Please forgive this rather general post however, I thought GDR...

Please forgive this rather general post however, I thought GDR investors would find it encouraging...

Merrill sees improved profit margins for [American] gold miners

Based on its forecast of higher gold prices in 2007 and improved production profile for certain North American gold mining companies, Merrill Lynch sees improved profit margins and higher stock prices for companies. However, production costs will also rise.

"While aggregate gold output (for the companies under coverage) is forecast to rise 6.4% to 23.4 million oz, the industry average total cash cost is forecast to increase by 11.1% to $300/oz," said Merrill Lynch 2007 Gold Industry Outlook. "However, thanks to our forecast for an 11.6% higher spot gold price, we expect North American gold producers to show improvements in industry profits in 2007. The industry's average net profit margin is expected to rise from 19.6% in 2006 to 24.4% in 2007."

Noting that valuation for the North American gold sector remain "at reasonable levels," Merrill picked the top performers for 2007. "The list includes growth-oriented, lower-cost gold producers with attractive valuations and exploration projects," the report said.

In the top senior gold producers category, Merrill selected Goldcorp's (GG) stock to increase from current levels of about $28.44/share to $38/share and Barrick Gold (ABX) to rise from $30.70/share to $38/share.

Below senior is top mid-tier producers. Merrill's choices are Yemana Gold (AUY) to rise from $13.18/share to $15.75/share and Iamgold (IAG) to increase from $8.81/share to $13/share. Eldorado Gold (EGO) falls into the top intermediate category and Merrill is forecasting a stock price increase from $5.40/share to $7.50/share.

Pan American Silver is the top selection for silver miners; the company's stock is forecast to rise from $25.17/share to $33/share.

For gold bullion, Merrill forecasts an average price of $675/oz in 2007 (up 11.6% year on year) and silver at $13/oz (up 12.2% year on year). "Our favorable outlook for gold is predicated on declining global gold output, lower net central bank sales, a rebound in fabrication demand, and still-strong investment demand," said the Merrill Lynch report.

"Propelled by a rebound in fabrication demand, growth in investment demand, and lower central bank sales, bullion averaged $604.65/oz in 2006, up 35.9% versus the 2005 average price of $445.42/oz," the report noted. "Bullion reached a 25-year high of $725/oz on May 10 before retreating back to the $550/oz level just a month later, indicating considerable intra-year volatility." The average silver price was $11.59/oz in 2006, up 58.3% from $7.32/oz in 2005.

Further supporting the forecast of higher gold and silver prices, the Merrill Lynch report noted its expected further weakness of the US dollar and for the Federal Reserve to begin easing interest rates in early 2007.

"In the medium term, fabrication demand should benefit from the next Indian wedding season in late winter-early spring," said the report. "In addition, we are looking for a higher average silver price in 2007 due to our expectation for further growth from fabrication and investment demand. However, the start-up of several new silver mines in the second half of 2007 may lead to a softer silver price in the latter part of this year."

The report noted that 2006 was a banner year for investors in gold bullion and gold stocks, with the spot gold price rising 23.2%, silver 45.7% and the S&P/TSX Global Gold Index registering a 29.3% gain.

"We would also ascribe the strong relative performance of the gold equities to the fact that recent merger and acquisition activity has shrunk the pool of higher-quality gold companies," the report said. "This has had the effect of pushing up the valuations of the remaining companies, in particular the North American mid-tier producer group. Thanks in part to soaring base metal prices, it is not surprising that the top share price performers were dominated by companies with base metal exposure." These include: Agnico-Eagle Mines (up 108.7%), followed by Yamana Gold (up 99.4%), Northgate Minerals (up 90.2%) and Hecla Mining (up 88.7%).

"For 2007, we believe our view for a higher gold price bodes well for the North American gold sector," the Merrill report said. "In addition, we believe the record year of mergers and acquisitions that hit the sector like a tsunami in 2006 will continue into this year as companies struggle to grow and replace reserves."

Gold production by North American companies is expected to rise, according to the Merrill Lynch report. "The 14 companies (in 2006 IAMGOLD acquired Cambior, Goldcorp acquired Glamis Gold, and Kinross made an offer to acquire Bema Gold) in our survey are forecast to report a 6.4% rise in aggregate gold output, from 21.973 million oz in 2006 to 23.373 million oz in 2007," said the report. "Over half (10) of the gold producers are forecast to report year-on-year increases in gold output in 2007, with nine producers expected to have increases above 10%."

The major reasons for the higher production forecast, said the report, are as follows: "Acquisitions of companies and projects previously not included in our survey (the three acquisitions noted above plus a full year's output from the Florida mine for Meridian and the San Andres mine for Yamana); new mine start-ups (Eldorado's Kisladag mine starting up in April; Teck Cominco's 40%-owned Pogo mine attaining commercial production in early 2007; several start-ups for Yamana, including Chapada, and Meridian's Rossi mine starting up in 2007); mine recoveries (the Kumtor mine of Centerra recovering from its 2006 pit slide); and expansions (Golden Star's Ghanian asset base)."