Adrian's Golden Day

08/13/2004 12:00 am EST

Focus:

Adrian Day

Chairman and CEO, Adrian Day Asset Management

Adrian Day, editor of The Global Analyst , is well known as one of the nation's leading experts on natural resources. He says, "With many of our holdings recently reporting results, we’ll look at several of our senior gold and silver portfolio picks." Here's his latest updates.

"Newmont Mining (NEM NYSE) is the leading gold mining company in the world, and our top holding. Its second quarter was weak, with several impairments, and weak operational performance in Nevada and Peru, but the company generated strong cash flow and reiterated its guidance for the full year. Its biggest challenge is replacing its production each year. However, it has several projects at various stages of development—including in Nevada, Australia, and Ghana—to replace the higher-cost mines running down. In addition, it has the largest exploration acreage of any major, which it is exploring aggressively. Intriguingly, the company announced it had purchased almost $100 million of marketable securities during the quarter, but gave no further details. Our analysis: With top management, a strong balance sheet, a diversified production profile and several projects in the pipeline, Newmont remains our gold stock of choice. We sense another major transaction coming. For investors who do not own it, it can be bought on any weakness under $39.

"Gold Fields (GFI NYSE), our latest gold pick, is the fourth largest producer in the world, and South Africa’s second. As with all the South Africans, it has been hurt by the strength in the rand. But it owns what are acknowledged as the best mines in that country, large and relatively low cost. That, and its strong balance sheet, enables CEO Ian Cockerill to state ‘we will survive (the high rand) and we will be the last man standing.’ Moreover, unlike some South African companies, Gold Fields has pursued an active strategy of diversification, and has about 40% of its revenues and reserves outside South Africa. It has several development projects in the pipeline, including the Arctic Platinum project in Norway. And there’s a new development: Russia’s Norilsk Nickel recently purchased a 20% stake in the company, and there is speculation as to its future moves. Our Analysis: Strong operations, low-cost mines, diversification, solid management, and a powerful balance sheet (over $600 million in cash) make Gold Fields a world leader, and one of the cheapest mining companies around. When the rand turns, as turn it will, Gold Fields stands to gain sharply. The stock can be bought, particularly on any pull back.

"Meridian Gold (MDG NYSE) is one of our long-time favorites, with conservative management, a rock-solid balance sheet (now over $200 million in cash and no debt); and a world-class, low-cost mine (El Penon in Chile, producing over 300,000 ounces a year at a cash cost of $50 an ounce). It’s been a testing time for Meridian, however. The challenge has been reserve replacement and future production both to diversify and to increase the company’s production profile. While several of its grass-roots exploration ventures have failed to pan out, the company has been successful in tackling this problem on several fronts. It recently made a new discovery at the project, the Dorado and it has expanded its exploration efforts around El Penon, including a joint venture with Gold Fields. Our Analysis: We are very comfortable with the company, which is not receiving full value for El Penon’s ongoing potential, let alone for Esquel. Any future positive development on either front, such as with the Dorado discovery, will see stock higher. Given the strong rally from early May from the low-$9’s to over $13, we would not chase the stock, but look to buy on any weakness.

"Pan American Silver (PAAS NASDAQ), one of the world’s leading silver producers, and one of the few pure plays, had its first-ever profitable quarter, on the back of record production. Unlike some companies, it has chosen to put its projects into production and thereby generate cash flow, and has undertaken a growth strategy, with production up 19% over the second quarter of 2003. After several difficult years, with low prices for silver and zinc (a common silver by-product), the company has successfully turned another corner, and should continue to see positive cash flow going forward. Most operations are performing well, though clearly the higher silver price has helped. The balance sheet is now in a strong position, with over $100 million in cash, and virtually debt free. The company is generating strong free cash flow which, together with its cash balances, puts it in a strong position for acquisitions. Our Analysis: The company and the stock remain leveraged to the silver price. We are holding and would look to buy on weakness say, to the low $13 range."

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