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-- Posted Tuesday, 21 December 2010 | | Source: GoldSeek.com
Frequently prospecting for new opportunities in natural resource-rich nations, Rodman & Renshaw Senior Analyst Alka Singh is just back from Argentina. The Gold Report caught up with her to sift through her thoughts on the precious metals industry. Her current objective is to seek out gold and silver producers with growth potential beyond the price appreciation of commodity metals.
The Gold Report: You follow both precious and base metals for Rodman & Renshaw. From the lay investor's perspective, what's the difference? What are the value drivers in precious versus base metals that investors should know?
Alka Singh: That's a great question because a lot of people think that precious metals (PMs), uranium and base metals are all metals and mining. What they don't understand is that there are different drivers for each sector. The supply and demand determine the price of gold, but the gold price also changes based on the fiat currencies. Gold, silver, platinum and palladium are viewed not only as commodities but also as a store of value. As the demand for precious metals (jewelry and ETFs) increases so does the price of these commodities. But as the precious metals are also a store of value, people consider these as good as cash and their prices increase as the U.S. dollar depreciates.
On the other hand, base metals are driven primarily by global economic activity and, particularly, by growth in the BRIC (Brazil, Russia, India and China) economies. Growth in these countries has a great impact on the base metals. To some degree, they are also driven by currency exchange rates. Because all these commodities are priced in U.S. dollars, they tend to appreciate as the dollar depreciates; however, you'll see precious metals appreciate more than base metals just because they are perceived as a store of value.
Investors realize the dollar is depreciating and wonder if they should just buy copper, nickel, zinc or lead. They're frustrated because the dollar keeps depreciating, and they see gold or silver appreciating while base metal prices remain the same. Part of that is because if the U.S. and other economies are not doing well—no buildings, bridges or hybrid cars being built; the demand for copper, nickel, zinc, lead—all of these base metals—actually goes down or stays flat. As governments keep printing more money, precious metals appreciate faster than the base metals when there is lack of economic growth. So, that's the key difference in the value drivers.
TGR: So, precious metals can be thought of as a currency, whereas base metals are simply raw materials.
AS: You got it, yes.
TGR: Alka, are we in an unusual situation where we see growth in the BRIC countries and pretty much worldwide devaluation of every nation's currencies? Have you seen this in the past where both base and precious metals can appreciate at a distinctive rate?
AS: I'm sure there have been situations like this in the past, but today it's more dramatic because every country is trying to out-print the other. China is keeping its currency low, while the U.S. is printing so much money in an effort to keep the dollar down. All I'm saying is the rate of change is different this time. More countries are depreciating their currencies due to slow economic development, which causes precious metals to go higher than base metals.
Back in 2008 during the financial crisis, when most of the world economies weren't doing well, we saw base metal prices going down every day. Gold prices also declined, but not as much and at a slower rate than the base metals.
TGR: What's your forecast for the PM sector in the coming year? Do you expect continued price appreciation in these commodities?
AS: For 2011, I see gold prices at $1,350 an ounce and silver at $28, which is close to where they're right now, but not a big increase. I'm not using higher-than-current prices because I believe, at some point, we'll see the U.S. economy starting to improve and all this quantitative easing (QE) will end. People have QE2 all priced in. While there is a good chance we'll see more QE, its impact shouldn’t be as great—or the quantitative easing wouldn't be as big—if we see the U.S. economy improving with more job creation. I'm keeping my fingers crossed, but I think gold, silver and other precious metals will stay where they are right now.
TGR: But the precious metals equities can be very profitable at these levels.
AS: Oh, of course. I think gold equities are still discounting $1,100–$1,150 gold, but they are not discounting a $1,400 gold price. Once we go into 2011 and see gold prices even at $1,400, the stocks could still go 20%, 30% higher from there.
TGR: So, you see precious metals stocks growing year-over-year based on earnings, not price appreciation in gold or other PMs.
AS: Yes, that is exactly correct. If gold stays at $1,400, I really think you'll see the margins improving next year even if gold prices don't go higher. Equities will perform because the markets will get used to $1,400 gold and not discount the stocks at $1,100 or $1,150, which is what they're doing right now. So it'll be more earnings and cash-flow growth. I cover only gold and some silver companies; I don't yet cover the platinum group metals (PGMs), which include platinum, palladium, rhodium, iridium, osmium and ruthenium. So what I'm telling you is based solely on gold and silver.
TGR: Given the price stability you're forecasting, what are you looking for in gold and silver mining companies now?
AS: Well, I'm looking for growth. That's what I'm looking for. Having this kind of a gold price and being in this kind of a gold-price environment, I think the market is going to pay for ounces in the ground. Investors are going to pay for development projects that a company can bring online over the next two to three years. I expect companies to come out with new projects to get more growth; that's the way they have to grow. They have to lower their cash costs or, at least, keep them constant, but growth must be imminent. Therefore, I think the focus will be more on growth.
TGR: So, this makes management—good management—even more valuable.
AS: Exactly. It does raise the importance of companies' management teams, because they will decide mergers and acquisitions (M&A) activities. Companies that lack a growth pipeline will have problems, as they'll need to make decisions on what to, and what not to, buy. That is going to be very, very important. A good management team with a good understanding of what they should buy at these prices will make the difference.
TGR: Alka, it's been a pleasure being with you. Thank you.
AS: Thank you so much.
Alka Singh is a managing director and senior metals & mining analyst at Rodman and Renshaw. Prior to joining Rodman, Ms. Singh was a Merrill Lynch VP covering Canada's metals & mining sector for two years. Before Merrill, she worked as an associate analyst covering gold and base metal companies at Orion Securities. Ms. Singh holds an MBA from Schulich School of Business, York University in Toronto, Canada, and a Bachelor of Science in geology from the University of Delhi in India. Streetwise - The Gold Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part. The GOLD Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report. From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported. Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734. Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.
-- Posted Tuesday, 21 December 2010 | Digg This Article | Source: GoldSeek.com
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