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Placer Dome CEO expects higher bid from Barrick
By Steve James
Reuters
Friday, November 25, 2005
http://yahoo.reuters.com/financeQuoteCompanyNewsArticle.jhtml?
duid=mtfh99624_2005-11-25_16-47-20_n25496006_newsml
NEW YORK -- With the price of gold inching toward $500 an ounce for
the first time in 18 years, investors might be in a quandary: whether
to buy gold bullion or shares in gold mining companies.
"We have done better owning gold than shares," said Jay Taylor,
publisher of an industry newsletter, J Taylor's Gold & Technology
Stocks.
"In the '70s there were dramatic profit margins -- a 10 percent move
in the gold price would result in maybe 30 percent increase in share
price," he said. "If anything, it's gone the other way and now there
are shrinking margins."
However, Peter Spina, who operates GoldSeek.com, a gold industry Web
site, said more investors appear to be getting into gold shares,
attracted more by profits than the security that often comes with
owning the precious metal.
"The Newmonts and Freeports will always attract institutional funds,
the big money," he said. "Traditionally, stocks have led the gold
price by three to six months. But recently we are seeing more
investment capital entering the market."
Shares in the so-called seniors -- the big companies that mine gold --
are at or near year highs. But there were mixed results in the third
quarter as spiraling costs, especially for energy, nibbled at
profits.
Denver-based Newmont Mining Corp., the world's biggest gold producer,
reported a drop in profit, citing not only high energy costs but also
a shortage of miners and environmental protests in Peru that delayed
exploration.
And Placer Dome Inc., Canada's No. 2 gold producer, said it was hurt
by higher energy costs and a loss on hedging against metal price
fluctuations.
But Toronto-based Barrick Gold Corp. saw third-quarter profit more
than triple, and Freeport-McMoRan Copper & Gold Inc. reported higher
profit and forecast that fourth-quarter gold sales would more than
double.
Newmont stock is trading at roughly 55 times estimated 2006 earnings -
- above the sector average of 53. Barrick is at 51.5 and Placer Dome
at 81, according to Reuters data. On Wednesday, Placer Dome rejected
an unsolicited $9.2 billion takeover bid from Barrick.
Gold closed at $495.70/496.40 in London on Friday after hitting a
fresh 18-year high of $496.75. U.S. gold markets were closed Thursday
and Friday for the Thanksgiving holiday.
Asked if a rise in the gold price automatically attracted more stock
investment, Taylor was skeptical. "It's not been the case in the last
six months, as energy costs have gone up faster than the gold price.
If there is a pullback in energy costs, then I would be more
optimistic."
He said bullion and gold share investors were two distinct
groups. "The bullion guys are very sophisticated ... and American
investors are clueless with respect to gold."
Frank Holmes, chairman and chief executive of U.S. Global Investors,
which holds mining and gold company stocks, is bullish on mining
company equities.
"The gold market is in deficit. Demand is greater than supply from
the mines," he said. "It takes time to explore and develop mines,
which would account for the takeovers in the industry. There is a
scramble for assets now."
In the short term, Holmes sees a correction, with gold maybe passing
through $500, then dropping back. "The real test will be if it goes
through $520-$525, in which case it probably runs up to $650," Holmes
said. "We're in a bull market for commodities, about one quarter the
way through a 20-year cycle."
Taylor agreed that gold is in a bull market. Asked whether he would
choose to invest in physical gold or gold company stocks, he said, "I
would want some bullion for its pure wealth as it retains its value
and is a means of liquidity.
"On stocks, if costs are not rising faster than the gold price, then
you should start to see wider profit margins."
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