John Ing of Maison Placements Canada has long made the case that gold is an effective hedge against both a lower U.S. dollar and a weaker economy. For most of the past six years, however, the U.S. economy has boomed while the value of the dollar rose by more than 40%; recently, it reached a 15-year high. But the winds of change are starting to blow in gold’s favour, mostly because of a growing belief that the dollar’s bull run is over, owing to the current economic downturn. Based on the latest government data, Ing notes that the U.S. economy is “flatter than Frankenstein’s heartbeat” and that a weaker economy is gold’s best friend.
Although Ing devotes much of his research to under-priced junior explorers and mid-tier companies (T.N.M., July 16-22/01), he also keeps a close eye on senior producers, particularly those poised to benefit from ongoing industry consolidation. Not surprisingly,
“The combined company will have a market capitalization of US$9 billion, low costs and almost US$1 billion in cash,” Ing notes. “We view the merger as a watershed event, in that ‘the smart money’ has positioned itself for gold’s recovery.”
Some market-watchers have been only lukewarm about the Homestake acquisition, especially given Barrick’s decision to place its Pascua-Lama project on hold. However, Ing takes a longer-term view, pointing out that the inclusion of Homestake’s 60%-owned Valedero property will improve the economics of Barrick’s Pascua-Lama project. Both gold projects are in the Chilean Andes, near and straddling the border with Argentina.
“Hidden in the acquisition is the fact that Homestake brings almost 2 million ounces of unhedged annual production, as well as almost 21 million ounces of unhedged reserves,” Ing adds. “That position gives Barrick at least a few years of room to work its magic in the hedging markets when contangos return, or allows Barrick wriggle room in the event gold blows through their collars. Analysts overlook that Barrick consistently makes money through its hedge book and not mining. And that is the rationale behind Barrick’s acquisition of Homestake.”
Ing also likes
Ing appears to be less keen about the future prospects of
Although Newmont is expected to produce an impressive 5.2 million oz. gold this year at a total cash cost of US$180 per oz., Ing says the company’s balance sheet is weak. Several operations didn’t perform as well as expected in the latest quarter, including Yanacocha in Peru. “Battle Mountain’s Phoenix is still in the permitting stage,” Ing adds, “but we do not expect this project to be in production soon since the economics are poor.”
As for Ashanti, Ing gives the company credit for improving output and lowering costs, with the Geita mine in Tanzania being a major contributor. The company’s hedge book is healthier, and debt has been lowered to US$290 million. “Although the hedge book is no longer a problem, the whopping debt repayment in 2003 and the uncertain shareholder ownership make the shares a risky hold today,” Ing concludes.
Placer, meanwhile, was rapped for its penchant for getting involved in “complex and difficult deals.” Ing notes, for example, that Placer has spent US$24 million at the US$1.1-billion Getchell project in Nevada, “and there is nothing to show in additional reserves.” For its part, Placer expects to release the results of this year’s work at Getchell by year-end.
Ing also believes that Placer’s plans to secure rights to the Pueblo Viejo gold deposit in the Dominican Republic could be complex. On the technical front, he notes that a combination of traditional technology and bio-leaching may be required, along with intensive metallurgical work.
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