Peruvian gold rush

Peruvian Gold Rush

By Dave Brown – Exclusive to Gold Investing News

The spot price of gold traded down to US$767.65 per troy ounce on Tuesday with growing concerns of global economic weakness in addition to fragile U.S. housing and labor-market conditions.

Data released on Tuesday indicated that pending home sales dropped 3.2 per cent in July, reversing gains from the month before, according to the National Association of Realtors. Pending sales are a leading indicator of housing activity, because they track contract signings, with figures on August existing home sales due to be released on September 24.

This narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets. Tracking the pending home sales index provides gold investors with a broad gauge of consumer confidence and the economic backdrop which may affect the financial markets.

Company news

On Tuesday, Chief Executive Officer of Buenaventura (NYSE: BVN) Roque Benavides told Reuters that he was interested in acquiring Latin American companies which would be complimentary to the company’s existing portfolio. Benavides said that he was focusing on opportunities that currently had capabilities and financial strength that would benefit Buenaventura within present global economic conditions. “We believe that this is the time when prices are dropping, and many of the companies may be tied up with cash. We have been talking to different investment bankers, which in turn have spoken to other companies. We have nothing concrete to report”.

The Peruvian gold producer was downgraded on Monday in a research report issued by the Latin American Equity Research team at Santander Investment Securities. The updated rating lists Peru’s largest publicly-traded precious metals company as a “hold” with a price target of US$25.50. This price target is based on a sum of the parts analysis and implies a 26 percent discount to current valuation levels.

The investment thesis is predicated on higher costs offsetting production growth in addition to lower metal price forecasts. The operational outlook suggested lingering cost pressures for the second half of this year resulting in a slight decrease in earnings from direct operations. The analysts have revised forecasts for metal prices due to escalated fear related to a global economic slowdown, which has placed pressure on most commodity prices as expectations are that demand will be reduced in the foreseeable future. They also believe expectations of high inflation and stronger demand from the jewelry industry could provide some support to gold prices, particularly after the recent pullback in prices.

Benavides has a more bullish outlook on the price of gold, as Buenaventura has recently unwound its gold hedges at US$890 an ounce, believing the price of gold should rise in the long term. “We believe it’s a good business not to hedge, and certainly the price of gold may go higher than US$1,000 an ounce in the next year or two,” said Benavides.

Buenaventura currently operates seven mines in Peru in addition to possessing partnership agreements and minority and controlling interests in several other mining companies in Peru. The company principally produces, distributes, and sells refined gold, silver-lead concentrates, silver-gold concentrates, zinc concentrates, and lead-gold-copper concentrates. In addition to its operations in mining, exploration, development and processing metals, Buenaventura owns an electric power transmission company and an engineering services consulting company. The company was founded in 1953 and is based in Lima, Peru, with a market capitalization of US$4.2 bl.