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Mining for quality in the precious metal sector

Mining for quality in the precious metal sector

Thursday, April 22, 2010

WHAT ARE WE LOOKING FOR?

This is our last look this week at what the pros are buying for their mutual funds.

Checking out their top holdings is a way to get stock ideas. It may help you do your due diligence when buying a specialty fund.

You can find the biggest holdings on a firm's website. Today, we will look at Dynamic Precious Metal at Dynamic Funds' site.

ABOUT THE FUND

The $675.4-million precious metals equity fund has been run by Robert Cohen for a decade. It gained 35.7 per cent for the year ended March 31. Over 10 years, it has an annualized return of 22.5 per cent.

The value manager looks for quality companies with experienced management, and projects in countries where there is low political risk.

Mr. Cohen is bullish on the price of gold. His colleague Martin Murenbeeld, chief economist at DundeeWealth Inc., forecasts the yellow metal will climb to about $1,226 (U.S.) an ounce by the end of the year, and have an average price of $1,293 next year.

The U.S. monetary base has been growing massively especially over the last couple of years to “bail out the financial crisis,” and paper money is becoming devalued, he said.

“Gold is a monetary asset that can't be simply willy-nilly printed,” he said. “It is the single and only commodity central banks around the world use to back their foreign exchange reserves.”

WHAT DID WE FIND?

Andean Resources and Red Back Mining have been the big gainers so far this year.

But Mr. Cohen is still enthusiastic about Andean Resources, a gold explorer with its flagship Cerro Negro project in Argentina.

“It is really one of the premier gold-exploration projects out there owned by a junior,” he said. “Mind you, it has a market cap of over $1-billion (Canadian).”

The project has a high-grade resource of more than three million ounces of gold, but that should double over the next two years, he said. “The geology is analogous to the El Penon mine, which made Meridian Gold, but we feel it is better.” He has a target of $5 a share over the next couple of years.

He is also a big fan of Red Back Mining, which has two high-quality, low-cost producing mines, including the Chirano project in Ghana and Tasiast mine in Mauritania.

The Tasiast mine has a reserve of close to five million ounces of gold, but “we feel it is going to grow to over 10 million ounces over the next couple of years,” he said. “Tasiast will, in my opinion, be the major driver of the net asset value of the company.” His target is $32 a share over two years.

Mr. Cohen also sees potential in Osisko Mining, which expects to start production of its first gold mine in Malartic, Que. early next year. “It should be producing close to 750,000 ounces a year which will make it the single-largest gold mine in the country,” he said.

Osisko is in the throes of acquiring Vancouver-based Brett Resources Inc. “If that does close, by 2015 the company can produce 1.1 million ounces a year from two mines,” he said. Excluding this proposed acquisition, he has a target of $15 a share over two years.