saville on rsg

In the 29th March Interim Update we described Australian-listed mid-tier gold producer Resolute (ASX: RSG) as one of the few 'dogs' in the TSI Stocks List. The stock has since gained 80% and can no longer be considered a dog.

RSG's current market cap is A$560M (US$421M), which means that it is selling at US$1400 per ounce of production. Golden Star Resources (AMEX: GSS), a company with similar 2006 production and a similar growth profile to RSG, is currently trading at around US$2200 per ounce of production. Therefore, despite its recent strong gains RSG is still trading at a large discount to GSS; and GSS is not exactly a market darling.

The point is, from a valuation perspective there's still a lot of upside potential in RSG. Also, RSG has been generating some excellent exploration results so it has good potential for significant resource expansion. The problem, however, is RSG's hedge book. It was good to see that the company didn't increase its quantity of committed hedges during the March quarter, but even though the current quantity is only about 20% of reserves it could become a big issue within the next 2 years due to a large increase in the gold price (a large increase in the gold price would generate a large mark-to-market loss in the hedge book). We will therefore be looking to exit RSG this year. In fact, if you have a sizable position in the stock it would, we think, be appropriate to take some money off the table now.