‘Time to Mine for Gold Mining Opportunities?’ – US Global Investors Special Gold Report


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Have gold miners hit rock bottom? Is there an attractive entry point? What are the drivers for a rebound?

Since many gold companies plummeted during the first half of the year, these are the questions that US Global Investors has been receiveing from advisors interest in investing in this deeply discounted sector and they are addressed in this report.

US Global Investors' CEO and Chief Investment Officeer Frank Holmes will present a keynote at Mines and Money London this December. His presentation, '50 Shades of Gold', will take a sideways look at the state of the gold market, updating some of the findings in this special report.

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‘Time to Mine for Gold Mining Opportunities?’ – US Global Investors Special Gold Report

  1. 1. KEY POINTS: •  Declining grades and fewer discoveries have presented considerable challenges   to miners. •  The recent collapse of the gold price was a final wake-up call, precipitating major costcontrolinitiativesacrosstheindustry. •  Thesemeasureswilllikelytightengold supply and, with demand for gold continuing, higher prices are likely. •  In a diversified portfolio, there are   three reasons to include gold and   gold stocks today. Have gold miners hit a bottom? Is there an attractive entry point? What are the drivers for a rebound? Since many gold companies plummeted during the first half of the year, these are the questions we’ve been receiving from advisors interested in investing in this deeply discounted sector. Time to Mine for Gold Mining Opportunities? SPECIAL GOLD REPORT For Institutional Use Only. Not for Distribution to the Public.
  2. 2. August 2013 • Page 2 Gold companies appear deeply oversold as of the end of July. Based on the annual rate of change of global gold mining stock prices over the past few decades, this year’s correction has been severe. Previous to today’s slide, BCA Research finds only five times that these extremes have happened. Following these dips, gold stocks rebounded, in some cases, significantly. And with the drivers remaining in place for gold, this rebound could happen again soon. Toprovidethehistorical2-to-1leveragetothegold price,minersneedtoaddvaluebybeinganeffective miner and effective public company. The table below outlines the key factors in how effective management adds value as miners and as public companies. The more disciplined and successful theexecution,thebiggerthepotential boostingoldequity returns. Over the past few years while the price of gold climbed,theminingindustrywashitwithseveral challenges.Then,thegoldpriceplummeted,which served as a sort of final alarm for the industry. To find out how gold companies were adapting their businesses, our team talked to several miningcompanies.Theresultsoutlinedonthe next page may surprise you. HowGoldMinersLeveragetheGoldPrice 160% 120% 80% 40% 0% -40% Annual Rate of Change Source: BCA Research 2013, Thomson Reuters 1985 1990 1995 2000 2005 2010 Gold Shares Deeply Oversold ? Add value by being an effective miner ✚ Add value by being an effective public company • Grow Production Volume • Provide Balance Sheet Leverage with Debt and/or and/or • Expand Margins • Return Free Cashflow Through Dividends and/or and/or • Optimize Capital • Enjoy Positive ‘Rating Multiplier’ Effect
  3. 3. August 2013 • Page 3 -9.29% 14.09% -15% -10% -5% 0% 5% 10% 15% 20% 2008 2009 2010 2011 2012 Gold Production Growth vs. Per Share Gold Growth 80 Gold Producers Cumulative Gold Production Growth Per Share Cumulative Gold Production Growth Source: Bloomberg In recent years, gold mining companies have beentryingtogrowtheirproductionprofile,but also faced a depleting resource base. Grades fell anaverageof21percentsince2005.Discoveries becamescarcewhilecostinflationrose,averaging 11 percent over the past three years. As the price of gold rose, there was a huge push to grow gold production at any cost, resulting in a significant increase in capital spending. Based onU.S.Global’sindependentresearch,thisgrowth was primarily financed through equity issuance. Of80globalgoldproducerswelookedat,produc- tionincreased14percentonacumulativebasisover thepast four years. But, on a per share basis, gold productiongrowthactuallydecreasedmorethan 9percent. Eveninarisinggoldmarket,theeconomicvalue per share was diluted, as gold miners issued shares faster than they discovered the metal andfasterthantheyincreasedtheirproduction. Webelievethe2013dropingoldpricewasthefinal wake-up call to miners, precipitating a wave of changesthroughouttheminingindustry.Hereare a few: • Executive turnover. At least 20 mining companies,includingNewmontMiningand BarrickGold,havenewCEOs.Webelievethis new leadership is a positive driver for CEOs to spearhead a focus on adding value for the shareholder. • Cost control is top priority. Miners will be focusing their efforts on viable projects. If spending is too expensive, exploration is cut and production halted. As one example, the world’s largest producer, Barrick Gold, says it may sell, close or curb output at 12 mines where costs are high. • Significant cuts to capital expenditures. AngloGold is cutting $2 billion, Freeport- McMoRaniscutting$1billionandIAMGOLD iscutting$100million.Phasetwolevelprojects willlikelybekeptataround$1,200perounce and phase three need to be as low as $1,000 per ounce. Webelievethesechangesarepositiveforinvestors ingoldandgoldminers,asspendingcutswilllikely tightentheworld’sgoldsupply.Weexpectdemand tocontinue,resultinginhighercommodityprices. AdaptingtotheChallenges
  4. 4. August 2013 • Page 4 ThreeReasonstobeBullishonGoldStocks Whilewe alwaysadvocateholdinga5to10percent weightingingoldandgoldstocks,herearethree reasonstobebullishtoday. 1. Fall Begins Season of Gold Buying Mostoftheattentionforgolddemandisfocused on the Fear Trade, which are primarily buyers whopurchasepapergoldoutoffearofdamaging government policies. However, according to the World Gold Council, about 70 percent of gold demand comes from consumers who buy gold bars, gold coins and jewelry. These Love Trade buyers are primarily in China and India, who have a long affinity for the yellow metal and buy gold for loved ones during special occasions. YoucanseetheLoveTrade’seffectonthehistorical price of gold below. Gold historically enters its period of seasonal strength with Ramadan, which beganinJulythisyear,followedbytheIndianFestival of Lights, wedding season, Christmas and Chinese New Year. Chinese New Year Diwali Christmas Ramadan Gold: 24 Hour Composite Historical Patterns (1974-2012) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 0 20 40 60 80 100 30 Yr 15 Yr 5 Yr 30 yr Pattern 15 yr Pattern 5 yr Pattern Source: Moore Research Center, Inc. and U.S. Global Investors Seasonal High Seasonal Low Seasonal Price Range Dec
  5. 5. 250 300 350 400 200 150 100 50 0 Source: Weldon Financial, koosjansen.blogspot.nl, sge.sh, usgs.gov, cmegroup.com Chinese Demand for Gold Remains Robust World Gold Mining Production vs. Gold Deliveries, in Metric Tons World Mining Production Shanghai Gold Exchange Physical Delivery COMEX Physical Delivery JAN-09 JUL-09 JAN-10 JUL-10 JAN-11 JUL-11 JAN-12 JUL-12 JAN-13 Dividend Growth of World’s Top 20 Gold Companies $0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 $4.5 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 Gold Stock Dividends in billions (left axis) Gold Price per ounce (right axis) Source: Bloomberg and CIBC World Markets Inc. 2. A Transfer from Paper to Physical Means Gold is in Strong Hands Gold deliveries in Shanghai jumped as physical gold delivered in the first six months of this year approached the entire delivered in 2012, and was morethandoubleChina’sannualproduction.The ShanghaiGoldExchangesupplied1,098metrictons inthesixmonthsthroughJune,comparedwith1,139 tonsforthewholeoflastyear.Comparatively,total known ETF holdings of gold have decreased by approximately500tonsyeartodate. 3. Dividend Payouts Have Been Growing According to CIBC World Markets, over the past 15 years, the world’s top 20 gold companies have increased their dividends at a compound annual growthrateof16percent.Bycomparison,goldonly rose 12 percent annually. July 2013 • Page 5
  6. 6. August 2013 • Page 6 GoldCompanies’BoosttoPortfolioofU.S.Stocks Over 10 years, regardless of the extreme moves in goldstocks,theinvestmentinbothgoldstocksand theSP500ETFneverdippedbelowtheportfolio entirely made of U.S. equities. In addition, the combination of gold stocks and U.S. companies increased the portfolio’s return by about $1,100. $20,072 $21,176 $7,500 $10,000 $12,500 $15,000 $17,500 $20,000 $22,500 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 SPDR SP 500 ETF (SPY) 5% Allocated to UNWPX, 5% to USERX, 90% to SP 500 (SPY ), Annual Rebalance Growth of $10,000 with 10 Percent Gold Source: Bloomberg, U.S. Global Investors The chart illustrates the performance of a hypothetical $10,000 investment made in the funds and strategy during the depicted time frame. Figures include reinvestment of capital gains and dividends, but the performance does not include the effect of any direct fees described in the fund’s prospectus (e.g., short-term trading fees) which, if applicable, would lower your total returns. This hypothetical portfolio is presented for educational and illustrative purposes only and is not a recommendation to engage in any particular investment strategy. Past performance does not guarantee future results.
  7. 7. August 2013 • Page 7 Total Annualized Returns as of 06/30/2013 One-Year Five-Year Ten-Year Gross Expense Ratio GoldandPreciousMetalsFund(USERX) -38.58% -11.68% 7.78% 1.61% WorldPreciousMineralsFund(UNWPX) -44.43% -16.25% 6.54% 1.45% SP500SPDR(SPY) 20.40% 6.92% 7.19% 0.1102%* Expense ratio as stated in the most recent prospectus. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. Current performance may be higher or lower than the performance data quoted. The principal value andinvestmentreturnofaninvestmentwillfluctuatesothatyourshares,whenredeemed,maybeworthmoreorlessthantheiroriginalcost.Performancedoesnot includetheeffectofanydirectfeesdescribedinthefund’sprospectus(e.g.,short-termtradingfeesof0.05%)which,ifapplicable,wouldloweryourtotalreturns.Performance quotedforperiodsofoneyearorlessiscumulativeandnotannualized.Obtainperformancedatacurrenttothemostrecentmonth-endatwww.usfunds.comor1-800-US-FUNDS. *Forinformationregardingtheinvestmentobjectives,risks,expensesandfeesoftheSP500SPDR,pleaserefertothefund’sprospectus. Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other importantinformation,obtainafundprospectusbyvisitingwww.usfunds.comorbycalling1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc. Gold,preciousmetals,andpreciousmineralsfundsmaybesusceptibletoadverseeconomic,politicalorregulatorydevelopmentsduetoconcentratinginasingletheme.Thepricesof gold,preciousmetals,andpreciousmineralsaresubjecttosubstantialpricefluctuationsovershortperiodsoftimeandmaybeaffectedbyunpredictedinternationalmonetaryandpolitical policies.Wesuggestinvestingnomorethan5%to10%ofyourportfoliointhesesectors. HoldingsintheU.S.GlobalInvestorsFundsmentionedasapercentageofnetassetsasof6/30/2013:AngloGold(GoldandPreciousMetalsFund0.01%,WorldPreciousMineralsFund 0.01%),BarrickGold(GoldandPreciousMetalsFund2.18%,WorldPreciousMineralsFund0.12%)Freeport-McMoRan(GoldandPreciousMetalsFund0.00%,WorldPreciousMinerals Fund0.00%),IAMGOLD(GoldandPreciousMetalsFund0.07%,WorldPreciousMineralsFund0.02%),NewmontMining(GoldandPreciousMetalsFund2.25%,WorldPreciousMinerals Fund0.06%).13-405 Don’tMisstheNextBigMoveinGoldStocks•
  8. 8. U.S. Global Investors, Inc. is an investment management firm specializing in gold, natural resources and emerging markets opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients. www.usfunds.com • 1.800.US.FUNDS Contact us to discuss today’s gold mining opportunities. Institutional Services Team Tadas Misiunas Vice President, Eastern Region and East Central Region 813.361.6336 tmisiunas@usfunds.com Henry R. Conkle Vice President, Western Region and West Central Region 512.921.1635 hconkle@usfunds.com Call 1-800-US-Funds to request your investor guide. Ready to invest now? Go to www.usfunds.com to invest online. TheGoldandPreciousMetalsFund(USERX)isthefirstno-loadgold mutualfundintheU.S.andseeksopportunityingoldmining,investing  inprovengoldproducingcompanies. TheWorldPreciousMineralsFund(UNWPX)givesinvestorsincreased exposure to junior and intermediate mining companies involved in   precious minerals such as gold, silver, platinum group, palladium   anddiamondsforaddedgrowthpotential. DiscoverU.S.GlobalInvestors’TwoGoldFunds For Institutional Use Only. Not for Distribution to the Public.