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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
African Barrick Gold looks a stealOctober 30 2010, 9:00am
A glance at the above chart of the FSTE 100 shows it has been a cautious week for equities as mixed economic data added a further note of caution to a fragile market.
Recent GDP figures showed the UK economy grew by 0.8% in the third quarter, double the consensus estimate of 0.4% and the second fastest reading since the first quarter of 2007.
A further fillip for the UK came from news that Standard and Poor’s (S&P), the credit ratings agency, had raised its outlook on the UK from “negative” to “stable” and reaffirmed its triple “A” rating. The move comes in appreciation of the comprehensive spending review which laid out credible plans to get back to a sustainable fiscal path.
However, perversely the news failed to stimulate equities as the chief focus remained on next week’s highly anticipated US Federal Reserve’s policy meeting, where they are widely expected to announce the second round of quantitative easing (QE2).
The recent strong data from both sides of the Atlantic has led to mounting speculation that the Fed could adopt a more measured approach to stimulating the US economy, causing investors to get cold feet ahead of the meeting. US third quarter GDP, due out on Friday, could still impact the Fed’s QE decisions.
Technical analysis highlights the FTSE remains near the upper band of the rising channel formation, but is nearing resistance from its previous high at 5800.
Despite the strength in the underlying index the relative strength index touched a seven week low, indicating that the momentum behind the rally is declining and this often leads to a rapid retracement. Support is seen at 5600 and 5400, but a break above 5800 could trigger the next leg higher.
In summary, equity markets have become fairly irrational over recent weeks, with positive economic data having an inverse reaction on risk assets, as hopes of QE overshadow the fundamental recovery story. I believe the FTSE will remain supported until next week’s announcement, but could then be a classic case of “buy the rumour and sell the fact”.
The expectation of QE2 has also created turbulence in foreign exchange rates and commodity prices. Gold has recently fallen off its recent all time highs, although it is likely to remain supported while the questions surrounding the underlying economy remain unanswered.
At $1342 a troy ounce gold remains in the middle of its upward channel formation that has been in place for the past two years and the moving averages are pointing higher, suggesting there could be further upside to come.
A related stock I have been following closely is FTSE 100 listed African Barrick Gold (Epic: ABG). The company was spun out of Barrick Gold, the world’s largest gold producer, in March 2010 and Barrick Gold retains a 74% shareholding. ABG is one of Africa’s five largest gold producers and is expanding organically, through acquisitions and cost cutting.
As can be seen from the above chart of ABG the shares have fallen over 15% recently after revealing it had discovered a theft ring at its Buzwagi mine in Tanzania and had suspended about 60% of staff.
The resulting delay in mining has impacted third quarter results and may reduce full year production by around 30,000 ounces, resulting in total production similar to last years level.
The setback should be temporary and chief executive Greg Hawkins said “We will overcome the Buzwagi issues this year. It is a temporary setback and we have taken some tough decisions with regards to the site and we have also introduced some pretty strong leadership.”
Third quarter results published on the 22nd October showed that operating cashflow in the first half of 2010 boosted net cash flow to $334 million and if you include the availability of more financing from its parent company, ABG has plenty of capital to expand through strategic acquisitions.
At current prices ABG trades on 10.8x next years’ earnings and with 27% growth forecast, it puts them on an attractive PEG of 0.4. The group also trades at around one times net asset value (NAV), which is a significant discount to peers such as Randgold Recourses and Petropavlovsk at 1.7 and 1.5 times respectively.
The shares are trading towards the lower end of its range and I believe it offers and excellent opportunity to take advantage of a rising gold price and the company’s strong fundamentals.
At the time of writing the share price is 536.5p and with a tight stop loss below its all time low at 515p, offers an attractive risk/reward bias, with targets at 559.5p, 576p and 595p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in African Barrick Gold, but client accounts may. The material in this report has come from Simply Charts and African Barrick Gold’s corporate website.