Investors cautious despite golden rise

LEADING gold producer Newcrest Mining (ASX: NCM) reports its profit for the June year today and there will be no surprise if it weighs in with a result that tops the $1 billion mark. Broker forecasts for the group's full-year result range from a low of $892 million to $1.21 billion, with a median forecast of $1.05 billion. It is the sort of stuff you would expect for a group drawing the benefits of bumper gold prices on annual production of 2.7 million ounces of the yellow stuff.

But all that hasn't amounted to much in terms of Newcrest's share price performance. The group's share price is pretty much where it started (calendar) 2011, notwithstanding the 26 per cent rise in gold prices in the same period.

Newcrest is not alone in having its share price disconnect with the rapid rise in gold prices. It's as if equity investors are treating gold stocks like any other class in periods of market turmoil, notwithstanding their leverage to higher metal prices.

Having said that, gold has retreated from its all-time high of more than $US1800 an ounce. But at Friday's close of $US1746 an ounce it is still none too shabby.

In a way, it is a pity that Newcrest reports its annual profit today and not in three or six months' time.

That's because there is nothing in the latest June year result for gold's $US300 an ounce increase at a lower exchange rate too in the last six weeks or so.

It is a point picked up by RBC Capital Markets in a research note on Newcrest last week. Based on previous Newcrest guidance on its sensitivity to gold price moves, the broker said that gold's six-week run equates to an annualised uplift to net profit of a whopping $650 million.

Taking it further, if you were to pencil in $US1800 gold (and $US4 a pound copper and a $US1.02 exchange rate), Newcrest's profit in 2012 would come in at something like $1.96 billion and $2.4 billion in 2013.

The disconnect between Newcrest's share price performance and its earnings surge would have to be examined under that scenario. But there is no guarantee that near $US1800-an-ounce gold will continue, even if the likes of Deutsche Bank reckon it has got $US2000 an ounce written all over it.

"We believe the main beneficiary of super low interest rates in the US, a weak US dollar, a view that central bank holdings in the US dollar are still excessive and ongoing questions over the stability of the financial system will be gold," the bank said.

For well-known historical reasons, the Germans know a thing or two about the value of gold compared with other asset classes.

So it was interesting to see Deutsche Bank add that the gold price would need to soar to $US2960 an ounce for it to return to relative levels with the S&P 500 last seen in the 1930s.

"For the time being this is not the economic scenario that we are forecasting, but events in recent days have certainly moved us closer to this outcome," the bank said last week.

REGULAR readers of Garimpeiro will know that top-end-of-town stock like Newcrest is not his normal stomping ground.

But take it as a long way around to pointing out that the surge in gold prices is having an amazing impact on junior companies with near-term development projects.

Cerro Resources (ASX: CJO) is a case in point. It's got a deep portfolio of projects, the most advanced of which is the 66 per cent-owned Cerro del Gallo gold/silver project in Mexico. Plug in a $US1157 an ounce gold price and a $US19.81 an ounce silver price and you're looking at a life-of-mine net cash flow (undiscounted) of $US516 million.

But plug in $US1700 gold and $US35 an ounce silver and it balloons to a staggering $US1.28 billion, based on an initial two-stage mine life of 14.3 years and average annual production of 90,800 ounces (gold equivalent).

But what has Cerro Resources' share price done since the run in gold and silver prices transformed the scale of potential returns from Cerro del Gallo? It has actually gone backwards from 25? a share in late July to the 18? a share close on Friday.

At that price, it is being valued by the market at $134 million against which it is holding cash of $18 million. The company is working on financing the project ahead of a construction start in 2012.

THERE has never been a better time for the explorers on to finds with that magical mix of gold and copper. Again, you will not have noticed that in the share prices of explorers on to something interesting.

But there will have to be some action before long on the assumption that gold holds on to these higher levels and that copper's looming supply shortage keeps it nice and strong.

It's against that background that Chile-focused Southern Hemisphere Mining (ASX: SUH) has been recasting itself as a copper/gold explorer.

It actually started out that way but when the global financial crisis hit, it looked for a near-term cash-flow opportunity at the Los Pumas manganese project in northern Chile.

It did OK there, but oversupply in manganese something BHP Billiton is adding to with its expansion of the Groote Eylandt operation in the Northern Territory means that the development of Los Pumas will have to wait for improved prices.

But the Chilean focus its CEO Trevor Tennant lives there has nevertheless paid off, with SUH emerging with two copper/gold plays in a country that is to copper what the Pilbara is to iron ore.

They are the newly acquired Llahuin and the Chitigua projects. Llahuin was picked up in July and is already showing development potential as a medium-sized producer.

Resource definition drilling is under way, as you would expect after due diligence holes drilled by SUH ahead of completing the deal returned results that included 208 metres from surface grading 0.42 per cent copper and 0.19 grams of gold a tonne.

But the real excitement could come from Chitigua, which sits between the El Abra and Quebrada mines on northern Chile's fabulously copper-endowed Western Fault Belt.

The latest hole there returned 46 metres of 0.4 per cent copper from three metres and 23 metres at 0.41 per cent copper from 63 metres. The best one-metre intersection returned 2.29 per cent copper.

SUH said that the results, along with its location on the Western Fault, highlighted the potential for a large porphyry copper system at Chitigua.

SUH closed on Friday at an unchanged 37? a share for a market cap of $56 million.