Sprott bearish on base metals, positive on gold, oil

Sprott bearish on base metals, positive on gold, oil

Prominent Canadian fund manager Eric Sprott said this week he was bearish on cyclical commodities such as industrial metals because of the economic slowdown, though he remained positive on gold and crude oil.

Sprott, a long-time gold bull who last week filed to launch a platinum and palladium product allowing investors to redeem the physical metals, said he expects that business to grow in the wake of MF Global's collapse.

"I am not bullish on cyclical commodities such as iron ore, coal, steel, lead and zinc because I am worried about this economic contraction that everybody is talking about," Sprott told Reuters in a phone interview from his Toronto office.

He expects gold to hit a record above $2 000/oz this year, with silver also rallying to an all-time high at more than $50/oz. On Wednesday, gold traded at $1 660/oz and silver at $30.50.

Sprott, whose parent company Sprott Inc manages around C$9-billion in assets, has been bearish on cyclical commodities since the 2008 global economic crisis, and has maintained the gold and silver forecasts throughout last year.

"I think there is more upside to the gold-mining stocks. Last year, the stocks were absolutely crushed when the price of gold went down. But when gold goes back up, the stocks will provide a better return."

Bullion lost 10% in December and briefly entered a bear market, as it struggled to regain its safe-haven appeal even though investors questioned the viability of the euro.

Year to date, spot gold was up 6 percent, largely tracking equity markets' gains. It posted a 10% gain in 2011 that sealed its 11th consecutive year of gains.

Sprott cited strong physical gold demand, indicated by encouraging imports by China and Turkey late last year.

In addition, he was positive on the outlook of the energy market because of relatively inelastic demand and depleting output.

"It's getting tougher and more expensive all the time to produce energy. I think that's a pretty good foundation for the oil prices hanging in there."

SELL SHARES, REDEEM METAL

On Friday, Sprott filed regulatory papers for a planned launch of a physical platinum and palladium trust initially worth $115-million on the New York Stock Exchange and the Toronto Stock Exchange. The firm already runs two physical gold and silver trusts.

Investors in Sprott's funds have the option to redeem physical metals, something that not all ETFs offer.

"A lot of people thought they owned gold and silver before MF Global went bankrupt. And all of a sudden they found out that they didn't own anything at all," he said.

"We like people who own the units to know that they have the ability of getting the physical gold and silver."

Sprott said investors rarely redeem physical metals, but that could change if economic conditions worsen.

"In certain circumstances, we could see a lot of redemption. I am talking about financial meltdown circumstances. So, hypothetically it could happen," he said.

Edited by: Reuters

Read the story online here: Sprott bearish on base metals, positive on gold, oil

The MasterMetals Blog

Virgin Islands refinery shutdown to hit Venezuela hard - Americas - MiamiHerald.com

Virgin Islands refinery shutdown to hit Venezuela hard

This week’s announced shutdown of a major oil refinery in the Virgin Islands could have major ramifications for the Venezuelan oil company, PDVSA.

By Antonio Maria Delgado

adelgado@elnuevoherald.com

The announced shutdown of an oil refinery in the Virgin Islands will hit hard the state-run Petróleos de Venezuela, S.A. (PDVSA), a company that loses a major customer for its hard-to-place heavy crude and a major supplier of components for the gasoline consumed in the country, analysts said.

The experts added that the closing of the refinery — one of the world’s 10 largest — could also impact the cash flow of the state-owned company, as the complex, where PDVSA has a 50 percent share, is one of the clients that best pays for Venezuelan crude.

“It’s a very important customer for Venezuela,” said former state oil company manager Horacio Medina. “It is one of the places where they were sending large amounts [of crude] every month.”

The refinery, operated by the joint venture Hovensa has the capacity to process 495,000 barrels a day, 248,000 of which are supplied by PDVSA.

Hovensa, which belongs to PDVSA and the U.S. company Hess Corp., announced this week it will close the refinery in a month after accumulating losses totaling $1.3 billion in the last three years.

Hovensa said the company had lost its profitability due to the global economic downturn and strong competition from a number of new facilities built in emerging markets.

Jorge Piñón, an oil market analyst, said in Miami that the St. Croix refinery also faced difficulties in competing with U.S. refineries because it uses the oil itself as fuel for its facilities.

“U.S. refineries use natural gas, which is selling at one of the lowest prices in its history,” Piñón said.

So the closure makes sense for Hess, a company that was bleeding from the sustained losses.

But the situation is different for PDVSA, said analysts, describing the shutdown of the refinery as a strategic mistake.

“If I see myself only as a refiner, then obviously the decision is correct; the refinery has to be closed. But if I see myself as a producer, you’re depriving me of 300,000 barrels of production that now I have to place somewhere else,” said Juan Fernández, former PDVSA planning manager.

The problem is that the heavy Venezuelan crude is difficult to place in a global network of refineries designed primarily to process light crude. For Venezuela, it would have been more convenient to reach a financial settlement with the refinery so it could stop operating at a deficit.

The cost of such an arrangement, which could be below $4 a barrel, a small fraction of the more than the $100 per barrel it currently charges, would be far below the cost of losing access to a market that generated revenues of over $9 billion a year.

It was the difficulties in placing its heavy and extra-heavy crude oil in international markets that led PDVSA to invest aggressively in the refining industry, buying stakes in refineries and modifying them so they could process the thick Venezuelan oil.

But that strategy, which had provided Venezuelan industry with an enviable vertical integration, was abandoned during the presidency of Hugo Chávez.

“The Venezuelan government has been destroying its refining capacity abroad. It had about 2 million barrels, with the sales of the refineries it owned in Europe and the U.S., and now comes Hovensa, which, along with Citgo, was one of the few customers that pays it correctly,” said Fernández.

The rest of Venezuela’s customers, like China, Cuba and other ALBA countries, receive oil under economic terms that are unfavorable for the nation, he said.

And the shutdown also could cause problems for the supply of gasoline in the country, because the Virgin Islands refinery had begun to supply components used in the production of gasoline that were no longer produced in Venezuela due to problems in domestic installations.

The problems in the Venezuelan refining system continued during November and December, according to local press reports that highlighted the serious problems faced in the Venezuelan refineries El Palito, Amuay and Cardón.

These problems, coupled with the closure of Hovensa, could exacerbate the problems in fuel supply that have started to become frequent in Venezuela, Fernández said.

“It’s a grim picture, but Venezuela seems to be following in the footsteps of countries like Libya and Iran, which, while big producers of oil, don’t have gasoline,” he said.

Read more here: http://www.miamiherald.com/2012/01/19/2598119/virgin-islands-refinery-shutdown.html#storylink=cpy
Virgin Islands refinery shutdown to hit Venezuela hard - Americas - MiamiHerald.com

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Platinum Primer: Fire Sale on the Rich Man's Gold

Platinum Primer

Fire Sale on the Rich Man's Gold 

ResourceInvestor.com
About 2000 years ago, Aristotle explained why gold remained the ideal choice of money throughout major nations and civilizations. In words that are just as relevant today, he said "Gold is durable, not like wheat, divisible, not like diamonds, convenient, not like lead, constant, not like real estate, and best of all, as jewelry, it has intrinsic value".
Among the most rare, valuable and sought after metals on Earth, platinum shares these same characteristics with gold. Platinum Guild International names platinum as the "most precious" of the precious metals based on its relative scarcity as well as for the following reasons:

1. The annual supply of platinum is only about 6.4 million oz. - which is equivalent to only 7.4% of the annual gold production and 0.87% of silver's annual mine production.
2. Platinum is exceedingly difficult to mine and extract. For example, rock face temperatures at Northam Platinum's Zondereinde mine in South Africa get as high as 162 degrees Fahrenheit and its shafts extend as far as 1.4 miles below the surface. Overall, the platinum recovery process is very complex and lengthy, in some cases taking as long as six months.
3. There are over 5 billion oz. of above ground gold ($8 trillion), whereas only an estimated 200 million oz. ($0.3 trillion) of platinum has ever mined....just 3.75% that of gold $ wise.
4. In addition to its high-conductivity, resistance to corrosion and inertness, platinum is an extraordinarily dense metal. 10% more dense than gold and 20 times the density of water, one cubic foot of platinum weighs more than 1,330 pounds (523 kilograms). As Vronsky notes, "that means a six-inch cube of the white metal weighs about as much as an average man!" This density, along with its other unique chemical properties, makes platinum an invaluable component in a myriad of industrial applications.
5. Platinum has many more utilities than gold. Unlike gold, more than 50% of the annual production of platinum is consumed (read destroyed) by industrial uses (40% alone go to catalytic converters).
6. Unlike gold, there are no large stockpiles of platinum (less than 4 million oz.). Therefore, any disruption in supply from the two major sources (South Africa at 80%, Russia at 10%) could propel platinum on a similar trajectory palladium experienced in 2001, when it moved sharply from $350/oz. to $1,100/oz.

Very Limited Supply

While virtually all other metals can be found in deposit the world over, platinum is anomalous in that important deposits are essentially found to occur in just two areas of the world (apart from a small handful of smaller deposits in North America and Zimbabwe), South Africa and Russia. Platinum does get produced as a by-product in some regions, but only in insignificant volumes.
Roughly 80% of the total world's annual mine production comes from South Africa and, with 88% of the world's reserves, it is far and away the most important national player in the platinum market. Another 10% of platinum supply comes from Russia, with bit players responsible for the remainder. As South African politicians have tabled mining nationalization policies in the last two years, any further escalating political instability and/or labor turmoil in South Africa could have a dramatic impact upon platinum prices – and the same holds true for Russia, albeit it to a lesser extent .

Other Regional Platinum Producers

There are but a few publicly-traded mining companies that produce platinum, and, in most of these cases, only as a by-product. An example is the giant nickel producer Vale-Inco in Canada. Total platinum production in North America is estimated to be less than 400,000 oz. per year (5% of world production) according to the British Geological Survey.

Global Platinum Consumption
Platinum consumption is typically divided into three categories: 50% industrial uses (auto catalysts account for majority), 40% jewelry manufacturing and 10% for investment purposes. With a rapidly emerging middle class, and dramatic economic growth, China is expected to increase both automobile and luxury jewelry purchases as citizens continue to accumulate wealth. China has eclipsed the United States as the largest consumers of cars and is projected by the IMF to be the world's largest economy by 2016. In 2011, about 3.82 million ounces of platinum will go into auto catalysts, 17% more than this year and the most since 2007.
Investment Prospects for the Rich Man's Gold

Since 1970, platinum has on average commanded a 30% premium over gold. As the following chart from www.infomine.com demonstrates, from 2000 to 2008, platinum spent much time trading over 1.8 times gold price.

Historically, the price of platinum runs in tandem with the precious metals group (gold, silver, platinum and palladium). However, as platinum is less liquid and has a smaller investor set, it is much more volatile both on the upside and downside compared to gold.
Platinum price appreciation has outpaced gold since 2001, right up until the US financial crisis in 2008. While gold has recovered from losses and is trading within 15% of its all-time high, platinum price is trading at two-year low and has yet to recover.

While there is mounting concern about global economic growth, automakers are still expected to sell a record 79.5 million cars and light commercial vehicles in 2012, according to LMC Automotive Ltd., a research company based in Oxford, England.
Demand for platinum is also coming from investors, as holdings in exchange-traded products collectively surpassed 1.5 million oz. in 2011 since the first platinum ETF was launched in 2007. Therefore, going forward, investment demand could be a significant surprise factor in driving platinum prices higher.

In 2012, we can expect to see:

• Persistent high gold price
• Global recovery of auto sector
• Platinum investment demand through ETF and physical possession
• Ongoing limitations and potential disruptions to supply

All in all, the current situation bodes well for platinum.  Look for it to trade substantially higher and back at a premium over gold, once the bull market in precious metals begins its cycle anew. With the current crisis in the euro currency and run-away US deficits, platinum might just regain its reign as the rich man's gold in 2012.
John Lee, CFA
jlee@prophecyplat.com
John Lee is a private investor in metals and mining stocks. He has authored numerous articles and been a featured speaker at international conferences on precious metals and global economies. Currently Mr. Lee is the Chairman of Prophecy Platinum (TSX-V: NKL), an explorer with a significant platinum resource in Canada's Yukon Territory.
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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Prophecy Platinum Corp. Neither Prophecy Platinum Corp. nor the author can guarantee accuracy of all information provided. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Prophecy Platinum Corp. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.