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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: Fishfinder who wrote (6672)	1/24/1998 3:33:00 PM
From: Eashoa' M'sheekha	Read Replies (1) \| Respond to of 116762

Barrons on Gold: By Cheryl Strauss Einhorn Key Commodity Indexes After hitting a 19- year low of $279 an ounce on January 8, gold has rallied; a nice gain Friday pushed its price to $300, about 7% higher than its level two weeks earlier. But many analysts believe the rebound will be short- lived. Why? Because the activity was largely technical, fund- based buying. Too, Friday's market reacted to the falling U.S. dollar and President Clinton's latest scandal. Besides that short- term activity, and some physical sales to India, which are expected to decline after the Chinese New Year, the same problems that plagued gold in 1997, are likely to dog it during 1998's first half. These include: central bank disposals, poor demand from financially worn Asia and a sound low- inflation economic outlook that bodes better for financial than physical assets. "The sell- side has it for the first half," says Felix Freeman, Scotia McLeod's gold analyst. "Prices are expected to decline toward the $265 area for the next three to four months." This is not a good sign for gold companies. Already, the market has seen the actual failure of Rea Gold. And just last week brought the effective failure of Pegasus Gold. Too, despite weak prices, real- estate concern TrizecHahn decided last week to dump its 28 million- share stake in Barrick Gold. Clearly, Trizec thought it could put its money to better use. Ostensibly, Trizec's gold- savvy chief executive, Peter Munk, doesn't expect prices to revive soon. While gold stocks have been battered, they're still generally overvalued. The average stock trades at a 70% premium to its underlying net asset value. "There is only one possible recommendation - - sell the lot,"asserts Freeman. He figures a decline to $265 an ounce would reduce gold- stock prices another 16% , in part because the shares tend to fall by 3% for every 1% drop in the metal's price. Even more bearish, should the stocks'current premium shrink to, say, 5% of the value of a company's total gold reserves, Freeman expects the stocks to skid by another 30% - 34% . "This level of short- term risk obviates buying any of these stocks, even on a more optimistic one- year view," he says. Furthermore, possible mine closures and re- assessments, project cancellations and companies succumbing to debt problems will make individual stocks even more risky. Without growth in production and reserves, it's tough to argue that these companies' shares should be trading at a premium. And analysts estimate that the industry can't sustain more than about six months of the current conditions without setting back future growth by several years, owing to the need to rebuild financial strength. So, which companies could be the next victims of the plunge in gold prices? Most likely, those with a lot of financial leverage- debt - - on top of their operating leverage. Financial leverage enables a company to make a bigger bet than otherwise, but the reverse is true, too. Companies that use financial leverage are at the greatest risk in a market downturn. Companies fitting into this category include: Echo Bay Mines, Royal Oak, Coeur d'Alene Mines, Amax Gold and even gold major Newmont Gold. The most leveraged - - Freeman calls them the "walking dead" - - have so much debt that they might not be able to service their liabilities until the industry turns. Hence, even if they have valuable mines, they still may not make it because it's unclear when gold will strengthen significantly. For instance, Amax Gold just reported yearend results. Total current assets: $118.6 million. Liabilities: $221 million. Net current assets? Minus $102.4 million. Surprisingly, few companies have strong hedge positions that could protect them from a further price decline for more than a year. Without any hedges at current prices, 40% of gold- mine production is unprofitable. Even companies like Homestake Mining could suffer. Homestake is one of the more leveraged equity plays on gold prices, given the company's high costs and relatively flat forward- production profile. It isn't likely that Homestake "will be able to post forward growth from its current gold assets," contends ABN Amro's Tom Hinrichs. Result: Should gold prices remain below $300, "Homestake will eventually be forced to write down a minimum of 25% of their proven and probable reserves," he maintains. Says Homestake's Mike Steeves, "It is our goal to address these concerns." Could any of these companies become takeover targets? The experts don't think that will happen soon. Says Hinrichs: "Many of these companies' chance of survival is next to nil."