Andrew ‘Twiggy’ Forrest gets a taste for gold

Follow the rich is always a good investment strategy, as was shown last year when iron ore billionaire Gina Rinehart moved early into oil and gas, and why another iron ore billionaire’s sudden interest in gold could deliver similar results.

Andrew Forrest, founder and major shareholder of Fortescue Metals (ASX: FMG), has not previously been closely associated with gold which is why his attempt to buy a big stake in Regis Resources (ASX: RRL) has raised eyebrows – along with the Regis share price.

Rated a mid-tier gold miner with annual production running at around 440,000 ounces a year, Regis shares had been falling for 12 months until last week when reports of an attempted raid on the stock by Wyloo Resources surfaced followed by a promising production update.

Wyloo has been used as a share raider by Mr Forrest in the past, famously dueling with BHP (ASX: BHP) for control of Canadian nickel explorer Noront Resources, and winning after more than a year of bidding and counter bidding.

Nickel, however, is in the comfort zone for Mr Forrest. It’s the metal where he first made his name as a business operator via Anaconda Nickel and its troubled Murrin Murrin mine in Western Australia, which is now owned by global commodities group Glencore.

Mr Forrest’s gold play has the look of Ms Rinehart’s oil play which saw her team with Korea’s Posco to acquire east coast gas specialist Senex Energy just before Christmas. Senex today would be booking handy profits thanks to the gas price explosion.

Potential unrecognised value of Regis Resources

Regis is not a gold star, but it could be a company which appeals to Mr Forrest because it has been heavily sold down to the point where value might be emerging, and it could also be in need of a white knight to help with a funding of McPhillamys, a proposed new gold mine in New South Wales.

From a five-year low of $1.29, last Thursday Regis bounced back to $1.61, a 24% rise even as gold joined the rest of the commodities complex heading south, shedding US$37 an ounce to US1768/oz, a relatively minor 2% fall which is part of the case for gold in tough times.

Mr Forrest’s move on Regis, which has slipped back to $1.49, was reported to have been made by the relatively new blue-blood Sydney-based stockbroking firm of Barrenjoey, which went to the market with a proposal to buy a 15% stake in the stock at $1.48.

If successful, the Regis shares would have been added to Mr Forrest’s existing 4.9% stake, taking him to 19.9%, just below the 20% full takeover threshold.

Wyloo is reported to have got close to its 15% target, reaching 13.8% before dropping its bid.

Interestingly, however, Regis shares kept rising after Wyloo walked, accompanied by a flurry of substantial shareholder notices from big banks, including Bank of America, JP Morgan, and Citi.

The bank reports of their stakes in Regis ranged from 5.07% for Citi, 5.34% for Bank of America, and 6.97% for JP Morgan and while they could simply be end of financial year bookkeeping notices, they could also be pointing to a fresh round of corporate action on the Regis share register.

Mr Forrest, as he demonstrated through Wyloo’s long-running battle with BHP, does not give up easily and the reasons which triggered his interest in Regis could be as valid today as it was last week.

The two obvious explanations for Mr Forrest wanting a bigger slice of Regis are that he sees deep underlying value in the stock which the wider market has not yet recognised, and/or exposure to gold, an asset which generally performs well during an economic downturn.

Regis, while it reported solid production numbers on Monday and a cash balance of $227 million after adding $60 million in the June quarter, was among the gold stocks downgraded last month by Canaccord Genuity, which expressed concern about the company’s debt load, hedge book and operational challenges.

The company also faces a test in funding McPhillamys at a time of rampant construction cost inflation which is reported to be running at more than 30% a year in the mining sector thanks to inflated prices for steel, labour, and fuel.

Mr Forrest, with pockets lined with iron ore profits, might make a perfect partner, or banker, for McPhillamys.

But it’s the other reason for watching Mr Forrest’s next possible move on Regis and that’s the appeal of gold in troubled times.

The appeal of gold in troubled times

Though the gold price has been falling as its arch enemy, United States interest rates rise, the decline has been modest relative to other commodities – and in some currencies gold has held its ground, or risen.

It’s the counterbalancing nature of gold which makes it a perfect portfolio companion, rising when everything else is falling, or at least not falling as far.

Over the past 12 months, as the Australian stock market (as measured by the All Ordinaries Index) has fallen by 9.5%, gold has slipped lower by just 1.8% (down US$34/oz).

But in Australian dollars, gold is up $191/oz (8.5%) thanks to a US$0.06 fall by the local dollar against its US cousin (US$0.74 to US$0.68).

Using gold as a currency hedge is a well-known wealth preservation strategy but it’s one that also works against other commodities.

Copper, for example, has fallen over the past 12 months by 20% from US$4.32 a pound to US$3.45, while iron ore, the commodity which underpins Mr Forrest’s $18.7 billion fortune, is down 48% from US$220 a tonne to US$114/t.

Fortescue shares have been tracking iron ore, falling by 30% since this time last year from $23.55 to $16.42.

With iron ore and his 37% stake in Fortescue losing value, it could be that Mr Forrest is looking to stabilise his fortune by building a position in a commodity which is holding its ground in US dollar terms, and rising in Australian dollars.

The same approach can be adopted by the less rich because gold is a readily available commodity to acquire as bullion, coins or jewellery and there are many well-run gold miners listed on the ASX, all at lower prices today than last month.

Newcrest Mining (ASX: NCM), the biggest of the Australian gold producers is down 18% over the past four weeks, as is Northern Star (ASX: NST), while Evolution Mining (ASX: EVN) has crashed by 35% after a poorly received production update.

But set against those falls is the gold price, which is down modestly in US dollar terms but up in Australian dollar terms, and that’s before getting to the question of Mr Forrest’s new-found interest in gold and what he sees as the next phase of the commodity market.

Mr Forrest’s gold game could be well worth watching.