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1. Daily Letter | 1 18 February 2009 Canaccord Adams is the global capital markets group of Canaccord Capital Inc. (CCI : TSX|AIM) The recommendations and opinions…
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  • 1. Daily Letter | 1 18 February 2009 Canaccord Adams is the global capital markets group of Canaccord Capital Inc. (CCI : TSX|AIM) The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analyst’s personal, independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important information, please see the Important Disclosures section in the appendix of this document or visit http://www.canaccordadams.com/research/Disclosure.htm. Metals and Mining -- Precious Metals and Minerals Steven Butler 1.416.869.7918 steven.butler@canaccordadams.com John Vinnai 1.416.869.7289 john.vinnai@canaccordadams.com GOLD’S RUN NOT YET DONE; RAISING PEAK GOLD SCENARIO TO $1,100/OZ As gold passes through our previous $950/oz peak target price (for equity target price setting), we remain confident in the bullish view on gold. As such, we are raising our peak gold price by a further $150/oz to $1,100/oz gold. Given the leverage to gold, our equity target prices have increased by approximately 20% (Figure 1). Our official 2009 earnings and cash flow estimates also reflect a bump in gold price to $975/oz from $900 (Figure 2 and 3). It is fair enough that gold may be in a bubble, but we think the bubble is still being blown up. Overall global financial market conditions remain weak and we believe the safe haven flight to gold can continue. Credit risk, while lower than most recent highs, is as high as the first peak last March which coincided with the collapse of Bear Stearns; but, gold is still lower than the US$1,003/oz peak set one year ago (Figure 4). Bear Stearns was a relatively small foreshadowing event in what was a growing list of much greater financial calamities that have occurred over the past year. Of particular interest has been the abrupt turn from the depths of deflation a few months ago (Figure 5). While inflation has not yet registered in near-term expectations, we ultimately believe that inflation and general devaluation of paper currencies will be the result of the concerted monetary and fiscal policies to reflate the global economy. Gold’s run since autumn 2008 has been a true bull run, rising despite the strength of the US dollar (Figure 6) and outperforming virtually ever other commodity and currency class and setting recent new highs in Euro, GBP and CAD (among other) currency terms. Indeed, the biggest factor in the current spike in gold has been increasing momentum of investment demand as demonstrated by the abrupt rise in SPDR gold trust holdings (Figure 7). Already year-to-date, this trust has added over 228 tonnes of gold for an annualized increase of over 1,700 tonnes in this trust alone. By reference, all ETF holdings in gold last year rose by only 308 tonnes to end 2008 at 1,209 tonnes. Clearly, a small portion of the immense amount of money on the sidelines (money market funds in the US grew by 23.4% in 2008 to $3.83 trillion) has made its way into gold. While the SPDR gold trust has been on quite a run, keep in mind it is still only a $31 billion investment, relatively paltry when measured against the trillions on the sidelines and trillions in bailouts and stimulus packages.
  • 2. Daily Letter | 2 18 February 2009 The record-setting level of investment demand is more than offsetting the slackening levels of fabrication demand, lower de-hedging demand and potentially higher scrap supply at these high prices. The low level of recent central bank selling (and noteable purchases by the Russian central bank) has also provided some support. We expect that a renewed Central Bank Gold Agreement (with potential IMF sales) in Europe will provide additional support for another five-year term commencing September 2009. Ratings and Targets As mentioned above, we have raised our peak gold scenario for equity target price setting by $150/oz to $1,100/oz. See Figure 1 for details. Target prices have increased by approximately 20% given the leverage to our higher peak gold price. Superior NAV leverage to gold is delivered by Golden Star, Northgate, Barrick and Agnico-Eagle. We have not materially changed target multiples except in the case of Eldorado Gold (return to historically higher multiple) and Silver Wheaton (balance sheet/financial covenant relief following recent equity financing). There are no ratings changes as a result of this update. Figure 1: Ratings and Targets Implied Peak NAVPS @ Peak NAVPS Spot P/NAV Peak P/NAV Mult. @ Peak Mult. Rating Target Return $950 $1100 Increase/ @ 5%/$970 $950 $1100 Increase/ Currency Price Previous New Previous New % Previous New (Decline) Current Previous New (Decline) SENIOR PRODUCERS Barrick Gold US$ $37.29 BUY BUY $39.25 $51.00 37% $26.17 $34.18 31% 1.37x 1.50x 1.50x 0% Goldcorp US$ $31.84 HOLD HOLD $29.25 $37.50 18% $19.55 $23.46 20% 1.58x 1.50x 1.60x 7% Kinross Gold US$ $19.17 HOLD HOLD $19.00 $23.50 23% $13.06 $16.20 24% 1.41x 1.45x 1.45x 0% INTERMEDIATE PRODUCERS Agnico-Eagle Mines US$ $54.21 BUY BUY $59.00 $72.00 33% $32.66 $41.08 26% 1.60x 1.80x 1.75x (3%) Centerra Gold C$ $5.30 SPEC BUY SPEC BUY $7.50 $7.50 42% $9.39 $12.04 28% 0.43x 0.65x 0.50x (23%) IAMGOLD US$ $8.58 R R R R R R R R R R R R Randgold Resources US$ $50.08 BUY BUY $51.25 $63.00 26% $34.18 $42.02 23% 1.42x 1.50x 1.50x 0% Yamana Gold US$ $9.38 BUY BUY $12.00 $14.00 49% $9.29 $10.88 17% 1.01x 1.30x 1.30x 0% Sr./Int. Capped Average 30% 24% 1.37x 1.45x 1.46x 1% JUNIOR PRODUCERS Eldorado Gold US$ $8.86 HOLD HOLD $7.50 $10.65 20% $5.71 $7.10 24% 1.52x 1.32x 1.50x 14% Gold Wheaton C$ $0.30 BUY BUY $0.65 $0.65 120% $0.55 $0.50 (8%) 0.52x 1.00x 1.00x 0% Golden Star US$ $1.82 HOLD HOLD $1.30 $2.15 18% $2.56 $3.94 54% 0.66x 0.50x 0.55x 10% Northgate US$ $1.46 BUY BUY $1.50 $2.15 47% $2.99 $4.26 42% 0.46x 0.50x 0.50x 0% SILVER PRODUCERS Pan American Silver US$ $17.42 HOLD HOLD $17.00 $20.00 15% $12.52 $13.57 8% 1.29x 1.35x 1.45x 7% Silver Wheaton US$ $7.47 BUY BUY $8.25 $10.00 34% $9.21 $8.67 (6%) 0.84x 0.90x 1.15x 28% Source: Canaccord Adams estimates Company-specific updates Our valuations and estimates have been updated for three recent equity financings in: • Kinross Gold (KGC : NYSE | HOLD); • Pan American Silver (PAAS : NASDAQ | HOLD); and • Silver Wheaton (SLW : NYSE | BUY). • In addition, we have adjusted our Gold Wheaton (GG : NYSE | HOLD) valuation and estimates to exclude any value for the gold stream from the Tulsequah project given yesterday’s suspension of construction activities by Redcorp Ventures and remove for the time being (pending financing arrangements), the $75 mm option to acquire an
  • 3. Daily Letter | 3 18 February 2009 additional 15% offtake from First Uranium’s MWS project. In addition, our valuation now assumes equity conversion of the C$50 mm payment to FNX in July 2010 at an assumed price of C$0.50/share (range will be $0.20-$1.00, our assumption of $0.50/share is neutral to NAV but dilutive to EPS estimates beyond July 2010). The impact of these revisions is largely offset by the raising of our peak gold scenario and a weaker Canadian dollar exchange rate (US$/C$0.80 versus $0.85 previously) for an unchanged target price of C$0.65. • Our Eldorado model has been updated to reflect the 2008 year end update and 2009 guidance. Gold & Silver price revisions for earnings/cash flow purposes Gold For earnings/cash flow purposes, we have increased our 2009 gold price estimate by $75/oz to $975/oz, and our 2010 estimate by $50/oz to $900/oz. Our 2011 and long-term estimates (2012 and beyond) are unchanged at $800/oz and $750/oz. Silver For earnings/cash flow purposes, we have increased our 2009 silver price estimate by $1.25/oz to $13.50/oz, and our 2010 estimate by $0.25/oz to $13.75/oz. Our 2011 and long term estimates (2012 and beyond) are unchanged at $14.00/oz. Earnings and Cash Flow Changes The biggest increase in 2009 cash flow estimates is noted in Golden Star (GSS : AMEX | HOLD), Agnico (AEM : NYSE | BUY) and Centerra (CG : TSX | SPECULATIVE BUY). Figure 2: Metals Prices and FX estimates Q4/07A Q3/08A Q4/08A Q4/08A % Change vs. 2008A 2009E 2010E 2011E 2012E Long Q3/08A Q4/07A Term Gold (US$/oz) US$/oz $789 $870 $799 (8.2%) 1.2% $873 $975 $900 $800 $750 $750 Silver (US$/oz) US$/oz $14.24 $15.00 $10.23 (31.8%) (28.1%) $14.99 $13.50 $13.75 $14.00 $14.00 $14.00 Copper US$/lb) US$/lb $3.29 $3.49 $1.79 (48.7%) (45.6%) $3.16 $1.50 $2.00 $2.50 $2.25 $2.00 Zinc (US$/lb) US$/lb $1.21 $0.81 $0.54 (32.7%) (54.9%) $0.86 $0.63 $0.70 $0.90 $1.00 $0.80 US/CDN Exchange $1.02 $0.96 $0.83 (14.0%) (18.9%) $0.94 $0.85 $0.90 $0.90 $0.90 $0.90 US/AUS Exchange $0.89 $0.89 $0.67 (24.3%) (24.4%) $0.85 $0.70 $0.75 $0.80 $0.80 $0.80 US/EUR Exchange $1.45 $1.50 $1.32 (12.2%) (8.9%) $1.47 $1.40 $1.34 $1.35 $1.30 $1.30 REAL/US Exchange R$ 1.79 R$ 1.67 R$ 2.32 (28.0%) (22.9%) R$ 1.84 R$ 2.25 R$ 2.20 R$ 2.20 R$ 2.20 R$ 2.20 Source: Bloomberg, Canaccord Adams estimate
  • 4. Daily Letter | 4 18 February 2009 Figure 3: EPS and CFPS revisions EPS Estimates CFPS Estimates 2008E 2009E 2008E 2009E Previous New % chg Previous New % chg Previous New % chg Previous New % chg SENIOR PRODUCERS Barrick Gold $1.85 $1.85 0% $2.07 $2.52 22% $3.01 $3.01 0% $3.24 $3.76 16% Goldcorp $0.55 $0.55 0% $0.46 $0.60 30% $1.29 $1.29 0% $1.16 $1.34 15% Kinross Gold $0.42 $0.42 0% $0.70 $0.86 24% $0.87 $0.87 0% $1.33 $1.53 15% INTERMEDIATE PRODUCERS Agnico-Eagle Mines $0.21 $0.21 0% $0.67 $0.89 33% $0.73 $0.73 0% $1.39 $1.69 22% Centerra Gold $0.53 $0.53 0% $0.59 $0.80 36% $0.99 $0.99 0% $0.99 $1.20 21% IAMGOLD R R R R R R R R R R R R Randgold Resources $0.67 $0.67 0% $1.22 $1.50 23% $1.36 $1.36 0% $2.05 $2.37 16% Yamana Gold $0.43 $0.43 0% $0.45 $0.56 24% $0.74 $0.74 0% $0.90 $1.01 13% JUNIOR PRODUCERS Eldorado Gold $0.21 $0.22 3% $0.29 $0.33 15% $0.34 $0.35 4% $0.41 $0.46 11% Gold Wheaton $ (0.02) $ (0.02) 0% $0.02 $0.02 0% $0.01 $0.01 0% $0.04 $0.03 (10%) Golden Star $ (0.18) $ (0.18) 0% $0.07 $0.14 108% $0.03 $0.03 0% $0.36 $0.47 30% Northgate $ (0.06) $ (0.06) 0% $0.13 $0.20 59% $0.30 $0.30 0% $0.53 $0.64 20% SILVER PRODUCERS Pan American Silver $0.72 $0.72 0% $0.65 $0.88 36% $1.37 $1.37 0% $1.46 $1.69 15% Silver Wheaton $0.34 $0.34 0% $0.29 $0.33 12% $0.44 $0.44 0% $0.47 $0.48 3% Source: Canaccord Adams estimate Figure 4: Spot Gold vs. Credit Risk 400 500 600 700 800 900 1000 1100 3-Jan-06 9-May-06 12-Sep-06 16-Jan-07 22-May-07 25-Sep-07 29-Jan-08 3-Jun-08 7-Oct-08 10-Feb-09 Gold$/oz 0 30 60 90 120 150 180 210 240 270 IBOXUMAEIndex Gold $/oz IBOXUMAE Index Source: Bloomberg, Canaccord Adams
  • 5. Daily Letter | 5 18 February 2009 Figure 5: Spot Gold vs. Expected Inflation (1 Yr) 500 600 700 800 900 1000 1100 3-Jan-06 9-May-06 12-Sep-06 16-Jan-07 22-May-07 25-Sep-07 29-Jan-08 3-Jun-08 7-Oct-08 10-Feb-09 Gold$/oz -7.00 -5.00 -3.00 -1.00 1.00 3.00 5.00 ExpectedInflation(%) Gold $/oz USGGBE01 Index Source: Bloomberg, Canaccord Adams Figure 6: Spot Gold vs. Trade Weighted Dollar 500 600 700 800 900 1000 1100 3-Jan-06 9-May-06 12-Sep-06 16-Jan-07 22-May-07 25-Sep-07 29-Jan-08 3-Jun-08 7-Oct-08 10-Feb-09 Gold$/oz 70 74 78 82 86 90 94 DXY Gold $/oz DXY Source: Bloomberg, Canaccord Adams Figure 7: SPDR ETF Gold Tonnes in Trust vs. Spot Gold Price 500 600 700 800 900 1000 1100 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Jan-09 GoldInTrust(t) 700 760 820 880 940 1000 1060 SpotGoldPrice(US$/oz) StreetTracks GLD:ETF Spot Gold Price Source: Company Reports, Bloomberg
  • 6. Daily Letter | 6 18 February 2009 Investment risks There are risks associated with share prices achieving our target prices and our financial forecasts. Metal prices may not match our forecasts, and exchange rate fluctuations may impact company earnings. Further, there are operating risks involved in all mining operations. Technical, environmental, regulatory, and political risks can all impact financial estimates and valuations.
  • 7. Daily Letter | 7 18 February 2009 APPENDIX: IMPORTANT DISCLOSURES Analyst Certification: Each authoring analyst of Canaccord Adams whose name appears on the front page of this investment research hereby certifies that (i) the recommendations and opinions expressed in this investment research accurately reflect the authoring analyst’s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the investment research. Price Chart:* In order to obtain these (6 or more) stock price charts or additional applicable disclosures and information concerning Canaccord Capital’s recommendations of companies under coverage mentioned in this report, please contact Canaccord Capital at 1-800-382-9280 or visit www.canaccord.com. * Price charts assume event 1 indicates initiation of coverage or the beginning of the measurement period. Distribution of Ratings: Global Stock Ratings (as of 4 February 2009) Coverage Universe IB Clients Rating # % % Buy 339 60% 31% Speculative Buy 68 12% 53% Hold 135 24% 24% Sell 23 4% 26% 565 100% Canaccord Ratings System: BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months. HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months. SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months. NOT RATED: Canaccord Adams does not provide research coverage of the relevant issuer. “Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the designated investment or the relevant issuer. Risk Qualifier: SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the stock may result in material loss. Canaccord Research Disclosures as of 18 February 2009 Canaccord Adams is the business name used by certain subsidiaries of Canaccord Capital Inc., including Canaccord Adams Inc., Canaccord Adams Limited, and Canaccord Adams, a division of Canaccord Capital Corporation. Clients of Canaccord Adams, in the past 12 months, may have been clients of Canaccord Capital Corporation, Canaccord Capital (Europe) Limited, Canaccord Capital Corporation USA Inc., and/or Adams Harkness Financial Group Ltd. The authoring analysts who are responsible for the preparation of this investment research are employed by Canaccord Adams, a securities broker-dealer with principal offices located in Vancouver, Calgary, Toronto, Montreal (all Canada), Boston, New York, San Francisco (all US) and London (UK). In the event that this is compendium investment research (covering six or more relevant issuers), Canaccord Adams and its affiliated companies may choose to provide specific disclosures of the subject companies by reference, as well as its policies and procedures regarding the dissemination of investment research. To access this material or for more information, please send a request to Canaccord Adams Research, Attn: Disclosures, P.O. Box 10337 Pacific Centre, 2200-609 Granville Street, Vancouver, BC, Canada V7Y 1H2 or disclosures@canaccordadams.com. The authoring analysts who are responsible for the preparation of this investment research have received (or will receive) compensation based upon (among other factors) the Corporate Finance/Investment Banking revenues and general profits of Canaccord Adams. However, such authoring analysts have not received, and will not receive, compensation that is directly based upon or linked to one or more specific Corporate Finance/Investment Banking activities, or to recommendations contained in the investment research. Canaccord Adams and its affiliated companies may have a Corporate Finance/Investment Banking or other relationship with the company that is the subject of this investment research and may trade in any of the designated investments mentioned herein either for their own account or the accounts of their customers, in good faith or in the normal course of market making. Accordingly, Canaccord Adams or their affiliated companies, principals or employees (other than the authoring analyst(s) who prepared this investment research) may at any time have a long or short position in any such designated investments, Related designated investments or in options, futures or other derivative instruments based thereon. Some regulators require that a firm must establish, implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research. This investment research has been prepared in accordance with Canaccord Adams’ policy on managing conflicts of interest, and information barriers or firewalls have been used where appropriate. Canaccord Adams’ policy is
  • 8. Daily Letter | 8 18 February 2009 available upon request. The information contained in this investment research has been compiled by Canaccord Adams from sources believed to be reliable, but (with the exception of the information about Canaccord Adams) no representation or warranty, express or implied, is made by Canaccord Adams, its affiliated companies or any other person as to its fairness, accuracy, completeness or correctness. Canaccord Adams has not independently verified the facts, assumptions, and estimates contained herein. All estimates, opinions and other information contained in this investment research constitute Canaccord Adams’ judgement as of the date of this investment research, are subject to change without notice and are provided in good faith but without legal responsibility or liability. Canaccord Adams salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desk that reflect opinions that are contrary to the opinions expressed in this investment research. Canaccord Adams’ affiliates, proprietary trading desk, and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this investment research. This investment research is provided for information purposes only and does not constitute an offer or solicitation to buy or sell any designated investments discussed herein in any jurisdiction where such offer or solicitation would be prohibited. As a result, the designated investments discussed in this investment research may not be eligible for sale in some jurisdictions. This investment research is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. This material is prepared for general circulation to clients and does not have regard to the investment objectives, financial situation or particular needs of any particular person. Investors should obtain advice based on their own individual circumstances before making an investment decision. To the fullest extent permitted by law, none of Canaccord Adams, its affiliated companies or any other person accepts any liability whatsoever for any direct or consequential loss arising from or relating to any use of the information contained in this investment research. For Canadian Residents: This investment research has been approved by Canaccord Adams, a division of Canaccord Capital Corporation, which accepts responsibility for this investment research and its dissemination in Canada. Canadian clients wishing to effect transactions in any Designated Investment discussed should do so through a qualified salesperson of Canaccord Adams, a division of Canaccord
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