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A market hangover may be
causing suffering among gold mining equities, but some cash-rich companies
still beguile investors with record-breaking dividends. Dividend
distributions are up by about one-third year-over-year from many major mining
companies, according to David Christensen, chief executive and president of
ASA Gold and Precious Metals Limited. The Gold Report spoke with Christensen at the Denver Gold Forum in
this exclusive interview.
The Gold Report: This year could be
described as a hangover from the high gold prices of last fall. The price of
gold hit a high of around $1,900/ounce (oz); it is
now about $1,760/oz. Yet, we do see some bubbling and some positive news in
the space. I'm sensing a cautious optimism among institutional investors.
David Christensen: In recent weeks, there
has been a general uptick in enthusiasm for gold mining shares. As you
pointed out, it's been a very tumultuous year for mining shares and the gold
price. While the gold price has stabilized, it hasn't set a new high in more
than 12 months. That has led to some investors withdrawing money from the
mining sector.
At the same time, the
shares of many gold miners failed to perform. Cash flow was generally less
than investors expected given the relatively high prices. Mining companies
weren't generating the growth investors desired and internal rates of return
have been much lower than investors had been seeking.
"Dividend
distributions are up by about 30% year-on-year from most of the major mining
companies."
As a consequence, there
was a selloff in the gold mining shares. Part of the selling pressure was
newer money that came into the sector over the last few years, such as hedge
funds, looking to make an early exit from the sector. Gold funds typically
remain fairly static in terms of their overall portfolios, while hedge funds
come in and out of the sector. As the sector lost momentum and the general
equity markets began to improve, hedge funds found alternative places to put
their money. The consequence was that there were no buyers and a lot of
selling pressure. Many of these shares are down more than one-third from
where they were a year ago.
TGR: Still, there are so many
gold producers, many of which are in your portfolio, that are still operating
at very impressive cash flows with impressive balance sheets. How are they
attracting new money—the hedge funds and the generalists—back
into their shares?
DC: It's really pretty
simple. They have come out of a very rapid period of growth and are beginning
to generate very strong cash flows and earnings. Moreover, gold producers are
increasing their dividends. Dividend distributions are up by about 30%
year-on-year from most of the major mining companies. We have companies today
that are distributing three times what you could get from a safe T-bond
investment here in the U.S., while providing added portfolio diversification
from investing in a gold mining share.
TGR: That's pretty compelling
to a lot of investors who are looking for income right now.
DC: We see some good value
in the sector at the present time due to the increasing volume of
distributable cash flow. The simple cash flow multiples or multiples to net
asset value (NAV) for the industry are at the lowest valuations we've seen in
several decades—perhaps during my career. Many of the mining companies
on the senior side are trading at 0.7–0.8 times NAV. Mid-caps to
juniors are at about half of their intrinsic value. Now is a good time to consider
many of the gold mining shares.
TGR: ASA has around a
half-billion dollars in assets. How many stocks do you own in the fund?
DC: It fluctuates between
30–34 positions. Right now, we're probably at about 32 positions in the
portfolio. We're very heavily weighted toward some of the quality benchmark
companies that most people would be familiar with, such as Barrick Gold Corp. (ABX:TSX; ABX:NYSE), Newcrest Mining Ltd. (NCM:ASX), Goldcorp Inc. (G:TSX; GG:NYSE) and, of course, one of
the all-time stellar performers, Randgold Resources Ltd. (GOLD:NASDAQ;
RRS:LSE). Randgold has been the largest or
second largest position in our portfolio for a good part of the last five
years.
Beyond that, there are a
number of small companies that make up much of the growth component of the
portfolio. They are names that aren't on everybody's radar screens, such as Silver Lake Resources Ltd.
(SLR:ASX), Osisko
Mining Corp. (OSK:TSX), Detour Gold Corp. (DGC:TSX), Lake Shore Gold Corp. (LSG:TSX) and Stornoway Diamonds Corp. (SWY:TSX). These will change over
time depending on how we feel those companies are doing, but they do provide
a lot of the growth for the portfolio.
TGR: I noticed a couple of
platinum names and a silver name in the portfolio. It's not a gold-only fund,
but certainly is very heavily weighted toward gold.
DC: It is a precious metals
fund, which typically will mean that we may underperform some of the purer
gold shares in a rising gold price environment. However, we tend to look at
these investments over a longer cycle. For example, we invested in platinum
mining shares for the long-term positive attributes of the platinum industry
several decades ago and during that time, they have
been some of the best performing investments in the portfolio. We have found
that a more diversified precious metals portfolio has outperformed the gold
portfolio over longer periods. But a gold fund, at times, will provide more
leverage to a change in the gold price.
TGR: A subsector within the
space is the royalty sector. You own Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) and Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX).
DC: The royalty sector is
one of the stronger business models in the precious metals space, and Royal
Gold and Franco-Nevada are the two big players. They have historically been
phenomenal companies in the portfolio. We are very long-term shareholders in
those names.
TGR: What about Silver Wheaton Corp. (SLW:TSX; SLW:NYSE)?
DC: ASA does not own Silver
Wheaton. There are a number of reasons for it. At the moment, we prefer to
get most of our silver exposure through a little company called Tahoe Resources Inc. (THO:TSX; TAHO:NYSE), which has been a strong
performer in the portfolio during the last year. Tahoe is developing a
high-grade silver asset in Guatemala, which we think is very attractive.
TGR: What progress has Tahoe
made on that asset?
DC: Tahoe has commenced
construction of its project. It is starting the second decline into its
operations, and things seem to be going very well. It doesn't have its
operating permits yet, but it wasn't expecting to have them by this time.
Tahoe doesn't need them for another nine months or so before it commences
operations. At this point, the development of the asset seems to be on time
and on budget, and the stock has continued to perform very well. We believe it
has one of the better management and operating teams in this industry.
By the way, there have
been no issues with its location in Guatemala either.
TGR: Guatemala doesn't seem
to be having the political or jurisdictional problems that have been
impacting other Latin American countries.
Do you have a favorite
jurisdiction? Your assets are really all over the planet.
DC: Gold deposits are put
where Mother Nature put them. I don't have the option to move an asset. As a
result, we don't have the benefit of picking countries first. What we do is
choose a quality project. If the quality of the project is sufficient to
offset the risk of operating in a given jurisdiction, then we'll consider it.
Nobody in their right mind would take a low-quality project in a high-risk
jurisdiction.
"Now is a good time
to consider many of the gold mining shares."
At the same time, we
might take a lower-return project in a safer jurisdiction as part of our
portfolio makeup. That risk adjustment is a constant ongoing process within
the portfolio. You know, there was a time when a gold fund, such as ASA,
would have been largely a South African portfolio. Up until the 1970s, there
were only a handful of gold mining operations outside of South Africa.
TGR: The Carlin Trend hadn't
been discovered at that point.
DC: Newmont Mining Corp.
(NEM:NYSE) existed, but it was also a significant
copper producer. There was Homestake Mining, which
is no longer in business, and Hecla Mining Co. (HL:NYSE).
That was largely the North American gold mining industry. At that time, ASA
was largely a South African portfolio of gold mining shares. As the world has
developed and exploration techniques have improved, we've become more
diversified.
TGR: It was interesting to
hear in presentations today about some of these large capital-expenditure
projects that are taking place in far-flung locations all over the planet
that one would never have thought of in the 1950s.
DC: I'll be honest—I
have favorite countries that I like to travel to and visit operations. They
aren't necessarily where I prefer to invest.
TGR: Your fund has obviously
struggled in the last several quarters because of languishing equity prices
in the gold and silver space, even with the strength of the commodity price.
Have you adjusted the portfolio at all based on the relative weakness of
equity prices? I know you're a long-term bull in the space.
DC: ASA does tend to be a
very long-term investor. There are securities in our Top 10 holdings that
we've owned for decades. They didn't become Top 10 holdings because we bought
10% of the fund in the stock. They became Top 10 because we bought 1% that
grew 10 times. They've just gotten there through success.
"The royalty sector
is one of the stronger business models in the precious metals space, and
Royal Gold and Franco-Nevada are the two big players."
In the course of the
last year, as the crisis in the industry broke and mining finance wasn't
available to develop projects, those companies that were going to be in need
of financing in the next year were some of the ones that we quickly ejected
from the portfolio. We knew that they were going to be under significant
pressure and that we were going to be able to buy those back as the market
environment improved. There was a lot of turnover in the portfolio that
wasn't typical for us.
TGR: I'm assuming that those
were some of the smaller- and mid-cap companies.
DC: Absolutely. There were
some adjustments from a risk standpoint in the larger caps, as well. The
market began to deteriorate in the gold sector. Some valuation gaps broke out
where companies that we considered to be very high-risk assets that weren't
being discounted by the market became overweight positions and some that were
lower risk had taken the brunt of the selling. Some adjustments were made to
lower the overall risk of the portfolio and hopefully improve its returns
going forward.
TGR: Do you have a mandate?
Will you look at a company of any size?
DC: We look for asset
quality and good management teams first and foremost. When it comes to market
cap, we don't have a hard and fast rule. We generally like a portfolio
position to be at least 100 basis points of the portfolio or 1% of assets
under management. If we're a $500 million (M) portfolio, I have to be able to
move $5M of stock in and out of that position at any one time. If the
liquidity isn't there to do that, then the company is simply too small. It's
a simple math problem for us.
TGR: You have to have the
liquidity. The only company that I don't really know in your holdings is
Silver Lake. Tell me a little bit about that one. Is that still in the
portfolio?
DC: We actually met with
Silver Lake management about 30 minutes ago. One of the benefits of being in
Denver is all the major companies in the industry are here at one time.
Silver Lake is
developing several assets in Australia, which we think are very strong. Most
of the management comes from Western Mining Co., previously one of the
largest mining companies in Australia, predominately in nickel. The strength
of the management team and its approach to the industry is a combination that
could make it an outperformer going forward. We're looking at this asset very
carefully.
TGR: The company is not
listed on a North American exchange at this point.
DC: It is only listed in
Australia.
TGR: The Australian stock
exchange is looked on with a little bit of a jaundiced eye. When you buy an
Aussie stock, do you take a closer look at their balance sheet? Do you do
more due diligence on a stock like that than you would on a North
American-listed issue?
DC: I hate to be flip, but
honestly, no. There are certain financials that we look at in any asset. The
level of modeling and the diligence is the same regardless of where they're
listed. The exchange they're listed on is a tertiary consideration.
Newcrest Mining is one
of the largest Aussie mining companies in the world.
TGR: And it's in your top
five holdings.
DC: Yes, it's our number
three position.
TGR: We haven't seen too much
discovery. There was GoldQuest Mining Corp.'s (GQC:TSX.V) big discovery in the Dominican Republic. Is CGA
Mining Ltd. (CGA:TSX; CGX:ASX) still in your
portfolio?
DC: Oh, yes, very much so.
TGR: That's in the
Philippines. We've seen some interesting things out of the Philippines.
DC: Historically, we haven't
done well in the Philippines as investors. CGA, for us, is a bit of, for lack
of a better term, a concept stock that we believe will be a good performer
for the portfolio going forward. It has a good project and strong management
team. It provides a little bit of exposure to that jurisdiction.
TGR: You're on the board of
the Denver Gold Forum. What are your responsibilities?
DC: The Denver Gold Group is
a not-for-profit organization that puts on conferences to assist the gold
mining industry reach out to investors, like myself, for potential investment
consideration. We host these conferences every year. The board tries to take
the concerns of our members, the companies that are here, and reflect them in
the conference to do the best job we can for the industry.
TGR: The general attitude
here is one of measured optimism. It feels as if we're all moving forward
cautiously in this space. There's a little more excitement today than there
was even a month ago.
DC: Look at what's going on
in the world today: concerns about political and economic situations in the
United States, Europe and the Middle East, what's going on with the euro and
the U.S. dollar. People can't help but consider gold as an alternative
investment. Gold prices will continue to do well for the next 12–24
months. Many countries, in fact, are looking to diversify their
holdings—as are investors—into gold bullion, as well as dollars
and euros. It's only a natural process. It's smart for investors to keep
anywhere from 2% to 5% of their portfolios in precious metals. It provides a
good diversification for an overall portfolio.
TGR: Thank you, David. I
appreciate your time.
David Christensen is CEO, president and chief
investment officer of ASA Gold and Precious Metals Limited. He joined the
company in 2007 as vice president of investments and assumed his current
positions in 2009. Prior to joining ASA, he worked with Gabriel Resources, a
junior gold company, from 2004 to 2007, where he worked on the feasibility
study and financing plans for the Rosia Montana
project. He has earned a StarMine ranking for some
of the most accurate earnings estimates, and has been consistently ranked by The Wall Street Journal
and Reuters as one of the precious metals industry's best analysts.
Christensen earned his Bachelor of Science degree in business administration
at California State University, Chico. He earned his Master of International
Management from the American Graduate School of International Management.
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DISCLOSURE:
1) Sally Lowder of The Gold Report conducted
this interview. She personally and/or her 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: Goldcorp Inc., Detour Gold Corp., Franco-Nevada Corp., Royal
Gold Inc. and Tahoe Resources Inc. Streetwise Reports does
not accept stock in exchange for services. Interviews are edited for clarity.
3) David Christensen: I personally and/or my family own shares of the following
companies mentioned in this interview: ASA Gold and Precious Metals Limited.
I personally and/or my family am paid by the
following companies mentioned in this interview: ASA Gold and Precious Metals
Limited. I was not paid by Streetwise Reports for participating in this
story.
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