It is all about profits – yours and the gold companies. This article is a brief fundamental coverage of gold stocks Down Under, not a lesson or lecture, just an analysis of the current state of the Producers. As such one has to briefly cover the overall fundamentals of the industry before one zooms in on the micro analysis of individual stocks.
Introduction
Firstly let’s be clear - Australia is a major gold producer and our modern gold industry is made up of various players including an elite LBMA Refiner in WA and many fine gold producers, developers and explorers. This is a modern industry run by highly professional operators and situated in a politically stable region with overall low sovereign risk and several awesome gold belts.
These Australian based miners are also involved in such golden activities all over the world from the staggering Ashanti Gold Belt in Ghana, the Thai Gold Belt, throughout the Pacific Rim, Europe, China – in short everywhere there is gold to be won from the earth.
The range of investments in this sector on the ASX is excellent and many of the companies are vastly undervalued by a number of valuation metrics. Several are also listed on the AIM, the TSX, in Germany and even Hong Kong.
The gold price in Aussie Dollars is currently in the depths of an AUD-gold-price correction at around A$1,140 mainly due to the currently high AUD: USD exchange rate of approximately 84c. The AUD gold price was recently as high at A$1600 for a brief time and will get back there again before too long.
As for our producers - cash costs of the top pure gold plays here vary from A$357 per ounce which is in the lowest cost quartile of the global gold mining industry - up to nearly A$800 per ounce. Capital flows from offshore have already been significant and most of the sector participants we cover have raised significant capital in the past 9 months.
Elite buyers such as Sprott Asset Management who represent high net worth individuals and institutions have already bought in and if it good enough for them all investors around the globe should be taking a very close look at Australia. I have been saying for some time that when gold really breaks out there will not be enough quality gold investments to satisfy demand across global markets – savvy money is in agreement apparently.
Down To Business
Let’s get right down to it then – are these stocks profitable right now? This is a basic fundamental approach which is only the tip of our approach here at GoldOz but it is important to start here as it strongly influences share price in present time. Will these stocks become more profitable over the coming months? Are they good value at current valuation levels and more importantly will these valuations / share prices increase or not?
Yes they are profitable and growing right now. Yes they will become more profitable in the coming months because wage pressures have decreased, gold prices will rise and their operations are moving forward enabling reductions in hedge books and debt. They are also increasing production in some cases or ramping up their new operations. This is a dynamic gold sector moving forward into the gold bull with vigor just as you would expect.
Are they good value at these price levels? It would be a mistake to look at current share prices and compare value to the stupendous bargains back in late 2008. Those price levels are still current for some of the smaller stocks and even the very occasional producer. The larger stocks have recovered to more appropriate levels given the current AUD gold price and are highly unlikely to go back to those late 2008 levels. Their recovery took place mainly up to March this year and a strong consolidation / accumulation phase has been continuing ever since.
The mid tier producers have great upside as shown in my Fundamental Performance Table (sorry Gold Members only) but only once the gold price begins to move or they sort their own individual issues. Issues vary significantly however one thing is clear – the improvement in the gold market has been evident for several years and therefore these companies have been highly mobilized constantly advancing and improving their operations.
Several mid tier producers are reworking old ground positions and investment perception in many cases underestimates the potential remaining in these fields. More than one of these were owned by several parties in the past resulting in poor exploration.
Other fields are beginning to give up their hidden wealth thanks to new exploration techniques and production technologies. Other companies are working off debt and hedge books that went with those loans as part of the deal. A few are building production in newly refurbished mills or ramping up new production facilities.
Are our gold stocks going to go up in value? Absolutely – from here we are looking at the near end of a long consolidation phase in gold and these stocks. Profitability will rise sharply when gold rises from here. Marginal producers will get much more attractive. New investors will find this sector because it will become evident to all that gold is not going away as a profitable investment class – excitement will build over US$1,000 gold.
Investment Strategy
You have to have great knowledge to make this work as an investment class. Many gold bugs could see gold going up over past years and yet missed out on retaining substantial profits as equities melted down in late 2008. Unfortunately many probably sold into that panic and collapse then lost interest and missed the recovery earlier this year.
Sound technique and confidence is required – at times nerves of steel. Taking profits is essential - the ‘buy and hold long term strategy’ can be an awful roller coaster ride. Short term trading can chop you up and shred your capital too so if you fall into these categories then you might now consider a better way to profit from the best investment game still remaining – gold & gold stocks.
Our strategy is to use technical and fundamental analysis for medium term trading and this has never looker better. We look at medium term investing from several months to a year or more and also try to separate out the “throw in the bottom drawer” and forget for 3 year investments.
This takes discipline and of course you have to keep a watchful eye on all stocks / equity investments by keeping up with quarterly news reports. This is another aspect of our research and coverage. Even though it is time consuming to condense we feel it is so important that it is worth the effort.
We present information to investors in our Gold Members Area in several different ways to allow investors to form an overall picture and strategy for themselves. Chart sets, technical notes, chart performance tables and now a fundamental coverage in simplified format all combine to assist with strategy.
One great investment strategy is to look at the operational progress being made in a company and invest slightly ahead of the crowd. Investors will follow when these companies have stronger balance sheets and higher production. Fundamental research is an excellent method to define this type of investment play. This is why we cover this method of research in conjunction with news and our technical coverage.
Some investors find this hard to learn or too time consuming but we feel a foot in both camps has great value. So we persist with T/A and fundamentals for our GoldOz Members.
Our overall view is that conditions are certainly changing in the gold sector Down Under and I am genuinely excited by what I see and read.
We just completed our summaries of the latest June quarterly reports for all the Australian Gold Producers which were released to the market around the end of July. Condensing and summarizing these lengthy reports is time consuming to say the least which is why we have focused on only the gold related stocks – it saves our Members and Gold Members loads of time.
These reports can then be used to gain an overall analysis on the sector and this quarter we have moved this to a new level. When you compare actual production levels to cash costs, sold price, debt, cash reserves and gold resource it forms an interesting picture. “Less is more” when you are comparing stocks either by technical or fundamental means.
Too much data can just tend to confuse the picture. However when you find what appears to be an extremely undervalued stock you also have to be careful – where is the risk? Extreme caution must be factored in when you are dealing with a continuing down trend on the chart. The trick is to be there when that risk is eliminated, when the chart turns and the stock is re-rated by the market.
The risk may be in the form of a court case, a hedge book issue holding up profitability or even threatening financial viability. Or it could be numerous other interruptions to mining activities. Sometimes it just comes down to lack of market exposure of those stocks or investor perception about the ground position, sovereign risk or scale of the project. Share price weakness can be caused by poor cash reserves which can be quickly overcome by a capital raising. Merger and acquisition activity has produced some stellar gains in the junior sector and smaller end producer categories.
The important factor in investing by fundamental means is to work out what is holding back the share price. Brokers, institutions and larger investors will get interested when certain criteria are in place and all the ‘boxes’ are ticked. Then the liquidity in the stock rises and so does the share price. Several of the companies we cover present fantastic opportunity and our Gold Members coverage makes these investments obvious.
What is also evident from our newly finished Fundamental Performance Table is that there is tremendous scope for the smaller stocks to move up in value. The chart sets can be used to clearly show when technical signals are aligning with the fundamentals I write about here. Investors can use this approach on their own in their own research at any time if they have the time.
We released some articles on the above for Kitco readers and have stepped up efforts to communicate more as the looming rally draws ever closer. The comparison now possible between technical and fundamental basics is valuable and will provide some useful investment data for comparison and gold stock investor understanding.
Summary
I see the investment climate for these stocks improving drastically in the short to medium term after a short pull back or flat period.
Of course not all the stocks move at the same time to produce these overall trends so you always have the situation where some have to correct and others are headed up. This is where technical analysis comes in as a useful addition to fundamental analysis. The trend of the sector will generally hold price appreciation back however by exerting a negative influence.
Investors can sit in two camps, technical or fundamental. It is not just about resources – a look at our investment tools make that clear enough. Value investing based on several key factors does work however. Technicals work if you are skilled enough but they are open to interpretation and we can be wrong – they don’t tell the whole story either. Therefore we think both camps are right however we strongly believe both should be used to the advantage of investors.
Gold in USD is sitting comfortably at a high base now and investors are now used to it being priced around this level. There are many technical and fundamental reasons why it is set to go higher covered by my esteemed colleagues so no need to grind over this again.
Australian gold stocks are poised to move explosively into action later this year and may take off before gold. Negative divergence patterns point to lower prices just ahead but investors will have to be quick and informed to make the most of this. Some look ready to move right now and we highlight which ones they are. We are also excited about our new Production / fundamental comparison guide – a unique coverage.
Special Offer
GoldOz has extended our discount offer for Gold Membership down to the 3 month membership level – an additional month of time extension takes the discount to 33% - for $80 you will get all the data needed to enter this run before or as it begins.
We also wish to extend our 12 and 6 month offers of discount price and extra time as advertised previously. Loads of free time given for both Membership levels. The 12 month Gold Membership will extend through the anticipated Bull Run ahead and enable us to assist these investors with exit strategies and updated technical analysis. Previous clients via Kitco readership who are wishing to return are recognized, please contact me to discuss a deal.
Fundamental analysis is provided as well via company news and the update on quarterly results is in progress right now. Chart sets, T/A and performance tables are all ready now in the Gold Members area so go direct to the GoldOz Store page – the link is in the tool bar near the top of the GoldOz home page. Get in now if you want a discount and are interested in making money on Australian gold stocks.
