IF YOU'RE FEELING REALLY BEARISH: A LOOK AT GOLD STOCKS By JOHN RUBINO www.TheStreet.com December 8, 2000 This is like coming home again, and I don't mean that in a good way. Back in the late 1970s I remember really liking a book on libertarianism by Harry Browne (who might or might not be the same guy who just ran for president on that party's ticket). Besides being (sort of) a philosopher, Browne was a "gold bug" investment guru, who said excess credit creation was causing a boom in real estate and other things which, coupled with rising energy prices, would lead to a sharp decline in the dollar's value. Gold, he said, would protect you against the resulting chaos. He was right, and anyone who listened made a killing. That was a long time ago, of course, and we've since gotten our act together. Inflation is way down, and gold has been so boring for so long that you almost never hear it mentioned in serious company. But lately those old arguments are starting to fit the facts in a way that's eerily, disturbingly familiar. Excessive money growth? Yep, by some measures at least. A real estate boom and spiking energy prices? Uh-huh. Stir in a surreal trade deficit and falling corporate profits, and 1970s-style currency trouble becomes at least conceivable. As for why gold does well when the dollar doesn't, there are two reasons: First, there's only so much of it in existence, and the new supply is limited and fairly predictable. It's thus not subject to government or Wall Street manipulation. Second, it's been used as money for thousands of years, and old habits die hard. So maybe it's reasonable to own a gold stock or two, just in case. To see which mining companies are still standing, I checked in with Claude Cormier, editor of the Quebec- based Ormetal Report newsletter. Not surprisingly, he sees a lot of value here: "The (gold) market has been down for so many years that there are very many bargains. It's like 1992 in the Dow Jones stocks where everything was selling at low P/Es." To identify the best bets, Cormier starts with their hedging philosophy. Gold miners, like most commodity producers, often sell their production years in advance via the futures market. This guarantees a given price, but it also limits their upside, because no matter how much gold rises, a fully hedged company will only get the contract price. So if your goal is to benefit from gold price spike, "I would try to avoid the companies that are heavily hedged with a lot of gold sold forward, and stick with companies that are not hedged and would benefit from an immediate price increase," says Cormier. Barrick (ABX:NYSE - news), for instance, is heavily hedged, so while "It's a great stock that will continue to be stable in an environment where gold doesn't move, [it] will not benefit as much as other companies if gold moves." Among the big, relatively unhedged players, Cormier likes Homestake Mining and Newmont Mining. But the best combination of risk and return is further down the ladder, with the mid-tier companies, many of which have good balance sheets, plentiful reserves -- and way more growth potential, says Cormier. "They are the ones that will prosper if gold rises." Here, he likes: * Meridian Gold, operator of mines in Idaho and Nevada that are ramping up dramatically. In the September quarter, it produced 112,000 ounces of gold at a cost of $155 per ounce. In dollar terms, its sales rose 90%, and (illustrating the operating leverage in this business) earnings went from negative $4 million to positive $10 million. Cash on hand is about $51 million, debt is minimal and despite the fast growth rate, its P/E, or price-to-earnings ratio, is only around 15. * Glamis, which has mines in California and Nevada. It's growing at low-double-digit rates and is debt- free, though not yet profitable. But it has new mines in Nevada and Honduras, which look like big, low-cost winners. If they both pan out, they'll lower Glamis' break-even point dramatically. * Agnico Eagle, an old-line Canadian miner that produced about 90,000 ounces of gold in 1999. It's working through some lower-grade ore this year, resulting in higher costs and a widening loss. But its finances are reasonably solid, and its exploration program is aggressive. For those of you suffering from tech stock withdrawal, there are lots of smaller, more speculative mining stocks out there. Most of these "juniors" are developing gold deposits that are not yet producing, but might sometime soon. "These have extremely high leverage and are the kind of stock that can move five or 10 to one," says Cormier. His pick in this sector is Francisco Gold (FGX:CDNX), which "has $2.50 per share of cash in the bank, gold valued at $10 a share and sells for $5" (all figures in Canadian dollars). So is gold going to $800 an ounce again (from the current $300 or so)? Not unless China invades Taiwan or Iraq nukes Saudi Arabia. But it's certainly possible that some of the better mining stocks will outperform B2B and wireless stocks in the coming year. ------------------------- John Rubino, a former equity and bond analyst, is a frequent contributor to Individual Investor, Your Money, and Consumers Digest. His first book, "Main Street, Not Wall Street," was published by William Morrow in 1998. At time of publication, he had no position in any stocks mentioned. While Rubino cannot provide investment advice or recommendations, he invites your feedback at [EMAIL PROTECTED] -END- -------------------------- eGroups Sponsor -------------------------~-~> <FONT COLOR="#000099">eLerts It's Easy. It's Fun. Best of All, it's Free! </FONT><A HREF="http://click.egroups.com/1/9699/0/_/126/_/976339415/"><B>Click Here!</B></A> ---------------------------------------------------------------------_->
