Why These Old Mines Could Be Solid Gold

Tuesday, 16 September 2019
Adelaide, Australia
By Bernd Struben

  • There is plenty of oil…unless it’s disrupted
  • A very dangerous flashpoint

Yesterday I promised to share our editors’ latest takes and tips on the turbulent oil and rare earths markets. We’ll look into oil today. And hold off on the rare earths for tomorrow, to do the sector and the immense opportunities it presents justice.

But first…

Streaming broadcasts of the ‘2019 Gold Mania Summit’ — featuring global strategist Jim Rickards and Aussie gold analyst Shae Russell — were scheduled to end last night.

However, due to its popularity and the increasingly bullish outlook for gold as geopolitical tensions heat up, we’ve arranged with The Daily Reckoning Australia to hold this open for one final day.

You can access that here.

We’ve covered a lot of ground on gold over the past week. So I’ll keep that brief today. But one area I want to touch on is technology. Things like advanced geochemical exploration. Or aerial electromagnetic surveys. Not to mention superior drilling and extraction techniques.

The rapid adoption of this kind of tech is changing the gold mining game in ways few could have imagined even a decade ago. It’s seeing idle mines in southern Australia reopened. And gold production in Victoria reach more than 100 year highs.

From Bloomberg:

As prices soar, production in the goldfields of Victoria state is rising again and has already climbed to the highest since 1914 as mining companies dig deeper and new technology helps to uncover once hidden and richer deposits in a region that almost rivaled the Californian gold rush and was thought to have petered out decades ago…

With Victoria’s state government forecasting there may be as much as another 80 million ounces buried underground in the region —about as much as was dug out during the initial gold rush from 1851 — major players are moving in, including Newmont Goldcorp Corp. and billionaire miner Gina Rinehart.

The vital nature of technology in determining a gold miner’s failure or success isn’t lost on Shae Russell. Nor is the takeover potential of tiny gold miners from the likes of Newmont and Gina Rinehart.

Here’s what Shae told me yesterday:

Old gold mines aren’t that depleted. And there are very few virgin deposits left. That’s why I look for are companies applying new technologies to understand the geology of their rocks.’

This is just one of the tests the five microcap stocks she recommends had to pass before making it onto her top gold plays list. Plays she believes could deliver investors 37 times the gains of gold as the yellow metal marches higher.

Shae and Jim cover all that…and much more…in the ‘2019 Gold Mania Summit’.

You can watch that here.

Now to the markets.

Markets

Some markets are up, others are down as investors await the US Fed’s decision today (overnight our time).

Do Fed Chair Jay Powell and crew have investors’ backs?

You bet.

A second 0.25% rate cut is almost assured. Especially with the spectre of oil price shocks looming large this week. A larger cut is unlikely at this time, despite Donald Trump recently spruiking negative rates.

The big question is whether the Fed will follow in the footsteps of its European counterpart, the ECB, and reignite the engines of quantitative easing (QE). If the Fed goes back on a bond and asset buying binge, global markets should see a nice bounce…

Overnight, the Dow Jones Industrial Average closed up 33.98 points, or 0.13%.

The S&P 500 closed up 7.74 points, or 0.26%.

In Europe the Euro Stoxx 50 index closed up 2.81 points, or 0.08%. Meanwhile, the FTSE 100 fell 0.01% and Germany’s DAX closed down 7.70 points, or 0.06%.

In Asian markets Japan’s Nikkei 225 is down 27.65 points, or 0.13%. China’s CSI 300 is up 0.44%.

In Australia, the S&P/ASX 200 is down 16.55 points, or 0.25%.

West Texas Intermediate crude oil is US$58.93 per barrel. Brent crude is US$64.25 per barrel.

Turning to gold, the yellow metal is trading for US$1,501.48 (AU$2,189.07) per troy ounce. Silver is US$18.03 (AU$26.29) per troy ounce.

One bitcoin is worth US$10,215.61.

The Aussie dollar is worth 68.59 US cents.

There is plenty of oil…unless it’s disrupted

If tensions continue to rise, if more tankers are hijacked or sabotaged, or if the shooting commences in earnest — the odds of a sharp spike in oil prices far exceed the odds of a deep slump.’

Your editor, 30 July

After the drone…or possibly missile…attacks on Saudi Arabia’s oil fields temporarily knocked out some 5% of global oil production Trump was quick to tweet, ‘PLENTY OF OIL’.

And he’s right. As I often write here, the world is awash in oil. The supply shortages we were facing earlier in the 2000s evaporated with the proliferation of fracking.

That new technology opened the floodgates to a sea of oil in places like the US Permian Basin. This has seen the US become the world’s top oil producer this year. A title it’s likely to hold for many years yet.

And it’s not just the US. Following the attacks in Saudi Arabia, Alberta’s Premier Jason Kenney was quick to point out that ‘Canada offers a safe, secure and socially responsible source of energy.’

Indeed, as Bloomberg notes, Alberta alone ‘produces almost 3.8 million barrels of oil a day, trailing only Saudi Arabia, the U.S., and Iraq.’ And they’re ready to up production if they can overcome environmentalists’ opposition at home.

Nonetheless, the loss of some 5.7 million barrels of oil per day out of Saudi Arabia naturally sent oil markets into a frenzy.

As you can see in the chart below, Brent crude prices went vertical (note the dates are US time):



chart image
Sources: Bloomberg
Click to enlarge

Traders sent Brent rocketing to US$69.02 per barrel. The 15% price rise marked its biggest one day hike in 31 years.

Jitters, anyone?

At time of writing Brent’s retreated back to US$64.25 per barrel.

Oil markets have calmed some following a restrained response — so far —from Donald Trump. The president of the world police is awaiting rock solid evidence before taking any action against Iran…or the Yemeni Houthis. Restraint, ironically, his political opponents and their media mouthpieces are trying to use against him.

News out of Saudi Arabia that the Kingdom is set to restore full oil output by the end of September is further soothing investor nerves.

From The Australian:

Newly-appointed Energy Minister Prince Abdulaziz bin Salman said the kingdom is already supplying oil to its customers at pre-attack levels and that normal production levels will return by the end of September. It has restored 50 per cent of production lost in Saturday’s attacks, Prince Abdulaziz said.

The Saudis rapid rebound may be welcome news to most of the world. But Chevron’s CEO, Mike Wirth likely isn’t among the celebrants. Speaking to CNBC earlier this week, Wirth said his company could start pumping oil in short order in the partitioned zone between Kuwait and Saudi Arabia.

With a half million barrels per day on tap, all Chevron needs is the green light from both nations. But a four year long dispute has sidelined production in the zone. And it doesn’t look like it will be resolved any time soon.

See what I mean about there being plenty of oil.

The kicker, as the world was rudely reminded over the weekend, is that much of that oil supply is vulnerable to disruption.

Unfortunately that threat isn’t going away anytime soon. It’s not just oil tankers in the  Strait of Hormuz that are susceptible to attack. It’s pretty much all of Saudi Arabia’s oil fields.

If further attacks follow — very possible — Trump might have little choice but to respond with force. It could even see the Saudis engage directly with Iran.

A very dangerous flashpoint

The Middle East has been a global trouble spot dating back to Biblical years.

In our own lifetimes war has raged in one part of the Middle East or another nonstop.

And yet, mostly, the oil rich region has still managed to deliver its crude to an energy hungry world.

You can see, then, why most investors have become complacent about the real and growing threats in the region. If you face the same threat week in and week out and you emerge unscathed, well, then surely the next week will work out fine as well.

Until, of course, it doesn’t.

My good friend Callum Newman is one of the few analysts who hasn’t been lulled into a false sense of security. In fact, he’s been ringing the alarm on this since early May.

Here’s what he wrote to his readers back then in Agora Financial Australia’s advisory service, Small Cap Alpha:

I believe that the Middle East is forming into a very dangerous flashpoint. This could take oil prices into an extremely volatile period…and all this is on top of the pressures already building elsewhere.’

Callum didn’t sit idly by and fret about a potential calamity in the Middle East. Instead he went out and researched the best positioned small-cap Aussie oilers.

His top stock right now is a tiny Aussie driller on the verge of a potential 30 million barrel discovery. Even at an oil price of $65 per barrel, that works out to almost 10 times the company’s current market capitalisation.

He lays everything out in his report, ‘The U-Block’. You can read that here.

That’s all for today. Tomorrow, we’ll dive into some unique rare earths opportunities

Cheers,

Bernd