I have long been a silver bug and have owned silver for many years. This article references quite a lot of what I have learned since my first silver adventure in the days of Bunker-Hunt. Dr Jeffrey Lewis’ analysis is remarkably similar to my own….. Perhaps it is because we are both medical practitioners and we somehow have been trained to think in much the same way?

Why Samsung Is Not Buying Silver
By Dr. Jeffrey Lewis

September 28, 2012

Cluff Gold, a gold mining concern focused on West African assets, recently signed a Memorandum of Understanding with Samsung. Under the unusual agreement, the huge Seoul, South Korea based industrial company will be offering substantial funding to the mining concern to help develop its mining portfolio in the initial form of a $20 million unhedged loan facility.

This is the very first financing deal of its kind, where a non-mining concern has shown an interest in a mining company to help provide it with a reliable supply of bullion over the longer term.

For whatever reason, capital from outside the mining industry is now starting to become available to it. Interestingly, the well-known shorts in the mining shares could well be in trouble, although the fact that Samsung is buying into a gold miner highlights the fact that it is probably too late to do the same for silver.

Silver Miners are Spread Thin & at the Mercy of the Banks

Although a desperate need for consolidation exists in the silver mining sector, the capital to do so seems quite hard to come by since miners are typically viewed as risky borrowers by funding banks. This situation creates significant problems for the supply of silver going forward.

If a tech company announced a similar joint venture with a silver miner, it would very likely create an industrial panic and see the price of silver push sharply higher. This move could be large enough to break the global financial system, especially if the famously short bullion banks are not as hedged by offsetting transactions in the OTC sector as they claim to be.

Basically, the worldwide surge in investment demand for silver is competing with constant industrial demand for a metal that is universally believed to be vastly more ubiquitous than it is due to years of extreme price distortion.

Furthermore, silver’s monetary history ties it to gold, even though they have different intrinsic values. Nevertheless, no central banks own silver in comparable quantities to their gold holdings.

Impact of the Samsung/Cluff Gold Deal

Overall, as noted by many, including the legendary gold mining CEO Jim Sinclair, the story is a major game changer that demonstrates substantial international corporate investment in a monetary metal.

It also highlights the persistent undervaluation in the sector, and the desire by industrial concerns to secure their long term supply of a precious metal.

Furthermore, the creative financing deal demonstrates the recognition of the facts that:

(1) Gold mines mine money,

(2) The supply of gold is dwindling and

(3) Gold plays an important role in the high tech industry, which is actually quite minimal compared with silver’s broader industrial importance.

The deal also indicates that the precious metals bear market inflicted by widespread hedging of gold shares is now coming to a close. Just think about it, if Samsung or another large tech company tried to source silver in this way, it could very well trigger a spreading crisis.

Precious Metals in the Rehypothecation Era

The Samsung/CluffGold deal also comes in the era of rehypothecation, which involves a broker pledging as collateral for a bank loan the securities in customer margin accounts.

Basically, the rehypothecation of assets, which infinitely dilutes claims on real assets, can and will ultimately lead to total losses even for investors who thought that they had strong collateral backing.

Furthermore, the inventory of the world’s credible assets is literally evaporating in absence of CapEx spending, which is also one of the reasons behind the ECB’s seemingly endless lowering of its collateral requirements.

Why Buy Silver?

Within this investing and supply environment for silver, a substantial buying interest could well have a remarkable upwards impact on the price of silver for the following reasons:

(1) Not much silver left. This is the same reason that central banks are not buying silver. Basically, silver has been dis-hoarded and any major buyer would immediately induce a short covering panic that would end all panics.

(2) Silver miners are spread thin. The supply of silver is largely a byproduct of the mining of other metals because the primary silver producers are still viewed as risky. They also often have trouble finding funding for their mining operations and exploration activities.

(3) Strategic threat. No one wants to be the one that blows the silver market sky high with large purchases, so gradual accumulation often seems a more prudent investment strategy in the relatively thin silver market.

Although Samsung may not be buying silver – yet – this innovative deal with Cluff Gold indicates that conditions are favorable for more “finance for supply” transactions of this type over the years to come

China to surpass India in Gold consumption this year: Deutsche Bank

Mainland China is poised to overtake India as the world’s largest consumer of gold, said Deutsche Bank in a special report.

Asian demand in particular has grown dramatically, where China is expected to become the world’s largest buyer of gold as soon as this year, the German bank added.

“We would argue that China’s long-term strategy on trade and finance likely includes a definitive position on gold. Given the possibility that China’s could be the world’s largest economy in the second half of the century we expect that at some point over the long-term the RMB may be in a position to challenge the USD as the world’s reserve currency,” the German bank added. “If this is envisioned by the PBOC we would expect that in preparation for such an event and to support reserve currency legitimacy in the eyes of its trading partners, the country (China) may see a stock-pile of gold rivaling that of the US as a requirement. On this basis we would expect that China could be quietly building its gold reserves,” they added. (Commodity Online)

From the charts below if China is to have gold reserves equal to that of the USA then they have a massive task ahead.

And China will not be able to amass enough gold to equal the USA’s reserves by production meaning that it will have to buy massive amounts of gold over the next few decades.

Gold Production by Country 2011 -2012

Focus Minerals 10 minute presentation video

Boardroom Radio Interview with Focus Chairman Don Taig
Click here to listen to the Boardroom Radio interview with Don Taig, Chairman of Focus Minerals in regards to the plans to raise $227.5M through a Placement to Shandong Gold

FULL-YEAR GROSS PROFIT DOUBLES AFTER LAVERTON OPERATIONS TURN TO PROFIT; GOLD PRODUCTION RISES

Circa $225M Placement to Shandong Gold
Subsequent to the end of FY2012, Focus Minerals announced, that it has entered in to a Share Subscription Deed with Shandong Gold International Mining Corporation Limited (“Shandong Gold”), under which Shandong Gold has agreed to subscribe for new fully paid ordinary Focus shares to raise circa $225 million (see ASX release dated September 20, 2012). The Board is recommending the Placement in the absence of a superior proposal and subject to an independent expert opining that the terms of the Placement are reasonable

The investment by Shandong Gold will enable Focus to pursue organic and non-organic growth opportunities, and represents the start of a long-term, mutually beneficial relationship which will allow Focus to unlock the potential of its large tenement holdings. Only 4% of Focus’ significant land holdings have so far been explored.

Focus’ large landholding in the two major gold precincts of Coolgardie and Laverton provide the potential for the Company to significantly grow its resource base through targeted exploration. “To capitalise on this opportunity for shareholders we clearly need capital to expand reserves and develop more resources hence the strategic placement opportunity we are putting before shareholders,” said Mr Baird.

Primary areas of exploration focus for the group will be Laverton and Burtville, the Greater Coolgardie area and the Treasure Island Gold Project on the Boulder-Lefroy Fault. Mr Baird said the group’s focus in FY2013 will be to deliver consistent and reducing cash costs with attention to operational improvements and efficiencies and stable production from existing mining centres. More specifically, the Company will develop the low strip ratio Burtville mining centre at Laverton to create a third major project area and transition the Coolgardie base load from the Tindals Underground mine to the Greenfields open cut.

To read more please click here

Today’s announcement of Integra’s (ASX: IGR) merger with Silver Lake (ASX: SLR) along with Alacer (ASX: AQG) emerging from the recent merger of Anatolia Minerals Development, a TSX listed company and Avoca Resources Limited plus Evolution Mining creation in late 2011 to form a mid-tier Australian gold producer through a merger of Catalpa Resources Ltd and Conquest Mining Ltd and the concurrent acquisition of Newcrest Mining’s interests in the Cracow and Mt Rawdon mines; Indicates that we are now seeing a wave of gold mining mergers creating a new class of 400,000 per annum mid-tier Australian gold producers.

Next up and squarely in the firing line are ASX: FML and ASX: RMS. I’m not saying that these two will merge but that they are targets. But it wouldn’t be a stretch to postulate that Alacer (ASX: ACQ) could take out Focus as they have adjacent resources and some outstanding synergies.

I was told by a friend in the park last night that gold was going to plunge… he was convinced that gold would go below $850 – his charts had told him so. This along with the plethora of negative stories about gold and silver that is washing around the internet world makes me think that many of the former gold and precious metal bugs have now left the field.

And I must say that excites me as when everyone is on one side of the boat it is time to move across to the other side. And it seems that I’m not altogether alone:

“Gold is considered one of the most popular “safe havens” during times of financial uncertainty. However, since March, gold has been in a slump and it has many investors questioning where else they could put their money. U.S. Treasuries just are not cutting it right now as yields are low and do not provide a big enough return to entice investors.

As of late investors have been turning to utilities and high grade corporate debt for their safe haven needs but history suggests that gold could be due for another bullish leg up, according to Martin Grubb, the managing director of investments for the World Gold Council.

Grubb says that it is not unusual for gold to have a delayed reaction to macro events. In this case, gold has certainly had a very limited response to the European debt crisis. However, let’s look at a historical timeline to determine whether or not Grubb’s case is valid.” http://seekingalpha.com/article/723861-gold-rally-on-the-way?source=email_portfolio&ifp=0

US economy stalling – QE3 coming? The two articles below should be of great interest. It seems that the USA is failing and the only way they can dig themselves out is more QE3 according to some of the pundits. It would appear that now is a good time to bulk up on the precious metals.
Two interesting articles: The Next Time Silver Crosses $30.00 Will Be The Last Time

and

The US economy added 80,000 jobs last month in the FT.

Alkane Resources seems set for some serious cash flows from its Tomingley gold mine. This plus it’s 100 year Dubbo Zirconium Project with some of the world’s richest heavy Rare Earth Resources places Alkane in a very sweet spot. That they have a suite of other strategic metals (Niobium, Tantalum) adds to ALK’s desirability. The Tomingley mine will give ALK significant cash flows to progress their other projects.

“Definitive Feasibility Study for the project delivered production of 50,000 to 60,000 ounces of gold a year for an initial 7.5 years, and based on a gold price of A$1,700 per ounce the project should generate cash flow (EBITDA) of around A$250 million with an internal rate of return of 32%.” read more

I hold ALK

If Focus maintains this production level it will move into the top tier of Australian producers ~ likely around Alacer’s production.

ASX ANNOUNCEMENT 11 April 2012
FOCUS MINERALS DELIVERS 47,489oz OF GOLD IN MARCH QUARTER
– Boosts gold production by 28% in March Quarter –

Focus Minerals Ltd. (ASX: FML), a leading Australian gold producer and explorer, has produced 47,489oz
of gold for the March Quarter — a 28% increase on the December Quarter.
Chief Executive Officer Campbell Baird said the growth was due to an improved performance from its
recently acquired Laverton operations and ongoing, consistent output from its Coolgardie mines.
Mr Baird said the March Quarter production numbers underlined Focus’ growing status as a major
Australian gold producer.

“We are delivering strong production growth. On a quarterly production basis
we are among the top tier of Australian gold producers,” he said.

Focus’ Laverton operations delivered 25,636oz from its tenth ore processing campaign at the Barrick
Granny Smith mill, a 50 day processing campaign. Production from the Coolgardie mines was 21,853oz
as forecast, and in line with the preceding Quarter.

“We are on track to deliver consistent, stable production at Laverton and Coolgardie with operational
efficiencies that will enable us to achieve margin expansion at a time of strong gold prices,” Mr Baird said.

“At Laverton we have developed three new sources of ore including the Apollo pits and are focused on
delivering a structured turnaround. The improvement in performance has resulted from a combination of
the number of open pits in operation giving us blended ore sources to maintain recovery and
throughput. We completed Campaign 10 with over 150,000 tonnes already stockpiled on the ROM pad
at a grade of 1.8 g/t in preparation for the next Campaign in the June Quarter.”

“At our Coolgardie operations we have also demonstrated our ability to develop and commission new
mines, having established two new mines there in the first half of FY 2012 to grow production.”

Production for the June Quarter is targeted to remain consistent with the March Quarter for both Laverton
and Coolgardie. The Laverton processing campaign at Barrick Granny Smith is scheduled to be 41 days
but with mining from higher grade ore zones to sustain stable production. Gold production for Focus Minerals in the December Quarter was 37,098oz

I hold FML

Hi,
we have updated our Australian Gold producers page to show the 2011 production figures. Please tell us if we have mucked up anything.