In a recent article, we discussed the large-cap gold stocks being sold by gold sector-focused funds. In this article, we present three mid-cap gold mining stocks that are being bought and two being sold by gold sector-focused funds, such as Sprott, Tocqueville and five others, in the latest quarter. The buys are particularly notable given the steep decline in both the price of gold and the price of the average gold stock, as represented by the Market Vectors Gold Miners ETF (GDX), that are down 27% and 44% respectively below the highs set last fall. Overall, gold funds collectively or in consensus sold $281 million in Q1 from their $7.85 billion position in the prior quarter.
Gold Fields Ltd. Adr (GFI), a South African mining holding company engaged in the exploration and extraction of gold in South Africa, Ghana, Australia and Peru, has figured among the top buys by gold sector-focused hedge and mutual fund managers for about four quarters now, since Q2/2012. In the latest quarter, gold-focused funds added a net $26.60 million shares, buying 5.02 million shares and selling none, to their $211.9 million prior-quarter position in the company. In the last four quarters, these gold funds have added 14.92 million shares to their 30.08 million share combined position in GFI at the end of Q2/2012. Besides gold-focused funds, 79 guru and 27 mega sector funds also collectively or in consensus added 0.67 million and 1.89 million shares in GFI in the latest quarter. Also, 57 billionaires and billionaire fund managers together added 0.27 million shares of GFI in the latest quarter.
In its latest March 2013 quarter, GFI missed earnings estimates, reporting 9 cents versus the 12 cents analyst estimate. Its notional cash expenditure (NCE), which is a measure of the true cost of producing an ounce of gold, declined from $1,355 per oz. to $1,291 per oz. The decline was on account of an 8% decline in net operating costs and reduced capital expenditures, partially offset by an 11% decline in production from 534,000 oz. in the December quarter to 477,000 oz. in the March quarter. Its shares trade at 7.0 times forward earnings, a steep discount to the 16.3 average for its peers in the gold mining group, while earnings are projected to rise from 50 cents in FY 2012 to 76 cents in FY 2014. GFI also has a dividend yield of 4.9% compared with the 0.9% average for its peers' stocks (based on financial data from Zacks.com). Furthermore, it also trades at 0.8 times book, 0.9 times sales, and 3.0 times cash flow versus averages of 1.1, 10.6 and 6.5 respectively for its peers in the gold mining group.
We believe that GFI is an attractive buy at current levels based on its discount valuation, high dividend yield, and it being a favorite among leading fund managers, including gold-focused fund managers. Furthermore, with gold prices fast approaching levels equal to the sustainable cash costs of many producers, the consequent plunge in profits is bound to drive lower capitalization producers out of the market. While GFI's sustainable cash costs are slightly above the average for gold companies, it does have $600 million in cash, which should provide it with protection if times get tougher in the gold mining industry. Also, in that event, it could even use its cash pile to acquire marginal lower-cost producers and improve its competitive position ahead of an eventual rebound in gold prices.
Besides GFI, precious metals sector-focused investors also collectively or in consensus bought the following two mid-cap gold mining stocks (see table below):
- Compania de Minas Buenaventura (BVN), a Lima, Peru-based precious metals mining company, engaged in the acquisition, exploration and development of gold and silver mines in Peru, in which gold sector-focused funds together added a net 0.93 million shares or $14.9 million to their 14.06 million share prior quarter position in the company.
- Agnico Eagle Mines Ltd. (AEM), a Canadian company engaged in the production, development and exploration of gold in Canada, U.S., Finland and Mexico, in which gold sector-focused funds together added a net 0.54 million shares or $14.6 million to their 9.94 million share prior-quarter position in the company.
Also, precious metals sector-focused investors collectively or in consensus sold the following two mid-cap gold mining stocks (see table above):
- Randgold Resources ADR (GOLD), that is engaged in the exploration and development of gold properties primarily in Mali and Cote D'Ivoire, in which gold sector-focused funds together cut a net 0.51 million shares or $34.2 million from their 8.13 million share prior-quarter position in the company.
- Yamana Gold Inc. (AUY), a Canadian company engaged in the exploration and development of gold properties in South America and Mexico, in which gold sector-focused funds together cut a net 1.83 million shares or $17.3 million from their 37.05 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. 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.
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.
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