Gold: Till Debt Do Us Part

By: John Ing | Fri, Aug 29, 2008
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The Russians invade Georgia, raising fears of a proxy war with the U.S.. Oil through $150 a barrel? No. In fact, oil is $30 below its peak, hitting three month lows. And gold, a safe haven in times of geopolitical unrest, fell $60 an ounce in one day. The explanation for the change is that after eight years of weakness, the U.S. dollar reversed course on fears of a global slowdown and is at its strongest levels in six months, regaining ground against a handful of currencies, including the euro, the Canadian dollar and the pound.

Investors are celebrating this reversal amid hopes that the commodity bubble has burst, washing out the much feared inflationary spike. Happy days are here again as the markets have breathed a collective sigh of relief on hopes that the subprime crisis was just a bad dream.

Wrong. It's simply a "dead cat bounce". Market sentiment indicators showed commodities were simply overbought after reaching record highs. As a result, traders exited en masse when key chart support levels broke down. We also believe that the correction was due to commodity players who earlier drove up prices to record highs unwinding speculative positions as they sought to raise liquidity and pay for huge redemptions. In addition, the normal seasonal slowdown in the commodity markets made the moves much more exaggerated as over-leveraged hot money hedge players took profits to offset their dreary bets. We also believe the $7.5 billion bankruptcy of big oil player SemGroup LP depressed the oil markets as bankers unwound their positions. (SemGroup had hedged 21 million barrels of oil.)

But is this really the end of the boom? We think not. The super cycle in commodities is not even half over. This secular bull is intact. The fundamentals such as tightening supply/demand conditions remain. Indeed, the pullback has sparked such a run on physical gold supplies that the U.S. Mint suspended and then rationed American Eagle gold coin sales for the first time in two decades due to depleted stocks. Big gold banks such as HSBC and UBS also reported healthy demand for physical gold.

The laws of supply and demand have not been suspended. The lack of excess capacity, not speculation, is one of the major drivers, particularly since continued strong demand from fast growing Asia will support higher commodity prices. The demand destruction for oil in the U.S. is offset in part by growing Asian demand and by the fact that inventories, particularly in the U.S. have fallen to low levels. The other driver remains the U.S. dollar. And America's insatiable need to borrow to finance both consumption and Wall Street's bailouts will ensure the dollar rally is short-lived.

Our view is that a correction was needed, and provides a classic buying opportunity.

Not Too Big to Fail

One by one, the big investment banks have succumbed to the implosion of their business models. The model was based on unbridled access to easy credit and the hubris-infused notion that they were "too big to fail." Moreover, the "made in Wall Street" securitization model allowed them to repackage mortgages and other debts into securities backed by other yet more new and improved securities, which allowed them to leverage their balance sheets with billions in complex structured securities. Gone was the model of taking in $100 of deposits and lending a portion to secured clients. Instead, bigger profits were to be made when the banks leveraged their balance sheets by more than 25 times with exotic securities often collateralized with their own dubious products. When some subprime players inevitably defaulted, financial institutions around the world found themselves holding billions of worthless debt from CDOs to swaps to level 3 assets. So the house of cards collapsed. The emperor was found to have no clothes.

A year into the credit crunch, the financial landscape is so profoundly transformed and so badly damaged that the massive deleveraging process will take years to unwind. Deleveraging requires capital and that is in short supply. Of concern and not yet addressed is the attendant counter-party risks of a collapse of one of these circular debt instruments, which could lead to a systemic chain reaction, taking with it a hedge fund, bank, sovereign wealth player or even a central bank.

Unfortunately, America's policy prescription is for another quick-fix dose of fiscal stimulus to borrow more money. That simply won't work. Wall Street's credit crisis is far from over. Long Term Capital Management, a hedge fund derivative player that failed 10 years ago, was considered a "one-off" failure. Then Bear Stearns, another "one-off" failure, had to be auctioned off. And now Fannie Mae and Freddie Mac are to be rescued. Another "one-off" failure? No. It's an epidemic.

What If They Are Wrong? Again

There is much talk that this financial crisis is coming to an end and that there is light at the end of the tunnel. One year later, the subprime crisis has moved to the sidelines. But the fact that there are no financings is lost on most observers. Indeed, subprime defaults might have been the trigger, but definitely not the cause. We believe the cause was the rapid expansion of money and so the availability of easy money played a role in the collapse of a speculative house of cards. Central banks around the world accommodated this, but of concern is that the policy prescription of today seems to be a continuation of past policies, such as debt on more debt, negative real interest rates and more government bailouts.

The other conventional wisdom is that the oil-price spike was due to "speculators" and that prices will go down once a slowdown is evident in the U.S.. Our own Josef Schachter says that while U.S. demand has diminished somewhat, the slack and then some will be taken up by Asia and other places where energy prices are heavily subsidized. We believe the doubling in oil prices is attributable to abundant liquidity, tight supply/demand factors and a reaction to an overleveraged financial system that saw investors hedge their portfolios with gold and oil, which are immune and traditional safe havens. Indeed, it happened before in the 1970s. Unemployment went up to double-digit levels in the worst economic downturn since the Great Depression. Americans also overspent and over-consumed and the dollar was so overvalued, it needed a bailout by America's trading partners. Of more importance was not the piling on of more debt, but that the U.S. had to accept the tough medicine of the Federal Reserve chairman of the day, Paul Volcker, who raised interest rates to double-digit levels to crush inflation. So, Americans were forced to put their house in order.

Today, however, oil prices have also spiked and inflation has again picked up. But these conditions are accompanied by a further quarter century of debt. Homeowners are losing their houses, savings are negligible and living standards are in decline. Quite simply, there is no easy way out of this economic pain. Wall Street won't be able to refinance America since the big investment banks themselves do not have enough capital. Needed is a tougher Fed. Needed also are the trillion of dollars of sovereign funds to be put to work. To do that, prices are going to have to drop further and rates must go higher to reflect the increased risks. And rather than view a transformed China as a supersized U.S., investors should realize there is a new banker in town, and there is need for both to push their countries closer together, not further apart. To be sure, the solution is not to relax yet another accounting rule or pile on more debt.

The American Dream Has Become A Nightmare

Today, the world is flooded with American IOUs. Low-cost car leases and mortgages wrapped up in complex financial products made it possible for Americans to own the cars and homes they could not afford. The American dream has become a nightmare. Car leases have gone the way of the buggy whip and there are more foreclosures than sales. The U.S. seems poised to resume a second down leg in a year long collapse. The next administration will inherit huge deficits requiring more foreign capital and even higher interest rates that will add billions to those deficits. Also out of luck are the sovereign funds that spent more than $80 billion in the first tranche of Wall Street's bailout over a year ago and whose holdings today are down more than 80 per cent. The U.S. economy is awash in red ink. Deficit spending was used for housing, cars and personal loans. Deficit spending was used to rescue Bear Stearns and now Fannie and Freddie. America is so indebted to the rest of the world that the appeal of U.S. securities is considerably diminished.

The Big Owe

Indeed, foreigners own $4 trillion or some 40 per cent of the $10 trillion U.S. federal debt. As a share of GDP, U.S. net debt stands at more than 20 per cent, compared with the United Kingdom at 17 per cent and the European Union at 15 per cent. Between 1997 and 2007, the current account deficit increased almost six-fold from an annual rate 1.25 per cent of GDP to seven per cent of GDP. And now, almost two years late and despite a lower dollar, the trade deficit is still close to six per cent of GDP. The country's annual oil bill alone is $700 billion. To underline the decline in U.S. fiscal health, at the start of this decade, the budget surplus was 2.4 per cent of GDP. The White House now expects next year's budget deficit to come in at a record half-a-trillion dollars, which does not include some $80 billion in war costs or the biggest rescue package since Franklin D. Roosevelt's New Deal. As a share of GDP, the deficit could reach five per cent. In a decade, household indebtedness rose from 90 per cent to 133 per cent of disposable personal income. American household debt stands at $2.5 trillion. Credit card debt is almost $1 trillion. Mortgages have since peaked at $13.6 trillion with the Ninja mortgages (NO INCOME, NO JOB, NO ASSETS) imploding.

So far, $510 billion in credit writedowns have been taken by the big global banks, rivalling the losses incurred in the U.S. savings and loans crisis. However, Wall Street institutions have raised only $300 billion of new capital. The gap between losses and capital infusions keeps widening every quarter. Today, the world's two largest economic blocks, Europe and the U.S., are beset by a combination of weakened financial institutions and monetary constraints. Global losses could easily top $1.2 trillion as home prices continue to slide. To be sure, America's quarter century of prosperity is over.

Confidence Gone

Restoring confidence is one of the biggest economic challenges facing U.S. authorities. We are living through a crisis that is fundamentally one of declining confidence. There is a lack of confidence in investment banks, which still have assets on their balance sheets at inflated values. There is the lack of confidence in the government in its handling of the bailout of Wall Street. There is lack of confidence on the part of the American consumer, who has paid too much for goods and cars they no longer needs. U.S. consumer confidence fell to nearly 30-year lows, with a recent poll showing that 81 per cent of consumers think the U.S. is on the wrong track. There is lack of confidence in the dollar because of the chronic fiscal and trade deficits. There is a lack of confidence in a bond market beset by a pick-up in inflation, particularly food and energy prices. There is a lack of confidence in structured derivatives, particularly those backed by mortgages. There is a lack of confidence between banks and their clients, which has spilled over into the financial markets, where there is little confidence among the banks themselves. Confidence has been so destroyed that it will take years to rebuild. Without confidence, there cannot be a restoration of credit and without credit, there cannot be a resolution to Wall Street's woes.

How Bad?

Just a few years ago, investors were worried about the Chinese banks. Today, that focus is on the U.S. banking system, the global symbol of American capitalism. Cash strapped financial institutions continue to borrow record amounts from the Fed. First it was the borrowers. Now it is the banks that are in trouble. Fannie and Freddie, the key players in America's mortgage market, require a huge bailout because they are considered too big to fail. But California's IndyMac Bancorp, with $32 billion of assets but lacking Fannie's and Freddie's lobbying prowess, was too small and became one of the largest bank failures in American history. The Federal Deposit Insurance Corp. (FDIC) closed two more regional banks and spent $15 billion to cover deposits. There are almost 8,500 financial institutions in the U.S., of which there are supposedly 117 problem banks on the FDIC's watch list. The two that were forced to close were on that list. Of concern was that IndyMac was not on that list. So far, nine U.S. banks have failed and the FDIC will have to borrow funds from the Treasury to cover future losses. There are estimates that 10 per cent or about 900 financial institutions might fail in part because of the mortgage problems, but most likely because they are simply too small. Much smaller New Zealand has so far shut down more than 40 institutions.

One thing for sure is that there are simply too many financial service players today and a consolidation is needed. Of concern now is not the failure of a large U.S bank, but that there will be many more big banks forced to close. The shock is that there will be so few remaining.

When George W. Bush came into office he inherited a $128 billion surplus, but leaves with one of the biggest budget gaps ever. During good times, the government should have been paying down debt - as the Canadian government has been doing. But now the cupboard is bare. Next year, saddled with the bailouts of 2008, what will the next president do? John McCain promises tax cuts while Barack Obama promises more spending on universal health care, education and the environment. Spending is spending and both will face the biggest financial crisis since the Great Depression.

The Root Cause of Inflation Is Money

Headline inflation has climbed to its highest level in 17 years and is now firmly embedded in the economy. U.S. wholesale prices have risen at the fastest rate in 27 years. History shows that short of repudiating debt, politicians often opt for more inflation since it allows governments to inflate their way out of their obligations. Inflation allows governments to repay its debts in a depreciated currency. Inflation is not caused by rising prices, which are a symptom rather than cause. The root cause of inflation is money creation. To avert a full-scale financial crisis, Fed chairman Ben Bernanke's printing press has been working overtime. Alan Greenspan's legacy and now Bernanke's easy-money policy have simply created the conditions for higher inflation. And history shows that the higher the inflation, the higher the cost to bring it down. The answer lies in the mechanics of inflation and money – there has simply been too much money created.

Today, we have the "walking dead" or "zombies" that are technically bankrupt but supported by bankers and central bankers that do not want to push these entities into insolvency for fear of causing a run on the banking system. Most banks have written down their subprime debt exposure, but haven't taken more writedowns because they do not have enough capital. Some have even resorted to "onion-style" accounting because there are billions of loans today that are worth zero. U.S. mortgage-related losses alone could reach $1 trillion. To fix the financial system, the Fed has resorted to duct tape and bailing wire and yet another increase in the public debt. Over the past year, the Fed's policy response was to lower interest rates from 5.25 per cent to two per cent and flood the system with liquidity. Cutting interest rates only leads to even more inflation. Since interest rates are still negative, the Fed could not lower rates further. So when Fannie and Freddie collapsed, the Fed turned its once pristine balance sheet into a repository of worthless paper and offered loans through the discount window to investment banks and Fannie and Freddie.

Yet nothing has been done to unwind leverage, reduce spending or even to avert future collapses. Merrill Lynch's dumping of $30 billion in mortgage-related securities for $6.7 billion or 22 cents on the dollar was an act of desperation and places yet another lower valuation for these toxic assets. Merrill even provided 75 per cent or $5 billion of the $6.7 billion to the buyer in a "smoke and mirror" transaction. But to finance this transaction, Merrill tried to raise $8.5 billion by selling its shares at a discount, and gave away $2.5 billion to earlier buyers in a "death spiral" deal with Singapore's Temasek. Wall Street's financial model is broken.

Small wonder the next walking dead are the big leveraged buyouts (LBOs) that were financed in the past two years period to a value of $1.4 trillion. Thanks to the credit crunch, financial markets have reeled from one crisis to the other and remain vulnerable. Those chickens are coming home to roost when huge repayments are coming due.

The stocks of the twin mortgage giants, Fannie and Freddie, fell to their lowest levels in two decades. Fannie and Freddie were considered the safety net for U.S. housing. Fannie and Freddie own or guarantee $5.2 trillion in mortgages equivalent to almost half of U.S. debt and are also among the biggest lobbyists in Washington. For some time, we believed that these two providers were on shaky ground and that the Fed's hope that Fannie and Freddie could rescue homeowners were misplaced and comparable to sending firemen without hoses to fight a 10-alarm blaze. Nothing has been done to boost Fannie's and Freddie's thin capital position. According to former St. Louis Federal Reserve president William Poole, "Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer". As the weakest link in a chain of financial integrity, these companies have only $81 billion or 1.5 per cent of capital supporting $5.2 trillion of mortgages. Fannie and Freddie's debt of almost $1.6 trillion is supported by a market value of less than $10 billion. Not only is Poole right, but the institutions are symptomatic of what is wrong with America's financial system.

Fannie and Freddie have more leverage than Bear Stearns, other investment banks or even hedge funds. Sure they need more capital, but from where? Wall Street itself does not have enough capital to save itself. Herein lies the rationale for the second step towards the nationalization of Wall Street. The Fed's takeover of Fannie and Freddie's indebtedness will pile more debt on its books, triggering yet anther increase in the debt ceiling, which was recently increased to $10.6 trillion. And by accepting billions of asset-backed securities as collateral, the Fed weakens its own balance sheet and creditworthiness. The Fed, the lender of last resort, has become the borrower of last resort.

U.S. Looks Abroad For Saviours

Wall Street is bust and lenders are being asked to join America's taxpayers to prop up more failed financial institutions. At the end of the first quarter, foreigner investors held over $1.4 trillion of U.S.-sponsored debt, such as Fannie and Freddie paper. These investors have long been buyers of the debt and equity of Fannie and Freddie because they offered higher returns than Treasuries. Asian institutions hold billions in securities issued by Fannie and Freddie, with China alone holding $76 billion. Europeans hold $39 billion in Fannie and Freddie debt, while investors in Britain hold $28 billion. The Russians, too, own more than $100 billion, with 20 per cent of Russian's monetary reserves in Fannie and Freddie paper. However, foreign central banks, which own a quarter of marketable U.S. treasuries, were net sellers of agency debt. Indeed, we believe the Fed's rescue was not about protecting the small homeowner, but about protecting the much bigger domestic and foreign holders. The billions in securities, while never explicitly guaranteed by the U.S. government, was considered an implied obligation. The failure of Fannie and Freddie to raise equity will probably move the Fed to "nationalize" these mortgage entities, but ironically will wipe out the value of previously issued securities held by foreign holders or dilute existing holdings. If the government takes a preferred stake, it would crystallize existing losses at a time when the government needs the help of foreign holders. To be sure, central banks will not take their losses lightly.

Trying to re-inject liquidity into a frozen system is impossible. To date, foreigners have underwritten the huge U.S. trade and current account deficits, sopping up billions of U.S. paper and causing a build-up in foreign currency reserves. Japan now has official exchange reserves exceeding $1 trillion. China has $1.8 trillion or 25 per cent of the world's total foreign exchange. However, the U.S. depends on foreign investment and must attract roughly $2 billion of new capital each and every day to finance these deficits. This reliance is unsustainable. America is simply borrowing a lot of trouble along with a lot of money.

It gets worse. What happens if foreign holders don't want dollars? No longer are the sovereign wealth funds willing to put such a large chunk of their savings in American securities indefinitely, particularly since their earlier attempts to bail out Wall Street haven't paid off. Almost two decades ago, dollars were being dumped and the Fed had to come up with the Paris Accord to stem the drop in the greenback. Today, America is the world's biggest borrower and conditions mirror those of the 1970s.

Looming is another dollar crisis of confidence as foreigners increasingly worry about losses in the event of a government nationalization of Fannie and Freddie, the health of Wall Street and, of course, the prospect of more fiat dollars created as part of a giant monetization bailout scheme. Gold is a good thing to have.

Wall Street Got Drunk

The U.S. must change. It must value thrift over consumption, savings over spending and live within its means. Policies that encourage consumption and free spending must be ended. Wall Street's business model is broken. It might be necessary to rescue Wall Street, but if future administrations do not change, then either Obama or McCain will simply perpetuate a broken business model. America must change its culture of consumption and debt. Bailing out Fannie and Freddie is a short-term fix that will have far-reaching consequences, particularly if foreign shareholders are left with nothing. Will U.S. taxpayers pick up the tab if foreign creditors walk?

The Fed must maintain fiscal discipline rather than prop up its cronies. Sure, these entities may have been too big to fail, but by underwriting their mistakes the Treasury has socialized risk. Few remember that Fannie and Freddie were recently mired in accounting scandals and faced record losses. More important, few remember that these institutions' financial model is not dissimilar to bankrupt Bear Stearns, which was less leveraged. In the interests of protecting Wall Street, the Fed has given Fannie and Freddie a blank cheque. Who will do the same for the U.S.?

Gold's Comeback

The International Monetary Fund estimates total losses in the past year's financial crisis at $1 trillion or half of the global investment banks' capital. There simply is not enough global capital to cushion these losses, so the printing of money is the inevitable consequence and gold will be a good thing to have. While the U.S. dollar was a major driver in the first run of gold, we believe America's policy prescription of devaluing its way out of trouble will be the second driver and that gold will surpass other financial assets. Gold is an alternative to the dollar. We expect the trillions of dollars currently on the sidelines in depreciating currencies to swing into gold and gold equities. At the same time, the bubble in the financial assets has burst. Financial companies are still grossly overvalued and their balance sheets are not only overleveraged but insufficient to cushion future expected losses. The cost of capital must be in equilibrium with its return. An increase in the risk premium as such should increase the cost of capital to companies. That is the problem with paper assets of today; the cost of capital is too high and, thus, the return is too low.

For some time we have said that gold was money. Supplies of the metal are limited and finite, while those of the dollar and other currencies are not. Gold's value has risen while the dollar has dropped. Gold – real money – doesn't grow on trees. It cannot be created by fiat; it can only be dug out of the ground. And, unlike paper money, it cannot be created by the whims of governments or central bankers. For that reason, central bankers have hoarded gold and are still the largest holders of the metal. Yet central bankers would have us believe that gold is worthless and an archaic instrument of the past. How wrong. Through thousands of years, civilizations have stored physical gold as a protection of their wealth. Gold was seen to level the playing field. It is only a matter of time before private use (ETFs, gold coins) increases and public use declines (central bank sales).

At one point this year, a euro bought 1.6038 dollars, the highest ever. In 2001, the euro was 80.87. In April 2000, gold was trading at $279 an ounce. Today, it is at $830. Yet it is not that gold is going up, but that the dollar that is sinking in value. In an era of low returns, gold is a classic hedge against a depreciating dollar and ever bigger doses of fiscal and monetary stimulus. For 20 years, gold miners were starved for capital and were preoccupied with just surviving. As such, there were no major discoveries. An increase in supplies of gold can only be solved by much higher prices. Commodities have emerged as a distinct asset class, with billions of dollars invested by formerly conservative institutional funds. While physical demand for jewellery has fallen off, demand in Asia remains strong. This was offset in part by declining output in South Africa and higher costs, which helped support higher prices. Gold's performance speaks for itself. Gold will peak at $2,500 an ounce.


Gold and gold shares have bottomed. While gold shares have lagged bullion they resisted the downtrend. The pace of consolidation was active with takeovers by Kinross of Aurelian Resources and Goldcorp's bid for Gold Eagle. Of particular interest was both bids were for early stage ounces and in Gold Eagle's case, there was not even an established NI 43-101 compliant resource for the Bruce Channel deposit. The lesson is that it remains cheaper to buy ounces on Bay Street than to spend money to explore. Profit margins are very healthy but the lack of discoveries also means that there is a growing demand for available ounces. Kinross's whopping bid for Aurelian's Fruta del Norte deposit is in Ecuador where a new mining code has not yet been adopted. The bid comes when Kinross is battling costs but is benefitting from better than expected results from newly opened Kupol in northern Russia.

Meanwhile, the intermediate gold producers have their hands full with Yamana and Goldcorp still digesting their acquisitions. The big cap producers on the other hand are poised to take in smaller companies and are likely to increase their "exploration footprints" now that development ounces are in short supply.

We continue to recommend bigger cap producer like Barrick Gold and Agnico Eagle. We do find excellent value in the smaller companies like Eldorado Gold Corporation, High River, Aurizon and Etruscan. For pure exploration bets we like Detour Gold and silver players Mag Silver and Excellon Resources.


Agnico-Eagle Mines Ltd.
Agnico-Eagle's second quarter results were disappointing due in part to lower by-product credits specifically zinc and reports that capex has increased 40 percent. Agnico second quarter results of only $0.06 was half of what the Street had expected. While the earnings were disappointing there was nothing material that will affect Agnico's long term outlook. For example, the delays for commissioning Goldex, will mean that Goldex will reach full production of 6,900 tpd by the fourth quarter. Similarly, Agnico's Kittila mine in Finland, was also delayed and will only produce 25,000 ounces down from 50,000 ounces. Guidance for next year will include a full year production from Goldex and Kittila however Agnico is still projected to produce 1.2 million ounces of gold by 2011. Agnico has one of the best underground managements and thus they have been able to tie up bigger longer life projects. More important, Agnico's pipeline is full over the short term and intermediate term. For example Meadowbank has potential to produce 400,000 ounces a year and its northerly position in Nunavut opens up opportunities like the $46 million investment in Comaplex about 25 km north of Rankin's Inlet. Agnico recently took a 5 percent stake in Gold Eagle and will cash out when Goldcorp completes its offer. Agnico Eagle has a $65 million budget with at least 25 drills turning on their projects. The crown jewel, La Ronde in Quebec, remains the flagship and the LaRonde North expansion is still expected to come on schedule in 2011. We continue to recommend purchase.

Aurizon Mines Ltd.
Aurizon is a Quebec-based gold producer, producing almost 37,000 ounces during the second quarter at its 100 percent owned Casa Berardi's mine. The company is on track to produce 160,000 ounces this year at a cash cost of $420 an ounce. The Casa Berardi mine was a difficult mine to build and Aurizon has been successful with bringing it into production within budget. More significantly the company has a huge land package in northern Quebec where it is conducting a $9 million drill program at the Big Joanna property. Aurizon has cash balances of $55.6 million. A resource update is expected before yearend and Joanna could be Aurizon's next mine. Aurizon also has a gold/uranium play in Kipawa, Quebec. We continue to recommend the shares here because the stock is undervalued.

Barrick Gold Corporation
Barrick is the leading "go-to" producer enjoying cash margins of 68 percent or almost $480 per ounce in the quarter. Barrick's second quarter results were in line with expectations and benefitted from higher gold prices. However like others, the company lowered its guidance for the year, 7.6 million ounces at a cash cost of $445 an ounce, due in part to lower output from Nevada. Nonetheless, the company enjoyed a healthy profit margin, and surprisingly to offset energy prices acquired Cadence Energy Inc. of Alberta as a hedge against rising energy costs. Barrick's move is innovative and will offset increasing energy costs. Cortez Hills in Nevada is on schedule and another $250 million is left to spend to bring this 1 million ounce producer into production. Barrick's fourth mine Buzwagi, Tanzania will produce 250,000 ounces at a cash cost of $300 an ounce next year. We like Barrick as a trading situation.

Eldorado Gold Corporation
Eldorado is a gold miner with mines in Turkey and China. Eldorado's second quarter was in line with expectations with the company producing 87,000 ounces at a low cash cost of $260 an ounce due in part to a full quarter of production from the Kisladag mine in Turkey. Eldorado's Tanjianshan mine in China contributed about 32,000 ounces at a cash cost $305 per ounce. Eldorado has begun construction at the Efemçukuru project in Turkey, with initial production expected in the latter part of next year. Efemçukuru will produce almost 120,000 ounces and has a high-grade vein system with 1.2 million ounces of proven and probable reserves. Meanwhile Eldorado took advantage of the increase in iron ore prices by selling the former producing Sao Bento mine in Brazil to Anglo-Gold for $70 million. Eldorado should produce 300,000 ounces this year a cash cost of $246 per ounce. Eldorado's bid for Frontier Mining Corporation was successful and thus low sulphidation oxide deposit with 11.7 million tonnes grading 3.62 g/t gold and 8.2 g/t silver measured and indicated resource is a potential new mine. We continue to recommend Eldorado for its growing production profile and portfolio of projects.

Goldcorp Inc.
Goldcorp is experiencing growth pains from digesting 17 mines having acquired over $10 billon of assets in 2006. Goldcorp surprised the Street and reported a loss in the second quarter due to lower production and an increased cost profile. Goldcorp also lowered its guidance to between 2.3 and 2.4 million ounces at a cash cost of $300 an ounce down from 2.6 million ounces and a cash cost of $250 per ounce. Noteworthy is that Goldcorp also bid a whopping $1.5 billion for Gold Eagle Mines which does not even have a NI 43-101 resource at this time. Gold Eagle has drilled about 200 holes and was successful in outlining the Bruce Channel deposit near Goldcorp's Red Lake gold mine. Goldcorp's takeover is even more audacious than its bid for Virginia's Eleonore project which at least had reserves in northern Quebec. While the results at Bruce Channel deposit have been impressive, it is still very much early days and Goldcorp was undoubtedly rushed into making a decision given Agnico-Eagle's purchase of 5 percent in Gold Eagle and Gold Eagle's intention to sink a shaft. We believe that the bid is overly aggressive and Goldcorp shares should underperform as the market digests yet more Goldcorp paper.

High River Gold Mines Ltd.
High River Gold shares have been a major disappointment despite bringing two mines onstream and advancing the world class silver Prognoz deposit in Russia. High River is slated to produce almost 300,000 ounces from three mines up significantly from 139,000 ounces produced last year. The Taparko-Bouroum Mine in Burkino Faso commenced production in October last year and the Berezitovy Gold Mine in Russia could exceed 100,000 ounces. Despite the rising production profile, the company has diluted its shares in order to finance future production. As an example, the company acquired the remaining 50 percent interest in the Prognoz silver project which caused the issuance of 34 million shares and the assumption of debt. Located in northern Russia, Prognoz covers 56 km2 and hosts over 30 epithermal veins. High River was to issue 160 million shares to Alfa to bring on Prognoz which would dilute existing holders. The deal was withdrawn amid concerns about dilution. Prognoz has more than 100 million ounces of indicated and inferred resources from just two of the 30 high grade silver veins. Prognoz could be producing in excess of 50 million ounces on an annual basis ranking it one of the top silver producers in the world. We continue to recommend High River shares particularly on this weakness.

IAMGold Corp
IAMGold's problem is growth since its mines are maturing. The French government's denial of the consternation permit at Camp Caiman shelves that project. IAMGold released results from the 100 percent owned Quimsacocha project in Ecuador, which calls for a 3000 tonne per day operation and is expected to produce 200,000 ounces of gold and 1 million ounces of silver with a capital expenditure of almost $340 million. Needed is the release of Ecuador's new mining code, the pre-feasibility study together with permitting. As such, with the earliest start-up date in 2012. IAMGold's project is too far off to give value and there is nothing near term that will provide growth. We would avoid IAMGold at this time.


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Analyst Disclosure
Company Name Trading Symbol *Exchange Disclosure code
Barrick Gold ABX T 1
Eldorado ELD T 1
Excellon Resources Inc. EXN T 1,5,8
High River Gold HRG T 1
Kinross K T 1
Mag Silver MAG T 1,8
Disclosure Key: 1=The Analyst, Associate or member of their household owns the securities of the subject issuer. 2=Maison Placements Canada Inc. and/or affiliated companies beneficially own more than 1% of any class of common equity of the issuers. 3=<Employee name> who is an officer or director of Maison Placements Canada Inc. or it's affiliated companies serves as a director or advisory Board Member of the issuer. 4=In the previous 12 months a Maison Analyst received compensation from the subject company. 5=Maison Placements Canada Inc. has managed co-managed or participated in an offering of securities by the issuer in the past 12 months. 6=Maison Placements Canada Inc. has received compensation for investment banking and related services from the issuer in the past 12 months. 7=Maison is making a market in an equity or equity related security of the subject issuer. 8=The analyst has recently paid a visit to review the material operations of the issuer. 9=The analyst has received payment or reimbursement from the issuer regarding a recent visit. T-Toronto; V-TSX Venture; NQ-NASDAQ; NY-New York Stock Exchange



John Ing

Author: John Ing

John R. Ing
Maison Placements Canada
130 Adelaide St. West - Suite 906
Toronto, Ont. M5H 3P5
(416) 947-6040

Rating Structure
Analysts at Maison use two main rating structures: a performance rating and a number rating system.
Performance Rating: Out perform: The target price is more than 25% over the most recent closing price. Market Perform: The target price is more than 15% but less than 25% of the most recent closing price. Under Perform: The target price is less than 15% over the most recent closing price.
Number Rating: Our number rating system is a range from 1 to 5. (1=Strong Sell; 2=Sell; 3=Hold; 4=Buy; 5=Strong Buy) With 5 considered among the best performers among its peers and 1 is the worst performing stock lagging its peer group. A 3 would be market perform in line with the TSX market. NR is no rating given that the company is either in registration or we do not have an opinion.
Analysts Certification: As to each company covered in this report, each analyst certifies that the views expressed accurately reflect the analysts personal views about the subject securities or issuers. Each analyst has not, and will not receive, directly or indirectly compensation in exchange for expressing specific recommendations in this report.
Analyst's Compensation: The compensation of the analyst who prepared this research report is based upon in part; the overall revenues and profitability of Maison Placements Canada Inc. Analysts are compensated on a salary and bonus system. Some factors affecting compensation including the productivity and quality of research, support to institutional, investment bankers, net revenues to the equity and investment banking revenue as well as compensation levels for analysts at competing brokerage dealers.
Analyst Stock Holdings: Equity research analysts and members of their households are permitted to invest in securities covered by them. No Maison analyst, or employee is permitted to affect a trade in the security of an issuer whereby there is an outstanding recommendation for a period of thirty calendar days before and five calendar days after the issuance of the research report.
Dissemination of Research: Maison disseminates its hard copy research material to their clients using the postage service and couriers. Samples of our research material are available on our web site. Electronic formats are available upon request.

General Disclosures: This report is approved by Maison Placements Canada Inc. ("Maison") which is a Canadian investment- dealer and a member of the Toronto Stock Exchange and regulated by the Investment Dealers Association. The information contained in this report has been compiled by Maison from sources believed to be reliable, but no representation or warranty, express or implied, is made by Maison, its affiliates or any other person as to its accuracy, completeness or correctness. All estimates, opinions and other information contained in this report constitute Maison's judgment as of the date of this report, are subject not change without notice and are provided in good faith but without legal responsibility or liability. Maison and its affiliates may have an investment banking or other relationship with the company that is the subject of this report and may trade in any of the securities mentioned herein either for their own account or the accounts of their customers. Accordingly, Maison or their affiliates may at any time have a long or short position in any such securities, related securities or in options, futures, or other derivative instruments based thereon. This report is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. This material is prepared for general circulation to clients and does not have regard to the investment objective, financial situation or particular needs of any particular person. Investors should obtain advice on their own individual circumstances before making an investment decision. To the fullest extent permitted by law, neither Maison, its affiliates nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of the information contained in this report.

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