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

Comments are welcomed!

Monday, February 15, 2010

Can Gold Stocks Get a Little Respect?

Despite positive news expected on the earnings front, gold stock share prices could be volatile this week.

Gold producing stocks have been beaten down since mid-January, with the Market Vectors Gold Miners ETF ($GDX) sinking about 14 percent. Gold producing stocks backfilled what had been a 18 percent drop by climbing 3.6 percent during the past week, riding the wave of a weekly 2.3 percent gain for the yellow metal.

Four gold producers are scheduled to release earnings this week including IAMGOLD ($IAG), Agnico-Eagle ($AEM), Kinross Gold ($KGC), and Barrick Gold ($ABX). Based on earnings results already reported for many major gold miners, investors are expecting solid profits to be reported. But that may not translate into higher intraday prices on earnings release day or the near future for these companies based on recent experience.

Gold Stock Earnings Review

Gold producers that have already reported earnings have shown generally positive results for Q4 2009 largely on the strength of higher gold prices in the fourth quarter. Even so, stock prices declined on earnings announcement day.

On Thursday, February 4, South African-based Gold Fields ($GFI) announced a 44 percent gain in profits compared to the previous quarter. The bottom line boost for Gold Fields was driven higher by a rising gold price in the fourth quarter compared to the previous quarter. Shares of Gold Fields closed at $11.15 per share on February 4, down 6.7 percent for the day in response to the price of gold dropping 4.1 percent. Gold Fields also announced it was projecting lower gold production for Q1 2010 compared to Q4 2009, and Gold Fields CEO Nick Holland had to address investor fears that South Africa is considering nationalizing gold mines in the country.

On Monday February 8, African producers Randgold Resources ($GOLD), and Harmony Gold ($HMY) reported higher net income for the fourth quarter of 2009, based largely on a higher price of gold.

West Africa-focused Randgold announced record production for the quarter and a 14 percent production gain for 2009 over 2008. Annual earnings increased a stellar 79 percent, due to record gold production at its “flagship” Luolo gold mine in Mali, Africa. Despite the positive news, Randgold shares traded down 2.6 percent for the day as did Barrick Gold (-3.5%), Newmont Mining ($NEM) (-3.9%), Goldcorp ($GG) (-3.1%), and Yamana Gold ($AUY) (-4.3%).

After the closing bell on February 8, South African-focused Harmony Gold ($HMY) reported a 44 percent increase in operating profits despite a 1.2 percent fall in gold production. Harmony attributed the stronger earnings to a higher South African rand and lower cash costs. In line with a weaker gold price for the day, the company’s shares fell by $0.05, or 0.5%, to $9.41.

Ironically, good fourth quarter results were met with sell offs in the shares of Randgold, Harmony Gold, and Gold Fields.

Gold Stock Earnings Preview

In light of this experience, what can investors expect with Agnico-Eagle, Kinross Gold, IAMGOLD, and Barrick Gold as they report fourth quarter results this week?

On Wednesday of this week, IAMGOLD is scheduled to announce earnings before the market opens. A fourth-quarter per share profit of 16 cents is expected, up from 6 cents for the same quarter a year ago. IAMGOLD has announced plans to increase gold production to nearly 1 million ounces in 2010, up from 939,000 ounces in 2009. Uncertainty about IAMGOLD’s ability to meet guidance had increased with the announcement in early January that CEO Joe Conway would abruptly step down. The company has had great success recently at reducing costs and investors are looking for this trend to continue.

Agnico-Eagle reports after the market closes on Wednesday. Analysts expect fourth-quarter share profit of 25 cents, compared with a loss of 1 cent a year ago. More recently, Agnico-Eagle has experienced significant setbacks as they ramp up production projects to take advantage of record gold prices. Of particular concern are build out problems at the Kittila mine in Finland. The company reported a loss of 11 cents per share for the third quarter of 2009, disappointing investors. Despite solid analyst expectations, Agnico-Eagle could disappoint if expected higher capital expenditure requirements and higher operating costs for 2010 worked to diminish earnings in the fourth quarter.

Kinross Gold is also scheduled to announce earnings on Wednesday after the closing bell. Kinross’ consensus estimate is for a fourth-quarter profit per share of 16 cents, up from 9 cents a year ago. Kinross is also experiencing problems including harder than expected ore delaying expansion plans at its Paracatu mine in Brazil. Other projects are also seeing setbacks. Despite these problems, Kinross recently received positive news that China Investment Corp., a $300 billion Chinese sovereign wealth fund released information showing its largest position in gold stocks was $4.6 million in Kinross.

On Thursday, Barrick Gold reports before the market opens. Analysts are expecting fourth-quarter profit of 59 cents per share, up from 32 cents a year ago. Of all the major gold producers, Barrick is the most likely to beat estimates. Barrick remains a top pick in the Gold Stock Strategist newsletter. Announcing the removal of their fixed gold hedges on December 1, 2009 was a positive for Barrick. Since then, about one-third of company analysts have raised the company’s 2010 estimates. 2010 earnings are expected to surge about 25 percent over 2009. Moreover, Barrick has a recent tendency to report positive earnings surprises.

Of course, the macro environment remains uncertain with continued mixed economic news out of the United States: retail sales are up, the unemployment rate is down, while consumer sentiment is falling. Economists are forecasting a slow down for the U.S. economy in the second half of 2010.

Moreover, surprising news of a rescue package for Greece by other EU members could roil the euro, boost the dollar and drive gold lower this week. Officials are meeting today to work out the details of how the EU will address Greece’s debt problem.

Uncertainty also surrounds a surprising bank policy out of The People’s Bank of China (PBOC) last Friday. The Chinese central bank unexpectedly raised bank reserve requirements for the second time in 2010. Traders are digesting the impact of this event with commodities—including gold—trading in a narrow range today. Backlash from this hawkish move could lead to a further liquidation of dollar-denominated assets—including gold.

Uncertainty Reigns and Roils Gold Stocks

It is too early for gold stocks to move strongly higher given continuing sovereign debt problems in the euro zone and China's unexpected tightening of banking regulations in 2010. As a result, there seems to be more risk than reward in gold stocks for the next month and into the summer. Of course, emerging geo-political events in Iran, Afghanistan, and the Middle East add to the uncertainty of gold and gold stocks.

Uncertainty on the global financial scene could continue to roil the markets for gold and gold mining stocks. We could see a volatile ride up and down for miners of the yellow metal this week and over the next months, even with positive news on the earnings front.

Monday, February 8, 2010

Randgold Shares Fall Despite Record Production

Randgold Resources Ltd. ($GOLD), a West African-focused gold miner, reported record production, a 79 percent jump in annual reported earnings, and a 30 percent increase in its annual dividend. Despite the positive news, Randgold share prices dropped 2.6 percent today after showing early price and volume strength (see chart below).

Randgold announced it produced a record 488,255 ounces of gold in 2009 compared with 428,426 ounces in 2008, up 14 percent year-over-year. Randgold said the rising production was due to an expansion at its "flagship" Loulo project. The government of Mali owns 20 percent of Loulo.

Surging gold prices helped to drive annual revenues to $434 million for the year, up 28 percent from $339 million in 2008.

The company reported the price of gold received in the fourth quarter averaged $1,101 an ounce, 38 percent higher than Q4 2008.

2009 annual results show a profit of $84.3 million compared to $47 million in 2008, or 79 percent. Fourth quarter profits were up 185 percent from the third quarter and 315 percent on the corresponding quarter in 2008.

The board increased the annual dividend by 30 percent to 17 cents per share from 13 cents. The company's balance sheet shows $590 million in cash and no net debt.

For more information on the earnings report, the press release contains more information on specific projects and can be accessed here. A recent company presentation can be downloaded here.

Randgold has projected cash by-product operating costs of $500 per ounce of gold mined, more than 20 percent above the industry average of $413 an ounce. As a result, it is more highly leveraged than other unhedged gold producers. The company cash costs are lower than continental neighbors in South Africa including: Gold Fields ($GFI) at about $600, Harmony Gold ($HMY) at about $750, and AngloGold Ashanti ($AU) at $550 cash cost per ounce of gold.

The company also has a 33 forward price-earnings ratio based on recent consensus annual earnings estimates for 2010. The forward 2010 p/e ratio is higher than the average forward p/e ratio for Tier 1 and Tier 2 gold producers at 19. But Randgold also is scheduled to increase production from 530,000 ounces in 2010 to 750,000 ounces of gold produced in 2011 as the Tongon project in Ivory Coast initiates production in late 2010.

Randgold is a compelling growth story through 2015. If development properties come on line per the schedule, the company could be a 1.5 million ounce per year producer in five years. Political risk in East Africa and rising operating costs over time present more risk than gold producers in more politically stable parts of the world.

Randgold traded down 2.6 percent today to close at $67.85. Other major gold miners were also down with Barrick Gold ($ABX) at $34.57 (-3.5%), Newmont Mining ($NEM) at $44.41 (-3.9%), Goldcorp ($GG) at $34.41 (-3.1%), and Yamana Gold ($AUY) at $10.01 (-4.3%).

Spot gold traded flat today around the $1,063 an ounce level.

Thursday, February 4, 2010

Gold Fields Falls Hard

Earlier today, Gold Fields ($GFI) kicked off the Q4 2009 gold miner earnings season by announcing a 44 percent gain in profits over the previous quarter. The company earned net profits of $187 million during the fourth quarter of 2009 compared with earnings of $129 million in Q3 2009. Profits were $54 million during the fourth quarter of 2008. The bottom line boost for Gold Fields was driven higher by a rising gold price in the fourth quarter compared to the previous quarter.

The company reported attributable production of 900,000 ounces of gold for the quarter, down from 906,000 ounces in the previous quarter due to mining safety delays. The company estimates that Q1 2010 attributable equivalent gold production will be 850,000 ounces due to a decrease in the South African region operations for the quarter. On the positive side, production in other regions are expected to rise for the first quarter of 2010. Looking forward, the company stated it hopes to achieve greater consistency in production for 2010.

Nick Holland, CEO of Goldfields said the company is still on track to be a million ounce per quarter producer. “It’s just taking longer to hit our target, but if I look at all the brownfields opportunities around … and the big increase in production at South Deep, we’re in good shape to still hit that target in the medium term.”

On other less positive news for Gold Fields, cash costs were higher by 5 percent in U.S. dollars to $613 an ounce, owing to a stronger South African rand. Third quarter cash costs were $586 an ounce. South African gold producers sell gold in U.S. dollars and pay operating costs in rand.

Political fears about South Africa were also on the table for today as CEO Holland was reported to have said he has been given assurances by the South African government that it would not nationalize the nation’s mining industry.

Gold Fields sports a 9 forward price to earnings ratio (p/e) based on recent consensus annual earnings estimates for 2010. Gold Fields has the lowest forward p/e compared to other major and intermediate gold producers (see chart).

COMPANY

Estimated

2010 P/E RATIO

Gold Fields Ltd. ($GFI)

9

Buenaventura ($BVN)

11

Barrick Gold Corp. ($ABX)

13

Harmony Gold ($HMY)

13

Newmont Mining ($NEM)

14

Yamana Gold ($AUY)

14

AngloGold Ashanti ($AU)

15

Lihir Gold ($LIHR)

16

IAMGOLD ($IAG)

18

Kinross Gold ($KGC)

25

Agnico-Eagle ($AEM)

26

Goldcorp Inc. ($GG)

27

Eldorado Gold ($EGO)

29

Randgold ($GOLD)

33

Like other South African gold miners, Gold Fields is more highly leveraged to the price of gold than other major producers because of its high cash cost per ounce and lack of price hedges. As a result, earnings are much more volatile than the industry as a whole. In a rising price of gold environment, the company will outperform other major gold miners significantly on earnings growth. When the price of gold falls, Gold Fields earnings will decline more sharply.

Gold Fields’ volatility of earnings—when combined with continued mine safety problems, active unions, and fears of nationalization—create uncertainty and make it difficult for investors to have confidence in earnings forecasts.

Gold Fields is not a recommended play for investors. However, traders with an eye to moving in and out of stocks may find fertile ground in Gold Fields.

Gold Fields is the world's fourth largest unhedged producer of gold with mines in South Africa, Ghana, Australia and South America. The company has total attributable gold reserves of 81 million ounces and a massive resource base of 271 million ounces.

Shares of Gold Fields were trading at $10.96 per share midday on Thursday, down $0.98 or about 8 percent, on a lower price of gold, projections of falling gold production for Q1 2010, concerns about South Africa nationalizing gold mines, and disappointment with the interim dividend of 50 cents per share.

The price of gold is trading at $1,062 an ounce midday, down $47.50 or 4.3 percent.



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