Spot gold prices and the shares of major producers have
taken a hammering during 2013, but the historic share price
lows are renewing interest in resource stocks for some
analysts, senior business reporter Simon Hartley reports.
Gold and producers of the precious metal have had a
forgettable year, with some major stocks down about 60%, the
spot gold price teetering near unsustainable margins,
thousands of jobs lost and scarce cash available for capital
While analysts are bullish on the outlook for spot gold
prices and see resource stocks in general offering good
value, the sector has some way to go towards making a full
Following gold's bull market run after the global financial
crisis, with investors seeking safe-haven investments, the
purse strings have since been loosened and appetite for risk
and higher returns has increased, with cash flooding back to
However, for the extraction and resource sector, China's
wavering growth trends and some mineral stockpiles have been
a disincentive for investors, who in many cases fled resource
stocks, many having became overly encumbered with debt from
the height of the metals commodities boom.
Announcements this week of the US Federal Reserve beginning
to taper its economic stimulus pushed gold down to about
$US1200, with expectations the US dollar will strengthen.
For many major gold producers to keep profit margins viable,
they have had to target high-grade gold reserves and close
their high-cost mines in an attempt to haul back production
costs by about $US200-$US250 per ounce, to within a range of
During the past year or so, spot gold hit a high of $US1751
($NZ2125) in November 2012 to low of $US1200 ($NZ1456) in
late May, a 30% decline.
During this week (the week up to and including today) gold
has been stubbornly at or below $US1200.
Over five years since 2008, spot gold had risen from a low of
$US735 to hit a record $US1900 in late 2011, but in the
following two years that decline equates to a 35% fall.
However, Craigs Investment Partners and Forsyth Barr analysts
are turning their eyes to resource-sector stocks, and while
still considered risky, offer some cheap buying worthy of
Craigs broker Peter McIntyre said while commodity prices were
down slightly during the past three years, resource-sector
stocks had underperformed by more than 30% and now looked
cheap; being well placed to benefit from an upturn in the
''With banks' [stock] relatively expensive, we're
recommending rotating into the resource sector,'' he said.
Key for the gold companies was them continuing to focus on
cost reductions, minimising capital expenditure, paying off
debt, use hedging only as a risk-mitigation tool and to
increase transparency over the new ''all-in sustaining cash
costs'' financial measurement tool, he said.
Mr McIntyre said the resource share price to equity ratio was
below its long-run average, and low against the rest of the
''The improvement in the US and European Union manufacturing
indexes suggests considerable scope for Chinese exports to
rise further, adding to growth,'' he said.
He said key areas of growth in industrial production in China
during the past year were ''solid recoveries'' of about 10%
each in electricity, steel and cement, suggesting further
growth acceleration in coming months.
Forsyth Barr broker Andrew Rooney said gold stocks had fallen
from earlier peaks by 62% to trade at historic lows, but at
share price to book value ratio, levels generally seemed at
the bottom of the gold cycle.
''Gold stocks have fallen significantly as the market
attempts to reflect the lower margins caused by lower gold
prices,'' he said.
On the outlook for spot gold prices, Mr Rooney said with
production costs having risen significantly it meant higher
gold prices were required to maintain supply.
''Under this scenario we could see a significant rebound in
the gold price over the next couple of years,'' he said.
However, for investors Mr Rooney cautioned that risks still
exist in gold stock; that further mine closures could happen
and that estimated gold reserve downgrades are inevitable,
''unless gold prices recover sharply in the near term''.
''While we would still look to mitigate these risks when
investing, we feel investors are being well paid to buy risk
and it now appears it is the right time to be contrarian,''
Mr McIntyre said spot gold's prospects were ''closely
linked'' to interest rates in the United States, the strength
of the US dollar and US equity risk premium.
''We believe headwinds for precious metal prices, and
specifically gold, still lie close to the surface,'' he said.
With the Federal Reserve in recent weeks having signalled a
delay to tapering, it had provided a ''less hostile''
interest rate and US dollar environments for gold.
''[However] we expect gold will continue to struggle to
attract investor inflows in an environment where the US
equity risk premium continues to decline,'' he said.
He said gold had not yet hit levels which could be considered
''cheap'' when compared with investing in equities or crude
That value might be why there was continued ''lacklustre
interest'' in gold ETFs (Exchange Traded Funds), with gold in
ETFs having ''stagnated'' at 1950 tonnes during the past two
and a-half months, he said.
Mr Rooney's preferred stocks include Eldorado Gold, Regis
Resources and Franco-Nevada, but he was avoiding stocks which
might be subject to reserve downgrades, such as Barrick,
Newmont and Goldcorp.
Mr McIntyre's preferred resource stocks in Australia include
Beadell Resources and Independence Group, Alacer Gold and