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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Sunday, May 31, 2009

China Fears Devaluation of U.S. Dollar

Treasury Secretary Geithner will be traveling to China this week to discuss the U.S. government's extraordinary deficit and debt position. The Chinese government has been strongly expressing concerns this year about Congress' and the Obama Administration's fiscal and monetary excess eventually leading to a devaluing of the U.S. dollar.

China is concerned that their U.S. dollar foreign reserves (about $1 trillion) will lose value as the U.S. government increases the national debt and the Federal Reserve finances it by buying up Treasury bonds that the private sector won't buy.

Dollar devaluation will increase inflation and boost the price of gold much higher.

China is likely to eventually reduce its exposure to U.S. Treasury bonds by using their largely U.S. dollar denominated foreign reserves to acquire competitors abroad through state-owned enterprises.

A recent CNBC interview provides a cogent and educational analysis from Martin Hennecke, Associate Director at Tyche Group, on why the price of gold is going to rise due to higher inflation. This interview was recorded at CNBC on
Thursday, May 28, 2009.

Here are a couple of excerpts from the interview:

"The banking crisis, the subprime crisis, hasn't been fixed at all, just simply transferred the problems from the banks to the books of the governments, especially in the Western countries. And now this is why the Federal Reserve has to raise, and the U.S. government has to raise such insane amounts of money --- 1.8 trillion dollars, is likely to be the deficit for this year. That's just the lower estimate, even Obama's government came out saying that [they] likely have to revise this due to the unemployment figures..."

"Inflation is going to increase very substantially as a result of all this money printing as they can't really raise all these funds that they need to raise for the bailouts and they will have to print substantial amounts of debt. Quantitative easing will get worse. As you have said, the Chinese are getting extremely nervous of this. We just had a projection from [the] Dallas Federal Reserve President, saying that the unfunded liabilities of the pension and healthcare in the U.S. is $99 trillion. So inflation is going to be a major issue going forward, so even for cautious investors, they need to invest just to protect their wealth. Gold definitely is one of the asset classes we like..."

Good luck to us all,

The Gold Stock Strategist

Saturday, May 23, 2009

Interview with Hawthorne Gold CFO

I've created a new company with a focus that goes beyond gold mining producers for investors called the Self Directed Investor. The Self Directed Investor is a financial media company, which uses audio, video and articles to empower investors through ideas and education.

This week, I interviewed Patrick McGrath, the Chief Financial Officer of Hawthorne Gold Corporation (HWTHF). The interview is available in audio format.

Hawthorne Gold is a Canadian-based gold exploration and development company with properties in British Columbia, Canada. Hawthorne is led by Richard Barclay and Michael Beley who were formerly associated with Bema Gold, now with Kinross Gold (KGC), and Eldorado Gold (EGO).

Hawthorne's goal is to become a junior gold producer
in the latter part of 2009 with their Table Mountain project and to continue resource development at the nearby Taurus deposit, and Frasergold deposit in the south central British Columbia Cariboo region.

Hawthorne has a very interesting story. I think you will enjoy the interview.


Gold Stock Strategist

Full disclosure: I do not own any shares in Hawthorne Gold.
The information provided in this post is believed to be correct, but not guaranteed. Investing in junior gold miners entails risks. Readers are responsible for their own investment decisions. Do your own due diligence.

Wednesday, May 20, 2009

Gold Majors Post Losing Q1 Earnings Season

On May 4, I published an article citing the fact that it is always difficult to project quarterly earnings for gold mining companies. Now that the majors have all reported, let's see how they performed versus consensus estimates.

There were some big surprises on both the up and down side. This earnings season Gold Fields Ltd. (GFI), and Goldcorp Inc. (GG), IAMGOLD (IAG), and Yamana Gold (AUY) surprised to the upside.

Surprising analysts to the downside were Harmony Gold (HMY), Eldorado Gold (EGO), Kinross Gold Corp. (KGC), Agnico-Eagle Mines (AEM), and Buenaventura (BVN).

Barrick Gold (ABX), AngloGold Ashanti (AU), Newmont Gold (NEM), and Randgold (GOLD) were all within 10 percent of consensus estimates.

Overall, major gold miners lost this quarterly earnings season with 4 companies outperforming consensus estimates, 5 missing estimates , and 4 companies were within 10 percent of consensus estimates.

The story for those companies that outperformed expectations was very similar: (1) increased production and (2) lower costs. This was just as I expected.

The table that follows provides actual reported earnings per share and consensus estimates.

Gold Miner Earnings Calendar, Actuals & Forecasts for Q1 2009
(click to enlarge)

Gold miners that can increase production through improved operations or development while controlling costs are the ones that will be successful through this rising price of gold environment.

Tune in next quarter to see how the gold majors fare!


The Gold Stock Strategist

Tuesday, May 19, 2009

GFMS Quarterly Gold Forecast Report is Released

I received the following in an email today from GFMS announcing that their Quarterly Gold Forecast Report has been released. GFMS provides the most comprehensive analyses of gold bullion markets (among other precious metals) than any other group and I recommend their work for those who want to really understand how the gold markets work.

"GFMS expects the annual average price of gold to rise for an eighth consecutive year and to a fresh record high in 2009. Quantitative easing in the United States and elsewhere, Chairman Bernanke's decision to monetise US government debt, coupled with ambitious fiscal stimulus programmes around the world could well spark inflationary pressures and thereby significantly widen gold's investment base. Furthermore, with global economic growth set to contract for the first time in the post-war era, the outlook for traditional investments arguably remains very poor, in spite of recent rallies in global stock markets. This, plus ongoing strains in the financial system and worries about the health of major banks could well ignite fresh safe haven inflows into the gold market.

On the other hand the behaviour of gold's supply/demand fundamentals in the first quarter - chiefly plummeting fabrication demand and surging scrap supply - showed that even strong investment flows into the yellow metal cannot necessarily be relied upon to drive prices higher. The tension between these forces will continue to be critical to price determination in the months and years ahead."

Last week at the Hard Asset Conference in
NYC, I listened to Philip Klapwijk, Executive Chairman of GFMS, Ltd., make an outstanding presentation on the current dynamics of the gold market consistent with today's announcement.

There are a lot of crosswinds in the gold markets and GFMS does a great job at pulling apart and examining each factor. I encourage those with greater interest in what drives the price of gold to review the GFMS Ltd. Powerpoint presentation delivered last week in NYC.


The Gold Stock Strategist

Wednesday, May 13, 2009

Junior Gold Producer "In Situ" Valuation Analysis

It has been almost a year since I published my first "in situ" analysis of junior gold miners. I have also added several emerging gold producers to the analysis.

The "in situ" analysis compares the relative value of junior gold producers based on market capitalization (MC) and measured, indicated, and inferred (MI&I) reserves. Dividing MC by MI&I provides a dollar amount per ounce of reserves that is useful for identifying the most undervalued companies relative to one another.

The "in situ" analysis is just a first step and can be misleading regarding the valuation of companies with considerably more potential gold reserves than currently reflected in Canada's National Instrument 43-101.

For example, San Gold is at the bottom of this valuation technique with a much higher market cap relative to MI&I. This is misleading regarding San Gold's valuation. San Gold hasn't updated their MI&I since December 2006 when they reported 1.6 million ounces of gold MI&I. This analysis doesn't capture several extremely positive high grade drill results in the Hingeline zone near their mill that San Gold has recently reported here, here, here, here, and here. Investor's have bid the price of San Gold shares based on these promising drill results and Goldcorp's bonanza gold zone in the nearby Red Lake Gold Belt. Investors have recognized this potential by bidding up the share price. Several analysts recognize this potential as well.

Other companies similar to San Gold that are likely to have unreported and significant additional resources include Gold-Ore, Jaguar, Jinshan, Metanor, and others. If these companies continue to prove up resources at current share prices, they would become more undervalued using the "in situ" analysis.

Another limitation of using the MI&I standard is it does not include the value of polymetallic reserves sometimes found with gold deposits, including silver, zinc, copper and other metals. These non-gold reserves can be used to offset the production cost of mining and milling gold.

The "in situ" valuation technique complements cash flow multiple valuation and is only part of my overall assessment of these companies. Qualitative factors like political risk, currency exchange risk, property rights risk, remote site risk, single mine risk, operational risk, and management competence risk are also important considerations in evaluation junior gold producers.

The following is my analysis of 31 emerging gold producers using a market capitalization divided by measured, indicated, and inferred gold reserves based on closing share prices on May 12, 2009. The lower the dollar value, the more undervalued the stock is relative to others.

An interesting point made before by the Gold Stock Strategist and other observers is that the higher market cap companies generally receive a higher valuation in the market, probably due to a perception that larger is less speculative and safer. Thee data generally support that observation, though there are a few outliers.

My conclusion based on this analysis and other data is that "fair value" consolidations among juniors like the New Gold and Western Goldfields merger make a lot of sense and should be welcomed by junior gold mining investors.

I also believe that any company with MC/MI&I below $100 an ounce could be considered a "deep value" junior gold producer, especially if they: (1) have a record of solid execution of their business plan, (2) are quickly ramping up gold production, and (3) have more than 2 million ounces of gold resource (MI&I).

COMPANY ............. MC/MI&I
1. Oceanagold................. $8
2. Kinbauri Gold............. $11
3. Gold-Ore Res............. $18
4. Vista Gold................... $19
5. Jinshan Gold.............. $20
6. Hawthorne Gold......... $20
7. ATW Ventures............ $28
8. Allied Nevada............. $30
9. New Gold.................... $31
10. Timmins Gold........... $33
11. New Guinea Gold...... $34
12. Metanor Res............. $38
13. Great Basin............... $41
14. La Mancha................ $43
15. High River................ $43
16. NovaGold.................. $46
17. MDN Inc................... $46
18. Castle Gold................ $52
19. Santa Fe Gold............ $56
20. Capital Gold............... $62
21. Alexis Minerals.......... $70
22. Claude Res................ $72
23. Richmont Mines....... $74
24. Troy Res ................... $96
25. Golden Star............... $105
26. Jaguar Mining........... $107
27. Minefinders............... $110
28. Aurizon Mines........... $119
29. Alamos Gold.............. $219
30. Gold Resource*......... $239
31. San Gold.................... $277

* internal gold equivalent resource estimate

This is another way to think about how to value emerging and current junior gold producers. I hope this is useful for readers.


Gold Stock Strategist
Full disclosure: I own shares in several of the companies listed above. The information provided in this post is believed to be correct, but not guaranteed. Investing in junior gold miners entails risks. Readers are responsible for their investment decisions. Do your own due diligence.

Friday, May 8, 2009

Where Is the Price of Gold Headed?

Readers of the Gold Stock Strategist often ask me, "How high will the price of gold eventually rise?" The truth is that I don't know how high it could eventually hit. Some analysts claim they know it will hit $1,600, $2,000, and even $8,000 an ounce. I'm not so sure about those projections. But, here is what I do know.

Gold is hovering around $900 an ounce with fundamental global financial conditions continuing to support bullish expectations for the price of gold. Gold as a safe-haven play has retreated as investors gain a heightened taste for risk are moving back into equities. Replacing the safe-haven appeal for gold is the inflation fear and increasing numbers of investors believe the U.S. and global economies may have bottomed.

China remains concerned about U.S. monetary and fiscal policy driving the value of their U.S. denominated foreign reserves down sharply.

The bond vigilantes are stirring a bit after taking time to swallow the extraordinary $1.8 trillion U.S. budget deficit projected by the Congressional Budget Office.

The U.S. dollar has come down sharply in value over the past month reflecting these concerns.

If China and the bond market are right, higher price inflation should begin to appear by the end of this year, maybe sooner. Have you looked at the recent rise in the price of oil? Spot WTI is now around $58 a barrel today despite extraordinary levels of inventory.

There are a lot powerful forces that can drive the price of gold down including increased central bank & IMF sales/leasing, lower Indian seasonal demand, and increased consumer scrap gold sales. As the price of gold goes up, the stock of gold mined throughout history can quickly come on the market. That makes it very difficult to predict the price of gold too far into the future. However, I do think the price of gold should rise over the next year or two. How high is anyone's guess.

Despite this uncertainty I have to develop an assumption for the price of gold going forward for modeling purposes. Right now, I expect the price of gold to easily end the year above $900 an ounce and possibly cross the $1,000 an ounce mark by end of year given the fundamental forces listed above.

Global interest rate cuts, unprecedented financial bailouts and budget deficits globally, combined with exploding supplies of money can reasonably be expected to create general currency devaluation and a return of higher than average price inflation as early as the end of this year.

Consequently, analyses on the Gold Stock Strategist are now using conservative "price of gold" assumptions equal to $900 an ounce for 2009 and $950 an ounce for 2010.

Don't you wish there was a "price of gold" crystal ball for sale? It would make forecasting so much easier!

Have a great weekend!


The Gold Stock Strategist

Wednesday, May 6, 2009

Gold Producer's Mid-Season Earnings Review

There are two items that investors are looking for with gold mining companies. The first item is earnings. Cash is king in the aftermath of the greatest global financial deleveraging in 80 years and investors want to see increased earnings. Beating consensus estimates is the name of the game in this environment.

The second item is reduction in the cash costs per ounce to produce an ounce of gold and other expenses (general and administrative, exploration, development, & maintenance). Controlling costs goes right to the bottom line and that’s what investors are increasingly focused on.

The following is a the chart of the YTD performance of 10 major gold miners with their actual 2008 cash cost per ounce along the x axis. Now in general, those companies that have done well this year have relatively low cash costs, like Yamana Gold or Buenaventura.

Others may have relatively lower cash costs per ounce, but have market or operational factors that are projected to significantly change their cash cost projections for 2009.

For example companies that mine base metals as by-products have large by-product credits. These by-product credits are subtracted from the cash cost per ounce of gold. Now, because, base metals prices crashed in the second half of 2008, cash costs per ounce to mine gold will rise in 2009 for companies with a large share of gold mining by-products.

Other companies may be reducing costs that are not captured by cash cost per ounce and so the chart could be misleading. For example, Gold Fields is reducing their capital expenditure for exploration, development and mine maintenance by 40 percent in 2009 and that is probably why their share price has done well despite the fact that they have a high cash cost per ounce profile for 2008.

Barrick on the other hand has relatively low cash costs, but had higher cash costs reported in the latest earnings call. Barrick said that it had net cash costs of US$404 per ounce in the most recent quarter, compared to net cash costs of US$250 per ounce a year earlier. You can see on the chart that their 2008 cash costs per ounce of gold mined was $337. Barrick has a large share of by-product credits and has been hurt by the base metals crash. This was expected and why Barrick is lagging other major gold producers in share price performance.

Last week, four companies released earnings: Agnico-Eagle, Barrick Gold, Buenaventura, and Newmont mining.

Here is a short synopsis of what they announced.

Newmont’s (NEM) earnings per share was cut in half, from $0.80 a share from a year earlier to $0.40. Excluding special items, Newmont’s earnings per share came in at $0.44, better than consensus estimates of $0.42. The company sold 1.3 million ounces of gold in the quarter at $906 ounce. Their outlook for 2009 is for total gold sales of 5.2 to 5.5 ounces of gold with costs applicable to sales of $400-$440 an ounce.

Barrick Gold (ABX) also reported earnings per share for the first quarter of $0.34, excluding special items, 2 cents lower than consensus estimates of $0.36. Realized prices for gold were down from the same period a year ago, from $925 an ounce to $912 an ounce, and cash costs reached $484 an ounce. Barrick reiterated its 2009 production guidance of 7.2 million to 7.6 million ounces of gold with cash costs per ounce of US $360 to US $385. The Company expects higher production rates and lower costs in the second half of the year.

Buenaventura (BVN), a Peruvian precious-metals producer, posted first- quarter earnings of 39 cents a share compared with a loss of 25 cents a year earlier. Earnings per share still fell short of the 45-cent consensus estimate. Buenaventura sold gold at an average of $911 an ounce in the quarter, down 2 percent from a year earlier. The Company is also taking advantage of gold prices after unwinding their hedge book last year. General and administrative expenses and exploration spending was cut by almost 40 percent from last quarter.

Toronto-based gold miner Agnico-Eagle (AEM) nearly doubled its quarterly profit compared with a year ago, helped out by one-time gains. Earnings were 35 cents per share, compared consensus estimates of 10 cents a share. Gold production in the first quarter was 91,812 ounces. The company said gold output in 2009 is expected to be 550,000 ounces to 575,000 ounces, rising to about 1.2 million ounces in 2010.

After the market close yesterday, Kinross Gold (KGC), Canada’s third- largest gold producer, said net income was 11 cents a share, equal to last year’s 11 cents. Earnings, excluding some one-time items, were 10 cents a share, falling below the consensus estimate of 13 cents. Gold-equivalent production during the quarter rose 59 percent to 526,888 ounces, while costs decreased 11 percent to $419 an ounce.

Also yesterday, Yamana Gold (AUY) surprised analysts by reporting net earnings per share of 12 cents or 8 cents adjusted, beating consensus estimates of 6 cents a share adjusted. Gold production rose 15 percent to 271,482 ounces, falling below company targets of 290,000 ounces. Costs per ounce rose to $379 from $371 in the year-before quarter Yamana confirmed guidance for production of between 1.3 million and 1.4 million gold equivalent ounces in 2009; 1.4 million and 1.5 million in 2010; and building to 2 million ounces by 2012.

Tomorrow, Eldorado Gold (EGO), Gold Fields (GFI), Goldcorp (GG) and Randgold (GOLD) will report their earnings and on Friday, Harmony Gold reports.

Next week IAMGOLD (IAG) and AngloGold Ashanti (AU) will report their earnings.

I am most interested in the earnings reports of the African gold miners Gold Fields, Randgold, Harmony Gold, and AngloGold Ashanti.

My reasoning is that company costs are denominated in the South African Rand and other African currencies, but revenue comes from gold sales in U.S. dollars. A relatively strong dollar in the first quarter of 2009 should help to increase margins for the African miners. The South African miners, based in Johannesburg, produce most of their gold in South Africa, the world’s third-biggest producer after China and the U.S. Another reason is that last year's production was stilted with regional power outages and mine accidents that have, so far, not repeated themselves.

AngloGold is expected to post 43 cents a share excluding one-time items, after a 50 cent loss in the preceding quarter.

Gold Fields, reporting tomorrow is expected to double earnings from a year ago to 10 cents a share.

Harmony Gold’s earnings, released a day later, are expected to rise 20 percent from a year earlier to 22 cents a share.Of course, Randgold mines primarily in West Africa and is more of a growth play than the other African gold miners. Ounces produced in 2009 should increase by almost 15 percent from 2008. Quarterly earnings are expected to be 15 cents per share for Randgold.

Judging by the results at halftime for the major gold miners first quarter 2009 earnings season, the score is Miners 3, Analysts 3 with 7 more companies to report in the next 7 business days.

So as we enter the second half of the earnings season for gold producers, keep your eye on whether they beat consensus earnings and whether they are effectively controlling costs, especially cash cost per ounce. Companies that execute well on these two indicators are likely to finish the year at higher share prices.


Gold Stock Strategist
Full disclosure: I do not own shares in any of these companies.

Monday, May 4, 2009

Gold Miner Earnings Forecasts for Q1 2009

It is always a difficult task to project quarterly earnings, especially for gold mining companies. But analysts have a healthy go at it, hoping to be within a few percentage points of the actual earnings per share.

So far, for the 13 major gold producers the Gold Stock Strategist follows and for which analysts kindly provide quarterly earnings forecasts, the analysts have two "close enough" consensus forecasts, one "what did we miss?" forecast, and one real whopper of a miss.

The table that follows shows that four of the thirteen gold miners covered reported quarterly earnings last week. The four companies that reported were Agnico-Eagle (AEM), Barrick Gold (ABX), Buenaventura (BVN), and Newmont Mining (NEM). Analysts appeared to miss Agnico-Eagles tax recovery of $38.6 million equal to $0.25 per share in earnings. C'est la vie.

Gold Miner Earnings Calendar, Actuals & Forecasts for Q1 2009

(click to enlarge)

This upcoming week will be a big one for gold miners with 7 of the 13 large gold mining companies I cover reporting quarterly earnings.

On Tuesday, Kinross Gold (KGC), Yamana (AUY), release their earnings reports.

On Thursday, Eldorado (EGO), Gold Fields (GFI), Goldcorp (GG), and Randgold (GOLD) report.

And on Friday, South African miner Harmony Gold (HMY) reports quarterly earnings.

IAMGOLD (IAG) and AngloGold Ashanti (AU) report Q1 2009 earnings during the week of May 11-15.

This is the big week for investors in the largest gold mining companies. Let's hope the week ends on a positive note.

The Gold Stock Strategist

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