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Published 27 August 2013 11:48, Updated 29 August 2013 00:45
Newcrest Mining’s Cadia East project in central NSW. The company’s share price is expected to benefit from imminent inclusion in a major global gold equity index.
Investors have until the end of the week to position for big changes to one of the world’s largest gold equity indexes, with Newcrest Mining, Regis Resources and Alacer Gold all potential beneficiaries.
The New York Stock Exchange (NYSE) is changing the rules for inclusion in its Arca Gold Miners Index, which could drive up to $4.2 billion in gold equity trading ahead of a mock portfolio being published by August 31, and the new-look index’s official start date of September 20, according to Macquarie Private Wealth.
The most important change from an Australian equity investor’s perspective is that non-US listed companies will be included in the index for the first time.
Newcrest, with a market cap equal to $US8.6 billion ($9.54 billion), is rated a “high probability” inclusion by Macquarie, while Regis ($US1.8 billion) and Alacer ($US874 million) are lower probabilities.
Macquarie forecasts 28 million Newcrest shares, or six days of average demand, will have to be bought by investors tracking the Arca index of mostly exchange-traded funds, should Australia’s largest goldminer be included.
However Macquarie stresses the buying opportunity is only a tactical one, and recommends unwinding it once the mock portfolio is announced.
“The potential inclusion of Newcrest (NCM) in the index is a buying opportunity with the view to trading the stock before its next quarterly update is released in October,” Macquarie says.
“We see risks to 2013-14 production while NCM ramps up output from its Cadia East and Lihir projects, and expect first quarter 2013-14 output will be significantly weaker than the last quarter of 2012-13 (forecast down 20 per cent). The balance sheet remains under scrutiny with gearing at double management’s stated target (post the recent $6.2 billion of asset write-downs) so any deterioration in output or gold price will intensify the investor’s focus on balance sheet metrics.”
Newcrest’s share price has rallied from $9 to nearly $14 since June, and CMC Markets’ chief market strategist Michael McCarthy suspects the NYSE’s August 9 announcement of rule changes for Arca (if not its new-look stock components) could have helped it along over the last fortnight, even though he doubts the changes are widely understood as yet.
“There could be a nice little trade there but by far the bigger factors for Newcrest are the gold price – and whether it can get through that $US1425 an ounce technical barrier it is again approaching – and whether management can get its act together and its production forecasts right,” he says.
Either way, it’s set to be a wild ride for holders of NCM. McCarthy notes it is again approaching its post-financial crisis heights of implied volatility.
Regis Resources has the next best chance of inclusion in the new-look Arca Gold Index. Its market cap of $US1.8 billion looks enough on paper given the minimum size for entry to the index under the new rules is $US750 million (up from $US100 million), however there is a buffer where companies in the current index valued above $US450 million will be allowed to stay.
Currently trading at $4.21, Macquarie recommends buying Regis up to a $4.30 valuation anyway, with the potential bonus of demand for 15.6 million of its shares (4.1 times average daily volume) should it make the Arca Gold index.
“Regis remains a standout in the ASX listed gold space for its consistency of production delivery, solid balance sheet and fully-funded gradual production growth,” Macquarie says.
“We would also highlight that with its pure Australian focus, Regis is exposed to the upside by the falling Australian dollar relative to the gold price.”