A beacon of stability
With prices hitting new records, gold promises to become even more appealing as billions in US government stimulus set the stage for rising inflation and a weaker dollar
THE gold-mining sector is rapidly emerging as a beacon of stability in an uncertain stock market, and a flood of recent equity issues by miners has topped up their balance sheets and laid the groundwork for a new round of takeovers.
With gold well above US$900 an ounce, investors have shown strong appetite for a sector that promises to become even more appealing as billions in government stimulus set the stage for rising inflation and a weaker US dollar - conditions that typically trip a buy signal for the precious metal.
Canadian miners Kinross Gold, Agnico-Eagle Mines, and Yamana Gold have collectively raised about C$1 billion (S$1.2 billion) in the past two months, stocking up their war chests at a time when many companies are struggling for cash.
'This is a reflection of gold being pretty well the only game in town in light of the woeful economy,' said John Ing, president of investment dealer Maison Placements.
But it's not just the top producers that are finding the funding taps still open. Developer Osisko Mining , which is moving part of a town in western Quebec, Canada, to build the Malartic gold mine, announced a bought deal last week that could be worth up to C$400 million, defying the recent thinking that junior explorers are running on a treadmill to insolvency.
The trade-off for Osisko is that it had to sell the shares at a deep 17 per cent discount to its market price to drum up demand. But the money raised will fund its mine nearly to completion, at which point it will have steady cash flows to rely on.
Other smaller players bulking up include Minefinders Corp, which completed a C$40 million bought deal in December, and Africa-focused Red Back Mining, which announced a C$150 million bought deal in late January that the company plans to use to fund an aggressive M&A push.
The thirst for shares comes as most equity sectors are still struggling to rebound from last year's market plunge, while worries of corporate defaults and narrow government bond yields have kept investors wary of debt instruments.
'What we've been seeing since the beginning of January is there's a sea change that's taking place,' said Frank Holmes, chief executive of fund manager US Global Investors. 'All these pension fund groups are recommending gold. I think what's really significant here is a lot of these buyers are (typically) non-gold fund buyers.' The buying has propelled shares of many established gold producers up to levels not far off the record peaks hit last year when gold topped out above US$1,030 an ounce.
The Toronto Stock Exchange's S&P/TSX global gold index, which tracks gold producers listed on several exchanges, has more than doubled from its trough in October last year, compared with a flat performance or slight gains since then by major stock indexes.
However, valuations for smaller players have remained compressed, a scenario that yields a big opportunity for cash-rich large miners to add assets on the cheap.
'It is a time of unprecedented opportunity,' Kinross CEO Tye Burt said of the wide valuation gap between large and small miners. 'So we thought it prudent to top up.' With gold at these levels, analysts expect several more gold miners to come to the equity trough to load up on cash, and a small bump higher in gold prices could be enough to trigger deals.
'It happens when gold goes over 1,000 bucks (an ounce),' said Mr Holmes. 'As gold goes through US$1,000, you'll get a revaluation of that whole space.'
Gold has 'very strong support' at about US$600 an ounce as any drop below that level would result in the closure of 20 per cent of the world's production capacity, OAO Polyus Gold chief executive officer Evgeny Ivanov said.
A 60 per cent increase in mining costs in the last two years, because of rising oil, steel and machinery prices, pushed the cash cost of producing gold in Australia to US$635 an ounce, Mr Ivanov told an Adam Smith conference in Moscow on Thursday.
'Below US$600 an ounce, mining in South Africa and Australia becomes unprofitable,' Mr Ivanov said. The nations are the world's second and fourth-largest producers of the precious metal, according to the US Geological Survey.
Polyus, Russia's biggest gold producer, has planned its budget for this year based on an average price of US$800 an ounce. OAO Polymetal's figure is US$750, CEO Vitaly Nesis said at the same forum.
Gold has averaged US$790 an ounce in London in the last two years, falling as low as US$606 in January 2007. It last traded below US$600 in October 2006. -- Reuters, Bloomberg
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