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Outlook 2016

Fund Manager: Stocks Of Gold Producers With Hiccups In 2015 Could Outperform In 2016

(Kitco News) - Shares of several gold-mining companies that were hurt by misfortune in 2015 just might be poised to outperform the rest of the sector in 2016 as they resolve some of their issues, said Dan Denbow, portfolio manager of the USAA Precious Metals and Minerals Fund (USAGX).

In particular, the gold mutual fund manager listed Goldcorp Inc., Eldorado Gold, Royal Gold, Alamos Gold Inc. and Dundee Precious Metals.

Dan Denbow

Denbow made clear that he was not recommending an investor rush out and buy just the handful he spoke about. “I would be willing to concede that some of that five is going to be wrong,” he said. In fact, the top five holdings of the fund comprised only 25.09% of its weighting as of this interview, according to Morningstar. The fund had assets under management of $537.9 million.

Mining stocks tend to follow gold prices, since that plays a role in companies’ profitability. Should gold tumble, mining shares could be expected to as well. As a result, gold mutual fund managers seek companies that might have a potential catalyst to help them do better than other producers whether it’s an up or down market.

“The companies that had issues this year might be the ones that outperform next year,” Denbow said. Of course, this assumes they resolve those issues.

Denbow started with Goldcorp (TSX: G; NYSE: GG).

“They had a couple of stumbles with the delivery of the Eleanore mine, and they’ve had to delay the delivery of the Cochenour mine,” Denbow said. Both are in Canada. Further, in September, Goldcorp trimmed its output guidance for Eleanore after higher-than-expected “folding” of underground rock in the Roberto deposit resulted in lower grades.

“As we see the growth in production from Cochenour, Eleanore and from Cerro Negro in Argentina, which they brought on earlier in 2015…(this) should be building up for a very positive cash-flow year for Goldcorp,” Denbow said.

Eldorado (TSX: ELD; NYSE: EGO) faced a challenge in 2015 when Greece’s government revoked a permit for technical studies on a major project, alleging the company violated contractual terms over technical studies. In early November, however, the country’s top administrative court overturned the decision.  Further, an attempt to monetize Chinese assets was slowed by weakness in the country’s stock market, Denbow explained.

“As we see the fruition of those two processes come through in 2016, that should allow Eldorado to be a good performer,” Denbow said.
  
Among the streaming companies, Denbow listed Royal Gold (Nasdaq: RGLD; TSX: RGL). The tumbling copper price has hurt Thompson Creek Metals Co. Inc., leading to concerns among investors on the financial viability of the Mount Milligan mine at lower copper prices, Denbow explained. Royal Gold has a streaming agreement for gold from the mine.

“As we get more certainty about what that means for Royal Gold and their royalty, that should relieve pressure on Royal Gold and allow it to be a much better performer 2016,” Denbow said.

Another company Denbow feels has potential to outperform is Alamos (NYSE, TSX: AGI).

“Alamos Gold has had a tough year,” Denbow said. He said the Mulatos mine in Mexico has been viewed as an “underperformer,” plus Alamos has had to integrate the acquisition of AuRico Gold.

“Both of those have led to their stock being an underperformer,” Denbow said. “Mulatos should have a better year in 2016, and they should get their acquisition bedded down. Both of those should help for that stock to find better footing for 2016.”

Among the smaller companies, Denbow singled out Dundee (TSX: DPM).

“They’ve been having to make some improvements and changes at their Tsumeb smelter in Namibia. They were late in delivering on that project.”

However, this smelter project is now up and running, and Denbow suggested the benefit has been underappreciated by investors.

“They also have expansion opportunities where some partners might come in and fund the expansion of that smelter. That will also validate the real value of owning that within Dundee. I think that sets up for what could be a good year in 2016 for Dundee.”

By Allen Sykora of Kitco News; asykora@kitco.com

 

 

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