The mining industry has a reputation for harboring scallywags that might cause some investors to steer clear of the whole sector.
Sector investors may remember
, the small mining concern that bamboozled investors out of billions of dollars by convincing them it held a 200-million-ounce gold resource on the island of Borneo. Its market cap reached C$6 billion, only to collapse when it became clear the deposit didn't exist.
But one industry pro says he has recently learned to love at least some of the rascals.
"Now I realize that even scoundrels can make you money," says Tom Winmill, president of New York-based Midas Management and portfolio manager of the $190 million
His attitude may at least partially reflect the improving economics of the mining sector. When Winmill took over running the fund in 2002, the gold industry was at its nadir, with bullion prices around $311 an ounce (vs. $690 an ounce recently). At the time, many mines were idle, but there was still no shortage of sharks.
Since then, not only has Winmill achieved more comfort with the cast of colorful characters, he has also profited handsomely. Through April 20, the fund logged a five-year compound annual return of 30.45%, according to Morningstar. By comparison, the 47 precious-metals funds tracked by Morningstar have average annualized returns of 26.23% over the same period. The Philadelphia gold and silver sector index, which tracks a basket of precious-metals producers, logged five-year CAGR of 14.2%, on the basis of analysis of adjusted closing prices for the index (April 2002 to April 2007).
That's an especially notable feat considering that Winmill's training is as an attorney rather than in geology or mining -- credentials that some see as a must-have for gold-sector specialists.
He recently agreed to provide
readers with some insight into how he manages the assets. He also explains why one of his top holdings is a base-metals giant rather than a precious-metals producer, and he reveals the thinking behind some of his other strategies.
What are the top holdings in your fund?
Golden Cycle Gold
, 7.8% of the total;
Pan American Silver
, 4.5%; and
Freeport McMoRan Copper & Gold
Golden Cycle trades an average of only about 2,800 shares a day at $7. That's a very illiquid stock. Why do you own it?
Midas owns about 20% of Golden Cycle's stock, and we have owned it since 1996. The company owns one third of the Cripple Creek mine in Colorado that was first mined in the 1880s.
owns the other two-thirds and operates the mine.
The utility of Midas owning Golden Cycle is in the stock's high delta relative to the gold price.
Delta is an options term that means that if the gold price rises, the value of Golden-Cycle should move up even more.
I'd only recommend it for the most-aggressive buyers, and then only in small quantities. I would suggest buyers pair it with high-quality names like
. High-quality names like Meridian are going to make money whatever the gold price does,
whereas the more speculative names give the chance to capitalize on a upside move in gold prices.
Freeport seems to be the odd man out in the list. It's primarily a base-metals firm rather than a precious-metals miner. Why is it included?
Freeport is one of my favorite stocks. By diversifying away from Indonesia with the acquisition of
in March, they have dealt with the political risk issue and the single-mine discount.
Prior to the Phelps acquisition, Freeport basically operated a single mine in Indonesia.
We expect dynamic growth in copper production as well as molybdenum and gold to a lesser extent. We're talking about massive cash flows for piddling amounts of extra capital expenditure. It's a bargain.
I think we could see the stock price double in three years.
Note: The stock has already rallied about 40% since the beginning of the year on anticipation of the March merger between the two giants.
You are not a geologist or a mining expert. How do you go about analyzing stocks in the sector?
Basically, I'm not really interested in mining or gold. I'm interested in making money. I'm bored by geology reports unless I learn something about how much money I am going to make.
My approach is to surround myself with a good network of people.
You said you've changed your view on the industry's many scoundrels. Explain, please?
There used to be a time when I'd say, "Here's a guy I wouldn't trust with a nickel."
Now I realize that even scoundrels can make you money.
For instance, that might be someone who by hook or by crook will make the gold deposit work.
I also look for someone who can convince anyone to "drink the Kool-Aid,"
an especially important factor during the promotion stage when the company is looking for development funds.
I try to get into the process early in
promotion stage -- usually prior to the development of a metal deposit into a mine. When the story about a company is well known, then it's time to get out.
What advice would you give to investors buying stocks in the sector?
With junior mining companies, I would not invest anything unless they are in production or have a full feasibility study. To have a completed feasibility study means that someone has gone over each hole and each core sample and has determined whether it is economic to develop the mine.
What's your view on the gold price?
My long-term view is very positive, because the dollar is headed lower. There is just no way around it. I think the recent
benign consumer price inflation figures open the door to the
adjusting down the fed funds rate. With an undefended dollar, gold prices will go up.