An Oversold Gold Miner

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.

Basically, gold, as tracked by the SPDR Gold Shares ETF (GLD 0.00%↑), hasn’t done as well as goldbugs might have expected in an inflationary environment, because rising rates have boosted the dollar, and gold miners, as tracked by the VanEck Gold Miners ETF (GDX 0.00%↑) have lagged gold. But if you believe the Fed will have to start cutting rates at some point next year, presumably, gold will go up. And when that happens, gold miners will likely go up even more, thanks to their operational leverage, which can turn a double digit increase in the price of gold into a triple digit increase in gold miners’ profits.

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

As with all mechanical screens, it’s best to do some further investigation, to eliminate false positives. For example, one of the stocks the bearish version of this screen picks up now is Reata Pharmaceuticals (RETA 0.00%↑) where the RSI looks high because the company was just acquired by Biogen (BIIB 0.00%↑).

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. 

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