In theory a rise in the price of a commodity like gold should at some point lead to a rise in price in the share price of those providing the commodity – the gold miners.  For most of the current ten year bull-run in gold prices that relationship followed the expected pattern – shares in the miners were rising higher than the price of gold.   Here is a chart comparing the price of gold to the share price of the US based gold miners ETF, the Fidelity Investments FSAGX:


In practice that relationship began to break down in 2011, as you can see from the chart.  The price of gold went flat in 2011 after a deceleration in 2010 and the share price of the miners continued to crater.  After a slow start in 2012 the price of gold increased 11% in the third quarter and since mid July 2012 the gold miners are returning to form.  Although the reversal has been most dramatic in the last two months, the trend was developing earlier.  Our own index of gold mining stocks, the XGD, was already outperforming the ASX 200 XJO going into July of 2012.  Here is the chart:



Gold miners have come roaring back and are now outperforming the price of gold.  In the month of September the price of gold rose 4.4%.  In the same period, the largest gold miner ETF in the world – US based Market Vectors GDX comprised of large cap stocks – rose 11.9%, following an equally impressive rise of 12.1% in August.

Here in Australia we can look at a three month share price chart of our largest gold miner – Newcrest Mining (NCM) as evidence of this dramatic reversal:



Is it time to climb back onboard the miners?  Is it too late?  Will the current trend hold?  Of course no one knows but the recent announcement by the US Federal Reserve of another round of bond purchases or Quantitative Easing with no time limit has analysts forecasting continued increases in the price of gold.  Deutsche Bank sees gold rising to USD$2,113 per ounce in 2013, with USD$2,200 a real possibility.  Bank of America Merrill Lynch has a 2013 forecast of USD$2,400, with a jump to USD$3,000 not beyond reason.  As long as central bankers in the US and Europe keep pumping money into the financial system gold should rise and it now appears the miners may go along for the ride.  

If you are thinking about coming along, here are Australia’s top ten gold miners by market cap:



Mkt Cap

Share Price

52 Wk Hi

52 Wk Lo

Forward P/E

5 Yr Expected P/EG

Profit Margin

Newcrest Mining Ltd









Regis Resources Ltd









Perseus Mining Ltd









Evolution Mining Ltd









Resolute Mining









Medusa Mining Ltd









St. Barbara Ltd









CGA Mining Ltd








Kingsgate Consolidated









Silver Lake Resources








Let’s walk through each of these companies to see which are the most attractive investing prospects; beginning with


Newcrest Mining (NCM), Australia’s largest gold miner by a wide margin.  The company has six operating mines in Australia, Papua New Guinea, and Indonesia and two advanced exploration projects in PNG and Fiji.  Solid miners with growth potential obviously need both operational and exploration assets.  Junior miners can prove to be good investments based on high potential exploration assets but at high risk.  But there is more to researching a miner than looking at the company’s operational and exploratory assets.

One important thing to consider when evaluating any miner for possible investment is the country of operation and exploration.  Sovereign risk is an important consideration for companies mining in certain countries where governments can be unfavorable to business interests or unstable.  The flip-side of that is that generally speaking costs of production in emerging market countries are lower than in developed economies.  Australia’s mining costs are extremely high, from labour to construction costs and taxes.  As much as possible you want to look at low-cost producing miners, and with a Profit Margin of 24.6% Newcrest qualifies.  Profit margin is an indicator of how much a company actually earns in profit from every dollar in revenue.  Companies with higher profit margins are doing a good job controlling costs. Note that there are other companies in the table with higher profit margins.

Valuation ratios can be helpful and in this table we used forward looking ratios from Thompson Reuters.  Newcrest has a respectable forward P/E and P/EG but again, other companies fare better.  The company’s financial position is sound with 16% gearing and $1.2 billion in debt.  Considering the fact NCM is one of the top five gold miners worldwide and a 23% increase in statutory profit from FY 2011 to FY2012 along with an 8% increase in revenue, is Newcrest a solid investment candidate?

Our major analyst firms don’t think so.  All seven of Australia’s major investment brokerage firms have weighed in with recommendation updates since the surge in share prices of the miners and only one – BA Merrill Lynch – has a BUY rating on NCM.  JP Morgan Chase and RBS Australia both downgraded NCM to HOLD/NEUTRAL.  Credit Suisse has an UNDERPERFORM rating and Citi, Deutsche Bank, and RBS Australia all have hold ratings.

Regis Resources (RRL) has an attractive Forward P/E at 9.07 and a 5 Yr Expected P/EG of 0.21 with an outstanding profit margin of 40.1%.  The company had record earnings in 2012 with an 88% increase in profit and a 58% increase in revenue.  Long term debt is $25.2 million with gearing at 12.6%. The numbers were released in early September and the already rising share price went up, reaching a 52 Week High shortly thereafter.  Here is RRL’s three month share price chart:



The company has one operating mine in Western Australia with two exploration projects.  The share price is up 30% over the last three months and analysts are largely bullish on this company.  Deutsche Bank upgraded RRL to BUY following the report while BA Merrill Lynch, Macquarie, and JP Morgan maintained BUY or OUTPERFORM ratings.  RBS Australia and UBS have the company at HOLD and NEUTRAL.

Perseus Mining (PRU) returned a profit of $52,461 million in 2012 after posting a loss of $51, 176 million in 2011.  Gearing is 16.8% and long term debt is $25.6 million.  They are focused on mining in West Africa and opened their first operating mine in 2011 and have another ready to begin production by the end of 2013.  Their profit margin is solid at 28.7% and both the Forward P/E of 7.23 and the 5 Year Expected P/EG of 0.23 makes them one to consider.  Here is the company’s three month share price chart:



Despite the sovereign risk with this company, our major analysts are uniformly bullish, with one exception.  BA Merrill Lynch recently upgraded the company from UNDERWEIGHT to NEUTRAL.  RBS Australia, UBS, JP Morgan, Credit Suisse, Macquarie, and CITI all have BUY or OUTPERFORM recommendations.  Citi called Perseus the “best in the sector.”

Evolution Mining (EVN) is a newcomer to the ASX, commencing trading in January of 2012.  The company was born through a merger of Catalpa Resources Ltd and Conquest Mining Ltd, along with the purchase of two mining interests owned by Newcrest.  Evolution has four gold and silver mines in Queensland and Western Australia with another under development.  Due to the newness of the company, there are no figures for Forward P/E and 5 Year Expected P/EG.  In January 2012 the company reported consolidated financial results for the former entities and showed a profit of $37.3 million on revenues of $469.6 million.  Gearing is 3.4% with long term debt of $17.5.  The share price is up 30% in the last three months.  Here is the chart:



Credit Suisse has a NEUTRAL rating on the shares due to capital expenditure concerns with one of the company’s exploration projects.  JP Morgan, Macquarie, BA Merrill Lynch, and RBS Australia all have BUY or OUTPERFORM recommendations on the company.  For some insight on the capex concern, a research note from 03 October at Morningstar, the analyst shared the opinion received from a number of miners that the previous pricing leverage contractor had over the miners is over due to industry wide concerns over rising capex costs.  The analyst claimed the actions by BHP to stop further development on two of their large projects have impacted the contracting industry.

Resolute Mining (RSG) has three operating mines; two in Africa and one in Queensland.  The company has major expansion plans and has had two share offerings to lower their gearing and emerged debt free in 2012.  In October, they announced a share buy back program.  The share price is up almost 40% in the last three months.  Here is the chart: