[miningmx.com] — SOUTH African gold shares are a buy despite the strong rand and continued steep increases in mines’ working costs over the next two years.
That’s the assessment of RBC Capital Markets’ analyst Leon Esterhuizen who, in a recent research report, commented: “South African gold shares are still looking good. We find the majority of SA gold shares trading at forward earnings multiples well below 20 times (some 16 times on average).
“Compared with the usual trading range between 10 times and 25 times, we believe the stocks remain cheap. Even with a much more aggressive rand forecast and allowing some 10% US dollar cost expansion in 2011 – plus a further 15% in 2012 – we still see increasing earnings and cash flow over the next two years.’
Turning to individual stocks, Esterhuizen singles out Gold Fields, Great Basin Gold, Pan African Resources and Gold One.
He commented: “We still like Gold Fields, while Harmony is starting to attract attention on the Wafi-Golpu potential value unlock. In the juniors, Great Basin Gold remains a favourite but real delivery is only expected to show in the second half of 2012.
“Pan African Resources remains the lowest value story backed by solid growth potential, while Gold One also seems cheap – provided the recent downgrades to guidance don’t become a trend.’
Esterhuizen is confident the gold price will remain in a bull trend and has raised his average forecast for 2011 and 2012 to $1,400/oz from $1 200/oz previously. His views on the gold price are widely supported by other market commentators, although some are a lot more cautious on the prospects for SA’s gold stocks.
Libertas analyst Roger Bade, reviewing recent developments at DRDGold, Gold One and Pan African, said: “It’s a bit scary being positive about three South African gold mining companies at the same time. This may relate to the high values that non-South African gold mines have been driven and the fact most investors had written SA off as a gold mining destination a long time ago. One would agree with the argument that deep mines should be avoided; but there appears some potential among the smaller brethren.’
Australian firm RCR says the recent performance of SA’s gold stocks has been “shocking’ and said: “Returns in physical gold have been superior to holding South African shares.’
Esterhuizen’s view is that SA’s gold mines have been getting a bad press mainly due to the speculation about nationalisation. He adds: “We believe that ignores the fact every major SA gold company has significant exposure to offshore asset bases. In the case of AngloGold Ashanti, over 65% of production now comes from the offshore base, with Gold Fields running at about 55% offshore exposure.
“Harmony, with Papua New Guinea production increasing, should be delivering at least 10% of its production from offshore by the end of 2011 but will still have significant potential to enhance that through the development of Wafi-Golpu.’
Harmony and Gold Fields feature in the top 10 “overweight’ gold stock picks by JPMorgan, which expects higher rand gold prices next year.
In a recently published research report the JPMorgan commodities team comments: “The precious metals complex is moving from being an investment novelty to the mainstream.’ JPMorgan expects gold to average $1,450 first half 2011 and highlights the acceptance of the rising gold price by the key consumer market for physical gold – India.
– The article first appeared in Finweek
