MAC/20: Mines and Communities

Miners go for gold - but investors shun the glittering prizes

Published by MAC on 2011-03-28
Source: Reuters, Wall Street Journal, BN Americas

This month's Fraser Institute report on mining (2009/2010) showed that more than 43% of mining company respondents rated gold as their number one targeted commodity.


However, just three weeks later, a survey carried out by Barclays Capital (Barcap) - one of the biggest global financiers of the minerals industry - suggests that investors don't think the same way.

Indeed, the head of Barcap's commodities team, Kevin Norrish, declares "Not one single respondent chose gold as a best performer for 2011. Investors don't believe in the gold story anymore."

The CEO of Newmont, the world's second biggest gold mining company, has also cast doubt on the wisdom of further mining of the precious metal:

"Unless we have a technical breakthrough ... we're going to see a business that is in long-term decline", says Richard O'Brien.

But, before critics of  gold extraction throw their caps in the air, a note of considerable caution should be sounded.

China is now the world's biggest producer of gold. And there's no evidence that the Beijing regime has lost its faith in gold as a "store of value"; or indeed as a potential internationally-traded currency which might come to replace the faltering dollar.

[Comment by Nostromo Research, 25 March 2011]


Big Investors Bullish on Commodities, Barclays Survey Find

By Alex MacDonald

Wall Street Journal

23 March 2011

London-Investors remain bullish about investing in commodities, with more than 80% either maintaining or increasing their investment in commodities over the last 12 months, Barclays Capital said in its annual survey of institutional investors Wednesday.

The survey, which was conducted as the Japanese nuclear crisis and Middle East unrest unfolded over the past three weeks, revealed that 83% of investors expect to maintain or increase investment flows into commodities over the next three years and 90% expect to generate returns of 6% or more this year, the bank said. Three-fourths of those polled also said commodities weightings in a balanced investment portfolio should be in excess of 6%, well above current norms, the bank added.

"Investors expect to see continued strong demand from emerging markets and they predict another strong year for commodities," said Kevin Norrish, managing director, Barclays Capital commodities research. "In addition, heightened geopolitical concerns, turmoil in the energy markets and rising inflation concerns will continue to cast commodity assets in a favorable light."

More than half of the investors surveyed expect the amount of investor money funneled into commodities to reach or exceed $60 billion in 2011, the amount that Barclays Capital estimates was invested in commodities last year.

Crude oil was the top pick among investors as the commodity to perform the strongest in 2011, while natural gas was voted the weakest.

Gold, a favorite in previous years, surprised and was voted the second commodity most likely to perform the worst in 2011, according to the survey.

"Not one single respondent chose gold as a best performer" for 2011, Mr. Norrish said. Investors "don't believe in the gold story anymore."

Gold has risen nearly 30% over the past 12 months due to concerns over sovereign-debt risk and a double-dip recession. Earlier this month, spot gold hit a record high of $1,445.05 a troy ounce due to uncertainty over the crisis in the Middle East and its impact on the global economy. But the findings of the survey suggest "that the enthusiasm for gold may be waning as financial market concerns that supported it over the past two years fade."

Mr. Norrish said that Barclays Capital still expects gold could break through $1,500/oz. and even touch $1,550/oz. But as inflation fears start to trickle in later in the year, gold will become less favored since it isn't necessarily the most likely option as a hedge against inflation anymore, Mr. Norrish said.

Oil, on the other hand, was selected as the top pick for best performer in 2011. Mr. Norrish said investors are bullish on oil due to a combination of factors including geopolitical risk stemming from the unrest in large oil-producing nations in North Africa and the Middle East, growing demand from emerging markets, and waning production in countries that aren't members of the Organization of Petroleum Exporting Countries, such as the U.S. and the U.K.

Mr. Norrish expects crude oil will average $137 a barrel by 2015, up from about $104 a barrel on Tuesday.

Grains were also voted as the second commodity group most likely to be the best performer in 2011 due to crop shortfalls stemming from severe weather last year and low stocks for certain food staples, particularly corn.

Investors views on natural gas were split: Gas was selected as the worst performer in 2011 and at the same time was ranked as third in terms of the commodities most likely to perform the best during the year. Mr. Norrish attributed the split to price sentiment stemming from different geographies.

In the U.S., natural-gas sentiment may be more bearish since the U.S. doesn't depend on a high level of liquefied natural gas imports to meet demand, whereas in the U.K., for instance, 20% of demand is met through LNG, Mr. Norrish said.

Investors said the biggest upside risk for commodities in 2011 would be geopolitics, while the biggest downside risk was the perennial concern about the potential for a significant slowdown in China's growth rate, with over half citing this as the biggest downside risk for prices. "It's a huge risk ...but I don't think it's very likely. China has to be in favour of growth....They have to keep the economy growing," he noted.

Regulatory risk wasn't a serious concern among investors despite initiatives in the U.S. and the European Union to look at ways to regulate commodities trading. Mr. Norrish attributed the low ranking of regulatory risk to the fact that investors are still uncertain about how the U.S. and Europe will seek to regulate their commodity markets.

In terms of investment, diversification is still the main reason for commodities investment, accounting for 40% of the vote. Absolute return was ranked as second in terms of top reason for commodities investment, with 37% of the votes.

Barclays Capital said more than 60% chose active strategies as their favorite method of commodity investment in 2011, compared with less than 20% in 2010.

"Commodities are now mainstream as an asset class, with institutional investors being very knowledgeable," said Martin Woodhams, head of commodity investor structuring and institutional investor sales at Barclays Capital. "Not surprisingly, they now want to pick and choose between strategies to achieve their returns. This is why active strategies have become so popular."

Interest in exchange-traded products, or ETPs, waned significantly from last year. Whereas it accounted for more than a third of the votes as a favorite investment strategy, it has now fallen to less than a fifth, most likely reflecting less interest in physically backed precious metals exchange-traded products, Barclays Capital said.

ETPs allow investors to buy exchange-traded shares in a fund that invests in a specific asset class by acquiring the physical product and storing it.

Avoid gold" in 2011 - Barclays Capital survey - Regional

Business News Americas

22 March 2011

Investor enthusiasm for gold may be waning as financial market concerns supporting it over the past two years have started to fade, UK-based investment bank Barclays Capital said in a report on commodity investor attitudes.

"'Avoid gold' appears to be one of the most striking messages in the section of the poll asking which commodities will perform best and worst in 2011," the bank said.

None of the respondents chose gold as the best commodity performer this year. The yellow metal was also ranked second in the vote for likely worst performer.

"Perhaps investors see the nature of global risks in 2011 shifting to a set of less gold supportive ones. That would seem consistent with the strong vote in favor of crude oil as likely to be the strongest market this year and the big vote for geopolitics as the main upside price risk across the whole of the commodity sector," the bank said.

The survey suggests that gold may now be in need of a new catalyst if its 9-year upward price trend is to be maintained.

However, the base metals market was in the middle of the rankings, according to the survey, with copper ranked more strongly than aluminum.

The Barclays Capital survey of investor attitudes to commodities is carried out biannually at the bank's US and European Commodity Investor Conferences.

Is it a case of: "more money, more problems" for gold miners?


22 March 2011

Toronto/London - For gold miners, it could be a case of more money, more problems.

Producers of the precious metal are the most obvious beneficiaries of the 30 percent rally in the precious metal's price over the past 12 months, but those miners are taking pains to prove to governments that their profits are not that glittering.

Gold prices have raced to their highest ever, touching $1,444.40 an ounce this month as investors snap up the currency safe haven as global inflation fears rise and instability spreads across the Middle East.

Governments from Australia, Chile, the U.S. state of Nevada and the Canadian province of Quebec have passed or considered increases in their royalties on gold produced by companies such as Barrick Gold and Newmont Mining.

Executives told the Reuters Global Mining and Steel Summit they have made a case to governments that the costs to tap into gold deposits have skyrocketed in recent years, so their profit margins are not rising with the metal's price.

"When I sit down with governments, I say the headline is gold prices are up, but behind the headlines you need to understand costs are up and capital numbers are up as well," Newmont CEO Richard O'Brien said.

Costs to find, finance and produce gold are probably between $900 and $950 per ounce, he said.

"That's even before we pay taxes," O'Brien said. "We're making a profit and we're not going to complain about it, nor are going to shirk our commitments to the communities. But don't think that gold prices are at $1,400 and costs are at $350. That's not where we are anymore."

Still, gross profit margins at most gold companies did increase in 2010 from 2009, according to data provided by RBC Capital Markets, and are likely to continue to widen over the next year or two.

Seek Tax Discipline

The move to increase governments' share of the gold revenues has occurred worldwide but still forces companies to carefully consider where they will put new mines, according to Greg Hawkins, CEO of African Barrick Gold.

"It's a tough one. Once you've started a mine, you can't move it ... so you are a little bit hostage to changes in the rules," he said.

Mining companies want to make sure that tax policy-makers are disciplined in how they make royalty changes, he said, and are aware of the large amounts of capital that companies pour into new projects.

He praised the East African nation of Tanzania, whose recent moved to raise royalty rates to 4 percent from 3 percent was applied only to new projects.

Still, part of the issue around rising costs is caused by the high price itself, according to Toronto-based Agnico Eagle Mines, as miners have the incentive to chase lower-quality ores that produce less gold.

"In a high gold price environment, when companies do their annual reserve calculation, they lower the cut-off on what becomes economic and what becomes waste. And that lowers (ore) grade, which raises unit costs," Chief Executive Sean Boyd said.

Still, even with the sky-high price, the industry faces ever more daunting prospects in tapping more difficult deposits that are straining its ability to produce gold.

"Unless we have a technical breakthrough ... we're going to see a business that is in long-term decline," Newmont's O'Brien said.

(Reporting by Matt Daily, Euan Rocha and Julie Gordon and Pav Jordan in Toronto, Eric Onstad, Amanda Cooper and Julie Crust in London, Writing by Matt Daily; Editing by Frank McGurty)

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