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World’s hottest gold stocks
By: Barry Sergeant
Posted: '16-MAY-06 20:03' GMT Mineweb

JOHANNESBURG (Mineweb.com) --Gold’s huge correction in the past few days – from 25-year highs of $730 an ounce late last week to under $690 on Tuesday – has left specialist gold investors facing tough realities and even tougher choices.

Some helpful guru advice was, however, made available by RBC Capital Markets on Friday last week, just before the heavy correction really set in. In a 36-page inter-disciplinary global gold review, analysts at RBCCM said that given the various fundamental factors impacting gold bullion, there was potential for $800 an ounce in 2006.

It was noted, however, that “an important near-term risk” was that weak jewelry demand over the traditional quiet summer period could undermine prices, “potentially resulting in a gold price correction back to a range of $600 to $625 per ounce.” After the price correction, RBCCM restated its view: “We see the potential for gold prices to continue higher in this ongoing secular recovery.”

RBCCM analysts believe that “a secular recovery for metals remains in place, driven in large part by concerns regarding the health of reserve currencies, as well as the growing economies and incomes in Asia and OPEC nations. At the same time, traditional disinflationary trends observed over the past two decades are becoming a thing of the past. As a result, tangible assets such as precious/base metals, oil/natural gas and related equities are expected to continue to outperform monetary-based assets such as bonds, bank equities and currencies.”

On the flip side, the Bank Credit Analyst argued in recent research that it was “on the back of growing inflation fears and speculative demand” that gold bullion had made it up to around $730 an ounce. Gold prices had risen almost 20% in the past three weeks alone and were now “deeply overbought,” according to BCA Research, “highlighting that a ‘mania’ is underway.”

Using very different tools to those applied by stock analysts, BCA Research argued that gold prices had now far outstripped the research unit’s cumulative liquidity measure that had correlated well with bullion prices for the past 30 years. Meanwhile, BCA Research noted that sentiment towards gold had reached record optimistic readings, “even surpassing the apex in the earlier mania phase in 1979-80. From a contrarian standpoint, this may be a sign of an impending top, although with prices climbing vertically, timing a correction is dangerous.”

With this note of caution in mind, there is no question that any investor would agree that currency values are critical to any investment decision and that, at the same time, forecasting currency rates is nothing more than a mug’s game. However, it has been noted that the positive correlation between gold bullion and the dollar observed over most of 2005 broke down in February 2006 and has since returned to its conventional negative correlation.

RBCCM’s multi-disciplinarian view is that the value of the dollar will continue to decline over the remainder of 2006, despite the fact that another lift to the US Fed funds rate (the core US interest rate, as governed by the Federal Reserve) may be on the cards. At least 50% of investors appear to agree with the view that the dollar is in for further troubles. Concern over the ballooning US current account deficit could once again take a front seat in the global investment landscape.

Weighing up all the factors, RBCCM has selected seven stocks in the global gold sector as “best picks:” Eldorado, IAMGOLD, Kinross, Centerra, Lihir, Newmont and Harmony, though not necessarily in that order.

Eldorado Gold is also fancied by CIBC World Markets, which has just reiterated its "sector outperform" rating on the stock, and raised the price target from $6,50 to $8,10 a share. IAMGOLD is also fancied by analysts at Wellington West, who have raised the stock’s target price from C$13 to C$15 a share; the RBCCM target is at C$14 a share. Kinross Gold has just been initiated as a “sector outperform” by analysts at Scotia, with a target price of $17, identical to that named by RBCCM.

The Centerra Gold target price has recently been raised by National Bank to $46 a share, compared to the C$69 mentioned by RBCCM. Lihir Gold was recently upgraded to "buy" by UBS and at RBCCM, the price target has been set at A$4.65 a share.

This leaves two so-called Tier One gold diggers to populate the ranks of the world’s hottest gold stocks: Newmont and Harmony. On Monday, CIBC World Markets reiterated a "sector underperform" rating for Newmont, but raised the stock’s price target from $65 to $76. RBCCM has a price target of $80 a share, and mentions that possible “risks and impediments” to the target price include the challenge of maintaining 8m ounces of annual consolidated gold production.
This leaves Harmony, which, for some time now, has been seen by a number of investors as offering among the best value due to the marginal nature of a number of its operations. The overall lower grades of its ores provide it with greater upside leverage to rising bullion prices, enabling it to outperform higher quality ore owners such as its South African peers, AngloGold Ashanti and Gold Fields.

RBCCM’s 12-month price target for Harmony is $25 a share (the stock was trading just below $14 a share in early Wall Street trade on Tuesday). RBCCM mentions that possible price impediments for Harmony include gold bullion price fluctuations, rand exchange rates, the inflation outlook, and production risks. The bulk of Harmony’s value, according to RBCCM, lies in its growth projects in South Africa and Papua New Guinea.

Harmony’s heavy exposure to South Africa (at 90% of current production) has put the company under severe financial strain due to the strength of the South African rand relative to the dollar.