Gold Basin: A "Big Crapshoot"

09/24/2004 12:00 am EST

Focus:

Gary Alexander

Senior Writer, Navellier & Associates

Gary Alexander has wide-ranging expertise, gained as editor for several of the very best financial advisors for some 20 years. He experience in the gold market was first gained as editor for gold guru Jim Blanchard in the 1980s. Here, he looks at a speculative gold play.

"As a cushion against a general stock market collapse we hold a 5% position in gold. I view gold as a hedge against a further collapse in the dollar. This means volatile gold stocks can act like a put option against the dollar. I feel that gold will return to $430 by year’s end, and then rise to the $450s, and perhaps $500, this time next year. Generally, I accumulate good stocks for a lifetime. But gold stocks are the only sector I hate to ‘accumulate.’ Gold stocks are trading vehicles. Gold will tend to rise whenever real US interest rates are negative, i.e., when short-term US dollar interest rates are below the rate of inflation. With Fed Funds rates now at 1.5% and inflation around 3%, holding gold is preferable to holding cash in dollars. The reason is clear: Gold doesn’t bear interest, but it does rise with inflation over time.

"For specific gold stocks, I run the gamut from big producers to smaller speculative exploration companies. Indeed, one of our gold holding is a big crapshoot: Great Basin Gold (GBN ASE). The company controls two main exploratory properties: 1) Ivanhoe in Nevada, the state with the richest gold and silver deposits in America. Nevada is also the third largest producer of gold in the world, behind South Africa and Australia. Over eight million ounces of gold are mined in Nevada yearly. 2) The Burnstone property in South Africa, where Great Basin has an 80% interest in an estimated 17 million ounces—several times their expected Nevada resources. South Africa has produced 1.4 billion ounces of gold in the last century, about 40% of all the gold ever mined. South Africa also holds 45% of the known world gold reserves, but South Africa also carries a political risk.

"I feel that Great Basin’s depressed market price reflects their Nevada potential alone, but it does not give them credit for the much richer South African holdings—mostly due to political and financing concerns. In the decade since Nelson Mandela led South Africa’s black majority into power, I’ve heard the Doomsday crowd say the country would soon devolve into a kleptocracy, like so many other African nations have done. But I give the troubled country high marks for overcoming that temptation and honoring the business community. Like the US dollar, the South African currency (the rand) has been overvalued, cutting into gold mining profits for us. That won’t last. South Africa just cut the discount rate. The currency will settle back down, and South African mining profits will increase.

"But there’s another financial concern. Great Basin needs to isolate and mine their gold assets, and that costs a lot of money. To fund exploration, they diluted their stock by ten million shares and five million warrants, to help pay for continuing exploration that will pay dividends in time. With 80% of Burnstone and other holdings, Great Basin has potential resources of 14 million gold ounces in South Africa. At the stock’s current market cap of just under $100 million, we’re paying just $7 per ounce of gold in the ground. Of course there’s a lot of expense needed to find, isolate, and mine those 14 million ounces. By this time next year, given a gold price near $450, Great Basin could produce at a rate of 200,000 ounces a year, with another 100,000 ounces coming from Area 1 at Burnstone in 2006. Then, we will rely on the usual excesses of Gold Fever to lift the stock up to $9 or $10."

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