China demand drives gold stocks

China demand drives gold stocks

Sunday, April 4, 2010

THERE was a great deal of excitement when Doray Minerals (DRM) jumped 172.7 per cent on Tuesday, but reports at the time tended to miss the point, focusing as they did on the market frenzy.

Drill intersections such as 8m at 62.53 grams per tonne are deeply impressive, but Doray's announcement may have come at a propitious time.

What was overlooked was that this is not the way we're used to seeing gold stocks perform. And, by the way, DRM gained another 22.6 per cent on Thursday, closing at 76c against a price four weeks earlier of 18c.

In the past, we've seen huge one-day jumps for uranium stocks during that metal's bubble, and specialty metals and coal-seam gas companies announcing big finds or big deals. But gold? No way, until now.

Gold explorers announcing discoveries in recent years may have made small gains, but the market has failed consistently to get excited. In fact, there have been plausible cases made that gold stocks are, generally, a rum investment.

That argument is now out the window, and you can also start ignoring the hand-wringing Jeremiahs twittering about the lagging gold price.

Look around you: gold stocks are on a roll. Apart from Doray, we've seen recent good gains for companies such as Ampella Mining (AMX), Azumah Resources (AZM) and Castle Minerals (CDT).

The fact that Doray shot up like this suggests there is a change in momentum for gold. And the Newcrest Mining (NCM) bid for Lihir Gold (LGL) adds further weight to this case.

Our theory is that gold's new appeal can be traced back, like almost everything else in resources these days, to China.

Previously we have reported on the amount of promotion in China for gold and silver investment. We have also argued that, given this promotion to its citizens, China cannot afford to allow gold prices to fall substantially. Just imagine the loss of face, not to mention resentment, if those investments turn out to be duds.

Here's the next piece of evidence. On Thursday, the World Gold Council signed a deal with the Industrial and Commercial Bank of China (the largest commercial bank in the country) to exchange market information and promote gold products in China.

The day before, the government-controlled China Daily put its shoulder behind the gold wheel with the headline "Gold prices set to soar as demand outpaces supplies". Those sort of headlines don't get written unless China wants to send a message.

The paper says gold consumption in China is likely to double over the next decade to 500 tonnes a year (about one-fifth of world mine production). The Doray jump is more than just a straw in the wind. We have a new ball game.

Kyrgyz Klondike

NOT that we're bitter or anything, but the absence of Pure Speculation in recent weeks seems not to have been noticed or regretted.

The reason for the service interruption is that your correspondent has been across the other side of the world -- not, we hasten to add, looking at mine sites in unpleasant locations, but rather spending a good deal of time in Italian churches (including the wondrous Basilica di San Petronio in Bologna), standing in the tiny Roman bedroom where Keats breathed his last and in the courtyard of the apartment used by Gregory Peck in Roman Holiday, lunching al fresco in a chilly Geneva alongside some new Russian money (he with the bad dye job, she with the jewel-encrusted watch) and contemplating hubris at Napoleon's tomb in Paris.

All of which beats the hell out of trudging around Kyrgyzstan looking for gold. Except that, rather than our ruinous credit card bills, the latter has yielded Simon Milroy and his Kentor Gold (KGL) a mine project that should not only produce 60,000oz a year but, because of the copper credits, will mean a cash gold production cost of just $US38 per ounce.

The cost figures have been made so attractive by the new plan to produce 6800 tonnes of copper a year compared with the previous target of 5000 tonnes.

First production is set for late next year. The cash costs had to be impressive because of the expected initial capital outlay of $US102 million ($110.9m).

Kentor has not given the final green light for the Andash project, but you can't imagine the company stopping now after spending so much money to this stage, and with those compellingly low costs. And with the prospect of increased gold demand across the Chinese border.

Oil warning

GOLD is not the only story worth reconsidering.

A paper just published in the British journal Energy Policy has revived the peak-oil issue. Research by a group of Oxford scientists suggests the world's oil reserves have been exaggerated by one-third, and the expected oil left remaining to be extracted should be downgraded from its present band of between 1150 billion and 1350 billion barrels, to something between 850 billion and 900 billion barrels.

David King, the British government's former chief scientist and now head of the Smith School of Enterprise and Environment, which put together the report, says demand may outstrip supply as soon as 2014. Sir David warns of shortages and price spikes within a few years, and says he is very worried that Western governments are not taking seriously the question of peak oil.

If he's right, investors should be looking at every oil story that comes across their screens. Many will be fizzers, but a spike in the oil price is going to make every barrel that much more valuable.

When the market reopens tomorrow, we expect to hear some more detail on drilling by Jupiter Energy (JPR) in Kazakhstan. It's interesting that a couple of advisory outfits have started coverage of this junior, last traded at 6.5c.

One of those is Perth-based Pursuit Capital, which brought out its first report the day JPR said it had found oil in its first new well, J-50. Jupiter's block contains an estimated 41 million barrels of recoverable oil and the company hopes to be in production by later this year.

Pursuit has valued JPR at 33c a share based on an oil price of $US70 a barrel.

We've been meaning to have a look at Pryme Oil & Gas (PYM), so were interested to find that Perth's RM Research had just completed a report on this junior, giving it a speculative buy tag. The company has small oil and gas production in Louisiana but RM is excited mostly about the Turner Bayou project, where exploration is likely to begin by mid-year.

The analyst says Turner Bayou could yield PYM production of about 2500 barrels a day. RM expects the start of drilling to take the shares above 10c, compared with the last sale at 6.7c.

brombyr@theaustralian.com.au

The Australian implies no investment recommendation. This report contains material that is speculative in nature. Investors should seek professional investment advice. The writer does not own shares in any company mentioned.

China demand drives gold stocks Reviewed by NajlA On Sunday, April 4, 2010, at 9:42 PM Rating: 5
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