ML: MTLS&MNG-GOLD:2002/03 Gold Price Assumptions Raised Part 1

08:05am EST 22-Mar-02 Merrill Lynch (M.Jalonen  ABX.CA NEM PDG)

    ML++ML++ML     Merrill Lynch Global Securities Research     ML++ML++ML

                            METALS & MINING - GOLD

                     2002/03 Gold Price Assumptions Raised

                        Michael Jalonen

(Part 1 of 2).

 

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Merrill Lynch, as a full-service firm, has or may have business relationships, including investment banking relationships, with the companies in this report.

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Reason for Report: Change in 2002/2003 EPS/CFPS Forecasts

 

Highlights:

o    Year-to-date 2002, the spot gold price has averaged around $290/oz (above our current 2001 forecast of $280/oz).  Based on several factors, we have

raised our 2002 spot gold price forecast from $280 to $293/oz.  In addition, we have increased our 2003 price forecast from $290 to $305/oz.

 

o    These higher gold price forecasts for 2002 and 2003 are predicated on

improving supply/demand fundamentals, including reductions to producer hedging, declining mine output and renewed investment demand (it would appear that gold has resumed its traditional safe haven role). Central bank sales (largely from Europe) and timely hedging, however, will likely slow price rallies.  Table 1

below and Table 4 on page 4 set out Merrill's revised price forecasts for all

metals under coverage.

 

o    Table 2 on page 2 sets out the changes in EPS and CFPS forecasts for the

North American precious metal producers in our survey.  The impact of the

higher gold price forecast is predictable, with the gold companies under

coverage having modestly higher 2002 forecasts (or smaller losses), but more

significant changes to 2003 forecasts.

 

o    Not surprisingly, there is less impact to 2002 EPS & CFPS estimates for

gold companies with low cost structures and/or strong hedge positions.

 

o    While our long-term gold price forecast remains unchanged at $325/oz, the modest uptick in our price assumptions increases NAVs by between 3% and 9%.

Conversely, gold producer valuations become somewhat more attractive. For

example, the P/NAV ratio of the senior gold producers declines from 2.22 to

2.14 times. In bull markets for gold stocks, the senior producers can trade up to 2.75-3.00 times NAV, indicating upside potential.

 

 

           Table 1: Merrill Lynch Commodity Price Forecast Revisions

                                    2002E              2003E

                                Old   New Change   Old   New Change

           Gold      (US$/oz)   280   293  +4.6%   290   305  +5.2%

           Silver    (US$/oz)  4.38  4.50  +2.7%  5.00  5.00  unchg

           Palladium (US$/oz)   376   380  +1.1%   423   380 -10.2%

           Platinum  (US$/oz)   460   493  +7.2%   470   450  -4.3%

           Copper    (US$/lb) 0.693 0.696  +0.4% 0.838 0.838  unchg

           Zinc      (US$/lb) 0.400 0.400  unchg  0.48  0.48  unchg

Source: Merrill Lynch Global Mining Team

 

 

Earnings - Impact of Higher Gold Spot Forecasts

 

Year-to-date 2002, the spot gold price has averaged around $290/oz (above our

current 2001 forecast of $280/oz).  Based on several factors, we have raised

our 2002 spot gold price forecast from $280 to $293/oz.  In addition, we have

increased our 2003 price forecast from $290 to $305/oz (and the 2004 forecast

from $300 to $315/oz).

 

These higher gold price forecasts for 2002 and 2003 are predicated on improving supply/demand fundamentals, including reductions to producer hedging, declining mine output and renewed investment demand. Central bank sales (largely from

Europe) and timely hedging, however, will likely slow price rallies.  Tables 1 and 4 set out Merrill' revised price forecasts for all metals under coverage.

 

Table 2 sets out the changes in EPS and CFPS forecasts for the North American

precious metal producers in our survey.  The impact of the higher gold price

forecast is predictable, with the gold companies under coverage having modestly higher 2002 EPS & CFPS forecasts (or smaller losses). The average change in

2002 EPS is around 15%, though the range is between 6% and 60% (with some

outliers on the upper end), compared to a 4.6% increase in the spot gold price forecast.

 

Not surprisingly, there is less impact to 2002 EPS estimates for gold companies with low cost structures and/or strong hedge positions. These companies include Barrick Gold (up 6%), Placer Dome (up 9%), Goldcorp (up 9%) and Meridian Gold (up 10%). Companies seeing the greatest change in 2002 EPS forecasts include TVX Gold, Repadre Capital, Glamis Gold, Agnico-Eagle and Newmont Mining.

 

There are several mining companies whose earnings and cash flow are affected

due to exposure through their respective gold mines. Reflecting its diversified asset base, Teck Cominco's 2002 EPS forecast changes only by 4%. Due to a

reduction in the equity income contribution from 15%-owned Bruce Power, we have reduced our 2002 EPS forecast from C$1.42 to C$1.15/sh.

 

Gold Price Impact - Higher NAV's

 

Table 3 sets out our revised net asset values (NAV) for the gold and other

mining companies under coverage based on the changes to the spot gold price

forecasts in 2002-2004.

 

While our long-term gold price forecast remains unchanged at $325/oz, the

modest uptick in our price assumptions increases the NAVs of gold producers

under coverage by between 3% and 9%. Not surprisingly, the lowest-cost gold

producers exhibit below-average change in their respective NAVs. The higher-

cost gold producers exhibit the largest relative change in NAVs, led by Cambior (up 8%) and Kinross Gold (up 7%). Among the senior producers, Newmont Mining

reports the largest change in NAV, at 6% (to $11.20/sh).

 

Among the mining companies, our NAV for Teck Cominco jumps by 4%, though this

is largely due to modifications to asset values of its non-gold mines, rather

than the higher gold price assumptions.

 

More Attractive Valuations

 

Price/2002E cash flow - Our assumption for a 4.6% higher spot gold price in

2002 reduces the estimated P/CF multiple of the senior producers by 6.2%, from 12.9 to 12.1 times. The senior producers have historically traded between 6 and 18 times CF, indicating upside potential for this group. All three senior

producers are trading around 12 times 2002 cash flow.

 

Price/NAV. The estimated P/NAV ratio of the senior gold producers declines from 2.22 to 2.14 times. In bull markets for gold stocks, the senior producers can

trade up to 2.75-3.00 times NAV, indicating upside potential for this group.

The P/NAV ratio for the mid-cap producers declines from 1.80 to 1.65 times. The three key mid-caps, Goldcorp (2.28 times), Meridian Gold (2.37 times) and

Agnico-Eagle (1.88 times) are now trading at more attractive levels compared to their recent highs (Goldcorp and Meridian traded over 2.6 times NAV).

 

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ML: MTLS&MNG-GOLD:2002/03 Gold Price Assumptions Raised Part 2

08:05am EST 22-Mar-02 Merrill Lynch (M.Jalonen) ABX.CA NEM PDG

    ML++ML++ML     Merrill Lynch Global Securities Research     ML++ML++ML

                            METALS & MINING - GOLD

                     2002/03 Gold Price Assumptions Raised

                        Michael Jalonen

(Part 2 of 2).

 

 

    Table 2: Merrill Lynch Metals & Mineral Commodity Price Forecasts

    NON-FERROUS METALS  H1/02E H2/02E  2002E H1/03E H2/03E  2003E Long-term

    Aluminum            $0.640 $0.665 $0.653 $0.775 $0.775 $0.775    $0.750

     % Change            +7.6%  -3.6%  +1.6%    n/c    n/c    n/c       n/c

 

    Copper              $0.702 $0.690 $0.696 $0.825 $0.850 $0.838    $0.900

     % Change            +5.6%  -4.2%  +0.4%    n/c    n/c    n/c       n/c

 

    Lead                $0.222 $0.260 $0.240 $0.225 $0.275 $0.250    $0.260

     % Change              n/c    n/c    n/c    n/c    n/c    n/c       n/c

 

    Nickel               $2.90  $2.90  $2.90  $3.30  $2.90  $3.10     $2.90

     % Change           +20.8%  +7.4% +13.7%    n/c    n/c    n/c       n/c

 

    Zinc                 0.380  0.420  0.400 $0.490 $0.470 $0.480    $0.500

     % Change              n/c    n/c    n/c    n/c    n/c    n/c       n/c

 

    PRECIOUS METALS     H1/02E H2/02E  2002E H1/03E H2/03E  2003E Long-term

    Gold                  $290   $296   $293   $305   $305   $305      $325

     % Change            +3.6%  +5.7%  +4.6%  +5.2%  +5.2%  +5.2%       n/c

 

    Palladium             $380   $380   $380   $380   $380   $380      $320

     % Change           +14.3%  -9.5%  +1.1% -12.6%  -7.3% -10.2%       n/c

 

    Platinum              $500   $486   $493   $475   $465   $470      $450

     % Change           +14.9%  +0.2%  +7.2%    n/c    n/c    n/c       n/c

 

    Rhodium               $980   $980   $980   $950   $950   $950      $950

     % Change           +70.4% +30.7% +47.8% +35.7% +40.7% +38.1%       n/c

 

    Silver               $4.50  $4.50  $4.50  $5.00  $5.00  $5.00     $5.25

     % Change            +5.9%    n/c  +2.7%    n/c    n/c    n/c       n/c

Source: Merrill Lynch

 

 

 

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MLPF&S or its affiliates usually make a market in the securities of this

company.

OPINION KEY: Opinions include a Volatility Risk Rating, Intermediate-Term and

Long-Term Investment Ratings and an Income Rating.  VOLATILITY RISK RATINGS,

indicators of potential price fluctuation, are: A - Low, B - Average, C - Above Average, D - High.  INTERMEDIATE-TERM INVESTMENT RATINGS, indicators of

expected total return (price appreciation plus yield) within the 12-month

period from the date of the initial rating, are: 1 - Strong Buy (minimum 20% --

more for High Risk securities); 2 - Buy (minimum 10%); 3 - Neutral (0- 10%); 4

- Reduce/Sell (negative return); 6 - No Rating.  LONG-TERM INVESTMENT RATINGS,

indicators of fundamental company factors demonstrating potential total return for the 3-year period from the date of the initial rating, are: 1 - Strong Buy (aggregate minimum 40%); 2 - Buy (aggregate minimum 20%); 3 - Neutral

(aggregate 0-20%); 4 - Reduce/Sell (negative return); 6 - No Rating. INCOME

RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower (dividend not considered be secure);

and 9 - pays no cash dividend.

Mar-22-2002 13:06 GMT