Time to Take Profits in Gold Miners?

With gold hovering over $1,000 per ounce, now seems like a good time to check in on two gold mining stocks I hold in my portfolio: Minefinders (MFN) and Yamana Gold (AUY). Long-time readers will know that I have been writing call options all year on these two stocks to good profit. With the recent rally, it may be time to make a clean exit.

The original thesis on Minefinders was a nice deposit on the cusp of production in a friendly jurisdiction. The market seemed to be overly wary of the company's non-producing status, but I was confident that management would bring their Dolores property into production. The risk was determining if management could meet its projection of bringing Dolores online with resources on hand. Then the credit crisis hit along with setbacks and blockades in Mexico and the company needed more capital.

They did what they had to do but now with Dolores in commercial production, the end result is the share count jumped roughly 20% from our entry point in early 2008. Accounting for fully diluted shares outstanding, investors suffered 50% dilution in order to bring the mine online. Obviously, this dilution impacts the valuation of the stock and without any other solid projects in the immediate future, MFN is approaching my range of $13 - $20 for its fair value. As such, I am looking to either take profits or write near-the-money calls to cushion any correction and/or exit the position.

Yamana Gold was less of a valuation call and more a straightforward, leveraged play on gold. I have already established covered call positions on AUY @ $9 and $14, looking to reduce my position or exit altogether at a nice price.

With established miners like AUY, history suggests investors will be presented with multiple opportunities to establish low-priced positions or take profits. Due to such volatility, a traditional buy-and-hold mentality seems ill-suited to gold mining stocks, especially as few of them pay a meaningful dividend. Such a strategy should probably be limited to plays on the actual commodities themselves (like ETFs or physical bullion).

While the market seems to be breathing a collective sigh of relief, the era of financial volatility has not yet ended. In fact, I am inclined to think it has just begun -- it may not resemble the credit crisis of 2008 but if precious metals are insurance against turbulent times, the time to hold some in your portfolio has not passed. But nothing goes up or down in a straight line and investors need to consider that gold mining stocks sometimes trade more with the rest of the stock market than they do with the underlying commodity.

Disclosure: Long MFN, AUY; Short: $9 & $14 AUY calls

Comments

[Barry Robbins:]

Thanks for the writeup on AUY. I also own a couple of silver miners (HL & SVM), and NovaGold (NG). Do you have any opinion on these? Silvercorp, SVM, a very well capitalized silver miner in China, seems very promising. Thanks.

Sep 24 08:19 AM

[sixpackistan:]

short term you are right- take your profit in AUY. however, i still see it as a takeover/acquisition target at current levels so it's a risk that you may miss the bump on that...if it happens...anyway, good article.

Sep 24 09:59 AM

[Slvrizgold:]

For the life of me, I cannot understand people who rave about Yamana. There are so many other companies with better leverage to increase in price of gold. Take Gold Fields, they have similar share structure and market cap to Yamana but they produce almost 4 million ozs vs. AUY only about 1.2-1.3 mil ozs. So when price of gold rises $200, GFI will have about $800 mil extra cash flow, while Yamana will only net another 240-260 million. This is substantial. Yes, I know Yamana has a good growth profile, but I also know the CEO self deals to himself and has created NO extra value in his 5 year aquisition spree on a per share basis. Yamana has been stuck in the mud around $10 for this whole time, and the share count has increased massively. To me, a company like Jaguar or GORO would be better alternatives, management has engineered a promising growth profile AND has kept shares outstanding at reasonable level.

Note: I own a LOT of Yamana, but I am disappointed at its meager performance. That said, it is too cheap to sell. I think a more competent mgmt. should take it over at this low price. The Aura deal was the last straw for me. Still holding a large chunk but have been allocating some to JAG SLW and other better leverage plays recently.

I would also like to comment on the author's comment that AUY is an aquistion target... Maybe so, but there are only a small handful of possible suitors, Minefinders on the other hand, could be approached by literally dozens of companies. I think MFN gets bought out before AUY. jmo

And I think Peter Marrone should be fired and jailed.

Sep 25 10:46 AM