Gold Companies Where Management Has 'Skin in the Game' Outperform Others


"Gold companies that have a high level of insider ownership have significantly outperformed peers with less insider ownership, says U.S. Global Investors."

Gold companies that have a high level of insider ownership have significantly outperformed peers with less insider ownership says U.S Global Investors.

Speaking to's Newsmaker podcast, U.S Global portfolio manager, Brian Hicks explained, after attending a number of conferences over the spring and hearing many discussions about the difference in performance between bullion and gold stocks, a few anomalies caught his attention.

While a number of stocks are clearly very cheap on a relative basis, he said, there was a dislocation "in that you're really not seeing insiders buying their own shares and yet they're asking us to buy their shares and trying to convince us that this is a great time to invest because of the disparity between bullion and the mine shares."

Hicks compared the share price performance of 32 silver and gold producers to the percentage of "insider ownership" of these stocks and found that, "the companies that were in the top half of insider ownership clearly outperformed, in a very meaningful way, companies that were in the bottom half of insider ownership."

"Just to quantify that," he added, "this is over a three year time period that ended on June 13 and the entire universe of stocks had a median return of 10.2%. The top half in terms of insider ownership returned about 14.6% whereas the bottom half only returned 7.8%."

U.S. Global Investors CEO, Frank Holmes says that this qualitative measure fits well into the firm's existing framework of assessing stocks that focuses on relative valuations.

He explains, "We line them all up and compare who has the best or worst production per share, who has the best of growth of reserves per share and who has the best growth cashflow per share. And then the mosaic would include, is this event going to be positive or negative in the next 12 months, will it change momentum and then we make decisions to overweight or underweight those companies."

Intuitively such a finding makes sense, given that managers with more skin in the game are likely to work harder to ensure profitability, as Hicks explains, " clearly if you have a stake in the position or in the company, you're going to be more diligent, you're going to be more thoughtful in running that business and it looks as though performance is enhanced."

Notwithstanding these findings, with the advent of the gold ETF, management teams have become even more important at gold mining companies because investors now need a reason to choose the stocks over investment in the actual metal.

Holmes agrees adding that the gold ETF has created a "transparency of their performance on a relative basis.

"One of the things we noted in some research by CIBC was the cost now of looking for producing and shipping an ounce of gold worldwide is over $1500/oz, taxes have risen dramatically and the cost of ongoing production has gone up dramatically, so management is going to be very, very key in making very prudent decisions that are not dilutive to the shareholders that they can show this attractiveness on reserves and production per share growth."

Geoff Candy

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