The Gold Report: Despite the lack of an economic recovery
and the reality of ever-increasing debt, the U.S. dollar and the equity
markets remain strong, while gold (as denominated in U.S. funds) remains
weak. Do you expect these conditions to change?
Adrian Day: Yes, absolutely. The strong dollar and equity markets
are two of the main reasons why gold has been down over the last 18 months.
The third reason is anticipated higher interest rates.
Gold will recover because the U.S. dollar is overvalued against most other
currencies, by as much as 25–30% against most Asian currencies. We're not
expecting an equities crash any time soon, but the risk level in the market
has increased, and stocks are no longer fundamentally cheap. So investors
will increasingly look to the protection gold affords. As for higher interest
rates, the U.S. Federal Reserve has, by its actions if not its words, made
clear it is waiting for perfect conditions before raising rates. I'm not
quite sure when we're going to see such conditions. In any event, higher
rates are already factored into the gold price, and should the Fed approve a
quarter-point rise, I would actually expect gold to rise on that news.
TGR: Many people argue that continuing zero-interest rates are the
only reason the economy is doing as well as it is. Do you agree?
AD: No question. This has been one of the weakest-ever economic
recoveries out of a recession. My greatest concern is the lack of tools
remaining to the Fed should the U.S. economy enter even a modest recession.
Interest rates are too low. A strong economy requires capital investment,
which comes from savings. Creating wealth by printing money builds a facade.
It depreciates the value of the underlying currency, encourages speculation
and punishes savers, especially retired people.
TGR: What do you make of the reports that China and Russia,
possibly with the aid of Brazil and India, intend to create a rival to the
petrodollar?
AD: This is coming. History teaches us that economic dominance is
never permanent. States that dominate the world through military and economic
power establish a reserve currency. But over time, the baton is passed from
one state to another, and in many cases it's clear who the successor will be.
Britain was once the dominant power, and the pound was the reserve currency
throughout the 19th century. After World War I, however, it became obvious
that the U.S. would replace Britain as the leading world power and that the
U.S. dollar would become the reserve currency.
America's situation today is similar to what the British faced a century
ago. I believe that the U.S. has peaked. It is hugely indebted, with a huge
welfare state and an overextended military. So who will replace the U.S.?
This is not obvious. That's why we have this attempt by the BRICs to weaken
the dominance of the dollar. This is a step along the path to a new reserve
currency. If this is to be the Chinese yuan, that's probably 15 years away,
because China's capital markets are just not deep enough today. In the
meantime, the excess U.S. dollars all over the world will begin to return
home, and this process will depreciate the value of the U.S. dollar.
TGR: The current bear market in precious metals equities began in
April 2011. Despite all the talk of "creative destruction" among
mining equities, are there still too many "zombie" companies?
AD: Far too many. It is too easy to raise mining money in Canada.
If you discount a company's stock and give a five-year warrant at a small
premium, someone will buy it, even if it's only an existing shareholder who
liquidates his current holding to get a more attractive deal in the new
round. In addition, there is flow-through financing, which would often not be
possible were there no tax benefits.
In 2014, 57% of the financings in the gold sector were for less than $1
million ($1M). We're now seeing financings for as little as $100,000 or even
$50,000. This money is spent merely to keep the lights on and pay salaries.
It's not spent on actual work in the ground. I've even heard of financings
where the entire point was to repay old debt owed to directors and
managements. About 45% of TSX-listed gold companies have less than three
months cash on hand.
TGR: A higher number of listed companies means more fees for the
exchange, but what effect does the continued existence of hundreds of zombie
companies have on the gold sector as a whole?
AD: It affects the whole sector negatively because every $1M put
into a bad company is $1M that's not going into a better company. Investors
burned by investing in zombie companies turn away from gold companies for
good.
TGR: Which companies have you been buying lately?
AD: Over the last couple of months, we have been buying a lot of
companies. The seniors include Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) and Goldcorp Inc.
(G:TSX; GG:NYSE). Smaller producers include Eldorado Gold
Corp. (ELD:TSX; EGO:NYSE) and B2Gold Corp.
(BTG:NYSE; BTO:TSX; B2G:NSX). We've also bought Pretium
Resources Inc. (PVG:TSX; PVG:NYSE), Vista Gold Corp.
(VGZ:NYSE.MKT; VGZ:TSX), Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) and Balmoral
Resources Ltd. (BAR:TSX; BAMLF:OTCQX).
TGR: What do you like about Balmoral?
AD: First, it is a prospect generator, and I like this model.
Producers are hungry for resources but with few exceptions aren't doing much
exploration themselves. And so they rely increasingly on others to find their
future reserves. This model doesn't guarantee success, of course, but I would
point out that shares of the prospect-generator group have outperformed
traditional exploration companies by quite a wide margin over this bear
market.
Second, this is a company run by good people with a good balance sheet who
are doing good work on the Detour Trend in Quebec, a very prospective area in
a great jurisdiction.
Third, Balmoral shares are very cheap right now.
TGR: Balmoral likes to point out that many juniors in its region
have been bought out by larger companies. Is this likely to happen to
Balmoral?
AD: It's an obvious buyout candidate. But I think the company would
prefer to further prove up its properties before it was taken out.
TGR: What other prospect generators do you like in Quebec?
AD: Midland
Exploration Inc. (MD:TSX.V) is one of my favorites. The company just
raised $14M, primarily from a group of Quebec institutions. So it is
extremely well funded for a small company. Midland has 22 projects with 10
active joint ventures (JVs). Its partners include Agnico Eagle Mines Ltd.
(AEM:TSX; AEM:NYSE), SOQUEM Inc. and Japan Oil, Gas and Metals National Corp.
(JOGMEC). Midland is very active, its management is very disciplined and it
has a very low burn rate of about $1M a year.
TGR: Did Midland need to raise this $14M?
AD: No, it didn't, as it had nearly $5M at the time. Typically, I
would argue against increasing the number of shares by 50%, but this
financing demonstrated the confidence Quebec and its institutions have in
Midland. After Virginia Mines, a company with a similar model to Midland, was
acquired by Osisko Gold Royalties Ltd. (OR:TSX), the Quebec pension funds
were looking for another horse they could back.
Gino Roger, Midland's president and CEO, has certainly demonstrated he
knows how to spend money wisely. He has a great exploration team, and I have
no doubt the company will get a discovery.
TGR: Which prospect generators do you like in Mexico?
AD: The first would be Riverside
Resources Inc. (RRI:TSX.V). The company also has properties in British
Columbia (B.C.) and Arizona. This is one of those companies you buy and then
put away while waiting for a discovery. It has 16 projects, including five
JVs and strategic alliances with Antofagasta Plc (ANTO:LSE) and Hochschild
Mining Plc (HOC:LSE). These alliances are interesting because they result in
someone else paying much of the money for generating prospects, and if the
partner does not move a project to joint-venture status, Riverside retains the
prospects generated.
Riverside features a very tight share structure and highly disciplined
management under President and CEO John-Mark Staude. The company doesn't
waste money. It has a little over $3M in cash now, plus some equities, enough
to carry it for the next 12 months.
TGR: And the second prospect generator you like in Mexico is?
AD: That would be Almaden Minerals, but there is some question
whether this company is still a prospect generator. However, shareholders
have just approved splitting it into two. Almaden will keep the Tuligtic
property, which is close to a prefeasibility study.
The spin-off, called Almadex Minerals Ltd., will get about $3M in cash and
another $2M in gold bullion, over 20 development properties and over 20
royalties. This new company will mean Almaden is returning to its roots. And
this new prospect generator will not have to raise more money anytime soon. I
think it's a good time to buy Almaden, because you'll get Almadex as well for
only $0.80/share. I should point out that we already own more than 5% of
Almaden. And I think Ixtaca will get sold. It's an attractive project in one
of the best mining jurisdictions.
TGR: Which prospect generator do you like in Europe?
AD: Reservoir
Minerals Inc. (RMC:TSX.V), though not specifically because it's in
Europe! It already has a big discovery, the Timok copper-gold project in
Serbia, which has an Inferred resource of 65.3 million tons (65.3 Mt) at 2.6%
copper and 1.5 grams per ton (1.5 g/t) gold, including 6.8 Mt at 9.6% copper
and 5.9 g/t gold. This is a JV with Freeport-McMoRan Copper & Gold Inc.
(FCX:NYSE). Should Freeport take the project to feasibility, Reservoir will
retain 30%. Freeport is drilling Timok extensively now, and if the existence
of a large enough deposit is confirmed, it's pretty clear it will buy that
remaining 30%.
Reservoir Minerals Inc. has several other JVs in the Balkans and North
Africa. The company has about $40M in cash, about 25% of its market cap. This
puts it in an excellent position to develop what it has and generate further
prospects. And this cash also allows it to take a strong position with
Freeport with regard to the sale of Timok. Simon Ingram, Reservoir's
president and CEO, is technically very competent and knows how to tell his
company's story.
TGR: How have the majors come out of the bear market?
AD: As a group, they bought at the top and sold at the bottom. They
bought heavily in 2009–2011, and they've sold heavily ever since then.
They've taken over $50 billion in write-offs. For an industry as small as
gold mining, that is really quite appalling.
Now we have a situation where many companies with advanced projects are
valued so cheaply, but few of the bigger companies have taken advantage.
There are some exceptions: Franco-Nevada, Agnico Eagle Mines, Goldcorp. But
even today, some of the majors are continuing to try to sell their assets
into a weak market.
TGR: Would two of those be Barrick Gold Corp. (ABX:TSX; ABX:NYSE)
and Newmont Mining Corp. (NEM:NYSE)?
AD: Yes, as they were two of the companies that went a little
crazier during the good times. We are beginning to see a pickup in mergers
and acquisitions (M&As), and as gold begins to move up on a sustained
basis, which I expect by early next year, we should see a sustained increase
in M&As.
As I mentioned above, the gold companies need reserves. Barrick Gold went
from 104 million ounces (104 Moz) to 93 Moz in reserves, even though it kept
the price at which it values its reserves the same. Goldcorp reserves are
down 8%, while IAMGOLD Corp.'s (IMG:TSX; IAG:NYSE) are down 15% and Coeur
Mining Inc.'s (CDM:TSX; CDE:NYSE) 27%.
TGR: Why have you been buying Goldcorp?
AD: It has shown a strong growth profile. Over the last year, it
has brought three new mines on-stream: Éléonore in Quebec, Cochenour in
Ontario and Cerro Negro in Argentina. It has a good jurisdictional-risk
profile, operating as it does mainly in Canada and the Americas. And it has
the lowest net debt to market cap of any major mining company at 24%. The
sector average is about 47%.
Goldcorp is a disciplined company. Remember that after its hostile offer
for Osisko Mining, Osisko found white knights in Agnico Eagle Mines and
Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE). Goldcorp then raised its
offer, but after Agnico and Yamana raised theirs in turn, Goldcorp walked
away. That's unusual. Most companies let ego get in the way in battles of
this sort. Having increased its line of credit and sold off its shares in Tahoe Resources
Inc. (TAHO:NYSE; THO:TSX), Goldcorp is now poised to make a major
acquisition.
TGR: Which companies in the royalty/streaming sector are your
favorites?
AD: Franco-Nevada and Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX). There's not much
to say about Franco except to say that, if you want only one gold company,
buy Franco. It has the best people in the business. It has a great balance
sheet, strong cash flow and a diversified asset base with a strong growth
profile. It has about 350 mineral royalties, of which about 35 are producing
now, so there is plenty of potential. It is a good buy at less than
$50/share.
Royal is also a great company, although its balance sheet is not as good,
and it is not as diversified as Franco. But it probably has more near-term
upside, and with Thompson Creek Metals Co. Inc.'s (TCM:TSX; TC:NYSE) Mt.
Milligan mine in B.C. now producing, it will probably see a bigger revenue
increase than Franco over the next 12 months.
We also like Altius Minerals Corp. (ALS:TSX.V). This is non-gold, of
course, but it is a diversified company with roots as a prospect generator
that has consistently sought out royalties.
TGR: Which near-term producers has your company bought?
AD: Three: Romarco Minerals Inc. (R:TSX), Pretium Resources and West Kirkland
Mining Inc. (WKM:TSX.V).
TGR: Romarco began construction of its Haile gold mine in South
Carolina in May. Even so, shares are still under $0.50. Does this surprise
you?
AD: Not really, because this is the stage when shares of companies
like Romarco languish. There will be little excitement until its first gold
pour, which is scheduled for Q4/16. But I expect that over the next 9–12
months, we will see the share price move up steadily, to say $0.70–$0.90.
There is now an extremely low downside to Romarco.
Diane Garrett is one of the best CEOs out there. She always does what she
says she will. She has demonstrated her competence with local communities,
government agencies and the banks. She raised the financing for Haile without
any gold hedging, which is impressive.
TGR: Are you confident that Pretium will get the permits for its
Brucejack project in B.C.?
AD: Pretium will get the permits, but it's a long process. While it
waits, it continues to drill and is coming up with some very good results. I
believe that this stock still suffers an overhang from the dispute a couple
of years ago about the reserve calculation. Considering its Proven and
Probable resources of 6.9 Moz gold, the mine capital expenditure (capex) of
$747M is quite reasonable. Pretium is a very good buy right now.
TGR: Is the purpose of Pretium's current drilling to define what it
has, expand what it has, or both?
AD: Both. This is a very "nuggety" deposit, so much
tighter drilling is required.
TGR: How do you expect the capex will be raised?
AD: I doubt Pretium will have much difficulty financing once it
starts getting the building construction permits. The Zijin Mining Group Co.
Ltd. already owns 9.6% of the company. I suspect that a Chinese group will
come in and take over the company eventually.
TGR: On June 3, West Kirkland published a prefeasibility study of
its Hasbrouck project in Nevada. Were you impressed?
AD: Yes. Hasbrouck is a relatively small, relatively unexciting
project of 567 Koz gold. The after-tax net present value is $75.3M, with an
internal rate of return of 26%. But it's also a simple project with no
metallurgical problems, so all-in mining costs will be cheap at $779/oz, and
the initial capex is only $54.3M. Permitting in Nevada is more time consuming
than it once was, but given Hasbrouck's economics, shares are just
ridiculously cheap at $0.06. Part of the problem is that investors are always
looking for more excitement, for the big killing, and you won't get that with
West Kirkland.
TGR: Will the company have difficulty raising the capex?
AD: Well, $54.3M is not a lot of money in absolute terms, but it is
a lot for a company with an $18M market cap. I have faith in Mike Jones, West
Kirkland's president and CEO. He's not going to do anything foolish. He will
raise the money in the most appropriate way, debt mostly. West Kirkland has
little downside and represents a possible triple or quadruple over the next
18 months or so.
TGR: How long do you think that gold equities as a class will
remain cheap?
AD: Much depends on the gold price. Investors want a higher price
on a sustained basis before they really come back to this sector. Anyone
still in the gold market must be patient. That said, the senior gold
companies are trading at pretty much their lowest valuation levels ever, and many
of the juniors have market caps lower than cash on hand.
Investors can afford to be selective. They need to look at market caps and
ask what they are getting for their investment. They need to consider not the
number of ounces but their quality. They want companies that have sufficient
cash to pursue at least the next stage or two of their business plans. It may
take another year or 18 months before we see a general recovery in this
sector, but in the meantime, this is just a great time to be buying gold
companies. There's an embarrassment of riches.
TGR: Adrian, thank you for your time and your insights.
