The project was slowed to a near-stop several years ago due to the high cost of developing the mine. The new PFS shows that over an 18-year life, Galore Creek will produce 4 million ounces of gold, nearly 66 million ounces of silver, and more than 6 billion pounds of copper. It still won’t be cheap, but the scale is now so large and higher prices for all three metals make the project worth doing.

That is if NovaGold and Teck can figure out a way to come up with the estimated $5.2 billion development cost to get the project into full production. The massive project could get even bigger as it moves next to the feasibility study stage, where new tests may indicate new opportunities for recovery.

Interestingly, NovaGold’s stock didn’t get much of a charge from the PFS. On July 25th, the first trading day following the company’s release of the PFS, shares actually closed down a bit. The news is finally filtering down to investors this week, and NovaGold’s share price has risen more than 4.5% at around mid-day, to $10.48, in a 52-week range of $5.98-$16.90.

As we noted last month, the company has no profits to show in the past 12 months and none are expected in the next 12 months. At that time the stock’s price/book ratio was 8.5, which has now fallen to 8.02.

NovaGold is not a value pick, and given the reaction to its Galore Creek PFS it may not even be a growth pick. The good news on Galore Creek had already been priced into the stock. Alternatively, there’s caution on the accuracy of this PFS because the last one NovaGold issued was believed by many investors to be too good to be true.

But even if the PFS is accurate, $5.2 billion is a lot of money and while Teck may have the resources to push development at Galore Creek, NovaGold will likely have to strike a deal with Teck or get financing from another source. Provided, of course, that the feasibility study turns out as well as the PFS.

The Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) is up about 0.5% at mid-day, to $36.21, in a 52-week range of $26.05-$44.86. The SPDR Gold Trust (NYSE: GLD) is up about 0.25%, and the Comex gold quote is up less than 1%, at around $1,633/ounce.

Paul Ausick

Goldman’s reading on the entire sector is that thermal coal, used to generate electricity and heat, would outperform metallurgical coal used in steel making. As if to underscore that point, Canada’s Teck Resources Inc. (NYSE: TCK) lowered its production guidance for the second quarter, citing higher costs and deferred shipments due to the Japanese earthquake and tsunami. Teck is among the world’s largest suppliers of the metallurgical (coking) coal used in steel making.

Teck expects unit mining costs  of $71-$76/metric ton in 2011. The company also lowered its estimated average selling price for metallurgical coal from $280-$290/metric ton to $270.

Goldman’s prediction for thermal coal is based on better demand from both China and the US as US exports rise and lower production in the US bring inventories down by the end of the year. US utilities signing contracts for 2012 are expected to be forced to pay more to guarantee supply.

The situation in China is more complicated. The country has been unable to produce enough electricity for months now, as continued drought has lowered river levels and reduced hydro-power generation.

Already high coal prices pose another problem because the government sets the rate at which utilities can sell electricity, and right now the government is more concerned about consumers than about utilities. Thus, it has forbidden utilities to raise rates and opted instead to ration power where it can.

Peru’s copper production is expected to account for about half the world’s production growth over the next ten years.  Mining companies with interests in Peru include BHP Billiton plc (NYSE: BHP), Newmont Mining Corp. (NYSE: NEM), Pan American Silver Corp. (NASDAQ: PAAS), and Teck Resources Ltd. (NYSE: TCK). The miners like Xstrata plc (OTC: XSRAY), Anglo American plc (OTC: AAUKY), and Freeport-McMoran Copper & Gold Inc. (NYSE: FCX) were expected to lead the charge. The proposed tax hikes could cool their enthusiasm, even though copper and gold prices remain high.

Peru’s corporate tax rate on miners is 30%, and Humala has said that the country could raise that to 45%. Peru also collects royalty payments of from 1%-3%, which are extremely low by international standards. Chile’s royalty rate is 35%, and even the US charges around a 17% royalty rate for Gulf of Mexico oil.

Raising Peru’s royalty payments or taxes should not have a huge impact on whether or not a company chooses to develop a project. Gold and copper prices are high enough to support more development, and the number of high-quality prospects anywhere in the world is small and getting smaller.

Mining companies could argue that even though market prices for gold and copper are high, so are costs. At some point, they could say, developing a new project is simply too risky.

In either case, though, investors will pay more for copper or gold. If the government raises royalties and taxes, some of those increases will get passed along. If mining costs continue to rise, those increases will certainly get passed along.

Fears that Humala will follow in the footsteps of Venezuela’s Hugo Chavez and nationalize Peru’s national resources are probably overwrought. But the new president’s support for higher taxes and royalties could hamper production of silver, gold, and copper. For investors, that means that prices should remain high.

Paul Ausick

When Goldman’s commodities group said that it was time to sell crude oil, corn, copper, soybeans, and palladium, traders agreed in droves, sending prices for these and other commodities straight down.  Goldman has changed its mind now that prices have fallen some 15%-20% in the past few weeks.

For example, Goldman believes Brent crude should rise from about $110/barrel today to $120/barrel by the end of 2011. The logic is that recent lower prices for commodities reduced the risk of both demand destruction and inflation. Consumers are expected to maintain solid demand for crude, cotton, and other metals.

Goldman also thinks that ag commodity prices will remain high primarily as a result of weak inventories. The threat of weather-related supply shortfalls are offset by low stockpiles. If crops are adversely affected by the weather, then building stocks again will be delayed, maintaining high prices into next year.

One crop that may see some downside is soybeans. If corn plantings don’t reach expected goals in the US, farmers are likely to plant soybeans instead, raising the amount of soybeans harvested and putting some pressure on pricing. The bank also predicts that live cattle prices will end the year at $1.20/pound, about where they are today.

The takeaway seems to be that while prices may not shoot up again, they are surely not going to fall off a cliff. The recent fall in commodity prices should be made up, putting an overall upside into prices through the end of the year.

In another report on commodities, Barclays Capital says that the global supply of copper for 2011 could fall from its original estimate of 16.1 million metric tons to 15.7 million metric tons. The bank attributes about a quarter of the decline to “incidents”, such as labor disputes and other problems. The rest is set down to declining ore grades, tired mines, and higher costs.

A shortfall of 400,000 metric tons will also keep copper prices high. Some analysts have projected a 2011 average price of $4.45/pound, well above today’s price of about $4.01/pound.

For copper miners facing the problems of lower grade ores and old mines, the bright side is that the profit margin on copper is around 68% at a price of $4.29/pound, while gold’s profit margin is about 52%. The lower grade ores in copper/porphyry deposits are typically larger than higher concentrations and they offer longer mine life than the more concentrated ore bodies.

Competition for copper deposits is expected to rise as well because traditional gold producers are looking for another play to replace some of their depleting gold resources. Barrick Gold Corp. (NYSE: ABX) has offered to buy Canadian copper miner Equinox Minerals for $7.8 billion. BHP Billiton plc (NYSE: BHP), Freeport-McMoran Copper & Gold Inc. (NYSE: FCX), and Teck Resources Ltd. (NYSE: TCK) will be forced to compete for copper sources, driving costs (and prices) even higher.

The iPath DJ-UBS Copper Total Return Sub-Index ETN (NYSE: JJC) is up about 1%, to $52.88, in a 52-week range of $36.60-$61.69. The Global X Copper Miners ETF (NYSE: COPX) is up more than 0.5%, to $18.55, in a 52-week range of $10.00-$20.98.

Both corn and Chicago wheat are trading more than -2% lower today, which is counter-intuitive given the continuing weather woes that continue to threaten corn planting and winter wheat harvesting. Prices for corn and wheat appear to be falling as fund managers head for the exits on the riskier (and high-priced commodities) in favor of safer investments like the US dollar. The moves are a response to both the continued sovereign debt problems in Europe and the coming termination of the Federal Reserve’s QE2 program.

The Teucrium Corn Fund (NYSE: CORN) is down nearly -1.5% at $44.57, in a 52-week trading range of $23.79-$48.77. The Market Vectors Agribusiness ETF (NYSE: MOO) is up slightly to $52.85, within the 52-week range of $35.62-$57.93. The PowerShares DB Agriculture Fund (NYSE: DBA) is off less than -0.5%, to $32.02, within a 52-week range of $22.85-$35.58.

Paul Ausick

The stockpile of zinc at the bonded warehouses of the London Metal Exchange is at its highest point since 1995, at over 800,000 metric tons. Like its stockpiles, the price of zinc is also relatively high, currently over $2,300/metric ton. Demand is expected to rise by 5.5% in 2011 while supply is expected to rise just 2.2%.

One longer term supply issue is that about 1 million tons of zinc will drop from supply by 2014 as several currently operating mines close down. Leading zinc producers include Teck Resources Ltd. (NYSE: TCK), Xstrata plc (OTC: XSRAY), and Anglo American plc (OTC: AAUKY) among others.

China, both the world’s largest producer and largest consumer of zinc, could be sitting on up to 1.5 million metric tons of refined zinc, which argues for lower imports of the base metal into China. But that’s not what appears to be happening.

Zinc imports have risen in China and the likely reason is that zinc is about to join copper as an alternative financing vehicle. Copper has served as collateral for loans in China for some time now, and it appears that the rising demand for zinc answers the same need. The ability to use base metals as loan collateral depends on a liquid domestic market for the metals. Lead could be next, as the Shanghai Futures Exchange has recently launched a lead futures contract.

Chinese authorities are cracking down on copper arbitrage, but holders are now re-exporting copper. Net imports of copper fell by -31% in the first quarter of 2011, while copper exports rose to a five-year high. As the government staunches the use of copper as collateral, zinc is very likely taking its place, with lead waiting for its turn.

As the political turmoil lessened in Ivory Coast, most traders expected the price of cocoa to fall once exports from the world’s largest producer resumed. Exports have now re-started, if only slowly, but cocoa prices not only remain high but continue to rise.

Part of the problem is that country’s banks have not yet re-opened, and cash-strapped cocoa farmers are smuggling their crops to neighboring Ghana. Another part of the problem is that prices are so low in the interior of the country that farmers only sell when they are desperate for cash.

But the main reason for still-rising cocoa prices is short covering. During the political unrest in Ivory Coast many traders went short anticipating that the end of the fighting would send cocoa prices plunging. Because that didn’t happen, the shorts had to cover, sending the market higher. At about mid-day today, cocoa is trading up $111/metric ton, at $3,279. The shorts are probably looking at prices at $2,500/metric ton or lower.

Stocks with exposure to cocoa prices include the iPath DJ-UBS Cocoa Total Return Sub-Index ETN (NYSE: NIB) which is up more than 3% today at $46.49, within its 52-week range of $37.40-$53.59. Kraft Foods Inc. (NYSE: KFT) posted a new 52-week high today of $33.77, and Unilever plc (NYSE: UL) came with pennies, rising to $32.55 within a 52-week range of $25.74-$32.75.

Finally, corn prices have fallen -$0.30/bushel so far today and wheat futures have fallen a nearly equal amount as traders start to wonder what will happen if the market gets flooded with supply. Russia is expected to resume wheat exports, perhaps in July, and Ukraine has already raised its export quota on corn. Some rain in the wheat-growing regions of China mean that Chinese imports may lag as well.

Stocks with exposure to grains include Archer Daniels Midland Co. (NYSE: ADM) which is down fractionally today, General Mills, Inc. (NYSE: GIS) which is up fractionally after coming within range of a new 52-week high, and Kellog Co. (NYSE: K) which did post a new 52-week high today of $56.84. The Teucrium Corn Fund (NYSE: CORN) is down more than -5%, to $44.15, within a 52-week range of $23.79-$48.77, and the PowerShares DB Agriculture Fund (NYSE: DBA) is down about -1.5%, at $33.61, within a 52-week range of $22.85-$35.58.

Paul Ausick

Not every miner was so bullish, though. Teck Resources Ltd. (NYSE: TCK) has cut its full-year sales outlook for both coal and copper. The cut in its copper output was blamed on a labor dispute in which miners have rejected a new five-year collective bargaining agreement and are continuing their strike. Teck has also had trouble getting its metallurgical coal to market due to disruptions to rail service and one of its export terminals in Canada.

Aluminum prices could also be in for a price rise, according to Tom Albanese, CEO of Rio Tinto plc (NYSE: RIO).  Because aluminum smelting and refining requires an enormous amount of electricity, Albanese thinks that the recent wave of smelter-building is reaching an end because there are few places left to build facilities where a sufficient supply of electricity is available.

In Japan, aluminum plants in the western part of the country are unaffected by power shortages, but a few plants in the east are subject to rolling blackouts. That’s not much of difference-maker because demand for aluminum from car makers like Toyota Motor Corp. (NYSE: TM) has dropped. Among Toyota, Nissan, and Honda Motor Corp. (NYSE: HMC) production is likely to fall by an estimated 200,000 units.

Gold futures closed at a record $1,438/ounce and silver has set a new 31-year high, closing at $37.29. The SPDR Gold Shares ETF (NYSE: GLD) rose about 1%, and the iShares Silver Trust ETF (NYSE: SLV) rose about 2.6%. The Market Vectors Gold Miners ETF (NYSE: GDX) and the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) both rose by about 3.6%. The Global X Silver Miners ETF (NYSE: SIL) rose nearly 5%.

Mining for gold is a good business these day, and China now thinks it wants to expand its gold mining beyond its own borders. China Gold International Resources Corp. Ltd., which is 42% owned by state-owned China Gold Corp., is looking to acquire mines in Russia and Mongolia. A company spokesman told Reuters that China Gold Corp. is looking to buy five or six properties.

On the food front, General Mills (NYSE: GIS) reported fiscal third-quarter EPS of $0.59 on sales of $3.65 billion, beating EPS estimates of $0.56 and posting sales pretty much inline with expectations. The company has already raised prices for some of its food in the US, and those increases have hurt the company’s sales overall.

US farmers are expected to plant more acreage this year, particularly in corn and wheat. Prices are expected to stay high though, due to increased demand. The US Department of Agriculture will issue its next acreage forecast on March 31st, and that will offer a more accurate measure of crop projections.

Paul Ausick

Total will pay about $1.74 billion to Suncor to gain an additional 19.2% stake in Suncor’s Fort Hills project and a 49% stake in Suncor’s Voyageur upgrader project. The deal bumps Total’s interest in the Fort Hills project to 39.2%. Suncor owns 40.8% of the project and is the operator. Teck Resources Ltd. (NYSE: TCK) owns the remaining 20% and is not involved in this deal.

In exchange for the stake in the Voyageur project, Total passes a 36.75% stake in its Joslyn project to Suncor, retaining 38.25% for itself. Total will be the operator at Joslyn. Occidental Petroleum Corp. (NYSE: OXY) owns 15% of the project and Japan’s Inpex owns the remaining 10%, and neither is involved in the announced deal.

Total will also cancel work on an upgrader it had planned as part of the Joslyn project. Instead the Voyageur upgrader will process the bitumen from both Fort Hills and Joslyn at a rate of 200,000 barrels/day once the upgrader is completed, now scheduled for 2016. Suncor expects to more than double its output by 2020, to more than 1 million barrels of oil equivalent per day.

Total’s history in the oil sands is a bit rocky. The company tried in 2009 to acquire UTS Energy, a partner with Suncor and Teck in the Fort Hills project, for about $830 million. Finally in July 2010, the French company coughed up about $1.5 billion for UTS to get its initial 20% stake in the Fort Hills project. Now Total owns nearly 40% of a deposit estimated to equal 3.4 billion barrels of oil equivalent. Total also owns 50% stakes in two other oil sands projects, Surmont (a 50/50 joint venture with ConocoPhillips Corp. (NYSE: COP)), and Northern Lights, another 50/50 joint venture with China Petroleum & Chemical Co., or Sinopec, (NYSE: SNP).

Oil sands development has gotten hammered by environmental groups for its destruction of the environment, its greenhouse gas emissions, and its nearly unquenchable thirst for water. However a report issued by Royal Society of Canada scientists downplays the impacts of oil sands mining but does note that the development accounts for 5% of Canada’s greenhouse gas emission and that as the industry grows so will emissions. The report also states that there is a need to review the adequacy of the financial reserves meant to pay for environmental disasters and to repair damage when projects shut down.

Total committed itself to oil sands development as a way to build its proved reserves at a reasonably affordable price. Even the massive costs of developing an oil sands project pales compared with developing ultra-deepwater reserves.

Paul Ausick

Berkshire Hathaway Inc. (NYSE: BRK-B) 319,851 shares worth almost $26 million.

Brookfield Properties Corporation (NYSE: BPO) 2,359,166 shares worth $36.2 million.

Goldman Sachs Group Inc. (NYSE: GS) 110,864 shares worth some $18.9 million.

Harvest Natural Resources Inc. (NYSE: HNR) 4,771,814 shares worth about $35.9 million.

Horsehead Holding Corp. (NASDAQ: ZINC) 1,358,498 shares worth $16 million.

Interactive Brokers Group, Inc. (NASDAQ: IBKR) 94,104 shares worth $1.5 million.

International Coal Group, Inc. (NYSE: ICO) 2,512,570 shares worth almost $11.5 million.

Leucadia National Corp. (NYSE: LUK) 791,074 shares worth $19.6 million.

Pinnacle Airlines Corp. (NASDAQ: PNCL) 2,002,902 shares worth $14.9 million.

Potash Corp. of Saskatchewan (NYSE: POT) 331,603 shares worth $39.5 million.

Teck Resources Ltd. (NYSE: TCK) 5,501 shares worth $245K…

Terex Corp. NYSE: TEX) 530,876 shares worth $12 million.

Wells Fargo & Co. (NYSE: WFC) 374,415 shares worth $11.6 million.

Other holdings are as follows:

• Capital Source Inc.  (?)
• Cresud S A  (CRESY)
• FAIRFAX FINL HLD SUB (FRFHF.PK)

JON C. OGG

UTS owns 20% of the Fort Hills project in Alberta, and Total was surely hoping to use that to lever an additional stake from either Petro-Canada, which owns 60% of the project and is the operator, or from Teck Cominco (NYSE:TCK), which owns the remaining 20%. It is now highly unlikely that Suncor will give up Petro-Canada’s share, and Teck’s share isn’t enough to give Total control of the project.

Total shares are off less than 1% in early trading today. The company’s 52-week range is $42.60-$91.34.

Paul Ausick
April 28, 2009

The acquisition is subject to a marketing deal, government approvals, and completion of due diligence. The underwriters for the stock offering have a 30-day over-allotment option for 975,000 shares.

Teck expects to complete a currently under-construction project to begin production by the end of 2009. Commercial production is expected in the first half of 2010.

Royal Gold shares are down about 5% on the news, probably with gold itself, while Teck shares are up slightly.

Paul Ausick
April 6, 2009