Trigger for gold: cheap growth
Hard-hit miners attract fund managers' attention
By Thom Calandra, CBS.MarketWatch.com
Last Update: 10:29 AM ET Apr 14, 2003
SAN FRANCISCO (CBS.MW) - The next trigger for gold mining stocks may be financial or geopolitical, or it just may be a simple formula called cheap growth.
"I know a lot of fund managers who are looking for growth, and the gold sell-off is giving them some prospects at cheap prices," says asset manager Frank Holmes of $1 billion U.S. Global Investors.
Gold stocks as a group have been hit hard since late January, when gold's spot price peaked at almost $390 an ounce. John C. Doody of newsletter Gold Stock Analyst points out that fast-growing intermediate gold producers, companies such a Meridian Gold (MDG) that are expected to pull an average half-million ounces a year from the ground, are all down as much as 30 percent from their 52-week highs.
Doody and Holmes will be among several dozen fund managers and mining executives gathering later this month in Las Vegas to give their take on a market that has disappointed many commodities investors. See: Las Vegas Precious Metals Conference.
Holmes, a Texas-based fund manager, contends that several gold mining companies qualify as growth stories in the classic sense of accelerating profits and - for now, anyway - cheap stock prices. He reasons that a handful of small and mid-sized gold producers will be able to exceed profit targets even if the gold price stays stuck at $325 an ounce.
"Fund managers need growth stories for their growth-oriented mutual funds, and I'm willing to bet some of them will look at companies that have mining franchises in place that will increase profits steadily over time," says Holmes.
The North American miners' free cash flow, a measure of a company's business prospects and efficiency, rose 17 percent in the fourth quarter from a year ago. One company, Glamis Gold (GLG), saw its free cash flow in the quarter, the latest for which figures are available, rise 19 percent from a year ago.
His best example: Wheaton River Minerals (WHT), a Canadian company that mines gold, silver and copper in Mexico and Argentina. The company's stock price this year is taking a hit after the gold price lost 15 percent of its value. Concerns about debt Wheaton River must assume to complete the purchase of an Argentina mine is also weighing on the stock, which is valued at $170 million and also trades in Toronto (WRM).
"This is a company trading at six times next year's profits," Holmes, himself Canada-born, says. "Where are you going to get that in this stock market?"
If the company's acquisition plans proceed as planned, Wheaton River will produce 470,000 ounces of gold, 6.7 million ounces of silver and 76,000 tons of copper next year. Several Toronto-based research firms see the company earning at least 14 cents a share next year. Wheaton River's stock trades at 90 cents on the American Stock Exchange.
Other mid-sized miners seen as cheap growth prospects include Iamgold (IAG), another Canadian company that along with Wheaton River was recently listed on the American Stock Exchange. The company's shares are selling for approximately 14 times this year's expected profits and 10 times next year.
Las Vegas gold show
The Las Vegas Precious Metals Conference will take place April 26 and 27. Speakers include Robert Bishop of Gold Mining Stock Report, Michael Burke of Investors Intelligence, James Dines of The Dines Letter, Adrian Day of Global Strategic Management, Richard Sacks of Phoenix Advisory, Rick Rule of Global Resource Investments, James Turk of Freemarket Gold & Money Report and Paul van Eeden of International Speculator, John Doody and Frank Holmes. See: Las Vegas Precious Metals Conference.
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