Why This Money Manager Is Going Long on Gold Equities

The Gold Report: Would you tell us a little about your money management company?

Howard Flinker: I've been in the business a long time and have a small money management firm. My approach is to exclude technology, first of all, and then everything else is essentially based on Graham & Dodd, long or short. On the long side, I want companies that have good operational statistics and records and cheap prices, and on the short side, expensive prices and lousy operational records.

I start in both cases with a contrary opinion. If almost everybody likes it, I ask myself, what can go wrong? I see if I can find it. And if I can find evidence to answer the question, I'll sell it short.

On the long side, when nearly everybody dislikes it, I say, OK, things will get better. Let me see if I can find signs when they begin to get better commercially. And on the long side, too, sometimes I say, OK, they're not making any money. What are the assets worth? Can I figure them out?

I like the cyclical wind at my back. In the case of gold and silver, I know there is rising demand in China and India (along with shrinking supply). In May, Chinese, Indian and Turkish demand took off again. On the short side, I want to see oversupply.

TGR: What kind of due diligence do you do on a company before you invest?

HF: I must meet with management. I want to get a gut feeling about them to see if what they say matches what it is in the published documents.

This morning, I talked to an engineer about a mechanical technique at Pershing Gold Corp. (PGLC:NASDAQ). Last week, I talked to another one because I had questions that I didn't understand. If I don't find an answer, I'll just keep looking.

TGR: Would you talk about a couple of companies in your portfolio that aren't on everyone's radar?

HF: One is Pershing Gold. I found a mention of the company in The Northern Miner. Its low capex caught my eye. I couldn't believe it. I called the investor relations person and he confirmed the data. I asked some more questions, and I said to myself, this is a money machine. I worked out that return on capital all-in, not the mining accounting but real accounting, would be about 40% pre-tax. You don't find businesses in very many places that earn that kind of money.

Pershing's just-released preliminary economic assessment (PEA) came out a little better than I thought in most respects. The company is going to spend a little more money to add some more equipment, but the incremental return on that incremental equipment is so high, it makes a lot of sense, like 80%/year on the additional investment. Overall, it's still going to make 40% or so pre-tax, maybe a few percentage points more at $1,200/ounce ($1,200/oz) gold.

In the PEA, management used the figure of gold at $1,250/oz. Gold at $1,250/oz adds 5–8 percentage points to my first calculation; at $1,350/oz gold, about 18 percentage points. You don't find businesses like that in gold mining or silver mining.

One could argue that it's only a seven-year project. So the returns are good for seven years and then what? But the reality is probably about double that. Either the company itself or one of the previous owners drilled below the water table and found almost as much ore as the company is disclosing above the water table. Naturally, one would worry about environmental approvals, but the state of Nevada has passed a law allowing Pershing Gold to drill below the water table. Pershing Gold would buy the land for about $0.5 million or $1 million and then drill there. It has the support in Congress of Harry Reid and a Republican and others.

The ore below the water table will extend the life in the PEA by probably 100%. Whether it's approved this year or next year, it will happen.

So when you can make 40% on your money at $1,200/oz gold for 7 years or 12 or 14 years, you have a money machine. That's what attracted me to Pershing Gold.

TGR: Do you think Pershing is a takeover target?

HF: Pershing's management now has two choices: either it is going to build this thing and crank out a lot of cash and profits, or it is going to wait for someone to come along and take it out. It could go either way. I think Pershing, at this point, might lean toward building and operating it.

TGR: Would you talk about another company that you're interested in right now?

HF: Exeter Resource Corp. (XRA:NYSE.MKT; XRC:TSX; EXB:FSE) shares are up a great deal today (June 29) for reasons neither I nor management know. Exeter is run by management that built and sold another mining business in Chile. Exeter is in the dry high plains of Chile.

Exeter has 18 million ounces (18 Moz) of gold resources. It has enough cash to last about four years if my bullishness about gold and silver is wrong, so it'll be around. It has 50 Moz or so of silver and about 5 billion pounds of copper. And I give it little value for the silver and copper just to make it simple arithmetically.

Exeter also has something else that's worth a great deal of money, and that's water. Water is scarce in the mountainous plains of Chile. Exeter could put it into its capex and pipe the water about 75 miles to its project when they need to, or the company can work on some kind of swap arrangement, or it can lease it the way you lease a car. You pay so much for a liter of water and then at the end of the lease, you have to give it back. And that would be the lessee's problem to find where to give it back. It's extremely valuable.

By itself, the water is probably worth 10 times what the stock is selling for. The gold is worth more than that. So we're talking about a big multiple either way. Exeter is cleanly financed and has no debt.

Somebody is going to come along. There's Kinross Gold Corp. (K:TSX; KGC:NYSE), there's Barrick Gold Corp. (ABX:TSX; ABX:NYSE), there are a few other companies that need water. Kinross actually has some environmental regulatory problems and may need to strike a deal. But if not, there are a number of mining companies that need water besides Exeter. And Exeter could always use the surplus.

We don't find many 18 Moz resources these days in one place, one place politically friendly, no less.

TGR: Is there another opportunity you wish to discuss?

HF: It is a technological disruptor even though I said I'm not technological. It's really a financial disruptor. It's called GoldMoney (XAU:TSX). It used to be called BitGold Inc. and merged with GoldMoney.

GoldMoney has developed a method for you and me to pay each other through it via a gold central depository. The company has seven vaults. So you and I would buy the gold or not, but we open an account. To transact funds, either it has to be in the same currency or it has to go from, for example, Canadian dollars to gold to U.S. dollars. Each transaction has between a 0% and 2% charge altogether or 0% to 1% on each side.

If you go through the banking system worldwide, the fees add up to between 5% and 7.5%; heck, there's a 3.5% charge if you go to Canada and use your MasterCard. GoldMoney has already developed the software. It's been functioning very smoothly even in the Brexit.

GoldMoney is transacting like bitcoins through gold. It is such a disruptor and offers such a huge savings that it is going to get a lot of business. As is stands, GoldMoney has been in business 12 or 13 months or so. The number of subscribers that it has acquired is just slightly behind what Facebook did in the first year. It's ahead of PayPal, LinkedIn, Twitter and Uber in their first years. The company is adding people who know they can save a lot of money, and there's a real economic advantage to this. The thing that attracted me is its aspect of gold.

Brexit has helped GoldMoney. I got a Tweet that said it's the busiest day the company has ever had, most sign-ups, most transactions. When there's turmoil like this, I can understand that that happens.

GoldMoney has seven vaults located around the world. So the vault side of the business has been around 15–20 years and nobody ever lost a nickel because somebody stole or misplaced the gold. It's audited every day by Brinks in all seven places.

TGR: Do you have any parting thoughts for our readers?

HF: The only things I'm long these days are gold and silver related. The reasons why I'm interested in gold and silver are not because the stock market's going to go down. That's a freebie. Demand rising in Asia is so potent, and supply is still shrinking. Mine supply turned down in Q4/15 for the first time in at least 10 years that I've tracked. That cannot reverse very quickly. We know how long it takes to build a mine. Recycling has come down immensely. It shrank 40% from the peak in 2011, and apparently it's still shrinking. So if you have rising demand, as I believe will continue in India and China, and shrinking supply, gold has to go a lot higher.

We now have monetary craziness that we've never seen in history—what the heck are negative interest rates?—that's got to come out somehow. It has to affect gold beneficially. Monetary inflation the way the central bankers have been creating money—that's also a freebie. So my feeling is you want to own gold, you want to have demand and supply at your back. Silver, too. And all these other things that people usually discuss are coming free. You're getting it for nothing. So I am pretty enthusiastic. I would think if you're looking five or eight years down the road, you're talking $3,000, $3,500 for gold.

TGR: Thanks for your time.

Howard Flinker has managed money long and short at Flinker & Co. since 1981, following 13 years at various brokerage and money management firms. He headed to Wall Street after obtaining an MBA at Columbia Business School.

Disclosure:
1) Patrice Fusillo conducted this interview for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Pershing Gold Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Howard Flinker: I own, or my family owns, shares of the following companies mentioned in this interview: Pershing Gold Corp., Exeter Resource Corp. and GoldMoney. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. Clients of Flinker & Co. hold shares of the following companies mentioned in this article: Pershing Gold Corp., Exeter Resource Corp. and GoldMoney. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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