I recently sat down with The Gold Report for a lengthy interview on gold and gold stocks that was published today. Here’s an excerpt of that interview where I discuss the factors we use to evaluate gold companies.
The Gold Report: Normally companies get better movement in the shares than in gold. Yet it seems most stocks are underperforming. Some of them are down much further than you would expect. Why?
Frank Holmes: There are two reasons for that. One is this fear of owning any equities. I think the real bubble is putting your money into CDs where investors are going to lose money on interest. Investors will get an interest payment below the inflationary rate and their money is locked up. It just shocks me. Right now, Mellon Bank charges to park cash with them. It’s charging investors a fee. It’s not paying. It’s charging.
It is just bizarre that people are so fearful when you can turn around and buy gold. I think there will be a wakeup call and the companies that will be the beneficiaries of that cash will be the gold mining companies that have not diluted the share-of-production factor. When there is a banking scare, equities as a whole get punished and gold equities as a whole get dragged into that market. Secondly, there is a failure to appreciate the importance of protecting the reserve-per-share and the production-per-share in acquisitions and building out mines.
Randgold Resources Ltd. (NASDAQ:GOLD) has been a huge winner for us, then it had a slow down. Its production-per-share dropped because its production dropped. Immediately the stock went into the penalty box, but now it has reversed that. The stock has been a spectacular performer this past week.
TGR: Would you say that the mid caps are a better shot at this point than the smaller caps?
FH: I think that the mid caps are the most overvalued. The Market Vectors Junior Gold Miners (GDXJ) ETF has over $2.5B in mid caps and it just jams up all these silver and gold stocks. One reason you’ve seen money going into these products is that gold analysts can’t recommend a junior gold stock without research coverage on the company, however, they can recommend an ETF like the GDXJ without research on all of the companies it holds.
I think any big-cap company is going to have to end up looking for those companies that have 10 million ounces (Moz.) in reserves and acquire them. One of the companies that we have taken a big position in is Gran Colombia Gold Corp. (TSX.V:GCM), which has over 10 Moz. of reserves and one of the best valuations. You are only paying $45/oz. of gold in the ground. Gold producers trade at six to seven times that level. That makes it a takeover candidate. It has a higher grade and is producing over 100 thousand ounces (Koz.), with plans to ramp up to 400 Koz. of gold production. We like to buy where we get a big bang for our buck—lots of gold-per-share.
To increase production and not dilute the shareholders, the company just raised $80M by issuing a 5% silver note. It is convertible at $15/oz. of silver, which allows you to buy silver at a massive discount. That gives them the cash to ramp up production for the final build out phase. This is brand new and very interesting. We like to invest in those types of companies. We like those companies that are very protective of themselves on a value-per-share basis.
The other one that we think is very exciting is Romarco Minerals Inc. (TSX:R) in the Carolinas. It continues to have a high grade. It likes to spend its dollars on increasing its reserve profile…â€
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The World Precious Minerals Fund ranked 32 out of 70, 42 out of 44, and 5 out of 33 precious metals funds by Lipper for total return for the 1-, 5- and 10-year periods as of 6/30/2011. The World Precious Minerals Fund ranked 1 out of 71, 34 out of 51, and 18 out of 29 gold oriented funds by Lipper for total return for the 1-, 5- and 10-year periods as of 12/31/2009. Past performance does not guarantee future results.
Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Holdings in the World Precious Minerals Fund as a percentage of net assets as of 6/30/2011: Coeur d’Alene (1.05%), Franco-Nevada (0.17%), Gran Colombia Corp. (3.43%), Randgold Resources (0.00%), Romarco Minerals (4.66%), Royal Gold (0.00%), Silvercorp Minerals (3.42%), Newmont Mining (0.00%), Market Vectors Junior Gold Miners ETF (0.00%).
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