ASX Gold Sector Review
We recommend purchase of ASX golds - with
preference for Newcrest & Kingsgate
Event
Our review of the Australian gold industry and ASX producers highlights that
producers are low cost, cash rich and mostly growth oriented companies. We
believe gold could dip below US$900 but forecast a test of US$1,000 in late
09/early 10. In our view, this is a good time to buy gold shares and our
preference is Newcrest & Kingsgate.
Gold Price - a dip then a rally
• Near Term Weakness: We forecast gold to trade down through US$900 in
the current quiet seasonally weak period and then rally through US$1,000
late in 2009 or into 2010.
• Positives: There are many positives for gold: a bearish US$, investment
demand is strong esp for ETFs, Central Bank sales are modest, twin deficits
in the US have surged and real interest rates are very low. The rapid
expansion in money supply is expected to lead to global inflation worries
later on.
• Gold Forecast: We assume US$950/oz through CY12.
Australian Gold Sector
• Foreign Ownership: Back in 1996, foreigners accounted for a mere 9% of
Australia's total, now ~60% is controlled offshore.
• Gold Output: Australia steadily declined from the peak 313t in 1997 to
215t currently due to a lack of new discoveries. Most "new" mines are
resurrections of former old mines e.g., Boddington.
• ASX Golds: ASX-listed golds are cash rich, with low costs, long mine lives
and excellent growth. Newcrest and Lihir account for 70% of the ASX gold
sector and beyond them and a few others, there is a lack of choice and
quality.
Valuations
• We use North American golds as a guide for ASX gold values.
• Tier 1 North Americans are trading on a prospective 15x 09E CFM, a slight
discount to past levels and on 1.5x P/NAV, a midrange of recent levels.
• Global gold shares have been de-rated over the past decade due to a lack of
discoveries and hence growth and poor returns - beginning with the
enlarged global majors.
Recommendations:
ASX golds are financially very sound and offer strong returns ahead of an
expected gold price rally, boosted by growth projects.
Majors: Newcrest, due to its overall qualities, over Lihir - but the latter is
the gold leverage play.
Smaller Cos: Kingsgate, due to its stronger, more compelling, near term
share price drivers over Sino where drivers are more medium term.
Dominion offers excellent gold exposure in the smaller cap sector but lacks
growth qualities of the above two producers.