Gold News

Metals Merry-Go-Round

Copper down, silver and gold up on global slump...
JOE REAGAR is a research analyst with ROTH Capital Partners, providing equity research coverage of the natural resources sector.
Here he tells The Gold Report's sister title The Mining Report how metals are like horses in a merry-go-round – as some rise, others fall.
So looming surpluses, shortages and reduced confidence in central banks will be negative for copper but positive for silver, gold, uranium and, especially, zinc.
The Mining Report: Gold rose 2.5% Jan. 15, and is up 8.4% for the year already. What do you make of that?
Joe Reagor: I think there's a lot of money flowing into the sector. It's been two rough years in a row for gold, but now there's a feeling that a solid floor has been established in the $1175-1200 per ounce range. 
TMR: Marc Faber says investor confidence in central banks is collapsing, and gold could rise 30% in 2015 as a result. What do you think?
Joe Reagor: Investor confidence in the large banks and the world economy has been reduced. Gold should have a steady increase throughout the year, but just one or two examples of positive economic data could result in a loss of some of the upside we've seen so far this year. Our 2015 forecast for gold is an average of $1263 per ounce.
TMR: The gold-silver price ratio has risen to 75. Does this surprise you?
Joe Reagor: We've believed since 2012 that gold would outperform silver. Looking at the new projects being built around the world, we've seen silver projects at 80-100 grams per tonne and gold projects at 0.09-1.1 grams. So after we applied our recovery rate, this suggested a higher gold-silver ratio on a rarity basis.
TMR: Will the gold-silver ratio decline in 2015?
Joe Reagor: Silver should outperform gold this year because silver has industrial uses. So the ratio should approach 70, for a silver price of about $18 per ounce.
TMR: A number of experts interviewed recently by The Gold Report have said that at $16 per ounce the prospects for pure silver producers are poor. Do you agree?
Joe Reagor: At that price, the pure silver producers would struggle. However, silver has risen to almost $18 per ounce, and if it continues to rebound, pure silver equities should perform better than those that derive silver credits from base metals operations.
TMR: What are your forecasts for 2015 base metal prices?
Joe Reagor: We follow copper, lead and zinc. Our forecast for copper is an average price of $2.74 per pound, with $2.70 in Q1 of 2015 and $2.60 in Q2. We expect little movement in lead, with a flat $1 per pound price for the year. And for zinc, we expect $1.10 per pound for the year, with the price rising as high as $1.30 in Q4. 
TMR: Given how important copper is to economic expansion, could its recent price decline be a leading indicator of a global slowdown?
Joe Reagor: I think the biggest issue is a slowdown in China. That country had stockpiled large amounts of copper but now appears to be selling back into the market, which is what's driving the price down. We think that world economic growth has lagged a bit and may continue to do so. We further believe that the strength of the US Dollar is more a reflection of the weakness of other currencies than it is of the strength of the US economy. 
TMR: Assuming for the sake of argument modest global economic growth, does this favor the so-called currency metals, gold and silver, over the industrial metals? 
Joe Reagor: For the most part, yes. Zinc should be the best performer this year, but after that, it should be pretty close between gold, silver and maybe uranium. 
TMR: Is the world running out of zinc?
Joe Reagor: A more accurate evaluation is that the zinc price has been so low for so long that we are running out of current supply. In 2012, the world zinc market was significantly oversupplied. The price fell to the $0.80 per pound range, so there was no incentive for reinvestment.
The London Metal Exchange's zinc inventory has fallen from 1.2 million tons in 2012 to below 700,000 tons, which means a roughly 250,000 per year shortage right now, even before the Century shutdown. So world zinc inventories could drop to dangerously low levels by the end of 2015 or early 2016. 
TMR: When will new zinc projects come on line to make up the deficit? 
Joe Reagor: If the price of zinc spikes, there could be a three to five year delay before the world can get zinc mines permitted and built. China has massive zinc reserves that aren't currently being produced, and a laxer regulatory regime than the rest of the world. But even if it brought some of its shuttered mines back on line and began construction of new ones, we'd still be looking at six months to get the former producing and a year or two for the latter. 
TMR: What does the recent fall in the price of copper mean for investing?
Joe Reagor: Generally speaking, a fall in copper prices today usually bodes well for three years from now.
TMR: Let's talk about uranium. To what extent is the fall in the spot price of U3O8 to $35 per pound from $42 per pound a short-term reaction to the oil price collapse?
Joe Reagor: I don't think it had much to do with that. In November, Japan announced that the Sendai reactor would be restarted, and this spurred a uranium buying spree by world utilities. Back then, there wasn't much spot supply available, which caused a momentary price spike. Keep in mind that the spot price was under $28 per pound last summer, and now it's over $35 per pound.
TMR: You indicated earlier in the interview that you are bullish on uranium. Explain why.
Joe Reagor: Our forecast is for a long-term shift from fossil fuels to uranium as an energy source. And besides one major mine in Saskatchewan, little uranium production has been added in the last few years. If more power plants come back on line in Japan, and China continues its nuclear power expansion, uranium demand will continue to increase. This could lead to the removal of the current surplus and the creation of a shortage. 
We don't anticipate a major move in the price of uranium. Some industry experts expect a quick move to the $70 per pound range, but we expect a staged recovery to the mid-to-high $40s by the end of 2015. 
TMR: How do you rate ISR uranium mining versus traditional mining?
Joe Reagor: ISR is the mining method that works when the industry is under fire because it requires lower upfront capital. The downside is that the permitting of additional wells and additional production areas can cause large fluctuations in production levels and impact overall profitability, whereas with conventional mining you're either producing or you're not. With conventional mining, once you're in production, you're done; you don't have to worry about repermitting as you go. Each approach has its advantages, but in today's market, ISR is clearly the leader. Should the price of uranium hit $70 per pound, however, conventional mining would again be the preferred method.
TMR: What's your general counsel for investors in 2015?
Joe Reagor: We favor the macro approach. Investors today aren't so much looking for analysts to pick specific stocks to buy and sell at specific prices as for general investing themes and some names that fit within them. So, for instance, we tell investors that with the US Dollar growing stronger, they should look for companies with all, or at least significant, production outside the US. Their costs are denominated in local currencies, so companies that mine metals whose prices are flat in US Dollars will benefit from the strong US Dollar. 
We're negative on current copper producers because of our negative outlook on near-term copper prices. We like pure zinc producers or those with significant zinc contributions because of the zinc shortage. In precious metals, we're targeting silver companies over gold companies because we expect the gold-silver price ratio to fall from 75 to 70. 
TMR: Given that mining equities have been bearish for almost four years, the good news of the past six weeks might lead investors to conclude that happy days are here again. Is this a reasonable conclusion?
Joe Reagor: A cautious optimism is reasonable. Mining equities in general are going to benefit from the lower oil price, and gold and silver equities in particular will benefit from the higher prices of those metals. 
I should again caution that better-than-expected economic data from Europe or China could easily reverse the recent trends in gold and silver. In addition, we note that the upward move in precious metals equities has outpaced the price increases in bullion. Therefore, we need further increases in gold and silver to support equity prices. Some gold stocks are up as much as 20-30% this year, so gold must continue to trend toward $1300 per ounce to justify these gains. We expect moderate strength in the precious metals sector in 2015.
TMR: Joe, thank you for your time and your insights.

The Gold Report is a unique, free site featuring summaries of articles from major publications, specific recommendations from top worldwide analysts and portfolio managers covering gold stocks, and a directory, with samples, of precious metals newsletters. 

See the full archive of Gold Report articles.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals