Mis-priced Stock, page-312

Jumped in on the close at 8.51 having waited over a year for a favourable risk/ reward entry point, and missing the brief dip to low 8s in September.

this stock has a few warts for sure, and there are many factors outside of the company’s control ie aud/ usd, inflation, interest rates, fed policy, mining labour and skill shortages, rising cost pressures due to inflation/ supply chains/ shipping, etc.

but on balance, the things that tilt me in favour of adding some nst to my portfolio are:
- top tier gold miner
- top rate management team
- strong growth profile in terms of assets presently producing and future green/ brownfield expansions/ development
- Australia based (cf North American miners) which gives natural offset of aud/ usd which falls inversely when rates and thus usd rise, hence the current panic around rising rates may well cause a drop in the usd gold price, but the aud usually falls in a rising US rate environment so the overall effect is neutral to positive for the aud gold price
- nst recently announced another 400k ounces hedged at aud2500 so this protects them further against downside in the gold price or a stronger than expected aud (strong Aus is very unlikely in the next 12mo due to various factors… but that’s another discussion); the average hedge is around aud2400 now.

the overall p/e is sitting around 8, with a decent yield and low likelihood that the gold price drops in a significant enough way to really dent earnings once allowing for hedging, growth profile, etc.

adding gold miners to the portfolio gives me a hedge against a market crash. There is an important point though, for new investors, which is that even gold miners often initially get sold off in a market crash despite a stable or rising gold price (just look back the share price charts of gold miners vs the gold price in 2008 and early 2020 if you don’t believe me…)

the good news is that eventually the gold miners will benefit from the higher gold price in a market crash, but don’t be surprised if the nst and other sp’s drop first, then go on a bull run later. Therefore, holding the gold miners through a market crash requires patience, conviction and awareness of these factors otherwise you may get frustrated and shaken out of your position at the bottom.

I have only taken an initial position at these levels, given by me room to accumulate more if the sp drops further to $8 or even down to $6-7 levels, especially in the context of a broader market selloff.

I would also recommend any gold bulls or those seeking gold as a portfolio hedge (in case Jeremy Grantham is right and this is just the beginning of the bear market… which I doubt but it is a possibility if inflation persists necessitating accelerated rate rises up to 5-6 over 12-18mo) should also consider a position in the PMGOLD etf, because this gold etf is much more likely to be stable or rise in price because it is actual physical gold rather than a mining stock and because it is priced in aud rather than usd, so any drop in the usd gold price due to rising rates in USA should be offset by the declining aud.

personally I prefer gold equities to the Pmgold etf because you are likely to benefit more in the long term due to (1) dividends, (2) growth in the gold asset base over time and in annual ounce/ year output over time, and (3) the leverage of equities to the gold price, ie a 10% rise in the gold price should translate to a 20%+ impact on profits (excluding hedging).

so my point is that each investor has to know what their goals are, such that (1) a gold miner such as nst is better suited to a long term investor who has a high tolerance of extreme volatility over 1-3 years and wants long term capital growth with some yield, whilst on the other hand (2) a gold etf is better suited for short term portfolio protection against inflation and market swings, because a gold miner can still drop in value dramatically in a market crash despite a rising gold price (sort of like what we see today, which creates a long term buying opportunity but may take years to eventuate and there is a real risk of permanent capital loss so a long time frame of 3-5 years + position sizing + tolerance of >50% sp swings are all required Pre-conditions for investing in gold miners.