Amid Power Shifts, Gold Remains A Refuge

At the macro level during the twelfth trading week of the year, all eyes were on the ailing North American auto industry, and the speculation over its shrunken, blown-out future.

• Of the Wee Three automakers, the fate of General Motors was front and centre this week. Stepping ever closer to a bankruptcy protection filing, GM’s market cap stands at a mere US$1.5 billion, compared with Toyota’s US$99 billion.

After watching the U. S. government insert itself in a big way over the past year into the nation’s banking and insurance sectors, we now see the disturbing spectacle of the Obama administration on its own — rather than GM’s actual shareholders — dictating that GM’s CEO Rick Wagoner be removed.

Wagoner’s replacement, Fritz Henderson, has already said of his management team, “We need to go deeper and we need to go faster” in cobbling together a survival plan acceptable to the U. S. government. It’s nothing less than a historic shift towards state-directed industrial activity in the U. S., last seen during the Second World War, with industry management looking to please Washington rather than shareholders, and power shifting in the U. S. to government from private owners.

For at least this next era, the future looks pretty grim for the U. S. dollar and U. S. private industry, but good for that timeless financial refuge, gold.

• In mining, the week kicked off with the board of HudBay Minerals utterly capitulating in its proxy battle with dissident shareholder SRM Global Master Fund. All directors tendered their resignations and were replaced with SRM’s nominee slate, with the resignations coming two days before the matter would have been put to a shareholder vote. It’s a rare instance in this industry of a total collapse in shareholder confidence in a board of directors.

Indirectly, there was some other good news for HudBay shareholders: its 19.9%-owned affiliate Lundin Mining reported that the first copper had been produced at its 24.75%-owned Tenke Fungurume copper-cobalt mine in the Democratic Republic of the Congo. Operated by Freeport-McMoRan Copper & Gold, Tenke is designed to produce 115,000 tonnes of copper cathode and 8,000 tonnes cobalt annually.

• Was it just two weeks ago we were saying how smart Gammon Gold was to be buying fellow Mexico-focused gold miner Capital Gold in a friendly deal? Well, Capital Gold peeked behind the curtain, apparently didn’t like what it saw, and has called it off.

• Vale announced that it is going ahead with its large-scale Moatize coal project, in Mozambique’s Tete province, tapping into coal reserves of 838 million tonnes.

Costing US$1.3 billion and slated for startup in December 2010, Moatize is the Brazilian giant’s first greenfield project in Africa. The mine will annually produce 8.5 million tonnes of high-quality metallurgical coal and 2.5 million tonnes of thermal coal. The Mozambican government is building a new maritime coal terminal at Beira, 600 km away by rail, to handle the new output.

• Speaking of big, Adriana Resources unveiled a super-size resource estimate for its Lac Otelnuk iron project in Quebec’s Labrador Trough: 4.3 billion tonnes of indicated resources grading 29.08% iron and a further 2 billion inferred tonnes at 29.24% iron.

• Ontario’s bean-counters were in a tizzy, with the decisively probusiness announcement from the provincial government that it would meld its provincial sales tax with the federal goods and sales tax. The party line among economists is that a harmonized tax is good for Ontario’s businesses because it lets them recover money now lost to retail sales taxes and use it for investment in new equipment and machinery, which will now be tax-exempt. That’s exactly what happened when Canada’s easternmost provinces harmonized their respective taxes with the federal GST. The move wins plaudits from the Ontario Chamber of Commerce, too, which reckons the move will save about $100 million a year in red tape and another $5 billion now lost to the retail sales tax.

The losers are ordinary consumers and the poor, who will face new taxes on a variety of goods currently exempted. But with the provincial Liberal party solidly in power and facing weak opposition, the political fallout from ordinary voters is likely minimal.

And that’s not all: the government announced it would cut Ontario’s corporate income tax rate to 10% from 14% over the next four years.