3
MATERIAL
TITANS
How to Get Wealthy
in the Emerging
Commodity Boom
3 MATERIAL TITANS
How to Get Wealthy in the
Emerging Commodity Boom
TABLE OF CONTENTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P.1
Randgold Resources Ltd (GOLD) . . . . . . . . . . . . . . . . . . . . . . . . . . P.1
NovaGold (NG) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P.3
Petrobras (PBR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.5
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3 MATERIAL TITANS
How to Get Wealthy in the
Emerging Commodity Boom
T
o battle the worst recession since
the Great Depression, our government has pumped a tremendous
amount of money into the economy. The
Federal Reserve balance sheet has been
growing fast, more than doubling in a
year’s time and it now exceeds $2 trillion.
Today, the role of the U.S. dollar as the
world reserve currency is being questioned. On top of the fundamentally
weaker dollar, increased demand from developing countries, led by China and
India, is fueling future inflation. The most
striking example among the commodities
is probably crude oil, whose price has
more than doubled off its lows, even as demand has remained weak.
Gold Prices: 1978 - Present
1100
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800
700
600
500
400
300
200
100
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1/88
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6/09
Randgold Resources Ltd (GOLD)
Gold is another, longer-term, example. Since
the end of 1999 to the end of June 2009, gold
has climbed more than 300 percent, while
stocks, as measured by the S&P 500, have declined in the order of 30 percent if you exclude
dividends. The most striking feature of this better than five-fold difference in performance is
that the divergence occurred while inflation
was almost nonexistent.
F
or thousands of years, gold has been a store
of value and symbol of wealth in nearly all
cultures of the world. While paper currencies
are only as good as the governments backing
them, gold is universally accepted as a valuable
asset, and as such it isn’t dependent on political factors.
Gold thrives on turbulence, and it has
served as a protection against the unforeseen
for ages. More importantly, gold is the one
asset that can benefit from both inflation and
deflation. Going forward, we cannot be certain
whether the economy will take another hit or
not. If another shock occurs, most commodities could come down in price, temporarily.
However, gold will still likely be a stalwart.
If we look ahead in the world with just
slightly higher inflation (and we think that the
reality will be harsher), gold will lead other
commodities, and inflation hedges will be
among the best investments of the era.
Here are three ways of capitalizing on this
trend. Together, they represent a relatively lowrisk way of inflation-proofing your portfolio.
Many more great stocks may be found in every
issue of Leeb’s Real World.
While we like the metal itself, we also think
that selected miners should outperform the
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3 MATERIAL TITANS
ble gold reserves and about 20 million oz in
gold resources (potential reserves that haven’t
been fully drilled or explored), of which 9 million oz of gold reserves and 16 million oz of
gold resources are attributable to it due to partial mine ownership.
metal. Here’s why. Global production levels
have maxed out. Since 2001, production has
declined 1.3 percent per year on average, despite gold prices more than tripling during that
period. If miners could increase output, one
would think that they would have done so in a
favorable market—that did not happen. Going
forward, much of the same is expected. As AngloGold Ashanti’s CEO Mark Cutifani, one of
the industry’s insiders, noted in 2008, world’s
gold production will be falling at a 3 percent
annual rate for the next five years.
In light of declining global production, gold
miners with large amounts of reserves and
strong growth potential will be the biggest winners. In this report, we highlight two such
companies.
Randgold Attributable Reserves and
Attributable Resources
(millions of oz.)
18
Attributable Resources
Attributable Reserves
16
14
12
10
8
6
4
2
0
2003
2004
2005
2006
2007
There are many positives about Randgold,
and first is that its production growth is expected to grow at an annual 20 percent rate.
Another positive is its relative low costs (cash
costs came in at $467/oz in 2008).
Randgold operates on largely untapped
ground and has two operating mines in Mali
(Morila and Loulo), a mine in Cote D’Ivoire
(Tongon) where production is scheduled to
begin in 2010, and a significant portfolio of exploration projects in West and East Africa. It
has about 11.5 million oz of proven and proba-
The Randgold’s Morila mine is its oldest operating mine. Randgold discovered the Morila
deposit in 1996 and subsequently financed and
developed the mine. Randgold sold partial
ownership to AngloGold Ashanti in 2000, and
production began that year. The two companies currently operate the mine through a
50:50 joint venture called Morila Limited,
which owns 80 percent interest in the mine
(the Malian government owns the rest). In
2008, the Morila mine produced about 425,000
ounces of gold, approximately 170,000
ounces of which were attributable to
Randgold. Having surrendered more than
5 million ounces of gold so far in its lifetime, production from Morila is now on
the down slope and it’s expected to decline through 2012. Production in the
first quarter of ’09 was less than 100,000
ounces, but was in line with projections.
If the Morila mine is Randgold’s aging
veteran, the Loulo mine is Randgold’s rising star, slated to make up for Morila’s declining production and then some.
Randgold has a larger stake in Loulo (80
percent, with the Malian government
2008
again owning the rest) than in Morila,
meaning that it will get a larger piece of
profits as well. The Loulo mine began operations in 2006 and is currently producing from
two open pits and one underground mine
scheduled to reach full production this year,
with another underground mine in the planning stage. Last year this mine produced about
258,000 ounces, but production is forecasted to
approach 600,000 ounces by 2012, representing better than a 100% increase from current
levels.
The company’s Tongon mine, which is expected to produce gold by the final quarter of
2
How to Get Wealthy in the Emerging Commodity Boom
also appear very promising.
GOLD
A big plus for the company is its financial strength. Having grown organically,
the company has delivered strong results
in both production and exploration, and
well deserves its premium valuation.
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50
40
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NovaGold (NG)
20
This small stock is a gem, and its reserves have the potential to make the
0
company one of the leading gold produc5/05
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ers in the world. Possessing one of the best
growth profiles in the gold industry, No2010, sits on an estimated 3 million ounces of
vaGold sits on top of one of the world’s largest
gold reserves, and should become a major
undeveloped gold, silver and copper deposits, a
source of production as the Morila mine is
world-class resource base. Yet the market is asphased out. Average annual production at Tonsigning a very low multiple to NovaGold’s
gon is projected to be about 270,000 ounces for
shares.
10 years. Randgold has an 84 percent ownership of this mine.
A reasonable valuation for a company at NovaGold’s stage of development is somewhere in
Randgold has a fourth potential mine in
the area $100 an ounce of gold (which is about
Senegal called the Massawa mine. Randgold inwhere it was being valued two years ago). With
fers that there’s more than 3 million ounces in
its market capitalization around $800 million
gold resources there and preliminary drilling
and gold reserves of 15.2 million ounces, inhas begun to further test the feasibility of the
vestors are currently pricing Nova Gold at
project. A major new discovery made in
about $53 an ounce of gold. We believe much
Gounkoto in May, near the Loulo project, is
of investor’s reluctance on the stock stems from
also very promising. Better estimates of how
Nova Gold’s largest projects being located in
much gold is in the deposit won’t be known
extremely remote areas of northwestern British
until late summer or early fall, but Randgold
Columbia and southwestern Alaska and the
thinks that the new discovery could dwarf all
company still being several years away from
its other projects in size and quality.
producing commercial quantities of gold.
To meet its production guidance of 491,000
Bringing these resources to market will require
ounces for this year, Randgold will have to sucbillions of dollars and a lot of hard work.
cessfully complete expansion and development
However, consider what happened to Barrick
projects at its Loulo and Tongon sites on time;
Gold between the mid 1980s and the early
thus there remain risks to its production
1990s. In a period in which gold itself was
growth forecast. However, Randgold’s managetrending lower, Barrick’s share price rose nearly
ment team has extensive experience operating
50-fold on the strength of the growth of its rein West Africa and has a strong track record of
source base. NovaGold has by far the strongest
successful execution, so barring unforeseen
growth profile in the industry today, and may
events beyond Randgold’s control, the projects
come close to matching Barrick’s expansion.
in development should be completed as expected. The Massawa and Gounkoto projects
NovaGold and Teck Resources jointly owned
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3 MATERIAL TITANS
equipment required for the mine.
Copper Prices: 2004 - Present
NovaGold’s Donlin Creek project in
Alaska, a joint venture with Barrick Gold, is
400
also underway. This mine, too, is still several years away from commercial operations,
350
but the company’s recently announced results of the feasibility study for Donlin
300
Creek are extremely exciting. Once built,
250
the mine is expected to be one of only a
handful of gold mines worldwide that’s ca200
pable of producing over one million ounces
of gold annually. The mine has proven and
150
probable gold reserves of 29.3 million
100
ounces. The first five years of the mine’s ex5/04
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pected 21-year life are expected to yield an
average of 1.6 million ounces of gold. The
Galore Creek copper, gold and silver project in
total cash cost is anticipated to be $394 per
British Columbia is one of the world’s largest
undeveloped copper-gold deposits. Galore con- ounce of gold. As with Galore Creek, substantial infrastructure will have to be put in place
tains 8.9 billion pounds of measured and indibefore operations can begin. Donlin Creek will
cated copper, with another 3.6 billion pounds
inferred. It also has 7.3 million ounces of meas- require an average of 127 megawatts of electrical power which the company plans to source
ured and indicated gold with another 3.8 milfrom a combination of on-site combined cycle
lion ounces inferred, as well as 123 million
gas turbine generators and wind power-generaounces of gold M&I with 65 million more intion facilities it will have to install. The project
ferred. While it will be several years before the
will also require the construction of a port on
mine starts production, it does stand to generthe Kuskokwim River, an access road connectate substantial cash flow for the company.
ing the port to the mine site, an airstrip, camp
Teck is funding 100 percent of the project’s reaccommodations, the mine and plant site area
maining C$60 million optimization study
and tailings facility. Cargo and supplies will
while maintaining sole voting rights on the
have to travel a long way to reach the remote
timing and nature of how those funds are
spent. Beyond that point the two will
equally share in the expense and decision
NG
making for the project. Galore Creek will
25
be a large-scale, open-pit operation producing a high-quality precious-metal-rich
20
copper concentrate. The company is in
the process of laying in the necessary in15
frastructure for Galore Creek, including
building more than 50 miles of roads,
bridges and a nearly 3-mile long tunnel
10
under a glacial mountain that will be capable of handling massive earth moving
5
vehicles and other mining equipment. It
will also have to build out the electrical
0
grid to power the mine’s operations, as
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well as install all of the other plant and
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4
How to Get Wealthy in the Emerging Commodity Boom
and production, supply, and distribution of gas,
mine. Among the company’s other assets are
and power operations in Argentina, Angola, Boits Nome operations, which include the Rock
livia, Colombia, Ecuador, Equatorial Guinea,
Creek, Big Hurrah and Nome Gold mines. Rock
Iran, Libya, Mexico, Mozambique, Nigeria,
Creek is on care and maintenance for now, but
Paraguay, Peru, the United States, Tanzania,
the company recently updated its resource estiTurkey, Uruguay, and Venezuela.
mates for the project by 24 percent, to nearly 3
million ounces of gold. Management is
studying ways to meet the project’s power
National Production of Crude Oil and NGL ( bpd)
needs and reduce the mine’s operating
costs. With gold prices up and the cost of
Offshore
fuel and other key inputs down, manageOnshore
ment may green light the mine once
again later this year.
Today, the company is closer than ever
to moving from junior exploration to
mid-tier miner status and thus we believe
the stock has dramatic upside potential
without being considered expensive.
Given the thawing in the capital markets
and the staggering sums that have been
pumped in the system (and the inflationary pressures that are likely to result from
those moves) the price of gold itself has
tremendous potential. As the yellow metal
rises, so too will the value of NovaGold’s properties, which in turn should drive the stock
value up.
Reaching sustainable self-sufficiency has
long been a goal for Brazil and for Petrobras.
Today, to increase its performance in energies
that contribute to sustainable development,
Petrobras no longer works solely with oil;
rather it’s an integrated energy company in the
broadest sense of the word. The company’s diverse energy portfolio gives it a unique capability to outperform the market during the
recession, and then continue to lead in the
years that follow. Unlike the U.S., where corn is
a staple food-crop with a soaring price-tag,
Brazilian ethanol is derived from sugar cane,
and Petrobras is decades ahead of practically
every other company in the world in its production and distribution. Petrobras’s expansion beyond oil is significant for many reasons.
Perhaps the most noteworthy is that through
the development and exportation of biofuel
materials, Brazil becomes more energy independent, with a stronger economy, and will be
at the forefront of a wind, solar and biofuel energy matrix.
Petrobras (PBR)
One the world’s biggest national oil companies, Petroleo Brasileiro (PBR), or Petrobras as
it is known, accounts for nearly all oil production and refining in Brazil. Founded in 1953
and based in Rio de Janeiro, this Brazilian government-controlled company is a leader in
many areas of energy operations, including
deepwater drilling, as well renewable energy including wind, solar and biofuels. It supplies
oil, liquefied natural gas, and natural gas to refineries in the country; surplus production is
sold in foreign markets. The company also invests in natural gas transportation companies,
petrochemical companies, fertilizer plants, natural gas distributors, and thermoelectric companies in Brazil and engages in the exploration
At the same time, oil remains a core asset for
Petrobras. Today, Brazil is the world’s ninth
5
3 MATERIAL TITANS
largest oil consumer, with annual consumption growth of 2.4 percent. In this
large market, Petrobras has an utterly
dominant position.
PBR
80
70
And its reserves and discoveries are
60
very significant. Its recent discovery in
50
Santo Basin is Brazil’s biggest oil-bearing
area and one of the world’s most signifi40
cant oil finds of the last 30 years. One
30
problem—it’s buried under several thou20
sand feet of water and thousands of feet
of salt. The oil discovered, however, in
10
the Tupi accumulation alone, a small
0
part of the new frontier, may boost the
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current Brazilian oil & gas reserves, currently at 14 billion barrels, by more than
2.2 million barrels per day, as well as nearly
50%. To reach the pre-salt layers, at depths
6,000 service stations all over Brazil, in addiranging from 3.11 to 4.35 miles, the company
tion to another 990 abroad.
developed new drilling projects: more than
With a market cap of $170 billion, Petrobras
1.24 miles of salt were crossed. To date, Petrois an excellent inflation-proof investment. It
bras is the only operator company, with or
also represents a huge added bonus for U.S. inwithout partners, to drill, test and evaluate prevestors, as the currency play with the potential
salt rocks. The Brazilian government has refor the Brazilian real to gain in value as the U.S.
cently acknowledged the special treatment they
dollar loses value. Investors can buy the ADR
intend to give Petrobras while drafting legislaof Petrobras on the New York Stock Exchange
tion that will control the bidding over the preunder the ticker symbol PBR to capitalize on
salt exploration and drilling rights.
the long-term value of this Brazilian powerPetrobras has significant experience in deephouse.
water; today, it operates 22 percent of global
deepwater production, holds numerous production water records and is the largest single
operator of floating production systems. The
company is financially strong, with $18.1 billion in funding for its 2009 projects already
completed, and with the remainder for 2010
expected to be met via funds from Brazilian Development Bank and through cost reductions.
The company operates through its four business areas: Exploration and Production, Downstream, Gas & Energy and International. In
2008, Petrobras produced 2.4 million barrels of
oil equivalent, a milestone reached by few
companies in the world. On the production
side, the company has 112 production platforms and 15 refineries with capacity to process
How to Get Wealthy in the Emerging Commodity Boom