Gold producers need to get glitter on margins

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GOLD producers have only themselves to blame for missing out on a market re-rating in line with the surge in local gold prices to near record territory.

That's the view from Evy Hambro, the London-based portfolio manager of BlackRock World Mining Fund, the world's biggest commodities fund and investment manager of Global Mining Investments (GMI), the listed investment company.

Hambro was in his usual tell-'em-as-it-is mood when he hit Melbourne last week to report to the faithful at GMI's annual meeting. (As an aside, the GMI global portfolio of mining investments gives it a (rising) net tangible asset backing of about 99¢ a share compared with its Friday close of 74¢.)

On a media call to mark his tour down under, Hambro was asked just what the local gold sector has to do to win over investor support, which it would normally be expected to have in spades given the gold price of $1245 an ounce.

"They are going to have to start turning those higher margins into value for shareholders," was Hambro's response. "Many of the gold mining groups around the world fritter away their margins on going to try and find new sources of supply, wasting the money on exploration and expensive corporate activity," he said.

"Also, with costs having escalated significantly over the last few years, much of the higher gold price has been eaten into by the higher costs.

"So I think shareholders want to see some of this margin coming back to them in the form of dividends, paying off debt and retained earnings. I think that is what people are really looking for to get gold shares really moving again," Hambro said in between providing commentary on BHP Billiton's decision to walk from Rio, something he had encouraged before the main event because it was simply too dilutive to BHP

shareholders.

So Australian gold producers have been told what they have to do. The biggest of them and GMI's main investment in the local sector, Newcrest (NCM), also happens to be hosting a "strategy day" for analysts in Sydney today, followed by a bus tour of its Cadia Valley operations tomorrow. Lucky them.