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The case for a mania in gold-related assets has been made numerous times by myself and many other gold bugs who have been focused on this sector for years. As I noted in a recent article, the more meaningful question is not whether or not a substantial move to the upside remains, but rather which sector within the gold universe is likely to benefit the most: gold bullion, shares of gold producers, or startups still in gold exploration.

While I regard bullion as the most important part of any gold portfolio, and while it currently is the largest part of my gold portfolio and will remain so for the duration of the bull market, I think mining stocks are due for an immense rally and thus offer the most upside potential. However the business of mining is complex, and one of the key factors that will affect a company's profitability - aside from the myriad of geological, engineering, and financial challenges - is the political environment in which the company is operating. Argentina's decision to nationalize an oil producer did raise fears that the same may occur to precious metals mining firms operating in Argentina, as I previously noted. While prices for Argentina miners have recently rebounded, the question remains: are miners at risk of nationalization? In all countries or just those with more overtly socialist leanings? Will this spoil the bubble?

To hedge against the potential for nationalization, there are three strategies I like to employ:

1. Invest in diversified producers. For big producers, I like to see operations in a number of jurisdictions, so as to ensure sufficient diversification. Newmont (NEM), Goldcorp (GG) and Barrick (ABX) are prime examples here of major producers with operations on multiple countries and continents.

2. Royalty stocks and prospect generators. For explorers, I like royalty stocks and the prospect generator model, as these companies also offer diversification opportunities via their ability to invest in many mines. Eurasian Minerals (EMXX) and Franco Nevada (FNV) are portfolio holdings of mine that rely on this type of model of not actually doing the mining, but rather doing the investing and research to find great opportunities around the world.

3. State partnerships. One trend I think is particularly important for investors in this space to be aware of is the opportunity to establish official partnerships with the state. There are two companies I've invested in that operate primarily in Africa - the aforementioned Tanzanian Royalty as well as Nevsun Resources (NSU) - and both of them have a model whereby they are recognized as official partners of the state, sharing both operating costs and revenue with the government. This obviously cuts into revenue, although it also provides the company to have a better relationship with the state - something I think will have the effect of reducing the risk of a harsh nationalization effort.

State partnerships are a trend I expect to see more of. As the price of gold rises, the government will of course want its cut, and may be willing to resort to mafia-like tactics to get it. However, no government wants to put a burden so onerous that the mining industry shuts down. Rather they simply want as big of a cut as they can get while still giving miners a reason to participate. For this reason I consider joint ventures with state-owned entities to become a key trend in gold production in the years to come.

Source: How Investors In Gold Mining Stocks Can Hedge Against Nationalization