CRITERION: Tim Boreham | August 27, 2008 GOLD has been the most alluring of substances for centuries, but it's the one commodity your columnist is ready to send to the doghouse for good. Even though the yellow metal itself holds investment merits, few local miners have been able to produce decent returns.
Until a few weeks ago it was assumed a price of $US1000 an ounce price would carry even the most marginal players into a golden era. At the time of quilling this missive, the gold price has shrunk to less than $US800 per ounce, more than 20 per cent below the March 27 peak of $US1033.90 oz.
With oil prices tapering and the $US tenatively recovering, few are talking about gold's mystical hedging qualities against inflation and an impoverished greenback.
Even with gold at record levels, the sector leaders underperformed the wider market -- and proved remarkably accident-prone in both literal and figurative senses. This was demonstrated once more with the sudden collapse of Michael Kiernan's Monarch Gold, which fell victim to poor head grades at its Davyhurst mine in Western Australia.
Monarch joins View Resources' Sons of Gwalia in the hands of administrators. Others, notably Bendigo Mining (ASX code: BDG) have had near-death experiences because of lower than expected grades, production hiccups and an inability to meet hedge book commitments. A telling stat is that despite the preponderance of listed gold players, gold production in Australia has fallen 20 per cent over the past decade and is at 20-year lows.
One issue is frequent production snafus including cycle disruptions, metallurgical problems and poor grades. Another simply is that there have been few decent discoveries since Tropicana, near Kalgoorlie, was proven up about eight years ago.
AngloGold Ashanti (AGG) chief executive Mark Cutifani recently exemplified the widespread angst by warning the industry -- already under threat from rising costs -- faced further pressure from the carbon emissions trading scheme.
Anglo and partner Independence Group (IGO) are mulling the feasibility of their Tropicana project, slated as a 300,000-400,000/oz a year operation, but Cutifani's message (or threat) is that there are plenty of other places in the world to go.
The upside to the gloomy outlook is that adversity brings opportunity, with some gold stocks unduly punished for past transgressions.
A classic example is Beaconsfield Gold (BCD), owner of the infamous Tasmanian mine that killed miner Larry Knight and trapped two others. Beaconsfield continues to attract the wrong sort of headlines because of the ongoing inquest into the disaster, but its production numbers have been encouraging.
The share price of Avoca Resources (AVO) has tanked, but it deserves credit for starting production at its Higginsville, Western Australia, mine, aiming for annual output of 170,000-190,000 oz.
Oxiana has merged with Zinifex to form OZ Minerals (OZL), thus diluting its gold exposure with the abysmal performers, lead and zinc. Oxiana's Prominent Hill mine in South Australia is on track. There's also merit in the idea that OZMinerals' valuation already compensates for the base metals malaise.
Another emerging producers mentioned in dispatches is the cashed-up Dominion Mining (DOM) with its low-cost Challenger mine in South Australia.
Fat Prophets gold bug Gavin Wendt notes that gold stocks have been sold off more sharply than during gold's last consolidation phase after 2006. He reckons the overall bear market has had an "exaggerated negative effect" on gold stocks.
"We do not believe that the bull market in gold and gold stocks is over," he writes. "We do, however, believe that the correction is likely to be more protracted and endure for longer now that the $US has displayed signs of strength."
A paradox of the weak greenback in recent times is that while it has enhanced gold's safe-harbour image, it has also meant that Australian producers have achieved poorer $A returns when selling the $US-denominated metal.
Hence, not all producers will rue the deflationary effect of the improving $US. For unwary investors, however, there's still more fool's gold than the real stuff in them thar hills.
The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser.
IGO Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
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