Fri, May 31, 2002 page19

• Gold mining shares losing luster

  MINERALS Firms such as Barrick Gold may have run their course and now is the time to sell, one analyst says

  • BLOOMBERG
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  The time to buy gold shares as a shelter from the stock-market storm has passed, says Daniel McConvey, an analyst at Goldman, Sachs & Co.

  McConvey on Wednesday said he sees little chance the metal -- a traditional investment haven -- will extend this year's 17 percent rally. He cut ratings on mining companies AngloGold Ltd, Barrick Gold Corp and Newcrest Mining Ltd. Their shares have surged 90 percent, 46 percent and 91 percent, respectively, this year.

  "We believe that gold will be more challenged to rise substantially," McConvey wrote in a note to clients. Investors who have loaded up on the stocks "should take some profits."

  

  A file photo of gold bars at the Bank of England.

  PHOTO: BLOOMBERG

  McConvey, who was controller of operations for Barrick before becoming a precious metals analyst eight years ago, lowered AngloGold and Barrick to "market performer" from "market outperformer" and Newcrest to "market outperformer" from "trading buy." The Standard & Poor's 500 Index's gold index has surged 44 percent this year, its best-performing group, amid concerns of more terrorist attacks in the US and mounting tension in the Middle East and South Asia.

  Gold rose US$1.30 to US$326.80 an ounce on the New York Mercantile Exchange, a 4 1/2-year high.

  Investors agreed the stocks may be overpriced.

  "Gold is a hedge against disorder and the fear of it," said Jean-Marie Eveillard, who manages US$2.5 billion in First Eagle SoGen funds and owns shares of AngloGold and Barrick. "But the metal is more attractive than the mining stocks. They are extraordinarily expensive."

  The Amex Gold Bugs Index of 12 mining stocks sells for 299 times expected earnings. That compares with a price-to-earnings ratio of 21 for the S&P 500.

  Gold stocks' gains also tend to be fleeting, investors said.

  "Gold stocks and gold in general benefit from uncertainty, especially political unrest," said Gene Pisasale, senior portfolio manager at Wilmington Trust, which manages US$27 billion in Wilmington, Delaware. "The next time we hear of a truce in the Middle East or [US Secretary of State Colin] Powell going to Pakistan, the stocks can come down 20 percent in a day."

  Even as McConvey reduced his recommendation on the shares, he boosted his estimate on where the shares would trade over the next 12 months.

  He raised his target on AngloGold to US$36 a share from US$29, to US$25 from US$22 on Barrick, the world's second-largest gold producer, and to A$9 from A$8 on Newcrest.

  AngloGold's US shares slid US$1.17 to US$33.12, while Barrick lost US$0.88 to US$22.43. Melbourne, Australia-based Newcrest Mining rose A$0.25 to A$8.15.

  Some investors said they were puzzled by McConvey's new price targets.

  "How can the analyst become more negative in his recommendation at the same time he raises the target price?" asked Eveillard.

  An investor who followed McConvey's recommendation to `"take some profits" by selling shares now would miss out on gains if his price targets prove accurate.

  Goldman spokesman Ed Canaday said the downgrades should be considered in a shorter time frame than the 12-month price targets.

  Of the 24 analysts tracked by Bloomberg covering Barrick, 18 rate it "buy," while six, including McConvey, rate it "hold." Seven rate AngloGold a "buy," 10 deem it a "hold" and two recommended selling the shares. Eleven of 14 analysts rate Newcrest "buy," while two rate it "hold" and one calls it a "sell." Continued low interest rates -- the benchmark Fed Funds rate is at a four-decade low of 1.75 percent -- may drive gold prices higher, McConvey said, as could "global political and economic uncertainty."

  Also, if stocks extend their decline, gold stocks could do better as an alternative to other equities.

  The weakening dollar also boosted demand for gold by making the dollar-priced metal cheaper for buyers using other currencies.

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