- increases in project costs being experienced by some miners are both significant, and likely ‘here to stay’. They also are likely to increase further going forward for a number of reasons related to country risk and the environment, to note but two – see observation following.
For example, Barrick just yesterday announced cost overruns on its massive Pascua-Lama gold project located on the border of Argentina and Chile. These increases apparently were not expected by all analysts, and therefore may not all or in part have been ‘priced into’ the Barrick share price – today’s market activity will tell the tale on that;
- operating costs are broadly escalating for both mining and oil & gas companies, and this will be reflected in their after-tax discretionary cash flows and earnings going forward. This will make access to required capital more difficult and more expensive – both in the context of the businesses of those companies, and in the context of shareholder interests – which may well face greater share dilution than they would have expected to experience;
- country risk and environmental issues are both likely to escalate going forward. If I am right in this, time delays and operating costs will increase further, as will corporate taxes including royalties, with the specter of ownership expropriation hanging in the background in some jurisdictions;
- some projects that are in the development stage will be postponed until cost and market conditions aligning – or perhaps will be simply not be ultimately pursued at all. For example, yesterday Barrick also announced it is postponing projects in Alaska and Chile;
- the exploration and development projects that will go forward are those with high mineral grades and ‘acceptable’ plant and cost structures that will result in satisfactory rates of return on capital in a ‘high risk environment’ – meaning that projected internal rates of return on capital will have to be higher than they have been in the recent years on new projects;
- the positive arising from this from a shareholder perspective is that over time:
- precious metal prices (particularly gold) ought to rise as supply falls, and
- prices for both base metals and oil & gas ought to rise in the face of lower supply levels, barring a serious slowdown in the developing countries including China, and even more serious economic malaise in the developed countries that now exists;
- the good news for companies exploring for, developing, and producing physical silver, is that a good deal of physical silver production goes into consumer product applications. That, combined with the fact that about 70% of all silver currently produced is generated as a by-product of mining operations aimed principally toward extraction of other minerals (copper, gold, nickel, to cite three) where that production may drop, in theory ought to auger well for the silver price, and for the companies who primarily explore for, develop, and produce physical silver;
- the bad news for companies exploring for, developing, and producing physical gold is that those investing in and trading in the gold space may well be more inclined to purchase and trade the physical metals (or derivatives thereof such as ETF’s and Bank Certificates) than they are the shares of the companies mining them; and,
- that said, that ‘bad news’ may prove to be very good news for those who carefully research and select ‘the right’ gold explorers, developers and producers (high grade, reasonable cost structure, etc.), as those companies ought to have a chance – subject to country risk and environmental issues – of doing well in an ‘escalated gold price’ scenario.
I plan to expand on these thoughts in subsequent Newsletters over the next weeks and months.
Context: In the end, company share value and hence price are forward looking. Anyone participating in the equity markets needs to carefully consider the possible or likely consequences of changes in capital and operating cost structures, country risk, country taxation structures, and expropriation risk – particularly in capital intensive operations, which includes both mining and oil & gas companies.
Topical Reference:
Barrick Gold shifts focus to investor returns, from
The Financial Post, Peter Koven, July 26, 2012 – reading time 3 minutes.
Snippets From Today’s Commentaries
Snippet #1: Country risk and environmental issues are both likely to escalate going forward. If I am right in this, time delays and operating costs will increase further, as will corporate taxes including royalties, with the specter of ownership expropriation hanging in the background in some jurisdictions.
Snippet context: Where costs escalate or might escalate faster than revenues, risk is enhanced.
Snippet #2: Company share value and hence price are forward looking. Anyone participating in the equity markets needs to carefully consider the possible or likely consequences of changes in capital and operating cost structures, country risk, country taxation structures, and expropriation risk – particularly in capital intensive operations, which includes both mining and oil & gas companies.
Snippet context: Consideration of these things is both ‘point in time’ specific, and fundamental to any reasoned share valuation or pricing decision.
Snippet #3: Consider what (Siemens) reduced industrial orders likely mean in the context of Eurozone economic activity in the next few months, and perhaps beyond that.
Context: Industrial orders tend to be a precursor of prospective manufacturing activity.
Snippet #4: Canada is a federation of quite different Provincial and Territorial economies. One has to take notice if one Province attempts to play the ‘strategic advantage card’ in any economic matter of importance to the country as a whole.
Snippet context: Taking strategic advantage is perfectly acceptable where parties are at arm’s length. That is not necessarily so where they aren’t.
Brief Commentaries prompted by world headlines
Eurozone: Industrial orders
Yesterday Siemens, Europe’s largest engineering conglomerate, announced that its orders dropped 23% in its latest fiscal quarter. Siemens’ largest market is the Eurozone, which is now reported on a collective 17-country basis as having suffered reduced business activity in July for the sixth straight month. I suggest you read the referenced article, and think about what reduced industrial orders likely mean in the context of Eurozone economic activity in the next few months, and perhaps beyond that.
Context: Industrial orders tend to be a precursor of prospective manufacturing activity.
Topical Reference:
Siemens new orders slide as crisis spooks customers, from
Reuters, Marilyn Gerlach and Jens hack, July 26, 2012 – reading time 2 minutes.
Eurozone >> Greece: Greek Government struggling with austerity
While not unexpected given the continuous procrastination of politicians – torn between pleasing their constituents and being re-elected and facing up to economic reality – the Greek Government is reported as having been unsuccessful to date in agreeing to the 11.5 billion euros in budget cuts necessary for Greece to receive Eurozone rescue packages totaling 240 billion euros.
The fact that the Greek Government is even debating this demonstrates how impractical a Government in a country with a distressed economy can be. The real questions for the Greek Government are:
do we cut our budget, take the money from our Eurozone ‘partners’ now, suffer what may be societal disruption consequences, and postpone for a few months or years what is increasingly seeming inevitable; or,
do we simply face up to what appears to be that inevitability; declare that Greece is bankrupt, leave the Eurozone, and suffer the consequences of that.
Making the second decision certainly would put the rest of the Eurozone countries between a rock and hard place, and force hard decisions that will otherwise simply be postponed.
Topical Reference:
Greek budget talks stumble as ‘Grexit’ predictions grow, from
The Financial Post, from Bloomberg News, Marcus Bensasson and Maria Petrakis, July 26, 2012 – reading time 4 minutes.
Eurozone >> Slovakia: An economic trickle in the Eurozone dyke?
Slovakia is a small country of 2 million people and an area of 8,000 square miles. It sits between Austria and Italy. Measured by 2011 GDP it was the 62 largest economy in the world, and the 12
th largest of the Eurozone’s 17 countries (2011 GDP U.S.$96 billion – source Wikipedia). On the surface, Slovakia was an economic success story through 2007 when it joined the Eurozone. It is now facing financial difficulties related to its banks and falling exports. There is now speculation Slovakia will seek a bailout from its Eurozone partners.
Given Slovakia’s size, from a quantum standpoint any bailout likely would not be more than a ‘fly on the back of an elephant’. However, if one looks beyond quantum, Slovakia’s apparent economic difficulties and the apparent financial distress of its banks nevertheless might prove to be one more trickle of water seeping through ‘the Eurozone dyke’ that may in the end result in ‘one more hole in that dyke’. If a dyke accumulates enough ‘holes’, it collapses.
Context: Slovakia is very small, but the Eurozone is in financial difficulty, and sometimes the smallest of things can ‘tip the scale’.
Topical Reference:
Insight: Slovenia rues bank mismanagement as bailout talk grows, from
Reuters, Marja Novak, July 26, 2012 – reading time 3 minutes.
North America >> Canada: British Columbia Premier – musings or more?
I am not particularly caught up in British Columbia Premier Christy Clarke’s current aggressive stance of demanding some sort of undisclosed as yet profit sharing arrangement should the Northern Gateway pipeline be built to transport oil from the Alberta oil sands to a Canadian (i.e. British Columbian) port. I am of this mind because it strikes me that any such attempt at a ‘profit grab’ by British Columbia:
- may well not be constitutional;
- could be precedent setting (e.g. if British Columbia wants to take a position it should participate in profits over and above reasonable profits generated pursuant to transport, why not ask Western Canada’s grain farmers for participation in their profits on grains shipped by rail to British Columbia ports, etc.); and,
- would have to be agreed in cooperation with the Canadian Federal Government (or so I think) in circumstances where the current Federal Government is a majority (and not ‘minority’) one.
For the time being I will continue to monitor this, but am not spending much time thinking about it beyond:
- given that Ms. Clark is raising such an issue she must be very worried about British Columbia finances; and,
- if she were to succeed in having her demands satisfied, depending on what those demands in the end prove to be, that could be very ‘precedent setting’ and a ‘game changer for Canada’.
Context: Canada is a federation of quite different Provincial and Territorial economies. One has to take notice if one Province attempts to play the ‘strategic advantage card’ in any economic matter of importance to the country as a whole.
Topical Reference:
B.C. Premier Christy Clark calls on Ottawa, Alberta to resolve Northern Gateway Feud, from
The Financial Post, Jason Fekete, July 25, 2012 – reading time 3 minutes.
