2017's worst-returning precious metal becomes hedge fund darling

(Bloomberg) — After lagging behind other precious metals last year, platinum is finally outperforming, and hedge funds are taking notice.

Money managers increased their bets on a rally for platinum, a commodity used in pollution-control devices for cars. Investors had been pessimistic on prices until the start of this year, but that sentiment changed as signs of synchronized global growth boosted expectations for demand. The metal’s strong correlation to gold is also providing support as a weaker dollar propels alternative assets higher.

While platinum rose in 2017, it was a lackluster performance compared with gold, silver and palladium. After Volkswagen admitted falsifying pollution data for its cars in 2015, the outlook for platinum had dimmed as purchases of diesel-fueled vehicles fell in Europe. Now, things are turning around as China starts implementing stricter emissions standards, fueling increased demand for the metal.

Precious metals have continued to climb even after the Federal Reserve raised borrowing costs in December for the third time in 2017 as traders sought a store of value. The dollar is trading near a three-year low against a basket of 10 currencies.

‘Sentiment change’

“There has been a change in sentiment in platinum,” said Maxwell Gold, a director of investment strategy at ETF Securities, which overseas $2.5 billion in assets in the U.S. “With the price rebound since the Fed raised rates last year, platinum is beginning to catch up to palladium and gold.”

In the week ended Jan. 16, money managers raised their net-long position, or the difference between bets on a price increase and wagers on a decline, by 79 percent to 19,806 futures and options, according to U.S. Commodity Futures Trading Commission data released Friday. That’s the highest since mid-September.

Platinum futures have climbed 8.7 percent in January to $1,020.10 an ounce on the Comex in New York. That compares with this month’s 3.5 percent gain for palladium, 1.8 percent for gold and a 0.6 percent slide for silver.

Tighter emission standards in China include lower pollution limits set this year for all diesel vehicles, which will mean higher use of platinum catalytic converters to meet the requirements, Gold said.

Production deficit

As consumption is poised to rise, stockpiles in warehouses tracked by the New York Mercantile Exchange have shrunk to the lowest since 2016. This year, supply will probably outpacing demand by 275,000 ounces, as jewelry and industrial uses climb, according to the World Platinum Investment Council. The deficit will widen from 15,000 ounces in 2017.

In South Africa, which accounts for more than 70 percent of global supply of platinum, an improving economic outlook has spurred a rally in the rand against the dollar. That raises the relative costs of producing metal, putting more pressure on South African mining companies already struggling to stay afloat, according to Shree Kargutkar, a portfolio manager at Toronto-based Sprott Asset Management, which oversees C$11.5 billion ($9.2 billion).

Investors are also piling into exchange-traded funds. On Jan. 16, the combined holdings of ETFs tracked by Bloomberg reached 2.54 million ounces, the highest since November 2015.

“That trend is definitely real, because it’s not one of those short-term blips that we see,” Kargutkar said. “Investors are looking at platinum as a store of value. In the short-term, that will be the primary driver.”

Story by Luzi Ann Javier.

Trump trade talk helping convince China on aluminum, Alcoa says

(Bloomberg) — The Trump administration’s condemnation of cheap Chinese aluminum is helping resolve overcapacity in China even before any measures are implemented, according to the top U.S. producer.

The Commerce Department is preparing to deliver its Section 232 report on national-security threats posed by aluminum imports. Before any measures are announced, debate surrounding the investigation has helped shine a light on the real issue of Chinese smelting overcapacity, and that’s helping convince China to take further action, Alcoa Corp. Chief Executive Officer Roy Harvey said. Global aluminum prices have surged as a result.

Harvey expects China to continue shuttering smelters as part of a broader pollution-fighting initiative. Any remedies levied in a 232 case should address Chinese overcapacity, he said in an interview.

“We’re waiting to see what exactly the 232 report holds as well, but we’ve been trying to make clear: let’s understand what the problem is and let’s understand how we’re trying to address it,” he said from Alcoa’s headquarters in Pittsburgh.

The Trump administration launched the investigation — under the seldom-used section of the Trade Expansion Act — in April and is due to deliver results this month. The president then has 90 days to determine whether he wants to take action, which could be in the form of tariffs, quotas or a mix of both.

The 232 study follows a World Trade Organization complaint filed in the last days of the Obama administration alleging subsidies to Chinese producers that suppressed global prices. Aluminum has surged 28 percent since then.

In an earnings presentation Wednesday, Alcoa said it projects the glut of Chinese aluminum to ebb in 2018 to about 1.5 million to 1.7 million metric tons, down from the company’s 2017 forecast of 1.8 million to 2 million tons.

Harvey said Alcoa’s strategy and market analysis team determined that Chinese reductions through pollution curbs and winter seasonal cuts are real and continuing, based on its study of the markets both inside and outside the Asian nation.

“We bring all of that into our proprietary view,” Harvey said. “So we base our understanding of 2018 on what they’ve just recently announced,” but “we base all of our conclusions off what we believe and understand on history and what’s happening more recently.”

Asked if he has a preference for 232 measures or the WTO case, Harvey said the latter may not be enough on its own.

“The difficulty with a WTO tool is that it takes a long time to happen,” he said. “I have to believe a lot of these discussions have led the Chinese government to see this is a real problem, and a real problem of overcapacity that needs to be fixed.”

Story by Joe Deaux.

Turkish gold imports hit record 370 T in 2017-Borsa Istanbul

ANKARA, Jan 19 (Reuters) – Gold imports to Turkey hit a record 370 tonnes in 2017, more than trebling from 106.1 tonnes, data from Borsa Istanbul showed.

This was the highest level of imports since the data was made available in 1995 and well above the previous record of 302 tonnes set in 2013.

Imports in December alone reached 49.3 tonnes, up 34 percent year on year.

Cagdas Kucukemiroglu, an Istanbul-based analyst with consultancy Metals Focus, said cheap credit made available through a government policy aimed at boosting small businesses had made its way into gold, while stronger economic growth had also bolstered demand.

That increase in buying pushed premiums in the Turkish market up as high as $5-6 an ounce for brief periods over the summer, against $1.50-2.00 currently, he said.

"The central bank also resumed increasing their gold holdings," he said. "They increased by 86 tonnes since May 5 through the end of 2017."

Spot gold prices last year posted their biggest annual gain since 2010, rising 13 percent.

(Reporting by Ece Toksabay in Ankara and Jan Harvey in London; editing by David Dolan and Jason Neely)

Asia Gold-Demand firms ahead of Chinese New Year; India discounts widen

BENGALURU/MUMBAI, Jan 19 (Reuters) – Gold demand in China firmed this week as retailers stocked up ahead of the Chinese New Year while price discounts widened in India, partly on expectations of a reduction in import duty in next month's budget.

Spot gold prices, up by more than 5 percent in the past month, rose on Friday, helped by a weaker dollar amid worries about a possible U.S. government shutdown, but remained on course for a first weekly drop in six weeks.

"Demand has actually increased on the physical side, mainly because there has been some pull-back in prices this week," said Brian Lan at Singapore dealer GoldSilver Central, noting that there had also been some safe-haven buying.

"We see businesses buying quite a bit because I think they are preparing inventories for the Chinese New Year," he added.

Gold was being sold at a premium of about $8 an ounce in China, compared with a range of $5-8 last week.

"Reports from Chinese jewellers suggest demand leading into this year's Lunar New Year is strong," ANZ analysts said in a note.

The Chinese New Year, a key gold-buying occasion in top consumer China, starts on Feb. 16 this year.

Meanwhile, gold discounts in India widened to the highest level in nearly four months on expectations of an import duty cut and as higher domestic prices dampened retail demand.

Jewellers were not making purchases because they expect a duty cut of at least 2 percent in the budget on Feb. 1, said Ashok Jain, proprietor of Mumbai-based wholesaler Chenaji Narsinghji. "Nobody wants to build inventory at current prices before the budget."

Dealers in India were offering a discount of up to $5 an ounce this week, the highest since the last week of September. Last week they were offering discount of $2. The domestic price includes a 10 percent import tax.

The recent rally in gold prices has been hurting wedding season demand, said one Mumbai-based dealer with a private bank.

Local gold prices jumped to 29,850 rupees per 10 grams this week, the highest since Oct. 16.

In Singapore, premiums ranged between 60-80 cents an ounce, unchanged from last week, while tepid demand in Hong Kong brought premiums down to about 50 cents. Last week premiums were between 60 cents and $1.20 an ounce.

Discounts in Japan widened to about $1 an ounce from 50 cents last week on weaker demand, a Tokyo-based trader said.

(Reporting by Nithin Thomas Prasad and Rajendra Jadhav; editing by Koustav Samanta and David Goodman)

Russia's Polyus launches $250m bond offering

MOSCOW, Jan 19 (Reuters) – Leading Russian gold producer Polyus said on Friday it would issue $250 million worth of bonds, with the proceeds of the sale mainly going towards refinancing its debt.

The offering is for senior unsecured guaranteed convertible bonds with a maturity of January 2021, the company said, adding that it expected them to carry a coupon of between 0.50 and 1.00 percent per annum, paid semi-annually in arrears.

The pricing is expected later on Friday. The conversion price is expected to be set at a premium of between 30 and 35 percent to the reference price‍, Polyus said.

The company's shares rose 2.5 percent following news of the bond issue, before falling back to 4,328 roubles ($76.48), a five-day low.

Though posting strong results in the previous quarter and raising its 2018 gold production forecast, Polyus has had an uneasy few months.

November saw the arrest in France of Suleiman Kerimov, the tycoon whose family owns the business, on tax evasion charges.

This was followed closely by a decision to scrap plans to sell a 10 percent stake in the company to China's Fosun , ending more than a year of negotiations.

The new bond issue is intended to help refinance some of the company's $3.08 billion debt.

($1 = 56.5925 roubles)

(Writing by Polina Ivanova; Editing by Gareth Jones)

Union at Colombia's Cerrejon to hear wage offer before possible strike vote

BOGOTA, Jan 19 (Reuters) – The largest union at Cerrejon, Colombia's top thermal coal mine, was set to meet with the company on Friday to hear a new salary and benefits offer before deciding whether to hold a vote on a possible strike.

A work stoppage at the Cerrejon mine, which belongs in equal parts to BHP Billiton, Anglo American and Glencore and produces about 37 percent of Colombia's total output, could reduce production and overseas sales from the world's fifth-largest coal exporting nation. Production and exports at Cerrejon, which produced 31.7 million tonnes of coal in 2017, fell for a third straight year as heavy rainfall affected operations, the mine's owners said this month.

"We will meet with the company this afternoon after a request from them to present a new offer, the fourth in this negotiation," Aldo Amaya, president of the Sintracarbon union, told Reuters on Friday.

"We will listen to the offer, but we're far off," he said. The company most recently offered a salary increase of 5.55 percent for this year, Amaya said, while the union has demanded 12 percent.

The company, which has 5,000 workers, did not immediately respond to a request for comment from Reuters.

If there is no deal Friday, the union has 10 days to call a vote among its 4,800 members on whether to strike or take the matter to arbitration. A walkout could begin within three days of a vote.

The last strike at Cerrejon, which produces coal at its open pit mine in Colombia's northern La Guajira province, was in February 2013 and lasted 32 days.

Cerrejon, one of the world's largest open-pit coal mines, has a railway line spanning more than 90 miles (150-km) and a seaport to handle shipments.

(Reporting by Luis Jaime Acosta; writing by Julia Symmes Cobb; editing by Tom Brown)

GDX $25 breakout on earnings

The world’s leading gold-stock ETF is nearing a major upside breakout from key technical levels.  GDX is getting closer to challenging and powering above $25.  That would accelerate the sentiment shift in this deeply-undervalued sector back to bullish, enticing investors to return.  Good operating results from the major gold miners in their upcoming Q4’17 earnings season could prove the catalyst to fuel this GDX $25 breakout.

The classic way to measure gold-stock-sector price action is with the HUI NYSE Arca Gold BUGS Index.  But the HUI benchmark is being increasingly usurped by the GDX VanEck Vectors Gold Miners ETF as the gold-stock metric of choice.  GDX is used far more often than the HUI in gold-stock analyses these days, both online and on financial television.  I haven’t seen the HUI mentioned on CNBC for years now.

GDX does have major advantages over the HUI.  Most importantly it is readily tradable as an ETF and with options.  GDX’s component stocks and their weightings are also regularly updated by elite gold-stock analysts, keeping it current.  The HUI is rarely if ever updated to reflect company-specific changes in the ranks of the world’s top gold miners.  GDX is dynamic where the HUI is effectively static and outdated.

GDX also has limitations as a gold-stock metric though.  It was only born in May 2006, so that’s the limit of its price history available for analysis.  And because its managers are paid 0.51% of its assets each year to maintain this ETF, GDX is not as pure of measure of gold-stock performance as a normal index.  Over a decade that adds up to a substantial 5% difference.  Nevertheless GDX’s popularity continues to grow.

This week GDX had $7.7b in assets under management, dwarfing its direct competitors.  That was 21x larger than the next-biggest 1x-long major-gold-stock ETF!  GDX’s sister GDXJ Junior Gold Miners ETF weighed in at $4.7b, but that generally includes smaller gold miners.  GDX is the undisputed king of the gold-stock ETFs.  As a contrarian speculator, I watch GDX’s price action in real-time all day every day.

For an entire year now, GDX has meandered in a relatively-tight trading range between $21 to $25.  As gold stocks periodically fell even deeper out of favor, this ETF slumped down near $21 lower support.  Then as they inevitably rallied back out of those lows, GDX climbed back up near $25 resistance.  That made for a roughly-20% gold-stock price range, certainly narrow by this sector’s standards and tough to trade.

This GDX chart over the past couple years or so highlights 2017’s gold-stock consolidation.  With this unloved sector neither rallying nor falling enough to get interesting, investors mostly abandoned it over the past year.  So gold stocks largely drifted sideways on balance, which certainly proved vexing for the few remaining contrarian speculators and investors.  A GDX $25 breakout would greatly improve psychology.

Last year’s gold-stock performance per GDX was very poor.  This ETF’s price climbed 11.1% in 2017, which is better than a kick in the teeth.  But gold’s impressive 13.2% gain last year well outpaced the gold stocks’ performance.  Normally the major gold miners’ stocks amplify gold advances by 2x to 3x, so GDX should’ve powered 26% to 40% higher in 2017.  Gold stocks are only worthwhile if they outperform gold.

That’s because gold miners face many additional operational, geological, and geopolitical risks compared to just owning gold outright.  So if the gold stocks don’t outperform gold, they simply aren’t worth owning.  Seeing them lag the metal which drives their profits for essentially an entire year is extremely anomalous.  It’s a reflection of the entire global markets proving extremely anomalous in 2017, an exceedingly-weird year.

Gold stocks normally perform much more like 2016 than 2017.  A couple years ago GDX rocketed 52.5% higher in one of the best major-sector-ETF performances in all the stock markets.  That greatly amplified 2016’s underlying 8.5% gold advance by 6.2x.  All those gains rapidly accrued in that year’s first half, as GDX skyrocketed 151.2% higher in 6.4 months on a parallel 29.9% gold upleg!  Gold stocks can really move.

But last year as extreme record-high stock markets and the even-more-extreme bitcoin popular speculative mania stole the spotlight from gold, gold stocks were largely left for dead.  Speculators and investors alike wanted nothing to do with classic alternative investments when everything else proved much more exciting.  Thus GDX hasn’t been able to decisively break out above its $25 upper resistance, despite trying.

GDX did power 34.6% higher in 1.8 months early last year, peaking on a closing basis at $25.57 in early February 2017.  But that rally fizzled with gold’s when stock markets started surging to new records on hopes for big tax cuts soon from the newly-Republican-controlled US government.  By early March GDX had retreated back down to $21.14, right at its $21 support line.  At least that held strong throughout 2017.

The gold stocks soon rebounded into another rally, but that topped at $24.57 in GDX terms in mid-April.  Again gold had stalled out amidst epic general-stock euphoria.  Gold is the key to gold-stock fortunes, as traders only think about the gold miners when gold itself catches their attention.  GDX was repelled right at its 200-day moving average, which can prove both major support or resistance depending on market direction.

By early May GDX was right back down to $21.10 again, increasingly establishing the clear consolidation trend seen in this chart.  The gold stocks couldn’t rally significantly heading into their summer-doldrums lull, and GDX was soon right back down to $21.21 in early July.  That very day I published an essay on gold stocks’ summer bottom, predicting a new upleg once those usual weak summer seasonals passed.

And that indeed happened, with GDX rebounding and then accelerating to power 20.2% higher to $25.49 by early September.  That was right at its early-February peak, a critical level technically to see a major upside breakout.  But once again gold didn’t cooperate, selling off sharply as general stock markets yet again blasted to another series of record highs on renewed hopes for big tax cuts soon.  Taxphoria was huge!

Thus the gold stocks slumped again, falling back down near GDX’s strong $21 support as this ETF hit $21.42 on close in mid-December.  That was the day before the Federal Reserve’s fifth rate hike of this cycle, so gold-futures speculators were scared.  They irrationally fear Fed rate hikes are bearish for gold, even though history has long proven just the opposite.  Gold and gold stocks surged after that hike as I predicted.

From the day before that latest FOMC meeting to this week, GDX rallied 13.8% to $24.37.  Wednesday morning when I decided to pen this essay, GDX was nearing $24.50.  So the long-awaited decisive $25 breakout is in easy reach.  Gold stocks are a volatile sector, with 3%+ daily swings in prices relatively common.  So all it will take to propel GDX above its $25 resistance is a few solid-to-strong sector up days.

The upcoming Q4’17 earnings season for the major gold miners in the next few weeks could prove the catalyst to spark serious gold-stock buying.  Because gold stocks are so deeply out of favor, the small fraction of traders that even think about them assume they are struggling operationally.  Throughout all the markets, traders wrongly attribute prices stretched to anomalous levels by extreme herd sentiment to fundamentals.

A month ago bitcoin skyrocketed near $20k as many traders believed such extremes were fundamentally righteous due to the underlying blockchain technology.  Yet it was a popular speculative mania, extreme greed sucking people in.  In early December I warned “Once this mania bitcoin bubble bursts, and it will, the odds are very high that bitcoin will lose 50% to 75% of its value within a few months on the outside!”

This week just over a month later bitcoin has indeed been cut in half, falling to $9k intraday.  Extreme prices are the result of irrational and ephemeral herd sentiment, not fundamentals.  Gold stocks are now stuck on the other end of the psychology spectrum, plagued with extreme fear.  Since their prices have been so weak, traders think poor fundamentals must be the reason.  But that’s simply not true at all.

As a contrarian speculator and market-newsletter writer for the past couple decades, few people are more deeply immersed in the gold-stock realm than me.  Every quarter just after earnings season I dive into the actual operating and financial results of the major GDX gold miners.  I’m eagerly looking forward to doing that again with their new Q4’17 results, which will be reported between late January and mid-February.

So now the latest quarterly results available from the major gold miners are Q3’17’s.  I explored them for the top 34 GDX gold miners, representing almost 92% of its total holdings, back in mid-November.  In Q3’17 these elite gold miners reported average all-in sustaining costs of $868 per ounce.  That’s what it costs them not only to produce gold, but to explore for more and build new mines to maintain production levels.

Q3’17’s average gold price was $1279, which means the major gold miners were collectively earning profits around $411 per ounce.  That made for hefty 32% profit margins, revealing an industry actually thriving fundamentally instead of struggling as herd-sentiment-blinded traders wrongly assume.  Gold miners make such excellent investments because their mining costs generally don’t follow gold prices.

Gold-mining costs are essentially fixed during mine-planning stages, when engineers and geologists work to decide which ore to mine, how to dig to it, and how to process it.  Once mines’ necessary infrastructure is built, their actual mining costs don’t change much.  Quarter after quarter generally the same levels of equipment, employees, and supplies are needed to mine gold.  So all-in sustaining costs hold pretty steady.

In the four quarters leading into Q3’17, the top-34 GDX gold miners’ all-in sustaining costs averaged $855, $875, $878, and $867.  That works out to an annual average of $869, virtually identical to Q3’17’s $868 per ounce.  Those flat AISCs happened despite the gold price varying greatly in that five-quarter span, with this metal slumping as low as $1128 and surging as high as $1365.  Gold-mining costs are static.

So as long as prevailing gold prices remain well above all-in sustaining costs, mining gold remains very profitable and spins out big positive operating cashflows.  And relatively-flat mining costs generate big gold-miner profits leverage to gold.  These core fundamental truths about gold-mining stocks are what could help their upcoming Q4’17 results ignite the buying necessary to propel GDX above $25 for a major breakout.

These new Q4 results aren’t going to be spectacular, as gold’s $1276 average price last quarter was just under Q3’s $1279 average.  But assuming flat all-in sustaining costs as usual, $868 in Q4 would still yield fat profit margins of $408 per ounce.  That too is virtually unchanged from Q3’s $411.  So the major gold miners as a sector shouldn’t see collective downside surprises in earnings in Q4, avoiding damaging sentiment.

It’s not the Q4’17 results that should spark major gold-stock buying, but their implications for the current Q1’18 quarter.  While Q1 is young, gold is averaging nearly $1323 so far as of the middle of this week.  That is already 3.6% above Q4’s average, which is a big move higher.  If these gold levels hold and the major gold miners’ all-in sustaining costs hold, they are looking at Q1’18 profits way up at $455 per ounce!

That’s a whopping 11.5% higher quarter-on-quarter!  Not many if any sectors in all the stock markets can even hope for such massive earnings gains.  And if gold continues powering higher in the coming months in a major new upleg, Q1’s average gold price will be pulled higher accordingly.  That means even larger major-gold-miner profits growth.  These super-bullish prospects ought to rekindle material gold-stock demand.

Investors usually buy stocks not because of current earnings, but because of what they expect profits to do over the coming year or so.  Rising gold prices coupled with flat costs give gold-mining profits growth in 2018 some of the greatest upside potential in the entire stock markets.  Institutional investors should take notice of this as Q4’17 results are released, leading to funds upping their tiny allocations to gold stocks.

On top of that January tends to be a big news month for the gold miners, as many publish their cost and production outlooks for the new year.  These reports tend to be bullish on balance, with the major gold miners forecasting higher production and lower costs tending to garner the most attention.  So there’s good odds of positive newsflow over the coming weeks as well, drawing investors’ focus back to gold stocks.

All this shows why the gold miners’ stocks have usually enjoyed strong seasonal rallies in January and most of February.  So GDX now has its best chance in a year of decisively breaking out above $25 in the coming weeks.  That would work wonders for bearish gold-stock psychology.  The more gold stocks rally, the better herd sentiment, and the more traders want to buy them.  And GDX’s potential upside is huge.

This last chart encompasses nearly all of GDX’s entire history going back to early 2007, a half-year after it was birthed.  Gold stocks remain wildly undervalued today, so GDX $25 and even its $31.32 seen at gold stocks’ latest major interim high in early August 2016 are super-low in longer-term context.  GDX is actually still down near stock-panic levels, highlighting vast upside as gold stocks inevitably mean revert higher.

The shaded area in the lower right encompasses the last couple years.  Despite GDX seeing one heck of a bull-spawning upleg in early 2016, the gold stocks remain very low.  GDX itself actually hit an all-time low in January 2016.  The gold stocks were trading at fundamentally-absurd prices as I pointed out that very week.  That extreme anomaly was the product of fleeting herd sentiment, it had nothing to do with fundamentals.

So far in young 2018, GDX is averaging $23.66 on close.  That’s actually worse than Q4’08’s $25.13, which was during the most-extreme market-fear event of our lifetimes.  For the first time since 1907, the general stock markets suffered a full-blown panic in late 2008.  Everything else including gold and its miners’ stocks were sucked into that epic maelstrom of fear.  Traders were terrified, fleeing in horror from everything.

So GDX plummeted as low as $16.37 in late-October 2008, climaxing a devastating 71.0% drop in just 7.5 months.  In that panic quarter of Q4’08, gold averaged just $797.  While industry costs were lower then, the major gold miners were still earning much less in both profit-margin and absolute terms than they are today.  Yet the average GDX share price was much higher in Q4’08 than it’s been over the past year!

The fact GDX could trade around $25.13 during a stock-panic quarter with $797 gold highlights the sheer madness of today’s gold-stock prices.  Since 2017 dawned, GDX has averaged just $22.99 with $1261 average gold levels.  Seeing gold-stock prices 8.5% lower despite strong profits and average gold prices being a whopping 58.2% higher makes zero sense!  The gold stocks have to mean revert far higher from here.

That’s what happened after the extreme pricing anomalies of that late-2008 stock panic too.  Over the next 2.9 years, GDX more than quadrupled with a 307.0% gain!  Another proportional mean-reversion bull out of early 2016’s all-time GDX low would catapult this ETF back up near $51.  That’s still more than another double from today’s levels.  And with gold mining so profitable, this new bull’s gains should be far larger.

While investors and speculators alike can certainly play gold stocks’ powerful coming upleg with major ETFs like GDX, the best gains by far will be won in individual gold stocks with superior fundamentals.  Their upside will far exceed the ETFs, which are burdened by over-diversification and underperforming gold stocks.  A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.

At Zeal we’ve literally spent tens of thousands of hours researching individual gold stocks and markets, so we can better decide what to trade and when.  As of the end of Q4, this has resulted in 983 stock trades recommended in real-time to our newsletter subscribers since 2001.  Fighting the crowd to buy low and sell high is very profitable, as all these trades averaged stellar annualized realized gains of +20.2%!

The key to this success is staying informed and being contrarian.  That means buying low before others figure it out, before undervalued gold stocks soar much higher.  An easy way to keep abreast is through our acclaimed weekly and monthly newsletters.  They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks.  For only $12 per issue, you can learn to think, trade, and thrive like contrarians.  Subscribe today, and get deployed in the great gold and silver stocks in our full trading books!

The bottom line is the leading GDX gold-stock ETF looks to be on the verge of a major breakout.  The upcoming Q4’17 results from the major gold miners along with Q1’s higher prevailing gold prices ought to catch investors’ attention.  The gold miners should prove very profitable in Q4, with prospects for big and fast earnings growth in Q1 and all of 2018 as gold powers higher.  This should help GDX get bid well over $25.

Once gold stocks power decisively above that vexing upper resistance level of the past year, the shift in trader psychology back to bullish will really accelerate.  Gold stocks should enjoy relatively-large capital inflows from institutional investors looking for undervalued sectors in an extremely-overvalued stock market.  The forgotten gold miners’ stocks have a good chance to outperform everything again this year like in 2016.

Adam Hamilton, CPA

January 19, 2018

Copyright 2000 – 2018 Zeal LLC (www.ZealLLC.com)

A candidate for 'deal of the year' in British Columbia

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Kutcho project

1. Introduction

Very rarely I come across a junior that simply seems to tick almost all boxes, and it looks like new sponsor Kutcho Copper Corp. (KC:TSX.V) is doing just that. From project profitability to management, from financials to geology, from location to metal prices, it comes across as a genuine display of quality and excellence. CEO Vince Sorace certainly made the most of Capstone Mining's strategy change a few years ago not to develop relatively smaller, non-core assets, and now looking to divest assets to clean up their troubled balance sheet.

In an impressive stream/convertible debt/equity deal with Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) to the tune of C$120M, Sorace managed to buy the Kutcho Copper Project outright in C$28.8M all cash plus an equity interest in the new to be formed company from Capstone, when Kutcho Copper still was predecessor Desert Star Resources, with a market cap of only C$10M at the time. As a consequence, the company is also fully financed to the FS under the current mine plan. I can't recall (I'm in this industry since 2010) ever having seen deals being done that are so much bigger than the involved junior itself, and are so well structured, with such a quality asset, so as far as I am concerned this should be a prime candidate for deal of the year for 2017.

Although Sorace would certainly deserve all the acclaim for this deal he could possibly get, the main purpose of this article is of course providing an outlook on upside potential for investors. When management would decide to just advance the project, which already boasts an excellent 2017 Pre-Feasibility Study (PFS), to Feasibility Study (FS) stage and having it fully permitted, there is already realistic potential for a double at current strong (and expected to go higher) base metal prices. But there is more. The company has several possibilities to include considerably more resources into the mine plan, which could increase the Net Present Value (NPV) of Kutcho Copper significantly. In this analysis I will discuss this potential, compare the company with peers, and indicate valuation upside.

All presented tables are my own material, unless stated otherwise.
All pictures are company material, unless stated otherwise.
All currencies are in US Dollars, unless stated otherwise.

2. Company

Kutcho Copper Corp. is a Canadian resource development company focused on expanding and developing the Kutcho high grade copper-zinc VMS project in northern British Columbia. The project is located nearby the richly mineralized Golden Triangle Zone, in hilly/moderately mountainous terrain. As can be seen below by the number of projects and mines, British Columbia is a familiar mining jurisdiction, and has a solid ranking on the Policy Perception Index according to the last Fraser Survey of Mining Companies, coming in at #41 out of 104 jurisdictions worldwide.

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Location map: Kutcho Copper: Kutcho project

The company signed a definitive agreement with Capstone Mining to acquire the Kutcho high grade copper-zinc-gold-silver project for C$28.8M and a 9.9% equity interest in Kutcho Copper, and at the same time released an updated PFS on June 15, 2017, which showed excellent figures. Seeing this being done at the same time is pretty unusual as well, but definitely confirms the can-do mentality of Sorace and his team for me. The base case scenario generates an after-tax NPV8 (8% discount) of C$265M and an after-tax IRR of 27.6%, using metal prices of US$2.75/lb copper, US$1.10/lb zinc, US$17.00/oz silver and US$1,250/oz gold and a currency exchange rate of 0.75 USD/CAD. This is all based on a modest initial capex of C$220.7M which is well below base case NPV, which is a strong feat for a base metal project in general. With current (much higher) metal prices this already proves to be a conservative PFS, and there is much more upside. More on this later.

Kutcho Copper could buy this asset as it made an impressive set of deals with Wheaton Precious Metals, formerly known as Silver Wheaton, and raised cash in the market. Besides the streaming deal which will provide US$65M for FS, permitting and early construction, a combination of a C$20M convertible debt loan and a C$4M equity financing with Wheaton, plus a mostly brokered C$14.7M equity financing (the aforementioned C$4M Wheaton equity was included here) provided for the C$28.8M cash component in order to acquire the Kutcho project from Capstone. I followed it closely and was amazed at the achievements, as I know how hard it can be for juniors to just raise a few million dollars. The Wheaton deal obviously opened many doors.

After closing the acquisition on December 15, 2017, which happened just a week after raising the C$14.7M, Kutcho Copper commenced trading on December 21, 2017, at the TSX Venture Exchange under the ticker KC.V.

As of January 16, 2017, Kutcho Copper has a share price of C$0.76 and a market cap of $36.82M, with only a very tight 48.45M shares outstanding (fully diluted 70.42M, all options and warrants out of the money at C$1.00, expiry in 3 years). The average volume since trading on December 21 is a pretty liquid 475,000 shares.

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Share price over 1 year period

As soon as the trading halt was lifted, the markets showed a lot of interest, and as fundamentals and future potential seem to be excellent, I see Kutcho Copper shaping up as one of the go-to base metal projects for the coming years.

Kutcho Copper has an estimated $4M in cash at the moment, and C$20M in debt. Management and Board controls 10% of shares, which is good to see; Wheaton Precious Metals holds 13% and Capstone Mining is the largest shareholder with 16%. There are 17.65M warrants, of which 6.37M are in the money and 3.4M of those will expire before the end of August. The balance has an expiry in 3 years @ C$1.00. The options have an average life of 4.25 years with a weighted average price of $0.62.

The management team and the board of directors consist of some very experienced quality people. For starters there is President and CEO Vince Sorace, who has been around for 25 years in the mining business, having raised over C$200M and founded various private and public resource companies. He managed to attract a few very interesting names to his team, as there are two key people from former high flyer Kaminak Gold: VP Community & Environment Allison Rippin Armstrong, and VP Exploration Rory Kutluoglu. COO Rob Duncan is also a household name in mining, having done a lot of exploration for majors including Rio Tinto and Inmet, with a lot of specific VMS experience. Eva Nakano does Corporate Development, and it's the first time I see this job being done by someone who is a Professional Geologist with an MBA.

Recent additions are Len Holland and Angus Christie, no newcomers either in the mining industry. Holland led the re-commissioning of Trevali's Caribou project, consults to Glencore, SNC Lavalin and First Quantum Minerals among others, and will lead the optimization of metallurgical processes. Christie, who led the Feasibility Studies by JDS for Sabina Gold & Silver and Kaminak Gold, will oversee the Feasibility Study process for the company. These two experts further complete and solidify one of the best technical teams possible.

The Board of Directors consists among others out of Stephen Quin, the current CEO of Midas Gold (who is also the former President and COO of Capstone Mining, and former President and CEO of Sherwood Copper, which amalgamated into Capstone during his tenure), Bill Bennet, former BC mines Minister for 3 periods, helped launch BC's First Nations mine revenue sharing program, and Brad Mercer, who leads exploration at Capstone Mining, who also managed the Kutcho field program in 2010 that contributed to the 2011 PFS for Capstone at the time.

The Advisory Board has also three notable and very experienced names on board, as there are Peter Meredith, former CFO and Deputy Chairman of Ivanhoe Mines, Rob Carpenter, co-founder and long time President and CEO of Kaminak Gold, and Tookie Angus, current Chairman of Nevsun Resources and former Managing Director of Mergers & Acquisitions for Endeavour Financial, and former Head of the Global Mining Group for Fasken Martineau. With Sorace having arranged all financings necessary to complete the feasibility study under the current mine plan, I can't think of a better team to handle exploration, project development and permitting.

I guess by now it becomes clear why I am pretty enthusiastic about Kutcho Copper, but first I will discuss the basics like the deals and main metals copper and zinc, before I delve into project, project economics and potential upside.

3. The deal and the financings

The acquisition of the Kutcho project by predecessor Desert Star Resources was a relatively straightforward deal, as the majority was cash, as can be seen in the summarized terms of the agreement as per the news release of June 15, 2017:

  • Desert Star to acquire 100% interest in Capstone’s wholly-owned subsidiary Kutcho Copper Corp. which holds 100% interest in the Kutcho project
  • Desert Star to pay Capstone C$28.8 million cash upon closing
  • Capstone to become 9.9% shareholder of Desert Star at the completion of the Acquisition
  • The shares issued to Capstone, will be restricted from sale for a period of two years from the date of issuance. Upon termination of the pooling restrictions, Capstone must give the Company written notice of its intention to sell any of the Purchased Shares, and Desert Star will have a 10-day right to designate the purchaser of such shares.
  • For so long as Capstone holds at least 5% of the issued and outstanding shares of the company, Capstone will retain the right to:
    – Appoint one director to Desert Star's board; and
    – Participate in any subsequent security offerings on a pro-rata basis in proportion to Capstone’s beneficial ownership interest in the Company's outstanding shares immediately prior to such offering
  • If the closing of the acquisition has not occurred on or before August 31, 2017, either Capstone or the Company may elect to terminate the Agreement

The C$28.8M cash component was puzzling to me when I first read about the intended acquisition, as normally it would be extremely difficult for an almost inactive C$10M market cap junior to raise that kind of money, not even taking into account the resulting amount of dilution. Therefore, the involvement of Wheaton two months later was quite a surprise.

The 9.9% stake of Capstone and a Board seat reinforces the relationship between the two companies, as director Quin was the former President and COO of Capstone, and already had the Kutcho project under his supervision as the CEO of Sherwood before it amalgamated with Capstone. VP Exploration of Capstone Brad Mercer is the representative for the 9.9% interest of Capstone in Kutcho Copper.

The last highlighted term turned out to be a formality, when the C$65M streaming deal with Wheaton was announced, Capstone was more than happy to initially extend the deadline to September 30, 2017, and extended this further into December later on, as CEO Sorace provided enough convincing arguments to do so.

The first streaming deal with Wheaton was already impressive, as Wheaton has the reputation of doing thorough due diligence. Here are the highlights:

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These terms are not too different compared to other deals. For example, the ongoing cash payments for silver come in at 20% at the Glencore-Wheaton deal (US$900M upfront cash).

In addition to this, Wheaton also agreed to participate in up to 14% of a proposed equity financing to a maximum of C$4M, proceeds to be used for the acquisition of the Kutcho project. This, and the US$7M upfront for FS expenditures were quite important in my view to convince participants in the pivotal C$14.6M round later on.

Another agreement very important for this round was the C$20M convertible debt loan with Wheaton, announced on October 31, 2017, which was fully backstopped by Wheaton, second lien to the US$65M stream and bears 10% interest per annum. This provided for the majority of the C$28.8M acquisition price for Kutcho in cash. The conversion price is a 25% to 30% premium to the price of any concurrent equity financing.

This equity financing was the C$14.6M round as mentioned before, priced at C$0.65 with half a warrant (@C$1.00, 3 years expiry). The money was raised by a syndicate lead by Macquarie, consisting of BMO, Haywood and PI Financial, and was the biggest risk in my opinion as everything else depended on it. CEO Sorace came through with flying colors, the acquisition of the Kutcho copper-zinc-silver-gold project could be finalized and Kutcho Copper was born.

Because of this deal, Kutcho Copper doesn't have to finance US$57M of capex by itself anymore (US$65M Wheaton stream minus US$8M of FS expenditures), which according to rules of thumb of 2/3 debt-1/3 equity would save the company about US$20M in dilution (which is about C$25M) in the long run.

An old, still existing back-in right of Royal Gold for 50% for 300% of eligible expenditures triggered at the FS isn't likely to be executed anytime soon. First, the back-in right is not on the entire deposit; it is only on a portion of the deposit. Royal Gold’s 50% of that portion amounts to 24% of the project. At the moment, the eligible expenditures are sitting at $50M and this will be increasing with another estimated C$12-15M. Therefore, their back-in payment would be at least C$150M and likely up to C$195M. If Royal Gold choses to back-in, they would additionally be responsible for their 24% of initial capex, so on a C$220.7M capex that is an additional C$53M, resulting in C$203-248M payments.

On a $265M NPV it doesn’t make much sense for Royal Gold to pay that kind of cash for only 24%, which is just C$63.6M. Even at an NPV of about C$800-1000M it would mean just break even for Royal Gold, but capex increases with the expanded scenario which would be needed for these kind of NPV numbers, so the needed NPV needs to be significantly higher before they would be interested. According to my modeling later on in this article, an NPV of C$800M comes close to the best scenario at C$3.75/lb copper, so never say never but it seems like this could only become a realistic scenario at C$5.00-5.50/lb copper.

Talking about copper, let's have a look at the main metals of the Kutcho project.

4. The metals: copper and zinc

The primary revenue generator of the Kutcho project is copper, followed by zinc, both accounting for about 92% of total revenues. According to the 2017 PFS, the majority (about 66%) of copper-zinc revenues for the Kutcho project is generated by copper at a US$2.75/lb copper price and a US$1.10/lb zinc price.

Copper

Copper is a well-known metal as it is used for many purposes (electronic devices, power cables, cars, plumbing, dynamo's, building parts, etc.). Copper is deeply tied to the Chinese economy, which uses about 40% of global supply. The trading and pricing of copper has become an indication of the overall health of the Chinese economy. Before that, it more or less did the same for the world economy, hence the name "Dr. Copper."

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Copper; ready to be shipped

Since 2001, the price of copper increased dramatically, following the development and growth of China. However, this growth path didn't appear to be sustainable for the long term, and China is currently switching from an exporting producer to a consumer oriented economy.

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Copper price history

Since copper has been or is still used (little do we know) as collateral in many financings in China, it could very well be that large, hidden stockpiles still exist. A side effect of this function as collateral is that the perception of "Dr. Copper" changed, and cannot be used anymore to simply gauge the state of the Chinese economy, let alone the world economy. It becomes more of an indication of speculation on copper.

Notwithstanding this, as the Chinese economy and the world economy in general are doing well and keep improving, overall demand for copper seems to have picked up again since the beginning of last year. This has been fueled by several events and developments, as there were strikes at some of the largest mines, Indonesia temporarily halting exports of concentrate, improving Chinese growth figures, Trump's tax cut plans, Chinese efforts on limiting pollution affecting smelter operations and the ongoing paradigm shift towards electrification of society (electric vehicles, solar, wind, grid storage, batteries, etc.), which will involve a significant increase in copper demand.

At a longer timeframe it is well known that the average grade of existing operations and their reserves keep dropping, impacting output. Besides this, it is also a problem that new projects aren't discovered fast enough to keep up with ever rising demand. Codelco, one of the biggest copper producers globally, is currently investing up to $25B in its existing mines just to keep production levels intact. Another development is the increasing time from discovery to production, due to needed increasing size of projects, as lower grades result in increasing need for economies of scale, and this in turn leads to huge projects that are hard to develop, permit, finance and construct, especially since many jurisdictions hosting large copper resources are becoming more hesitant on increasing environmental concerns. This is all believed by analysts to lead towards a supply crunch for copper in a few years, widening to a massive 7-8Mt deficit by 2030:

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Copper supply/demand; Rio Tinto presentation
, source: Wood Mackenzie Q3 2017

2030 is a long way out from today of course, and part of the copper price is speculation, but it does look like Kutcho Copper is positioned well when aiming for a production decision in 2-3 years.

Zinc

A chronic shortage of supply of zinc is well underway now. The coincidental closure of major zinc mines (Brunswick, Perseverance, Century, Lisheen, Skorpion) through depletion during 2016, taking 500kt per annum off the table, resulting in a widening supply/demand deficit and lowering LME stocks to critical levels, and coupled with new capacity not coming online before the end of 2018, the outlook for the zinc price in 2018 looks strong. The price of zinc already ran up from US$0.67 to a recent US$1.53/lb, and is forecasted to go up even more this year, possibly even to US$2/lb:

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The zinc market has been in deficit for a long time (since 2012), but only since the end of 2015 did the zinc price start to appreciate, probably due to covert Chinese stockpiles which finally seemed to be depleted by then. Chinese stockpiles are always a possibility with any Chinese supply and/or demand dominated commodity.

Here is a chart from Kitco.com, indicating long term weakness in LME inventories, but only since the end of 2015 coinciding with factors like production going offline:

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It seems like the stocks are heading for new lows, and recently broke through the 200,000t levels, and dropped below the 10-day supply threshold that is deemed to be critical. China has also been shutting down numerous mines due to safety and environmental concerns. However, there are developments going on which could balance the current supply/demand deficit in a few years. Glencore is bringing back online a staged annual 130,000t of production at its Lady Loretta mine located in Australia, commencing in Q4, 2018 and at full production at the end of 2019.

Another mine is the Dugald River mine, owned by Chinese giant MMG, which would add 170,000t annually, also located in Australia. Notable operators looking to expand existing mines are Teck and Hindustan Zinc, adding another estimated 170,000t. This is also planned for late 2018 or the beginning of 2019. As total zinc production is about 14Mt per year, adding 470,000t doesn't sound much but the earlier cutback of 500,000t was able to send the zinc market in a serious deficit. Big question will be what (Chinese) demand will look like when new supply starts to come online. As zinc is primary used for galvanizing steel, its demand is tied to general economic growth. At current growth rates, which aren't accelerating yet and are modest, I see the zinc price coming down again after a peak somewhere this year, but could probably hold on to levels above US$1.10-1.20/lb for the longer term, as I don't view the forecasted additional production coming online capable of creating a big surplus.

As the majority of revenues is generated by copper, the outlook for the long-term economics of this project is strong in my view.

5. Project

The Kutcho project is located in northern British Columbia, approximately 100 kilometres east of Dease Lake and Highway 37, and consists of one mining lease and 46 mineral exploration claims encompassing 17,060 Hectares. The site is accessible via a 900-meter long gravel airstrip located 10 km from the deposit and a 100 km long seasonal road from Dease Lake suitable all year for tracked and low-impact vehicles, and trucks in the winter period. The road and airstrip obviously have to be upgraded for a mining operation, and this is taken into consideration in the 2017 PFS, which will be briefly discussed later on.

I wondered what exactly the need is to upgrade the airstrip in BC which has some remote areas but isn't exactly the middle of nowhere, and management had this to say: "It is very inexpensive to upgrade the airstrip such that it can be used for efficient mining crew rotations. That way scheduled flight service can pick workers up in towns far away such as Smithers, Terrace, and even Vancouver and a crew change out can still be completed in one day. The second, and very important, reason for the airstrip is that it provides a rapid way to get medical aid in and out if there is a serious incident on site. Lastly, it means less traffic on the haul road." Fair enough.

Questions on a potential impact of a winter break were also quickly answered by management. They have planned the scale of the program such that they can achieve all the technical data collection for the feasibility in one field season. Allison Armstrong is also completing a Gap analysis going back from 2017 to 2011 for environmental permitting requirements, and all of that data can also be collected in 12 months. There isn't really a winter break although the easy field season up there is May 21 to October 31. Outside this window, things are not impossible, just more expensive. Environmental monitoring occurs year-round with data downloads and monitoring monthly. These are simple skidoo or helicopter trips in the winter months.

Management will complete all drilling requirements June 1st to Sept 30th with up to four drill rigs. Therefore, Kutcho has some safety margin before things become more expensive.

The project has a long history, as mineralization was discovered back in 1968, and Sumitomo and Esso started developing the project from 1972 to 1989. From then onwards, Kutcho sees a number of different owners, where it always had a non-core position, or metal prices didn't justify further development. The last owner Capstone didn't develop it further after a positive 2011 PFS as it changed up its strategy towards larger projects, buying for example Santa Domingo and Pinto Valley, and shelving Kutcho. A few years ago, balance sheet issues emerged, and eventually forced Capstone into recently selling the project.

Mineralization at Kutcho comprises three known "Kuroko-type" volcanic massive sulfide ("VMS") deposits aligned in a westerly plunging linear trend. VMS deposits are sought after as they usually occur in groups, close to each other. Features of the Kutcho deposits suggest that they formed at or near the water-seafloor interface in a structurally controlled depression.

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The red sulphide horizons in the right diagram host the mineralization for Kutcho. The chemical composition of the alteration around the Kutcho deposits is well zoned around the hydrothermal vent areas. For readers with geological knowledge: mineralization consists of a pyritic footwall with zoned copper and zinc towards a sharp hanging wall contact.

The largest deposit, Main, comes to surface at the east end of the trend, with Sumac followed by Esso down plunge to the west.

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Although Main dips to about 250m below surface, the operation will be largely an underground mine, with only in the first year a starter pit. The proposed mine only handles the Main and Esso deposits, as Sumac hasn't been sufficiently delineated (just Inferred). The Esso deposit is located about 2km on strike from Main, and a possible upgrading and including Sumac into the mine plan could result in some likely development cost savings at Sumac.

The Kutcho project has a decent resource estimate, completed in 2017, and although the pounds of copper don't exceed the 1B pounds (for comparison majors are looking for 5-10B pound deposits), the grade is pretty high. According to this now relatively outdated information from 2015, the global head grade could be ranging between 0.8-0.9% at the moment, and global reserve grade below 0.5% even, so Kutcho's average 2% grade is either way impressive. The by-products improve this to an excellent 2.92% copper equivalent grade:

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Management has outlined plans to increase production, and has to increase Reserves for this. The main strategy for this is to use a lower cut-off grade in order to increase Reserves, and as indicated earlier is looking into upgrading Sumac by infill drilling. More on this later, let's have a brief look at the 2017 PFS first.

The results of this study, more in particular the stellar after-tax IRR of 27.6%, was the reason I was fascinated straightaway when I heard about the acquisition. Usually a copper dominated project has a capex well over US$1B and has IRRs below 20% @US$3.00/lb copper, but this one came in at a 53% higher IRR using US$2.75/lb copper as a base case, which is conservative at current copper prices of US$3.25/lb, and indicates healthy margins. A major threshold for me was also the capex of C$220.7M being lower than the after-tax NPV8 of C$265M, as I consider the capex being equal to NPV a solid starting point. As an aside: for megaprojects capex could be bigger to the tune of even two times before financiers/buyers lose interest, and IRRs could sink to 14-15% in that case as well.

The PFS used a 2,500 tpd underground mining scenario with a starter pit, with a life of mine (LOM) of 12 years. This results in a C$88k capex/tpd ratio which seems fairly conservative as I will show in a minute. An interesting feature is the limiting of a tailings pond, which is beneficial to permitting this part, as relatively recent failures (2015: Mount Polley, Samarco) have increased scrutiny. The tailings will be sent to a paste backfill plant to produce a cemented paste, half of which will be used for backfill while the other half will be sent to the surface tailings disposal.

This sounds good, but as permitting in BC isn't always easy, I still wondered why management opted for a small 1y starter pit, as open pits create more surface disturbance, which generates more issues for permitting. According to management, the reason they retained the small year one open pit rather than having a 100% underground mine is that the hanging wall rocks from that pit are acid neutral or acid consuming and will be used as construction material for site roads and pads for infrastructure. They would have to dig a small pit for those materials anyway so the idea to have one dual purpose pit where they also get to extract ore from makes sense, at least to me.

Besides this, I suggested dry stack tailings as another option to minimize environmental impact and permitting risks. According to management, dry stack tailings versus paste tailings and a cover over them is something the company and JDS, the engineering firm responsible for the PFS, will indeed study in detail in the upcoming FS. However, at the moment the engineers at JDS favor the paste tailing facility due to factors surrounding climate and precipitation levels. If this remains the safest way to store the surface tailings, the company will be responsible for all interested parties, communities and First Nations understanding that.

CEO Sorace is very aware of the importance of including First Nations in the environmental process, and already struck a Communications Agreement with the Tahltan Central Government on October 26, 2017, creating the framework for strong engagement. Management has also taken initial steps to establish a relationship with the Kaska Dena Government. Typically an Impact Benefit Agreement is signed closer to the completion of a Feasibility or further along the process.

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It is refreshing to see the First Nations having a prominent place early on in the process, and by hiring an expert like Alison Rippin Armstrong things seem to be in very good hands.

After this little intermezzo, let's continue with the PFS. Recoveries will be 84.7% for copper and 75.7% for zinc, which indicates an opportunity to optimize the metallurgy according to management. The average annual production will be 33M lbs copper and 46M lbs zinc. The payback period will be 3.5 years after-tax.

Although the company completed a PFS last year, and it isn't easy to find comparable peers, I wanted to have some idea of metrics for underground copper projects:

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As mentioned, it can be seen that capex for Kutcho seems low in absolute terms, but in relative terms it is at least twice as expensive compared to peers. This has a lot to do with infrastructure, but probably also with economies of scale, as you can see at the different throughput rates. I also included the monster project of NGex Resources, Los Helados, to show what scale can ultimately do for capex/tpd. This is one of the reasons that management is aiming at a 4,500tpd scenario. Sustaining capital seems low as well vs capex, compared to its U.S. peers, especially for an underground operation. Management had this to say about it: it all depends how companies have distributed initial capex vs sustaining capex. The Kutcho initial capex includes items like full plant construction, road and full 1 year of underground development, therefore sustaining capital is low and primarily consists of underground development. I guess I would have to compare the studies more in-depth to fully understand the differences here.

The Nevada Copper IRR seems to look good on a conservative US$2.77/lb copper price, but looks can be somewhat deceiving. In reality their project has already benefitted from a huge US$220M in sunk costs. A significant part of it has been used for drilling, engineering, studies, permits etc, and also construction of part of the open pit component, but my guess is 35-50% was used for the underground project, more specific for engineering, surface infrastructure and facilities, headframe/hoist installation, warehouse, a 630m deep and 8m diameter production shaft and over 200m of lateral underground development.

Compared to the relatively high capex, Kutcho EPCM seemed low at first sight, but when I looked at Nevada Copper and Highland Copper, it turned out to be quite average for such North American relatively small-scale copper operations. As can be seen, copper recoveries for Kutcho are below those of its peers, and this is another target of management, especially zinc recoveries, which shouldn't be too hard to get to 80% in my view.

When discussing the project, a number of options for further improvement of economics have been identified. Here is a brief overview, and other options as well:

1. Lowering the cut-off from 1.5% to 1% for the Main zone:

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This could add 5Mt to the mine plan pretty easily, still maintaining most of the average grades for the various metals, and even more important the orebody looks much more continuous which could prevent dilution of ore with waste, so it wouldn't surprise me if the actual head grade would be relatively higher versus the reserve grade in that case.

2. The same goes for Sumac, as this would add 4Mt. As Sumac is Inferred, more infill drilling is needed to convert this into Measured and Indicated and eventually into Reserves, needed for the upcoming Feasibility Study. The FS is planned for Q2 2019, as can be seen here:

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3. The 3 deposits are all open down dip, so there is another possibility to add resources. According to management, 1.3-3.6Mt isn't unrealistic at all. So Kutcho could be looking at 23-24Mt total tonnage potential.

4. There are many other drill targets identified on the property, more specific VMS sulphide horizons like the ones hosting the Kutcho deposits. To gain useful mineralization from these targets on a short term looks a bit like a long shot, as historic drill results were low grade, short intercepts that indicates lots of newly required drilling, but more importantly there is no time to possibly convert these targets from greenfield to eventual reserves before the end of Q4, 2018, when all drilling must be finished according to plan.

5. Improving recovery rates for copper and especially zinc, as according to the PFS: "Recoveries and reagent usage may be improved by further metallurgical test work, particularly zinc, which was not optimized during the latest round of metallurgical testing."

6. The exchange rate of the Canadian Dollar versus the US Dollar is improving (PFS rate was 1.33, now 1.25)

7. Metal prices are significantly higher at the moment compared to the period when the PFS was completed (summer of 2017), management could hold on to these PFS price decks in order to be conservative, but in case of copper it doesn't seem to be a long-term risk to use a slightly higher price. For zinc it looks like the current US$1.10/lb is just fine for the long term.

8. When the current Reserve would go from 10,44Mt to an estimated 20Mt (as you have to take into account some dilution) if everything works out as intended, the possibility for a 4,500tpd operation becomes a reality. When using a bit lower capex/tpd figure because of economies of scale (down from C$88,280 to C$75,000), initial capex is estimated at C$337.5M (coming from C$220.7M). Lowering opex from C$73.72 to C$65 seems realistic too.

When I would use a 20Mt scenario, an 80% Zn recovery rate, a 1.25 exchange rate, a US$3.00 base case copper price and a fixed US$1.10 Zn price, a 2,500tpd throughput scenario for a LOM of 22 years, and a 4,500tpd throughput scenario for a LOM of 12 years, this would be the resulting hypothetical sensitivity table:

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Although the average grade goes down a bit on the expansion scenarios, the advantage of adding tonnage is obvious. The 4,500tpd 12-year scenario avoids the increasing discount over the years as is the case with the 2,500tpd 22-year scenario, and would result in a higher NPV and slightly better IRR. The ideal scenario would be, in my view at least, developing the 4,500tpd scenario, followed by potential delineation of more reserves for a longer LOM through exploration, as the geologists have identified many VMS targets in the area:

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COO and geologist Rob Duncan explained to me why the not-too-interestingly looking drill results provide enough material to see exploration potential. According to him, in VMS systems, the most important thing to understand is the volcanic stratigraphy (layering) and the position of the geological time breaks where massive sulphides (from black smoker chimneys etc.) can accumulate on the sea floor or in the near subsurface.

The exploration results, simply because numerous assays do contain mineralization, however in short intercepts, indicate that the correct position has been found and that the semi massive or massive sulphides found there do contain economic metal minerals. In other words, they are not completely barren.

None of those results are near economic, however, Duncan has seen several examples where economic intersections can occur only 50m along strike from results like these. This is possible due to how dynamic the volcanic environment was at the time of formation. Just 50m away a different volcanic unit could very well provide the boundary for a sub basin that thicker accumulations if sulphides can get trapped in. Another frequent case is that in combination with the above, a secondary structure could appear, along which new volcanic units erupt from and/or higher heat flow channels the mineralized fluids through. So far drilling has resulted in economic grades, assumed to be in the vicinity of hopefully something bigger, by only the current anomalous results.

According to the opinion of Duncan, none of the exploration intersections (other than immediately west of Esso) represent targets from which to build resources from for now, but are highly encouraging from a pure exploration discovery point of view. Looking at the anomalous, non-economic results, versus the advanced stage of the existing deposits, I can only agree with this as it is too early stage to be included in the upcoming FS. However, this exploration potential could prove to be very interesting later on, as all intercepts are located within a 10km radius from the Main deposit, providing for good trucking options if economic mineralization might be discovered.

If this is the case, and tonnage could be added in order to increase LOM, this will have an impact on NPV and probably valuation as well in the future. In order to get an idea about valuation of Kutcho Copper, I will discuss this subject in the next paragraph.

6. Valuation

As I usually do, a peer comparison often comes in handy when it's about time to say something about valuations. Not so this time, as my tables just indicate that for copper projects there is incredible variation in typical metrics, notwithstanding stage or jurisdiction:

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And:

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As is always the case with peer comparisons, every company has its own story with very specific details, causing valuations the way they are, therefore making it impossible to take comparison results at face value. A few remarks: for Nevada Copper I used the combined PFS this time, indicating economics for the total project, which are less positive than just the earlier mentioned underground scenario. This causes Nevada Copper to trade more or less as a leveraged play on copper, especially with a capex still much higher than NPV. Western Copper & Gold applied fairly high metal prices besides copper, for example, US$1400/oz for gold which is 35-40% of revenues. A somewhat more industry-standard US$1250/oz would have taken down the IRR to about 19%. Additional issue here is a big capex, also 37% larger than NPV. Besides this, because it is a large open-pit operation and permitting in the Yukon isn't easy, the permitting takes a long time.

Although it isn't a bad project, this causes the P/NAV to be very low, actually the lowest in my table. Entree is actually a very different situation, with the Oyu Tolgoi 20% JV, where it is taken to production by Rio Tinto. I just included it to more or less show the valuation of a developer under construction. As Entree has more projects at Oyu Tolgoi, and the recently published PEA results include them all, my figures aren't very straightforward, but I chose to use the most advanced, smaller part.

Maybe the best peer to look at is Highland Copper, although this one also has another, earlier stage project (White Pine) besides its flagship project, Copperwood. It has been sitting on a 2012 FS for a very long time, actually during the full bear market, and will come with an updated FS in Q2, 2018. The grade, size and economics of their Copperwood project are more or less comparable, and Michigan, U.S. is a solid mining jurisdiction. It appears that Highland already has all major permits in place. The company has top notch shareholders (Greenstone 17%, Osisko Royalties 15%, Orion Mine Finance 14% and also 24% institutional shareholders), and management and directors hold 7% as well, which is all pretty impressive. There are a few differences of course: the share structure is very much diluted with 467.5M O/S and 617.8M F/D, and I am not aware of any financial packages like Kutcho Copper has arranged. Notwithstanding this, I consider Highland Copper an interesting copper play, worth further due diligence, as I don't own it yet. This all results in a P/NAV for Highland of 0.30, which is 130% higher compared to the current figure for Kutcho Copper, which indicates re-rating potential.

When we would look at the P/NAV of smaller producers like Nevsun, Sierra Metals and others, we see an average P/NAV of 0.6-0.7, and considering the size of the Kutcho deposits so far, this category is the direction Kutcho Copper will be going.

It is very hard to pinpoint towards a value of a developer before it is fully financed and ideally built and commencing production, but in my view the Highland Copper P/NAV of 0.3 provides us with a realistic and conservative guidance at FS/permitted stage. With the current base case NPV8 of C$265M @US$2.75/lb Cu, this would result in an estimated market cap of C$79.5M, and a hypothetical F/D share price of C$1.14. As management isn't going to sit on their hands, assuming they can in fact prove up 20Mt in Reserves, the 4,500tpd scenario would generate an estimated NPV8 @US$3.00 of C$584M, which would result in a hypothetical F/D share price of C$2.50 in 2 years from now, if all goes as planned. Also keep in mind that the Kutcho economics are excellent for a base metal project, and excellent economics usually get a premium in the market.

When the company achieves capex financing and successful construction afterwards, the P/NAV of 0.6-0.7 comes on the radar, with hypothetical targets of C$4 in sight, including new dilution as any package would probably contain some new equity. And this is all still at C$3.00/lb copper and C$1.10/lb zinc, which could prove to be conservative in a few years from now.

For this year, all efforts are geared towards increasing and upgrading the reserves/resources by lots of drilling, optimizing metallurgy, doing baseline studies and environmental assessment/permitting work. This will result in two major catalysts in the first half of next year: the updated resource estimate in Q1 2019, and the FS in Q2 2019. I asked management if they would be open to provide an updated PFS somewhere halfway (Q3 2018), based on already converted resources and optimizations until that point, and it seems a possibility in order to avoid a 2-year timeframe between the PFS and FS.

7. Conclusion

The longer I look at Kutcho Copper, the more I realize this is a very rare junior. It isn't ten-bagger material in 2 years, but in my view this could be one of the most compelling and low risk triples over that same time frame that I know of.

Management is top notch, the project has excellent economics and lots of upside potential, backers are top quality with Wheaton Precious Metals, and main metal copper is forecasted to go into long-term deficits, which could create higher metal prices. Dilution will be limited to an absolute minimum as everything up to the start of construction barring unexpected events is accounted for financially, and the share structure is already very tight.

All fundamentals appear to check out for this junior, and it seems only a matter of time before Kutcho Copper enjoys even further enhanced project economics, visualized by key catalysts, hopefully causing a significant re-rating. In my view, Kutcho Copper could very well be on its way to establish itself as one of the go-to base metal juniors of 2018 and beyond.

I hope you will find this article interesting and useful, and will have further interest in my upcoming articles on mining. To never miss a thing, please subscribe to my free newsletter on my website www.criticalinvestor.eu, and follow me on Seekingalpha.com, in order to get an email notice of my new articles soon after they are published.

Disclaimer:

The author is not a registered investment advisor, currently has a long position in this stock, and Kutcho Copper is a sponsoring company. All facts are to be checked by the reader. For more information go to www.kutcho.ca and read the company’s profile and official documents on www.sedar.com, also for important risk disclosures. This article is provided for information purposes only, and is not intended to be investment advice of any kind, and all readers are encouraged to do their own due diligence, and talk to their own licensed investment advisors prior to making any investment decisions.

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Exploration camp used by Kutcho Copper

Bond market bear creating gold bull

aheadoftheherd.com

Gold is climbing as bond yields rise and the dollar falls, over speculation that China is pulling back on buying US Treasuries and Japan signals it is winding down its quantitative easing program. Meanwhile, US debt continues to grow after the Republicans under President Trump pushed a trillion dollars worth of tax cuts through the Senate, that the Congressional Budget Office thinks will add $1.7 trillion to the deficit over the next decade.

It’s all good news for gold which thrives on the spectre of high government debt leading to more money-printing (aka the Federal Reserve buying Treasuries) and inflation.

Today’s Federal Debt is $20,493,401,574,964.07.

The amount is the gross outstanding debt issued by the United States Department of the Treasury since 1790 and reported here.

But, it doesn’t include state and local debt.

And, it doesn’t include so-called “agency debt.”

And, it doesn’t include the so-called unfunded liabilities of entitlement programs like Social Security and Medicare.

Federal Debt per person is about $62,805.

usgovernmentdebt.us

Inflation, of course, diminishes the value of the currency and hikes gold prices, since the US dollar and gold normally move in opposite directions.

Gold is seen as a hedge against inflation.

Consumer prices in the United States increased 2.1 percent year-on-year in December of 2017… Figures came below market expectations of 2.2 percent amid a slowdown in gasoline and fuel prices. Still, core inflation edged up to 1.8 percent and the monthly rate increased to 0.3 percent, the highest in eleven months. tradingeconomics.com

China Treasury purchases in doubt

Last week was very interesting for the bond markets which are a key determinant of the US dollar and therefore gold prices. On Friday, January 12, spot gold hit $1,337.40, having enjoyed a three-day run of $21.40 following an announcement from the Chinese that they could either slow or halt their purchase of US Treasuries. China holds $1.3 trillion worth of US debt, the most of any country.

The Chinese buy Treasuries – effectively lending money to the US government – so that the US can keep buying Chinese goods and China can keep selling their products, earning enough dollars to convert into Chinese yuan to pay workers and suppliers. The People’s Bank of China buys US dollars from exporters, accumulating large forex reserves, and sells them yuan, to keep the dollar higher against the yuan. This gives China a competitive trade advantage.

From November 2016 to November 2017 China’s trade surplus with the US was $416 billion, with the bulk of those earnings in US dollars, South China Morning Post pointed out in an editorial on Monday. Exports rose 10.9% in December.

Whether or not the Chinese follow through (officials later denied the rumour), bond investors got spooked at the prospect of the world’s largest T-bill holder losing faith in US debt, and by extension, the US economy. A large selloff ensued, with the 10-year US Treasury bill hitting its highest yield in 10 months at 2.59% (bond prices and yields are inversely related: when prices drop, yields go up).

The move up was also influenced by the Bank of Japan, which on Jan. 9 trimmed its purchases of Japanese bonds by about $20 billion. The Japanese cutback fueled speculation that the BOJ would end quantitative easing, just as the Federal Reserve did last September; the yen rose immediately by half a percent, as did Japanese bond yields.

Gold-bond yield correlation is weak

While rising bond yields are typically bad for gold, since they increase the opportunity cost of owning gold which pays no income for holding the metal, the present lift in gold prices, even though bond yields are rising, means the correlation is weaker than normal, according to analysts quoted by Kitco.

The head of commodity strategy at TD Securities said that gold is benefiting from uncertainty given that the US dollar is weaker as bond yields push higher.

“This tells me that markets don’t have a lot of confidence in the U.S. at the moment,” [Bart Melek] told Kitco. Vince Lanci, founder of Echobay Partners, said that the fact that gold can rally in a higher bond environment is further proof that the yellow metal has entered a new phase of its bull market. “China buying or not buying Treasuries in the short term is not the big factor… the fact that gold rallied on it means the path of lesser resistance, for now, is up,” he said.

A bear market in bonds

Still, the fact that bond yields are rising is a strong signal to gold investors that: 1/ the demand for US Treasuries is falling and 2/ that the stage is being set for a higher inflationary environment which would mean higher interest rates and increased stock market volatility.

According to a 2017 report from Bank of America Merrill Lynch, when gold prices and bond yields rise in tandem, the stock market tends to move the other way. The report notes both the stock market crashes of 1973 and Black Monday in 1987 were preceded by three quarters of rising bond yields and rising gold. That’s because when both investment vehicles rise, it signals higher inflation, and that leads to rises in interest rates, which are generally bad for stock markets. When stock markets fail, investors turn to more concrete safe havens Ie. gold.

Coupling the current 10-year benchmark Treasury rise, with the fact that a slew of maturing government debt hit the market last week – $32 billion of 10- and 30-year US bonds were sold, along with 4 billion euros of German bonds – “bond King” Bill Gross declared a bear market for bonds. Quotes Bloomberg:

“Bond bear market confirmed,” Gross said in a Twitter posting [last] Tuesday, noting that 25-year trend lines had been broken in five- and 10-year Treasury maturities. The billionaire fund manager at Janus said last year that 10-year yields persistently above 2.4 percent would signal a bear market…

What about inflation?

Bonds tend to sell off when investors believe that more inflation is coming. That’s because the yield gets eaten away by inflation (Eg. you own a 10-year Treasury bill that pays 3%. If inflation is 2%, your real return is only 1%.)

Data last Friday showed that US inflation is now above 2%, with most analysts believing that more rate hikes (an anticipated three more interest rate rises by the Fed this year) have been priced into the inflation rate. Rates could even go higher. In a Wall Street Journal article, Boston Fed President Eric Rosengren said he expected “more than three” rate hikes in 2018 because it wants to get ahead of inflation and not tighten too quickly.

The rise in the two-year Treasury bill – the benchmark Treasury most sensitive to Federal Reserve rate hikes – pushed above 2% last week for the first time since the collapse of Lehman Brothers in 2008, the start of the financial crisis.

The two-year note now provides more income than dividends on the S&P 500 Index. Could this be the harbinger of the next stock market crash?

More debt will hike interest rates, sink the dollar

Meanwhile the elephant in the room is the ballooning US debt. In under a decade, mostly under the Obama Administration, the amount of debt doubled from US$10 trillion to $20 trillion. The chief economist at Goldman Sachs recently revised his deficit projections from below $500 billion in 2018 to over $1 trillion in 2019 due mainly to the Trump tax cuts which will require an additional $200 billion in each of the next four years. How will Congress get the funds? By issuing more Treasuries. Goldman expects net borrowing to go from $488 billion in 2017 to $1.03 trillion this year, and the same amount in 2019. Importantly, under this forecast the debt to GDP ratio rises from 3.7% in 2018 to 5% in 2019, which increases borrower risk. To compensate, and attract T-bill buyers, the Fed is likely to offer higher interest rates. ZeroHedge quotes future Fed chair Jay Powell predicting that is exactly what is going to happen, in a 2012 Fed meeting:

“I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that is our strategy.”

The “big losses” Powell refers to “down the road”, which is actually now, is the extra interest the US government will be forced to pay on its Treasury bills, as the yield curve continues to climb. This will start a vicious cycle that goes something like this: Higher interest rates boost the cost of borrowing for businesses and individuals, thereby slowing the economy. This necessitates more government borrowing, thus pushing up the debt to GDP ratio which makes US T-bills more risky and less attractive to investors. If demand for Treasuries drops, so will the dollar, meaning foreign bond holders get paid in US dollars that are worth less, further slowing demand for them. Finally, as the dollar continues to fall, the US government will have to pay exorbitant amounts of interest on the Treasuries upon maturity, increasing its risk of defaulting on the loans once they become due.

From this brief analysis, it’s easy to see that debt is good for gold. Bullion investors don’t have to worry about the government defaulting on the piece of government debt they own, nor should they be concerned about the value of the currency falling when the T-bill plus interest matures. As long as the gold is in the form of physical metal bullion it’s a safer bet than a T-bill.

Dollar is withering

In a recent post I wrote about how China is hoping to reduce the hegemony of the US dollar, which most commodities are priced in, through the launch of a new oil futures contract. The yuan-denominated oil futures will allow exporters like Russia and Iran to buy and sell their oil through China, thus avoiding US economic sanctions and circumventing the US dollar. Moreover, the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong.

This is just the latest move on behalf of China to usurp the economic might of the United States. Between them, Russia and China are moving to kill the dollar. If that ever happens, it will make US-Chinese military conflicts in the South China Sea look like petty squabbles.

At the end of 2015 the Russian Central Bank made the yuan an official reserve currency, and in 2017, the RCB opened its first office in Beijing. The closer cooperation was a result of US sanctions on Russia after the crisis in the Ukraine, and the oil price slump that hit the Russian economy. The two countries have also issued government bonds denominated in each other’s currencies, which are designed to compete with US Treasuries.

Since then trade between Russia and China has been increasing, following in the footsteps of landmark energy deals that have taken place over the last decade. These include the $456 billion gas deal that Russian state-owned Gazprom signed with China in 2014, a $25-billion oil swap agreement Russian oil giant Rosneft signed with Beijing in 2009, and a doubling of oil supplies from Rosneft to China in 2013, valued at $270 billion.

Russia and China are also increasingly sharing technology with possible military applications. The US Congress’ US-China Economic Security and Review Commission reported the export of Russian aerospace technology to China was “challenging US air superiority and posing problems for US, allied, and partner assets in the region.”

Another interesting development is the joint trade in gold between China and Russia. The idea is to create a link between the two gold-trading hubs, Shanghai and Moscow, in order to facilitate more gold transactions.

Quotes ZeroHedge:

“In other words, China and Russia are shifting away from dollar-based trade, to commerce which will eventually be backstopped by gold, or what is gradually emerging as an Eastern gold standard, one shared between Russia and China, and which may one day backstop their respective currencies.”

Sound familiar? What they’re talking about is the kind of monetary system that existed before the 20th century – when banks were constrained in their loans by how much gold was in their vaults. The US went off the gold standard in 1971, thereby severing the linkage between the world’s major currencies and gold. Soon afterward, the US dollar became the leading reserve currency.

Trade conflicts: throwing fuel on the fire

While President Trump under his “Make America Great Again” banner has pressured key trading partners including China, Canada and Mexico, the reality is that passing protectionist measures and ripping up existing trade agreements like NAFTA is likely to depress the dollar – further alienating foreign investors who would otherwise flock to the greenback, and hurting the US economy to boot.

For example during NAFTA negotiations last fall, currency strategist Jens Norvig was asked what would happen should NAFTA fall apart. The result he said would not only be dramatic declines in the values of the Mexican peso and the Canadian dollar, but also appreciation of the yuan and the euro versus the dollar.

“In fact, I think over the medium-term, [euro] and [Chinese yuan] would benefit from the U.S. “America First” policy, as it has to make the [dollar] a less attractive reserve currency,” CNBC quoted Nordvig saying. The benefactor, again, will be gold.

Conclusion

Gold rose 12.5% in value last year, shaking off US rate hikes, the frenzied introduction of bitcoin, and record-setting highs on the Dow and S&P 500 exchanges. While some investors have exited the precious metals space to chase alternative realities, aka the crypto world, gold has been, and will continue to be, a solid investment especially during times of economic and political upheaval when the metal functions as a safe haven.

Are there other basic, more fundamental reasons to buy gold? Well, read this excellent article from Bloomberg, ‘Disastrous' deals sideline gold-mining M&A as metal rises’ posted on MINING.com.

For those who follow economic trends, the latest turbulence in the bond markets is a pretty bullish signal for gold. While there will be daily fluctuations, the short term trend seems to be one of a sustained rally, especially if bond yields continue to rise and the dollar keeps slumping.

The correlation between the bond markets, the dollar and gold is an important determinant of future gold prices. These relationships are something every gold investor should track, to determine ideal entry and extra points for both bullion and gold stocks.

I have bond market trends on my radar screen, and due diligence, which I freely share, on exceptional quality gold exploration juniors on my to do list. Do you?

If not, perhaps you should.

Richard (Rick) Mills

aheadoftheherd.com

Sign up for Ahead Of The Herd’s free highly acclaimed newsletter.

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

India to allot Coal India 11 new mines to boost production by two-fifths

NEW DELHI, Jan 19 (Reuters) – India will allow Coal India to build 11 new coal mines, the government said, a move that could increase annual production of the world's largest coal miner by two-fifths.

The mines, in the eastern states of Odisha, Jharkhand and Bihar, are expected to operate at full capacity by 2022, Coal Minister Piyush Goyal told reporters.

Coal India, which is 79 percent state-owned, had asked the government to grant it additional capacity.

The new mines are expected to increase Coal India's annual production, which was 554 million tonnes in the year to March 2017, by 225 million tonnes. The company aims to ramp up production to about one billion tonnes by 2022.

The move would help all of Coal India's seven units produce over 100 million tonnes per annum, and reduce the country's dependence on imported fuel, Goyal said.

India imported about 190 million tonnes of coal in the year ended March 2017.

Environmentalists worry that despite India's commitment to renewable energy, the country's rising use of coal at a time when many Western nations are rejecting the dirty fossil fuel will hamper the global fight against climate change.

(Reporting by Sudarshan Varadhan; Editing by Sanjeev Miglani and Adrian Croft)

Most U.S. states lost coal mining jobs in 2017 – data

Nearly two-thirds of U.S. coal producing states lost coal mining jobs in 2017, even as overall employment in the downtrodden sector grew modestly, according to preliminary government data obtained by Reuters.

The statistics come as the administration of President Donald Trump claims credit for new jobs in the coal industry, a business he has promised to revive by rolling back Obama-era environmental regulations.

Unreleased full-year coal employment data from the Mining Health and Safety Administration shows total U.S. coal mining jobs grew by 771 to 54,819 during Trump’s first year in office, led by Central Appalachian states like West Virginia, Virginia, and Pennsylvania – where coal companies have opened a handful of new mining areas.

“You know, West Virginia is doing fantastically well,” Trump told Reuters in an interview this week about the state, which gained 1,345 coal jobs last year, according to the data.

“It’s great coal.”

But the industry also lost jobs in other Appalachian states like Ohio, Kentucky, and Maryland; the western Powder River Basin states Montana and Wyoming; as well as in several other states like Indiana, New Mexico, and Texas.

Texas lost the largest number, at 455, and Ohio was a close second, losing 414, according to the data.

Pennsylvania, which gained 96 jobs in 2017, is also expected to go negative soon after Dana Mining announced this month it would close a mine employing about 400 people.

Overall, the number of U.S. coal jobs is still lingering near historic lows at less than one-third the level in the mid-1980s, according to Bureau of Labor Statistics data, as the industry loses market share to cheaper natural gas.

Trump had campaigned on a promise to revive the coal industry, and since taking office he has begun rolling back climate change and other environmental regulations, and expanded leases on federal lands, in an effort to do so.

While the effort has cheered the coal industry, it has had little impact on domestic demand for coal, with U.S. utilities still shutting coal-fired power plants at a rapid pace and shifting to cheaper natural gas.

Luke Popovich, a spokesman for the National Mining Association, said the bright spots in the industry in 2017 came amid a big surge in demand for shipments from overseas – but he also credited support from the administration.

“We have seen production rise this past year by more than six percent and exports rise five-fold over the previous year,” he told Reuters.

”Honest people can differ over how much credit the president deserves for this revival and how much credit belongs to market forces. To those of us closest to the coal industry, there is little question that the administration’s regulatory reset … has made a decisive difference.”

Editing by Richard Valdmanis and Marguerita Choy

SKF quality and service value proposition improves delivery time of large size roller bearings

A long-standing SKF customer in the cement and concrete industry contacted SKF for a solution when a routine maintenance check determined that the bearings on one of their vertical roller mills needed replacement.

Operating in an extremely demanding environment, the vertical roller mill is critical in the production process of this cement producing facility. “It was therefore crucial that the bearings are of superior quality to deliver reliable performance and maximise productivity for the customer,” states SKF Territory Sales Manager, Sean Weir.

Weir says that the SKF Explorer series bearings were proposed; he explains the technology: “These bearings feature optimisation of the internal design, high performance materials and heat treatment. These properties result in a greater wear resistance, lower operating temperatures and longer service life even under contaminated or poor lubrication conditions. This translates to improved availability and productivity.”

“The best delivery time of six months from SKF Europe was not an option for the customer who considered the risk exposure too high. As one of our loyal key customers who use a wide range of SKF products we had to pull out all the stops in order to come up with a better solution.”

“SKF South Africa solicited support from the SKF mining segment team and we were consequently able to reduce the delivery time from SKF Dalian factory in China by 1.5 months to the satisfaction of our customer,” affirms Weir.

According to Weir, the bearings condition is being closely monitored until a maintenance event can be scheduled.

Both the engineering company that overhauled the mill as well as the customer valued SKF knowledge and expertise. “In addition to strengthening their confidence in SKF as a partner, our ability to assist the customer has opened up many other opportunities for collaboration and engagement in other projects between the customer and our authorised distributor also,” concludes Weir.

SKF Explorer

Sealed mini fuse holder helps design engineers add accessible circuit protection in on- and off-road vehicle applications

KETTERING, Ohio – January 18, 2018 – TE Connectivity Ltd. (NYSE: TEL) (TE), a world leader in connectivity and sensors, announced today its new IP67-rated, two-position mini fuse holder that makes adding accessible circuit protection easy for on- and off-road vehicle applications. This new sealed, compact mini fuse holder performs in the harshest environments.
TE’s new fuse holder accepts standard DEUTSCH DT and AMPSEAL 16 connector mounting clips, which are available in 90-degree and 180-degree options. The fuse holder also is available in heavy-duty thermoplastic and is designed to withstand significant vibration and mechanical shock. The product can accommodate two active and two spare fuses and accepts AMP MCP 2.8 contacts.
“Our sealed mini fuse holder allows engineers to quickly and easily add circuit protection to a new application or existing design,” said Mark Brubaker, product manager, TE. “This adds to our broad portfolio of rugged connectivity products that deliver reliable performance under harsh conditions where failure is not an option.”
ABOUT TE CONNECTIVITY
TE Connectivity Ltd. is a $13 billion global technology and manufacturing leader creating a safer, sustainable, productive, and connected future. For more than 75 years, our connectivity and sensor solutions, proven in the harshest environments, have enabled advancements in transportation, industrial applications, medical technology, energy, data communications, and the home. With 78,000 employees, including more than 7,000 engineers, working alongside customers in nearly 150 countries, TE ensures that EVERY CONNECTION COUNTS. Learn more at www.te.com and on LinkedInFacebookWeChat and Twitter.

TE Connectivity – Mini Fuse Holder

Will surge in bond yields smash gold?

Yields on U.S. Treasuries have leaped recently. It will wreck the yellow metal. Or maybe not.

Yields reach new heights. Breakthrough for gold?

Last week, we wrote that concerns emerged that China could stop or slow buying the U.S. Treasuries. The U.S. bond yields reacted strongly. We noted that in theory it should sink gold, but the usual “correlation between bullion and Treasury yields broke down thanks to the depreciation of the U.S. dollar, which supported the gold prices”. Due to the importance of that issue for the gold outlook, we continued to monitor the developments in the bond market to keep investors updated.

Let’s look at the chart below. It shows that yields on 2-year U.S. Treasuries jumped on Tuesday to 2.03 percent, the highest level since 2008. And one can also see that 10-year Treasury yields hit 2.54 percent, the highest level since the beginning of 2017.

Chart 1: The price of gold (yellow line, left axis, London P.M. Fix, in $), the yields on 10-year Treasuries (red line, right axis, in %), and the yields on 10-year Treasuries (green line, right axis, in %) over the last ten years.

Many analysts assert that soaring yields will scupper the golden ship. But the price of the yellow metal rallied last week. It dropped slightly on Tuesday, but it rose again yesterday. Anyway, gold doesn’t look as casualty of rising yields. At least so far. Why?

Real, not nominal, rates matter for gold

One of the reasons behind the counterintuitive gold’s reaction is that real interest rates didn’t soared. Of course, they also jumped, but remained within the trading range seen since 2017, as one can see in the chart below.

Chart 2: The price of gold (yellow line, left axis, London P.M. Fix, in $) and the U.S. real yields (red line, right axis, yields on 10-year Treasury Inflation-Indexed Security, in %) over the last five years.

Climbing nominal yields with steady real interest rates indicate that investors expect that inflation hydra may finally raise its ugly head. Indeed, the recent data shows that the Producer Price Index increased 2.6 percent in 2017, the fastest pace in six years. The annual rate of inflation in consumer prices slipped from 2.2 percent to 2.1 percent in December, but the core CPI edged up from 1.7 percent to 1.8 percent last month. Gold may not be the best weapon to use against hydras, but it is perceived to be a good hedge where investors may safely hide their wealth.

Weakness in greenback supports gold

Another key factor is that rising yields haven’t helped so far to halt the decline in the U.S. dollar. However, there might be a rebound in the greenback, at least in the short-term. We saw the first potential signs of that yesterday, when the dollar rose from a three-year low. Today, the earlier downward trend reestablished, but there might be some consolidation in the euro, and thus in gold as well, ahead of the ECB’s policy meeting next week. Especially that the ECB officials have recently sent some dovish signals. Vitor Constancio, the ECB vice president, said he did not rule out that monetary policy would still continue to be “very accommodating for a long time”, while Ewald Nowotny told reporters that the euro’s recent strength against the greenback is “not helpful”.

Conclusions

The U.S. bond yields continued their rally. Gold didn’t plunge as the real interest rates remained within the sideways trend. A buildup in inflation could push the Fed to raise interest rates more aggressively, but the U.S. central bank seems to remain behind the curve. Higher inflation would lower real interest rates, which should support the gold prices. The weakness in the U.S. dollar is another key tailwind in the gold market. There might be a reverse in the EUR/USD exchange rate ahead of the ECB’s monetary policy meeting next week. Gold would decline, then. But if the eurozone’s economic expansion continues, the bearish trend in the dollar may remain with us, which would be supportive for the gold market. We will elaborate on this in the February edition of the Market Overview. Stay tuned!

If you enjoyed the above analysis, we invite you to check out our other services. We focus on fundamental analysis in our monthly Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today.

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor

Australian shares slip slightly on Wall Street pause; NZ little changed

Jan 19 (Reuters) – Australian shares inched down on Friday, following Wall Street which took a breather after a stretch of record highs, while gains in healthcare and consumer staples stocks kept the index afloat.

Wall Street fell on Thursday after a run of strong performances from the Dow Jones Industrial Average and the S&P 500 index.

Australia's S&P/ASX 200 index inched down 0.1 percent, or 5.4 points, to 6009.2 by 0113 GMT, on track to mark its second weekly loss. The benchmark ended flat in the previous session.

The materials sector was the biggest drag on the index, weighed down by gold stocks, which slipped for a fourth straight session, down as much as 1.5 percent.

While base metal prices were up on an upbeat performance from China's industrial sector, gold prices were flat in a narrow range and under pressure from higher U.S. Treasury yields.

Newcrest Mining Ltd lost as much as 2.2 percent and hit its lowest in more than three weeks, while fellow gold miner Saracen Mineral Holdings Ltd touched its lowest in more than five weeks, falling as much as 3.9 percent.

Output at BHP Billiton PLC's Escondida mine in Chile, the largest copper mine in the world, fell 7.8 percent in 2017 versus the prior year because of a prolonged strike.

Rio Tinto also has a stake in the mine. BHP was flat, while Rio fell as much as 0.8 percent to the lowest in more than a week.

Real estate stocks also pulled the benchmark index down, with Gateway Lifestyle Group sliding as much as 2.9 percent and Iron Mountain Inc hitting its lowest in more than five months, sliding by as much as 2.7 percent.

U.S. home building fell more than expected in December, recording the biggest drop in just over a year, but the steep drop in groundbreaking activity will probably be temporary against the backdrop of a tightening labour market.

Financial stocks slipped, with three of the 'Big Four' banks losing between 0.2 percent and 0.4 percent. Commonwealth Bank of Australia inched up 0.2 percent.

Healthcare stocks and consumer staples kept the index afloat.

CSL Ltd added as much as 1.5 percent, hitting its highest in more than six weeks, while Wesfarmers Ltd rose as much as 1 percent.

"We had a negative Wall Street, a soft commodity complex, but this may be counterbalanced by a nice set of China GDP numbers and December Aussie labour market numbers yesterday," said Emmanuel Ng, FX strategist at Oversea-Chinese Banking Corporation Ltd.

"In addition, global risk appetite remains in risk-on territory. Overall, interest towards cyclicals look to remain intact."

China's gross domestic product grew 6.8 percent in fourth-quarter 2017 from a year earlier.

Australian job growth in December topped expectations to match the longest run of monthly gains on record, yet unemployment still edged up as more people looked for work -putting an unwelcome brake on wages and inflation.

New Zealand's benchmark S&P/NZX 50 index also traded flat, slightly dipping at 0.023 percent, or 1.93 points to 8274.6, but was on track to end the week higher.

Markets remained little changed after a survey showed manufacturing activity in New Zealand grew in December at its slowest pace in five years.

Material and telecom shares pulled on the index but were offset by industrials and healthcare stocks.

(Reporting by Christina Martin in Bengaluru; Editing by Eric Meijer)

The periodic table of commodity returns

If for some reason, you still think that the commodity markets are predictable, today’s chart provides a nice piece of humble pie.

The Periodic Table of Commodity Returns, which comes to us annually from our friends at U.S. Global Investors, shows the returns of commodities over each year of the past decade.

As you may have guessed, commodities are a volatile asset class – and as a result, their respective rankings fluctuate wildly each year, making things really interesting for any observer.

The year in review

In 2017, we experienced the second full year of recovery from the collapse of commodities that plagued the dreaded stretch from 2011 to 2015.

Aside from natural gas (-20.7%), commodities were basically up across the board. The graphic, which focuses mostly on major commodity markets, has palladium (56.3%), aluminum (32.4%), coal (31.2%), copper (30.5%), and zinc (30.5%) as the big winners over the last year.

It’s worth mentioning that some smaller markets are not included on the table – and battery metals like cobalt (133%) also did exceptionally well in 2017.

Deeper digging

If you are not yet thoroughly geeked out, there is an interactive version of this graphic as well. It allows you to sort by category, performance, or volatility.

Surprisingly, the least volatile substance on the table is gold:

Gold volatility

While the gold market has been eerily quiet as of late, this is unexpected. That’s because, at least compared to other financial assets like bonds or stocks, gold has quite the reputation for being volatile and risky.

But, when compared to other commodities, gold actually appears relatively tame.

What real volatility looks like

Here are the charts for natural gas and coal, each which much better represent a Dr. Jekyll / Mr. Hyde relationship.

Natural gas volatility

Natural gas is in weird place.

It’s a better alternative than coal or oil for emissions, but it’s still a fossil fuel. This, along with the natural ebbs and flows of the oil and gas markets, have made gas particularly volatile over the last few years.

Coal volatility

Of course, coal is falling out of favor in the long-term global energy mix – but that doesn’t mean it can’t get a shot in the arm from Chinese or Indian demand in the short term.

As a result, coal is all over the map on the Periodic Table of Commodity Returns, as well.

Sepro Wireless IO control system installed and commissioned in N.S.W. Australia

Recently a Falcon SB1350B-SE Gravity Concentrator was installed and retrofitted with a Sepro wireless Input/Output (IO) control system at a gold project in New South Wales, Australia.  Pre-existing instrumentation and water piping was used, but the control panel was replaced by a wireless AutoPac for ease of installation and the ability to use the Falcon on various streams throughout the plant.

The control panel was installed on the ground level in an MCC container while the Falcon Concentrator was installed in the plant 3 stories above.  Commissioning was done by the Sepro Technical Service Team over the course of 2 days.

Sepro Wireless IO packages are available for Sepro supplied Falcon Semi-Batch, Continuous and Ultra-Fine Gravity Concentrators. Also available for non-Sepro brands. For more information see article: Introducing Sepro Wireless Input/Output Automation Package for Falcon Gravity Concentrators .

Top left: Antenna at distance alongside existing instrumentation
Top right: Wireless IO antenna on the Falcon instrument junction box
Bottom left: New panel in the MCC with the paired antenna
Bottom right: New panel being commissioned by Sepro Technical Service Team

India steel ministry seeks abolition of met coal import tax

(Bloomberg) — India’s steel ministry is seeking to remove import tax on coking coal to soften the impact of rising costs on users of the key steel-making fuel and promote production of the alloy that’s crucial for Prime Minister Narendra Modi’s plan to boost domestic manufacturing.

The ministry has written to the finance department to consider its request in the federal budget on Feb. 1, federal steel secretary Aruna Sharma said in an interview in New Delhi. Her department has also proposed removing taxes on ferro-chrome and ferro-nickel, ingredients used in making stainless steel.

Benchmark prices of premium coking coal have risen 34 percent over the past year, after cyclone Debbie affected supplies from Australia, the biggest shipper of the commodity. Prices have remained high and may spike again if forecasts of another similar weather disruption come true, according to consultants Wood Mackenzie Ltd. and CRU Group.

“Doing away with the import duties will provide steelmakers some support if prices continue to rise,” said Abhisar Jain, an analyst at Centrum Broking Pvt. in Mumbai. “So far the steelmakers have protected themselves by passing on the increase in raw material costs, but that becomes increasingly difficult as costs go up.”

Indian steel producers, including state-run Steel Authority of India Ltd. and JSW Steel Ltd., rely on imports, mostly from Australia, for supplies of met coal.

Basic customs duty on coking coal is 2.5 percent, according to JSW Steel’s Joint Managing Director Seshagiri Rao.

Story by Archana Chaudhary and Rajesh Kumar Singh.

Platinum miner Lonmin's lenders relax loan agreements again

LONDON, Jan 18 (Reuters) – Platinum miner Lonmin has received a further waiver on its debt agreements from its lenders, preventing a default, the South Africa-focused company said on Thursday.

London-listed Lonmin, which is being bought by Sibanye-Stillwater, has been battling liquidity issues caused by combination of low platinum prices, a strengthening local currency and soaring costs.

Lonmin's lenders had granted the company a waiver of compliance with a loan agreement that required its net worth to remain at a minimum of $1.1 billion, the company said.

"(The) waiver will ensure that this shortfall is not regarded as an event of default during the waiver period."

Lonmin's banks waived the same debt covenants which were due to be tested in September.

The struggling miner said it would publish its 2017 full-year results on Jan. 22, along with its first quarter production report. The announcement was delayed in November pending the completion of a business review.

(Reporting by Zandi Shabalala; editing by Alexander Smith)

OPEC-Russia oil deal renews threat from Canadian oil sands

When OPEC and Russia meet this weekend to review their strategy for clearing a global oil glut, they’ll face an unusual problem: it could be working just a bit too well.

As their output cuts, coupled with robust global demand, tighten the market, crude prices have soared to a three-year high near US$70 a barrel. That’s prompted warnings — from Iran’s oil minister to Goldman Sachs Group Inc. — of a fresh surge in U.S. production, wrecking all of OPEC’s hard work.

“The big concern is prices — are they worried about prices going too high too quickly?” said Mike Wittner, head of oil-market research at Societe Generale SA in New York. “There are many reasons they’d be concerned, but top of the list is: how will U.S. production respond?”

With plenty of surplus oil still around, ministers from the United Arab Emirates, Iraq and Kuwait insist there’s no need to change strategy and the cartel will stick with its plan to restrain production for the rest of the year. Nonetheless, the price jump means that delegates gathering in the Omani capital of Muscat face increased urgency to decide how to phase out the curbs.

“Getting too far above US$70” can both stimulate new supply and affect the economy, Jeff Currie, head of commodities research at Goldman Sachs, said in a television interview. “OPEC members do not want to see that.”

Fierce competitors for decades, the Organization of Petroleum Exporting Countries and Russia joined forces in late 2016 against the threat posed by a boom in U.S. shale oil, which had flooded markets and sent prices crashing. To offset the American bonanza, OPEC and Russia assembled a coalition of 24 nations that would cut their own production.

For much of 2017, they struggled, as global inventories remained bloated and prices depressed. But the strategy gained traction in the second half of the year as stronger demand and supply threats from the Persian Gulf to the North Sea helped deplete brimming storage tanks.

Prices responded, with Brent crude futures climbing to US$70.05 on Jan. 11, the highest since December 2014. While that gives oil-producing economies much-needed relief, it also presents them with troubling consequences. Energized by new investment, U.S. production could top 11 million barrels a day next year, surpassing both Saudi and Russian output, according to U.S. government forecasts. That compares with an estimate of 9.3 million a day for 2017.

“There is an unintended consequence from this higher price,” said Ed Morse, head of commodities research at Citigroup Inc. “OPEC are fearful of not only the shale response, but of deep water and of oilsands from Canada.”

That said, burgeoning crude demand will help to mop up some of the additional output. Global consumption will expand by about 1.5 million barrels a day this year, OPEC Secretary-General Mohammad Barkindo said earlier this month.

The producers will formally review their accord in June, and may start to wind it down in the second half of the year, Citi’s Morse and SocGen’s Wittner said. Saudi Arabia and Russia, the biggest producers in the pact, have repeatedly stressed that when the time comes to end the deal it will be done gradually.

In the meantime, the pressure to change strategy is likely to ease in coming weeks as oil prices retreat, the two banks predict. Crude futures will slip in tandem with a lull in seasonal demand as the need for winter fuels abates, and as hedge funds take profits from the recent rally.

“For now, with the price strength looking very temporary, I think OPEC will say we’re on our way to getting the market rebalanced, and keep going,” Morse said. But that resolve may not last all year. “There could be an agreement on ramping production back up over the summer.”

thyssenkrupp closes the loop in Africa’s sugar industry

thyssenkrupp Industrial Solutions South Africa combines local knowledge with global expertise to bring turnkey technology and equipment solutions that will promote the sustainability and profitability of the sugar industry in the Sub Sahara African region. The company offers market, feasibility and engineering studies as well as complete EPC (Engineering, Procurement & Construction).

Africa produces around 10 million tons of sugar per season and imports an additional two million tons to meet demand. South Africa, Swaziland and Mozambique are the three main players in the sugar industry in the Sub Saharan region.

Stretching across the provinces of Mpumalanga and KwaZulu-Natal with a small production in the Eastern Cape, South Africa’s R12 billion sugar industry consistently ranks in the top fifteen out of some 120 sugar producing countries worldwide, producing an average of 2,2 million tons of sugar per season. There are approximately 24 000 registered sugarcane growers in the country. Sugar is manufactured by around six milling companies with some fourteen sugar mills operating in the local cane-growing regions.

“But the full potential of the South African sugar industry can only be extracted if the numerous challenges facing this sector are addressed,” cautions Dayalan Padayachee, Senior Business Development Manager, thyssenkrupp Industrial Solutions South Africa. “This is an aging industry using old technologies which negatively impact plant reliability and throughput with subsequent cost implications. Additionally, as a result of the protracted drought, the industry is dealing with the worst cane production in a decade with subsequent drops in cane quality  and volumes that adversely affect throughput.”

The rapid changes in environmental legislation over the past decade with strict laws regulating greenhouse emissions and waste water as well as the sugar tax on consumption present further challenges for the local sugar manufacturing industry. In addressing these challenges sugar manufacturers simply have to find ways to keep up throughput, maintain productivity and optimise in all areas while reducing input costs, according to Padayachee.

This is where thyssenkrupp, a highly qualified, quality-orientated company, steps in as the perfect sugar technology solutions partner.

“We have the technology and the equipment to build a complete plant, from feasibility studies right through to commissioning, but we also have the capabilities to identify specific areas where improvements to aging plants and optimisation of processes, systems and equipment are possible. Our approach is to look for ways how we can make our customers smarter throughout the production process with our main focusses here on energy conservation, water treatment, steam and plant optimisation as well as energy mass balance expertise.” 

Thyssenkrupp‘s turnkey solutions will assist the local sugar industry to work smarter and improve profitability. Through the optimisation of processes and equipment end-users can improve efficiencies across the plant and conserve energy and water resources. New revenue streams can be generated by creating alternative markets through the production of by-products from recovered waste.

“One can also diversify excess sugar into biochemicals like Poly Lactic Acid, where thyssenkrupp can support with its technology and execute the project on a turnkey basis,“ adds Padayachee. The water that is used during the crushing of the cane is used as heating vapours during the process. Water losses occur through molasses, filter cake, Bagasse, etc. According to Padayachee the balance of untreated water can be effectively treated and re-used for non-critical applications on the plant. “It is imperative that sugar producers start treating waste water to prevent harming the environment. Additionally, treated water can be re-used, saving on the water bill as well as our country’s vulnerable water supply. We have the necessary skills and expertise to develop complete water treatment plants for sugar mills or add value to existing treatment facilities by providing for a polishing unit for example to assist  mills in making the water suited for re-use.”

The Industrial Solutions business area of thyssenkrupp is a leading partner for the engineering, construction and service of industrial plants and systems. Based on more than 200 years of experience we supply tailored, turnkey plants and components for customers in the chemical, fertilizer, cement, mining and steel industries. As a system partner to the automotive, aerospace and naval sectors we develop highly specialized solutions to meet the individual requirements of our customers. Around 19,000 employees at over 70 locations form a global network with a technology portfolio that guarantees maximum productivity and cost-efficiency.

Its Centre of Excellence for sugar technology lies in Pimpri, Pune in India. thyssenkrupp Industries India (tkII) has revolutionised the sugar industry over the past six decades with over 133 sugar plants built globally. The company’s advanced technology focusses on reliability, productivity and safety of products and equipment for each step in the sugar producing process: Cane handling (unloaders, feeder tables), cane preparation (choppers, levellers, fiberizors, shredders), cane milling (3/2-roller mills), process equipment (Falling Film Evaporators/Continuous Vacuum Pans, centrifugal machines), power generation plant (water cooled condensers, cooling towers), steam generation plant (boilers) and effluent treatment plant (sumps, screens). The equipment including boilers are manufactured by thyssenkrupp in India.

“We differentiate between the scopes of local knowledge and global expertise and specialists from India such as sugar technologists, process engineers and doctors in chemical engineering join the South African thyssenkrupp team to deliver optimum solutions that will ensure a sustainable and prosperous future for Africa’s sugar industry,” concludes Padayachee.

Roller Mill Shop assembly

Shop assembly Centrifugal machines

Shredder

Gold rally has legs on voracious China demand, bullish options

Gold’s breakneck rally eased this week, but tailwinds in both physical and paper markets suggest it’s got room to run.

Chinese New Year buying and option prices suggest the stars are aligning for the metal to extend its 6 percent gain over the past month.

“I’m always a bit nervous when gold prices rise this much, this fast,” said Mark O’Byrne, marketing director of bullion dealer GoldCore Ltd. “But there certainly is healthy demand from China and the futures market — I think we should break highs above $1,400 later in the year.”

Options traders are betting on at least another month of rising prices. They’re charging more for benchmark call contracts than for similar puts, and by the biggest premium since November. The bias, measured in implied volatility, has increased to about 0.6 percentage points.

Gold tends to do well in January and February. That’s when demand spikes in the biggest consuming nation, China. Over the past decade, the metal advanced by about 6 percent on average in the first two months combined. The Lunar New Year, which is often celebrated with gifts of gold in much of Asia, falls on Feb. 16 in 2018.

Winning in January

The first month of the year has historically been gold's strongest

Still, a technical indicator points to a rally that may have grown tired.

The metal, which reached a four-month high this week, crossed into 2018 with an eight-day rally, the longest string of increases since 2011. Now, it’s considered overbought, according to the relative-strength index, a gauge of momentum.

As gold is quoted in the U.S. currency, its upswing largely depends on whether the greenback’s losing streak continues.

Option prices signal that traders foresee the dollar falling over the next month against the euro, yen and pound. That’s good news for bullion: The 120-day price pattern is close to its strongest negative correlation since late 2012.

Story by Todd White and Eddie van der Walt.

Output at Chile's Escondida copper mine falls 7.8 pct in 2017

SANTIAGO, Jan 17 (Reuters) – Output at BHP Billiton PLC's Escondida mine in Chile, the largest copper mine in the world, fell 7.8 percent in 2017 compared to the prior year due to a prolonged strike, the company said in a statement on Wednesday.

The decline to 903,000 tonnes came despite the start of operations at a new wing.

BHP said production in the second half of the year grew 29 percent to 583,000 tonnes compared with the same period in 2016, largely due to the opening of the concentrator on Sept. 10, 2017. The mine produced just 320,000 tonnes of the metal in the first six months due to a strike that lasted more than 40 days.

Workers ultimately returned to work after deciding to extend their old contract, but that means they will return to the negotiating table with the company this year.

Rio Tinto PLC and Japan's JECO Co Ltd also have stakes in Escondida.

(Reporting by Fabián Andrés Cambero; Writing by Luc Cohen; Editing by Sandra Maler)

Tahoe welcomes new Canadian Ombudsperson for responsible enterprise

VANCOUVER, British Columbia – January 17, 2018 – Tahoe Resources Inc. ("Tahoe" or the "Company") (TSX: THO, NYSE: TAHO) welcomes the announcement today that Canada will establish the office of Ombudsperson for Responsible Enterprise.

Ron Clayton, President and CEO of Tahoe: “We applaud the government’s announcement today to appoint a human rights ombudsperson to oversee Canadian mining and other industries abroad. Independent oversight will strengthen best practices, ensure transparency within the mining industry and promote safe and responsible mining operations in Canada and abroad. Today’s action is a positive step forward for the Canadian mining and extractive industry and we look forward working with the new Ombudsperson.”

Tahoe is committed to responsible and sustainable business practices in all aspects of its mining operations in Canada and abroad and adheres to the UN Guiding Principles on Business and Human Rights and the Voluntary Principles on Security and Human Rights.

About Tahoe Resources Inc.

Tahoe’s strategy is to responsibly operate mines to world standards and to develop high quality precious metals assets in the Americas. Tahoe is a member of the S&P/TSX Composite and TSX Global Mining indices and the Russell 3000 on the NYSE. The Company is listed on the TSX as THO and on the NYSE as TAHO.

For further information, please contact:

Tahoe Resources Inc.

Alexandra Barrows, Vice President Investor Relations

[email protected]

Tel: 775-448-5812

Chile's Corfo, SQM strike deal in lithium dispute

SANTIAGO, Jan 17 (Reuters) – Chilean development agency Corfo said on Wednesday that it had struck a deal with lithium company SQM , ending a long dispute over royalties in Chile's Salar de Atacama, home to one of the world's richest lithium deposits.

The deal frees the miner to apply for an increase in its production quota amid a demand boom and surging prices for lithium, which is used in the batteries that power electric cars.

Corfo chief Eduardo Bitran said SQM had agreed to overhaul its corporate governance board to ensure adherence to global standards, a key condition put forward by Chilean authorities. The deal also hikes the royalties paid by SQM to equal those established in a similar contract between Chile and SQM competitor and lithium producer Albemarle.

SQM, like the U.S.-based Albemarle, would be required to supply Chile with lithium at a favorable price, a stipulation intended to incentivize value-added production in Chile.

The deal also includes an option that would permit SQM to work with state miner Codelco to begin developing the Maricunga lithium deposit. Codelco, one of the world's largest copper producers, has lithium assets in Chile but is currently not producing the metal.

"Our intention is to make it available for Codelco so it can … make viable the development of a new activity in this area," Bitran told reporters.

Under the new contract, SQM would be able to produce up to 216,000 tonnes of lithium carbonate a year through 2025 in the Salar de Atacama, the source of half the company's revenue, if it makes certain investments and obtains the relevant permits.

The arbitration began in May 2014, after Chilean authorities accused SQM of underpaying royalties and violating environmental regulations.

The dispute had threatened to complicate Nutrien Ltd's bid to divest its stake in SQM. The fertilizer company, formed earlier this year by the merger of Canadian Potash Corp of Saskatchewan and Agrium, must sell its shares in the Chilean lithium miner as part of an agreement with Indian regulators.

After talks collapsed in October last year, Corfo announced in December that representatives of SQM and Potash had met with Chilean authorities to reopen negotiations.

The deal removes the miner's former chairman Julio Ponce, who has been fined for market manipulation, from control of the company.

Bitran had previously said Chile could earn up to $7.5 billion in royalties by 2030 from a new contract with SQM.

(Reporting by Felipe Iturrieta; Writing by Dave Sherwood; Editing by Lisa Shumaker and Matthew Lewis)