Print this

Email this

Submit a Question

Few investors would give much of their time to understanding precious-metals stocks. But those who followed the advice of Bear Stearns analyst Mike Dudas have turned $1,000 into $3,500 in just three years. How is that 53 percent annualized return possible? Just look at the price of gold, up from $252 an ounce in 2001 to $388 in mid-May. The rally has been broad, not just in gold but also in silver, coal, and most other natural resources. The run-up has occurred as a result of rising global demand, which has given mining companies the power to raise prices for the first time since the 1980s.

There is also a global shortage of key metals. That's because capital spending on mining and exploration hit a low during the tech boom. In 1996, for example, worldwide spending on gold exploration annually was $3 billion. It has since fallen below $1 billion. Since it takes between four and eight years to bring refined gold to market from the time a mine opens, there's good reason to believe the shortage will not disappear anytime soon.

Despite gold's strength during the bear market, Dudas, 40, predicts that global inflation will fuel a continued rally in metals even as the economy continues to improve. That's because inflation erodes the value of currencies, while precious metals retain their underlying value. The scenario bodes well for companies such as Newmont Mining (NEM, $40), the largest precious-metals company in the world. The company is a mining powerhouse, with operations on six continents. It is an aggressive explorer as well and has plans to invest some of its $1.5 billion in cash to develop ventures in Ghana and Australia. An added attraction is that in April, Newmont increased its annual dividend payout from 20 cents a share to 30 cents. But what's most appealing about Newmont is what it is already pulling out of the ground. Newmont has said it plans to produce more than seven million ounces of gold this year, at an average cost of $230 an ounce. It would then presumably sell that gold for a much higher wholesale price. Retail prices, predicts Dudas, will go up from an average of about $363 an ounce in 2003. Based on Dudas's estimate that gold will average $415 this year, Newmont's profits should rise at least 33%.