Gold time rock 'n roll
By: Peter Gonnella
Posted: 2002/05/21 Tue 18:44 | © Miningweb 1997-2002
PERTH – Australian gold mining stocks had another session in the sun today (Tuesday) and market experts say there is plenty more upside potential in both the gold price and share prices in the short term.
Most major Aussie gold stocks closed at either new record or near year-high levels after bullion surged to US$318 an ounce overnight, its highest point in more than two years, before settling at above $315/oz, a gain of $5/oz. By the end of trading in Australia, the spot price was sitting on $315.75/oz (about A$570/oz). In Asia, the spot price remained strong, largely because of the appreciation of the yen which stimulated trading in Tokyo and short covering and arbitrage activity elsewhere in the region.
The price spike was attributed to the softer US stockmarket which, increasingly, appears to be inversely linked to gold's price movements. Wall Street and the Aussie All Ords took a tumble amid fresh terrorist-related claims by the US government just days since it admitted to having had "general" intelligence of terrorist threats ahead of September 11. Basically, nervousness now seems to underpin the current correlation between the US equities market and the gold price, not fundamentals. They were forgotten long ago.
In a futile exercise of damage control, US vice president Dick Cheney tried to cover his bases for next time, warning that it was a case of when, rather than if, another terrorist would strike. Cheney's alarmist comments combined with a weaker US dollar against major currencies such as the yen, high oil prices, the perennial Middle East conflict and persistent talk of Iraqi tensions saw investors head for the sanctuary of gold.
Some of the major Australian Stock Exchange-listed gold miners to benefit from the spot price lift included AurionGold [ASX:AOR], which added A$0.12 or 3.87 percent to A$3.22; Lihir Gold [ASX:LHG], which was up A$0.05 or 3.47 percent to A$1.45; Newmont Mining [ASX:NEM], up A$0.13 or 2.44 percent to A$5.45, Sons of Gwalia [ASX:SGW], up A$0.15 or 2.39 percent to A$6.42; AngloGold [ASX:AGG], which climbed A$0.22 or 2 percent to a record finish of A$11.20; Durban Roodepoort Deep [ASX:DRD], which put on A$0.10 or 1.25 percent to A$8.10, Newcrest Mining [ASX:NCM], up A$0.02 to A$6.90; and Croesus Mining [ASX:CRS], up A$0.03 or 4.48 percent to A$0.70.
Where to from here? Traders expect the US dollar to be kept under pressure, at least in the near term, on the back of the massive US trade deficit, and are predicting an upside target of $320-$325/oz. "With the funds continuing to believe in the yellow metal and the US dollar appearing weak, the price looks set to test resistance around $320.00 in the short term," according to the Standard Bank.
Meanwhile, BNP Paribas Equities' head of research, Geoff Bell, told Miningweb a gold price of greater than US$300/oz was now being factored into share prices. Not only that but also, if recent history was anything to go by, there was plenty of gas left in the tank yet. "Further analysis suggests that if the market were to factor in a $350/oz gold price, stocks would rise another 35 percent and a $400/oz price would lead to a 70 percent rise above today's share prices," the Sydney-based gold analyst said.
Bell's bullish forecasts were based on almost 10 years of data BNP has built up of the expected internal rate of return (IRR) for the gold industry. He explained that the IRR was calculated as the discount rate necessary for the discounted cash flows of all of the gold companies covered to equal the market capitalisation of those companies, using the spot gold price of the day as the forecast gold price.
Interestingly, when the gold price was around $400/oz (between July 1993 and the end of 1995), Bell said share prices were sufficiently high that the expected IRR for the industry at that time was only between zero and around 2 percent.
As the gold price declined, so too did investor confidence. "Stock prices fell faster than fundamentals so that by 2000 and 2001, the IRR for the gold industry … had increased to between 6-8 percent," Bell said. "This result was achieved even though a gold price of close to $260/oz to $270/oz was used for cash flow calculations."
BNP's current IRR estimate, released just before today's $5/oz price jump, had dropped to around 3 percent (incorporating a spot price of $310/oz).
Bell said applying the BNP model at $350/oz and assuming the market would again accept returns similar to those at $400/oz (about 2 percent), which looks probable, meant that a 35 percent hike in overall share prices was still possible. "Running the same analysis at $400/oz, the upside in average stock prices rises to 70 percent," he said.
Bell added that stocks with higher leverage to the gold price would in general have the greatest upside potential.
The mind boggles. Perhaps investor sentiment is indeed getting way ahead of market fundamentals. But, who's complaining? |
