Summertime, and the gold bugs are biting

The onset of summer and the recent spike in gold prices are making some brokerage firms more optimistic that a U.S.-led economic recovery could lead to improved demand fundamentals for jewelry and, consequently, all precious metals. RBC Dominion Securities suggests that aggressive interest-rate cuts and increased money supply could provide additional pricing power for these commodities.

“The fundamentals suggest that gold should be in a US$275-to-300-per-oz. trading range, and there is further upside for the North American gold equities,” analysts John Barker and David Walsh recently note in a market commentary.

The firm’s top picks in the sector are Placer Dome (PDG-T) and Kinross Gold (K-T). “Both companies offer leverage to rising gold prices, as well as solid balance sheets,” the analysts state.

While Placer Dome is an obvious pick, having earned US$16 million on production of 694,000 oz. gold at a cash cost of US$163 per oz. (total cost: US$244 per oz.) in the latest quarter, Kinross hadn’t received much attention from analysts before the recent, but short-lived, rally in gold prices. The company’s shares are trading below US$1, which prompted the New York Stock Exchange to delist the company for falling below this target threshold. Kinross is appealing that decision, while noting that its primary market (about 80%) continues to be Toronto.

While Kinross reported a loss of US$4.9 million on production of 239,352 oz. gold at a total cash cost of US$191 per oz. in the first quarter of 2001, it has taken numerous steps to strengthen its financial footings. Operating costs fell 15% during the first quarter from the previous year, helped by the recent sale of the Denton-Rawhide gold-silver mine in Nevada to another company. Having disposed of non-core assets and cleaned up its balance sheet, the company is better positioned to benefit from any further rallies in gold prices.

RBC Dominion isn’t the only major brokerage firm predicting that the truly dark days may be coming to an end for gold producers. Closures of sub-economic mines and marginal mines are now taking place across the globe, and several low-grade, high-profile projects have been placed on the back burner. From a capital perspective, this flight to quality has pushed investors toward the big names in gold, such as Barrick Gold (ABX-T) and Franco-Nevada Mining (FN-T). Intermediate producers, for the most part, are still struggling to gain attention.

One notable exception is Goldcorp (G-T), which has attracted institutional attention because of the success of its new Red Lake mine in Ontario’s famed gold camp of the same name. A few years ago (before a strike halted production), Goldcorp was just another intermediate producer struggling to squeeze profits from an aging mine. That changed with the discovery of a new pocket of mineralization at Red Lake, appropriately dubbed the High Grade zone. Today, it’s hard to find an analyst who hasn’t given a thumbs-up to Goldcorp for its operating and exploration success at Red Lake.

At June 8, production had reached 240,000 oz. gold at a cash cost of US$57 per oz. The better-than-expected performance prompted Goldcorp to revise its 2001 production forecast to 440,000 oz. gold at a cash cost of less than US$75 per oz. This, in turn, has made Red Lake the largest gold producer in Canada.

Goldcorp’s success also challenged the notion that Ontario’s gold camps are yesterday’s news, unable to compete with the new generation of low-cost gold mines operating elsewhere in the world. Grade is king again, and Red Lake is processing ore averaging 2.57 oz. gold per ton, above the forecast grade of 2 oz.