Barron's: A Vein of Hope for #Gold Miners

CONCLUSION : Barron's taking a constructive view on gold miners for the following reasons : 1- valuation looking very enticing with stocks trading at multi year lows. 2- companies trying to become more shareholder friendly. 3- a new honesty towards showing all in costs. 4- new CEO's wanting to implement changes ( newmont and Barrick).

 

Interestingly, the article highlights both Newmont and Goldcorp. Goldcorp being the highest quality of the large miners. Barrick is highlighted also as the highest risk higheest reward one particularly if the gold price rallies.

 

 | SATURDAY, APRIL 20, 2013

A Vein of Hope for Gold Miners

By ANDREW BARY  

The miners have probably the most hated stocks in the market—and not without reason. Now they're getting their acts together. Why Newmont and Goldcorp could rise 40%.

After a sharp decline, gold-mining stocks probably are the most hated group in the market.

There are plenty of reasons for that. The metal has moved into bear-market territory, falling last week to $1,402 an ounce—26% off its all-time high of $1,900, hit in September 2011—including a jarring $134 drop on Monday. And despite the high prices of recent years, well above the less than $800 at which gold traded in 2008, the miners haven't been able to generate significant profits and free cash flow.

Many investors have given up on the miners, opting for direct gold exposure through exchange-traded funds such as the SPDR Gold Trust (ticker: GLD), which holds $50 billion of bullion.

Manuel Diaz/AP Photo

A mine in the Dominican Republic owned by Goldcorp and Barrick. Political risk is a major hazard for miners.

But mining stocks now look enticing, trading at or near multiyear lows, and the companies are trying to become more shareholder-friendly. In the past year two of the top miners, Newmont Mining (NEM) and Barrick Gold (ABX), brought in new CEOs and vowed change.

"In my career, I've rarely seen a group less well-liked than the gold miners," says David Steinberg of DLS Capital in Chicago. He notes that the widely followed Philadelphia Stock Exchange Gold & Silver Sector index (XAU) trades where it was in the late 1980s. "Relative to history, these stocks are extraordinarily undervalued, but I don't know when sentiment will turn," he says. His firm owns Barrick, Goldcorp (GG), and Kinross Gold (KGC).

Gold stocks were out of favor even before the recent plunge. At $28, a leading U.S. exchange-traded fund, the Market Vectors Gold Miners (GDX), is down 27% this month, 39% this year, and is at less than half of its 2011 peak. Looking at the fund's three largest stocks, Goldcorp has slid 24% this year, to $28; Barrick is off 49%, to $18; and Newmont is down 29%, to $33.

Downside in these stocks seems limited, barring a further collapse in gold prices. They could rise 40% if gold rallies back toward $1,700, where it started 2013.

Among this group, Goldcorp probably is the safest play because it has the lowest mining costs, the strongest balance sheet, the best growth outlook, and the largest market value at $22 billion. It aims to boost its annual gold output to about four million ounces by 2017, from 2.3 million last year, while many rivals will struggle to simply maintain annual production.

None

Once the industry leader and the only gold stock in the Standard & Poor's 500, Newmont has been a huge disappointment; its shares are below where they stood a decade ago, when gold was at $400. Its attributes include a broad global portfolio that makes it less dependent on a single mine. One of its innovative moves is a dividend linked to the gold price. At the current price, the quarterly dividend would be 25 cents a share—a yield of 3.1%. (The yield in the table nearby is based on its most recent payout, which was keyed to a higher gold price.) Newmont shares are no higher than they were in the late 1980s.

BARRICK IS THE RISKIEST of the three because it has the most debt, at $14 billion, isn't generating any free cash flow after heavy capital expenditures, and faces a big challenge with an enormous mine it is developing in a remote location at an elevation of 15,000 feet on the Chile-Argentina border. Chile has ordered Barrick to stop work on its side of the mine, due to environmental issues.

At a minimum, this probably will delay the mine's opening, which had been scheduled for 2014, and potentially drive up the cost, projected at $8 billion to $8.5 billion—already about double the original estimate. Barrick also faces pressure from the Dominican Republic for higher payments on the newly opened Pueblo Viejo mine, in which it has a 60% stake; the rest is held by Goldcorp.

JPMorgan analyst John Bridges downgraded Barrick last week to Neutral from Overweight, noting the company's "debt load and capital overruns are becoming problematic in an environment of weaker gold prices."

Last week the Wall Street Journal reported that Barrick is seeking to sell three of its Australian mines.

Barrick looks particularly cheap with a 2013 price/earnings ratio of five, but profit estimates could come down, due to lower gold prices. If gold rallies, Barrick probably has the most upside of the three.

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Barrick is a poster child for the industry's woes, including higher operating costs, bad acquisitions, cost overruns on new mines, and political risk. Resource nationalism around the world is becoming a growing issue for miners. It's getting more difficult to get government approval for mines, and once they're operational, governments sometimes want to rewrite contracts and get higher taxes, knowing they have leverage.

One encouraging sign is that the industry is showing a new honesty about costs. In the past, companies emphasized "cash costs," which often were about $500 to $600 per ounce. But that ignored a slew of other costs, including those for maintenance and environmental remediation. Barrick, for instance, forecasts 2013 cash costs of about $635 an ounce and "all-in sustaining costs" of about $1,050; Newmont projects about $1,150.

LOW CASH-COST ESTIMATES are designed to impress investors with the industry's profitability. They also encourage host governments to shake down miners. "Governments are seeking to impose significantly higher taxes on us because they think we're making superprofits," said Goldfields CEO Nick Holland in a speech last summer. "The opposite is true."

Doug Groh of the Tocqueville Gold fund (TGLDX) estimates the industry's true all-in cost is about $1,350 an ounce, reflecting new mine development. Thus, miners aren't creating much value at current prices. Nonetheless, he sees reason for optimism, owing to "management turnover, better capital allocation, and reduced cost pressures." Further declines in gold price could lead to an industry shakeout that ultimately would be bullish.

The Bottom Line

With their shares at multidecade lows, the miners are minding costs and becoming more shareholder-friendly. They could rise 40% if gold rebounds.

Given the risks of individual stocks, a better option for investors could be an ETF like the Market Vectors fund or a gold mutual fund. Betting on junior miners, including those in the Market Vectors Junior Gold ETF (GDXJ), looks dangerous. Big miners, having been burned with bad deals, are less inclined to buy the juniors. The top-performing open-ended gold mutual fund in the past three years has been First Eagle Gold (SGGDX); Tocqueville is No. 1 over the past five years, according to Morningstar.

The monetary backdrop for gold looks favorable, as major governments around the world suppress interest rates and crank up the monetary printing presses. "Unlimited global monetary debasement is a reason to buy, not sell [gold]," tweeted Barron's Roundtable member and gold bull Fred Hickey of the High-Tech Strategist. The amount of gold in the world, an estimated 5.6 billion ounces worth $7.8 trillion, is a fraction of the global monetary base, and it's growing at just 1.5% a year.

Most investors have little or no allocation to gold and mining stocks. This could be a good time to get in. The metal and the depressed stocks offer a hedge against all the ills that can flow from monetary and fiscal profligacy around the world. 

E-mail: editors@barrons.com

Paulson's Advantage fund stung by plunge in gold - Yahoo! News

Paulson's Advantage fund stung by plunge in gold

By Svea Herbst-Bayliss and Katya Wachtel

BOSTON/NEW YORK (Reuters) - Hedge fund billionaire John Paulson's best-known fund is down 2.4 percent in April, largely due to the sharp selloff in gold, a source familiar with the numbers said on Thursday.

The Paulson & Co Advantage fund is making money for the year, but just barely, with a 1.3 percent gain, the source said.

The fund's substantial holdings in several gold mining stocks, including a bet on AngloGold Ashanti Ltd, which is down 40 percent this year, have dramatically cut into the Advantage fund's returns.

Gold is one of the worst performing assets this year after rising mightily following the financial crisis. The precious metal has fallen 17 percent this year, including a 13 percent drop in April alone.

Shares of companies tied to the performance of gold, including the SPDR Gold Trust, the biggest gold exchange-traded fund, also have fallen sharply. This year investors have pulled $10 billion out of the gold ETF as of Wednesday, said financial information firm Markit.

The sharp slide appears to have caught a number of hedge fund managers like Paulson by surprise. Next week he intends to update his clients about all of his funds, including a fund dedicated specifically to investing in gold, several sources said.

Paulson, who has made money on gold up until this year, has long held firm to the view that inflation will eventually rebound, making gold a prudent hedge. But in the wake of the selloff, the firm has incurred losses in the hundreds of millions of dollars in several funds that invest in gold, said people familiar with the firm.

The fund manager, lionized after a big bet against the overheated housing market in 2007 that made billions for his investors, has floundered trying to repeat the success in recent years.

Assets at his firm have dropped to $18 billion down from $38 billion in early 2011 due to redemptions and poor performance. Over the past two years, the Advantage fund and a leveraged version of the fund have posted some of the worst numbers in the $2.2 trillion hedge fund industry.

At the end of the first quarter, the Advantage strategy, which includes the two funds and managed accounts, had about $4.6 billion in assets.

STICKING WITH GOLD

Still, Paulson is sticking with his plan. "The recent decline in gold prices has not changed our intermediate- to long-term thesis," Paulson partner John Reade said earlier this week.

A Paulson spokesman would not comment on the April numbers for the Advantage Fund.

For the New York-based fund manager, gold's drop is another in a string of black eyes. He has also taken heavy losses on some big investments, including in Chinese forestry company Sino-Forest Corp and Bank of America Corp. In 2011, the Advantage Fund's sister fund, Advantage Plus, lost more than half of its value.

The Advantage Fund's performance this year also leaves Paulson near the bottom of the rankings. Some hedge fund managers are reporting double-digit gains, but most were up only 3 percent in the first quarter. The Standard & Poor's 500 index was up 10 percent.

Paulson's fund is not alone in holding fast to the notion that gold is still an asset to hold.

In a research note this week, Ray Dalio's $141 billion Bridgewater Associates wrote that while the magnitude of the selling in gold was surprising, much of it was driven by selling by "weak" and leveraged hands.

However, several investment banks beginning with Goldman Sachs cut their 2013 gold price forecasts over the past two weeks. Any fund that uses technical analysis to buy and sell securities is selling gold now, a Wall Street analyst who was not authorized to speak publicly said.

Other investors say some hedge fund managers have lost a lot of money on gold because they did not hedge the bet properly. "Most people who are long gold are only long," said John Burbank, who runs hedge fund Passport Capital. He said his own fund hedged by owning physical gold and betting against gold mining companies, whose share prices have dropped dramatically.

Burbank said his company employs two geologists to dig deeply into the gold mining companies. "Other firms don't have that," he said.

In addition to Paulson, other well-known hedge fund managers David Einhorn and Daniel Loeb are also victims of the recent gold rout.

Loeb said gold was one of his Third Point hedge fund's biggest losers in the first quarter in a recent investor letter. Einhorn's Greenlight Capital Management recently listed gold as one of his five largest positions. He is believed to largely own physical gold as opposed to shares in the exchange-traded fund.

Any hedge fund with large gold positions, whether in its physical form or through equities, is being hurt, said the Wall Street analyst.

Other investors had better timing and slashed gold investments before the metal began to nosedive this year. Billionaire George Soros significantly reduced his gold exposure in the fourth quarter of last year, for example, and recently said the asset was "destroyed as a safe haven".

Hedge funds Moore Capital Management and Lone Pine both got rid of stakes in the SPDR Gold Trust ETF at the end of the year, regulatory filings show.

(Reporting By Svea Herbst-Bayliss and Katya Wachtel; Editing by Matthew Goldstein, Kenneth Barry, John Wallace and Tim Dobbyn)

Paulson's Advantage fund stung by plunge in gold - Yahoo! News

#Gold funds: Net outflows totaled US$1.2bn since the start of the year

Gold funds suffered a major outflow of cash this year. Net outflows totalled US$1.2bn since the start of the year through Apr 10, the most since 2011 (EPFR Global). At the same time, global equity funds recorded net inflows of US$21.25bn.

·         SPDR gold holdings continued to slide and totalled 1,146t (36,843koz) valued at US$50.827bn from 1,154t (37,113koz) yesterday.