Paying Attention To Gold Miners

On Zero Hedge on Monday, contributing editor “Quoth The Raven” suggested “paying urgent attention to gold miners”:

As everybody knows, one of my favorite assets on the board right now for buying is gold miners. They are completely hated and totally undervalued, without even a semblance of pricing in the potential leverage they could gain from a spike in gold prices.

An Oversold Gold Miner

In a recent post, we looked at the power of the technical indicator RSI (Relative Strength Index).

RSI is a number from 0 to 100 indicating how overbought or oversold a security is. Values over 70 are usually considered overbought, and values below 30 are usually considered oversold.

One screen I’ve been looking at recently includes both RSI and the Piotroski F-Score, which is a measure of financial strength on a scale from 0-9, with 9 being best. I run a bearish version of that where I look for stocks with an RSI over 80 and a Piotroski F-Score of 2 or lower, and I run a bullish one where I look for an RSI under 20 and an F-Score of 8 or better.

As it happens, a gold miner comes up on this screen, one with an F-Score of 8 and an RSI below 20.

Digging Deeper

In the case of our gold miner, I found a deep dive on it by an analyst who highlighted a few key facts about it. On the positive side, it has some of the highest margins in the industry, reporting all-in sustaining costs of about $700 per ounce, compared to an estimated industry average about $1,360 per ounce in the period.

On the negative side, one of the company’s properties is in a state in Mexico that has some political risk (a history of strikes). Because of that, this analyst wrote he’d want a discount of 35% to his estimate of the miner’s fair value before investing.

The stock is trading at a slightly bigger discount to his fair value estimate now, and by using options, we can potentially get it at an even bigger discount. We have a trade teed up to do just that. If you'd like a heads up when it fills, feel free to subscribe to our trading Substack/occasional email list below.