Prospects are good if you can strike gold

WITH analysts predicting that the dollar is likely to decline further after the US election, and equities, bonds and property starting to lose some of their appeal, now might be the time for investors to go for gold.

The strategy of UK-based gold exploration company Mercator Gold, which was formed in March and listed on Aim last week, is to explore large ground holdings prospecting for gold deposits in and around known mining areas.

First up is the Meekatharra region of central Western Australia, where exploration is now under way targeting discoveries totalling two million ounces of gold.

Mercator benefits from access t o SpaDiS technology, an exploration tool that allows rapid processing of large geological databases and the prioritisation of drilling targets. Mercator raised 1.38 million prior to the listing and placed 8.5 million shares at 6p to raise 510,000 on flotation.

This week, City Equities sold its entire holding of four million ordinary shares in Mercator, together with its entire holding of warrants to some of its private customers. It might have it all to prove, but with the gold price strong, Mercator looks well positioned.

With shares currently priced at 9p, investors with an appetite for risk might want to get in at the start.

Despite owning one of the richest new gold projects to come on stream in recent years, Bema Gold’s problems at its Petrex project in South Africa and disputes over a development deal in Chile have meant that the company has not had the best of years so far.

Aim’s biggest miner has two producing assets - the Julietta Mine in Russia and the Petrex Mines in South Africa - and two exploration prospects, one at Kupol in Russia and one at Monument Bay in Canada. The company is currently producing around 220,000 ounces of gold a year but, according to analysts, that figure could more than quadruple over the next four years to reach the one million ounces a year mark.

Following recent drilling results, one broker has given the Kupol prospect a basic monetary valuation of 448m. But with around three million ounces of gold in the ground in the proved and probable reserve category, analysts estimate that this figure could triple over the next 12 to 18 months.

That’s why there is currently plenty of interest in Bema shares from larger investors, particularly as next year should see the company turn in its first pre-tax profit. Shares look an attractive buy at 170p.

Mining investment company Golden Prospect’s comprehensive range of investments represents an attractive portfolio for investors looking to hedge their risk. In the six months to June, unrealised gains from the company’s investments stood at around 12m, although since then 1.5m has been realised.

The recent acquisition of investment banking and institutional brokerage firm Ambrian Partners establishes the company as a fully-fledged mining finance house. Shares look good value at 35.5p.

Because Galahad Gold transformed itself from an investment company into a mining development company at the end of the year, there are no useful half-year comparatives. In the first half of 2003, it made pre-tax profits of 430,000, but mainly from share dealing.

Interest now centres around its three mining plays - the most important of which is Pebble in Alaska, which is being developed by Galahad’s 36 per cent-owned associate, Northern Dynasty.

Latest estimates indicate that it could be the largest gold play in North America. As Pebble is unlikely to be in production before 2007, share price movements will be dictated by reports on reserve estimates. Shares look high enough at 11.25p.

Meanwhile, gold mining company Celtic Resources’ on-off deal with Russian mining giant Alrosa continues to cloud its future strategy.

The proposed straight assets-for-shares swap designed to lock Alrosa into a long-term alliance is being hindered by Alrosa’s hesitancy to sign on the dotted line. Rumours are circulating that the tie-in is starting to unravel, while prospects haven’t been helped by a wet spring in Kazakhstan leading to gold production falling almost 10,000 ounces below anticipated levels.

While Celtic’s assets and track record are attractive, the uncertainty surrounding its dealings with Alrosa needs to be resolved before investors rush in.

Drew Johnston is a business writer and managing director of Blueprint Media