African Gold
Sorting the Wheat from the Chaff
Sector Market Weight, Gold Overweight
We recommend being market weight in the African gold space. We
recommend an overweight position in gold due to a positive investment
thesis and upside in H1/09, before de-stocking risks into H2/09.
With the high gold price, general stock performance over the last three
months has been relatively good. However, over the last 12 months, this has
been compounded by challenging environments, political issues and financing
concerns in the wake of the global slowdown. We recommend some exposure
to the sector by picking one or two solid stocks with low financing risk,
strong operational performance, with projects in countries which are relatively
politically stable.
We believe large and liquid is best and the Tier II golds offer the potential
for the best returns. Within RBC's research coverage universe of African
gold companies, we would recommend Randgold Resources due its strong
balance sheet, positive cashflow and potential for new mines/acquisitions. We
believe Red Back is also a good investment, albeit at an earlier stage of
company development. We recommend the following:
• Buy low risk stocks such as IAMGOLD, Randgold, and Red Back with
a nimble approach on price weakness. We believe Randgold is in the best
position due to a strong balance sheet and positive cashflow.
• Hold stocks with future value prospects such as Centamin.
• Sell development companies such as Axmin and Moto, with limited
value in the short term and funding concerns.
Consolidation a Theme
At present, many companies are more occupied with re-evaluating their
operations and projects in light of falling commodity prices and high gold
price. However, throughout this year, we believe M&A activity may be a
theme, as smaller companies struggle to survive. For the Tier II producers,
we expect the likes of Randgold and Red Back to be more active in this space,
picking up cheap bargains on distressed/undervalued companies with quality
assets. We believe Randgold may look to acquire Moto and Red Back will
look to increase its interest in MDL.
We believe the most of the tier I gold players will look for organic growth
at current operations. However, there may be some asset stripping, as they
look to tighten the reins and conserve cash. We do not expect the majors to
become significant acquirers in the African gold space themselves.
Tier II Shine Through Financing Risk
Our financial risk analysis stress tests shows Randgold, Red Back and
IAMGOLD to be the most durable with the least risk. We believe Central
African Gold, Axmin, Banro and Moto are at the most risk and vulnerable to
low gold prices.

African Gold – Sector Market Weight, Gold Overweight
On the whole, we recommend being market weight in the African gold space. With the high gold price, general stock performance
over the last three months has been relatively good. However, over the last 12 months, this has been compounded by challenging
environments, political issues and financing concerns in the wake of the global slowdown. We recommend some exposure to the
sector by picking one or two solid stocks with low financing risk, strong operational performance, with projects in countries which
are relatively politically stable.
At current price levels, we believe the investment opportunity for Emerging Producers1 and Tier III golds seems overly compelling.
However, we believe short term risk of implosion outweighs the longer term potential of heavy rewards. In short, large and liquid is
best and the Tier II golds offer the potential for the best returns. Within RBC Capital Market’s research coverage universe of African
gold companies, we would recommend Randgold Resources due its strong balance sheet, positive cash flow and potential for new
mines/acquisitions. We believe Red Back is also a good investment, albeit at an earlier stage of company development. We
recommend the following:
• Buy low risk stocks such as IAMGOLD, Randgold, and Red Back with a nimble approach on price weakness. We believe
Randgold is in the best position due to a strong balance sheet and positive cash flow.
• Hold stocks with future value prospects such as Centamin.
• Sell development companies such as Axmin and Moto, with limited value in the short term and funding concerns.