Australia | Sep 22 2011
By Greg Peel
We all know why the gold price is currently where it is, which includes a 35% rally (USD) since February, so we don't really need Goldman Sachs to rattle off for us sovereign debt issues in Europe, concerns over a slowing US economy and general unrest in Middle East & North Africa as the reasons.
What we don't really know is why gold has rallied 35% but of all the listed Australian gold mining stocks, only Alacer Gold ((AQG)) has provided returns of a similar nature, as Goldmans notes. Indeed, several stocks have actually fallen in value.
Goldmans nevertheless offers no explanation, other than to say the discrepancy “suggests that gold equities may rally towards the end of the year”.
There is a matter of the Aussie dollar, but then Aussie dollar gold has rallied 20% in the same time so that's not much of an excuse, unless gold miners have unfortunately lost on currency hedges. There are always the matters of project delays, delays to project approvals, weather disruptions, maintenance shut-downs, lower than expected grades and so forth, which is why gold mining stocks can never be considered a perfect proxy for the metal itself. But perhaps one of the major reasons gold stocks have underperformed is costs.
It is well understood that cost inflation in the mining industry this year has been rampant given shortages of labour, professionals, equipment and general mining necessities, and gold mining in particular has not been granted any immunity. This inflation has led to disappointment in results from many resource sector stocks this last reporting season and has forced many an analyst to downgrade next period's forecast earnings and target prices.
Another possible explanation, more from left field, is that plunging stock markets have led to margin calls, which force geared investors to quickly raise cash. An easy source of quick cash may well be to sell those gold stocks which haven't dropped by as much on the day or may even have rallied slightly. Such activity would help put a lid on gold stock performance.
Yet perhaps Goldman Sachs does not feel the need to offer a reason given this is not the first time such a lag has occurred. Indeed, history suggests that when the price of gold takes off it often takes a while before gold stock prices finally get their act together and start moving as well. This was even the case when the gold price rushed up to US$835/oz in 1980 before falling back sharply. Despite the sharp fall, gold stock prices actually began to rally.
On Goldman Sachs' gold price forecasts, Santa Barbara ((SBM)) and Kingsgate Consolidated ((KCN)) are “clearly” offering the best value at present, given regression valuation suggests the market is pricing in US$1000/oz for SBM and US$1200/oz for KCN as spot prices in perpetuity.
Other stocks exhibiting a marked breakdown in gold price to stock price correlation this year include Newcrest ((NCM)) and OceanaGold ((OGC)), as noted by Goldmans, which makes one wonder why the analysts have a Buy rating on three of the four above-mentioned stocks but not on OGC. They do, however, have a Buy on Teranga ((TGZ)) while Perseus ((PRU)) scores a Hold as does Oceana and Alacer.
RBS Australia previously had mid-cap gold miner Alkane Resources ((ALK)) as one of its high conviction calls but it must be noted that ALK also boasts reserves of rare earth metals, which are rather the metals du jour. RBS has nevertheless been disappointed by Alkane's recent definitive feasibility study which was below the analysts' expectations.
RBS would thus rather seek its safe haven gold exposure through the gold pure-play that is low-risk Regis Resources ((RRL)). Regis thus replaces Alkane on RBS' high conviction list and the analysts continue to use their Sell conviction on manganese miner OM Holdings ((OMH)) as “funding source”.