Analysts at Ambrian Capital reckon investors may need to be more picky as they search for the hidden nuggets of the gold sector in the coming year.
While its analysts rubbed shoulders with the great and the good of the mining industry at the Indaba conference in Cape Town, the City broker published an in-depth research report that gives a forensic assessment of the increasingly expensive gold sector.
“Gold-focused mining equities performed well in 2010, as the gold price continued to rally, breaking new highs,” said Peter Davey, Ambian’s chief mining analyst.
He adds: “Many investors had the opportunity to yield good returns - without necessarily having had to be too objective when it came to the question of which particular stocks to have picked.
"A large number of junior explorers acquired tenements in gold exploration hotspots and without a single drill-hole their share prices sky rocketed.”
The analyst reckons that this exuberance will continue if the gold price continues its ‘northward trend’.
“Whilst we are certainly bullish on the gold price for 2011, we would prefer to recommend stocks that, in our view, present more tangible prospects for exploration success than simply being in the right location.”
Ambrian's mining experts stress that most stocks in the sector are now priced at ‘hefty premiums’ their asset value and bargains are hard to find. However the four-man team picked out three outstanding buys for 2012 and another promising trio to go on the watch list.
The Ambrian top picks for 2011 are Avocet Mining (LON:AVM), Gold One (ASX:GDO) and Chalice Gold Mines (ASX:CHN). Given an honourable mention are Archipelago Resources (LON:AR), Centamin Egypt (LON:CEY), Condor Resources (LON:CNR) and Nyota Minerals (LON:NYO, ASX:NYO).
Ambrian also named several junior gold stocks as ‘relatively cheap producers’, based on 2011 estimates. The list includes: Norseman Gold (LON:NGL, ASX:NGX), Orosur Mining (LON:OMI, TSX-V:OMI), Cluff Gold (LON:CLF, TSX:CLF), Goldplat (LON:GDP), Anglo Asian Mining (LON:AAZ) and Pan African Resources (LON:PAF).
Below we look what Ambrian had to say about the London-listed gold exploration groups.
Avocet Mining (LON:AVM) - Target Price 271 pence (current price 221.75 pence)
Duncan Hughes describes 2010 as a watershed for Avocet and he expects that it will complete its transformation in 2011.The junior gold firm is focusing on growth in West Africa, while the analyst thinks it will sell the Southeast Asian mining assets.
“Production fell at the company’s SE Asian operations in 2010, as it also did in 2009, but the new Inata mine was an outright winner, with production of 137,732 ounces,” Hughes said.
He adds: “Share price momentum is building as Inata delivers, the investment thesis is now about West African growth, and we firmly believe management can make this a 500,000oz pa gold company within five years.
Furthermore Hughes emphasised that Asian divestments would give Avocet a sizable war chest so there is also the potential for corporate activity.
Centamin Egypt (LON:CEY) - ‘buy’ target price 174 pence (current price 144 pence)
Adam Kiley highlighted that the unrest in Egypt has not distracted Centamin, after it had its best quarterly results to date. Going forward though he believe that underground mine develop will be critical.
“After producing 53,189 ounces at a cash cost of US$498 per ounce in the December 2010 quarter, Centamin is on track to meet its 2011 production target of 250-290,000 ounces,” Kiley said.
However, to meet those targets the continuing development of the underground holds the key.
He adds: “We believe Centamin‘s Life-Of-Mine production forecast of 415,000 ounces per annum is achievable, but we highlight that the grade mined/processed in the earlier years is much higher than that in the latter years.
“We do, however, expect the underground production to compensate this potential drop off.”
The analyst reckons the underground mine development with be the major swing factor that will determine whether or not Centamin will hit its production targets or miss them.
Archipelago Resources (LON:AR) - ‘Buy’ Target Price 74 pence (current price 64 pence)
Kiley highlights that Archipelago will be ‘London’s next gold producer’. He reckons the company has an exciting year ahead of it with the 1.7 million ounce Toka Tindung coming online in the early part 2011.
“We expect Archipelago to have an exciting 2011 on two fronts,” Kiley said.
“First, we believe it has one of the outstanding gold assets on the AIM market and will make a successful transition from developer to producer by the middle of 2011; and second, we are very bullish on the exploration potential at Toka Tindung as there has been very little exploration over the past decade.”
The analyst believe the project is currently worth US$405 million (NPV – Net Present Value), rising to US$608 million once it achieves ‘steady-state’ production.
Kiley adds: “We don‘t believe the asset should face any major issues during the ramp-up phase, as it is a relatively high-grade open-pit gold mine, that is processed in a CIL facility; this is as easy as it comes for a gold mine.”
Condor Resources (LON:CNR) - ‘Speculative buy’ target 7.5 pence (current price 6 pence)
Hughes initiated his coverage on Condor with a ‘speculative buy’ rating. In many ways the stock was the dark-horse of 2010, when it came from relative obscurity to record one of the biggest gains on London’s AIM market - the share price exploded from 0.4 pence to reach 11.5 pence in three short months.
At the turn of the new year Condor published a maiden JORC resource for the La India project, however there is more to come. Since the announcement the stock pulled back sharply.
“Last month’s announcement on the conversion of 0.9 million ounce of Russian resources to JORC-compliant resources presented an incomplete picture. Not all the data was processed and completion of the Russian resource conversion is now expected in March 2011,” Hughes said.
He adds: “We believe Condor is oversold on the back of the release of an incomplete resource statement.
“Predictably, the market reacted negatively to what appeared to be a disappointing announcement, but this should be seen as an opportunity in an exciting gold prospecting region that has effectively been ignored because of regional instability.”
The analyst reckons Condor is currently worth 7.5 pence – based on La India as it stands with a industry average value-to-resource of US$63 per ounce of gold. Furthermore he believes that the coming months will see more newsflow which will in-turn drive the shares higher.
Nyota Minerals (LON:NYO, ASX:NYO) - ‘Hold’ Target Price 27 pence (current price 25 pence)
Hughes reckons Nyota’s flagship project, Tulu Kapi in Ethiopia, has all the hallmarks of a significant gold belt that could contain a number of plus-1 million ounce gold deposits. And as such he thinks that exploration and discovery will surely drive the share price.
That said, the analyst reckons the share price is up with current events, given his 27 pence target – which is just above the current share price of 25 pence.
“Nyota Minerals has focussed the last 18 months on its Tulu Kapi gold project in Ethiopia; results have been consistently encouraging, and we fully expect the resource base to double again this year,” Hughes said.
“Nyota appointed new management at the start of 2010 and ramped up its exploration effort in the country. This has paid handsome dividends”.