SMALL CAP IDEA: Are smaller gold mining firms the better option?

Gold is close to a record high price and might well be on course to break through the historic US$2,000 per ounce mark.

At the beginning of this week, the price was holding firm at just over US$1,920 per ounce.

The only time it’s ever been higher was a week earlier when the price briefly hit US$1,930.

At just over £1,550 per ounce, the sterling price is also nudging at records, although there was a run up towards current levels back in the spring of last year as the Russian invasion of Ukraine combined with chaos in UK domestic politics to encourage investors to move into haven assets.

The more creative of UK investors, though, haven’t just been buying physical gold or ETFs.

Value: Gold might well be on course to break through the historic US$2,000 per ounce mark. At the beginning of this week, the price was holding firm at just over US$1,920 per ounce

They’ve also been moving into equities.

The reasons are simple enough.

Most gold mining companies have cost bases which are reasonably fixed.

Inflation can move things around a little bit, especially if companies are overly leveraged towards oil for their energy costs.

But, in general, once the overall cost at which an ounce of gold is produced – the all-in sustaining cost – is established, it can often stay fairly stable.

And that means that at times when the gold price jumps up significantly – as it has done by almost US$300 per ounce since November – all the gains go straight to margin.

Big gold miners, like Endeavour and Barrick do well. But heavyweight investors are already well exposed to these.

It’s the mid-caps and smaller producers, like Caledonia Mining, Pan African Resources, Ariana Resources, Chaarat Gold, Resolute, Scotgold, Shanta and Serabi that tend to get the real boost.

But there’s often a delayed effect, as market sentiment catches up with fundamentals, and investors work out exactly where the best gains are to be had.

No two gold miners are alike of course, which is where the stock picking skill enters back into the equation.

Gold companies offer the production of a safe-haven asset with the corresponding downside of operational and – sometimes jurisdictional – risk.

But some companies have a better track record than others in this regard, and backing an experienced team is probably the key to making the right choices in this space.

In Southern Africa, both Caledonia Mining (1,135p) and Pan African (18p) look attractive and well-seasoned, boasting long track records of successful gold production and decades of experience of operating in the country – respectively Zimbabwe and South Africa.

Not easy jurisdictions at the best of times, and yet these companies make it work.

Caledonia has just completed the expansion of production at its long-lived Blanket mine in the south of Zimbabwe and is currently also absorbing the acquisition of the country’s largest undeveloped gold resource.

It’s managed to keep operating throughout the ups and downs of recent Zimbabwean history, to the extent where it’s now a significant player at a national level.

For its part, Pan African also has long years of experience operating in South Africa, keeping production going at some of the country’s most historic mines.

The chief executive Cobus Loots comes from a Black Economic Empowerment background and also has plenty of experience dealing with South Africa’s powerful mining unions.

Throughout the years Pan African has kept annual production at or around the 200,000oz mark, and although the mines haven’t always been easy to work, the company has managed to find a way through.

Shanta (12p), too, has had the occasional glitch in what’s generally been a strong performance over the years at its mines in Tanzania and, like Caledonia, it too has significant upside to the production profile in the shape of multi-million ounce exploration potential across the border.

In North Africa, Centamin (116p) comes in and out of favour in Egypt, while in Ethiopia it looks like KEFI (0.75p) might finally be about to get the long-awaited Tulu Kapi project off the ground.

Other existing London-listed producers that are worth a look include Chaarat (10.9p), which has been operating a mine in Armenia for some time, and which also has significant upside from developments in Kyrgyzstan; Serabi (38p), which has production in Brazil; Australian company Resolute (16p), which has a long track record of production in West Africa; and local champion Scotgold (40.5p), with its small mine in the Grampians.

And a hat-tip to Ariana Resources (3.4p), which has interests in small-scale production in Turkey.

Ariana has stayed the course over the years, where other mightier names have fallen, and has produced real returns for shareholders.

Aside from the hard cash it’s paid out when deals have gone its way, its shares are also up significantly over the past few years, although a re-rating in response to the latest strength in gold is only faintly in evidence.