Australian gold stocks poised to shine
By Virginia Harrison, MarketWatch
SYDNEY (MarketWatch) — While gold prices have been on a record-breaking run, the performance of gold stocks in Australia has failed to dazzle, but some analysts are bullish on the outlook for the sector and point to a string of companies to watch.
Gold prices GC1Z +0.90% have surged nearly 30% this year. At the same time Australia’s S&P/ASX 200 gold index has lost nearly 4%, while the broader benchmark S&P/ASX 200 AU:XJO +0.31% is trading down around 14%, according to data from Factset.
“We’ve seen the gold price rally significantly and we haven’t seen gold stocks perform nearly as well,” said Andrew McLeod, research analyst with Limestreet Capital, an Australian resources fund that excludes index heavyweights BHP Billiton Ltd. AU:BHP +0.66% BHP +1.20% and Rio Tinto Ltd. AU:RIO +1.32% RIO +2.22% .
“We have a solid weighting to the gold sector. If we were to hold cash, or gold, we’d favor gold at the moment. Because of the disconnect between gold commodities and equities right now, we think there’s a massive opportunity within that sector,” McLeod said.
Gold price rally
The combination of concerns about Europe’s sovereign debt crisis, sluggish global economic growth and dwindling market confidence has helped underpin gold prices in recent months, with uncertainty boosting the metal’s safe-haven appeal.
A rush of gold-buying by central banks – including China, India, Mexico and South Korea – may have also contributed to the rally in physical gold prices.
“You’ve got central banks with almost endless piles of cash, and everyone worried about their actual wealth is trying to reduce exposure to feared currencies,” McLeod said. “The broader market is just nervous of investing full stop.”
UBS recently upgraded its gold forecasts arguing current conditions are ripe for further gold-price growth.
Market-damaging events such as the spread of euro zone debt woes “will lead to gold being increasingly used as the line of defence against additional negative market outcomes,” they said.
“With the pool of competing asset alternatives sparse, new money will flow into the gold market over the months ahead and into 2012, and this will have significant price implications,” the strategists said.
UBS upgraded its 2011 average gold price from $1,500 an ounce, to $1,665 an ounce. Forecasts for 2012 have been raised sharply, from $1,380 an ounce, to $2,075 an ounce.
Gold stock picks
UBS have also issued significant upgrades to its outlook for gold stocks, forecasting an average earnings upgrade in fiscal-year 2012 of 67%.
West African-based explorer Perseus Mining Ltd AU:PRU is the broker’s top pick. It also favors Adamus Resources Ltd. AU:ADU -2.61% and sector heavyweight Newcrest Mining Ltd. AU:NCM NCMGY in the Australian market.
“We continue to prefer Perseus [and] expect a near-term re-rating as it reaches producer status, Adamus Resources due to the positive deal with TSX-listed Endeavour…and Newcrest Mining for its world-class asset base,” UBS said.
McLeod from Limestreet Capital shares the upbeat view on Perseus Mining. He also favors Noble Minerals Ltd. AU:NMG, another West African explorer expected move to production later this year, and Integra Mining Ltd. AU:IGR, “a low-cost producer with exploration upside as well.”
Shares in Integra Mining and Noble Minerals have rallied more than 30% in the past three months, while Perseus Mining is up by more than 60%.
“If you’re looking to outperform you’d get involved with the smaller cap companies, which are more leveraged to the actual gold price and are smaller ships to turn. We see a lot of value in the sector,” McLeod said.
Virginia Harrison is a MarketWatch reporter based in Sydney.
