Gold price soars but gold stocks continue tol languish
http://www.theaustralian.com.au/business/mining-energy/gold-price-soars-but-gold-stocks-continue-tol-languish/story-e6frg9ex-1226047965675
Robin Bromby From: The Australian May 02, 2011 12:00AM
SO what is going on with gold stocks? Perhaps a better question would be: what in heaven's name does gold have to do to make the market interested?
Investors in gold stocks are probably tearing out their hair by now. The metal keeps going up, but the stocks (by and large) keep falling.
Gold rose another $US25.20 an ounce on Friday night and in after hours trading reached $US1566/oz. True, the Australian dollar has been working against us. The US dollar's decline means that in our dollar terms the metal is at $1434/oz -- which, still, is not too dusty.
One is spoilt for choice with examples of stocks where there's a good story coupled with a fast declining share price. Chesser Resources (CHZ) has gone from $1.28 in November to 72c on Friday. Yet look at its quarterly report released on Wednesday. It already has 303,000oz at one of its Turkish prospects; at another, Kestanelik, the good intercepts keep coming, such as 5m at 26.5 grams/tonne gold. There has not been any real bad news from this company.
As one gold bug lamented to us, if gold moved downwards by $US25 in one night, the gold stocks would face a wipe-out. But a similar upward movement does nothing on the upside.
One of the best African stories, Perseus Mining (PRU), fell by 8c on Friday and closed at $2.93. The stock fetched $3.55 on November 9 after gold closed in New York that morning at $US1410.50/oz, $US155.50 below its present price.
Go figure, as they say.
Adamus Resources (ADU) has had its first gold pour in Ghana, still has plenty of exploration upside at that project and has now expanded into under-explored Liberia. Oh, and $20.57 million in the bank as at March 31. The shares? Well, 89.5c in early January, 68c on Friday.
Every gold investor will have a similar story about which to lament.
Some possible explanations: share buyers are tapped out and will respond these days only to some hyper-story; costs (especially diesel) have gone up for Australian producers and receipts down with the soaring dollar; many people are not interested in gold stocks; or there have been so many gold screw-ups (think the former Bendigo Mining, think the former Ballarat Goldfields) that investors are super-wary of gold stories.
On Wednesday, we had Range River Gold (RNG) call in the administrators. In its December quarterly, the company had predicted it would produce between 7000oz and 10,000oz in the March quarter -- albeit at an average cash cost of $1000, which didn't leave much left over for the bottom line, with that cost coming down to $800 in the June quarter.
This sort of thing doesn't help the gold stocks generally. And even the successful producers have had a pretty unimpressive record of returns to shareholders in the form of dividends. The former Lihir Gold comes to mind in that regard. Compare that with Homestake Mining in the US during the Great Depression: it no doubt was a saviour to many shareholders by paying good dividends from its gold mining all through those dark days.
Analyst Tony Locantro, who now runs Locantro Capital, reminds us that during the great gold bubble of 1978-80 gold stocks lagged the metal's gains for up to 18 months. The last substantial gold stock run was in the lead-up to the 1987 crash where companies like the former Metana Minerals basked in the glory of small, easily treated oxide deposits.
He sees local gold stocks now becoming day-trader and short-term trader favourites, citing Integra Mining (IGR), which was 4.8c in 2003 and has had several rallies and two big runs, one in 2008 and the other in late 2010. Locantro says it's had more comebacks than John Farnham.
Staying with the showbiz analogies, he said the former Dominion Mining at its South Australian operation had "more breakdowns than Lindsay Lohan", the stock moving between 30c and $6.79 with much movement both ways in between before Dominion was snapped up by Kingsgate Consolidated (KCN).
On the one hand, the former Red Back Mining could once have been picked up here for around 10c but then moved to Toronto and went to $C20.
His own tale of woe is Atlantic Gold (ATV), which has made real progress with its gold story in Nova Scotia -- it has a 454,000oz reserve so far -- but which languishes at 4.7c.
Other reasons for stock non-performance in his view include not enough merger and acquisition to build bigger companies, too few big discoveries in recent years, punters' preference for stories they don't really understand (rare earths and potash, for example) and fears the gold price is not sustainable.
Warwick Grigor at BGF Equities, on the other hand, remains bullish about gold and reckons it's just a matter of time before the penny drops for investors. Then we'll see gold stocks take off.
But he does see a few handicaps. For one, there are not many gold stocks that are substantial enough to attract institutional interest. For another, traders are preferring the speculative stocks to ones with established reserves and emerging as miners -- just the opposite strategy to that we have all been advised to follow.
He cites Perseus. It has a large resource, has begun mining in Ghana and is a prime takeover target. Its enterprise value is $170 an ounce in the ground, but the more speculative players in West Africa have had their share prices pumped to a stage where their EV per ounce is between $300/oz and $400/oz.
Grigor also sees the move by Barrick Gold to buy Zambia copper company Equinox Minerals (EQN) as an indication that the Canadian company believes the gold sector offers insufficient growth potential, so has diversified into the red metal.
Copper targets
ON the subject of the Equinox takeover, Foster Stockbroking sees PanAust (PNA) and Anvil Mining (AVM) as the next two best-dressed targets for anyone looking to expand their copper interests.
Foster's preferred stocks in the copper producer/developer space are Tiger Resources (TGS), Altona Mining (AOH) and Rex Minerals (RXM).
NO room for our coal and iron ore items -- we'll post them online by tomorrow.
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The writer implies no investment recommendation and this report contains material that is speculative in nature. Investors should seek professional investment advice. The writer does not own shares in any company mentioned
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