This chart blew us away. Stock prices are supposed to move at random. So how do we explain such a seemingly orderly pattern? To answer this question you have to also consider the cyclical movements of commodities prices. Take a look at the chart below. It shows the trend in commodity prices between 1982 and 2000 – an 18-year upswing in equity prices.

As you can see, commodities entered a secular bear market just as equities entered a secular bull market. And vice versa.

The reason for this is actually relatively simple. As costs for raw materials increases corporate profits decrease. Eventually, the decrease in profits causes demand to fall for commodities… and prices fall.

This fall off in prices then reduces investment in the acquirement and production of raw materials, which in turn reduces supply. As supply gets tighter prices begin to rise again. Investment in commodities becomes once again profitable, and the cycle completes itself.

This story gets really interesting when you consider that during the vicious sell off in commodities last year prices bottomed far higher than in previous recessions.

According to Rosenberg:

In the 2001 recession, the oil price bottomed at $19.33/bbl; in 1990, it bottomed at $16.81/bbl; in 1982 at $28.48/bbl; and in 1975 at $10.11/bbl. We bottomed this cycle at levels that were peaks in prior cycles. The same holds true for copper – it hit its trough at $1.39/pound this time around versus $0.630 in 2001 and $1.00 in 1992. Ditto for the ‘softs’ – soybeans bottomed at $8.48/bushel this time, compared with $4.15 in 2001, $5.42 in the recession of the early 1990s and $5.32 in the early 1980s downturn.

What does this mean for your investments? Put simply, this implies that “the floor is in” for commodities. Consider adjusting your portfolios accordingly.

Gold edged down on Friday as the dollar firmed against the euro, but trading was quiet as investors awaited the outcome of OPEC’s production meeting this weekend and a spate of data due next week for fresh impetus.

Spot gold was quoted at $810.00/812.50 an ounce at 1310 GMT, down from $814.60 an ounce late on Thursday, as the firmer dollar dented interest in the metal as a currency hedge.

The euro slipped after data showed falling inflation in the euro zone, boosting expectations the European Central Bank will cut interest rates further. [ID:nLS548735]

Falling oil prices are also doing little to help gold, which typically moves in line with crude. Traders are awaiting the outcome of this weekend’s meeting of the OPEC oil cartel, at which production cuts will be discussed. [ID:nSP342706]

“Obviously there is still a correlation between oil and gold,” Wolfgang Wrzesniok-Rossbach, head of sales at Heraeus, said. “If OPEC make a decision which might drive the oil price up, that would also be positive for gold.”

Despite the gold price dip, the precious metal is heading for its biggest monthly gain in nine years as investors spooked by the outlook for the global economy buy into the metal as a haven.

Prices have climbed some $90 an ounce, or 12 percent, this month. Gold is also up 12 percent in euro terms, and 15 percent in terms of the Australian dollar.

“Investment (in gold) is strong because there is huge concern over the economic and financial environment, both in the short and possibly the longer term,” RBS Global Banking & Markets metals strategist Stephen Briggs said.

“The measures being taken to stabilise the situation may lead to inflationary fears down the road, so gold has a double benefit from that.”

Gold is typically seen as a hedge against inflation.

DATA

Traders will also be watching for a raft of economic data due out next week, which could have a significant impact on the dollar. U.S. auto sales are due out on Tuesday, and U.S. non-farm payrolls on Friday.

“Next week, manufacturing indices for all major economies will be released,” Standard Bank analyst Walter de Wet said. “This should indicate the speed at which manufacturing is contracting globally.”

Dresdner Kleinwort said on Friday it expects gold prices to average $870 an ounce this year, falling to $740 an ounce in 2009. For silver, it forecasts an average price of $15 an ounce in 2008 and $9.75 next year.

But Wrzesniok-Rossbach at Heraeus said delegates at a forum on Thursday organized by the precious metals group expected gold prices to hit new highs next year.

“Consensus was that in the long run all the bailouts we are seeing, whether in the car industry, the banking industry or others … will (create) inflation, and that would be positive for gold,” he said.

Among other precious metals, spot platinum was quoted at $860.50/880.50 an ounce, slightly up from $853 late on Thursday. Palladium was at $184/192 an ounce against $187.50.

Silver was at $10.12/10.20 an ounce against $10.31 an ounce.

The industrial precious metals have suffered more from the economic downturn than gold, with platinum and palladium, which are chiefly used in catalytic converters, both dropping significantly from their summer highs.

By Jan Harvey
LONDON, Nov 28 (Reuters)

Evil speculators drove the global economy to the brink earlier this year. They creamed off obscene profits as decent hardworking people struggled to pay their bills. Shame on them… and, if you were involved, shame on you!

This was the line relentlessly pursued by the likes of John McCain, Barack Obama, George W Bush and even the US commodity regulator the CFTC.

They are all wrong.

Speculators aren’t bad; they are an essential part of an efficient market. Anyone who claims otherwise is very stupid.

As oil headed for its peak of $147 a barrel, some claimed that the removal of speculative bulls from the market would cause the oil price to fall to $50 a barrel. These claims have now been exposed as a lie.

The bears are now well and truly in charge. There are more short positions in the market than long positions.

Last week, speculative short positions on WTI contracts outnumbered long positions by 9,130 contracts. There were 192,081 long positions and 201,211 short positions. This means short contracts grew by a staggering 65% over the week.

So why isn’t oil now close to $50 a barrel? Why aren’t these speculators driving the price down?

The reason it isn’t is because all of these claims about evil speculators were a politically-motivated smokescreen. The political elite needed a scapegoat that shifted the blame away from them.

If gains in prices were driven by speculation and speculation alone, logic dictates that commodities that are not traded on any exchange would have enjoyed static prices.

This is simply not the case.

The price of steel, iron ore and cobalt has doubled over the past year… with not a speculator in sight.

It’s the fundamentals, stupid

Price gains are down to long-term demand growth and the lack of investment in finding new supplies. I believe that the amount of speculative froth is limited. It certainly doesn’t make up the majority of the price.

Threats by US regulators have had an effect. Some oil bulls have decided to withdraw from the market until it is clear what action to the regulator will take. A market abhors uncertainty and that is what they have created.

I think the CFTC is unlikely to introduce any regulations to curb futures trading. They are unlikely to interfere with free markets. It is an absurd proposition. Once this is clarified, the oil bulls will once again enter the market.

This uncertainty is part of the reason that many investors have been switching from energy investments into the bombed out banking sector over the past month… but this trend may be about to be reversed.

Last week Merrill Lynch said that the “fashionable” investment tactic of buying bank stocks while selling energy companies was looking overdone. It warned on the level of toxic debt in bank balance sheets.

Of course, the main cause of the slide in the oil price from highs has been down to fundamentals.

Fears of a global recession have hit demand and the dollar has been rebounding. The US regulators can also share some blame by using the market as a scapegoat, causing participants to withdraw.

I believe that the strengthening of the dollar will be a temporary phenomenon. The country continues to swim in a sea of debt at the same time as spending billions and billions on global warfare. To steal a phrase from the greens, it’s simply unsustainable.

The global economy may be in the doldrums for a number of quarters, but it will recover. Oil is a finite resource and demand continues to grow — despite the economic slowdown. The long-term trend remains intact.

“Speculators” are essential for a market to operate efficiently. They provide the liquidity needed for producers and buyers to get a good price. They are not a force for bad, but a force for good.

Although demand conditions for many commodities may have eased, supplies are struggling to keep pace with even the slower rate of consumption. I believe this will continue.

The oil price is on the rise again today as investors fret over another supply shock. Another potential hurricane is causing disruption in the Gulf of Mexico. This is just one of many potential supply shocks that could happen this year.

I remain a long-term bull of the oil price. Demand is rising for a finite resource. This is just a temporary price fall.

At Smart Commodities UK I seek to profit from the latest trends in the oil, commodities and infrastructure sectors. Click here to discover the latest profit opportunities.

Regards,

Garry White
Editor
Smart Commodities UK.

Source:Get Ready For The Next Oil Price Surge

Does it matter? Well, sort of. For reasons explained in this space ad nauseam, the U.S. dollar isn’t fundamentally strong. But relatively speaking, it might look less weak than it used to.

That is, traders are beginning to think that the slump that hit the U.S. first has now spread globally. The U.S. bore the brunt of the growth-slowing, credit-crisis-induced correction. Now it’s the rest of the world’s turn to suffer.

That is one way to explain the U.S. dollar’s recent action. And don’t forget what OPEC President Chakib Khelil said in late April. He told investors that, “[Oil] prices are high due to the fact of the recession in the United States and the economic crisis which has touched several countries, a situation which has an effect on the devaluation of the dollar, and therefore each time the dollar falls one percent, the price of the barrel rises by $4, and of course vice versa.”

Pencils and papers please. A six percent decline in the U.S. dollar against the euro should translate into a $24 decline in oil prices, according to the Khelil’s math. Oil would be at around $123 if the dollar rally began exactly when the oil price began to fall. It doesn’t quite synch up like that. But you get the impression the Sheik is on to something.

Don’t forget leverage either. The relative rise in the dollar leads to lower commodity prices. But falling prices also cause traders to cash in their long commodities trades. This additional selling accounts for the even bigger than expected falls in some specific sectors (like base metals).

What does it all mean? The U.S. dollar may look less ugly relative to the euro than it did a month ago, given the prospect of slower growth in Europe. But what an ugly piece of trash it remains. We have no idea how long the rally will last or how much lower resource prices will go. But we are nearly certain that by the end of the year, the dollar will resume its passage on the way toward intrinsic value, which is much lower than today’s current value.

Dan Denning
The Daily Reckoning Australia

Source: U.S. Dollar Strength or Oil Weakness?

Conservatively, plan for US$200/barrel by 2010, but don’t be surprised if a recession somewhere drops price back to US$100, for a short while, or sudden war in the Middle East sends prices skyrocketing.

Expect the fundamentals of fading supply growth and growing demand to push prices ever higher in the 5 year horizon, perhaps well beyond US$300/barrel.

In May of this year Goldman Sachs energy strategist Argun Murti famously made his oil price prediction that the black goo would “super-spike” past $200 in six months to two years’ time.

Turns out Murti knows a thing or two about the oil price prediction game. In 2005 he correctly predicted — when oil was at about $55 a barrel — that it would pass $100, which it duly did in January.

“Murti is getting the last laugh,” says Justice Litle in Taipan Daily. “When he first predicted oil could reach a $105 a barrel, way back in March of 2005, oil was trading below $60. The prediction was scorned and laughed at, even as it caused a bump in crude prices… some thought it was just a Goldman Sachs publicity stunt.

“But it was no stunt. Murti’s call was dead right, and all the naysayers were wrong. For the past three years, many have been predicting that the bottom would fall out for oil prices. As crude passed through each new threshold — $70, $80, $90, $100 — there were loud drumbeats for how the price of crude would collapse ‘any day now.’”

Another oil price prediction that is proving scarily accurate is Keith Fitz-Gerald’s forecast that oil prices will reach $187 a barrel within three years. Read on here to find out why Keith thinks oil is heading for $187 a barrel and why the energy ‘experts’ have it wrong again.

Compared to $200 in two years, Fitz-Gerald’s $187 per barrel prediction seems quite conservative.
For more about oil price projections and Peak Oil, visit our Peak Oil Guide.

Martin Hutchinson in Money Morning blames Fed inspired inflation and speculators:

The reason for this intense advance in commodity prices is that the Fed and its European counterpart have been pumping money into their respective economies to prevent the collapse of several major banks. The St. Louis Fed’s “Money of Zero Maturity” (the best broad money-supply measure left over since the central bank stopped reporting M3 money-supply statistics in March 2006), is up at an annual rate of 17.6% during the last six months. In Europe, Euro M3 is up at an annual rate of 10.8% during the same period – still double the growth seen in nominal gross domestic product (GDP).

In the key emerging markets, the money supply has been rising even faster – 19% in China over the past year, and 21% in India. Not surprisingly, those countries’ inflation rates are taking off, with India into double digits and China quickly getting there.

He goes on to say:

It’s fairly clear to me that concerted speculation by hedge funds and pension funds is what’s been pushing up oil prices. But that may be playing out – and reaching its limit – as the huge price increases we’ve seen in “black gold” over the past year is finally dampening consumer spending both here in the United States and in other key markets worldwide…

Dave Gonigam in Daily Reckoning sees oil supply as the problem:

…Oh, and those darn speculators. OPEC loves to blame them, and has blamed them, going at least as far back as $92 oil eight months ago.

BP (NYSE: BP) chief Tony Hayward is having none of that, calling the notion of speculators driving up the oil price a “myth.” More relevant, he told the World Petroleum Congress, is that “supply is not responding adequately to rising demand.” But then Hayward goes off the rails when, according to Reuters:

He added that politics rather than geology was the reason. “The problems are above ground not below it,” he said.

Now it’s true enough, as Hayward complains, that OPEC nations don’t like having Western oil majors like BP working OPEC oil fields the way they did in decades gone by. But the fact oil-rich nations are giving BP less access than they used to doesn’t change the fact that the world’s biggest oil fields are in decline, and new ones aren’t coming online nearly fast enough to pick up the slack. I can understand why OPEC doesn’t want to fess up to that reality, but why is Tony Hayward so reluctant?

Surely, these three factors of inflation, speculators, and lagging supply are the primary causes of rapidly rising prices. But, will any of these factors fall off or fade in the near future? Speculation is most likely to wain according to Hutchinson. Demand may well slump with consumer spending, but inflation will likely worsen… Bill Bonner says:

Talk is cheap. It’s action that is dear. And the action the Fed needs to take – raising rates – will be so potentially costly for the lame U.S. economy that Bernanke and Co. are afraid to do it. They’re hoping inflation will go away so they can continue the battle against the slump, without having to worry about their unprotected flanks. Most likely, they will make a gesture towards raising rates – perhaps a quarter of a point. But then, when the mob starts howling for his head, Ben Bernanke will drop them again.

It’s evident that the Fed does not have the will or the tools to ward-off looming inflation. With inflation eating your dollars and commodities most likely set to rise higher, there are still many opportunities to profit…

Implications

Martin Hutchinson says:

Investing in the late stages of a bubble is highly speculative. Nevertheless, I reiterate my prediction of a few months ago that gold will reach $1,500 an ounce. Even if the Fed begins to act against inflation in August, it is very unlikely that its initial actions will be effective. Don’t forget that in the last great inflationary bubble of 1980, gold hit a level that’s the equivalent of $2,300 an ounce in today’s money.

I would consider SPDR Gold Trust (formerly StreetTracks Gold Trust) shares (GLD) about the most efficient way of getting a pure gold play. As an alternative, you might consider a silver investment: The metal is currently trading at less than 15% of its 1980 high, the equivalent of $130 per ounce. If that’s a move you like, the iShares Silver Trust ETF (SLV) seems the best way to play silver directly.

Also see other commodity ETFs such as:

S&P GSCI(TM) Commodity Indexed Trust (GSG)

PowerShares DB Agriculture (DBA)

Market Vectors Global Agribusiness (MOO)

“Is Britain going back to the 1970s?” asks Ben Traynor in Fleet Street Daily.

I was 14 when I first learned about the 1970s oil price shocks, and how they had caused stagflation (unemployment and inflation rising at the same time) in Britain.

In a nutshell, here’s what I was taught: the higher cost of oil meant Britain had to pay more for its fuel. This represented a transfer of wealth from oil importers like the UK to oil exporters like the OPEC nations.

Unfortunately it took time for people to cotton onto this. They saw their cost of living rising, and wanted to be paid more. Unions threatened to strike if they didn’t get their way. The government tried to stimulate growth in the economy, hoping this would make the problems simply go away. But they didn’t.

All that happened is we got inflation — nature’s way of forcing us to buy less when we refuse to accept that we’re poorer.

Britain entered a wage-price spiral, which fuelled higher inflation. Eventually we had to be bailed out by the International Monetary Fund.

By the end of the decade, Britain had both high inflation and high unemployment (usually the two are inversely related).

I realise this is a somewhat simplistic précis. Economic history is far more nuanced than this. Nevertheless, the broad strokes of this story made sense to me as a 14-year-old.

And they still do. Which is why it was heartening to hear that JCT seems to share my view of what went wrong in the 1970s:

“In the first oil shock, we took wrong decisions and embarked on second round effects and tried a high level of inflation for a long period of time,” he said.

“We created by our own absence of lucidity mass unemployment in Europe when before 1974 we had no mass unemployment. Price stability, and credibility in price stability, in the medium term, is the best way to have a high level of sustainable growth and sustainable job creation.”

Indeed, it was the lure of sustainable growth and sustainable job creation that led Gordon Brown to grant operational independence to the Bank of England in 1997, his very first act as Chancellor.

But there’s evidence that the Bank is losing the “credibility in price stability” battle. Inflation expectations are on the rise; the FT today writes that investors are more sceptical of the Bank’s ability to tackle inflation than at any time since it gained independence.

The Bank only has itself to blame. It has cut interest rates this year despite the fact that inflationary pressures are rising. Its reasons for doing so are understandable — Britain’s economy is on the rocks.

But that doesn’t change the fact that fighting inflation should be the Bank’s number one priority.

The Bank isn’t helped by the fact that its inflation target is measured by the Consumer Price Index (CPI). CPI annual inflation was at 3.0% last month, right at the upper limit of the Bank’s target zone.

But we in Britain know full well that the prices of what we buy are going up more than that. Small wonder the Bank is losing the battle for hearts and minds.

If the Bank went all out and targeted inflation properly, we’d quickly feel poorer. But that’s the point — we are poorer.

Prices of commodities we buy are going up around the world. As both Trichet and my economic teacher would gladly tell you, this represents a transfer of wealth away from Britain to those countries exporting the stuff the world needs.

Ben gives some background on why prices are rising in Britain – in a word, inflation:

Inflation is the natural consequence of a weak currency. The principal reason for this is that a weak currency makes imports more expensive. This is exactly what’s happening in Britain – everything from food to energy is getting dearer. If the ECB puts its rates up, more money will head into the euro, further weakening the pound. Unless… unless the Bank of England also raises rates. Truth be told, the Bank should raise rates anyway. At July’s meeting they should announce a rise of 0.5% at least.

Not that they will. Because today we have yet more ‘bad data’ from the housing market. House prices are falling twice as fast as they did in the early nineties. According to the Halifax, house prices fell by 2.4% last month, to add to the 1.3% fall we had in April and the 2.5% fall in March.

Since January, the average house is worth 6.6% less. That works out at a not-too-clever £13,000 (Yesterday, Theo took an in-depth look at the housing market, calculating housing’s “P/E ratio”)

So an interest rate megahike is unlikely. But one thing is certain – the Bank of England can’t save the housing market. So it shouldn’t try.

Predictions time! When can we expect rates to start rising? For July, I reckon the Bank will stay put, leaving rates at 5%. Of course, that all depends on a) how much deflationary data we get this month, and how much the Bank can stomach, and b) whether or not the politicians try to meddle, and how successful they are if they do.

Milton Friedman once wrote that inflation is a problem because the more volatile prices are, the less efficient is the price mechanism. Because no-one knows what’s going on.

As he put it: “The broadcast about relative prices is, as it were, being jammed by the noise coming from the inflation broadcast”.

By August I think that noise will become too loud for the Bank to ignore. And then we’ll see some action (though probably only of the quarter-point variety; they’re cautious, these central bankers).

From our perspective, then, it’s as you were. Little succour in sight for the UK economy. But a possible chink of light that the Bank may, by hook or by crook, soon begin to start taking inflation seriously.

Traders cited the cratering dollar, combined with international tensions stoked by rumors that Israel might be planning an attack on Iran.

Kevin Kerr, editor of Global Resources Trader said that “fear by far is the biggest driver right now … Shorts were certain earlier in the week that oil would freefall and with [Thursday’s] rally and then [yesterday’s] event, even hardened traders are left shaking their heads.”

That flame of fear was fanned by Israel’s Transport Minister Shaul Mofaz, a close adviser to Prime Minister Ehud Olmert, who was quoted in a local newspaper as saying that if Iran continues with its program for developing nuclear weapons, an Israeli attack on that country’s nuclear sites is “unavoidable.”

Morgan Stanley analysts wrote that they expect to see a short-term spike in oil prices, with crude-oil shipping patterns suggesting that prices for West Texas Intermediate crude will reach $150 a barrel by July 4.

“Distribution patterns of crude oil out of the Middle East are mimicking those of last year as we exited 3Q07, when we predicted an oil price spike into year-end based on our projections of sharp inventory draws in the Atlantic basin,” the analysts wrote. “That same pattern is now again upon us, and we are making an identical call, only this time we are starting from a much tighter Atlantic Basin inventory backdrop.”

Source: Meanwhile, Crude Heads for the Moon

China is announcing to the world (see AFP story) that it will NOT INCREASE OIL IMPORTS due to the impact of the recent earthquake swarm. How utterly, totally responsible of them!

Whoah! Say hello to oil price moderation, if not a slow retrenchment in oil prices. (Is the Fed listening?)

Actually, if this news gets the play it deserves the price of oil ought to sell off by $20 or so per barrel. This pops the bubble.

Seriously. Knock-knock. Who’s there? POP!

The initial energy-speculation on earthquake-related oil demand was based on the fact that hundreds of Chinese dams were damaged by the earthquakes. So hydro-electric power output is down. And the thinking was that China would burn diesel to spin generators. But you just cannot apply conventional thinking to those Chinese. Very inscrutable, no? (Remember the Korean War? No, the Chinese would not cross the Yalu River to fight the American Army, right?)

The Chinese have a way of surprising the world. The reality is that overall electric demand is down in China because of damage to infrastructure. Collapsed buildings and factories do not use electric power.

So with candor verging on the astonishing, China says “no.” China will not increase oil imports.

Also, someone in China must be looking at the import bill for oil at $130 or so, and determining that China has to use oil more efficiently. Especially since China subsidizes fuel at the pump. Chinese consumers do not pay the “world price” for fuel. The difference comes out of the hides of Chinese oil companies, plus the Chinese government. As Mr. T used to say, “The word is ‘pain.’”

Well, China works hard for its money. And the top leaders evidently want to quit spending so much on foreign energy sources. Especially since they have to pay for the oil twice… once to import it, and again to subsidize its use.

As the story below quotes the deputy director of the National Development and Reform Commission, “Now with oil prices so high, it would be unwise to continue increasing the import of oil. It’s a better approach to adopt even more energy-saving measures.”

As for where China is going in all of this… It’s not as if there is a lack of energy-efficiency technology in this world. Really, if there was never another patent issued in any field of energy-related technology — just shut down all research on new ideas — we could spend the next 50 years or so just adapting the existing technology base to transforming the energy systems of the world. The Chinese know this.

R&D for new stuff is good, but the big challenge for the world is systems integration of what is already discovered. The richest energy-mines are in the technical journals on the shelves of the world’s libraries. The Chinese know this as well.

So this news embodies many different levels of importance. But the news is entirely good.

Until we meet again

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: China Isn’t Increasing Oil Imports

Kimberley Consolidated Mining (KCM), a junior diamond miner, explorer and developer made a sparkling appearance. Its share price soared by 11% as it listed on Johannesburg’s alternative exchange (AltX).

For South Africa it’s – what commodities boom?

Still, the economic outlook remains gloomy in the southern hemisphere.

According to Statistics SA, South Africa has “seriously missed the commodities boom”. It reckons the mining sector’s contribution to first quarter GDP plummeted some 22%.

Of course everyone expected the mining sector to shrink what with the power crisis, not to mention safety issues and violence against migrant workers. But even economists didn’t think it would be that bad. Most predicted a 10% fall.

Gold, platinum and diamond producers – South Africa’s worst performers – are to blame. They’ve not been producing enough precious material!

Platinum production was down 15% in the first quarter year-on-year… gold was down 19% and diamonds 18%. This was a major reason for South Africa’s economy growing just 2.1% versus 5.3% in the previous quarter.

So, South African miners are trapped in a recession in the middle of a commodities boom. Most lay the blame for this at the door of Eskom, the state electricity supplier. But other reasons are beginning to emerge…

The reserve bank’s efforts are one — it’s trying keep inflation between 3% and 6% at a time when the oil price is going through the roof. This means the bank was forced to hike interest rates to keep inflation within its target. Propping up the currency is another move that has caused many miners to move their production boosts — they’ve gone offshore!

Then there are the new mining regulations. While they came into force as long ago as May 2004, they’ve taken some time to implement. And, of course, new royalty payments came into affect this year. This was the subject of heated debate between the mining industry and the government.

Now, it looks like things are about to get worse…

Electricity supplies may have been stabilised, but winter is on its way. Domestic consumption is expected to rise. More stress on the system does not bode well for its major mining users.

Still, there are gems down there…

You can’t blame South African miners for downing their tools and investors for making for the exit!

But the little newcomer shows that there are still gems in there.

In spite of fears about prospects in South Africa, KCM still managed to arouse a lot of interest when it listed on the JSE’s AltX. Even as Statistics SA announced the mining sector’s demise, the first day’s trade in KCM saw its share price soar.

So what has KCM got going for it?

CEO Hein Le Riche reckons there is massive demand for high quality gem diamonds. And there is a lot of promise in KCM’s prospects. The company’s two main mines (Bo-Karoo and Taung) are on the Orange River. This territory is famous for large high value gemstones.

Mining at Bo-Karoo kicked off in mid-2005. Between then and now the mine has produced an average of 250 carats a month. For the year ending 2009, the mine is forecast to produce 4,840 carats, rising to 6,000 the following year.Bo-Karoo has “indicated” diamond resources and more certain “probable” diamond reserves of 25,490 carats.

Already the mine has produced some significant white and coloured sparklers – a 98 carat stone in 2006 and a 123 carat stone in 2007. The latter went for $22,000/carat. Then in April this year a 46 carat blue-white stone sold for an impressive $28,000/carat.

At its other alluvial mine, Taung, 3657 carats of diamond have sold for an average of US$751/carat. Better still, 90% of these diamonds are of gem quality and 40% are bigger than one carat stones. A 42 carat Cape yellow diamond from Taung sold for US$918 per carat.

Then there is The Carter Block in the Northern Cape Province near to one of De Beers mines. Here there are known kimberlite pipes – the other type of diamond mining that takes the form of an open pit. There are also alluvial deposits.

KCM has entered a joint venture on this with JSE listed Trans Hex, a company that has kimberlite mining expertise. While this mine is still in the exploration phase, prospects have been judged good enough to begin bulk sampling.

Exploration is also underway at Batloung, another area in the Northern Cape where KCM holds mining rights.

The company may raise capital to fund the development of these Kimberlite prospects particularly the one at Carter.

…and prices are rising for its gems, not just KCM shares

All in all, it sounds as though Mr Le Riche’s confidence is justified.

In two years KCM and its subsidiaries produced more than 12,000 carats. These, he said, sold for more than R120m (just under £8m). In February alone Bo-Karoo and Taung produced more a 1000 carats. These brought a gross income of more than R10m.

Since 2005, KCM has sold diamonds worth R150m. Come February 2009 the company expects to generate an annual R91m in sales. It has already achieved a third of that this year!

Even KCM has underestimated the buoyancy of diamond prices. In its pre-listing statement it said average prices would be around $1900/carat, but that has already shot to $2400/carat.

And Mr Le Riche reckons demand is strong enough to push prices higher still. That means KCM is not limiting itself to South Africa. It has plans to enter Sierra Leone, Angola and Lesotho, too.

One word of warning though! Diamond stocks have been the worst performing of resource stocks.

Still, KCM is already ahead of its revenue targets for this financial year by 30%. It has profits of R4.5m forecast for February 2009. By the end of 2010, the company is forecasting profits of R30,5m.

Even better news! It is talking of paying dividends to shareholders. That would make it the first AltX mining company to do so. And it could send the share price higher!

So, if all goes to plan, this one could be just be a glimmer of light in the South Africa’s darkness.

Keep exploring,

Erin and Isabel

By Erin Hamilton and Isabel Turner,
First published on Wednesday, June 04, 2008

Source: Junior Diamond Miner And Explorer KCM Makes A Sparkling Appearance