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A Conversation With Frank Holmes of US Global Investors

- By Holmes Osborne, CFA

I had the opportunity to chat with Frank Holmes of U.S. Global Investors. The fund manager has launched a new gold exchange-traded fund, GOAU (GOAU). The ETF focuses on gold royalty companies and stocks with certain quantitative qualities such as revenue per share. We discussed what to be careful of when buying gold miners.

Holmes made several comparisons to VanEck Vectors Gold Miners (GDX) and VanEck Vectors Junior Gold Miners (GDXJ), the largest gold mining ETFs. I wrote an article the other day on Seeking Alpha about how the latter has changed from a junior gold mining ETF to established miners, silver, Africa and Australia.


The first thing we found interesting is the number of gold miners that dilute their shareholders. From December 2012 to December 2016, Junior Gold Miners constituents increased shares outstanding by 110%. That is amazing in a bad way. Gold Miners, in comparison, grew 13% over that time frame. The two ETFs lost 57% each while gold lost 31% over that time frame.

As of June 19, Gold Miners owns 33% of the same stocks as Junior Gold. Holmes said that at one point, Junior Gold owned 20% of 20 companies. In six weeks, the ETF sold $3 billion in mining stocks. This is the reason gold was going up and the miners were going down in value several months ago.

The new ETF loves royalty companies. Why? Growing revenues per share is one reason. Over the time frame listed above, Royal Gold Inc. (RGLD) grew its revenues per share on an annual basis of 5.1%, Franco-Nevada Corp. (FNV) grew 3.4% and Wheaton Precious Metals Corp. (WPM) lost 4.4% because of a deal that went sideways. The average constituent in Gold Miners shrank 8.6% over that four-year period while the average constituent in Junior Gold shrank 9% a year. That is amazing.

Royalty companies have been growing dividends too. Over the last five years, royalty companies have increased dividends by 17%. The average constituent of the S&P 500 has grown 11%. Unfortunately, the average constituent in the Philadelphia gold and silver index shrank dividends by 32%.

Holmes compared royalty companies to the book (and movie) "Moneyball." To refresh your memory, the Oakland A's competed with the bigger clubs by attracting certain ball players with certain characteristics, like the ability to get on base. The A's paid these players far less, but dollar for dollar got more bang for their buck. Holmes says gold royalty stocks are similar. The average revenue per employee for Newmont Mining Corp. (NEM) is $310,000 and Barrick Gold Corp. (ABX) is $390,000. Meanwhile, the average revenue per employee at Royal Gold is $20.3 million and $25.8 million at Wheaton.

Another important metric the ETF looks at is sales, general and administrative expenses compared to revenues. I will list the 10 best according to U.S. Global Investors: Sibanye Gold Ltd. (SBGL), Regis Resources Ltd. (RGRNF), Anglo American Platinum Ltd. (AGPPF), Newcrest Mining Ltd. (NCMGF), Pan American Silver Corp. (PAAS), Harmony Gold Mining Co. Ltd. (HMY), Franco-Nevada, Impala Platinum Holding Ltd. (IMPUY), Resolute Mining Ltd. (RMGGF), and Pan African Resources PLC (PAFRF). Holmes likened the waste of money on Class A real estate in Toronto to other miners headquartered in small towns in Canada.

The top 10 miners with the highest revenues per share vastly outperformed gold and the Gold Miners ETF. The numbers are listed on the graph Holmes sent me, but it looks like the top 10 miners grew 60%, gold lost 20% in value and the Gold Miners ETF lost 50%. Quite a difference.

The new ETF looks to invest 30% of the fund in royalty companies, 20% in large-cap companies, 30% in mid-cap companies and 20% in small-cap companies. The small caps are domiciled outside of North America and have a market cap of at least $200 million. The mid caps are North American domiciled or have a listing in Canada or the U.S.

The take away from this is to be careful when buying mining companies. Miners are notorious capital misallocators. Look for share dilution, SG&A to revenue and sales to revenues. The royalty companies are an interesting way to invest in gold too.

Disclosure: We own GDX, HMY and IMPUY.

This article first appeared on GuruFocus.