Commodities / Raw Materials

[Mick100]

By Bill Powers
February 4, 2005


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In January 2004, I put together an article that appeared in the February 2004 issue of the Canadian Energy Viewpoint, which laid out the case for and against $50 oil. While the arguments against $50 oil have been thoroughly discredited, most market observers still do not understand that the price of oil will continue to head much higher. Below, I will examine several of the reasons why the price of oil will not significantly pull back from today’s levels and is likely to reach the $80 mark within the next 24 months.

At the foundation of many oil analysts’ argument for lower oil prices is the belief that OPEC can control the price of oil and use its spare capacity to keep the price within acceptable limits. There is one main reason this line of thinking is not valid – OPEC has no spare capacity whatsoever. OPEC, or more specifically Saudi Arabia, has given several indications over the past two years that it will increase production to keep oil prices at palatable levels, yet we continue to see oil prices reach new highs.

In past years, when there was excess production capacity both inside and outside of OPEC, high prices always brought additional supply onto the market. Times have changed and many analysts have failed to recognize it. Now that the world has reached the apex of Hubbert’s Peak (the thesis that once half of a petroleum-producing region’s reserves have been extracted, that region’s oil production will peak and decline along a bell-shaped curve), the world’s supply of oil will go down irrespective of price. This is an extremely bullish situation for the price of oil.

Some of the industry’s most informed participants believe there is little that can be done to increase worldwide oil production. Last year, British Petroleum announced that it will be returning to shareholders all cash flow it receives in excess of $25US per barrel. For every dollar the company receives in excess of $25US per barrel, BP will adjust its dividend or increase its share buyback program to return the cash flow to shareholders. BP has essentially given up its efforts to increase production or even keep production flat. Instead, the company has chosen to give shareholders back their capital with interest.

Another reason the price of oil is headed higher is that OPEC’s reserve base is vastly overstated. One of the world’s leading experts on petroleum supply, Dr. Colin Campbell, contends that OPEC has been vastly overstating its reserves for years. Campbell offers substantial evidence that OPEC reserve estimates are politically motivated. Kuwait is an excellent example of what is wrong with the way OPEC countries report reserves. The country reported a gradual decline in its reserve base from 1980 to 1984. This should be expected from a mature producing country. However in 1985, the country reported a 50% increase in reserves with no corresponding discovery. The Kuwaiti government increased its reserve estimate following the implementation of an OPEC production quota system that set country production levels based on country reserves. Kuwait was not alone in increasing its reserves for political reasons. In 1988, Abu Dhabi, Dubai, Iran and Iraq all significantly increased their reported reserves for political reasons. Even OPEC heavyweight Saudi Arabia followed suit and reported a massive increase in reserves in 1990.

Lack of new discoveries in both OPEC countries and non-OPEC countries has led to the current situation in which the world consumes far more oil each year than it discovers. According to Dr. Campbell, the world consumes four barrels of oil for every one it discovers. Clearly this situation cannot continue indefinitely since discovery and consumption must mirror each other.

The last reason I believe we will see $80 oil within the next 24 months is that worldwide oil supply is dropping and prices have not yet reached levels high enough to choke off demand. Despite record gasoline pric

[Mick100]

Platinum - The Noble Metal

Ron Struthers

Platinum is often referred to as the 'noble metal'. Webster's definition of Noble is "high and great in character, showing greatness, outstanding or excellent, fine splendid, magnificent"

Platinum has certainly been standing up to this definition. The noble metal averaged US$845 a troy ounce in 2004, the highest average annual price since 1980 and also up 22% from the average in 2003 of $691/oz.

Platinum has always been a leader in the precious metal sector, other than a brief time in 1996 when gold was priced higher than platinum. The platinum price has been the top performer in this precious metal rally, climbing from $350 in 1999 to $950 in 2004 up 171%.

Meanwhile gold went from $255 in 1999 to a high of $457 in 2004 up 79%. Silver up about 95% from its 2001 low to recent high.

Since platinum spiked early in the year to $950, it has settled in a trading range between $825 and $875 for the past 6 months.

Probably the big question on your mind, can the platinum price maintain these lofty levels?




I think so, and here is why

You probably are aware that the most platinum production comes from South Africa (S.A.). In 2003, 75% of global supply came from S.A. and 17% from Russia. Three mines, namely Anglo American Platinum (Angloplats), Impala Platinum (Implats) and Lonmin plc Platinum (Lonplats), accounted for 96% of S.A. production. Norilsk Nickel (Norilsk) accounted for 98% of Russia's production and Montana's Stillwater produced 2% of the world's platinum.

Much higher metal prices normally translate into higher production, resulting in lower prices as supply increases. However, since most platinum is mined in S.A. and mainly by three producers, what is happening here is of importance.

The most important factor, is the main listed PGM producers operating in S.A. have seen the S.A. currency (Rand) appreciate significantly, it has been one of the strongest currencies and this has resulted in operating margins that have actually contracted while platinum prices have skyrocketed!

According to a very recent report by Deutsche Bank, based on their new long-term rand forecast, they have calculated an average marginal cost of production for an "average" Bushveld Igneous Complex operation at US$700 per ounce. Their modelling shows a range of marginal costs of production of US$600-850 per ounce on a 3-PGM basis depending on individual circumstances.

This US$700 cost/ounce is based on a decrease in both their short-term (three-year) Rand/US$ forecast by 20-25% & importantly, their long-term real rand forecast has decreased by ±22% to R7.10/US$ (from R9.10/US$).

You can see that unless platinum prices remain high, S.A. producers will be unable to expand to meet future higher demand. The cost forecast also considers a drop in the rand/US$ rate. If the rand rises further, so will costs and probably US$ platinum prices.

There are sufficient platinum reserves if the price is high to meet long-term demand, but delays in planned expansions have resulted in demand outstripping supply since 1998. The most notable example is Angloplats, which announced in 2000 its planned expansion from 2 million platinum ounces/year to 3.5 million by 2006. Every subsequent year it has missed its target and in December 2003 it revised down its target for 2006 by 15% to 2.9 million platinum.

The longer term mining trend looks bullish too, in future more UG2 Reef and less Merensky Reef will be mined, due to a greater depletion of the latter. UG2 has a higher proportion of palladium and less platinum and base metals, which will influence the supply of platinum. The metal ratios in the eastern Bushveld also have more palladium and less platinum and base metals than those in the western Bushveld, where historically the majority of the mining has taken place.

No stockpiles left

Since 1990, approximately 6 million platinum ounces and 19 million palladium ounces have been sold from the Russian strategic stockpile. The size of the Russian PGM strategic stockpile is

[Mick100]

TWELVE GUIDELINES
FOR BUYING GOLD MINING STOCKS

Kenneth J. Gerbino

The twelve guidelines should help you to better understand some investment basics regarding the mining industry, especially if you do not have a background in geology or mining engineering. I have kept this as non-technical as possible so no one falls asleep. Keep in mind, these are basic guidelines and far from complete.

-If the company does not have an independent professional resource calculation for gold or silver or other minerals, know that someone is either speculating or guessing at the most critical data point regarding mining industry valuations. Be careful not to confuse "resources" with "reserves". Measured and Indicated resources are reliable as a resource. "Inferred resources" are very speculative mineral inventories, so be careful when "inferred" is used. A resource still has a long way to go to become an economic deposit, as opposed to "reserves" which are deemed to be proven economic and mineable ounces calculated by very strict engineering and government rules. Canada's National Instrument 43-101 is one such guideline regarding resources and reserves.


-I would suggest your portfolio be 60% invested in companies already producing gold or silver profitably. The other 40% divide into companies close to production with impressive projects or very far along in defining large and significant mineral resources. Producers should include majors and mid-tiers (your monetary insurance, since they undoubtedly have the goods in the ground). Look for mid-tiers with good growth profiles. Junior producers with new projects are also ok.

-Companies with lots of money in the bank or access to sponsorship from top investment banks in Toronto, London and Vancouver is vital in this capital intensive business and always a good thing to look for. Diversify: have at least 15 good companies. Depending on your risk tolerance you could allocate a small portion to grass roots exploration stocks but know this is the very high-risk end of the business.

-The industry has changed in the last five years. Exploration and development budgets from 1998 to 2002 declined dramatically. Therefore going forward, in my opinion, any substantial project that is near feasibility (an extensive outside engineering report based usually on tens of millions of dollars of geological, metallurgical, and engineering work) could be a buy-out candidate for major and mid-tier companies that need to catch up on reserve replacement and growth.


-"Good management" is an overused word. My definition of good management is 20 year mining professionals who have had successful executive positions with large or successful mining companies or projects in the past. If you see names like Barrick, Newmont, Placer, Anglo, Goldfields, etc. on the resume you are most likely dealing with some quality professionals. People who ran mid-tier companies or successfully helped bring medium to large projects to production also qualify. There are always exceptions, but you better know who you are dealing with. Direct mail pieces touting some gold stock and claiming top management should be carefully checked out.


-Size is very important. The larger the deposit or potential resource the better. Small mines are not worth your trouble as there are few institutions that will finance them and fewer companies that will ever acquire them. With gold mines try and look for 2-3 million ounce and above possibilities. Mining giant Goldfields, only targets projects with 2 million reserve ounces. With silver, 100 million ounces should be your minimum. But the above still has to be qualified. If the resource is too deep under the surface, of very low grade (richness), or has one of many other negative reasons it may not ever be economic to mine.

-Tonnage is important. Big tonnage operations create economies of scale that can make some low metal values economic to mine. Three hundred million tonnes (a tonne is 2204.62 pounds, not to be confused with a ton which is 2000 pounds) for an open pit gold mi

[Skol]

The Feb 8th Bulletin magazine has a two page article on nuclear power and the shortage of uranium. 68% Rio Tinto owned ERA gets a mention.

[Mick100]

A Case For Investing in Water:

http://www.financialsense.com/editor...2005/0211.html


.

[Mick100]

Fresh water - Blue Gold

An essay by Jim Puplava

http://www.financialsense.com/Market...2004/1122.html


.

[Mick100]

Bloomberg News

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China Says Oil to Exceed 50 Percent of Its Energy by 2010
Feb. 14 (Bloomberg) -- China will rely on oil for more than half of its energy by 2010, when net imports will rise to between 180 million tons and 200 million tons of oil a year, a Chinese official said.

``China should import more energy - that's the picture for oil and gas,'' Gao Shixian, director of energy economics and development strategy at China's National Development and Reform Commission, said at a conference in London today. ``Energy diversification is a priority for China.''

The world's second-largest oil consumer after the U.S., China relies on coal for two-third's of its energy. Rapid growth in Chinese demand helped send oil prices to record levels last year.

By 2010, oil will account for between 51.4 percent and 52.6 percent of China's energy needs, up from 29.1 percent in 2000, Shixian said at an ``IP Week'' conference organized by the U.K.'s Energy Institute. In 2010, the country's oil demand will probably be between 350 million tons and 380 million tons.

Last year, China's net import of oil was more than 100 million tons, of which about half came from the Middle East.

China's natural gas consumption is rising at an even faster pace and the country is projected to have net gas imports of between 20 billion cubic meters and 25 billion cubic meters in 2010, from zero imports in 2000.

By 2010, natural gas will account for 20 percent of the country's energy needs, as the percentage share for coal declines. The country may import more gas in the form of liquefied natural gas, or LNG, as industrial demand grows, Shixian said.

China paid $1 billion more for oil and gas last year because of higher prices, he said. The country has about 40 million private cars, he said, a low figure when compared with developed nations considering that China has about 1.3 billion people.

China's demand is unlikely to rise as fast in 2005 as in 2004, Adam Sieminski, global oil strategist at Deutsche Bank AG, said at the conference.



To contact the reporter on this story:
Stephen Voss in London sev@bloomberg.net

To contact the editor responsible for this story:
Tim Coulter at tcoulter@bloomberg.net
Last Updated: February 14, 2005 11:54 EST

[dingdong]

O Mick I am pleased you do not just follow gold. Most people apart from the blinkered yankee infidels have worked it out that gold is going nowhere.

[Mick100]

I would describe myself as being bullish on all commodities / resources abdab, including gold

Only 1 in 10 co's that i hold is primarily into gold. You may have got the wrong impression from my rantings on the gold thread.


Mick

[whiteheron]

Like Mick100 I am very bullish on commodities and resources

Initially I was not sure how long that the bullishness would last , but I am now convinced that it will be with us for at least another two or three years and perhaps much longer , ten years or more a possibility

I have the vast majority of my funds invested in commodities and resources , with a wide spread within the sector
Returns achieved over the last couple of years have been very satisfying and I expect a continuation thereof , but at a slightly reduced rate