I have been attending the European Gold Forum in Zurich the past two days and one has to say there has been something of a sea change in mood given the seemingly positive sustained performance of the gold and silver markets so far this year. As usual there have been some extremely interesting presentations, but those who have been looking at the likely progress of the gold price this year have been bullish on the yellow metal to a greater or lesser extent. On the greater side we have Egon von Greyerz of Matterhorn asset value who preaches a huge rise in gold and silver prices - not so much in real terms, but more related to a virtual meltdown in global economies and currencies with gold keeping its value and everything else collapsing. See: Gold to $10,000 - VON GREYERZ. Be afraid. Perhaps the more conservative approach was from Martin Murenbeeld of Dundee Economics who comes up each year with a series of forecasts for likely best performance, worst performance and mid-range and then takes a weighted average approach. He was looking for a rather more muted year end price of $1,293 See: Murenbeeld cautiously positive on gold for the year ahead.
But a rather different approach to analyzing major gold miners was taken by Mike Bedford, Consultant to precious metals consultancy Metals Focus. He opened by commenting that many of the corporate presentations were rather short on definitive numbers, but long on platitudes!
His rather different approach to analysis of the relative performances of the gold mining majors is achieved by initially combining data from virtually all the top gold miners as though they were a massive single company and then use the overall results to compare relative performances of the individual stocks. The companies for which he combined the data to come up with his overall analysis were Barrick (NYSE:ABX), Newmont (NYSE:NEM), AngloGold (NYSE:AU) , Gold Fields (NYSE:GFI), Goldcorp (NYSE:GG), Harmony (NYSE:HMY), Sibanye (NYSE:SBGL), Agnico Eagle (NYSE:AEM), Polyus Gold (OTCPK:OPYGY), Newcrest (OTCPK:NCMGF) and Randgold (NASDAQ:GOLD). Between them these Tier 1 gold miners produce around one third of global gold output.
The approach is an interesting one in the light of recent moves by the major miners to cut costs, debt and capital spending. On an overall basis Bedford reckoned that from his analysis for example the industry as a whole has cut back exploration expenditure too much, as they have on what he described as 'staying-in-business' costs and perhaps even capital spending has been cut to a lower level than it should have been on an overall basis. Obviously when one compares individual companies with the overall figures some appear to perform much better than others so it becomes a valuable tool for comparative analysis.
The standout company from his analysis was probably Randgold, followed by Agnico Eagle. Randgold is what in political terms might be considered a benevolent dictatorship and thus is able to adjust much more rapidly than some of its peers which perhaps make decisions by committee which can slow adjustments down. Randgold has also worked to a lower gold price assumption than most of the others and has also been particularly good at controlling costs and debt. It is probably the only one of the companies included in the analysis which is currently debt-free.
Bedford came up with a series of competitive metrics showing the mining companies in different lights. Overall he sees the companies as having under-invested recently in their efforts to bring costs down and notes that reserve life has fallen (18.5 years on average), although perhaps not too much should be read into this as this can climb rapidly if the gold price increases. Net debt had surged in the profligate years before the gold price turned down and has now come back down sharply, although the overall number of shares in issue has risen 17% over the past few years reducing most of the per share metrics. Dividend payments are not great averaging out at around 1%, but overall he still sees the gold sector as quite cheap - but could certainly do better as it adjusts.
This approach to comparative gold stock valuations looks to be a valuable exercise, but has only so far been applied to the majors. In a Q&A session Bedford suggested he'd like to try and run the same kind of analysis for junior producers (and presumably for mid-tier ones too). One suspects this would show up some very different figures indeed, particularly given the capital constraints under which the smaller companies have been operating.
For more information on this approach to stock valuations contact Metals Focus.
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