Gold Mining Sector Rotation, $950 Gold Price Forecast
Commodities / Gold & Silver Stocks Sep 18, 2008 - 08:38 AM GMT
Commodities Commentary, The Slowing Dragon, and Gold Price Forecast - Madison Avenue Research Group's outlook for gold is bullish. Our sentiments echo Philip Klapwijk, Chairman of London-based research firm GFMS Ltd. at a conference in London today. Klapwijk said "We're expecting gold to stage a powerful rally in the fourth quarter” and believes gold may rise to US$950 an ounce by the end of year as central banks and miners hold back sales and investors buy the metal as a haven against falling stock prices.
Gold is now in an oversold position and the underlying commodity stocks are poised for above performance after months of decimation. The odds now favour a gold trend reversal upward is now based on its trading pattern relative oil (in tandem) and the US dollar (inversely); adjacent to the left is the oil vs. Dollar 60 day percentage change oscillator (Sept 14/98 - Sept 12/08) which shows the dollar as very overbought, especially after one of the steepest movements upward for $US dollar and steepest downward moves over 60 trading days in the past decade for oil (oil is technically extremely oversold). The recent flight to US dollars seems more momentum based and not fundamentally based - a pendulum will shift back towards tangibles (gold) can happen at any time.
Physical demand for gold remains high; dealers report shortages of gold bars in Singapore and Honk Kong ahead of the upcoming festival seasons in Asia, India and the Middle East. On the global supply side numbers continue to decline, in fact global gold output numbers out of South Africa for the year leading through July show production slumped 16.4 percent (the country has faced power and infrastructure problems leading to rationing and outright operations suspensions).
Although international observers confirm there are signs of China's economy levelling off its rampant growth pace, there has been a recent shift in credit, possibly in reaction; credit has begun to expand again in China after a tightening of the money-supply since 2006 in small increments. China has in excess of $1.7 trillion dollars in foreign-exchange reserves that would likely be put to use (if need be) in order to keep their economy at steady pace, resulting in continued global commodity demand. In fact, in response to the recent US Fed credit crisis this last weekend (that emanate from the subprime crisis), China cut short-term interest rates overnight for the first time in six years .
Mining Sector Rotation
Breathtaking Velocity of Rotation out of Resources has Created Opportunity Now
Sector Rotation is always happening, both between and within sectors. There are many forces at play - both micro & macro. A well balanced portfolio will have exposure to all sectors - the key is the weighting and timing. The stock market is a discounting mechanism; industry groups are priced now according to investor's perception of future company earnings and fortunes within the various groups. Capital flows in and out of the markets according to anticipated fortunes and momentum. The flight from commodity based stocks has been breathtaking as fund manager liquidated positions and appears to have created opportunity. The relative ranking of the mining sector has steadily fallen from week to week and now sits at a low relative to almost every sector tracked (as illustrated in adjacent Sector Rotation Performance Spreadsheet excerpt found at http://madisonaveresearch.com/topgold.htm ).
Fund Managers exited sector based on Price - Ignoring Valuation. There are some exceptional deals that now exist within the mining sector and when the sector turns back in-favour look to selected names to top the leader board. Picking selected names in a sector that is out of favour is like swimming a river upstream, however we need to take the time now – when blood is in the streets to start accumulating and ensuring top candidates are front and center on our radar screen now.
Review of Top Senior Gold Producers
Gold prices are well above cost of production and many major producers are throwing off large amounts of free cash, have vast reserves, and are at very attractive prices now. Below is a review of the top ten gold producers in ascending order of ounces produced. Source Market Equities Research Group Q3 Summer Resource Book.
First place) Barrick Gold Corp. (NYSE: ABX )(TSX: ABX) Production of 7.6 - 8.01 Moz of gold at costs of US$390-415/oz and 380-400 <lbs of copper at US$1.15-1.25/lb. The company forecasts 2008 project capital expenditures of US$1.5-1.7 billion and sustaining capex of US$600-800 million. Barrick is the world's larget gold company in terms of market capitalization, annual production, and reserves. The company reported reserves of 124.6 Moz at the end of 2007. Current growth projects include Buzwagi, Cortez Hills, Pueblo Viejo, and Pascua-Lama.
Second place) Newmont Mining Co. (NYSE: NEM ) 2008 gold sales guidance is 5.1-5.4 Moz at costs of $425-450/oz. Capital expenditures of $1.8-2.0 billion are expected, with approximately half allocated to its development projects. Newmont is the world's second-largest gold company in terms of production. Yanacocha and Nevada remain Newmont's foundation, but it operates in most other gold-producing regions, including Australia, Canada, Indonesia and most recently West Africa. Reserves were 86.5 Moz at December, 2007.
Third place) AngloGold Ashanti Ltd. (JSE: ANG)(NYSE: AU ) Revised 2008 guidance to 4.9-5.01 Moz at costs of US$440-460/oz. Previous guidance had been 4.8-5.0 Moz at US$425-435/oz. The increased production reflects an assumed power supply of 96.5% in South Africa, while the higher costs are attributed to inflationary trends. Production of 1.22 Moz was at cash costs of US$464/oz in the June quarter. AngloGold Ashanti is a global gold producer domiciled in South africa. Production is sources from Africa, Australia and the Americas. Reserves were 73.1 Moz at year-end 2007.
Fourth place) Gold Fields Ltd. (JSE: GFI)(NYSE: GFI ) ~4.02 Moz annual gold production. Gold Fields expects gold production at its South African operations to be 2-4% higher than in March quarter with more stable power supply. Cash costs are forecast to be slightly lower with the effect of higher production partially offset by increases in power, commodities and royalties. Capital expenditures of US$327 million are expected compared to US$277 million in the previous period, as spending is expected to increase in South Africa and Ghana. Gold Fiels Ltd. is a senior gold producer with roughly two-thirds of its production sourced from South Africa. It also has assets in West Africa, South America and Australia. At the end of June 2007, attributable gold reserves were 91.6 Moz.
Fifth place) Harmony Gold Mining Co. Ltd. (JSE: HAR)(NYSE: HMY ) ~2.33 Moz annual gold production. Through mergers and acquisitions, Harmony has become a significant South African gold producer. The company is restructuring its asset portfolio around core operations in South Africa and growth projects in Southeast Asia. At the end of June 2007, reserves were 53.6 million ounces.
Sixth place) Goldcorp Inc. (NYSE: GG )(TSX: G) 2008 guidance is for gold production of ~2.6 Moz and average cash costs of US$250/oz on a by-product basis. The company expects quarter-on-quarter improvements in both production and costs as Los Filos ramps up and the Red Lake mine expansion is completed. Capital expenditures are forecast to total $1.2 billion, including $700 million at Penasquito but excluding the company's share of Pueblo Viejo. Goldcorp is North America's third largest producer, with 43.4 Moz of gold reserves at the end of 2007. Operations and projections are focused in the Americas. The company's growth projects include Penasquito in Mexico and Eleonore in Quebec.
Seventh place) Freeport McMoRan Copper & Gold Inc. (NYSE: FCX ) ~2.32 Moz annual gold production. Freeport-McMoRan Copper & Gold, Inc. engages in the exploration, mining, and production of mineral properties primarily in Indonesia, North America, South America, and Africa. It focuses on the copper, gold, molybdenum, and silver prospects. At December 31, 2007, it had total consolidated recoverable proven and probable reserves of approximately 93.2 billion pounds of copper; 41.0 million ounces of gold; 2.0 billion pounds of molybdenum; 230.9 million ounces of silver; and 0.6 billion pounds of cobalt. Freeport-McMoRan Copper & Gold, Inc. was founded in 1987 and is based in Phoenix, Arizona.
Eighth place) Newcrest Mining Ltd. (ASX: NCM ) Recent production issues at Telfer are expected to affect 2008 guidance of above 1.81 Moz of gold and 86,500-90,000 t of copper. Newcrest Mining is the largest Australian-domiciled gold producer and has significant copper production. Key operations are located in Australia and Indonesia. The company has an extensive development pipeline, including Cadia East, Ridgeway Deeps and Kencana. As of June 2007, reserves were 33.2 Moz of gold and 2.7 Mt of copper.
Ninth place) Kinross Gold Corp. (NYSE: KGC )(TSX: K) ~1.58 Moz annual gold production. Gold-equivalent production guidance is 1.9-2.0 Moz in 2008 and 2.5-2.6 Moz in 2009. Quarterly production is expected to increase throughout 2008 to approximately 625,000 oz by year-end. Forecast average costs of $385-395/oz for 2008 increased from previous guidance due to higher first-quarter costs and operational issues at Maricunga and La Coipa. With the start-up of its lower-cost projects, especially Kupol, the company expects costs to decrease through 2008 to $335-345/oz by the December quarter. The acceleration of the Fort Knox expansion and update of the Cerro Casale feasibility study are expected to increase 2008 capital expenditures by 10% to US$725 million. Kinross is a senior gold producer with operations located in North America, Brazil, Chile and Russia. The company is expected to complete three growth projects throughout 2008: Paracatu in Brazil, Kupol in Russia and Buckhorn in the United States. At December 31, 2007 reserves were 46.6 Moz. As of Sept 4, 2008 Kinross has succeeded in its bid for Aurelian - Kinross now owns 74.8% of outstanding shares -the offer extended to September 15, 2008.
Tenth place) Rio Tinto Plc (LSE: RIO)(NYSE: RTP ) ~1.23 Moz annual gold production. Rio Tinto is a diversified metals and mining company. The company is the world's second largest producer of iron ore and coal, the third-largest producer of uranium and gem-quality diamonds, the fourth-largest copper producer and the largest aluminum producer. It is also the world's largest producer of bauxite, titanium dioxide slag, borates and talc, and the largest exporter of industrial salt.
By James O'Rourke,
Financial Editor, Madison Avenue Research Group, MadisonAveResearch.com
A full sector rotation chart accompanies the original of this article and should be viewed at http://madisonaveresearch.com/topgold.htm
© 2008 Copyright James O'Rourkei - All Rights Reserved
This article may contain forward-looking statements regarding future events that involve risk and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual events or results. Reports herein are for information purposes and are not solicitations to buy or sell and of the securities mentioned. Full terms of use http://madisonaveresearch.com/topgold.htm online.
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