[miningmx.com] — GOLD has not gotten off to a good start in 2011 and, while general investor sentiment remains bullish, a few notes of short-term caution have been sounded.
One that should be heeded in particular has come from gold “guru’ Martin Murenbeeld – chief economist for DundeeWealthEconomics.
Murenbeeld is sticking to his medium and long-term bullish guns calling gold into the $1,600/oz range for 2012 but he’s turned wary on short-term prospects noting that, “the technical condition of gold looks a little weak just now’.
That assessment follows a week in which – as Murenbeeld put it – “sentiment was all over the place’ with gold dropping below $1,360/oz compared with an all-time high above $1,420/oz early reached early in December.
Various reasons are being bandied about to explain the pullback. Murenbeeld’s take is that, “the combination of solid equity market performance and some temporary resolution to the European Union (EU) debt crisis could damage gold somewhat and this has been factored into the first half of 2011.’
But both Murenbeeld and Numis Securities analysts Andy Davidson and Cailey Barker stressed that the EU debt crisis had not gone away.
Murenbeeld commented, “It is hard to forecast that the EU will pull out of this crisis without one or more countries defaulting over the next several years.
” Indeed, the future is likely to include depression for some EU members, withdrawal from the euro system and/or significant ECB (European Central Bank) monetary reflation. The later would, of course, push gold prices higher.’
The Numis analysts commented, “the astronomic levels of national debt essentially mean that the US and key members of the Eurozone are, or are about to become, bankrupt.
“Will the economies recover before the currencies collapse? We don’t know but we have no sense that the question has been settled either way – and we therefore continue to accumulate gold on any sizeable dip.’
Against this background JP Morgan Cazenove analysts Steve Shepherd, Allan Cooke and Abhishek Tewari have come out with an upbeat research report calling gold higher but also predicting that SA gold shares should outperform the metal during 2011.
An important assumption made in this forecast is the analysts believe the rand gold price will continue to increase for the next three years. Specifically, they predict it will average R327,556/kg during 2011 – up 14% on the 2010 average price of R287,587/kg.
The rand gold price received by the SA mines is crucial for their financial performance and the strength of the rand against the dollar during the past 18 months has robbed them of much of the benefit of the rising trend in dollar gold prices.
The analysts noted that “the rand/dollar exchange rate remains the greatest risk to our earnings forecast for the SA gold miners.’
They commented, “the bull trend in the rand gold price since 2006 has slowed over 2009/2010 to the horror of the SA gold miners who have suffered around 20% local unit cost inflation since 2007.
“If the rand gold price continues to fall as it did in 2003/2004 the outlook for the gold miners is nowhere near as rosy since we expect them to lose around 10% of their cash margins to cost inflation.’
The analysts’ top SA gold share picks are Gold Fields and Harmony which they believed would continue along the improving trend shown in 2010.
According to the analysts, “Gold Fields was the best performing SA gold major in 2010 with a 19% rise, matching its gain in the prior year, followed by Harmony which clawed back 9% after slumping 19% in 2009. AngloGold Ashanti underperformed its peers and the metal after it posted a strong rally in the prior year.’
They have set a 12 month, DCF-based price target of R136 a share for Gold Fields (currently R115.50) and predicted Harmony (currently R78.63) will reach R103.
According to the JP Morgan report, “Gold Fields has moved to restructure the operational management structure of the SA mines and an improving outlook is positive for the share’s rating, in our view.’
Turning to Harmony the analysts commented, “Harmony is the least expensive SA gold major on our numbers and particularly so given that we have not yet factored any value for the massive Wafi/Golpu project in Papua New Guinea.
“It’s also the riskier gold share as the group is highly geared to the rand gold price, with relatively slimmer free cash flow margins more at risk due to a stronger rand/dollar exchange rate, safety-related production losses and relatively high SA cost inflation.
“We continue to forecast a higher rand gold price. The market has yet to factor in the substantial upside potential at Wafi/Golpu in our opinion.
“Our high level model for Golpu (ex Wafi) potentially adds around R15/share which is not included in our base case valuation.’
The writer owns shares in Gold Fields and Harmony.
