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Gold stocks expected to regain lustre
Analysts feel decreasing mining costs and increasing reserves should boost shares
JESSE RISEBOROUGH
Bloomberg News
June 26, 2007
Gold stocks have failed to keep up with bullion prices this year. As mining costs slow and as the companies find more gold that can be mined at a profit, the shares have every reason to rebound.
Mining costs, which have doubled in the past seven years, are starting to moderate as some producers focus on larger, higher-grade mines in countries where operating expenses are lower. Average total cash costs for North American producers are forecast by National Bank Financial Inc. to fall 1.9 per cent in 2008 after gaining by more than a fifth this year.
Goldcorp Inc., Canada's second-largest gold producer, and Agnico-Eagle Mines Ltd., the country's No. 4, are among companies increasing reserves, a measure of gold in the ground that can be extracted profitably. Gold companies are also selling fewer forward contracts to lock in higher prices, suggesting they expect bullion to climb.
"I will be particularly interested in those companies that have got prolific reserves and then are blessed with a very low production cost," said Alfred Wong, who helps manage $16-billion (U.S.) at UOB Asset Management Ltd. He has bought shares of Agnico-Eagle of Toronto, Eldorado Gold Corp. and Goldcorp, both of Vancouver, in the past month.
Agnico-Eagle and Goldcorp are National Bank Financial's top picks. Eldorado's cash costs are set to fall 27 per cent and output will increase almost threefold by 2009 after opening mines in China and Turkey, according to a June 7 report by Credit Suisse Group.
The Amex Gold Miners Index, a measure of global gold stocks, has risen 5.7 per cent since its low for this year in January. Still, the index is down 3 per cent in 2007, while the price of gold has gained 2.5 per cent. The metal, which advanced for six consecutive years, last year rose to a 26-year high of $730.40 an ounce before falling.
Gold for immediate delivery fell $2.30 to $654.70 an ounce yesterday.
The price of gold may rise back above $700 an ounce by the end of the year, according to forecasts issued by JPMorgan Chase & Co. and ABN Amro Holding NV in the past three weeks.
Gold will reach $800 an ounce by 2010 and then $1,400 by 2015, analysts from Credit Suisse Standard Securities Inc., led by David Davis, said in a report this month.
Costs of producing gold have been rising as mining companies compete with each other for equipment and workers at the same time as fuel and power have become more expensive.
Now so-called cash costs - costs directly related to mining - for some producers are starting to ease. Companies are finding higher grades of gold that require the removal of less waste ore. At the same time, producers such as Eldorado and Peter Hambro Mining PLC are tapping new gold mines in China and Russia, nations where labour and power are cheaper but where political uncertainty had discouraged exploration before.
Cash costs for North American gold producers covered by National Bank Financial averaged $330 an ounce produced in the first quarter. Average cash costs for those producers have risen from $164 an ounce in 2000, the bank said in a May 25 report. Costs are expected to average $324 an ounce this year and fall to $318 next year after averaging $265 last year, the bank said in a June 5 report.
"Costs have reached a level that is certainly controllable, so any increase in the gold price pretty much goes to the bottom line," said Michael McCormick, who helps manage the equivalent of $318-million at Leyland Private Asset Management in Sydney, Australia.