By Michael Vallo
Few assets are more widely hated than gold. Over the past three years the price has fallen from over $1,900 an ounce to a recent $1,195, and with a strengthening dollar, virtually no inflation, and interest rate hikes on the horizon, the future doesn't look bright for the shiny metal. Which makes it an interesting investment.
Bloomberg News "For a contrarian you can't find a sector that is more out of favor right now than gold," says Joe Foster, manager of the Van Eck International Investors Gold Fund (INIVX). The former geologist expects volatility to continue for the next few months, but with seemingly every headwind already pushing on the price of gold, it might take little to spark a rally.
One possible catalyst is a Swiss referendum on Nov. 30 that would force the Swiss central bank to bolster its gold reserves, though a recent poll suggests the odds are against its passing. Barron's technical analyst Michael Kahn recently made a bullish case for gold.
Foster thinks small and mid-sized miners such as Randgold Resources (GOLD), Eldorado Gold (EGO) and B2 Gold (BTG) are particularly well positioned within the gold mining space.
According to Foster, evaluating gold stocks is less about valuation metrics and more about the company's ability to grow and develop mining properties. He and his team break down companies mine-by-mine and run financial models to project production capacity and cost.
The performance of gold mining stocks is closely correlated to the price of gold, so it's not surprising that the fund has struggled lately. This year the fund is down a little bit less than one percent, well behind the stock market but ahead of the 5.8% average drop for its category peers. Over 10 years the fund has outperformed 99% of all precious metal equity funds with an average annual return of 4.23% according to Morningstar.
Barron's asked Foster to share five of his five favorite gold mining stocks. Investor beware, however: these small miners can be volatile, zooming higher when gold is in favor and falling hard when it's not.
B2Gold: The Vancouver based company's mine in Namibia is scheduled to begin production this quarter and reach full production levels next year. The mine has stayed on schedule and budget and could be a candidate for expansion in the future. Foster also likes B2Gold's recent acquisition of Papillon Resources, which is developing a "world class gold property" in Mali. "They've got a long development story ahead of them," says Foster.
Torex Gold Resources: The $1.2 billion miner is developing a property in Mexico, the company's first mine. Torex (TXG.Canada) acquired the El Limon-Guajes open pit gold mine from a previous owner, who had poor relations with the local stakeholders and failed to navigate the regulatory process. Torex has put the mine back on track with construction expected to be completed midway through 2015. "They've gotten friendly with the people on the ground and managed to get their permits," says Foster, "geologically we like the deposit too, it's a good sized mine." The company has also started developing a potential second mine in the same region.
Rio Alto Mining: Foster prefers small companies or "junior mines" to larger companies. "The large caps have really gotten too big for their own good," says Foster," it's very hard to sustain a large gold company." Rio Alto (RIOM), with a market value of just $815 million, operates a successful heap leach project in Peru. Heap leaching is an alternative method of recovering lower grade gold with much lower costs. Foster says Rio Alto has had success with the method and recently acquired another heap leach operation in Peru.
Eldorado Gold Corp: Eldorado is developing the Skouries Mine in Northern Greece. The company, which operates one other Greek mine, acquired the property in 2011 after a legal battle between the Greek government and the European Court held up development. Production is now slated to begin in 2016. The company also has properties in Turkey, which is one of the lowest cost environments for mining.
Randgold Resources: With the exception of B2Gold, all of Foster's picks are regional. Foster says the geographic focus allows companies to better handle the local regulatory and political situation. Randgold Resources operates exclusively in Africa, and mostly in West Africa. Foster likes the $6.5 billion company because it has one of the most successful discovery track records in the industry. Discovering gold deposits is much more profitable than acquiring smaller companies for their gold properties, the more common tactic.
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