Week in Review: Gold, Silver & Base Metals

Eric Sprott, as always, is bullish on silver and gold.

Canadian fund manager Eric Sprott said this week he was bullish on precious metals and bearish on cyclical commodities like base metals. Sprott said, “I am not bullish on cyclical commodities such as iron ore, coal, steel, lead and zinc because I am worried about this economic contraction that everybody is talking about,” during  a phone interview from his Toronto office. Sprott expects gold to hit a record over $2,000 an ounce this year and thinks silver will rally to an all-time high of more than $50 an ounce. Sprott also stated, “I think there is more upside to the gold-mining stocks. Last year, the stocks were absolutely crushed when the price of gold went down. But when gold goes back up, the stocks will provide a better return.”

According to data compiled by Bloomberg, the S&P 500 is up 2.9 percent in 2012 for its best start to a year since 2003. Equities posted gains as manufacturing in the New York region expanded in January at the fastest pace in nine months. Spanish borrowing costs fell at a bond auction as investors ignored S&P downgrades last week and German investor-confidence rose dramatically. Although China’s economy expanded at the slowest pace in 10 quarters, there is pressure on Premier Wen Jiabao to ease monetary policy which is expected to help the markets. Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $47 billion summed it up nicely when he stated, “the economic data broadly exceeded expectations”.

As a result, base metal stocks have done quite well over the past few months. Many issuers are up significantly after being hit hard in 2011 due to the European debt crisis and global economic slow-down. First Quantum Minerals (profile TSX:FM), after touching a 52 week low in October of $12.60 a share, has reversed the course and closed this week at $22.55 – a significant gain of 79% despite the fact the company’s shares were actually down $1.35 on Friday. Early in 2012, First Quantum settled its dispute with Eurasian Natural Resources (profile LSE:ENRC) reaching a US$1.25-billion agreement. Another strong performer has been Lundin Mining (profile TSX:LUN). Lundin’s shares have rallied off of Q4, 2011 lows ($3.20 per share) reaching a recent high on Thursday of $5.30 which marked a 65.6% gain over the past 2 months. Like First Quantum, shares of Lundin Mining sold-off on Friday losing 4% on the day. TSX Venture base metals junior Goldbrook Ventures (profile TSXV:GBK) bucked the bearish trend on Friday gaining 44.9% on the day after it announced a “friendly” take-over offer of $0.39 per share from Jien Nickel Industry Co.

Gold and silver stocks haven’t done quite as well as their industrial cousins. As we closed out 2011, gold and silver bullion retested recent lows while many gold and silver producers did the same. But lately, precious metals are on the comeback trail. Silver, in particular, was up sharply on Friday gaining 4.95% closing the day at $32.14 an ounce.

Gold equities, on the other hand, have been somewhat more difficult to figure out. In November, one prominent analyst said the valuation of Kinross Gold (profile NYSE:KGC) was “ridiculous“. BMO Capital Markets analyst David Haughton calculated that, while trading at CDN$13.45 per share, the company was valued at just 0.7 times net present value (assuming a 10% discount rate). This was well below the average for senior gold producers which, at the time, were averaging 1.1 times net present value – numbers Haughton felt were “pretty affordable”. This week Kinross was the big percentage loser on the NYSE and TSX down 19.8%. The company announced on Tuesday that it would take six to nine months more than expected to study and plan its Tasiast mine in Mauritania, delaying development and possibly negatively effecting production. TD Securities analyst Greg Barnes summarized the company’s woes in a research note saying, “It seems that capital and operating costs are facing significant upward pressure”. Kinross Gold’s shares closed on Friday at $10.36 on the TSX Exchange.

On the silver-side, worth a mention was MAG Silver (profile TSX:MAG). The company’s shares were up 9.6% on Friday after the board approved a collective 89 percent increase in exploration spending on their 100% owned Cinco de Mayo project and on their Juanicipio joint venture project with Mexican mining giant Fresnillo (profile LSE:FRES). MAG Silver is operating in Mexico and certainly has a significant partner in Fresnillo – the world’s largest silver producer.

Mike Luft

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