Gold News

Gold/Silver Ratio "Flat Like Prices"

2014 will prove tough for miners who can't post good margins...
BENJAMIN Asuncion and Geordie Mark of Haywood Securities forecast 2014 gold and silver prices of $1300 and $21.50 respectively.
Speaking here to The Gold Report, they argue that with prices flat at best, the gold and silver miners who will thrive will be those blessed with the prudent but aggressive management that can post good margins at today's prices.
The Gold Report: Gold is up for the year. Do you expect this trend to continue?
Benjamin Asuncion: For 2014, we're officially forecasting an average gold price at $1300 per ounce. We've elected to err on the side of conservatism in our commodity forecasts, which leaves company valuations to be more reflective of operating performance than reliant on higher metal prices.
TGR: Ambrose Evans-Pritchard of The Daily Telegraph says if the Federal Reserve "has to back off [tapering] again, gold will have a fresh lease on life." Do you agree, and do you think the Fed is committed to tapering?
Geordie Mark: I agree that if the Fed backs off tapering, it's a total game changer for sentiment. Janet Yellen, the new Fed chair, has certainly been quite cautious as to how she's going to approach monetary policy, so right now we're in a wait and see period, but that being said, the market now appears to show a certain positive sentiment for precious metals companies.
TGR: We've seen various currency panics around the world in recent weeks. Will this lead to a flight to safety in the US Dollar?
Geordie Mark: Ultimately, strengthening of the US Dollar likely will be based on a strengthening US economy rather than capitulation of other major currencies. The outlook with regard to tapering demonstrates broader directional strength in the US Dollar. We might be able to expand on that.
TGR: For several years, what's been good for the US Dollar has been bad for gold and vice versa. Is this a new iron law, or could it change?
Geordie Mark: That's definitely been the argument in the past. However, the big thing here is that we've got another player that could firm up the gold price: China.
Benjamin Asuncion: The Chinese typically take a longer view on investing in gold. Last year we saw outflows from exchange-traded funds (ETFs) in the order of roughly 30 million ounces. That amount was quite close to the amount of gold being imported by China from Hong Kong.
The amount of gold being replaced annually is growing significantly slower than the money supply. So we are seeing support for higher metal prices, and the ounces out there are in demand, given the lower prices that are reducing production.
TGR: What's your 2014 forecast for silver?
Benjamin Asuncion: We're currently using $21.50 per ounce in our valuations, based on a gold price of $1300 per ounce, which implies a silver-gold ratio of about 60:1. This ratio is fairly consistent with the ratio we've seen from 2000 onward. Looking at the relationship between the two metals, historically silver has correlated closely with gold but demonstrated roughly twice the volatility.
TGR: Unlike gold, silver has industrial uses. How does the supply-demand question in silver look?
Geordie Mark: On the supply side, the majority of silver production comes as a byproduct of other mining operations (ie, lead and zinc), therefore, the silver price doesn't necessarily dictate the economic viability of these mines. This results in an appreciable amount of silver supply that's fairly agnostic to the silver price, which translates to greater fluctuations in prices, particularly on the downside.
On the demand side, we have industrial applications accounting for roughly half of the total demand, followed by jewelry, coinage, photography and silverware. Investment demand accounts for the remainder, for which the silver ETF holdings are a significant source. On the ETF side, we see a different picture compared to gold, with gold ETFs shedding ~30% last year, in contrast with a more optimistic picture of silver ETFs posting a marginal increase.
TGR: Gold and silver equities have lagged prices significantly in recent years. Is this changing?
Benjamin Asuncion: So far this year, we've seen this change as gold and silver have been relatively lackluster with each posting gains around 10%, a stark contrast to the equities that have risen upward of 30-40%, pointing to improving sentiment.
TGR: The crisis in precious metals equities is almost three years old. What must junior gold and silver mining producers do to ensure their survival?
Benjamin Asuncion: To ensure survival in the paradigm of declining metal prices, companies have trimmed non-operational expenditures (i.e., corporate general and administrative, and exploration) and deferred significant capital projects to preserve the balance sheet. We're also seeing some signs of more selective mining (i.e., focusing on higher grade and higher margin production). However, the latter requires a longer-term outlook. 
One of the criteria we evaluate companies on is their ability to endure at current metal prices – those without significant burdens like hedges or onerous amounts of leverage or debt. We're focusing on companies with attractive valuations that we see have the opportunity for lower cost growth profiles with the means to fund development plans. Having said that, given the current equity valuations, sometimes it's cheaper or less risky to wait and buy ounces than drill them.
TGR: What must junior explorers to do survive?
Geordie Mark: Juniors need to differentiate themselves from their peers. Right now these companies need to take a step back and take time to assess or re-assess their portfolios. Exploration targeting metrics need to be cognizant of prevailing commodity prices and thus look for mineralized systems capable of potentially operating in a lower commodity price environment. Such strategy also follows for those companies with defined assets that need to be re-examined in light of a lower commodity price environment. Such strategies likely will make those companies capable of attracting available capital in the markets. Above all, companies must continue to move forward rather than to stagnate.
TGR: What do you think are the sources of optimism for investors in 2014?
Geordie Mark: Ultimately, turnarounds in operator performance. We're looking for mining companies to deliver on costs and to improve margins. Commodity prices will do what they do; they are out of our control. But solid operations performance by the companies is expected to be returned in equity valuations as the market regains confidence in individual companies, as well as in the sector as a whole.
Benjamin Asuncion: The story going into Q1/13 was declining cost profiles from operators. Some delivered on that last year, and some didn't. However, across the board most are still pointing to improved performance in 2014 relative to 2013. That's one source of optimism.
The other thing we'll be looking for in 2014 is companies that can execute on acquisitions and consolidate stranded assets. Even companies that operate and execute may be constrained by other considerations, such as being laden with more debt than they can service in the current metal price environment.
TGR: Since the bear market in gold and silver equities began in April 2011, a fair number of investors have been holding on to battered stocks with the view that there has to be a turnaround. Some stocks have continued to fall. Should investors cut their losses, cull these stocks and consolidate in companies that look like better bets?
Benjamin Asuncion: I think this consideration really has to be taken on a position-by-position basis. Our consensus here is generally evaluating all project merits, but companies that are not advancing their projects and just whittling away at their treasuries are not good bets.
I think that investors still looking for exposure within the exploration side should examine companies that still have plans to expand their projects, companies that are still in some sense moving forward. From an investment point of view, if investors are holding onto an explorer that isn't doing anything to advance its project or is overburdened with debt, they really aren't getting anything by holding on to that company. Looking forward 12 months, what will be different with that company? Investors should review their portfolios with a view to determining which companies can survive with reasonable commodity price expectations.
Geordie Mark: Ben is saying that investors should become more company specific in their investments. What's crucial is dynamic management in creating value, whether it's by additional discovery, augmenting production or undertaking cost control and improving operating margins. All of those factors are exceedingly important components of creating future value for shareholders. They are the positive milestones to put equities in a more positive light.
TMR: Ben and Geordie, thank you for your time and your insights.

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