Gold News

Yes, Major Miners Can Survive $1100 Gold

Which is lucky, says this senior mining stock analyst...
 
ANDREW KAIP is managing director of mining equity research at BMO Capital Markets. Previously a mining analyst at Haywood Securities, Kaip also served as a project and consulting geologist for more than 10 years.
 
Now he tells The Gold Report here not to expect near-term higher prices for gold or silver. But, due to continuing cost cutting and other efficiencies, he argues that the senior gold producers can now make profits above $1100 per ounce gold.
 
The Gold Report: You recently became managing director of mining equity research at BMO Capital Markets. What kind of overview of the gold and silver sectors does this position entail?
 
Andrew Kaip: Taking one of the lead roles at BMO Research has given me the opportunity to step away from the day to day of covering stocks. Supervising a team of analysts allows me to spend more time thinking about where we are in the gold and silver cycles and the implications for investors. That's precisely what we did when we launched coverage on the senior gold producers.
 
TGR: So where is gold in its current cycle?
 
Andrew Kaip: At BMO, we've kind of stuck our neck out after some deliberate thought, and we're suggesting a lot of similarities between 2001 and 2015. The price of gold was low then, just as it is now. Similarly, the gold producers of 2015 have come to resemble those of 2001, in that they have finally, after a long struggle, stabilized their operations such that they can contend with low prices. They have shut down unprofitable mines and lowered costs at those that they have kept.
 
I believe that gold producers are now in the early stage of a new cycle.
 
TGR: What are your 2015 and 2016 forecasts for the price of gold?
 
Andrew Kaip: Quite flat. We forecast a 2015 average price of $1200 per ounce and an average of $1180 per ounce for 2016. Beyond that, we expect a slow and gradual rebound to about $1250 per ounce long term.
 
TGR: And your forecasts for silver?
 
Andrew Kaip: Very much the same story. We forecast a year-end 2015 price of $16.43 per ounce, $16 per ounce for 2016 and $17 per ounce for 2017. We expect silver will then move toward $21 per ounce long term.
 
TGR: Despite the continuing massive expansion of global money supply and a host of geopolitical crises, most recently the possible exit or expulsion of Greece from the Eurozone, the gold price slid. Isn't this counterintuitive?
 
Andrew Kaip: At first glance, it would seem counterintuitive. One might have expected that the Greek crisis would have supported a high gold price. I recently returned from a marketing tour throughout Europe and discussed this issue with investors. The reality is that the Greek contagion has been mostly isolated. To be honest, Greece is a very small component of the European economy, and so the crisis has a quite small global macroeconomic effect. It is not regarded as having any serious implications for the United States.
 
More pertinent to the current price of gold is the discussion regarding whether the Federal Reserve will raise the prime rate in September.
 
TGR: We have heard talk of the Fed raising interest rates for years. US gross domestic product fell 0.2% in Q1 2015. Would the Fed really increase rates when the US economy could be heading into a recession?
 
Andrew Kaip: No, it wouldn't. But many economic data points must be released before it can be said that the US economy is in recession. Right now, the data are mixed. We go through periods where the US economy starts hitting good numbers, and investors get quite constructive about it. Then we see a couple of soft numbers, and the discussion changes to the unlikelihood of higher interest rates.
 
I believe the US economic trend continues to be more positive than negative. That is why, for instance, we've seen job numbers improve over the last few years, and quite frankly, why the US Dollar is as strong as it is. BMO is forecasting that by September the Fed will be in a position to raise the rate and will do so by that first quarter point.
 
TGR: A recent story in Al Jazeera suggests that China intends to move aggressively to make Shanghai the center of the gold world. What do you make of this?
 
Andrew Kaip: It's a significant development. China has spoken often of its desire to increase its reserve holdings of gold. We don't really know how much gold China holds, but we do know that China has become the world's largest gold producer. China is certainly seeking to increase its control over the pricing of gold. This is a reality that not many investors are paying attention to.
 
TGR: As ownership of physical gold continues to shift from West to East, would Shanghai's more powerful role lead to a higher gold price?
 
Andrew Kaip: A long-term trend has been established. Is it constructive for the price of gold? It has the potential to be, but ultimately, the price will serve as a barometer measuring the health of the larger economies in a global perspective.
 
In the meantime, this shift to Shanghai will increase the desire for investors to know more about the health of the Chinese economy and how that will impact the price of gold, just as today the price of gold is to a great extent determined by considerations of the health of the US economy.
 
TGR: A BMO Research note in June stated that you have "moved toward a more constructive view of the senior gold miners." Have the senior miners slimmed down and become more efficient?
 
Andrew Kaip: They were forced to do so by the decline in the price of gold. They have been forced to move their companies to the point where they can operate profitably at a lower gold price.
 
They have achieved this in a number of ways. First, they have reduced their corporate overhead on an absolute or per-ounce basis quite substantially. Second, they began readjusting their capital programs. They scaled back new project development and reduced sustaining capital budgets dramatically.
 
TGR: Have the senior miners increased efficiency at the cost of compromising their reserves?
 
Andrew Kaip: This is a matter that concerns investors. Reducing stripping in open-pit scenarios decreases sustaining costs but also results in fewer ounces mined. So, sustaining capital has declined because reserves have declined. It is our view, however, that producers have not cut as deeply as investors may think, that they have not rationalized sustaining capital levels to the point where they compromise mine lives.
 
TGR: Summer is traditionally the weakest season for precious metals equities. Is it prudent for investors to buck the prevailing wisdom and take positions in gold and silver companies now?
 
Andrew Kaip: The history of the last 20 years has demonstrated the wisdom of summer buying. The seasonality analysis BMO did last year concluded that investors who bought in June and sold in September realized average returns of 9-10% eight times out of 10. This is a real opportunity, and investors should pay attention.

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