Getting in on the gold rush
Sonita Horvitch
Financial Post
Thursday, January 09, 2003
Gold stocks could continue to shine in 2003 and might outperform the market for the third year in a row, says Bill Belovay, vice-president and portfolio manager at Toronto-based Jones Heward Investment Counsel Inc., who specializes in precious metals and resources stocks.
"Bullion has been in an upward trend since April, 2001, and this move has fuelled the advance of gold stocks."
After gold's recent spike above US$350 per ounce, the price could consolidate for a while, he says, before continuing to advance. "Its progress will not be in a straight line and investors should expect ongoing volatility in the commodity."
At Jones Heward, Belovay manages the BMO Precious Metals Fund, which focuses on gold mining companies. Belovay has been managing this fund since April, 1998. This fund was up 85.1% in 2002. The benchmark for Belovay's fund is the S&P/TSX composite gold index. It rose 24.8% in 2002.
The strength of the bullion price over the past two years can, he says, be attributed in part to the collapse of the U.S. technology stocks and the bear market in general with its perceived negative impact on the U.S. dollar. "Pressure on the U.S. dollar is good for gold." Belovay considers that the U.S. dollar will likely remain vulnerable given the focus on the country's large trade deficit.
Also, the uncertainty surrounding a possible war in the Middle East is good for the precious metal. Then there are the worries about the health of key Latin American countries and concerns about the mixed messages about the vigour of the recovery in the developed world. "Gold does well in this climate of fear."
For the BMO Precious Metals Fund, Belovay prefers companies that have not hedged their production forward as they reap the full benefits of a strengthening bullion price. Although, he will buy "value situations" if he considers the stock cheap.
In 2002, he continued to avoid major international gold producer, Barrick Gold Corp. (ABX/TSX), which recently closed at $24.47 and trades in a 52-week range of $36.05 - $21.30. "It is a hedged producer." This stock was down 4.3% in 2002.
Belovay's two favourite Canadian gold producers continue to be:
- Meridian Gold Inc. (MNG/TSX) $26.05 ($32.98 - $9.88). This is one of Belovay's core-holdings. The share price of this Reno, Nev.-based company came under selling pressure at the end of November after the sudden departure of Rich Lorson, Meridian's former vice-president of exploration, he says. "This drove the stock price down to the benefit of short-sellers, but I did not sell."
Belovay remains confident in the company's management, and likes its assets -- the El Penon Mine in Chile and its recently acquired El Esquel project in Argentina. "Meridian is a remarkable growth company with production growing from the current 430,000 ounce level to more than700,000 ounces in 2004, once the El Esquel mine comes into production." Meridian could make further acquisitions, says Belovay, but in keeping with its "prudent" approach, management is unlikely to overpay for an acquisition or overextend the company financially in the process."
- Goldcorp Inc. (G/TSX) $20.33 ($21.40 - $9.88). This Toronto-based company has a rich ore body at its Red Lake mine in northwestern Ontario. The company's drilling continues to reveal multiple high-grade ore zones, he says. Given its strategic asset, the company remains a possible takeover target.
A junior producer that is for the aggressive investor:
- Gabriel Resources Ltd. (GBU/TSX) $4.70 ($6.20 - $2.85). Based in Toronto, this company holds an 80% interest in the Rosia Montana gold-silver property in Romania. "It is an underdeveloped ore body." The stock, says Belovay, has performed badly this year. To Belovay, the company is a takeover candidate as is "one of the last large accessible gold ore bodies in the world." Experience with these stocks has shown that there are rewards to the patient investor, he says.
In addition to gold, Belovay is bullish about the outlook for platinum. This precious metal is, he says, enjoying rising demand from the auto industry which is under pressure to reduce emissions in light trucks. The supply of platinum, which comes chiefly from South Africa and Russia, cannot keep up with this demand, he says.
When it comes to sells, Belovay has reduced his holding in:
- Aber Diamond Corp. (ABZ/TSX) $31.10 ($32.50 - $20.25). Based in Toronto, this company has a 40% interest in the Diavik diamond project in the Northwest Territories, which is being developed for production this year. The stock had a strong run recently fuelled by speculation that the company would transform itself into a royalty trust. Belovay took advantage of this rally to sell the stock. "The uncertain world economic backdrop could adversely affect diamond sales in 2003."
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