* Ian Glass * From: Herald Sun * September 14, 2011 12:00AM
I'm often asked, "What do you think about gold?" Until a few years ago, I would have replied that it was a relic of the past and not worthy of the attention of a serious investor. These days, I am not so sure.
In my view, the interest in gold is due to the concerns of some investors that the major economies of the world, the US and the Euro zone, are going to turn on the printing presses. These people see gold as a store of value that will maintain its purchasing power if this comes to pass.
A discussion about whether gold is in a bubble or not is a topic that draws strong views around our dealing room.
The sceptics point to the fact that (excluding Australia) core inflation is quite subdued, notwithstanding the two rounds of quantitative easing in the US and that gold has spent the past decade getting steadily more expensive relative to everything else.
The believers think that central banks and governments, with a view to devaluing their currencies as a way to boost the competitiveness of their exports, are in a race to debase. Even the Swiss National Bank has decided to join the game by drawing a line in the sand above which it will not allow the Swiss Franc to appreciate against the Euro. This level has been set at 1.20 Swiss Francs per Euro.
The Swiss Franc has long been seen as a currency to hold for those looking for a safe haven. With one less safe haven available, this will push even more frightened money into the gold trade.
I prefer to hedge my bets. Rather than buy gold bullion, I like to think of gold as a product and look at the companies that "manufacture" this popular product. Ideally, we should be looking at companies that have a low cost of production and are also steadily increasing their production of the precious metal.
Our top picks among the small to medium size gold sector are Saracen, Integra and Red 5.
Saracen is a gold miner operating 120km northeast of Kalgoorlie. We expect it to produce more than 120,000 ounces of gold this financial year. Saracen has a plan to potentially boost this to 250,000 ounces per year with the establishment of a second mining centre. This centre focuses on the high grade Red October district. The resource in the Red October district sits at 10.4 million tonnes at a grade of 1.8 grams per tonne (or about 600,000 ounces of contained gold). Our research team's valuation is $1.22 versus the last price of $0.780.
Integra Mining has its operations 60km southeast of Kalgoorlie. A low cost producer, it is well on the way to producing more than 100,000 ounces in FY2012 at a cash cost of less than $600/oz. This is in comparison to its average realised gold price in the last quarter of $1373/oz. It has also recently announced a solid increase in its reserves, as well as having had some excellent drilling results from its Majestic and Lucky Bay deposits. Our valuation for Integra sits at 75c against its present price of $0.575.
RED 5 operates in the Philippines. It is putting the finishing touches to its plant with commissioning expected to begin this month. The project build is fully funded, with an expected buffer of about $18 million.
Red 5 is building stockpiles of ore ready to be processed. The company forecasts its first gold pour sometime in November. Red 5 is trading at a more than 50 per cent discount to our valuation of 49c a share.
>> Ian Glass is an investment adviser and partner at Evans and Partners.
The Herald Sun accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser.
