-- Posted Friday, 15 June 2007 | Digg This Article
Now that most US economists have expanded their acceptable inflation numbers, the CPI report this morning was greeted as a positive, despite the fact that the overall number came in higher than expectations because the core rate was low. The inflation rates, as interpreted from PPI and CPI numbers, are still running in the upper end of the acceptable range the Fed has put on inflation growth between 2-3%, but a willingness to allow slightly higher inflationary figures while the country is experiencing slowing growth is making the money managers on Wall Street happy. Precious metals markets will interpret this as a real positive because now there is clear evidence the Fed will stay on hold for the foreseeable future regarding rate hikes.
Now we can begin to concentrate on the fundamentals that will move this market rather than continue to get preoccupied with Fed rate hikes. Mine production is the largest supply side component for both platinum and gold. Below this note is our recent supply side piece on the Mine production component of total supply.
Platinum:
South Africa produces over 75% of the globe's platinum supplies. AngloPlat and Implats are still nearly 8 percent away from labor union wage demands. The platinum industry negotiations in South Africa seem to be sputtering into a stalemate and should force the mine production offline in two weeks.
Gold:
Just like the platinum producers, the gold mining labor unions and mining companies are starting at polar opposite negotiating points to try and solve wage increases in the next two weeks. Even if workers only go on strike for a week or two, it will take another week or so to get production levels ramped back up…meaning anything longer than a week is going to mean double the time for full production being offline from the market. South African production of gold is around 20-25 tonnes a month. Losing 20-25 tonnes of production at the same time central bank sales are shrinking back off the market will combine to create a potentially major supply gap in the market over the summer.
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Interesting side note:
The Bank of England updated their reserves activity for the month of May and according to IMF statistics, the BOE sold 210,000 ounces or 6.53 tonnes of gold in the month of May. The Bank of England has no announced sales program and has made no comment publicly on the move. This is the first set of gold sales by the bank of England since the now infamous 50% selloff of gold reserves by Gordon Brown in the 1999-2002 period. This comes at the same time the Bank of Spain has sold 25% of their reserves into the market and the Swiss National Bank has announced a new sales program to sell 250 more tonnes into the market over the next 28 months.
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Mine Production
According to GFMS, mine production over the past decade has averaged 2,571.5 tonnes a year or roughly 82.5 million ounces. Virtual Metals pegs annual mine production on an average basis the last five years at around 2,426 tonnes (78 million ounces). While it’s a moving target and both figures are around the same level, we’re going to use GFMS stats for this review to keep some uniformity to the figures. On a side note, unlike GFMS, Virtual Metals is forecasting a razor thin decline in mine supply for 2007.
It is becoming more apparent that a peak of 2,645 tonnes (85 million ounces) was reached in 2001 with mine supply having fallen nearly 7% in 2006 to 2,471 tonnes (79.4 million ounces). Will mine supply appreciate significantly from here? There are a lot of if's and maybe's involved in making that guess, but if annual production trends from South Africa, Peru, Canada, United States and other countries are a hint, the answer is no. CEOs from the largest gold mining companies have stated at recent conferences that higher prices are needed in order to justify the massive capital investments being considered to build new projects and bring production into the marketplace. Even though mine production is the largest definable input component of supply in the market, the levels are still pretty static. Mine supply might increase a little, it might go down a little, but the market is used to seeing about 2,571 tonnes annually from production. In a recent note about why gold equities seem to be losing their shine in the marketplace, UBS makes the statement below:
d) there have also been fewer gold discoveries made which has minimized the optionality of gold equities.
While the statement certainly has negative implications for mining company equities and their attractiveness in the market, the lack of any world-class discovery by a producer in the last decade should only highlight the desirability of owning the commodity versus investing in the stocks. Eventually, the lack of new mega-mines coming online will impact the supply side of the market significantly as the older, mega properties currently in production hit lower and lower grades and no replacements are found. For example, take the mine production from the three largest gold producing properties in the world, Grasberg, Yanacocha and Goldstrike. In 2004, these three properties alone produced roughly 8 million ounces or about 10% of global production. In 2007, these three properties are expected to produce about 5.6 million ounces, a drop of nearly 30% in three years. While there is some rebound expected in their production totals, it’s highly doubtful they’ll ever reach the 10% of total global production ever again.
The cash cost per ounce creep going on in the industry, new stringent environmental regulations, new tax and royalty regimes and regular labor disputes around the globe will continue to negatively impact the ability to quickly and reliably bring new production online. Again, this is bad for the companies, good for the commodity.
Much like the energy markets, more and more discussion is entering the mining space about the lack of available new green fields from which to derive new supply. Unlike oil and gas, it hasn't been proven yet to be economically feasible to mine gold under the sea. The majors and mid-tier companies are mining on Bay Street and Wall Street, not out in the field.
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