Gold Fields presents buying opportunity

David McKay | Wed, 08 Jun 2011 09:02

[miningmx.com] -- NOW could be a good time to buy shares in Gold Fields. The company took a beating lately following the election success of Peru’s Ollanta Humala, representing the nationalist party, Gana Peru. There’s also research saying Gold Fields is looking for a much improved second half to its financial year, providing longer-term reasons for supporting the share.

First though, Peru. The reason for the selloff in Gold Fields is that its Cerro Corona mine, situated in Peru, accounts for some 16% of production and almost a quarter of total pre-tax profit. Given that it's taxes that may increase with the election of Humala, there are real grounds for worry until Humala’s position on encouraging investment while dealing with 33% national poverty is clarified.

However, a couple of stockbrokers, such as JP Morgan, think the sell-off on Peru’s stock exchange, which was 12.5% lower when trade was suspended – its largest ever decline for a single day – has been exaggerated.

It’s thought, for instance, that Humala will be under the close scrutiny of former president Alejandro Toledo, who gave him crucial support in the presidential run-off against Keiko Fujimori. There’s also pressure on Gana Peru to name an investment-friendly finance minister without delay. Furthermore, Gana Peru doesn’t have a controlling majority in the country’s congress.

Says JP Morgan: “We would see a sharp selloff in Peru as a buying opportunity. Humala would be more moderate than expected if elected – if anything because he can ill afford to see Peru’s growth collapse, given his intention to fight poverty more aggressively.”

Moody’s Investors Service also described Peru’s credit rating as “unbelievably strong”. It’s thought there’s some $50bn in investment, mostly from mining companies, still to flow into the country over the next few years.

One has to have some sympathy, in fact, for Peru which is perhaps feeling a touch of South Africa’s nationalisation contagion: just because someone raises the idea of nationalisation doesn’t mean it’s going to get adopted. Incidentally, the US deputy trade representative, Demetrios Marantis, following a meeting with South African trade officials on Tuesday, declared himself becalmed by South Africa’s statements on the nationalisation debate.

Relative to Harmony Gold, AngloGold Ashanti and DRDGOLD, shares in Gold Fields have underperformed 15% this year.

However, Leon Esterhuizen of RBC Capital Markets says the outlook for the counter is improved, and recommends it, partly on its current low valuation. “Gold Fields has an exciting growth pipeline backed by a strong balance sheet, making it one of our preferred South African gold picks,” he said in a note to clients dated June 3. “Gold Fields is well placed relative to its South African peers, particularly given a stronger outlook into H2,” he said.