Initial Mining Earnings Essentially Confirm Peak Gold

Sure, my job is to be even keeled, even when confronted with the daily crime scene manipulated “markets” have become.  However, even I have my limits; and watching today’s “trading,” it was hard not to feel nauseous.  I mean, today alone, we saw the Greek “negotiations” collapse, with just eight days until “ground zero.”  Not to mention, another all-time low for the Baltic Dry Index; implosion of the Ukrainian “cease-fire” before it even started; Wal-Mart reducing sales expectations, partly due to the “strong dollar”; a big “unexpected” drop in the Philly Fed Index – featuring the largest plunge in business expectations since the 2008 crisis; Caterpillar reporting its worst sales month since said crisis; EIA oil inventories exploding to a new 80-year high; Japan reporting its 31^st straight trade deficit; and the horrific mining results to be featured in this article.  Heck, even Goldman Sachs admitted its proprietary model is signaling a worldwide recession; and oh yeah, per what I discussed in yesterday’s podcast, the Federal Reserve did a 180 degree turn yesterday, when it’s January 27^th “minutes” revealed an FOMC with not the slightest inclination to raise rates.

And yet, the PPT executed yet another “dead ringer” algorithm to support the “Dow Jones Propaganda Average“; whilst, for the second straight week, “someone” reversed oil’s plunge following an abysmal inventory report – at the exact same $50/bbl “line in the sand” level. And of course, despite news that Chinese physical gold deliveries are running 17% above last year’s record level; and India’s Central bank unexpectedly repealing the bank ban on gold imports, gold and silver were “Cartel Heralded” at the COMEX open, and viciously suppressed until day’s end. Not that such fraud won’t eventually be overrun – which as sure as night follows day, it will. But in the meantime, it is torturous to endure – particularly when realizing that the longer it goes on, the more damage it will cause the entire world when undone.

And then, of course, there’s that “other” reason to own precious metals – which in my “financial analyst” role, I have spent hundreds of hours researching. Which is, that irrespective of gold and silver’s peerless monetary attributes, they are in fact commodities with ragingly bullish supply/demand imbalances. In this week’s “supply response,” I discussed how PM demand is surging whilst supply is plunging; and following this week’s atrocious mining earnings reports, I am not only 100% confident that gold and silver supply have peaked; but that the industry must consolidate NOW to avoid the danger of mass bankruptcies. Or at the least, to enable the shedding of additional marginal properties and overhead without terminally destroying balance sheets. In other words, the PM mining paralysis I predicted in my year-end forecast.

Actually, one of the most pleasurable parts of my job is the ability to utilize the financial analyst tools I’ve spent 25 years honing. Clearly, the free markets I once worked with – following four years of studying finance, and three getting my CFA – are gone. But nonetheless, the skill set is equally valid; and frankly, there’s little I enjoy more. Thus, I’ve been looking forward to poring through mining press releases and financial statements – in my quest to prove that Precious Metal mining production has nowhere to go but down. And now that the majority of gold miners have reported, I couldn’t be more confident!

Thus far, not a single gold miner has issued a positive report; although relatively speaking, some looked like Apple compared to others. I’ll give you some qualitative commentary in a moment; but for now, here is a tally of 2014 net income of the world’s seven largest gold producers – as well as their 2015 production outlooks. As you can see, only Goldcorp anticipates, without reservation, increased 2015 production. Only Newmont actually achieved a 2014 profit; and conceivably, all but Goldcorp could see lower 2015 production.

Moreover, not a single company reported higher reserves. And given that the lesser “resources” category (measured, indicated, and inferred) typically utilizes significantly higher gold price assumptions (why, I have no idea); it’s painstakingly obvious how much “equity” the gold mining industry has surrendered to the Cartel. Moreover, whether “reserves” or “resources,” the odds of economic production in any scenario are slim at best. Let alone, today’s historically suppressed price environment, where the odds are closer to “none” than “slim.”

I’ll get to silver in a second; but regarding gold, clearly the biggest loser was Kinross – which for the second year in a row, massively reduced reserves without even changing its $1,200/oz gold price assumption. Not to mention, it forecast a 2015 production decline of up to 11%.

I’ll get to silver in a second; but regarding gold, clearly the biggest loser was Kinross – which for the second year in a row, massively reduced reserves without even changing its $1,200/oz gold price assumption. Not to mention, it forecast a 2015 production decline of up to 11%.

Looking at the two largest gold miners, Barrick and Newmont – with #3 AngloGold scheduled to report next week – both are expecting flat production for years to come. To wit, Newmont gave guidance that 2016 and 2017 production will be essentially the same as 2015, whilst Barrick suggested that 2016 and 2017 production levels may well be lower than 2015.

As for the South African miners, clearly this high cost region is the gold equivalent of U.S. shale oil; as without having a full understanding of exactly which metrics investors were focused on, it’s quite clear that Goldfields, despite forecasting only a 1% production decline, is in dire straits. Like fellow South African miner Harmony, Goldfield’s stock was utterly annihilated following results. As was Goldcorp’s, by the way, despite its strong production growth forecast. Perhaps, because GG valued its silver reserves with a $22/oz price assumption – suggesting they might have been significantly lower if synchronized with today’s reality.

As for silver, such analysis is far more difficult; as roughly two-thirds of the world’s silver production is by-product of gold and base metal mines. For example, Goldcorp is actually the world’s fifth largest silver producer; but because its silver output is byproduct of “primary gold mines,” it doesn’t disclose silver production levels. Moreover, large producers like BHP Billiton are not only primary base metal producers, but tare so large that silver amounts to just a tiny amount of their total output. Furthermore, several of the world’s largest silver producers are not public companies; and of those that are, such as Fresnillo, not all have yet reported earnings.

However, of those that have reported, none are forecasting higher 2015 production; such as the world’s seventh largest producer, Pan American, which expects roughly the same silver production in 2015 as 2014. That said, no major Precious Metal miner – including Kinross – holds a candle to the atrocity that was Coeur D’Alene’s report last night. Frankly, I can’t say I’m too sympathetic; as nearly a decade ago, I met its then CEO, who mocked me for claiming silver prices were manipulated. Anyhow, like Kinross, Coeur D’Alene appears just one write-off from major financial distress – which is probably why its stock plunged 13% today alone.

Not surprisingly, CDE did its best to put lipstick on a giant, oinking pig – in claiming silver reserves rose 10% from a year ago. Which, by the way, was entirely due to massively overpaying for Orko Silver two years ago – when silver prices were dramatically higher. That said, the 15% plunge in their gold reserves completely offset the silver reserve gain. However, when one realizes CDE utilized price assumptions of $19.50/oz and $1,350/oz, respectively, in its reserve calculations, it’s not difficult to foresee another massive write-down (and subsequent balance sheet stress) if PM prices don’t recover soon. Worse yet, Coeur wrote off a whopping 45% of its gold and silver resources, and expects 2015 silver production to decline by 7% to 14%. But heck, at least they were “honest” enough to admit “all-in” costs of $17.50-$18.50/oz. In other words, shouting to the world that they will incur massive 2015 losses at current prices. And this, the world’s tenth largest silver producer!

Well, that’s enough for now. Clearly, it’s irrefutable that for the time being, “peak gold” has arrived – and likely, “peak silver” as well. And care of the utterly dire financial condition of the mining industry – and extended lead times involved in turning deposits into mines, gold production for years to come will be unaffected by gold prices, even if they soar to the stratosphere. And as for silver, the primary miners’ situation is not materially different; with the additional risk that – as occurred in 2008 – if base metal prices continue to decline due to global economic weakness, it’s very possible that byproduct silver production will plunge precipitously – just as it did during the Great Depression. And thus, whilst “peak gold” and “peak silver” are largely ambiguous terms – as like shale oil, if the price is high enough production inevitably rises; for the foreseeable future, gold and silver have essentially ZERO chance of materially rising, and a significant chance of significantly declining.

And by the way, no one does a better job dissecting the complexities of silver mining than Steve St. Angelo at srsrocco.com. Assuredly, he will give as detailed an analysis of the top silver miners – probably more so – than I have with the top gold miners.

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Courtesy of http://blog.milesfranklin.com