Gold share buys & avoids

[] — SPECULATORS IN New York haven’t been as optimistic about gold since 1995. That’s the import of figures from the Comex (Commitment of Traders Report), which showed in early October a net long position of 20,3 oz. These are traders who buy gold now hoping to sell it later at a profit.

“I wouldn’t be surprised if gold went through $500/oz year-end,’ says Paul Walker, executive director at GFMS, a British consultancy that monitors gold supply and demand. He wasn’t expecting the gold price to ramp up so quickly. And as the gold price climbs, the frothiness in the market is expected to continue.

Against that background it’s difficult to know which gold shares ought to be bought, if any, bearing in mind that the shares run ahead of the metal price by several months.

Data supplied by RBC Capital Markets shows that, in the year to date, it was best to be invested in emerging gold shares on an absolute return basis. Of five shares followed by RBC – which includes Banro, Gabriel Resources and Oxus Gold – there was an 85,7% gain over the past 12 months and a 55,9% gain in the year to date.
Mid-cap gold shares showed slightly lower gains. You’d have actually lost money had you invested in Western Areas (down nearly 2%) 12 months ago. However, the so-called blue chips – AngloGold Ashanti, Gold Fields and, arguably, Harmony Gold – have performed solidly in the year to date, gaining 18,2%, 18,4% and 31,2% respectively.

But since October 2004, Harmony Gold has shed 18,3% in share price, which is an important place to start when considering future investment.


Why buy? Harmony Gold recently finished restructuring its loss-making assets and has restated total cash cost goals of R79 000/kg against current revenue of just short of R100 000/kg.

It has cleaned up its balance sheet by paying off a convertible loan and will close out a hedge at the year-end that currently prevents it from receiving full exposure to the spot gold price.

The company is ideally positioned to gain from further increases in the rand gold price and has a number of interesting blue-sky projects in Papua New Guinea on its books, as well as in SA.

Why not? Around 90% of its assets are in SA. If the rand gold price falls under pressure, Harmony is likely to suffer. Longer term, how does Harmony grow?
Though it has a number of projects on its books, it needs a new story, particularly as fund managers distrust management following its failed bid for Gold Fields.


Why buy? More than 50% of its gold output is sourced from the US, Australia and Africa (non-SA), so it’s the most protected SA gold stock against rand vagaries. The executive is being gradually replaced with new, younger blood.

The company is stable and continues to hedge a portion of gold output. AngloGold Ashanti remains a good long-term option if you believe that the gold market is a tad overcooked but essentially a good place to be.

Why not? If you believe that the gold price is going to burst through $500/oz and is heading much higher, you won’t get the best exposure from AngloGold Ashanti.


Why Buy? Though around 67% of its annual gold output is from SA, it’s seeking to build offshore production to strike a 50:50 balance. Gold Fields is a good operational bet, having performed extremely well during the hostile bid.

Another reason to buy (or avoid): Gold Fields tends to throw up corporate surprises from time to time. It has twice attempted to establish itself in an offshore base – without success. The company has also attracted two attempted takeovers from AngloGold and Harmony Gold.

Russian firm Norilsk owns 20% of the company and there’s the likelihood of more corporate action in the future.


Why buy? The ultimate in gearing to the gold price, DRDGOLD has more lately opted for stable income. It put its North West province mines into liquidation and was seen deriving the majority of earnings from its offshore mines, including a royalty on a mine in Papua New Guinea. DRDGOLD still has leverage to the gold price at its lumpy ERPM mine and Blyvooruitzicht.

Why not? This share has run hard with the gold price and analysts fear that it’s becoming overvalued, even though the share is recovering from a 29% slump over the past 12 months.

Only if you think that gold is cruising through $550/oz is DRDGOLD worth thinking about. It also has a mixture of good and weak assets. Currently, its offshore mines are experiencing a rough patch, putting the load of responsibility on the uneven SA gold mines. You’ve been warned.


Why buy? Western Areas owns half of the South Deep mine, which recently suffered a reserves downgrade. However, the company is in play, according to analysts, who think its financial problems – including a prejudicial hedge book – will invite a suitor sufficiently able to recapitalise the business.

Why not? There are just too many other options to go risking much on Western Areas, which is still reeling following the shock murder of its former CEO Brett Kebble.

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The company’s hedge book is structured for a low gold price, which means that the company derives 25% below the spot price of gold. Corporate action could save Western Areas from its woes, but it’s highly speculative.