Comment from Angelos Damaskos, CEO of Sector Investment Managers and fund adviser to the Junior Gold fund…
Following confirmation by UN inspectors that chemical weapons of mass destruction were used by the Assad regime, the threat of military intervention by the United States and other UN members in Syria is unsettling the markets. Gold continued its rise to exceed USD1,400/oz in late August. However, we believe that the main drivers of the gold price in July and August were the rise in demand for physical bullion from Asian investors and a reversal of sentiment among holders of ETFs and other financial instruments.
UN intervention in Syria could cause greater instability in the region, especially as Iran is its key ally. Rising risks in the world’s most prolific oil-producing region could cause investment flight to safe heavens, principally gold. The next phase of gold’s rebound would be hitting USD1,500/oz. At this level investor confidence should increase significantly as this is believed to be the average replacement cost of new production.
Gold mining shares continued their recovery in August and Junior Gold’s portfolio rose by 10.5% during August, following a rise of 17.4% in July. It appears that, just as smaller capitalisation shares fell the hardest in the two-year bear-market, they can also recover quickest as sentiment changes.
Among the main contributors to Junior Gold’s portfolio performance for the month were:
Aureus Mining (AUE.LSE) rose by 35% when it announced that construction of its New Liberty project in Liberia is on track to start production in Q1 2014. Progress by a banking syndicate in arranging the necessary financing was also seen as positive. The feasibility study of the project finalised in 2012 showed a pre-tax net present value of USD234m (5%), an IRR of 37% and payback within 2.2 years at an average gold price of USF1,400/oz. As expectations for the future gold price rise, the economics of this project improve and could help re-rate the company’s current market capitalisation of about USD140m.
Alexco Resources (AXR.TO) is one of our selected silver investments in the portfolio (silver currently accounts for around 18% of the fund). Alexco rose 73% after it announced its second quarter operational results. Mine and mill output rose by 25% and metal production was up 52% over the first quarter, while operating costs continued to drop. The suspension of operations during the winter months will allow further review of mine plans and the cost structure. With silver also benefitting from safe-haven demand, the company is set to return to profitable mining at one of the world’s highest-grade silver mines early next year.
