Gold just dropped to a five-week low. The miners are getting flattened. You’d have to be crazy to buy gold miners now, right?
Crazy like a fox, maybe.
Investing in miners would be easier if we knew that gold’s bear run was coming to an end. And I’m optimistic about that. Sure, gold’s getting beaten like a rented mule. But that’s due to short-term selling. It’s mainly fueled by big funds selling gold, which they tend to do at the wrong time.
Regardless, good mining stocks can be found with gold at its current price, and even a little lower.
What do I look for in a miner? The overperformers will have most of the following qualities…
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Low valuation relative to its peers. Is it getting fair value for the gold in its mines, or is it being priced like it’s sitting on nothing but rock? It seems counterintuitive, but I look for miners whose gold assets are underpriced, because those are the ones with room to grow.
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Cash or ready access to cash. It’s good if a company is sitting on a big pile of cash. It’s better if it has cash flow that will cover operations and pay for expansion.
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Cost advantage. Can this miner make money at $1,200 an ounce for gold? How about $1,100? How about $1,000? While I don’t think the price of gold is going down to $1,000, you can bet many investors are pricing in a worst-case scenario. And those that can survive the hard times will do great in the boom times to come.
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Resource upside. I’m looking for high-quality properties with strong discovery potential and crackerjack geologists. And the projects must be in mining-friendly jurisdictions.
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Production upside. Can the company increase its throughput at its mill? How much will it cost to raise production? Are there “feeder” deposits nearby that could add to production?
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Excellent management. I don’t want managers who are using the company as a “piggy bank” and issuing shares to finance a high-on-the-hog lifestyle. I want managers with a plan for the future and a clear vision on how to get there. It’s better if they have proven track records.
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Insider Buying. There are many reasons to sell a stock, but an insider has only one reason to buy: Because he or she thinks the stock is going higher.
These fundamentals will narrow your universe of picks. But which ones will you buy? There’s nothing more frustrating than buying a miner you know is undervalued… then watching it get more undervalued as other, “crappy” miners go higher in price.
To get over this last hurdle, I use a mix of technical signals that have worked very well in the past. For example, in my
Gold & Resource Trader advisory service, I’m currently holding a miner with solid fundamentals and excellent management. Because it has no debt, it can expand production quickly.
This miner is sitting on a huge deposit of very high-grade ore, and is one of a small handful that has consistently delivered profits to its shareholders despite slumping gold prices.
Yet this miner is often overlooked by investors for reasons that have nothing to do with its business prospects.
No one has a crystal ball. But I think gold is cheap, and I can see profitable miners priced like lumps of coal. Call me crazy, but I think it’s time to pick up those golden nuggets.