Hi Darlene, long time no see. But I am back with a bit of good news to share --- BCMD Recommended as "Enticing" Accummulate/Buy!!!
Here is today's StreetBeat on <<Gold Mining>> from Briefing.com.
briefing.com
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Updated 01/12/98
StreetBeat is designed to provide you with additional insights on the market from recognized financial experts on (and off) Wall Street. Please note that the views and opinions expressed by the panelists below are not necessarily those of Briefing.com.
This week's topic: Gold Mining
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Panelists
•Steven Porter, Sectors Analyst at Elliott Wave International. •
Larry Strauss, Senior Mining Analyst at Canaccord Capital Corporation.
Q&A
Briefing: Gold prices have fallen roughly 15% since October 1997. Do you anticipate that central banks will sell more of their gold reserves in 1998? Where do you see gold prices going in the near-term?
Steven Porter: The low growth, disinflationary backdrop is rolling over into a global deflationary environment that is just now taking root. Asian economies are just now plunging into that abyss. I am looking for gold prices to trend lower, but I have no firm downside objective. Actually, my technical background tells me that a sharp reversal in gold is what will fool the most people. Everybody now hates what may very well be this "winter's straw hat." Cash becomes king when a crises starts; when it becomes a panic, people look for "hard" safety. Asia may be the trigger for that panic. Gold's intrinsic value still holds luster for me.
Larry Strauss: The question here is misleading as it suggests that central bank sales are the only reason why gold prices are at depressed levels. While there is no denying that they are a considerable factor in accounting for the slide in gold prices, Argentina has been the only central bank to announce a sale of a portion of its gold reserves since October 1997. It is more prudent to look at the decline in gold prices on an extended basis and the reasons why they have fallen from once lofty heights.
What often gets lost in the central bank hoopla is the fact that funds were also selling significantly in 1997. Furthermore, they continue to hold substantial short positions as evidenced by the current, net non-commercial position of over 60,000 short contracts on the COMEX exchange. As a result, brief rallies in gold prices have largely been a function of short covering, but lacked fundamental backing for a sustained advance. The strength of the U.S. dollar has also acted as a major depressant on gold prices while the demise of the tiger nations' and the South Korean economies have exacerbated the slide. Finally, while we anticipate further central bank sales, the actual amount is too difficult to gauge. Fluctuations over the years have been tremendous. Every year since 1989 central banks have been net sellers with a low of 3 million ounces in 1994 to a high of 20 million ounces in 1992. Going forward, central banks have an important decision to make since they are by far the world's largest holders of gold. By selling, and forcing supply on the market, they reduced the value of the assets in which they are key holders; and if they elect to sell huge additional quantities quickly, they would likely shoot themselves in the foot by reducing asset values further. Moreover, weak gold prices are hurting the economies of many of the Third World nations the IMF is trying to help. Central bankers are fiduciaries, and by selling large additional quantities of gold quickly, they would jeopardize the existence of an entire industry. If gold prices fall significantly further, central banks would have less incentive to sell; indeed, they may even implement a comprehensive policy that could help the market recover. Simply put, as OPEC held most of the cards regarding oil prices in the 1970s, central banks hold them today regarding the price of gold.
Near-term, we do not see the potential for a major reversal in gold prices for a couple of reasons. First, such a happening would be necessitated by a significant, sustained decline in the U.S. dollar and we simply do not see that being a likelihood at this time. Secondly, the air of uncertainty surrounding the European Union's stance on its gold holding policies is keeping buyers sidelined and will likely contribute to a further defensive posture in the gold market until participants get a better sense of direction as to what their official policy may be. For example, an announcement from the EU that it would sell 200 million ounces of gold over ten years would be a bearish development, whereas a plan to sell 100 million ounces of gold over twenty years would likely be beneficial and help foster a recovery since the gold market could absorb such a quantity. This would probably induce short covering by specs .
Briefing: What impact will the Asian crisis have on gold mining companies in 1998?
Steven Porter: Until this Asian situation settles down, institutional favorites will continue to bleed. The dollar has acted as a safe haven and alternative to gold and gold stocks. We are looking for a top in the dollar at nearby levels. That will raise hopes for the bullish case in gold. Many junior stocks, on the other hand, are already washed out and are performing well on a relative strength basis.
Larry Strauss: The Asian crisis should be a negative, and in fact has already resulted in a decline in gold and share prices. The main reason for this is that while their currency, equity, and real estate markets collapsed, the value of gold in their currency terms rallied sharply and provided an asset which could easily be sold to raise capital to pay obligations. Indeed, this provided a clear example of gold storehouse characteristics. An argument could be made that the peoples of SE Asia and South Korea should have been buying gold, but the time to invest for a rainy day is when times are good. Gold did just what it should do and that is appreciate in value when they needed it most. Nonetheless, their sales to raise capital have had a negative impact on the gold market and may continue to do so ahead.
Briefing: With many gold stocks at depressed levels, do you anticipate consolidation in the industry?
Steven Porter: I think there will be later on but not until there are signs that gold has regained its footing. It is too premature to speculate on takeover candidates.
Larry Strauss: Consolidation is an inevitable bi-product of this downdraft, and the longer we remain at these levels, the more consolidation we will see. Companies that can't meet payables will become less expensive acquisition targets for stronger players, and the ones with little or no cash, sizable debt obligations, but quality, low-cost assets will be the likely takeover candidates. Of course a key question is, will we remain at these levels?
In our view, the potential exists for weak gold prices for the next 6-18 months. As mentioned earlier, a weaker dollar would help, but we don't see such a turnaround given that the Japanese economy is far more closely linked to the SE Asian and South Korean problems than is the United States' economy. Additionally, Germany and other European countries are far more dependent on exports for economic growth than the United States so a stronger dollar remains in Europe's, and indeed, Japan's best interests. Finally, other G-7 nations would look unfavorably at a decline in the dollar to help strengthen the U.S. economy since the U.S. has led global growth. So, gold prices will likely remain depressed going forward as long as the dollar remains strong, and until the European Union gives us a clear direction as to what its policy will be with respect to gold reserves. Currency factors notwithstanding, weak gold prices should spur consumption, reduce the amount of producer hedging, reduce the amount of production, and make less scrap supplies available to the market-- all of which are long-term, or are potential long-term, bullish factors for gold.
The longer gold remains depressed, the more powerful the move to the upside will likely be. Consider that over half of current gold production is uneconomic at today's prices. This doesn't mean that gold has to rally over the total cost of production. Keep in mind that there have been many instances in the past when commodity prices have remained below the total cost of production for substantial periods of time. This is why why we have a 6-18 month timeframe in which the gold market may remain weak. One example that comes to mind is copper in the mid-'80s when it was at $0.55-$0.60 per pound, yet average total production costs were above $0.70 per pound.
Briefing: What is your near-term industry outlook? Which gold mining stocks are you recommending and/or avoiding?
Steven Porter: Canyon Resources (CAU), Royal Oak (RYO), and Brush Creek (BCMD) are enticing plays that I would accumulate at current levels. I look at them as core positions as we are well into the crises stage. The worst of the damage has already been seen in these junior stocks. They represent some hard value as opposed to the glut of paper assets choking the market now.
Larry Strauss: At Canaccord Capital Corp., it is our strategy to recommend only the most conservative investments in the North American gold sector; those companies that will likely survive a decline in price and have the ability to pick up better assets of those companies that can't survive. With that in mind, we have BUY ratings on Barrick Gold, Euro-Nevada and Franco-Nevada, Placer Dome, and Freeport McMoRan Copper & Gold. In addition, we have an ACCUMULATE rating on Newmont Mining.
Barrick Gold (ABX) is the most conservative investment in the North American gold sector. If they don't change their hedge in any way, they should realize at least $410 an ounce on all gold sales through mid-2000. Despite this, Barrick's shares have been cut in half from the February 1996 rally when gold was at $415, yet they continue to look promising since their earnings and cash flow have been insulated from the adverse impacts of weak gold prices by their well-regarded strategic hedging program.
Euro-Nevada (EN) and Franco-Nevada (FN) are royalty companies that are good defensive plays in the current environment. They are putting the extremely low-cost Ken Snyder mine into production in May 1999, where cash costs are projected to be only $78 per ounce. They should outperform most other gold producers (excluding Barrick) because they currently receive most of their revenues as net smelter returns (NSR). Therefore, they receive gold on their high-quality investments but don't incur production costs. As such, the impact of weak gold prices on their operating margins is far lower than it is for most gold producers.
Placer Dome (PDG) has been restructuring over the past year by selling off four, non-core, high cost mines and opening two new ones (Pipeline and Musselwhite)-- the results of which should be increased production and lower overall costs. Pipeline in particular is expected to be a strong cash generator over the next couple of years. Moreover, the company has hedges that should provide gold price realizations about $50 above spot prices.
Freeport-McMoRan Copper & Gold (FCX) operates Grasberg, the world's richest copper and gold mine. This mine has more gold reserves than any other single mine in the world, yet the value of its copper is double that of its gold. FCX is among the lowest cost producers of either copper or gold and has grown its reserves tremendously over the past few years, a trend we expect to be continued for several years to come. The stock is not without its risks, though, since Freeport's only mine is located in Indonesia. President Suharto has been in office more than 30 years and there have recently been pressing concerns about his health. This concern is amplified since there is no clear succession of power. Therefore the potential for political instability is festering. In addition, there is concern that Indonesia's economic problems could have negative implications for the company. The main risk for Freeport would be if Grasberg is nationalized, which we do not believe is likely to happen when a new leader takes over. The recent drop in FCX share prices is a result of slumps in both copper and gold prices, the board's decision to cut its annual dividend from $0.90 to $0.20 per share, which is now more in line with most other senior gold producers, and Indonesia's economic and political risks.
Newmont Mining (NM) is one of the lowest-cost gold producers and is North America's largest gold mining company with production of 4 million ounces of gold in 1997-- a number which is expected to grow in 1998. Newmont Mining doesn't have any significant hedges, although some that had been acquired from Santa Fe Pacific Gold, and subsequently liquidated, are likely to be accounted for in earnings releases through August 1998. Until then, they should get about $25 per ounce above spot gold prices. Newmont's lack of a material hedging program is of concern and is the reason why we have rated them ACCUMULATE instead of BUY, but low costs should help contribute to positive earnings and cash flow in 1998. From an operational standpoint, Newmont's key mining areas (Yanacocha in Peru; Carlin Trend in Nevada; Zarafshan in Uzbekistan; and Minahasa in Indonesia) are all operating very strongly. |
