Kopernik Global’s Bets On Gold Keep Paying Off

Contrarian investing is not for the faint-hearted. Among all the strategies used by hedge funds and institutional investors, it is probably one of the hardest to master and that’s because as humans, our general tendency is to follow the herd and seek validation. However, despite being one of the toughest strategies to learn and implement, contrarian investing also has the reputation of being one the very few strategies that is able to routinely generate stellar returns irrespective of market cycle. A testament to the prowess of this investing strategy is the returns that David Iben‘s Kopernik Global Investors has generated since the beginning of 2016.

While most hedge funds have found it hard to remain in the green this year, the Tampa, Florida-based hedge fund has produced outsized returns for its investors in the first two quarters of this year and is on pace to deliver its best yearly returns since its inception in 2013. According to our returns algorithm, Kopernik Global was the fourth-best performing fund in our database during the second quarter, as its March 31 long positions in stocks with a market cap of at least $1 billion delivered 27.9% weighted average returns during the quarter, pushing the fund’s year-to-date returns using the same formula to 40.4%.

A large chunk of the gains that the fund has generated in 2016 have come due to the conviction that Mr. Iben showed in gold miners three years ago. According to Kopernik Global Investors’ latest 13F filing, its U.S. equity portfolio was worth $565.12 million at the end of June and its top-four equity holdings, all of which were mining companies, accounted for over 43% of the value of the fund’s portfolio. In this article, we’ll take a look at the fund’s top-five equity holdings heading into the third quarter and discuss how these stocks have been performing of late.

At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).

#5 Pandora Media Inc (NYSE:P)

– Shares Owned by Kopernik Global (as of June 30): 3.5 million

– Value of Holding (as of June 30): $43.53 Million

Let’s start with Pandora Media Inc (NYSE:P), which was the only non-gold mining company among Kopernik Global’s top-five equity holdings at the end of June. During the second quarter, the fund reduced its stake in the music streaming company by 14%. However, there were several other hedge funds that became bullish on the company during the same period, as ownership of Pandora among the funds covered by Insider Monkey rose by 11 to 46 and the aggregate value of their holdings in the company increased by 67% to $1.29 billion. Shares of Pandora have rallied since April and are currently up by 8% year-to-date. A large part of the recent gains have come on the back of rumors that the company might be an acquisition target. Most analysts who track the stock don’t consider these rumors to be unfounded, as Keith Meister’s Corvex Capital recently filed a petition to increase its stake in the company to 15% from 9.99%, and has been pushing Pandora to explore strategic alternatives, including selling itself.

#4 Royal Gold, Inc (USA) (NASDAQ:RGLD)

– Shares Owned by Kopernik Global (as of June 30): 736,308

– Value of Holding (as of June 30): $53.03 Million

With Kopernik Global having initiated its stake in the company during the final quarter of 2015, Royal Gold, Inc (USA) (NASDAQ:RGLD) is the most recent large bet that the fund has made on the gold mining sector. Though Kopernik reduced its stake in the company by 9% during the second quarter, the value of its holding in Royal Gold, Inc (USA) (NASDAQ:RGLD) still increased significantly during that time due to the terrific rally in the company’s stock. So far in 2016, shares of Royal Gold have appreciated by over 115%, and most analysts feel that they can go much higher still. On August 8, analysts at Barclays PLC reiterated their ‘Overweight’ rating on the stock while upping their price target on it to $99 from $62, which represents potential upside of 27%. Hedge funds covered by Insider Monkey don’t seem to share the same bullish sentiment on the stock, as the ownership of it among those funds declined by four to 17 during the second quarter. John Thiessen’s Vertex One Asset Management reduced its stake in Royal Gold by 17% to 90,900 shares during the second quarter.

We’ll check out the performance of Kopernik Global’s top three stock picks on the next page.

#3 Barrick Gold Corporation (USA) (NYSE:ABX)

– Shares Owned by Kopernik Global (as of June 30): 2.56 million

– Value of Holding (as of June 30): $54.64 Million

Moving on, Kopernik Global reduced its stake in Barrick Gold Corporation (USA) (NYSE:ABX) by 15% during the second quarter. Though shares of the Ontario-based gold mining company have gone through a notable correction in the past few weeks, they are still trading up by 146.15% this year. The company recently announced that it will be forming a joint venture in Venezuela in which the government of Venezuela will own a 55% stake. Despite the humongous gains that the stock has registered this year, mostly on the back of the rally in gold prices, most analysts feel that the stock will continue to do well even if gold prices stagnate, as Barrick Gold Corporation (USA) (NYSE:ABX) has paid off a large amount of its debt in the past few quarters and its profitability is on the rise. The number of hedge funds in our system long Barrick Gold inched up by four to 51 during the second quarter. Hugh Sloane‘s Sloane Robinson Investment Management upped its Barrick Gold holding by 19% to 1.48 million shares during the quarter.

#2 Kinross Gold Corporation (USA) (NYSE:KGC)

– Shares Owned by Kopernik Global (as of June 30): 11.84 million

– Value of Holding (as of June 30): $57.9 Million

Kinross Gold Corporation (USA) (NYSE:KGC) was another gold mining stock in which Kopernik Global reduced its stake during the second quarter, by 27%. Like the shares of Barrick Gold, Kinross Gold Corporation (USA) (NYSE:KGC)’s stock has also suffered a significant correction in the past few weeks, but despite that is currently trading up by 141% year-to-date. On August 25, the company revealed that it has suspended operations at its Maricunga gold mine in Chile and laid-off 300 employees following a judicial order that upheld the decision of Chile’s environmental regulator to shut down the water system linked to the mine. Though the Maricunga gold mine accounted for 8% of Kinross Gold’s gold production in 2015, the company said that suspending its operations there is not likely to impact its cost and production forecast for its fiscal year 2016. At the end of June, there were 31 hedge funds in our database that reported owning a stake in the company, with the aggregate value of their holdings in it being worth $722.86 million.

#1 Cameco Corporation (USA) (NYSE:CCJ)

– Shares Owned by Kopernik Global (as of June 30): 7.24 million

– Value of Holding (as of June 30): $79.47 Million

Cameco Corporation (USA) (NYSE:CCJ) was the only company among Kopernik Global’s five most valuable equity holdings in which the fund increased its stake during the second quarter, by 17%. It is also the only stock among those five that is currently trading in the red for 2016, down by 23.33%. The Saskatchewan, Canada-based uranium producer has lost over 60% of its market capitalization since the second quarter of 2014. However, because the company has kept its quarterly dividend unchanged during that time, its stock currently sports an attractive annual dividend yield of 3.27%. Despite Cameco Corporation (USA) (NYSE:CCJ) reporting weak numbers for its most recent quarter, analysts think that its stock will do well over the long-term as a number of reactors will become operational going forward and the demand for uranium is expected to rise by over 50% in the next two decades, mainly as a fuel for electricity generation. During the April-to-June period, ownership of the company among the funds that we track dropped by two to 19, while the aggregate value of their holdings in it also fell by $77 million to $266.44 million. Two hedge funds that sold off their entire stakes in the company during the quarter were Neil Chriss‘ Hutchin Hill Capital and Matthew Tewksbury’s Stevens Capital Management.

Disclosure: None