Hello. Welcome to Company Focus. My name is Aamer Nawid, Analyst at Fat Prophets. Today I'm going to be taking a look at gold mining shares.

One of the most common questions I'm asked of late is with the gold price performing so well, how come gold mining shares are lagging the gold price considerably?

I'll answer that and also identify one gold mining company which I think represents terrific value at the moment.

Straight on to the disconnection between the gold price and gold miners. You can see here that the gold price is represented in red. The market vector's ETF, a US listed ETF is represented in black. I've used this US listed ETF because it provides more of a global perspective on things. It contains the likes of Barrett Gold, Newmont Mining as its main constituents and gives an idea of how gold mining shares across the world are performing.

You can see here investors are clearly clearly sceptical about the ability of these companies to retain their earnings or to retain their margins even though central banks are buying gold readily and even though Western central banks are adopting very accommodative monetary policy which should really underpin the price of gold.

So what are investors actually worried about? I think cost control is a key issue. As mines get older they become more expensive to actually exploit and I think the precious metals agency, GFMS, stated since 1999 average grades have actually fallen by around about 30 per cent.

In addition to that, exploration wise, it's also becoming a lot more difficult. The Metals Economics Group, a consultancy there, highlighted recently that in 2002, total exploration budgets came in at $500m. 2008 that figure is up to $3bn, yet they're producing, they're finding less gold.

In terms of production, you can see here on this chart that despite massive investment, production from gold mines has actually remained at roughly the same levels as they were a decade or so ago.

So in terms of headwinds that the gold miners face, costs are one of them.

The oil price is another. The oil price here represents, as you can see, it represents about a quarter of gold miners' costs and you can see here that investors are fearing (oil is in blue) that late 2008 situation when oil took off, you can see here in black, GDX, the market vectors index the ETF that we saw in the earlier chart, actually fell off quite considerably. I think investors might actually be factoring that in and pricing that in and sort of getting out before a similar sell off occurs and that has added to the selling pressure.

In addition to that, the emergence of ETFs and the emergence of the ability to get access to physical gold rather than the riskier, I suppose the risk that is associated with equities, has sort of exacerbated this sell off.

You can see here from this chart here that ETFs have become more popular. Ignore the lighter shade there, that represents GLD which is the SPDR Gold Trust in America. But as a whole, you can see ETFs are attracting further funds and people are moving into physical through this way rather than taking the risk of gold mining shares.

But it's worth noting at this point that George Soros, famous investor, has recently actually done the opposite. He has moved away from physical gold and into gold mining shares for exactly the risk and the leverage that a lot of investors are actually moving out of gold mining shares for.

So if you turn your attention now to the UK listed companies, they've all taken an absolute battering this year. I think obviously cost issues are a major reason, but there has also been production misses from last year. There has also been some freak operational occurrences and there has also been some political instability which have basically weighed on investor sentiment.

From where I'm looking, the entire sector represents really good value. I think that people generally we're losing faith in paper currencies and I think the gold price will continue to strengthen.

The one that stands out is Randgold Resources which so far this year has done very, very well. In the first quarter this year it has reported that profits were stronger, production was stronger.

You can see over the last few years resources and reserves have steadily increased and they were upgraded again earlier this year. The company managed also to up its dividend which is all loads of positives.

They've been dealing with cost issues. They've been dealing with political issues.

However, the exploration work at their Gounkoto project in Mali could prove the catalyst for an additional upgrade in resources and reserves. Development and construction elsewhere across their portfolio of operations and projects could also add to the optimistic outlook for Randgold Resources.

Thanks for watching. Make sure you tune in again next time.