Gold rises on EU banks recapitalization pledge - EUROPE AND MIDDLE EAST | Mineweb

Spot gold was up 1.4 percent on Monday after France and Germany put forward a plan to recapitalize euro zone banks, while traders remained cautious ahead of further details of the plan.

Author: By Jan Harvey (Reuters)
Posted:  Monday , 10 Oct 2011 

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LONDON (REUTERS)  - 

Gold rose more than 1 percent on Monday as the dollar fell versus the euro after France and Germany pledged to strike a proposal to recapitalize euro zone banks, while traders remained cautious ahead of further details of the plan.

German Chancellor Angela Merkel and French President Nicolas Sarkozy said after talks on Sunday that they aimed to come up with a sustainable answer for Greece's debt problems and agree how to recapitalize European banks.

Spot gold was up 1.4 percent at $1,659.80 an ounce at 0915 GMT. Prices of the precious metal have been choppy since they plunged as much as 20 percent in September from the record highs they hit early in the month.

Strong physical demand after Friday's price decline and as Chinese buyers returned to the market after a week-long holiday also helped support prices, as did worries that the latest plan to tackle the euro zone debt crisis could prove short-lived.

"At the moment, near-term direction does look very, very mixed, but on a longer term view, you still have to be positive given what we are seeing coming out of the physical markets, particularly in Asia," said Credit Agricole analyst Robin Bhar.

"Clearly (recent) very extreme volatility called into question gold's role as a safe haven, which should be characterized by low risk and low volatility," he added. "But as a form of insurance (it is attractive)."

"People are thinking the newsflow is only beneficial in the short term. Europe still has to get its act together on a much longer-term basis."

Unusually for an asset that usually benefits from losses in assets seen as higher risk, like stocks, gold climbed along with equity markets on Monday. European shares were lifted by the Franco-German plan to tackle the debt crisis. .EU

The fillip lent to risk appetite by the proposal also lifted the euro 1 percent versus the dollar, while oil climbed. A weaker dollar tends to benefit gold, as it makes dollar-priced commodities cheaper for other currency holders.

France's Sarkozy said he and Merkel were in "total agreement" on the recapitalization of European banks, even though officials in Paris and Berlin have made clear in recent days that the countries are far apart.

"While a detailed plan was lacking, we view any progress on bank recapitalization as a positive for gold," said UBS in a note. "Typically liquidity concerns and funding issues are not gold's friends."

U.S. gold futures for December delivery were up $24.80 an ounce at $1,660.60.

MONEY MANAGERS CUT BULLISH BETS

Data released by the U.S. Commodity Futures Trading Commission on Friday showed money managers, including hedge funds and other large speculators, scaled back bullish bets in gold futures and options for the eighth time in nine weeks.

China's financial markets reopened after the week-long National Day holiday. The popular gold forward contract on the Shanghai Gold Exchange rose more than 1 percent to 341.90 yuan per gram, or $1,674.50 an ounce.

"The decline in gold prices recently has attracted retail interest as China's Golden Week holiday draws to an end," said HSBC in a note.

"Dennis Lau, director of sales operations for Chow Sang Sang Holdings Intl, the largest listed jewelry maker and retailer in Hong Kong, mentioned in an interview that more gold buyers are attracted to the gold markets this year following the plunge in gold prices," it added.

"Sales during Golden Week were 50 percent higher from a year earlier as buyers took advantage of the price decline. Due to positive retail buying, we remain upbeat on gold prices."

Premiums on gold bars in Hong Kong remained around $3 per ounce, as physical stockpiles were running low, said dealers.

Other precious metals also benefited from the weaker dollar, with silver up 2.2 percent at $31.83 an ounce.

Among the more industrial precious metals, spot platinum was up 1.8 percent at $1,512.49 an ounce, while spot palladium was up 4.1 percent at $606.85 an ounce.

(Additional reporting by Rujun Shen; Editing by Alison Birrane)

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Two M&A news that show the Chinese on a buying spree.

BMO comment on the Chinese deals for Daylight Energy and Kalahari Minerals.

CONCLUSION: Clearly the Chinese have a longer term view and see this market sell-off as a great opportunity to buy assets on the cheap. This morning we have news on two deals:
 
1- Sinopec is offering C$10.08 cash per share or $2.2BN for Daylight Energy or a 120% premium to friday's close or a 43.6% premium to the 60 day weighted average price. DAY is 50/50 oil vs nat gas producer all in Alberta, Canada. Their assets are focused on the Pembina and Cardium fields. The company recently purchased a large land position in the Duvernay oil play. It also had one of the highest debt levels with a debt to cash flows of 2.3:1.
 
Companies which have underperformed this year due to high debt levels and/or perceived higher risk are : Petrobakken, Crew Energy, Nal Energy, Legacy Oil &Gas and Penwest. They may benefit from this opportunistic bid.
 
2- China Guangdong Nuclear Power ( CGNPC) confirmed this morning it resumed talks with Kalahari Minerals plc on a recommended takeover offer. The press highlights that the price of 270p per share, a 10% premium from friday's close is being discussed ( but a 26% premium to the close of friday a week ago). CGNPC had bid 290p before the Fukushima accident and has been trying to renegotiate the price down since. Kalahari's main asset is a 42% stake in Extract Resources which is developing the Husab uranium deposit in Namibia.
 
Companies which could benefit from this renewed interest in uranium are: Uranium One, Paladin, Denison & Bannerman.

Gold stocks valued far lower vs. current gold prices

Gold stocks valued on far lower gold prices than are currently being achieved.

GOLD ANALYSIS | Mineweb

Gold miners will be still making huge profits at current price levels even though the gold price may be well off its top and that when the next quarterly earnings are released shortly perhaps the market will recognise this and re-rate the miners.

The prices of gold stocks vis-a-vis the gold price itself seem to be drifting further and further apart.  Is this telling us something about the stocks themselves or that the gold price is in excess of where the markets think it should be?

If one examines the fundamentals behind the gold price rise to its current levels - even if this is well below the peak of only a few weeks ago, the logical observer might find it strange that it is not far higher - and there are few specialist gold analysts out there who now believe that the yellow metal will fall significantly below current levels.  Indeed a recent survey of mainstream analysts' projections shows that this usually highly conservative group - you only have to look at the London Bullion Market Association's annual gold price prediction competition to see how conservative the top analysts have tended to be in their forecasts - are almost unanimously looking for higher gold prices in the weeks and months ahead.  The gold bulls - and even some of these have proved to undercall the gold price rise in the past - are looking for even higher levels and their views should not be ruled out however crazy they may seem to the impartial observer.  Remember that only around four years ago a $1,000 gold price looked excessively optimistic when the mainstream analysts were perhaps predicting a long term price of only $500-600, with $700 gold forecasts considered by many as over-the-top!

Coming back to the mainstream analysts - as noted by Ross Norman in an article published on Mineweb yesterday and worth repeating again (see Analysts mostly unfazed by gold price volatility and raising 2012 forecasts) - "The Bloomberg median analyst forecast for the gold price in 2012 rises by about 27% from $1,406 as of 30 June to $1781 as of 5 October.  Natixis, the more conservative among the lot, raised its 2012 gold price forecast this Monday by 11.5% to $1,450, followed by Credit Suisse who raised its price forecast by 19% to $1,850 on Tuesday. Goldman reiterated its 12-month forecast at $1860, seeing no changes in fundamentals.  BofA Merrill Lynch and Barclays' analysts continued to maintain their 12-month forecast of a gold price of $2,000. Barclays viewed the gold price correction as a temporary move and a buying opportunity. Morgan Stanley this week hiked its 2012 forecast by an eye-catching 35% to $2,200."

Bank analysts by definition tend to err, often heavily, on the side of caution - they hate to be caught out being too positive.  But the problem with this for the gold mining stocks is that valuations by the major financial institutions tend to be based on these bank analyses and then discounted some more.  So looking at the Bloomberg median figures in June of $1400 suggests that the stocks at that time were probably being valued on a gold price of perhaps $1200 or less - hugely below what is actually being achieved.  The miners themselves also tend to run their public projections on even lower-still prices to remain within stock exchange guidelines and so they are not accused of over-egging their profits forecasts - but given they also manage to mostly underestimate costs that is not always a bad thing.  However the net result is that those who are actually mining gold will be making profits hugely in excess of any sensible forecast based on analysts' gold price predictions.

The September quarter, for example, will have seen operating gold miners selling their product at an average price of well in excess of $1600 an ounce - probably even as high as an average of $1700 or more given that nearly all are fully unhedged.  This is probably around $200-$300 AN OUNCE more than in the June quarter which itself saw record revenues and profits.  For a top miner like Barrick, producing nearly 2 million ounces a quarter this translates to a revenue increase of perhaps half a billion dollars!  Yet Barrick's stock price is way below where it was in the first half of the year.  This does not seem to make any logical sense.

Similarly Newmont - with a quarterly production of around 1.2 million ounces of gold - will likely see a revenue increase of some $300 million.  These are staggering figures, yet, although Newmont's stock price has performed better than Barrick's over the past few months - not least because of its perhaps more generous dividend policy which it is now tying to the gold price - it is still below where it was a year ago.

Of the other top North American gold miners, Goldcorp's share price has been similarly lethargic and of the South African majors, AngloGold's share price performance over the past 6 months has been pretty dire, while Gold Fields may have done a little better, but neither have performed anywhere near that which their likely revenue and profit increases through higher gold prices and changing geographical focus would suggest.

There has been a pick up in the various gold indices over the past few days as the gold price is seen as stabilising after its recent fall, but one suspects that when the magnitude of the likely 3^rd quarter earnings increases become known there could well be some rerating upwards due - perhaps even a substantial boost.

But perhaps the biggest problem for the majors is the level of ongoing capital expenditure necessary to advance, or even maintain, their output levels as existing mines become depleted, grades fall and new bulk mining low grade projects increasingly tend to be found in more hostile geographical environments leading to huge mine development costs of many billions of dollars. 

Increasingly, investors see capital expenditure as a direct cost (and indeed many mining companies are now publishing figures which present it in that manner).  While this is indeed a limiting factor, the high gold prices at least are leading to all the majors reporting  positive net cash flows after taking capex into account which wasn't necessarily the case even a couple of years ago.  They are also beginning to change their focus a little for which they may well be taken to task by the 'pure gold' lobby, but there is a logic in adding substantial by- or co- product output as gold resources are seen as becoming increasingly scarce and expensive to develop.  There may also be a trend, perhaps in its early stages, for the majors to seek out smaller high grade operations with a reasonable life - perhaps of a type which they may have considered too small in the past.

To gain a rerating the big gold miners are having to change and, as noted above, perhaps they are already doing so.  Virtually all are improving their dividend policies - as with Newmont with its promise of gold price related payouts - but none are yielding more than a little under 2% even at their current low prices and most are below 1%.  There is pressure on them from the financial community to improve this record and there are also indications that shareholder pressure due to the poor stock price performance is forcing their executives to be far more proactive and aggressive in setting out their benefits (see Major gold stock promotion now seems to be a competitive sport).  

Whether all these factors in combination will have an effect remains to be seen.  But there does seem to be a recognition that most gold stocks have underperformed  in relation to the gold price over the past several months and that at some stage the market will recognise this.  There's also a lot of rubbish talked about the volatility of the gold price which may have been unnerving investors.  Because the gold price is viewed in absolutes rather than as an index its movements are perhaps more apparent to the average person yet the major stock indices have actually been just as volatile as the gold price - some indeed more so - over the past few weeks.  Headlines like 'Gold no longer a safe haven' have abounded but even the mainstream analysts, as noted above, see gold's downward move as a blip in the ongoing bull market - and an unsurprising one perhaps given the rapid price increase seen in late summer.

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