Gold Mining Stocks Are Beating Bullion: A Win-Win

By: Frank Holmes | Fri, Aug 1, 2014
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For the first time in at least a couple of years, gold mining stock returns are outpacing those of the yellow metal itself.

As you can see in the chart below, the NYSE Arca Gold BUGS Index has given back 22.31 percent year-to-date (YTD), whereas gold has delivered 7.74 percent.

Gold Mining Stocks are Beating Bullion

This is good news for both equities and bullion. When miners are doing well, gold tends to follow suit. Indeed, since the beginning of the year, spot gold has seen steady growth following a lackluster 2013. As I noted earlier in the month, it's been one of the best-performing commodities of the year so far, a mere nugget's throw behind nickel and palladium.


Miners restructuring their business strategy

Gold Miner

Gold mining, to be sure, is a tough gig. When gold prices are between $1,000 and $1,200 an ounce, miners barely break even in terms of cash flow.

Last year was particularly brutal. The metal plunged 28 percent--from $1,675 to about $1,200--which was the largest annual drop since 1981.

To reduce risk, many companies have cut costs in several ways. Some have decreased capital spending. Others have sold off assets. Others still have placed exploration on standby.

Case in point: Comstock Mining Inc., a young mining company which we own in our Gold and Precious Metals Fund (USERX), has managed to shrink operating expenses from $4.4 million this time last year to $3.8 million, mostly by lowering legal and advisory expenses. Other realized annual savings have come from administration and staff reductions.

In a recent interview with The Gold Report, U.S. Global Investors portfolio manager Ralph Aldis addressed the company's rising success:

Comstock started production over a year ago at about 10,000 ounces a year. It doubled that and now it's targeting a 40,000-ounce run rate in H2/14... The company has permits to reach 4 million tons per year so Comstock should be a 100,000-ounce producer by 2016. It's a situation where people are creating value and [Chairman of the Board] John Winfield knows how to make money.


Time to wake up to gold-diggers

An equity that has performed exceptionally well this year is Klondex Mines Ltd., headquartered in Nevada. Not only does it represent the largest position in both USERX and our World Precious Minerals Fund (UNWPX), but we also own it in our Global Resources Fund (PSPFX).

One of the main reasons we're so fond of the stock is that in 2013, when the Market Vectors Junior Gold Miners Index was down 61 percent, Klondex was up 28 percent. It's currently up 30 percent YTD and is targeting free cash flow (FCF) by the end of the year.

"This is a great story," Ralph said in the same interview. "Most people haven't woken up to it yet."


Royalty companies are thriving as well

Other players in the gold space that have flourished in this climate are royalty companies, which provide upfront capital to miners in exchange for a stake in future output. Since royalty companies avoid the costly rigmaroles gold miners must deal with on a regular basis--securing permits and building infrastructure, among others--they often receive a healthy return on their investments.

Two such companies are Franco-Nevada Corporation, based in Toronto, and Royal Gold, based in Denver. We own both in USERX, UNWPX and PSPFX, as well as our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX). Whereas Franco-Nevada has risen 42 percent YTD, Royal Gold has leaped 70 percent.

Gold Royalty Company Stocks soaring


Looking ahead

Gold might have taken a minor hit this week, but autumn is right around the corner, when the gold jewelry industry traditionally replenishes its stock. And with unrest in Ukraine and the Middle East continuing to drive the fear trade, as unfortunate as these events are, gold prices appear buoyant.

This bodes well not only for investors in bullion but also mining companies, which will likely proceed with cost-cutting initiatives to maintain or expand margins.

 


 

Frank Holmes

Author: Frank Holmes

Frank E. Holmes
Chief Executive Officer
Chief Investment Officer
U.S. Global Investors

Frank Holmes

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron's, The Financial Times and other publications.


Please consider carefully a fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Copyright © 2010-2014 Frank Holmes

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