Five of the Best: Gold miners set to surprise in 2012

Angelos Damaskos, manager of the £40m Junior Gold fund and CEO of Sector Investment Managers, picks five gold miners best placed to benefit from the upswing in commodity prices.

Damaskos said the upward trend in the gold price is set to continue as the complex crisis facing developed economies persists.

"Very difficult market conditions and further cuts in government spending will have a dramatic devalue effect on the strongest Western currencies, causing investors to seek another source of value."

"This has an exaggerated effect on the gold price, and we expect, on an inflation adjusted basis, $2,500 per ounce is the right price to look for in 2012."

He conceded gold mining shares are back to August lows after a brief rebound, despite their advantages such as the ability to use operational gearing, and having future cash generation among the highest in the equity space, he said.

"However, when recovery picks up, the markets could be extremely daunting and investors should be already positioned rather than shy away or panic-trade.

"Being in gold miners now just means be prepared for a potential strong re-rating across equities," he said.

Damaskos added indicators show investment is shifting more and more into gold-related assets, and gold mining stocks are not decoupled from the physical asset. He expects physical gold and gold equities to align in the long term.

The manager has tripled exposure to one of the few non-producing companies he holds, as part of the 20% of the portfolio he uses to bet on future operations.

He increased his weighting in British-Canadian company, European Goldfield, from 1.7% to 5% after it announced it will receive backing from a Qatar sovereign fund. "It is a very rare opportunity for a company to be funded to production in such adverse market conditions," he said.

Focus Minerals, an Australian producing house, "is posting very strong forecast for productivity growth next year, which will add to the cheap operational costs."

With a market value of $230m, Damaskos calculated the group will generate $30m of cashflow each quarter.

The manager backs it as a combined entity with heightened growth prospects, after the firm took over Crescent Gold, "a smaller company with high operating costs that had done everything wrong".

"Focus Minerals stepped in providing liquidity and restructuring the balance sheet. The combined entity is expected to produce 220,000 ounces of gold a year, which would put it into the mid-tier sector. This would prompt a re-rating of its shares and consequently much higher profits."

Spanish Mountain Gold - The firm is at the latest stage of development and should come to production within the next two years. Its operating bases in Canada enjoy a very safe jurisdiction and well understood environment, labour and geology circumstances. Infrastructure and electricity are available next to the property, which makes operating costs very attractive.

Forecast production is 200,000 ounces a year, "which, with a market capitalisation of 80m Canadian dollars, means the firm would pay back costs in a couple of years, leading to a huge cashflow generation."

The manager is retaining a 5% weithting in South African miner Kingsrose Mining, held since the first positioning phase of the portfolio. "It has been trading quite stably at 4-5 times above the market, and can represent a really good entry point at the moment. We hold it as a long-term trade as it has no debt and operates at one of the lowest producing cost, at $150 per ounce."

The company produces 45,000 ounces of gold a year, which is forecast to grow to 75,000 next year. Damaskos expects this will have a "very dramatic effect on valuations, which will add to exciting results from the exploration program"

The manager said the firm, worth 330m Australian dollars, sits in the mid-cap spectrum, "where we consistently keep half of our portfolio as we want to have good and sound liquidity levels."

Damaskos also favours Allied Nevada Gold, $3.1bn in size, for its "tremendous growth prospects" and very low operating costs. "It is mostly a gold miner but also offers a considerable silver product., plus the cap size makes it a sound holding for us, so we keep it at around 5% of the portfolio."