-- Posted Thursday, 12 August 2004 | Digg This Article
The past two days have witnessed large volume panic selling out of the US that has wiped 33% off the share price. The wires are full of nervous investors that are contemplating joining the lemmings. There has been very little selling of the stock on the JSE, the trading price has been determined by that in New York. Compare the nominal 500 000 share turnover on the JSE during the past two days to the 28 million in New York and you will see the total picture.
Sure the quarterly results were not good. But stop and analyse the situation. The offshore results were fine, the problem lies with the South African mining operations. As a result of the poor performance the MD has left under what appears to be a cloud.
It has long been a policy of the South African miners, started by Anglogold, to seek offshore ventures in which gold can be mined at under $200 an once. This was commenced in order to dilute the effect on the local earnings of the strong rand leading to a falling rand price of gold. The recent amalgamation of Iamgold and Goldfields is a classic example of this broadening policy. It has paid dividends, even for Durban Deep. So where does the problem lie?
There is a twofold scenario in the case of Durban Deep. Firstly they have started to rectify the internal hemorrhaging under the previous management, and have commenced a staff reduction programme. This should negate the current commentaries that this mine will never again raise its head. Never forget that DROOY has been in continual production for almost 120 years and has always cocked a snoot at the doomster and gloomster Jeremiahs who have continuously predicted its immediate demise. The current analytical attitude is that as the current quarterly results were bad there is absolutely no hope that the next quarter will improve. In fact all the expectations are for an even worse set of results.
The second aspect to Durban Deep’s local performance is the rand price of gold and we need to carefully analyze the rand data in addition to the share price as this is a major contributory factor to South African mining performance
In my analysis Durban Deep has been oversold out of the US to the point of utter stupidity and represents another major buying opportunity similar to that of its total low on the JSE at R4,35 in November 2000. Remember that in the following 18 months the share price went up 1250% to touch R55.
This is NOT a panic selling area but a once in a lifetime buying opportunity.
Durban Deep’s share price on the JSE has mapped a massive broadening pattern over the past two years. The fall of the past week is merely the final panic sell off leg of this formation. It is NOT the start of a new bear market but the end phase of a very old correction. Once this chart reverses it will signal and end to the base formation and the commencement of a brand new BULL market.
In addition the trading since the start of this year has been inside a clear down sloping channel. It suddenly had a vertical drop out of this pattern. This also signifies a final panic selling rout.
The oscillator in the bottom frame is at an extremely oversold level and indicates a major buying area. Any reversal from this crazily oversold position will be the trigger for the start of a new bull trend, not just a minor rally.
Vertical sell offs of this nature tend to have V type reversals in which the share price recovers at the same rate as the fall. A recent classic example of this was in Af. Lease the minor gold producer. It dropped vertically from 125c to 85c in a couple of days but bounced back to 145c in the following four days.
But as important as the share price chart of Durban Deep may be the real focus should be on the rand price of gold as this will be the trigger to refute the continued bad results theory and the indicator of the trend of rand earnings for the South African miners.
The rand price of gold has been in a steadily falling trend since the start of the year. This has had a drastic effect on the earnings of the South African mines in rands from a highly profitable R96 000 a kilo in January to the current borderline breakeven level of R77 000 a kilo. But there are distinct signals that this trend is ready to reverse in a positive period.
The main downtrend in the top frame is being severely tested and about to be broken. But look at the oscillator in the bottom frame. It has already broken above the major down trend and is leading the chart into a new bull phase. In addition to that note the red horizontal on the price chart that is acting as a minor overhead resistance. This in fact is the neckline of a small reverse head and shoulders pattern that signals a trend reversal. Thus all my data on this chart indicates that the rand price of gold has stopped falling and is ready to reverse into a new positive trend.
Such a reversal will have a dramatic catapult effect on the earnings of the South African mining operations and Durban Deep in particular. The rand price of gold is sitting at around R2 450 per ounce or R78 700 per kilo. I am looking for a reversal back up to at least R2 700 per ounce or R86 500 per kilo. That will push even Durban Deep’s operations back into the black.
Markets work on perceptions. The current idea is that Durban Deep cannot possibly stabilize its returns for the coming quarter and that the results will be even worse than those just published. I take the opposite view. Based on the rand price of gold data I am looking for at least a stabilization if not a solid improvement of the next quarter results for DROOY.
The final word must go to the recent trading pattern on DROOY in the US. Over the past two days the share price has collapsed but the oscillator in the bottom frame has totally refused to confirm the new lows. This is a buy divergence signal of a potentially powerful trend reversal on the daily trading.
I must look at Durban Deep as one of the best potential recovery stock situations that I have ever seen. I believe that within a month all the panic sellers will be ruing their recent hasty actions.
Dr. Clive Roffey
Gold Action
info@utm.co.za
-- Posted Thursday, 12 August 2004 | Digg This Article
