Dividend-paying large caps 'mask' opportunities in junior gold miners

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Investors coming back to the gold equities sector should look beyond dividend-paying large-cap stocks and target small and mid-cap names with greater growth potential, according to Euro Stars AAA-rated manager Georges Lequime.

Lequime, who manages the Earth Gold fund and has returned 192.5% over the past three years, said 2011 had been a difficult year for portfolio managers, as investors had become ‘increasingly suspicious’ when it came to precious metal stocks.

Over the summer the price of gold bullion broke previous record highs and currently sits at around $1,710 per troy ounce. However, Lequime said, while physical gold has seen massive inflows, gold-related securities, such as mining stocks, have seen outflows.

Speaking to Citywire Global from Cape Town, Lequime said: ‘In the second half of 2012 we had concerns about the global economic recovery, we saw a rush out of all equities, including gold and mining.’

Lequime said it was small and mid-cap mining names which were most affected, despite these firms having the greatest room for growth. Instead, there was a great deal of attention played to large-cap, ‘more liquid’ names.

‘There are good quality projects trading at discount but the demand is for large cap, liquid stocks which are generating significant levels of cash flows and have dividend yields of 3-4%,’ he said.

Small cap opportunities

Lequime said the challenge will be to convince those who invest across a range of sectors and asset classes to have faith in the growth prospects of smaller names in the gold and precious metals industry.

He said: ‘Investors will be particularly concerned by what is happening on the margins and want to find companies which pay out a dividend and so they are drawn to companies with high dividends.’

‘However, this doesn’t mean they are looking at all stocks, as there are some mid-tier, junior companies which are going to unlock significant value for shareholders.’

‘I do see, over the next six to 12 months, investors will be more drawn to the gold equity sector and the valuations investors are good despite the gold price being at pretty high levels. It seems to me like 9 out of 10 investors have got out of gold equities in the past year but they could come back.’

In his general outlook for 2012, Lequime said he expected the gold price to stabilise, possibly around its current levels of $1,700 per ounce, and, in this environment, there will be room for consolidation in the sector.

‘We have got a number of companies with significant levels of cash on the books and there could be a lot more M&A activity in 2012. That will be one of the main themes in 2012, more M&A and a stable or clear direction in the gold price.’

At the same time as the Earth Gold fund returned 192.5%, its benchmark, the FTSE AW/Mining TR fund rose 90.13%.