Gold fund managers, burned, seek miners ready for tough times

Mon Jan 13, 2014 10:59am EST

* Gold falls 28 pct in 2013, gold miners shares down 53 pct

* Nine out of 10 worst UK funds in 2013 focused on gold

* Randgold is among fund managers' favourite stocks

By Clara Denina and Silvia Antonioli

LONDON, Jan 13 (Reuters) - Gold stocks fund managers, who lost as much as two thirds of their clients' money in 2013, pledge they can do better this year by picking the few gold mining firms that can weather sharply lower prices.

An era of expensive expansion projects and loose financial controls has ended with the biggest annual gold price fall in 32 years in 2013. Investors expect miners to deliver on promises of cost cutting and balance sheet discipline.

Bullion prices fell by 28 percent last year, bringing an abrupt end to 12 straight years of gains. Gold mining stocks fell by 53 percent on average..

It comes as no surprise then that nine of the 10 worst-performing funds in the UK in 2013, and six out of the 10 worst in the United States made bets on gold equities.

At the top of that list is the Junior Gold fund, which lost almost 66 percent - a level that even its manager, Angelos Damaskos, describes as "eye-watering".

"At the beginning of 2013, we were more focused on growth in production rather than cost controls, which is what has been the weakness of most investors in the gold sector. We did not expect the gold price to drop so much," Damaskos said.

"The key criteria for us in 2014 is to make sure that the investment companies have a sustainable all-in cost of around $1,000 an ounce or less," Damaskos said.

Just behind Junior Gold were Ruffer Baker Steel Gold, which dropped by 61 percent, and WAY Charteris Gold by 54 percent, according to financial data provider Morningstar.

THE WHEAT AND THE CHAFF

Even during the boom years, gold mining stocks were already underperforming.

In the 1995-2013 period, bullion returned 213 percent, while gold mining stocks lost 36 percent, according to S&P indexes.

"Losses of the gold miners were bigger in the negative years for gold and not as positive in the positive years for gold," Jodie Gunzberg at S&P Dow Jones Indices said.

Optimism about ever-rising gold prices in the good years led companies to embark on acquisitions and ambitious expansion plans, rather than focus on cost efficiency and debt control.

This led to multi-billion dollar writedowns in 2013 by companies such as Barrick Gold Corp, Goldcorp Inc , Newmont Mining Corp and Kinross Gold Corp .

And for 2014, analysts forecast average gold prices will decline further as the economic backdrop brightens.

"The gold industry has allowed its costs to go up at a faster pace than the gold price itself. That's why they are in a pickle today," said Neil Gregson, manager of the JP Morgan Global Natural Resources fund.

"I think a low gold price is a great thing for the industry, because it's going to sort out the wheat from the chaff. The strong will survive, the rest will get closed down."

During the bear market for gold in the 1990s, larger companies seemed to be the safest bet, offering low costs, longer mine life and little debt.

This is no longer the case, according to fund managers, who say they have to look across the spectrum to find the few players that are capable of surviving lower prices.

One of Damaskos's favourite stocks for 2014, due to its low cash costs, is Australia-listed Kingsrose Mining.

For Gregson, one favourite is New Gold, a low-cost producer that also gets income from copper, a byproduct in its mines, and owns undeveloped gold properties that could become valuable should the price rise.

One of the stocks he has sold is Petropavlovsk due to output targets he deemed too ambitious based on the assets owned.

Most managers interviewed by Reuters favoured the larger Randgold Resources, however, praising its strong management and seeing it as one of the best positioned firms to survive a tough price environment.

"We believe it is one of the very few companies that can deliver margin improvement from an increase in its overall grades," said Ani Markova, manager of the Smith & Williamson Global Gold and Resources Fund.

WHAT'S YOUR PLAN FOR 1,000?

Gregson, whose fund includes energy and industrial metals stocks, reduced exposure to gold stocks throughout 2013 to 10 percent now from 25 percent. He said the gold price outlook remains fragile and that few miners still are prepared to face the rough times.

"We all got caught out a little bit because companies said they were going to restructure last year but they didn't. Now they are sort of being dragged kicking and screaming into rationalization," Gregson said.

"We have been asking gold companies for a year or two, 'What is your plan for a 1,000 (dollar per ounce gold price)'? And you'd be surprised (that) some of them still don't have one."

Other managers also say miners need to step up their efforts to adjust.

Evy Hambro, manager of BlackRock's Gold and General fund, which ranked fifth worst in the UK Morningstar list, said firms have done "nowhere near enough" to improve margins, costs and capital allocation in 2013.

"In previous years the gold price has kind of protected management decisions, but now there is no escape," he said.

"They need to be more disciplined about the ounces they produce. If they are not going to make a rate of return in mining per ounce, then leave it in the ground. Wait for a day when there is a better gold price."

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