Australia | Jan 22 2008
By Greg Peel
There are two reasons gold has fallen sharply from its highs above US$900/oz in the past few days to be closer to US$850/oz today. One is that the US recession monitor suddenly went from yellow alert to red alert in the new year, and the stability of the US financial sector appeared perilous, which thus drove gold very rapidly from US$800/oz to US$900/oz. Such rapid movements will always be followed by pullbacks, as surely as the day is long.
The other reason is one which cropped up several times in 2007, and has again now in 2008, and that is stock markets are in a panic. While intuitively one might expect such panic to lead to gold buying rather than selling, and this used to indeed be the case in earlier times, in this day and age it’s all about leverage. Stock prices are collapsing and margins are being called left, right and centre. There are just too many people across the globe who had borrowed money to buy stock and are now forced to either top up their accounts or sell out and make up the shortfall. One way to raise the required cash is to sell something else – anything else – and gold fits the bill.
Gold has thus been exhibiting a two steps forward, one step back pathway of late, particularly since the original Shanghai Surprise of February last year. Each time the metal has recovered eventually to post new highs. Moreover, margin selling only exacerbates stock market falls and adds to the overall panic. Hence in such situations a market is likely to move more quickly into oversold mode.
All this suggests that today’s particular carnage in gold stocks may be throwing up some good buying opportunities for the strong of will, and it is notable that Citi has initiated coverage of Avoca Resources ((AVO)) with a Buy recommendation on a day when its shares have fallen 15% (mid afternoon). This brings the number of brokers covering Avoca in the FNArena database to four, all of whom have Buys.
Citi calls Avoca an emerging producer with “great exploration potential”. In July this year Avoca should join the ranks of Australia’s medium-sized gold producers as it commences the first commercial production at its Trident mine. Production is expected at 150koz in FY09, 170koz in FY10 and 180koz in FY11. Citi suggests cash cost should total A$360/oz in the first three years.
As far as potential goes, Avoca boasts large landholdings in Western Australia’s goldfields that are yet to be heavily or deeply explored. Recent purchases of tenements for the Chalice, Poseidon South and Two Boys projects have provided Avoca with a commanding landholding, the analysts note.
Citi has initiated coverage with a Buy (High Risk) rating and a target price of $2.80. At about 2.30pm the stock was trading at $1.84. The average target (of four brokers) in the database is $2.90, with Merrill Lynch the high-marker at $3.15.