Golden Gains

11/12/2004 12:00 am EST

Focus:

For "golden gains" we turn to three of the top advisors in the natural resource sector. Adrian Day looks to a gold portfolio "cornerstone." Steve Sjuggerud opts for a high-risk speculation. And Ivan Martchev adds a new South African play to his portfolio.

(For more on the advisors cited below, please click on their photos.)

Day, Adrian "Gold has convincingly broken through its resistance to a 16-year high," notes Adrian Day, editor of Adrian Day's Global Analyst. "Despite recent problems, Newmont Mining (NEM NYSE), which is up 36% since May, remains our gold stock of choice. The world’s largest gold company, it has strong, globally diversified operations; an extensive pipeline of developmental and exploration projects; top management; and a solid balance sheet. To be sure, the last several months have given Newmont its share of problems: local protests against its planned expansion in Peru; environmental charges in Indonesia (subsequently proven false); and reduced output at higher cost at its main operations in Nevada. However, Newmont’s pipeline is a key asset, with major projects in Ghana and two in Nevada scheduled for startup over the next three years. In addition, Newmont has been able to increase its reserves from drilling its own properties, unlike most gold companies. Like most mining companies, Newmont has seen significant cost pressures, primarily from fuel and currencies, but innovatively has acquired a substantial oil investment to act as a natural hedge against its fuel costs. Newmont is hardly inexpensive, but it is clearly the gold stock of choice with powerful growth potential and belongs as a cornerstone of all gold portfolios."

Sjuggerud, SteveSteve Sjuggerud , in True Wealth , notes, "I recently asked the money manager of one of the best performing gold funds, ‘If you could own just one gold stock what would it be? Without hesitation, his answer was Northern Orion (NTO ASE). Meanwhile, on my recent trip to Argentina, I met with Pablo Marcet, the head of Argentine operations for Northern Orion. Educated at Stanford and Harvard, he's quite an impressive guy. Before joining Northern Orion, he ran mining giant BHP's operation down here. Northern Orion is the world's lowest cost producer of copper. Literally, its cost of production is about zero, net of gold by-products (it's a happy accident that gold falls out of copper production). Northern Orion’s Alumbrera mine is a cash cow. Its 12.5% stake is spitting out about $45 million a year in cash flow. However, Alumbrera should be depleted in the next eight to ten years. But a nearby, undeveloped mine called Agua Rica is widely considered one of the largest undeveloped copper and gold mines in the world. When it becomes operational it should deliver $200 million a year in cash flow, giving this company huge upside potential. Right now, the market is only valuing the Alumbrera cash flows. We're adding Northern Orion to our portfolio and plan to hold it for five years, when Agua Rica gets close to being operational."

Martchev, Ivan"Our long-held view is that gold stocks are near the beginning of a long, multi-year uptrend," says Ivan Martchev, co-editor of Wall Street Winners. "If we're right and this is the resumption of that trend, you should see new highs by early 2005. For a leveraged play on gold, consider Bema Gold (BGO ASE), a high-cost gold producer. If you're looking for leverage, high-cost producers are a good bet because the slightest up-tick in prices can add dramatically to earnings. Bema's cash cost to mine an ounce of gold is around $320. That makes Bema a lower quality stock, but it also means it's extremely leveraged to the price of gold. The reason is twofold. First, a relatively small rally in gold turns Bema from a money loser into a profitable stock. Second, Bema's higher costs stem from its production operations in South Africa and the massive strengthening of the South African rand currency against the dollar. But the rand's strength is becoming a huge political issue in South Africa and we expect the rand to ease, lowering Bema's production costs. Even better, the company is taking steps to lower its overall costs. Both factors should help higher gold prices drop straight to the bottom line. This means that as gold prices rise, the company should swing from a money-loser to a healthy profit-maker. From a technical perspective, Bema broke above key resistance just under 3 on heavy volume. Traders should buy Bema under 3.50, setting a stop loss around 2.35."

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