Over the last five years, the gold price has soared but so has the Australian dollar. Even so, gold has increased in AUD terms by about 55%.
You might expect that the return for investing in Australia's largest gold miner, Newcrest (ASX: NCM) would reflect this but since June 30th 2007 the share price has gone down slightly. Do their forecasts give rise to hope for a better future?
Newcrest is the fourth largest gold miner in the world after the giant Barrick, Goldcorp and Newmont . Newcrest produced 2.3 million ounces of gold last financial year and has two major short term growth projects leading to a target gold production of 3.8 million ounces by 2016. The company expects further growth after that from a third development project at Wafi-Golpu in Papua New Guniea which has identified reserves of 27 million ounces.
Newcrest has a strong exploration program and has already identified substantial gold reserves of 51 million ounces with 90 million ounces of gold 'resources'. 'Resources' are an earlier, less certain classification of mineral deposits than reserves.
While Newcrest dominates the Australian market, other local gold miners of some size are Kingsgate (ASX: KCN), Alacer (ASX: AQG), Oceanagold (ASX: OGC) and Resolute Mining (ASX: RSG).
Foolish takeaway
Gold companies' share prices often move in line with changes in the gold price. Given the underperformance in the last few years, shareholders may have some hope that Newcrest's share price may recover.
The company's major short-term projects appear on track for commissioning in this financial year which might also lead to an upgrade in its share price. Of course, forecasting short-term share price movements is an enormously difficult (if not impossible) task.
One way of valuing gold mining companies is to compare their market capitalisation with their identified gold reserves/resources in the ground. On this basis, Newcrest is valued at about $370 per ounce of reserves which is considered to be relatively good value.
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Motley Fool contributor Tony Reardon owns shares in Newcrest. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
