Gold Stock Rerating Underway but Hurdles Remain


"According to Investec Securities Mining Analyst Hunter Hillcoat, gold companies have certainly been given a reprieve of late, driven in large part by the strength of the yellow metal since the onset of QE3."

Gold stock valuations seem to be on the mend but, the "good ole days" remain a long way off.

It may not have happened with the whiz bang that many would have hoped but, it does seem that gold equities are beginning to get their strength back.

According to Investec Securities mining analyst, Hunter Hillcoat, gold companies have certainly been given a reprieve of late, driven in large part by the strength of the yellow metal since the onset of QE3.

Speaking on Mineweb's Gold Weekly podcast, he said, "Over the last few months, we have certainly seen a rerating coming back into the gold equities, reflecting, perhaps the leverage that gold stocks offer relative to alternate investments in the asset class."

But, while many of the share prices are breathing a little easier than they were, they are by no means out of the woods yet.

Many, if not all the reasons behind the loss of their premium to the gold price remain and, it is up to the management of the stocks to ensure that they hold on to the gains already made.

For Hillcoat, the reasons for the decline are manifold but include, an inability on the part of producers to meet production expectations, too often, over promising and under delivering. There was also, he explains, an ongoing reduction in the quality of the ounces.

"As the gold price went up people started expanding their reserve and resource bases because they could use a higher gold price and a lower cut-off. This enabled them to produce more gold but, at a far lower margin."

There was also, he says, the impact of sharply escalating operating costs, which is still an issue today.

For example, he says, in the Australian context, "you had iron ore operators with massive margins able to pay huge salaries to attract human capital, which pushed up labor costs. But, the gold miners haven't had the same margins to be able to meet these increases and they have been exposed accordingly."

Asked whether, the premium attracted by gold stocks will return to historic levels, Hillcoat is doubtful because, with the entrance of new asset classes, like ETFs there are now alternatives available to investors wanting exposure to gold that lessen the need for equities.

But, he says it is also important to understand that investment markets are fickle. Sometimes he says, they are looking for resource and reserve size, other times for growth, while in another phase, like the one we are in at the moment, markets are looking for capital returns and dividends.

"It is important for companies to stick to their strategy but remain cognizant of what the investment market is looking for so that they don't get caught out one way or the other."

There was a long period where we saw gold stocks lose their premium and, while they have started to gain them back he says, obviously it is in the hands of the producers to determine whether or not that premium is retained.

"While we have an increasing gold environment and macro economic conditions that support the gold price, there will be an attraction to being in the equities," Hillcoat says, but warns, while, it seems like a number of companies and their management teams have begun to learn their lessons, "if they continue to disappoint, I would expect they will lose their premium again."

Geoff Candy

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