accumulator keeps buying, page-19

Good mention of KMC re Bullant but others got more.
Quote: Robin Bromby of Australian
INVESTORS clearly are still not convinced there's big money in gold shares. We know this because, overall, stocks have not risen in line with the metal's price.
But eventually we must follow the pattern after the 1980 gold surge to the then record of $US850 an ounce - which, actually, is still the record high in real terms because if you adjust that price for inflation, then gold would have to reach $US2466/oz to form a new high.

But what was surprising back then was that gold shares barely ticked upwards even at the height of the gold frenzy. Looking at the main gold equity index of that time - the Johannesburg Stock Exchange's - that share price take-off happened several months later when companies began publishing their profit results and the (gold) penny dropped. Investors suddenly saw the effect of the high gold price on bottom lines.

Even though the gold price faded in the following three years, sinking below $US400/oz, the South African stocks maintained a lot of their gains.

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We will have to wait and see what happens this time as the two situations are different. This time the gold price rise has been sustained, a steady rise across 10 years to the present highs against a one-off frenzy followed by subsidence in 1980-83.

Just one example will do.

Last week, emerging junior producer Kalgoorlie Mining Co (ASX code: KMC) sold the first shipment of ore from its Bullant goldmine to be treated at Barrick Gold's Kanowna Belle plant near Kalgoorlie. The 10,507 tonnes of ore contained 1241oz of gold. This yielded the company $2.1 million, which is equivalent to nearly 10 per cent of its then market capitalisation of $25m.

KMC's sales to Barrick are expected to occur monthly, yielding regular cashflow, until the junior commissions its own treatment plant able to treat 500,000 tonnes a year of ore. Yet this is a stock that on the day of the announcement of the first sale was trading at just 9.7c.

Talk to gold company investors and you will hear many such stories of frustration.

Chris Bain, who runs Melbourne-based Phillip Resources Fund, says many companies are producing at costs of between $650/oz and $750/oz.

"Investors just don't see the extraordinary profits these companies will be making," he adds.

Bain, a former working geologist, believes it is a good idea to own a little physical gold but his fund is targeting companies in production now as the best leverage to the metal's price. Look for companies that are producing between 70,000oz and 120,000oz a year, he adds.

There are three companies he regards as "real standouts". They are Saracen Mineral Holdings (SAR), Integra Mining (IGR) and Silver Lake Resources (SLR), all West Australian mine operators.

He also likes OceanaGold Corp (OGC), which is producing the metal at $580/oz in New Zealand.

Keith Goode of Eagle Research has projected earnings of three companies against the gold price. They show one trend: as the gold price increases, the miner's profitability climbs more quickly because the basic costs remain static.

In the case of Silver Lake, its 2012 after-tax profit would be $49.6m (27.7c earnings per share); at $US1800/oz, that profit would be $81.1m (45.3c EPS) and at $US2000/oz Silver Lake would be banking $102.1m. Alacer Gold (AQG) would see its 2012 after-tax profit at $190m while, at $US2000/oz, the bottom line would be $388.5m. There would be a smaller but still impressive rise for Catalpa Resources (CAH), a company that is in the process of merging with Conquest Mining (CQT).

Adelaide stockbroker Wesley Legrand of Grand Private Equities prefers gold stories within Australia because of the political risk (or lack thereof). He is nervous about some foreign jurisdictions, fearing governments there may nationalise gold if financial circumstances sour.

He is accumulating several miners or emerging producers with projects here, including Phoenix Gold (PNX), Silver Lake Resources, Conquest Mining and Kentor Gold (KGL) now that it has diversified back into WA while pursing its project in Kyrgyzstan. Legrand also favours stocks in what he clearly regards as the safer foreign jurisdictions and is accumulating Dragon Mining (DRA), whose gold is in Sweden and Finland, along with Beadell Resources (BDR), which has a high-grade deposit in Brazil.

He is also happy to follow some West Africa stocks, for the moment.

Last week we had further reminders of the gold riches in that region. Bassari Resources (BSR), which is drilling a zone in Senegal where the resource now stands at 240,000oz, reported an extraordinary intersection of 7m at 54.3 grams/tonne gold, while Adamus Resources (ADU) said it had visible gold at its project in Liberia. Meanwhile, analyst Mike Millikan at Hartleys in Perth recently singled out Canyon Resources (CAY) after high-grade hits in Burkina Faso, with gold confirmed over a 1km-long strike zone with the potential to expand over 2km.

Here's another factor to keep in mind. As Warwick Grigor of BGF Equities has been telling clients, low grade is the new high grade. Investors should be looking for companies preparing to mine lower-grade ore, a development made possible by the soaring gold price. So keep an eye out for companies reducing their cut-off grades (the grade below which the gold is not counted in the resource) and increasing mining reserves as pits are redesigned for the high gold price regime.

"Stocks that were shunned three months ago could suddenly become preferred trading vehicles," he writes. This applies in Grigor's view to high-cost producers such as Navigator Resources (NAV) and Norton Gold Fields (NGF), and to exploration companies including ABM Resources (ABU), which has 1.67 million ounces.

He also cites PanAust (PNA), which is developing a four million ounce project in Laos because, even with a low gold grade of 0.77g/t, the cash production costs are likely to be about $450/oz. There can be big money in grades under 1g/t if the tonnage is large enough, he says.

However, while most investors seeking safety tend to focus on gold, it's not the only port in a financial storm. Corn and coffee - where supply is relatively inelastic - have also been staying strong. We're seeing potash prices climb: recently India, which was offering $US425 a tonne to Canadian suppliers, had to succumb to $US475/tonne through to December and $US525 thereafter.

But for Australian investors seeking a safe haven, gold is still No 1.
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