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AUSTRALIAN GOLD PRODUCERS
Tony Locantro
When I have published my gold price forecasts over the last few years, I am always nervous as to the potential to be seen to be way off the mark. 2005 was looking like the year it all fell apart for me, however over the last two months the gold price has been rather kind (and volatile) and I now go into the last week of the year hopeful I do not land on the spot $512US but am close enough to take it as a win. (Previous forecasts included $418US in 2003, and $442US in 2004.

As I have mentioned in a previous article my gold price forecasts are based on taking a fundamental view, then sitting back closing my eyes in the hope I can roughly picture the activity on Kitco towards the end of the next year. There are no charts (I do not follow technical analysis at all), no studies of trading trends and the first number that comes to mind is always the one I run with.

For 2006 my gold forecast is $586US using a range of $575US to $615US. I honestly hope I am well off the mark next year and proven to be conservative as forecasting is something I am reluctant but obviously persuaded to do based on the fact I have been providing commentary sporadically over the last 3 ½ years.

Gold Producer Scorecard 2005

Key Points From Table

  • Major mainstream stocks such as Lihir, Newcrest and Newmont have all performed well. Croesus, which has a high market profile, has been disappointing, whilst St Barbara has undergone a major transformation and been the star performer for 2005. (348% increase)
  • Bolnisi, Dominion, and Oxiana have had outstanding years thus far and have enhanced their market darling status.
  • Overall the performance of the Australian Gold Sector has been lacklustre considering the USD and AUD gold price appreciation and the strong stock market backdrop.
  • Out of the 27 producers, 13 are still below their price levels as at January 3, 2005.

Highlights for 2005

  • Barrick reaching agreement to acquire Placer Dome on December 22 2005 on revised terms was significant. (Vital in allowing for takeover premiums to be applied to Australian producers.
  • IAMgold's planned acquisition of Gallery Gold was seen as a precursor to further corporate activity in the Australian Gold Sector
  • Exceptional production results released by Dominion Mining, where costs and ounces produced were well in excess of previous expectations.
  • Michael Kiernan taking the Chairman's role at Croesus and having Monarach Resources announce a planned merger with Siberia Mining (Kiernan and Forrest )

Issues Still Plaguing The Sector

  • Rising capital costs. (Diesel and construction).
  • Major shortage of skilled workers and consultants to take projects forward
  • Reported shortage of tyres suitable for mining equipment
  • Some companies are still faced with hedge books that are out of the money. Based on the performance of late it will be interesting to peruse the state of some hedge books and to see who has locked in some higher prices.
  • Sector is still failing to create considerable mainstream interest. Although there has been a notable increase in fund/institutional buying we are still along way from a bubble.
  • Shortage of product. The Australian Gold Sector is lacking in major investment opportunities due to corporate activity and companies moving their operations offshore.
  • A number of companies now carry political and diversification risk.

Outlook For Early 2006

  • The producers are expected to attract the bulk of investor attention in early 2006 as a number continue to closely track the USD spot gold price.
  • Market capitalisations of the emerging producers are starting to move higher, and at some stage I would expect them to outperform the major gold producers.
  • Corporate activity expected to continue with mergers and acquisitions likely to accelerate and assist the re-rating process.
  • Gold and share price volatility to increase considerably in 2006 with trading ranges likely to move away from $5-$15 into the $20-$30 zone. (spot gold price).

My Strategy For The Next Phase

We were fortunate to latch onto a turnaround story earlier in the year and are now essentially free-carried on a mid-sized producer. The more liquid stocks are being treated as trading counters and positions continue to be built in the emerging producers despite a number of them already doubling.

The junior gold sector continues to struggle under the weight of stale bull selling and dilution (large number of capital raisings), although a number of marginal and/or sub-economic projects are now coming into the zone.

A major 1m+ ounce discovery is desperately required to kick-start the juniors as at this stage speculators are not viewing the smaller gold stocks as a major wealth creation opportunity and would prefer to purchase on the first major sign of momentum.

With the benefit of hindsight 2005 could well go down as a development year for the gold sector. Despite excellent movements in both the AUD and USD gold price, the shares prices of the gold producers are still reflecting a disbelieving market. Investors are yet to come to terms with higher market capitalisations and the selling pressure indicates the desire of many to exit positions as soon as a profit or break even point is reached. Whilst it can be argued that the smart money is already set and repositioning for the next phase, the long awaited frenzy has failed to materialise.

The majors will continue to track the spot gold price, however we need investors to take their eyes of gold's every move and focus on company developments, future corporate activity and the lure of a major discovery. If this indeed erupts into a major gold bull market there is still a considerable way to go and the risk factors for enthusiasts will be based on being underexposed once the action really starts. 2006 is shaping up as an exciting year (albeit volatile in both directions) and hopefully a worthy lead up to the speculative blow-off phase.


27 December 2005

Disclaimer

I have direct/indirect holdings in the stocks listed/mentioned above. Clients have considerable holdings in each of the stocks and may change these holdings without notice. The information on each stock has been derived from ASX reports, company discussions and a site visit to Long Victor in 2002 and 2004 (Independence Group) and Arafura's Nolans Bore Project in April 2004). Each of the stocks listed is to be considered as speculative, and may not be appropriate for individual investors. No buy recommendations have been provided on the listed stocks, and the opinions on each are those of the author only. It should also be noted that some of the stocks may have very low levels of liquidity and may result in significant percentage rises and falls. Please conduct further research and consult your financial advisor before making an investment/trading decision.

About the Author
Tony Locantro is a Perth based Senior Private Client Advisor specialising in the junior resource market. He is the author of "The Green Room, A Guide To Speculating On The Australian Stock Market" (available free to prospective clients via email request) and presents on resource stock investment. He has been a contributor to a number of precious metals and market related forums.

If you would like further information or are interested in becoming a client I can be contacted at tlocantro@aapt.net.au


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