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Gold/Mining/Energy : Precious and Base Metal Investing -- Ignore unavailable to you. Want to Upgrade?

To: Tommaso who wrote (21521)	10/1/2003 11:31:47 AM
From: Giraffe	Read Replies (5) \| Respond to of 39344

All they need is gold at US$700 Analysts rate gold stocks Steve Maich Financial Post Wednesday, October 01, 2003 The United States is headed for record budget deficits, Washington's strong dollar policy is crumbling and the economic prospects for much of the world seem to be hanging by a thread. Sounds like ideal conditions for the price of gold to rise, and hence a perfect time to buy gold mining stocks, right? Not exactly, according to analysts John Tumazos and Jared Muroff at Prudential Financial. Mr. Tumazos and Mr. Muroff released a study of the gold mining industry yesterday, and they conclude that the biggest players are already fully-valued or overvalued based on their outlook for the price of gold. "It appears that the gold stocks are trading not on the current gold price, but on bullish expectations for the gold price where it could cross US$500, US$600, or even US$700 an ounce," the report says. Since hitting a low of US$255.55 an ounce in April 2001, has risen 50.8%. The metal closed at US$385.40 an ounce yesterday, up 11% for the quarter. That's the best three-month gain for gold since 1999, and the price now sits just a few dollars shy of the six-year high it hit last week. Mr. Tumazos expects the price to keep climbing throughout the next year, but the prices attached to major gold mining stocks make them a dangerous bet at these levels nonetheless, he said. The two analysts calculate a multiple of "net present value" for each of the six largest publicly-traded miners, and the conclusions are startling. According to their research, Goldcorp Inc. is discounting a gold price of US$830 to bring its shares into line with its net present value. Newmont Mining Inc. and AngloGold Ltd. are discounting a gold price of US$671 and US$625, respectively. Canada's two major producers are trading at more reasonable levels, but still reflect some aggressive targets. Placer Dome Inc. is factoring in a US$577 gold price, while Barrick Gold Corp. is discounting US$524 an ounce, according to the report. By their estimates, Goldcorp is trading at 2.3 times its net present value, while Barrick and Placer dome are at 3.1 times and three times respectively. Newmont trades at 4.4 times NPV, and AngloGold is at 4.47 times. Prudential says a multiple of three times NPV indicates a fully valued stock. The calculation is highly subjective because it includes a raft of debatable assumptions and estimated cash flows. For example, Prudential assumes that 75% of the companies' recoverable resources will be converted into provable reserves and eventually mined. The analysts also figure that each company will have to spend US$40 per ounce to develop and eventually mine unproven resources, and that new mine construction will take two years. The report applies a different discount rate to each company based on their unique technical, financial and geographic circumstances. Obviously, these are rough estimates, but they still provide an interesting picture of the industry's future. While some might say these valuations are justified given the enormous uncertainty facing world financial and currency markets, only the most ardent gold buyers expect the price to keep climbing at the rate it has over the past two years. Prudential expects the gold price to keep climbing through next year. Mr. Tumazos revised his 2004 gold price forecast up to US$425 from US$375 yesterday to reflect the ongoing turmoil in the U.S. economy and the rising demand from hedge funds betting on a market decline. But the rush to restart several large projects that had been shelved for years while the gold price languished points to a glut that should put a cap on rising prices in the future. Mr. Tumazos expects the price to ease back to US$400 in 2005, followed by a decline to US$375 in 2006. And by 2009, he expects prices to return to US$325 an ounce. With that in mind, the analysts initiated coverage of Goldcorp with the same "neutral" rating given to Barrick and Placer Dome. And because of their higher valuation as compared to net present value, the analysts rate Newmont Mining and AngloGold "underweight," Prudential's equivalent of a "sell" recommendation. smaich@nationalpost.com © Copyright 2003 National Post