Test the gleam of gold shares

Gold has been a prime beneficiary of the economic and financial turmoil of recent years, as befits its age-old role as an investment haven in troubled times. Shares in companies mining, developing or exploring for gold deposits have put in a more mixed performance, some cruising cheerfully forward, though many are well off the highs reached during the mid-2000s mining share boom and others are languishing.

However, there are good reasons why investors hoping to profit from an interest in gold should consider the shares. Other than in exceptional circumstances, such as a corporate move or a major discovery, gold shares usually move in sympathy with the metal price. But, when the shares move, they usually move further than the metal – in both directions – and, if their projects prosper, they might attract bids and, unlike the metal, eventually pay dividends.

Lately hovering at nearly $1,100, more than four times its level on the eve of the terrorist attacks of 11 September 2001, the beguiling metal has attracted jewellery demand from India, which bought 200 tonnes of gold last year, and other traditional markets, as well as China and Russia. Helping push gold higher have been investors fearful of the outlook for the US dollar and other leading currencies after the official money-printing orgy triggered by the credit crunch and recession. US ‘gold bugs’ are gushing about gold surging through $1,600 an ounce.

Recently, gold’s rise has faltered on a bounce in the dollar and that had an impact on gold shares, while over the past year it has failed to match the performance of copper, zinc and platinum. But continuing uncertainty, fuelled by fears over potential overheating of the Chinese economy, suggests that its day is far from done.

It needs to be borne in mind that, however impressive gold’s performance has been recently, in real terms, adjusted for inflation, the gold price today is still significantly lower than in 1980, when it touched $870 an ounce. That means that, except for the piece kept under the bed against revolution and social collapse, gold is essentially an asset to trade – and so are the shares.

Golden trio

Several shares have already proved rewarding for the market – and readers of Growth Company Investor. Three are Centamin Egypt, which has started selling gold from Egypt’s first gold mine in modern times; Randgold Resources, which has built up some impressive assets in West Africa with 8.8 million oz of proven and probable reserves and more on the way; and Petropavlovsk (formerly Peter Hambro Mining), which produced 487,000 oz of gold from Far Eastern Russia last year and has the prospect of useful iron ore deals with China.

Centamin Egypt, headed by Australian entrepreneur Josef El-Raghy, a former AIM share now on the Full List, cites a 6.4 million oz low-grade reserve at Sukari, with estimated resources of some 13.7 million oz. The shares having surged from 38.75p to 142.75 during the past year, now stand at 117p and may take something of a breather for now.

Randgold Resources, headed by tough South African mining figure Mark Bristow, recently added 1,800 sq km of prospects in the Democratic Republic of Congo to its assets in Mali and elsewhere in West Africa through a joint venture between its 70 per cent-owned Moto Goldmines and Congo’s state-owned mineral group, OKIMO. Between 2006 and 2008 the shares doubled to £12, at which Growth Company Investor first highlighted them, and powered all the way to £53.45 last year, before easing to £46.11, at which level they retain a strong following.

Petropavlovsk, another ascendant from AIM to the main market, has thrived, helped by the top-level connections of chief operating officer Pavel Maslovsky, and is now Russia’s third-largest gold producer, with a major iron ore deal with a Chinese group also in the offing. Steered by the entrepreneurial Peter Hambro, the company, which last autumn agreed to set up a £60 million mining fund with the pension fund of oil giant Gazprom, saw its shares motor to more than £17 in the mining boom before slumping to £4.

Now recovered somewhat to 978p a share, Petropavlovsk has placed $330 million (£206 million) of 4 per cent bonds convertible into shares at £12.93, a 32.5 per cent premium which is a demanding but attractive target. The price should at least show further bounce from present levels.

In the running

The AIM list boasts several candidates hoping to make a similar mark. One of them is European Goldfields, based in the Yukon, Canada, and hoping to make itself a ‘mid-tier gold producer’ by 2012 on the strength of its Skouries and Olympias gold, copper, lead and zinc projects in Greece and its Certej gold and silver venture in Romania.
Headed since October by mining financier Martyn Konig, appointed to handle £310 million of project financing, the company surmounted the hurdle of securing Athens’s approval of its preliminary environmental impact study for Skouries and Olympias. Certej has made slower progress with permitting than some fans had hoped, but, with an estimated eight million oz of gold in the Greek project alone, not to mention the other metals, the shares, pinpointed by Growth Company Investor last year at 153.6p and having touched 446.5p since, offer undoubted potential for the medium to longer term.

Also off the top is Medusa Mining, quoted on AIM and Down Under and on target to lift output from its Co-O gold mine in the Philippines 17 per cent to 100,000 oz this financial year, with an average gold grade of 18.7 grammes of gold per tonne of ore, cash costs of only $184 an ounce and a resource target of anything from three to seven million oz. Run by formidable managing director Geoff Davis and with another gold prospect at Bananghilig and copper at Lingig, Medusa’s shares leapt from 50.5p to 238p over the past year before easing back to 186p, at which they could prove worthwhile over the medium term.

Another West Africa player is Cluff Gold at 65.5p. Run by the entrepreneurial Algy Cluff, seasoned sector participant with some considerable successes and other less triumphant ventures to his name, the company lifted estimated resources at its Baomahun project in Sierra Leone 40 per cent to two million oz before Christmas and could repay a punt.

Elsewhere, Avocet Mining, now 94p, which lost an interim £2.7 million, hopes to double gold production this year to 200,000 oz from Penjom in Malaysia and North Lanut in Indonesia, with a contribution from Inata in Burkina Faso (a project of its Norwegian acquisition Wega). Toronto and AIM-quoted Kirkland Lake Gold, at 12.5p, has found two new high-grade gold zones at its Macassa property in Ontario; Allied Gold, at 18p, cites encouraging drill results from Pigiput in Papua New Guinea; and Conroy Diamonds and Gold, at 5.5p bouncing from a bombed-out 2p low, reports ‘promising’ gold intersections at Clay Lake in County Armagh.

Calling the shots

These days, China, when not trying to curb overheating, is not only an important buyer of gold, but plays an increasing role in gold projects. Last year China Non-Ferrous Metals, a People’s Republic corporation, bought 19.9 per cent of Chaarat Gold Holdings and, says Chaarat boss Dekel Golan, would be interested to help fund
its Chaarat project in Kyrgyzstan’s Tien Shan gold belt.

Golan expects a resource report in March to show an increase of more than 20 per cent to four million-plus oz and contends that cash operating costs of $420 to $450 an ounce are envisaged, with an average grade of up to 4.5 grammes a tonne. There is much more of the project yet to be drilled.

Golan hints that the Geneva-based company is considering ‘ring-fencing’ this property from its other targets and possibly even hiving off a separate company. He argues it could cost $350 million (£219 million) to bring Chaarat into production at a hoped-for rate of 200,000 oz a year and suggests that the Chinese, who are not minded to play the role of passive investors, would be keen to take an active hand in the financing.

Floated at 60p in 2007, Chaarat’s shares plunged to 8.75p within the past year, not helped by a financial crisis at a then key shareholder. China Non-Ferrous paid 25p and Growth Company Investor highlighted the shares in September at 23.75p, since when they have rallied to 40.25p, valuing the company at £45.5 million, and should have further to go.

Meanwhile, a group of Chinese companies is buying control of another once-battered AIM company, Oxus Gold, in a £115 million financing deal. A consortium of Chinese concerns, including Baiyin Non-Ferrous Group and the major state-owned CITIC investment group, is buying new shares at 6p and convertibles and warrants in Oxus exercisable at 7p and 10p.

These moves, which will lift the company’s AIM value from nearly £35 million to more than £140 million, form the core of a financing package that should enable the company to start underground production next year from its half-owned Amantaytau gold mine in Uzbekistan. The deal gives the Chinese consortium more than 70 per cent of Oxus, falling to 65 per cent if existing loan holders convert to shares.

Tien Wei of CITIC will become chairman of Oxus, which, suggests current chairman Richard Shead, should be able to increase gold production from Amantaytau to 300,000 oz a year. Oxus also proposes to consolidate its depressed shares on a one-for-seven basis.

Since the company’s 2001 AIM float at 30p, the shares, which initially rose above 50p, plunged to 3.73p on repeated delays and snags at Amantaytau. They have now reached 8.75p and, while not risk-free, could now begin to make solid progress.