South African Gold...

12/02/2005 12:00 am EST


A trio of top advisors are looking to South Africa. Elliott Gue sees South Africa's miners as laggards that are poised to catch up. Adrian Day offers a pair of South African golds. Meanwhile, Doug Fabian selects a South African exchange traded fund.

(For more on the advisors cited below, please click on their photos.)

Gue, Elliott"South African gold stocks have been laggards in the precious metals arena," says Elliott Gue, in his trading service,Advantage Bulletin. "Gold was rallying during the past couple of years, but the South African currency, the rand, was rallying even more against the US dollar (it went from 14 to under 6 in just over two years). This caused the rand price of gold to actually decline, while unions demanded higher rand wages.

"All this put a lot of pressure on the South African precious metals mining sector, which lagged precious metals stocks domiciled in the US and other countries. Now , the rand is currently weakening and gold bullion continues to be strong, the best-case scenario for South African gold mining stocks. It used to be that a strong dollar meant weak gold prices, but the recent breakdown in the eurowhile the dollar is rallying against most major currencies has led to ‘safe haven’ buying of gold bullion.

"Anglogold (AU NYSE) is a major South African gold miner that's been rapidly expanding internationally. The company has 22 mining operations on four continents and has grown to be a major player in the precious metals mining sector. Just as with Harmony, Anglogold's story is driven by macroeconomic considerations. There's a lot of strength in all South African precious metals mining stocks, which suggests a possible retest of Anglogold's multi-year highs near 49. Buy below 42 for a holding period of three to six months.

"DRD Gold (DROOY NASDAQ), another South African miner, has been an even bigger laggard. Its high-cost mines and union problems have caused it to lose more money than other mines in South Africa. There was even a bankruptcy rumor in the spring, which caused a washout low earlier in 2005. We don't expect DRD Gold to go bankrupt, but it is an extremely high risk/high reward type of position suitable for risk capital only. Buy below $1.55. You should be willing to hold this stock for six to nine months, or even as long as a year."

Day, AdrianAdrian Day, editor of The Global Analyst, adds, "Gold Fields (GFI NYSE), a South African miner, has a strong balance sheet and management, but has faced some extraordinary challenges in recent quarters," "The latest quarter, as expected, was not its best, as a strike in South Africa cut production by 8%, and drove up total cash costs by some 7%. Despite this, the company’s emphasis on cost control is paying off, with a modest decline in operating costs. Relations with its largest shareholder, Norilsk, also seem to have improved.

"Meanwhile, Gold Fields is also involved in a partnership with  Orezone Resources (OZN ASE). The miner continues to advance the Essakane, which is a joint venture with Gold Fields in Burkina Faso. Even more importantly is a program underway on the extension of Essakane across the border in Niger. There has been little exploration on this 100%-owned property, which is about to be drilled, and there is every reason to expect the mineralization to continue. If so, this will put Orezone is a very strong negotiating position. With a company resource over five million ounces, a strong balance sheet and no debt, the stock is not expensive."

Fabian, DougIn addition to his Successful Investing, which focuses on total portfolio development, Doug Fabian publishes The VIP Investor, a specialized fund trading service that takes significant positions in a limited number of holdings at any given time. His latest recommended purchase is iShares South Africa (EZA ASE). He explains, "For the past year emerging markets have been the place to be for excellent international gains.

"Yet, today, many of them are now overbought and would expose us to too much risk. There is, however, one emerging market that has done well recently and is not overextended, and that is South Africa. The iShares South Africa is a country-specific exchange traded fund with big exposure to the mining industry. Given gold’s recent move to new highs, a position in EZA can be viewed as both an emerging market and a precious metals play."

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