Finding New Gleam for Gold Miners

August 29, 2012 at 10:37

truthing

Gold-mining stocks are starting to shine again.

Once the most popular way to invest in gold, miners fell out of favor when exchange-traded funds made it easier buy and trade the precious metal directly.

But battered prices and vows of corporate discipline have given new life to gold miners, which have recently outpaced the metal itself.

Since Aug. 1, the NYSE Gold Bugs Index, which tracks the shares of 16 mining companies, is up 10%, compared with a gain of 3.5% in gold futures.

It is a stark change. Between November and the end of July, the index slumped 28%, a drop four times steeper than gold’s 7% decline.

With gold currently trading around $1,660 a troy ounce, the largest gold miners are currently valued at an average of 14.5 times earnings, below the average of 15.9 for companies in the Standard & Poor’s 500-stock index, and much less than gold miners’ historical average of 30, according to Citigroup.

At today’s prices, the miners’ shares suggest gold prices below $1,400 a troy ounce, a 16% discount to today’s price, said Jeffrey Wright, an analyst with Global Hunter Securities.

“A lot of professional investors are very attracted to gold stocks because they are so cheap,” says Matthew Peterson, a portfolio manager with Newgate Capital, a Greenwich, Conn., money manager that oversees $1.8 billion.

Mr. Peterson says Newgate has increased its holdings of gold-mining companies in its natural-resources portfolio to 12%, from 2.5% at the beginning of the year.

Gold-mining shares have been hurt by management missteps, such as cost overruns and ill-timed acquisitions.

Many investors say the high-profile ousters of some executives and public pledges of thrift from others have gone a long way toward restoring their faith. After Barrick Gold Corp. the largest gold miner by production, said last week it was in talks to sell its stake in an African subsidiary—part of an initiative to better spend cash—its shares outpaced the gains in the NYSE miners index.

Moves like those taken at Barrick will push future profits beyond expectations and boost shares in the process, says Adrian Day, president of Adrian Day Asset Management, an investment manager in Maryland with about $170 million under management.

Other investors aren’t willing to bet on such a turnaround.

Michael Cuggino, portfolio manager of the $17 billion Permanent Portfolio family of funds, says he plans to keep the funds’ gold investments in physical metal, in order to better track the value of the metal itself.

Mining companies “have to manage their business, pay dividends and operate a budget,” Mr. Cuggino says, which can dilute the effect of a rise in gold prices.

But if prices fall, miners can still improve profitability and boost production, according to a Citigroup analysis, which predicts a better return for gold miners than for gold ETFs.

In an environment of flat or lower gold prices, investors “prefer to have exposure to gold miners” that are profitable and, ideally, pay a dividend, Global Hunter’s Mr. Wright said.

Some miners have almost doubled their dividends recently, luring investors frustrated by record-low interest rates. Newmont Gold Corp., which links its dividend to the gold price, almost doubled its total dividend payment in the first half of 2012 compared with the same period last year.Gold Resource Corp. in March adopted a policy that gave stockholders the option of taking their dividend in gold bullion.

Ani Markova, portfolio manager of the $600 million AGF Precious Metals Fund, says she was moving into beaten-down miners from gold bullion. She highlights Osisko Mining Corp, of Montreal, which is ramping up production at what the company hopes will become Canada’s most productive gold mine.

“We think it’s a very attractive asset that a year from today will surprise” on its profitability, Ms. Markova says. “However, the management team needs to deliver.