After a year of falling share prices, gold shares are, in my view, finally set to run given the strong gold price, both in dollar terms and in rand terms.
Back on 15 August, we mentioned two gold stocks in our watch list: DRD Gold and Goldfields. At that time DRD was at R4.15. Today it closes at R5.53 (up 33%). Goldfields was then R108.90, today at R113.85 (up 4.5%).
Gold shares have been performing poorly over the last twelve months as they were unable to capitalise on the rising gold price, due to declining production and escalating costs. In particular, company-specific problems, like Harmony's accounting dress-up, have hit the share price hard.
However, I believe many of the gold shares are now at a level that offers value. According to our valuations, the following three gold mining companies are undervalued and therefore of particular interest:
Goldfields: Its fair value is north of R160, and we believe in the next twelve months it should reach R170, if the strong gold price is sustained.
DRD Gold: Its technical chart looks promising, we believe it will reach R9.80 in the next twelve months.
Harmony: After the shocking announcement of its former CEO, Bernard Swanepoel, its share price fell by about 40%. It will take some time for the company to sort out its operational problems, but I believe the company presents value at the current levels. The target share price is R126.
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