Factors to Consider When Picking Gold Stocks
By Jane Louis
18 Nov 2007 at 02:53 PM GMT-05:00
SAN FRANCISCO (ResourceInvestor.com) -- The dollar is not done falling yet, according to John Doody, editor of the newsletter “Gold Stock Analyst”.
“I think we’ve gone to phase two of the dollar’s fall,” he said, noting that the U.S. economy could see a “waterfall” of foreign investors pulling out of the dollar.
“If they all want to head to the door at the same time, there’s going to be a problem.”
Speaking at the Hard Assets Investment Conference in San Francisco, Doody told listeners that while the falling dollar will spark a run in the gold price, it will also increase operating costs in countries where the local currency has skyrocketed against the dollar, such as Brazil, Canada and Australia.
But in countries like Mexico, where the peso has not seen a big gain against the dollar, costs will remain low, thus making companies that operate there more attractive.
These are important factors to consider when adding gold stocks to a portfolio, Doody said. He said when he makes his stock picks, he looks for companies that have the potential to double their value without any change in the gold price.
“We look for disparities,” he told Resource Investor on the sidelines of the conference. While some companies should be valued low due to high costs and other issues, Doody’s picks are companies that are needlessly “undervalued versus their peers,” he said.
And generally, his picks are right on. Doody’s infamous “Top 10 Stocks” have recorded an average gain of 30% per year for the past 12 years - and an impressive increase of 506% in the last five years alone.
When choosing stocks, investors need to look at why the market values one company’s ounces of gold more than another’s when the gold price is the same for everyone, Doody said. He uses a method called “market cap per ounce” to analyze companies on an even playing field.
The method uses a formula that divides a company’s market capitalization by the ounces of gold it produces per year or by its proven and probable reserves.
He pointed out that Agnico-Eagle, for example, has similar proven and probable reserves as Crystallex, but Agnico-Eagle has a market cap of C$6.73 billion, while Crystallex has a market cap of C$716.88 million, making Agnico-Eagle’s market cap per ounce much higher.
“One is overvalued and one is under,” he said. “You have to be following the stock to know.”
So what are Doody’s top picks for investing in gold mining companies?
He names his top 10 choices as:
Claude Resources [AMEX:CGR; TSX:CRJ];
Nevsun Resources [AMEX:NSU; TSX:NSU];
Golden Queen Mining [TSX:GQM];
Apex Silver Mine [AMEX:SIL];
Crystallex [AMEX:KRY; TSX:KRY];
Goldcorp [NYSE:GG; TSX:G];
Western Goldfields [AMEX:WGW];
Minefinders [AMEX:MFN; TSX:MFL];
Royal Gold [Nasdaq:RGLD; TSX:RGL];
and Silver Wheaton [NYSE:SLW; TSX:SLW].
When asked what he thinks will happen to companies like Crystallex, where political instability in Venezuela has kept the miner from receiving a permit, Doody said that the firm is likely to get taken over by a major should the permit go through.
“Somebody will buy them if they get a permit,” he said. “All the majors are starved for ounces,” and they are large enough to handle the political risks.
“You have to take the country risk,” Doody said.
Doody’s “Gold Analyst Newsletter” can be found here.
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