Gold: old, new, borrowed and blue

Why Lydian International's stock price jumped 105% on Wednesday, and other wild stories from the edge of "real money" madness.

JOHANNESBURG - 

Toronto-listed Lydian International's stock price jumped 105% on Wednesday, once again illustrating how gold bugs, a highly-bred pedigreed species, are prepared to take wild rides in one of the world's most volatile and dangerous equity subsectors. In Lydian's case, a savagely leaping stock price was triggered by results from a step-out drilling program recently initiated at Lydian's Amulsar gold discovery in Armenia.

Armenia? Well, so it goes. Listed gold stocks not only live on the edge of global monetary madness ("gold is the only real money"), they also comprise one of the world's least consolidated mining sectors, as likely to find gold where it has been known to be found for millennia, as on the Galapagos Islands. Where, as a sampling, around 70% of global seaborne iron ore trade is dominated by just three companies, Vale, Rio Tinto, and BHP Billiton, there are hundreds upon hundreds of gold stocks, listed and unlisted, scattered across the world.

There are also countless informal miners, trying, like most formal gold diggers, to scratch out a living. According to a recent roadshow presentation by Ampella Mining, which has made an impressive strike in Burkina Faso, various estimates put the number of artisanal gold miners active in the country at around 200,000, working more than 200 mining sites throughout the country. Making money is tough, even in gold.

Barrick, the world's biggest gold miner by value and production, posted US$2.4bn in EBITDA (earnings before interest, tax, depreciation and amortisation) in its financial 2008 year; BHP Billiton posted underlying EBIT of US$6.2bn from its iron ore division, alone, in its financial year to 30 June 2009. BHP Billiton group EBIT was US$18.2bn for a 12 month period when, by some accounts at least, the world had ended, except, of course, for the chosen and enlightened few who held gold bullion. Those with iron ore did even better.

It seems to matter but little that gold miners often struggle to make money; some listed gold stocks have nothing vaguely close to a gold mine, and many never will have, but that is never seen as a reason to let a wild story be cloyed by potential fact. So it is that, as a sampling, that while the steam may have run out of the price, for now at least, for Ventana Gold, the stock continues to sit more than 12,000% higher than its 12-month low.

Ventana has this year published a series of high grade drill intercepts from the La Mascota mineralized zone on its flagship La Bodega gold property in Colombia. At least one analyst has mentioned a price target of C$10.00 a share for Ventana (against current trades just below C$5.00), not least on the back of a projected 550,000 ounces of gold production a year at total cash costs of just US$295 an ounce.

While Ventana has many moons to go before completing its drilling programme, Greystar, which has long proven up a resource of more than 10m ounces of gold, and more than 60m ounces of silver, at Angostura, also in Colombia, is languishing 36% below its stock price highs. Greystar carries a market value of US$200m, considerably less than the US$378m carried by Ventana. So it goes.

Speculators and the odd investor are spoilt for choice in the global gold sector. The aggregated market value of listed gold stocks around the world runs close to US$300bn, compared to US$167bn for BHP Billiton alone, the world's biggest diversified resources stock, and, currently, one of the world's better performing stocks of any kind. There are, however, a good number of gold stocks also trading close to 12-month highs.

Seen as a grouping, gold stocks have performed comparatively well over the past 12 months, but have "bounced" by lesser numbers than a good number of other mining equity subsectors.

The key reason, no doubt, can be found in the relative outperformance of the dollar gold bullion price, which fell less than most other commodities, but has also risen less from lows. Gold spiked above US$1,000 an ounce back in March 2008, at the height of the Bear Stearns "crisis" on Wall Street; the price would later fall below US$700 an ounce, before again briefly spiking above US$1,000 this year, without showing any conviction that it would gain traction above four figures.

For gold companies, this means that quarter-on-quarter comparisons are becoming less focused on gold prices, than on attacking costs, increasing net gold output, and on adding new ounces to the forward pipeline at costs that appeal to investors. These are each tough nuts to crack.

Copper stocks, which have recorded among the best recoveries, also comprise the subsector with the most cross-overs with gold stocks; Barrick, for one, is a substantial copper producer and while Freeport-McMoRan ranks as a global Tier I gold digger, its primary business is advertised as the world's biggest publicly traded copper miner; it is also one of the world's leading molybdenum diggers.

Among the world's top gold deposits, copper abounds; there is Grasberg (primarily copper, owned mainly by Freeport-McMoRan), Olympic Dam (copper, and the world's biggest uranium deposit, BHP Billiton), Pebble (copper, Northern Dynasty, and Anglo American), Natalka (Polyus), Sukhoi Log (Polyus, maybe), Oyu Tolgoi (copper, Ivanhoe Mines, and Rio Tinto), Reko Diq (copper, Barrick), and Lihir.

At this point, top performing gold stocks tend to be those with compelling stories, generated by newsflow, as in the case of Lydian, those stocks under actual (such as

Glencar Mining) or potential (such as Osisko) bid, and also those stocks sniffed out by tipsters (such as West Timmins) and other gurus who have long gone over the edge. Looking at broader patterns, after two weeks of tough going, it has been from the closing week of June that listed mining stocks of all kinds have attracted net positive inflows.

The dynamic has been characterised by general rises in equity markets, to around 10-month highs, the outperformance of mining stocks generally, and, at the fundamental level, gold miners dealing with a dollar gold price that has broadly churned since March 2008. At this point, for investors who count size as really important, Kinross Gold ranks as the price-leading Tier I gold stock. Kinross was one gold stock chosen for investment earlier this year by US hedge fund Paulson & Co Inc., which famously ripped gains of US$ 3.7bn out of the system, betting against (mainly US) banks in 2007 and 2008.

Paulson & Co. also bought into Tier I members Gold Fields, and AngloGold Ashanti, plus a significant stake in the SPDR Gold Shares ETF, along with a stake in the recently in-production Centamin Egypt. While Gold Fields may have slipped somewhat out of the limelight for now, at least, the other stocks mentioned rank high among in-demand gold names. Could Kinross's rally extend? Kinross has spent much of this decade transforming from a stodgy, higher cost gold producer to one that increasingly reports lower costs, along with a highly convincing longer term growth profile.

During 2008, Kinross moved into the bottom quartile of the global gold industry cost curve, against the trend of rising costs and declining production. This year has seen dramatic year-on-year increases in production and profit margins, underpinning a generally upbeat news flow.  

Another Tier I gold stock, far bigger than Kinross in terms of market value, has for three months been attempting to top its 12-month high. This is Goldcorp, traditionally among the more speculative of the big gold stocks, likely to overshoot on both the rise and the fall. For those investors who believe that patterns in gold stocks pricing accurately anticipate future moves in dollar gold bullion prices, then Goldcorp, almost alone, would stand as strong potential evidence that gold bullion could attempt to break out on the upside, most likely towards the end of the Northern Hemisphere summer.

Below the Tier I level, the evergreen favourites at the Tier II level continue to remain in heavy demand, in the form of Iamgold, Eldorado, Golden Star, and Red Back.

Iamgold mines on three continents, including Africa; Red Back and Golden Star mine in Africa alone. By contrast, there has been ongoing profit taking in Randgold Resources, an Africa-only gold miner, possibly associated with its bid for Moto Goldmines, in partnership with joint bidder AngloGold Ashanti, for one of the world's major gold fields, in the tricky and atavistic Democratic Republic of the Congo.

Tier III favourites still in place include Alamos, Kingsgate, Pan African, Jaguar, and Semafo. Star gold developers and explorers include mainly the usual bunch of suspects:

Andean, Medusa, Osisko (where Goldcorp upped its stake this week), Seabridge, US Gold Corp., highly speculative Perseus Mining, East Asia Minerals, Continental Mines, Moneta Porcupine, Western Copper (a relative newcomer), Conquest Mining, Hill End Gold (going like the proverbial Boeing), Dioro Exploration, Lake Shore Gold, Linear Gold, Queenston Mining, La Mancha Resources (becoming a serial suspect), Catalpa Resources, Patagonia Gold, Golden Odyssey, Glencar Mining, Romarco, Emmerson Resources, Hillgrove Resources, Chalice Gold, Orvana Minerals, very speculative San Gold, Troy Resources, Citadel Resource, Goldrich (a relative newcomer) Premier Gold, St Andrew Goldfields, and West Timmins.

Previous high flyers that have apparently faded somewhat include Novagold, Colombia Goldfields, Azteca Gold, Frontier Mining, New Dawn, PanAust, San Anton Resource, Trilliant, High River, and micro caps such as Appleton Exploration, Laurentian Gold, Channel Resources, Shield Mining, Mirasol Resources, Luiri Gold, and PMI Gold.

Enthusiasm has also ebbed away somewhat for some spectacular erstwhile performers such as Norseman Gold, Mano River, Australian Solomons, Sandfire Resources, and First Uranium, which may be on the way to upgrading gold to its primary output - but that is a cloudy story for another day.

These times are strange, as ever, and bugs can do strange things. While Lydian soared by more than 100%, so it was that overnight, East Asia Minerals hopped by 30%, Colombia Goldfields by 27%, and Queensland Minerals fell by 29%. Tianshan Goldfields moved up by 28%, Philex Gold soared by 63%, and Reed Resources really pulled off a good move, jumping 80%, but more on a story to do with lithium than with gold. So it goes.

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