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Gold and gold stocks are inhabiting two different worlds, say experts
Robin Bromby From:The Australian March 26, 2011


Gold and gold stocks are inhabiting two different worlds. You can blame the muscular Australian dollar, gold exchange-traded funds and hedging (where it still exists) -- or, equally, the companies themselves -- but the fact is that the stocks may now be only a partial proxy for the metal itself.

Goldman Sachs in a report this week on value in the gold sector notes that Kingsgate Consolidated was trading at a 26 per cent discount to its valuation. St Barbara is also, they say, trading below its longer-term price-value ratio


Veteran gold analyst Keith Goode of Eagle Research suggests there could be two reasons. One is the investor being torn between the "should I buy physical gold or should it be gold stock" quandary; the other is that many of the bigger gold companies here have individual blemishes that detract from their values.

There is also a third way, with some investors opting for the fashionable gold proxy of the gold exchange-traded funds.

Then there is, of course, the Australian dollar having risen so far, so fast against the US dollar and wiping out large chunks of gains by those who bought physical gold a few years ago, and the margins of the producers exporting from Australia.

But -- as if to prove Goode's point that each company has its own individual set of circumstances -- taking some of our bigger locals shows differing patterns. Apart from the fact that they're nowhere near their 52-week highs, even with a new record gold price this week, we see that OceanaGold with its New Zealand mines topped at $4.17 in September and then hit a low of $2.29 this month. It was Kingsgate's turn for its high in October, when the shares reached $12.30 and then it recorded its low of $7.40 after the Japanese disaster.

Operational news has a bearing, too. Record sales of gold are impressive, but not if costs are creeping up significantly.

Thai gold producer Kingsgate last month reported a plunge in first-half profit and reduced its interim dividend. There was some investor concern about its newly acquired Challenger mine in South Australia (through the Dominion Mining takeover), which had been having some technical problems and cash costs were not leaving much cream.

Then St Barbara earlier this month sliced more than 10,000oz off its expected annual production, after heavy rain disrupted mining at the Gwalia operation.

The good news is that Goldman Sachs still considers Kingsgate and St Barbara among their favourites, retaining 12-month price targets of $14 (just under $9 yesterday) and $3.90 (around $2.20 yesterday) respectively.

Never mind that analysts recommend a stock, any hiccup makes investors nervous even when gold us running hot.

Goode says you cannot equate stocks and physical gold. The sharemarket is different to the gold market, he adds. This means that sometimes the two move in unison, but often don't.

In fact, the ETFs (exchange-traded fund) are said by some gold bugs to be the main reason that gold company share prices are not doing better. The funds have siphoned off a great chunk of gold-following money; if that all came back to the sharemarket, you would see prices really take off as equity demand soared.

Valuations are another problem. Take Saracen Mineral Holdings. This company has just produced a first-half profit of $34.6 million, after reviving the Carosue Dam mine in Western Australia, part of the former Sons of Gwalia operations. When the profit was announced, the market yawned. Here is a very profitable gold producer with stock selling at around 76c yesterday and capitalised at just $384m.

If Saracen were listed in Canada instead, its valuation would probably be double that.

It's no wonder companies like the former Avoca Resources decided to merge with Toronto-listed Anatolia Mineral Developments to form Alacer Gold Corp. Now the new entity is capitalised at $933m, it is getting close to the level where global investors start taking a real interest. It was the same reason others left Australia, most notably the now former Red Back Mining: they went where they were fully appreciated (and could raise big money), as proven by the fact that Kinross Gold last year put a $US7.2 billion price on Red Back's head and took it out. More recently, Mineral Deposits packed its Sabodala goldmine in Senegal and sent it off to a new listing in Toronto.

And that's another reason why the share prices of even our bigger gold companies are, by North American standards, pretty ordinary.

In terms of world standing, there's Newcrest Mining and then there's daylight.

That Australian-owned gold-copper producer is capitalised, for comparative purposes at $US28bn ($27.34bn), and is now slightly bigger than Newmont Mining of the US. With Barrick Gold worth $US48.4bn and Goldcorp $US37bn, Newcrest is up there on the world gold stage.

Then it's a long way down -- past AngloGold Ashanti, Harmony Gold, Gold Fields, Iamgold and several others -- to the next Australian, which happens to be Medusa Mining, worth $1.34bn, followed by Perseus Mining at $1.2bn (and long expected to be swallowed by a bigger fish), Kingsgate Consolidated at $1.14bn, CGA Mining on $1.02bn, Regis Resources on $935m, followed by St Barbara ($694m) and OceanaGold Corp ($661m).

The problem for Australia is that successful gold companies are picked off -- Lihir Gold grabbed Equigold, then Newcrest swallowed Lihir -- and we're back to square one.

However, at the heart of it all, are those graphs: the gold price keeps rising; the producers wax and wane.

There are those who say it's close to its peak, it may run to $US1500/oz, but a correction is overdue. We've heard such pessimism over recent years, and it has been proved wrong