StockBeat: Gold Miners Get Their Day in the Sun

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StockBeat: Gold Miners Get Their Day in the Sun
Credit: © Reuters.

By Geoffrey Smith -- Gold mining stocks are finally getting their day in the sun.

The iShares MSCI Global Gold Miners (NASDAQ: RING ) ETF, which we’ll take aa a rough proxy for the sector, has hit a three-year high this week, tracking the surge in world bullion prices. It’s now up 28% since the end of May alone. Bullion , despite hitting a six-year high this morning, is up only 11% in the same timeframe.

Part of the reason is catch-up: gold itself never fell out of favor with global investors to the same extent that gold mining companies have done in the past three years. But while gold is a relatively straightforward investment that is priced off fairly transparent developments in monetary policy, jewelry demand and the asset management policies of central banks, each company has its own operational and governance risks, often complicated by political risk in the jurisdictions where they operate.

The problems are illustrated by the woes of U.K.-listed blue chip Acacia Mining (LON: ACAA ), which was spun off from Barrick Gold (NYSE: GOLD ) in 2010 and which mines mainly in Tanzania. On the face of it, the company has a fine resource base and access to all the expertise of its parent company. However, it’s been unable to export gold-bearing ore from Tanzania for two years due to a dispute with the government.

Barrick’s attempts to solve the issue – by offering to buy out minority shareholders and by negotiating directly with Tanzania on Acacia’s behalf – appear to have made the situation even worse: Acacia issued a 5,000-word statement attacking its parent on Monday, blaming it for its troubles with the government and accusing it of trying to buy back its asset on the cheap.

That partly explains why Acacia is up only 3% this year, although it's up 3.3% this morning, helped by perceptions that it is still cheap. By contrast, the largely scandal-free Harmony Gold Mining (NYSE: HMY ), which operates largely in South Africa, is up 25%. Likewise, Russian-based miners Petropavlovsk (LON: POG ) and Polymetal (LON: POLYP ) - despite past incidents with minority shareholders - are up 56% and 19%, respectively, profiting from a lull in the hostile rhetoric coming out of the U.S. toward their home country.

The market applies sharp discounts miners’ resource bases – Acacia's market value is $983 million, while just its proven and probable gold reserves are worth over $7 billion at current prices, and it has hundreds of millions of dollars more in silver and copper by-product on its books. Miners with more speculative projects can trade even more cheaply. That means that the upside for investors can be enormous. However, there are reasons why gold itself is considered the safe haven, rather than the companies that produce it.

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