Tag Archives: Hong Kong gold trade

From Good Delivery bars to Kilobars – The Swiss Refineries, the GFMS data, and the LBMA

In early September 2015, I wrote an article titled “Moving the goalposts….The LBMA’s shifting stance on gold refinery production statistics”, in which I explained how the London Bullion Market Association (LBMA) had, on Wednesday 5 August, substantially lowered its 2013 gold and silver refinery production statistics literally a few days after I had commented on the sizeable figure of 6601 tonnes of 2013 refined gold production that the LBMA had previously published in May 2015.

Specifically:

  • On 5 August, the LBMA substantially altered and republished Good Delivery List gold and silver refinery production statistics in two of its published files: LBMA Brochure Final 20120501.pdf and LBMA Overview Brochure.pdf
  • For gold, the alterations were most pronounced in the 2013 refined production figure which was reduced from 6601 tonnes to 4600 tonnes, i.e. a 2001 tonne reduction
  • Other years’ figures for refined gold refinery output (2010-2012) were also reduced, with the 2008-2009 figures being increased
  • As part of the update, the LBMA linked its amended figures solely to GFMS estimates of gold mining and scrap output,  adding the words ‘estimated to be‘ in front of the 4,600 tonnes figure, and the words ‘owing to recycling of scrap material‘, thereby framing the revised figure solely in terms of scrap gold in excess of 2013 gold mining supply. This use of GFMS data is bizarre because all refiners on the LBMA’s Good Delivery List provide exact refinery production statistics to the LBMA Executive as part of the LBMA Pro-Active Monitoring programme, so there are no need to reference estimates from external data providers
  • In the updated versions of the brochures, the LBMA made no reference to why the gold figures had been reduced, nor what the original figures referred to, particularly for the huge difference of 2,000 tonnes of gold refinery output in 2013 between its two sets of figures
  • By 12 August, the LBMA had again updated its 2013 gold refinery output figure to 4579 tonnes

In my Part 1 article, I had concluded that:

“There are 2,300 tonnes of 2013 gold refining output in excess of combined mine production and scrap recycling being signalled within the  6,601 tonnes figure which was removed from the LBMA’s reports on 5 August 2015.

Could it be that this 6,601 tonne figure included refinery throughput for the huge number of London Good Delivery gold bars extracted from gold ETFs and LBMA and Bank of England vaults and converted into smaller gold bars in 2013, mainly using LBMA Good Delivery Swiss gold refineries? And that maybe this 6,601 tonne figure stood out as a statistical outlier for 2013 which no one wanted to talk about?”

Note that for 2013, Gold Field Mineral Services (GFMS) estimated gold mining production to be 3,022 tonnes, and gold scrap supply to be 1,280 tonnes for 2013, so in total GFMS estimated gold mining + scrap supply at 4,302 tonnes in 2013. Therefore, the LBMA’s original figure for 2013 gold refinery production of 6,601 tonnes exceeded the combined GFMS mine and scrap supply by 2,300 tonnes.

Whose interests are served by replacing actual refinery output figures with far lower estimates comprising GFMS gold mine production and scrap recycling data? What happened to the third major source of gold supply to refineries during 2013, i.e. London Good Delivery gold bars, and why won’t the LBMA reference this? Why would the LBMA go to great lengths to de-emphasise the huge volume of Good Delivery gold bars being sent to gold refineries (especially in 2013) for conversion into 9999 fine kilobars, when its obvious for all to see that this huge migration of bars happened?

This article, which is Part 2 of the analysis into the LBMA’s 2013 gold refinery statistics, looks into this 6,601 tonne number and the 2,300 tonne delta compared to GFMS estimates, specifically examining the mountain of evidence that highlights the huge volume of Good Delivery bars that were processed through the Swiss gold refineries in 2013, and the huge associated shipments of gold from the UK to Switzerland, and onward from Switzerland to Asia.

Part 2 also looks at the extent to which GFMS and the World Gold Council, through their report text and data, addressed, and did not address, the non-stop processing of Good Delivery gold bars into smaller finer kilobars during 2013.

When Part 1 was written, I had also planned that Part 2 would examine the 2013 gold withdrawals from the London-based gold ETFs, and the 2013 withdrawal of gold from the Bank of England, however, these topics were subsequently addressed in a separate piece titled “How many Good Delivery gold bars are in all the London Vaults?….including the Bank of England vaults“.

That article itself had found a lot of interesting information including:

  • that the entire London LBMA vault network (including the Bank of England) lost 1,500 tonnes (120,000 bars) between 2011 and early 2014, shrinking from 9,000 tonnes to 7,500 tonnes
  • Between the end of February 2013 and the end of February 2014, the amount of gold in custody at the Bank of England fell by 755 tonnes
  • In 2013, the large physically-backed gold ETFs which store their gold in London saw a 720 tonne outflow of gold (GLD 561, IAU 60, ETF Securities’ PHAU 52, ETS Securities GBS 42, ‘Source’ Gold 31)
  • The full set of gold ETFs storing their gold in London can, nearly down to the exact tonne, account for all of the LBMA vaulted gold held outside the Bank of England vaults (See  start of my article titled “Central bank gold at the Bank of England” for an explanation of this)

Note: Deutsche Bank gold ETFs and an ABSA gold ETF also store their gold in London, and during 2013, these 2 sets of ETFs lost approximately a combined 12 tonnes of gold (~9 tonnes from Deutsche and ~3 tonnes from ABSA, so this would increase the 720 tonne ETF loss above, to about 732 tonnes.

 

Yet another Change to the LBMA Brochure in September 2015

On 29 September 2015, the LBMA made a further alteration to the 4-page LBMA Overview Brochure, the brochure that had featured the shifting gold and silver refinery output statistics.

On this occasion, although the data in the table remained unchanged, some unusual footnotes were added underneath the table of refining statistics. The text, table and the new footnotes are as follows:

LBMA brochure refining Sept 2015 text

The footnotes are highlighted as per yellow box:

LBMA brochure refining Sept 2015 footnotes and table

Let’s look at these 3 footnotes one by one.

Note 1): The data for 2008-2013 contains estimates which will be updated when actual data becomes available.

This note is illogical, since the LBMA already has all of the exact data of gold and silver output per refinery. This was stated in the previous versions, and it’s all detailed in my previous article.

Also, specifying ‘Figures correct as at September 2015’ is illogical since the LBMA states that the data is ‘estimates’ and not ‘actual data’. Correct relative to what? How can ‘estimates’ be deemed to be correct if the ‘actual data’ is not published?

That would also explain the bizarre note number 2.

Note “2) Refined production should include only the refinery’s output that has gone through a refining process”.

Footnotes to tables are normally used to explain data, not to justify the data. This Note 2 sounds more like a pronouncement or a direction from a LBMA communication to the refineries rather than an explanatory footnote.

In English grammar, ‘Should‘ means to give advice, a recommendation or a suggestion, and to express obligation or expectation. This footnote looks like it has been lifted out of a directive from the LBMA to the member refineries.

Converting a 995 fine Good Delivery ~400oz bar into a series of 999 kilo bars does involve a a chemical refining process in addition to melting and pouring. The transformation by the refineries of large bars into smaller bars is still throughput, and is a refinery process (as you will see below).

Also problematic to the LBMA’s footnote is that converting 9999 fine scrap (in the form of old bars) to new 9999 bars, which sometimes happens, would not necessarily be captured in the above LBMA footnote, so this approach to seemingly attempt to tie in the LBMA data to GFMS mining and scrap refining data opens up a can of worms.

Note 3): the production of newly accredited refiners excludes production in the years prior to accreditation.

Note 3 should be obvious, and besides, it wouldn’t change much in terms of the huge gaps in the numbers between 6601 tonnes in 2013, and the GFMS figure of 4302 tonnes.

 

Macquarie 2013 – Where has the ETF gold gone

In August 2013, Macquarie Commodities Research, in its report “Where has the ETF gold gone” commented that:

“over 1H 2013 it [the UK] has exported 797 tonnes [of gold], equivalent to 30% of annual gold mine production”

“…gold bars from ETFs have gone to Switzerland, where most of the world‟s gold refining capacity is, to be remelted into different size bars and coins and then sold on end consumers, predominantly in Asia, specifically China and India.

“Trade data also backs up this movement of gold – Hong Kong customs reported imports of gold from Switzerland of 370t in 1H 2013, up 284t on 1H 2103 (fig 3), while Indian imports from Switzerland appear to have risen by more than 100t YoY.

It is not really very surprising that the gold has found its way from vaults in London (and most likely the US and Switzerland) to Asia via Swiss refineries. We have repeatedly noted that gold ETFs are part of the physical gold market and if investors don’t want the gold it has to go somewhere else.”

Since the four large Swiss gold refineries account for the lions share of worldwide annual gold refinery output (See my article “Swiss Gold Refineries and the sale of Valcambi“), its important to examine what the Swiss gold refineries had to say about the smelting of London Good Delivery gold bars into smaller bars in 2013, as well as their comments about the dramatic reduction in gold scrap coming into the refineries during that time.

Note that London Good Delivery gold bars are variable weight bars that weigh about 400oz each (12.5kgs). These are the standard type of gold bars stored in central bank vaults and held in physically backed gold Exchange Traded Funds (ETFs) such as the SPDR Gold Trust (GLD).

 Swiss Gold Imports from the UK: 2013

In 2013, Switzerland imported more than 2,600 tonnes of gold and exported approximately 2,800 tonnes of gold. That year’s gold import and export totals were the highest ever annual totals recorded for Switzerland. See chart below from Nick Laird’s Sharelynx.

Although Switzerland doesn’t possess any major gold mines, it does host one of the largest physical gold markets in the world, which regarding investment gold, primarily comprises the large Swiss gold refineries along with some bullion banks (including UBS and Credit Suisse), the Swiss National Bank and the Bank for International Settlements (BIS), and the Swiss wealth management and private banking sector. But the throughput and precious metal processing of the four large gold refineries accounts for nearly all the country’s gold imports and exports.

SWAUAtexports04.php

The UK is consistently the largest import source of gold into Switzerland. In 2013, Switzerland imported nearly 1,400 tonnes of gold from the UK during the year, with hardly any gold moving back in the opposite direction. Notwithstanding the fact that the UK does not have any producing gold mines, 1,400 tonnes is 46% of GFMS 2013 global gold mining production estimate of 3022 tonnes. And despite the fact that GFMS itself stated that the UK only contributed 41 tonnes of gold scrap to the 1280 tonne global gold scrap total in 2013, 1400 tonnes of UK gold exports to Switzerland is 109% of GFMS’s 2013 global gold scrap estimates.

So why is the LBMA not including all of this 1400 tonnes of UK to Switzerland gold exports in its 2013 gold refinery production statistics?

SWAUAexportsUK05.php

Even Swiss gold imports from the United States in 2013, at 267 tonnes, paled into comparison compared to Switzerland’s imports of 1,373 tonnes of gold from the UK, and left all other import sources such as Italy and France in a distant third.

SWAUAlatestimp2013.php

Thanks to Nick Laird of Sharelynx for permission to use the above 3 charts.

Swiss Refineries – From the Horses’ Mouths

Let’s look at what the Swiss gold refineries had to say about the conversion of Good Delivery gold bars into smaller bars during 2013. You will see that the large Swiss refining companies treat Good Delivery bars as one of three sources of supply coming in to their refineries.

It’s important to note that the transformation of London Good Delivery bars of 995 fineness into, for example, kilobars of 9999 fineness, still involves the use of chemicals in reactions, albeit smaller amounts than when refining mining ore, and is not just a simple melting and re-casting exercise.

Argor-Heraeus’s perspective on Good Delivery bars in 2013

In its 2013 Corporate Sustainability Report, Argor-Heraeus had the following comments to say about the 400oz bar to smaller bar transformations:

In 2013, we consumed 3,120,603 kg of chemicals, 4% less than in 2012, despite a slight increase in precious metals processing. This decrease derives from the fact that a large percentage of gold processing involved the re-smelting of metal already in circulation (Good Delivery) to obtain high-fineness ingots, which are in great demand. The processing of a metal that is already pure requires smaller amounts of chemicals in reactions, as opposed to the refining of raw materials from mines.”

Argor-Heraeus even divides the gold inputs that go into its refining process into three distinct categories, namely, a) Scrap, b) Mines and c) Good Delivery, such is the importance of the Good Delivery refining activity to the refinery. See the following graphic from the Argor-Heraeus 2013 Sustainability report, complete with descriptive icons of the three input sources inputs of metal:

AH flow

 

The text box from the left-hand corner of the above graphic has been zoomed in and magnified below to aid readability:

AH text

Elsewhere in the same report, Argor-Heraeus reiterates the same 3 sources of gold supply that come in to its refineries for ‘Transformation and Processing‘.

AH graphic

Argor-Heraeus picks up the Good Delivery bar theme again in its 2014 Corporate Sustainability Report, where it produces a similar but slightly more detailed graphic, complete with the icons, and which explains that the Good Delivery bars can be either ‘grandfathered or non-grandfathered‘ and that the materials are ‘already certified Good Delivery, or already high-quality‘. High quality but not good delivery could be signifying gold bar brands on the former London Good Delivery list, or else lower grade coin bars, that had originally been made from melting down and casting into bars the gold coins that were previously  in circulation. Coin bars were at one time on the London Good Delivery list up until 1954.

Grandfathered is a term used by the LBMA in its discussions of ‘Responsible Gold Guidance‘ and is defined as:

Grandfathered Stocks: Gold investment products (ingots, bars, coins and grain in sealed containers) held in bullion bank vaults, central bank vaults, exchanges and refineries, with a verifiable date prior to 1 January 2012, which will not require a determination of origin. This includes stocks held by a third-party on behalf of the listed entities.

 The Argor-Heraeus 2014 graphic referencing Good Delivery bars is as follows:

AH 2014 graphic1

 

Metalor’s information on Good Delivery bars in 2013

In its 2013 Annual Report (large file 3.4 MBs), within the review of 2013 performance section, large Swiss based gold refinery Metalor Technologies highlights a steady demand for ‘recasting of gold bars for banks':

“Full-year net sales in the Refining business unit declined by 16 percent as precious metal prices remained low, reflecting a weak global economy. The drop in prices negatively impacted the price/volume mix, as reduced quantities were retained at lower prices. This was partly offset by steady demand in less profitable activities, such as the recasting of gold bars for banks.”

Metalor also provided a host of pertinent insights into other drivers of the 2013 gold market:

“The spot-price of gold and silver declined by more than 30 percent over a six-month period, and this prompted sharp sell-offs of the gold stored in ETF (Exchange-Traded Funds) vaults. The consensus is that this surplus was absorbed by strong China based bullion purchases, while price-dependent scrap flow fell rapidly.”

High grade precious metal bearing scrap flows worldwide dropped sharply due to sustained price erosion. This market development created an overhang in refining capacity, and a much more competitive pricing environment, although some of the volume reduction in scrap flows was offset by new mining doré contracts. The drop in price led to strong bullion purchases, mainly driven by China.”

The Refining business unit saw a challenging 2013, due to reduced gold prices. This resulted in a continuous slowdown in the scrap market. …….a decreasing volume of mining doré coming from abroad, due to changes in country regulations.”

“In Asia, the Hong Kong refinery was able to sustain a high level of activity due to strong demand and a high premium on bullion products.”

 

Valcambi on refining of Banks’ gold

Valcambi has an annual refining capacity “in excess of 1,200 tons for gold and 400 tons for silver“, so is known for having potentially unused refining capacity.

Following the July 2015 Valcambi acquisition by Indian company Rajesh Exports, the acquirer clarified to Indian newspaper ‘Business Standard’ that it was a regular activity for Valcambi to use its excess capacity to meet “emergency” refining requirements for gold held by bullion banks.

In fact, on the recently updated Valcambi website, an entire web page is now devoted to describing how transportation works for banker clients, in addition to clients that are miners, scrap dealers, other refineries, and watch makers. See ‘Transportation for Bankers‘ web page which details the import and exports procedures which the Valcambi refinery offers its banker clients.

Valcambi bankers

Valcambi 1

Under its Assaying web page, Valcambi even sees fit to specifically explain the process for the incoming ‘shipments of Good Delivery (GD) bars‘ which are merely checked to confirm that they haven’t been tampered with, as opposed to the shipments of ‘Non Good Delivery (NGD) precious metals‘, which are subjected to homogeneity checking, sampling and analysis. This shows that the volume of Good Delivery bar shipments into Valcambi is significant enough to warrant specific coverage on its website.

Valcambi Assaying

Valcambi good delivery

Under its Refining web page, Valcambi again details its ‘3’ sources of incoming gold, namely “primary doré supplied by mines”,  “industrial scrap and recycling“, and “metals invested and owned by financial and governmental institutions“, i.e. London Good Delivery Bars.

Valcambi refin

Valcambi refining

On the phenomenon of a low gold price leading to a decline of gold scrap coming into Valcambi, the CEO, Michael Mesaric, recently had the following to say while talking with Indian publication Bullion Bulletin at the India International Gold Convention (IIGC) 2015 in Goa:

Bullion Bulletin: The gold price is coming down continuously, is there any impact on the refinery segment?

Michael Mesaric: There is a small impact as well because if the gold price is very low there is very little scarp coming in.”

 

Argor-Heraeus interviews -They’re bringing in good delivery bars”

On 4 December 2013, Alex Stanczyk from Anglo Far-East group, in an interview with Koos Jansen published on his BullionStar blog, said that he (Stanczyk) and colleague Philip Judge, accompanied by Jim Rickards, had just returned from a visit to Switzerland where they had met with the managing director of one of the large Swiss refineries. Although the identity of  the refinery was not revealed, Alex Stanczyk said that the refinery MD informed them that there was huge demand for fabrication at his refinery and that:

“They put on three shifts, they’re working 24 hours a day, and originally he (the MD) thought that would wind down at some point. Well, they’ve been doing it all year. Every time he thinks its going to slow down, he gets more orders, more orders, more orders. They have expanded the plant to where it almost doubles their capacity. 70 % of their kilobar fabrication is going to China, at a pace of 10 tons a week.”

They’re bringing in good delivery bars, scrap and doré from the mines, basically all they can get their hands on.”

“…sometimes when they get gold in, it’s coming from the back corners of the vaults. He knew this because these were good delivery bars marked in the (nineteen) sixties.”

The same Swiss gold refinery executive was interviewed by Jon Ward of the Physical Gold Fund in September 2015, with the interview published as a podcast and as a transcript.

Jon Ward: In 2013, I recall you commented on the tightening of physical supply in the gold market and even the difficulties you were having in sourcing material. In fact, as I remember, you remarked that in 30 years, you’d never seen anything like it.”

The exact identify of the Swiss refinery executive was also not revealed in the September 2015 interview, however the executive is most certainly from the Argor-Heraeus refinery. Why? Because, the introduction to the 2015 interview states that:

“The gentleman we are interviewing  is part of senior management of one of the largest Swiss refineries.  His refinery is one of only 5 global LBMA referees…”

The LBMA appoints 5 refinery assay laboratories to help it to maintain the Good Delivery system. These appointees are known as ‘Good Delivery Referees’ and they meet on a quarterly basis at the LBMA. The 5 Good Delivery Referees are Argor-Heraeus, Metalor Technologies and PAMP (all from Switzerland), Rand Refinery (South Africa), and Tanaka Kikinzoku Kogyo (Japan).

Therefore, the interviewee has to be from one of three Swiss refineries, namely, Argor-Heraeus, Metalor or PAMP.

Furthermore, and this is the critical point, during the interview, the refinery executive states that his company has just opened in Santiago, Chile.

“Head of Refinery: ..looking at mining partnerships, we are expanding in Latin America. We have just opened in Santiago, Chile, and are trying to provide even more competitive services for the Latin American mining industry.”

Out of the short-list of Argor-Heraeus, Metalor, and PAMP, the only one of the three to open an operation in Santiago, Chile in 2015 (and the only one of the three to even have an operation in Chile) is Argor-Heraeus. See Argor-Heraeus new item below from the news page of its website dated 16 September 2015:

AH Santiago

The press release for the above Chilean plant announcement is only in Italian, but can be read here.

Lets look at what the Argor-Heraeus refinery executive says about conversion of Good Delivery bars to kilobars, both in 2015 and during the few years prior to that. From his September 2015 interview:

Jon Ward: Over the last couple of years, has this meant that you actually had to melt down and re-refine a whole lot of 400-ounce bars for China? If you have, I’d like to know where the bars come from.

Head of Refinery: The bars are coming from what you could call “the market.” Looking back, there were all these ETF liquidations, and the ETFs were holding bars in the form of 400-ounce bars. At that time a lot of the physical liquidity maintained in the London gold market was actually in 400-ounce large bars. The final customers were not interested in 400-ounce bars, so it was one of our jobs to take these bars, melt them down, refine them up to the 999.9 standard, and cast them into kilo bars.

Jon Ward: Were a whole lot of these bars coming from London?

Head of Refinery: Regarding the ETF liquidations, this gold had to go somewhere, and that was all converted. This is a thing you see every year. You also see some liquidations of physical gold held with COMEX and NYMEX. More or less, these are the sources of gold other than newly mined.

 PAMP – Three Shifts and Full Capacity – Barkhordar

In January 2014, in an article titled “Gold Flows East as Bars Recast for Chinese Defying Slump“, Bloomberg highlighted that the PAMP refinery, owned by MKS (Switzerland) SA, was at full capacity during parts of 2013,  and the article quoted PAMP Managing Director Mehdi Barkhordar as saying that they had to add production shifts to cope with processing demand:

“Gold’s biggest slump in three decades has been a boon for MKS (Switzerland) SA’s PAMP refinery near the Italian border in Castel San Pietro, whose bullion sales to China surged to a record as demand rose for coins, bars and jewelry.”

To keep up with orders, MKS added shifts at the PAMP refinery, located about 4 miles (6.4 kilometers) from the Italian border, Barkhordar said in November…”

Furnaces that can process more than 450 tons a year were at full capacity from April to June, melting mined metal, scrap jewelry and ingots at 1,000 degrees Celsius (1,832 degrees Fahrenheit) into the higher purities and smaller sizes favored by Asian buyers.”

“The surge in orders meant some parts of the refinery worked three shifts instead of the usual two, Barkhordar said.”

Again, you can see that there were three sources of supply for the PAMP refinery in 2013, i.e. mining, scrap and ingots (bars). According to GFMS, global scrap gold supply fell by 354 tonnes (21%) from 1634 tonnes in 2012 to 1280 tonnes in 2013, so this did not account for the ‘surge in orders’ and the need to add extra refinery shifts. Likewise, global gold mining output only increased by 160 tonnes (5%) from 2860 tonnes in 2012 to 3022 tonnes in 2013, and much of this increase was in China, Russia, Australia, Kyrgyzstan, and Indonesia which refine their own gold domestically, so this would also not explain the surge in orders, which therefore can only be attributable to recasting existing large gold bars into “smaller sizes favored by Asian buyers“.

Therefore, all 4 of the 4 large Swiss gold refineries are on the record that London Good Delivery gold bars were a very significant source of gold supply into their refineries during 2013 and even since then. So why did the LBMA amend its 2013 gold refining production statistics and seek to purely link its revised ‘estimate’ numbers to GFMS estimates of gold mine supply and gold scrap supply? There is an entire third source of gold supply to the refiners being overlooked because the LBMA dramatically reduced its 2013 gold refining production figure of 6,601 tonnes. Classifying Good Delivery bars as a supply source for refining is as legitimate as classifying gold scrap as a supply source for refining, and both come from above ground gold stocks.

 

GFMS and the World Gold Council

The well-known gold research consultancy GFMS, as well as gold mining lobby group the World Gold Council, between them produce a number of gold supply and demand reports each year. [Note: GFMS, formerly known as Gold Fields Mineral Services, is now part of Thomson Reuters].

Each year GFMS publishes a gold survey and related update reports later in the year. In 2013, this GFMS gold survey included two update reports. The 2013 survey and its updates were sponsored by Swiss refiner Valcambi and Japanese refiner Tanaka, with ‘generous support‘ from a selection of entities including Swiss refiner PAMP (part of the MKS Group),  South African refiner Rand Refinery, US gold mining companies Barrick and Goldcorp, bullion bank Standard Bank, US futures exchange CME Group, and the gold mining sector backed World Gold Council.

Its notable that the GFMS reports are ‘sponsored’ by some of the large Swiss gold refiners, yet there is nothing in the GFMS reports that puts cold hard factual numbers on the amount of Good Delivery bars processed through the refineries. As you will see below, GFMS mentions the good delivery bar processing in passing in its text, but not in its 2013 gold supply-demand ‘model’.

What, if anything, did GFMS have to say about conversion of London Good Delivery gold bars into smaller gold bars, such as kilobars, during 2013?

In its GFMS Gold Survey for 2013 – Update 1 (large file 11MBs) report, published in September 2013, the report states that:

“Strong trade flows were recorded between the UK and Switzerland, where Good Delivery metal was refined to smaller bars and shipped to India and China.”

The GFMS Gold Survey for 2013 – Update 2 (large file 9.8 MBs), published in January 2014, reiterated this point about large bar to small bar refining. On page 5 of the Update 2 report it states:

The duality of disinvestment in the developed world and an increase in physical demand from Asia was witnessed by the largest movement of gold, by value, in history as bars were shipped to Asia, often being melted down into smaller bars en route.

Notice that not all Good Delivery bars were converted to smaller bars before shipment to Asia. Some shipments went straight to Asia without being melted and converted.

And on page 9 of the same Update 2 report, the source of some of these smaller bars is given, i.e. the source was UK ETF gold holdings:

As a consequence, UK-led ETF outflows found their way to Switzerland, where refiners melted the metal into smaller bars, and shipped them East, in order to satisfy the surge in demand.”

The World Gold Council (WGC), regularly issues its own gold supply demand reports called ‘Gold Demand Trends‘, and publishes these reports in the form of an annual version, followed by shorter quarterly updates. In ‘Gold Demand Trends Q3 2013′, published in November 2013, the WGC said:

“Gold continued to work its way through the supply chain, to be converted from London Good Delivery bar form, via the refiners, into smaller Asian consumer-friendly kilo bars and below. This process is borne out by recent trade statistics. Data from Eurostat show exports of gold from the UK to Switzerland for the January – August period grew more than 10 fold to 1016.3 tonnes. This compares to a total of just 85 tonnes for the same period in 2012.”

In its Full Year 2013 edition of ‘Gold Demand Trends’, published in February 2014, the World Gold Council had this to say about the London Good Delivery bar shipments going to refineries, being transformed into smaller bars, and then recommencing their onward journey to the East:

No review of 2013 would be complete without a mention of the unprecedented flow of gold from western vaults to eastern markets, via refiners in North America, Switzerlandand Dubai.”

These shifts resulted in the shipment and transformation – on an epic scale – of 400oz London Good Delivery (LGD) bars into smaller denominations more suitable for consumers’ pockets.”

Notice the reference to refiners in North America and Dubai also, in addition to Switzerland.

In its ‘Gold Demand Trends Q1 2014‘ published in May 2014, the WGC stated that:

As illustrated last year when gold flowed out of western ETFs, through refineries in Switzerland and to consumers in the East, official trade data can provide insights into global gold flows.”

The full GFMS Gold Survey for 2013 (large file 6.2 MBs), i.e the report before the 2 updates, was originally published in April 2013, and was written too early in 2013 (probably written in March 2013) to really capture the flows of Good Delivery gold bars from the UK to Switzerland that were smelted into smaller bars. This was before the massive gold price smash of April 2013 that got the ETF gold sales going. That report mentions ETF gold outflows of 148 tonnes up to 11th March 2013, including 111 tonnes from the SPDR Gold Trust (GLD), but the 2 GFMS update reports from September 2013 and January 2014 were written at a later date, with a better vantage point, when the 400oz bar to smaller bar trend had gathered momentum.

Where was the Swiss refinery output going to in 2013?

On the outbound export route, Swiss gold exports of 2,800 tonnes in 2013 went primarily to Hong Kong (939 tonnes), India (520 tonnes), China (254 tonnes), Singapore (179 tonnes), Thailand (149 tonnes), Turkey (147 tonnes) and the United Arab Emirates (125 tonnes), with the residual 500 tonnes going to other destinations as detailed in the below chart from Nick Laird’s Sharelynx.

SWAUAlatestexp2013.php

 

 

GFMS – Masking the Swiss refining of Good Delivery Bars?

Given that the LBMA decided to compare its amended gold (and silver) refinery production statistics against GFMS ‘estimates’ of gold supply (especially out of sync for 2013), then its important to look at what GFMS claimed gold supply and demand to be in 2013. This may help in determining a possible rationale the LBMA had for reducing its refinery output figures.

So, does the 2013 GFMS gold supply and demand data model show this “largest movement of gold, by value, in history” “on an epic scale” phenomenon from the UK to Swiss refiners to Asia? The answer is explicitly NO, neither in 2013, nor in any prior year, but to a limited extent yes, but only after drilling down into the sub-components of an obscure GFMS balancing items within the GFMS supply-demand equation.

But GFMS precious metals supply data and the way it’s presented does not seem to want to highlight the ‘largest movement of gold, by value, in history‘. So even though GFMS mentions (in passing – see above) the historically important 2013 movement of 400oz bars to refineries through places like Switzerland and their transformation into smaller bars by the large gold refineries, the GFMS gold supply statistics keep some of the relevant numbers locked away and jumbled up within a rather odd rolled up figure that it calls “implied net (dis)investment“. Other relevant data, such as OTC demand data, is not even detailed by GFMS, it’s just assumed.

 GFMS gold supply – Disaggregating the implied figure

Here is how GFMS gold supply statistics looked for 2013, taken from the GFMS Update 2 2013 report published in January 2014. In 2013 GFMS used 4 supply categories, namely, ‘Mine production‘, ‘Old gold scrap‘, ‘Net producer hedging‘ and ‘Implied net disinvestment‘.

GFMS-style gold supply and demand figures, 2013 - from GFMS Update #2 report
GFMS-style gold supply and demand figures, 2013 – from GFMS Update #2 report

The first thing to notice is that there is no GFMS supply category called ‘Good Delivery bars’, unlike the large Swiss gold refiners themselves which actually list Good Delivery bars as a distinct gold supply category, such is the importance of that supply source.

Neither is there any category for Gold ETF outflows. So even though 6,600 tonnes of gold came out of LBMA gold refineries in 2013, if you looked at a GFMS supply demand model from 2013, you would never know this. Apart from gold mine production of 2,982 tonnes and old scrap supply of 1,371 tonnes (which together totalled 4,353 tonnes), the only other non-zero supply figure in the GFMS model was ‘implied net investment’ of 383 tonnes.

On the demand side in 2013, GFMS listed jewellery fabrication (2,198 tonnes), other fabrication (792 tonnes), central bank purchases (359 tonnes), physical bar investment (1338 tonnes), and producer de-hedging of 50 tonnes. Again, looking at this demand side, you would not know that gold refinery output in 2013 reached 6,600 tonnes, and that this figure was 2,300 tonnes more than combined mine production and scrap recycling.

There was also a footnote to the above GFMS supply and demand summary table which defines the GFMS definitions of ‘Net producer dehedging‘ and ‘Implied net disinvestment/investment‘.

GFMS defines ‘Implied net disinvesment‘ or “Implied net investment‘ as a residual figure in its supply-demand table (i.e. a plug figure), and states that this “captures the net physical impact of all transactions not covered by the other supply/demand variables“, So basically, it’s a catch-all plug figure. GFMS says that “the implied net (dis)investment  figure is not independently calculated, but derived as the item which brings gold supply and demand into balance.” See full GFMS explanation below:

GFMS disclaimer

This ‘Implied net’ (investment/disinvestment)’ figure is where the 2013 GFMS supply and demand figures become, in my view, completely convoluted and opaque. GFMS says, in both its 2013 Update 1 and Update 2 reports that:

“It is interesting to examine how the implied figure compares to information on activity within the different arenas of investment over the year, (although given aforementioned limitations in this information, it is not possible to dis-aggregate accurately the implied figure into these components)”.

How GFMS exactly makes sense of its ‘Implied net’ (investment/disinvestment)” figures is hard to fathom because there is no proper explanation of the ‘aforementioned limitations‘ that GFMS alludes to except the fact that it doesn’t seem to be able to offer estimates for physical bar movements in Comex nor physical bar movements in OTC activity, part of which it considers the bar shipments to Switzerland to be.

GFMS could also maybe ask the gold refineries in Switzerland and elsewhere for the throughput figures on what they refined in 2013, be it gold mine doré, scrap metal, or Good Delivery bars, and then use that data also. And GFMS could also ask the SPDR Gold Trust Authorised Participants how much gold each of them took out of the GLD in 2013 and how this gold made its way to Switzerland and elsewhere, did the banks send the gold to Switzerland themselves using secure transporters such as Brinks, or did they sell it to other parties who then sent it to the refineries etc etc. The same question could be asked of the Bank of England and the amount of gold withdrawn from its gold vaults and the bullion bank identities of who withdrew it.

In the GFMS world, demand has to equal supply, so whichever side of the equation is greater, the other side has to have a plug figure. In 2013, GFMS put the above items into the demand side, and arrived at an estimate of 4,737 tonnes for demand. It then did an estimate for supply using only 2 components (mining and scrap), and arrived at 4,353 tonnes for supply. Since demand did not equal supply, GFMS then said that implied dis-investment was 383 tonnes. (The figures are 1 tonne out due to what must be a rounding error).

Here is my quick and easier to read version of the GFMS 2013 gold supply – demand table:

gfms 2013 reformat

GFMS then takes the plug figure of 383 tonnes and thinks about an explanation for it.

In its 2013 gold surveys, GFMS also produced another figure which it called ‘World Investment‘, which it defined as “the sum of implied net investment, physical bar investment, and all coins“. It provided this ‘world investment’ figure for both H1 and H2 2013.

This ‘world investment’ figure includes investment demand for physical gold bars and coins, gold medallions, and imitation coins (made of gold), but it also includes investment in products such as gold-backed ETFs. So if there is a huge outflow of gold from the gold ETFs, as there was in 2013, GFMS did not consider this to be gold supply, but rather, GFMS considered it to be negative demand, that it then buries in the implied net investment category.

Since the Authorised Participants of the large gold ETFs redeemed huge amounts of gold from these ETFs in 2013, especially in the first half of 2013, GFMS refers to this as gold ETF ‘investors’ redeeming gold from the ETFs. This is not entirely true because only large investors can redeem from an ETF such as GLD. Small investors just sell their shares in GLD. GFMS calls these 2013 ETF redemptions ‘implied disinvestment’, and it is this phenomenon that caused the GFMS ‘implied disinvestment’ category to be negative in the first half of 2013, but not in the second half of 2013, when GFMS insists that there was positive ‘implied net investment’.

GFMS calculated that there were 550 tonnes of gold outflows from ETFs in the first half of 2013, and 330 tonnes of gold outflows from the same ETFs in the second half of 2013, making a total outflow of 880 tonnes for 2013. Somehow, although the 550 tonnes of gold that left ETFs in H1 2013 caused the H1 implied net investment to be a negative 613 tonnes (as would be expected), the 330 tonnes of outflow from gold ETFs in H2 2013 did not, in GFMS’s eyes, have the same effect, and GFMS’s implied net investment in H2 2013 was a positive 230 tonnes, meaning that although ETFs had an 880 tonne outflow for the full year 2013, the GFMS implied net investment was only -383 tonnes. This then creates another residual number which would have to have been a positive 497 tonnes from some other type of investment demand.

gfms world inv 2013

What else is buried in this GFMS implied net investment apart from ETF flows? It seems to have been Comex exchange activity and OTC activity that is within this implied figure, but GFMS avoids putting numbers on it, hence the confusion.

The reason given by GFMS for a positive net investment of 230 tonnes in the second half of 2013, which cancelled out approximately 500 tonnes of the ETF gold outflows, was what it calls  “significant net buying” in the OTC market.

GFMS refers to its implied net investment figure as “a proxy for institutional investor activity” and said that it “shifted to negative territory” in H1 2013. I’ve included the GFMS 2013 discussion below, just to should how convoluted and unsatisfactory this GFMS logic was. Firstly, the GFMS Update 1 report discussion on ‘implied net investment':

“The implied net (dis)investment figure is not independently calculated, but derived as the item which brings gold supply and demand into balance. The figure should therefore not be seen as an exact tonnage equivalent but instead an indication of investment activity separate from retail bar and coin demand. Additionally, although a substantial majority of this tonnage will reflect such activity, implied net (dis)investment could also include other flows that, technically, are outside the definition of investment. One example is the impact of any central bank activity that is not being picked up in our official sector figures and that would, as a result, be absorbed within our implied net (dis)investment category.”

“Despite this caveat, implied net (dis)investment typically does provide a clear indication of the overall impact of investor activity on the market for the period discussed. Furthermore, using information collected through field research and publicly available data, Thomson Reuters GFMS performs a ‘reality check’ on these values.”

“It is interesting to examine how the implied figure compares with information on activity within the different arenas of gold investment (although given aforementioned limitations in this information, it is not possible to disaggregate accurately the implied figure into these components).

Due to the nature of gold ETFs and other similar products, we are certain that the near 580-tonne decline in ETF holdings had a one-to-one impact on the volume of investment. The picture is somewhat more opaque when it comes to the futures and OTC markets. As for the former, at end-June, noncommercial and non-reportable net positions in Comex futures were 477 tonnes lower than the end-2012 figure. Turning to the OTC market, however, the first half-year saw robust volumes of investment.

 “As a shortage of bullion rapidly developed in many regional markets and local premia jumped, transactions that were related to physical gold transfer jumped in the London market. Feedback from our contacts, gold trade data and clearing statistics published by the LBMA indicate that a substantial amount of large gold bars (from redemptions of ETFs and sales from unallocated accounts) were shipped to Switzerland from mid-April to be converted to small bars for markets in Asia and the Middle East”.

In its 2013 Update 2 report, GFMS then stated the following. Notice how a lot of the text is copied over from the previous Update 1 report. Update 2:

GFMS update 2 implied

Therefore, GFMS throws a number of items into its OTC category but steers clear from committing itself to really explaining what it means by OTC activity. It states that “the OTC
market is dominated by institutional investors“. It states that  “a substantial amount of large gold bars (from redemptions of ETFs and sales from unallocated accounts) were shipped to Switzerland from mid-April to be converted to small bars for markets in Asia and the Middle East“.

It alludes to “direct shipments, albeit more restrained, from the United Kingdom to the Far East also jumped, as refineries reached full capacity.”

GFMS hazily refers to ‘metal accounts’, which I would consider to be unallocated accounts, and not directly related to absorbing physical ETF gold outflows. GFMS says in its 2013 Update 1 report that “Metal accounts held by western high-net-worth investors also posted a net rise, largely reflecting gold’s traditional role as a means of wealth preservation. This was also partly related to the ongoing shift out of gold ETFs, as metal accounts offered lower fees, while transactions in the OTC market were less transparent than in ETFs.

By the time it wrote its Update 2 report for 2013, GFMS had concluded that:

GFMS update 2 otc

So an 880 tonne outflow of gold from the large ETFs (which are predominantly based in London), as well as hundreds of tonnes of gold outflows from the Bank of England, that led to 1373 tonnes of gold being exported from the UK to Switzerland in 2013, the lions share of which were transformed into kilobars and then shipped to the Asian markets, somehow, according to GFMS, turned into only a negative 383 tonne implied net investment due to “significant net buying for the year as a whole” in the OTC market. There is no attempt to explain the 1373 tonnes of gold exported from the UK to Switzerland in 2013.

If you classify gold ETF outflows as a distinct supply category of gold, which seems logical to me and which the large Swiss gold refineries also consider it to be, then a GFMS supply-demand model would look like this:

gfms 2013 reformat ETFs

The trouble (for GFMS) then is, that the model doesn’t balance, and they are left with a 496 (or 497 tonne) item on the demand side that they can’t explicitly explain what it refers to.

World Gold Council version of GFMS 2013 data

The World Gold Council (WGC) also publishes gold supply and demand data in its annual and quarterly ‘Gold Demand Trends‘ publication. Until 2015, the WGC used GFMS data as a data source, after which it switched to using gold supply and demand data from the Metals Focus consultancy (see below for discussion of the WGC – Metals Focus switch). The WGC uses a different (and easier to understand) layout format for presenting the gold supply and demand data, but for the 2013 format, it still subscribed to the approach of putting ETF withdrawals in the demand category as a negative number.

In its ‘Gold Demand Trends – Full Year 2014′ report, which has the most complete data for 2013, the WGC states in a footnote that the source is

“Source: GFMS, Thomson Reuters; The London Gold Market Fixing Ltd; World Gold Council. Data in the table are consistent with those published by GFMS, Thomson Reuters in their Gold Survey but adapted to the World Gold Council’s presentation

WGC 2013 table

The above WGC model puts gold ETF outflows (Good Delivery bars) into its own line item, but instead of including it as Supply, the WGC puts this in a negative demand. There is also another line item under demand that the WGC calls ‘OTC investment and stock flows‘, which it defines as “Partly a statistical residual, this data is largely reflective of demand in the opaque over-the-counter (OTC) market, with an additional contribution occasionally from changes to fabrication inventories.

GFMS changes its Supply-Demand Methodology in 2014

When the GFMS 2014 Gold Survey was published in April 2014,  GFMS had surprisingly altered the methodology and formatting of its supply-demand data model to include gold ETF outflows as an explicit line item. GFMS also ditched the implied investment concept, but came up with a physical surplus /deficit plug figure instead. I say surprisingly because GFMS had used its previous supply-demand model for a long number of years. GFMS did not dwell on why this had not been done earlier, choosing instead to highlight the benefits of such a change:

GFMS 2014 methodology

Could it be that GFMS subscribers questioned as to why the huge ETF withdrawals were not explicitly listed in the 2013 GFMS supply-demand model, that forced the change? Perhaps.

The inclusion of ETF gold flows (and gold flows from gold futures exchanges) were explained as follows. The OTC category continued to seem to cause problems to GFMS. See below:

changes

gfms meth 3

The actual re-gigged GFMS supply-demand model, redone for 2013 was as follows. The figures for 2013 are slightly different from the ones that GFMS published during 2013, since the table below was published in April 2014 when GFMS probably had updated data about 2013 compared to the reports it published during 2013:

gfms 2014

The above GFMS revised model can also be reformatted as below, moving ETF and Exchange ‘build’ to the supply side, since they are supply and not demand:

gfms 2013 using its 2014 formatting

How the 99 tonnes of Exchange Inventory supply is calculated is not clear. Net Balance of 277 became 276 due to rounding differences. Even including ETFs and Exchange Inventory, there is no explanation by GFMS of what the Net Balance referred to beyond a vague reference to OTC activity.

This GFMS 2014 Survey report was sponsored by Swiss refiner Valcambi, and Japanese refiner Tanaka, with support from Swiss refiner PAMP, the CME Group, the World Gold Council, German refiner Heraeus, Italian refiner Italpreziosi (Italy), Rand Refinery of South Africa, and Istanbul Gold Refinery. Again my question would be why not ask all of these refiners (especially the Swiss refiners) what their throughput of Good Delivery bars was during 2013.

Instead, GFMS still seemed to struggle with explaining what it calls ‘OTC trade’. It even discussed (with a straight face) the huge London gold market clearing volumes of paper gold in 2013, seemingly trying to use this as some sort of vague connection to physical bar movements:

gfms otc

As to GFMS’ assessment (on page 26) of OTC activity, there is nothing concrete offered by GFMS as to what the OTC investment consists of. It mentions bars being shipped to Switzerland and on to Asia, but why is this activity not captured in physical demand?

However, GFMS does have a section in its 2014 (discussing 2013) titled “Supply from Above-Ground’ Stocks”.

“If we include the sales of ETF holdings, then the visible supply of gold to the market from above-ground stocks was 2,160 tonnes, equivalent to 42% of total demand in 2013. The figure comprises 1,280 tonnes of scrapped fabricated products and 880 tonnes of sales from ETF stockpiles.”

And it also included a table of ‘Visible Supply’ in which it did add ETF withdrawals of 880 tonnes to the ‘SUPPLY’ side for 2013, which created a total of 5,182 tonnes of gold supply for 2013. So this is further proof that the amended LBMA gold refinery figures for 2013 are completely out of sync with reality, since even GFMS now includes this ETF supply.

GFMS Visible Supply 2013

But still, 5182 tonnes of supply does not explain 6600 tonnes of gold refining output for 2013. What about all the gold that was withdrawn from the Bank of England in 2013 and shipped to Switzerland? Does GFMS capture this central bank related flow?I can’t see anywhere in the GFMS model where these type of gold flows are captured.

GFMS claims that for official sector transactions, it uses sources such as the IMF and central bank websites, and also “our own proprietary data on undeclared central bank activity, compiled using information collected through field research“. Then why does it not capture all the gold at the Bank of England that has been lent by central banks to bullion banks which has then been withdrawn from the vaults of the Bank of England and flown to Zurich during 2013?

And even for some central bank purchases that it has learned about, GFMS won’t reveal who the purchasers were due to ‘respect of confidentiality’. What does this say for accuracy of a supply-demand model if the nontransparency of central bank transactions prohibits gold transactions being publicised? See example from GFMS Update 1 report 2013:

“South Korea raised its bullion holdings by 20 tonnes in March. The balance of gross buying in the public domain consisted of small gains in gold reserves in a handful of countries. The overwhelming majority of these purchases were made by Asian countries, including Nepal, Mongolia, Brunei and Indonesia. Apart from the aforementioned buyers, over 40% of gross purchases or some 80 tonnes were accounted for by undeclared transactions, details of which cannot be released in respect of confidentiality. In some cases, gold was added quietly in the local market.”

 By the time it wrote its Update 2 report for 2013, GFMS listed some additional central bank buyers during 2013, and then stated that:

“Apart from the aforementioned buyers, over 60% of gross purchases or some 225 tonnes were accounted for by undeclared transactions, details of which cannot be released in respect of confidentiality. In some cases, gold was added quietly in the local market.”

That’s more than 135 tonnes of central bank purchases during 2013 that were not captured in the GFMS model.

 

Borrowing Gold in London

In my 7 September article “How many Good Delivery gold bars are in all the London Vaults?….including the Bank of England vaults“, I included a quotation from the Financial Times on 2nd September 2015 which stated:

“The cost of borrowing physical gold in London has risen sharply in recent weeks. That has been driven by dealers needing gold to deliver to refineries in Switzerland before it is melted down and sent to places such as India, according to market participants.”

And I concluded that:

“it begs the question, why do the dealers need to borrow, and who are they borrowing from. And if the gold is being borrowed and sent to Swiss refineries, and then shipped onward to India (and China), then when will the gold lenders get their gold back?”

Scotia Mocatta, a bullion bank which is very active in the Indian and Hong Kong/Chinese gold markets, vindicated this point in its ‘Metals Monthly September 2015‘  (page 3):

“The recent low Gold price has spurred physical buying interest to the extent that lease rates have climbed as metal is borrowed and delivered to refineries to be melted into the required bar sizes (such as kilobars) before being shipped to its final destination.

 So, where in the GFMS and World Gold Council data models is this “metal that is borrowed and delivered to refineries to be melted into the required bar sizes (such as kilobars)” being reflected? It appears that these gold bar movements are not being reflected at all.

 

World Gold Council switch from GFMS to ‘Metals Focus’

Earlier this year, the World Gold Council (WGC) switched from using GFMS as a data provider of gold supply and demand data. In an announcement, the WGC said:

“Starting in May 2015, we will be publishing gold supply and demand data provided by Metals Focus, a leading precious metals consultancy. These data will feature in Gold Demand Trends First Quarter 2015 onwards. Previously, we sourced gold supply and demand data from GFMS Thomson Reuters. The decision to change data providers was based on rigorous market research and a competitive pitch process. For more information, please see the focus box in Gold Demand Trends First Quarter 2015”

The focus box in Gold Demand Trends First Quarter 2015 states:

When new data sets become available and new methodologies are developed, we review how these might complement and advance our own methods. To that end, in 2014 we conducted a rigorous assessment of the gold market data landscape – a process which involved an in-depth review of a number of leading data providers. Following this review we appointed Metals Focus as the provider of our core demand and supply statistics.

“The World Gold Council is committed to publishing the most accurate gold demand data available. We are confident that the move to Metals Focus supports this aim.”

What the WGC didn’t mention in its press release nor in its Gold demand Trends Q1 2015  report is that in October 2013, the WGC purchased a 50% shareholding in Metals Focus Data Limited via its subsidiary WGC (UK) Ltd. The other 50% is owned by Metals Focus Limited. Surely this 50% shareholding is material information that should have been divulged by the WGC in its ‘focus box’ statement above? With its recent emphasis on costs savings, the WGC may have opted for switching from GFMS to Metals Focus partially because it may save money by using a data provider that it has an ownership interest in.

From the WGC 2014 financial statements:

WGC Metals Focus

WGC (UK) Ltd (Company No. 07867682) is a fully owned subsidiary of the World Gold Council, operating out of the same address as the parent company, 10 Old Bailey, London.

Metals Focus Data Limited is a joint venture for “the collection of data relating to the supply and demand for precious metals and licensing of data to third parties”.

What is Metals Focus Limited?

Metals Focus Ltd (Company No 08316950) was incorporated in December 2012, and was founded by Nikos Kavalis, Charles de Meester and Philip Newman, all of whom have previously worked at GFMS. Kavalis (through Premier Metals Consulting Ltd), de Meester and Newman each own a 28.87% shareholding in Metals Focus according to CompanyCheck. Metals Focus 2013 accounts can be seen here.

Metals Focus Data Limited, the 50-50 joint venture between the World Gold Council and Metals Focus Ltd, whose latest accounts can be seen here, has the following directors: Nikos Kavalis, Philip Newman and Lisa Mitchell of Metals Focus, and Terry Heymann, an MD at the World Gold Council.

Some of the sponsors of Metals Focus and its reports include Swiss refiners Valcambi and PAMP/MKS PAMP, other refiners Asahi Refining,  TCA (Italian precious metals refining), the World Gold Council (obviously), Brady Commodity Software Solutions, the CME Group, and G4S. So Metals Focus could also obtain very direct data from at least these Swiss refineries as to their throughput of Good Delivery gold bars.

Although the World Gold Council has now switched data suppliers to Metals Focus since earlier this year, in its 2015 Q1 Gold Demand Trends, it still uses the same supply-demand presentation format as previously,  with ETFs in 2013 being classified as negative demand and not supply. Interestingly, in the Metals Focus data, the ETF line item for 2013 has now risen to 916 tonnes.

wgc metals focus pres

 

Conclusion

With 6,600 tonnes of Good delivery refinery gold refining production confirmed by the LBMA to have taken place during 2013 (before the LBMA altered its data), you can see in the above analysis that this is problematic for the models of GFMS, the World Gold Council and possibly the model of Metals Focus too. Since the LBMA is sent refining data by its members, then, if it chose to, the LBMA could generate very accurate data for gold and silver refinery output for all of 2014 and nearly all of 2015.

Almost all other industries are able to publish accurate industry production figures with a minimal lag of maybe 2-3 months that provide an up-to-date snapshot of that industry’s activity. This is also true of economic data such as labour statistics and housing starts. Why then is it so hard for the LBMA to publish full and comprehensive gold refinery output data on a quarterly basis?

If this reporting procedure was put in place, the global gold industry would have far more clarify and insight into the huge flows of kilobar gold that are, on a daily and weekly basis, now being flown from Switzerland into Delhi, Ahmedabad, Chennai, Bangalore, Hyderabad and Kolcata in India, and that are also flowing at a torrential rate through Brinks vaults in Hong Kong and on into China.

 

Swiss Gold Refineries and the sale of Valcambi

The normally low-key Swiss gold refining market has been thrown into the spotlight with the announcement that private company Valcambi, the world’s largest gold refinery, is being acquired by Indian group Rajesh Exports Ltd (REL), the world’s largest gold jewellery manufacturer.

This acquisition is worth analysing for a number of reasons, namely will the Valcambi-Rajesh transaction impact marginal gold supply out of Switzerland and elsewhere, and how will the transaction, if at all, increase the likelihood of other large gold refineries becoming future acquisition targets?

Mesaric Mehta

Telegraphed Transaction

The announcement of the Valcambi acquisition should not come as a surprise because it was telegraphed in early July by the Economic Times of India. In its article, the Economic Times revealed that Rajesh Exports was in discussions to acquire a large stake in a Swiss gold refinery, and although the identity of the acquiree was not confirmed at that time, the Times said that Rajesh had “sounded out Valcambi…on a possible transaction”.

Since both Rajesh and majority Valcambi shareholder Newmont Mining declined to comment at the time (with Rajesh citing stock exchange rules), the Times and its industry sources were left to speculate that two of the other three large Swiss refineries, Argor-Heraeus or Metalor, might instead be targets, as opposed to Valcambi. Notably, the 4th large Swiss gold refinery, PAMP, was not mentioned in the Economic Times report.

The Times report would suggest that Rajesh Exports took the initiative in searching for a leading precious metals refinery to purchase. However, now that the acquisition has been announced, Rajesh Exports states that it was the Valcambi shareholders who initiated the search for a buyer. In its press release Rajesh states that:

the owners of Valcambi conducted a global search for divesting Valcambi, after an extensive search selected Rajesh Exports to acquire Valcambi.

That the search was prolonged was confirmed by India’s Business Standard, which also highlighted that Rajesh Exports was simultaneously on the look-out for a suitor:

Valcambi shareholders were looking for a buyer for quite some time. We (Rajesh) were also looking to deploy our cash at a safe place, which could generate a fair amount of business interest and help us grow. So, both of us came together and the transaction was concluded.”

But the transaction looks predominantly to have been a strategically planned sale of Valcambi by its holding company European Gold Refineries (i.e. its owners Newmont Mining and a private Swiss investor group), with what looks like input and advice from investment bank Credit Suisse.

A Quick Recap on Valcambi

Before discussing the Valcambi acquisition, its important to understand the Valcambi shareholding structure and the various parties involved with the refinery over its 54 year history.

Balerna based Valcambi was originally incorporated in the southern Swiss Canton of Ticino as Valori & Cambi SA on 15 May 1961, and changed name to Valcambi SA on 30 June 1967. The founders of the original Valori & Cambi, like its successor, seem to have wanted to maintain low profiles, because other than the fact that it was founded by ‘5 Swiss businessmen/entrepreneurs from Mendrisio”, there is little in the public record to identify who these 5 individuals were, since the online company register records don’t so back that far.

In 1967, Credit Suisse bought 50% of the Valcambi refinery, followed by the purchase of another 30% stake in 1968. The final 20% shareholding was purchased in 1980, giving Credit Suisse 100% control of Valcambi from 1980 up to December 2003. In that era, it was not unusual for a large Swiss bank to own a gold refinery, and the other 2 large Swiss banks of the day, UBS and SBC, also owned their own gold refineries (UBS owned Argor and SBC owned Metalor).

In December 2003, some of the same founders of Valcambi (from 1961) joined up with Newmont Mining and established a company called European Gold Refineries SA (EGR), which was 50% owned by Newmont and 50% owned by a group of Swiss investors (whose identities are not easily discernible). EGR then simultaneously bought 100% of Valcambi SA from Credit Suisse, and at the same time acquired a 66.65% shareholding in a company called Finorafa SA, which was a large gold distribution and financier business into the Italian jewellery market.

In their 2003 funding of EGR, Newmont and the Swiss private investor group each put up CHF 15 million in equal combinations of equity and debt.

In early July 2007, Mitsubishi International Corporation (MIC) of Japan bought a 6.55% shareholdings in EGR, with an option to buy a further 26.78% stake by 15 August 2007 (i.e. over 33% in total). Mitsubishi failed to take up its option in August 2007 to buy a larger shareholding in ERG, so this left Newmont and the Swiss investor group each with a shareholding of 46.725%, since their 50% stakes were each reduced by half of the Mitsubishi International Corporation of 6.55%, i.e. reduced by 3.275% each.

Newmont then bought another 15,960 shares in EGR from some of the private investors in April 2008, which increased its stake from 46.725 to 56.67%. This left the Swiss investor group and Mitsubishi holding a combined 43.33%. By this time ERG owned 100% of Finorafa SA as well as 100% of Valcambi, but Finorafa SA was by that time inactive.

Then in mid-November 2008, Mitsubishi had a change of mind and sold its 6.55% stake back to Newmont and the Swiss private investor group. These resold shares seem to have been split fairly equally between Newmont and the private investor group, bringing Newmont’s stake up to 60% By 2009, Finorafa, although owned by EGR, was in liquidation.

For the Valcambi transaction, Rajesh Exports has actually bought European Gold Refineries SA (EGR), which has full ownership of Valcambi SA. To purchase EGR, Rajesh established a Swiss company called Global Gold Refineries AG, which happens to be registered in the Canton of Lucerne (See company register here).

In turn, Global Gold Refineries AG is 95% owned by REL Singapore Pte Ltd, and 5% owned by Rajesh Exports Ltd India (and REL Singapore is fully owned by Rajesh Exports India). See here for the corporate structure of Valcambi and the holding companies. According to Rajesh, REL Singapore was set up primarily to execute international acquisitions and to source gold from mines.

Valcambi plant

Who were the Swiss Investor Group?

Note that since the acquisition of Valcambi by Rajesh Exports, there are now only 2 directors listed under the Valcambi Board of Directors, namely Valcambi CEO Michael Mesaric, who is staying on as CEO, and new chairman Federico Domenghini. Domenghini is also listed as the only director of the holding company Global Gold Refineries (see above). Interestingly, Michael Mesaric worked in senior roles at Credit Suisse between 1990 and 2002 before joining Valcambi, and is the first of our Credit Suisse connections.

The penultimate board of directors of Valcambi before the acquisition consisted of 6 individuals, 5 of who have now left the board. This penultimate list of directors can be seen here.

Although the full details of the Swiss investors behind Valcambi appear to be hard to find, some potentially relevant facts can be gleaned from the commercial register of the Canton of Ticino and also from the most recent pre-acquisition list of Valcambi board of directors. In addition, Rajesh mentioned one of the main private investors in its stock exchange press release (see below).

European Gold Refineries SA (EGR) was incorporated in Ticino in December 2003. Since 2003, the members of the board of EGR have been a selection of Newmont appointee directors, a selection of Mitsubishi appointees (for a short period), and a handful of other appointees. It is this third group of directors which may provide clues as to who the ‘Swiss private investors’ are, or at least who represents them.

Looking at EGR’s extract from the commercial register, in reverse date order, the most recent directors of EGR representing Newmont Mining (up until late July 2015) were Thomas Mahoney (chairman), Andrew Strelein, and David Farley. In addition, Carlo Camponovo, Luciano Martelli, and Michael Mesaric were listed as directors. Given that Mesaric is the CEO, this leaves Carlo Camponovo and Luciano Martelli as potential representatives of the Swiss investors, because logically, the Swiss private investors would need representatives on the board.

Going back further, ex-directors of Valcambi include Frank Hanagarne, Darren Morcombe, and Pierre Lassonde, all of Newmont, and Haydar Odok and Toshiro Sakai of Mitsubishi. After that we are left with 3 other directors, namely, Davide Camponovo, Emilio Camponovo, and Marco Cavuoto.

From the recent Valcambi board of directors profiles, Luciano Martelli works at Aurofin SA, and is also a director of Aurofin SA. Martelli has in the past also worked at Credit Suisse. Aurofin is a precious metals trading and financing company that was established in 1969 by Emilio Camponovo. Emilio Camponovo is still chairman of Aurofin.

Carlo Camponovo’s Valcambi profile states that he also worked at Credit Suisse from 1993 to 1997, and then worked at Finorafa SA, which is the second company that EGR owned from 2003 until it was liquidated in 2009. Marco Cavuoto was also a director of Finorafa until 2008.

The main reason for illustrating the above is to show the connections between Valcambi, Aurofin, Finorafa, and tangentially Credit Suisse, and also the Camponovo connections. Furthermore, it illustrates the low-key approach that Valcambi seems to have had in specifically naming its private shareholders.

The Valcambi web site even states that “In Switzerland and beyond: our firm deliberately keeps a low profile but has over the years become a key player in the precious metals refining industry” and to prove the point, the quotation is attributed to an unnamed ‘board member’!

Ironically, in the acquisition press release, Rajesh Exports dropped the low-key approach and provided some additional information about the Valcambi shareholders when it mentioned “Mr. Emilio Camponovo” as “the founder and current major share holder of Valcambi“. This suggests that the Camponovos were in the driving seat for the Valcambi sale alongside Newmont (and possibly Credit Suisse as navigator).

The Deal

Since Valcambi SA and European Gold Refineries SA are both private companies, there is little financial information available about either company. This has even stumped some of Newmont’s sell side analysts on Wall Street, who in their coverage of the sale admit that since Valcambi is a private company, they don’t have much visibility into Newmont’s disposal of Valcambi beyond knowing the net proceeds of the deal.

The Economic Times article on 1 July appears to have had very knowledgeable sources in India since it accurately foresaw that the deal was an all-cash deal for $400 million, 70% of which would be financed from Rajesh’s resources, and the other 30% from “overseas borrowings”.

This was highly prescient, since the announced acquisition turned out to be an all cash deal for $400 million, and Rajesh Exports confirmed at its press conference on 27 July that 30% – 35% of the consideration will be financed by long-term debt (provided by Credit Suisse, no less).

The Rajesh Exports press release states that over the last 3 years, Valcambi booked revenues of US$ 38 billion per annum, and earnings before interest, tax, depreciation and amortization (EBITDA) of US$ 33 million. These revenues look astronomical but they represent the annual average precious metals flows through the refinery being booked at market values (i.e. 945 tonnes of gold and 325 tonnes of silver per annum at market values).

Newmont (the 60% shareholder) will receive net proceeds from the sale of US$119 million. That could mean $200 million net proceeds to the entire shareholder base. Although its unclear as to exactly how much (in net proceeds) the private investor group received. Given that Rajesh is paying $400 million for Valcambi, Rajesh is also taking over or paying down some of the debt of EGR or Valcambi, or else Valcmabi has a quantum of cash on its balance sheet, or both.

Now that the deal has been announced, Newmont has pitched the sale of its stake as a disposal of a non-core asset which it claims will help pay down its debt and focus on its core business. So, being the largest shareholder of Valcambi, and actively wanting to dispose of non-core assets, this reinforces the view that Newmont was the primary driver of the entire ‘global search’ for a buyer of Valcambi.

As mentioned above, Credit Suisse has a long history of involvement with the Valcambi refinery, having fully owned Valcambi from 1980 to 2003. Credit Suisse’s involvement in the new deal also points to ongoing or rekindled relationship with the Swiss private shareholders and Newmont, since it sold the refinery to them in late 2003.

Until 2008, Newmont managed the Valcambi asset through its Merchant Banking group. This group, among other things, took care of “merger and acquisition analysis and negotiations”. Although Newmont’s Merchant Banking group was phased out in 2008, skilled corporate finance individuals at Newmont undoubtedly lent a hand to in the Valcambi disposal project.

Theoretically, Rajesh Exports could have just bought Newmont’s stake in Valcambi and become the new majority shareholder alongside the existing private investors. The fact that they didn’t go down this route could either mean that Rajesh wanted full corporate control, or that the investor group wanted to redeem its investment, or both.

Valcambi SA campus

Ramifications of the Valcambi Sale

The sale of the Valcambi refinery now raises questions as to whether its customer base and the mix of destinations for its gold exports from Switzerland will change, and what impact, if any, will the acquisition have on the ability of other countries to acquire Valcambi refined gold.

Rajesh Exports was an existing customer of Valcambi before the acquisition, and probably quite a large Valcambi customer.

In a 2011 presentation, Rajesh Exports stated that:

Top Suppliers include Australian Gold Refinery, ANZ Bank and Valcambi Refinery who constitute 90% of total supply of Raw gold to REL

So Valcambi was already an important supplied to Rajesh. Although Rajesh Exports only consumed about 170 tonnes of gold over its financial year 2014-2015, Rajesh Mehta, chairman of the group stated in his press release that:

The acquisition is also of national importance for India, as India is the largest consumer of gold in the world, it would be a step in the right direction by an Indian company to own a world-class asset like Valcambi. On a theoretical basis Valcambi is capable of supplying the entire gold requirement of India.

Gross gold imports (excluding smuggling) into India totals about 750-800 tonnes per annum at the moment. In its 2013 Sustainability Report  Valcambi states that its refinery has an annual capacity for gold refining of 1600 tonnes, and a total annual ‘precious metals’ refining capacity of 2000 tonnes. This is what Rajesh Mehta is referring to ‘in theory’ above.

Will Valcambi start supplying all of its output to India? Most probably no. Could this mean that Valcambi will start supplying more of its output to India? Probably yes. Even if it does though, Valcambi still has a lot of spare refinery capacity.

Rajesh Exports seems to have done the Valcambi acquisition for multiple reasons and not just to secure a source of refined gold supply. Rajesh claims that it wants to become a fully integrated major global gold player. (See above link to presentation where Rajesh even had a ‘Mission 2016′ plan to be a ‘fully integrated jewellery company’ by 2016).

Rajesh also had spare cash which it needed to invest in what it referred to as a safe place (i.e. “We were looking to deploy our cash in a safe place” – See Business Standard quote above). And Switzerland remains a universally known ‘safe place’ to deploy cash.

Rajesh already owns some gold mines, and a refinery, as well as gold manufacturing plants, wholesalers and a retailer network of jewellery showrooms which it plans to expand. The Valcambi acquisition allows Rajesh to move back along the gold supply chain. It also presumably will lead to cost savings on acquiring refinery output.

One of the less tangible benefits will be increased information flow about the gold market, both to Rajesh and to Valcambi. Another benefit to Rajesh will be refinery knowledge and skills transfer. Although headquartered in Bangalore in the state of Karnataka in the southwest of India, Rajesh Exports currently has a gold refinery in Uttarakhand in the north of India. This refinery has a gold output of 200 tonnes per annum. Rajesh plans to upgrade this refinery and turn it a subsidiary of Valcambi and then apply for LBMA gold and silver accreditation for  the refinery.

One of the main reasons why Valcambi (and its competitors PAMP and Argor-Hereaus)  set up in southern Switzerland near the Italian border was that Italy used to be the world’s largest jewellery manufacturer, consuming vast amounts of refined gold as is occurring in present day India. So in some ways, the acquisition of Valcambi by Rajesh Exports Ltd, as the world’s largest gold jewellery manufacturer, is just taking the supply chain logic a step further and going back to the traditional source of the Italian jewellery manufacturers (i.e. Ticino).

All of the above suggest that the acquisition will not end up diverting huge volumes of Valcambi output to India to such an extent that it would impact other customers’ reliance on Valcambi.

Additionally, Valcambi’s CEO, Michael Mesaric said of the deal that “the coming together of REL and Valcambi would ensure that Valcambi improves on it’s global share of gold business, by opening up new markets in India, Middle East and China.” Although Valcambi never broke down its gold exports by destination, about 80% of total Swiss gold exports in 2014 already went to Asia, with India, Hong Kong and China being the top 3 destinations. So what Mesaric is referring to appears to be more of the same, albeit even higher reliance on the existing top export markets.

Furthermore, Valcambi shareholders would not have agreed to the sale to Rajesh if it jeopardised its existing global customer base. Newmont has reiterated its support and will continue to use Valcambi “under the new ownership structure” since it has “long-term contracts with Valcambi for refining the gold produced” from a number of it mines.

In its 2013 sustainability report, Valcambi states that its clients are:

“some of the largest mining companies in the world, premium luxury watch manufacturers,the largest international banks, governments, central banks and scrap dealers”

The report also revealed that on a geographic basis,  Valcambi’s ‘business turnover’ was 33% in Europe, 36% in Europe (non EU), 15% in  North/South America, 9% in Africa, 4% in Asia, and 3% in Oceania.

Given that the gold exports trade statistics out of Switzerland do not align with the regions of this business turnover data, these figures (which would also include mining company and bullion bank business) must represent where Valcambi books its sales to and/or where the actual clients are based, rather than the ultimately destinations of the refined gold and silver output that are exported from Switzerland,. For example, a London-based bullion bank client of Valcambi that wanted gold refined in Balerna and sent to China would probably be accounted for by Valcambi as a European client, and the China destination of the gold would not get captured in the revenue records.

Valcambi’s refining capacity

Even if Rajesh Exports requires a higher share of the Valcambi refinery output, there is still plenty of spare refinery capacity in the Balerna facility.

Valcambi’s 2013 sustainability report also said that the refinery had an actual ‘product throughput’ of ‘3.8 tons bars and coins per day’ of gold and ‘1.8 tons bars and grain per day’ of silver. Assuming a 5 day week (250 day work year), that would be 950 tonnes of gold throughput and 450 tonnes of silver per annum.

Rajesh Exports just revealed in its press release that over the last 3 years, Valcambi has refined an annual average of 945 tonnes of gold and 325 tonnes of silver (2835 tonnes of gold and 975 tonnes of silver over 3 years). Presumably the last 3 years that Rajesh mentions refers to the last 3 calendar years of 2012-2014.

The London Bullion Market Association (LBMA) doesn’t reveal annual production data of its refinery members on an individual level, however, the LBMA recently published high level totals of the refined gold production of its accredited refiners (LBMA Good Delivery List) over the years 2006 to 2013. What was striking about the data was that total refined gold production of its refinery members reached 6,601 tonnes in 2013, which was 42% higher than total refined gold production in 2012, and also more than double global mine production of 3,016 tonnes of gold in 2013. See table below from LBMA publication:

Total annual refined gold and silver production by LBMA refiners 2006-2013 (tonnes)

Refinery output 2006-2013

So with Valcambi being the largest gold refinery in the world, it would be realistic to suggest that its annual average of 945 tonnes of refined gold output over the last 3 years probably hides the higher refined gold production that it too experienced in 2013 versus 2012. Unfortunately, there is no LBMA 2014 data. Doing a quick hypothetical calculation of Valcambi’s annual gold output over 2012-2014 where 2013 production was 42% higher than 2012, and 2012 production equaled 2014 production, then Valcambi would have refined 828 tonnes of gold in both 2012 and 2014, and a massive 1179 tonnes in 2013. This however would still be below the refinery’s gold output capacity of 1400 tonnes per annum.

So, whichever way you look at it, on average, the Valcambi refinery is not yet running at full capacity for gold, it probably hasn’t ever reached full capacity (even in 2013), and it still has plenty of spare capacity. So even if Rajesh Exports ramps up gold flow from Valcambi to India, other export destinations such as China, South East Asia and the Middle East needn’t suffer as long as mining and bullion bank clients of the refinery can provide metal to make use of the reserve refining capacity.

The other Swiss Gold Refineries

Does the sale of Valcambi foreshadow the sale of any of the other large Swiss gold refineries or increase the likelihood of a similar transaction? I’d say no, but to answer these questions, you may find it helpful to look at the shareholder structure of Valcambi’s competitors in Switzerland, and then decide.

Apart from Valcambi, there are 3 other large gold refineries in Switzerland and 2 smaller refineries. Valcambi’s 3 big competitors are PAMP, Metalor and Argor-Heraeus.

The refineries owned by PAMP and Argor-Heraeus are also located in the south of the Canton of Ticino, literally within walking distance from Valcambi, in what’s known as the golden triangle of gold refineries in the southern tip of Switzerland. As mentioned above, these refineries were established in this area in order to be as near as possible to Milan and the Italian gold industry. Looking at the map below you will see the municipalities of Mendrisio (Argor-Heraeus), Balerna (Valcambi), and Castel San Pietro (PAMP). Balerna is only 4kms from Mendrisio, and 2kms from Castel San Pietro. Notice also the Swiss – Italian border at the bottom of the map south of Chiasso.

Along with Metalor, which is in Marin-Epagnier in the Canton of Neuchâtel in north-west Switzerland, these Big 4 refineries refine the bulk of Switzerland’s (and the world’s) gold. Valcambi, PAMP, Argor-Heraeus and Metalor are all Associates of the LBMA, and PAMP, Argor-Heraeus and Metalor are three of the five refiners on the LBMA’s refiner referee list which helps maintain the LBMA’s Good Delivery System for gold and silver.

Mendrisio 2

Two other smaller companies refine gold in Switzerland in addition to the Big 4. These two companies, also in the Canton of Neuchâtel and located quite close to Metalor, are PX Précinox in La Chaux-de-Fonds, and Cendres + Metaux in Biel. Together they arguably form another golden triangle of refineries, close to the Swiss gold watch industry and incidentally close to the headquarters of the Swiss National Bank in Bern (home of the SNB’s gold vaults and where the BIS’s also stores gold).

Neuchatel

The good delivery bars of Valcambi, PAMP, Argor-Heraeus, Metalor and PX Précinox are on the LBMA’s current Good Delivery list for gold, while the bars of Cendres + Metaux are on the LBMA’s former Good Delivery list for gold (transferred to the former list in April 2015).

Because PX Précinox and Cendres + Metaux are smaller than the Big 4, the analysis below only focuses on Metalor, PAMP and Argor Hereaus, all three of which are privately held Swiss companies.

Metalor

Metalor here refers to Metalor Technologies International SA. Currently the Metalor group is majority owned by French private equity company Astorg Partners SA (www.astorg-partners.com) headquartered in Paris. The remainder of the shares are owned by Swiss individuals and by Metalor management.

The Metalor group is not just a refinery group. It has two others divisions, Advanced Coatings (for electronics and jewellery) and Electrotechnics (silver conductivity electrical contacts used in electrical applications). The refinery division has 4 refineries worldwide, in Neuchatel Switzerland, in the US (North Attleboro, which is south of Boston and is the headquarters of the refining division), in Hong Kong, and in Singapore. The 2012 Metalor annual report states that the group’s refining capacity of fine gold was 650 tonnes per annum in the Swiss, US and Hong Kong refineries. The Singapore refinery was opened in 2013, and since this has a refinery capacity of 150 tonnes,  that boosts the total refinery capacity to about 800 tonnes per annum now.

Metalor is the oldest of the Swiss gold refineries and was under the ownership of Swiss Bank Corporation (SBC) from 1918 until 1998. In 1998 a group of Swiss private investors comprising Ernst Thomke, Martin Bisang, Rolf Soiron and Giorgio Behr acquired the majority of shares from UBS. UBS still retained a minority shareholding following this transaction. Thomke then became Metalor chairman until April 2004, after which Bisang was appointed chairman.

Metalor then raised additional capital from another group of Swiss private investors who operated through a British Virgin Islands company called ‘Partners Only’. Zurich business magazine Bilanz speculated as to the identities of these ‘Partners Only’ investors in an article published in 2005, and another published in 2009. These articles list a number of well-known Swiss investors connected to Roche.

In September 2009, Metalor announced that in July 2009, a majority of the private investor shareholders had sold their shareholdings to Astorg Partners SA in an equity funded transaction. The press releases stated that two of the largest investors would invest their proceeds back in with the Astorg transaction, and that Metalor’s management including Scott Morrison, the Metalor CEO, would also become long-term shareholders. One of these 2 ‘largest shareholders’ who stayed on was Martin Bisang (see above). (Metalor press release and Astorg Partners Press Release).

Swiss newspaper NZZ (Neue Zürcher Zeitung) confirmed in 2010 that Belgium headquartered private equity company Sofina had co-invested alongside Astorg Partners, and together they had acquired almost 60% of the shares, which left the remainder of the shares owned by Metalor management as well as Martin Bisang and Daniel Schlatter. Both Bisang and Schlatter are connected to Bellevue Group, a boutique bank in Zurich, owning 20% and 5% of Bellevue shares, respectively. Bellevue actually acted as co-lead financial advisor to Metalor in its sale to Astorg which lists the transaction as spanning 2008-2009. Astorg lists its Metalor investment as being part of its Astorg IV fund.

The board of Metalor now includes Joël Lacourte, Managing Partner of Astorg Partners, Sophie Pochard,  Jean-Hubert Vial,  and Benjamin Dierickx, all of Astorg Partners, Martin Bisang and Daniel Schlatter of Bellevue Holding AG, and Metalor CEO Scott Morrison. See Neuchâtel company register extract and Bloomberg.

Of the 2008-2009 sale, Martin Bisang has said previously that “it was extremely difficult to find a buyer” for Metalor. This in some ways was because the Lehman induced financial crisis of 2008/2009 impacted transactional values at that time. However, Astorg was looking for acquisition targets in Switzerland at  that time, which obviously helped the sale.

Metalor CEO in 2009 Philippe Royer, said that Astorg was a “long-term majority shareholder”. While this is true, private equity companies in most cases eventually want to crystalise their investments, and so its hard to put an exact time-frame on a PE company’s definition of ‘long term’. Maybe 10 years+. The same may be true of the remaining private investors including from Bellevue. A hostile acquirer looking to purchase just the Metalor refineries would have to take on board the other divisions and navigate the complexity of the company. In a similar way a friendly acquirer in the jewellery or investment gold sectors might be put off by the industrial divisions of the group.

Verdict: No change at Metalor in the medium-term.

 

Argor-Heraeus

The Argor-Hereaeus group, located a few minutes drive from Valcambi and PAMP in southern Ticino, has an “annual refining capacity of 450 tonnes for both gold and silver” according to a 2013 company report.

As well as refining, the group produces a range of bars and coins and high precision products for the watch and jewellery sectors.

The current shareholding structure of Argor-Heraeus is quite diverse and consists of parties from three contiguous central European countries, namely, German engineering conglomerate Heraeus, German bank Commerzbank, The Austrian Mint, as well as Argor-Heraeus management. The fragmented shareholder base evolved as follows:

The company, as Argor SA, was established in 1951. Swiss bank Union Bank of Switzerland (UBS) acquired an 80% stake in 1960, and full ownership in 1973. In 1986, Heraeus of Germany purchased a 25% stake from UBS and entered a joint venture with UBS. In 1999 UBS departed leaving Heraeus and the company management with 100% of the shares. Then in April 1999, Commerzbank took a 35% stake, which resulted in Heraeus having 35%, Commerzbank having 35% and Argor-Heraeus management having 30%.

In 2002, the Austrian Mint (owned by the Austrian central bank) acquired a 24.3% interest, which left then Heraeus with 26.5%, Commerzbank with 26.5% and management were said to have 22.7%.

According to the 2013 annual report of the Austrian Mint, it now claims to own 28.6% of the shares of Argor-Heraeus, with an equity value of CHF 122.4 million (and a profit share for 2013 of CHF 19.5 million). According to the 2014 Commerzbank annual report, Commerzbank now owns 31.2% of Argor Heraeus shares with an equity value of CHF 152.7 million (and a 2014 profit share of CHF 22.7 million). In its latest annual report, Heraeus does not reveal its holding in Argor-Heraeus, but if the Austrian Mint and Commerzbank won a combined 59.8%, then that leaves 40.2% for Heraeus and Argor-Heraeus management.

On the website, Heraeus is listed at the top of the shareholder list, so this may indicate that Heraeus has the largest shareholding, which would be above 31%. This would leave management with the remainder.

A complex and diverse shareholder base means a diverse board of directors, and from the Argor-Heraeus SA company registry filing, the board of directors includes, as expected, a cross-section of directors from Commerzbank, the Austrian Mint, and Heraeus, including Gerhard Starsich, CEO and board member of the Austrian Mint, Hans-Jürgen Deutsch of Heraeus Precious Metals, and David Burns, head of commodities at Commerzbank.

All three parties often refer to the strategic benefits of being a shareholder in the Argor-Heraeus refinery so, it seems that the existing formula, whatever it is, is working well.

For example, Commerzbank states that it has a “long-standing cooperation with the refinery Argor-Heraeus S.A. allows us to combine well-founded experience in physical metals with strong expertise in structuring“. Likewise, the Austrian Mint refers to using Argor-Heraeus as a source of refined metal supply, presumably on preferred terms. All parties also presumably get access to information flow about the Swiss gold refining industry and gold demand and supply trends in and out of Switzerland, which is helpful.

In its 2013 annual report, the Austrian Mint said that Argor-Heraeus achieved “large increases in sales and profits in comparison to the preceding year”, so the refinery appears to be a good investment for the various parties also.

It therefore doesn’t seem likely that any of the 3 external shareholders would need to, or want to, dispose of their shareholdings. An acquirer would have to navigate negotiations with a central bank (Austria), a large German bullion bank, and a large German conglomerate, in addition to the Argor-Heraeus management.

Verdict: No change in Argor-Heraeus ownership over the foreseeable future

 

PAMP (Produits Artistiques Métaux Précieux)

PAMP SA of Castel San Pietro in Ticino, a neighbour of Valcambi and Argor-Heraeus, operates two precious metals refineries, one in Ticino and the other as a joint venture with MMTC in Delhi in India. PAMP SA is fully owned by MKS (Switzerland) Finance SA of Geneva.

Together the two refineries have an annual capacity for  550+ tonnes of gold, and 1200+ tonnes of silver. According to its website, “PAMP handles over 400-metric-tonnes of gold per year”, therefore there is still spare capacity.

MKS, a private company founded in 1979, is actually headquartered in the Netherlands, and has 16 offices around the world. MKS could be described as a physical precious metals refining and distribution company, and also a precious metals trading and financing company. The main office is in Geneva. MKS also owns precious metals bar and coin wholesaler Manfra, Tordella & Brooke (MTB) in New York which will be familiar to some readers as an approved Comex depository for gold. MKS Finance SA is also an Associate of the LBMA.

According to its company registry filing in the Canton of Geneva, the board of MKS (Switzerland) SA includes chairman Marwan Shakarchi, vice-chairman Karma Shakarchi-Liess, Venkata Gopalakrishnan, Hans Isler, Jean-Pierre Roth, and Stanley Walter.

The PAMP SA company filing from Ticino can be seen here.

In India, the PAMP refinery, India’s largest gold and silver refinery, is a joint venture established in 2008 with MMTC, and is known as MMTC-PAMP. MMTC is a ‘Government of India Undertaking’ or Central Public Sector Enterprise (CPSE), and is a huge trading company and the biggest precious metals importer in India. A few of MMTC’s directors are Indian Government appointees and the company’s website even uses a government web site domain (http://mmtclimited.gov.in/).

According to its profile:

“MMTC is the largest importer of gold and silver in the Indian sub-continent, handling about 174 MT of gold and 1165 MT of silver during 2011-12. MMTC supplies gold on loan and outright basis to the exporter, bullion dealers and jewellery manufacturers on all India basis.”

MMTC also has its own nationwide retail jewellery showroom network. From an Indian prespective, it’s not surprising that Rajesh Exports would have steered clear of looking to acquire PAMP because of PAMP’s existing relationships with MMTC. Recall that PAMP was not mentioned by the sources quoted by the Economic Times of India as a potential Swiss refinery target, while Valcambi, Metalor and Argor-Heraeus were mentioned. MMTC-PAMP, is the only precious metals refiner in India currently on the LBMA’s good delivery list.

An acquisition of PAMP SA of Switzerland would probably have to  be a full acquisition of the entire MKS Finance group becasue PAMP and MKS are closely integrated across a lot of their respective functions. Since MKS seems to be thriving independently, its doubtful if they’d be interested in being taken over. Perhaps they’d be more open to collaboration. Negotiating with one owner as opposed to multiple owners  in an acquisition scenario would undoubtedly be easier though.

It’s still unclear though as to how the exact shareholdings of MKS and PAMP are structured. MKS states that it’s a family-owned business and that would mean either exclusive or majority ownership by the founding Shakarchi family. It probably has some management ownership also. But being a private company, its hard to determine if MKS has, or does not have, a set of external private investors.

Verdict: PAMP and MKS will probably remain independent but watch this space