Tuesday, June 14, 2011

In Gold We Trust: Standard Chartered and a good solid piece of fundy analysis on the gold sector

Reader 'PB' today alerts this humble scribe to a report that he found over at the quality blog Jesse's Cafe Américain". Entitled "In Gold We Trust" and published today June 14th by Standard Chartered, there's lots for those into juniors and gold to get their collective teeth into. Here are the front page bullet points to get you started:

Slow production growth: Most market commentary on gold centres on the direction of US dollar movements or inflation/deflation issues – we go beyond this to examine future mine supply, which we regard as an equally important driver. In our study of 375 global gold mines and projects, we note that after 10 years of a bull market, the gold mining industry has done little to bring on new supply. Our base-case scenario puts gold production growth at only 3.6% CAGR over the next five years.

High cost hurdle: Our IRR analysis of the major gold projects under construction globally reveals that the long-term gold price will need to be US$1,400/oz to justify capital cost. For greenfield projects, the gold price would need to be closer to US$2,000/oz to generate the minimum required return. Escalating costs of building gold mines could result in delays at many projects.

Deficit  market: The limited new supply comes at a time when central banks have turned from being net sellers to significant net buyers of gold. The result, in our view, will be a gold market in deficit, even assuming flat growth in demand. With the supply-demand balance so out of kilter, we see the gold price potentially going to US$5,000/oz.

Our hunting ground – the juniors: We believe the gold juniors are the best way to play a rising gold price, as they offer good growth at attractive valuations in terms of EV/resource within our universe of 106 gold companies. We think the gold majors, with their low growth, will continue to underperform the juniors, particularly those depending on expensive acquisitions for growth.

Zhaojin Mining our top pick: Among the gold companies we cover, Zhaojin Mining stands out for its superior production growth and low production cost. More importantly, it has built a track record in low-cost expansion through exploration and acquisition. We also like Zijin Mining for its cheap valuation and Philex Mining, which has the potential to create value by spinning off its petroleum business and restarting its Bulawan mine

So now we've got you in the mood, go read the whole thing here and thanks again to reader 'PB'

In Gold We Trust 061411