* Gold shares up 22%, heavily outperform basic gold price
* Canadian, Australian firms among fund managers' favourites
* Valuations significantly cheaper vs pre-gold crash levels
By Clara Denina and Silvia Antonioli
LONDON, Aug 8 (Reuters) - Gold mining shares are bouncing back from a disastrous 2013 and are expected to far outperform the price of the metal in coming months as company efficiency measures lure investors back to the sector.
Years of over-spending on expansion projects and disruptive merger activity fell heavily on miners last year, just as the gold price posted its biggest annual drop in 32 years.
Gold mining stocks plunged 53 percent on average versus a 28 percent drop in gold prices after a 12-year bull run.
Eight months into 2014, the gold mining sector is rapidly making up some of the lost ground with a 22 percent gain to date, outperforming global mining shares overall.
Goldcorp Inc, the world's biggest producer by market value, has gained 34 percent, and Africa's Randgold Resources is up 33 percent.
The gold price, meanwhile, has risen by just 9 percent to $1,318 an ounce.
UK-registered equity funds have increased their exposure to gold mining shares to an average of 1.55 percent, the highest since November 2013, according to data from Morningstar.
"We are witnessing how business execution and delivering on plans can lead to better equity performance," said Ani Markova, fund manager at Smith & Williamson Investment Management.
"The equities are trading at historically low valuations and offer investors the ability to participate in miners' significant cash-flow leverage to small positive changes in the gold price," she added.
The surprise double-digit dive in the gold price last year forced mining companies to implement austerity measures to conserve cash and improve capital allocation. At a lower gold price, they now have lower margins and cannot afford to consider high risk moves.
"The companies aren't able to destroy value in the way they were before," BlackRock's director and portfolio manager Catherine Raw said.
"The sort of risk we have taken on within the gold companies has changed as we get a little more comfortable that the gold price is stable to rising at that $1,250 to $1,350 level and that the companies themselves are starting to do the right thing."
Raw said BlackRock had increased its overweight exposure to Canadian-listed Eldorado, citing its high quality resource base and potential to generate strong cash-flow at gold prices around $1,200 to $1,300 in coming years.
BlackRock's funds reduced an underweight exposure in AngloGold Ashanti, which is diluting its high-risk, high-cost production in South Africa by adding assets in Central Africa and Australia that are lower cost and higher grade.
While the sector as a whole is seen to be moving in the right direction, some laggards remain.
"Last year, you'd have lost between 50 and 90 percent of your money investing in gold shares, but there was nowhere to hide," Neil Gregson, portfolio manager at JP Morgan Global Natural Resources fund, said.
"The difference between the poorest and the best performance is very wide (this) year to date, some stocks are down 50 percent and some are up 150 percent."
Shares in heavyweight Barrick Gold are up 7 percent, while Australian small cap Northern Star Resources is up 120 percent this year, Gregson cited as an example.
The sector as a whole is still cheaper than it was in 2010, which makes it attractive for investors.
From 2011, gold companies started to be de-rated as they lost control over operating costs and gold prices headed down from highs, UOB Asset Management fund manager Robert Adair said. Gold hit its highest level ever at $1,920.30 in September 2011.
"There is now potential for a re-rating of the price-earnings, price-cash flow as well as the enterprise value to EBITDA multiples that investors are willing to pay for gold companies," Adair said.
This bodes well for performance in the remainder of 2014.
"With gold mining stocks trading at a 58 percent discount to 2011 levels, gold miners' shares remain highly undervalued relative to fundamentals," ETF Securities associate director Simona Gambarini said.
(Editing by Veronica Brown and Jane Baird)