PDAC: precious metals and uranium gurus weigh in with predictions for 2011

The opening technical session “Commodities and Market Outlook” of the Prospectors and Developers of Canada convention in Toronto gave a relatively upbeat outlook for precious metals and uranium prices this year, especially considering the wild ride investors endured over the 2008-10 period.

Mining analyst Michael Jansen from JP Morgan’s London office kicked things off by declaring that there is “still considerable head room in real terms” with respect to the gold price.

He said the opportunity cost of holding gold will continue to be low as long as the real yield on U.S. assets remains low, or around 1.2%. He commented that the opportunity-cost factor “matters more than the inflation-hedge argument” for gold, because the gold/inflation relation “has broken down.”

Equities, he said, “looked cheap compared to gold,” and described how he’d seen the “wholesale crowd pull back from gold and go into equities.” As a result, he said, the gold exchange-traded funds (ETFs) sector “has topped out as we start to see liquidations.”

Other factors at play these days, he said, are: net gold purchases by central banks; mining companies’ hedge books essentially reaching zero; mine supply surging 3-4% in the coming years after having leveled off in previous years; miners’ cash costs rising slower than the gold price’s rise (globally cash costs averaged US$555.40 per oz. in 2010); and gold’s share of exploration spending having shrunk to 50% today from 90% around the turn of the millennium.

JP Morgan predicts gold will average US$1,465 per oz. this year, and has a target of US$1,500 per oz. by the end of the year.

Mining analyst Jim Steel from HSBC’s New York office had a similar message about silver‘s prospects, given that silver’s all-time high 30 years ago is actually US$125 per oz. in today’s terms once adjusted for inflation. (c.f. gold’s inflation-adjusted all-time high is US$2,300 per oz. in 2011 dollars).

Steel noted that silver’s recent price rally outperformed every other asset class, even though silver “looks expensive compared to gold” based on the gold-to-silver price ratio.

With respect to silver ETFs, he descibed them as being less prone to selloffs than one might expect, because the average silver ETF holder is male, is in his 50s or older, has a net worth exceeding US$1 million, and is holding the silver ETF as part of an inheritance for his children.

Analyst Edel Tully from UBS’s London office listed five reasons to be optimistic that palladium prices would continue to be strong: rising gasoline-powered car demand in China (palladium is used in gasoline autocatalysts, whereas platinum is used in diesel autocatalysts popular in Europe); the catching up of Chinese emissions standards with the West’s more-demanding and more-palladium-consuming ones; price-inelastic demand with limited threat from electric cars on a 5-year view; constrained mine supply from Russia and South Africa; and diminishing available Russian stockpiles.

As for platinum, she said it’s “playing catch up” to palladium, as investors had sold platinum to buy palladium.

She said South African mine supply “is challenged” owing to rand appreciation, 10+% wages rises, soaring electricity costs, threats of supply disruptions, and falling grades.

On the demand side, Tully cited that global vehicle sales had rebounded to pre-recession levels, and that America’s brief flirtation with low-platinum-consuming small cars had ended.

Overall for 2011, UBS is forecasting average palladium and platinum prices of US$800 and US$1,905 per oz., respectively, and rising next year to US$825 and US$1,950 per oz., respectively.

Analyst Greg Barnes from TD Newcrest in Toronto marveled at the incredible turnaround in uranium prices over the past six months. After languishing around US$40 per lb. uranium oxide for three years, prices soared to US$73 per lb. before settling to today’s US$60-per-lb. level. This was caused, he said, by the “Chinese making a big move into the long-term market, which surprised people,” in order to fuel the country’s 23 new nuclear power plants either under construction or likely to be built in the not-too-distant future.

Barnes ticked off some of the other major factors affecting uranium prices: the U.S. Department of Energy selling off uranium stocks to pay for environmental cleanups; the end in 2013 of Russia’s nuclear-warhead-related, highly-enriched uranium sales program; global uranium mine production increases, especially from Kazakhstan, which has surpassed Canada as the number one producer; and large Indian uranium purchases to come, as it politically normalizes its nuclear industry.

Barnes reckons a US$70-per-lb. uranium oxide price is necessary for new uranium mines to be built. Accordingly, TD Newcrest is predicting uranium oxide prices in the US$70-80 per lb. range to 2016.