ETF Teardown: The Best Gold Stocks

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool.

ETFs hold collections of stocks that share certain elements. If investors think gold still presents a great opportunity today, for example, they can turn to Market Vectors Gold Miners, whose top holdings include gold and silver mining stocks such as Agnico-Eagle Mines (NYSE: AEM  ) and Harmony Gold Mining (NYSE: HMY  ) . But because this ETF invests in a number of stocks, its broad diversity also limits your upside.

Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best gold investments. To help, we'll use Motley Fool CAPS, our tool for screening and ranking stocks and stock pickers.

The power of tags
To help investors locate great stocks quickly, we "tag" CAPS-rated stocks with descriptors that group the company with others in the same category -- "Coal," for example, or "Nuclear Power."

Selecting the "Gold" label in CAPS gives you a list of 84 investments that are directly tied to the shiny commodity. This collection of investments has done very well in the past year, up 16.1% while the S&P 500 has ticked down by 4.7%.

To gauge which companies the CAPS community thinks offer good opportunities in this sector today, we'll sort these businesses by their CAPS star rank, from one to the maximum five stars. We'll then examine some of the individual companies to see who -- from Wall Street to Main Street -- is bullish or bearish on them, and why.

Down to the nitty-gritty
Here are some gold stocks I've pulled from CAPS today:

Company

CAPS Rank

Operations Located in:

Northern Dynasty Minerals (AMEX: NAK  )

*****

Alaska, Ontario

Rubicon Minerals (AMEX: RBY  )

*****

Canada, United States, Democratic Republic of Congo

Anglo American plc (Nasdaq: AAUK  )

*****

South Africa, Chile, Ireland, Brazil, Venezuela, Australia

El Dorado Gold  (AMEX: EGO  )

****

Turkey, Brazil, China

Seabridge Gold (AMEX: SA  )

**

Canada, United States, Mexico

The road to El Dorado
How can an investor pass up a gold company with the name El Dorado -- let alone one that uses "ego" as its ticker symbol? El Dorado Gold is an intriguing player in the gold-mining world because it's looking for the shiny metal in places where most others aren't -- regions such as Turkey and China.

The company's stock has come under attack lately as it faces further uncertainty over its Kisladag Mine in Turkey. Before Turkish authorities shut it down in August because of concerns over its environmental impact, the mine had produced more than 135,000 ounces of gold in 2007 at a cash cost of $189 per ounce. The High Administrative Court was supposed to rule on whether the mine could be reopened but has instead sent the case back to a lower court.

Management views the production halt at Kisladag as temporary, and the company still anticipates 109,000 ounces of gold production in 2008 from its Tanjianshan Mine. With its other projects still in development and the court case for Kisladag dragging on, though, some investors are losing faith. But of the 301 CAPS investors rating the company, 280 still see enough potential for the company to outperform the S&P going forward.

Sold on unseen gold
On the other end of the quality spectrum -- at least according to the general consensus from CAPS investors -- is Seabridge Gold, which earns only two stars in CAPS. The biggest red mark on Seabridge's scorecard? A $1 billion valuation with zero revenue.

The company has been busy collecting drill-hole data to more accurately project the gold and copper resources in its various properties. At its Kerr-Sulphurets-Mitchell ("KSM") project in Canada, for instance, CEO Rudi Fronk claims that new estimates from the sites show that "the KSM project represents one of the largest undeveloped gold/copper systems in the world today."

But many investors are wary of a company that continues to print new shares to fund uncertain developments. Surprising gains in the stock over the past year aside, more than a few investors have given pause when considering Seabridge. Indeed, more than 26% of the All-Stars rating the company have given it a thumbs-down.

You can lead a horse to water ...
Plucking individual stocks from the gold sector is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies and not take a recommendation. After all, even the best stock pickers can be horribly wrong on a stock.

So, do you agree that gold still has plenty of upside? Or are precious-metal miners due for a pullback? Give your own opinion in Motley Fool CAPS.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 20, 2009, at 1:22 AM, jc2811 wrote:

    VHGI potential stock dividend. Company may sell off healthcare assets to WNDM to concentrate on Gold Business; numbers work out as follows:WNDM closed at $2.17 per share on 12/1/09 and VHGI closed at $0.185 per share on 12/1/09.Under the current capitalization structure it would equate to roughly 8 shares of WNDM for every 100 shares of VHGI owned by our shareholders. If completed, VHGI intends to distribute the WNDM stock to its shareholders as a dividend in 2010, subject to completion and effectiveness of a re-sale registration statement. http://finance.yahoo.com/news/OTCBBWNDM-Announces-LOI-to-prn...

  • Report this Comment On December 20, 2009, at 1:23 AM, jc2811 wrote:

    VHGI potential stock dividend. Company may sell off healthcare assets to WNDM to concentrate on Gold Business; numbers work out as follows:WNDM closed at $2.17 per share on 12/1/09 and VHGI closed at $0.185 per share on 12/1/09.Under the current capitalization structure it would equate to roughly 8 shares of WNDM for every 100 shares of VHGI owned by our shareholders. If completed, VHGI intends to distribute the WNDM stock to its shareholders as a dividend in 2010, subject to completion and effectiveness of a re-sale registration statement. http://finance.yahoo.com/news/OTCBBWNDM-Announces-LOI-to-prn...

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