4-6-00
I have never been a “gold bug”. I always thought of gold stocks as a hedge for about 2-5% of your portfolio. Gold tends to move inversely with the stock market as exemplified by the surge of up to $11 per ounce during the interday meltdown of the stock markets on Tuesday.
I have always been a value investor seeking stocks or sectors which are
trading at unrealistically low prices. I also have been a contrarian, buying
stocks or groups that are in disfavor. Gold stocks certainly fit these
criterion.
Markets, particularly today’s market usually react in extremes either
to the upside or downside. This phenomena is exaggerated in a market where
everyone “wants it now” and has forgotten about limit orders. This
type of behavior was clearly evident on Tuesday.
Kinross Gold is a bit of an upstart in the industry having grown from
nothing in the early 90’s to a major producer. Last year the Company produced
over 1 million ounces of gold. The stock rose to a peak of over $9 during 1996
and is now selling at all-time lows. The stock is almost like a perpetual option
at these prices. It is now selling for less than it was when gold was $30 per
ounce lower.
One of the reasons for this is the fact that a major shareholder, which
obtained its stock from the sale of a property, sold its stock to the public in
a secondary offering last October in the $2.70 range. Since that time, the stock
has been falling. In today’s market, people sell anything that is going down.
This effect has accentuated the decline. Peter Lynch, a former top manager for
Fidelity, used to say that if he bought stocks based on charts he would never
have bought anything.
Kinross should again produce over 1 million ounces during 2000. Cash
flow at current prices should be in the area of 20 cents per share. Therefore,
it is selling at about 7X cash flow. If gold were to trade up to $400, which I
believe is possible in a time of rising inflation, cash flow would exceed 60
cents per share. With multiple expansion to perhaps 12X cash flow, the stock
could be at $7-8. A few shares as a hedge may be a good idea.
We and our affiliates hold a large position in Kinross. This is not an
offer to buy or sell any security. It is for informational purposes only. The
accuracy of this report is not guaranteed. This is not a complete analysis of
any industry or company. We were not compensated in any way for the preparation
of this report.