Kazakhstan Gets $1.8 Billion in Chinese Funding for Gas Pipeline

By Nariman GizitdinovDec 13, 2012 BLOOMBERG

Kazakhstan won $1.8 billion in Chinese funding to build a natural-gas pipeline from its oil- rich west to the densely-populated south, and may ship supplies to its East Asian neighbor.

China Development Bank Corp. agreed to provide funds in a deal signed Dec. 11 in Hong Kong, Kazakhstan’s state gas shipper KazTransGaz said today in an e-mailed statement.

The 1,475-kilometer (917-mile) pipe from Beineu to Shymkent will be built by China National Petroleum Corp. and state energy producer KazMunaiGaz National Co. The two companies agreed on plans for its construction in 2008 as China sought gas to feed its burgeoning economy. They’ve invested $500 million each in a joint venture to build the link, KazTransGaz’s website shows.

The line will ship as much as 10 billion cubic meters a year, Kazakhstan’s Oil and Gas Ministry said in September. The link may export gas to China once domestic demand is met, the ministry said.

KazTransGaz, based in Astana, is a unit of KazMunaiGaz.



Gold CEOs Told to Fix Slump as Investors Prove Restless

By Thomas BiesheuvelDec 12, 2012 12:53 BLOOMBERG

Gold-mine investors are losing patience with management in the $60 billion industry as their shares head for the first back-to-back annual slump since 1998, even as the metal completes a dozen years of gains.

Producers from Canada’s Barrick Gold Corp. (ABX), the world’s biggest, to Newmont Mining Corp. (NEM) of the U.S. are failing to control expenses. The average cost to extract an ounce of gold by the largest miners jumped 23 percent to $584.70 in 2011, data compiled by Bloomberg show. In contrast, silver production costs fell 12 percent to the lowest since 2007, the data show.

Money managers including billionaire investor George Soros reacted by boosting stakes in physical gold, pushing gold-mine executives to resign, or shifting into silver. Direct holdings of the metal reached a record 2,629.3 metric tons Dec. 10, valued at $145 billion, after more than tripling in five years, data compiled by Bloomberg show.

“Investors are very critical, voting with their feet and pushing management teams to resign,” said John Wong, a portfolio manager at CQS Group’s New City Investment Managers, who increased his silver holdings. “You can tell from the way investors sold Barrick down that they are on short fuses.”

Barrick replaced Chief Executive Officer Aaron Regent with Chief Financial Officer Jamie Sokalsky on June 6, saying it was “disappointed” in the share performance after costs rose and production dropped. Since then the stock lost another 19 percent as the company missed earnings for four straight quarters amid delays and cost overruns at its Pascua-Lama project on the mountainous Argentina-Chile border.

At least five more gold CEOs lost their jobs this year.

Silver Alternative

Silver producers comprise three of the five biggest holdings in Wong’s $94 million Golden Prospect Precious Metals Ltd., led by Silver Wheaton Corp. In 2010, four of the funds’ five largest holdings were gold producers.

The NYSE Arca Gold BUGS (HUI) Index of gold mining companies has declined 24 percent in the past two years compared with a 4.4 percent gain in the MSCI World Index. The performance is a result of an “appalling track record of value destruction” by management teams, according to Evy Hambro, manager of BlackRock’s $12 billion World Mining Fund.

Hambro’s biggest holding is Rio Tinto Group, which only produces gold as a byproduct from copper mining.

Gold producers make up six of the eight worst performers in the S&P Global Resources index this year, with IAMGOLD Corp. (IMG), Harmony Gold Mining Company Ltd. and AngloGold Ashanti Ltd. (ANG) posting the biggest declines.

Share Performance

The Arca benchmark gold index fell about 12 percent this year compared with a 9 percent gain in gold’s price. The Bloomberg World Mining Index is little changed, while key materials such as iron ore and thermal coal dropped 11 percent and 16 percent respectively. Copper has gained 6.7 percent. Gold rose 0.2 percent to $1,713.5 an ounce by 8:07 a.m. in London.

Gold companies also face competition from gold-backed exchange-traded products, or ETPs, as investors bet on bullion without the operational risks from mining.

Billionaire investor George Soros boosted his stake in exchange-traded products backed by gold in the third-quarter. Soros Fund Management increased its investment in the SPDR Gold Trust, the biggest fund focused on the metal, by 49 percent to 1.32 million shares as of Sept. 30 from three months earlier, a U.S. Securities and Exchange Commission filing showed.

“We are at a watershed where the message from shareholders is very loud and clear: ‘We do not like what you do,’” said Markus Bachmann, Johannesburg-based manager of the Craton Capital Precious Metal Fund. “The costs are too high. The returns are not good enough.”

Inflation Slowing

To be sure, producers with good management and operations may be set to benefit from slowing cost inflation and rising gold prices, investors say. Gold may advance to $1,850 an ounce next year, according to the median forecast of 24 analysts, while cost inflation of 19 percent in the past 12 months may ease as the mining industry curtails expansion in response to faltering Chinese demand.

“There are signs that the cost inflation is contained, which will help the companies,” said Bachmann. “By and large we will see a healthier industry next year.

Kinross Gold Corp. (K), Canada’s third-largest producer, fired its CEO Tye Burt in August saying a change of leadership was needed to guide the company through capital allocation and project development improvements. In October, Kinross said CFO Paul Barry will leave the company.

Spending Reduced

‘‘Kinross was in fact the first of the majors to respond decisively in early 2012 to industry wide cost escalation — first by resequencing our growth projects to reduce our overall capital commitments and second by pausing a large build at our Tasiast expansion project in order to review smaller, less capital intensive options,’’ J. Paul Rollinson, Kinross CEO, said in an e-mailed statement.

‘‘As a third step after I assumed the role of CEO in mid year we reduced our capital spending by $200 million from our original 2012 forecast and are continuing to look for every opportunity to reduce costs,’’ Rollinson said.

Barrick said it’s continuing a review of its assets and has deferred about $3 billion in capital expenditure. All alternatives for investing shareholder capital will compete against each other to allow it to return more to shareholders in the future, repay debt and invest in assets.

‘‘Our overriding objective is to translate Barrick’s strengths and results into higher shareholder returns,” the company said in an e-mail. “We intend to deliver this through a disciplined capital allocation approach that maximizes risk- adjusted returns on investment and free cash flow.”

Overpaying, Writedowns

Newmont, the largest U.S. gold producer, was one of the first companies to respond to costs rising across the industry, the company said in a statement. That included cutting operating and administrative expenses and reductions in spending on exploration and advanced projects, it said.

Precious metal producers spent a record $53 billion on deals in 2010 and a further $43 billion last year as record gold prices spurred deals. That led to writedowns that are an admission of overpaying.

Newmont took a $1.61 billion writedown on its Hope Bay mine in Canada in February after putting the project on hold. The company gained control of the mine as part of its C$1.5 billion ($1.5 billion) acquisition of Miramar Mining Corp. in 2007. Kinross took a $2.49 billion writedown on its Tasiast mine in Mauritania, which it bought as part of its all-stock C$8 billion acquisition of Red Back Mining Inc. in September 2010. Agnico- Eagle Mines Ltd. wrote down its Meadowbank project in northern Canada.

“The lack of capital discipline is probably the biggest issue,” said Wong. “They’ve all relied on the gold price to bail them out, which actually is a very bad way to manage a business.”


Inside Citi’s 2013 Precious Metals Outlook

Posted on December 7, 2012 by Jared Cummans

As 2012 nears its close, investors are beginning to look toward a new year, one that will hopefully be less volatile for the commodity world. The precious metals world, in particular, saw a fair amount of volatility throughout the past year as this elite group of four has rarely had a quiet period. With the approaching fiscal cliff and economic uncertainty fresh in the minds of many, predicting where these commodities will end up next year has become a hobby of analysts all across the market.

Citigroup recently came out with their forecast for these four metals for the coming year, and they have some insights that investors may want to pay attention to prior to making allocations.

Gold to Gain…For Now

Gold’s average price in 2012 fell at $1,679/oz, and Citi expects the yellow metal to add to that tally for the coming year. Citing President Obama’s re-election and the continuation of a “dovish monetary policy,” the financial juggernaut has pegged gold to average $1,750/oz for next year, a gain of 4.2%. But Citi also predicts the metal to contract in 2014, back down to $1,655. Note that this would be the first annual loss for gold prices in 13 years.

Silver Not So Shiny

Jim Rogers may have called silver a better investment than gold, but Citi is not so sure that sentiment will hold true for the next 24 months. This white metal averaged $31.3/oz this year, and that is expected to dip to $31.0 for 2013 and all the way to $26.5 for the year after. The banking giant points out that silver will see a supply increase, but will be damaged by weakening supply in the industrial and jewelry segments.

Platinum Ready to Run

The other white metal averaged $1,556/oz this year, but that number is expected to climb fast. Citi is forecasting for platinum to jump to $1,675 in 2013 and then to $1,775 for 2014. All in all, that would mark a gain of 14% in two years if everything falls Citi’s way. Note that this means that the bank is predicting for platinum to overtake gold in price in 2014. Though platinum has been volatile because of the ongoing mining strikes in South Africa, “Citi projects a balanced market for platinum between 2012 – 2014 and a deficit from 2015 on.”

Palladium to Outshine the Rest

Palladium is a black sheep of sorts, as it very rarely gets the same attention that its three counterparts do. But for those who do pay attention to this metal, things seem to be quite rosy for the next few years. Citi thinks that this year’s average price of $638/oz will be shattered in the next two years, with prices shooting up to $744 in 2013 and $925 the year after. That would mark a 44% increase in just two years for this precious commodity. With auto markets recovering, Citi predicts that growing demand and tight supplies will lead to a deficit in the palladium market, pushing up prices.

Goldman’s Jim O’Neil – Where The Markets Are Heading in 2013




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Shares of Middle-Class Consumption 2000-2050


Commodity Prices