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After failing to shine for 25 years, gold has reclaimed its reputation as a haven in uncertain times and looks set to run for a while.  Australian producers are benefitting not only from renewed interest in the metal but also the fall in the local dollar against the US currency.

An Australian dollar gold price of $1400, compared with $900 in US dollars, has thrown a lifeline to many smaller local producers and the stampede into gold stocks means that companies that were struggling six months ago are now able to raise equity and attract investor interest. But like all booms, this one has its pitfalls.  Some of those companies have high costs or are mining projects that have previously been worked and have little upside.

“There are a lot of ragtag stocks that call themselves producers,” warns BGF Equities analyst Warwick Grigor who in his latest gold sector review says the price could reach US$1300-$1400 this year.

Grigor contends the bull run will continue for the foreseeable future because gold has become the defacto currency of choice.  He argues the US dollar is overpriced but there is no confidence in other currencies. “The only alternative currency is gold; that is why we are seeing the gold price rising. Gold is the only credible currency right now.”

As opposed to the euphoria of previous booms, Grigor says the rise of recent months has been a “strong and well behaved market responding to the real demand for gold as opposed to a speculative bubble” and says the price will rise as long as the recession continues and liquidity is pumped into economies.

The problem for stock investors has been a dearth of choice.  The sector is dominated by the big cap. stocks of  Newcrest (market cap. $15 billion), Lihir ($7.4 billion) and the Sydney-based Chinese producer Sino Gold at over $15 billion.  South Africa’s AngloGold has a listing here and market cap of over $800 million then it’s then a big step to St Barbara at $590 million and Dominion at $547 million. The three majors were the first to move on the gold price as institutions and investors jumped into the known, producing companies. Having had early runs, there is a view they are now marking time while interest moves onto the smaller and emerging producers.

But Macquarie Research Equities gold analyst Jim Copland says although the larger companies are pricey now, institutional investors are still ignoring the smaller companies because they rate liquidity over valuation and only want to buy stocks they can quickly exit if they need to.

He can see this changing if the gold sector moves into a medium term phase and the funds become more confident that the price will remain higher, but until then says the funds are sticking with the known despite outstanding valuation at the smaller end.

Copland likes St Barbara, as a locally-listed domestic producer with an Australian-denominated cost structure, Sino Gold for growth, and Kingsgate for growth and value.

Warwick Grigor also likes Kingsgate, which has forecast production of 100,000 ounces a year from its Chatree North mine in Thailand, and Intrepid Mines on its new mine potential.   He also likes Perseus Mining, which has deposits in Ghana, Ivory Coast and Kyrgyzstan and is a possible takeover target as it does not have a controlling shareholder.

Grigor sees best value in companies that will become producers of virgin deposits in the next one to two years. “A lot of the brown field operations out there are high cost and have limited upside on the exploration front.”

He suggests a conservative investor might consider Newcrest, Lihir and Kingsgate while someone wanting to be more aggressive could go for Kingsgate, Perseus and Intrepid.

Other stocks on the radar of brokers who spoke to TheBull were Alkane, considered interesting for its copper-gold projects in central New South Wales and Centamin Egypt which last month began mining the Sukari Gold Project in Egypt.

Gold stocks can be highly volatile so are not for setting and forgetting.  Apart from reacting to volatility in the metal’s price, they can also be subject to three phases of investment:  the price jumps when a discovery is announced, trades sideways while the resource is proved up and the company raises money to get into production, and then jumps again as the company moves towards commissioning the mine.  The skill for investors is to get in at the right phase and monitor the stock so as not to get stuck in a price lull.

Newcrest is Australia’s largest producer, at over 868,000 ounces last year and Lihir mined 882,000 ounces, principally from its Lihir island mine in Papua New Guinea, but it should be noted that BHP Billiton is also a significant gold miner at 80,000 ounces, and sits on the world’s fifth largest gold deposit at Olympic Dam.  Gold comes under BHP’s base metals division along with uranium and copper and did not rate a mention in the last financial report.  That might change in coming months when it is one product that gives a lift to the bottom line.

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