The price of gold averaged approximately US$865/oz in 2008, up 24% on the year (after touching a 25-year high of US$1,040/oz in-mid March), compared to gains of 15% in 2007, 35% in 2006 and 20% in 2005. Analyst Ron Coll of Jennings Capital attributes these gains to “weakness in the US dollar, low real interest rates, improving supply-demand fundamentals, limited Central Bank selling, renewed investment demand and a decidedly more negative view of producer hedging.”
The price of silver averaged approximately US$15.00/oz in 2008, up 12% on the year, compared to gains of 16% in 2007 and 57% in 2006.
Historically, Central Bank selling, scrap and producer hedging have bridged the gap between global gold mine supply (2,500 tonnes) and annual fabrication demand (2,800 tonnes). Coll believes that this gap could remain unbalanced for the next several years thereby leading to firmer gold prices. Coll also opines that the effects of an ongoing credit crisis, “out-of-control government spending with associated inflationary pressures,” panic stricken capital markets and a weaker US dollar should translate into higher gold prices.
Coll forecasts an average gold price of US$819/oz for 2009 and US$900/oz for 2010. His silver price forecast calls for an average of US$10.75/oz for 2009, and US$12.00/oz for 2010.
Coll’s top pick in the Gold & Precious Metals sector is Yamana Gold (YRI: TSX). Yamana is a gold-silver-copper producer with activities focussed in South and Central America. The Company holds interests in nine operating mines with gold production of 745,000 ounces in 2008, increasing to 1.2 million ounces by 2010, with two new mines coming on stream and two significant expansion projects in progress. The company’s cash costs are expected to be around US$400/oz. Yamana is expected to cash flow in excess of US$500 million ($0.70/share) in 2009 increasing to US$770 million ($1.07/share) in 2010. In addition to its gold production, the company is also expected to producer 130 million pounds of copper and 11 million ounces of silver annually. Year end cash was estimated to be US$220 million and the company had working capital of US$200 million. Total debt stood at US$600 million. “The Company trades at (or did when this report was published) a low 8.5x 2009 CFPS and 1.0x NAV!” Coll’s target price for Yamana is $12.00/sh.
Coll’s colleague Stuart McDougall’s two picks in Gold & Precious Metals sector were Red Back Mining (RBI: TSX) and Semafo (SMF: TSX).
Red Back Mining is an emerging gold producer, with activities in West Africa. The company has two open-pit mines in Ghana and Mauritania and recently began underground mining at the mine in Ghana. With production expected to rise from 260,000 oz in 2008 to over 400,000 oz in 2010, the company sports an impressive growth profile. The company was expected to have a year end cash balance in excess of US$60 million, which should be more than sufficient to cover the 2009 capex program and repay current debt of US$28 million. In the near term, McDougall sees “potential catalysts in the form of increasing production from relatively the higher-grading Akwaaba Deeps underground mine over the next six months, completion of mill expansions at both the Chirano and Tasiast mills in Q2/08 and continued growth of reserves and resources.” McDougall has a target price of $9.75/sh for Red Back Mining.
Semafo is a junior diversified gold producer also focussed on West Africa. It operates three conventional open-pit gold mines in Burkina Faso, Niger and Guinea. Semafo is expected to increase production from 195,000 oz in 2008 to 260,000 oz in 2010 which should translate into strong earnings and cash flow growth. McDougall considers Semafo’s “exploration upside to be above average, particularly at the flagship Mana mine, Burkina Faso, which is showing the potential to become a new mining camp.” The company also has a strong track record at both replacing reserves and growing resources, having more than doubled the former and increased the latter by 54%, since starting commercial operations at its first mine in 2002. Semafo currently trades at 0.7x NAV, 10x 2009 forecast EPS and 3.4x forecast 2009 CFPS.
To Be Continued ...
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