Create Your Own GDXJ Portfolio

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Includes: AG, ALO, ARNGF, CDE, EXK, FSM, GDXJ, GPL, HL, IAG, KL, KNTNF, LMCNF, MUX, ORZCF, PAAS, PMNXF, PVG, SSRI, SVM, TGCDF, USAS, WDOFF
by: Don Durrett

Summary

How to create a mid-tier portfolio.

How to balance risk in a mid-tier portfolio.

Why a mid-tier portfolio makes sense.

After the large rebalancing of GDXJ, many investors are having second thoughts about owning gold mining stock ETFs. Creating your own mid-tier portfolio is the answer to this conundrum, and it isn't that difficult. Yes, you will have to manage it on your own. However, once it is created, you should only have to make a few trades a each year.

Based on current valuations, below is my ideal mid-tier portfolio. It only includes producers, which I consider to have less risk than non-producers. I have broken it up into three groups to balance risk.

The first group is $100 million to $500 million. Many of these could be considered juniors and they have higher upside potential. In this group, I pick stocks with significant upside potential. They will have more risk than then next two groups, but should also outperform them.

The second group is $500 million to $1 billlion. These are the true mid-tier producers. In this group, I want solid stocks with growth potential. These stocks should outperform the third group.

The third group is $1 billion to $3 billion. These are the emerging majors. Most of them do not have high growth potential, but they lower the risk of the portfolio. Several of these stocks will likely surprise to the upside - if gold/silver prices rise.

Some people will ignore group three, because of their high market caps. However, I have found that you want to own positions in these companies. Stocks with less than $3 billion market caps can also be growth stocks, and they are ideal for lowering the risk of a portfolio.

When you manage your mid-tier portfolio you want to keep it balanced, with 4 to 8 stocks in each group.

Group 1 ($100 million to $500 million)

Stock Name

Symbol (US)

Type

Rating

Share Price (US)

FD Shares

FD Mkt Cap 7/30/17

Alio Gold

ALO

Gold

3

$4.36

38M

$168M

Americas Silver Corp

USAS

Silver

3.5

$3.28

49M

$161M

Argonaut Gold

ARNGF

Gold

3.5

$1.82

182M

$332M

K92 Mining

KNTNF

Gold

3

$0.51

230M

$118M

Leagold Mining

LMCNF

Gold

3.5

$2.10

155M

$327M

Orezone Gold

ORZCF

Gold

3.5

$0.61

164M

$101M

Perseus Mining

PMNXF

Gold

3.5

$0.24

1164M

$285M

Group 2 ($500 million to $1 billion)

Stock Name

Symbol (US)

Type

Rating

Share Price (US)

FD Shares

FD Mkt Cap 7/30/17

Endeavour Silver

EXK

Silver

2.5

$3.09

132M

$407M

Fortuna Silver

FSM

Silver

2.5

$5.07

160M

$811M

Great Panther

GPL

Silver

2.5

$1.26

185M

$233M

McEwen Mining

MUX

Silver

2.5

$2.62

305M

$799M

Silvercorp

SVM

Silver

2.5

$2.88

175M

$506M

Teranga Gold

TGCDF

Gold

2.5

$2.61

111M

$293M

Wesdome Gold

WDOFF

Gold

2.5

$1.98

316M

$389M

Group 3 ($1 billion to $3 billion)

Stock Name

Symbol (US)

Type

Rating

Share Price (US)

FD Shares

FD Mkt Cap 7/30/17

Coeur Mining

CDE

Silver

2.5

$8.22

181M

$1491M

First Majestic Silver

AG

Silver

2.5

$8.20

176M

$1443M

Hecla Mining

HL

Silver

2.5

$5.38

399M

$2146M

IAMGold

IAG

Gold

2.5

$5.42

464M

$2518M

Kirkland Lake

KLGDF

Gold

2

$10.57

212M

$2247M

Pan American Silver

PAAS

Silver

2.5

$16.87

154M

$2597M

Pretium Resources

PVG

Gold

2.5

$9.67

187M

$1808M

Silver Standard Resources

SSRI

Gold

2.5

$9.78

124M

$1212M

All of these stocks have been analyzed by me, and I own all of them except one. All of them are listed as having moderate risk in the GoldStockData.com database. It is a good idea to avoid high risk stocks in a mid-tier portfolio. The ratings come from the GoldStockData.com database and reflect a stock's upside potential. The highest rating I use is 3.5. At one time I used a 4 rating, but everyone thought those were the best stocks to own regardless of risk.

When you create your mid-tier portfolio, focus on producers. This will not only lower your risk, but position you for higher gold/silver prices. I have learned from experience that when gold/silver prices are trending higher, you want to own producers. The reason why is because their cash flow immediately increases and that causes their share price to increase.

The gold/silver mining business is cash intensive. Not only does it cost money to produce gold/silver, but mining companies most continually explore and develop projects. For this reason, a company's balance sheet is always under scrutiny by investors. When gold/silver prices rise, it has the effect of improving a company's balance sheet, and sometimes dramatically.

If you own a producer that suddenly finds itself with a pristine balance sheet with zero debt and a few hundred million in cash, that stock is going to explode in value. This is why you want to own them. If gold/silver prices explode for an extended period, nearly all of the stocks in my mid-tier portfolio are going to become strong companies with strong balance sheets.

For this reason, my favorite stocks to own are producers. And the most ideal stock is a producer that is also a growth stock. What is powerful about creating a portfolio like the one above, is that many of these stocks are going to be growth stocks. In fact, that is the strategy of these companies. Once you become a strong producer, you are always looking for growth. What else are they going to do with their cash flow?

I expect a lot of consolidation in the gold and silver mining industry. For this reason, you want to own a lot of producers. Why? Because you want to own the stocks that are the most aggressive and the ones that are doing the acquisitions. You do not want to own the company that is acquired. The growth company is the one doing the acquiring.

Many gold/silver mining investors like to invest in exploration stocks for the potential big gains. But the risk/reward is much better chasing cash flow and the producers. Yes, there is risk that gold/silver prices could go down. But if you are a long-term investor and you guess right about higher gold/silver prices, you will be in an ideal position. Moreover, if we do get higher gold/silver prices, the odds are that some of your other non gold/silver investments went down. So, it is perhaps the best hedge against uncertainty.

Some would argue to stay away from miners and any paper investment, and stick with physical gold and silver. I actually can't argue against that advice. I think physical bullion is perhaps the perfect asset at this time. And I think physical silver has the best risk/reward characteristics of any investment, because of the 75 to 1 gold silver ratio.

The problem is if you are a big investor, where are you going to store all of that silver? If you have to pay annual storage fees, those can add up. Yes, it's good to own some physical silver, but at a certain point, storage becomes an issue.

Physical gold may explode in value, but if it does, then a mid-tier portfolio makes even more sense. I always think of physical gold as an asset, not an investment. I think the gold producers have more leverage than physical gold.

Disclosure: I am/we are long ALO, USAS, ARNGF, KNTNF, LMCNF, ORZCF, PMNXF, EXK, AG, FSM, GPL, MUX, SVM, TGCDF, SSRI, CDE, HL, IAG, KLGDF, PAAS, PVG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.