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GOLD & SILVER ANALYSIS
NBF WORLD GOLD PRODUCERS QUARTERLY
Gold bullion continues upward while equities take it on the chin
Toronto-based precious metals analysts Tanya Jakusconek recommended Monday that investors seek precious metals companies with short to medium-term production growth, low operating costs, and good exploration programs.
Author: Dorothy Kosich
Posted: Wednesday , 30 May 2007
RENO, NV - Toronto’s National Bank Financial Equity Research Division has revised its 2007 & 2008 gold forecast to $675/oz, $625/oz for 2009, $575/oz for 2010 and $525/oz long term. In her May 28th World Gold Producers Quarter, Precious Metals Analyst Tanya Jakusconek said she believes that currency will be the main driver of gold prices this year, followed by the oil prices, with interest rates as a third driver. “In the commodity markets, low central bank activity (fewer sales than in 2006) and more investment demand (through ETFs and speculative interest) will be important contributors to the demand for bullion,” she explained. “On the equity front, we continue to expect that in 2007, gains will be very stock specific. A strategy for maximizing returns would be to identify companies with short to medium-term production growth, low operating costs (hence margin expansion), good exploration programs adding to reserves and resources and growing net asset values.” NBF favors Goldcorp (NYSE: GG, TSX: G) in the senior groups “for its quality development projects and low cash costs. Top picks among the mid-tier producers continue to include Agnico-Eagle (NYSE, TSX: AEM), “a very low-cost producer with significant exposure to other metals (zinc, copper and silver), a strong near and medium-term growth pipeline and exploration upside.” Jakusconek also favors Eldorado (AMEX: EGO, TSX: ELD), which has “a strong near and medium-term development pipeline and low relative valuation to its peers.” She also praised the exploration programs for both companies. Jakusconek attributed gold’s strength during the first quarter to active de-hedging, and the continuing popularity of ETFs. “The lower volatility added to consumer confidence as jewelry demand also grew during the quarter, especially in China, where the Chinese New Year brought on the Year of the Golden Pig, which is considered particularly favorable for gold buying.” During the first quarter, Jakusconek noted that gold kept mild correlations with oil and the U.S. dollar. “In addition to related commodities, currency and interest rates, another drive of the gold price continues to be the supply demand dynamics,” she said. While gold scrap supplies dropped 13% year to year during the first quarter, Jakusconek forecast that “given the relatively high gold price environment, we would expect that scrap supply would increase as people opt to sell gold jewelry to capitalize on the high prices.” Although gold mine output increased by 5% during the first quarter, “the bigger issue remains that owing to an under investment in exploration and development projects during gold’s bear cycle, mine output today will continue to wane as new projects in many cases are just starting to be built and significant production from these projects is still a few years away,” she predicted. Jakusconek stated that central bank sales during the quarter totaled 95 tonnes, “mainly on the back of three countries that accounted for 94 tonnes of sales—Spain (40 tonnes), France (31 tonnes) and Indonesia (23 tonnes). At the same time, there were few central bank buyers in the quarter, central bank buying represented 1 to 2 tonnes in the quarter.” “While producer de-hedging continues to be a major trend, there was a little producer hedging…mainly from junior companies looking to hedge as a way of funding new projects,” according to Jakusconek. The biggest hedgers were Etruscan Resources with just under 250,000 ounces and Australia’s View Resources with 175,000 ounces. During the second quarter so far, Barrick reduced another 1.2 million ounces from its book, only leaving future production hedges while Lihir “blew out its hedge book” with a 1.4 million-ounce reduction. Noting that ETFs have become one of the most popular alternative investment vehicles, Jakusconek said that global ETF holdings mushroomed to 685 tonnes by the end of the first quarter, a 9% increase over the fourth-quarter 2006 holdings. “With two new ETF launches in India and the planned launches in Japan and Europe, ETF holdings continue to grow and are currently at 691 tonnes,” she said. NBF’s analysis found that COMEX’s speculative position was “very volatile during Q1, ranging from a low of 5.3 million ounces to a high of 14.2 million ounces (both figures are Future only positions); with the current long position at 9.6 million ounces.” “The volatility and upward trend were driven by producer de-hedging in the quarter, which caused fluctuations in the gold price. In addition to the COMEX, the CBOT…ranged from 125,000 ounces to 1.1 million ounces during the quarter,” Jakusconek said. “Currently there is a short position of 85,000. The upward trends in the speculative positions continue to provide support to a rising gold price.” EQUITIES Equity issues in 2007 have set a new high of $4.2 billion so far this year, compared to $3 billion for all of 2006, “and we are only at the end of May,” NBF declared. Major issuers so far this year include Gold Fields, which issued $1.4 billion in equity to finance it’s a acquisition of South Deep and to reduce the Western Areas hedge book, Lihir, which issued $1 billion in equity to fund capital projects and clear its hedge book, Gammon Lake (Cdn$200 million), NovaGold (Cdn$203 million) and Redback (Cdn$375 million). NBF’s research determined that world gold indexes average a negative 4% return during the first quarter “as compared with their broader market index counterparts that returned 3% in the period.” Of the 23 gold producers surveyed by the report, 14 had negative returns, according to NBF. During the first quarter Durban Deep dropped 27% on poor operational performance, and Centerra Gold declined 21% on increased political risk in the Kyrgyz Republic. Goldcorp declined 16%, Agnico-Eagle, 15%, and IAMGOLD, 13%. Companies with positive performance include Golden Star up 49%, Freeport-McMoRan, up 18% and Kinross up 15%.