BMO likes Mexico for gold and silver Torex to outperform
BMO Capital Markets expects the silver price to post a small and short-lived correction in the very short term, as gold likely will also correct somewhat for a brief period.
But the longer-term fundamentals look very favorable for gold, BMO advised.
However, BMO Global Mining analysts Bart Melek, David Haughton and Andrew Kaip Wednesday said they expect silver to outperform gold into 2011. “After a very strong rally over the last three months, gold and silver are projected to be star performers into 2011,” they advised.
BMO Research recently increased 2011 estimated gold and silver prices to US$1,450/oz and US$28/oz, respectively.
“If concerns surrounding quantitative easing, monetization and European sovereign debt defaults trigger another broadly based loss of risk appetite, investors would no doubt want to increase their gold and silver holdings,” said BMO.
The analysts also advised that silver and gold are “nowhere near their historic highs.”
“At the latest record price of US$1,430/oz, gold is also nowhere near its historical real dollar high of $2,385/oz (adjusted for inflation, 2010 dollars) reached in January 1980, but is much closer than silver to its peak.”
“In real terms (2010 dollars), the silver peak was nearly US$141/oz in January 1980, which is roughly 400% above the current price,” the analysts noted. “If investor/industrial demand moves higher as it forecast and given current supply expectations then silver has lots of room to move higher, in our view,” they advised.
MINED SILVER SUPPLY FORECAST
BMO Research predicted 223 million ounces of silver, 73.4 million ounces of gold will be mined this year with 220 million silver ounces and 74.9 million ounces of gold mined in 2011.
Properties expected to show strong growth are mainly located in Mexico and include Goldcorp’s Penasquito mine, Fresnillo’s Saucito and Fortuna Silver’s San Jose mines, which are expected to begin commercial production in the second half of 2011.
Among the primary silver miners, the largest production growth is expected to come from Silver Standard’s Pirquitas and Pitarilla mine, Bear Creek Mining’s Corani and Santa Ana mines, Pan America’s Navidad and La Preciosa mines, and Tahoe Resources’ Escobal mine, BMO advised.
However, BMO estimates that the overall mine supply of silver, including by-product silver will increase only 3% annually through the 2012 period.
“While mine supply is expected to be relatively robust over the next several years, any growth in output is expected to occur at a much slower rate than the jump in consumption,” the analysts said. “This means that the sector functions at a much higher utilization rate, implying that physical markets will be quite tight and that the highest cost producers will likely set the price.”
Meanwhile, the analysts suggested governments will continue to buy gold to diversify their official forex reserves. “Silver purchases are also quite possible amongst central banks,” they forecast.
In its analysis, BMO predicted, “China’s retail investors could further swing gold purchases into the overdrive, after the Chinese government relaxed rules governing the direct ownership of gold.”
“Gold imports into the country have soared six-fold since the start of 2010,” BMO noted. “Appetite for gold could rise further, pending the successful introduction of investment funds, which allow Chinese investors to hold assets overseas, including gold, under the Qualified Domestic Institutional Investor rule (QDII).”
PREFERRED SILVER EQUITIES
BMO Capital Markets’ preferred silver equities include: Silver Wheaton (TSX: SLW), outperform, US$46 target; Coeur d’Alene Mining (NYSE: CDE), outperform, US$31.50 target; Pan American Silver (NASDAQ: PAAS), outperform, Cdn$11 target.
PREFERRED GOLD EQUITIES
BMO’s preferred gold equities include: Alamos Gold (TSX: AGI), outperform, C$24 target; Barrick (NYSE: ABX), outperform, US$65 target; Kinross (TSX: KGI), outperform, US$25 target; and Newmont Mining (NYSE: NEM), outperform, US$82.50 target.
Other preferred gold equities include: Centamin Egypt (TSX: CEE), outperform, Cdn$4.25 target; CGA Mining (TSX: CGA), outperform, C$4.25 target; European Goldfields (TSX: EGU), outperform (S) [speculative investment], C$17.50 target; Lake Shore Gold (TSX: LSG), outperform (S), C$4.75 target; Osisko Mining (TSX: OSK), outperform (S), no target; and Torex Gold (TSX: TXG), outperform (S), no target.
