Mid-sized Gold Producers, Outsized Gains


"The mid-sized segment has proven more responsive to price gains."

We're continuing this week's theme of looking behind the numbers of global gold equities, with the help of David Haughton, precious metals analyst with BMO Nesbitt Burns. Today, we look at the intermediate-sized gold producers.

While the large-cap segment of the gold equity marketplace has generally lagged behind the price of gold bullion as it has rallied to record prices north of $1,300 (U.S.) an ounce this year, the mid-sized segment has proven more responsive to the price gains, Mr. Haughton said.

"The intermediates have captured a lot of the price momentum, because that's where the growth is," he said.

Investors looking to capitalize on bullion's rally have favoured companies with strong growth profiles because it means they will capture ever-rising benefits from the record commodity prices as their production increases. The highly profitable price for gold also strengthens the case for increasing production—providing motivation for growing intermediates to ramp up their expansion plans and perhaps deliver on their growth potential earlier than the market would otherwise have anticipated.

Little surprise, then, that, as Mr. Haughton put it, "The market is biased toward growth."

But while that thinking has propelled strong gains in the intermediates, it has also left them looking expensive relative to the senior gold miners.

The intermediate group's price-to-cash-flow, price-to-earnings and enterprise-value-to-EBITDA multiples are all roughly 20 per cent higher than those for the senior producers (which we highlighted in Wednesday's column)—and the premium for the intermediates is even bigger when we're talking about 2010 numbers.

These relatively high valuations probably explain why fewer than one-third of the intermediates have an "outperform" rating from BMO's analysts—compared with almost half of the stocks in the senior segment. In general, their strong gains have left them more expensive, and with less upside potential.

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