The Gold Report –
The Gold Report: Swiss Bank UBS recently lowered its 2011 average gold price to $1,615/ounce (oz.) to account for a stronger U.S. dollar, and predicted an average gold price in 2012 of $2,075/oz. How does that compare to Global Hunter Securities’ projections?
Jeff Wright: We have a somewhat lower view of gold into 2012, closer to an average of $1,800/oz. to $1,900/oz.
In some respects, the dollar is weakening, but as the sovereign debt crisis in Europe lingers, the dollar has also strengthened. As long as you have worldwide volatility and a strengthening dollar, gold will be kept in check because its price is denominated in dollars. Once the European debt crisis resolves itself, gold will continue its upward bias and appreciate over time.
TGR: Gold recently had its best week since early September, rising a bit over 2%. Have we reached the floor at above $1,600/oz. or could we see a dip?
JW: We can certainly dip below that. When we’re in a $1,660-$1,680/oz. range, we could easily drop $100/oz. based on an unforeseen event in Europe or the Middle East. On a percentage basis, I don’t think going below $1,600/oz. is a big stretch.
TGR: Recently, gold has traded up on positive economic data in the United States and down on negative news. Can you hazard a guess on what’s happening?
JW: When there has been negative news in the marketplace, either financial or political, investors have sought cash, not gold. We’ve also seen increased margin requirements in the futures market for gold, which I think caused some liquidation in gold contracts. Fund managers had to rotate out of gold to raise capital to meet their new margin requirements.
TGR: August and September were rough months for a number of precious metals companies. In the producer arena in particular, it seems like the one-mine names were hardest hit, despite having stable revenues. Does this surprise you?
JW: It didn’t surprise me within the junior realm particularly, as we saw a flight from equities with very robust gold prices. I think it is more of a shift to larger companies with more stable, bigger production profiles and stronger balance sheets; it is not necessarily a reflection on a junior company’s ability to perform and produce. In more uncertain markets, the equity markets migrate toward larger-cap equities. That has been the case over multiple up-and-down cycles in the stock market.
What has surprised me is that the correlation between producers and development explorers has not been as sharp as I would have anticipated. I would have thought the producers, even the junior producers, would have held their ground more than they did in correlation to the junior explorers. The junior explorers are the hardest hit when people are taking flight from equities. While they were hard hit in this instance, the disparity was not as great as it had been in previous instances.
TGR: You have rerated some of the companies you cover because of how far their share prices fell in that drop. How are these turbulent markets creating buying opportunities?
JW: Given that gold and silver are at near-record levels, production companies with solid balance sheets that have increased their production profiles over the past 12-24 months will produce significant, free cash flow for the foreseeable future. From a generic financial perspective, the opportunities are attractive. The margins have increased, and while the cash costs have gone up, they have not gone up as much as the commodities have risen themselves. In some cases, you have a situation with expanding margins and expanding production. This makes a company attractive for either initiation or revaluation. A small-cap producer can make a compelling story unless it fails to execute over the longer term. If there is no reason this company should be at this price, it should go up in a sensible and rational equities market.
TGR: But do you expect the equities market to be rational in the near term?
JW: While the market is still fairly volatile, the past week has been relatively good as far as stabilizing the equity markets and some of the mining names. That doesn’t mean we are out of the woods quite yet.
If you look at the metrics of volatility, the VIX Volatility Index remains fairly elevated. Until that volatility is taken out of the market, you could have a swing in the equity market up or down that would not be indicative of the companies’ cash flow profiles.
TGR: What’s your near-term outlook for the precious metals space?
JW: I think the junior miners and the midtier miners will see share price appreciation over the next 12 months. Is it going to be a steady progression? If it were only that easy. It could be a bumpy ride until the volatility subsides in the marketplace. But over the long term, I think it will be an upward momentum.
I think you’ll see institutional investors return to natural resource and precious metals equities just based on the substantial price improvement and top-line/bottom-line improvement over where we were a couple years ago. The great thing is it makes a CEO and management team’s job a little easier at $1,600/oz. gold than it was at, say, $1,200/oz. gold, which just a couple years ago was a very good price.
TGR: Jeff, thank you for your time and your insights.
Jeff Wright joined Global Hunter Securities with more than 15 years of capital markets experience, most recently as a managing director and head of the natural-resource practice at Shoreline Pacific LLC. Previously, he was vice president at Montgomery & Co. and was a leader on the team that launched a capital markets business in a historically mergers and acquisitions-focused investment bank. Wright was formerly a vice president at Robertson Stephens in the equity financial products group. He received his Master of Business Administration degree from the University of Southern California and his Bachelor of Arts degree in political science from North Carolina State University.
Article published courtesy of The Gold Report – www.theaureport.com