Successful commodity investing is a tough game.
Whether it’s oil and gas, gold, or almonds; all commodities at some point or another become subject to price rises as demand for the commodity climbs, before a big spike in supply as producers try to cash in, and then a crash in price as supply floods the market.
To win as an investor you need to get in before the demand rises and get out before the price plummets.
I closely limit my exposure to commodities, but avoid gold and gold miners like Newcrest Mining Limited (ASX: NCM) and EVOLUTION FPO (ASX: EVN) in general because gold has limited industrial use and in my view the price often fluctuates based on investor emotions, a driver no one can easily predict or measure.
Having said all that, one company I do like is Northern Star Resources Ltd (ASX: NST). If I had any faith in gold I would probably buy shares in it. That’s because despite being at the mercy of gold prices, Northern Star Resources is a remarkably well positioned business.
Going for gold
For instance even with a market capitalisation of around $1.7 billion the company has no bank debt. By comparison Newcrest Mining had around $3 billion in debt at 30 June 2015, and almost 30% gearing. Debt is not inherently bad, but can become a risk factor when commodity prices fall.
Northern Star has also been building a war chest of cash. For the most recent December quarter, the company added $30 million in cash assets after paying a dividend and investing in growth. The company declared a 32% return on equity in its 2015 Annual Report and was sitting on $226 million in cash assets at 31 December 2015, all strong positives against volatile commodity prices.
And still growing
Northern Star’s rapid rise in production as it acquired assets from distressed sellers may simply have been good timing, but looking ahead the company is aiming to continue developing the assets and grow gold production significantly over the next two years.
From producing 215,419 ounces of gold in the 2014 financial year (FY14), Northern Star is targeting production of up to 570,000 ounces in FY16, and 700,000 ounces in FY18. This is described as “organic” growth from investment in exploration and development of existing assets.
Exploration and development of course come with additional risks, like failure or the danger of gold price changes and currency fluctuations. But if the prudent management of Northern Star continues into the years ahead the company will be better placed than many to ride out volatility.