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Last week I offered five reasons why it still makes sense to buy or own gold. The guidance came from Caesar Bryan, one of the best gold analysts in the business.
Bryan has managed the Gabelli Gold Fund GLDAX, -0.04% for 26 years, and he’s simply crushed his benchmark MSCI World/Metals & Mining Index. He’s beaten it by 50.5 percentage points over the past year, 13 percentage points annualized over five years, and 4 percentage points annualized over 15 years, according to Morningstar. The fund also outperforms the S&P 500, the Dow Jones Industrial Average and Nasdaq over the past year.
Here’s last week’s column on gold: ‘Gold is going higher’ despite recent surge.
And today we discuss the best way to pick gold-mining stocks, and 17 to consider. Gold prices GC00, +1.45% rose to a fresh high Tuesday.
Go with successful fund managers
Many gold-mining companies are small, so it’s tough to attract decent talent at the top. The Philadelphia Gold and Silver Index XAU, +2.25% (the top 30 stocks) has about the same market value as J.P. Morgan JPM, -0.87%. So it’s especially important to size up management.
“If you can get a manger who is reasonably solid, you are half the way there,” says Bryan.
What are the qualities to look for? One is a track record of success. Avoid those who have over-promised but under-delivered. Look for a management team that has expertise in three areas: Finance, mine-construction engineering and geology.
“If we see one of those missing, that is a bit of a red flag,” says Bryan.
Also look for good cost control.
The bad news is the field is full of promoters. Promoters are a necessary evil, especially in early stage exploration and development companies.
“You need a promoter to raise the money; otherwise you never get the thing built,” says Bryan.
Just be wary of anyone pitching a scenario that’s too good to be true. Go with hucksters, and you can easily lose all your money. An old saw in gold investing states that at the start of a promotion, the promoter has the dream and the investor has the money. Further on, the promoter has the money and the investor has the dream. If you avoid the grifters, you’re more likely to be an investor than a dreamer.
Three with companies with solid management teams to consider are Newmont NEM, +1.91% developing mining assets attained in the purchase of Goldcorp; Barrick Gold GOLD, +2.33%, led by Mark Bristow, who is shedding assets and bringing down debt; and Agnico Eagle Mines AEM, +2.01%, where CEO Shawn Boyd manages costs well.
Go with solid assets
Figuring out mine and reserve quality requires technical expertise that can’t be taught in a few minutes. As a rule, though, favor companies with proven reserves and a plan to extract the gold, over early stage exploration companies.
Beyond his top three positions (Newmont, Barrick and Franco-Nevada FNV, +0.72% ), he singles out these three for asset quality — a blend of grade level of deposits, reserve depth and cost of production.
Alamos Gold AGI, +1.52% has pieced together solid assets via acquisitions, and is now moving into harvest mode, which will boost free cash flows and dividends. Kirkland Lake Gold KL, +1.73% has high-grade assets with underappreciated potential in Australia and Canada. Teranga Gold TGZ, -1.34% has quality assets in Senegal purchased from Barrick Gold. Bryan does not think the potential is fully priced into the stock.
Bryan cautions against owning single asset companies — like one he favors called Pretium Resources PVG, +4.66% — unless you own a lot of gold companies to diversify away the risk. Most individual investors won’t.
Aside from buying his mutual fund, here is another way to diversify. Consider the VanEck Vectors Gold Miners GDX, +2.37%, a long-standing suggestion in my stock newsletter, Brush Up on Stocks.
Go with royalty owners
Here’s a great way to get exposure to gold and mining companies with few of the risks. Buy companies that get “royalties,” or a percentage of production.
They get royalties in exchange for upfront payments used for mine development. A good royalty company has exposure to dozens of mines and companies, which gives you great diversification. They simply take a share of production, so any cost overruns are irrelevant.
If companies extend the life of a mine, they keep getting the royalties. And if a mining company goes bankrupt, they normally keep the royalty on mine production, after bankruptcy.
“The company can mess up and your royalty remains,” says Bryan.
Shareholders in mining companies rarely enjoy this advantage. And as Warren Buffett does, smart royalty companies strike deals when customers are in financial straits, to extract sweet terms.
One royalty company that Bryan likes and owns is Franco-Nevada. It has no debt, and it uses free cash to expand its portfolio and pay a modest dividend. Another favorite: Wheaton Precious Metals ( WPM, +2.80%.
See who else has an interest
Here’s a trick for getting a handle on the quality of a company’s mining assets: Check if a good royalty company has purchased a share of production. This means their experts approve the grade quality, reserves and extraction costs. This is a kind of “coat tailing,” but there’s no shame in that.
One to follow is Franco-Nevada, which publishes a detailed description of its royalty portfolio. This is a list of all the companies it “endorses” by doing business with them. Among Bryan’s holdings, Franco-Nevada has “approved” the mines of Barrick, Kirkland, Newmont, Teranga, Alamos Gold, AngloGold Ashanti AU, +2.53% and Pan American Silver PAAS, +2.59%.
Osisko Gold Royalties OR, +2.84% is another one to track. It owns royalties on mines at Victoria Gold VITFF, +1.70%, Agnico Eagle Mines, Yamana Gold AUY, +2.01% and Kinross KGC, +1.88%.
Avoid political risk
This refers to the danger that political instability or some other kind of turbulence in a host country will disrupt your mining company’s operations, or even nationalize them. There are no hard-and-fast rules, but generally be cautious on mining companies with operations in Russia and Venezuela. In South Africa, mines typically have to be very deep, so there are more safety issues. There can also be electricity shortages there.
Buy and chill
Studies show people hurt their accounts by over-trading. Time and again, outperforming mutual fund managers I interview for this column teach me the same lesson: You do better if you buy and hold for long periods of time.
“In investing, one of the keys is just patience,” says Bryan. “We have a very low turnover. We give our investments plenty of time.”
Morningstar shows an annual turnover rate of 16%, which is low in the mutual fund industry. Of Bryan’s top 10 positions, eight were first purchased over five years ago.
Who among us can say that about our current portfolios?
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested GDX, NEM and AU in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School. Follow Brush on Twitter @mbrushstocks.
