 Gold Stocks: Inspecting Your Portfolio
Kenneth J. Gerbino
Archives
Kenneth J.
Gerbino & Company
March 18, 2005
The large cap mining stocks
are outperforming the junior precious metal mining sector. By
junior sector, I am referring to companies in the broad category
of exploration and developmental stocks to small companies producing
less than 125,000 ounces of gold per year. There are eight reasons
for this underperformance at this time.
1. Insiders are always selling
shares as prices of these smaller stocks are well above levels
from a few years ago. Your "undervalued" junior gold
stock at $2.00 is a homerun to an insider that is in for 10 cents
from 2-3 years ago.
2. Billions of dollars of private placement stock has been issued
from many of the smaller companies in the last 24 months. These
placements are a fact of life in the cash hungry junior sector
and selling by these investors is always a factor. This new supply
of stock often depresses the stock price of even the better companies
for a period of time.
3. ETF's (Exchange Traded Funds) are an alternative to all classes
of mining stocks and even a small amount allocated away from
junior mining stocks will have more of an adverse effect on values
due to the less liquid market.
4. The gold bug crowd has discovered uranium stocks and this
is taking investors attention and capital.
5. Base metals are also very appealing currently and a host of
copper and other base metal juniors as well as large cap miners
are now competing for speculative investment dollars that use
to be exclusively earmarked for gold and silver stocks.
6. New investment funds from more traditional money managers
will first gravitate towards the more established mining companies
and managers handling large sums of money will only buy the more
liquid and well-known large cap. mining stocks.
7. Gold has had a good run in the last four years and with reported
inflation still at low levels and the dollar having been already
beaten up pretty badly; some investors are worried about a resting
period for the metal and another correction in the juniors and
are taking some money off the table.
8. Gold is currently approaching the old highs for the last decade
and this is always a nervous time for all mining investors, especially
shareholders of the junior companies.
The above reasons are the harsh
realities of the gold mining and precious metal mining industry.
The good news is that the junior sector has many quality companies
with cash in the bank, good management and excellent resource
rich projects. Despite the ups and downs the good companies will
do well.
Investors should have a diversified portfolio of majors, mid-tiers
and some of the quality advanced exploration and developmental
companies. With the juniors, one has to be patient and know that
if your company really has the "goods" in the ground
and the extraction of those metals can be accomplished economically
then patience is what will get you through the frustrating times.
The gold and precious metal
investment story is solid. Fourth quarter gold consumption was
up 8.6%, while mine supply was only up 1.3%. If one includes
producer de-hedging then mine supply was down 12.6%.
It appears that there are some
new and major players in the gold market. It would be nice if
some of them were central banks. The clue to this assumption
is that in September of last year Comex gold net speculative
positions was at about 6 million ounces and gold was $400. One
month ago Comex net speculative positions were only 2.3 million
ounces and the gold price was over $425. This to me is a red
flag and may be signaling new large physical buyers are
present or have been in the last few months.
The fundamental story for gold
and silver is a good one, but you as an investor must protect
yourself against as many things as possible that could go wrong
in the junior sector- and that means understanding that a lot
of companies have either risky projects or minerals that are
so deep in the ground or so low grade that all the ounces don't
really amount to much real value.
We follow about 250 large and
small companies very closely but only own what we consider the
best 25 of the large, mid-tier, and junior sector. Many stocks
we review are overvalued and many are over promoted and risky.
There will be a fair share of selected buy-outs in the next few
years but only for the companies with outstanding and very advanced
projects that are permitted and close to construction starts.
The CEO's of the major and mid-tier companies that I regularly
talk to are all looking for acquisitions.
The Bank of Montreal Nesbitt
Burns sponsors an excellent annual institutional mining conference
and it is usually one of the 7-8 mining conferences I attend
each year. This recent meeting was an upbeat affair with the
CEO's from over 120 companies presenting technical and financial
information on their activities and projects. An important message
from the major mining companies was that warehouse supplies of
many basic metals are at decade lows and demand from customers
is not letting up. They see supply squeezes for the next 2-3
years.
I think it is a good idea to
have some exposure to other metals (copper, zinc, nickel, lead,
chromium, aluminum). Many base metal companies sell for only
5-8 times cash flow because they are considered cyclical in nature.
Gold and silver producers that produce some base metals also
sell for lower cash flow multiples than just pure precious metal
producers.
I expect this "cyclical"
concept to change and for the valuations of companies that may
produce gold with copper or silver with zinc to be revalued upwards
and for the pure base metal producers to be re-valued upwards
also. The reason is that with just 2-3% growth in Asia and India
(current growth rates are 8-9%) a steady demand for resources
will create a more sustained and structural market for these
metals. A steady demand for the long-term and massive infrastructure
projects in Asia and India would change the "cyclical"
aspect of base metal production. Infrastructure projects are
usually not cyclical since they have State backing and many times
just keep rolling along despite poor economic conditions. The
projects in the U.S during the great depression and many projects
in Asia during the Asian meltdown are good examples. Any change
from the "cyclical" concept for metals would be reflected
in higher cash flow multiples and higher stock prices for mining
companies. Tight supplies also will help stock values.
The Commodity Research Bureau
Index (CRB) has just hit a 24-year high because of four mega-trends.
China, India, past excessive money creation and excessive debt.
The CRB Index is a precursor to higher inflation rates and higher
gold prices. This will be very positive for the entire spectrum
of mining stocks.
One should be positioned to
take advantage of these mega-trends. The resource sector and
especially the mining companies should be a solid investment
theme in the years ahead but stock selection is going to very
important so do your homework. Please visit our website for other
articles on gold, the economy and the stock market.
March 17, 2005
Kenneth J. Gerbino
Archives Kenneth J. Gerbino & Company
Investment Management
9595 Wilshire Boulevard, Suite 303
Beverly Hills, California 90212
Telephone (310) 550-6304
Fax (310) 550-0814
E-Mail: kjgco@att.net
Website: www.kengerbino.com Copyright ©2004-2016 Kenneth J. Gerbino & Company. All Rights Reserved.
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