Red-Hot Resources

"Luck is not chance, it’s toil; fortune’s expensive smile is earned.”

Thursday, June 28, 2007

News With a Twist

Here's three pices of news out today that means more than they seems on the surface …

  1. Japan's Factory Output Unexpectedly Drops, Damping Rate-Increase Prospects Japan's industrial production unexpectedly dropped for a third month in May, the longest decline in almost two years, raising concern that growth is slowing in the world's second-largest economy.

XX My take – this likely means that the Bank of Japan's growling about potentially raising interest rates is all noise and no teeth. And THAT should be good for gold prices. Japanese investors – huge gold buyers – were cutting back on gold purchases on the hope that the BOJ was going to raise rates. "Why risk money in gold when you might get a good return just sticking your money in the bank," is how that reasoning goes.

But if the BOJ isn't raising rates, the Japanese might buy gold instead. Let's watch and see how this develops.

  1. Kazakhstan Reduces Forecast for Oil Output 13 Percent; Projects Delayed Kazakhstan, the second-largest oil producer among the former Soviet states after Russia, cut its forecast for oil output by 13 percent because of project delays and pipeline bottlenecks.

XX My take -- This is actually important for uranium. Uranium prices have been weakening partly because investors, traders and utilities alike were factoring in huge production increases from Kazak uranium mines. But now we see that Kazak is suffering serious delays in its oil projects. What do you think the odds are that it will suffer serious delays in its uranium projects? Better than average, I'd say. Bottom line: This should be bullish for uranium prices. That said, the expected pullback in uranium prices could be a self-fulfilling prophecy by now. I'm just more convinced than ever that it will be a buying opportunity.

  1. Yamana Announces Agreement With Northern Orion and Proposal to Meridian Gold to Create Pre-Eminent Mid-Tier Gold Producer Yamana Gold and Northern Orion Resources Inc. today announced that they have entered into a business combination agreement and a concurrent proposal has been made to Meridian Gold Inc. with respect to the combination of the three companies.

XX This is interesting news, and not just because Yamana is in the Red-Hot Canadian Small-Caps portfolio. The companies have good reasons for the merger/takeover.

  1. The combined company will have annual gold production of more than 1.4 million ounces by 2009 from a combined base in 2006 of approximately 660,000 ounces
  2. It will have a cash-cost per ounce of a NEGATIVE $100 per ounce in 2007-2010 due to copper credits.
  3. It will start with a net cash balance of $575 million and that should rise to $2.4 billion by 2010.

In other words, with this combination, these companies are on their way to the big league.

But it also shows that gold companies don't consider themselves overvalued. In fact, they think this is prime time to do mergers and acquisitions. Gold is cheap at these prices, my friends, and select gold miners are even more so. I expect another wave of M&A activity in the near future.


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