Benjamin Graham, the legendary investor, would have bought gold stocks, but investors need to dig carefully.
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Gold stocks might be getting hammered, but this is the time when big investors with deep pockets get interested, looking for, what they call "asset plays".
It makes sense, because after sustained selling, many gold stocks have more than halved from the levels they held just six months ago. Some are trading at close to their cash asset backing!
For "deep value" you can't go past Unity Mining (ASX code UML), which has a gold mine in Tasmania. It has a market cap of about $50 million and cash of $24.5 million, plus $9.1 million of gold bullion available for sale.
The company is on track to produce 50,000 ounces, which, at current levels of about $US1400 a tonne equates to revenue of $70 million. It's not the lowest-cost producer in the world, but based on its quarterly report, the mine should generate about $20 million this calendar year. UML is trading on an earnings multiple of 3.5 times, whereas six months ago, it was trading closer to eight-times.
A bigger gold miner that is just as cheap is Endeavour Mining (EVR), which has a market cap $362 million and three mines in production West Africa. A fourth is starting next year. It has cash of $135 million and debt of $200 million.
Endeavour is on track to produce about 320,000 ounces this calendar year, and this should ramp up to 450,000 next year with the extra mine. For calendar year 2014, this company is trading on about 1.7 times earnings multiple!
People (including George Soros) are dumping gold because of a belief that economic conditions around the world are improving, and that the key bogey of inflation is being kept at bay.
This is despite the trillions of dollars being pumped into the system by central banks in an effort to resuscitate depressed economies.
The key macro at the moment is yield and earnings predictability. Gold miners and small resources companies in general, don't offer this.
This doesn't mean that investors of all persuasions are turning their backs on the sector. Institutions of various types are using Benjamin Graham-type analysis to look for value, which might not emerge for some time, but which has as good a foundation as any.
Graham, who wrote The Intelligent Investor, came from the era of the Great Depression, when it was not uncommon to find companies that traded at less than the difference between their liquid assets, and their near-term debts.
As one portfolio manager said to Radar: "Balance sheet quality is more relevant to us because we are looking to outperform benchmarks (in his case the S&P/ASX 200 Index), which is relative." In contrast, the benchmark for those of us outside the elite world of investing other people's money, is cash.
Resource companies will be unloved for quite some time, which means that it will be hard to make consistent profits from the sector.
But some corporate investors with deeper pockets who can make money from purchasing assets directly, look at such market tremors as opportunities.
