The price of gold soared over $1,800 an ounce yesterday but gold mining stocks have not had the same upswing. But that is about to change, thinks UK-listed Sector Investment Managers, which says that the weakness in gold mining shares is temporary and that balance will be restored soon.
This month’s sell-off in global equities has widened the dislocation between gold mining equities and the bullion price. Angelos Damaskos, chief executive at Sector Investment Managers, believes that gold shares currently discount a long term price of about $1,000 an ounce, which, given the strength of the safe haven asset, cannot go on forever.
Damaskos, who also advises on the firm’s Junior Gold Fund, looks back at the great depression in the 1930s when gold went up 46 per cent and shares in Homestake Mining, a big gold mining company at the time, jumped 1,400 per cent. By contrast, since 2005, when the precious metal went above $500 an ounce, the Philadelphia Gold Mining Index has gone up 91 per cent compared with a 184 per cent hike in the gold price. If history repeats itself, gold mining stocks have a large re-rating ahead, Damaskos argues.
The Junior Gold Fund’s largest holding is Focus Minerals, an Australian gold miner, and Sector Investment Managers estimates that each $100 an ounce change in the gold price means a $23 million lift in annual profits. Focus’s share price trades at $61 of enterprise value per ounce of resources, and when the planned merger with Crescent Gold has been concluded, Demaskos thinks its rating should be closer to $115 an ounce.
Another major holding is Spanish Mountain, a development stage company with operations in British Columbia in Canada. The company’s assessment assumes a flat gold price of $950 an ounce and expects average annual production of 213,800 ounces during the first five years at a total cash cost of $570 an ounce. At this rate, each $100 rise in the gold price results in a $21.4 million rise in yearly profits and the increase in profitability would exceed $170 million a year at the present gold price.
Damaskos notes that roughly two-thirds of the Junior Gold portfolio is focused on producing companies. The firm's other funds include the Junior Oils Trust and the Junior Energy Fund.