Friday, 2 June 2017

Portfolio Strategy: Gold Miners

Well investment of the portfolio continues slowly due to the generally expensive market conditions and my attempts to add to positions slowly and maintain the optionality of cash.

As noted in my view of Gold I perceive the yellow metal may presently be a decent defensive holding. My most recent shopping has been in the Gold Mining space where I have purchased holdings of four different miners to complement my holding of the GBSS physical gold ETF. 

Why 4? Well generally I want to encourage concentration in stocks as per my manifesto. However in this area the stocks tend to have quite significant specific risks, especially junior miners, due to the political climate, structural issues, ore grades, processing failures, mine failures etc. Hence diversification may have more benefit for this particular class of stock.

I will add a little colour on each investment:

Acacia Mining (LON:ACA): As noted in my research note I feel this company is currently suffering a temporary political setback and is oversold. Acacia has some good quality mines in Tanzania with decent cash costs and some interesting exploration projects. I note that today the company has put out another press release reaffirming annual production guidance and stating they expect resolution of the export issue shortly. If this issue is resolved with a relatively minor financial settlement or impact I expect the stock to rapidly rerate perhaps above the GBP4.00 level it previously traded at prior to March.

Goldcorp (NYSE:GG): I bought Goldcorp shares due to my generally positive outlook for gold. Goldcorp is the 4th largest producer in the world and it has lower AISC than Newmont and Anglogold Ashanti. Furthermore I do not want to own South African producers due to the deteriorating political climate for the economy and the mining industry (yes Acacia is in Tanzania - but it already priced in a large discount). I could own Barrick but i think Goldcorp is better managed having made fewer large acquisitions during the previous up-cycle.

GoldCorp Presentation

Goldcorp benefits from a range of projects spread across generally 'favourable' mining regions from a geopolitical perspective with all production in the Americas. Chile and Canada which are supportive mining environments, Mexico is ok too and Argentina is improving. Essentially this is a large cap play on Gold. There is less upside here than some of the junior miners but also a much stronger balance sheet to support the company through this protracted downturn. The 'Coffee' project in the Yukon could provide a nice sweetener depending upon development results.

The next two are essentially more speculative, but small positions:

Klondex Mines (NYSE:KLDX): This is historically a small operation based in Nevada. In recent years they have expanded buying up projects local to their existing mill and a further development in Canada. Production has been increasing off the back of this and synergies exist amongst the portfolio of mines in Nevada. Whilst AISC is over $1700/oz this is in part due to the high cost 'True North' mine in Manitoba which is being redeveloped. The stock is cheap but has production and generates decent cash flow.

This is something of an option on higher gold prices and I consider it speculative but not so speculative as an explorer with no production or cash inflow. The stock has been a poor performer this year in part due to liquidations from the structural issue at the Junior Gold Miners GDXJ ETF - This presented an opportunity to purchase the stock at an attractive price.

Kirkland Lake (TSE:KL): Somewhat like Klondex this is a Junior miner focused in Canada and Australia - again 'safe' mining areas. AISC guidance is below $900/oz for 2017 and the miner is expanding production. In terms of market cap it is a similar size to Acacia so again a mid-cap miner. The Macassa mine in Ontario is particularly high grade and the company derives around 40% of its total gold from that deposit with total production split 60/40 Canada/Australia. Add to this a good cash position, development projects and decent free cash flow generation.

KL Presentation - Outlook 2017

Some positive signs are the initiation of a tiny dividend in Q1 (C$0.01), a buyback programme - as the board feel the company is undervalued - and a significant recent purchase totaling C$10m by legendary precious metals investor Eric Sprott who is the chairman and owns 10% of the shares:

In a specialized industry like mining I consider insider purchases to be important indicators about the potential of favourable future developments. This is because the board will know of preliminary feasibility results ahead of the market. 

(Incidentally one of the only industries where insider purchases can be a negative sign are banks - this is because they are in the 'confidence' game to assure no bank runs and continued survival - quite a gamble.)

So there you have it - 4 Gold mining positions in a month. I think I will hold my gold positioning there for now as Gold and Gold stocks form 19% of the portfolio. I want to avoid more than 20% in any one stock - as per the manifesto - and I think I would like to avoid more than 20-30% of the portfolio being in one idea - i.e Gold - so will hold off additional purchases for now in the Gold space. 

Note I have broken my manifesto rule of 3 stocks per sector now with these 4 miners in one space but given the small size of each position and need for diversification I am comfortable with this. Depending on outlook/performance I may consolidate down to 3 holdings in the medium term.

The portfolio presently is 38% invested in equities, 11% Gold Physical ETF, 3.5% bonds and the residual GBP cash:

Amiable Minotaur Portfolio

So in chart form we can see how the portfolio is still heavily weighted to cash as each of the new Gold mining positions are all <2.5% of the portfolio:

Amiable Minotaur Portfolio

Interestingly I am quite diversified internationally but weighted towards developed markets in general. I have tried to adjust these measures for country economic exposure rather than necessarily the market where they are listed:

In terms of sectors Gold Miners now form my 2nd largest sector exposure in equities after Retail followed by Energy, Banks, Utilities and Financials:

That is the current positioning of the portfolio. These additional positions give my current equity count of 13 stocks with a total of 15 active positions if we include the Gold ETF and my bond holding in TLT. Both measures are below my 20 suggested stock portfolio limit.

Since inception we are down around 1-2% despite a slightly rising market in principle due to the cash drag, costs of FX fees/dealing and the poor performance of the energy sector. 

Disclaimer: I have an interest in all the securities mentioned in this article at present but i may change these in the future. These are opinions only, not investment advice. Construct your own portfolios with due care and attention.  If in doubt read my disclaimer.

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