During the 1995/1996 gold bull market, our dollar was in the 80c range, yet the more speculative issues performed strongly prior to the bubble bursting in 1997 when the RBA announced they were selling gold. Whilst it is difficult to forecast the 80c level being reached again after spending some time sub 50c, the current gold and interest rate climate would well be conducive towards a similar performance across the board.
Our major and mid-cap gold producers whilst seeing their share prices stabilise after some stomach churning falls are now being poleaxed with waves of institutional selling which manages to overwhelm stocks after the 20 minutes of madness after market open have passed.
I have noted an increase in Emails from readers voicing their concern as to a number of individual performances from Australian gold and silver stocks, however investors should be preparing themselves for what I consider to be the "second phase" of this precious metals bull.
The Downside Of Popularity
One of the obvious benefits of the stock market is the potential to make a poultice without being hounded by teeny boppers when your doing the grocery shopping or holidaying on a tropical with scantily clad members of the opposite sex. Like Hollywood stars with fame and popularity comes a price, and for the market darlings at times they have to spend some time in the sin bin, consolidate then fight their way out of it. Some of our gold stocks are now finding the going tough, as the good news tap runs dry, and after spectacular share price runs investors are finally starting to find reasons to sell them.
Whilst formulas do my head in totally, I have come up with a pretty simple one that doesn't cost thousands of dollars to learn, whilst the risk/reward profile in my opinion rarely appears more attractive.
Others have named formulas or indicators after themselves so what the heck lets call this one Locantro's Emerging Mining Stocks (LEMS)
(M + S + C + G - P = )
M = Management
S= Share Structure
C= Commodity/Commodity Mix
G= Grade
P= Popularity
Now find a mining company, and out of 10 rank their management track record, share structure, the commodities they are involved in terms of where they are on a cyclical basis, the grade of their resources or drill results, then rank how popular they are on the Internet and other mediums. Popularity can also be assessed through volume and volatility of the stock.
Remember the aim here is to find the next popular stock or for those that follow musical trends the next "Avril" or novelty group where their sexual preferences or positions are key volume drivers.
I took my favourite mining stock and came up with 33. In terms of management, share structure, commodity/mix, and grade the sub total came to 36. I then subtracted 3 for the company's popularity based on low volumes, limited discussion on financial forums and the fact the majority are hardly going to find it an attractive proposition in its current state. On a technical basis it may appeal from time to time, however short-term traders that rush into the stock may find no safety net in which to unload their volume on once the buying frenzy loses its momentum.
This method of stock selection is not for everyone and at times it can be terribly frustrating watching the money flow continually target a handful of stocks. With production and higher share prices comes the potential for bad news or reports that fail to live up to the giddy expectations investors place on market darlings.
The media would have you believe a junior explorer that is well-managed with cash in the bank is a higher-risk proposition than a company in full production or an industrial stock such as a high profile finance and insurance company. Whilst this attitude prevails the junior mining sector will be left alone for a select few, whilst others struggle to come to terms with falling equity and real estate prices.
ASX Gold Producer Scorecard
Australian Gold Sector Comments
With currency movement and gold resources/ reserves rapidly depleting the environment for Australian gold producers has become challenging in terms of maintaining profitability and mine life. The real upside during the second stage of the precious metals bull market could come from companies possessing similar growth profiles exhibited by the graduating class of 2002/2003 prior to their major moves up the gold producer ranks.
Whilst exploration expenditure has undergone a significant increase, corporate activity may well increase as growth becomes the key to survival.
Disclaimer: The stocks mentioned in the article are for illustration purposes only and are not intended as investment advice. The article is written as a guide to further research, and the opinions expressed are those of the author only. Prior to investing in the gold sector professional advice and/or further research should be undertaken.
About The Author
Tony Locantro is a Perth based private client advisor specialising in junior gold, silver and base metals stocks. He is the author of "The Green Room, A Guide To Speculating On The Australian Stock Market and presenter on mining stocks.
Tony Locantro
locantro@iinet.net.au
12 May 2003