Gold: President Trump, The Tariff Man

Equity markets soared on reports of a ceasefire negotiated by Presidents Trump and Xi Jinping, after the G-20 talks. But markets plunged when President Trump deflated the enthusiasm with a self-congratulatory tweet, “I am the Tariff Man”, ignoring that tariffs are really a tax on consumption. Trump, the Tax Man? Then the short lived truce was ended by the diplomatic firestorm caused by the unprecedented Canadian arrest of Huawei’s CFO, Sabrina Meng Wanzhou on a US warrant which was more evocative of the 19th century gunboat Opium Wars than modern democracies with established rules and norms.

While the headlines are mostly about tariffs, inflation has returned, fueled by the tight labour market pushing prices for services higher and a stronger economy that pushed imports higher. Not surprising, inflation was given a boost from Mr. Trump’s damaging tariff war. The sugar rush of stimulus from Mr. Trump’s tax cut also boosted the full employment economy and deregulation allowed American companies to repatriate funds sparking massive share buybacks that lifted stock prices to record highs. Looking into the future, the implications are worrying. November core inflation which excludes energy and food to better capture inflation, has already picked up on increased costs for cars, medical care and housing. Currency and credit markets which once feasted on good news, ignoring the bad news, sold off sharply on the prospects of rising deficits and threats of higher inflation, signaling a change in investor attitudes.

2019, The Year of Living Dangerously

Next year, we expect a number of factors that will drive gold prices higher. In 1990, the top ten largest institutions held about 10 percent of US financial assets. Noted economist and nonagenarian Henry Kaufman calculated that today’s 10 largest financial institutions now hold about 80 percent of US financial assets. Never has so much is held by so few. Similarly, the Economist magazine noted that since 1997, market concentration has risen in two-thirds of industries such that 10 percent of the economy is made up of industries in which four companies control more than two-thirds of the market. In Canada, the concentration is more widespread with the oligopolic concentration of the banks, cable, insurance, auto and media industries.

And worrisome too, is that Wall Street’s newest structured products, ETFs, algos and derivative CTA sell programs (managed futures funds) has resulted in a similar unhealthy concentration of assets, such that next year a sudden change in the markets will see the marketability of a large volume of securities and liquidity disappear – not everyone can fit through the exit door at the same time. Gold will be a good thing to have then.

More broadly, the American economy has experienced many booms and busts in the past three decades from the dot-com bubble to the Asian crisis to the Lehman collapse. Although the pick up in inflation is largely self-inflicteded, interest rates have moved up four times as the central bank drains the liquidity punchbowl, exposing an American house of cards, and a vulnerability to higher rates. Each time before every bust, the economic tipping point came when inflation and rates rose. Worrisome is that the Trump administration next year is likely to unleash even more stimulus in advance of the next election. We haven't seen anything yet.

Tariff Wars

President Trump thinks that trade wars are winnable. Ironically he might have been victorious but for a series of self-inflicted gaffes that have hurt the US economy and markets, ensuring defeat instead. The most serious is that his “America First” leaves the rest of the world on the sidelines just when he needs allies.

Ironically, despite the threats of tariffs and hardline rhetoric, in the two years since Trump’s election, the US trade deficit has actually widened, to a record level of around $1 trillion, again more for self inflicted reasons like Trump’s near record spending or an unfunded tax cut that reduced US savings and of course a strong dollar that made US goods more expensive. And in another self inflictedmove, with each Presidential tweet, he spooks an already fragile stock market. Yet in blaming America’s problems on others, Mr.Trump's attempts to disrupt China’s supply chain could backfire and his one note, “America First” tariffs are doomed to fail, like the Smoot-Hawley tariffs which helped make the downturn worse, sinking the economy into the Great Depression.

Mr. Trump has effectively changed the half century rules of engagement that allowed China to grow at the fastest pace since the Ming dynasty. Although this president has not yet started a military war or a full blown trade war (unlike his predecessors), he plans to erect an iron curtain around China because the trade conflict that matters to both, is who is to take the technological lead in the 21st century. However, Mr. Trump's hard-line attitude has split the American business community and in demonizing China, he also hurts an important market for American business.

Like King Canute, he cannot reverse the tide of globalization. Already Trump’s tariffs on half of China’s exports have caused a “tit for tat” retaliation by Beijing who slapped a 25 percent tariff on US soybeans that led to a stunning collapse of US exports worth some $12 billion last year. Because China typically purchases some 60 percent of US soybeans, American farmers are feeling the pinch and are unsupportive of the tariffs. The tariffs even spread, affecting storage and other agriculture suppliers. Farm equipment providers face deepening losses adding to the financial stress on America’s all important agricultural sector. Then in an escalation of the trade war, China banned the sale of certain popular iPhones after a court granted an injunction for patent infringement. China’s online retail market surpassed $1 trillion in 2017, twice that of the United States and is the largest in the world. Currently, tariffs are the principal weapons of engagement.

The Tariff Man Doesn’t Understand Tariffs

But this growing rivalry between China and the United States also has the unintended consequence of creating geopolitical vacuums. China already does more business with its neighbors than that of the Americans. China has become a dominant influence in Latin America, replacing the United States. Despite the tariffs, China’s exports have grown. China has lent to Brazil and is now the biggest buyer of soybeans, replacing the United States. China has extensive relations with Chile and Peru, buying their iron ore, copper and oil. China has been willing to invest in places that needs capital. The trade war has made America businesses less competitive, more distorted and thus is unpopular with Wall Street, joining the farmers who quickly became the pawns on the battlefield of Trump’s trade war. Unfortunately they are also among its biggest causalities, reminiscent of the Eighties when America imposed an embargo on grain sales to Russia which took American farmers many decades to recover. As the US retreats, it undermines its international reputation, for potentially a very long time.

In fact, it is less clear that Mr. Trump’s domestic programs will be met with the same sort of accolades and self congratulatory tweets as his trade policies where bullying and brinkmanship has met with some success. For a time, Mr. Trump’s tweets and bully pulpit was ignored by the financial markets but today, dropping agricultural prices, GM plant closings and a slump in the stock market has caused second thoughts, particularly among the car dealers and farmers who are seeing inventories and losses mount. Both General Motors and Ford have said that Trump’s tariffs cost them $1 billion each causing GM to restructure, closing plants and laying off workers on both sides of the border.

Worst of all, Donald Trump’s tariffs are gaining fewer and fewer supporters. Wall Street has given its verdict. The farm belt has lost, maybe lost markets for generations. And, voters will be hit in their pocketbooks. Donald Trump, the Tariff Man doesn’t understand tariffs.

The Thucydides Trap

Yet despite the unpopularity of the trade war, it is not the center of the dispute between China and the United States. It is about a larger technology war in which a global hegemon is being challenged by an ascending challenger – the Thucydides Trap. The term, coined by Graham Allison was named after the ancient Greek historian Thucydides, who noted that,“ it was the rise of Athens and the fear that this instilled in Sparta that made war inevitable”. Allison noted that the past 500 years have seen sixteen cases in which a rising power threatened to displace the incumbent power. Twelve of those ended in war. Mr. Trump and his hardliners seem oblivious to the past. More importantly, China’s ”Made In China 2025” blueprint issued in 2013, places semiconductors at the forefront of technical innovation. China too has used regulation and laws as weapons in the trade war with the launch of a price fixing probe on Samsung, SK Hynix and US-based Micron Technology which controls about 95 percent of the global market for chips used in computers and smartphones. The Chinese investigation alleges that the three groups inflated prices. China accounts for 51 percent of Micron’s semiconductor sales and thus is vulnerable.

Not Everyone Is Equal Under The Law

Huawei, the telecom giant is bigger than Boeing and larger than Apple in smartphones. Huawei will generate over $100 billion of revenues and is a leader in 5G technology, the next generation of mobile network. The arrest of Huawei’s CFO, Sabrina Meng Wanzhou, and charging her with violating US sanctions on Iran has caused an international firestorm. The EU, Russia and Iran’s neighbours have traded with Iran and the violation of those sanctions have yet to see a politician, party or executive charged under those sanctions. In fact since 2010, most of the world’s financial institutions have paid million dollar fines for violating US sanctions and yet executives from Bank of America, Barclays, Deutsche Bank or the Royal Bank of Canada were not charged. In fact, no executive was charged for the violation of numerous laws that contributed to the market crash of 2008.

Mr. Trump tweeted that he will use Meng’s arrest as a bargaining chip in the trade talks. Were Huawei not China’s leading technology company, would she have been arrested? While, China is often accused of not following rules and norms, it seems not everyone is treated the same under America’s laws.

Canada too is caught between a rock and a hard place in the battle between the two superpowers. Under an extradition treaty with the United States, Canada arrested Meng at the behest of the Americans. However, Canada is not blameless. Everything could have been avoided. Why was Sabrina Meng not tipped off to not board her plane to Canada? To China, the arrest is not just another salvo but a naked display of American power from which a settlement agreement or ceasefire might represent “ a loss of face”. Ironically it might take a Canadian judge to adjudicate the case and despite the international furor, will likely release Sabrina Meng on insufficient grounds.

The Bull Market is Dead, Long Live The Bull Market

To be sure, the decade-long bull market is over. This year, the market will have its first down year in a decade. Buying the dips was an excellent strategy while the market kept on recording new highs. However this year, beset by a tighter monetary policy, rising interest rates, Trump’s escalating trade war together with a slowdown in the global economy, profits are elusive causing lower stock prices. Skyhigh valuations have finally caught up and investors have found that buying the dips was an unprofitable strategy, as markets ratcheted lower.Marijuana stocks and bitcoin are on the trash heap. The inverted yield curve has turned negative for the first time since 2007, igniting concerns that the world’s biggest economy is slowing down. The dollar too has crested. Now selling the rallies seems to be the best trading policy.

We believe the stock market is simply a discounting mechanism and while the US economy is currently in excellent health and yields still low, next year’s outlook is murky, particularly with an escalating trade war, gyrating oil prices and a worsening geopolitical climate. We also believe that the market is the canary in the coal mine and the recent turmoil is only beginning to price the above uncertainties and risk.

After Trump’s firing of “dovish” Janet Yellen, the bond market rallied on his handpicked Fed Chairman Jay Powell’s appointment. The honeymoon ended with Trump’s complaints on “hawkish” Powell’s fourth rate increase. Defying Trump, Powell might not have a choice in raising rates since America's deficits loom large and funding with debt issuances will be difficult if foreigners balk. Mr. Powell warned that risky corporate debt has surged and, “highly leveraged borrowers would surely face distress if the economy turned down”. Next year, we believe, with an expected slowdown, America’s fiscal and Achilles Heel vulnerability will be exposed. Ironically Trump’s dilemma is largely self-inflicted again. Gold will be a good thing to have.

The Drum Beat of Trade Wars

Ominously, US federal debt exploded over $21 trillion and is more than 100 percent of GDP, a level reached only during and just after World War II. The interest payments today on that debt alone has exploded to over $500 billion and in October, the deficit was at $1 billion or 58 percent higher than a year ago. The federal debt and deficit have grown dramatically since Trump took office with spending up 18 percent and a budget deficit, spurred by defense spending will top $1 trillion, for the first time in American history. Trump, the spender.

Of concern is that amid the escalating trade war, foreign central banks are among the largest holders of US debt and have lately balked at buying more debt. Problematic is that with the US becoming the world’s biggest debtor, in essence a giant hedge fund, in accumulating big foreign debts to fund consumption, foreign creditors in the hunt for yield, has them looking elsewhere because of currency, yield risk and Trump’s politicization of diplomacy. The US has become overly dependant on foreign capital to finance its huge twin deficits and any reduction in foreign flows would cause Treasury securities to lose value, forcing the Fed itself to be the buyer of last resort and the printing press. And of concern is that with the world drifting in a more protectionism direction, that the markets themselves have become much more volatile and vulnerable to swings in market sentiment.

Then there is that big risk that China could always weaponize its massive US treasury debt holdings since it is the largest foreign holder of US debt. After all, Mr. Trump’s politicization of the arrest of Meng shows that all is fair in love and war. China has been absent in five of the past six auctions of American treasuries. After being hit with sanctions, Russia recently sold all of its American debt holdings. With America mortgaged to China, Mr. Trump is unwittingly treading on thin ice.

Gold, The Ultimate Store of Value

There was a time when the dollar was worth its weight in gold and anyone including foreign governments could redeem their dollars for gold. However in 1971, beset by huge debts and fearful of running out of gold, President Nixon severed the link to gold. Henceforth the US could run up its debt, using the printing press to pay for their debts because American dollars had the “exorbitant” privilege as the world’s reserve currency. Of course after the 2008 financial crisis, when the Fed opened the monetary spigots, a decade long bull market ensued. Until now. Like the Seventies, America has become more indebted and again, foreign governments today are balking at the dollar’s value, expressing concern over the excess of dollars and the American financial hegemony that provides the plumbing for the world’s financial system.. Like the technological war, America’s global financial hegemony and dollar supremacy is on the wane with many looking for alternatives.

Yet, Mr. Trump is not the biggest threat to the economy. Not the tariffs, not the Cold War with China but the looming disruption of the fragile world’s financial ecosystemwhich has been broken, creating uncertainty of America’s role in global commerce. World trade has slowed amid the realisation that world co-operation and adherence to rules has been replaced by growing protectionism, not only in the United States but elsewhere in echoes of the Great Depression. It is not the trade imbalance with China that is America’s problem, but that China saves too much and the US saves too little. In August, the Chinese held $1.2 trillion of US debt due more to America’s propensity to spend more than they earn. This is America’s Achilles Heel.

Gold is an Alternative For Central Banks

The Fed remains the world’s biggest holder of gold but the non-dollar countries are increasing their holdings. China and Russia have boosted their gold holdings and are the fifth and sixth largest holders. Russia and China are among the top 10 gold holders and a growing number of countries are conducting trade using their own currencies and even gold. China and Europe are settling oil contracts in other currencies than the dollar. Payment systems and channels today bypass the US because of fears of arbitrary sanctions. Gold has become an alternative for many central banks. Central banks’ demand for gold rose 22 percent in third quarter, according to the World Gold Council.

Consequently, the mighty dollar is not so mighty. Markets, lulled into complacency by the rounds of quantitative easing that financed federal spending, have been shaken by Trump’s trade wars damaging confidence in the US financial system. Since he started his “winnable” trade war, the trade deficit has soared to a record level and now the recent market and currency volatility has unleashed fears of a beggar-thy-neighbour currency war that went hand in hand in the 1930s.

All of which suggests that the debt laden US economy is not strong enough to shake off the trade-related hits to the corporate sector. The US balance sheet is in shambles. Debt on debt is not good.The credit troubles has taken the Fed unaware. So likely, will the outbreak of inflation. Mr. Trump believes he can kick the debt can down the road, for the next president. Wrong. His protectionism policies and isolationism echoes the blunders of the 1930s. 2019 will be a rewarding year for gold.

Thus, the age-old discipline of supply and demand leaves the dollar with only one way to go. The dollar is the keystone to the world’s financial ecosystem. However, two-thirds of the world’s assets are denominated in a fiat currency, issued by a country that is actively debasing that currency to lessen its debts and obligations. The only thing underpinning the dollar is the belief that the US is a credible steward of that currency. That belief is being tested. Today the dollar is on a shaky foundation, and amid the structural weakness of rising twin deficits, growing US debt and a protracted trade war, it comes down to trust. Without confidence in a fiat dollar, there is no reserve currency.

The dollar like the Venezuelan bolivar has become dependent on outside money. Part of gold’s allure is that it is a safe haven in uncertain times. There are two ways to describe the movement of gold. One can say that gold has fallen against the dollar or that the dollar has fallen against gold. In the dollar world, it is the latter because gold has maintained its value in those respective currencies whether they be pounds, roubles or renminbi. We believe, gold will continue to rise in value as long as the United States runs twin deficits, spends more than they bring in and Donald Trump is in the White House.

Gold’s bull market has just begun. Gold will benefit from the diversification away from equities. From a low of $1,150 when Trump was inaugurated, gold has built a two year base and we expect the rally to continue with a near term target at $1,275 an ounce. Short covering and hedge fund demand will push gold to $1,340 an ounce with a $2,200 an ounce target within 18 months. Gold will be a good thing to have.

Recommendation

The latest quarterly results for the mining industry were a mixed bag due in part to the lower gold price and squeezed margins. Underlying this is the gold miners’ dilemma of replacing declining reserves, since many deposits are past their peak. In the past five years, the industry has not replaced their reserves due in part to the lower gold price, ill advised takeovers and rising costs. In addition average mine grade has dramatically dropped from almost 4 g/t to under 1 g/t.

Moreover, many of the larger gold mines with open pit operations are or at close to the end of their mine lives resulting in pit wall collapses. Detour, Alamos, Goldcorp’s Eleonore and Centerra each had pit wall collapses. None have shutdown but finding gold has become more difficult. Consequently, we believe the reserves of those producers with underground mines, possess longer lives and will attract premium prices. To be sure, the low hanging fruit has been plucked as mega-deposit discoveries are few and far between. One of the reasons for the Barrick and Randgold merger is the shortage of long life assets at an all in cost of less than $1,000 an ounce. New Barrick will have the most long life mines as well as the longest reserve life in the industry.

We also expect increased investor appetite for selected grassroots programmes which possess favorable risk/reward and profiles. Finding new discoveries is like fishing. If your line is not in the water, you won’t catch anything. Without exploration, there won’t be any discoveries. Financing has become problematic for the juniors. We expect the majors to finance these plays or adopt a portfolio approach like Agnico Eagle giving them exposure to potential discoveries. West Haven, Aurania and development plays like Rubicon are adding value with the drill bit. Newer jurisdictions like Ecuador are favoured. However, increased resource nationalism, and a penchant to kill the golden goose in Tanzania, Mongolia or South Africa gives cause for selectivity.

Among the senior players, we continue to favour Barrick, Agnico Eagle and B2Gold. We also like mid tier Kirkland Lake and growing juniors like McEwenMining. We would avoid balance sheet stretched Yamana and New Gold. The fight over Detour Gold was surprising. While hedge fund player, Paulson replaced Detour’s board members hoping to put Detour into play, little is expected to happen since most of the big players have passed. Detour’s flagship big pit just can’t make money – a pyrhic victory indeed.

Barrick Gold Corp.

The world’s top producer, Barrick Gold had a positive third quarter with higher production generating free cash flow. During the quarter, corporate and administration expenses was lower than projected at $235 million. Nevada remains a core area with Cortez, Goldrush and Turquoise Ridge. Barrick also signed and furthered their agreement with Shandong Gold, a state-owned Chinese company whereby each will purchase shares in each other. Shandong owns 50 percent of Veladero and will assist in the joint development of huge Pascua Lama. Barrick's share merger with Randgold Resources was completed and we think the combination is brilliant. The focus of the world's leading gold company will be on Tier One assets which was defined as those producing more than 500,000 ounces per year, with a mine life of greater than 10 years. Barrick will have five of the world’s top 10 Tier One assets and the lowest cash costs. To be sure the arrival of Mark Bristow will further an agreement with the Tanzanian government over stalemated Acacia Mining which is not reflected in the stock price. Barrick is the world's largest gold producer and with a whopping 78 million in-situ reserves, we recommend the shares here.

B2Gold Corp.

B2Gold will produce almost 1 million ounces this year at an all in cost of under $800 an ounce. The key for B2Gold’s newly constructed Fekola in Mali are plans to increase mill throughput from the current rate of 5.5 mm tpa to 7.5mm tpa. The cost is minimal and the company will release results early in the year. B2Gold is generating free cash flow and financing the mill will not be a problem will cash at $355 million. B2Gold is one of the fastest-growing intermediate goal producers with Otjikota in Nambia producing 22,000 ounces and Masbate in the Philipines producing 58,000 ounces, in the quarter. El Limon in Nicaragua was a disappointment but an expansion that boosts output by 18,000 ounces a year is expected. We like B2Gold for its growth profile.

Centerra Gold Inc.

Centerra Gold had a good quarter with Mount Milligan’s quarterly throughput averaging 40,000 tpd. However, throughput was impacted by an unscheduled shutdown. The company has applied to increase water usage but a long term water source remains a problem. On a positive note, Kumtor in the Kyrgyz Republic had a strong quarter due to processing the higher grade material from the S B zone in the central pit. As a result, production guidance was increased to 490,000 ounces to 510,000 ounces and production was increased from 665,000 ounces to 705,000 ounces with all in costs under $750 an ounce. Both Mount Milligan and Kumtor generated positive cash flow in the quarter but water access will remain a problem at Mount Milligan. Oksut in Turkey is 26 percent complete. Development plans for Kemess in BC continues but this capital intensive project won’t see first production until 2022, at the earliest. We prefer B2Gold shares.

Kinross Gold Corporation

Kinross had disappointing results due to equipment issues at Tasiast mine in Mauritania. The problem prone mine ramp-up of the new SAG mill was complete and in October performed up to specs. Talks continue with the government and Phase Two is up in the air. At Round Mountain Phase W, ore should be processed midyear and high-grade satellite deposits should boost output at Kupol in Russia. Kinross is conducting a feasibility study for the restart at La Coipa and Lobo-Marte in Chile is scheduled about midyear but overall remains a problem. Kinross has about $2 billion of liquidity. Kinross produced 586,000 gold equivalent ounces in the quarter at a cash cost of $777 per ounce. Guidance was maintained at 2.5 million ounces at AISC of $975 per ounce. We continue to be concerned about Tasiast Phase One and talks with the government will be a overhang. We prefer B2Gold shares here.

Kirkland Lake Gold Ltd.

Kirkland Lake gold had a barnburner quarter and revised estimates upward. The high grade Fosterville mine in Australia continues to surprise, providing almost half of Kirkland’s produciton. Also, the company shed light on an expansion. Kirkland Lake had record cash flow and has a stellar balance sheet which will finance both expansions at Fosterville and the Macassa Mine in Ontario. Kirkland Lake is targeting production this year between 655,000 ounces to 670,000 ounces with an all in cost around $760 an ounce. Cash at September totaled $260 million. The Fosterville mine is expected to produce over 500,000 ounces by 2020. Macassa’s number four shaft expansion will allow the doubling of production by 2021 at a cost of $80 million. Kirkland has allocated $90 million for exploration and dusted off plans in the Northern Territory of Australia. We like the shares here.

Goldcorp Inc.

Goldcorp had a disappointing quarter due to start up problems from flagship Penasquito pyrite leach facility in Mexico (recoveries too low). Goldcorp’s problem is that it has too few Tier One assets, and too many Tier Three assets plus the need to spend big dollars just to maintain output. Goldcorp should pare their extensive portfolio with an emphasis to boost profitability and free cash flow while paring the legacy of previous management’s acquisitions like Eleonore, Coffee and Latin America’s NuevaUnion and Norte Abierto because all will require major funding without providing meaningful ounces. The company’s mantra of 20/20/20, has not yet worked resulting in production disappointments. Cerro Negro in southern Argentina came on stream but like Penasquito is a wait-and-see project. Coffee in the Yukon is still mired in exploration mode rather than development. Grade is a problem here and another new mine and geology plan is being worked on suggesting that they have to go back to basics. Near term, Goldcorp has to get more out of Penasquito and Eleonore which is still not operating as originally expected. Until Goldcorp’s near and intermediate term outlook is clearer, we prefer Barrick here.

IAMGold Corporation

IAMGold had a flat quarter with production of 208,000 ounces with Rosebel in Suriname having a surprisingly weak quarter. While flagship Essakane and Sadiola had better output, the feasibility study for Essakane heap leach project and a CIL plans is uncertain. IAMGold’s joint venture Côté Lake gold project feasibility study was tabled with partner Sumitomo and ounces were brought in from development into reserves (production slated for 2021). IAMGold has a strong balance sheet with total liquidity of almost a billion, including $600 million of cash. Selling a 30 percent interest in the Côté Lake gold project to Sumitomo accelerated the development but we remain skeptical given our concern over the deposit’s continuity. At Westwood third quarter production was 30,000 ounces due to mining lower grade stopes during the quarter. We prefer B2Gold here.

McEwen Mining Inc.

McEwen had a strong quarter as the El Gallo mine in Mexico residual leaching activities come to an end. El Gallo’s production will be replaced by Gold Bar in Nevada but Fenix nearby El Gallo complex could add to life of mine. McEwen had positive exploration results from Black Fox in Ontario, which will produce about 48,000 ounces next year. At the Gold Bar on the Cortez Trend, construction is advancing on budget and is on schedule with first production expected early next year, averaging 60,000 ounces annual at AISC of $843 an ounce. Exploration continues at Gold Bar with the hope of extending mine life. At Los Azules in Argentina, the company has an extensive exploration programme. At the Black Fox mine, an extensive exploration plan is continuing with a deep drilling programme. McEwen has a large land position in Timmins and with untested depth extensions at Black Fox, McEwen has a strong growth profile and exploration upside. We like the shares here.

New Gold Inc.

New Gold had a disappointing quarter. The company sold the Mesquite mine to improve its short-term liquidity position but took a book loss on the sale. With only New Afton and Rainy River left, Renaud Adams, the new president is left with the task of turning Rainy around. Grade is a problem here and Rainy River has been a major execution disappointment. New Gold owns 100 percent of Blackwater but a large capex and questionable returns, makes it only an option on the gold price. With over $1.2 billion of debt incurred mostly to build Rainy River, we believe there will be insufficient cash flow to turn New Gold around. Sell.

John R. Ing

[email protected]  

(Please refer to the Legal Section of our website (maisonplacements.com) for our Research Disclosures for an explanation of our rating structure (click here).)