Sprott Asset Management is out Wednesday with another rosy view of the gold market, maintaining that "the fun has only just begun," especially when it comes to equities.
The firm's argument centres on the fact that while the commodity has risen about 20 per cent since the start of 2010, gold stocks - even some of the biggest names in the industry - have significantly trailed its performance.
Sprott points to the NYSE Arca Gold Bugs Index , which is designed to give investors exposure to near-term movements in the gold price by focusing on companies that do not hedge production beyond 1.5 years.
Despite a 35-per-cent increase in the price of gold since March, 2008, the HUI is still trading close to the same level as when gold was barely over $1,000 (U.S.).
Sprott points out that any increase in the price of gold above a producer's total cost per ounce significantly increases a company's net income in percentage terms. For instance, a gold producer with cash costs of $500 per ounce can generate a earnings before interest, taxes, depreciation and amortization (EBITDA) of $500 an ounce mined when gold is fetching $1,000. But most mining companies have extra costs on top of their operating expenses. A new gold project may have extra expenses that will add another $300 or so to costs, so a miner only generates $200 of margin.
With $1,350 gold, however, and the same cost structure of $500 in operating costs and $300 in additional costs, a gold company's margins will rise from $200 to $550 an ounce, a gain of 175 per cent.
"We don't believe current gold equity valuations reflect this potential margin increase at all, but they soon will. A re-rating is just around the corner," said Sprott.
To boot, Sprott said HUI's recent relative underperformance to gold is not in line with historical trends, and HUI technicals are also signaling a bullish uptrend.
Upside: Sprott suggests producers' stock prices over the next two quarters will be catching up to the gains seen in the bullion market, "as investors realize how much stronger gold producers' earnings will be at $1,350 gold."
Canadian Imperial Bank of Commerce has started a new up-leg as it approaches $80 per share, said technical analysts Monica Rizk and Ron Meisels of Phases & Cycles. Technical indicators, including the rising 40-week moving average and the moving average convergence divergence (MACD), confirm the bullish status, and only a decline below $70-71 would reverse this, they said.
Upside: Point and figure measurements, which filter out non-significant price movements, suggest targets of $99 and $109 from current levels, the analysts said.
Orezone Gold Corp. could become a prime takeover candidate for an African gold producer looking to expand or establish itself in Burkina Faso, said Desjardins Securities analyst Brian Christie. The comment follows Orezone hiking the gold resource estimate for its Bombore project by 30 per cent to 3.46 million ounces.
Upside: Desjardins rates Orezone as a "Buy-Speculative" with a $3 target price.
West Fraser Timber Co. Ltd. reported solid results and cash flows, contributing to a further 50-per-cent reduction in net debt, said Desjardins Securities analyst Pierre Lacrois. "While the outlook for lumber remains highly uncertain at this point, pulp seems to have stabilized somewhat," he said.
Upside: Mr. Lacrois raised his his target price to $47.75 from $44.25 to reflect slightly better anticipated earnings in 2011 and lower debt.
Gabriel Resources Ltd.'s new chief executive officer Jonathan Henry is making progress towards local and federal acceptance of the Rosia Montana gold project in Romania, said RBC Dominion Securities Inc. analyst Stephen Walker. A Romanian Technical Assessment Committee process restarted in late September after a three-year hiatus.
Upside: Mr. Walker increased his price target on the stock by $3 to $7 and upgraded the stock to a "sector perform" from "underperform."
Darcy Keith