UK funds still find value in battered gold sector
By Brian Spoors
LONDON, June 16 (Reuters) - British investors in gold mining shares said on Wednesday there was still value to be found in a sector that has been battered by the slump in gold bullion prices to their lowest level in 20 years.
Gold share values have dropped almost in step with a commodity which has lost its age-old allure as a store of value, with supply expanding as central banks have disposed of a metal which they no longer see as key reserve asset.
Even so, fund managers say there are still shares to be bought despite the sector's depressing auguries and on a gold price at around $258 per ounce.
''I have been focusing on very low cost producers,'' said Ian Henderson, a director at Fleming Investment Management.
''There are some (producing) at below $100 per ounce, so they still have got phenominal margins,'' he added.
Henderson also advocated shares of gold miners which had worked with the bullion banks and central banks to put together forward selling programmes which have cushioned them against the worst impact of the low gold price.
He said there was also value to be found in companies which had diversified out of gold and others which could be involved in takeovers as in South Africa's Harmony and West Rand Consolidated .
An example of a low-cost producer was Barrick Gold (Toronto:ABX.TO - news), while Australia's Sons of Gwalia was an example of one which had protected itself through forward selling, he said.
Henderson's precious metals mining shares weighting was neutral with platinum and silver shares included with gold.
Typically other funds were no more optimistic.
''It is not a sector we have been overweight in for a long time but it is not one you can totally neglect as it is a big part of the indices in South Africa,'' said portfolio manager David McIlroy at Foreign and Colonial Emerging Market Funds.
''I imagine sales for central banks continuing and it is difficult to see any major upticks for the gold price. As soon as it does uptick, the gold mines will sell (more).''
One fund manager noted that gold shares offered value with major companies' price/earnings ratios ranging from 10.9 times earnings in South Africa to over 60 times in North America.
''The South Africans in particular are offering tremendous value as a lot of them are taking big steps to rationalise their assets,'' said a mining share fund manager who asked not to be named.
''Outstanding is Anglogold which is yielding around seven percent and is the world's leading producer. But you have to deal with a very pessimistic mood,'' he added.
Graham Birch, head of the natural resources team which run several funds at Mercury Asset Management, said he advocated topping gold shares up with those of platinum producers where the underlying metal prices were much more stable.
''For the broader based World Mining Trust we are not taking a big stance on gold. We are pretty market neutral at about 18 percent,'' Birch added.
Birch's Mercury Gold and General unit trust fund in the year to June 15 was returning 9.6 percent against FT Gold Mines index which is down 10.2 percent.
''But three year figures were very grim. We're down 49 percent against an index which was down 60 percent. We can't work miracles in a market which is that bearish.''
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