Commodities & Metals

Midas Fund Still Sees $1,700 Gold This Year, With Stock Picks (MIDSX, GDX, SLV, GLD, EGO, AVVGF, NAK, RIO)

A respected gold fund manager still sees gold going to $1,700.00 this year, with a likely year-end price around $1,600.00 per ounce.  24/7 Wall St. got a chance to interview Tom Winmill, portfolio manager of the New York City-based Midas Fund (MIDSX), as part of our portfolio manager interview series.  With the name Midas, you know the focus has to be on gold.  Gold is still king, and Winmill has some favorite picks and a sector outlook worth consideration.

This interview came at a very unique time.  It has been impossible to not notice that many key gold stocks have sold off much more than gold.  All you have to do is follow the move in the Market Vectors Gold Miners ETF (NYSE: GDX) with a loss of 15% or so in less than a month.  This was after the rapid cratering of silver seen in the iShares Silver Trust (NYSE: SLV) with roughly a 30% fall in less than a month.  Tom Winmill did not focus on silver in our interview, but this rapid drop after an equally rapid rise has been an influencing event in many shares tracking precious metals.

Winmill sees this latest drop as a buying opportunity for a long-term thesis in many of the key miners, explorers and producers of gold.  He noted, “Equity investors are pricing in much lower gold prices and that doesn’t look to be the case.  The companies involved in gold are now trading at lower valuations and I am getting more excited about gold stocks here now that margin expansion is taking place.” Winmill is looking for a peak of around $1,700.00 per ounce in the coming months and he expects that the year-end price is likely to be around $1,600.00.  As far as a year average for 2011, he expects that the average daily price of gold in 2011 will be closer to 1,500.00 per ounce.

We always try to offer both sides of critical situations, so we could not ignore that the year-to-date performance of the fund has lagged the market.  So far, the drop for 2011 has been about 17.5%.  The difference is that Midas Fund is up more than 26% if you use a one-year performance now and that in turn implies that the return was significantly higher at the end of 2010.  Rather than just buying bullion or derivations of the SPDR Gold Shares (NYSE: GLD), the Midas Fund invests in shares of the miners, explorers, and producers and we already know how much those have been hit so far this year.  24/7 Wall St. even just gave a list of the most sold-off gold stocks of any size in 2011 this week and that will explain more of the severity of the drop.

The caveat to a rise in the price of gold is a rise in the real returns of short-term interest rates, according to Winmill.  The current climate of negative real returns after inflation is helping gold remain high.  With more and more currency being created, the move into hard assets is likely to remain.  We were also given the opportunity to discuss some key stock picks in the gold sector.  We saw the top ten holdings of the Midas Fund and we wanted to know which were among his favorites based upon the current share prices today.

Winmill first noted Eldorado Gold Corp. (NYSE: EGO), even if gold prices were to retreat as he noted it is one of the lowest-cost producers and has a great management team.  After looking at the current price of about $15.50, the 52-week range is $14.45 to $20.23.  Thomson Reuters even has a consensus price target of about $22.73, so even the consensus analyst group is expecting a move of nearly 50% here in Eldorado shares.
He is one that few U.S. investors know about called Avocet Mining plc that trades under the ticker “AVM” in London.  This was the #1 position in MIdas Funds’ holdings as of April 30, 2011.  What Winmill sees here is a move away from Asia in asset sales and a great focus on Western Africa where its is greatly undervalued against its land assets and on the cash flow that will come from there.  Avocet does trade over the counter here in the U.S. as Avocet Mining PLC (AVVGF) but it rarely trades shares.

Perhaps the most interesting name offered up based on today’s pricing was Northern Dynasty Minerals Ltd. (AMEX: NAK).  Winmill noted this one as a long-term play as the company is not generating revenues yet.  It has huge assets based upon gold and metals reserves in Alaska, so it is not one of the more speculative companies that also has political risks you see in other parts of the world.  The caution here is that Winmill does not expect large-scale production to matter for Northern Dynasty until after 2016, but he also believes the company could be acquired before then.  Using spot prices and a discounted cash flow model, Winmill thinks this company could be worth $3 billion or even as much as $6 billion based upon the valuation of metal deposits.

The prized Pebble Partnership of Northern Dynasty is with Anglo American.  Winmill noted that the company is owned almost 20% by Rio Tinto plc (NYSE: RIO) after a $200 million investment and it is also almost 10% by Mitsui. He also spoke very highly of Chairman Robert Dickinson as a man who does extremely well in just about everything he touches.  We took our own look at Northern Dynasty.  With shares around $11.25 today, the market cap is just over $1 billion and its 52-week trading range is $6.00 to $21.76.  This is down almost half from its highs.  One recent analyst call came from Canaccord Genuity’s Wendell Zerb, who has a ‘Speculative Buy’ rating on the stock with a projected one-year target of $18.10 on Northern Dynasty.

There were some parting takeaways that are not around individual names that Tom Winmill left us with.  He noted, “Gold is one investment that draws much more emotion out of investors, and that often causes investors to lose sight of the return on equity.”  Another aspect that Winmill believes will help gold stocks is a sector consolidation that should continue.

There are always two-sides of a coin.  That is what makes a market.  If the Midas Fund is correct, then the sell-off in many of the company stocks around gold will have brought about a considerable buying opportunity.  That also implies that there is much upside remaining for the Midas Fund.

More information can be found at the Midas Fund site; and there is also data published at Morningstar and also at Zacks.


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