Gold Stocks – A Value Investor Opportunity

With the recent drop in the price of gold and silver, shares of precious metal stocks have been dropping rapidly. As this collapse of gold and silver stocks seems to be occurring across the board, it begs the question: Is this an apocalypse for these companies, or is it rather a rare opportunity for investors to buy solid mining stocks at discount prices?

With the drop in the price of precious metals, gold and silver stocks are being battered in the market. The US Federal Reserve’s announcement that they will begin drawing down, or “tapering,” quantitative easing policies in 2014, there is strong speculation in the market that gold is poised for a big letdown, and gold stocks appear to be the “canary in the mine shaft,” with many of the world’s premiere gold miners trading at or near their 5-year lows.

The question for investors to answer is whether the timing now is right to buy stock in these companies at huge discounts or is this trend likely to continue with gold stocks declining even more? Perhaps more importantly, even if gold prices do not recover in the short to mid term, are many of these producers discounted to the point that they make long-term sense? Having always been a fan of the Benjamin Graham school of thought, I believe that many gold stocks now qualify as remarkable value buying opportunities.

Even if the Federal Reserve does initiate QE tapering in early 2014, it is far from a slam dunk that the economy will be able to sustain itself without the aid of QE dollars. There is speculation that once tapering begins, there will be a dramatic negative impact upon the global economy, which could ultimately push investors back into the safety of gold. That being said, even if the economy does manage to continue to thrive without the billions of dollars that government . Hence the argument to invest in gold.

To be a true value pick though, a stock requires more than simply a discounted share price. While I consider myself a follower of the value investment philosophy, it is far more of a hybrid than the classic Benjamin Graham model. In order to attribute true value, a company must also be well run, and provide an opportunity for growth. In addition to Graham, Phillip Fisher and Peter Lynch have been two of my major influences when researching companies and looking for new opportunities.

Recently, I came across an article in which value investor guru Seth Klarman was actively searching for discounted mining stocks. I am not sure if you are familiar with Mr. Klarman, but he is a renowned billionaire value investor who is a co-founder of Baupost Group. Seth wrote a book called “Margin of Safety,” (now out of print), that is famous for being the most stolen library book in history, with used copies of the book selling for thousands of dollars on websites such as eBay and Amazon. Klarman, more so than Warren Buffett, is a pure value investor, in that he is a true contrarian, with a reputation for buying stocks at a deep discount.

With the mining market, and more specifically, the gold market, unlikely to reverse dramatically in the short term, I will be publishing a series of research reports of various companies that I consider good value prospects. These research reports are designed to give a better understanding of each company, largely from a value perspective, but they are also influenced by both growth and yield factors. While gold stocks have been the most dramatically affected by the market and have the most obvious value opportunities, I will also be looking at prospects of other metals, such as silver, copper and uranium.

In order to adhere to the tenets of Graham & Dodd’s “Security Analysis”, the reports are designed to assess value with a significant margin of safety relative to the stock price. Most of the companies that have been selected are large-cap and mid-cap mining stocks, but I have added a couple of small-cap stocks as high-risk, speculative alternatives.

Assessing value in the mining sector can be difficult, which is why I believe that investors have been rather indiscriminate when selling off their mining and more specifically, gold stocks. But as with any sector, there are good and bad companies, as well as a whole array in the middle. So, given the wide range of companies that I am looking at, in a perfect world I set out to find opportunities that have:

  1. A strong management team
  2. Solid production numbers
  3. Multiple locations
  4. Cash & assets
  5. Operations in politically stable regions
  6. Proven and probable reserves
  7. Measured & indicated and inferred resources
  8. Favourable operating costs per ounce,
  9. No debt

Obviously, the goal is to fit all of the above criteria, but doing so may also set a filter that ignores some exceptional value opportunities. Given that many of the major gold stocks are trading at or near their 5-year lows, it would seem reasonable that the sector offers value opportunities for those willing to put in the research. Our next article will begin to dissect these filters and what investors should be looking for when uncovering these opportunities in the gold sector.

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