Gabelli fund manager Bryan looks at balance sheets, likes Australian gold producers
(Kitco News) - Look for strong balance sheets, pay attention to Australian producers and consider royalty/streaming companies.
Those are all some of the factors that Caesar Bryan is looking at as portfolio manager of the Gabelli Gold Fund (symbol GOLDX for AAA shares and GLDIX for institutional class of shares). The fund has around $260 million of assets under management.
Bryan looks for gold to benefit from investors wanting diversification in their portfolios amid the economic slowdown prompted by global efforts to combat the COVID-19 pandemic.
There are some negatives for the precious metal, such as soft physical demand in China and India, which are the world’s two largest consuming nations, he pointed out.
“But that is going to be overwhelmed by investment demand,” Bryan said. “That’s because of what’s happening in financial markets. The two drivers are going to be fiscal stimulus and monetary stimulus... which are going to raise concerns and fears about any unintended consequences of this unprecedented action.”
The Federal Reserve has announced open-ended quantitative easing and several lending programs to prop up the economy and stabilize markets. Meanwhile, the U.S. has enacted $2 trillion in fiscal stimulus at a time when tax receipts are expected to fall, meaning a growing deficit.
“This is a much bigger intervention than the 2008-09 intervention [after the financial crisis],” Bryan said. “Gold, after [initially] suffering, did very well coming out of that and peaked above $1,900 in 2011….So this is a very gold-friendly backdrop.”
Valuations, dividends favorable for gold stocks
Sometimes, there is “extraordinary” volatility in shares of mining companies, with “stomach-turning” short-term moves, Bryan said. Nevertheless, he listed several factors he considers constructive for gold stocks. For starters, he said, these equities tend to be “inexpensive” relative to gold itself, based on the fund’s valuation models.
Second, the world is in a low interest-rate environment, meaning investors wanting an income stream may be able to benefit from dividends paid by gold producers, Bryan said. A number of companies have announced increased dividend payments in recent months.
“Now, there may be some companies that go the other way in the short run and defer their dividends,” Bryan said. This may be the case since many mines are being temporarily shut down to combat the spread of COVID-19. “But going forward, there is a good income story with the gold equities.”
For one thing, balance sheets in the gold sector tend to be stronger than in the last bull-market cycle, Bryan explained. Back then, companies were taking on debt in a race to add ounces to their output, but have since been trying to shed debt.
Further, governments likely will want to keep mines open as much as possible, as taxes and royalties are a significant source of income for many, Bryan continued.
Yet another factor working in favor of gold-mining companies is low energy prices, which in particular reduce diesel costs for open-pit mines. Also, weaker local currencies versus the U.S. dollar improve the profitability of producers operating in countries such as Mexico, Australia and Canada, Bryan continued. The exchange rate means producers are now getting more pesos and Australian/Canadian dollars for each ounce of gold sold in U.S. dollars. At the same time, their costs are constant in their local currencies.
As of this interview with Kitco News, the peso had weakened by roughly 30% from the start of the year, while the Canadian dollar was down by around 9% and the Australian by around 13%.
What to look for when picking gold stocks?
In the current environment, Bryan favors companies that have balance sheets strong enough to survive a two- to four-month shutdown.
“You always want to have strong balance sheets in the mining sector,” he said. “But particularly right now, you don’t want to be caught with a company...which might have a problem with a shutdown, especially a single-asset company.”
However, he does not shy away from smaller companies if they have strong balance sheets. A number of “well-positioned” smaller companies have underperformed larger producers, thus presenting an opportunity, he said.
Bryan currently likes Australia-based producers, pointing out that they collectively tend to have cash reserves and minimal debt. For this reason, some of his fund’s larger holdings with mines in the country include Evolution Mining Ltd., Newcrest Mining Ltd., Northern Star Resources Ltd. and Saracen Mineral Holdings. He also pointed out that Australian producers have not faced the government-mandated shutdowns of miners in other parts of the world, at least so far.
Further, Bryan explained, the weaker Australian dollar can potentially increase reserves that can be mined at a profit. As an example, he said, when Northern Star and Saracen bought the Kalgoorlie joint venture, Kalgoorlie’s reserves were calculated with a cutoff based on roughly A$1,600 gold prices. But with the moves in the foreign-exchange market, the gold price in Australian dollars is now around A$2,700.
“So we think there are probably quite a few more [profitable] ounces there…,” Bryan continued.
North American companies that he likes include Newmont Corp., Barrick Gold Corp., Franco-Nevada, Agnico Eagles Mines Ltd., Wheaton Precious Metals, Kirkland Lake Gold Ltd. and Alamos Gold Inc.
Royalty and streaming companies appear to be sitting better than actual producers during temporary mine shutdowns since they have limited operating costs, Bryan said. These companies provide upfront money to producers to finance development projects and in return, get a portion of future mine output, often in the form of by-product metal, thereby making royalty companies “producers” without actually digging. Thus, when the industry temporarily halts production, streaming companies mainly face “deferred” income from mines, the fund manager explained.
Bryan also said this might be a good time for investors to have exposure to silver since the metal has underperformed gold prices for some time. He looks for the historically high gold/silver ratio to decline, which would mean silver would start gaining ground against the yellow metal.
“By all means, have a little silver right now,” Bryan said. “I don’t think this is the time to shun or avoid a gold company that has silver revenues.”