Gold book compares international producers

A fundamental shortfall of supply over demand will cause the price of gold to rise in 1994 and 1995, according to Goldbook ’93, published by London-based T. Hoare & Co.

Echoing this prediction is Rhona O’Connell. At a recent meeting in Vancouver of mining executives and investors, the gold expert said demand is strong enough to underpin a rising trend in price.

“During 1994, if the gold market is to stay in balance, physical holders in Europe and North America will have to sell as much metal as they did during the previous two years combined,” O’Connel told the meeting, sponsored by Canaccord Capital. “Over 1994 and 1995, the total will have to exceed all the sales of 1991-1993, plus some of that from 1990.”

Three other factors are believed to have strengthened the gold market this year: currency volatility, political developments and the entrance of professional traders such as Soros and Goldsmith.

O’Connell pointed out, however, that the major threats to any sustained recovery would be accelerated supply from the official sector (central bank selling) and a resurgence in forward sales from the mining sector. The authors of Goldbook ’93 say the foundations for renewed strength in gold have been laid. Their “middle road” prediction is that the price of the yellow metal could average US$390 in 1994 and rise to US$420 per oz. in 1995. The book was written to coincide with the launch of a new Gold Share Index by London-based The Financial Times (FT). The index will, for the first time, provide an international yardstick for measuring share performance. The new FT index will cover 34 gold producers from North America, South Africa and Australia, replacing the present “South Africa only” FT Gold Index. The criteria for inclusion are: sustainable gold production of 300,000 oz. per year; at least 75% of revenue derived from mined gold; and at least 10% of the shares in free float.

Goldbook ’93 also compares South African producers with Australian and North American gold companies. For example, it notes that North American producers generally entail lower costs and are, therefore, rated more highly. The average cash cost for North American producers in the FT Gold Index is US$204 per oz., while for South African producers it is US$263. This implies an operating profit margin for the North Americans of “around 55% greater than for the South Africans.”

North American companies were also highly rated because they are better able to replace aging mines with new operations or newly discovered deposits. The authors expect, however, that the pricing differential between North American and South African gold companies will be reduced somewhat as political risk decreases in South Africa, and as political and environmental regulations increase in North America.