March 17, 2016

Gold: Trumped?

Negative interest rates brought negative moves. Global markets are in turmoil. Gold rallied from
the dead after three years in the wilderness with its best start in more than 30 years. Gold is up 19
percent this year as risk adverse investors sought safehavens over the angst of a slowing global
economy despite the printing of trillions to bring near zero interest rates, then zero and now
negative rates. Markets are concerned that the round of negative interest rates means central
banks have exhausted their options and there is growing skepticism that it wont be enough to
revive the global economy. The Federal Reserve put on hold any move to increase rates after its
miniscule 0.25 percent increase was met with collapsing markets and a weakened greenback.
The dollar too has peaked because of concerns about Americas faltering economy and doubts
they can raise rates again, particularly in an election year.
Negative interest rates last seen in the Great Depression, has turned the world topsy-turvy with
everyone paying for the privilege to save and borrowers, paid for borrowing. But why should one
pay a penalty to leave their savings in the bank, when they could always keep it under the
mattress? Cars alone are now financed with low or zero-interest loans and like the subprime
1

days, a trillion dollars were packaged into five year paper but 60 day delinquency rates are at the
highest level in two decades. It is not the level of rates that is worrisome, it is lack of confidence
in money and what the central banks are doing. Paper money is simply dying.
Since 2008 our politicians have left the tough stick handling to our central banks. Fiscal policies
were absent. The G20 meeting in Shanghai ended in failure. America, seems stuck at two percent
growth while the oil sector has put a dent in the worlds economy. Moreover, US policymakers
are stuck in election mode and no one can make the courageous decisions. China, now the
worlds second largest economy still grows but not enough it seems to pull the rest of the world
along. And, Chinas foreign exchange reserves have been falling as it dips into its massive
reserves to cushion a declining renminbi, an extension of the stealth currency war where
countries depreciate their currencies to help exports. Running out of ammunition, we believe the
adoption of negative interest rates is an extension of this beggar thy neighbour currency war
which moves the problem from one country to another.
By unleashing unconventional monetary practices as early as 2000, global central banks inflated
stock and bond prices which imploded in 2008 and again inflated another bubble such that
governments today face another solvency crisis. The big banks have so far taken the brunt of
negative rates because of the difficulty of passing on the costs to their customers. The cost of
insurance against bank defaults widened over worries of contagion since under negative rates,
the banks traditional spreads are reduced, challenging a still fragile banking industry. Cash is
no longer king. Central banks once the stewards of our money have become creators of money
and, the latest move simply pushes currencies lower with unintended consequences. But zero
interest rate arent the reason for subpar economic growth.
Central Banks The Wizards of Oz?
The European Central Bank (ECB) loaded its bazooka again, introducing more rate cuts and
more asset purchases, despite neither working in the past. This time Mr. Draghis bazooka shot
blanks. Running out of ammunition, central banks appear to have lost their magical powers to
boost global growth. Describing central banks, Chinese central bank governor Xiaochuan
recently explained, they were neither a god nor a magician. Then Neil Kashkari, head of the
Minneapolis Federal Reserve described the Feds, Wizard of Oz routine that we are so
mysterious and you cant understand what we are doing. He said, and that really hurt trust
between the people and the institution.
The dilemma for central banks is that their creation of money was unable to boost spending or
economic growth whilst debt kept mounting. Debt on debt is not good. Confidence in our central
bankers has declined. In fact, the solution today seems very similar to the Latin America solution
where cash is handed out, then capital controls with price freezes are imposed followed by
currency depreciation and hyperinflation. Instead our central banks would be better off
purchasing that debt now, which is trading at a discount to extinguish these liabilities.
After years of quantitative easing, five countries including Switzerland, Denmark, and Sweden
and now Japan, pay negative returns to investors. While some central bankers hoped quantitative
easing would spur spending, their economies are still weak despite racking up more than $7
trillion of debt. Between 2008 and 2015, the Feds balance sheet jumped over $5 trillion or some
26 percent of GDP. That amount is equivalent to the value of all the worlds coins and bank
2

notes. The Bank of Japan's assets are at a whopping 70 percent of GDP. The debt load of the
banking system, the central banks surrogates has grown so much that Europes Deutsche Bank
AG has derivative and asset exposure equivalent to the worlds GDP, supported only by a skinny
capital base of $30 billion or only 11.1 percent. No wonder investor anxiety and credit default
swaps are widening to levels not seen since 2009. Dj vu.
But people arent stupid if you charge them to hold their savings, they wont necessarily stuff
their mattresses but will look for alternatives to hoarding thus the move to gold, oil and lately
iron ore!
The Donald
Investors can only look to the United States where there is a cry for change amid a rising tide of
economic anger paving the way for Donald Trump, likely the next Republican nominee for
president. He has been called a bully, fraud and a threat to democracy by mainstream pundits,
media-types as well as his own GOP party. But rather than worry about his message, we should
listen to those who are voting for this establishment outsider and their rationale for a need for
change. Indeed, eschewing political correctness, his populist message attacking the mainstream
is not new and is just timeworn politicking or marketing. His remedy though to shrink big
government and big business has resonated among this disaffected class who want the canon of
often promised jobs, health care and security. What is different is that the Donalds message
focuses on the messenger unlike the last president and others before who offered hope and
change but delivered neither. What they got was more spending, more debt, more promises and a
widening gap between rich and poor. Many of his supporters are the blue-collar and middle-class
supporters, fed up with the status quo after being ignored and part of the million Americans
without jobs. Trust was betrayed in a statement against political correctness.
On the other side, Hillary Clinton, a key member of the party establishment, is set to sweep aside
populist Sanders. As a result, in the ultimate reality show, we are to witness a battle between
extremes, the political class, billionaires and sexes. And the message?
Oscar Ameringer (the German-American socialist editor) cynically wrote, politics is the gentle
art of getting votes from the poor and campaign funds from the rich, by promising to protect each
from the other. The Donald wont be the only politician to back away from promises. But the
irony is that this GOP reality show has broken out into open intercine warfare, attacking not the
Democratic nominee but their own Republican candidate, threatening to use the very party
establishment and elites to usurp the democratic process. How undemocratic.
Nonetheless, prepare for a volatile summer and likely, a brokered convention. The voter
frustration has also spilled over into investor anger and the loss of trust in our markets,
currencies and their creators. There is even a loss of faith in our public institutions. Here again,
our central bankers have failed. Markets are looking for change, reform and a store of value in
our money since mattresses cant hold enough. Gold is a good thing to have.
Gold is a Beneficiary of Negative Interest Rates
Central banks around the world have tried to foster growth by aggressively printing money
which of course devalued their currencies causing a stealth accumulation of physical gold by
shrewder central banks. The numbers are startling. Since 2007, the Federal Reserve has created
3

more than $7 trillion from the thinnest of air, much of it generating negative returns. Over the
same span of years, America's public debt has jumped to $19 trillion from $9.2 trillion. Negative
interest rates are not the solution. America's trading partners as before, awash with overvalued
depreciating dollars have been buying massive supplies of cheap gold. Last year central banks
bought almost 600 tonnes or 14 percent of demand. The wiser central banks have been buying
gold. China and Russia has purchased gold for eight years in a row. China has the worlds fifth
largest gold holding ahead of France, Italy and Germany. Since 2010, central banks have become
net buyers of gold. The foolish ones like Canada and the UK sold their gold reserves.
Currency wars happened twice in the last century and are a reflection of paper currencies
collapsing in value. A gold
standard
or
quasi-gold
standard
is
inherently
invaluable. Politicians can't
inflate the money supply
under a gold standard, and
the supply of gold cant be
expanded by the push of a
button.
Golden Solution
For thousands of years, gold
had a long-term record as a
storehouse
of
value.
Ironically, the world's central
banks have created record
demand for physical gold. At one time, central banks acted as clearinghouses or custodians for
gold. Countries placed their bullion on deposit at the central bank receiving a claim that could be
redeemed upon demand. Gold would be transferred from warehouses to warehouses in London,
New York, and Fort Knox. Wars were fought and gold was transferred from country to country
in order to finance those wars and later, repatriation. Central banks were the conduit.
In 1971, President Nixon took the US off the gold standard in response to the flood of dollars
that were seeking redemption into gold. Americas rise and use of the dollar as a reserve
currency became the cornerstone of money as a medium of exchange. However that cornerstone
is built on layers of debt. The Federal Reserve was granted enormous powers following the
monetary collapse in 2008, caused in large part when they lowered interest rates from 6.5 percent
in 2000 to a paltry 1 percent in 2003. This easy money sparked the housing boom and crisis.
Once again, the Federal Reserve has inflated another bubble, expanding its balance sheet by
creating money out of thin air. Of concern is that the largest debtor in the world now depends on
foreign capital to finance its large fiscal deficits and an avalanche of dollars from America's
IOUs already has caused a significant loss of value.
The allure of the gold standard is its supply is limited, serving to constrain central banks from
printing money and constraining profligate government spending. To be sure, with the
likelihood that we might have to stuff our mattresses with our savings, a role for gold is
emerging. In fact there are moves afoot to bring back a quasi-gold standard to back multi4

currency blocs such as Asian currencies or petrodollars similar to the euro which is linked to a
basket of currencies and tied to gold.
China the end of Americas Financial Hegemony
While America is the worlds largest debtor, China is the worlds biggest creditor. The
geopolitical rivalry between China and United States continues even during an election year. The
US views China as a rival and heated up trade disputes (steel) and skirmishes over the South
China Seas. Were China to visit Cuba with its armada, the United States surely would certainly
oppose such a move. The introduction of the Trans Pacific Partnership (TPP) without China is
another example. While the recent G 20 meeting in Shanghai underlines the importance of
cooperation, it was interesting to note that so little was accomplished. Despite this
gamesmanship, China desires to maintain a stable and constructive relationship with the United
States but to reduce Americas financial hegemony. China also opened its financial markets
anticipating an eventual two way flow of funds. China so far has played a supporting financial
role but we expect that the opening up of its markets, the establishment of institutions and its
insatiable appetite for reserves (including gold) will redraw the financial markets map. Chinas
bond market is the third largest bond market and has opened up to foreign money. While Chinas
surprise devaluation caught many offside, we believe China does not want to put all the eggs into
the dollar basket. Chinas push to include the renminbi in the IMFs monetary basket and Hong
Kong Connect linking its stock exchange is part of an attempt to open up its capital markets.
And of course, Americans should remember that China, Russia and Taiwan are the large holders
of some $13 trillion of US Treasuries outstanding and despite their differences remain major
holders. However, the recent dip in China's reserves to support the renminbi underlines their
importance and America needs these players to purchase and hold onto that debt. Money is a
commodity and trillions ebb and flow. The Fed is supposed to be the steward of the dollar which
is still the world's reserve currency. However since the Fed has flooded the world with dollars
amid growing debt, deficits and political dysfunction, Americas dominance has deteriorated
such that the rest of the world has pursued a defensive strategy in order to keep their currencies
from rising too fast. Debt is the dollars Achilles heel. China holds 1,762 tonnes of gold or only
1.8 percent of reserves. We believe Chinas ongoing gold purchases are part of its desire to make
the redback one of the worlds major reserve currency move over dollar.
Recommendations
The age old law of physics of supply/demand leaves the dollar only one way to go- down. We
believe gold will continue to rise as long
as the Fed and other central banks
continue to print money in the quest to
keep rates down. Thus, the rise in gold
this year comes as no surprise. Negative
rates and quantitative easing only
perpetuated this currency war, providing
an underpinning to gold. In an election
year, dollar devaluation is a certainty.
We believe golds second leg of a 20
year bull market has only just begun. We
see $2,016 in 2016.
5

The mining community gathered in force in Toronto during PDAC and this year the mood was
more upbeat because of the uptick in gold. We believe that the miners major asset is their in-situ
reserves. We calculate that the mining industry has about 22,000 tonnes of reserves and that the
recent bear market has made those reserves
more valuable, particularly since mining
costs have been reduced. Those reserves are
unallocated and thus we expect healthy
M&A activity because it is cheaper to buy
ounces in the marketplace than to explore.
We continue to recommend investment in
gold stocks because of their leverage to the
gold price and the fact that most are now
earning money producing that ounce of gold.
We continue to recommend the large liquid
mining stocks such as Barrick and Agnico
Eagle because of its emphasis on a back to
basic strategy focused on profitability, widening margins and organic growth. Debt reduction
will continue which is a good thing. The intermediates like B2Gold and Eldorado are attractive
as they have reduced costs and possess attractive growth prospects. Noteworthy is that the
mining industry largely did not replace reserves last year with only two of ten miners replacing
reserves (Centamin and Detour). Goldcorps and Yamanas reserves fell by 18 percent. We also
believe the more junior projects with early stage development projects should also be looked at
and are well-positioned when capital trickles down from the majors. We like McEwen Mining
here.
The gold mining industry wrote down a record amount last year as acquisitions backfired. The
industry unloaded assets but have begun to earn money on every ounce they produced. The
dilemma for the mining industry is who will finance the industry? We believe the Chinese as part
of a going out strategy will be among the new cheque writers as it remains cheaper to buy
ounces on Bay Street than to explore. Valuations are also cheap with the lowest valuations
(under $200 per ounce) for in-situ reserves.

Company
Agnico-Eagle
Barrick
Centerra
Detour Gold
Goldcorp
Iamgold
Kinross
Newgold
Newmont
Yamana

Reserves the Industrys Lifeblood

Reserves (P+P)
Symbol
Direction
mm
AEM
19.1

ABX
91.9

CG
8.4

DGC
16.4

G
40.7

IMG
7.7

K
34

NGD
15
NEM
73.7

YRI
16

% change

Assumption

5
1.2
9
10
18
11
1.2
unch
10
18

1,200
1,000
1,200
1,200
1,100
1,200
1,200
1,200
1,200
1,200

Barrick Gold Corp.

The worlds largest gold producers results were above expectations and the shares were among
the best performers. Barrick derisked its balance sheet by paying down $3 billion of debt last
year and targeted another $2 billion which will likely be achieved through asset sales (Acacia,
Kalgoorie or Zaldivar), free cash flow and cash on hand. Barrick has 12 operating mines with
five tier one core largely focused in the Americas producing between 4.5 5 million ounces
through 2020. Last year, Barrick reported a maiden resource of almost 6 million ounces for the
Alturas project comparable to Barricks Veladero in Argentina. Looking ahead, Barrick expects
organic growth from its portfolio of Lagunas Norte, Cortez underground, Turquoise Ridge and
growing Goldrush. Barrick could add another one million ounces by 2020 with the development
of these projects. Barrick produced 1.2 million ounces in the fourth quarter but boosted reserves
by almost 9 million ounces despite the sale of 3 million ounces. We continue to like the shares
here.
Primero Mining
With mines in Mexico and Canada, Primero reported a $100 million impairment charge due to
the expensive Black Fox acquisition yet produced 200,000 ounces. The San Dimas mine in
Mexico is being expanded but is caught in a tax dispute with the Mexican tax authorities which
the company said that they would defend. However, the ongoing discussions will likely drag on.
Primeros Black Fox, in Ontario was a disappointment and consumed management time. Primero
has about $70 million of liquidity (cash $40 million) and $75 million of common debentures
maturing in 2020. Primero produced guidance between 260,000 280,000 ounces at AISC at
$900 an ounce. The Black Fox expansion of Gray Fox was wisely put on hold, however the
company replaced mine depletion at both mines. We prefer other situations here.
Kinross Gold Corp.
Kinross reported improved results and guidance of 2.7 million ounces to 2.9 million ounces with
the acquisition from Barrick of the Bald Mountain mine and the balance of Round Mountain to
replace reserves which declined almost 7 percent last year. Kinross expects to release a Phase I
feasibility study at Tasiast which will add grinding capacity and boost nameplate capacity. At
Tasiast, Kinross troubles continue as US authorities, including the Justice Department and SEC
investigate its dealings in Mauritania and Ghana. Still, Tasiasts large stripping ratio and
infrastructure price tag suggests that Tasiast will remain an albatross around management's neck.
Although we like the increase of its North American footprint, because it reduces Kinross's
healthy exposure to Russia, its growth opportunities are limited. We prefer B2Gold here.
Goldcorp Inc.
Senior producer Goldcorp reported disappointing results including a whopping impairment
charge and an 18 percent drop in all important reserves. It appears the wheels are falling off the
Goldcorp wagon as they also surprised the Street with lower earnings, reduced dividends and
lower guidance due to a slower ramp-up at Eleonore in Quebec, lower output from Red Lake and
a surprise shortening of the life at high cost Los Filos in Mexico which mined gold at $2,000 per
ounce. In addition it appears that flagship Penasquitos shelved expansion and cutback at
Cochenour hurt Goldcorps ambitious plans. Newly minted CEO David Garofalo has shaken up
its management ranks and flattened reporting lines. By downloading responsibility to the mines
management, he emulates Barrick's very successful management shakeup. We believe Goldcorp
7

will have to resort to a similar back to basic approach. Goldcorps balance sheet is in solid
shape and they can afford the restructuring. We believe there are still downside surprises at
Cochenour and thus must alter its Ontario strategy. Growth will be a problem. We prefer Barrick
at this time.
Detour Gold Inc.
Intermediate gold producer, Detour produced 146,000 ounces in the quarter for a total output of
506,000 ounces at $775 per ounce cash cost at 100 percent owned Detour Lake in northern
Ontario. Although reporting a net loss of $163 million, Detour generated free cash flow and
plans to produce 540,000 ounces to 590,000 ounces this year. Mill throughput exceeded 55,000
tpd. Only 20 percent of Detours large land package is explored and thus Detour has promising
potential upside. Detour released a twenty three year LOM plan calling for average production of
617,000 ounces over the LOM over the next three years and 655,000 ounces over the LOM.
Detour increased its reserves by 10 percent to a whopping 16.4 million ounces. Detour is a longlife, large scale producer that would make a tasty tidbit for the ongoing consolidation. The only
overhang is the $500 million convertible maturing in late 2017 of which most could be paid out
from cash on hand and cash flow. We like the shares here.
McEwen Mining Inc.
McEwen Mining exceeded guidance by producing almost 154,000 gold equivalent ounces last
year from the El Gallo mine in Mexico and 49 percent San Jose mine in Argentina. McEwen
plans to produce 141,000 ounces this year at $950 AISC. McEwens Gold Bar project is in
Eureka county, central Nevada and is an open pit development situation with a positive
feasibility study. Cash flow was positive and McEwen has a healthy treasury of $40 million of
cash, investments and precious metals. McEwen importantly has no debt. With 25 percent held
by Rob McEwen directly, we like the shares here.
John R. Ing
jing@maisonplacements.com

17/03/2016

MAISON PLACEMENTS CANADA INC.

$/oz
All in
52 Week Range Shares Production oz (000)
(Mil)
15-Mar
High
Low
2014
2015 2016E Cost
215.3 1400
47.84
51.5 27.63
1671 1600 810
18.98
19.99
7.88 1,100.4 6200
6100 5300 831
Price

Symbol

Agnico Eagle
Barrick Gold
B2 Gold Corp

AEM

Centamin PLC
Centerra Gold
Eldorado Gold
Detour Gold

CEE

1.70

1.83

CG

6.33

8.67

Goldcorp
Iamgold Corp
Kinross Gold
McEwen Mining

New Gold
Newmont Mining (US$)
Yamana

Rating:

ABX
BTO

1.90

2.28

2015

2016E

PE Multiple
2015

2016E

Market

Market

Stock

Cap $Mil

Cap/oz

Rank

0.43

0.11

0.28

434.91

170.86

10,300

6,164

0.65

0.30

0.75

63.27

25.31

20,886

3,424

0.08

0.15

0.15

12.67

12.67

1,757

3,563

924.5

384

0.96 1,152.4
236.4

377

440

470

980

0.08

0.07

0.10

24.29

17.00

1,959

4,452

620

536

510

910

0.30

0.25

0.28

25.32

22.61

1,496

2,792

0.85

5.51

493

540

900

Per Share Earnings

2014

ELD

4.35

6.69

2.66

720.7

789

723

630

950

0.19

0.04

0.06

108.75

72.50

3,135

4,336

DGC

19.72

22.82

10.02

168.8

460

506

580

910

(0.35)

(0.15)

0.10

(131.47)

197.20

3,329

6,579

21.43

24.87

13.54

813.5

2800

3500

3100

850

0.61

0.10

0.24

214.30

89.29

17,433

4,981

391.3
1.50
1.79 1,144.0
0.84
298.0

844
2600
140

806
2500
154

780 1100
2800 900
141 900

0.08
0.17
0.12

(0.40)
(0.08)
0.05

(0.40)
(0.05)
0.10

(7.00)
(49.50)
48.20

(7.00)
(79.20)
24.10

1,096
4,530
718

1,359
1,812
4,664

1
2
5

IMG
K
MUX

2.80
3.96
2.41

3.70
4.64
2.84

NGD

4.82

5.38

2.52

317.8

380

435

400

860

0.09

(0.02)

0.02

(241.00)

241.00

1,532

3,521

NEM

26.37

27.98

15.39

449.8

5200

5000

4700

980

1.10

0.98

1.10

26.91

23.97

11,861

2,372

YRI

3.97

5.28

1.89

937.7

1300

1275

1230

850

0.14

(0.08)

0.01

(49.63)

397.00

3,723

2,920

5 Strong Buy 4 Buy 3 Hold 2 Sell 1 Strong Sell

Gold Price
2013 $1,410
2014 $1,200
2015 $1,200
2016E $1,300

John R. Ing
416-947-6040

Analyst Disclosure
Rating:
5 Strong Buy 4 Buy 3 Hold 2 Sell 1 Strong Sell
Company Name
Trading Symbol
*Exchange
Barrick Gold Corp
ABX
T
Eldorado
ELD
T
Centamin
CEE
T

Disclosure code
1
1
1

Rating
5
5
3

Disclosure Key: 1 = The Analyst, Associate or member of their household owns the securities of the subject issuer. 2 = Maison Placements Canada Inc. and/or
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Maison Placements Canada Inc. or it's affiliated companies serves as a director or advisory Board Member of the issuer. 4 = Maison Placements Canada Inc.
has managed co-managed or participated in an offering of securities by the issuer in the past 12 months. 5 = Maison Placements Canada Inc. has received
compensation for investment banking and related services from the issuer in the past 12 months. 6 = The analyst has paid a visit to review the material
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Disclosures
Rating Structure: Number Rating: Our number rating system is a range from 1 to 5. (1=Strong Sell; 2=Sell; 3=Hold; 4=Buy; 5=Strong Buy) With 5 considered
among the best performers among its peers and 1 is the worst performing stock lagging its peer group. A 3 would be market perform in line with the TSX market.
UR is under review and is given to companies dealing with either a new issue or is waiting to clear. NR =we do not have an opinion.
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