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Revisiting November 2017 Gold Analysis

I will be publishing a new gold analysis soon but I want to first revisit the analysis I did in November 2017.

In November 2017, and over the course of three Seeking Alpha articles I looked at gold companies.  In the first article I looked gold companies trading in the US with the following characteristics: leverage, valuation and sensitivity to gold prices.  In the second article I looked more closely at a short list of four companies that did well under the criteria of the first analysis.  The third repeated the analysis on Canadian miners.

Here is the performance of all of the companies over the past 18 months


If you click on the "All Securities" link you will see the break down of all the companies in the list.

This blog post is going to look at the three components of the first article to see how predictive each was to the overall return.

Leverage Factor


The first factor was leverage and the criteria was for highly leverage companies (read the article if you want to know why).

The most highly leveraged companies were:

  • AU
  • NGD
  • CDE
  • ABX (GOLD)
  • SSRI


Let's see how the leverage group performed relative to the group as a whole:


Slightly better returns as a group, in all three categories.

Valuation Factor


The next factor was valuation.  I took a novel approach to valuation, looking at value relative to production and reserves.

The best value companies were:

  • GFI
  • AU
  • KGC
  • AUY
  • IAG and ABX (GOLD) (tied)


Let's see how the value miners did relative to the whole group:

You can see that by all of the metrics except risk-adjusted return, the value stocks did better than the group as a whole.

Co-Relation to Gold Price

The final factor looked at the degree of stock price movement with gold price movement and I was looking for miners whose price was highly correlated with the price of gold.

Top five were:

  • ABX (GOLD)
  • BVN
  • SSRI
  • CDE
  • KGC


Let's see the results:


The factor was not predictive.

Summary


I recommended AU and ABX (GOLD).  Those two companies came in fourth and sixth overall (over the time period Jan 2, 2019 to June 12, 2020).  This is not bad, both are over the average.

However both metrics missed the top three performers - EGO, GFI and AGI.  I am disappointed about that.

Improvements can be made to the model.  First change the valuation metric to guidance for the upcoming year for the short-term and reserves valuation as a longer-term metric.  Incorporate the company's costs into the valuation metric.  Rather than look for the most leverage, look for the "right" amount of leverage.

The second article also included a risk factor.  Because I only applied it to a short list of four, I can't tell how informative it was.  I am, however, still interested in the metric.

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