Time to Revise Our Gold Expectations

The price of gold is showing signs of stability after gold stocks got crushed in the commodity sell-off early this fall. However, we are clearly not in the $1000-plus gold price environment many had anticipated under these dire economic conditions, nor have traditional multiples returned, says Credit Suisse analyst Anita Soni.

Apart from a brief period earlier this year, when gold hit an all-time high above $1030 an ounce, the yellow metal has not performed true to course. The first quarter advance proved to be a bubble with large-scale institutional speculators driving the price sharply higher... and then sharply lower over the next seven months, according to Jeffrey Nichols, managing director at American Precious Metals Advisors.

Mr. Nichols told the China Gold & Precious Metals Summit in Shanghai on Thursday:

In spite of the lack of direction and day-to-day price volatility in the gold market this year, at least we can say that no other asset class has held its value quite so well.

"Clearly the standard 1 to 2 times price-to-net asset value [NAV] paradigm no longer applies, particularly for the more junior stocks,” Ms. Soni said in a research note, adding that exposure to base metal by-products is no longer a guarantee of lower cash costs. For senior producers, P/NAV multiples are around 0.5 times, while they range for 0.66x for mid-tier names and as much as 1x for small market cap companies.

Until longer-term valuation fundamentals matter again, Ms. Soni believes she has determined an appropriate near-term basis for valuing gold equities. It uses spot commodity prices plus 10% to determine net asset values: $850 per ounce for gold, $10.50 for silver, $1.80 per pound of copper and $0.58 for zinc.

This produces returns between 30% and 60%, which she considers a reasonable near-term basis for valuation until gold moves upward again. Ms. Soni has also produced target prices and net asset values for the long term, with an extra 10% for gold again, or $930, a level she said is “imminently achievable.”

As a result of these changes, Credit Suisse has upgraded its rating on Kinross Gold Corp. (KGC) to “outperform,” while Yamana Gold Inc. (AUY) and Northgate Minerals Corp. (NXG) have been downgraded to “neutral.” Target price reductions for the miners it covers range from 18% to 80%.

“The issues in the mid-tier space are those of operational risk and to a lesser extent, the spectre of potential funding shortfall,” Ms. Soni said. Yamana’s recent production and cost revisions have not been well-received, sending its share price multiple from near-senior levels to the discounted mid-tier level.

She cited several other near-term issues that could weigh on the stock. Its production ramp-up will likely be slower than expected and the market may show a lack of patience with this.

Yamana’s capital program funding could get very tight if current market conditions and commodity prices persist, which may make it very hard for the company to resist issuing equity given the success Agnico-Eagle Mines Ltd. (AEM) and Red Back Mining Inc. (RBIFF.PK) have had with their recent financings.

Cut-backs to preserve capital will hurt its value in terms of adding exploration and growth opportunities, and Yamana currently has significant exposure to copper.

And while Ms. Soni suggested that Yamana is perhaps the best candidate for a takeover given its low valuation and a few very good assets, particularly El Penon in Chile, she says this is not enough to recommend it as an “outperform.”

Comments

[Greg Pinelli:]

A few points..gold has zig zagged because the real turmoil is taking place on the critical relative asessment of hard money vs. paper money and it's credit extensions. My take is the die was cast this past November when worldwide nation states and groups (EU) committed to creating whatever liquidity is necessary.
The next critical evaluation point between gold (silver is riding the coattails, as always) and paper will come in late Winter andearly Spring when significant market players start looking at the liquidity flowing from comittments and understand how serious the across the board depreciation of ALL currencies is likely to be.
THAT'S WHEN IT HITS THE FAN... there will be no recognized safe haven paper and gold will become very..very desireable as real money.
What is very interesting is that the view above will likely become the CONSERVATIVE one..while the pleading and convincing will be on the paper credit side...the worm is about to turn!

2008 Dec 08 12:09 PM

[beabaggage:]

Another stupid analyst with another stupid way to account for the price of a junior mining stock. No honey, it is all based on fear and speculation. NXG should be upgraded, she has obviously not looked at their propects, ever increasing, which are not reflected in the book value NOR their totally written off major copper and gold asset, Kemess North. Once the CN govt starts dealing with many u/e people and Harper gone, the greenies will be silenced and KN will be back on the table, damn the stupid lake they are worried about.
We will see who is around longer, Credit Suisse or Northgate (as a stand alone company or part of some other major gold producer at some point!)

Long NXG and I read the reports and updates, not liek this idiot.
NXG producing 130,000 oz of gold this quarter, that is $100million of gross cash plus some copper offset and lower fuel and supply costs. Plus copper hedges from 6/09 on for Kemess South at north of $2.50 a lb.

2008 Dec 08 12:24 PM

[GMiki1:]

A lot of great juniors out there--Impact Silver, a silver producer in Mexico, has hit VERY high gold results. I hold that and Bravo Gold, which is great assays. Northern Dynasty, NAK, is extraordinary and selling at an absurdly low price for 57 million ounces of gold in the ground in Alaska and giant partners with lots of money. Of course, who has cash left to buy anything.

2008 Dec 08 12:58 PM

[NOWHEREMAN:]

Duh? "the across the board depreciation of All currencies is likely to be."

Name just one time, just one when ALL currencies depreciated simultaneously? Or is this just Your Tier 3 opinion? Nuff Sed

Bea: don't forget that NXG still has that MOU regarding the Kerness North property.

An interesting joint venture between PCU and BVN is still being developed. It could turn PCU into a FCX lookalike and enhance the value of BVN. IMHO

Of the three, I own NXG.

One other thing, China has signed a Free trade Agreement with Peru.

2008 Dec 08 01:46 PM

[NOWHEREMAN:]

Gmiki: what are the symbols for Impact and Bravo and can you relate anything else?

Thank you.

2008 Dec 08 01:50 PM

[Greg Pinelli:]

As long as we're on the subject of actually analyzing companies...BVN+PCU are hardly equal to a fraction of FCX....while almost all major and wanna be majors are vastly undervalued FCX is a big time player...none are in BHPs class but then who is???
As for currencies..they are ALL depreciating...the wannabe analysts who don't know that really should check the most recent liquidity and interest rate move by EVERY country.
By the by...NXG is a penny stock....largely a copper minor that will have long to wait..the author above spoke about gold and gold equities..someone is pushing their laggards..paultaut.......

2008 Dec 08 10:22 PM

[NOWHEREMAN:]

Duh, duh, duh.

there you go again, changing what has been written to accomodate your opinions.

The NXG commentary was addressed to Beabaggage who was talking about NXG. SLW is also a sub-$5 stock or haven't you noticed. (anything below $5 is considered to be non investment grade)

I never said anything about a union of PCU and BVN. This is something you are making up as you go along.

PCU is the world's 5th biggest copper producer, it has virtually no debt, it has not suspended its dividend or curtailed its mining operations, but is continuing with a Billion dollar joint venture with Gold producer BVN, which will make it a FCX "lookalike". PCU already produces Moly, zinc, silver and gold.

I repeat: When have all currencies depreciated simultaneously?

If you make unsubstantial claim, be prepared to get called on it. If you posit that it is now, what have all of them declined against? You will, of course, go on the attack rather than give an answer

BHP does not have Gold exposure, surely you know this. Gold not oil or coal is under discussion.

Meanwhile, because of "depreciation" of the currencies against the "Dollar" where AUY has its mining operations and the steepness of the drop in the prices for their ores, it is my opinion that AUY will have an operating loss for the 4th quarter. ooops.

FCX has a similar problem with its Indonesian facility. But then there is Phelps Dodge. PD is going to contribute big time to 4th quarter results, possibly as much as a $6 Billion writeoff for Goodwill.

I assume you know what "Goodwill" is. (that's an ass between u and me.)

What are those currencies which are going to destroy AUY's and FCX"s balance sheets depreciating against?

After all, every currency is depreciating.

2008 Dec 09 01:40 AM

[bosun.j:]

Some guy who calls himself "Georealist" reveals just how unrealistic he truly is with his neo-CON slur "liberal".

2008 Dec 09 08:33 AM

[NOWHEREMAN:]

Thanks, I'm about as conservative as can be but, we are all in a Foxhole now and I appreciate whatever help I can get from whatever source I can get it.

Whatever goes around, comes around. IMO

2008 Dec 09 10:01 AM

[Vox Rationalis:]

Georealist: "As for currencies..they are ALL depreciating...the wannabe analysts who don't know that really should check the most recent liquidity and interest rate move by EVERY country."

I love people who know everything. Tell me...depreciating against what exactly?

2008 Dec 09 02:59 PM

[Duude:]

As long as the dollar is seen as a safe haven, gold will not rebound. However, the moment we can see a light with our economy, foreign money will be drawn out of the dollar and back into stocks and gold. We will then spend much more time refocusing our sights on how we printed our way out of this mess. The dollar will be the bubble of 2009. After a long deep recession, the Fed will find it difficult to raise interest rates as quickly as may be needed to sponge out the excessive liquidity in the new marketplace.

2008 Dec 09 03:21 PM

[update:]

Duude got it right.

We are in a deflationary trend, goldbugs.

I will let you figure out the rest. But just a little hint.

GOLD GOES DOWN IN DEFLATIONARY PERIODS.

The great thing is that you can just wait instead of rushing in and losing money until gold re-establishes an UPTREND.

gosh this is easy.

2008 Dec 09 09:43 PM

[User 30121:]

You deflationists out there, please tell me what prices are going down? Okay, gasoline. Name something else. Food? Not! Any other "necessities"? Not! So, where is the DEflation?

2008 Dec 09 10:12 PM

[Vox Rationalis:]

I think the correct play here is not long gold, but short US Treasuries. Think about it - today, 4-week treasuries sold at 0.00%. Nothing! There is almost literally only one way for Treasuries to go. And suppose the Fed and Treasury get it just right, removing liquidity as the banking system restart lending, such that there is no inflation? What happens to gold if there's no rampant inflation? Might go up a bit, might go up not at all. As the economy improves, and as risk aversion lessens, money will move into more risky assets, and away from Treasuries, causing them to lose value. And as the battle shifts from deflation to inflation, interest rates WILL go up, and Treasuries will become less valuable.

User XXX wrote: "You deflationists out there, please tell me what prices are going down? Okay, gasoline. Name something else. Food? Not! Any other "necessities&quot.... Not! So, where is the DEflation?"

As overall leverage has dropped, there are fewer dollars chasing about the same assets, and about the same level of production. As confidence has dropped, there are fewer people spending money in the marketplace, as people are tending to save more. This is a simple supply/demand problem. If there are fewer dollars in the market and the same amount of stuff, the dollars become more valuable in terms of the stuff. Prices decline.

Sure, it's theoretical, but there are already signs of it. Since the summer, orange Juice at Costco is down 5%. Rotisserie chickens are down 10% (I believe Costco prices fall faster than most if not all other stores). All commodities have dropped significantly, and the prices are working their way through. As for financial assets and real estate - do I even need to say it?

2008 Dec 09 11:13 PM

[Gerry Sullivan:]

Many things are going down in price besides gasoline. Certainly real estate is going down. Apparel is going down across the price spectrum.
Check Saks.

Toys are going down...check the latest flyer from ToysRUs.
Bacon is going down in the supermarket.
Steak restaurants are running specials. Check the Morton's web site.

Consumer electronics are going down faster than ever. Check Best Buy.

Used and new car prices are going down.

2008 Dec 10 08:24 AM