How Jim Slater Sieves For Gold Shares

Published in Investing on 30 September 2010

The veteran investor has a method to make sense of the madness.

I'm not much persuaded by gold bugs proclaiming their love of the stuff on bulletin boards. I sense some tap out their messages in dark rooms whose walls are pasted over with newspaper clippings about the collapse of the dollar and hyperinflation in 1930's Germany.

Jim Slater is a different matter -- a natural born money maker -- and he's extraordinary bullish on gold.

I'm sure many who heard him repeat at the Growth Company Investor event this week that you should have 30% of your money in gold investments are already re-jigging their portfolios.

Why Slater is bullish

Slater acknowledges people tend to either love or hate gold:

"The Financial Times has been notoriously terrible. They complimented Gordon Brown on his sale -- it's called the 'Brown Bottom' in the gold market -- and they've been bearish ever since. It must be very irritating, because it's gone up every year in the last ten."

He is particularly dismissive of bearish arguments that gold has no intrinsic value, retorting you can say the same about the dollar, Greek debt, diamonds, and works of art. He recalls buying a job lot of 50 works of art by L.S. Lowry a few decades ago for £50,000, and selling them a week later for £100,000.

"I did quite well, but if I'd kept them some would be worth maybe half a million now. The point is: what is the value of art? I didn't like them, other people do. So 'no intrinsic value' is a lot of nonsense."

More bull points

  • Tradition: "Gold is an historic store of value. It's been there for 2,500 years as a currency. Most of the fiat currencies that ever existed have been and gone, and the ones we've got at the moment aren't looking too good. Also, it's in the human psyche -- we've got a gold medal for the Olympics and golden wedding anniversaries."

  • Rarity: "All the easy gold has been mined. I'm involved in a mine, which is mining gold at half a gram per tonne. We're mining at the rate of 40,000 tonnes per day to get this gold. It's getting harder and harder to find. It's not being printed, that's the point."

  • Security: "It isn't that gold only goes up in times of inflation. Gold goes up mainly in times of fiscal uncertainty and that's what we've got at the moment, practically everywhere. "

  • Cheap: "As long as quantitative easing goes on, it won't surprise me to see it go easily to $1,500. It's cheap by any conventional standards. [...] It's been one of the best performing assets over the past ten years, and I think it will [be] this year again."

  • Real: "Gold isn't so much about what it is, but what it isn't. It isn't the dollar. It isn't a doubtful currency. It isn't a doubtful debt."

  • Not a bubble: "As Richard Russell [author of the Dow Theory newsletter] says there's no fever like gold fever. So far, it's been a bull market by stealth. At a certain point, as these dollars start to really go, I think there'll be a bull market. When you read it on the front page of a newspaper and a taxi driver tells you, then you know that you've got to get out -- quickly. But at the moment, it's greeted very, very sceptically."

How to find gold shares

Ever the stock picker, Slater far prefers buying gold shares to the metal, believing he can get an edge through research, and relishing the leverage affect a rising gold price has on a mining company's bottom line.

It's also no surprise that the man who systemised growth investing in his hugely popular The Zulu Principle has devised a filter for finding the best gold shares.

Here's what Slater looks for:

1. A reasonably safe political territory

"What's the point in having gold as a safe haven investment if it's in an unsafe place? I wouldn't be in Venezuela for anything. There's very rich gold there, but Chavez who runs it who could expropriate property within the blink of an eye. Similarly, I wouldn't be in Russia."

2. A strong resource base

3. No serious environmental problems

4. An experienced CEO with a good team

5. A strong balance sheet

6. No hedging

"Very important. It brings a lot of companies to their knees."

7. Strong cashflow

"With a price-to-cashflow below the average of its peer group."

8. Increasing production, with a reasonably long life

9. The cost to ounce to produce to be comfortable

"You don't want it producing at $1,100 -- that's too dangerous with the price at $1,300. But $700, $800, or $900 -- that's fine."

10. A very prospective resource

"Very important". Slater is looking for mines that might yield further discoveries, by either digging sideways or digging deeper.

11. Low valuation of the gold in the ground

This is determined by dividing the market capitalization of the mining company by the number of ounces of gold in its prospects. You want the result to be as low as possible.

Slater says GoldCorp's recent acquisition of Andean Resources saw the former pay $773 an ounce for the gold in the ground.

In contrast, he prefers Norseman Gold whose assets are valued at $40 an ounce, and Spanish Mountain Gold, where the gold is valued at $18 an ounce. "$773 is very comforting, when you're in at $40 or $18. Obviously it leads to takeovers."

Plenty of profit potential

Slater says the potential upside from well-chosen gold shares comes from a lot more angles than with his typical growth shares.

Like growth shares, gold shares can be re-rated if, say, you buy it when it's on a low price-to-cashflow versus its peer group. Takeovers are another route -- and Slater expects more consolidation to come.

Additional kickers include that prospective deposit, which can lead to extra resources being discovered, and exposure to a rising gold price, which he expects, and which drops straight through to the bottom line.

Finally, selecting companies that are increasing production not only produces more revenues and profits, it also lowers the unit cost of producing gold, further boosting profits.

"So you've got all those things conspiring to make you money, which is what I like," he enthuses.

Five gold shares he found earlier

If you're too impatient to use Slater's method yourself, here are five shares that he says it spits out. They also just happen to be the five biggest holdings of Junior Mining, the fund managed by his son-in-law (with a fair amount of Slater senior's input, one supposes!)

  • Centamin Egypt (LSE: CEY)

  • Medusa Mining (LSE: MML)

  • Norseman Gold (LSE: NGL)

  • Focus Minerals (listed in Australia)

  • Spanish Mountain Gold (listed in Canada)

Note that as well as a multi-million pound investment in Junior Mining, Slater has personal holdings of greater than 5% in Norseman and Spanish Mountain.

Finally, if you're tempted to simply back the Slater dynasty by buying Junior Mining, note that on shareholders will vote on 1 October to rename it Junior Gold. The fund has done very well since its launch in September last year -- with a gain of around 40% -- but it's subject to an active manager's usual high annual charges (1.75%) and initial charge (5.25%).

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Paullypips 01 Oct 2010 , 9:21pm

I know gold investments are controversial and not common on the Motley Fool website but "thank-you" for a very interesting article.

MashkiaTsair 03 Oct 2010 , 5:01pm

At which price it is a good buy ?

RobinnBanks 03 Oct 2010 , 6:33pm

When it has dropped 50% it's a good buy, or even a goodbye!
And no elephants galloped, but they don't charge much anyway.

MashkiaTsair 03 Oct 2010 , 7:18pm

Question about valuation:
(from article)
11. Low valuation of the gold in the ground

This is determined by dividing the market capitalization of the mining company by the number of ounces of gold in its prospects. You want the result to be as low as possible.

The Annual Report from "Norseman Gold" shows different numbers:

March 2009 Open Pit & Underground Resource and Reserve Summary: (in ounces of Gold)

Reserve – Proved 2.3k
Reserve – Probable 400k
Total Reserve 400k

Resource – Measured 130k
Resource – Indicated 1200k
Resource – Inferred 2400k
Total Resource 3700k

The current valuation of "Norseman Gold Plc"is =
£51.50 x 1.73 M shares = £89 M (x1.58) = $140 M USD

$140 M / 3700k ounces = $37/ounce (at £51.50/share based on "Total Resource")

Is my calculation correct or I miss something? Should I calculate based on "Total Resource" or "Total Reserve" ?

I am kinda newbie in Gold mining shares, and it is not my typical investment, so I just trying to understand the way to evaluate such companies.

Do you agree with my calculations ?


MashkiaTsair 03 Oct 2010 , 7:55pm

Also one thing I do not understand:
Company says they have 171,860,000 M shares, while according to Google, they have 1.73M shares. Which one is correct ?


TMFFlaneur 04 Oct 2010 , 9:09am

@MashkiaTsair - I was quoting Jim Slater directly, but anyway $37 an ounce seems very close to $40 an ounce to me -- he was probably rounding up. If he's correct that others have paid over $700 an ounce (I suspect it is more complicated than that!) then $3 isn't going to make much difference.

TMFFlaneur 04 Oct 2010 , 9:12am

Re: The number of shares in issue, these often vary between different data suppliers, depending on how well they've kept they're figures up-to-date. You can usually look in the company's latest annual report and at subsequent RNS' talking about new share issuance (or buybacks) to work out your own precise figure.

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