Troika of reasons to maintain faith in gold, according to Sector Investment Managers’ Angelos Damaskos
Angelos Damaskos, CEO of Sector Investment Managers and fund adviser on the Junior Gold fund, believes investors in listed gold mining companies need to keep in mind three key points.
Supported by rising demand for gold among investors, the price is on track for its twelfth successive year of gains. At the current price of about $1,700/ounce most gold mining companies are generating strong cash-flows and profits.
Nevertheless, shares in gold miners remain oversold and out of favour as investors raise three arguments against owning gold equities, which we believe can be dispelled:
1. Should the gold price fall considerably in the next three to five years as the global economy improves, gold miners may find their profits eroded quickly.
No-one knows where the gold price might be in three to five years. However, there is no question that the global debt problems are so large that they are unlikely to be resolved in the short-term, therefore investor demand for bullion will keep growing, pushing its price higher.
2. Most companies have missed their guidance on operating expenses and capital cost for building new mines.
It is true that cost inflation due to the rise in base metal prices, scarcity of skilled workers and a drop in average grades as the gold price moved higher was not anticipated by the industry. However, it appears that companies are now much more focused on cost control and future updates are likely to report significant improvements.
3. The larger, cash-generative companies have failed to improve the returns to their shareholders by paying insignificant dividends.
The larger companies have recently increased dividend pay-outs and more are planning to return capital to shareholders.
Some large investors, like the central banks of growing, healthy economies, are long-term in their outlook and unlikely to sell their holdings until they have clear visibility of economic stability well into the next decade. Gold shares, on average, are currently undervalued in relation to the price of gold. The longer gold trades at the current levels, the more generalist investors appear wrong about mining companies’ valuations.
At some point, investor sentiment will change, causing a re-rating of gold shares. We believe that Junior Gold is well positioned to benefit from such re-rating, with its holdings in companies with growing production, strong balance sheets, capable management and prospective exploration and development programmes.