RBC's notes tied to NYSE Arca Gold Miners offer mildly bullish bet on gold equity, value play

By Emma Trincal

New York, Sept. 20 - Royal Bank of Canada's 0% Accelerated Return Notes due November 2012 linked to the NYSE Arca Gold Miners index offer exposure to precious metals via mining stocks, a way to play the gold rally without being overly bullish, sources said.

The payout at maturity will be par of $10.00 plus triple any gain in the index, up to a maximum payment of $12.50 to $12.90 per note, according to an FWP filing with the Securities and Exchange Commission.

The exact maximum payment will be determined at pricing. Investors will be fully exposed to any index decline.

Investors expect only a moderate growth in the underlying index and one that will not exceed the value of the cap at 25% to 29% for the term, according to the prospectus.

Trailing gold

"This is an interesting idea because the gold miners haven't rallied as much as gold," said Frederick Wright, partner and chief investment officer at Smith & Howard Wealth Management.

"I haven't seen the miners as an underlying before. I've seen gold a lot."

The NYSE Arca Gold Miners index provides exposure to publicly traded companies worldwide involved primarily in the mining of gold and silver.

A well-known exchange-traded fund tracking this index is the Market Vectors Gold Miners, which trades under the ticker symbol "GDX."

Value play

Lee Kramer, president of Capital Management Analytics, said that the gold miner index is a value proposition for investors.

"It's relatively attractive. I like the gold miners. They are value stocks," he said.

"There is a huge discount between the price of gold, which has hit record highs, and the price of gold miners, which until recently has been lagging.

"Things are beginning to change, and you've had a tremendous run-up in gold miners over the past couple of months. ... They're up 20%. But the disconnect with gold is still there, and there's still value."

He said that Barrick Gold Corp., the largest constituent of the index with a 15.66% weighting, offers an attractive valuation given the gap between this stock's price-to-earnings multiple and that of the rest of the market.

"It's the biggest North American gold miner, and it trades at a discount to the rest of the market," he said.

The same is true for Newmont Mining Corp., the third largest holding in the index, which, he said, used to trade at a "large premium" and now is priced at a discount to the overall stock market.

"The actual gold price has done a lot better than the miners," Kramer said.

"If you think that the gold rally still has legs but you don't want to bet the farm on it, then this may be a good way to play gold.

"Obviously, you can't be too bullish.

"If you really see value in those stocks and think that the price-to-earnings multiple will expand, then you may consider buying the stocks.

"This note is moderately bullish because you get capped. But you get the three times leverage."

Moderate bulls

The risk-versus-reward profile of the note, however, is not one size fits all, the financial advisers said.

"If I'm bullish, I'd prefer to buy the stock," said Kramer.

"This is a middle-of-the-road approach. You're bullish but willing to have the cap.

"I might want the downside protection in exchange for a lower cap, or maybe two times leverage instead of three, for the downside protection."

Wright said that he was willing to live with less leverage for a higher cap or, "even better," for downside protection.

"This note has the same risk profile as investing in the ETF directly. The advantage is that they give you leverage," he said.

"But to me, one of the value-added of structured notes is the ability to offer some downside protection to the client. That's why I would be more likely to make that trade-off."

The notes are expected to price in September and settle in October.

Bank of America Merrill Lynch is the agent.

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