Despite the recent sell-off in gold equities and bullion price volatility, investors haven?t given up on the sector.
However, those who want exposure to gold producers have to pay close attention to both cash costs and balance sheets if they want to avoid any ugly surprises.
Jamie Spratt, a mining analyst at Clarus Securities, recommends holding a core position in a basket of low-leverage names, while trading around higher-leverage names.
The low-leverage group ? companies found to have low-cost operations and relatively less financial leverage ? includes Goldcorp Inc., Randgold Resources Ltd., B2Gold Corp., Rio Alto Mining Ltd., New Gold Inc., Alamos Gold Inc. and Aurico Gold Corp.
Mr. Spratt considers these the go-to names, given their high quality, low cash cost assets that are relatively shielded from industry cost pressures and more likely to operate profitably through the cycle.
?In our view, these names should also have good longer term upside as they can generally fund their growth internally with relatively stronger free cash flow,? the analyst said in a research report.
The high-leverage group ? companies with financial and/or operating leverage, which equates to lower margins?? includes Barrick Gold Corp., Osisko Mining Corp., Detour Gold Corp., IAMGOLD Corp. and Banro Corp.
?These names will snap back quickly in a gold price rebound given their operational and financial leverage to gold prices,? Mr. Spratt said.
While the sector as a whole has suffered in 2013, the analyst highlighted the performance gap between the two groups. The low-leverage group has declined roughly 24% year-to-date, while the high-leverage group is down about 58%.
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