A Melman Minute — March 30, 2011

Miners around the world received yet another jolt within the past few days when they learned just how irrational foreign governments can behave, and it matters little to the lesson that the latest violator of common sense is Zimbabwean President Robert Mugabe. The issue at hand is the demand from Zimbabwes government that foreign mining ventures sell 51% of their corporation either to the government or set up share organizations for their employees. Final sale of the 51% interest must take place by September 25 of this year and there are no guarantees regarding the fair value price which might be received for disposing of a companys majority shareholdings in their own company.

The new regulations are part of an indigenization policy which seeks to hand over control of major foreign financial interests, initially related to mining but later to include all foreign investors, to local hands.

Clearly, mining interests are reacting to these announcements in a profoundly negative manner and we cannot imagine anyone who might be willing to engage in a new mining venture within Zimbabwe under such conditions.

This is yet another example of the dangers of investing in foreign nations which do not have a long history of the sanctity of contracts combined with a sound and fair legal apparatus.

Shareholders in uranium mining exploration, development and producing companies cannot be pleased with a recent announcement just issued by the Coalition government of Great Britain when Deputy Prime Minister Nick Clegg told Parliament that the cost of building nuclear power plants might become economically prohibitive, given the new and expensive additional safety requirements likely to be imposed following the Japanese calamity.

Britain had given approval to the building of at least 10 new reactors at a cost of about 50 billion Pounds (about C$80 billion) each, but with new safety requirements, the UK Telegraph reported that, ...Now Mr. Clegg believes the extra costs of protecting the new plants could prove unsustainable.

Electric power is an economic product and, if the cost of building nuclear plants becomes so expensive that the total permitting, construction and financing costs drive the per unit production price above other alternatives, future projects might be abandoned.

The reasoning behind nuclear power generation remains sound, and we have every reason to believe that common sense will prevail in the form of insuring growing use of that alternative, but it would be foolish to ignore statements such as those emanating from Great Britain.

There is a strange combination of events ongoing in the financial world. As can be seen by the two-year chart of the Dow Industrials, that particular average and financial markets in general continue to power ahead as if there was no end to good news with index averages once again at the highest level in two years and the uptrend which began in March 2009 remains solidly intact.

However, at the same time, an array of ominous news continues to avalanche down upon us, and at The Melman Report, we would emphasize that we are not exaggerating regarding the negative nature of recent headlines. What follows is a list of major concerns of the moment.

Americas housing market is in drastic decline as the hoped-for recovery in residential real estate has not only failed to materialize, that market has actually continued to crater with average home prices across America down by over 3% during the past year, according to the S&P/Case-Shiller Price Index released yesterday. Examples of dramatic declines abound with major cities such as Atlanta, GA recording a 7% drop in residential real estate prices during the past year while, using a different time span, a mid-size city such as Fresno, CA has seen average prices fall from over $300,000 at the market top in 2006 to under $140,000 today, leaving multitudes of homeowners owing much more on their mortgages than their homes are worth.

Real estate is not only failing to generate new home equity, it continues to erode much of which had previously existed. That must be counted as a negative for the American economy, an indication that further Quantitative Easing (money creation) programs may still be in store.

Political uncertainty is rising as the American government comes to grip with the onrushing requirement either to approve an increase in the American national debt, which many politicians are loath to do, or face the reality that segments of that government may have to shut down as the national debt spirals above the legal limit. As of this morning, the debt limit is fixed at $14.294 trillion and the latest figure for the current debt is $14.211 trillion.

Time is running out and the political pressure is growing intense.

Portugals financial situation is rapidly deteriorating. New estimates of their budgetary deficit are now approaching 8%, far above previous numbers, and Standard & Poors rating agency has once again cut the rating on Portuguese debt, forcing that government to pay ever-higher rates of interest which they can ill afford. Portugal just joined Greece in receiving a negative future outlook from S&P.

As noted by the Wall Street Journal, ...Portugals government appears likely to run out of money within the next three months, according to bond-market analysts. It has enough cash to repay bonds that mature in April, but not those that mature in June.

Clearly, they will need help from the European Economic Community, but voters in the most prosperous European nation, Germany, just indicated their displeasure with any future bailouts by handing the government of Chancellor Merkel a resounding defeat in regional elections.

And so, these crises build in intensity while at the same time the markets rally.

As of 10:00 AM PDT, financial markets continue to advance with the Dow Industrials ahead by almost 90 points and Canadas TSX Index has surged by over 150. Precious metals shrugged off earlier selling with gold now trading near $1,424, up by about $6 while silver had advanced by over 30 cents to near $37.50 per ounce. However, base metals are encountering heavy selling with copper and nickel coming under particular pressure. Mining share indexes are advancing by about one percent.

In other markets, long term interest rates are little changed, the US Dollar is slightly weaker and Crude Oil remains in the $104105 zone.

All quotes US$ unless otherwise noted.

Next Melman Minute scheduled for Friday, April 1 which should provide a most interesting news background!

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