Triple-listed Oceana Gold had two unusual requests from the Australian Stock Exchange this year, starting with a "please explain" why its share price had plummeted to a record low of 22c in February, and followed in November by another "please explain" why it had shot to $2.70.
In both instances, New Zealand's largest gold-miner had no material information to disclose, but the global spot gold price rallied through the $US1000 ($NZ1400) mark for the first time in February and then clawed its way to pass a record $US1200 in early December.
The year 2009 will be remembered for the volatility of equity markets, which globally were just beginning to struggle out of the red from a financial crisis and subsequent recession.
However, the underpinning of global economies by countries' "printing money" undermined government, reserve bank and investor sentiment about the value of global currencies and gold was suddenly recognised as a investment class of its own, Craigs Investment Partners broker Peter McIntyre said.
"There's been disarray in the currencies markets.
Gold gained support and has been maintained as under-owned," he said.
During the year, global gold production was up by 3%-5% but demand was up 15% and the global price had risen by more than 35%.
During the five weeks to December, it hit 13 record highs, including a brief stint above the $US1200 mark.
Forsyth Barr broker Suzanne Kinnaird said the gold-price trend appeared likely to continue, but expecting further high returns "may be too optimistic".
"Many investors fear a sudden unwinding of long positions, which could weaken prices sharply," she said.
She forecast net investment demand for gold in 2010 was likely to drop by 50% compared with 2009 investment, but a recovery in jewellery demand, lack of central bank selling and lower demand would still be strong enough to keep the gold market under-supplied and support the price.
Annual global jewellery demand for gold is generally about 2400 tonnes, but that was likely to be down 18% for 2009.
Balancing that was emerging economies' increasing their demand, and she saw a recovery to 2200 tonnes in 2010 and 2400 tonnes in 2011, Ms Kinnaird said.
In the short term, she expected gold prices to range from $US1100 to $US1200.
Both brokers highlighted that the volatility of gold prices and gold-associated stocks meant investors were in a higher-risk investment sector, but nevertheless, they recommended some clients should have an allocation of up to 5% in portfolios as an insurance policy.
The National Australia Bank's (NAB) monthly gold analysis for December said central banks, having decreased their gold holdings since the mid-1980s, now appeared keen to rebuild their reserves.
Mr McIntyre said a stark example of the sell-down of gold was British Prime Minister Gordon Brown's decision, when chancellor of the exchequer, to sell more than half Britain's gold reserves between 1999 and 2002.
With gold at a 20-year low, Mr Brown sold 395 tonnes at an average $US275 per ounce, realising $US3.5 billion.
That 395 tonnes would be worth $US15 billion-$16 billion today.
"It was bad timing, but there's a lesson there in selling during any market low," Mr McIntyre said.
In late October 2009, the Bank of India bought 200 tonnes from the International Monetary Fund for $US6.7 billion, at an average $US1045 per ounce.
Gold prices subsequently increased by more than 10%.
In the NAB report, chief economist Alan Oster said: "The size of the purchase by India at a price considered very high by historic standards surprised the market."
In recent weeks, India had been reported to be conducting more talks with the IMF to acquire a further "up to 200 tonnes" of gold, he said.
"Since November 3, the gold price has risen by over 10%, with markets surprised by the extent of central bank gold-demand."
Oceana's improving fortunes were not linked solely to the global spot price, but included its production cost management, hedging policy, capital raising, record production and exchange rates; the last albeit volatile.
While gold is still considered a "safe haven" investment in times of turmoil and as a foil to inflation, the global equity-market volatility and weak New Zealand dollar assisted Oceana earlier in the year.
The kiwi was trading at US50.3c, not long after gold hit $US1000 per ounce.
"Oceana really did benefit from the weak kiwi at that time," Mr McIntyre said.
The global interest in gold fired an interest in gold production and production-associated stocks, many of which had been languishing after a year of recession after several boom-years; most notably in the Australian resource sector.
Oceana was no different and at the start of 2009, its share price had "fallen off a cliff" to 22c, having during 2008 had a high of $3.60, Mr McIntyre said.
Oceana relisted on the Toronto stock exchange in June 2007, at $A4.15, but by late 2008 its market capitalisation had slumped an alarming 88%, from $A668 million to $A80 million.
"Oceana's tenure would have been shaky if it had not moved [its principal listing] to the Toronto exchange, where investors know the risks of mining more thoroughly," he said.
However, Mr McIntyre said in the past year, Oceana had performed well; its crucial production costs dropped when combined diesel and electricity costs were shaved 30% in some quarters.
And in early November, Oceana had announced an estimated increase in gold resources of more than 40%.
An increased estimate on resources does not have "demonstrated economic viability", but in Oceana's case, a promising test-drilling programme is returning positive grades of gold.
In mid-December, Oceana announced an extension of estimated reserves to 617,000 ounces, as higher global prices allowed for mining of less-profitable grades.
Mr McIntyre estimated an additional two years of mine life, to between 12 and 14 years.
Oceana quantified the first announcement, saying all categories of previous mineral resources at December 2008 were 3.39 million ounces and all categories of mineral resources at June 2009 were 4.85 million ounces; a 43% increase.
Oceana has mined more than 2.5 million ounces from Macraes since 1990 and has been bullish in recent months on its exploration programmes in brownfield areas, with an eye to extending overall mine life.
Gold production this calendar year is expected to surpass earlier estimates of a record 300,000 ounces to potentially 303,000 ounces, derived from its open pits and underground Frasers Mine at Macraes and its open pit in Reefton.
In late July, Oceana raised $30 million to expand its exploration programme, hoping to extend its mine life by three years after 2014, and it began a third drilling programme in August.
Mr McIntyre reiterated what Oceana executives had highlighted in early June: it was carrying too much debt and its hedging polices were "out of favour" with investors, and it would get out of hedging when contracts expired naturally by the end of 2010.
At Oceana's last quarterly report on its hedge books, its call options (contracts to buy at a pre-fixed price in the future) were looking profitable while its "put options" (contracts to sell at a pre-fixed price in the future) were not.
"They will be in the money on their call options, and out of the money on their put options and forward gold-sales contracts," Mr McIntyre said.
Separate from the call and put options, Oceana has forward gold-sales contracts for 122,340 ounces at a locked price of $US540, representing a loss at present levels.
Oceana has 103,434 ounces on its put (sell) options with an average price of $US700, and 104,024 ounces on its call (buy) options at an average price of $US743.
"While investors want unhedged plays to make the most of [high] spot prices, there is a danger to gold producers if there is a massive fall in those spot prices," Mr McIntyre said.
Oceana Gold was propelled into mid-tier gold-producer status by its cashless merger with Sydney-based Climax in late 2006, and took over development of the Didipio gold/copper mine in the northern Philippines.
Mr McIntyre said the project had become "both a blessing and a curse" for Oceana.
While its gold and copper deposits were considered high grade, Oceana had spent about $US120 million before it blew out its development costs by double to $US320 million ($NZ606 million).
This was compounded by the credit crunch, and the mine was mothballed.
"When Oceana's hedging position runs out at the end of 2010, it will want to be in a position to start up [Didipio] then, or look again at getting a joint-venture partner," he said.
Mr McIntyre predicted Oceana will be in a "strong" trading position in 2010.
Global demand for gold would continue to underpin its share price and New Zealand looked set to remain a steadily producing cash-cow, he said.
However, the future of the Didipio project remained at the fore of uncertainty surrounding Oceana's future, Mr McIntyre and Ms Kinnaird said.
• The brokers' financial disclosure documents are available on request.
The big guns
The seven major global gold holders (in tonnes):
8100: United States
3400: Germany3000: International Monetary Fund
2500: Italy
2500: France
1400: (US) SPRD Gold Index Fund
1000: China
Source: Craigs Investment Partners
How gold prices are benchmarked
Twice a day by conference call, five banks in London agree on "fixing" the price of gold to kick-start global trading.
During 15-minute calls at 10.30am and 3pm, the five members balance off the price struck between that of those who will sell and those buying, becoming the benchmark for the global spot price.
More than $US13 billion ($NZ18 billion) per day is traded in London alone, with deals secured on paper transactions, as opposed to actual bullion changing hands.
The fixing has been running this way since September 1919, when gold's first fix was $US20.67 an ounce.
Banking participants are Deutsche Bank, Barclays, HSBC Bank, Societe Generale and the Bank of Nova Scotia's bullion division, Scotia Mocatta.
Source: Reuters
