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Sept 2011 - Denver Gold Show

  • The market cap size of the companies covered typically ranges from ~$25m to ~$2.5bn, are mostly gold, and depend on our perceptions of the management, project and country as to whether they are written.
  • This presentation is based on our observation and analysis of Gold and Gold Shares for about 35 years, (or since 1977).
  • We have used the GLD (SPDR) chart as a proxy for our comparisons as it does understandably have a close visual correlation to the Gold Price (in Slide 3).
  • It is no secret that over the past year most Gold Shares have underperformed the Gold Price as shown in the greater than US$20bn market cap Megas (in Slide 4). And in the greater than US$10bn market cap Majors (in Slide 5).
  • However in Australia, it has not been that simple with Regis and Alacer outperforming the Gold Price in the greater than >$1bn market cap category. And it should be borne in mind that the performances shown are in A$, which would have to be increased by at least 5% for US$.
  • And apart from Ramelius, most of the >$0.5bn Australian golds shown tried to recover in the recent rally, with a number of the movements explained by fundamentals such as Silver Lake's fall around May 2011 (shown by the purple line in the chart) in Slide 6, due to a fund redemption.
  • Measuring any form of recovery depends on the base, since as shown in the relationship with the Philadelphia Gold and Silver Index, XAU, - it hasn't recovered from the GFC setback.
  • The comparison with the XAU looks better on a 2-year base, or it did up to December 2010, after which it went sideways. We have seen this behaviour pattern before where the gold shares appear to ignore the gold price, and then suddenly recover by a multiple (as in Slide 10),
  • Examining the chart more closely, the gold shares rose to a point and then drifted sideways in late 1979, waiting for the gold price to drop back.
  • And then soared, with the gold price rising, coinciding possibly with the leverage aspect that would have become more noticeable from the reporting of profitability, and again even more so in 1982, (in Slide 11).
  • What leverage - well the impact that a rising gold price has on profitability and the NPV of the share as shown by the numbers in the table for the Australian gold producers that we cover.
  • In which their after tax profits double for a 33% increase in the gold price from US$1500/oz to US$2000/oz, as in the case of Alacer, Silver Lake & Focus (in Slide 12).
  • Or to put it another way, what gold price does the market appear to be basing the share prices on as in Silver Lake at US$1380/oz and Focus Minerals at US$1350/oz (in Slide 13).
  • So on that historic gold price chart, where are we now ?. Do the shares reflecting a gold price about $1300/oz, correlate to when the market was at US$300/oz in 1979, and hence infer that the equilibrium level after the "spike" is $2000/oz, or are we further along in a different scenario?.
  • The reality is that the Gold Producers are making money. As Focus Minerals remarked at the Australian Diggers and Dealers Conference in early August 2011, "we sold 1000oz gold and received more than $1.7m !!" (as in Slide 15).
  • Hence despite the recent rally, Gold Shares or Gold Equities appear to be overdue for an upward correction that may be partly driven by profitability from analysts estimates and/or reporting by companies.
  • Written by: Keith Goode
  • Sunday, 18 September 2011

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