From the August 2006 issue of Research Magazine • Subscribe!

Sector Upgrade

After a recent revaluation, the gold sector looks poised for a good medium- to long-term performance.

Oscar Cabrera

Goldman, Sachs & Co.

Oscar.cabrera@gs.com

Outlook: We are raising our coverage view to Attractive from Neutral on strong gold market fundamentals and our belief that the performance "gap" between gold price and equities (at about 20 percent) should close as companies address supply challenges (lower grades/higher cash cost).

Fundamentals reinforce gold "store of value" above $600 an ounce, as a structurally weaker U.S. dollar, in line with Goldman Sachs economists' expectations, inflationary pressures, strong net investments, and the potential increase in reserves at key emerging market Central Banks provide support.

We are increasing our gold price estimates to an average of $635 an ounce from $600 an ounce in 2006, $700 an ounce from $650 an ounce in $2007, and are introducing 2008 at $710 an ounce. We have increased our long-term gold price estimate to $425 an ounce from $400 an ounce.

Recent Estimate Changes: Gold Fields Ltd. (GFI) upgraded to Inline; Companhia de Minas Buenaventura (BVN) downgraded to Underperform.*

Top Picks: Barrick Gold Corp. (ABX); Newmont Mining Corp. (NEM)*

Barrick and Newmont are our favorite picks, but AngloGold Ashanti Ltd. (AU) also offers compelling upside potential. We estimate Barrick and Newmont share-potential upside at 32 percent and 26 percent respectfully, as our raised base-case discounted cash flow (DCF), cash flow per share (CFPS), and earnings before interest, taxes, depreciation and amortization (EBITDA) estimates factor our revised gold price assumptions.

AngloGold maintains the highest sensitivity to a $10 an ounce change in gold prices, among our gold-coverage universe, with a weighted average 4.2 percent change CFPS and DCF, compared to Barrick Gold at 2.3 percent and Newmont at 2.8 percent. As such, AngloGold shares offer a 23 percent upside potential under our new estimates.

Barrick Gold offers the most attractive risk reward in our gold-coverage universe. We believe Barrick's share upside could be as high as 47 percent under our bull-case gold price assumptions, as the company realizes higher synergies than its budgeted $200 million run rate from its merger with Placer Dome, and its shares undergo a 25 percent price-to-discounted cash flow (P/DCF) multiple expansion (from 1.2 to 1.5) as a result.

We recommend investors switch out of Buenaventura into Gold Fields. We are revising our rating for GoldFields to Inline from Underperform, as we increased our net-asset value (NAV) gold reserve estimate to 63.1 million ounces from 64.0 million ounces, factoring potential resource to reserve conversion at the company's operations under a stronger gold-price environment, plus valuation upside at Driefontein, Kloof, Beatrix and Takwa, the company's longer-life mines, under our new gold long-term price of $425 an ounce.

*Goldman Sachs has received compensation for investment banking services in the past 12 months for AngloGold, Barrick and Gold Fields; expects to in the next 3 months from AngloGold, Barrick, Buenaventura, Gold Fields and Newmont; had compensation for other services in the past 12 months from Barrick and Newmont; had non-investment banking and non-securities-related relationships and in the past 12 months with all of these firms; managed or co-managed a public offering in the past 12 months for AngloGold; and is a market maker in AngloGold and Newmont shares, for which it is also a specialist.

Geoff Stanley/Heather Douglas

BMO Nesbitt Burns Research

Geogg.Stanley/Heather.Douglas@bmonb.com

Outlook: We are upgrading our sector rating to Outperform from Market Perform. This follows a progressive downward revaluation of the sector, which resulted in the lowest recorded sector valuation levels since BMO Nesbitt Burns began compiling data over 15 years ago.

A significant correction has meaningfully reduced the downside risk in the gold price, and the medium- to longer-term outlook remains positive.

We believe much of the gold price risk created by a flood of speculative investment activity is now removed. Taken in conjunction with the current historically low valuation levels, we believe it is now appropriate to upgrade the gold sector to Outperform from Market Perform.

Recent Estimate Changes: Alamos Gold (AGI) upgraded to Outperform from Market Perform; AngloGold Ashanti Ltd. upgraded to Outperform from Market Perform; Gold Fields Ltd. upgraded to Outperform from Market Perform; Compania de Minas Buenaventura upgraded to Outperform from Market Perform.**

**BMO Nesbitt Burns has undertaken underwriting liability for, provided investment banking services to, and had an investment-banking relationship with the past 12 months with AngloGold Ashanti.

CIBC World Markets Inc.

Sid Mokhtari/Barry Cooper

Sid.mokhtari/barry.cooper@cibc.ca

Outlook: We are looking for a corrective bounce in the U.S. dollar, as it has reached deep oversold levels relative to other majors. While this should keep downward pressure on gold in the short-run, our longer-term bias is still for further U.S. dollar weakness. The worst-case scenario for gold is to retreat lower toward the January peak of $580, where the next best buy opportunity for the gold sector develops.

We are still targeting $800-$850 within the next year, and the risk probably is that it could happen sooner rather than later.

Improvements to gold equity prices are being driven by changes to fund flows brought about by increased volatility in bullion, an expectation of increasing margins, improved earnings and gold prices. We believe most of these trends will continue, as gold has begun 2006 with high volatility, ranging over $100 per ounce so far this year.

We believe the longer-term fundamentals remain place for gold to move upward. We have increased our 2007 forecast to an average of $850 per ounce from $650 per ounce. We believe that smaller-cap stocks will offer the best returns.

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