67 WALL STREET, New York - January 4, 2012 - The Wall Street Transcript has just published its Gold and Precious Metals Report offering a timely review of the sector to serious investors and industry executives. This Gold and Precious Metals Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Investment and Central Bank Demand - Dividends Dependent on Gold Prices - Gold Producers vs. Gold ETF - Midcap and Small-Cap Consolidation Activity
Companies include: Endeavour Silver (EXK); Alacer (ASR.TO); Apogee Silver (APE.V); Barrick (ABX) and many more.
In the following brief excerpt from the Gold and Precious Metals Report, interviewees discuss the outlook for the sector and for investors.
Elizabeth Collins, CFA, is the Associate Director of equity research for the basic materials team at Morningstar, Inc. Her responsibilities include oversight of coverage for companies in the following industries: agriculture, chemicals, coal, engineering and construction, metals and mining, steel, wood products and building materials. Before becoming an Associate Director, Ms. Collins was a Senior Analyst on the energy team, where she had oversight for Morningstar's coverage of oil services firms, oil and gas companies, and coal companies. Before joining Morningstar in January 2005, Ms. Collins was an Intern in Navigant Consulting, Inc.'s corporate finance department. She earned her MBA from DePaul University in March 2005 and holds a B.A. in psychology from Boston College. Before business school, she worked as a Youth Program Coordinator for a public housing community organization in Boston.
TWST: As we look at these changes, are they going to stay in place or are we going to see additional changes?
Ms. Collins: We talked about how there are lot of good reasons for gold prices to be high and where they are today, but I think in the long term we could see some of the pressures relieved. Some of the catalysts that people talk about for seeing gold prices fall eventually would be an increase in real interest rates, because the interest rate environment is very low right now, and that's been driving people into gold. Also, it's unusual that central banks are net buyers instead of net sellers. Jewelry is still the number one contributor to demand for gold, but its role has been lessened as the investment community has taken up more of the demand for gold, and that's an unusual phenomenon too. If these drivers flip back to the way things were in the past, it's possible that we could see gold prices come down. For gold miners, kind of a different way to approach that question is that either one of two things could happen to see the gap between gold prices and gold equities close.
One is that people could start factoring in higher-price gold price expectations or you could see the gold companies start to take more concrete actions to address the disconnect, and we've seen that this year. Many gold companies have always issued dividends in the past, but very recently they initiated dividend policies where they're specifically linked to gold price levels. Newmont (NEM)and Eldorado (EGO) have done that. It's very transparent, so each quarter their dividend from Newmont or Eldorado will be at a certain level depending on what the price of gold has been. Obviously, gold as the commodity itself doesn't offer any income. We're seeing companies trying to address the disconnect in a concrete way, and so far the equity markets have responded very positively to the extent that you can measure sentiment surrounding these announcements. At Morningstar, we like it from a fundamental perspective because mining companies tend to behave very procyclically.
When times are good and they are flush with cash, they tend to buy other companies, and those other companies tend to be trading at high valuations because times are good. And when times turn, and the industry starts faltering because commodity prices are falling, the companies are left with a lot of debt. It's very hard for mining companies to invest in a contrarian fashion, but having a gold-price-linked dividend kind of forces managers to be less procyclical and more contrarian because when times are good, they have more cash going to their shareholders, which leaves less cash on hand for them to do those acquisitions and vice versa. When gold prices fall, their dividend will decrease and they'll have that source of cash freed up to help them invest in their business.
TWST: When you look at the next year or two, what's your general thinking on gold prices?
Ms. Collins: I think that in the near term, gold prices will continue to be high and volatile because the world will continue to be giving us factors that lead to strong demand for gold from investors. I mean, in emerging economies, they will continue to be worried about inflation and that will lead to stronger investment demand for gold, while investors in developed economies will be concerned with the value of the dollar and other fiat currencies, which can drive demand for gold as a hedge against currency debasement risk. But I think in the long term, we populate our models with a lower long-term gold price assumption, which is closer to $1,200 an ounce. We do that for couple of reasons. Eventually, we will see gold prices come down if we see an increase in real interest rates - that could be one catalyst.
Also as I mentioned, it's very unlikely that equity markets in general are factoring in today's gold prices well into the future, so using a long-term gold price forecast of $1,200 an ounce really helps us to pick companies as opposed to making a sector call based on gold prices. For example, we can focus on low-cost miners and investment opportunities, where expectations for a company's production by the market are less than what we think will actually be the case. And then finally and most importantly, if you look at the cost of mine supply, the highest-cost miners are still pulling gold out of the ground at a cost that leaves them very profitable today even after factoring in for the recent cost inflation. In a commodity industry, that shouldn't necessarily be the case over the long term. I mean, South African miners, which exhibit the highest-cost structure in the industry, they can pull gold out of the ground at total costs of say $1,100 to $1,200 an ounce, and in most commodities, you should think that long-term price of the commodity will converge with the marginal cost of production.
And I think that those are forces that we'll see that play out in gold as well. Shifting over to the demand side of the picture, in order for mine supply to be demanded at all, we have to see net positive investment each and every year, which means that globally we have to buy more gold than we already have, which is a big statement. Central bank holdings alone equal 12 years of mine supply. So there is a lot of gold above the ground, and if any of these macroeconomic factors that have been causing people to invest more in gold turn around and head the other way, you could see disinvestment in gold. A lot of the forces that have been driving gold prices higher have been part of a positive feedback move. I mean, people have seen that gold has outperformed other asset classes and that has drawn them to investing in gold. If you see the flip side, things might run in the other direction.
TWST: Given your kind of cautious outlook, what are you telling investors to do?
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Gold and Precious Metals Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
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