Gold sector-focused funds -- including Sprott, Tocqueville, and five others -- that are specialists in precious metals investing have been collectively or in consensus selling top gold miners every quarter since last fall. Their selling continued into the latest quarter (Q1 2013), when top gold funds collectively sold $281 million from their $7.85 billion position in the prior quarter. Their selling was far more aggressive among the three large-cap gold miners, namely Barrick Gold Corp. (NYSE:ABX), Goldcorp, Inc. (NYSE:GG), and Newmont Mining Corp. (NYSE:NEM), in which they collectively sold $252 million from their $2.25 billion combined position in the prior quarter. Furthermore, this selling accelerated last quarter, as gold-focused funds collectively sold $46 million in Q4 2012 and $13 million in Q3 2012 in those three large-cap gold mining stocks.
With the 35.1% plunge in gold mining stocks since the end of Q1, including 7.4% on Thursday, it seems as if these hedge and mutual fund gurus of precious metals investing have been making the right call for at least three quarters now. Their selling in Q1 is even more notable given that the average gold stock at the end of last year was already down 31.8% from its peak in September 2011. Their selling has been most severe in ABX, in which they sold 5.29 million shares in Q1 2013 from their 36.9 million share prior quarter position. Furthermore, they sold an additional 1.69 million shares in Q4 2012, 2.59 million shares in Q3 2012, and 0.1 million shares in Q2 2012. ABX shares are down 61.0% since their peak last fall, including 52.6% this year and a sharp 7.8% plunge on Thursday.
Investors who follow the buying and selling activities of these precious metals gurus, as documented in their quarterly 13-F and daily 13D/G filings, could have saved themselves a lot of pain as is evident from the plunge in prices of gold mining stocks yesterday and for most of this year. ABX, GG, and NEM -- down huge this quarter -- have a SectorRankTM of 1.0, 1.2, and 1.0, respectively, on a 1-to-5 scale, near the bottom based on our ranking system. Conversely, stocks ranked at the top (above 4.5) have consistently beaten the markets by wide margins, which makes sense given that these are based on the collective buying and selling activities of Wall Street's 300-plus top fund managers.
Barrick Gold, a Canadian company engaged in production of gold and copper with 26 operating mines on five continents, including in Peru, Canada, U.S., Australia, and Chile, is the world's largest producer of gold. In its latest March quarter, ABX revenue and earnings both beat analyst estimates. However, they were down year over year. Earnings per share at 92c for the March quarter was well below last year's $1.10 due to lower production, lower prices and higher costs. Earnings are expected to slide further this year to $3.09 from last year's $3.83, and from $4.67 in FY 2011. In addition to this, the company faces significant challenges at its Pascua-Lama mine in Chile. While the company has budgeted huge capital expenditures for the Chilean mine, it is unclear when production will start due to environmental regulatory concerns.
At Thursday's closing price of $16.60, ABX shares trade at five times FY 2014 earnings compared to the 10 average for its peers among gold mining stocks (based on financial data from Zacks.com), and it has a dividend yield of 4.9%, well above the 0.9 average for its peers. The lower multiple is a reflection of the declining earnings, lower production, higher costs, lower gold prices, and environmental challenges at its Pascua-Lama mine in Chile. The stock currently trades near 10-year lows, while earnings are up strongly during that period. We believe that while the company continues to face significant challenges, and prices could still drop slightly, its shares are trading at a compelling discount valuation and are an attractive buy here.
Furthermore, while bears currently rule the gold market, and it is likely that it may continue a bit further as it is one of the few areas of the market where bears have had any success lately, the current trend is bound to end soon. At sub-$1,300 prices, gold is fast approaching levels equal to the sustainable cash costs of many producers. As profits plunge and maybe even go into negative territory, it will drive some of the lower capitalization smaller producers out of the market, thereby paving the way for lower supply and higher prices going forward. While ABX will face challenges as well due to its high production costs, it is likely to survive a shakedown due to its higher capitalization, and could stand to benefit from the eventual spike in gold prices from these depressed levels.
Besides ABX, precious metals sector-focused investors also collectively or in consensus sold the following two gold stocks (see table below):
Click to enlarge image.
- Goldcorp, a Canadian company engaged in mining and exploration of silver, copper and gold throughout North and South America, in which gold sector-focused funds together cut a net 3.71 million shares or $88.8 million from their 37.26 million share prior quarter position in the company.
- Newmont Mining, that produces gold in the U.S., Australia, Peru, Indonesia, Canada, New Zealand, Ghana, and Mexico, in which gold sector-focused funds together cut a net 2.55 million shares from their 24.99 million share prior quarter position in the company.
With the average gold stock as represented by the Market Vectors Gold Miners ETF ($GDX) currently at multi-year lows, the time may be approaching for adding high-ranked gold mining stocks to a well-diversified portfolio. We believe that knowledge of how the best minds in the investment community, in the form of guru, mega and gold sector-focused fund managers, are collectively positioning themselves can help us pick the best stocks to add to our portfolio. We have observed predictive power in the moves of leading fund managers on stock prices going forward, some of which are documented in our earlier articles on Q4 2012 small-cap biotech picks by guru funds and Q1 2013 top telecom equipment picks by guru funds.
General Methodology and Background Information
The latest available institutional 13-F filings of 128 sector-focused hedge fund and mutual fund managers, including seven focused on precious metals, were analyzed to determine their capital allocation among different industry groupings and to determine their favorite picks and pans in each group. These sector-focused fund managers allocate most or all of their resources to their sector of specialization, and the argument is that they have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When these sector-focused fund managers invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.
This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.
Credit: Fundamental data in this article were based on SEC filings, Zacks Investment Research, Thomson Reuters, and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.