Categories: General Market Commentary / Precious Metals
Topics: General Market Commentary / General Precious Metals

What We Look For When Picking Superior Gold Stocks

What We Look For When Picking Superior Gold Stocks

 

The ability to filter through hundreds of gold stocks, choosing those with the best relative value, among other things, is a skill that our portfolio management team at U.S. Global Investors has over 30 years of experience in. Our primary fiduciary responsibility as active managers is to sift, sort and prioritize these names in order to pinpoint the ones we believe can provide the best opportunities for our funds and to our shareholders.

Although we use several technical strategies to accomplish this, I have outlined some of the most important factors we focus on when classifying the best of the best gold stocks.

The Portfolio Manager’s Cube

For starters, the portfolio manager’s cube lays out the value drivers behind superior resource stock performance. It draws attention to the intersections among a resource company’s production, cash flow and reserves (rows) and relative value, momentum and event drivers (columns). Using this model, we compare stocks to find attractive opportunities and overpriced risks, particularly in mining companies.

We start off by looking at production, cash flow and reserves on a per share basis.

Production lets us know how much gold or minerals a company expects to produce in relation to others, which will directly impact its profitability.

Similarly, cash flow deals with the costs necessary to aid in production, and indicates the quality of a company’s income. Does the company have ample cash flow to finance the costly yet necessary infrastructure, equipment, geological analysis and manpower to extract the metal, not to mention pay dividends?

For exploration companies that do not have cash flow, we look at burn rate, which describes how long a company’s current cash levels will last before it has to return for additional financing. For example, if a junior exploration company has $15 million in cash reserves and is spending $3 million a month, it has five months to deliver enough reserves per share to convince capital markets it is worth the risk.

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