1999 Gold Mining Industry Year In Review




In a year in which gold prices moved from the $250s to the $340s and then back below $300, the most influential factors in determining gold prices were issues of the amount and level of producer hedging and hedge fund shorting, and the central bank announcement (The Washington Agreement) that resulted in a short covering squeeze.

When the gold price fell, so did most of the stocks, Creating a period of pretty poor performance from the sector through the summer, and then an explosive rally when the gold price ran up, but not as explosive as one would have expected, given the magnitude of the gold price move. And then unfortunately, as the gold price has settled, we've seen these stocks return in some cases to near their 52–week lows.

But poor performance wasn't universal in the sector, If you look at the performance year-to-date of the group, some stocks have held up particularly well in light of the gold price. In North America that would include Newmont Mining (NYSE:NEM) and Agnico-Eagle (NYSE:AEM). If you look internationally there's been good performance from AngloGold (NYSE:AU) and Gold Fields of South Africa (NASDAQ:GLDFY), Minas Buenaventura (NYSE:BVN), Meridian (NYSE:MDG), Acacia in Australia, which is in the process of being bought out. So a number of these names have provided decent returns. Certainly compared to the average of the index they've done fairly well, perhaps not as well as Internet stocks, but in light of what has happened to the gold price there have been some winners this year.

Also Meridian Gold is one that stands out, Newmont Mining has been a very good performer, and AngloGold has been the best senior performer. These companies are going to have to embrace that all of these performances were related to company-specific events such as cost cutting, discovery of new deposits, development of new deposits, especially very much higher grade deposits. And as predicted on this site early last year.

Gold continues to be a financial asset, and gold has a role in today's financial world. But more importantly, the banks, to a large degree, are going to stand behind gold. Indirectly, one of the messages that the central bankers are sending is that if in the future the short sellers come into the market and excessively lean on the price, they have the capacity to bring things back into line.

For a free interview excerpt in which John Hathaway (Senior Portfolio Manager with Tocqueville Asset Management, the 'world's acknowledged expert on the hedging activities of the gold producers), lists reasons he believes gold could spike over $600 see http://archive.twst.com/notes/articles/jad470.html

There has been disdain by investors for gold hedging firms, the niche and the lot in life for gold producers is to be warrants on gold. As warrants go they should be good warrants, well–managed warrants, with low costs, good management and foresight.

Many investors believe that hedging goes against this concept. Not all, but many types of hedging cap the upside, and thus they cap the value of the warrant. Many generalist fund managers feel, "If I buy a gold stock I want leverage to gold. I don't want an Ashanti or Cambior (AMEX:CBJ) where my value has gone down as the gold price goes up. There is a second reason behind the disdain for hedging: that is that the level of disclosure by the producers regarding their hedge positions was woefully lacking.

There has been much improvement in the last month. One major company, Barrick Gold (NYSE:ABX), even went to the extent of holding seminars on hedging in Toronto and in New York. I think disclosure will continue to improve. There is a movement afoot in Australia to standardize disclosure regarding derivatives. FASB 133 and other initiatives by the SEC and FASB will also help with disclosure. There are similar initiatives in Canada. Better disclosure will help to bring back investors to the sector.

Recommendations about which sector stocks are most likely to reward investors.

One is Great Basin Gold (OTC Bulletin Board: GBGLF), which has come up with some spectacular results just north of Goldstrike. The other one is Pacific Rim Mining (Toronto: PFG.T), with its property in Southern Peru. This may represent a situation of lightning striking twice. One of the principals in the company is Catherine Leod, who was also involved with Arequipa, which was subsequently bought by Barrick. Maybe she can do it again. These types of companies are once again beginning to crop up, albeit on a very limited basis. Which is encouraging.

The first of the three largest positions is Newmont Mining, largely unhedged, which has great assets and good management. Next is Harmony Gold Mining (NASDAQ:HGMCY), which is based in South Africa, which produces about 1.3 million ounces of gold per annum. They have fairly high costs and not great assets. They've been very successful at reducing costs of their mines in South Africa. Also their financial management's been excellent. They are totally unhedged except for a small hedge on a Canadian asset that they recently purchased called the Bisset Mine. They have net cash on the balance sheet yet are extremely operationally leveraged to any changes to the gold price. The third largest recommended holding is Freeport McMoRan (NYSE:FCX); it controls one of the world's great gold and copper mines.

Agnico is a great exploration play. The company, in terms of its hedge book, is relatively light. It still offers great leverage to the gold price. It's a one-deposit company. Management really knows it well and operates a very tight ship.

It's very difficult for an investor to pick any single gold stock. A diversified basket is most recommended.

Placer Dome (NYSE:PDG) has the leverage that is provided by its development projects, which gives an intriguing aspect to the upside. Of mention also is Freeport-McMoRan Copper & Gold as a hybrid gold company, but the standard concern is about what's going on in Indonesia .

A 48-page Investing in Gold Companies Report Issue is available and includes:

  1. The confidential Off–The–Record survey of management performance at 17 Gold firms asked market insiders about the ability of management teams to create shareholder value. In a sector where many management teams are rated on the basis of their M&A and also hedging activity, some CEOs are chastised for overpaying for acquisitions.
  2. Firms reviewed in Off–The–Record include:
  3. Agnico-Eagle Mines, Apex Silver, Barrick, Battle Mountain, Cambior, Echo Bay, Franco-Nevada, Freeport-McMoRan, Goldcorp, Hoarmony Gold, Homestake, Kinross, Meridian Gold, Newmont Mining, Placer Dome, Stillwater Mining and Teck Corporation.
  4. Four (average 2,500 words) CEO Interviews with top management from the following sector firms discussing their future plans and outlook for their firm and the Gold sector:
  5. Agnico-Eagle, Kinross, Echo Bay and Golden Eagle International.
  6. To obtain a copy of this insightful 48-page report, see http://www.twst.com/info20.htm This special section is also included in the NATURAL RESOURCES Sector of TWST On–line at http://www.twst.com/subscribe/natura_resou.html

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