The Best Gold Stocks Don’t Need to Make Acquisitions
One of the pet peeves of gold stock investors who own large gold producers like Barrick Gold or Anglo Gold is the risk that these companies will make an acquisition. As we’ve previously noted gold companies continually need to replenish their depleted reserves. Consequently, senior gold producers are always on the hunt for more acquisitions. However, most of the time the acquiring company pays a substantial premium to the exploration company. Most commonly the stock price of the acquiring company drops in the months following a major acquisition. The best gold stocks are not on the hunt for new reserves.
The reason why investors do not like acquisitions is because it is usually dilutes existing shareholders. In other words, the senior gold producer needs to raise money in order to finance the acquisition. This in turn dilutes existing shareholders and drives the share price down in the short term. The best gold stocks will not dilute existing shareholders.
Investors also fret that an acquisition will go badly. Sometimes there is a problem with the integration of of large egos or company cultures. There have been hundreds of ill-timed acquisitions where the expected synergies and cost savings never pan out. The most famous example of this was the ill-timed merger between AOL and Time Warner. The best gold stocks avoid problems associated with digesting acquisitions.
Gold stock investors tend to prefer gold companies that have a solid pipeline of growth ahead of them. For example, most gold stock investors do not expect a company like Yamana Gold to make any large acquisitions in the next year or so because it has a lot of growth in the pipeline. For that reason, Yamana is often viewed as one of the best gold stocks in the world. On the other hand a company like Barrick Gold recently made a large acquisition of copper assets which most investors were critical of.
The Best Gold Stocks Have the Best Management
There’s a saying that I like to remember when analyzing gold company and that is that you can’t fix stupid. One of the major problems of gold stock investing is the fact that company management is absolutely critical. There is a lack of high quality managers in the gold industry. Unfortunately, a number of managers simply use the company treasury has their own personal expense account. There are dozens of companies that might have a first class deposit with a poor management team.
For this reason, many gold stock investors prefer to simply focus on the individuals that have a track record for allocating capital in an intelligent fashion. These types of gold stock investors simply like to bet on the management rather than focus on the details of the property. They in essence like to ride the coattails of gold company managers like Pierre Lassonde or Rob McEwan. Pierre Lassonde gained fame in the gold industry for creating Franco Nevada and Newmont Mining. Rob McEwan has a sterling reputation because he guided Goldcorp through astonishing growth from a penny mining stock into one of the largest gold producers in the world.
When proven company managers start new companies investors pile in and pay little regard to the actual property. The thinking is that these types of individuals will allocate capital in an intelligent fashion and generate solid returns for gold stock shareholders.
What is Good Management?
It is important to define the characteristics of good management of gold companies.
The best gold stocks have ethical managers. The gold stock industry is rife with promoters and unscrupulous managers. Company managers that are honest and forthright about their deposits and the obstacles facing the company are most impressive.
The second component of high quality management is the ability to raise money. A manager with a proven track record can access capital from a multitude of sources. A manager with shoddy track record is forced to sell shares on oppressive terms and he often needs to dilute existing shareholders in order to please insiders.
The last component of a high-quality management team is the ability to focus. Focus includes zeroing in on one jurisdiction and one type of mineral. When dealing with exploration companies it is common to find managers that are bouncing around from idea to idea. One minute the company is exploring for gold in Colombia and the next moment they are exploring for zinc in Thailand. The best gold stocks are focused with clear goals.
The top opportunities in the gold mining sector are generally where the top management team intersects with superb technical skills. Investors should avoid gold stocks that are run by a promoter that is involved in any legal proceedings. This might include bankruptcy proceedings fraud charges or tax evasion.
The Best Gold Stocks Have a Shareholder Friendly Capital Structure
One of the more overlooked issues with finding the best gold stocks is dilution. It is important to take a close look at the capital structure of a gold company and analyze how many warrants are outstanding and at what price. It is not uncommon for a gold company to issue hundreds of thousands of options to company managers at favorable prices. For example, one might be analyzing a gold stock with a market capitalization of $100 million when in fact the market capitalization is closer to $150 million due to the number of options that have been promised to company managers.
Warrants are tradable options that can significantly dilute shares of gold companies. You can go to visit preciousmetalswarrants.com to analyze the current price and exercise price of gold stock warrants.
After investors exercise their warrants the gold stock price usually experiences a considerable amount of weakness. It is important to keep an eye on the expiration date of warrants because it is likely that there will be weakness in the gold stock price around that time. Another issue to keep an eye on is private placement. Gold stocks generally pullback for three or four months after private placement is placed.
In order to fully understand the value of your shares it is important to look at the capital structure of a gold company and most importantly take a close look at how many warrants and options have been issued. The best gold stocks have a shareholder friendly capital structure.