Ann: Production Update Q4 June 2017, page-8

The last few weeks have been strange and difficult at the same time for investors in the gold area: there has been the fourth rate increase by the FED and the more hawkish tone for the future, the ending of the index change of the ETF, more regional tensions (N-Korea and Quatar for example) etc.
This all has resulted in a decrease in the POG with some US 70 per OZ at the moment and even a bigger smash on the gold stocks, whether in the US or Australia. When I read the "ratio" behind this by analysts they always come up with the same reasoning: interest rates will go up, the US is in a good position so the US-dollar will strengthen etc. This all leads to their outcome for Gold (which bears no interest or dividend) that the opportunity cost of holding Gold have become higher so it is normal that the POG will decrease.
Perhaps so, at least for the coming weeks, but when I read these kind of stories I always say to my self "do they really not see the problems the world is facing" otherwise their analysis "on the automatic pilot" will not hold.
First of all I am aware of the inverse relation between the POG and the real interest levels. I can see that the nominal rates in the US for example for 10 years treasuries has risen in the last 12 months with some 100 bp. towards a level of almost 2,4%. With a CPI of 1,9% this leaves a real interest of around 0,5% (Wow). The monthly increase in CPI is quite modest, only when we see much bigger wage increases or a sudden increase in energy and or food prices we will see higher CPI-levels. So for the coming months it is reasonable to say that the real interest levels will be in the 0,4 - 0,7% level. Not impressive in my eyes.
There is also a negative correlation between the US-dollar and the POG. Now we see something strange that the US-dollar has lost value especially against the Euro and we see a decrease in the POG. I have no specific analysis for this.
The tensions in the world have for sure not decreased and there is enough to be worried about. This should back the price of gold, but this is not the case (for now).
So I can see that sentiment in the precious metals area is negative. I don't like this, but for now there is little we can do about it. We just have to wait for the sentiment to turn. Can we make a case for a higher POG?
But my biggest worry lies in the unsustainable levels of debt in the world. Take the US. Only the debts on the federal level are already around the 20 Trillion. Together with an annual deficit of around $ 500 bn. and a refinancing on the current debt (some 10% to 15% of the federal debt has t0 be refinanced every year) some 3 Trillion has to be financed (every year!). With a 1% higher interest this will cost the US already some $ 30 bn. per annum. So you can do the maths after say 5 years. Then of course there are big deficits in the US pension system for public services (the funding levels are around 40 to 70% on average. In the Netherlands it has to be above the 105 level, go figure) and the mounting costs of health in the US. So not everything is well and okay in the good old USA. So we can wait for a slow down in the US economy in the coming years. I think this is the real reason why the FED is increasing rates. They want room to be able to cut rates again if the economy needs it. Nest to all of this the downsizing of the FED's balance sheet (current of around 4,5 Trillion) will not be an easy task, to be sure. Conclusion: the FED is balancing on a very thin piece of string. Succes not guaranteed.
When you let the current environment of precious metals and miners really sink in you can become a little depressed. But as always there are two sides on every coin. Take SBM for example. The just released their 2016/2017 production. A very nice 381.000 OZ. When I take a conservative approach for the 2017/2018 production level of some 370.000 OZ with an AISC of around A$ 960,- I come up with the following positive cash-flow prediction ( not all 100% correct because next to the AISC costs there are some other costs to be paid in a year which will lower the cash flow, but as a frame to work with it is oke) for the next year: a combination of the current POG in A$ of A$ 1.600,- and forward sales of 100.000 OZ for a price of A$ 1.727,- delivers an average selling price of some A$ 1.633,- for the year. This generates a positive cash-flow of A$ 673,- per OZ. A total of 370.000 x A$ 673,- = A$ 249 mln. for the coming year. The company has no debt and cash/gold position of A$ 161 mln per june the 30th (go figure in 2015 they still had a debt level of around A$ 300 mln. What they have done with their debt position would deliver them the Champions League cup for sure). I always work with a valuation frame work around the positive cash-flow per stock to come up with a " fair value" of the shares. For SBM I can make the following calculations now, beginning with some 497 mln. of shares outstanding. The positive cash flow per share is: 249/ 497 = A$ 50 cents. A demanded yield of around 10% for SBM is reasonable. This translates into a PE of 100/10 = 10. Now I can calculate the fair value, being in this case 10 x 50 cents = A$ 5,00. I can add the cash flow per share (in the case of a debt you must distract that from the fair value), being 161 / 497 = 32 cents. This brings the total fair value for SBM to A$ 5,00 plus A$ 0,32 = A$ 5,32,-. I am not saying SBM should be worth A$ 5,32 right now, it does not work that way. I only tells me that, under a stable environment for the coming years, the share price of SBM is undervalued (as is the case for anther miners) and that I will wait for the value to come to the surface. I think there are a lot of companies with much lower positive cash flows per share who are valued much higher. So I am disappointed with the performance of many Australian miners for the moment but at least I know that there is value to add to my portfolio with miners at the moment. One advice to the board of SBM: if you do not plan to buy some future growth then there is enough room to start paying a dividend.