Day's Precious Picks

02/11/2005 12:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

Adrian Day is among the advisory world's leading authorities on natural resources. Although he sees near-term weakness for gold, he views any correction as a time to aggressively buy. Here, he highlights a trio of favorite gold plays and his top pick among silver miners.

"We’ve had a significant correction in the price of gold, which has been primarily a US dollar move. And if the dollar continues its rally, gold will continue to fall; there’s little question about that. In the short term, I think there is a likely possibility of a further rally in the dollar, and therefore a further correction in gold and a further drop in the gold stocks. However, unless gold collapses to $380 or so, which I don’t see, I think the downside in gold stocks is pretty modest at this point. Because of the recent declines, many of these stocks are trading at low valuations in terms of price to reserves, price to production, price to cash flow, and even price to earnings.

"When gold stocks do move up, they have the ability to rise quite sharply. Thus, I would emphasize that any weakness we see in the next few months should be an opportunity to buy gold stocks, and to buy them fairly aggressively. I just don’t think there’s a lot of downside. We have seen investment demand from Japan, India, and Turkey, which is a conduit for gold buying from the Middle East. We also have the huge potential from China. Legal restrictions on the free trading of gold in China are being liberalized, and as this continues, I think buying will pick up significantly.

"If you are at all bullish on gold, or simply want some kind of hedge, I think Newmont Mining (NEM NYSE) is the #1 stock to own. It’s the largest gold company in the world in terms of production, reserves, and market cap. Newmont also happens to have the highest leverage to the gold price among the senior gold companies. It’s got a very strong balance sheet, and it’s almost down to being debt-free, which is a phenomenal achievement considering the very high 40% level of debt to equity they had following the merger with Franco Nevada; that’s a wonderful achievement. They are very active behind the scenes. The company’s merchant banking business, which is involved in acquisitions and buying stakes in other producers is an overlooked and very significant contributor to earnings. One thing they have been doing is taking positions in junior mining companies, in case those companies make discoveries. For many, this is the gold stock of choice, and it’s at a good price right now.

"Vista Gold (VGZ ASE) is an interesting company. It’s a mid-tier junior. Its strategy has been to accumulate resources in the ground at low-cost, but deliberately not develop them. They now have ten properties; two of them have full feasibility studies. They have about 13 million ounces in the ground, which represents 0.7% of the value of an ounce of gold to every share. With the stock trading around $3.50, we consider it very undervalued. This stock will be very sensitive to the price of gold. The way to look at Vista is that it is a permanent 'option' on gold prices.

"Virginia Gold (CA:VIA  Toronto) is a stock that I’ve liked for a long time. I like the business model, I like the people, and I like the balance sheet. Virginia has a joint venture model. They typically go out and acquire properties, doing early exploration, and then find a partner to spend the money. That limits their risk but enables them to maintain their balance sheet and have exposure to a lot of projects. Last summer, they had a fantastic discovery that came completely out of the blue. It’s a very large, very high-grade discovery. We don’t know how big this discovery will get, but even if it was cut off tomorrow, it’s still likely to have 1 to 1.5 million ounces of gold. And it could be much bigger than that. Luckily, the high quality of this mine was found prior to developing any partnership, so Virginia still owns 100% of this mine. Even though this stock has gone up a lot – from about C$1 to C$3.50 - I'd argue that it is a better value today than it was back then. This new property is very, very significant, and I think this stock will be very strong over the next 12 months.

"I’m also favorably inclined toward silver. There are very few silver companies, and there are even fewer good silver companies. So when silver moves, the silver companies tend to have much more leverage than silver prices, than gold stocks do to gold prices. Silver Standard (SSRI NASDAQ) is my favorite silver stock at the moment. Over the years, it has built the company by exploration and development, but not by production. Their concept was to build up resources in the ground until the price of silver moves up. However, they are now moving ahead to bring two properties into production, as these properties are economic at today’s silver price. That will give them some cash flow. One problem in the past was that by not producing, the company didn’t have any income and had to continually go back to the markets to raise money. That has now changed completely. The firm has $64 million in cash. This is a phenomenally strong balance sheet for a junior company. They could actually, if they want to, fully finance the two mines that they are bringing into production. They are probably not going to, but it’s a wonderful position to be in. The way to look at Silver Standard is as a very leveraged call on silver. It tends to be the most sensitive to silver of all the silver stocks. When silver goes down, so does SSRI. But when silver goes up, Silver Standard has tremendous upside leverage."

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