When known gold bug Frank Giustra bangs the drum for a new precious metal play, as he did back in February, no one takes much notice.
When one of the world's largest money managers, Capital Group Companies Inc., joins the move into gold by discreetly taking stakes in iconic Canadian companies Agnico Eagle Mines Ltd. and Barrick Gold Corp., heads turn – and it's time to ask if the next bullion bull market is just around the corner.
While most of the investing world was ignoring gold stocks this winter, Mr. Giustra got serious about his latest project, as Vancouver-based Leagold Mining Corp. raised approximately $400-million to buy a Mexican property. Mr. Giustra, legendary for his ability to pick promising junior miners, is chairman of Leagold.
And this spring, we recently learned that Capital Group got into the gold game by committing more than $1-billion to Agnico Eagle and Barrick. That qualifies as a contrarian move from the Los Angeles-based asset manager, which boasts an 80-year track record and invests $1.47-trillion (U.S.) for individual and institutional clients. The price of gold went off a cliff four years ago and has gone sideways ever since. The prolonged slump weighed on mining stocks, as many precious metal producers struggle to pay down debt taken on in better times.
Buying into a pair of Canadian miners also represented a shift in thinking within Capital Group, as until recently, its funds had a relatively small exposure to mining in general and gold stocks in particular. Capital Group has a long-standing policy of not commenting on specific investments and a spokesperson declined to provide information on the recent purchase of Agnico Eagle and Barrick. But when a money manager this big makes moves, it leaves a trail.
The first sign that something was afoot at Agnico Eagle came in March, when chief executive officer Sean Boyd announced the company landed "an important new strategic institutional investor" by selling $220-million of stock to a single, unnamed buyer in a private placement. Recent regulatory filings revealed Capital Group was the mystery backer, and investment bankers say the investment came after Mr. Boyd and his colleagues spent the better part of three years courting the fund manager.
For Agnico Eagle, raising money through a private placement had the short-term benefit of minimizing fees, which normally amount to 4 per cent of a share sale, as the company expands mines in northern Canada. It also has properties in Finland and Mexico. Longer term, Capital Group's backing may translate into additional financial support, along with the seal-of-approval from a respected fund manager.
From Capital Group's point of view, analyst Steven Butler at GMP Securities said Agnico Eagle is an attractive stock play because "it's one of the only senior gold producers that is replacing production with new reserves through its exploration programs, with a good growth profile right through 2010."
Capital Group's investment in Barrick came from straightforward open-market purchases, with regulatory filings showing the fund manager picked up 35.7 million shares in Toronto-based company over the first three months of the year, a stake currently worth $785-million (Canadian). Barrick is the world's largest gold mine, and analysts say Capital Group showed an interest as a painful period of shedding assets to pay down debt came to an end. Barrick re-emerges as a low-cost, disciplined producer.
The gold market is a world of its own. There is a constituency of investors who put bullion on a shelf beside canned food and ammo, against the day the world spins out of control, and there are those who hold gold as a hedge against governments that debase currencies. There are industry veterans, such as Mr. Giustra, who always have gold projects on the go.
Fund managers such as Capital Group invest based on fundamentals – they buy the likes of Agnico Eagle and Barrick because they believe these stocks will go up. If more fundamental investors reach the same conclusion and embrace gold miners, the long-tarnished sector is poised to shine.
Andrew Willis