Mining for Value

08/13/2008 12:00 am EST


Eric Roseman

Editor, The Commodity Trend Alert

Eric N. Roseman, editor, Commodity Trend Alert, turns bullish on this gold producer.

Recently, I wrote that the short-term picture for the XAU Gold & Silver Index looked bearish. Well, we crossed even lower and it still looks dicey. But we’re massively oversold at these levels and I think investors have the best entry point to buy smashed-out mining stocks in more than two years.

If you look at the MACD, gold stocks are now the most oversold since last September ahead of the Fed’s series of interest rate cuts. This barrage of selling won’t last and will find a bottom this month.

We’re adding South Africa’s AngloGold Ashanti (NYSE: AU) to our portfolio. Many South African mining stocks have been hit hard over the last few years despite the bull market in gold. Soaring production costs, protracted strikes, electricity disruptions, and forward hedged sales have taken their toll on these companies.

CTA does not hold any individual South African producers. The only vehicle where we do own South African mines is via ASA Limited (NYSE: ASA), a diversified large-cap global mining fund. But after a huge decline over the last several years, AngloGold’s stock price is just too low to ignore.

At this price, it’s a strong speculation in our portfolio. AngloGold’s CEO, Mark Cutifani, was quoted recently, claiming he’ll reduce the company’s forward sales by 0.8 million ounces—down to 6.1 million ounces by December. Anglo’s CEO also believes gold prices will end the year at $1,000 an ounce.

AngloGold has one of the biggest forward hedged sales among its peers. Steadily rising bullion prices have turned gold producers away from hedging since 2005 in favor of direct exposure to spot prices. Companies that have hedged their production over the last few years have been poor performers because spot prices have surged. That trend is finally changing at AngloGold, the world’s third largest gold producer.

AngloGold has also opened the door to a suitor for a possible merger. I can’t think of a more undervalued gold mining company right now at this depressed price than AngloGold. The stock has been a major disappointment over the last three years at a time when gold stocks have averaged a 15% annualized return based on the XAU Gold & Silver Index. Anglo’s stock price is down 22% in 2008.

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