Gold''s swift rally may spark scramble


Miners finally get Street's attention
Gold's run at $300 an ounce sparks a mini-rush

By Thom Calandra
Tuesday, Feb. 5, 2002

SAN FRANCISCO -- Long-forgotten gold mining stocks are
attracting the attention of Wall Street money managers.

"I'm getting a lot more calls," says Pierre Lassonde, who later
this month will become president of Newmont Mining, soon to
be the world's largest gold producer upon completion of a
merger. "When I was in Europe last year, I saw more interest
in gold stocks than I have in five years."

As the metal's spot price reached $299 an ounce this
afternoon, new figures point to heavy share accumulation
of the largest gold-mining companies. Weekly money flows
into those companies are at their highest point in more than
three years, technical analyst Clark Yingst at Joseph
Gunnar & Co. in New York says.

"Clearly, investors are unsettled by reports of fiscal
distress," says Yingst, who tracks cumulative money flows
based on whether investors are paying progressively
higher or lower prices for a stock. He says the gold mining
group, as measured by the Philadelphia Gold and Silver
Index, could rise another 15 percent to 20 percent in coming

The index, along with gold-mining indexes in Canada, South
Africa, and Australia, is soaring as gold attempts to surpass
the elusive $300 level. The 11 stocks in the so-called XAU
index have on average gained more than 15 percent in the
past 10 trading days. Companies such as Newmont,
which will merge into two other gold-mining companies l
ater this month, are seeing their average trading activity
swell to 2.5 times their three-month daily average.

"My phone is ringing, that's for sure," says Lassonde,
a former Toronto fund manager and co-founder of
Canada's Franco-Nevada Mining, one of the two companies
merging with Newmont in a $2.5 billion transaction.

The $20 or so gain in the price of the metal in the past
two weeks has fueled a frenzy of activity in mining circles.
Lassonde today pointed to the $100 million-plus of
Canadian financings late in January for three small gold
companies. Once the three-way merger of Denver-based
Newmont, Franco-Nevada, and Australia's Normandy
Mining is completed later this month, Lassonde hopes
to sell some mines from a Battle Mountain Gold purchase
and other assets, about $750 million worth, to an eager
gold industry.

"Our timing, I think, is propitious," Lassonde said from
Toronto. "Goldcorp and Meridian, lots of gold companies,
need to replace their reserves. They need assets."

Wall Street and London-based money managers are
showing up for mining companies' conference calls in
greater numbers. On Monday's earnings conference call
from Johannesburg, "close to 50" money managers
listened to Gold Fields Ltd. Chairman and CEO Chris
Thompson discuss the South African company's
record-breaking $67 million of quarterly profit, a
ccording to Cheryl Martin, a Gold Fields vice president.

"People forget how far gold stocks can move in a rally,"
says Adrian Day, president of $60 million Global Strategic
Management in Maryland. "You go back to when the
general stock market crashed in '73 and '74 and gold
went to $180 or so from $110 in two years, and the
major gold mining companies quadrupled and
quintupled in price. Homestake went to $60 from
$11, and the South African companies did the same
thing." Homestake Mining is now part of Barrick
Gold, a merger completed last year.

"The fact is, there are a limited number of gold
mining companies, I think $50 billion worth of market
capitalization if you were to add them all up, the
majors and the juniors," says Day, who populates
about a third of his clients' portfolios with gold stocks.
In comparison, General Electric, the world's largest
stock market company, is valued at more than $350

Technical analyst Yingst sees the XAU, now above
67, its highest point since February 2000, reaching
72. "But first I think we'll see some backing and filling,"
he said about investors who are likely to take profits
in their gold mining stocks.

Investor interest in gold mining stocks comes in the
thick of rising prices for the equities. "The last five days'
for Barrick Gold and Placer Dome have seen average
daily volume that has exceeded the one-month average
daily volume of each company by 20 percent and 24
percent, respectively," Chris Johnson, senior quantitative
analyst at Schaeffer's Investment Research in
Cincinnati, said today. "This has occurred while the price
of the stocks have increased by 6.3 and 9.1 percent, a
sign that investors have been accumulating theses shares."

The question for serious investors is whether gold-mining
stocks can sustain their rally, which has boosted equity
prices to 30 and in some cases 40 times their yearly
pre-tax profits. Lassonde at Franco-Nevada/Newmont
says he is frank about this question, which gets posed
by fund managers scrambling to buy gold shares.
Gold-mining stocks have made gold-based mutual
funds the best-performing sector for much of the past
14 months.

"Let's look at Newmont, since I know that one best,"
says Lassonde, a former engineer who has been in
the gold business for more than three decades. "If gold
goes to $350 an ounce, (Newmont's) pre-tax cash flow
would be about $1.6 billion, or $4 a share on a
pro-forma basis." Given that major gold mining
companies sell for about 12 times cash flow, "the
stock would have to go to between $50 and $60," he

Which brings the question: Can spot gold prices
surpass $300 an ounce, a level not seen since
February 2000? The price of spot gold, $299 this
afternoon, was more than $6 above what professional
analysts call an area of major resistance. The most
active gold futures contract, meanwhile, hit $299.80
Tuesday, then settled at $299.10, a gain of $9 for
the day.

"One of these times it's going to get through
resistance," says Robert Bishop, longtime editor of
Gold Mining Stock Report. "I think right now we are
seeing speculation that one or more mining companies
is covering hedges." So-called hedges allow gold
mining companies to lock in higher prices for their
metal. The practice encourages lending of the metal
by bullion and central banks, thus adding to price

Anglogold, one of the world's largest miners and the
industry's most prolific user of forward-sale hedging in
times of weak prices, reduced the amount of gold it sells
forward by 19 percent in 2001, or some 3.4 million
ounces. Earlier in the week, Anglogold said it could
unwind as many 4.5 million ounces this year. Newmont,
Gold Fields, and other large producers have sworn off the
practice of hedging.

Caesar Bryan, manager of the Gabelli Gold Fund in New
York says he will head to Japan next week. Japanese
consumers have quadrupled the amount of gold they
are buying ahead of new government rules that will limit
bank guarantees on cash deposits, starting in May.

"Gold is the ultimate hard asset, and one day, sooner
than later, it will go through $300 an ounce," says
Bryan, whose $27 million fund is up 22 percent since
Jan. 2. He expects shares of companies that reduce
their hedge books to become more attractive to investors
in coming months. But he still prefers totally unhedged
producers. His fund's largest holdings are Newmont,
South Africa's Harmony Mining, and Gold Fields, all of
them known as straight-shooters in the industry.

"The whole idea that gold is a useless investment has
become pervasive," Bryan says. "I think that's about to