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First Eagle’s High Risk Investment in the Gold Industry
Posted by: Patricio Kehoe (IP Logged)
Date: December 23, 2013 05:01PM

Despite plummeting prices and underperformance of industry peers, First Eagle Investment Management LLC continues to invest heavily in the gold industry. The investment firm is not only holding on to previously held stocks, but is increasing his exposure to the market, buying up shares of troubled companies such as Anglogold Ashanti Limited (AU). So the question arises: Why is First Eagle bullish regarding such a company? The answer might lie in the huge discount at which the third-largest gold producer by output is trading, along with a certain degree of long-term optimism.

Huge Holdings Point to Long-Term Commitment

Since First Eagle recently increased its stake in Anglogold by more than 20%, bringing his total holding to over 32.5 million shares, I believe we are looking at a long-term investment. I am keen on pointing this out, since the stock is currently performing very poorly, and has already lost around 275% of its value year to date. Above average production costs and plummeting gold prices have put a huge deal of pressure on the gold miner, leading to very poor results. In addition, since many of its operations are in geopolitically risky countries such as Mali and the Democratic Republic of Congo, shareholders have been shedding this stock in large volumes.

Although Anglogold had a very rough year, and will continue to face elevated cash costs and reduced margins going into 2014, there are some positive signals looking forward. One of the most promising features, are the firm’s operations in South America and Australia, which are enjoying solid organic growth. Although investors will have to wait some years for assets in these regions to reach full production, large profits should be achieved in the long-term. In other words, First Eagle surely has its eyes set on the company’s new projects, and their future growth potential.

Projected Growth and Low Price

Another attractive feature investors must keep in mind is a stock’s growth potential. When looking at Anglogold, this becomes especially relevant, as a comparison to Barrick Gold Corp (ABX) will demonstrate. Anglogold currently offers 13.6% returns on invested capital, compared to Barrick’s -2.8%, and has an EBITDA growth rate of 465.7%, the highest in the industry. Thus, whereas the Canadian miner has a negative EPS growth rate of 48%, Anglogold is looking quite profitable going into 2014.

Despite the differences, Anglogold and Barrick at trading at similar values, making choosing between the two stocks an easy decision. Anglogold is particularly attractive, since it has actually reached its 52-week low and thus offers ample room for growth. As the third-largest gold miner, the company will surely recover from its current situation, making First Eagle’s investment very profitable in a few years.

Risky Nonetheless

First Eagle might be an Anglogold bull, yet investment gurus do not agree with the company. John Hussman recently sold off 60% of his holdings in the firm, John Burbank and Steven Cohen shed all their shares, and Jim Simons and Jeremy Grantham are also bearish regarding this stock. With inflation costs rising and the price of gold not expected to pick up any time soon, I consider Anglogold to be too risky to invest in.

 

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

 




Guru Discussed: Jean-Marie Eveillard: Current Portfolio, Stock Picks
Stocks Discussed: AU, ABX,
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