Endeavour into Gold

Endeavour's Youga Gold Mine in Burkina Faso produced 21,575 ounces of gold in the second quarter of 2011.

Today marks the fifteenth day in which the TSX has experienced a large point gain or loss, most of which have been triple digit. In the U.S., the Dow Jones has investors on the edge of their seats as volatility reigns supreme. A worsening economy, a US debt downgrade from Standard & Poor’s and a move from the Federal Reserve to keep interest rates near zero for at least the next two years are resulting in unprecedented uncertainty. Michael Cohn, chief market strategist at Global Arena Investment Management in New York stated, “We’re definitely in a recession of confidence, and that’s what it’s all about—confidence.”

In what has been one of the more dramatic sell-offs and recoveries in recent memory, many investment professionals are comfortable sitting on the sidelines until some stability returns to the equity markets and direction, whether that be up or down, is confirmed. But some money managers see opportunities in this environment. “Volatility is the friend of a long-term investors because he or she can take advantage of it if they have a strong stomach to buy stocks when they are getting crushed,” according to John Buckingham, chief investment officer at Al Frank Asset Management in Aliso Viejo, California.

With the U.S. capturing global economic headlines during the past three weeks let us not forget our friends in Europe. The German economy, the largest in Europe, nearly stalled in the second quarter as the European sovereign-debt crisis weighed on confidence. France’s recovery unexpectedly ground to a halt while Italy and Spain remained sluggish and Greece’s economy contracted.

In these turbulent times many investors are thinking the same thing: gold. In 2011, the yellow metal has jumped 45 percent, hitting a high of $1,817.60 on August 11th after the U.S. debt downgrade. “Gold is the quintessential hedge when there are worries about the economy,” said Dave Meger, the director of metal trading at Vision Financial Markets in Chicago.

Although gold is the word of the day, some feel that shares of gold producers, which have not escaped the sell-off in equities, are set to surge on gold’s record prices and, at some point, will outpace the gains of the metal itself. “You win a lot more with the shares,” stated John Hathaway, who manages $2.5 billion as a managing director at Tocqueville Asset Management LP. While Barry James, who manages $2 billion as chief executive officer at James Investment Research Inc. in Xenia, Ohio, simplified the argument for gold equities, “There’s the leverage effect of owning a mining stock. Miners can get it out of the ground for a few hundred dollars and that gets multiplied as the price of gold rises.”

One TSX miner has been making a transition from a diversified mining investment banker into a junior gold producer. Endeavour Mining (TSX: EDV) shifted their focus towards gold after the 2008 market melt-down saw their share price fall from over $11 to a low of $1.20. Since then, the company has been undertaking a quiet yet successful transformation and has a producing mine in Burkina Faso and two development stage projects in Mali and Côte d’Ivoire. In response, Endeavour’s share price has doubled and currently trades at $2.42. But it appears that the company’s executives are not satisfied. Management states in their most recent financial statements, “Endeavour’s strategic acquisition program is targeting complementary producing, or near-term producing, gold assets.”

Canaccord Genuity analyst Nicholas Campbell likes what he sees and, on August 5th, issued a “speculative buy” on Endeavour Mining with a target price of $5.00 per share. Within Campbell’s report he writes, “We believe that EDV’s strong balance sheet ($2 per share in working capital) should provide some downside protection during a challenging junior mining environment and allow it to take advantage of depressed equity valuations to further grow its production through acquisition.”

Disclosure: at publication date Endeavour Mining is a client of MiningFeeds.com.

Mike Luft

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