Potential M&A make small gold miners a good bet

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Small gold miners will yield strong returns for investors over the next couple of years because of higher prices for the precious metal and anticipated takeover activity, a fund manager told Reuters on Tuesday.

Steven Poulton, a co-manager at London-listed Altus Resource Capital said the company's Junior Resources Fund launched in June 2009, had about 48 million pounds under management at the end of 2009.

"The gold sector shows the greatest value and has the best opportunities," Poulton said, adding that some of the smaller gold producers could be takeover targets for larger mining companies looking to replenish their resources.

Poulton and his colleague Ed Bowie are geology experts; both have worked for resource companies.

"We are looking to invest about 70% of the portfolio in gold equities in the first two years of the fund. Junior being defined as anything with a market capitalisation below 150 million pounds," Poulton said.

"Typically we are looking at the production and development stage - companies that have defined resources - less at the exploration stage."

The fund which returned more than 35% in the six months to December will eventually diversify across a broader range of commodities, such as base metals and energy minerals.

Altus' is based in Guernsey. Its share price has since June jumped more than 40% to 140 pence.

World class deposit

Gold itself earns investors nothing and in fact accrues storage costs. But investors have over the past couple of years made a beeline for the precious metal, to try and protect their portfolios from the financial crisis.

A weaker dollar has also boosted gold's status as an alternative currency. Also a plus are worries about inflation, which erodes wealth, because of the large amounts of money pumped into the global economy by government and central banks.

Spot gold hit a record high of USD 1,226.10 an ounce on December 3, more than 40% above the levels seen in January 2009. Prices have since slipped to around USD 1,100 as investors moved their funds into higher yielding assets.

Top holdings in the Junior Resource Fund include Toronto-listed Greystar Resources, which Poulton said has a "world class deposit" in Columbia.

"Greystar has 15 million ounces, it is a very significant project," said Poulton. "There is an element of political risk, but we have faith in Columbia as a mining jurisdiction. A number of major miners are there."

The International Finance Corporation, part of the World Bank, invested in Greystar last year.

Greystar accounts for 5.6% of the portfolio and Sydney-listed Perseus Mining is another 5.4%.

"It has over 5 million ounces in West Africa, a strong management team," Poulton said. "It's a likely takeover target."

Perseus Mining said last month it has received takeover approaches from North American suitors.