* Gold shares up 22%, heavily outperform basic gold price
* Canadian, Australian firms among fund managers' favourites
* Valuations significantly cheaper vs pre-gold crash levels
By Clara Denina and Silvia Antonioli
LONDON, Aug 8 Gold mining shares are bouncing
back from a disastrous 2013 and are expected to far outperform
the price of the metal in coming months as company
efficiency measures lure investors back to the sector.
Years of over-spending on expansion projects and disruptive
merger activity fell heavily on miners last year, just as the
gold price posted its biggest annual drop in 32 years.
Gold mining stocks plunged 53 percent on
average versus a 28 percent drop in gold prices after a 12-year
Eight months into 2014, the gold mining sector is rapidly
making up some of the lost ground with a 22 percent gain to
date, outperforming global mining shares overall.
Goldcorp Inc, the world's biggest producer by market
value, has gained 34 percent, and Africa's Randgold Resources
is up 33 percent.
The gold price, meanwhile, has risen by just 9 percent to
$1,318 an ounce.
UK-registered equity funds have increased their exposure to
gold mining shares to an average of 1.55 percent, the highest
since November 2013, according to data from Morningstar.
"We are witnessing how business execution and delivering on
plans can lead to better equity performance," said Ani Markova,
fund manager at Smith & Williamson Investment Management.
"The equities are trading at historically low valuations and
offer investors the ability to participate in miners'
significant cash-flow leverage to small positive changes in the
gold price," she added.
The surprise double-digit dive in the gold price last year
forced mining companies to implement austerity measures to
conserve cash and improve capital allocation. At a lower gold
price, they now have lower margins and cannot afford to consider
high risk moves.
"The companies aren't able to destroy value in the way they
were before," BlackRock's director and portfolio manager
Catherine Raw said.
"The sort of risk we have taken on within the gold companies
has changed as we get a little more comfortable that the gold
price is stable to rising at that $1,250 to $1,350 level and
that the companies themselves are starting to do the right
Raw said BlackRock had increased its overweight exposure to
Canadian-listed Eldorado, citing its high quality
resource base and potential to generate strong cash-flow at gold
prices around $1,200 to $1,300 in coming years.
BlackRock's funds reduced an underweight exposure in
AngloGold Ashanti, which is diluting its high-risk,
high-cost production in South Africa by adding assets in Central
Africa and Australia that are lower cost and higher grade.
While the sector as a whole is seen to be moving in the
right direction, some laggards remain.
"Last year, you'd have lost between 50 and 90 percent of
your money investing in gold shares, but there was nowhere to
hide," Neil Gregson, portfolio manager at JP Morgan Global
Natural Resources fund, said.
"The difference between the poorest and the best performance
is very wide (this) year to date, some stocks are down 50
percent and some are up 150 percent."
Shares in heavyweight Barrick Gold are up 7
percent, while Australian small cap Northern Star Resources
is up 120 percent this year, Gregson cited as an
The sector as a whole is still cheaper than it was in 2010,
which makes it attractive for investors.
From 2011, gold companies started to be de-rated as they
lost control over operating costs and gold prices headed down
from highs, UOB Asset Management fund manager Robert Adair said.
Gold hit its highest level ever at $1,920.30 in September 2011.
"There is now potential for a re-rating of the
price-earnings, price-cash flow as well as the enterprise value
to EBITDA multiples that investors are willing to pay for gold
companies," Adair said.
This bodes well for performance in the remainder of 2014.
"With gold mining stocks trading at a 58 percent discount to
2011 levels, gold miners' shares remain highly undervalued
relative to fundamentals," ETF Securities associate director
Simona Gambarini said.
(Editing by Veronica Brown and Jane Baird)