There's Still Plenty Of Time To Pan For Profits In Mining Stocks

For the past three years, no investment has brightened up a portfolio like gold. The yellow metal fetched nearly $416 an ounce in December, its highest price since 1996. The stocks of the companies that mine it are doing even better. The Amex Gold BUGS Index was up 66% in 2003 through Dec. 12, after a 124% full-year gain in 2002 and a 60% rise in 2001 -- a cumulative gain of 491%.

Is it too late to take a shine to gold? True, after the capture of Iraq's ousted president, Saddam Hussein, gold -- the ultimate pessimists' investment -- took a slight hit. But the long-term factors driving gold stocks and gold itself are still in place, say fans. "We're in the early stages of a major bull market for gold that will go further than anyone thinks possible," says Richard Russell, editor and publisher of Dow Theory Letters, an investment letter based in La Jolla, Calif. "We are in what I call the accumulation phase, where intelligent, knowledgeable investors are buying."

The reason is simple: Many mining outfits are flush because they've ratcheted down their costs so much that almost all of the gains from the metal's run-up are going straight to the bottom line. For the major producers, the break-even point averages around $300, according to Amaury deBarros Conti, senior gold equity trader for San Antonio's U.S. Global Investors (GROW )Inc. This makes gold stocks a levered play on the metal's price: Some experts reckon a 1% rise in the price of gold now sends gold stocks up 3%. Most companies also have cut back sharply on hedges -- a promise to sell future production at a set price -- as the price of gold has risen. Gold prices spurted on Dec. 2, when Barrick Gold Corp. said it would reverse a two-decade-old strategy of hedging aggressively.

Couple that with the big-picture worries that favor the metal itself: The U.S. is piling up trade deficits and domestic debt by the trillions. Inflation looks likely to rise in the next year or two, and the weakening dollar is near an all-time low against the euro. "Gold is real money," says Russell, who advocates owning gold coins, such as one-ounce South African Krugerrands, over stocks. Bernie Schaeffer, chief executive of Cincinnati's Schaeffer's Investment Research Inc., adds that investors may lose interest in the stock market if the 2003 rally is dashed by yet another downturn. Throw in the still-tense international situation, and it's gold heaven. "The party isn't over," says Schaeffer, who advocates putting 20% of a stock portfolio into gold-mining stocks such as blue-chip Newmont Mining (NEM ). "You're talking about a relatively scarce asset like gold, denominated in an asset, cash, that is being pumped up by the Fed with some abandon."

The buoyancy of bullion has pushed many mining stocks to new highs. Wheaton River Minerals (WHT ) Ltd. of Vancouver, B.C., reported record net earnings of $14.7 million in the third quarter, up from $1 million in 2002. A penny stock a year ago, it now trades near $3 a share. Denver-based Newmont was up 60% for the year, to $46 a share, as of Dec. 12. Schaeffer says the stock "could make a run towards its old [1987] highs" of $81.

New entrants are showing up on money managers' buy screens. Coeur d'Alene Mines Corp (CDE )., the world's largest silver miner, is an emerging producer of gold. Schaeffer says the $4.83 stock, which has tripled since September, 2001, could hit $20 a share when and if gold rises above $500 an ounce. Loaded with debt, the company has its risks. "It may be a speculative play now," concedes U.S. Global Investors' Conti, whose U.S. Global Investors Gold Shares (USERX ) fund was up 73% in 2003 through Dec. 15. "But in two years, it'll grow into one of the must-own names among mid-cap gold stocks."

Yet skeptics are still plentiful. Some say the next six months to a year could be especially rough. Carl M. Birkelbach, of Birkelbach Investment Securities Inc. in Chicago, doesn't expect gold to get much higher over this period. "I think we're going to have trouble getting over the $416 threshold," he says. In 1989, 1990, 1993, and 1996, gold traded around the same price for a month or two and then fell like lead. But even Birkelbach thinks gold could resume its rise by the end of 2004. If he's right, investors may find they have another golden opportunity.

By Mara Der Hovanesian

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