"Let's look at Newmont since I know that one best," he says. "If gold goes to $350 an ounce, pre-tax cash flow would be about $1.6 billion, or $4 a share on a pro-forma basis."
Given that major gold mining companies sell for about 12 times cash flow, "the stock would have to go to between $50 and $60," he said.
Full text:
Thom Calandra's StockWatch
Miners finally get Street's attention
SAN FRANCISCO (CBS.MW) - Long-forgotten gold mining stocks are attracting the
attention of Wall Street money managers.
"I'm getting a lot more calls," says Pierre Lassonde, who later this month will become
president of Newmont Mining (NEM: news, chart, profile), soon-to-be the world's largest
gold producer upon completion of a merger. "When I was in Europe last year, I saw more
interest in gold stocks than I have in five years."
As the metal's price broke through $295 an ounce Tuesday afternoon, new figures point to
heavy share accumulation of the largest gold-mining companies. Weekly money flows into
those companies are at their highest point in more than three years, technical analyst Clark
Yingst at Joseph Gunnar in New York says.
"Clearly, investors are unsettled by reports of fiscal distress," says Yingst, who tracks
cumulative money flows based on whether investors are paying progressively higher or
lower prices for a stock. He says the gold mining group, as measured by the Philadelphia
Gold and Silver Index, could rise another 15 percent to 20 percent in coming weeks.
The index (XAU: news, chart, profile), along with gold-mining indexes in Canada, South
Africa and Australia, is soaring as gold attempts to surpass the elusive $300 level. The 11
stocks in the so-called XAU index have on average gained more than 14 percent in the past
10 trading days. Companies such as Newmont Mining (NEM: news, chart, profile), which will
merge into two other gold-mining companies later this month, are seeing their average
trading activity swell to 2.5 times their three-month daily average.
"My phone is ringing, that's for sure," says Lassonde, a former Toronto fund manager and
co-founder of Canada's Franco-Nevada Mining (FN: news, chart, profile), one of the two
companies merging with Newmont in a $2.5 billion transaction.
The $17 or so gain in the price of the metal in the past two weeks has fueled a frenzy of
activity in mining circles. Lassonde Tuesday pointed to the $100 million-plus of Canadian
financings late in January for three small gold companies. Once the three-way merger of
Denver-based Newmont, Franco-Nevada and Australia's Normandy Mining is completed
later this month, Lassonde hopes to sell some mines from a Battle Mountain Gold purchase
and other assets, about $750 million worth, to an eager gold industry.
"Our timing, I think, is propitious," Lassonde said from Toronto. "Goldcorp. (GG: news,
chart, profile) and Meridian (MDG: news, chart, profile), lots of gold companies, need to
replace their reserves - they need assets." See more on the gold rush.
Japanese consumers buying gold instead of using
bank deposits
Wall Street and London-based money managers are showing up
for mining companies' conference calls in greater numbers. On
Monday's earnings conference call from Johannesburg, "close to
50" money managers listened to Gold Fields Ltd. Chairman and
CEO Chris Thompson discuss the South African company's
record-breaking $67 million of quarterly profit, according to Cheryl
Martin, a Gold Fields (GOLD: news, chart, profile) vice president.
"People forget how far gold stocks can move in a rally," says
Adrian Day, president of $60 million Global Strategic Management
in Maryland. "You go back to when the general stock market
crashed in '73 and '74 and gold went to $180 or so from $110 in two
years, and the major gold mining companies quadrupled and
quintupled in price. Homestake went to $60 from $11, and the
South African companies did the same thing." Homestake Mining
is now part of Barrick Gold (ABX: news, chart, profile), a merger
completed last year.
"The fact is, there are a limited number of gold mining companies, I think $50 billion worth
of market capitalization if you were to add them all up, the majors and the juniors," says
Day, who populates about a third of his clients' portfolios with gold stocks. In comparison,
General Electric, the world's largest stock market company, is valued at more than $350
billion.
Technical analyst Yingst sees the XAU, now
almost 67, its highest point since May 2001,
reaching 72. "But first I think we'll see some
backing and filling," he said about investors
who are likely to take profits in their gold
mining stocks.
The question for serious investors is whether
gold-mining stocks can sustain their rally,
which has boosted equity prices to 30 and in
some cases 40 times their yearly pre-tax profits.
Lassonde at Franco-Nevada/Newmont says he is frank about this question, which gets
posed by fund managers looking to buy gold shares. Gold-mining stocks have made
gold-based mutual funds the best performing sector for much of the past 14 months.
"Let's look at Newmont since I know that one best," he says. "If gold goes to $350 an
ounce, pre-tax cash flow would be about $1.6 billion, or $4 a share on a pro-forma basis."
Given that major gold mining companies sell for about 12 times cash flow, "the stock would
have to go to between $50 and $60," he said.
Which brings the question: Can spot gold prices surpass $300 an ounce, a level not seen
since February, 2000? The price of spot gold of $295.50 on Tuesday afternoon was three
dollars above what professional analysts call an area of major resistance.
"One of these times it's going to get through resistance," says Robert Bishop, longtime
editor of Gold Mining Stock Report. "I think right now we are seeing speculation that one or
more mining companies covering hedges." So-called hedges allow gold mining companies
to lock in higher prices for their metal. The practice encourages lending of the metal by
bullion and central banks, thus adding to price weakness.
Anglogold (AU: news, chart, profile), one of the world's largest miners and the industry's
most prolific user of forward-sale hedging in times of weak prices, reduced the amount of
gold it sells forward by 19 percent in 2001, or some 3.5 million ounces. Newmont, Gold
Fields and other large producers have sworn off the practice of hedging.
Caesar Bryant, manager of the Gabelli Gold Fund (GOLDX: news, chart, profile) in New York,
says he will head to Japan next week. Japanese consumers have quadrupled the amount of
gold they are buying ahead of new government rules that will limit bank guarantees on cash
deposits, starting in May.
"Gold is the ultimate hard asset, and one day, sooner than later, it will go through $300 an
ounce," says Bryant, whose $27 million fund is up 22 percent since Jan. 2. He expects
shares of companies that reduce their hedge books to become more attractive to investors
in coming months. But he still prefers totally unhedged producers. His fund's largest
holdings are Newmont, South Africa's Harmony Mining (HGMCY: news, chart, profile) and
Gold Fields, all of them known as straight-shooters in the industry. |
