By Ajay Shah, on May 29th, 2012
by Shubho Roy and Ajay Shah.
The macroeconomic setting
India’s macroeconomic woes consist of a high inflation, low GDP growth and a drop in asset prices. The loss of momentum is visible in the seasonally adjusted data:
| Indicator |
Early 2009 |
Latest |
| GDP growth (QoQ, saar) |
9.83
Q2-2009 |
4.25
Q4-2011 |
| Inflation (CPI-IW, pop, saar, 3mma) |
7.5
Feb
2009 |
12.9
Mar 2012 |
| INR/USD |
48
Jan 2009 |
56
May 2012 |
The picture is not uniformly bleak. The most important asset price of the economy, Nifty, has not dropped across this period. On 1
January 2009, Nifty was at 3033. Today, it is at 4920, which is a good 62% higher. More generally, stock prices have held up rather
well so far. The trailing P/E of the broad market index, the CMIE Cospi, stands at 17.3, while the median value across its full history (from 6/1990 to 4/2012) is 17.83. We may think that conditions in India are difficult, but the stock market is saying that they’re roughly median conditions in terms of the outlook for earnings growth.
The current account deficit
In recent years, the fiscal condition of the government + PSUs has worsened. This has led to a large gap between savings and investment (the worsening in public finance has diminished savings). There is an accounting identity: The gap between savings and investment is the amount of capital that has to be imported. This is the current account deficit. We have a capital shortfall within India, so we are importing capital.
It is likely that in the coming year, we will have a current account deficit of 4% of GDP, or $80 billion a year, or Rs.1700 crore
a day. This means that we have to worry about how foreign capital views India. Under these conditions, if there is even a short hiccup
in capital inflows (as appears to have come about after the government proposed to modify the Mauritius route, and more generally with the problems of governance in India), it yields sharp rupee depreciation.
We import a lot of capital; government policy actions interrupt that flow of capital; the rupee depreciates. This is not
mis-behaviour of the financial system. The system is not malfunctioning; it is behaving as it should.
What should the responses be?
There are five sensible paths for government to take, in this situation:
- We need to see that at heart, this is a problem of macroeconomics. The root cause of the current account deficit is the
fiscal deficit. If we want a lower CAD, we need a lower fiscal deficit.
- To ensure the smooth flow of Rs.1700 crore a day into the country, we should not spook foreign. We should not interfere with the de facto residence-based taxation framework which India is giving foreign investors, as long as they come through
Mauritius. This policy framework is, in fact, in India’s best interests.
- Deeper problems about the loss of confidence of foreign investors, owing to governance problems, need to be solved by strengthening governance.
- In the face of these difficulties, it would make little sense for RBI to trade in the currency market, to try to block the rupee
depreciation. There is good reason for rupee depreciation; the currency market is doing a pretty good job of translating the
fundamentals into a price. And, in any case, even if RBI desired to do something about it, its weapons are puny when compared with the size of the currency market and the Indian economy.
- It is an opportune time to continue with the liberalisation of the capital account. However, it is useful to think deeply about how to proceed with this. Some kinds of liberalisation can be dangerous. It is important to think about sequencing, and at all
times, to worry about unhedged currency exposure. A good deal of expertise has built up on the subject, through the Raghuram Rajan Committee and the UK Sinha Working Group.
An evaluation of what has been done
There are three features of recent policy responses which appear to be on track:
- By and large, RBI’s trading on the currency market appears to be at a low scale, nearing zero in many recent months. This is
wise. It increases respect for the brainpower at RBI.
- The government raised the price of petrol, so as to cut the fiscal deficit. This increases respect for the brainpower and
political capabilities of the government.
- The government decided to defer the attack on the Mauritius treaty by a year (though not to shelve it altogether). In the
absence of clear policy statements about the importance of residence-based taxation, this shelving does not increase respect
for the government.
Apart from these three good moves, a slew of dubious ideas have been afoot.
- A. Enlarging the scope for dollar-denominated borrowing by Indian firms
- On 20th April, 2012: external Commercial Borrowings regulations were amended to:
- Increase the limit on power companies to refinance their borrowings in Rupees with foreign currency loans (also called External Commercial Borrowings or ECBs).
- Allow companies to borrow in foreign exchange to make capital expenditure for maintenance and operations of toll systems (See here)
- Companies were allowed to refinance their ECBs with subsequent ECBs at higher interest rates (See here).
Evaluation: Do we really want Indian firms to hold dollar denominated debt? In particular, firms in the field of infrastructure who have cashflows in rupees? Sensible firm should see the high ex ante currency volatility and stay away from borrowing in dollars without hedging; so the impact upon capital flows will be small at best. And firms that do borrow in dollars and keep it unhedged are probably not going to fare well.
- B. Enlarging the scope for dollar-denominated borrowing by banks
- On 4th May, 2012: The maximum interest payable on forex deposits by NRIs in Indian banks was increased (See here):
- For deposits between 1 to 3 years the increase was 75 basis points.
- For deposits between 3 to 5 years the increase was 175 basis points.
Evaluation: Banks are disaster-prone 19th century institutions. Do we really want them to hold more unhedged foreign
currency exposure? Of all places in the economy, this is the worst place to keep unhedged currency exposure. The wise ones will not borrow in this fashion, so the impact upon capital flows will be small at best. And the unwise ones, that borrow in dollars and keep it unhedged, are probably not going to fare well.
- C. Reducing the economic freedom of exporters
- On 10th May, 2012: the right of exporters to hold foreign exchange was reduced by 50% (See here):
- Exporters were allowed to keep their forex earnings in special accounts called EEFC accounts. They were not mandated to convert it into Rupees. This allowed them the ability to fund imports for their business without going through costly conversions.
- Now only 50% of their export earning will be allowed to be kept in forex. The rest will be converted into Rupees against their wishes.
Evaluation: In the old India, FERA made ownership of foreign exchange an exotic and rare thing. Many businessmen in
India engaged in import/export misinvoicing and tried to hold assets outside the country. In the early 1990s, C. Rangarajan’s RBI embarked on a modern arrangement. Exporters were given greater economic freedom. We are now rolling the clock back by 20 years; we are tampering with current account liberalisation.
The number “50%” has not been justified in the RBI notification. Any exporter, with significant raw material import cost will now pay unnecessary transaction charges. In global trade, where every country takes the utmost effort to keep their exports competitive, any small distortion impacts on export competitiveness; this is pushing in the other direction – it is an attempt to reduce India’s export competitiveness.
This is a new low in Indian economic policy. Every internationally oriented household in India will now be more keen to hold assets and liquid balances outside India, safe from the clutches of Indian capital controls. This measure will thus exacerbate capital flight and worsen the problems of the rupee. Success in the marketplace will tend to accrue to businessmen who break laws as opposed to the law-abiding ones.
- D. Damaging the currency futures market
- On 21at May, 2012: restrictions were put on exchange-traded derivatives (See here):
- The net overnight open positions that the banks hold shall not include positions in the exchanges.
- The positions in exchanges cannot be used to offset positions in the OTC market for
- The position of banks in currency exchanges shall be limited to $100 million or 15% of the market (whichever is lower)
Evaluation: The world over, there is a clear understanding that the exchange is a superior way to organise financial trading. When compared with the OTC market, the exchange has superior transparency and risk management. Policy makers need to continually modify policies so as to favour a migration of all standardised products away from the OTC market to the exchange-traded contracts. RBI’s moves go in the wrong direction.
How do we ensure that the price on a financial market is driven by fundamentals? The answer : We must have a deep and liquid market, and a broad array of sophisticated speculators. RBI’s actions are going in the exact opposite direction. They are trying to make the market illiquid. But it is in an illiquid market that we will get market inefficiencies and weird behaviour of the price. They are increasing the chance that something nutty happens on the rupee.
This circular is also a reminder about poor legal process at RBI. Every action by a regulator must articulate a rationale. Financial regulations are motivated by exactly two possibilities – consumer protection or micro-prudential regulation. The government agency that wields the power of financial regulation must show the clear rationale, describing what is the market failure that this regulation is seeking to address. The government agency must show the cost-benefit analysis, explaining why the costs of this action outweigh the benefits. As is typical of financial regulators in India today, RBI’s documents show no rationale.
It is possible to conjure one conspiracy theory. The attempts at damaging the liquidity of the currency futures market should be seen in connection with previous work on damaging the liquidity of the OTC market. Perhaps there is a grand plan here. The scale of RBI’s trading on the currency market is implausibly small when faced with the size of the Indian economy, with the size of India’s cross-border interactions and the size of the currency market (both onshore and offshore). Perhaps these recent moves are designed to damage the liquidity of the market, so as to get to a point where RBI intervention can make an appreciable dent on the price. Perhaps the game plan is to gnaw away at the capability of the currency market through a series of moves, and then take off doing large scale manipulation of the market. If this is the game plan, it reflects very poorly on the economic policy capability at RBI. It would also generate massive profit opportunities for the speculators of the world, who would short the rupee when the large scale manipulation commences.
Rumours about other bad ideas abound. E.g. it is suggested that RBI will sell dollars to exporters directly. How is this different from selling dollars on the market?? It is suggested that the currency futures and the OTC markets should be completely cutoff by banning the arbitrage. How would this solve the macroeconomic problems which bedevil the rupee?
Microeconomic distortions are not a good way to address macroeconomic problems
What does one make of this spectacle? A simple principle worth reiterating is:
Problems rooted in macroeconomics must be addressed using macroeconomic instruments.
We got into this mess because of inappropriate fiscal and monetary policy. We need to solve these — monetary policy must get back to the business of delivering low and stable inflation, we have to fight inflation until we see y-o-y headline inflation (i.e. CPI-IW inflation) going to the 4-to-5 per cent range. Alongside this, fiscal policy needs to correct itself. Each of these has a clear direction to move in, and movement on any one is valuable regardless of what the other does.
A big element in the picture is the loss of confidence, in the eyes of the private sector, on an array of issues ranging from ethical standards to the sophistication of fiscal, financial and monetary policy. This is an important problem and it needs to be addressed. The spectacle of a government flailing at the macro problems using micro instruments is worsening matters. Perhaps there is constant pressure to announce `new measures’ to solve the problem. Deeper solutions are hard, and there is enthusiasm for `doing something’ (large or small) [example].
We’ve seen this movie before. In the last decade, again and again, RBI tried to wield capital controls as a tool for macroeconomic policy. They failed. It is disappointing to see the lack of learning.
Some of the moves above have come out of the reflexive socialism that lurks within the Indian bureacracy. Perhaps, in a crisis environment, the ordinary immune system within each government agency, which keeps the sub-clinical socialism under check, is not working as well. This hurts from two points of view. It betrays the lack of capability of these government organisations; it reminds us that the Indian State is strewn with people who have a low knowledge of economics and a taste for dirigiste. It also reminds us of the policy risk: Precisely when the best capabilities are required (in a crisis), we seem to be slipping into the lowest quality policy initiatives.
Everyone who sees the government / RBI engaged in one ill thought out measure after another gets worried about India’s future. How can a $2 trillion economy flourish while such immense powers are placed with individuals and institutions with such weak capabilities? This further damages confidence, which deepens the macroeconomic crisis.
Acknowledgements: We are grateful to Apoorva Ankur, Sumathi Chandrashekaran, Pratik Datta and Kaushalya Venkataraman for useful suggestions.
By B.P.T., on May 29th, 2012
At 9:00 AM Eastern time, the monthly S&P/Case-Shiller home price index report will be released. Given that most economists don’t expect the overall U.S. economy to improve until housing prices end their decline, the market will be watching this number closely.
At 10:00 AM Eastern time, the monthly report on Consumer Confidence for May will be released. The consensus index level is 69.7, which would be a 0.5 point increase from last month’s number.
Also at 10:00 AM Eastern time, the State Street Investor Confidence Index will be released, which looks at changes in the amount of equities held in the portfolios of institutional investors.
At 10:30 AM Eastern time, the Dallas Fed Manufacturing Index for May will be released. The consensus is that the index will be at 3, which would be an increase of 6.4 points from the previous month.
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By Simon Grey, on May 25th, 2012
I first read them when I was a teenager. I was really inspired by the psychohistorians, who used statistics and social sciences to predict the future. I knew it was fiction, but what really struck me is the notion that the science of what people do could be important. I wanted to be one of those guys.
I suppose this helps to explain why Krugman is so exceedingly certain about everything he says: He really believes that he can trust the models. Now, I am not trying to suggest that economics or other social sciences are completely worthless or unimportant, but it is foolish to think that tossing a bunch of mathematic equations and statistical analysis at human behavior is going to be a good predictor of human behavior, and thus the future. That Krugman has idolized this pretense of knowledge an certainty goes a long way into explaining why he is consistently wrong, consistently contradicting himself, and why he is apparently unable to recognize just how wrong he tends to be. After all, he’s simply punching numbers in some rather mathematically advanced statistical models. The problem is that he can never be bothered to question the assumptions upon which the models are built. And that’s what happens when you trust in science.
By The Energy Report, on May 25th, 2012
Having just founded her own research company, Mine2Capital, Alka Singh has her sights set on the uranium sector, where she sees deep values in a beaten-down industry. With two major catalysts likely to boost spot prices, M&A activity afoot, new mines coming into production and new companies coming to market, well-positioned investors stand to benefit from what just may be a coming boom. In this exclusive interview with The Energy Report, Singh shares what she sees on the horizon.
The Energy Report: Alka, after years at Rodman and Renshaw and then at Jennings Capital and Dahlman Rose, you started your own shop, Mine2Capital. What made you decide to set out on your own, and what investing philosophy will you use?
Alka Singh: The reason we founded Mine2Capital was to provide trusted information for reliable investments. That was the theme with which we started this company. In the financial markets around the world, it is not always clear to investors which information can be trusted, because some data are massaged to look different from the reality. It is our vision to provide the buyside with carefully researched data and due diligence backed by our expertise in our specific sectors, and we are very careful to disassociate ourselves from any direct or indirect financial benefits from the mining firms themselves. However, we do nurture access to all the top CEOs in our industries. Another aspect of our company is that we endeavor to connect good companies around the world with capital from the financial markets—connecting mines and capital. That is the philosophy behind the company name, Mine2Capital. That’s what our goal is.
TER: Will you provide exclusive proprietary research reports to individual buyside clients, or are you preparing reports that you disseminate generally to the buyside?
AS: Yes, all of that. We do provide exclusive valuation and reports for the buyside. If a client wants us to take a look at a company or at an asset, we do the due-diligence for the assets, build financial models and write research reports. Also, there are some companies that we like and we independently cover them and disseminate information in our reports to the buyside as well.
TER: Along that line, will you be doing any buyside activities yourself? Will you be operating any funds?
AS: That will be phase 2 of Mine2Capital. We definitely want to do that as well, but not right this minute. Right now we will be doing due diligence and completing company valuations for buyside clients. In six months to a year, we will be looking at investing as well.
TER: Alka, your own sector expertise is uranium mining. What is your current theme?
AS: Well, the uranium sector had just started to show some life in late 2010 and early 2011 when the unprecedented tsunami and earthquake hit Japan and brought the sector back to low levels in March 2011. Many countries started reducing their nuclear power generation. Japan has since shut down all of its 54 nuclear power plants, some only for maintenance. And Germany has announced a phaseout of all nine of its nuclear plants by 2022. This has had a negative impact on the uranium price, and of course on uranium equities. Ultimately, given its long-term safety record, low-carbon emission profile and its ability to produce low-cost baseload power, we continue to believe that nuclear power generation will play a key role in the electricity supply chain.
TER: If Japanese reactors begin to come back online, what would it mean for uranium consumption and demand?
AS: We anticipate that Japan will begin to restart its nuclear power plants by year-end. The return of these reactors to the global fleet would increase uranium demand by approximately 12%. Another thing that will push prices higher is the end of the U.S.-Russian Highly Enriched Uranium (HEU) Purchase Agreement in 2013. Right now, Russia supplies the world with an equivalent of 24 million pounds (Mlb) of uranium on an annual basis through the down-blending of its nuclear warheads. Globally, there are 435 nuclear reactors that consume about 180–190 Mlb/year of uranium, and world production is currently only 150 Mlb. Through the HEU agreement, Russia currently supplies 13% of global uranium consumption and 45% of U.S. uranium needs.
So the end of the HEU agreement will force us to seek other sources of material at the end of 2013, and that’s why we are very positive on the uranium sector, even now. Russia, China and South Korea continue to propose and plan new reactors. Those new nuclear power plants that are supposed to come online in the next 20 years are not being canceled—at least not yet.
Nuclear power remains the only carbon-free baseload source of electricity, and it is producing far more clean power than even wind or solar. In light of this, we are very positive on uranium prices and equities.
TER: So, you are saying the major catalysts for the uranium mining industry would be Japan restarting some of its reactors and the end of the HEU pact in 2013.
AS: That is correct, George. Those are the two biggest catalysts. Equities are always valuing events 12 months in advance. So, if the HEU agreement expires in late 2013, we should see an increase in uranium prices later this year. We also expect uranium equities to react positively in response to that increase in uranium prices.
TER: From what you have just said, I would surmise that you believe the uranium mining equities market is at value levels currently.
AS: It is. You are absolutely right. The uranium sector right now is definitely a value sector.
TER: Alka, I am looking at some of these sub-$200 million ($200M) market cap juniors, and some of them have mid-double-digit negative returns over the last three months. It seems that investors should be discounting these important catalysts now. What is the issue here? Is it fear?
AS: Investors tend to hate stocks when they are going down and love them when they are going up, and uranium equities react in the same way as other sectors. But logic should tell you otherwise. When everybody is against the uranium sector and staying away, that is the time to actually get into the sector—not when everybody is buying it.
The whole junior mining space is under scrutiny right now, and a lot of the portfolio managers are in cash-preservation mode and are trying to understand what direction the market is going before forking over their money in any commodity equities, whether it’s junior gold equities, junior base metals equities or junior uranium equities. Investors are going toward more liquid names, and uranium juniors have all been getting killed in this kind of a market.
TER: We are seeing consolidation in the market right now. Does this normally signal a bottom in the markets?
AS: Sometimes it does. When you see a period of consolidation, it’s either the bottom and stocks take off, or it’s just consolidating before taking another leg down. But I think in the uranium equities market this consolidation will see the next leg up rather than down. Uranium prices have been beaten down a lot, and if you look at some of the conventional uranium producers, the cash costs are above $70/lb if you include capex and exploration costs. So uranium prices cannot stay where they are right now. It’s only the in-situ recovery (ISR) production projects, which are cheaper than conventional mining projects, that can actually survive this kind of a market. There are exceptions, like Cameco Corp. (CCO:TSX; CCJ:NYSE), which has a high-grade mine with low costs. But if you look at Denison Mines Corp.’s (DML:TSX; DNN:NYSE.A) costs, they are lower than the company’s $50/lb projection in Q1/11, and are now estimated at $32.50/lb as of Q1/12. But it is still difficult to be profitable when the uranium spot price is $52/lb.
TER: Would you expect that we will continue to see consolidation?
AS: Yes. It is an M&A market. Rio Tinto (RIO:NYSE; RIO:ASX) recently purchased Hathor Exploration. Cameco purchased AREVA’s (AREVA:EPA) interest in the Millennium project. We’ve also seen Uranium Resources Inc. (URRE:NASDAQ), which is a junior, purchasing Neutron Energy. Given the low uranium price environment, companies with good assets and relatively cheaper valuations will be on the radar screen for majors, and they could get taken out.
TER: What are some of your recommendations to investors?
AS: Let me start off with GoviEx Uranium, which is a private company, and has over 100 Mlb of uranium at its Madaouela Project in Niger, which is one of the highest-grade undeveloped uranium projects in Africa. The company is looking to create value for its shareholders and advance the project to production. For advancing the project, GoviEx could be looking at some financing options. In our view, the company should be looking at the public markets as it can create a lot of value for shareholders if it can time it right. GoviEx had its preliminary economic assessment (PEA) completed in March, 2011 by SRK Consulting. SRK estimates a 15-year mine life with an internal rate of return (IRR) of 22% and a net present value (NPV) of about $240M and had used less than 70% of the total resources at Madaouela I. A prefeasibility study is ongoing to be completed by the end of the year. Also, the company recently received $40M in strategic investment from Toshiba Corp. in an offtake agreement to advance GoviEx’s Madaouela project in north central Niger.
Moving on to currently publicly traded companies, I like the ISR names in the U.S. because they have a much lower cost of production than some of the conventional mining names. I like Uranium Energy Corp. (UEC:NYSE.A), Ur-Energy Inc. (URE:TSX; URG:NYSE.A), Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A) and Uranium Resources. I am also positive about Strathmore Minerals Corp. (STM:TSX; STHJF:OTCQX).
With Uranium Energy Corp., I like the management team and I like the fact it is already in production in Texas, where you only need state approvals for permits. The company is already in production at the Palangana mine. It has five other projects lined up, and Goliad will be the next mine in production. Uranium Energy Corp. recently made an acquisition in Peru, where it will also be producing uranium by ISR methods in the next four to five years. The company’s production run rate is ramping up toward approximately 1 Mlb/year of yellow cake (uranium) and will continue to increase to 2 Mlb/year from Texas operations. Uranium Energy Corp. is the first one to bring an ISR mine into production in the U.S. after six years. Its operations in Peru are not going to start for another four or five years, however.
TER: Moving on, what’s the appeal of Ur-Energy?
AS: Ur-Energy has one regulatory hurdle remaining, which is approval for the plan of operations from the Bureau of Land Management (BLM) for its Lost Creek project in Wyoming. This one catalyst will be very beneficial for the company. Between Lost Creek and Lost Soldier, Ur-Energy has about 24 Mlb of uranium, $36M in cash, with the remaining capex on the project at about $31M. The recent PEA was completed in the end of April of this year, and cash costs have actually come down to an average of around $16/lb. So, even if the company sells uranium at a spot price of $52/lb, that low cash cost is what I like. I also like that production is coming soon, beginning in Q2/13.
TER: You mentioned Uranerz. Can you elaborate on that?
AS: Uranerz is targeting production for H2/12 at its Nichols Ranch processing facility from its five deposits, located in Wyoming’s Powder River basin in Wyoming, which is the second-largest uranium-producing state after New Mexico in the U.S. The company is waiting for one last major permit, which is the deep disposal well permit. Uranerz has about 18 Mlb of uranium, and it is already licensed for a maximum production of about 2 Mlb/year of yellow cake. The one thing that is different about Uranerz is that its operating costs are slightly higher than the others, at about $35/lb.
I also like Uranium Resources because it has a large resource with about 101 Mlb of uranium, out of which 50% is ISR amenable.
Strathmore Minerals is another one I like in pre-production stage. Korea Electric Power Corp. (KEP:NYSE) owns about 14% of it. It is active in Wyoming and New Mexico. Strathmore is in the permitting process for production at Roca Honda, which is in New Mexico, and a feasibility study is now being completed with a Q3/12 release target. It is also permitting production at Gas Hills, which is in Wyoming. Strathmore would be in production in 2016. I actually expect Strathmore and Uranium Resources to come together in some sort of a merger or asset swap arrangement. The Nose Rock, Roca Honda, Marquez and Church Rock projects in New Mexico are owned by Uranium Resources and Strathmore Minerals jointly.
TER: Uranium Resources has shown itself to be acquisitive. But it is a small company with an $82M market cap, while Strathmore has a smaller still market cap of $40M. Would you expect this to be a stock transaction if Uranium Resources bought Strathmore?
AS: You are absolutely right. If there is a transaction, and I’m not aware of one happening now, I think it would be a stock transaction. If you look at a map of the properties that they own, the two companies basically have stakes in each other’s properties. They have land positions close to each other, and it just makes sense for them to join hands. In that case, they would only have to build one central mill, and Uranium Resources has already taken one step by buying Neutron Energy.
TER: My understanding is that Strathmore’s Roca Honda project is the largest uranium mine development proposal in the U.S. in decades. How long would it take for that project to get to production?
AS: Yes, Roca Honda is one of the largest and highest-grade proposed uranium mines in the U.S. in over 30 years. If the permits are obtained on time, we should see Roca Honda in production by late 2016.
TER: Uranerz, which is a near-term ISR producer, is surrounded by much larger companies—Uranium One Inc. (UUU:TSX) and Cameco. Do you think of that as a takeover target?
AS: Uranerz could be a takeover target. So could Ur-Energy and Strathmore Minerals. Once Uranerz gets that last permit and starts production later this year, it will become more attractive as a takeover candidate. Denison, Paladin Energy Ltd. (PDN:TSX; PDN:ASX) and Cameco are all looking to grow their production profiles. Cameco even made a bid for Hathor, but Rio Tinto won the bidding war, and so Cameco is definitely looking for assets as well.
TER: It sounds like there is a lot of action ahead in this sector. Thank you Alka, I enjoyed speaking with you.
AS: I enjoyed it too. Thank you.
Alka Singh started her career as a mining research associate with Wellington West Capital Markets in Toronto. Since then she has worked for Orion Securities and Merrill Lynch in Canada. She then moved to New York City to build the mining franchise for Rodman and Renshaw, where she covered 24 precious metals, base metals and uranium names. Singh has since started her own independent research firm, Mine2Capital, to provide unbiased research for clients. She holds a Bachelor of Science in geology and a Master of Business Administration in finance. She is a CFA charter holder.
By Christopher Briem, on May 25th, 2012
Nothing new for us… but check out the latest from Zillow on underwater mortgages in the US by metro area: Despite Home Value Gains, Underwater Homeowners Owe $1.2 Trillion More than Homes’ Worth
I believe it is showing we are by far the lowest incidence of ‘underwater’ mortgages, i.e. those whose home values are less than their mortgage equity.
But in particular check out where we rank in table 1: Negative Equity Snapshot… and in particular the last column there. Zero is good! Most of those numbers are still scary.
They have a neat interactive graphic of the national picture as well.
By B.P.T., on May 25th, 2012
At 9:55 AM Eastern time, Consumer Sentiment for the second half of May will be announced. The consensus is that the index will be at 77.8, which is the same as the value reported in the first half of the month.
By Simon Grey, on May 24th, 2012
People struggling with headaches, toothaches, and even feelings of loneliness are calling 911 — often several times a day.
This chronic abuse is overwhelming what industry experts call the 911 “safety net” system. It’s also wasting what could add up to billions of dollars every year, paid ultimately through higher taxes and medical fees.
This costly problem has gone unnoticed in the current debate on health care reform.
Oh wait; there is a way to efficiently allocate scarce resources: it’s called the free market. In the free market, people bear the direct costs of that which they consume, instead of offloading the costs onto a third party. While this might seem heartless, it’s actually better in the long run because it ensures that valuable resources—like emergency help lines—are given to people who have a substantial need for them instead of being given to someone who is, say, “suffering” from a cold.
Now, there are probably some who might object that deserving people may fall through the cracks. This is a rather insulting objection, though, as it presupposes that everyone is as uncharitable as the average leftist. The reality of the situation is that there will likely be some form of charity provided to poor people who are truly in need of emergency consultations. Of course, this charity will undoubtedly be provided for by those who defend the free market, and not by the socialists who want the government to provide for everyone’s needs, even if that means letting people suffering from the sniffles waste everyone’s time by tying up emergency help lines.
By The Gold Report, on May 24th, 2012
 Global gold production is at an all-time high, according to a new report from the U.S. Geological Survey. In this exclusive interview with The Gold Report, the Survey’s Mineral Commodities Specialist Micheal George pinpoints where the gold is coming from and what trends can be expected in the coming years.
The Gold Report: The U.S. Geological Survey’s (USGS’) Mineral Commodity Summaries (MCS) 2012 describes world mine production and reserves by country. What are the biggest changes from last year?
Micheal George: There weren’t a lot of big changes other than replacing reserves that were mined during the previous year. The largest changes were Australia increasing reserves by 100 tons (t) and Canada decreasing reserves by 70 t. The reason behind Canada’s decrease was the closure of mines due to exhausting mineable reserves. Australia’s increase was due to adding new mines to its potentially active mine list.
Annual world mine production increased approximately 5% in 2011. It was the third year in a row of an increase in production and marked an all-time high for gold produced since recorded history. Compared to the recent low in 2008, production is up about 19% or 440 t. So it’s recovered quite a bit.
TGR: What are the reasons for higher gold production? Is it simply because the gold price was higher?
MG: The gold price was higher, so more mines are processing, and they’re pushing out more gold. A lot of it is coming from China right now. Quite a bit of gold is coming from other countries as well.
TGR: Are mining companies replacing reserves through exploration or acquisition?
MG: Both. Nowadays, a lot of the additional reserves have been coming from exploration, mainly around the deposits that are currently being mined.
TGR: How does the USGS estimate reserves for this report?
MG: Reserve estimates are calculated by the government in each country in the report. For example, the Australian government or Canadian government does research and revises reserve numbers and that is what we use in the report. The USGS also researches public company reserve reporting. Sometimes we use company published reserves if we know all of the companies in a country. For example in Papua New Guinea, all the mining companies are publicly traded, so they all have to report their reserves.
TGR: How about production and reserve numbers from China?
MG: The production numbers are straight from the Chinese government. I don’t think it has updated countrywide reserves in the last couple of years. If it has, we don’t have a new number from it.
TGR: Are you saying the change in gold price and increase in production over the last year hasn’t materially changed the reported gold reserves in China?
MG: In our publication, yes, China’s reserves have not changed too much mainly because we don’t have any new reports out that have updated reserves or that Chinese miners have just basically replaced what they’ve mined out in recent years. Reserves are a moving target. It’s constantly changing based on price, based on technology, based on a whole host of factors.
TGR: At these prices, are we running out of gold? In the energy sector, we hear about “peak oil.” We don’t really hear about “peak gold.” Is there such a thing?
MG: “Peak gold” doesn’t really work as a theory. There have been several historical “peaks” in gold production. There was a peak in U.S. gold prior to World War II in 1938 at 161 t. Production then dropped during the war because of a shift to wartime materials. Gold production trended downward until the 1970s because of low gold prices. After a sudden increase in gold prices in the 1980s, a rush to find new gold deposits led to the discovery of additional deposits in the Carlin trend area in Nevada. The Carlin mine had been operating since the 1960s, mining these massive, low-grade deposits. At that time, USGS geologists were out there and investigating these deposits. The U.S. Bureau of Mines helped develop the process of cyanide heap leaching, which, in turn, allowed the low-grade deposits to be economically developed. That caused a substantial increase in U.S. gold production. By 1998, we hit another high of U.S. gold production at 366 t. But at the time, the price of gold was at a historical low. By 2002, the price started to increase and has steadily increased through today. The persistent high gold price has led to increased production in 2010 and 2011, with new mines coming on-line and existing mines expanding operations. Continued exploration spurred by the high gold price has led to numerous discoveries, some of which have quite a bit of reserves, such as on the Cortez trend. There is a mine that just started up a couple of years ago that has a huge reserve right now. The world follows a similar pattern as the U.S., with multiple peaks in production over time. 
In this way, gold is unlike oil, which is a consumed material. Gold is unique in that it’s an investment, not merely a commodity. Because of its value, gold is rarely ever consumed in a traditional sense. It’s nearly indestructible, and it’s nearly completely recycled. I think the only gold use I found that isn’t recycled is in spacecrafts. This means that an increase in demand may not be solely met by new supply. It could be met by scrap supply. It also takes decades for gold production to respond to price movements because of the time lag it takes from deposit discovery to production. It could take decades for a mine to start up. Also, when gold prices are low, production generally plateaus and may decline, owing to a lower rate of return on investment. At the same time, exploration for new deposits is minimal because companies need to reduce their expenses and they don’t go looking for new deposits. That’s what happened in the 1990s and early 2000s. There were historically low levels of exploration, so we had this time lag of about 10 years. Now, we’re seeing the gold price affecting production and causing production to go up where we didn’t see that a couple of years ago.
TGR: Is there a similar situation on the supply side where it takes decades or a long period of time to create sustained demand? Perhaps demand in China is an example?
MG: Not necessarily because demand can really bounce around quite a bit. You have a huge pool of recycled material sitting out there. So if the price gets high enough, people are willing to give up their gold.
TGR: Comparing gold to oil again, one meaning of “peak oil” is that we are running out of cheap and easily obtained oil. Now there’s a lot of oil, but it’s expensive to get to. Is there a similar situation for gold? As long as the price is high, people are going to look for it, but is it becoming more and more expensive to find, mine and process?
MG: Only when you compare dollars to dollars. Yes, it is more expensive to look for gold now than it was previously, but not significantly. If you put inflation factors on it, exploration and production costs have not risen nearly as much as for oil. However, when the price of gold goes up dramatically, companies will mine lower grade deposits. So if the gold price drops significantly, then ore grade would actually go up. Right now, miners evaluate deposits based on where the deposit ends or where the pit wall is going to be. The mine gets bigger as the price goes up, and the mine gets smaller as the price goes down. With a lower gold price, they are going after higher-grade deposits. But with a high price, they are going after as much ore as they can produce that is profitable.
TGR: You also mentioned that as the price of gold goes up, spending on gold exploration goes up. The 2010 Minerals Yearbook just came out. It says that gold was the primary mineral exploration target with more than 50% of the world’s non-ferrous exploration budget of $5.4 billion, 59% more than in 2009. Do you see that trend continuing?
MG: Yes. That trend has continued from 2011. It has gone up again, and gold is still more than 50% of the targeted materials.
TGR: What is the next most popular mineral for exploration?
MG: Probably copper. It gets a little fuzzy because miners may be going after copper porphyry, but copper porphyry also has gold in it. But it’s probably copper.
TGR: Is the nature of the mining industry still cyclical?
MG: Yes, it’s just how mining is. There are boom and bust periods. The successful companies are able to spread out their risks more than others. They’re making huge profits right now to make up for huge losses coming up. Mining is one of the few industries where the companies know they’re going to have a big loss coming up eventually. The industry is cyclical. Gold prices go up, gold prices come down. In mining, they have to balance out the really good years with the really bad years. Hopefully the gains and losses offset and the companies make a profit over 30 or 40 years.
TGR: A large component of domestic gold supply listed in the MCS was imports of ore and concentrates from Mexico. How do those fit into the market?
MG: That is cross-border refining. Mexico doesn’t have enough refining capacity to refine its own ore so it is sent across the border, sometimes by the same company owning both properties in the U.S. and in Mexico. Ore is sent to the U.S. to be further refined into either dore or bullion to be sold on the market. Sometimes, refined ore will be shipped to another country, say, Switzerland, where it’s further refined into bullion, which enters into the London market to be sold.
TGR: Let’s dig a little more into the recycling market. Last year, the U.S. had 225 t of gold recycled. That was approximately equal to the domestic mine supply.
MG: Yes. Regarding scrap, the price is driving people to give up their gold. Television commercials for buying gold air every day, and that’s essentially what’s driving the market. People are parting with their gold jewelry that they don’t want anymore.
TGR: But for every buyer, there’s a seller. So who’s driving the demand side?
MG: Investment is driving the demand side, especially worldwide investors. Across the board, even in the U.S., people are investing in gold as a safe haven. They don’t want to invest in the dollar or the euro because they aren’t doing so well. So they find something else that is gaining value and that gives them a good rate of return but also has the liquidity in that they can sell it anytime, anywhere. Even if the world economy collapsed, gold would be valued by somebody somewhere.
TGR: Is this individual investors or central banks or both?
MG: Both. Central banks have historically been sellers on the market until 2010. Now they are buyers. The sellers are traditionally the European banks, and now we’re seeing buyers from non-European banks.
TGR: What about institutional investors?
MG: Oh, yes, they’re buying gold, too. Everyone from Joe Public to the Russian Central Bank and Chinese Central Bank is buying gold. Everyone is buying gold for investment.
TGR: We hear a lot about emerging geographies for gold exploration and mining. What about Africa? What are the largest producing countries in Africa?
MG: Africa as a continent is one of the largest gold producers, and it has more reserves than most of the other areas because it’s underdeveloped right now. I just got some new numbers that show this year the third largest producer in Africa is Tanzania. Mali, which is now number four, went up, but Tanzania went up by more. Their numbers are pretty close to each other, so they probably will flop back and forth. They both have several large mines owned by multinational companies, so they’re pretty stable owners. However, they won’t catch up to South Africa any time soon.
TGR: South Africa is still number one?
MG: South Africa is number one, but it’s falling just because of its age. Its mines are so much older, so much deeper and so much more complex. It’s also been having labor issues. Across the board, costs have gone up. Everything is underground, and there are some mines that are two miles underground.
TGR: What country is number two in Africa?
MG: Number two is Ghana. Ghana is almost double Tanzania and Mali. South Africa is another 100 t above Ghana. So there’s still room. No one is going to catch South Africa right away. It will take years.
TGR: And how is the U.S. doing?
MG: U.S. production is increasing. It increased again last year a little bit.
TGR: According to your report, annual production is approximately 230 t?
MG: It’s been about that for a while. Some of the larger mines are aging so they’re showing some drops in production. It can be hard to get new mines started in the U.S. The U.S. has several world-class deposits that are either in lawsuits or just having difficulties getting permitted.
There is a lot of gold up in Alaska that is untouched. There are a lot of areas in Alaska that are untouched for exploration also. Nevada still has quite a few deposits that are not developed that can come on-line soon. As I said, Cortez came on a couple of years ago, and now it’s a huge mine.
TGR: Are there other areas in the U.S. that might contribute to gold production in the future? North Carolina has seen some activity during this cycle.
MG: North Carolina is an interesting area. It’s all on private land. Mining companies own the land, so they don’t have to worry about permitting like out West, where they have to permit through the Bureau of Land Management or the Bureau of Reclamation. They just have to get their permits through state agencies. It’s a little easier that way. The deposits are different, the gold is locked up in quartz and greenschist, which is a little harder material to work with, but it can produce gold. There is one project that’s far ahead of everybody else, and then there are a couple that are still in the early phases.
TGR: What is the project that is most advanced?
MG: The Haile mine from Romarco Minerals Inc. (R:TSX).
TGR: Can you explain what your group at the USGS does? Do you promote mineral development in the U.S.?
MG: We are like a warehouse of information. A company could call me up and ask questions about what has happened in the past and why the price has gone up in the last few years. It could ask me questions, but we don’t do anything to directly promote mineral development.
We produce the MCS, which gives a quick glance at what’s going on today in the gold industry. The larger, more detailed Yearbook gives more of an overview of what happened during that year so you can see where development and production took place. It provides insight into why production was flat per se or why exploration has gone up. It gives a good basis to understand the industry during the past year.
TGR: Thank you for your insights.
The most up-to-date documents referenced in this interview can be accessed here.
Micheal George is a mineral commodity specialist at the U.S. Geological Survey, where he serves as the principal contact for mineral commodity data and information, and as a referral source for business and industry representatives, foreign representatives, the general public and other agencies. George has also served as an economist for the Mineral Management Service and a researcher in the U.S. Bureau of Mines. George holds a Bachelor of Science degree in mineral economics from Pennsylvania State University and a master’s degree in cartographic and geographic sciences from George Mason University.
By B.P.T., on May 24th, 2012
At 8:30 AM Eastern time, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 371,000 new jobless claims last week, which would would be 1,000 more than the previous week.
At 8:30 AM Eastern time, the Durable Goods Orders report for April will be released. The consensus is that there was an increase of 0.5% from the previous month.
At 9:45 AM Eastern time, the weekly Bloomberg Consumer Comfort Index will be released, providing an update on Americans’ views of the U.S. economy, their personal finances and the buying climate.
At 10:30 AM Eastern time, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.
At 11:00 AM Eastern time, the Kansas City Fed Manufacturing Index for May will be released.
At 4:30 PM Eastern time, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
Also at 4:30 PM Eastern time, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
By Simon Grey, on May 23rd, 2012
That jump in the lower line is pretty much all student loans. And whenever the government is loaning out money, you can bet that the direct recipients are in the middle of a big ol’ bubble.
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