Gold: Trade Wars, Currency Wars And Financial Wars

Amid the politics and symbolism, Mr. Trump has weaponized the US dollar causing it to soar but risks a borrowing shock for half of the world. Once tweeting the dollar is too strong, he now revels in its strength using it as a bully stick to remake the world order. Dollar strength has marked a dividing line between the United States and the rest of the world. In the Sixties, former French President Valery Giscard d’Estaing once complained that the “exorbitant privilege” of the world’s currency allowed the US to borrow more cheaply than it could otherwise, to consume beyond their means and, print money to pay its debts.

That special privilege also allowed the weaponization of the American dollar. In the politics of trade, Mr. Trump has leveraged the dollar’s role to make other nations pay attention to America’s financial hegemony, with the result, relationships with its allies are at a low ebb. Moreover, in using the dollar as his bully stick, he undermines its role as the world’s reserve currency. The stakes could not be higher. Donald Trump has tweeted, “Trade wars are good, and easy to win”. Yet this trade war already has morphed into a currency war, reminiscent of the Dirty Thirties. Financial wars are next. For a time, everyone thought Trump was all tweets and no action. And now equities, commodities and bonds are in danger of becoming collateral damage as the current global financial order changes under Trump and his tweets.

Weaponization of The Dollar

Start with the bull market which has overlooked Trump’s weaponization of tariffs and sanctions. America is not in uncharted territory. The depression in the Thirties morphed into the Great Depression in part by the passage of the Smoot-Hawley Tariff Act, which slapped taxes of 20 percent to 44 percent tariffs on some 900 goods. Within 30 days, 30 countries (including Canada) retaliated and volume dropped by two-thirds exacerbating the Great Depression. Today, Trump’s politically motivated trade war risks a slowing of the global economy, more inflation and other unintended consequences. Already his tariffs sparked a “tit for tat” punitive tariff retaliation on food exports which has hurt a lot of farmers, including Trump’s voting base. Cheap goods won’t be so cheap anymore. US companies, small businesses and ultimately consumers will pay a hefty price for this politicking.

The dollar’s special privilege also allowed the weaponization of sanctions on Iran, which have driven oil prices to the highest levels in four years, spiking global inflation and again squeezing the consumer. Trump’s new sanctions against Russia caused them to dump virtually all their US Treasuries in retaliation and the purchasing of gold at the rate of 25 tonnes a month making Russia today the fifth largest holder at 2,170 tonnes. India too dumped US Treasuries joining China and Japan who are buying gold as a hedge against American financial hegemony. Germany recently joined Russia in looking for alternatives to the American dominated SWIFT bank payment system. The EU itself plans to turn the euro into a global reserve currency that would rival the dollar and reduce its financial dependence on the US. The financial chemistry is changing against the dollar.

And amid this tweetstorm, few notice that Trump’s campaign promise to boost spending on infrastructure and reduce government spending has come and gone. In fact, Mr. Trump is focussing on everything, but the economy, despite controlling both Houses and the White House. As imports flood into the US, the trade deficit has actually widened producing more ammunition for Trump’s trade war, which has boosted an already overvalued dollar. It has happened before. In the past, the US dollar has experienced a series of financial upheavals and was often unreliable as a store of value. In 1985, the United States strong armed France, UK, Germany and Japan to sign the Plaza Accord to weaken the then strong dollar in order to correct trade imbalances. The Asian crisis soon followed. And then, during the Gulf war, President Bush intervened on both sides of the greenback. History shows that currency wars take no prisoners.

Emerging Markets Have Become an Emerging Problem

The strong dollar has tipped the emerging market players into bear market territory as both currencies and growth slowed. India's rupee, one of the strongest currencies in the emerging markets fell to a record low against the dollar. Argentina was forced to hike rates 60 percent to stop capital flight. Italian yields surged above 3 percent, a level last seen during the money crisis. South Africa’s rand, at one time one of the strongest emerging currencies has fallen to new lows. Indonesia’s rupiah fell to its lowest level since the Asian crisis in 1998 and Brazil’s real has collapsed ahead of an election. Emerging markets have become an emerging problem.

Alarming is that the strong dollar and plunging currencies have crippled the emerging countries’ debt paying ability since many hold cheap US dollar denominated debt and the rising dollar increases the cost of servicing that debt. We believe those collapsing currencies are the first volley in a competitive devaluation war, sparked by Trump’s hardball politics of trade and his “America First” programme. Despite earlier preferring a weaker dollar, Mr. Trump recently tweeted, “Money is pouring into our cherished dollar like never before”. Yet he believes China and Europe are manipulating their currencies, making US exports less competitive. This time his tweets are all action.

Consider Turkey, locked in a standoff with the United States. At yearend, one US dollar was worth 3.79 lira. Today the lira is worth about 6.18, so their debt now costs 63 percent more to repay. In a multi-polar world, investors have dumped emerging market debt on fears that the Turkish and Argentina twin crises could spread to other emerging markets, triggering a currency war. Argentina needed a record breaking $50 billion IMF bailout after raising rates to stop the peso from collapsing further. They are not alone. In the developed world, Italy’s huge debt leaves it vulnerable to economic and political shocks whilst its newly minted government is anti-EU and anti-austerity. Other EU nations including Britain are also vulnerable to a rising dollar because of their outsized dollar denominated indebtedness and need for capital inflows.

Déjà vu

The Dirty Thirties and risk became an object lesson for central bankers. In response to the major financial collapse of 2008, there was a dramatic increase in government sponsored liquidity that included successive rounds of quantitative easing. The IMF calculated between 1987 and 2011, the world suffered through 147 banking crises, including the Lehman collapse only ten years ago when the system was flooded with liquidity to avoid a repeat of the Great Depression. However, former Chairman Bernanke and subsequent Fed chairs have repeated the same mistake of yesteryear in piling up ever higher debt on their balance sheets.

Looking back, there's no question that the Smoot-Hawley Tariff Act of June 1930 was the catalyst turning the depression into the Great Depression. The tariffs were the largest single tax increase on trade and sparked retaliation by some 30 countries, including Canada. Although the Americans had backed the greenback with gold, panic and a wave of bank runs ensued on fears that the Treasury would run out of gold. In January 1934, the Fed suspended the dollar’s convertibility into gold and gold clauses were subsequently changed with it becoming illegal to hold gold. The government subsequently confiscated gold and raised the price to $35 an ounce which effectively devalued the dollar. A sidebar is that much of the 8,100 tonnes held in Fort Knox today came from that confiscation. The dollar no longer became as good as gold.

Bank deposits are now federally insured but government spending still makes up a large part of the economy. Of course, when Nixon officially took the dollar off the gold standard in 1971, the foundation of the dollar was backed only by fiat and the good faith and credit of the United States. And, just as America displaced Britain as the world’s pre-eminent economic power, today America’s massive debts, escalating tariff wars and increased government spending are flashbacks of that past undermining the dollar’s role as a store of value. Gold’s role however remains the same.

America Needs Foreign Capital to Pay its Bills

Although, the collapse of Turkey was largely self-inflicted, the toxic combination of low interest rates, excessive money creation and massive government spending caused them to rely upon foreigners to finance its growing deficits. Similar too is the United States. Like Turkey, America’s growing debt load is never-ending and set to top $1 trillion every year in each of the next four years. Since the last crisis, debt has not gone away but is higher than ever, limiting the Fed’s ability to buy their way out of trouble. Debt on debt is not good.

Moreover, Trump’s trillion dollar tax cut has driven the deficit to unsustainable levels such that the Americans must rely upon the largesse of foreigners to fund their day to day activities, difficult after slapping allies with tariffs or declaring them national security threats as a pretext to give the United States a better negotiating position. Without outside funding, the United States must rely on printing more money to pay for its debts but in monetizing, will cause a massive depreciation in the dollar. A decade ago the US Treasury market was some $5 trillion. Today, Treasury issuances are over $15 trillion or a 200 percent increase. Given the United State’s dependence on foreign capital, an eroding dollar value would see an avalanche of dollars, and the massive dumping of assets and Treasuries leaving the Fed the buyer of last resort.

We believe, the reality is that like Turkey, the United States has become overly dependant upon foreign financing needing constant inflows. With the upcoming November mid-term elections setting up the prospects of a Democrat-controlled House and gridlock, those overseas funds may not be forthcoming. Trump once complained that a weaker dollar was “killing us”, now revels in the strong dollar because he believes his tariffs are making America great again. How wrong. Instead his Made in America policies have generated an open-ended cycle of protectionism, populism and competitive devaluations, undermining America and the dollar’s influence.

China vs US

Then there is the escalating economic cold war with China which raises fears of slowing global growth and the “Thucydides Trap”. However, we believe that the brinkmanship is symptomatic of a much deeper rivalry to determine global leadership on the technologies of the future. China remains the world’s workshop. Yet within weeks, a full blown trade war will have started when the US slaps punitive tariffs on virtually all of Chinese imports. China will likely counter putting tariffs on some 80 percent of US exports to China which would be problematic for Mr. Trump since consumer spending accounts for 70 percent of the US economy. Apple products, flat screen TVs and cars are to cost US consumers more. China’s domestic market on the other hand, is growing at twice the rate of America’s and the impact will be less on China’s economy which is growing at a robust 6 percent plus. Although, China’s currency has fallen 10 percent, exports to the rest of the world have picked up. China also used other fiscal tools by pumping up government spending and expanding its big banks’ balance sheets to help offset the impact of tariffs.

However, nobody will win in a war between the world’s two biggest economies. Of more importance is that China has accumulated more than $3 trillion of reserves and is the largest of America’s foreign creditors. China was the major buyer of US dollar debt but its recent absence and currency diversification moves has upset the financial hegemony of the US dollar. America’s vulnerability is that it needs outside capital and in becoming the biggest debtor in the world, will need funding from the biggest creditor in the world.

China is also the world’s largest producer and consumer of gold for both jewelry and investment purposes. China has become the fifth largest gold holder after Russia at 1,842 tonnes. China recently swapped renminbi for oil with Russia and Saudi Arabia as China diversifies away from the dollar and settlement system. China will also import Iranian oil using renminbi. An increasing amount of China’s trade with other countries, particularly those along the One Belt, One Road initiative is now issued and settled in renminbi. Could China someday peg its currency to gold? In time, yes. China’s $3 trillion in reserves give it a claim in the creation of a new or alternate monetary order. After all, the economic locomotive pulling the world is China, not America. China is also the world’s largest trader in physical gold through the Shanghai Gold Exchange (SGE). Renminbi denominated contracts are a further step in the internationalizing of its currency and diversification away from dollars. Gold is an alternative to the dollar and now with the physical market firmly under Chinese control, the dollar’s days are numbered.

Inflation Is Back

In the meantime, US policies will ultimately lead to weaker growth and higher inflation. Inflation is back. The latest consumer price index (CPI) reported a 3 percent (above the Fed’s 2 percent target) increase suggesting growing wage and price pressures. August payrolls came in stronger than expected. Unemployment is near all time lows. Energy is higher. Food prices jumped as Trump’s tariffs are beginning to take hold. Steel prices alone are up 40 percent. Tariffs are simply inflationary. Inflation is a dynamic animal, once started, it is hard to stop. In the emerging markets, signs of corporate distress and concern over plunging currencies have lifted inflation to double digit levels.

Inflation is harmful to the economy. In the Seventies, after wars and deficit spending, inflation was bordering on virulent and former chairman Paul Volcker needed almost a decade to rein it in. which did trigger the Latin American crisis in the 1980s. This time, fed by rounds of quantitative easing and Trump’s trillion-dollar tax cut, the minuscule central bank increases will not rein in the inflation that Trump’s tariffs have started.

World on Fire

Also boosting inflation is climate change. Extreme heat waves have gripped the world. This year may prove to be the hottest year on record according to NASA’s network of satellites, buoys, ships and land status. Climate change has affected major centers from drought to crop yields to hurricanes to fatalities leaving the world with depleted inventories. Trump’s tariffs only exacerbated the trend. Even grain prices have skyrocketed due to crops affected by heat and drought. Last year was a record breaking season for wildfires in the United States. In Europe, nuclear reactors have been shutdown because of the lack of water. This year the planet will record its fourth hottest year, ever.

Some areas of North America are returning to the dustbowl, reminiscent again of the Great Depression when one million acres were affected and thousands of farmers lost their livelihoods and property. During the Great Depression, large areas of the plains were affected by drought and soil erosion, causing starvation and the migration of families, many to California. The phrase “dustbowl” came from a 1935 newspaper account of describing the dust storms that drifted across the prairies in Texas. Weather was undoubtedly a factor, but American farmers also were to blame. Extremes whether hot or cold are not good. Inflation is a dynamic animal.

Has Gold lost its Midas Touch?

Gold has fallen 12 percent, briefly trading below $1,200 an ounce after reaching a peak of $1,358 an ounce earlier this year. To be sure, the stronger dollar and uptick in rates has weakened the appeal of holding gold and the latest data reported that hedge funds and investors have placed a massive gold short bet at levels last seen in 2001, when the funds foolishly shorted gold at $275 an ounce, the bottom of the market. We believe a day of reckoning is around the corner since there is not enough inventory in Comex warehouses to cover this position.

Data from Bloomberg

Significantly if measured in Turkish lira, Venezuelan pesos, India's rupee or Indonesian rupiah, gold has protected wealth as a safe haven. Gold priced in Turkish lira has jumped 70 percent and its trading volume doubled as local prices jumped by a third. Although gold priced in lira has become more expensive, it still heads higher as gold holders hedge against further depreciation. It is not that gold is going down but it is just that gold measured against the dollar has fallen. To be sure in dollar terms, gold have been disappointing. However, since yearend measured in about ten local currencies such as the pound or even the euro, gold has climbed 2 percent while in dollar terms, it is off 6 percent.

Still gold remains an international currency holding its value over time. Importantly, it is a currency not issued by a sovereign nor by fiat. Gold remains part of the international monetary system and held in reserves by the International Monetary Fund, BIS and most central banks. It is the ultimate payment system, immune from US financial sanctions and payment system.

Gold Will Be a Good Thing To Have

The Great Depression was a global economic collapse but was preventable. Today global trade is more important than in the Thirties with supply chains that span the globe. However, Trump’s tariffs will curb global economic growth, which will be disastrous for American exporters and their supply chains. Unlike in the Thirties, there are safety nets today such as Social Security, Medicare and Medicaid but the costs however are in the trillions, hidden in off-balance-sheet items.

And despite holding the world’s biggest debt, America continues to spend more than it produces and today that debt is higher than in 2008, the last financial crisis. US isolationism and deepening geopolitical rifts has seen the trade wars morph into currency wars undermining the dollar as the world’s reserve currency. The US has a serious problem with their deficits and an overvalued dollar. The dollar is on shaky foundations.

America’s Achilles heel is that it is dependant on foreigners to finance its deficits. American privilege remains exorbitant, for now. However, the lesson from the Great Depression is that well-intentioned policies could easily turn a recession into a depression. The background of negative influences for the dollar is also positive for gold. We thus expect a major realignment between gold and the dollar. Gold will be a good thing to have.

Mr. Trump’s staying power lies in this politician’s single–minded effort to tap the zeitgeist that included opening up the fault-lines on immigration and blaming them for “hollowing out” America’s industrial capacity. After a decade of austerity and stagnant incomes, his never-ending political campaigning capitalized on America’s endless wars as part of a nationalistic push at the expense of globalization and immigration. His America First campaign seized on the view that the US is no longer dominant, raising the prospect that the ascendance of China is a “Thucydides Trap”. And of course there were constant tweets of promise and hope of the old days already gone. Mr. Trump was simply the beneficiary of promises lost as voters flocked to his populist message peddling an alternative version of realities. Still, The Donald no longer shocks, which is shocking, almost as shocking is the prospect of four more years. Again, gold will be a good thing to have.

Recommendations

To no surprise, the second quarter results of the gold producers were mixed due largely to the weaker bullion price which squeezed margins. New Gold and Detour Gold were disappointments as both face chronic operating challenges. B2Gold and Kirkland Lake Gold were upside surprises on year over year production increases. Yet the gold producers’ key challenge remains reserve replacement.

Ironically after restoring balance sheets, selling high cost mines and pruning management, the miners have reduced their exploration budgets in an effort to improve margins. Exploration is the lifeblood of the mining industry but the gold miners are more interested in less riskier “brownfield” development projects – organic growth seems to be the new mantra.

We believe that this is a mistake. With the industry adopting more of a “portfolio” approach in backing smaller exploration plays in the hopes that “luck” is around the corner, new approaches to exploration are needed, particularly since the low hanging fruit has been plucked. To date there is a glimmer of hope among the junior explorers. Great Bear Resources rose 250 percent on two high grade holes from its Dixie gold project in the Red Lake district. Skeena Resources jumped 50 percent on reports of 43.39 g/t over 27.70 m at Eskay Creek in B.C. McEwen Mining which is studying to extend mine life at El Gallo in Mexico reported high grade results at nearby Froome of 53.93 g/t gold over 8.29 m along the footwall. And in Australia, RNC Minerals reported a whopping 2,200 g/t gold about 500 metres underground at the Beta Hunt mine, a former nickel producer. We believe these discoveries are tentative signs of a revival in exploration and a reversal of the downtrend in production.

Among the senior producers we like Barrick Gold for their 65 million ounces of in-situ reserves, Agnico Eagle for its rising production profile, and B2Gold for their growing reserve potential. Among the juniors we like McEwen Mining for its growth potential.

Agnico Eagle Mines Limited

Agnico Eagle had a good quarter increasing full-year guidance and is on track to produce 2 million ounces in 2020. Agnico replaced reserves last year with the drill bit and its pipeline includes LaRonde 3, Goldex Deep and Amaruq underground. The company received the type A water license to begin construction at Whale Tail, a satellite deposit near Meadowbank in Nunavut. Agnico Eagle has eight drills turning at Amaruq and the company increased guidance to 1.6 million ounces this year at an all in cost about $900 per ounce. Agnico Eagle has about $700 million in cash and an undrawn credit facility at $1.2 billion. The company has a strong balance sheet and is able to expand its core area in Nunavut, crown jewel LaRonde in Quebec and Kittila in Finland where it is expanding production. Of interest is LaRonde Zone 5 was declared commercial this summer. Agnico Eagle has eight operating mines in Canada, Finland and Mexico with 20 million ounces of in-situ reserves at a total cost below $900 an ounce. We continue to recommend the shares for its growing production profile.

Barrick Gold Corporation

The world’s largest producer, Barrick Gold had a mixed quarter but continues to pay down debt, Barrick produced almost one million ounces at AISC of $860 an ounce. Barrick reported a loss of eight cents a share in the quarter but will spend almost a billion dollars in sustaining capital this year and about half billion dollar in growth capital. Barrick is not harvesting but investing. Barrick has cash of $2.1 billion and is on track to reduce debt to $5.8 billion after repurchasing $629 million of notes, with less than $100 million in debt due before 2020. Barrick has an enviable core position in Nevada and is building a third shaft at Turquoise Ridge. Also Barrick reported a high grade gold discovery at Fourmile near Goldrush with plans for Cortez Deep South and Crossroads. Barrick has sufficient organic growth to replace its ounces with reserves in excess of 65 million ounces. Barrick’s John Thornton has cemented strong relationships with the Chinese who have capital and are in search for reserves. Following the JV deal with Zijin on Porgera, the company furthered its joint venture with Chinese state owned Shandong Gold to develop the Lama side of long delayed Pascua Lama. We continue to like the shares here.

B2Gold Corp.

B2Gold had another strong quarter with growing production from Fekola in Mali which came on stream this year. B2Gold produced 240,000 ounces overall in the quarter and increased the exploration budget at Fekola to $11 million looking for a north extension zone. B2Gold second quarter was stronger than expected and the company generated about $28 million of free cash flow in the quarter. Also Otjikoto in Namibia produced in line with expectations and the Masbate mine in the Philippines was better than guidance. However in Nicaragua, La Libertad and El Limon, production guidance was reduced. Otjikoto was more or less on budget and the huge solar plant will save costs. B2Gold has cash of $107 million and an undrawn credit facility of $300 million. B2Gold is one of newest members to the senior category and is one of the fastest growing gold producers producing one million ounces with projects in Nicaragua, the Philippines, Namibia, Mali and Burkina Faso. We like the shares here.

Centerra Gold Inc.

Centerra Gold had a disappointing quarter due to ongoing water problems at Mount Milligan in BC. Centerra produced 130,000 ounces and generated $43 million in the quarter. Although the company applied for additional access to water, it appears that that access won’t be available for another couple years. The loss of water affects tailings storage and the operation of the mill which resulted in the reduction of production and increased costs. Water storage volumes are half of what is expected and continues to be a problem. Mill capacity of 55,000 tonnes per day was reduced to 30,000 tonnes per day with losses of about a third of output. The other piece of bad news was that the Kumtor operations in the Kyrgyz Republic remains under a cloud with some four million ounces left in the pit, affected by the lack of an agreement with the Kyrgyz government. An agreement with the government is still not in place as a new government was elected. Centerra is then left to build Oksut in Turkey slated to produce 100,000 ounces in Q1, 2020 but Kemess in northern B.C. is a non-starter with a healthy capex , technical and environmental challenges. We prefer B2Gold at these levels.

Detour Gold Corporation

Intermediate gold producer, Detour Gold had another disappointing quarter, producing 155,000 ounces which was in line with expectations but at an all in sustaining cost of more than $1,100 an ounce. Mill throughput was 56,000 tons per day but the head grade grade averaged only 1.06 g/t which is still a problem since recoveries were lower. The availability of larger shovels helped but despite these tweaks, costs are too high with AISC at $1,280 an ounce. Processing costs remain quite high and the future expansion of Detour West remains mired in lengthy talks with the First Nations. Surprisingly, Detour is trading up on speculation that activist investor Paulson has put the company into play. However Detour is dressed up and ready to go to the party but it appears there are no suitors, with Barrick Gold the latest, denying any intention. We would sell Detour shares here.

Goldcorp Inc.

Goldcorp had a good quarter and its balance sheet remains strong. The Penasquito pyrite light leach project in Mexico is ahead of schedule and will start in the current quarter helping the former flagship to maintain output. Problem plagued Eleanore mine in Québec and Cerro Negro in Argentina did show improvement and higher grades helped at Cerro Negro. Guidance was maintained at 2.4 million ounces this year. However, big capital bets at Century, Nueva Union and Norte Abierto are the key and whether they are successful or not is at least a few years away. Execution will be key as Goldcorp must somehow extract value from some poorly made and expensive acquisition. In the interim, costs have been reduced and another $100 million of savings is expected next year. Near term, Borden, Coffee and Cochenour in Red Lake are execution challenges. Thus given the execution and capital risks, we prefer Barrick here.

Kinross Gold Corp.

Kinross’ second quarter was disappointing as Fort Knox production was lower due to a pit wall failure and lower grades hurt results. However, overall guidance was maintained at 2.4 million ounces at AISC of $975 an ounce. At Tasiast in Mauritania, Phase one was completed but a government clampdown and tax code revision will affect Kinross’ Phase two plans. In the interim, Kinross is expanding Round Mountain and Bald Mountain where engineering is almost complete. Kinross will spend $1.1 billion this year with project studies at La Coipa and Lobo Marte in Chile. While Kinross has initiated a feasibility study at La Coipa, the capex cost will be huge. The Russian assets, Kupol and Dvoinoye continue to perform well with satellite deposit Moroshka to contribute in the fourth quarter. Still, Kinross has a strong balance sheet, with almost $1 billion of cash and $1.6 billion in available credits and no major debt maturities are scheduled until 2021. Nonetheless, we prefer B2Gold .

Kirkland Lake Gold Ltd.

Kirkland Lake increased their production in the quarter due to strong contributions from high grade Fosterville in Australia and Macassa in Ontario. Cash cost were $400 an ounce with an AISC under $800 an ounce. The Company reported strong free cash flow. Kirkland is targeting one million ounces with on expected boost from Fosterville at 400,000 ounces by 2020 and a doubling of Macassa output. Guidance was over 640,000 ounces this year. Macassa had a record quarter with grades at 21.5 g per ton. With the construction of the number four shaft advancing, collaring is expected later this year. Kirkland Lake has strong earnings and cash flow prospects but needs to boost its reserve life. Acquisitions then are likely. Nonetheless, we like the shares here.

Iamgold Corporation.

Iamgold reported a solid quarter with guidance at almost 900,000 ounces with AISC at $1,000. The company expects better output from Rosebel in Suriname with nearby Saramacca to be processed at Rosebel in the 2H 2019. The heap leach project at Essakane in Burkina Faso will extend that mine's life and a feasibility study is expected by Q1 2019. Peak annual production could exceed 500,000 ounces at AISC of $950 an ounce. Iamgold has $656 million of cash and cash equivalents plus short-term investments of $120 million. Their joint venture with Sumitomo at Côté Gold is continuing but with a $1 billion price tag and a feasibility study expected next year, this project remains speculative. At crown jewel Essakane, the company lowered production at 97,000 ounces due to planned mill maintenance with recoveries at 91 percent. Westwood in Quebec produced only 31,000 ounces in the quarter but costs are still high and underground development is continuing. We prefer B2Gold here.

New Gold Inc.

New Gold had a tough quarter with disappointment over Rainy River again. New Gold produced 108,000 was at AISC of $877 an ounce. Grade remains a problem and capital is tight. Lower output, and a new life of mine plan was released but did not give much encouragement. And, New Gold took yet another impairment. The balance sheet is tight with cash of $167 million and debt of almost $800 million. The good news is that New Gold appointed another new president, Renaud Adams who has an operating background and a turnaround reputation.. Rainy River remains a problem asset and with a loss of $300 million in the latest quarter, asset sales are likely. We would avoid the shares here. Sell.

John R. Ing

[email protected]