Gold sparkles amid market mayhem

New York (Feb 14)  A collective $3 billion in market value has been added to the thriving Australian gold sector in the past week as established producers and junior project developers alike continue a golden run.

An analysis of the bulk of the Australian Securities Exchange-listed gold sector revealed its collective market capitalisation had increased by $7.9 billion to $26.6 billion in the past three months.

The increase included a rapid $3.1 billion rise last week alone as the Australian-dollar gold price edged up to $1740 an ounce. Spot gold was trading at about $US1237 an ounce on Friday, up almost 17 per cent since January 1.

The data, compiled for Fairfax Media by Patersons Securities, includes 21 ASX-listed gold producers as well as three companies with promising development projects.

Excluding major gold producer Newcrest Mining, which has a market capitalisation of $12.5 billion, the group's combined market capitalisation was $14.1 billion, up $2 billion over the week.

Unlike other battered sectors within the mining industry where junior companies are struggling to survive, Patersons Securities analyst Matthew Trivett said investors were finding value in smaller gold stocks.

"These conditions create a great opportunity for some of these smaller development stories to actually secure good margins and financing and create robust operations," he said.

Gold hopeful Dacian Gold's market capitalisation has more than tripled in six months to just over $160 million as it works towards a final investment decision on the development of its Mt Morgans gold project in Western Australia.

Last week Dacian revealed recent drilling results highlighted the potential for the mine's three planned pits to be merged into a large 1.8 kilometre-long pit.

"There is obviously growing recognition that this is going to be a large project and there is definitely a major change in the sentiment of gold investors," chairman Rohan Williams said. "I have been doing this for 25 years or so and I haven't seen a better time."

The market's largest producers including Newcrest Mining, Evolution Mining and Northern Star Resources have also benefited from recognition of the recent rise in the US-dollar gold price, a weak local currency and lower costs across the sector have created significant positive tailwinds for Australian gold miners.

The market capitalisation of Evolution, the second-largest gold producer on the ASX, briefly ticked over $3 billion for the first time on Friday.

As interest in shining gold stocks build, Allan Gray fund manager Simon Mawhinney said investors should proceed with caution given the gold sector's past failings.

"You do have to be selective," Mr Mawhinney said.

"Mining is difficult and I think everyone underestimates the true economic costs of extracting a unit of whatever it is, in this case an ounce of gold, and replacing it with an ounce you can take out of the ground next year.

"It is clear they have to spend a lot of money to expand their mine lives and how do you know they are going to do that profitably? They have not been able to do it profitably in the past.

"The history of these gold miners is torrid, it's horrific, they are woeful capital allocators and suddenly we think they are all going to be great."

The criticism is not unfair, according to Evolution Mining chairman Jake Klein.

"If you look in the rear-view mirror we [the gold sector] probably haven't been great allocators of shareholder capital," he said.

"When the price went up we chased lower grade and higher cost ounces. There is now a renaissance within the Australian gold sector but if we fall into those traps we are going to end up with the same result.

"I think we have learnt our lesson but I don't take full blame for our past failures because shareholders were cheering us on and telling us to grow at all costs. It is going to require a new contract between shareholders and companies so that companies aren't motivated to chase marginal ounces."

Source: BusinesDay