Gold: The War Drums Are Beating

A polarizing Republican in the White House. War protests in the streets. An unqualified President. Donald Trump? No, Ronald Reagan who fundamentally changed politics, maybe forever. And, what of the current occupant? From tax reform to trade to foreign policy, Trump has pursued a high risk, high reward gambit that has produced some stunning results including a proposed summit with North Korea, bi-partism tax reform package, First Step Act on prison reform, a long promised move of the embassy to Jerusalem and a rollback of a series of agreements. As critics focus on his foibles, this president has done what few politicians before him have accomplished, fulfilling his campaign promises.

Today we hear much about Trump’s tweets and the danger of what happens when fake news spread. Fake news has affected political campaigns, influence elections, and even Brexit. But little is said about fake rhetoric which should equally be of alarm. Fake rhetoric, unencumbered by accuracy or even logic is thought to be the basis for some of Trump’s decisions or, in fact the rationale for making policy. Mr. Trump seems to have been given the same advice George Costanza gave to Jerry Seinfield just before he was to take a polygraph test. “Just remember, it’s not a lie if you believe it.” Life has imitated art.

Constant Chaos is the New Norm

Still, Mr Trump’s approval ratings flirt at 50 percent and this “fire and fury” president may even win the Nobel Peace Prize for North Korea. Ironic? Not really. His predecessor was awarded the Noble Prize for the promise of global peace in 2009.

Renegotiating NAFTA is an example where Trump has threatened to unilaterally tear up an agreement but the ultimate agreement itself is likely to have much fewer changes than promised, allowing Mr. Trump to declare victory, on the assumption however that the three legislative bodies give final approval. Similarly, there was Mr. Trump’s u-turn to rejoin the Trans Pacific Partnership (TPP), after withdrawing a year ago from the 11-nation agreement and rejected again in an after dinner tweet during Mr. Abe’s visit to the White House. Japan is a major ally of the United States that trades about $200 billion in goods and services each year and the loss of face only deepened schisms with yet another ally. What will Mr. Trump do to America’s enemies? Constant chaos is normal.

Still, Mr. Trump sees these u-turns as virtues and just part of his negotiating tactics. There is no compass in his negotiations and his need for free-flying improvisation may have worked during his real estate days, but applying the same principle to geopolitics is rife with risk. Within hours of scrapping the nuclear agreement with Iran, missiles were fired between Israel and Syria. The European Union is banning European companies from complying with US sanctions as well as planning to switch to euros instead of dollars for Iranian Oil. When Trump slapped punitive tariffs on steel and aluminum from abroad and then followed with a new round of US sanctions on fourteen Russian companies, the Russian stock exchange plunged, causing chaos in global commodity markets and inadvertently hurt European aluminum manufacturing.

The War Drums Are Beating

Trump appears to be starting a trade war, an economic war and a military war. Trump’s blusters are pointed in all directions; picking a fight with China, its largest single trading partner, with sanctions that threatens to spiral out of control. Geopolitical risks trump fundamentals. Campaign promises trump world agreements. Trump’s zero-sum negotiation tactic has led to brinksmanship in a round robin negotiation with China, Europe, Canada and Mexico. This uncertainty has also blurred the lines between economic negotiations and national security. High stakes negotiations are better off on the poker table rather than the world stage.

Yet the cost of the Trump administration’s aggressive policy choices will not only result in more debt, but fuels more inflation as they represent a shock to the supply side of the economy. His sanctions on Rusal already caused a spike in aluminum prices, the key commodity in cars. His tweet against OPEC caused higher oil prices. The fear of a tariff war has spooked global markets. Soyabeans spiked on Chinese threats of a tariff war with America. Commodity prices have suffered collateral damage from cost-push inflation, now with the US at full employment, inflation will be much higher. Protectionism we learned from the Dirty Thirties is just fuel for that fire.

America Alone

This trifecta of wars is supposed to make America First but, typical of his bluster, Trump’s “Art of the Deal” negotiating pattern of asking for a lot, settling for less and then declaring victory no matter the outcome is waning. Fortunately, his much feared tariffs are threats and not yet reality. However, his administration’s approach of “good cop versus bad cop” and setting artificial deadlines from Brussels to Ottawa to Pyongyang is a high-risk gamble. Unfortunately, like poker, after played a few times, bluffing is easy to spot.

As if Trump doesn’t have his hands full waging tariff wars with close allies, Canada, Europe and Japan, he has threatened to wage war with that other superpower, China. Trump’s trade czar confidently said that America’s trading partners would not retaliate. How wrong. China immediately countered with tens of billions of dollars in tariffs targeting politically-sensitive states. Nonetheless, with stakes so high there appears to be no clear path toward a negotiated settlement while the final say resides in the White House. That decision itself appears to be “put on hold”, according to Treasury Secretary Steven Mnuchin, raising hopes for an interim trade truce.

A New Arms Race – Technology

We believe this trade clash with Beijing is not even over steel and aluminum but the dominance of core information technology into the 21st Century. China has its own “Made in China 2025” strategy which aims to establish a world leading role in technology with giants like Alibaba and Tencent whose market values are already over half a trillion. China has the world’s fastest supercomputer and is building its own Hadron supercollider. While the US has taken a laissez-faire approach, heading in a different direction in technology, China is funding centres in India and Japan. China has supercomputers faster than the U.S., chips that are Chinese made and fifth generation wireless networks (5G) will be first in China, not America.

Semiconductor chips has replaced oil as the lifeblood of the global economy. We believe the arms race over the future and technological dominance will shake American hegemony to its very foundations. In an attempt to stall China’s technological advancement and catch up, America introduced tariffs. Tariffs won’t work. S&P Global warned that American companies would be the biggest losers in a trade war with China.

The Thucydides Trap

America’s economic power goes well beyond market access. At the end of World War II, the United States accounted for roughly 50 percent of global output. Today, the International Monetary Fund (IMF) estimates that share at 15.1 percent. Nonetheless, America’s financial hegemony remains dominant, which is a major factor in maintaining America’s standing in the world and another subtle weapon in the new Cold War.

China's rise over the past half century has given Trump cause for concern calling China, “a strategic competitor”. China’s challenging the primacy of the US raises the question by Professor Graham Allison of Harvard as to whether China and the United States can escape the Thucydide’s Trap. Professor Allison and his colleagues studied the conflicts between a rising power and an established ruling power over a 500 year period showed that when one power threatens to displace the other, that in 12 of 16 cases, they ended badly in bloodshed.

In ancient Greece in the fifth century, Athens the rising power, had challenged the ruling power Sparta, and went to war against one another on the fear of the rise of the other. And almost a century ago, Germany, the rising power and Britain the ruling power started World War I following the ancient example of Sparta and Athens. The war to end all wars ended four years later with Europe in ruins, the German Kaiser gone and England similarly losing a good part of its economic strength. Then two decades later, the Second World War ended with the defeat of rising axis powers Germany and Japan by the allies, led by America, the ruling power. Today Professor Allison’s, “Destined For War: Can America and China escape Thucydides”, raises the point that American fears are not about steel and aluminum but that the roots for China’s rising strength are due to the technological revolution. China has already overtaken the US here. Amid the deepening economic rivalry between China and the US, the parallels with previous periods are hard to avoid. Noteworthy is that in those instances where there was no war, there was instead a painful adjustment of attitudes and actions.

Dominoes of Destabilization

As the Fed’s quantitative tightening intensifies, the financial system will contract further raising alarms over the $164 trillion of debt held by the US, Japan and China. Inflation long feared to be dormant has picked up as the sanctions have affected everything from aluminum to oil. And, ominously the benchmark 10 year Treasury yield continues to breach levels not seen in seven years, indicating rising inflation expectations and stormy times ahead.

A decade after the global financial crisis, the world led by the United States has loaded up on debt again. In 2009, when President Obama took office, the national debt was $7 trillion. The non-partisan Congressional Budget Office estimates that debt at $17 trillion and will top $20 trillion in a couple of years. America has run deficits for years, flooding the world with cheap dollars. It is America’s Achilles heel.

Mr. Trump’s stimulus package of tax cuts will boost the fiscal deficit and deepen the trade deficit, as Americans spend more, undermining Trump’s efforts to eliminate the trade balance. Ironically, America’s large debt load will make it more dependant upon China, the very country that he is bashing. America’s finances are in shambles. In truth, China’s economy is more financially complementary than competing directly with the US economy. Only four nations have a higher debt to GDP ratio than the United States; Greece, Italy, Portugal and Japan. Trump’s tax cut will cost $5.5 trillion in lost revenues and add over $1 trillion to the deficit over the next decade, deepening the hole in America’s debt to GDP currently over 100 percent.

Why should China finance America’s consumption at a time when they are being blamed for America's self-induced problems. Meantime, Congress is so fixated on elections, that they are too distracted to pass the necessary bills or legislation to encourage Americans to save more. And of course there is the increasing risk of escalation. Is the tariff war really the beginning of the Thucydides Trap of yesteryear, sending the world back to the dark ages of beggar-thy-neighbour protectionism?

China Resets The World’s Reserve Currency

China is weaning itself off the dollar and has many more tools in its arsenal. In pledging to open up its markets and loosen restrictions on autos, manufacturing and banking, China has given America a taste of its own medicine. Importantly, China has $3.1 trillion of financial reserves, making it the richest nation in the world but also holds some $1.2 trillion of US debt. China has held back on their largest American import: government debt.

In fact, once the biggest buyer, China has started dumping US government debt. China saves more than the US and could easily undermine the dollar by dumping massive dollar assets, causing America to boost rates because the Fed could not arrange currency swaps with other countries in time. China has been buying yuan too while selling dollars. China isn’t alone. Russia, Taiwan, Saudi Arabia and Norway have reduced their dollar exposure. America has become the world's biggest debtor to the world’s latest creditor. Who needs who?

Of longer term concern is the day when China clears global payments in yuan. It goes without saying that China's has benefited from a cheap currency allowing cheap goods to be exported to the United States. However, since the addition of the yuan to the IMF’s Special Drawing Right (SDR) basket, the Chinese currency has moved up against the dollar. China has begun to reset the world’s dependency on the US dollar reserve system.

It is the US dollar that is the world’s reserve currency which is the source of America’s strength and that “exorbitant privilege” allows America to pay its bills in the currency that it prints. America’s central role in the global financial system is a powerful weapon but that role diminishes with every new sanction. The dollar’s strength lies in the trust placed by global markets in US financial governance and today that is a dwindling asset. China and Russia are setting up alternatives to the dollar.

Consequently, China has sought to internationalize its currency, pricing oil for example by creating a petroyuan and pricing iron ore in yuan. Already, the majority of the world’s physical gold is traded on the Shanghai Gold Exchange. China is the world’s largest consumer and producer of gold.

The world’s largest importer of crude and commodities is sending a subtle message – the end of dollar hegemony and a yuan based oil, iron ore and gold. After all, America halted dollars for gold in 1971, when Nixon closed the gold window. China has also purchased gold becoming the sixth largest gold holder in the world and there's talk of having the yuan backed by a basket of currencies, including gold which would lessen China's dependency on the US dominated financial infrastructure. Other central bankers have added to their stockpiles of gold. Meantime, China’s $1 trillion Belt and Road initiative is a source of much needed capital and infrastructure for itself and will extend its influence from Beijing to central Asia to Europe and Africa.

America, The Bubble

Moreover, after years of easy money, Trump’s trillion dollar spending plans risks America becoming the next global crisis as its debt spirals out of control. And, since Trump’s much feared trade deficits are a product of American’s consuming much more then they produce, they are forced to increasingly borrow from foreigners to sustain their standard of living and profligacy.

We believemarkets are vulnerable to a serious correction on four fronts: runaway deficits, property bubbles, mounting inflation and geo-political tensions. With America’s outsized international funding requirements and a debt to GDP ratio of 100 percent made worse by a long spell of strong growth and easy money, the greenback is in for a long-term downward spiral. America itself is a bubble. For too long Wall Street has viewed America’s problems as long term, but eventually the long term becomes the short term.

To be sure, the Trump administration and Congress have been successful in kicking the can down the road. Although the debt ceiling was raised only a few months ago, Trump’s tax package has accelerated the day of reckoning. Debt on debt is not good. Two-thirds of the world’s assets are denominated in a fiat currency issued by a country whose leaders are taking policy actions, which will inevitably lead to its debasement. The US has a serious problem with its deficits and the dollar. Furthermore, increased use of financial sanctions have forced countries to move away from the dollar and the American-led SWIFT system. High bond yields, geopolitical uncertainties on top of an ageing bull market has left stock valuations at historic highs and, the dollar vulnerable to a massive correction. A perilous adjustment lies ahead. Argentina has joined Venezuela in the currency crisis club. Is America to be next?

Within this backdrop, gold is going to be a good thing to have when stores of value are highly priced. Gold is an alternative to currency debasement, and Mr. Trump. If gold was overbought seven years ago, it looks unloved today. We continue to believe gold which recently tested $1,365 an ounce five times will successfully break through with a target of $1,700 and $2,200 an ounce within 18 months.

Recommendations

Gold has surprisingly performed in line with most markets despite a strong dollar which is more of a cyclical correction in a bear market. Gold seems stuck in a trading range after two years of gains but is poised to break out. However, the gold miner shares have not enjoyed the same result, falling 5 percent in the same period despite restoring their profitability with wider margins.

One reason for the non-performance is that bullish stock markets have caused investors to forego the traditional hedging characteristics of the gold miners. And of course, the rise in resource nationalism from the Democratic Republic of the Congo, to Mongolia, to Tanzania, to Mauritania and now Indonesia who decided to kill the golden goose with threats of increased taxes and even outright nationalization of mining operations, tearing up long standing agreements. However, underpinning a turnaround in gold stocks is the curbs on supply – both voluntary as heavy capex limits production and involuntary, as cash starved governments create inevitable stoppages. Peak gold has arrived.

An old adage is the best place to find a gold mine is where one is. Kirkland’s Fosterville is a good example where drilling beneath a mature orebody opened up new reserves. Barrick’s success in Nevada after Goldstrike led to a core district. Organic growth is the key and the paucity of discoveries has led the industry to dust off old mine plans to exploit their own reserves. For that reason, the majors continue to look appealing because the future discoveries are in their own backyard.

We believe that change is coming and gold shares will begin to outperform gold. While recent M&A activity has been confined to tuck-in acquisitions, the senior companies have taken a portfolio approach and have financed the junior exploration programmes. Reserves are the lifeblood of the mining companies and less than half of the majors replaced their reserves last year. Agnico Eagle, Goldcorp and recently Barrick have financed the treasuries of juniors hoping that they will discover additional deposits and the next round of mines. Finally, reserves in the ground are at the cheapest ever and we believe the producers will discover that it is cheaper to buy ounces on Bay Street than to explore. Moreover since there is a shortage of top-tier deposits, we believe the cashed up majors and Chinese state owned players will compete for those same ounces. Mining is capital intensive and billion dollar mines projects are the norm so location and execution will go at a premium. Thus, we continue to favour the seniors like Barrick and Agnico Eagle. We also like the mid-tier players like B2Gold and Kirkland Lake. Among the junior developers, we like McEwen Mining.

Agnico Eagle Mines Limited

Agnico Eagle maintained their guidance for this year reaffirming a goal of producing 2 million ounces in 2020. Agnico Eagle will spend $1 billion this year and produce 1.53 million ounces, a transition year. Flagship La Ronde and 50 percent owned Canadian Malartic had a strong quarter.

Agnico also closed the acquisition from Yamana of the exploration portfolio of Canadian Malartic which included promising Hammond Reef. The acquisition broadens Agnico’s exploration pipeline. LaRonde produced 90,000 ounces at a low cash cost of $427 an ounce due to higher grades. Agnico is continuing to work the lower part of the mine and LaRonde Zone 5 will be the next producer. Agnico has $465 million in cash and cash equivalents and $1.2 billion in undrawn credit lines. We continue to recommend the shares here for its growing production and reserve profile.

Barrick Gold Corporation

Barrick Gold produced about $181 million in free cash flow in the latest quarter, allowing it to further pay down debt. Barrick’s priority was to redress its balance sheet and was rewarded with Moody's and Standard & Poor's upgrading Barrick's credit rating. Nonetheless investors were disappointed by the drop in production this year to between 4.5 million to 5 million ounces at AISC of $800 an ounce which was mainly due to asset sales. Barrick had a cash balance of $2.4 billion and three quarters of its outstanding debt is due after 2032 so Barrick can now focus on exploiting the largest reserve position among the gold producers. Turquoise Ridge in Nevada for example is a key asset and a third shaft is planned with a production start in 2022. At Goldrush also in Nevada, a 32 infill drilling program is planned. Barrick has an enviable base in Nevada and its future is from largely that area.

In Tanzania, 64 percent owned Acacia is fighting a $190 billion tax bill and is mired in negotiations. Barrick has written down these assets while an agreement with the government is still being negotiated. At that other disappointment, Pascua Lama, Pascua is being wound down and Barrick is looking for a joint venture to share the risk – unlikely at current prices. Nonetheless, we continue to recommend Barrick here for its large reserve base, management and growth plans.

B2Gold Corp

Intermediate producer B2Gold had a strong quarter as it brought Fekola in Mali into commercial production. Otjikoto in Namibia also made a strong contribution. B2Gold will produce 1 million ounces this year at an all in cost about $800, joining the senior producers in terms of output. On a consolidated basis, B2Gold produced 239,000 ounces, which was 16,000 ounces better than budget. B2Gold built Fekola under budget and the mine is a company builder. B2Gold also paid down $75 million on the revolver, which is sitting at $250 million drawn, and there is still $250 million available. Given B2Gold’s growing production profile, long life reserves and experienced record of mine builders, we like the shares here.

Centerra Gold Inc.

Centerra’s $200 million sale of royalty portfolio salvages the $310 million deal for Aurico over a year ago for which they paid a whopping 38 percent premium.Kemess North was always a tough deal. The latest study by SRK calls for a build-out cost of $600 million to spend with only a 12.6 percent IRR and payback of almost 4 years. The project alone calls for a conveyer belt from deposit to mill over a distance of 6.5 km to go through mountains and tough terrain. Permitting will be lengthy and financing will be tough. Centerra’s swing for the fences to minimize Kumtor exposure has seen the company acquire Thompson Creek (Mt Milligan) where they are producing gold and copper but at a loss (AISC in last quarter was $1,554 an ounce). Kumtor is stuck in limbo since a strategic agreement with Kyrgyz Republic is in abeyance with a new government. The unsolicited bid by Chaarat Gold may be a squeeze play.

Detour Gold Corporation

Detour Gold had a disappointing quarter and disclosed plans for yet another revised mine plan. While guidance was maintained, the company has not been able to produce according to the last mine plan because of operating issues, which adversely affected throughput. Detour produced 150,000 ounces at a grade of 1.17 g per ton and all in cost of $1000 an ounce. However, mining rates were down due in part to the loss of a rope shovel and equipment failures. The usage of contractors also boosted costs. Costs are a major problem at Detour due in part to the low mine grade where there is little room for error. For Detour, it is back to the drawing board and the search for another president. In addition, the expansion of Detour South is mired in negotiations with the Moose Cree, which could take some time. Given the uncertainties and likelihood of write downs, we remain sellers.

Franco-Nevada Corporation

Franco-Nevada is a royalty/streaming company that has just celebrated its 10th anniversary. The “desk and chair” miners have outperformed both bullion and mining shares over that period. Franco is undergoing, a third generational leadership change, ensuring another decade of success. The players have been important financiers to the mining industry. Franco is making final payments on First Quantum’s Cobre Panama, which will be in production late this year. While royalty/streaming companies have been successes, their valuations remain sky high when compared to the miners they support and while there is less operating risk with the royalty players, the premium paid for that safety is often 4 X times that of a comparable producer. For that reason we have not rated the royalty companies.

Goldcorp Inc.

Goldcorp produced 590,000 ounces in the first quarter at an all in cost of $810 per ounce but output was lower than the first quarter last year due in part to lower output from Penasquito in Mexico. The Pyrite Leach project at Penasquito is almost complete which should revive production, somethime late 2018. Cerro Negro in Argentina is also expected to be a key contributor in the third quarter. On an annual basis. Goldcorp will produce between 2.5 million ounces and 2.7 million ounces in 2019. To date, Goldcorp has also achieved about 84 percent of estimated a $250 million in cost savings and optimization. At Eleonore in Quebec, output is finally in line and the company is boosting tonnage to 6,200 tpd at average grade of 5.39 g/t. While Goldcorp shares have recovered, the heavy lifting still must be done with big capex ahead for Nueva Union, Coffee and Norte Abierto. Phase I NuevaUnion capex alone is $3.4-$3.5 billion. Consequently, we prefer Barrick shares whose growth profile is largely from its own reserve base and will not need to spend the mega billions required by Goldcorp.

Kinross Gold Corporation

Kinross had solid contributions from Bald Mountain in Nevada, Fort Knox and Paracatu in Brazil. Kinross however has $1 billion in cash and $2.6 billion in liquidity with no debt maturities until 2021. Kinross strong quarter was offset by Mauritania's surprise rejection of the key permit to expand Tasiast Sud. This is a major setback since Tasiast was to be a stronger contributor. Also Kinross’ Russian mine exposure (1/3 of assets) was impacted by the imposition of Russian sanctions. First Mauritania and now Russia, so Kinross has taken on a high geographic risk complexion. Kinross’ Tasiast Phase 1 only has $50 million left to spend and tonnage is to increase from 8,000 tpd to 12,000 tpd. To put in perspective, Tasiast I contributed 113,000 ounces at a cost of $751 per ounce. Kinross notes however that since 2010, operating cash flow has been negative $72 million but the company has paid to the government, some $400 million in taxes, royalties etc.

Mauritania had a better deal than Kinross shareholders. Tasiast II might be stillborn anyway. We believe the uncertainties with Mauritania will overhang the shares. We prefer B2Gold here.

Kirkland Lake Gold Ltd.

Kirkland Lake had exceptional results producing 148,000 ounces in the quarter. Kirkland Lake has a stellar balance sheet and its mines produced free cash flow. The company ended the quarter with $275 million of cash and no debt. Reserves increased 36 percent to 4.6 million ounces at an average grade of 11.1 g/ton, driven by Fosterville. Taylor in Timmins is to be Kirkland’s next producer. Kirkland increased its stake in Nuvo, an exciting high grade exploration bet in Pilbara, Australia. Kirkland Lake also has an exploration program in the Northern Territory of Australia where it has two drills underground. The discovery would be of benefit since Kirkland has infrastructure in the area. We like Kirkland Lake here.

Iamgold Corporation

Iamgold had a positive quarter producing 229,000 ounces at $1,000 AISC due to major contributions from Essakane in Burkina Faso and Westwood. Iamgold installed a 15 MW solar power plant at Essakane which is the largest hybrid solar thermal plant in the world. A reserve estimate from Saramacca is expected and the play is to be in production next year. Partner Sumitomo is expected to complete a feasibility study by the first half of next year which allowed Côté Gold’s reserves to be returned do the balance sheet again. Production is planned in 2021 but we are doubtful they will meet that target because continuity plagued the project. Iamgold has a strong balance sheet with $811 million in cash, cash equivalents and short-term investments with only $400 million of long-term debt, not due until 2025. We prefer Agnico Eagle here.

McEwen Mining Inc.

McEwen Mining's first quarter saw the construction of Gold Bar in Nevada. Gold Bar will replace declining El Gallo mine in Mexico whose production switched to sulfide from oxides. McEwen will also spend $15 million on exploration at newly acquired Black Fox Complex. In addition, the company will ship ore to the Black Fox Facility. McEwen will produce 170,000 ounces this year with some production from Black Fox and El Gallo mine in Mexico. McEwen plans to produce 215,000 ounces nest year with output from Gold Bar, Los Azules is for the next cycle as the PEA revealed a 3.6 year payback but a price tag at $2.4 billion. We like the shares here.

New Gold Inc.

New Gold surprised the Street with the need for yet another mine plan and disappointment over delays in bringing Rainy River into production. Costs were higher and newly commissioned Rainy River still has teething problems resulting in a loss of $20 million. New Gold produced 97,000 ounces in the quarter. New Gold only has $191 million in cash and $34 million is drawn on the credit facilities but finances are tight. The problem was that Rainy River’s execution was flawed and the mine plan was obviously poorly planned. Given that low grades, tonnage and recoveries were disappointing, costs have been too high. Consequently, New Gold replaced yet another president, appointing Ray Threikeld, the former head of Rainy River and a seasoned executive. Nonetheless, we would avoid the shares until the problems, both operational and financial are fixed. The company has maintained guidance between 525,000 ounces and 595,000 ounces but we are skeptical. Sell.

Newmont Corporation

Senior player, Newmont had a strong quarter, spending $600 million on development and building seven projects. The company is building out Northwest Exodus, Twin Creeks underground, and Subika underground later this year. Newmont also advanced Ahafo North in Ghana, Yanacocha Sulfides in Peru (FS) and Long Canyon Phase 2 in the US (PFS). Newmont maintained its guidance for the year and cost profile, guiding between 4.9 million ounces and 5.4 million ounces this year. Cash from continuing operation was $266 million and the company has stellar liquidity of $6 billion. About 70 percent of Newmont's production is located in the United States and Australia but Ahafo underground and Subika in Ghana is questionable given that country's new nationalism and desire for a larger pound of flesh. Newmont has a strong pipeline of projects, free cash flow and a strong balance sheet. The shares are a hold here.

Yamana Gold Inc.

Yamana Gold had another loss reflecting the $160 million write down from the spin-off of Brio gold. Yamana’s balance sheet debt load is strained by the $1.6 billion of debt and thus the company has not much room to maneuver. The ramp up of Cerro Moro in Argentina is about 70 percent complete and will produce about 85,000 ounces. We prefer B2Gold here.

John R. Ing

[email protected]