The gold price is rising, meaning the share prices of Aussie gold miners should follow suit.

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 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 stgeloping 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 comprising 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? Or is it too late?  Will the current trend hold? 

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.  

Here are Australia’s top ten gold miners by market cap:

Company

Code

Mkt

Cap

Share Price

52 Wk Hi

52Wk Lo

Fwd P/E

5 Yr Expected P/EG

Profit Margin

Newcrest Mining Ltd

NCM

$51.6b

$28.24

$37.48

$20.89

15.10

0.97

24.6%

Regis Resources Ltd

RRL

$2.51b

$5.53

$5.87

$2.45

9.07

0.21

40.1%

Perseus Mining Ltd

PRU

$1.31b

$2.85

$3.65

$2.12

7.31

0.23

28.1%

Evolution Mining Ltd

EVN

$1.3b

$1.91

$2.02

$1.24

17.66*

0.19*

8%

Resolute Mining

RSG

$1.23b

$1.96

$2.21

$1.21

9.78

-0.50

25.7%

Medusa Mining Ltd

MML

$1.12b

$4.92

$7.50

$4.31

5.24

0.18

60.9%

St. Barbara Ltd

SBM

$1.06b

$2.15

$2.58

$1.28

6.32

-0.40

27.9%

CGA Mining Ltd

CGX

$979m

$2.90

$2.97

$1.56

5.9

3.2%

Kingsgate Consolidated

KCN

$876m

$5.79

$8.19

$3.90

6.98

0.29

20.9%

Silver Lake Resources

SLR

$756.9m

$3.80

$3.97

$2.02

5.76

23%

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 stgeloped 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 stgelopment.  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 stgelopment 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:

This is a company suitable only for those investors who frequent the roulette tables in Macau.  In June of 2012 an analyst at Citi expressed concern over Islamic insurgents overrunning northern Mali, where Resolute has mining operations.  Stay away as there are safer opportunities.  

Medusa Mining (MML) reported full year earnings at the end of August and came in with a year over year 46% drop in revenues and a $55% drop in net profit after tax.  The explanation was production cutbacks at the company’s one existing mine to expand production capacity.  Analysts and investors alike must have liked the explanation and the company’s prospects as RBS Australia, Citi, and Deutsche Bank all have BUY recommendations and the share price actually went up after the announcement.  Here is the chart:

The company is debt free and pays a dividend of 1.2%.  Although this is a high risk prospect, an analyst at RBS Australia noted that this is a transition year and production capacity after the expansion will double.

St Barbara Limited (SBM) operates mainly in Western Australia with three operating mines, but they have interests in PNG and the Solomon Islands as well.  Full year financial results showed a 90% year over year increase in NPAT.  Although the company has low gearing at 0.8% and total interest-bearing debt of $4 million, capital expenditures and exploration expenditures for the year came in at $121 million, finishing the year with a cash balance of $185 million.  Analysts at Macquarie have the company at UNDERWEIGHT citing concerns over management assumptions about costs and capital expenditures going forward.  The shares rallied after the earnings release:

CGA Mining (CGX) has one operating mine in the Philippines and is listed on the Toronto Stock Exchange as well as the ASX.  There is merger proposal in progress between CGA and Canada based B2Gold.  CGA’s 01 October full year earnings release showed a drop in revenue from $219 million in 2011 to $151 million in 2012.  NPAT fell from $60.6 million to $5.9 million.  None of Australia’s major investment firms provide coverage for CGX.  Despite all this, the share price is up almost 60% over the last three months.

Kingsgate Consolidated (KCN) is Australia-based with four operating mines in Australia, South East Asia, and South America.  Full year earnings released on 30 August were record setting, with a 259% increase in NPAT and a 107% increase in revenue.  However, gearing is at 20.31 with long term debt of $157.5 million and $96.2 million total cash on hand.  The two analyst recommendations coming out after the report had Citi with a NEUTRAL and BA Merrill Lynch with an UNDERPERFORM.  Both cited lukewarm production guidance and funding concerns due to debt levels and production costs.  Here is the company’s three month price chart:

The final company in our table is Silver Lake Resources (SLR).  The company operates exclusively in Australia with two operating mines and two additional mines under stgelopment.  Full year earnings for 2012 came in with a 50.4% increase in revenue and a 97.4% increase in NPAT.  The company’s gearing at 6.6% and long term debt of $11.76 million are relatively modest.  However, total cash on hand of $68.25 million in debt seems light in the eyes of JPMorgan, the only major analyst covering the company.  The Morgan analyst cited the recent costly acquisition and capital expenditures for a new mine Murchison project as reasons for lowering the target price from $3.88 to $3.84.  On 03 October FNArena reported a 1.73% increase in short interest in =SLR, standing at 5.8% right now.  The share price is up almost 35% in the last three months:

There are no guarantees in life, but considering investor thirst for hard assets in the face of central bank bond buying and the central banks themselves buying up gold, it is hard right now to imagine a reversal in the upward trend of gold prices.  The World Gold Council recently reported that central banks bought 254.2 tons in the first half of 2012, with the possibility of an additional 500 tons bought by the close of 2012.  All this suggests the share prices of the gold miners ready to meet increased demand should continue to roar.

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