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Raj Ray: Miners' Cost Cutting Set to Deliver in Late 2014

 -- Published: Wednesday, 3 September 2014 | Print  | Disqus 

Source: Brian Sylvester of The Gold Report 


When gold prices plunged in late 2013, gold producers took notice and developed mine plans that offered greater flexibility in troubled times. But even the best plans take time. Well, it's almost time for the producers to deliver, says Raj Ray, associate metals and mining analyst with National Bank Financial. He is looking for producers with flexible mine plans that can generate cash flow against a backdrop of static gold prices; the market likes developers with advanced, low-capital intensity projects with permits in place. In this interview with The Gold Report, Ray explains why developers are at the forefront of gold's big comeback and tells us how to find plays that are poised lead the charge.

The Gold ReportThe gold price can't seem to climb back above $1,300/ounce ($1,300/oz) despite several geopolitical hotspots making headlines. What's underpinning the price weakness?


Raj Ray: The issue is that despite the geopolitical backdrop, the fundamentals still appear weak. The big drivers—demand from India and China and gold exchange-traded funds—have been more or less flat year-over-year. China is still digesting the gold it purchased last year. And, although price premiums have declined in India following the recent Bank of India's move to permit trading houses to import gold again, further relaxation of the import tariffs is not forthcoming. If not for geopolitical conflicts providing support, gold could have moved much lower than $1,300/oz. I don't see a big driver to push gold higher over the next six to eight months.


TGR: India has imposed high tariffs on gold imports and those have resulted in a marked increase in gold smuggling. How is that influencing the gold prices?


RR: I don't think there has been a marked impact on gold prices in India due to smuggling. The World Gold Council says about 250 tons of gold are smuggled into India each year. If you add that to the official gold imports of roughly 800–850 tons, you still have a shortfall of around 200–300 tons based on average annual imports. What might be something to look out for heading into the wedding season is the rainfall and its impact on food production. Rural India accounts for 60–70% of India's gold demand. The rainfall outlook has improved slightly, but a rainfall shortage could make the government reluctant to reduce the import duties anytime soon. It would also mean that people have less money to spend on gold.


TGR: You said China is still digesting its 2013 gold hoard. How long before China is consuming gold as it did in 2013?


RR: Given the lack of transparency, we don't know if the 2013 gold-buying frenzy was driven by consumers or the state. If most of it was consumer-driven, there could be several possible explanations as to why demand has been muted this year. One is the slowing economy, which in turn has contributed to the depreciation of the yuan. There is lower demand for luxury goods. People are still holding on to a lot of gold inventory following last year's purchases. Chinese consumers could return to the market soon but I expect this to play out for another 6–12 months.


TGR: Your forecast for gold is $1,325/oz for the remainder of 2014. What numbers are you using into 2015?


RR: We are using $1,325/oz in 2015, then we ramp it up to $1,400/oz for 2016.


TGR: A recent National Bank Financial report suggested that the poor equity performance of producers in Q2/14 had more to do with high expectations and inflexible mine plans than with static gold prices. Would you explain?


RR: When the gold price plunged in 2013, a lot of gold producers went through a period of mine optimization. The expectation was that they could get to higher-grade, low-cost ounces quickly. The initial drop in costs that we saw was a result of cutting nonessential spending, but the companies eventually found out—as did the market—that it's much harder to decrease operating costs by reworking mine plans. These things take time. The second quarter results from some companies are starting to show the benefits of mine optimization plans initiated last year. But it's still early.


TGR: In the same report, you note that one reason for optimism is that there are signs that "pervasive back-end loaded production profiles among our producer universe are playing out." Could you elaborate?


RR: For producers, the move to eliminate economies of grade also impacted throughput as companies realized that they were not able to replace lower-grade ore with higher-grade material fast enough. We might see that change in the second half of 2014 as companies gain access to higher-grade zones as a result of mine optimization. We're seeing some of that impact in Q2/14 but we expect an even greater impact in the second half.


TGR: Would you give us the essentials of your investment thesis for producers and junior developers for the second half of 2014?


RR: My investment thesis for producers hasn't changed much from the beginning of the year. I still like companies with operational flexibility and the ability to generate cash even in a muted gold price environment. Operational flexibility means companies that have completed sufficient development to easily access higher-grade ore if and when gold prices drop. Companies with high cash costs will still find it difficult to navigate this market environment given our forecast for muted gold prices for the rest of the year and into 2015.


For development plays, the market likes advanced, low-capital intensity projects with permits in place. The market still doesn't have the appetite for large-scale, capital-intensive projects.


TGR: Parting thoughts?


RR: The gold space is still going through a period of operations consolidation. Companies have reworked their mine plans and are starting to see the benefits. We will see that play out further in H2/14. We still believe that the gold price environment could be muted over the next 6–12 months. Companies that would perform well in this environment are companies that have low cash costs and operational flexibility.


TGR: Thank you for your insights, Raj.


Raj Ray is a metals and mining research associate analyst with National Bank Financial, covering junior mining companies. Prior to joining NBF, Ray worked as an equity research associate with GMP Securities covering diversified and fertilizer sectors. He has also worked in investment banking with Dundee Capital Markets on equity financings and M&A transactions for small- to mid-cap gold and base metal companies. Prior to this Ray was a process engineer at Vedanta Resources Plc for four years. Ray holds a Bachelor in Metallurgical Engineering from India and a Master of Business Administration in finance from the Schulich School of Business. He has also completed all three levels of CFA and is awaiting his charter.


1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor.
2) Streetwise Reports does not accept stock in exchange for its services.
3) Raj Ray: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.


Streetwise - The Gold Report is Copyright © 2014 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.


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