Gold stocks have never been cheaper

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The gold price has soared in recent months over fears of a double dip recession, with investors seeking security in a tangible asset. However, some savvy investors have noticed the effect that the high gold prices will have on gold stocks, and have put their money into mining concerns focused on the precious metal. It’s only logical that as the gold price soars, so too will the sales of gold miners.

Zimbabwe is renowned for its gold deposits, typically located around greenstone belts scattered throughout the country. While Zimbabwe does not possess any large gold mines like those mined by the world’s largest mining companies, it does possess many lucrative small-scale and open-pit potential sites with reasonable quantities of the precious metal. A number of companies are actively mining in the country, and several others are in the exploration phase. If investors want exposure to gold stocks, the ZSE has little to offer. There are only two listed companies whose primary activity is gold mining, namely RioZim and Falcon Gold.

RioZim’s balance sheet carries a large amount of expensive debt, which has not allowed the group to post a meaningful result in the dollarized environment. Several months ago rumours surfaced that Rio would default on its borrowings, sending the stock into a spiral which has dragged the share price down over 62% since the end of March. Rio quickly denied the rumours, but could do little to halt the drop in price. The company’s poor performance in recent months could also relate to their struggle to find an underwriter for a much-needed rights offer. First mooted in the middle of 2010, Rio decided to raise around $40 million in order to retire their debt and embark on expansion plans which would boost the company’s earnings significantly. Only recently did the company announce that it had secured an underwriter, although nothing further has been communicated.

Falcon Gold is a minnow with a market cap of just $4.5 million on the ZSE and it is over 80%-owned by New Dawn Mining. For most of 2010 the company’s mines were under care and maintenance, but following New Dawn’s acquisition, Falgold was able to bring two of its mines back online. Unfortunately, the threat of indigenization has weighed on the share price, despite New Dawn CEO Ian Saunders announcing that the company would turn profitable this year.

While these two companies appear to be facing difficult challenges, with such a high gold price it may just be the right time to throw down the gauntlet. RioZim mined a total of 18 004 ounces of gold last year which, if sold at an average price of between $1 500 and $1 700 would result in a significant increase in turnover, thus reducing costs and improving the company’s ability to retire its expensive debt. Falcon Gold’s performance is dependent on New Dawn’s ability to raise the necessary funding ($5 million) in order to bring production to levels of 25 000-30 000 ounces of annual production by the end of 2012. In turn this could raise Falcon Gold’s turnover to around $42 million if gold prices remain at current levels. Gold production on this level would bring Falcon Gold back to prominence as a gold stock in Zimbabwe, and allow it to grow beyond its current assets.

While the gold price is high, Zimbabwe’s gold miners are benefiting from increased turnovers when they are most needed. If one is prepared to assume the high levels of risk associated with these two companies, they have never been cheaper.

By |May 12th, 2011|Categories: Markets, Research|

About the Author:

Kudzanai’s background in financial journalism with ZFN, combined with a continuing education in financial management, provide a solid grounding for his work in the research department.