Around the Markets: Big returns sought in small mines
By Madelene Pearson and Tan Hwee Ann Bloomberg News
Published: July 28, 2006
MELBOURNE Surging gold prices this year have put bullion miners among the best-performing Australian stocks. And some investors are thinking anything but big.
The smallest producers among them, including Bendigo Mining and Agincourt Resources, now are set to outperform such giants as Newcrest Mining, said Michael McCormick, a manager at Leyland Private Asset Management who owns shares of Bendigo and Agincourt.
Those two companies, along with Pan Australian Resources, Sino Gold and Dominion Mining, are exploring for bullion or starting production. Their stock prices should take off as output begins and the price of the precious metal stays high, McCormick said.
Jim Rogers, an investor who foresaw the start of a commodity rally in 1999, predicted in April that gold was likely to soar to $1,000 an ounce, or 28.3 grams, from $630 now. McCormick said that gold would approach the $873 record reached in 1980, possibly this year.
"There's still a huge amount of value in the Australian gold sector," said Rogers, a Sydney-based money manager. In any gold market, the strength usually starts with big companies and eventually reaches the smaller ones, he said. "You know you are in a bull market when the smaller ones are starting to run."
The stock of producers of raw materials including gold have risen 9.1 percent this year, based on their industry group within the Standard & Poor's ASX 300 benchmark index of Australian stocks. The index has gained 5.2 percent.
Bendigo, which is based in Melbourne, has fallen 10 percent and Agincourt, based in Perth, is 22 percent lower.
Other nascent producers that McCormick holds include Leviathan Resources, which is down 36 percent. Ballarat Goldfields, which is on his "watch list," is down 31 percent. Prices for start-up producers have fallen as other gold stocks pared their gains this year because the start-ups are thinly traded. That exacerbates market swings, he said.
Gold stocks also are among the best performers this year in South Africa and Canada as well. Gold Fields, based in Johannesburg, has risen 29 percent, and Bema Gold of Canada is up 88 percent.
In the United States, 15 of 20 gold mining companies with market values greater than $50 million are outperforming the S&P's 500 index.
Bullion futures are up 24 percent this year and reached a 26-year high of $732 an ounce in May. Oxiana, the second-biggest Australian gold miner by market value, has jumped 80 percent this year, among the best gains in the S&P/ASX 300. Resolute Mining has advanced 52 percent.
Companies that have not hedged, or locked in the price of the gold they expect to produce, and have output of 100,000 ounces or more a year will be among the best performers, McCormick said.
Newcrest, the biggest Australian gold miner by market value, produced 1.53 million ounces in fiscal 2006. The company has forward- sold about 88 percent of its forecast 2007 gold output, Merrill Lynch said in a report this week.
Bendigo Mining, which produced its first gold this month, is forecasting output of 200,000 ounces a year over three years, reaching 600,000 ounces a year at full production. It has not locked in future prices.
Ballarat Goldfields, which began gold output in December, is targeting production of 100,000 ounces a year, increasing to 200,000 ounces in three years. Its shares are up 10 percent in the past year.
Shares of smaller gold companies like Leviathan and Bendigo are trading at as little as half their net present value, giving them more potential for higher returns, said Pieter Bruinstroop, a commodities analyst at Ord Minnett in Melbourne. Net present value is a calculation of the current value of expected cash flows.
If Rogers's prediction of $1,000 gold is right, the rally in gold shares will not end soon. Rogers, who wrote the book "Hot Commodities," published in 2004, did not predict when the metal would reach that price.
McCormick said that the start-up miners would be the shares to own in that environment.
"You get more leverage from the emerging producers," he said.
MELBOURNE Surging gold prices this year have put bullion miners among the best-performing Australian stocks. And some investors are thinking anything but big.
The smallest producers among them, including Bendigo Mining and Agincourt Resources, now are set to outperform such giants as Newcrest Mining, said Michael McCormick, a manager at Leyland Private Asset Management who owns shares of Bendigo and Agincourt.
Those two companies, along with Pan Australian Resources, Sino Gold and Dominion Mining, are exploring for bullion or starting production. Their stock prices should take off as output begins and the price of the precious metal stays high, McCormick said.
Jim Rogers, an investor who foresaw the start of a commodity rally in 1999, predicted in April that gold was likely to soar to $1,000 an ounce, or 28.3 grams, from $630 now. McCormick said that gold would approach the $873 record reached in 1980, possibly this year.
"There's still a huge amount of value in the Australian gold sector," said Rogers, a Sydney-based money manager. In any gold market, the strength usually starts with big companies and eventually reaches the smaller ones, he said. "You know you are in a bull market when the smaller ones are starting to run."
The stock of producers of raw materials including gold have risen 9.1 percent this year, based on their industry group within the Standard & Poor's ASX 300 benchmark index of Australian stocks. The index has gained 5.2 percent.
Bendigo, which is based in Melbourne, has fallen 10 percent and Agincourt, based in Perth, is 22 percent lower.
Other nascent producers that McCormick holds include Leviathan Resources, which is down 36 percent. Ballarat Goldfields, which is on his "watch list," is down 31 percent. Prices for start-up producers have fallen as other gold stocks pared their gains this year because the start-ups are thinly traded. That exacerbates market swings, he said.
Gold stocks also are among the best performers this year in South Africa and Canada as well. Gold Fields, based in Johannesburg, has risen 29 percent, and Bema Gold of Canada is up 88 percent.
In the United States, 15 of 20 gold mining companies with market values greater than $50 million are outperforming the S&P's 500 index.
Bullion futures are up 24 percent this year and reached a 26-year high of $732 an ounce in May. Oxiana, the second-biggest Australian gold miner by market value, has jumped 80 percent this year, among the best gains in the S&P/ASX 300. Resolute Mining has advanced 52 percent.
Companies that have not hedged, or locked in the price of the gold they expect to produce, and have output of 100,000 ounces or more a year will be among the best performers, McCormick said.
Newcrest, the biggest Australian gold miner by market value, produced 1.53 million ounces in fiscal 2006. The company has forward- sold about 88 percent of its forecast 2007 gold output, Merrill Lynch said in a report this week.
Bendigo Mining, which produced its first gold this month, is forecasting output of 200,000 ounces a year over three years, reaching 600,000 ounces a year at full production. It has not locked in future prices.
Ballarat Goldfields, which began gold output in December, is targeting production of 100,000 ounces a year, increasing to 200,000 ounces in three years. Its shares are up 10 percent in the past year.
Shares of smaller gold companies like Leviathan and Bendigo are trading at as little as half their net present value, giving them more potential for higher returns, said Pieter Bruinstroop, a commodities analyst at Ord Minnett in Melbourne. Net present value is a calculation of the current value of expected cash flows.
If Rogers's prediction of $1,000 gold is right, the rally in gold shares will not end soon. Rogers, who wrote the book "Hot Commodities," published in 2004, did not predict when the metal would reach that price.
McCormick said that the start-up miners would be the shares to own in that environment.
"You get more leverage from the emerging producers," he said.