Valuation of the gold/silver mining industry

Weekly Corporate Growth Report, Jun 30, 1997

The situation is looking pretty dim for the Gold/Silver Mining Industry, at least in the short term. During the March 1997 interim, gold prices were averaging $351 an ounce, down from a mean of $376 in the final quarter of 1996. After posting a norm of $388 an ounce in 1996, gold will probably only average $370 an ounce in 1997, with a possibility of moving up to $385 in 1998.

The bullion market is not showing much life and remains in the doldrums. This reflects the benign inflationary expectations, the strength of the dollar, and concerns over central bank sales.

There has also been a trend for consolidation within the industry. Newmont Mining beat out Homestake Mining in the quest for Santa Fe Pacific Gold. This leaves Newmont with an enviable reserve base, good prospects for production growth, and a land position with excellent potential.

Not Striking Gold

After sliding downward in the fourth quarter of 1996, the bullion market continued to head south in the March period and hit a low of $337 an ounce on February 12,1997. As if coming up for air gold prices rose to $362 an ounce in early March before going under once again Currently, bullion is changing hands at about $342 an ounce.

There seems to be a number ol factors that are preventing the needed upward movement in the industry. The present view on future inflation and the benign inflation environment does not sit well for gold. The yellow metal usually responds positively to increases in the general level of prices.

Making matters worse is the current strength of the dollar. This is most likely limiting demand from foreign sources due to the fact that gold is priced in US dollars. Additionally, the threat of large official sales by European central banks, as that continent prepares for its monetary Union, continues to damper the bullion market.

Finally, interest rates are on the rise and this increases the cost of holding gold. All of these factors, along with the returns available for alternative investments, such as common stocks, paint a rather bleak picture for the Gold/Silver Mining Industry.

The pressure is on for gold mining companies to expand reserves and productions. At the same time, however, it is necessary to maintain, if not reduce, operating costs. Similarly, the consolidation taking place within the industry will likely continue for some time. (Source: Value Line)