The Growth Report September 13th 2001
Vol. 1 Issue 3
Dow Jones 9605.51
NASDAQ 1695.38
S&P 500 1092.54
Companies Featured This Week; Newmont Mining, Franco Nevada, Placer Dome, Newcrest Mining
A FEW WORDS
The Growth Report wishes to express its most heartfelt sympathies to the people who have been directly affected by the recent national tragedy. Our Staff shares in the shock and disbelief felt by all Americans and would like to send our support and strength to the families and the victims of this crime against humanity.
Gold Reacts For The Worse Possible Reason
With the U.S. markets closed, European bourses crashed with the worst hit Germany and the UK suffering 6% falls. Then, as the Asian markets opened, the Nikkei smashed through the 10,000 mark falling to its lowest level since 1984. In North America, Canadian markets slumped before trading was halted with the only positive moves coming in gold stocks reacting to a spike in gold prices as investors flocked to the safe haven of the precious metal. One can only fear how the mighty, but already weakened, U.S. markets will react when they reopen.
The intent of this weeks issue is to discuss the merits of gold producers and, without the assumption of an imminent rise in the gold prices for any particular reason, which gold stocks may fare well in an otherwise moribund metals market, and an ongoing consolidation within the industry.
The events of the last two days underline a couple of the strategic reasons for holding gold equities - portfolio insurance as well as a hedge against the almighty US$ weakening. The gold price jumped in European trading to close up US$16/oz to US$287/oz (click here). Gold prices have settled back as the Federal Reserve and central banks around the world have given their assistance to the U.S. monetary system, moderately strengthening the US dollar. Certainly, the strength of the U.S. dollar is likely to be undermined which should serve to fuel or at least sustain any rally in gold prices.
As any qualified commentator of the gold market will tell you – there are just too many variables for anyone to say whether gold is going to rise or fall. Sure, if we could predict gold’s imminent return to levels above $300-$325/oz, it would be a relatively simple exercise to name 20 gold stocks which would give you 20-50% returns – minimum! Sadly, like everyone else out there, we can’t predict when such a move may happen. Here’s what we have in mind: Invest in a couple of gold mining companies at current levels which could see plenty of upside independent of a surge in gold prices, offering portfolio insurance and allowing you to be in the game if gold ultimately trends higher.
The name of the game is Consolidation – and that’s my Final Answer…
Call a friend, poll the audience, but no one is going to be able to accurately predict when the gold mining business will emerge from five horrible years of downdraft. Regis himself would be as good a person to call as any analyst. What is reasonable to predict is that the consolidation in the industry will continue and Growth Report’s strategy is to try to identify the companies which could play an important part of the M&A activity – hopefully on the sell side attracting a premium from the predator!
Consolidation in any industry tends to peak at either the top or the bottom of a sector’s market cycle. Either companies use high-priced paper to aggressively pursue growth through acquisitions (case in point – the tech market of 1999-2000) or consolidation takes place at the bottom of the cycle when, in the case of the resource industry, commodity prices are viewed as close to their bottom.
Two years ago, major consolidation took place in the copper mining business when Phelps Dodge Corporation [PD:NYSE] acquired Cyprus Amax for US$1.8 billion and Grupo Mexico bought Asarco for US$1.18 billion. At the time copper prices were close to $0.60/lb and subsequently rallied to over $0.80/lb before the weakening world economy hit prices this year. Copper still sits at $0.66/lb after going through the traditionally slow summer months for demand.
ALL THAT GLITTERS?
During the 1990s, gold acquisitions peaked in 1996/97, when gold was at its highest level of the decade. Subsequent to this merger mania, the gold price tumbled and has been in a free-fall ever since, before stabilizing at lows this year. The last three years have seen bottom-fishing acquisition activity, which has been continuing unabated, and in the face of extremely low gold prices. The major mining companies certainly believe in themselves and the inevitable turn around in fortunes for their precious gold! Indeed, the largest transactions have taken place in the last two years. Last week, South Africa’s AngloGold [AU:NYSE] approached Normandy Mining [NDY:TSE] with a US$1.7 billion ‘friendly’ (yet to be recommended to shareholders) bid (click here). Earlier this year, Barrick Gold [ABX:NYSE] announced its merger with Homestake Mining [HM:NYSE] in a C$3.3 billion transaction.
All this takeover activity has resulted in a much smaller number of major gold mining companies to invest in, as well as fewer acquisition targets to further consolidate the industry. Growth Report believes that the companies mentioned herein all exhibit the potential to outperform the sector as the gold price rises and more importantly still offer great potential in flat gold markets. Growth Report has focused its stock recommendations between Takeover Targets and Leveraged Growth selections. With two in each category, all should serve investors well regardless of the direction of the gold price in the near term.
Leveraged Growth
Newmont Mining [NEM: NYSE]
$21.15 Close September 10th 2001
Newmont remains one of the few un-hedged major gold companies in the industry. A policy which has resulted in lower profitability in recent years than market bellweather Barrick Gold, but also allows the company to greatly benefit from a rise in gold prices as every $/oz increase in the gold price is positive to the bottom line. Newmont offers the outside chance of consolidation with my sources informing me that once again Barrick Gold is at least running a slide rule over the numbers. The synergies of such a merger are attractive. The combination of assets on the prolific Carlin trend in Nevada and their prized Peruvian assets would make the company a powerhouse in mining. That being said, Barrick is currently amalgamating with Homestake Mining and as such Newmont could prove to be an awfully large proposition at this time. With the New York markets closed during gold’s surge and subsequent retreat, we expect Newmont to open around its closing level on Monday. Despite gold’s softening there is no doubt that the precious metal continues to demonstrate that during difficult times it is the safe-haven of choice. Over the next 6-12 months we feel the stock can appreciate to the $28/share range and recommend purchases below $22/share with a stop/loss of $18.25/share. If Newmont were subject to a major consolidation move by the likes of Barrick, we would expect a price closer to $30/share.
Franco Nevada [FN: TSE]
C$21.41 Close September 11th 2001
What a balance sheet and what a record of achievement. Franco Nevada has stood out in a ravaged mining industry by posting 14 years of consecutive earnings and 13 years of dividends for its well-rewarded shareholders. Franco is a royalty company. It doesn’t operate gold mines but owns royalty stakes in the gold produced from other companies operations. This allows the company to benefit from rising gold prices while protecting shareholders from the hurt of so many companies suffering with development of operations in a stagnant market. Franco has also taken strategic equity stakes in companies, which have performed well. Only months ago, the company acquired a 19.99% equity stake in Normandy Mining in an asset swap. With the recent announcement of a takeover action by Anglo Gold, Franco’s stake has increased by several hundred million dollars in a matter of months. The company has no debt and over C$800 million in cash and C$600 million in marketable securities support its modest market capitalization. We recommend the stock with a 6-12 month price target of C$26/share and a stop/loss of C$18.00.
Take-Over Targets
Placer Dome [PDG: NYSE / PDG: TSE]
$11.10 Closing Price September 11th 2001
Placer has cleaned up a messy balance sheet and reduced its cost base as a result of its 60%-ownership of the Pipeline gold deposit in Nevada, which has been a consistent 1 million ounce low-cost producer for the last 4 years. Placer is our #1 North American buy-out target in this sector. The ongoing industry consolidation has seen Placer act somewhat slowly and with a mixed history of acquisition success itself. It has been long rumored in the industry that a take-over is in the works and sometimes you have to go with the writing on the wall. We recommend the stock with a 6-12 month target of $15 (US) /share and a stop/loss of $9.
Newcrest Mining (NCM: Australian Stock Exchange / NWCNY: ADR on NYSE)
A$4.41 Close September 12th 2001
Following Anglo Gold’s approach of Normandy Mining, Newcrest probably represents the prime takeover target in Australia. Profits for the year to June 30,2001 rose to A$38.2 million from A$3.4 million a year earlier. The company produced 792,000 ounces of gold in the year and due to an aggressive gold hedging policy had strong profit margins. With gold reserves of 10.4 million ounces of gold and total mineral resources of 42 million ounces of gold, Newcrest is extremely attractive to any company seeking to expand gold resources ahead of a sustained rise in gold prices. The company recently closed a share placement at A$4.10/share which raised A$138 million. We agree with these investors and recommend Newcrest with a 6-12 month target of $6.50/share and a stop/loss of A$3.90. The stock should open up stronger than its close as the Australian markets were closed before today’s events.
Note: Newcrest trades in the form of American Depository Receipts or “ADR’s” that allows American investors to participate in the stock and trade it in the US. Each ADR represents one Newcrest ordinary share. Get a current quote for Newcrest shares HERE stockhouse.com
Final Remarks
When the markets reopen, we expect to see short term selling pressure across the board. If overseas markets are any indication, there will continue to be confidence in the financial structure of the United States and any short-term drop in the shares of solid growth companies will present an entry point for patient investors.
Doug Ramshaw, Editor
We appreciate your feedback! Please send your comments or questions to editor@growthreport.com
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The Growth Report Newsletter is an independent electronic publication committed to providing our readers with factual information on selected publicly traded companies. All companies are chosen on the basis of certain financial analysis and other pertinent criteria with a view toward maximizing the upside potential for investors while minimizing the downside risk, whenever possible. Moreover, as detailed below, this publication accepts compensation from certain of the companies which it features, through Growth Report, LLC, owner of this newsletter. To the degrees enumerated herein, this newsletter should not be regarded as an independent publication.
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