A "Glimmering" Trading Opportunity


RBCCM says that the South African gold sector appears to be around its most attractive pricing in almost six years.

Analysts at RBC Capital Markets note that the South African gold index "used to trade like clockwork" on a six month forward price-earnings (PE) multiple, oscillating between 10 times [indicating good value] and a maximum of 25 times [indicating "expensive" value] forward.

Over the past four years though, RBCCM adds that "earnings have been largely non-existent. With massive losses and constant under-delivery on production promises, the market has had a torrid time of pricing for earnings potential". In the result, valuations have been declining consistently, to the point where analysts at RBCCM "now believe a trading opportunity is presenting itself".

For the first time in almost six years, RBCCM states, "we believe the index to be priced on a forward PE multiple in the order of 15 times. Although this assumes meaningful delivery against production and cost guidance and a sustained high rand gold price, we believe this rating level allows for enough ‘protection' against more possible disappointment (given past maxima to about 25 times)". . .Overall the RBCCM analysts argue that the current selloff of South African gold stocks has been overdone.

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