Gold producers could benefit from increasing prices in the second half of the year, analysts say.
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Oscar CarbreraGoldman [email protected]
Coverage: Metals and Mining: Precious
Outlook: We remain bullish in our gold price outlook. Gold fundamentals have continued to strengthen over the quarter … We expect gold prices to end 2007 at $725 an ounce and average $689 an ounce during the year, driven by further weakening of the U.S. dollar, especially against Asian currencies. Demand trends from investors and central banks have provided support to gold prices. In addition, slower mine supply (due to permitting and lack of skilled labor) will also be supportive in our opinion.
Gold prices experienced a volatile first quarter in 2007, exiting the quarter at roughly $665 per ounce. Prices have since risen to above $670 per ounce. We continue to believe that gold fundamentals are strong. Demand trends have been supported by investors and central banks, while a slower mine supply (due to environmental concerns, increased cost pressures and lack of skilled labor) is likely to affect gold prices in the medium to long term in our view.
While increased central bank sales do play a risk factor to gold prices, we believe there is a general expectation for European banks to fulfill the Washington agreement quota of 500 tons per year. Therefore, anything less would be considered a positive development for gold pricing.
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Paul O'BrienRaymond [email protected]
Coverage: Mining: Gold
Outlook: What we are seeing now is an underlying seasonal weakness that is not unusual for this time of year. The demand for gold is typically weaker during the summer months before peaking in the fourth quarter. The fundamental long-term picture for gold is positive.
We expect to see a rise in the price starting in the fourth quarter, traditionally the strongest period for the physical demand for gold due primarily to purchase of gold in Asia and India and for the upcoming holidays and wedding season.
The central banks will also play a role in the improving picture and are likely to exert a positive influence on the price of gold for the fourth quarter. Thus far, they have sold only 300 tons of gold — 200 tons short of their 500-ton quota.
September marks the year-end for the central banks. Central-bank sales are likely to fall short again this year. Since the banks have not sold their quota and aren't likely to within the few remaining months, this reduction in supply contributes to an improvement in the outlook for gold.
The flat-to-declining mine production worldwide also plays an important role. Decline in output from South African mines outweighs what we expect to see from emerging areas of gold mining.
Another factor pointing to positive demand are the exchange-traded funds (ETFs) being launched around the world: StreetTRACKS Gold Shares (GLD), being one. The Italians recently announced that they will introduce new ETF investment products backed by physical metal holdings including gold.
Meridian Gold (MDG)*: Outperform
Why This Rating? Meridian has seen valuation at levels it has not seen for a while. It has been … trading at 1.4 times net asset value in line with sector averages. It is backed by an excellent performing operation the El Pe??n Mine in Chile. Meridian Gold Inc. announced quarterly $0.19 earnings per share. First quarter results for Meridian proved better than our estimates of $0.18 EPS.
Total cash costs for the quarter were announced at negative $68 an ounce versus our estimate of negative $126 an ounce (production of 70,900 ounces of gold and 1.6 million ounces of silver was previously announced). Earnings were impacted by higher than estimated operating costs and depreciation, depletion and amortization (DD&A) offset somewhat by other expenses relating to a mark-to-market gain on zinc forwards, while cash flows were impacted by deferred taxes and stock based compensation charges.
