One Chart May Explain Why Gold Stocks Are Lagging Bullion
March 1, 2013
by Frank Holmes
of U.S. Global Investors
It may be time for certain gold stocks to shine, writes Bryan Borzykowski in a Canadian Business article this week. He highlights many of the issues that have come to the surface over the past few years, including the bad decisions made by management, capital cost increases, and the birth of the gold bullion exchange traded fund.
But there’s a sea change occurring, as the industry has had executive turnover and many write downs in an effort to right the wrongs. “If gold companies continue to reinvent themselves … investors could see even better returns on stock than on bullion,” he writes.
We’ve talked about these issues several times, and many were confirmed when Jorge Beristain from Deutsche Bank visited our offices lately. Beristain talked about multiple changes gold companies are expected to make this year to draw investors, including reporting true industry production costs, reining in excessive capital expenditures and ceasing the dilution of shareholders via equity issuance for deals.
I believe diluting shareholder capital has been a major cause of underperformance compared to bullion. Based on U.S. Global’s independent research of 80 gold companies, production among global gold producers over the past four years has increased 14 percent on a cumulative basis. However, on a per share basis, gold production actually decreased more than 9 percent.
Even though we have been in a rising gold market, the economic value per share has been diluted, as gold miners issued shares faster than they discovered the precious metal or faster than they increased their production. As a result, stocks have underperformed.
Not all gold miners have diluted shareholder value. That’s why “with the problems the industry is facing, you want to make sure you’re buying a good business,” writes Borzykowski. As I explained to him, gold companies paying or increasing their dividends is a significant factor that shows a prudent use of capital and fiscal discipline.
Skin in the game is also important. I indicated that companies with executives who own shares have historically outperformed the companies where management did not own stock.
For our Gold and Precious Metals Fund (USERX) and the gold mining companies in the Global Resources Fund (PSPFX), we seek stocks with experienced management that have shown proven growth in production, reserves and cash flows on a per share basis. Over the long-term, these gold companies have historically outperformed.
Over the first weekend of March, Ralph Aldis, portfolio manager of the gold funds (USERX and UNWPX), will be speaking on these issues at the Prospectors and Developers Association of Canada (PDAC) conference in Toronto, helping investors understand the importance of active management in the gold mining industry.
Read Canadian Business article “Gold Stocks’ Time to Shine.”
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