Fail­ing to de­liver

Metal not de­liv­er­ing the goods de­spite in­vest­ment cli­mate that ap­pears highly favourable

Finweek English Edition - - Companies & Markets - BREN­DAN RYAN bren­danr@fin­

THE GOLD PRICE and gold eq­ui­ties are frus­trat­ing in­vestors as the metal fails to re­spond to the world’s great­est fi­nan­cial cri­sis since the Wall Street Crash of 1929. Since mid-Septem­ber the gold price has see­sawed from US$740/oz to just above $900/oz and then back down to cur­rent lev­els of around $830/oz.

Sig­nif­i­cantly, gold has failed to get back to the peak of $1 030/oz set in March – that de­spite an un­prece­dented rush by in­vestors to buy gold coins, which re­sulted in the US Mint and the Rand Re­fin­ery tem­po­rar­ily run­ning out of stock.

Gold shares have un­der­per­formed the metal over the past 18 months, al­though in­vestors got a tan­ta­lis­ing glimpse of what they’re ca­pa­ble of dur­ing the first week of Oc­to­ber when gold got above $900/oz and the rand weak­ened sharply against the US dol­lar, reach­ing lev­els of US$1/R9,40.

The rand gold price was pushed into record ter­ri­tory around R277 000/kg, from which it’s sub­se­quently pulled back to cur­rent lev­els around R247 000/kg. Such a move, if sus­tained, has ma­jor im­pli­ca­tions for SA’s gold pro­duc­ers. Share prices of the four ma­jor pro­duc­ers – An­gloGold Ashanti, DRDGold, Gold Fields and Har­mony – also re­sponded but then pulled back when the US dol­lar gold price re­treated.

Har­mony and DRDGold are viewed as the SA gold shares with the great­est ex­po­sure to a ris­ing rand gold price and, on 14 Oc­to­ber, both were still 16% and 21% re­spec­tively above their price lev­els on 2 Oc­to­ber.

Har­mony has also opened a sig­nif­i­cant pre­mium over Gold Fields, at trad­ing around R90/share on 14 Oc­to­ber com­pared with R75,30/share for Gold Fields. The re­verse has been the norm for much of the past few years.

JPMor­gan an­a­lysts Steve Shep­herd and Al­lan Cooke pub­lished a re­port on 8 Oc­to­ber call­ing a buy on SA gold shares due to the ris­ing rand gold price and the fact the shares are cheap when val­ued on a price to net present value (P/NPV) ba­sis.

The an­a­lysts com­pared the cur­rent sit­u­a­tion to that of late 2001, when the rand gold price rose sharply due to rand weak­ness post 9/11 and the gold sec­tor out­per­formed the SA eq­uity mar­ket strongly dur­ing 2002. They com­ment: “We be­lieve there are sub­stan­tial short-term gains in prospect through ex­po­sure to Har­mony and, for in­vestors with a higher-risk ap­petite, DRDGold. We be­lieve there to be a short-term trad­ing op­por­tu­nity in the SA gold sec­tor that has the po­ten­tial at worst to of­fer out­per­for­mance of the JSE but may also de­liver ma­te­rial ab­so­lute cap­i­tal ap­pre­ci­a­tion.”

Ac­cord­ing to the an­a­lysts, SA gold shares are trad­ing at P/NPV mul­ti­ples that are “un­prece­dented”.

Us­ing the gold price of $913/oz and ex­change rate of US$1/R9,43 that ruled on 6 Oc­to­ber, the an­a­lysts cal­cu­lated the NPV of DRDGold at R10,83 com­pared with its then price of 425c/share.

Har­mony’s then share price of R82,43 com­pared with its es­ti­mated NPV of R126, while Gold Fields was trad­ing at R72,20 against an es­ti­mated NPV of R161,69.

Other an­a­lysts don’t see it that way. One bear­ish an­a­lyst said he felt gold shares were headed lower over the short term. “The in­ter­na­tional bank­ing sit­u­a­tion seems to have been sta­bilised by the wide­spread gov­ern­ment in­ter­ven­tions. There’s no need to rush into gold, and the jew­ellery trade is hold­ing back on buy­ing. I also think the weak­ness in the rand has been over­done and it will strengthen in fu­ture.”

Though dif­fer­ing opin­ions are what make mar­kets, if the rand starts to slide again and gold gets back above $900/oz then JPMor­gan’s num­bers will be­come highly rel­e­vant.

Go for Gold! Steve Shep­herd

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