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lsg all time high/gold stock valuation

  1. Despite the fact that the gold price has broken out above US$330, I feel that some unhedged gold stocks have performed better than others and could possibly continue to do so. One such stock is LSG and the main reason for its outperformance, I believe, lies in its fundamentals. Today LSG's share price is at an all-time high of $1.27.

    I am a big fan of fundamental analysis eventhough I am learning at the moment about TA and find it very interesting. It definitively helps you figure out the 'when' side of the equation in investing.

    Anyway, for all those interested in valuing gold companies using FA, a common instrument to observe is the Market Cap compared to the Per Ounce Resource. (Market Cap/Resource oz). This basically measures what the market is valuing the 'in-ground' gold resources of a particular company.

    According to the ex-JBWere gold/mining analyst team, headed by Robin Widdup (which is now the Management Team at LSG), gold company valuations tend to change depending on the cycle (stage) in which the gold market is in (to simplify either bull or bear). This is a part of their case for Investing in Gold now:

    Why invest in Gold now?
    Bottom of cycle for gold and metals
    Gold Company Valuations
    • Market Cap/per oz Resource
    Now 1993/94
    A$50/oz A$150-200/oz

    • PER
    Now
    x 10 x 25

    (I can e-mail the full PDF Presentation, which is nearly two years old & not on their web-site, to anyone interested: [email protected])

    So if we look at $A150-200 an ounce of 'in-ground' resources at which Aussie gold companies were valued at in 1994 (then the gold price averaged around US$400/oz), we can compare it to the current situation and see possibly considerable upside. Not all companies will be valued the same however and political risks play a large part in differences. Still, its a usuful tool to use to check what the market is valuing your particular gold stock.

    Nevertheless, to get back to LSG, in the latest Chairman's Report, an upgrade in attributable gold resources from its investee companies was published, (LSG owns stakes in 15 different potential gold/copper/zinc producers/investees) that included Indophil's (IRN) world-class Tampakan project. LSG's resource summary looks like this:

    1999: < 1 million ounces;
    2000: 1.4 million ounces;
    2001: 1.8 million ounces;
    2002: 4.4 million ounces, including Tampakan.

    As this secular gold bull market continues into 2003, we could soon see ourselves applying the 1993/1994 valuation scenarios to the above resources of LSG. For LSG shareholders, this should translate into a lot of optimism for the New Year.

    J.

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