Gold shares get their shine back

GOLD mining shares are bouncing back from a disastrous 2013.

GOLD mining shares are bouncing back from a disastrous 2013.

They are expected to far outperform the price of the metal in coming months as efficiency measures lure investors back.

Years of overspending on expansion projects and disruptive merger activity fell heavily on miners last year just as the gold price posted its biggest fall in 32 years.

Gold mining stocks plunged 53% on average versus a 28% drop in gold prices after a 12-year bull run.

Eight months into the year and the gold-mining sector is rapidly making up lost ground with a 22% gain to date, outperforming global mining shares overall.

Goldcorp, the world's biggest producer by market value, has gained 34%, and Africa's Randgold Resources is up 33%.

The gold price, meanwhile, has risen by just 9% to $1318 an ounce.

UK-registered equity funds have raised their exposure to gold mining shares to an average of 1.55%, the highest since last November, according to data from Morningstar.

"We are witnessing how business execution and delivering on plans can lead to better equity performance," said Ani Markova, fund manager at Smith & Williamson Investment Management.

"The equities are trading at historically low valuations, and offer investors the ability to participate in miners' significant cash-flow leverage to small positive changes in the gold price," she said.

The surprise double-digit dive in the gold price last year forced mining companies to implement austerity measures to conserve cash and improve capital allocation.

At a lower gold price, they now have lower margins and cannot afford to consider high risk moves.

"The companies aren't able to destroy value in the way they were before," said BlackRock's director and portfolio manager, Catherine Raw.

"The sort of risk we have taken on within the gold companies has changed as we get a little more comfortable that the gold price is stable to rising at that $1250 to the $1350 level, and that the companies themselves are starting to do the right thing."

Raw said that BlackRock had increased its overweight exposure to Canadian-listed Eldorado, citing its high-quality resource base and potential to generate strong cash-flow at gold prices of $1200 to $1300 in coming years.

BlackRock's funds reduced an underweight exposure in AngloGold Ashanti, which is diluting its high-risk, high-cost production in South Africa by adding assets in Central Africa and Australia that are lower cost and higher grade.

While the sector as a whole is seen to be moving in the right direction, some laggards remain.

"Last year, you'd have lost between 50% and 90% of your money investing in gold shares, but there was nowhere to hide," said Neil Gregson, portfolio manager at JP Morgan Global Natural Resources fund.

"The difference between the poorest and the best performance is very wide (this) year. Some stocks are down 50%, and some are up 150%."

Heavyweight Barrick Gold's share price was up 7%, while Australian small cap Northern Star Resources was up 120% this year, Gregson said.

The sector as a whole is still cheaper than it was in 2010, which makes it attractive for investors. From 2011, gold companies started to be derated as they lost control over operating costs and gold prices headed down from highs, said UOB Asset Management fund manager Robert Adair.

Gold hit its highest level on record at $1920.30 in September 2011.

"There is now potential for a rerating of the price:earnings, price:cash flow as well as the enterprise value to earnings before interest, taxes, depreciation, and amortisation multiples that investors are willing to pay for gold companies," Adair said.

This bodes well for the precious metal for the remainder of the year.

"With gold mining stocks trading at a 58% discount to 2011 levels, gold-mining shares remain highly undervalued relative to fundamentals," said ETF Securities associate director Simona Gambarini. - Reuters