Posted by Davy Bui on September 21st, 2009 in Enlightened-American Portfolio, Market Commentary, Stock Research
Email Davy

With gold hovering over $1,000 per ounce, now seems a good time to check in on two gold mining stocks I hold in my portfolio, Minefinders (MFN) and Yamana Gold (AUY). Long-time readers will know that I have been writing call options all year long on these two stocks, to good profit. With the recent rally, it may be time to make a clean exit.

The original thesis on Minefinders was a nice deposit on the cusp of production in a friendly jurisdiction. The market seemed to be overly wary of the company’s non-producing status; I was confident that management would bring their Dolores property into production — the risk was determining if management could meet its projection of bringing Dolores online with resources on hand.

With Dolores now in full commercial production, the share count jumped roughly 20%. Accounting for fully diluted shares outstanding, investors suffered 50% dilution in order to bring the mine online. Obviously, this dilution impacts the valuation of the stock and without any other solid projects in the immediate future, MFN is approaching my range for its fair value. As such, I am looking to either take profits or write near-the-money calls to cushion any correction and/or exit the position.

Yamana Gold was less of a valuation call and more a straightforward, leveraged play on gold.  Readers can view my previous research on Yamana here. I have already established covered call positions on AUY @ $9 and $14, looking to reduce my position or exit altogether at a nice price.

With established miners like AUY, history suggests investors will be presented with multiple opportunities to establish low-priced positions or take profits. Due to such volatility, a traditional buy-and-hold mentality seems ill-suited to gold mining stocks, especially as few of them pay a meaningful dividend. Such a strategy should probably be limited to plays on the actual commodities themselves (like ETFs or physical bullion).

While the market seems to be breathing a collective sigh of relief, the era of financial volatility has not yet ended. In fact, I am inclined to think it has just begun — it may not resemble the credit crisis of 2008 but if precious metals are insurance against turbulent times, the time to hold some in your portfolio has not passed. But nothing goes up or down in a straight line and investors need to consider that gold mining stocks sometimes trade more with the rest of the stock market than they do with the underlying commodity.

As always, YMMV.