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Who in their right mind would buy one of the most notorious dogs in the entire South African mining sector – the failed Dominion Uranium mine – and do it at a time when uranium prices are still depressed? That’s the $64 000 question following news that the Gupta family – the ultimate controlling shareholder in Shiva Uranium – has bought Dominion for US$37,3m. It’s either the steal of the century – given that developers Uranium One wrote off an investment of $1,8bn when they shut Dominion down in October 2008 – or it’s a classic case of throwing good money after bad.
But Dominion isn’t the only example of investment decisions being made that have some analysts and fund managers shaking their heads.
For example: Who of sound mind would pour money into physical gold or gold equities after the price has risen fivefold over the past decade and is looking volatile – if not decidedly shaky – at around $1 200/oz? The answer to that one is some very successful investors: John Paulson for one, George Soros for another as well as our own home-grown “boykie” Christo Wiese (see page 17).
Paulson bought 11,3% of AngloGold Ashanti from Anglo American in March last year for $1,28bn. He subsequently hired two of the gold sector’s top analysts – Victor Flores and John Reade – to run his gold hedge fund.
Soros is the billionaire who famously bet and won big time against the British pound when he shorted the currency. He told this year’s World Economic Forum in Davos in early February: “The ultimate asset bubble is gold.” However, only a prescient few noted at the time Soros hadn’t specified whether he was buying or selling. Turns out he was buying. It was subsequently revealed (later in February) that Soros’s hedge fund had doubled its gold holdings in the December 2009 quarter.
So what’s going on? The answers all have to do with investment time horizons and perceptions of future risk – in particular, worries about resurgent inflation. Investors ploughing their money into gold, uranium and other commodities – such as platinum, iron ore and nickel – are taking radically longer-term views than the standard investment horizon of three months.
That’s a disease known as “quarteritis” – referring to the fund managers who have to report quarterly results and get judged by investors on that short-term basis.
Let’s start with the bearish view on gold, given that it’s back below $1 200/oz, which has got the gold grizzlies – such as GFMS CEO Paul Walker and British financial institution Natixis – growling. Natixis reckons gold has topped out at current levels and is headed back to $950/oz next year. “On balance we feel the multi-year rally in gold prices is becoming increasingly difficult to sustain and that the start of a steady correction is imminent,” the firm said in its just published 2010 second quarter metals review.
Walker is deeply concerned about the way the soaring price of gold has hammered physical consumption by the jewellery trade and made the market almost totally dependent on investment demand. Gold could come crashing down if investment demand suddenly turned sour, Walker warned at a recent presentation in Johannesburg.
The investment case in favour of gold centres on the crisis in global financial markets that started late in 2008 and has now spilled over into the sovereign debt markets with the crisis in Greece.
Simply stated, hundreds of billions of US dollars have been created out of thin air and pumped into the financial systems in the United States and various other major Western nations to avoid a severe recession. It now seems hundreds of billions more euro are being pumped into Greece – and, in due course, other suspect economies such as Spain, Portugal, Iceland and Ireland (the so-called PIIGS) – to avoid an economic collapse that would hit the entire European Union.
DundeeWealth Economics chief economist Martin Murenbeeld spelt it out in a report published on 13 May when he posed the question: “What would happen in Europe if the EU and ECB (European Central Bank) had decided not to rescue the PIIGS? Recession? Depression? Multiple bank failures?
“The answer is probably ‘all of the above’ – but no one really knows exactly and, more importantly, the EU and the ECB were not willing to risk finding out. Accordingly, Europe chose the path of monetary reflation last weekend and gold prices rose to an all-time (nominal) high this week.”
Murenbeeld views what’s happening in Europe as “a game changer” for gold, because what’s coming is another surge in liquidity – which has to result in inflation.
That’s good for gold. US investment guru Jim Rogers put it this way in a recent interview with Bloomberg: “All we can do is put our money into real assets, because paper money is being debased.”
For “real assets” read gold, other precious metals – such as platinum and silver – and other key commodities that developing economies including China must have, such as iron ore and ferrochrome.
So far, the world’s major economies haven’t seen this predicted inflationary surge and various reasons have been put forward by economists to explain that phenomenon. The gold bulls reckon inflation must inevitably materialise and the forecasts about what will happen to the gold price when it does range into the stratosphere – $5 000/oz plus.
Murenbeeld – a highly respected and conservative gold analyst – sits near the bottom of those forecasts but still says gold could reach $2 300/oz, which is the price at which the metal would currently have the same value adjusted for inflation as it did when it hit $850/oz back in 1980. What Murenbeeld isn’t predicting is when that will happen.
Even if you don’t believe this scenario, the suggestion being made forcibly by a number of investment managers is that you still need to have some of your portfolio – say, 10% to 15% – in gold. Just in case.
Now let’s turn to uranium, where the current spot price of uranium oxide sits around $42/lb, which compares with a high of around $130/lb in 2007. The more important uranium market indicator is its long-term contract price, which is also currently depressed, sitting around $58/lb.
Price, demand and investment sentiment for uranium have all been hammered by the global recession. Uranium supply has also been dominated for decades by material being recycled from the scrapped nuclear weapons stockpiles of Russia and the US.
That was then, this is now, says Paladin Energy CEO John Borshoff, whose company has successfully built and commissioned new uranium mines in Namibia and Malawi. Borshoff spelt it all out in no uncertain terms at a recent conference, declaring current low uranium prices were “unsustainable”. He added worries over future demand for uranium were no longer the issue, given the rate at which new nuclear reactors were being built worldwide.
Borshoff said: “The question is on the supply side. Who is going to produce the uranium that will be needed by a very real nuclear renaissance? The future supply of uranium into the long-term contract market is structurally compromised and there’s no short-term fix – but that situation isn’t well understood.”
Borshoff’s assessment is clearly shared by a number of other major players. SA’s “big three” gold producers – AngloGold Ashanti, Gold Fields and Harmony – are all looking at uranium projects.
At the same time there’s a scramble for assets, combined with furious merger and acquisition activity taking place in the area south of Rio Tinto’s Rossing Uranium mine near Swakopmund in Namibia. That activity has gone largely unnoticed in SA because the companies involved are all listed on the London, Australian and Toronto stock exchanges. The JSE hasn’t featured.
So by now you should at least understand why the Guptas have bought the Dominion mine, even if you don’t agree with their decision. What remains to be seen is whether they can make Dominion perform. Dominion will stand or fall by the success of its underground mining operations, which must deliver sufficient volumes of the correct grade of ore to the state-of-the-art high pressure leach recovery plant.
Not only did previous owner Uranium One overstate the underground grade but it also failed miserably to operate the mine without serious dilution of recovered ore.
Shiva Uranium CEO Jagdish R Parekh says the group is on top of the situation but acknowledges Shiva is the “new kid on the block” and still has to prove itself. He says Shiva is bringing in the right kind of mining expertise to tackle Dominion, where its orebody has been reassessed and better defined through due diligence studies.
The counter view is that Dominion needs a uranium price of at least $100/lb just to break even.
I guess we’ll find out in due course who is right.
CHRISTO WIESE
Is Wiese becoming precious?
IF THE COMMODITY plays of the rich and influential are worth monitoring regularly, then investors should keep an eye on retail tycoon Christo Wiese. His big play was in diamonds, when he set himself up as the “kingmaker” at Ocean Diamond Mining Holdings (ODM), effectively wedging himself between buyout offers from Trans Hex, the Rembrandt-owned diamond miner, and Namco, another Toronto-listed marine diamond specialist. ODM was eventually sold to Namco (which subsequently ran horribly aground) and Wiese pocketed some stunning returns from what was anything but a mainstream mining counter.
Of course, Wiese’s travails at fluorspar miner Sallies have been well documented. After backing the hapless (and luckless) Sallies in several fund-raising exercises, Wiese last year bailed out at great personal loss when he sold all his ordinary shares to United States-based majority shareholder Firebird at a smidgen of his original investment value.
While he still holds a substantial stake in Sallies Debentures, indications – at least according to an interview on Fin24.com – are Wiese bailed out of Sallies because “other opportunities had presented themselves”. Indications (rather, rumours) at the time were that Wiese was keen to make a play in the gold sector.
In August 2009 Fin24.com reported Wiese had built a strategic holding in a small Constantia-based gold exploration company called White Water Resources. According to shareholder data on McGregor BFA, Wiese is now no longer invested in White Water Resources. But what McGregor BFA’s data does suggest is that Wiese – via his well-known nominee company Titan – is taking a view on precious metals.
The latest available shareholding records show Wiese holds a strategic stake of around 14% in Brian Gilbertson’s diversified mining house, Palling-hurst Resources. Perhaps more interesting is that Wiese might be building a holding in Gold One, the junior gold mining venture headed by former Uranium One boss Neil Froneman. According to McGregor BFA’s shareholder analysis, Wiese holds close to 3% of Gold One.
MARC HASENFUSS
Face off: INFLATION
Is it going to become a global problem?
BRUCE WHITFIELD
YES
Beware the bogey
YOU WON’T hear me say this often: I hope I’m wrong. I just don’t see how a lid can be kept on global inflation. I must concur with German Finance Minister Peer Steinbrück and others who caution that pumping liquidity into financial markets to stabilise them must ultimately result in inflation.
POLICYMAKERS CAN ONLY mitigate its impact by removing some of that excess liquidity – the consequences of which could very well be to once again risk the stability of the world’s financial system. Despite signs of inflation picking up in places such as Britain – where, at 3,7%, inflation is almost twice the official 2% target – the threat to global inflation is seen as more of a medium-term problem. That means governments are likely to be tardy in withdrawing funds from markets.
CYNICS MAY ARGUE New York University Professor Nouriel Roubini struck lucky with his 2007 recession forecast: lucky or not, would you bet against him now? Roubini is part of a growing chorus of respected economists cautioning about rising inflation. His argument: increased sovereign debt – from the United States to Japan to Greece – will ultimately lead to higher inflation or government defaults. The build-up of sovereign debt worries Roubini, who is concerned nations that can’t pay their debts will either print money or seek to “monetise” their debts.
SLUGGISH DEMAND is helping keep South African inflation within its target range and expectations are it should move to the midpoint of the 3% to 6% target range. That’s good news. But for how long? Demand in the SA economy must recover as growth levels normalise amid rising wage demands and substantial increases in administered prices. All the while, the rand looks vulnerable – which will impact import pricing.
CAN CHINA and India really keep up their current growth rates in perpetuity without an inflation consequence for importers of their goods? I fear not. Of course, a bigger risk is stagflation – an environment where economies exhibit zero or very low growth but cost inputs rise. That’s a spat for another day.
GRETA STEYN
NO
It will be business as usual
WHAT DO OUR FEARS about global inflation stem from? The main answer is the massive liquidity pumping exercise central banks worldwide undertook after investment bank Lehman Brothers went bust in September 2008. That liquidity injection – known as “quantitative easing” (QE) – took the form of central banks buying bonds, in the process putting cash into the banking system.
I DON’T AGREE. QE won’t push inflation in the developed world meaningfully beyond what it’s been over the recent past. When QE was undertaken, the fear was that deflation would develop and that the banking system would seize up and not function.
THE MAIN REASON I don’t believe QE has or will cause inflation is that central banks began withdrawing the cash as soon as the banking system started functioning normally and economies emerged from recession. The Fed started selling bonds back into the market, thus taking cash out. The Bank of England is also slowly withdrawing the liquidity it put into the system. True, the European Central Bank is only now starting to undertake QE to ease the stress on the Eurozone’s debt markets, but it’s sterilising the liquidity being pumped into the market.
IT’S TRUE THAT in Britain there was some consternation about inflation coming in at 3,7% in April – more than one percentage point above the target. But let’s be realistic here: that’s hardly Seventies style inflation. The Bank of England ascribed the reasons to oil prices, a rise in the VAT rate and sterling’s depreciation. The bank said those factors were temporary and no cause to raise interest rates.
IN THE US, the 12-month increase in the consumer price index was 2,2% in April – nothing to write home about. On a seasonally adjusted basis, CPI in the US actually declined month-on-month in April. The responsible way in which central banks are extricating themselves from QE is ensuring inflation in major economies won’t be out of the ordinary.
But Dominion isn’t the only example of investment decisions being made that have some analysts and fund managers shaking their heads.
For example: Who of sound mind would pour money into physical gold or gold equities after the price has risen fivefold over the past decade and is looking volatile – if not decidedly shaky – at around $1 200/oz? The answer to that one is some very successful investors: John Paulson for one, George Soros for another as well as our own home-grown “boykie” Christo Wiese (see page 17).
Paulson bought 11,3% of AngloGold Ashanti from Anglo American in March last year for $1,28bn. He subsequently hired two of the gold sector’s top analysts – Victor Flores and John Reade – to run his gold hedge fund.
Soros is the billionaire who famously bet and won big time against the British pound when he shorted the currency. He told this year’s World Economic Forum in Davos in early February: “The ultimate asset bubble is gold.” However, only a prescient few noted at the time Soros hadn’t specified whether he was buying or selling. Turns out he was buying. It was subsequently revealed (later in February) that Soros’s hedge fund had doubled its gold holdings in the December 2009 quarter.
So what’s going on? The answers all have to do with investment time horizons and perceptions of future risk – in particular, worries about resurgent inflation. Investors ploughing their money into gold, uranium and other commodities – such as platinum, iron ore and nickel – are taking radically longer-term views than the standard investment horizon of three months.
That’s a disease known as “quarteritis” – referring to the fund managers who have to report quarterly results and get judged by investors on that short-term basis.
Let’s start with the bearish view on gold, given that it’s back below $1 200/oz, which has got the gold grizzlies – such as GFMS CEO Paul Walker and British financial institution Natixis – growling. Natixis reckons gold has topped out at current levels and is headed back to $950/oz next year. “On balance we feel the multi-year rally in gold prices is becoming increasingly difficult to sustain and that the start of a steady correction is imminent,” the firm said in its just published 2010 second quarter metals review.
Walker is deeply concerned about the way the soaring price of gold has hammered physical consumption by the jewellery trade and made the market almost totally dependent on investment demand. Gold could come crashing down if investment demand suddenly turned sour, Walker warned at a recent presentation in Johannesburg.
The investment case in favour of gold centres on the crisis in global financial markets that started late in 2008 and has now spilled over into the sovereign debt markets with the crisis in Greece.
Simply stated, hundreds of billions of US dollars have been created out of thin air and pumped into the financial systems in the United States and various other major Western nations to avoid a severe recession. It now seems hundreds of billions more euro are being pumped into Greece – and, in due course, other suspect economies such as Spain, Portugal, Iceland and Ireland (the so-called PIIGS) – to avoid an economic collapse that would hit the entire European Union.
DundeeWealth Economics chief economist Martin Murenbeeld spelt it out in a report published on 13 May when he posed the question: “What would happen in Europe if the EU and ECB (European Central Bank) had decided not to rescue the PIIGS? Recession? Depression? Multiple bank failures?
“The answer is probably ‘all of the above’ – but no one really knows exactly and, more importantly, the EU and the ECB were not willing to risk finding out. Accordingly, Europe chose the path of monetary reflation last weekend and gold prices rose to an all-time (nominal) high this week.”
Murenbeeld views what’s happening in Europe as “a game changer” for gold, because what’s coming is another surge in liquidity – which has to result in inflation.
That’s good for gold. US investment guru Jim Rogers put it this way in a recent interview with Bloomberg: “All we can do is put our money into real assets, because paper money is being debased.”
For “real assets” read gold, other precious metals – such as platinum and silver – and other key commodities that developing economies including China must have, such as iron ore and ferrochrome.
So far, the world’s major economies haven’t seen this predicted inflationary surge and various reasons have been put forward by economists to explain that phenomenon. The gold bulls reckon inflation must inevitably materialise and the forecasts about what will happen to the gold price when it does range into the stratosphere – $5 000/oz plus.
Murenbeeld – a highly respected and conservative gold analyst – sits near the bottom of those forecasts but still says gold could reach $2 300/oz, which is the price at which the metal would currently have the same value adjusted for inflation as it did when it hit $850/oz back in 1980. What Murenbeeld isn’t predicting is when that will happen.
Even if you don’t believe this scenario, the suggestion being made forcibly by a number of investment managers is that you still need to have some of your portfolio – say, 10% to 15% – in gold. Just in case.
Now let’s turn to uranium, where the current spot price of uranium oxide sits around $42/lb, which compares with a high of around $130/lb in 2007. The more important uranium market indicator is its long-term contract price, which is also currently depressed, sitting around $58/lb.
Price, demand and investment sentiment for uranium have all been hammered by the global recession. Uranium supply has also been dominated for decades by material being recycled from the scrapped nuclear weapons stockpiles of Russia and the US.
That was then, this is now, says Paladin Energy CEO John Borshoff, whose company has successfully built and commissioned new uranium mines in Namibia and Malawi. Borshoff spelt it all out in no uncertain terms at a recent conference, declaring current low uranium prices were “unsustainable”. He added worries over future demand for uranium were no longer the issue, given the rate at which new nuclear reactors were being built worldwide.
Borshoff said: “The question is on the supply side. Who is going to produce the uranium that will be needed by a very real nuclear renaissance? The future supply of uranium into the long-term contract market is structurally compromised and there’s no short-term fix – but that situation isn’t well understood.”
Borshoff’s assessment is clearly shared by a number of other major players. SA’s “big three” gold producers – AngloGold Ashanti, Gold Fields and Harmony – are all looking at uranium projects.
At the same time there’s a scramble for assets, combined with furious merger and acquisition activity taking place in the area south of Rio Tinto’s Rossing Uranium mine near Swakopmund in Namibia. That activity has gone largely unnoticed in SA because the companies involved are all listed on the London, Australian and Toronto stock exchanges. The JSE hasn’t featured.
So by now you should at least understand why the Guptas have bought the Dominion mine, even if you don’t agree with their decision. What remains to be seen is whether they can make Dominion perform. Dominion will stand or fall by the success of its underground mining operations, which must deliver sufficient volumes of the correct grade of ore to the state-of-the-art high pressure leach recovery plant.
Not only did previous owner Uranium One overstate the underground grade but it also failed miserably to operate the mine without serious dilution of recovered ore.
Shiva Uranium CEO Jagdish R Parekh says the group is on top of the situation but acknowledges Shiva is the “new kid on the block” and still has to prove itself. He says Shiva is bringing in the right kind of mining expertise to tackle Dominion, where its orebody has been reassessed and better defined through due diligence studies.
The counter view is that Dominion needs a uranium price of at least $100/lb just to break even.
I guess we’ll find out in due course who is right.
CHRISTO WIESE
Is Wiese becoming precious?
IF THE COMMODITY plays of the rich and influential are worth monitoring regularly, then investors should keep an eye on retail tycoon Christo Wiese. His big play was in diamonds, when he set himself up as the “kingmaker” at Ocean Diamond Mining Holdings (ODM), effectively wedging himself between buyout offers from Trans Hex, the Rembrandt-owned diamond miner, and Namco, another Toronto-listed marine diamond specialist. ODM was eventually sold to Namco (which subsequently ran horribly aground) and Wiese pocketed some stunning returns from what was anything but a mainstream mining counter.
Of course, Wiese’s travails at fluorspar miner Sallies have been well documented. After backing the hapless (and luckless) Sallies in several fund-raising exercises, Wiese last year bailed out at great personal loss when he sold all his ordinary shares to United States-based majority shareholder Firebird at a smidgen of his original investment value.
While he still holds a substantial stake in Sallies Debentures, indications – at least according to an interview on Fin24.com – are Wiese bailed out of Sallies because “other opportunities had presented themselves”. Indications (rather, rumours) at the time were that Wiese was keen to make a play in the gold sector.
In August 2009 Fin24.com reported Wiese had built a strategic holding in a small Constantia-based gold exploration company called White Water Resources. According to shareholder data on McGregor BFA, Wiese is now no longer invested in White Water Resources. But what McGregor BFA’s data does suggest is that Wiese – via his well-known nominee company Titan – is taking a view on precious metals.
The latest available shareholding records show Wiese holds a strategic stake of around 14% in Brian Gilbertson’s diversified mining house, Palling-hurst Resources. Perhaps more interesting is that Wiese might be building a holding in Gold One, the junior gold mining venture headed by former Uranium One boss Neil Froneman. According to McGregor BFA’s shareholder analysis, Wiese holds close to 3% of Gold One.
MARC HASENFUSS
Face off: INFLATION
Is it going to become a global problem?
BRUCE WHITFIELD
YES
Beware the bogey
YOU WON’T hear me say this often: I hope I’m wrong. I just don’t see how a lid can be kept on global inflation. I must concur with German Finance Minister Peer Steinbrück and others who caution that pumping liquidity into financial markets to stabilise them must ultimately result in inflation.
POLICYMAKERS CAN ONLY mitigate its impact by removing some of that excess liquidity – the consequences of which could very well be to once again risk the stability of the world’s financial system. Despite signs of inflation picking up in places such as Britain – where, at 3,7%, inflation is almost twice the official 2% target – the threat to global inflation is seen as more of a medium-term problem. That means governments are likely to be tardy in withdrawing funds from markets.
CYNICS MAY ARGUE New York University Professor Nouriel Roubini struck lucky with his 2007 recession forecast: lucky or not, would you bet against him now? Roubini is part of a growing chorus of respected economists cautioning about rising inflation. His argument: increased sovereign debt – from the United States to Japan to Greece – will ultimately lead to higher inflation or government defaults. The build-up of sovereign debt worries Roubini, who is concerned nations that can’t pay their debts will either print money or seek to “monetise” their debts.
SLUGGISH DEMAND is helping keep South African inflation within its target range and expectations are it should move to the midpoint of the 3% to 6% target range. That’s good news. But for how long? Demand in the SA economy must recover as growth levels normalise amid rising wage demands and substantial increases in administered prices. All the while, the rand looks vulnerable – which will impact import pricing.
CAN CHINA and India really keep up their current growth rates in perpetuity without an inflation consequence for importers of their goods? I fear not. Of course, a bigger risk is stagflation – an environment where economies exhibit zero or very low growth but cost inputs rise. That’s a spat for another day.
GRETA STEYN
NO
It will be business as usual
WHAT DO OUR FEARS about global inflation stem from? The main answer is the massive liquidity pumping exercise central banks worldwide undertook after investment bank Lehman Brothers went bust in September 2008. That liquidity injection – known as “quantitative easing” (QE) – took the form of central banks buying bonds, in the process putting cash into the banking system.
I DON’T AGREE. QE won’t push inflation in the developed world meaningfully beyond what it’s been over the recent past. When QE was undertaken, the fear was that deflation would develop and that the banking system would seize up and not function.
THE MAIN REASON I don’t believe QE has or will cause inflation is that central banks began withdrawing the cash as soon as the banking system started functioning normally and economies emerged from recession. The Fed started selling bonds back into the market, thus taking cash out. The Bank of England is also slowly withdrawing the liquidity it put into the system. True, the European Central Bank is only now starting to undertake QE to ease the stress on the Eurozone’s debt markets, but it’s sterilising the liquidity being pumped into the market.
IT’S TRUE THAT in Britain there was some consternation about inflation coming in at 3,7% in April – more than one percentage point above the target. But let’s be realistic here: that’s hardly Seventies style inflation. The Bank of England ascribed the reasons to oil prices, a rise in the VAT rate and sterling’s depreciation. The bank said those factors were temporary and no cause to raise interest rates.
IN THE US, the 12-month increase in the consumer price index was 2,2% in April – nothing to write home about. On a seasonally adjusted basis, CPI in the US actually declined month-on-month in April. The responsible way in which central banks are extricating themselves from QE is ensuring inflation in major economies won’t be out of the ordinary.
