(Kitco News) - After a dismal few years for the mining sector, investor attention is returning to the market as gold and silver continue to set record highs, and with momentum showing no signs of abating.
In a recent interview with Kitco News, Chris Mancini, co-Portfolio Manager of GOLDX at Gabelli Funds, said it is not surprising that generalist investors are once again looking at the mining sector, as record-high prices are expected to continue driving record earnings for the foreseeable future.
“These companies are in a great position right now from both a balance sheet perspective and a cost perspective relative to the price,” he said.
Last month, Mancini attended the annual Mining Forum Americas, hosted by the Denver Gold Group, where sentiment at the conference reflected an excitement and energy not seen in years.
He noted that not only are gold prices hitting record highs on a nearly daily basis—currently trading near $4,200 an ounce—but mining companies have managed to keep costs relatively low. According to data from the World Gold Council, all-in sustaining costs have hovered around $1,600 an ounce through the first half of this year.
After a slow start to the year, gold producers’ gains have finally started to outpace gold itself. The VanEck Gold Miners ETF (NYSE: GDX) is currently trading at $80.48 per share, up more than 130% so far this year. Meanwhile, spot gold prices are at $4,194.20 an ounce, up nearly 60% year-to-date.
Despite the strong performance, gains in the mining sector are still relatively new, as GDX only broke its 2011 all-time highs last month.
Mancini added that even at current prices, he still sees overall value within the mining sector, which remains relatively cheap compared to gold’s momentum.
“The market is only just starting to wake up to the story that gold mining companies give us exposure to the gold price plus income, and that even gives us some leverage to the gold price,” he said. “Mining companies are generating so much free cash flow that they're enormously cheap. Even if the gold price stays where it is, you have a company like Newmont trading at 10 times earnings, which is very cheap for a company that has a 25-year reserve life and is the biggest, most liquid gold mining company in the world.”
Mancini said that while gold producers are generating significant revenue, corporate executives have not let success go to their heads. He pointed out that balance sheets remain disciplined.
“Boards have been listening to their shareholders, who have been saying they don’t want to see unnecessary growth. They want to see a return of capital through share buybacks and increased dividends,” he said.
As for where gold is heading, Mancini said that while the market looks a little overbought, it is difficult to see what could derail this robust uptrend.
“The narrative has started to kick in that the world needs an alternative to the U.S. dollar—and the only alternative is gold,” he said. “At the same time, falling interest rates in the U.S. are going to put more pressure on the dollar, creating another tailwind for gold. It’s difficult to see any significant downside for gold right now.”
Finally, when it comes to building a precious metals portfolio, Mancini said it makes sense to have a 15% allocation—10% in the physical metal and 5% in mining equities.
