Month: November 2013

Source: Special to The Energy Report (11/19/13)

http://www.theaureport.com/pub/na/richard-karn-three-australian-miners-positioned-for-success

Sometimes the worst of times brings out the best in people. Such is the case in Australia’s mining sector, according to Richard Karn, managing editor of The Emerging Trends Report. While some companies are floundering or failing altogether, Karn has noticed a few shining exceptions. These are companies with innovative management teams that have approached project funding in this challenging environment as though it were a high-stakes chess game—and their maneuvers are astonishing. In this interview with The Mining Report, Karn takes a look at three mining companies that are defying the odds and may emerge victorious.

The Mining Report: Richard, last month you delivered a fairly upbeat presentation on specialty metals at the Mines & Money forum in Melbourne. Why are you so positive on the Australian mining space?

Richard Karn: Well, it wasn’t exactly upbeat. What I presented was an overview of the specialty metal sector drivers, which are still quite positive, and the impediments to getting Australian projects funded today.

I then presented three brief case studies of companies that are getting their specialty metal projects into production despite the hostile funding environment.

TMR: Are you predicting an imminent rebound in the Australian specialty metal sector?

RK: No, I am not. The shakeout in the resource sector in general, and the specialty metal sector in particular, does not appear to be over. The sector might be bottoming, but I think there is still more pain to come.

At the conference, Dr. Alex Cowie of livewire markets presented findings that showed 16 resource companies have been delisted from the Australian stock exchange in the last six months, and another 210 resource companies now sport market caps of less than AU$3 million (AU$3M) and on average have less than AU$860,000 (AU$860K) in cash and marketable securities. Without a miracle, many of those companies will go under as well because there is simply too little investor appetite at this time.

TMR: Were there any positive takeaways?

RK: What I was upbeat about was the way opportunistic management teams with good projects were employing a combination of pragmatism, flexibility and sheer determination to move their specialty metal projects toward production, despite the ongoing dearth of commercial project finance and a lingering, somewhat adversarial regulatory environment.

What’s happening is a few management teams are quietly excelling while the majority are floundering.

From an investment point of view, being able to differentiate between those specialty metals companies positioning themselves to succeed from those unlikely to survive allows capital to be concentrated where it has the best chance of earning a return.

That is not to say that these companies will be successful and make their shareholders buckets of money—just that they have been able to transition from the “story” stage to the “reality” stage of going into production; whether they can do so profitably remains to be seen.

But most companies in the specialty metal sector have been unable to get beyond the “story” stage, and investors are fed up with the fairy tales.

TMR: What makes Australian specialty metal projects so difficult to finance?

RK: The single biggest obstacle is that many specialty metals do not trade on an exchange, which means the metals are unhedgeable, which in turn means specialty metal projects cannot secure forward sales, which is how commercial banks make sure their loans are repaid. In fact, pricing is purposefully opaque and is often treated as a trade secret because it represents a competitive advantage. This problem is not specific to Australia.

Then there is the complex metallurgy and highly specialized, technical uses that are difficult to understand—even by end users themselves.

All too often, executives want the specialty metal regardless of price, but are unwilling to participate in putting specialty projects into production—despite the fact that such an investment would pay massive dividends going forward, especially in terms of reducing price volatility and improving supply chain security.

Some of these end users have learned a bitter lesson from a misplaced faith in slogans like “market forces will prevail,” which is frequently not the case with specialty metals.

We can make the case that many specialty metal projects would be better served by staying private as a JV between producers and end users, which in effect is how one of our brownfield projects has put itself into production.

TMR: That is a pretty significant set of hurdles to overcome. Under those circumstances, what companies have managed to secure funding, and what are they mining?

RK: The three companies I profiled in my presentation are Alkane Resources Ltd. (ANLKY:OTCQX; ALK:ASX), Carbine Tungsten Ltd. (CNQ:ASX) and Valence Industries Ltd. (VXL:ASX). They have managed project finance in distinctly different ways.

Alkane is actually putting two greenfield projects into production in the vicinity of Dubbo New South Wales, one gold, the other a suite of zirconium compounds, ferro-niobium and rare earth element (REE) products, and the company is utilizing different finance routes for each project.

Carbine Tungsten is wrapping up negotiations to commence the second phase of production from the historic Mt. Carbine tungsten mine in far north Queensland.

Valence Industries is about to start producing a range of graphite products from the stockpiled ore at the historic Uley graphite project, south of Port Lincoln, South Australia.

So we’re talking about two greenfield and two brownfield projects that have managed to fund their projects into production.

TMR: Could you tell us more about these different paths to financing?

RK: The first of Alkane’s projects is the AU$115M Tomingley gold project, which is a 2.2 g/t open pit operation on track to commence production in February 2014. It will produce 50–60,000 oz (50–60 Koz) of gold per year at an all-in cost of roughly AU$1,000 per ounce (AU$1,000/oz), which at the current gold price will throw off about AU$25M per year in cash flow.

Alkane operated the nearby Peak Hill gold mine profitably from 1996-2005, so it wasn’t much of a leap to make the decision to put Tomingley into production in 2011, even as the company was simultaneously pursuing its flagship mega-project, the Dubbo Zirconia project.

So back in mid-2011, when the gold price and the Australian stock market were more buoyant, Alkane provided Credit Suisse with the mandate to put together a AU$45M debt facility to help put Tomingley into production. One of the terms required the forward sales, or hedging, of 90 Koz of gold production, which was done at a strike price of AU$1,450/oz.

Then in 2012, Alkane made two decisions that resulted in Tomingley being developed without commercial finance. The first was a AU$100M capital raising in April; and the second was the sale of Alkane’s 49% interest in the McPhillamys Gold project for AU$70M in Regis Resource Ltd. (ASX: RRL) shares.

With the flexibility this liquidity provided, Alkane was able to respond proactively to the collapse in gold prices in April 2013: The company closed the 90 Koz gold hedge at a AU$7M profit and made the decision to self-fund the Tomingley gold project—all the while completing the bankable feasibility study (BFS) for the Dubbo Zirconia project and actively negotiating offtake and financing arrangements.

In fact, the cash flow from Tomingley will provide Alkane with additional flexibility as it puts together the financing package for its mega-project: the AU$1 billion (AU$1B), polymetallic Dubbo Zirconia project.

Briefly, the Dubbo Zirconia project is a unique zirconium, hafnium, niobium, tantalum, light and heavy rare earth elements (LREE and HREE) and yttrium project. The AU$1B project will pay for itself within roughly five years and will throw off more than AU$250M per year in free cash flow for more than 30 years—and potentially for as long as 70 years.

There are two key aspects to financing a specialty metal project of this scale: convincing market participants that Alkane’s products are of strategic long-term importance, and being able to deliver commercial product samples to potential end users. Supply concerns related to China’s supply dominance of a number of specialty metals has secured the former, and the demonstration plant Alkane has had running at Australian National Nuclear Research and Development Organisation since 2007 has supplied the latter.

So today, Alkane is looking to fund the Dubbo Zirconia project through a combination of Export Credit Agency (ECA) loans, strategic investments, standard commercial project finance and a potential equity raising.

Alkane is looking to fund roughly half of the Dubbo Zirconia project with an ECA debt facility. These are large sovereign institutional loans for the development of projects deemed to be of strategic importance to that country that are offered at very competitive rates and terms. The only codicil is that the project must buy that country’s products, employ its firms or have offtake agreements with companies operating in that country. And there is interest in the Dubbo Zirconia project from countries all over the world—effectively from any country that has to compete with China.

The Dubbo Zirconia project is held in a private company called Australia Zirconia Ltd., and Alkane is prepared to sell anywhere from 10–15% and potentially as much as 30–45% of interest for the project to key end users and/or sovereigns. The rationale behind the purchase would be for end users and/or sovereigns to participate more fully in the running of the company as well as to share in the enormous potential profits. From Alkane’s point of view, the larger the strategic investment, the less equity dilution would be necessary to fund the Dubbo Zirconia project through to production.

Alkane’s product suite has also put it in an enviable position in terms of securing standard commercial project finance for a portion of the required AU$1B. Generally, such finance is tied directly to offtake sales agreements, and to date Alkane has reached agreements with Austrian powerhouse Treibacher Industrie AG (private) for the purchase of the first five years of the Dubbo Zirconia project’s ferro-niobium production as well as a Memorandum of Understanding (MoU) with Shin-Etsu, Japan’s largest chemical company, to toll treat Alkane’s HREE and LREE chlorides with an option to buy any or all of the products. Negotiations continue with more than a dozen Japanese, Korean, North American and European companies for the 14–16 tonnes of annual zirconium compounds Alkane will produce. Once the zirconium compound agreements are finalized, the size and scope of commercial finance package will be determined.

Alkane anticipates that as the primary debt facilities are finalized, the market will reward the Dubbo Zirconia project’s successful financing with a dramatically higher share price, which would suggest a far smaller equity raising and minimal dilution.

Our take is that the cash flow and flexibility provided by the Tomingley gold project creates an additional avenue for the funding of the Dubbo Zirconia project, such as with the issuance of convertible notes; regardless of whether that option is chosen, having access to the bond market as an alternative can only serve to spur competitive tension between lenders.

TMR: Before we get into your other two companies, can you explain your fondness for brownstone projects?

RK: I confess that I am biased toward a certain kind of brownstone project because I’m partial to overlooked, under-valued assets that have been victimized by circumstance. In cases like those I profiled, these projects represent low risk, high return opportunities.

People tend to forget (and bankers tend to shy away from financing) a large swathe of brownstone projects. Many of these projects were shuttered not because they ran out of ore, or grades deteriorated or they were poorly managed, but because something unforeseen happened to kill the price of the metal they were producing.

In the case of tungsten and graphite, commencing in 1982 when Deng Xiaoping had China “turn outward” in the general direction of a market economy, projects all over the world were closed because they could not compete with the flood of inexpensive supply from China’s command economy. That was how China came to control so many specialty metal markets: The government more concerned with amassing foreign currency reserves and seizing control than they were with profit, and as we’ve seen, now that they have control, they are exercising it by squeezing supply. As a result, western companies are beginning to take security of supply seriously.

TMR: And this is opening the door for non-Sino sources such as Carbine Tungsten Ltd. and Valence Industries Ltd.

RK: Exactly. In essence, Carbine Tungsten Ltd. and Valence Industries Ltd. are models of perseverance and innovative finance.

Both have taken an incremental approach based on putting historic mines back into production in stages, counting on the quality of their product to help them progress toward full production. We have every reason to believe at this point that they will make it.

Carbine Tungsten has the Mount Carbine tungsten mine in far north Queensland, which operated last as a joint venture between the Roche brothers, Treibacher and Sandvik from 1973-87, with production averaging 0.16% tungsten trioxide.

With funding tight and commercial lenders loathe to commit funds to either mining or reprocessing operations, Carbine Tungsten has adopted a phased approach to putting its mine back into production on a “shoestring” budget.

In 2011 during Phase 1, the company undertook an equity raising to purchase a used processing plant for AU$1.1M in order to start reprocessing tailings from past operations. The goal was to demonstrate the quality of its tungsten trioxide product for potential clients.

In 2012, Carbine Tungsten brought in a new operations and management team with a successful track record led by Jim Morgan, and for the last 17 months it has been processing feed from the 2 million tons (2 Mt) of tailings that grade 0.1% tungsten trioxide. Production has stabilized at roughly 1500 metric tonne units (MTU) per month, which admittedly is nothing to write home about, but with the AusIndustry R&D Tax Incentive, it has been sufficient for the company to operate at breakeven.

Optimizations continue, and the company is currently weighing an $800K investment to improve recoveries and adapt to the wet conditions, which would both make operations more profitable and extend the remaining eight-month life of mine (LOM) to 16–18 months.

More importantly, however, the delivery and acceptance of the company’s tungsten trioxide product has cemented its relationship with offtake partner Mitsubishi Corp. (8058:JP), which has participated by means of two non-dilutive pre-paid offtake agreements of AU$400K each. To date, only one of these facilities has been drawn down, and Mitsubishi has purchased all of Carbine Tungsten’s production.

This product approval has proven critical in opening the door to a return to full-scale production, albeit incrementally.

TMR: What’s the next step for Carbine Tungsten?

RK: Carbine Tungsten is in the process of finalizing a roughly AU$15M funding facility from Mitsubishi, the terms of which are understandably being withheld, to progress to phase 2, in which the company expands the plant in order to process the roughly 12 Mt of mineralized waste material grading 0.075% tungsten trioxide.

The phase 2 plant expansion will be the backbone of a larger plant expansion planned for phase 3 and will incorporate x-ray sorting to improve the grade of the mill feed as well as recoveries. It will be more profitable than Phase 1. Environmental permitting is in place.

Importantly, Mitsubishi has committed to purchase 80% of Phase 2 production and 50% of Phase 3 production.

In 2012, Mota-Engil made a AU$2M investment in Carbine Tungsten toward Phase 3 for hard rock development, a feasibility study and various approvals to put the mine proper back into production. The JORC-compliant resource consists of 47 Mt at 0.13% WO3 with a high-grade zone under development that currently indicates 4.5 Mt at 0.32% WO3.

Phase 3 will see a final AU$40M expansion of the plant, and production in the vicinity of 2,650 tons per annum of tungsten trioxide would commence within 18 months of securing financing. With Mitsubishi committing to the purchase of 50% of production, Carbine Tungsten’s management is currently in discussions with potential offtake partners and debt funders.

Continued strides in expanding production combined with success in securing offtake agreements from a return to full-scale mining support management’s intention to minimize equity dilution going forward.

TMR: Tell us about Valence industries Ltd.

RK: Valence Industries Ltd. was spun off from Strategic Energy Resources (ASX: SER) and its sole project is the historic Uley graphite deposit in the southern extreme of Eyre Peninsula, South Australia.

Uley last produced in 1992–3 and was just getting the bugs worked out of its plant when the Chinese flooded the graphite market in 1993. The project has been in a care and maintenance phase since that time.

After a number of false starts over the last two years, not least due to the difficult market conditions, new management, led by CEO Chris Darby, appears to be on the verge of putting Uley back in production. They raised an initial AU$1M from a combination of existing and new shareholders, which is no mean feat in this environment, and the company is undertaking a compliance listing to raise AU$6.5–10.1M, AU$6.5M of which is fully underwritten by Patersons Securities. A prospectus was issued last week and is available through the company website.

Valence has also responded to a difficult funding environment by adopting an inexpensive, “proof is in the pudding” phased approach to redeveloping its brownstone project. The company will recommence production by processing the more than 70,000 tons of stockpiled ore grading 8–10% graphitic carbon. All permits and licenses are in place.

To date, Valence have secured Letters of Intent (LOIs) from at least five customers for 5,500 tons of graphite products, and the plant and mine site, which has undergone a AU$3M refurbishment over the last two years, is slated to resume production in Q1/14. Darby expects the stockpiled material to generate AU$11.5M in cash flow and a AU$5.5M net profit.

Similar to the route taken by Carbine Tungsten, Valence recognizes that product acceptance and long-term offtake agreements are key to its expansion plans. A BFS based on a detailed scoping study and augmented with production data for the return to full mining production is also due during Q1/14.

We have visited Uley four times over the last three years because the project has always interested me, both as an historic producer laying fallow and as a truly undervalued asset. Not only do the main deposits contain 6.4 Mt grading 7.1% graphitic carbon, it was a true low-cost, dig-and-deliver operation: Not once did the last operators of Uley have to do any blasting. Furthermore, we hiked extensively over its tenements, and just based on the graphite that was visible on the road banks and cuts and that was visible in virtually every hole we dug with a trenching tool, we believe there is substantial exploration upside.

Phase 2 at Uley will see the addition of a AU$34M modular plant capable of producing 50,000–60,000 tpa of graphite products. As long as they are economically feasible, the two plants will operate side by side. The detailed scoping study Valence produced earlier this year foresees as many as 14 graphite products based on flake size and purity ranging in price from $890–2,500 per ton, with production costs averaging $550 per ton.

What we are particularly intrigued by is the way Valence Industries has already secured indicative commitments to provide funding for AU$30M of the AU$34M. The company has made arrangements with firms in Singapore and the UK that will see each of the offtake contracts purchased at up to 90% of the face-value, side-stepping traditional commercial finance entirely, and implying a not unreasonable roughly 10% cost of capital. These funding tranches will be provided with each completed contract or on a “project needs” basis, and there is substantial potential for further offtake, royalty or debt facilities should the need arise.

TMR: So how would you summarize what these companies have in common?

RK: What these three abbreviated case studies show is that in order to get specialty metal projects into production today, management teams need to be flexible and pragmatic in their approach. The defining characteristics are product approval and pre-paid offtake agreements, both of which figure prominently in getting projects financed. Doing so with minimal equity dilution is a much-welcomed change as well.

TMR: Any final comments?

RK: I think there is reason to be somewhat optimistic about the outlook for the specialty metals sector in Australia. Deals are getting done. The best-managed companies are quietly excelling. Specialty metal demand, the crux of the opportunity, is increasing.

But it is more critical than ever to understand what you are investing in: Specialty metal price volatility will not disappear, so investing in the sector is not for the faint of heart, the impatient or those too lazy to do their homework. But for those who get it right, we fully expect outstanding returns.

As managing editor of The Emerging Trends Report, Richard Karn has a broad, multi-disciplinary background and a working knowledge of precious and specialty metals, as well as considerable research, analytical and writing experience. The first nine Emerging Trends Reports have been re-evaluated and updated published in e-book form, as Credit & Credibility. He has written for publications ranging from Barron’s, Kitco and Fullermoney to Financial Sense Online.

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By CentralBankNews.info
    Nigeria’s central bank maintained its Monetary Policy Rate (MPR) at 12.00 percent, as expected, but said it had not yet reached the end of its tightening cycle and may need to tighten in 2014 in response to potential headwinds from higher interest rates in the United States and Europe and domestic spending ahead of the 2015 elections.
   The Central Bank of Nigeria (CBN), which has held rates steady since October 2011, also said it’s monetary committee had adopted an inflation target of 6.0 percent to 9.0 percent in 2014 – the same as this year – and “reaffirmed its commitment to moving Nigeria firmly into being a low-inflation environment in the medium term.”
    Nine of the committee’s 11 members that were present voted to maintain rates while one member voted to cut the MPR rate by 50 basis points and raise the public sector cash reserve requirement (CRR) to 75 percent from 50 percent. Another member also voted for a 50 point cut in the MPR but to raise the public sector CRR to 100 percent.
    Nigeria’s inflation rate fell further to 7.8 percent in October, a low for the year and continuing the trend since early 2010 of falling inflation. The last time Nigeria’s inflation was at this level was in March 2008 when also hit 7.8 percent.
    But core inflation rose to 7.6 percent from 7.4 percent in September and the “Committee noted the potential risks to inflation of increased aggregate spending in the run-up to the 2015 elections.”
    The central bank expects a continued benign outlook for inflation in the first half of 2014, adding that global monetary conditions were likely to remain loose going into the first quarter of next year.
    “First, in the U.S.A., it is clear that the incoming Federal Reserve Chairperson, Janet Yellen, does  not see tapering as imminent given the on-going disputes around the budget and the weakness of economic recovery,” the CBN said.
    It also noted that the Bank of England (BOE) was not considering raising rates until unemployment falls to 7.0 percent, probably in late 2015; the European Central Bank (ECB) had only just lowered its benchmark rate while the Bank of Japan (BOJ) is likely to continue with quantitative easing until inflation reaches its 2.0 percent target.
    “For these reasons, the Committee does not anticipate any major internal or external shocks before its next meeting in January 2014,” the CBN said.
    Nigeria’s economy has been steadily expanding with Gross Domestic Product up by an annual 6.81 percent in the second quarter, up from 6.18 percent in the first quarter.
    The central bank forecast 2013 growth of 6.87 percent, down from a forecast or 6.91 percent in September, but up from 6.58 percent in 2012. The non-oil sector remains the major engine of growth, with output expanding by 7.95 percent in the third quarter compared with a decline of 0.53 percent for the oil sector.
    But the central bank cautioned that financial markets were “extremely fragile and susceptible to external shocks,” noting that excess crude savings have fallen to less than US$5 billion on Nov. 14 from $11.5 billion at the end of 2012 with Nigeria’s external reserves in excess of $45 billion only due to a massive inflow in portfolio funds.
    The central bank called on the government to rebuild buffers in the excess crude account by blocking fiscal leakages in the oil sector and raising oil revenues.
    “Clearly, the major risk on the fiscal side at present is not one of escalation of spending but loss of revenue from oil exports,” the CBN said.
    But the central bank is worried about the outlook for next year, saying the Federal Reserve is expected to start tapering its quantitative easing while interest rates will also rise in Europe, “both of which will lead to some pressure on the exchange rate and stock prices due to the impact on capital flows.”
    In addition, the CBN expects domestic spending to pick up in connection with elections.
    “As a result, the MPC is of the view that we are not yet at the end of the tightening cycle and may need to tighten further in response to these eventualities next year.”
    Like many other currencies, Nigeria’s naira fell sharply in May and hit a low of 163.7 to the U.S. dollar on Sept. 11, down 4.5 percent from 156.35 at the end of 2012. But since then the naira has strengthened and was trading at 159.1 earlier today, down only 1.7 percent on the year.

    www.CentralBankNews.info

By Sasha Cekerevac for Investment Contrarians

One of the most amazing things occurred the other day: a former Federal Reserve official apologized for being part of the quantitative easing program!

Andrew Huszar was an integral member of the Federal Reserve team put in place to launch the most aggressive, unprecedented quantitative easing program in the history of America.

Much of what Andrew stated won’t be news to my readers, as I’ve highlighted many of these points before.

But now that an actual Federal Reserve official is publicly stating what I’ve said all along—that the quantitative easing is only helping Wall Street, not Main Street—perhaps this can help gain traction in trying to put pressure on the Federal Reserve to come back to reality.

At the very least, I’m glad that Huszar is now publicly stating what we already know, that the quantitative easing program implemented by the Federal Reserve is “the greatest backdoor Wall Street bailout of all time.” (Source: “Confessions of a Quantitative Easer,” Wall Street Journal, November 11, 2013.)

Huszar’s inside assessment of the Federal Reserve’s program is that quantitative easing does not help the average American; instead, he says, “Wall Street was pocketing most of the extra cash.” (Source: Ibid.)

It doesn’t take a rocket scientist to understand the true impact (or lack thereof) of the Federal Reserve’s quantitative easing program.

Think about it: trillions of dollars have been pumped into the economy, yet how much has the U.S. economy really benefitted? Very little, I would say.

Most of the benefits of the trillions of dollars have gone to build new bubbles, such as the bond market and now the stock market.

The politicians, as well as the top one-percenters, don’t feel the need to do what’s really needed—implement structural changes in our economy—because they see the stock market going up. They’re feeling fine about the whole situation, as their wealth is growing.

But for the average American, the situation is only incrementally better than it was a few years ago.

My worry is that the U.S. economy and the markets have become addicted to quantitative easing. The longer the Federal Reserve keeps pumping up the balloon, the more painful it will be when it bursts.

This simply can’t go on forever, and I would urge readers not to necessarily panic, but just prepare for when the good times end.

This means markets that have been pumped up over the past couple of years are, for the most part, in unsustainable territory. I don’t think the stock market would be where it is today without the Federal Reserve’s trillions of dollars of quantitative easing.

And now we have a former Federal Reserve official explicitly stating what I’ve been warning about for months—that Wall Street is addicted to the quantitative easing program.

However, at some point, the Federal Reserve will begin to pull back, and the pain, I fear, will be much worse than people currently expect.

What should an investor do?

Because it’s impossible to predict the top of any market, one should still have a well-diversified portfolio. To that end, I would look for companies that are out of favor and, thus, have remained below the radar of the excess liquidity generated by the Federal Reserve.

I think having a hedge against both inflation and the U.S. dollar also makes sense, and this would include precious metals (gold, silver, platinum, palladium) as well as investments that profit from the emerging markets and outside of America.

I believe we are closer to the end than the beginning of quantitative easing by the Federal Reserve. With more people beginning to realize that this policy isn’t helping the average American, watch for any adjustment, as the process will be quite painful.

By CentralBankNews.info
    Global interest rates resumed their downward trend in October after stabilizing in September as central banks continued to cut policy rates in response to slower global demand, especially from emerging markets, weak inflation and the worldwide effects of acrimonious U.S. politics.
    The Global Monetary Policy Rate (GMPR) – the average rate of the 90 central banks tracked by Central Bank News – fell to 5.52 percent at the end of October from 5.58 percent in September and August, continuing the trend of declining official interests since November 2011.
    During October nine central banks cut their policy rates by a total of 306 basis points versus a total rate rise of 75 points by two banks, resulting in a net decline of 231 points, slightly below the monthly average this year of a 333 point decline.

    Global monetary policy in October was distinguished by Chile and Mexico’s surprise rate cuts along with Canada and Norway’s decisions to drop their tightening bias as the central banks took out insurance against slower global growth and any negative impact from U.S. political infighting.
    The looser policy stance came on the heels of the U.S. Federal Reserve’s decision in September to delay a tapering of asset purchases while it waits for clear signs of economic improvement. In retrospect, the Fed’s decision looked wise given the subsequent political impasse in Washington D.C. and the government shutdown.
    The main reason that markets were surprised by Chile and Mexico’s rate cuts was that there were no glaring signs of a sudden deterioration of economic activity.
    But with few inflationary pressures and global demand easing, the central banks of Chile, Mexico, Canada and Norway took the opportunity to head off the expected negative economic impact from the shutdown of the U.S. Federal government and the worldwide uncertainty created by the fear that the U.S. could default on its debt.
    “Growth of the United States may have suffered as a result of a partial closure of the federal government and increased uncertainty,” with the effect that downside risks to global growth had risen, said Colombia’s central bank last month.
    Neither Chile nor Mexico had warned markets that they were close to cutting rates, though rate cuts had been discussed by the board of the Central Bank of Chile in its previous five meetings.
    Explaining the rate cuts, both Chile and Mexico referred to the absence of global inflationary pressure and weak global growth, while Chile added that domestic demand, which had been holding up well, was set to decline.

    Buoyant financial markets enabled Chile and Mexico to cut rates as capital was once again flowing to emerging markets following the Fed’s September decision.
    Unlike fellow emerging markets of Brazil, Indonesia and India, which have raised rates to defend their currencies and curtail inflation, Chile and Mexico’s had maintained high enough interest rate differentials and stronger economic fundamentals to allow them to ease monetary policy in response to the prospect of weaker growth.
    In addition to Chile and Mexico, the other central banks that eased policy last month included Hungary, Jordan, Mozambique, Serbia, Sri Lanka, Tajikistan and Bulgaria.
     Rate cuts by Hungary, Mozambique and Serbia were largely expected as the banks were still in an easing cycle but Sri Lanka and Jordan’s easing surprised. Both Sri Lanka and Jordan cited the favourable outlook for inflation while Jordan added that rising foreign exchange reserves had also enabled it to cut rates.

     Brazil and India were responsible for the only two rate rises in October and both moves were expected by financial markets.
     It was Brazil’s fifth rate rise in a row, and although inflation has been trending downward, markets expect the Central Bank of Brazil to tighten further before it declares victory over inflation.
    It was India’s second rate rise in a row but the Reserve Bank of India combined an increase in its policy rate by a cut in its emergency borrowing rate as it continued to unwind the extraordinary measures it took in July to defend the rupee which had plunged in response to the outflow of capital ahead of an expected shift in U.S. monetary policy.

    www.CentralBankNews.info
 
 

By Saxobank

When will the Fed take the US Economy off Life Support and Start to Taper QE?

Is the Fed addicted to QE? This new infographic from Saxo Capital Markets asks why the Federal Reserve decided not to taper its QE Infinity strategy that it introduced in September 2012, even though US unemployment rates decreased and real GDP has gone up by 2.5% in the last quarter. Could the performance of the equity markets or US Treasury yields have affected the Fed Chairman, Ben Bernanke’s, decision on QE tapering? See the full infographic on Saxo Capital Markets’ site and join in the discussion with Saxo on Twitter.

Saxo Bank, the online trading specialists, recently picked up two awards at the Forex Magnates 2013 Annual Awards on 13 November. Forex Magnates hosted the ceremony in London, with 750 leading figures in the FX industry determining the award winners.

Saxo Bank was voted ‘Best Broker’ and ‘Best Proprietary Platform’ at the annual summit’s concluding ceremony, as attendees chose across fifteen categories presented by Michael Greenberg, Forex Magnates’ CEO. An award serves as a benchmark throughout the FX industry, taking into account a nominee’s accomplishments within different sectors of the industry.

Co-founder and co-CEO of Saxo Bank, Kim Fournais, received both prestigious awards, a recognition of the company’s success in the development of its innovative trading platforms.

Saxo Bank has built its trading platforms to enable users to manage entire portfolios from a single account, meeting the ever-changing needs of traders and investors in a continuously evolving industry. Private investors can access an industry-leading, multi-asset online trading platform and trade across the world’s major financial markets – including Forex, FX, CFDs, Stocks, Futures, Options and ETFs – from any location. Saxo Banks’ specialist investment services extend across three fully integrated trading platforms: SaxoTrader, SaxoWebTrader and SaxoMobileTrade.

Forex Magnates is a specialised forex news source which publishes ad-hoc research across the financial industry and hosts international summits for FX executives and influential industry figures.

Find out the full list of winners and read further coverage of the Forex Magnates Awards and the 2013 London Summit online.

By The Sizemore Letter

It’s that time of year again. Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) just released its latest 13F filing, which outlines its buys and sells over the past quarter.

While this data is always a little bit dated by the time it is released (Berkshire’s reporting date is Sept. 30) and it does not take into account non-traded securities, derivatives or short positions, these issues matter relatively little in the case of Warren Buffett.

The Oracle, after all, is known for taking large, concentrated positions and holding on to them for a while.

What Warren Buffet Has Been Buying and Selling

As of quarter end, Berkshire Hathaway had made a large new investment in Exxon Mobil (XOM) worth $3.5 billion, boosted its existing position in dialysis provider DaVita HealthCare Partners (DVA) by nearly a quarter, and reduced his holdings in ConocoPhillips (COP) and GlaxoSmithKline (GSK)

And since quarter’s end, Warren Buffett has been busy. Berkshire added yet more shares of DaVita on Nov. 8 and initiated a new position in Goldman Sachs (GS) on Oct. 8.

What It All Means

To start, Buffett still is bullish on financials. Financial services represent nearly 40% of the Berkshire traded stock portfolio, led by Wells Fargo (WFC), which alone accounts for 21% of the portfolio. Buffett is holding tight to IBM (IBM), his largest recent investment, despite its terrible performance this year. And Buffett — or one of his lieutenants — still is very bullish on DaVita’s dialysis business, despite its dependency on Medicare as a payer.

I am inclined to agree. DaVita has been a recommendation of the Sizemore Investment Letter since May.

I’m not privy to Berkshire Hathaway’s investment committee meetings, but it’s not hard to understand their bullishness. Dialysis is a business that is anything if not predictable. Patients must have the procedure done regularly, and there are generally only two ways off: a transplant or death.

Earlier this year, DaVita got a kick to the teeth when Medicare proposed reducing its payments by over 9%. Medicare and Medicaid together account for about two-thirds of revenues. But demographic trends practically guarantee that DaVita’s revenue stream will explode in the years ahead, even if margins are somewhat crimped.

Kidney disease can affect any American at any age, but it is a bigger problem among the middle-aged and elderly. According to the Kidney End-of-Life Coalition, 45% of the more than 320,000 patients receiving dialysis therapy in the United States are over the age of 60, and the fastest growing segment of the dialysis population to be among patients aged 75 and older.

Meanwhile, the largest cohort of the baby boomers still are in their early 50s and not too far removed from their physical prime. But the front end of this generation is in its late 60s, and with every passing year a larger number of baby boomers find themselves at risk of chronic diseases like kidney disease.

Buffett and his team appear to be betting that these demographic forces will outweigh the effects of a stingier Medicare program.

I, for one, agree.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar, but also which stocks will deliver the highest returns. This series starts Nov. 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.

This article first appeared on Sizemore Insights as What’s Warren Buffett Up To?

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By The Sizemore Letter

The rumors of securitization’s death following the 2008 mortgage meltdown have been greatly exaggerated.

Mortgage-backed securities and collateralized debt obligations are back with a vengeance, despite their role in bringing about the worst financial crisis in 100 years. Wall Street also has found new income streams to securitize — for instance, we now have bonds that are backed by the monthly rent payments thrown off by rental houses.

But in a truly new innovation, SolarCity (SCTY), the installer of residential and commercial solar power systems, has issued bonds back by the lease payments that home and business owners make in exchange for their solar power.

SolarCity is planning to raise $54.4 million in the issue, and Standard & Poor’s has given the bonds a rating of BBB+, which is investment grade, but just barely. (Why anyone still gives S&P’s credit ratings — or those of any ratings agency — any credence at all is another question for another day.)

Perhaps the most attractive feature of the SCTY bonds: They’ll be priced to yield 4.8%.

But don’t bother calling your broker — the current issue is only available to select institutional investors. Rest assured, though, if the issue is a success, more will no doubt be down the pike.

At first glance, what’s not to like? You’re getting a reasonably high yield from an investment in an industry that is making the world a greener, better place.

But I have some advice for you: Don’t even think about investing in these bonds or any like them … at least not any time soon.

If you want to be green, call up SCTY or one of its competitors and have a solar system installed on your roof. But don’t let your civic-mindedness lead you to make a bad investment decision. The bonds are unattractive at the yield on offer.

Solar power is a no-brainer as a public policy initiative, in my opinion. Had our leaders invested in it sooner, we could have avoided decades of massive trade deficits driven by energy imports. But SolarCity is not a profitable company, and neither are most of its competitors. Furthermore, this particular revenue stream — lease payments on solar systems — is new, has limited history, and to my knowledge, has never been tested in court.

And I haven’t even touched on political risk. Continued public embrace of solar energy depends heavily on tax incentives, which are subject to change depending on which party is running the show in Washington. You don’t want your investments at the mercy of a fickle government.

Finally, let’s look at alternatives.

I recently wrote a favorable article about REITs in which I recommend Realty Income (O), a conservative triple-net REIT that owns things like pharmacies and FedEx distribution centers.

Realty Income has been a dividend-paying and dividend-raising monster since going public in 1994. In 19 years, it has made 519 dividend payments and hiked its dividend 73 times, and it currently pays a dividend yield of 5.4%.

Yes, Realty Income is a stock and has equity risk, whereas the SolarCity bonds do not.

But answer me this: What seems riskier to you: a stock that has made 519 consecutive dividend payments, backed by a conservative property portfolio that survived the 2008 meltdown without a scratch, or a new bond issued by a young, unprofitable company and backed by an unproven revenue stream?

I don’t know about you, but I’m taking the REIT.

Yes, there is equity risk. But what of it? If you’re buying for the income stream, market movements are a tolerable nuisance.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long O. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar, but also which stocks will deliver the highest returns. This series starts Nov. 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.

This article first appeared on Sizemore Insights as SCTY – Don’t Get Burned With Solar-Backed Bonds

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By John Whitefoot for Daily Gains Letter

On the surface, the S&P 500 third-quarter earnings season is looking pretty good. The S&P 500 is up 25.4% year-to-date and is up 32% year-over-year. So far so good!

By the end of the first week of November, of the 446 companies on the S&P 500 that reported third-quarter results, 73% said they beat their earnings projections. All is well on Wall Street and Main Street! Numbers don’t lie! (Source: “Earnings Insight,” FactSet web site, November 8, 2013.)

Or do they? That number is pretty solid, at least until you factor in a record 83% of all S&P 500 companies revised their third-quarter earnings guidance lower. It’s a little easier to clear a hurdle when you significantly lower the bar. But sadly, not even that was enough for some S&P 500 companies.

What about revenues? Roughly half (52%) were able to beat revenue projections. The percentage of S&P 500 companies that beat revenue estimates is above the fourth-quarter average of 48%—but again, everything is relative. On the other hand, third-quarter sales are below the 59% average recorded over the previous four years.

What do these numbers mean? That a large percentage of S&P 500 companies are reporting better-than-expected earnings on less-than-stellar revenue. That’s a pretty tough equation to figure out, unless you toss in cost-cutting measures and share repurchase programs.

It’s going to be difficult for S&P 500 companies to continue to wow investors with artificially high earnings if sales remain stagnant. The writing is on the wall.

Of the 85 S&P 500 companies that have issued earnings-per-share (EPS) guidance for the fourth quarter, 73—an eye-watering 86%—have issued negative EPS guidance. Again, it’s all relative; the five-year average of S&P 500 companies issuing negative fourth-quarter earnings is just 63%. That’s a huge discrepancy by anyone’s standards.

And 2014 isn’t looking any rosier. The best way to describe U.S. economic growth in 2014 is “tepid.” According to some economists, the U.S. should have been able to achieve close to, or even above, 2.5%–3.0%; however, it’s been stuck below two percent and is expected to stay there for much of 2014. (Source: “Lukewarm Economic Recovery Expected to Continue in 2014, Says IU Kelley School of Business Forecast,” Newswire.com, November 6, 2013.)

These third-quarter results, fourth-quarter projections, and 2014 forecasts should be a wake-up call for investors, not to avoid the stock markets, but rather, to ignore the white noise surrounding propped-up earnings.

While neither exhaustive nor bulletproof, here are a few fundamentally strong companies that have been reporting good revenue growth over the last five years.

Green Mountain Coffee Roasters, Inc. (NASDAQ/GMCR) has reported five-year sales growth near 40% and is up 44% year-to-date. The company announced that third-quarter revenue increased 11% year-over-year, while third-quarter earnings were up 65% at $0.76 per share.

Deckers Outdoor Corporation’s (NASDAQ/DECK) five-year sales average is just 16%, and the company is currently trading up 83% year-to-date.

Meanwhile, iGATE Corporation (NASDAQ/IGTE) has reported five-year sales growth near 30% and is up 104% year-to-date. iGATE said that third-quarter revenue increased by 8.2% year-over-year, while earnings climbed 11.1% to $0.30 per share. (Source: “iGATE Reports Strong Third Quarter,” iGATE web site, October 10, 2013.)

Sustained earnings growth can only come on the heels of strong sales. In this economy, that’s a tough order; unemployment is up, wages are stagnant, and debt levels are high. But with a little due diligence, it is possible to find solid companies bucking the weak sales growth trend.

http://www.dailygainsletter.com/investment-strategy/three-strong-stocks-for-lean-times/2115/

London Gold Market Report

from Adrian Ash

BullionVault

Tues 19 Nov 08:40 EST

WHOLESALE QUOTES for gold bounced from 1-week lows beneath $1270 per ounce Tuesday morning in London, turning higher as Asian and European stock markets failed to extend Monday’s rise to new all-time highs in US equities.

UK investors wanting to buy gold saw it dip overnight within £15 per ounce of end-June’s three-year low at £775.

Euro gold also rose from 1-week lows hit overnight as the single currency edged back against the Dollar despite better-than-expected ZEW sentiment data from Germany.

 “Physical bids were absent on the break lower,” says one Asian dealer.

But “there’s been a slight uptick in demand,” counters today’s commodity note from Standard Bank’s analysts.

 Not as strong as in June, July or August, says the note, the rise in Asian buying “is certainly stronger than a week ago” following Monday’s 1.5% drop.

 Chinese premiums to London prices rose today above $4 per ounce on the Shanghai Gold Exchange, even as Yuan prices shed 1% by the close of business.

 However, “We maintain that physical demand alone cannot push gold substantially higher,” writes Standard Bank’s Walter de Wet, “[not] while monetary policy, in especially the US, is normalising.”

 US Fed policy will drive 2014 gold prices, according to separate analysis from TD Securities’ Bart Melek and Citigroup analyst Edward L.Morse.

 “With macroeconomic news perhaps bringing mixed fortunes for gold,” adds Jonathan Butler at Japanese conglomerate Mitsubishi, “the overall bearish trend could well continue.”

 Western investor selling on Monday saw a fresh 57-month low in the volume of gold bullion needed to back shares in the SPDR Gold Trust (ticker: GLD).

 The world’s largest gold ETF shed 1.2 tonnes to cut its holdings below 865 tonnes, a level last seen when the Fed’s quantitative easing program was beginning, in February 2009.

 “It’s important not to remove support,” said New York Fed president William Dudley last night in a speech, “especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates areat zero.”

 But Philadelphia Fed president Charles Plosser, a long-time critic of the Fed’s quantitative easing policy, meantime repeated his call for the US central bank to announce a total sum for QE, tapering its monthly money-creation and bond buying to end purchases when that level is reached.

 “We cannot continue to play this bond-buying game by ear,” Plosser told an audience at the Risk Management Association on Monday.

 “[We] risk the Fed’s credibility while creating lingering uncertainty about the course of monetary policy.”

 Silver today tracked but extended the move in gold, rallying from a new 3-month low overnight at $20.24 per ounce to reach $20.44 by Tuesday’s Fix in London, set at the lowest price since 9 August.

 New gold imports to India, the world’s No.1 consumer but overtaken by China in 2013 thanks to aggressive anti-gold rules from government, were meantime delayed according to dealers, as logistics were focused on exporting metal.

 “We have to understand,” Reuters quotes a private bank dealer as gold also rallied from 1-week lows in the Rupee, “that it will be slow process of consignments for both exports as well as domestic consumption.”

 India’s government is currently seeks to clarify and enact a strict 80:20 rule for new gold imports, imposed in the summer and setting a 20% re-export minimum on all quantities of gold landed.

Adrian Ash

BullionVault

Gold price chart, no delay | Buy gold online

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can fully allocated bullion already vaulted in your choice of London, New York, Singapore, Toronto or Zurich for just 0.5% commission.

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.