rfc ambrian

Respected mining house RFC Ambrian believes that the gold price will hold firm for the “foreseeable future” thanks to persistent euro zone fears and the potential for more quantitative easing.

In its new publication on small to mid-cap gold miners, it provided a reasonably upbeat assessment of market conditions for companies exploring for and mining the precious metal.

This year the gold price hit record highs of US$1,900 per ounce, but has since levelled out at between US$1,600-US$1,700 per ounce.

Yet despite these record prices and the expectation that they will remain strong, gold equities have tumbled across the board. It is not just the juniors being hit, the larger producers have suffered too.

Duncan Hughes, Ambrian’s chief mining analyst, said that for the most part the finger cannot be pointed at the management of the companies.

“While in some cases a fall in a specific company’s share price has been justified (for example, when the company has ‘overpromised and under-delivered’), we feel that in most cases the market has significantly oversold gold equities and this has presented some attractive investment opportunities,” the former geologist said.

Hughes reckons the value of shares in gold companies will eventually narrow the gap with the gold price. Historically, this discount has always narrowed, he pointed out.

He still believes a third round of quantitative easing (QE3) – which the broker flagged last year but which never materialised – could hold the key to bolstering the gold price in near-term.

As more money is pumped into the economy, the price of the US dollar declines, forcing investors to seek other safe-havens for the cash such as gold.

Ambrian’s analysts reckon continued weakness in the dollar, as well as persistent euro zone fears, will help underpin the long-term value of gold as a safe haven asset.

“Coupled with a general fear that western governments will struggle to reduce their deficits, many Central Bank portfolio managers have opted for investments in gold where historically they held paper currency,” Ambrian said.

This trend has been on-going for some time and is expected to continue in the future, again supporting the gold price.

“Gold’s outstanding bull point is that it is no one else’s liability. So when currency debasements and devaluations come along, gold will hold its value in real terms,” Hughes said in the preface to the company’s gold sector research document.

Hughes said the market at the moment is difficult, whatever commodity you happen to be mining.

“Despite this, we’d say that there are opportunities for good gold investments in the small-mid cap space,” the head analyst added.

Hughes also points to the potential for larger gold miners with cash to consolidate smaller explorers included in the publication, as they look to stimulate growth through accretive acquisitions.

“We have not seen a large amount of activity flow through to the explorers or developers as of yet, but as their valuations remain at such distressed levels we believe it will not be long before producers will look at raiding and cherry picking the best from this sector,” he said.

Ambrian’s overriding message to investors therefore is not to avoid gold juniors altogether, but rather to be selective about which companies to pick.

With this in mind, the analysts marked out four areas to look at: turnaround stories, low-cost producers, developers and explorers.

West Africa-focused Avocet Mining (LON:AVM) is the top pick in the turnaround story category, having performed well historically but poorly over the short-term.

“Avocet had a difficult first half to 2012 and has outlined a drop in its 2012 production guidance,” Hughes said.

“However, the company still has strong exploration upside, achievable expansion targets, and we believe it is well positioned to turn around production problems going forward. The market has oversold Avocet and we see upside in both the short and long term.”

Mandalay Resources (TSE:MND), with its mines in Chile and Australia, has successfully ramped up production at Cerro Bayo and is producing cash costs at less than US$300/oz of gold after credits, making it the top pick for low-cost producers.

“With strong growth prospects and a sensible growth strategy, Mandalay is set for income and capital growth despite the weak market conditions,” Hughes said.

Liberia-focused Aureus Mining (LON:AUE, TSE:AUE) sits at the top of the pile of the analyst’s most promising developers list.

He thinks the New Liberty project has strong economics despite its very high strip ratio.

Although he admits the company may face roadblocks in raising US$130 mln of project funding in the current market, Hughes marks it out as his top pick given its potential as a possible takeover target.

As for explorers, the analyst suggests investors look at Papillon Resources (ASX:PIR).

The owner of the Fekola Project in Mali recently unveiled a maiden resource of 3 million ounces of gold, while early metallurgical tests have been positive.

“We feel these assets will be attractive to investors and M&A [Mergers & Acquisitions] suitors alike,” Hughes stated.

Elsewhere, the analyst likes the look of South America-focused miners Mariana Resources (LON:MARL, TSE:MRY) and Minera IRL (LON:MIRL, TSE:IRL).

Hughes said exploration holds the key to the former’s success with less than 10 per cent of the prospective Las Calandrias project effectively explored, while he expects increased life of mines at Minera’s Don Nicolas and Ollachea deposits, two assets he says that are “gearing up for finance”.

Hughes also called Eastern Europe-focused Ortac Resources (LON:OTC) a “hidden European gem”.

Ortac’s flagship Šturec Gold Project in Slovakia has a resource of around 1.3 million ounces of gold equivalent and Hughes thinks there is a “good probability” of boosting the resource further in the future as it remains open along strike and at depth.

“We often hear there’s a lack of good gold development stories listed on the AIM market, but we believe that we have come across a real gem in Ortac Resources,” the analyst said.

However, with the market cap sitting at just £12 mln, Hughes reckons investors are being scared off by fears the project will not be developed given local opposition to the miner.