Gold Prices Will Rebound, But Be Careful How You Invest - Fund Manager
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(Kitco News) – The vast majority of junior miners are not investable, so investors have to be extremely selective, said Matt Geiger, managing partner of MJG Capital.
“I’m a big believer of Pareto’s Law, that the top 20% of any population is going to result in 80% of the value, and if you take that a step further, the top 4% of any population is going to generate 64% of the value,” Geiger told Kitco News on the sidelines of The Hard Asset Conference on Jekyll Island. “So, in my opinion, you need to be rejecting the vast majority of juniors that are trying to get you as a shareholder and really focus on the very top 4% to 5%.”
The VanEck Vectors Junior Gold Miners ETF (GDXJ) has fallen 6% year to date in 2019, while the gold bullion has stayed relatively flat during the same period.
Geiger noted that the vast majority of junior miners are not investable due to several factors that may harm their financials, including a blown out share structure, significant debt overhang, or more commonly, excessive amounts of general and administrative expenses.
“Rick Rule’s group at Sprott Global did a very interesting study. They looked at 75 companies with a sub-$10 million cap and they found that over a five-year period, over 60% of the money that these companies raised, went into G&A [general and administrative]. So that’s director’s salaries, that’s expensive travel, that’s first-class meals. That is not what you want as an investor, you need that money to be going into the ground, either in terms of drilling or engineering work as you continue to advance your project’s feasibility,” he said.
Geiger said that one way around this problem for investors is to pick miners that have had a history of good management, instead of simply putting money into a basket of junior mining stocks.
On prices, Geiger said that even though the mining space has been beaten down, he remains constructive on the sector due to its cyclicality.
“To me, this is a cyclical industry, and you’ve got to buy when it’s not attractive, and you’ve got to take profits when you see generalists streaming into the space, so I’m very optimistic about these upcoming years, but you have to show patience and pick the right stocks,” he said.