Why Paulson Is Bullish On AngloGold

| About: AngloGold Ashanti (AU)

by Mark Goldstein

John Paulson is bullish on AngloGold Ashanti (NYSE:AU), but should you care? Perhaps, you should, if you too own and run a namesake US$3.5B hedge fund that is almost completely invested in gold.

What matters is not Paulson's opinion of the stock and company, but whether AngloGold Ashanti can sustain wins that it reported in the first quarter. Last quarter, the company beat estimates and almost doubled its earnings from a year ago.

The company's stock price has performed in step with the rest of the sector, trending alongside other gold miners of comparable market caps. For instance, Gold Fields (NYSE:GFI), Newmont Mining (NYSE:NEM), and Barrick Gold (NYSE:ABX) have all basically took a dip in the past few months, just as AngloGold Ashanti had.

Gold miners, in general, are in a good position, since demand for the product is unique. In essence, it's similar to that of oil supplies are not growing, and won't ever grow; whatever's in the ground now, is what this planet is stuck with. Scarcity of the metal can only increase, but that does not necessarily lead to an increase in bullion prices or an increase in demand. Bloomberg, for example, notes that some of the largest holders of gold and bank reserves, such as China, are not so keen on holding gold as a way to preserve value.

You have to couple things like this with the fact that AngloGold Ashanti is often entangled in very unsettling geopolitical contexts (CEO Mark Cutifani alludes to that here: "We're a little bit down on that percentage this time around, but that was mainly because South Africa was a little disappointing."). The company also gets embattled by pointed claims and accusations by various human rights advocacy groups, so it's easy to see how one's eyes could wander away from miners that are based in South Africa in such a big way.

In this light, Barrick Gold might seem like a better proposition, but it is not without its controversies as well. The company has a controversial track record when it comes to the environment. The fact that the company threatened to sue an author and publisher last year over a book, made the company out to be overly defensive, in the very least.

Bear in mind that so much of the nature of the mining business is unlike the way business is done in other industries, where you have a traditional market of customers that wait in line at stores for your products. You can make a killing off of royalties in this industry, for example-which is exactly the business Franco-Nevada (NYSE:FNV) is in.

But is Franco-Nevada evidence that a position in gold is a solid proposition, or merely that there is a rush going on, and that the only companies that make for solid propositions are the pickaxe sellers?

The fact that gold was once a standard of value that backed the American dollar cannot be tweezed out of the market psyche. In the back of every investor's mind, is this notion that gold is somehow a container of value-whether the investor believes that others believe this, or the investor believes this him or herself.

Because the overall health and the fundamentals of most of the companies mentioned here, save for, say, Harmony Gold Mining (NYSE:HMY)-which reported lower earnings in the first quarter compared to the same quarter last year, among other negative and pessimistic points in its earnings report-are sound and relatively predictable and stable.

AngloGold Ashanti might find itself up against a wall in negotiations on mining activities in a certain country this year, but because of the size of the business, its wins elsewhere will more than make up for it-which is probably why most of the mentioned miners are trading in lockstep with each other right now.

Or you can take this observer's view of the lot, and simply rank the comparable securities up by fundamentals. Up against, Barrick and Newmont Mining, AngloGold earns (17.6%) more on its invested capital than Barrick (12.1%) and Newmont (5.1%). More importantly, AngloGold generates more free cash ($1.24B) than Barrick ($342M) and Newmont ($797M).

Though there are certainly competitors that continue to do well. Compass Gold continues to thrive in Mali, as it realizes the success of its mines more and more. The company is Africa's third largest gold producer and is exploring for more opportunities in the area.

Fundamentals considered, I can't justify building out a long position in AngloGold at this point. Perhaps it's my aversion to the necessary politics that the company entangles itself in, in order to close deals and land mining rights; or maybe it's the company's track record with fatalities (is bringing fatalities down to zero by 2015 a laudable goal?).

Instead of trying to time the performance of AngloGold's stock price, if you truly believe that demand for gold will rise (along with its price and returns), consider an ETF such as the Market Vectors Gold Miners (NYSEARCA:GDX). The fund mimics the performance of the NYSE Arca Gold Miners Index, and is a good way to buy the metals and minerals mining sector. Market Vectors Gold Miners rose over 9% last month and analysts see no reason why the boon will stop anytime soon. The good news comes from increased interest from China, where investment demand is expected to grow in the area of 10% in 2012.

AngloGold Ashanti is certainly in a position to grow. Paulson would not be so keen to back the company if it did not have good growth prospects. The question, then, is if the stock can keep up its healthy numbers. All evidence seems to say that it will continue and investors should take note and get in while they still can.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.