The world still needs
gold and other natural resources, but we may need a new investment model to
sustain them, says Byron King, writer and editor for Agora Financial's Outstanding Investments and Energy
& Scarcity Investor newsletters and contributor to the Daily Resource
Hunter. Despite ongoing market volatility, he names several midtier and small-cap gold equities for investors with a
"reasonable" tolerance for risk. In this exclusive Gold Report interview, King also shares his perspective
on the practical and political future of gold mining in South Africa.
The Gold Report: Among the 14
investments in your Outstanding Investments portfolio of precious
metals companies and funds, there are 10 companies and 4 funds. All 10
companies have market caps above $1 billion. How did you select them?
Byron King: Let me answer the
question by referring to something that Chuck Noll said when he coached the
Pittsburgh Steelers in the 1970s. Every year, during the National Football
League draft, people would ask him what position he was going to draft for.
Noll's answer was that he didn't draft for position; he looked for the best
all-around player.
I do the same for the Outstanding
Investments list. I don't pick a particular type of play or method of
operations. I look for the best particular company in any given month when
I'm making a recommendation. I want a company with long-term potential and
portfolio staying power.
TGR: Is it important that
all of those companies pay a dividend?
BK: It is. I want paying
the shareholders to be part of management's philosophy. I want paying the
shareholders to be as important to management as paying their own salary, or
paying the electric bill or anything else.
TGR: Was that important to
you before 2008 or is it is a more recent preference?
BK: I've always liked
dividends, certainly from large companies. Large companies with large cash
flow spend money for all sorts of things. Companies pay big bucks for
executive salaries, headquarters and corporate jets. Okay, I get it. Still,
the company had better have money for its shareholders. Companies need to
include shareholders as regular creditors.
TGR: What do the funds add
to the portfolio?
BK: Trading flexibility,
more than anything else. If you want to own physical metal, then own physical
metal. Take delivery. But if you want to be able to trade in and out of metal
movements, funds are okay. Also, funds offer investors a way to expose their
portfolio to the upside of the gold and silver plays without locking
themselves into a particular company.
For example, when
Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) had a
situation where the structure of its mine in Québec became unsafe and
had to stop operations, Agnico-Eagle took quite a hit. Whereas, if you own a
fund that owns a variety of gold mine companies or precious metals, you don't
suffer the big hit from a one-off disaster at a particular company.
TGR: What is your rationale
for recommending the SPDR Gold Shares exchange-traded fund (GLD:NYSE.A)?
BK: I recommend it for
trading purposes only. I make a point of saying that SPDR is a play for when
you want to trade in and out of the fundamental metal. If you want long-term
gold holdings, you should own physical gold or find another way of doing it,
not through SPDR.
TGR: There are no major
silver producers represented in the portfolio. Tell us about that decision.
BK: I got out of a couple
of large silver producers about a year ago because I thought silver was
entering a decline, which it did. That does not mean I would not get back in
to the silver producers in the months to come.
TGR: Impala Platinum Holdings Ltd. (IMP:JSE) is the only company in
the portfolio that does not have a Buy rating. Why not?
BK: Impala is an intriguing
company. It has great potential upside, but it's frustrating. Because it is a
South African play, there's an element of political risk.
Still, I believe
platinum has a very strong upside. Impala could benefit from that. I would
call Impala a Buy for people with a stronger than usual stomach for risk.
TGR: Of the 10 companies in
the Outstanding Investments portfolio, what are a couple that you
think offer the most value right now?
BK: For someone with a two-
to three-year timeframe and a reasonable tolerance for risk, NovaGold Resources Inc. (NG:TSX; NG:NYSE.A) is finally making good
progress up in Donlin Creek, Alaska. Donlin Creek is one of the world's largest new gold plays
with well over 30 million ounces (Moz) Identified.
You cannot ignore NovaGold as an important player
in the coming years. The question is how it will get from the here-and-now to
those years to come. Everything about NovaGold has
been slower and more costly than we would like. In another interesting angle,
NovaGold spun out a copper play.
TGR: Yes, NovaCopper Inc. (NCQ:TSX.V; NCQ:NYSE.A). Tell us about NovaCopper and how that will work.
BK: Basically, NovaCopper is the Upper Kobuk Mineral Project (UKMP) in
northwest Alaska.
For people with a
long-term timeframe, the Upper Kobuk project, under the NovaCopper
banner, is worth adding to the portfolio. Investors will have to be patient
and realize they'll go through the up-down rollercoaster cycles as the play
develops and evolves. But for a long-term resource play, I think NovaCopper has long-term reward.
TGR: NovaGold
also has looked into working with third parties for the gas pipeline, the
port facility, the oxygen plant and various mining equipment at Donlin Creek. These could potentially reduce its capital
needs by about $1 billion, or approximately 20% of its capital expeditures, so it would have to raise less capital to
meet its financial commitments to Barrick Gold Corp. (ABX:TSX; ABX:NYSE) to develop Donlin Creek. Will this ever get to production or does Barrick just take it out? [Editor's Note: NovaGold has not engaged in nor undertaken to engage in
any leasing agreements at this time.]
BK: I anticipate an
eventual takeover by Barrick. If I were Barrick's management, I would want to add the entire body
of that gold resource to my bottom line for my own defensive purposes and to
impress the stock market.
TGR: Some of the companies
in the Outstanding Investments portfolio have large mines or
significant exposure to Africa. South Africa, with its prolific Witwatersrand
basin, is still the continent's largest gold and platinum group metals (PGMs)
producing region, but gold production in South Africa went down in 2011 and
there are whispers that the ANC wants to nationalize at least a portion of
the country's PGM mines. What is your take on the current state of mining
politics in South Africa?
BK: I was just in South
Africa, in May. First, South Africans generally are nervous about what's
happening with the euro, the dollar and the Chinese economy. As a major
resource-exporting country, those economies are South Africa's markets.
They're the cash register for South Africa. So with all the issues in Europe,
North America and Asia, South Africans feel as if they are being pulled along
by events that are far out of their control.
In addition, as the
price of gold and other South African commodity exports drops, the South
African national income account drops. What's more, because much of the
accounting is done in U.S. dollars, the strengthening dollar is creating cost
inflation in the South African mining industry. The country is getting less
money for its products, yet it is paying more to operate its mines. That is
very troublesome for the political powers and for the industry.
Unfortunately, the way
to deal with the immediate situation is to lay people off. In a country where
unemployment is as rampant as it is in South Africa—5% officially, and
more like 50% when you count underemployment—that becomes a very dicey
political issue. Right now, the big issue in South Africa is the day-to-day
economics of the mining business.
When you get into the
bigger, pie-in-the-sky takeover questions, the South African political
structure has to account for the fact that many of the largest mining
operations are extremely expensive to operate because the mines are so deep
and technically challenging. The future of deep mining in South Africa is not
putting people in the ground to do the work; the only way South Africa can
remain a large-scale miner, certainly in the Witwatersrand basin, is with
robotic mining.
But automation and
robots raise all kinds of technical and cultural issues. One miner down below
might support 10 people working in the plant on the surface, and those 10
people working on the surface might support 100 people in their local
village. So, one mining job underground in South Africa might be the key to
100 people eating or not eating.
TGR: Some of the bigger
mines employ 10,000 people. They do not have the mechanized infrastructure of
a North American operation.
BK: No, and mechanization
is a very contentious issue with the National Union of Mineworkers in South
Africa. However, the economics and safety issues are such that many of the
large South African mines must move toward more automation or they will have
to shut down the mines. The mining companies are already doing the research
and development. I know this. I've seen some of the futuristic technology.
TGR: Is South Africa a safe
place to invest?
BK: I am OK with investing
in large, well-known, name-brand companies with liquidity on the markets in
Johannesburg, London, the U.S. or Canada. I am nervous about South African
politics there in the medium to long term. For the average North American
investor who wants an array of mining or energy stocks, owning shares in a
few South African companies listed on North American and European exchanges
is fine, but keep your eyes open.
TGR: What about other
jurisdictions in Africa? Has the recent turmoil in Mali and subsequent
selloff created opportunities, or should retail investors stick to safer
jurisdictions?
BK: Right now, one of my
strongest small-cap or micro-cap recommendations is Reservoir Minerals Inc. (RMC:TSX.V), which is in Serbia.
The Serbian angle alone for copper and gold makes Reservoir Minerals a great
play, but it also has some very promising acreage in Gabon.
TGR: Is that a gold play?
BK: Yes, at an early stage.
It is based on geologic research performed in years past by France's Bureau
of Geological and Mining Research, which identified some very promising
pre-Cambrian greenstone plays in Gabon.
TGR: Where are Reservoir's
projects?
BK: East of Belgrade, it
has a gold mine at Deli Jovan. This is a mineral district that goes back to
the Roman Empire. A gold mine there was blasted through solid gabbro back in
the early 1900s and closed just before World War II. The Reservoir people
opened it up after 75 years. To my mind, this is a very promising gold-mining
district.
Reservoir also owns
acreage adjacent to the Bor copper deposit in
Northeastern Serbia. At one time, Bor was the
largest copper mine in Europe. Reservoir has mineral claims along strike,
north and south of the Bor mine, which it is joint
venturing with Freeport-McMoRan Copper & Gold Inc
(FCX:NYSE).
TGR: Is there one other
small-cap or micro-cap name you could leave our readers with?
BK: One of my favorite
small gold players is Carlisle
Goldfields Ltd. (CGJ:TSX; CGJCF:OTCQX) in Lynn Lake, Manitoba.
Carlisle is pursuing the gold mineralization in an existing mining
district—an old copper-nickel play from the 1950s and 1960s. The old
miners never went after the gold because the price did not support it, way
back when. But there is a remarkably large gold-silver resource in the area.
Lynn Lake has railroad
access, which lessens infrastructure costs dramatically. There also is an
airfield nearby. There is a lot of old mining heritage and mining history
there. It's not that you would really reactivate any of the old works, but in
terms of a brownfield development in the midst of the boreal forest of
northwest Manitoba, this is a very promising gold-silver play.
TGR: Basically, Carlisle is
working on an extension of the Canadian Shield that goes into Manitoba and
stretches around Hudson Bay. Does it have a maiden resource yet?
BK: Carlisle has over 2 Moz Identified, and I think there is more to come. It has
an aggressive drilling program. It is cashed up with enough money to do what
it needs to do. It already spent the money needed for drilling. Moving ahead,
it just has to do back-office lab work and paperwork to process the NI
43-101. I expect Carlisle to show stronger and stronger numbers in subsequent
iterations of the NI 43-101. I think it's a strong takeover candidate.
TGR: Who would do that?
BK: I do not want to be
overly speculative. An Agnico-Eagle type of company, a strong midtier that needs a nice resource. I expect its 2 Moz will double in the next 6 to 12 months based on data
that's still being crunched, and without much new drilling. I think Carlisle
would make a very attractive 3 to 5 Moz addition to
a midtier player.
TGR: Are there rosy days
ahead or should investors expect continued volatility?
BK: I think we will have to
live with volatility for the foreseeable future. The good news is that the
world needs resources. There are seven billion people out there. A billion
are doing all right, just now, and the other six billion want to get there,
too.
The next big issue is
whether the world economy supports the investing model we've grown up with.
The China story is beginning to unravel. The Chinese are pouring less steel, and even rejecting shipments of iron ore. It's a
slowdown that's been building for a while, and now we have to deal with it.
We have unending
problems in Europe. No need to elaborate there, right? Meanwhile, the U.S. is
in the middle of a presidential election season. Everything that anyone says
for the next six months will be nothing but political propaganda; you have to
work really hard to decipher the truth. As the summer wears on, the U.S. will
reach its debt limit and we'll have those arguments and the threat of a U.S.
government shutdown all over again. All of these big picture things are
weighing down on people's willingness to invest in the future.
I was at a conference
last week at Harvard University. I was in the room with senior executives
from high-tech firms, large money managing firms and such. Everyone talked
about how nervous they are about the future. One person explained why he's
sitting on a huge wad of cash and not spending. He said, "I can deal
with a recession every 10 years, but if we are going to have recessions every
two or three years, I am going to accumulate as much cash as I can. I will
sit on it and ride things out, good and bad."
People are nervous about
the future, about investing, about whether they will ever see a return on
their investments. We're living in a world of return-free risk. Where's the
future in that?
We have to learn to live
with market volatility. That does not mean there are no opportunities out
there. It just means that the risk profile of owning for the long term will
be much more problematic.
TGR: You said the world
needs resources, but does the world really need gold?
BK: Easy question. Yes, the
world needs gold. Gold prevents the people who make and run fiat currencies
from doing anything too stupid, although I seldom fail to be amazed. The
people in charge are really pushing the limits of that stupidity-envelope.
TGR: Thank you for your
insights.
Byron King writes
for Agora Financial's Daily Resource Hunter. He edits two
newsletters: Energy & Scarcity Investor and Outstanding
Investments. He studied geology and graduated with honors from Harvard
University, and holds advanced degrees from the University of Pittsburgh
School of Law and the U.S. Naval War College. He has advised the U.S.
Department of Defense on national energy policy.
Click here for a free copy of
Bryon King's award-winning Outstanding Investments.
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He
personally and/or his family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: NovaGold Resources Inc. Streetwise
Reports does not accept stock in exchange for services. Interviews are edited
for clarity.
3) Byron King: I personally and/or my family own shares of the following
companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this
interview: None. I was not paid by Streetwise Reports for participating in
this story.
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