Sector Watch: Gold mining
The profit outlook has rarely been better for gold mining companies. Gold prices have risen from around $265 per ounce in 2001 to a peak of $725 in May 2006, a 25-year high, before retreating to a 2007 level of around $670 per ounce. Most industry analysts forecast continued increases in gold prices, fueled by demand for this metal in investment and technology applications, and some experts predict $1,000 per ounce gold prices by 2010.
Most of us associate gold with rings and other jewelry, and, indeed, jewelry applications are gold’s primary use, accounting for approximately two-thirds of annual gold consumption. The demand for gold in jewelry manufacturing applications is expected to remain firm because of rising jewelry sales in India and China.
Gold is also used in aerospace, electronics and healthcare applications. Demand from these sectors reached record levels of 458 tons in 2006, primarily on the strength of demand from electronics manufacturers. Gold is used in many types of electronic circuitry and is also increasingly employed in nanotechnology applications.
Gold and the U.S. dollar hold a dominant position in international finance. During periods of political and/or economic uncertainty gold prices generally rise. With the U.S. government reporting large trade imbalances and budget deficits, many foreign investors have begun purchasing gold as a hedge against long-term dollar depreciation. Investments in gold bars and coins grew 7% in tonnage terms and 45% in dollar terms in 2006. Gold’s value also rises when other investment classes such as stocks and bonds become especially volatile. Central banks and the International Monetary Fund influence world gold prices through their purchase and sale activities. While the U.S. Federal Reserve Bank holds 16% of its assets in gold, China’s central bank holds only about 1% of its assets in gold and is likely to increase gold stockpiles in the future. Gold acquisitions by central banks are expected to support rising gold prices.
Seabridge Gold
Seabridge Gold, Inc. (AMEX: SA) is a junior gold mining company that owns low risk gold reserves in North America. It controls Courageous Lake, Canada’s largest undeveloped gold project, and Kerr-Sulphurets, one of Canada’s best undeveloped copper and gold plays. Seabridge Gold also owns the Noche Buena gold mining project in Mexico and has more Nevada gold exploration projects in its portfolio than any other junior mining company. The company reported proved gold reserves totaling 10.2 million ounces, unproved gold resources totaling 22.0 million ounces, and gold resources of 0.85 ounces per fully diluted share in a June 2007 investor presentation.
Due to its early development stage, Seabridge Gold is not yet generating revenues. Increased spending for exploration activities resulted in an increase in 2006 net losses to $14.2 million, or $0.42 per share, from a net loss of $5.1 million, or $0.17 per share, in the prior year. March quarter 2007 net losses totaled $786,000, or $0.02 per share. The company’s 2007 business plan focuses on further development of the Courageous Lake drill program and commencing drill programs at the Kerr-Sulphurets and Noche Buena mines. The undiscounted value of the company’s gold assets (before extraction and other costs) is thought to exceed $560 per share. Seabridge Gold established a 52-week high on Monday before closing at $21.71 on the American Stock Exchange. My target price is $27.
Royal Gold
Royal Gold, Inc. (Nasdaq: RGLD) is also focused on low-risk North American mineral assets. Instead of owning mines, this company owns royalty interests on mine production. It generates royalties from the Pipeline Mining Complex, the Leeville project, the Betze-Post mine, the Bald Mountain and Robinson mines in Nevada and smaller mines in Montana, Argentina, Mexico and West Africa.
At year-end 2006, Royal Gold’s precious metal reserves subject to royalty interests totaled 42.2 million ounces of gold and 595 million ounces of silver. Gold reserves increased 97% and silver reserves jumped 34-fold in 2006.
In the nine months ended March 31, 2007, Royal Gold’s net income rose 79% to $14 million, or $0.59 per share, from $7.8 million, or $0.34 per share, in the same period a year ago. In April the company announced plans to acquire Battle Mountain Gold Exploration for 1.5 million shares of Royal Gold stock. Analysts expect Royal Gold to produce 50% growth this year and 32% growth next year. Royal Gold shares were recently trading at a 29 times P/E multiple. My $35 price target for Royal Gold is 40% above the current price.
