Gold stocks look like they might finally break through the gloom surrounding the broader market. And not before time, given that gold has risen by some 50 per cent over the past year.
Gold shares have done little in the same period, notwithstanding the impact on earnings and valuations that the gold price rise is having.
But late last week there were signs that the disconnect between gold's advance and the market's treatment of gold shares is being addressed.
Gold equities rose some 1.48 per cent on Friday as measured by the S&P/ASX gold index. Helping fuel the better tone was a rash of bullish gold price predictions by some big name investment houses.
UBS and Barclays Capital tipped gold to average $US2000 ($1909) an ounce or more next year. That compares with Friday's close of $US1858 - a price at which your average gold producer is enjoying margins of more than $US1000 an ounce.
With forecasters lining up for $US2000 next year, you've got to think the present $US1000 an ounce margin is here to stay.
And that means gold equities will have to be treated accordingly. As UBS noted, the upgrade in its 2012 forecast to $US2075 an ounce from $US1380 an ounce means the producers are in line for some turbo-charged earnings growth.
Looking at our leading producer, Newcrest, UBS has increased its 2012 profit expectation from $1.26 billion to $2.17 billion. That's a 72 per cent rise. There is a trickledown effect on the sector.
For what it's worth, UBS reckons the best buys in the sector are Perseus, Adamus, Ausquest, Beadell Resources and Newcrest.
Garimpeiro is interested in the local gold companies making their way to the Denver Gold Forum on September 18-21 in Colorado Springs. The present valuation of the Australian producers is a fraction of that enjoyed by their North American peers. Assuming their presentations go well, there is a chance their "value" proposition will be too hard for investors to ignore. The Aussies include Newcrest, St Barbara, Resolute, Silver Lake and Saracen.
SOLID SILVER
Silver has done none too shabbily in the past year, outperforming gold by rising some 109 per cent to $US41.38 an ounce on Friday - despite long-running talk of it being in "bubble" territory.
The longer that silver has held at these levels, the more intense the search by investors for silver exposure in the domestic market.
Garimpeiro has mentioned BHP Billiton's annual 40 million ounce-plus production at Cannington in Queensland, as well as the move of Alcyone and Cobar Consolidated into production.
Then there's White Rock Minerals, spun off from Rex Minerals in October last year.There are high hopes for its modern-day exploration hunt at Mount Carrington, 100 kilometres west of Lismore. With a production history that dates back to the late 1800s, Mount Carrington was last worked between 1987 and 1990 by Joseph Gutnick's stable with limited success. But changed commodity prices and improved geological understanding, means Mount Carrington is well worth a fresh look.
An E.L. &C. Baillieu analyst, Adrian Prendergast, reckons White Rock has redrawn the geological mapping of the region, coming to the conclusion that historical mining missed the strongest mineralised zones "moving through" the region.
White Rock has a resource of 190,000 ounces of gold and 10.5 million ounces of silver, mostly within 50 metres of the surface. The hope is that a new drilling program will lead to an upgraded estimate early next year. Then White Rock can start to think about producing. Prendergast noted that White Rock was not a stock for the risk averse before setting a 55? price target. That compares with Friday's closing price of 26? a share, giving the group a market cap of $16 million. It is holding (and spending) about $5 million in cash.
Garimpeiro notes that 10 million ounces of silver back in October 2008 when White Rock floated was worth about $US100 million. On Friday's close for the metal, you can make that $US400 million. Mind you, that is for stuff sitting in a vault.
Frequently Asked Questions about this Article…
Why have gold stocks lagged even though the gold price has risen about 50% over the past year?
The article notes a disconnect: while the gold price has climbed roughly 50% year‑on‑year, gold shares hadn’t moved as strongly until recently. Reasons suggested include market valuations and investor sentiment lagging the metal’s move — although recent analyst upgrades and bullish gold price forecasts have started to lift gold equities (the S&P/ASX gold index rose about 1.48% on a recent Friday).
What are the major gold price forecasts and how could they affect gold producers?
UBS and Barclays Capital tipped gold to average about US$2,000 an ounce (the article references US$2,000 and UBS’s 2012 upgrade to US$2,075 from US$1,380). At prices near US$1,858 (a recent close cited), many producers are enjoying margins of more than US$1,000 an ounce; a sustained move toward US$2,000+ would support faster earnings growth for producers and lead analysts to upgrade profit forecasts, as happened with Newcrest in the article.
How did UBS’s forecast change Newcrest’s profit expectations and what does that mean for investors?
According to the article, UBS increased its 2012 profit expectation for Newcrest from $1.26 billion to $2.17 billion — a roughly 72% rise. That example illustrates how higher gold price assumptions can materially boost producer earnings, which in turn can re‑rate gold equities if investors price that earnings growth into shares.
Which Australian gold stocks did UBS highlight as top picks?
The article reports UBS named Perseus, Adamus, Ausquest, Beadell Resources and Newcrest among the best buys in the gold sector.
Why is the Denver Gold Forum important for Australian gold companies?
The article explains that Australian producers (including Newcrest, St Barbara, Resolute, Silver Lake and Saracen) attending the Denver Gold Forum can showcase their projects to international investors. Because Aussie producers were trading at a discount to North American peers, a strong presentation at the forum could highlight their value proposition and attract increased investor interest.
How has silver performed recently and what opportunities does that create for investors?
Silver has outperformed gold over the past year, rising about 109% to US$41.38 an ounce on the cited Friday close. The article suggests that prolonged strength in silver has intensified investors’ searches for domestic silver exposure, including large producers (BHP Billiton’s Cannington) and junior companies moving into production or exploration.
What are the key facts and risks about White Rock Minerals mentioned in the article?
White Rock, spun off from Rex Minerals, has a reported resource of 190,000 ounces of gold and 10.5 million ounces of silver, mostly within 50 metres of the surface. The company hoped a new drilling program would support an upgraded resource estimate and potential move toward production. An analyst set a 55‑cent price target versus a recent closing price around 26 cents, giving a market capitalisation of about $16 million and cash of roughly $5 million. The article also cautions White Rock is not for the risk‑averse — these are exploration‑stage dynamics and valuation is sensitive to metal prices and drilling results.
How do historical silver holdings translate into market value as silver prices rise?
The article gives an example: 10 million ounces of silver that were worth about US$100 million in October 2008 would be worth roughly US$400 million at the recent silver price cited. The article notes, however, that this is a simple valuation of metal in a vault and doesn’t account for mining, processing or other project risks.
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