How to Safely Invest in Gold

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The risks regarding the US fiscal cliff and economic uncertainties in Europe, present a bullish case for gold. However, most of the gold mining companies have risen significantly as of late and are trading at high valuations. In my opinion, this is the time to follow big hedge funds, as sometimes they possess information and resources that individual investors don’t. Baupost Group, run by Seth Klarman has a portfolio size of over $3.3 billion, and here are its top holdings in the gold mining sector.

Reasons To Buy Novagold Resources

Shares of Novagold Resources (NYSEMKT: NG) took a beating, when the management of Barrick Gold (NYSE: ABX) announced that the development of Donlin Gold project cannot be currently financed, owing to “high investment costs.” Novagold Resources has a 50% stake in Donlin Project, and Barrick Gold’s decision to push back its development by 3-5 years, received overly negative response from the street. Donlin Gold has gold reserves of 33.8 million ounces and once operational, the mine would produce up to 1.5 million ounces annually. Considering the macroeconomic risks at hand, gold is poised for a pop. This means that by the time gold production begins at Donlin Gold, assets of Novagold resources would have appreciated significantly.

However I believe that the production will begin earlier than expected. Barrick Gold is ramping up its gold production, and some reports claim that its reserves are depleting very quickly. The management would either look to expand its assets or acquire new mines. Since gold prices are already high, gold assets would cost more. Additionally, because Barrick Gold has been reporting disappointing results in the previous quarters, the management might not be interested in buying gold assets at higher prices. I believe that, in order to preserve shareholder value, the management would look to announce expansion plans, sometime in 2013. In my opinion, long term or short term, Novagold Resources has a bright future ahead.

Baupost Group holds 21 million shares of Novagold Resources.

Reasons to be Bullish on Allied Nevada Gold

Allied Nevada Gold (NYSEMKT: ANV) is another value play. On Dec. 17, the company received early construction approval to develop its Hycroft Mine, with 130,000 tonnes a day of milling capacity. The management expects to produce over 0.582 million ounces of gold and 29.1 million ounces of silver annually beginning with 2015. Rising production levels with rising commodity prices, presents a bullish case for Allied. Also due to the early approval, the company has a head start and we can expect operations to commence in 2014.

Its debt/equity ratio equating to 0.84x appears to be modest, as the company ended the quarter with $502 million in cash reserves. Its quarterly net income stood at $13.4 million, which was down due to higher interest expenses.  The management announced that it would be collecting $22.6 million under due receivables in Q1FY13, which could singlehandedly power up the stock.

The company also has the Hasbrouck and Wildcat mines under development. According to preliminary assessments, Hasbrouck contains around 29.3 million ounces of silver and 1.2 million ounces of gold. According to estimates, Hasbrouck’s payback period is just 18 months, which is considered stupendous for any kind of business model. Its Wildcat property is estimated to have high grade minerals, with around 1.1 million ounces of gold reserves.

Trading at a forward P/E of 17.14x, shares of Allied appear to be fairly valued, but that doesn’t mean that its shares can’t go north. Its quick ratio of 6.56x and a current ratio of 8.15x are quite impressive, indicating that the company won’t be having any problems in meeting up with short term unplanned liabilities. The company enjoys a net profit margin of 28.54% which is significantly higher than its peers. Altogether, Allied Nevada presents a strong case for long term investors.

Baupost Group holds 5.053 million shares of Allied Nevada Gold.

A Foolish Conclusion

Since both the companies are preparing for production increases, investing in them would be a good idea. Both the companies have sound financials, and their respective stocks appear to be undervalued. Altogether, both the shares get a Foolish Buy rating.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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