Australia | Nov 14 2006
By Chris Shaw
Barclays Capital suggests technically the outlook for gold remains positive and the price of the metal is still likely to move higher. Trading guru Dennis Gartman of “The Gartman Report” is long and suggests weakness should be bought rather than strength sold, all of which looks positive for Australian gold stocks.
How positive? According to Gold Report Australia (GRA) the Australian listed gold sector is undervalued by as much as 50% at the larger end of the market and potentially as much as 100% at the smaller end, with a re-rating expected to start in the current quarter.
The GRA outlook is based on a view the gold price still has substantially further to run, as if the price can remain above US$618 per ounce it could potential set a new high by the end of the calendar year. This means a move above US$787 per ounce in little more than a month, something that would certainty bring renewed interest to the sector.
The move is unlikely to end there in the group’s view, as it sees potential for the gold price to test US$1,000 per ounce if managed funds return to the gold market. This would be beneficial for margins for gold producers, resulting in higher earnings. The group also expects further corporate activity in the sector, which again is something that would attract interest from the trading end of the market.
So assuming gold has higher to go, where should investors look for the best value in the sector or the best bang for their buck? Austock Securities has come to the rescue by providing a summary of the sector, allowing for a comparison of the various gold stocks the broker covers.
A review of the list shows the broker rates Newcrest (NCM), Sino Gold (SGX), Oceana (OGD), Resolute (RSG) and Perseverance (PSV) as Buys, while Austindo (ARX) is a Speculative Buy. Lihir (LHG), Bendigo (BDG) and Tanami (TAM) are rated as Hold.
In terms of valuations, the broker estimates Bendigo is trading at the largest discount to valuation at 68%, though given the company’s recent issues and the resulting negative sentiment this is balanced by its Hold rating.
Leaving aside Tanami, which is at the speculative end, Oceana is at a 54% discount to the broker’s valuation of $1.64, Resolute at a 61% discount to its $3.88 valuation, Newcrest a 29% discount to its $32.88 valuation and Perseverance a 16% discount to its valuation of $0.56. Sino is the exception among the Buys, trading at a 35% premium to the broker’s valuation of $4.04. In contrast, Lihir Gold is trading at a premium of almost 50% to the broker’s valuation of $2.00.
Another valuation measure in the gold sector is how much the market is willing to pay for the company’s reserves, so the broker has estimated the market capitalisation per ounce of reserves, which gives another insight into where the value lies.
The broker has based this analysis on forecast gold prices of US$625 per ounce in 2007, US$550 per ounce in 2008 and US$500 per ounce in 2009. Using this method Resolute and Oceana appear cheapest, the former’s market cap/oz of reserves measure coming in at $95 and the latter at $99.
In contrast, Sino is on a market cap/oz of reserves measure of $354, while for Bendigo the measure is $2,921. Newcrest and Perseverance look reasonable on this measure, coming in at $132 and $149 respectively.
Given the difference between the broker’s forecasts for the gold price and the current spot price the broker has also incorporated some valuation measures based on the current market price for gold of about US$629 per ounce, carrying this price forward for the next couple of years.
As a result, on a Price/Operating Cash Flow measure the story is similar, with Perseverance leading the way at 3x in both FY08 and FY09, while for Oceana the measure is 4x and 3x respectively. Again, Bendigo looks least attractive on this measure, recording multiples of 40x and 11x.
Comparing the broker’s ratings to the FN Arena database sees something of a consensus, as the database shows Perseverance as receiving four Buy ratings and one Underperform recommendation. Only Lihir scores this many Buys, but that is offset by four Hold ratings, one Reduce and one Sell recommendation.
The consensus view on Oceana is mildly positive at three Buys and two Holds, while Sino Gold scores a single Buy rating and three Holds. Newcrest is rated as Buy three times and Hold seven times, while Bendigo scores three Hold ratings.