South Africa: A Gold Mine

02/17/2006 12:00 am EST


Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocelynn Drake, an analyst withSchaeffer's Investment Research, combines fundamental, technical, and sentiment-based factors in determining her top-rated stocks. Here, she applies that trio of metrics to uncover a potential opportunity in South African gold.

"South Africa-based AngloGold Ashanti Limited (AU NYSE), produces about seven million ounces of gold annually from its open-pit and underground mines in Africa, Australia, and the Americas," notes Jocelynn Drake, analyst with Schaeffer's Investment Research . "In all, the company has more than 20 mines in more than ten countries. With the price of gold rising more than 18% last year, the stock has already won my attention. The mining sector continues to be hot, as not only gold, but silver, copper, and platinum linger near multi-year highs.

"With the recent sharp pullback in the yellow metal, AU is currently consolidating into support at its ascending ten-week and 20-week moving averages. The shares also continue to outstrip their peers. Investors have shrugged off this display of impressive technical strength and continue betting against the shares. Options players have loaded up on bearish bets, with nearly 3,800 puts accumulated at the equity's February 55 strike. This buildup of pessimistic positions could serve as a layer of options-related support against any pullback in the shares.

"Short sellers have also set their sights on the shares. In January, the number of AU shares sold short jumped by 11% to 3.8 million. At the equity's average daily trading volume, it would take more than four days to buy back these bearish bets. An unwinding of these positions could supply ample fuel for a sharp rally higher in the security. Wall Street hasn't been particularly enthusiastic about the shares either. According to Zacks, all five of the brokerage firms following the company rate it a 'hold' or worse. Not only does this leave room for upgrades, but any fresh coverage of the security could also provide the stock with a nice boost."

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