When gold prices plunged in late 2013, gold producers took notice and developed mine plans that offered greater flexibility in troubled times. But even the best plans take time. Well, it's almost time for the producers to deliver, says Raj Ray, associate metals and mining analyst with National Bank Financial. He is looking for producers with flexible mine plans that can generate cash flow against a backdrop of static gold prices; the market likes developers with advanced, low-capital intensity projects with permits in place. Ray delivers his top gold producer and developer picks in this interview with The Gold Report.
Raj Ray is a metals and mining research associate analyst with National Bank Financial, covering junior mining companies. Prior to joining NBF, Ray worked as an equity research associate with GMP Securities covering diversified and fertilizer sectors. He has also worked in investment banking with Dundee Capital Markets on equity financings and M&A transactions for small- to mid-cap gold and base metal companies. Prior to this Ray was a process engineer at Vedanta Resources Plc for four years. Ray holds a Bachelor in Metallurgical Engineering from India and a Master of Business Administration in finance from the Schulich School of Business. He has also completed all three levels of CFA and is awaiting his charter.
Raj Ray: The issue is that despite the geopolitical backdrop, the fundamentals still appear weak. The big drivers—demand from India and China and gold exchange-traded funds—have been more or less flat year-over-year. China is still digesting the gold it purchased last year. And, although price premiums have declined in India following the recent Bank of India's move to permit trading houses to import gold again, further relaxation of the import tariffs is not forthcoming. If not for geopolitical conflicts providing support, gold could have moved much lower than $1,300/oz. I don't see a big driver to push gold higher over the next six to eight months.
TGR: India has imposed high tariffs on gold imports and those have resulted in a marked increase in gold smuggling. How is that influencing the gold prices?
RR: I don't think there has been a marked impact on gold prices in India due to smuggling. The World Gold Council says about 250 tons of gold are smuggled into India each year. If you add that to the official gold imports of roughly 800–850 tons, you still have a shortfall of around 200–300 tons based on average annual imports. What might be something to look out for heading into the wedding season is the rainfall and its impact on food production. Rural India accounts for 60–70% of India's gold demand. The rainfall outlook has improved slightly, but a rainfall shortage could make the government reluctant to reduce the import duties anytime soon. It would also mean that people have less money to spend on gold.
TGR: You said China is still digesting its 2013 gold hoard. How long before China is consuming gold as it did in 2013?
RR: Given the lack of transparency, we don't know if the 2013 gold-buying frenzy was driven by consumers or the state. If most of it was consumer-driven, there could be several possible explanations as to why demand has been muted this year. One is the slowing economy, which in turn has contributed to the depreciation of the yuan. There is lower demand for luxury goods. People are still holding on to a lot of gold inventory following last year's purchases. Chinese consumers could return to the market soon but I expect this to play out for another 6–12 months.