The Gold Mining Business Is Working, Seniors Offer The Best Value- Analyst
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(Kitco News)- Whilejunior explorers with their massive upside potential usually attract the mostattention during the Prospectors & Developers Association of Canada (PDAC)annual convention, one analyst said that he is paying more attention to themajor producers.
Inhis presentation, Sunday, Matt Badiali, an analyst at Banyan Hill Publishing,said that he sees investments in senior producers like Goldcorp (NYSE: GG, TSX: G), Barrick (NYSE: ABX, TSX: ABX),Newmont (NYSE: NEM), and Kinross (NYSE: KGC, TSX: K) as the best and safest contrarian plays currently in themarketplace.
He notedthat despite a spat of positive earnings, major gold companies are trading attheir lowest level in almost a year. He added that the pessimism doesn't make alot of sense fundamentally. He said that it should not take long for generalinvestors to see that gold companies are undervalued and are worth looking at.
“Thegold mining business has improved a lot in the last two years. The Business ofgold mining is working. Companies are seeing higher prices for their product;they have lower debt and better management,” he said. “Now is the time toinvest.”
With gold prices expected to continue to rise as a result of higher inflation pressures, Badiali said that revenues of the major producers should continue to rise.
He said that he prefers the large producers over junior explorers because of therelative safety in the marketplace. He noted that most majors are trading“ridiculously low” compared to their cash flows.
“Thenonrevenue companies are so hard to get right,” he said “But in this market,investing in the large producers is a no-brainer. These companies are makingmoney, so it’s only a matter of time before their stock prices go up.”
Buyingmajor producers outright is a good play, but Badiali said that he thinks thebest value is selling put options on these companies. By selling the put, youguarantee you will buy the stock from an investor at a specified price during aspecific time period.
Badialirecognizes that selling a put does have more risk than buying a stock. But hesees the danger as minimal in the current market.
“Idon’t think Goldcorp or Barrick are going bankrupt anytime soon,” he said. “Ifyou sell a put the worst that would happen is that you will end up gettingshares of a good company in a solid business at a lower price. That is amanageable risk.”
Badialiadded that the timeframe for the trade is at most 18 months.
“I’mnot looking for long-term gains right now,” he said. “I want to rise myinvestment up and then get out when the market starts to turn. I alwaysrecommend using trailing stop losses.”
Badialialso recognized that senior producers also face long-term problems like the factthat their resources are running out and there is a lack of large-scalediscoveries. However, he added that those are not material risks to hisrecommendation.
“Theseproblems faced by large producers are big esoteric issues. They won’t topGoldcorp from achieving its 2020 goal. It won’t impact major earnings in thenext few years,” he said.
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.