HardAssetsInvestor

Written by Brad Zigler  |

April 25, 2011

The Year’s Best Gold Miner Bet

Details

Real-time Monetary Inflation (last 365 days): 3.2%

Last week, we looked at the trailing performance of gold mining shares, as a class, vs. bullion, using the indexes underlying the Market Vectors gold miners ETFs as our benchmarks.

That's not to say an investor couldn't have made money with a recent mining stock investment. There are some standout stocks in the indexes. Here's a look at the five gold producers in the NYSE Arca Gold Miners Index that have advanced the farthest above their 200-day moving averages. The index is tracked by the Market Vectors Gold Miners ETF (NYSE Arca: GDX):

• Minefinders Corporation Ltd. (NYSE: MFN) Vancouver-based Minefinders explores, develops and mines precious and base metal properties in Mexico and the United States. Among the company's principal holdings is the Dolores Mine, an open pit gold and silver mine located in the Sierra Madre range in northern Mexico.

• Gammon Gold Inc. (NYSE: GRS) Another Canadian company, Gammon exploits gold and silver deposits in various properties in Mexico, including the states of Chihuahua, Sonora, Nayarit and Guanajuato. Gammon is headquartered in Halifax, N.S.

• Silver Standard Resources Inc. (Nasdaq: SSRI) is a global outfit with interests in Argentina, Australia, Canada, Chile, Mexico, Peru and the United States. The Vancouver-based company seeks to acquire and develop silver, gold, tin, zinc, lead and copper properties.

• Harmony Gold Mining Co. Ltd. (NYSE: HMY) Harmony's primary focus is gold, mined above and below ground in South Africa, though properties in Papua New Guinea and Australia. The company is based in Randfontein, South Africa.

• Goldcorp Inc. (NYSE: GG) Vancouver's Goldcorp markets gold, silver, copper, lead and zinc from its interests in Canada, the United States, Mexico, and Central and South America.

One-Year Performance (02-Apr-2010 Through 21-Apr-2011)

Benchmarked against the universe of gold producers represented by GDX, these five stocks all made more money—albeit with more risk—than a buy-and-hold position in the miner ETF.

Now, about that risk.

Risk is reflected in each issue's annualized volatility—the variance around the stock's average price over the course of a year.

The Sharpe ratio reflects each issue's risk-adjusted return; that is, the payback for taking on additional risk. A ratio above 1.00 denotes an investment that earns more than a percentage point in return for each point of volatility assumed.

Beta measures risk relative to a benchmark; in this case, GDX's price. The metric here isn't volatility per se, though generally speaking, most stock analysts would tell you that a beta higher than 1.00 means a stock is more volatile than its benchmark, and that a beta below 1.00 denotes a stock with less volatility.

Beta's important because it's used to produce the ultimate measure of risk-adjusted returns—alpha. Alpha tells you how much "excess return" you could expect from a stock you pick versus a beta-adjusted investment in the benchmark. It's your reward for stock-picking.

From the looks of things, it seems Minefinders Corp. has been the best stock pick from the GDX universe over the past year. And, with alpha as our yardstick, Goldcorp Inc. is the "worst of the best."

This is all history, of course. Nothing's to say that Minefinders, or any of these stocks, or the sector, for that manner, won't run out of steam in the year to come.

But that's a topic for another column.