Gold stocks

This is a basic outline of the Australian equities concerned with the Gold market, and some of the factors that you should consider before looking at this area. Report taken from the 'Daily Trader Report' - June 2006

Firstly we should stress that Gold orientated stocks are highly volatile; principally the effect of the overseas gold price in USD$ (which is influenced by many short term global economic and political situations) and the AUS$ / USD$ exchange rate can cause the price of gold orientated equities to fluctuate overnight, frequently causing large gaps in the charts. Gold is an inflationary hedge mechanism and an alternative to buying Bonds and US linked assets in light of the US current account and trade deficits. Add speculation and the uncertainties of mining - a recent example being the tragic accident in Beaconsfield, Tasmania - and you can appreciate that trading in gold stocks can be fraught with difficulties.

Gold stocks can be split into two polar groups;

Exploration - companies that have a licence / lease to explore for reserves (The WA governments treatment of Cazaly resources should be a recent caveat). Exploration stocks offer the greatest potential returns provided they actually discover a worthwhile reserve, otherwise they will tend to devour capital during the exploration process.

Production - companies that have proven reserves and are producing ore.

With Producing stocks there have been some recent differences in valuation, mainly because brokers were valuing the stocks on forecast gold prices, not spot prices. As the market has realised that Gold prices may be staying at this higher level for some time there has been a market re-evaluation of many of the gold stocks. Therefore the published reserves that each stock possesses can be re-priced, raising (or lowering) the value of the stock, but of course it is not as simple as that, there is the added complication of hedging.

Hedging
Gold companies have long understood that they are dependent upon the gold price and are prepared to forward sell a % of their production, in times when the gold price is low they can guarantee an income to cover their costs, when the gold price is high they can can forward sell a proportion of future production. However if they hedge too much at a low price then they cannot fully benefit from the high gold prices that follow.

Reserves
Reserves are 'money in the bank' - or are they? be aware that ore reserves are graded but they can be subjective as it is difficult to fully ascertain the complete quantity and quality of underground reserves, you may also find that a company may mine the premium grade ore initally - which looks very good for cash flow - and leave the lower grade ore for the future, but if the price of gold drops then the valuation has the potential to drop exponentially.

Anyway, how do the ASX gold stocks stack up, here is a summary list of the main stocks to consider, with comments including their present (As of May 2006) valuation compared to the spot gold price and their hedging;

Ballarat Goldfields (BGF) - No hedging and a potential spot price upside of 25%

Beaconsfield gold (BCD) - halted production due to fatal accident, geological uncertainty may affect reserve evaluation but on current figures it is undervalued by about 35%. has hedged a lot (40%) of its reserves.

Bendigo Gold (BGD) - undervalued by about 30% with no hedging

Bolnisi Gold (BSG) - No hedging in place and undervalued by 35 - 40%

Dominion Mining (DOM) - Hedged around 10% of reserves and 30% undervalued

Highlands Pacific (HIG) - undervalued by almost 50%, around 60-70% of reserves are hedged.

Kingsgate Cons (KCN) - minimal hedging and 30% undervalued

Leviathan resources (LVR) - around 10% reserves hedged and 40% undervalued

Lihir Gold (LHG) - 6% reserves hedged, 30% undervalued. Has had some problems with their sole mine (in PNG)

Newcrest Mining (NCM) - potentially 30% undervalued with 17% reserves hedged.

Oxiana Ltd (OXR) - no hedging and about 30% undervalued.

Pan Australia Res (PNA) - no hedging and very undervalued by around 60%

Perseverance Corp (PSV) - 20% of reserves hedged and 50% undervalued.