Consider Eldorado Gold for Geographic Diversification
With the gold price breaching $1,350/ounce, it is becoming more likely that we have seen a bottom in the gold price at $1,180/ounce. With this being the case, investors should consider buying some gold mining stocks. While you can diversify relatively easily by purchasing an ETF such as the Market Vectors Gold Miner ETF (NYSEARCA:GDX) or the Market Vectors Junior Gold Miner ETF (NYSEARCA:GDXJ), I think that you’ll do substantially better if you pick a handful of gold miners yourself using a few basic screening criteria.
- Buy companies that are growing their production.
- Buy companies that have low debt loads.
- Buy companies that are producing gold inexpensively.
- Buy companies that operate in relatively safe jurisdictions.
By buying a handful of companies that fit these criteria, you can build your own “ETF” that bypasses the pitfalls, and this should dramatically improve your performance.
One company that does a good job of meeting these criteria is Eldorado Gold (NYSE:EGO). Eldorado Gold has a $5.2 billion valuation. It is primarily a gold producer that produces approximately 750,000 ounces of gold rather inexpensively at $900/ounce before taxes, which means that at $1,350/ounce the company should have pre-tax cash flow of roughly $340 million per year.
While this isn’t cheap compared to many other companies in the sector, I should point out that for a large gold producer, Eldorado Gold has a lot of growth. It expects to grow its production to about a million ounces per year over the next few years, and it has the capital to do it. The company has $735 million in working capital versus $585 million in long-term debt, which means that it has ample capital to explore and develop its many properties.