Achievements in nine months for gold miners

During the first nine months of 2010, nine of the world's biggest gold miners posted an aggregate USD 10.6bn in operating cash flow (compared to USD 7.5bn in the comparative 2009 period). Add Phoenix, AZ.-based Freeport-McMoRan, a diversified miner ranked as the world's biggest publicly trader copper producer, but also a member of the exclusive global Tier I gold miner club, and the number increases dramatically to USD 14.8bn (2009: USD 10.3bn).

GRAND TOTAL (NINE*) USD m	9M10	9M09	2009	2008	2007
Operating cash flow	10,620	7,463	10,732	7,038	5,392
Capital expenditure	-6,604	-6,705	-9,085	-9,381	-7,425
Free cash flow	4,016	758	1,647	-2,343	-2,033

* AngloGold Ashanti, Barrick, Goldcorp, Newmont, Harmony,
Agnico-Eagle, Kinross, Gold Fields, Yamana

Four major listed gold miners - Russia's Polyus, China's Zijin and Australia's Newcrest (which now includes Lihir, in itself a member of the big league) - don't publish detailed quarterlies, but numbers from the other ten provide a handy indicator of how the market is valuing gold stocks. This could be interesting: the prevailing nominal gold price is trading close to record levels.

GRAND TOTAL (TEN*) USD m	9M10	9M09	2009	2008	2007
Operating cash flow	14,838	10,313	15,129	10,408	11,617
Capital expenditure	-7,441	-7,843	-10,672	-12,089	-9,180
Free cash flow	7,397	2,470	4,457	-1,681	2,437

* AngloGold Ashanti, Barrick, Goldcorp, Newmont, Harmony,
Freeport-McMoRan, Agnico-Eagle, Kinross, Gold Fields, Yamana

During the first nine months of 2010, the ten gold miners almost matched aggregate operating cash flow for 2009 as a whole, which was USD 15.1bn. Capital expenditure for the group is showing signs of slowing down, after a peak (for now) of USD 12.1bn in 2008. There was a marginal deceleration this year, but that is likely to reverse as some big mine builds gain pace, not least those underway by Toronto-based Barrick, the world's biggest gold digger by value and output.

A number of variables brought idiosyncrasies to individual valuations. Mine build sprees, such as those seen at Goldcorp and Agnico-Eagle, two Tier I global gold diggers that were but shadows a decade ago, have seen strong optimism factored into stock prices for some years.

Hedge books have also been an important influence on some individual stock price levels. Most hedge books have by now been burned, sometimes at considerable cost, as seen a year ago at Barrick, and at AngloGold Ashanti, which crushed the final sector of its hedge book last month.

Newmont, which has been in business for a century, and which has been allergic to hedges, provides one of the more stable benchmarks for listed gold stock valuation. Newmont's stock price traded up around USD 60.00 a share in early 2006, when bullion was trading around USD 550.00 an ounce.

Newmont fell to just below USD 25.00 a share in the latter parts of 2008, after prices for practically everything in the world fell (gold bullion fell less in percentage terms than many other prices and indicators). During 2008 gold dropped from USD 1,000.00 an ounce to around USD 700.00. Newmont's stock price once again moved above USD 60.00 a share in June this year, when gold moved for the first time through the USD 1,250.00 an ounce barrier.

For both 2005 and 2006, Newmont generated USD 1.2bn in operating cash flow; during the first nine months of 2010, alone, USD 2.3bn has been generated. This time around, Newmont's market value has been moderated, relative to the dollar gold price, compared to 2006. This individual case holds for gold stocks generally: today there is more competition around, and, possibly, savvier investors.

Gold exchange traded funds are now clearly one source of competition for investor demand for gold. Launched five to six years ago, gold ETFs have at least partially tempered the longstanding overvaluation of gold miners, relative to other miners. Today, the NYSE-listed SPDR Gold Shares ETF ranks as the biggest gold exchange traded fund in the world; it currently holds physical bullion worth USD 57.9bn, compared to Barrick's value of USD 51bn.

As a proxy for physical gold bullion, gold ETFs arguably attract the more risk-adverse investor. With an ETF, there is no need to fret over risks associated with unions, geopolitics, management, weather, mining, metallurgy, and so on.

Gold miners are being kinder to investors. This year's increased velocity of cash flow generation reported by gold miners has been de-stressing fresh equity placements (rights issues). The ten gold miners raised USD 6.7bn in fresh equity during the first nine months of 2009, setting up a record year on the quantum of equity issues.

The first nine months of this year has seen a more modest USD 1.2bn raised by issuing fresh equity, with USD 777m of that attributable to AngloGold Ashanti as it set up the cash arsenal to finally put its hedge book into its grave. The biggest chunk of equity issues in 2009 came from Barrick, also aimed mainly at smashing its hedge book into history.

Dividends are rising. After aggregate cash dividends of USD 1.9bn in 2008, the 2009 payout contracted heavily, not least on Freeport-McMoRan's huge dividend cuts after the copper price bloodbath of 2008. Traditionally, Freeport-McMoRan pays immodestly substantial dividends, compared to primary gold miners.

Aggregate dividends for the ten big gold miners for the first nine months of this year are at USD 1.2bn, nearly double the USD 673m paid during the comparable 2009 period. Just over a fifth of this year's combined payout is courtesy Freeport-McMoRan.

In conclusion, it seems that gold miners continue to enjoy something of a premium rating, compared to other miners. Vale, the world's No 2 miner, which earns most of its dough, by far, from its spectacular seaborne iron ore business out of Brazil, pumped out USD 12bn in operating cash flow during the first three quarters of this year. When this operating cash flow is measured as a ratio to Vale's market value of USD 174.8bn, it can be concluded that Vale offers better value than most gold miners. (Freeport McMoRan, however, offers even better value than even Vale).

The comparative outlook for the pricing of iron ore vs. gold is another story, but Vale's iron ore output is gigantic, and its margins among the highest of any business in the world. Vale's iron ore output, currently running at an annualised 320m tonnes a year, is set to rise to 522m tonnes in 2015. While gold is priced very differently, every extra dollar made on a tonne of Vale's iron ore, with output running at around half a billion tonnes a year has a different ring to every dollar extra made on an ounce of gold, when the biggest miner, Barrick, is currently running at an annualised rate of close to 8m ounces.

Mineral differences aside, there is a demonstrable case to be made out that the valuation of gold miners is gravitating further toward the common denominator derived from all mining stocks. Given the available factors, the process is likely to continue, although "pure" gold miners may yet been classified as a separate group that attracts some kind of premium rating.

The quality and quantity of gold discoveries has been falling for years, and new mines are increasingly straying beyond gold. Mixed mines cost more to build and run, and are more difficult to manage. Goldcorp's new Peñasquito operation in Mexico mines substantial quantities of gold, lead, zinc and silver, but not necessarily in that order. Gold miners are increasingly moving to big copper-gold deposits, such as Barrick's Cerro Casale JV project in Chile, where indicative capital expenditure is put at around USD 4.2bn.

		Market	OCF*
	Stock	Value	9m 2010	Ratio
	price	USD bn	USD m	(times)
Agnico-Eagle	USD 81.54	13.7	393	34.8
Goldcorp	USD 47.02	34.6	1,110	31.2
Harmony	ZAR 85.30	5.3	244	21.7
AngloGold Ashanti	USD 50.48	19.2	990	19.4
Barrick	USD 51.71	51.0	3,346	15.2
Gold Fields	ZAR 123.40	12.6	1,135	11.1
Kinross	USD 18.56	21.0	700	30.0
Newmont	USD 62.76	30.5	2,322	13.1
Yamana	USD 12.06	8.9	380	23.5
Totals/Average		196.9	10,620	18.5
Freeport-McMoRan	USD 106.28	50.0	4,218	11.9
Totals/Average		246.9	14,838	17.4
Vale	USD 33.05	174.8	11,961	14.6

* Operating cash flow

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