PNA's production reports have revealed a number of positive and...

PNA's production reports have revealed a number of positive and negative perspectives, highlighting investors' attention.

The miner has reported a slightly weaker than expected June Quartrer result with copper and gold production lower and cash costs higher. Copper output was 15.2 kt. The cash costs were USD 1.04/lb, higher than March Quarter's USD 93 cents. This is due to 1) wet conditions affecting the production; 2) higher AUD, which directly increasing the operating costs especially labour/salary; 3) Higher fuel costs.

The miner has also indicated that the whole year's production for copper is likely to be at the lower end of the guidancce. However, this can be offset by the relatively strong production of precious metals (gold and silver) which are expected to be at the upper side of the guidance.

Overall, the outlook for 2011 continues to be sound for the following reasons:
- Although strong AUD and fuel costs are unlikely to be softended for the rest of 2011, strong gold and silver price are expected to be sustainable, helping to maintain/increase the revenue of the miner;
- New discoveries are made: Brown fields exploration success with potential extension to the Phu Kham mineral resource and potential new discovery of the LCT prospect;
- Ban Houayxai Gold Silver Project on track for commencement of commissioning in late 2011, whereby the Phu Kham Upgrade is aheaad of schedule and below budget;

China's movement
More importantly, none of the investors have taken into account the potential investments of the Chinese enterprises in the precious metals sector! China has more than USD 3 trillion under reserve, without diversifying into other currencies and assets. This is logically risky from the portfolio management perspective.

For example, gold only accounts for less than 3% of the total reserve of People's Bank of China (Central Bank of China), which is significantly lower than the western countries' average of 7%.

China's USD reserves will be eroded as more QEs are being released, while other currencies such as EURO and YEN do not appear to be safe as well. A good strategy for the Chinese government is to increase the stake of gold and silver. As the current gold price is over USD 1,400 per ounce, investing into gold companies seems to be more cost effective!

Currently, the Chinese government/enterprises are targeting on the iron ore industry (eg Hanlong's proposal of acquiring Sundance). After the iron ore and other base metals' acqusitions, it is likely that precious metals projects/companies are the next acquisition/investment target of the Chinese government/enterprises.