Global Gold Production Increasingly Threatened, Invest Locally!

Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Dec. 19 I wrote an article suggesting that mid-tier and even small cap gold companies offer excellent risk/reward opportunities, [see article here]. In that piece I briefly described Nevada gold plays Allied Nevada, (NYSEMKT: ANV) and Pershing Gold. I opined that companies like Barrick Gold, (NYSE: ABX) and Nemont, (NYSE: NEM) have consistently under-performed,

"On average, the majors have under-performed GLD for the past 3 months, 6 months, 1 year, 2 years, 3 years, 5 years and 10 years. Other than that, they've been great investments! As gold prices increased, the majors spent way too much exploring around the world. Now the industry is stuck with bloated costs and is producing gold in dangerous places like Indonesia, Ghana, Russia and Uzbekistan, (all top 10 producing countries in 2011)."

Global Gold Production Challenges Getting Worse, No End in Sight

The reason for me revisiting this topic is to highlight just a few recent examples of resource nationalism that point to even more difficult times ahead for gold producers. Consider this January 2, 2013 article from the Financial Times,

"As construction workers put the finishing touches to a waste water pipeline at the hilltop Martabe gold mine in North Sumatra, Indonesia, dozens of police and soldiers armed with machine guns and knives keep close watch nearby. Like many other international mining companies in Indonesia, Hong Kong-listed G-Resources went to great lengths to win the support of the local community for a large gold project that had been 15 years in the making.

With nearly $1bn spent on mine construction and annual production forecast at 250,000 ounces of gold (worth more than $400m at current prices), Martabe looked set to be one of the most successful large mines to come on stream in Indonesia in recent years, at a time when the investment climate has been damaged by resource nationalism and regulatory uncertainty. 

But all the development projects, communication programmes and local job creation appeared to have been in vain when more than a thousand residents tried to storm the mine complex in October before launching a violent attack on local government offices."

And, please consider this news item from early last week, (isn't South Africa a safe haven place to invest)?  

"South Africa's Harmony Gold shares dove Monday after the company announced it would delay the post-holiday restart of the Kusasalethu mine due to ongoing violence and  labour unrest and violence. 

Kusasalethu's troubles mark a shaky start to 2013 for South Africa's mining industry, after a year marked by numerous violent strikes, which left more than 50 miners dead and harshly hurt both the country's investment image and the economy."

Finally, please consider this,

"Shares in Centamin  fell 69% on Thursday after it suspended Operationsat its flagship Sukari gold mine in  Egypt. Worth more than £1 billion before its troubles began, the company is now worth a shade over £300 million.

Centamin's gold exports have been halted over an unforeseen and arbitrary request from customs officials for prior approval by the Minister of Finance. The Alexandria-based company first fell foul of Egyptian bureaucracy when a lower court annulled its licence to operate the mine in October.

Since the fall of the Mubarak regime in Egypt, foreign investor uncertainty has increased greatly and many fear that contracts signed before the transition to democracy would now not always be honored.

Centamin had recently reported record output, up 40% over last year at Sukari and it was on track to produce 250,000 ounces this year. "

Many other examples can be found with a Google Search. The scurge of resource nationalism has but one cure, higher production costs for the operators. Therefore, Barrick and Newmont pay the considerable costs, yet U.S. gold companies Like Allied Nevada and Pershing Gold share the benefits of higher gold prices. Why is resource nationalism growing? Simply put, governments, labor groups, local landowners and politicans have seen success by pursuing these activities.  Higher wages and higher royalties and taxes paid (by foreign companies) is a no-brainer for politicians to campaign for. What will stop this global trend? Seemingly nothing.  

Allied Nevada and Pershing Gold Remain Very Attractive, Safe Investment Opportunities

Refering again to my previous article recommending U.S. gold producers such as Allied Nevada and Pershing Gold, I continue to love these names. Allied appears to trade rich to peers, but only because it's massively ramping up production over the next two years. Allied may achieve cash costs of $200 per ounce given the company's co-product silver production, [by industry convention, silver revenues are applied, "credited" against the overall cost of mining the gold].

Pershing Gold continues to make excellent progress on its Relief Canyon Mine re-start, now expected within 12-18 months. The value of this prospective mine alone comfortably covers the entire Enterprise Value, "EV" [Market Cap + debt - cash] of Pershing. This week the company will release its upgraded gold resource data. An almost tripling of resources is expected, from 248k ounces to 600k-750k ounces. Chairman and CEO Stephen Alfers continues to masterfully execute and de-risk the company. No wonder that Coeur d'Allene, invested $4 million in Pershing last year.

Foolish Bottom Line

I believe 2013 could be a blockbuster year for Pershing. If visibility towards first production becomes clear by later this year, the stock should re-rate significantly higher as it moves from development-stage to producer. After reaching an annual run-rate of 50k ounces, I believe a run-rate of 75k-100k ounces is achievable by 2016. 100k ounces is nothing to sneeze at these days. And that's only for the first mine. Pershing has 25k acres to explore for the next generation of mines. Although high risk, Pershing offers substantial upside, well beyond that of the gold majors.  Foolish investors need to keep an eye on Allied Nevada and Pershing Gold.

MockingJay2011 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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