Investors reaping rewards from dazzling gold equities

Investors who were lucky or brilliant enough to foresee rising gold prices this year and who had the intestinal fortitude to follow their hunches have reaped spectacular rewards.

The runaway best-seller among Canadian gold equities has been Agnico Eagle (TSE), up 245.5% from its price on Dec. 31, 1992. Number Two spot belongs to Royal Oak Mines (TSE), up 220.5%. Running a close third is Goldcorp (TSE) at 186.3%. (All positions were calculated from a table produced by Michael Jalonen, an analyst with Midland Walwyn. Prices were calculated from the last day of 1992 to closing prices on Sept. 12, 1993.)

In fourth place is Franco Nevada (TSE), up 167.3%; in fifth, TVX Gold (TSE), up 154.7%; and in sixth, Echo Bay (TSE), up 152% (see table on Page 2 for complete listing).

Reflecting the strength in the equities, the Toronto Stock Exchange gold and silver index climbed 80.3% during the same period, to 9,468 from 5,250 when the year began.

These remarkable gains were made at a time when the gold price rose 10.2%, to US$367.10 per oz. (Sept. 12, 1993) from US$333. Why would the equities advance so strongly based on a comparatively slim percentage move in bullion? For one thing, says Jalonen, going into 1993, the gold stocks were undervalued. “They were sold heavily in 1992 when investors thought gold was going nowhere.”

This year’s gold market leader, Agnico Eagle, was particularly hard-hit last year when investors worried about its gold mines. There had been a serious fall of ground at one mine. Furthermore, investors did not look kindly on the stock because the company’s production had been left totally unhedged. The gold equities also responded to the fact that earnings can rise dramatically even though the actual rise in bullion price is not especially impressive. Hypothetically, a mere $10 rise in the bullion price could put an additional $1 million into the coffers of a 100,000-oz.-per-year producer. And most of the additional revenue would flow to the bottom line. The net result: a rise in per-share earnings and a proportional rise in the share price.

Jalonen calculates that for each US$50-per-oz. move in the price of gold, American Barrick (TSE) adds 22 cents in per-share earnings; Echo Bay, 30 cents; Homestake Mining (TSE), 50 cents; Placer Dome (TSE), 23 cents; Agnico Eagle, 27 cents, and so on.

The fall of the Canadian dollar vis-a-vis its U.S. counterpart is another factor. It boosts the bottom line because gold, of course, is traded in American dollars. As well, inter-listed stocks trading on exchanges in both the U.S. and Canada would automatically rise in Canadian dollar terms as the domestic currency falls.

For investors wondering whether now is the time to buy gold producer stocks, Jalonen warns that price-to-earnings multiples are generally high. For example, Lac Minerals (TSE) sports an astounding P-E multiple of 160, based on estimated earnings this year of 5 cents. Echo Bay’s is 118, according to Jalonen’s table. Even Agnico Eagle’s is high, at 76. Both Barrick and Hemlo Gold Mines (TSE) are at a more reasonable level of about 30 times earnings. Obviously, the market is anticipating higher gold prices. Jalonen has erred on the side of caution, however, projecting gold prices at US$400 per oz. (on average) for next year. As well, each stock has its “own individual story,” Jalonen noted. Agnico, for example, has discovered Zone 20 at its La Ronde mine in northwestern Quebec, which is expected to boost reserves substantially and could add to production down the road. So its higher multiple could be justified, whether or not gold continues to perform strongly.

Placer Dome faces the phenomenal potential of its Venezuelan properties and Hemlo has advanced exploration plays that hold promise.

But no matter how you cut it, the gold equities have dazzled this year. The question is: Can they continue the run into 1994?