FUNDVIEW-Beware gold miners bearing stock offerings--Midas

Thomson Reuters






By Edward Krudy

NEW YORK, Nov 25 (Reuters) - As gold prices set records,
investors in gold stocks should watch out for miners raising
capital by issuing more shares and diluting investments of
existing shareholders.

Investors in gold miners seek protection from the threat of
inflation as government printing presses work overtime to
stimulate the economy. But their investments could be eroded in
a sea of new equity.

Gold has been in the headlines, making new highs on almost
a daily basis and at least one prominent investor announced a
new gold fund to a fanfare of news coverage. Some analysts have
warned of a gold bubble.

Spot gold hit a record high of $1,182.70 an ounce on
Wednesday and has risen 60 percent since late October 2008. The
Arca Gold Bugs index , which measures the performance of
15 big gold miners, is up around 190 percent during the same
period.

Low interest rates, growing budget deficits, and
uncertainty about the economy are driving more investors to the
lure of the precious metal as the U.S. dollar tumbles.

"Frenzies in the gold market are associated with mass
issuance of gold equities," said Tom Winmill, president of
Midas Management in Walpole, New Hampshire, in a recent
interview. "And that's when it's time to take some money off
the table."

Winmill, who manages the $122.8 million Midas fund ,
says secondary offerings have picked up recently especially
among smaller gold miners. While issuances are not at the high
levels in the first quarter of the year when he took some
profit, Winmill expects them to take off again as the price of
gold rises.

"If you had $3000 gold prices, there would be a huge amount
of capital that would be sought in order to open up these
mines, which are currently uneconomical at current prices," he
said.

Many smaller gold miners with significant resources in
harder to reach places, such as South Africa's Harmony Gold
Mining Co Ltd , fall into this category, says
Winmill.

One of the biggest secondary offering from a gold miner
this year was from Canada's Barrick Gold Corp ,
which raised over $4 billion in September.

But other smaller miners have also come cap in hand to
capital markets during the quarter such as Anatolia Minerals
Development Ltd and Allied Nevada Gold Corp .

More than 260 companies involved in gold mining globally
have raised equity capital amounting to about $33.4 billion
this year, according to Thomson Reuters data.

GOLD SET TO DOUBLE

Winmill believes conservatively that gold will double in
value in the next ten years and the best ways to ride that
wave, he says, is through owning gold mining stocks.

He insists he is not a "gold bug" predicting the imminent
demise of the world currencies but believes market dynamics
favor gold investors.

"I see the purchasing power of the dollar declining by at
least 50 percent in the next 10 years," said Winmill. "I'm
pretty comfortable that the gold price in dollar terms will be
a least double what it is today in ten years."

The fragmented nature of the industry means that Midas
predominantly holds stocks in mid-sized companies with a
smattering of bigger names.

About 98 percent of the fund's holdings are foreign stocks,
according to fund tracker Morningstar.

The fund has about 85 percent of its assets in gold miners,
says Winmill, and is up nearly 90 percent year to date,
according to Morningstar.

STOCKS BETTER THAN ETFs

One of Windmill's largest holdings is Kinross Gold Corp
, a Canadian miner based in Toronto, with
interests in the Americas and the Russian Federation.

Among smaller companies in the portfolio is Jaguar Mining
, a New Hampshire-based company that has mining
operations in the Iron Quadrangle region of Brazil.

Windmill prefers stocks to gold exchange traded funds such
as the SPDR Gold Trust because an increase in the price
of gold will have a greater impact on marginal profits.

If the price of gold rises 10 percent to $1100 an ounce,
then a producer who has been making $500 per ounce is now
making $600, an increase of 20 percent.

As prices rise, demand from jewelry manufacturers has been
falling, with the slack taken up by financial investors. But
Winmill is not worried about an asset bubble; he is content to
ride the upswing while it lasts.

"Is gold the greatest store of value? At this point I don't
think it makes any difference," he said. "I think gold's been a
bubble since the first person said, 'here's a coin. I will buy
your cow for this gold coin.'"
(Editing by Kenneth Barry)
((edward.krudy@thomsonreuters.com; Tel: +1 646-223-6314;
Reuters Messaging: edward.krudy@reuters.com@reuters.net))