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Gold producers could benefit from increasing prices in the second half of the year, analysts say.


Oscar CarbreraGoldman [email protected]

Coverage: Metals and Mining: Precious

Outlook: We remain bullish in our gold price outlook. Gold fundamentals have continued to strengthen over the quarter … We expect gold prices to end 2007 at $725 an ounce and average $689 an ounce during the year, driven by further weakening of the U.S. dollar, especially against Asian currencies. Demand trends from investors and central banks have provided support to gold prices. In addition, slower mine supply (due to permitting and lack of skilled labor) will also be supportive in our opinion.

Gold prices experienced a volatile first quarter in 2007, exiting the quarter at roughly $665 per ounce. Prices have since risen to above $670 per ounce. We continue to believe that gold fundamentals are strong. Demand trends have been supported by investors and central banks, while a slower mine supply (due to environmental concerns, increased cost pressures and lack of skilled labor) is likely to affect gold prices in the medium to long term in our view.

While increased central bank sales do play a risk factor to gold prices, we believe there is a general expectation for European banks to fulfill the Washington agreement quota of 500 tons per year. Therefore, anything less would be considered a positive development for gold pricing.


Paul O’BrienRaymond [email protected]

Coverage: Mining: Gold

Outlook: What we are seeing now is an underlying seasonal weakness that is not unusual for this time of year. The demand for gold is typically weaker during the summer months before peaking in the fourth quarter. The fundamental long-term picture for gold is positive.

We expect to see a rise in the price starting in the fourth quarter, traditionally the strongest period for the physical demand for gold due primarily to purchase of gold in Asia and India and for the upcoming holidays and wedding season.

The central banks will also play a role in the improving picture and are likely to exert a positive influence on the price of gold for the fourth quarter. Thus far, they have sold only 300 tons of gold — 200 tons short of their 500-ton quota.

September marks the year-end for the central banks. Central-bank sales are likely to fall short again this year. Since the banks have not sold their quota and aren’t likely to within the few remaining months, this reduction in supply contributes to an improvement in the outlook for gold.

The flat-to-declining mine production worldwide also plays an important role. Decline in output from South African mines outweighs what we expect to see from emerging areas of gold mining.

Another factor pointing to positive demand are the exchange-traded funds (ETFs) being launched around the world: StreetTRACKS Gold Shares (GLD), being one. The Italians recently announced that they will introduce new ETF investment products backed by physical metal holdings including gold.

Meridian Gold (MDG)*: Outperform

Why This Rating? Meridian has seen valuation at levels it has not seen for a while. It has been … trading at 1.4 times net asset value in line with sector averages. It is backed by an excellent performing operation the El Pe??n Mine in Chile. Meridian Gold Inc. announced quarterly $0.19 earnings per share. First quarter results for Meridian proved better than our estimates of $0.18 EPS.

Total cash costs for the quarter were announced at negative $68 an ounce versus our estimate of negative $126 an ounce (production of 70,900 ounces of gold and 1.6 million ounces of silver was previously announced). Earnings were impacted by higher than estimated operating costs and depreciation, depletion and amortization (DD&A) offset somewhat by other expenses relating to a mark-to-market gain on zinc forwards, while cash flows were impacted by deferred taxes and stock based compensation charges.

Production increased from 50,637 ounces of gold and 1.3 million ounces of silver in the fourth quarter of 2006 to 55,581 ounces of gold and 1.5 million ounces of silver, while total cash costs decreased from negative $2 an ounce to negative $68 an ounces after silver credits. Higher grades (21 percent to 34 percent) and silver prices (6.0 percent) were offset by lower throughput (negative 10 percent) and recoveries (negative 1.0 percent).

Meridian continues with the expansion from 35,000 tons per month to 65,000 tons per month that we estimate to be completed by year end 2008. Combined with new flotation circuits aimed at improving gold, silver and zinc recoveries (2 percent to 3 percent) and the addition of a ball mill, we estimate 108,000 ounces of gold, 0.5 million ounces of silver and 11 million pounds of zinc production.

Updating our model for first quarter 2007 results and 2007 outlook, our 2007 estimated net-asset value per share decreases marginally from $19.03 to $19.01, while our 2007 estimates have changed from $1.01 EPS to $0.99 EPS. The chief impact for the year-over-year increase to our total cash costs (and impact to earnings) is mainly from our long-term silver price (decreasing from $13.82 an ounce in 2007 to $11 an ounce in 2008-plus) and the addition of the 40 percent owned Rossi mine (in Nevada, with Barrick Gold Corporation owning 60 percent).

We are maintaining our Outperform rating and $37 target price that continues to reflect 1.9 times NAV per share.


Nawojka WachowiakBMO Capital [email protected]

Coverage: Precious Metals and Minerals

Outlook:. We believe the fundamentals for a positive outlook for gold remain intact, and that in the medium to longer term, concerns regarding inflation and a weakening U.S. dollar should result in a return to the rising trend for the gold price. Our gold price forecast is $655 an ounce in 2007, $675 an ounce in 2008 and $700 an ounce in 2009.

Gold equities are trading at historically low valuation levels relative to the spot gold price. We believe the influences on this are the availability of the ETF as an alternative precious metal investment vehicle, the negative impact of cost increases on margins, de-hedging’s disproportionate influence on the gold price versus equities, and a lagging acceptance of higher gold prices. The sector is discounting a gold price $25 an ounce below the prevailing spot, consistent with the $19 an ounce discount on March 1. The two-year average is $28 an ounce above spot. North American senior and intermediates are trading at a 7 percent discount to NAV vs. the two-year average 12 percent premium. We do not expect a return to historic premiums, but a modest rebound in valuation as gold prices stabilize.

Top Recommendations: Our recommendations are biased toward stocks with valuation re-rating potential and/or superior growth profiles. Quality of management has an influence as well.

Meridian Gold: Outperform


Tony [email protected]

Area of Coverage: Gold

Meridian Gold (MDG): Buy

Why Meridian Gold’s Buy Rating? Higher production and lower costs drove strong quarter. Meridian Gold reported first quarter EPS of $0.19, ahead of UBS’ estimate at $0.18 and consensus at $0.17. Earnings were positively impacted by higher sequential gold (plus 5 percent) and silver production (plus 20 percent), as well as a lower effective tax rate (41 percent vs. 60 percent). Cash costs of negative $34 an ounce were lower than the $7 per ounce realized in the fourth quarter as a result of higher silver production and the timing of zinc sales. Production guidance for 2007 remained unchanged.

Meridian’s 40 percent owned Rossi mine in Nevada began commercial production in March. At El Pe??n, approval was obtained to commence initial production at the Fortuna vein. Full production is expected in the second half of 2007, when final permits are received.

Meridian reported 12 new drill-hole results at its Mercedes project in Mexico, of which 10 holes had apparent ore grade mineralization … Although these recent infill results indicate lower grades than those previously reported, they confirm the continuity of the Corona de Oro ore shoot. We are maintaining our target price of $34 per share, which is predicated on a 1.95 times multiple to our operating NAV estimate of $16.38 per share (with gold at $700 an ounce) plus net cash of $2.01 per share. We maintain our Buy 2 rating.

* Meridian Gold’s Board of Directors says that it met July 3 to consider Yamana Gold Inc.’s unsolicited proposal to acquire all of the common shares of Meridian, which Yamana says is related to its merger agreement with Northern Orion Resources Inc. Meridian’s board says the announced proposal does not provide a basis to enter into discussions with Yamana, though as of July 3 no formal offer had been made.


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