Friday, 11 February 2011

GDXJ or GLDX, what to choose in the Gold Exploring Realm?

Note: the ticker of the Global-X Gold Explorer ETF has changed to GOEX in 2016.

The GDXJ ETF issued by Van Eck has become a reference for precious metals mining investors. Launched only 15 months ago, GDXJ has grown to 2.18 Billion $ by Feb. 7.
It counts 60 different positions among explorers & developers and some emerging or intermediate producers. GDXJ counts four silver miners in its top 10 holdings, among which Hecla is the largest holding. Van Eck has had a major success before with its GDX major gold miner ETF and most probably investors felt reassured because of this. Nevertheless, the lasting success of GDXJ was due mainly to its excellent performance over 2010, where it outperformed both the major miners and bullion gold. GDXJ seeks to replicate the Market Vectors Junior Gold Miners Index, the Factsheet mentions. The reference index and the ETF sharing the same corporate background, that doesn’t mean a lot. GDXJ paid a hefty dividend by the end of December 2010, distributing realized gains on successful exits to its investors. GDXJ is optionable as is GDX.

It has lasted a while, but since the beginning of November 2010, a competitor has risen. The child is baptised GOEX and is issued by Global X funds. Contrary to GDXJ, the new GOEX is a pure gold play and it is focussed on explorers and developers, not on miners. So the focus is quite different. Launched just over three months ago, GOEX hasn’t had much chance in growing yet, especially in the shade of its notoriously successful elder brother. By Feb 7, the market cap was barely 24.3 M$, about 90 times smaller than GDXJ.
GOEX only counts 30 positions. It seeks to replicate the solactive gold explorers index. Though I cannot prove this index was designed by Global X, graphs miraculeously start by november 2010, when GOEX was launched. Global X envisages to make GLDX optionable, but open interests are disappointing.
Total costs don’t differ a lot, with GDXJ marginally cheaper at 0.59% against 0.65% for GLDX.

Take-over targets
If tracking specific designed benchmarks isn’t too convincing, you should perhaps better evaluate the performance of this new family of junior mining or explorer ETF’s by the successful exits they can make. In over a year GDXJ has had one important exit: Andean Resources which was bought by GoldCorp. Just a week ago, Newmont launched a bid on Fronteer Gold. Happy surprise: both ETF’s have Fronteer among the components of their portfolio. GDXJ owns Fronteer Gold for 3.54 % of its portfolio, whereas for GOEX (with a more narrow focus), Fronteer Gold has risen to its top holding component at a hefty 6.45% of the GOEX portfolio.
Ventana Gold announced Monday Feb. 14 that it has agreed to let Brazilian billionaire Eike Batista buy the shares in the company he doesn't already own for C$13.06 per share.
The take-over doesn't bring about another giant stock price jump, since Ventana has been the target of a hostile take-over proposal by Batista's AUX Canada Acquisition Inc for three months now.

Both GOEX (4.36% on Feb 9) and GDXJ (1.91% on Feb 7) have Ventana Gold in their portfolio.
Two deals on a fortnight: seems those guys have a nose for buying potential take-over targets.

Gold Miner Pulse
Gold Miner Pulse (GMP) is a database of Canadian gold miners and explorers, including valuation reports and several classifications based on Reserves and Resources, Ore grades and Market cap/Ounces of PM. An analysis has been discussed before. Canadian explorers typically have a lot of exploration work going on outside Canada, often with some Latin American focus, but many times really operating worldwide.
Both ETF’s are heavily tilted towards Canadian PM Miners (some of which are quoted on American Exchanges as well). The GLDX portfolio contains 12 components from the GMP database, for 48.2% of its value. The GDXJ contains 20 components from the GMP database, for 41.2% of its value. GDXJ being more diversified, the number of GDXJ holdings is higher, but for a smaller total percentage.

Premium or discount ?
ETF’s have a Nett Asset Value, but trade as stocks. As such they may quote at a premium or a discount compared to the NAV. GOEX offers a graph on this, but GDXJ includes a table with the premium/discount at close since the ETF was launched. I include a scatter plot here.
Scatter plot of Premium or Discount to the NAV, click to enlarge
Ususally discounts or premiums are small, however you notice (regression line) that premiums occur more often when the share price of the ETF is progressing. During a gold market retreat, discounts are more frequent. Two excessive values were found: on Jul. 1st 2010 a hefty discount occurred in the midst of a several day sequence of PM weakness. The excessive premium dates December 29, when the GDXJ started quoting ex-dividend.

GDXJ had a 0.07% net debt on Feb 7. They aim to be fully invested, but withdrawals don't often balance new investings. To keep balance, stock positions either may be added on to or they may be trimmed.  GOEX has some cash on balance. The USD cash saldo is largely balanced by an overdraft, mainly in CAD. Nett cash positions or nett debt most likely vary from day to day.

The two ETF's don't match closely: both have their stronger and weaker points: the presence of silver plays in the GDXJ adds on potential but also volatility. The focus on explorers in GOEX adds potentially higher gains on take-over targets. And if you have the cash to spend, taking a stake in both is not a bad idea .

Further reading
The GDXJ ETF has been discussed earlier on this blogThat article was written a few days before GOEX was launched. An important conclusion still holds: GDXJ contains for over 50% 'medium cap mining stocks' (typically with a market cap between 1 and  5 Billion dollar.) Micro caps (< 200 M$) are rather rare and their weight is almost neglectable. GOEX (ex GLDX) is being discussed in a column by Scott Wright of Zeal (dated Apr. 29).

Update (May 27, 2011)
Since GOEX has been quoting for over six months now, it is time for a check on how this new ETF has been performing. A new posting: GOEX: the proof of the pudding is in the eating tells everything about it.

Further reading:

More similar papers are linked to in the top section of the list of blog articles.

1 comment:

  1. Gold will definitely have a long way to go. I can say it's still a good investment.

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