It used to be that gold stocks outperformed the rise in the gold price by roughly a factor of three. But then energy prices went up, and the lights went out in South Africa. Costs, in general, have been hard to contain. Understandably, given the power cuts and safety issues, South African stocks have performed particularly badly. But in general gold shares have underperformed.
So is this now a buying opportunity? Investec Asset Management seems to think so — but with some reservations.
For once Erin and I agree. Small to medium sized gold producers (not explorers or developers!) with rising unhedged output that have a tight rein on costs are the ones to watch. If all goes well these are the ones whose earnings should rise more than gold, says Investec’s Daniel Sacks. And it’s these players, too, that could well be bid targets for the sector’s heavyweights.
Majors eye junior producers
Take AngloGold Ashanti. It might do well if it bought out an unhedged smaller producer. In a preliminary results presentation AngloGold’s Aussie chief, Mark Cutifani, admitted that, if the gold price hung around $900, this miner would receive "significantly lower than the spot price" in 2008.
AngloGold has sold up to 60% of its future output at well below the current spot price for gold. As much as 20% lower! And that is based on a gold price of around $900. This gold major has a hedge book of some 10.4million ounces at the end of 2007, the largest among gold producers.
It’s couldn’t be much worse, say analysts. To buy out the hedge book, AngloGold would need a staggering share issue of roughly a third of its equity. Worse still, if mines continue operating at 90% power, 400,000 of AngloGold’s glittering ounces will remain buried. So getting rid of the hedge book sooner rather than later seems unlikely.
Unless, of course, it takes out a smaller producer!
The world’s number one, Newmont, is another that might do well to look for juniors. Here is a company that has struggled to top up its already mined reserves. So, small-fry producers and explorers have been in frame. And why not! Why reinvent the wheel? If somebody else is further down the track and doing it better, that seems the obvious thing to do.
Tight on the purse strings
So which of these small to medium companies might be good bid targets for the big boys? Could it be London-listed Randgold Resources? Or perhaps one of Canada’s juniors, Kinross Gold or Great Basin Gold.
Great Basin is Investec’s favourite, and we are starting to see why. It has two mines in development, one in Nevada and one on South Africa’s Witwatersrand, two of the world’s richest gold sites. It is currently a lossmaking operation, but that is mainly down to capital investments to advance these two projects. (Exploring and developing doesn’t come cheap!). What this means is that Great Basin is just about to make the transition from explorer to producer.
Ferdi Dippenaar, president and CEO, reckons that come 2008 Great Basin will start delivering golden ounces from the Hollister site in Nevada. "This is our year of delivery," he has been quoted saying. In the first year 80,000oz are expected, with 160,000oz expected for the next six years at a cash cost of US$214/oz. But rumour has it that Barrick and Newmont are in talks with Great Basin. Apparently, they want to acquire Hollister to boost their reserves.
Given the estimated resource at its Burnstone property in South Africa, perhaps this is where the focus should be. After drilling 245 holes in 2007, measured and indicated resources are said to be 11m ounces. Roughly 2m ounces have been added to inferred resources category. So no reserves yet! But the company has completed a feasibility study which estimates and average of 254,000 oz of gold for 19 years! And it could be made a much bigger project. Mr Dippenaar has said Burnstone 2 and Burnstone 3 are certainly an option!
The good thing about Great Basin is that its balance sheet is strong — it has no debt and has funding to the tune of US$57m. That means it is able to finance both of the above projects and also continue exploring. It recently entered into a joint venture with a private Mozambican company to explore a 12 square kilometre property in this former Portuguese colony. Better still, it is unhedged, so able to take advantage of a strong gold price.
Management talks the talk
Mr Dippenaar has certainly used his marketing acumen to raise the profile of this company! Last year Great Basin was one of the world’s best performing gold stocks. Marketing training also means he knows what to say on issues like safety. Because Burnstone is a new mine "actually designed for safety" he said in an interview. He also said "we will not kill anybody".
What is clear is that Mr Dippenaar, a Namibian-born accountant and former marketing manager at Harmony Gold, has his eyes firmly on containing costs. He is even willing to share infrastructure and resources, like energy, with neighbouring mines.
Now we usually favour companies run by miners, but having an eye for numbers in these times can’t be a bad thing.
So keep mining,
Erin and Isabel
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