Guest Post: "Kamikaze Attack and The End of Mining", by Andy Hoffman

Though Andy Hoffman writes excellent commentary nearly every single day at the Miles Franklin site, there are some days when he absolutely hits it out of the park. Friday was such a day.

Again, you should be checking the Miles Franklin site every day for Andy's commentary. You should also be sure to read what Bill Holter posts every day, too. You can find there writings be clicking here: http://blog.milesfranklin.com/

As you read Andy's commentary from Friday, keep in mind this very important fact...Andy spent over a decade as an award-winning analyst on Wall Street. So when he mentions "balance sheets" and "write-offs", he knows what he's talking about. With that in mind, please take the time to read and re-read this extraordinarily well-written and important post.

TF

"Kamikaze Attack and The End of Mining"

by, Andy Hoffman of Miles Franklin

The trials of Job indeed!

To that end, I do not recall taking a day off from writing in the past two years – and given the horrific immolation the world’s Central banks are foisting on the world’s population, I don’t anticipate slowing down any time soon.  Following the past two days’ violent, post-FOMC precious metals attacks, my principal thought is not if, but when this “Cartel Suicide” yields an utter explosion of global physical buying.  That is above and beyond this year’s current pace of equaling last year’s record level – inevitably, catalyzing dramatic product shortages (especially silver), as we experienced in 2008, 2011 and 2013.

As I wrote in yesterday’s “BS to the Nth power,” Wednesday’s FOMC statement – in pretending to be “bullish” about the labor market outlook – was not just “misleading” and “disingenuine” but a flat out lie, ahead of Tuesday’s mid-term elections.  That said the fact their incremental words were not backed up by actions (they still expect to hold rates low for a “considerable time”) is all one needs to know about their true intentions – which in fact, even the beholden cheerleading MSM is starting to understand.

Meanwhile, amidst yesterday’s excitement of the “Dow Jones Propaganda Average” surging due to Visa’s “great news” that Americans are borrowing more than ever at usurious interest rates; as well as the “better than expected” GDP report, due solely to government “defense” spending to bomb ISIS; and the rehashing of a 12-day old rumor that Japan’s pension fund will increase its equity allocation in the most overvalued market since the internet bubble peak (care of the Bank of Japan holding debt yields near zero); interest rates actually declined on the day and didn’t budge overnight.

As for the day’s “other” news, which obviously the money printing, market-goosing algos don’t care about, they included the largest-ever increase in non-performing loans at the world’s largest bank, ICBC of China; an utter implosion of Greek stocks and bonds, as its inevitable default moves closer to the realm of imminence; and Citibank restating its earnings lower due to pending Department of Justice and CFTC “legal investigations.”  And don’t forget the “gold-negative” announcement (LOL) that one of Germany’s oldest banks has imposed an actual negative interest rate of 25 basis points on deposits above €500,000.  Considering that 20% of Europe’s banks failed the most passable stress test imaginable this week, how many investors will feel comfortable holding large deposits in German banks now – particularly when just last year, the largest German bank was deemed “so horribly undercapitalized, it’s ridiculous?”  Not to mention, foreign depositors, now that the ECB’s QE program has caused the Euro to implode?

Given all this wildly PM-bullish news – not to mention, as I write, September consumer spending “unexpectedly” declined whilst personal income barely rose (weren’t plunging gas prices supposed to fuel surging consumption increases?); TPTB were hell-bent on creating the opposite reaction.  To wit, not only did they need to foster the impression that the FOMC statement was “America-bullish” ahead of the elections; but with the upcoming “Save our Swiss Gold” referendum gaining momentum, the last thing they need is surging PM prices to positively influence sentiment.  That said, the physical reaction to their paper shenanigans was immediate, per this interview with Andrew Maguire – and the more they “push the envelope,” the more rapidly their “paper dominion” over price discovery will end.  To wit, the HUI is nearly down to its 2008 low, the TSX-Venture is dead and buried, and mining capital spending died years ago.  In other words, there has been essentially no incremental exploration spending for years; and in my 12½ years in the sector, exactly one major discovery – which, per this article, may never be developed.  Throw in indefinite delays in major developments the world round – the poster child being Barrick’s Pascua Lama project; and the outlook for global mine production has never been bleaker.

On last week’s “Miles Franklin Silver All-Star Webinar Panel,” we discussed the inadequate concepts of “cash costs” and “all-in sustaining costs”; as in the former case, few companies with “low” cash costs actually generate profits; while in the latter case, few companies with “low” all-in costs actually replace reserves.  Long-time readers know how vehemently I despise mining shares – and generally speaking, all “paper PM investments,” and this is exactly why.  Poorly managed, woefully undercapitalized, and operating in the world’s most difficult industry; with a Cartel not only suppressing gold and silver prices, but naked shorting the shares into oblivion.  And no company characterizes this misery better than the world’s second largest miner, Newmont Mining – which, in fact, inspired the latter half of today’s article title.

Newmont, whose stock is back to 2001 levels – when gold was $275/oz. – reported last night that 3Q earnings declined 50% year-over-year, despite an average gold price decline of just 4%.  And amidst the mining jargon, utilized to spin this earnings disaster positively is the irrefutable facts that one of the best capitalized gold miners not only generates an utterly miserable return on equity (worse if you consider last year’s $1.6 billion write-off), but is experiencing steadily declining production and a dramatically weakening reserve base.

As you can see below, Newmont’s proven and probable reserves are essentially the same as seven years ago, when gold prices averaged $575/oz.  This year’s production is expected to be 6%-11% lower than 2007; and given last year’s reserve write-down with a $1,400 gold price assumption, I can only imagine the killer this year’s write-down will be assuming prices remain near current levels.  Heck, as we learned last year, prices don’t even need to decline to yield write-offs – when the world’s sixth largest gold miner, Kinross, reduced its reserves by an astounding 33%, despite no change to its $1,200 price assumption.

Comically, Newmont claimed its “all-in sustaining” cost is $1,020-$1,080/oz., despite not increasing reserves over a seven year period in which gold prices more than tripled.  This year, capital spending was reduced by nearly 60% from 2013’s levels, and gold prices have declined further.  Thus, when reserves (and production estimates) are slashed again at year-end, be sure to have Newmont’s management explain how their business is “sustained” at $1,020-$1,080/oz.  In other words, such estimates are but a sham, as the real cost of sustaining the mining industry is far closer to the $1,500/oz. espoused last year by the CEO of Goldfields, the world’s fourth largest gold miner.

Newmont Mining Char

And now, for the main event – and perhaps, the denouement of the most vicious paper PM raids since 2008.  As I write at 9 AM EST, gold and silver are down to $1,162/oz. and $15.85/oz., respectively; in other words, so far below their actual costs of production, both cash and sustaining, that my recent estimate of a 25%+ drop in global PM production is likely far more imminent than inevitable.  This morning’s raids were, as usual, initiated at the 2:15 AM EST open of the London paper pre-market session followed by the 8:20 AM EST open of the New York COMEX, despite the aforementioned wildly-PM bullish events; in the latter case, due to “idiot longs” being forced to sell following gold’s breach of its “triple-bottom” level of $1,180/oz.  And I do mean fools, as why anyone would continue to fight the Cartel in rigged paper markets is beyond me.

However, I haven’t even discussed the former part of today’s article title, which could not be more PM-bullish – or “world-bearish.”  Which is that overnight, the Bank of Japan not only increased its “Abenomics” bond monetization target from ¥70 billion to ¥80 billion (in other words, essentially all government bond issuance), but tripled its Nikkei equity ETF buying program from ¥1 billion to ¥3 billion.  Global stocks are exploding higher – on the prospect of potential hyperinflation; yet interest rates haven’t budged and oil prices down to $79.60/bbl.  are on the verge of breaking below the July 2012 European sovereign crisis low of $77.50 – when Spanish banks were bailed out, and Draghi was forced to make his infamous “whatever it takes” speech.  Note bene, take a look at where Europe – and the Euro – are today, and tell me if you think he was “successful.”

Back to Japan, where everything negative we have ever written – from “demographic hell” (July 2012), to “final currency war” (January 2013), “the real Yen bomb starts – NOW” (May 2013) and “the Japanese Noose is tightening” (February 2014) are coalescing in a hyperinflationary crescendo, which must end in complete financial cataclysm.  To wit, if you think this chart depicting the unmitigated failure of U.S. QE is bad just think where it stands for Japan – now that it has been “QEing” for two decades with a 240% debt/GDP ratio, multi-year high in CPI inflation, and dramatically negative GDP growth; and oh yeah, another sales tax increase slated for 2015.  Yes, this is what the “weak yen” the Bank of Japan so desperately wanted has brought to the “Land of the Setting Sun”; well, that and a 140% surge in corporate bankruptcies since Abenomics commenced 18 month ago.  Actually, scratch that – as the 140% bankruptcy increase is just in 2014 alone!

Yen Graph

As I write, the yen has not only breached the long-time “line in the sand” of 110/dollar, but plunged to more than 112/dollar, down a whopping 2.6% today alone.  Before today, the Yen’s “real effective exchange rate” had already plunged to its weakest level since 1982.  However the financial death sentence Shinzo Abe has just unleashed on his population will make today’s Yen levels look like the “good old days” in hindsight.  Remember, the Yen traded between 200 and 300/dollar in the 1970s and 1980s – which is exactly where we believe it’s going now, enroute to being the first “first world” nation to experience 21st century hyperinflation.  And heck, I haven’t even noted this morning’s broad-based dollar surge – not because the U.S. economy is doing so well (LOL), but because global fear is causing a liquidity surge into the reserve currency.  Which, of course, we deem the “single most PM-bullish factor imaginable” due to the global inflation, currency wars and geopolitical tensions such devaluations cause.  Not to mention, the massively detrimental impact on U.S. corporate earnings of a “strong dollar.”

Again, we cannot emphasize enough our belief that we are back in “2008, with the temporary exception” of manically PPT-supported equity markets in TPTB’s desperate attempt to prevent universal recognition of what global economic data, commodity prices, bond yields, and the desperate actions of Central banks like the PBOC, Bank of Japan and ECB are screaming loud and clear.  For those holding mining shares and other “paper PM investments,” is to pray they are not permanently destroyed – which frankly, many already are.  And for those wise enough not to speculate in the world’s most naked-shorted securities; but instead, save in history’s only proven money, all we say is one word – RELAX.  Global physical demand was already sitting at all-time highs before this month’s Cartel paper raids; and now that the mining industry is all but destroyed, the upcoming production declines will be equally violent as the inevitable – perhaps imminent – physical demand explosion.

And once again, we at Miles Franklin ask but one thing of our loyal readers – which is to “give us a chance” to earn your business, should you decided to buy, sell, trade or store precious metals.

202 Comments

Barfly's picture

First

There was the beginning.

Turd Ferguson's picture

Fix, please

MODERATOR

This is not an ebola thread. This is a thread for discussing the miners and Japan QE.

Response to: (No subject)
dragonfly5's picture

3rd and reflecting

Was just wondering this morning - Japan's economy is already considered "broken" by many and yet they just broke it more . . . Wondering what implications that has for Western economies already heavily burdened - TPTB seem to have no problems breaking something more than it already is.

btcgoldbull's picture

Not sure I share Andy's view

on mining shares, seems to me that WHEN the gold price is finally freed from Comex price suppression the miners are still a leveraged play on the gold price. Also, Andy may be somewhat biased towards physical purchases since he works for Miles Franklin and therefore "has a dog in this fight"  

Turd Ferguson's picture

Don't make that leap

MODERATOR

Andy hates the miners and he works for a bullion company.

Andy does not hate the miners because he works for a bullion company.

I've gotten to know him a little and he is definitely not a hypocrite.

Pining 4 the Fjords's picture

Mattheim

I think Andy's point about many of these companies being "already broken" is somewhat valid-  JMO, but I suspect a number of known names will either dilute to such a huge degree that shareholders are screwed, or will just go under and be scooped up for pennies by big money.

That said, I think you also have a valid point- survivors will just explode at some point.   It's like you either lose everything, or get a 50 bagger, no middle ground.  Figuring out who lives through this will be everything for investors. Don't know if I'm savvy enough to do this...   But I plan on trying, within reason.

Whitecastle123's picture

Maybe everyone knows this,

With mining costs being $16.00 - $22.00 or more.   What is the process or chain from mining the silver to buying a Turd round at Scottsdale.  

When silver in mined and smelted,  what price and purity is the silver being sold to the private mints for further processing.  

Do the private mints need to re-refine the silver to a .999-.9999 purity before the blanks are made, media tumbled and stamped ?   Costs of the dies and man power, shipping costs.  

What prices are the retailers buying from the mints.  It just doesn't seem possible I can get my grubby mitts on a round for these prices considering everything that goes into creating a round from start to finish.   

Turd Ferguson's picture

And don't forget

MODERATOR

Dude is a trained equity analyst and CFA. He knows how to review balance sheets and income statements and he knows the games that companies play to make things appear better than they really are.

Mr. Fix's picture

Sorry about that post,

I know it seems a bit redundant, but I've been saying that the miners are being executed for years.

I'm expecting no survivors.

Not much else to talk about today…

Mining shares are just one minor casualty of “the end of the world as we know it” also known as “the end of the great Keynesian experiment”. 

btcgoldbull's picture

Just curious

Turd, what are your thoughts on the mining shares?  And for FWIW I am not disparaging Andy in any way, just pointing out what I thought was a potential conflict of interest.

goldcom's picture

Andy makes some valid points

and their are some miners that can't survive the current price levels and resource companies running out of cash while the most of the miners either don't have the cash for acquisition of the resources at fire sale levels or just want to sit on their capital to ride this thing out. That is why it is so important to have some knowledge which ones can ride it out.

I get the whole physical thing and that is important. Some miners will make it some won't, and if the price continues to decline for another six months there will be more consolidation in the mining industry so investors need to be on top of  what is going on with these companies and be nimble.

With what is happening I have to believe that the natural laws of supply and demand can't be suppressed as it has been the past 3 years. A few months at best and maybe next week I'm thinking.

The pairing trends of gold with the Yen is a real head shaker but in this sick Keynesian twilight zone world of finance should it be that big of a surprise.

Motley Fool's picture

stewie

Pretty pictures. Does anyone else notice the uncanny resemblance of the last chart to this : 

So what, fear next up? xD

Edit : Err ok then. Seems stewie's post was deleted. This was the comparison graph :

Turd Ferguson's picture

@Matt

MODERATOR

this is from two years ago but the conclusion pretty well summarizes how I feel. 

https://www.tfmetalsreport.com/blog/4424/miner-case-depression

Response to: Just curious
Turd Ferguson's picture

@stewie

MODERATOR

Copy and paste from that guy's site are not welcome here. If you'd like to discuss the merits of his opinions, please do so there, not here.

mike97's picture

stewie - Pls don't post Dan Norcini on TF Metals

Norcini is a disinformation agent for the Fed/Cartels. We don't read him and we don't want him posted here.

realitybiter's picture

hui:gold ratio

is kind of pointless.  Assume the metals price is not a free market.  If prices are incorrectly priced below free market for the metal it is logical then that the low hui to gold ratio is not indicating lower metals prices, but miners that are soon to be BK and out of production, resulting in lower supply, amidst higher demand for the metal....indicating higher metals prices.  hui to gold ration only works in an honest environment, which is the perpetual pissing match round here....so rather than hui to gold indicating lower metals prices, it is actually indicating a rupture of the system and massively higher metals prices...wtfdik?

Nobody knows how this will end.  I doubt the price riggers will force Chinese mining out of business..  I really like Andy Hoffman.  The guy has answered any email I ever wrote, speaks clearly, honestly, and is a smart smart guy.  That said, nobody gets everything a hundred percent right....I still think you might be lucky enough to get some paper bets right, but the risk is not worth it.

IF we get a big event....which I think we will if the system shows some big cracks...(TPTB will create some diversion and simply shut markets down....) and when they reopen trading who knows what it will look like?  Maybe over the interim the nationalizations of mines will occur.  Who knows.  

realitybiter's picture

hui:gold ratio

is kind of pointless.  Assume the metals price is not a free market.  If prices are incorrectly priced below free market for the metal it is logical then that the low hui to gold ratio is not indicating lower metals prices, but miners that are soon to be BK and out of production, resulting in lower supply, amidst higher demand for the metal....indicating higher metals prices.  hui to gold ration only works in an honest environment, which is the perpetual pissing match round here....so rather than hui to gold indicating lower metals prices, it is actually indicating a rupture of the system and massively higher metals prices...wtfdik?

Nobody knows how this will end.  I doubt the price riggers will force Chinese mining out of business..  I really like Andy Hoffman.  The guy has answered any email I ever wrote, speaks clearly, honestly, and is a smart smart guy.  That said, nobody gets everything a hundred percent right....I still think you might be lucky enough to get some paper bets right, but the risk is not worth it.

IF we get a big event....which I think we will if the system shows some big cracks...(TPTB will create some diversion and simply shut markets down....) and when they reopen trading who knows what it will look like?  Maybe over the interim the nationalizations of mines will occur.  Who knows.  

mike97's picture

Any ideas on the HUI takedown

I have been away much of the weekend and wondered if anybody had a good explanation on who profits from the miners being taken down to 2008 levels.

The obvious one is money. The takers down (Fed/Cartel/PPT) must be buying through a hedge fund/ agent in anticipation of a rocket launch upward at some point.

Sorry if I missed some earlier posts. I will try and read through them now.

Bollocks's picture

Motley Fool

If we follow the course of your chart to the now-removed chart that stewie (?) posted from Trader Dan's, then silver really will go to practically zero.

So... a precious metal, with an approx 12 : 1 mined ratio to gold (much speculation on this figure, I know, but that's about the middle) and which is probably much rarer due to huge, generally non-reclaimable, industrial use - being the second most widely used commodity - is going to practically zero in price.

Well, bring it on. Silver is the buy of the century. And perhaps of all time.

 

buzlightening's picture

Always have enjoyed Andy Hoffman!

He brings the truth together in a way no other can.  He consistently shoots the diseased brains out'uv the convoluted logic of crooked central bankstering criminal minds.  Keep firing away Andy, as the rotting decomposing head of the squid, consumes itself upon it's own unbelievable psycho babble.

Motley Fool's picture

Bollocks

That was a gold chart. The silver one seems more advanced in comparison. 

Bohemian's picture

I am not sure what Norcini has to do with it...

Do you mean that Valuation chart...? It was created by Jean-Paul Rodrigue, a professor at Hofstra University; he is the author.

https://people.hofstra.edu/geotrans/eng/ch7en/conc7en/stages_in_a_bubble.html

It relates to business cycles, stages in a bubble, not just for gold...

buzlightening's picture

Bollocks has a condensed version of squids demise.

"Well, bring it on. Silver is the buy of the century. And perhaps of all time."  Buy it and buy it physically now while you still can.  As with any paper ASSet, you don't own the underlying physical if you can't hold it in your hands.  100% possession is the law now, among lawless criminal central banksters.

Motley Fool's picture

Bohemian

I don't think he even commented on it. The link for the c/p stewie did is this : http://www.traderdannorcini.blogspot.ca/2014/10/hui-gold-ratio-hits-lowest-level-ever.html

..and apparently you should discuss it there if you are interested. :)

Thanks for sourcing that chart, I know it is for any bubble, but wasn't aware who created it. :)

Bohemian's picture

@Motley

".....and apparently you should discuss it there if you are interested. :)"

No, I will pass on this one. ;-) My wife is coming back from Chicago and I have to clean the mess around. :-)

Bollocks's picture

Motley Fool

"That was a gold chart. The silver one seems more advanced in comparison". 

Ok, well that post disappeared pretty fast - I thought it was silver. The silver chart being "more advanced in comparison" adds even further to what I said then.

@buzlightening
Yup. I'm all in-my-hands physical. I'm not a trader. I'm not mental. (well, maybe a bit cheeky).

Bollocks's picture

permission to say "speechless"

"All governments must protect the ability of journalists to write and speak freely." —President Obama

https://twitter.com/NSCPress

DeaconBenjamin's picture

Hokkaido Electric hikes prices 12%

SAPPORO – Hokkaido Electric Power Co. raised prices for households by an average of 12.43 percent on Saturday, the first of the nation’s major utilities to carry out a second full rate hike since March 2011.

Hokkaido Electric obtained government approval to raise so-called small-lot power charges by 15.33 percent on average starting in November, but will keep the hike to 12.43 percent until the end of March 2015 as a one-off measure to soften the blow to households.

Hokkaido used to be among the regions with the lowest electricity charges in Japan, but the utility’s charges are now among the highest, nearly on a par with Tokyo Electric Power Co. and Okinawa Electric Power Co.

Power rates for large-lot users, mainly businesses, rose by an average of 16.48 percent starting Saturday and will last through the end of March 2015. The full rate hike of 20.32 percent will then take force in April.

The full-fledged rate change is different from the monthly power rate reviews, or adjustments, often conducted to reflect changes in oil and natural gas prices and do not require government permission to execute.

In November, the monthly power rate for a standard household is projected to reach ¥8,198, incorporating the impact of the monthly review, up ¥856 from the previous month. Without the temporary measure, the cost would be ¥8,380.

The power industry is facing expanded costs for procuring fossil fuels for thermal power generation because all nuclear power plants remain suspended in the wake of the March 2011 meltdowns at Tokyo Electric Power Co.’s Fukushima No. 1 power station.

http://www.japantimes.co.jp/news/2014/11/02/business/hokkaido-electric-jacks-household-electricity-prices-by-12/#.VFacPMlMKkw

DeaconBenjamin's picture

Surprise BOJ move paves way for 10% sales tax

It appears clear that Bank of Japan Gov. Haruhiko Kuroda is pressing Prime Minister Shinzo Abe to raise the consumption tax again next year as legislated to improve the country’s fiscal health despite concerns it could further slow economic recovery.

The central bank’s move to expand its unprecedented monetary easing program was the first since it was launched to battle deflation with massive purchases of government bonds and bank assets in April 2013.

The benchmark Nikkei 225 stock index closed Friday at a nearly seven-year high as the yen sank further against the dollar to levels unseen in more than six years.

The surprise move, which will pump trillions of yen more into the financial system, is intended to stimulate lending and spending in the world’s third-largest economy.

But it’s also an acknowledgement that Abe’s government has so far failed in its broad efforts to revive growth, especially after the first stage of the doubling of the 5 percent sales tax, which raised the levy to 8 percent, took effect in April.

According to the latest data, consumer spending is falling, unemployment is rising and inflation is slowing further.

By injecting more money into the economy, the government hopes to raise public expectations for stronger inflation to spur spending and fuel growth.

The yen had already sunk to multiyear lows against its major counterparts because of the BOJ’s radical program. After failing to boost exports as hoped, the weaker yen is increasingly being viewed as problematic for inflating the cost of living and doing business by raising the cost of imports, such as fuel.

Yet the BOJ drove the yen down further Friday, raising its goal for expanding the nation’s monetary base at an annual pace of about ¥80 trillion instead of between ¥60 trillion and ¥70 trillion. The central bank may believe these steps will produce stable growth and inflation and thus encourage the government to follow through on doubling the sales tax, despite fears of another slowdown in consumption and industrial output.

Harumi Taguchi, an economist at IHS Global Insight, said the BOJ was spooked by signs the economy could slip back into deflation. A stricter consumer price index dubbed “core-core CPI,” which excludes the volatile prices generated by food and energy, has fallen to nearly 1 percent, Taguchi noted. Falling oil prices could push overall inflation even lower, with the doubling of the sales tax to 10 percent next year threatening to weaken spending and growth.

The BOJ’s action “has significance as a strategic move to create an environment where the government can easily decide to raise the (sales) tax again,” Kanno said.

Another explanation of why the BOJ unexpectedly eased policy, although denied by Kuroda, is that the central bank moved in lock step with the government, staging a surprise for market participants.Japan’s giant public pension fund, the biggest in the world, announced the same day that it will review its portfolio and double its purchases of Japanese stocks, another piece of news that sent the Nikkei soaring.

The ¥127 trillion Government Pension Investment Fund said it will cut its holdings of Japanese government bonds — the biggest chunk of its portfolio. The BOJ, meanwhile, will gobble up even more JGBs from banks under its expanded easing program, potentially addressing concerns that the unloading of JGBs by the GPIF will trigger a spike in long-term interest rates that could bankrupt Japan by jacking up debt-servicing costs.

http://www.japantimes.co.jp/news/2014/11/01/business/economy-business/surprise-boj-move-presses-abe-hike-sales-tax/#.VFacjclMKkw

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