Good as…

Ex­cep­tional – though the driv­ing forces re­main ob­scure to many in­vestors

Finweek English Edition - - Companies & Markets - VIC DE KLERK vicd@fin­week.co.za

OVER THE PAST SIX MONTHS gold shares have been good to in­vestors – very good. In US dol­lars the price of South Africa’s for­mer flag­ship – An­gloGold Ashanti – is up by 200% since Oc­to­ber 2008. And that was while the con­sen­sus views of an­a­lysts col­lected by Thom­sons Fi­nan­cial con­sis­tently al­lo­cated a poor rat­ing of 2,6 to those shares (1 equals per­fect buy­ing op­por­tu­nity; 3 def­i­nitely sell). The share price of Bri­tish Amer­i­can To­bacco (BAT), which en­joys a nearly per­fect rat­ing of 1,3, per­formed poorly over the same pe­riod – even against a very weak US dol­lar.

Prospec­tive in­vestors in gold shares mustn’t try to be too smart with their own anal­y­sis and se­lec­tion. Pick your pre­ferred gold share. For many in­vestors in SA that’s Har­mony Gold. Buy and sell the share as your faith in gold and the US dol­lar goes up or down. Also think about the price of gold shares in US dol­lars. For those who be­lieve in gold, gold and gold shares are in fact there to pro­tect in­vestors against the US dol­lar, whose value can only fall now that the United States is is­su­ing new dol­lars and cre­at­ing credit at an un­prece­dented rate.

Fun­da­men­tal con­sid­er­a­tions should def­i­nitely not play any role in the choice of a spe­cific gold share. Tra­di­tional in­vest­ment val­ues, such as div­i­dend yield, ap­par­ently don’t seem to count in de­ter­min­ing the value of a gold share. Ac­cord­ing to Thom­sons Fi­nan­cial’s an­a­lysts, not one of the world’s lead­ing gold mines will pay enough cash div­i­dend in 2009 to give in­vestors a re­turn of more than 1% on their cur­rent share prices. And as a busi­ness, gold shares have no place in a War­ren Buf­fett port­fo­lio. Not one of the big­gest gold mines cur­rently brings in a re­turn on eq­uity (ROE) of more than 15%.

Nev­er­the­less, their share prices have in­creased ex­cel­lently and they are this year’s top per­form­ers in any port­fo­lio. The pop­u­lar Smartmoney web­site – with its equally pop­u­lar “Map of the Mar­ket” – gives seven gold mines as world play­ers. The di­a­gram shows the seven mines and al­lo­cates each one an amount of space in re­la­tion to its mar­ket cap­i­tal­i­sa­tion.

Bar­rick and Gold­corp, with mar­ket val­ues of nearly US$33bn and $29bn re­spec­tively, are the big­gest and sup­posed to at­tract the most at­ten­tion. SA’s two play­ers – An­gloGold, with a mar­ket value of $15bn, and Gold Fields, with $8,87bn – are minute by com­par­i­son. How­ever, their share prices – which have in­creased in US dol­lars by 53% and 37% re­spec­tively this year – are at­tract­ing con­sid­er­ably more at­ten­tion.

The mar­ket value of gold shares, even though it’s now al­ready be­ing ex­pressed in bil­lions of dol­lars, is still rel­a­tively small com­pared with other in­vest­ments. The to­tal mar­ket cap­i­tal­i­sa­tion of the seven shares in Smartmoney’s di­a­gram is just over $130bn. The mar­ket value of Microsoft, one of the US’s big­gest listed shares, is $185bn. Even Buf­fett’s Berk­shire Hath­away weighs in at $116bn.

In­vestors who pre­fer smaller gold mines, those pre­vi­ously called mar­ginal mines, will see there’s noth­ing much on the JSE be­sides the three big guns of An­gloGold, Gold Fields and Har­mony. In fact, Har­mony, with its mar­ket value of R41bn or around $5bn, should also ap­pear on Smartmoney’s di­a­gram. If those three are omit­ted there are 13 other gold mines the JSE could place in the gold min­ing sec­tor: most are al­most a joke.

Four are sus­pended list­ings and have no value. Vil­lage, with a mar­ket cap of R5m, doesn’t even qual­ify for the AltX mar­ket. And Halo­gen, what­ever it might be, with a mar­ket value of R27m – if you can find a buyer for 10 of its shares – prob­a­bly doesn’t be­long on the JSE ei­ther. The shares of African Ea­gle and Pan African Re­sources, each with a mar­ket value of just more than R100m, some­times trade quite well.

The choice in gold on the JSE for prospec­tive in­vestors who don’t like the three big guns is lim­ited to Great Basin, DRD Gold, Sim­mer & Jack and Wit­wa­ter­srand Cons Gold.

Gold it­self – since its low in Oc­to­ber last year, its price has in­creased from $725 to cur­rently just un­der $1 000 – is of­ten a safer op­tion if in­vestors aren’t sure of the driv­ing forces be­hind the share prices of in­di­vid­ual gold mines.

For a di­rect in­vest­ment in gold, Absa’s NewGold (JSE code GLD) is cer­tainly the eas­i­est al­ter­na­tive. Proof Kruger coins, ob­tain­able from the SA Mint, are also a good in­vest­ment and it’s nice to boast own­ing the nice case and the shiny gold coins, which now cost nearly R10 000 each.

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