- Posted August 14, 2013 by
Losing Faith in Gold
Miners’ Woes | Vancouver is home to more than 700 mining companies scattered among high-rises framed against the stunning North Shore mountains. They’re often small, employing a handful of people who then hire auditors, engineers or helicopter pilots to reach remote sites. Many are struggling to survive. The median Vancouver mine exploration company has $325,000, enough to last less than five months, according to data compiled by Bloomberg. Jeff Sundar, 38, cut his monthly salary by more than half, to C$5,000, last year to stretch the cash of his Vancouver explorer, Entourage Metals Ltd. (EMT) Its stock has dropped more than 80 percent since it raised C$5.35 million in a February 2011 initial public offering. The firm had four full-time geologists at the time; now it has one.
Financing Challenge | In April, Toronto brokerage Fraser Mackenzie Ltd. shut, saying investor interest in early-stage mining had “considerably diminished” and shareholders voted to conserve capital “while we still have it.” The firm had employed as many as 80 people. There were rows of empty seats at a Vancouver mining conference in May. Half as many exhibitors as a year before came, said conference organizer Joe Martin. “No Soliciting” signs were posted on tables to discourage salespeople who hadn’t paid from showing up anyway. In one hall, David Hodge, president of Zimtu (ZC) Capital Corp., bellowed about an early-stage exploration company like a carnival barker.
ETF Panic | Stock in Zimtu, a Vancouver-based natural resources investment company, traded Aug. 12 at 37 Canadian cents, less than a fifth of the C$2.19 price in February 2011. The ease of buying gold through exchange-traded funds backfired on some investors. One couple who put more than half of their assets into gold ETFs approached Rinehart Wealth Management in a panic in April, said Daniele Donahoe, president of the Charlotte, North Carolina-based firm, whose clients generally have more than $1 million. She said she sold many of the funds for the couple. “With the advent of these ETFs people have been able to become somewhat of their own worst enemy,” Donahoe said.
Billionaire Paulson had so much conviction that he used a gold ETF (GLD) to start share classes for his funds denominated in bullion, allowing investors to avoid the dollar. Most of his own $9.5 billion investment in his firm’s funds as of Jan. 1 was in the gold shares. Today, Paulson & Co. reported in a filing that it reduced holdings of the SPDR Gold Trust, the largest gold ETF, by 53 percent in the second quarter as the metal plunged into a bear market.
Demand Intact | The firm has said the gold share class is still “up considerably” since beginning at an average cost of $950 an ounce in 2009, and it remains committed to bullion. “The long-term trend of increasing demand for gold in lieu of paper is intact,” John Reade, Paulson’s gold strategist, said in an April statement.
The metal is also weighing on returns at Utimco, the $29.2 billion fund for the University of Texas and Texas A&M University systems. Utimco began buying gold as a hedge against dollar devaluation in 2009 and by 2011 held more than 20 metric tons -- larger than Canada’s gold reserve -- in a New York warehouse. The investment became a political weather vane in the state, where one legislator proposed a bill to move the gold to a newly created Texas Bullion Depository.
Assets Devalued | While gold helped the endowment gain more than 14 percent in fiscal 2011, it’s since been a drag. Returns were 9 percent in the fiscal year through May 31. “What I missed was how emotional so many people tend to get on this topic,” said Bruce
Zimmerman, the fund’s chief executive officer, a former Citigroup Inc. pension manager who had never owned gold before. “Gold represents less than 4 percent of our portfolio, probably encompasses about 5 to 6 percent of our thoughts and discussion but generates about 99 percent of our publicity.” The fund isn’t selling the gold, which it holds at an average cost of $1,231 an ounce, Zimmerman said.
“Given easing monetary policy, there is a scenario where financial assets essentially become devalued,” he said. At Texas Christian University, endowment managers considered buying gold for similar reasons three years ago --and rejected the idea, said chief investment officer Jim Hille. TCU instead holds oil and gas royalties, which produce income, he said. Gold typically must be sold to lock in gains.
Weathering Decline | “It just doesn’t do anything for your payout needs every year,” he said. The Fort Worth, Texas, university’s $1.3 billion endowment gained 13 percent in the fiscal year through June 30. The largest mining companies argue they can weather gold’s decline -- so far, to a price still far higher than the $640 average over 20 years -- by cutting overhead costs, paring exploration and writing down assets acquired during the boom. Barrick Gold Corp. (ABX), the world’s biggest gold producer, took $8.7 billion of writedowns and slashed its quarterly dividend 75 percent, lowering what it calls “all-in sustaining costs” to $900 to $975 an ounce for 2013. Gold miners have announced at least $23 billion in writedowns in the past month.
“Companies are pretty good at knuckling down and ultimately reducing costs,” Jamie Sokalsky, CEO of Toronto-based Barrick, said in an Aug. 1 interview. “I don’t think you are going to see massive types of closures.”
‘Not Sustainable’ | Nick Holland, the CEO of Gold Fields Ltd., is less sanguine. The company’s South Deep mine is one of the few in South Africa that could survive prices near the year’s lows, in part because it’s largely mechanized and less reliant on labor, Holland said. “The industry is not sustainable at $1,230 an ounce,” he said June 27. “We’re going to need at least $1,500 an ounce to sustain this industry in any reasonable form.”
Prices are already too low for Boahene in Ghana, who said he can’t afford to pay his workers $10 a day and rent an excavator for $750 a day. He said he’ll go back to installing satellite televisions if the price doesn’t recover. The gold rush had a darker side for the town of Dunkwa. Resentments grew against Chinese immigrants who arrived to develop mines, using excavators and other heavy equipment few local people could afford. Miners dumped silt and chemicals into the river Pra, the region’s chief drinking source. Dunkwa hasn’t benefited much visibly from its mineral wealth. On the unpaved, rutted road through town, a battered silver hatchback with a bumper sticker reading DESTINY inched past as a taxi, stuck in a six-foot-wide puddle, disgorged its shoeless passengers to walk through the muck.
Crime Spike | Thefts -- of mobile phones, motorbikes and even Caterpillar Inc. (CAT) excavators -- are reported daily, said Love Mensah, crime officer of the Upper Denkyira East Municipal Assembly. The thieves use a master key to start the excavators and load them onto trucks, he said. The two men shot recently were trying to loot homes and mine sites of Chinese nationals, Mensah said. Ghana’s government expelled dozens of Chinese miners this year, enforcing laws that restrict small-scale mining to citizens. Shutdowns of their mines compounded joblessness caused by gold’s falling price, said Lawrence Ansah-Brew, the area’s environmental health officer. “The youth are just loitering about,” he said.
Nana Kofi, 22, quit school as a teenager, moved to Dunkwa and got jobs running excavators. Out of work for eight months, he said he’s down to $450 in savings. “I know about 200 young men who are at home,” he said. “When we attack people with machetes, they should know we have to eat. I don’t mean I will do that, but it will happen.”