Interesting re gold futures (more focused on larger...

Interesting re gold futures (more focused on larger producers..... provides outlook (12 months with approx open pit time = nice future)

Can Gold Find Support At Current Levels?
FN ARENA NEWS - 03/09/2008


One feature of the gold market over the past couple of years is the lack of selling from central banks, especially those in Europe. As Barclays Capital points out, the latest central bank gold agreement ends on September 26th and again the banks will fall well short of meeting the 500 tonne limit for annual sales, with a total of around 360 tonnes more likely in the group's view.

This would put official gold sales at their lowest level since 1999 according to Barclays. When coupled with lower gold global production, this is a supportive element for gold prices and has been recent years, reasons Barclays. However, it hasn't helped the price of gold of late, as money has swung out of the commodities sector. The group takes the view this underperformance of supply has been more than offset by lower demand, particularly for fabrication.

As a result, it suggests unless physical demand increases in the shorter-term, it is unlikely the gold price will be able to sustain its recent price floor and could fall lower, even if official gold sales remain at their presently subdued levels.

But Macquarie takes the view on a 12 month time frame there is more upside than downside risk in the gold price at present, largely as the US Federal Reserve is caught by ongoing inflationary pressures that will prevent it from lifting interest rates significantly, even as signs are starting to flow through that the US economy is improving slightly.

This is likely to prevent the US dollar from undertaking any sustained further rally against the euro and other major currencies, in its view, and a weaker dollar is a positive for gold prices. As well, the broker is more positive on the outlook for physical demand for gold at current levels and sees this as supportive. Deutsche Bank agrees, seeing little prospect for the US dollar to rally significantly given what it regards as ongoing problems in the US housing and financial markets and a slowdown by US consumers.

Assuming the brokers are correct in their view, it comes down to how to play the gold market from an equity perspective, with the most sensible way to divide the market into the large cap and smaller cap companies. As Macquarie suggests, such an approach means the macro theme of potentially higher gold prices is covered by exposure to large cap plays such as Newcrest (NCM) and Lihir ((LGL)), while those seeking a higher risk/reward scenario can look at the more prospective smaller caps such as St Barbara ((SBM)), Sino Gold ((SGX)) and Kingsgate ((KCN)).

For St Barbara, Macquarie likes the fact the company has a funded growth profile that should see it develop into a 400,000 ounce per year producer, while Sino offers low cost production growth and Chinese exposure, while Kingsgate has low costs and substantial exploration upside.

Deutsche has focused on Newcrest and Lihir as its top picks in the sector, pointing out both stocks are priced at competitive levels compared to their global peers despite lower production costs and lower enterprise valuations for their respective reserve levels.

Between the two, the broker suggests Newcrest at present offers slightly more attractive valuation metrics in terms of reserves and production costs, while forward profit margins and price multiples favour Lihir. This leads the broker to forecast better performance from Newcrest during this current period of uncertainty for gold prices and the US dollar, but once this settles down it expects Lihir to become the more attractive option.

The broker rates both stocks as Buys, with price targets of $38.00 for Newcrest and $4.50 for Lihir. By way of comparison, the FNArena database shows Newcrest rated as Buy six times and Hold four times, with an average price target of $35.16.

Lihir scores seven Buys, one Hold and one Underperform and its average price target according to the database is $3.44. Both stocks are trading well below these levels and as at 11.45am today, Newcrest was down $1.83 or a little over 7% at $23.01, while Lihir was 12c or 5.3% lower at $2.13. Newcrest's trading range over the past 12 months is $22.28 to $40.50, while Lihir has ranged between $2.08 and $4.45.

Among the smaller plays, St Barbara is up 1c at $0.23, Sino Gold is 28c weaker at $3.89 and Kingsgate is down 7c at $4.53. The average price targets for these stocks according to the FNArena database are $0.56, $6.69 and $6.92 respectively.