The Gold Report: You prefer to value gold based on its worth
relative to other financial benchmarks. Tell us about some of your go-to
ratios and why they are meaningful.
Carsten Ringler: I'm looking at different ratios between different
baskets of assets like, for example, the gold to real estate ratio. In
January 1980, when gold peaked at $850 per ounce ($850/oz), a single-family
home in the U.S. was $74,500 and the ratio was 88 oz, meaning it took 88 oz
to buy the average home. At the moment a single-family U.S. home averages
$237,400, which means you would need 202 oz gold to buy that house in today's
market. Factoring in inflation since 1980 by using the CPI calculator from the Federal Reserve Bank of Minneapolis,
gold should be around $2,473/oz. That means gold is very much undervalued.
Another ratio I look at is gold versus the Philadelphia Gold and Silver
Index (XAU:NASDAQ), which consists of a basket of different gold and silver
producers. I divide the price of this index by the gold price, and the ratio
is currently .0417, but at its peak on May 31, 1996, the ratio was 0.38. That
means the value of the gold and silver producers has fallen dramatically over
the last 19 years, meaning that there's a lot of upside in precious metals
stocks if the market is recovering, perhaps even 500–700% upside.
And the ratio between the S&P 500 ETF Trust (SPY:NYSE.Arca) and the
Market Vectors Junior Gold Miners ETF (GDXJ:NYSE.Arca), a basket of junior
gold producers, is 0.095 versus a high of 1.41 on Dec. 6, 2000. That means
essentially the same thing. If we are going back to the ratio highs that we
hit a few years ago, there's huge upside in gold mining stocks.
TGR: You use a chart that shows gold's annual price performance
since the year 2000. Over that 15-year period, gold has increased an average
of roughly 10% annually in all currencies. Isn't that chart really about the
monetary expansion that has taken place over that same period?
Source: goldprice.org
CR: Absolutely. Since the financial crisis in 2008–2009, many
central banks have been printing money to avoid deflation. Until 2011, the
correlation between money printing and higher precious metals prices was
quite high. I see gold and silver as currency; precious metals have anchored
financial systems for thousands of years and do have a positive track record.
I'm really bullish on gold and silver, especially silver because it is
used in more than 10,000 industrial applications. About 800 million ounces
(800 Moz) of silver are coming from mine supply, plus an additional 200 Moz
come from recycling each year, currently worth roughly $15 billion ($15B).
But the U.S. national debt grows by $6.2B every 24 hours. This kind of
monetary system is fragile. If people lose their confidence in the paper
currency system, there could be a big run into the tiny precious metals
market, not only to physical metals but into precious metals mining stocks as
well.
TGR: That said, how do you explain gold's poor performance,
basically since 2011?
CR: In 2000, gold was at $260/oz but then, at the late stage of the
bull cycle, a lot of speculative money went into precious metals and gold
spiked at $1,922/oz in September 2011. This was an overheating moment that
triggered a heavy selloff. I still see further downward momentum before the
upswing.
TGR: Do the current depressed valuations for precious metals
stocks, in general, mean that they are undervalued or is this an accurate
reflection of where metal stocks should be given current metals prices?
CR: That is the big question. If you look at the big gold producers
like Kinross Gold Corp. (K:TSX; KGC:NYSE) or Barrick Gold Corp. (ABS:TSX;
ABX:NYSE), they made significant mistakes when the gold price was hot, and they
are being punished because they took on a lot of debt. Barrick's debt, for
instance, is about $13B. Companies like that have been beaten down quite
dramatically. But even small gold producers that are generating free cash
flow are getting beaten down, too, like Teranga Gold
Corp. (TGZ:TSX; TGZ:ASX), the biggest gold producer in Senegal. But this
is where there is value—the small- to mid-cap producers with low all-in
sustaining costs, solid balance sheets and good management teams. These
companies will survive these metals prices. And because they have been beaten
down, say, 70–80%, the risk is lessened. Only the smart money is investing in
these companies at these metals prices. But now is a good time to build a
basket of interesting precious metals producers, and maybe another basket of
interesting developers.
TGR: How should investors handle the precious metals equity portion
of their portfolios given the current market conditions?
CR: That depends on an individual's risk profile. If you have a
good stomach for risk, perhaps you should buy now, even if the market goes
down another 20–30%. Buy on the way down and sell on the way up, that's what
I'm doing in my portfolio—it is definitely a strategic way to buy a basket of
hand-selected companies. I also suggest owning a good portion of physical
metals in this kind of market environment. It is the money of last resort.
TGR: What are some overriding themes that you're taking advantage
of?
CR: I'm quite bearish on the global equity markets. We saw a huge
bull market from 2009 to 2015 on the S&P 500, when it went to around
2,080 from 666. That market is really mature. One number that scares me is
the high margin debt on the New York Stock Exchange (NYSE). When the big
market crash happened in 1987 we saw $38B in margin debt, but as of June
2015, NYSE margin debt was more than $504B. Everyone is dancing until the
music stops. So I'm shorting the S&P 500, while building my basket of
different precious metals producers.
TGR: Do you see the U.S. Federal Reserve raising rates in
September?
CR: I see the Fed making some kind of small move, maybe 25 basis
points. The economy is not in the best shape and if the Fed raises rates too
much the dollar could become much stronger, which could hurt domestic
industry and exports.
TGR: What are some gold producers that you are following and that
continue to perform despite lower gold prices?
CR: One name is Metals X Ltd. (MLX:ASX), based in Australia. The company
is producing gold and is also Australia's biggest tin producer. It has a huge
nickel project, too. Metals X will produce around 160,000 ounces (160 Koz)
gold this year, but could reach around 450 Koz inside two years. The market
cap is AU$449M, and the weak Australian dollar lowers its overall production
costs.
TGR: In 2014–2015, Metals X produced 150 Koz at all-in sustaining
costs (AISC) of AU$1,170/oz. Where is that growth going to come from?
CR: The growth should come from the Central Murchison gold project
(CMGP) in Western Australia and the Rover project in the Northern Territory.
CMGP could initially add another 196 Koz per year for the first 10 years of
production. The stock has performed extremely well, going from to
AU$1.59/share from AU$0.74/share in one year. The company also owns a sizable
nickel project, which could be exciting at higher nickel prices.
TGR: What other names do you like?
CR: I also really like Klondex Mines
Ltd. (KDX:TSX; KLNDF:OTCBB). The share price is up 70% since the
beginning of 2015.
TGR: Klondex recently published the assay results from 44 holes at
Fire Creek in Nevada. While the grades were a bit lower than expected, the
widths were wider. What do those results ultimately mean for the company?
CR: The results are very positive. The drill campaign confirmed
that Fire Creek is a high-grade asset that is underexplored. All of those
results will be put into a new resource model. The company generates free
cash flow on production, even in this market. Klondex has an underutilized
1,200-ton-per-day (1,200 tpd) mill, so it has the capacity to further boost
production. I think management did an excellent job delivering what it said
it would deliver.
TGR: And until recently the tonnage that Klondex could actually
mine was capped. But the cap has been lifted.
CR: That was a big milestone, and until it was lifted Klondex
produced gold under a bulk-mining permit. Now that the company has no
restrictions, it can mine more ore there. All the news in the last two or
three months has been quite positive. I expect the company to grow in the
coming years.
TGR: Are there others you want to share with us?
CR: Another company I really like is Timmins Gold Corp.
(TMM:TSX; TGD:NYSE.MKT). Timmins has been punished since the beginning of
the year for the Caballo Blanco and Newstrike Capital Inc. acquisitions. The
stock traded in 2012 above $3 and now it is at $0.36, but I think it is wise
to buy gold assets when prices are cheap. If gold reaches $1,500/oz or
higher, those projects are going to heat up again. The management team has
proven to be good operators. The same team built the producing San Francisco
mine on time and on budget. I saw the numbers from Q2/15 and I think the
company could eventually get to $13–15M in operating cash flows if gold
averages $1,250/oz per annum. Timmins has a lot of leverage if the market
recovers. At $1,350–1,500/oz gold, the company could easily fund Ana Paula
and/or Caballo Blanco, and be in a good position for the next bull market.
TGR: So you still have faith in management?
CR: I'm confident that CEO Bruce Bragagnolo will see the company
through the tough times. I think we will see higher gold prices in the next
12–18 months. My price target on Timmins is $1.40.
TGR: What are some companies you're following on the silver side?
CR: Endeavour
Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) is one of my favorite silver
producers and I own shares in it. It has really good management. CEO Brad
Cooke has been heavily involved with shareholders since 2004, and the
management team all owns significant amounts of shares. Endeavour has
purchased mines that were not profitable and turned them around. Terronera
(formerly San Sebastián) is the company's next mine. Endeavour is driving
down cash costs but is not making any big profits on annual production of
10–11 Moz silver equivalent at these low silver spot prices. This could be a
$700M–1B market-cap company if the silver price reaches $28/oz.
I also like Newmarket Gold Inc. (NGN:TSX.V). It has three mines in
Australia. In H1/15 the company posted US$54.6M in operating cash flow on
production of 115.6 Koz at AISC of US$985/oz. The company should produce
around 205–220 Koz gold in 2015 at AISC of US$1020–1,100/oz. Most of its
costs are in Australian dollars, so the company has really good margins. It
also has 6.7 Moz in gold resources in all categories.
TGR: You also follow a number of precious metals developers and
explorers. Tell us about some of those names.
CR: One company that is not well known is London-based Hummingbird
Resources Plc (HUM:AIM). It has two interesting gold projects in Africa.
One is Yanfolila in Mali, which is fully funded and under construction. The
ramp up to commercial production should begin in mid-2016. AISC are expected
to be $733/oz on production of 79 Koz per year. Gold Fields Ltd. (GFI:NYSE)
invested $100M on Yanfolila before it sold the project to Hummingbird, so the
company has a $65M tax credit against any profits. The company also has the
Dugbe project in Liberia, which hosts 4.2 Moz gold and could produce 125 Koz
annually once it is in production. This is Liberia's largest gold deposit.
Hummingbird's market cap is £25M—undervalued and unbelievable. I'm also a
Hummingbird shareholder.
TGR: Any others?
CR: I also like Integra Gold Corp. (ICG:TSX.V; ICGQF:OTCQX). It owns the
Lamaque project in Val-d'Or, Québec, a mining-friendly jurisdiction. The
company owns a high-grade resource, very good infrastructure and a mill,
which needs to be refurbished. The updated preliminary economic assessment
published in January predicted a 77% internal rate of return at $1,175/oz
gold. The company also bought the Lamaque North project for about CA$8M. When
the market is better, this could be a takeout candidate.
Another company among the developers is Altona Mining
Ltd. (AOH:ASX), which is developing the fully permitted and licensed
Cloncurry copper-gold project in Queensland, Australia. The company has $47M
cash and a joint venture partner in Sichuan Railway Investment Group. Signing
of the final joint venture agreement is expected by February 2016. The
project could reach production by 2018 at AISC of US$1.96/pound (US$1.96/lb)
net of byproduct credits. At the moment copper prices are weak, but much
could change in three years. This could be a really interesting project at
$3.25/lb copper.
TGR: Perhaps one more name before we wrap this up?
CR: Another one that I really like is Pretium
Resources Inc. (PVG:TSX; PVG:NYSE), which is developing the high-grade
Brucejack project in British Columbia. It has a Proven and Probable resource
of 7.5 Moz gold. If Pretium gets all the necessary mining permits and
licenses for Brucejack, the funding will come in short order. Zijin Mining
Group has invested CA$81M for a 9.9% stake. This is one of the few projects
that would still be profitable at $800–900/oz gold. This is a really sexy and
attractive project in my eyes. There are so many interesting developers out
there.
TGR: What's on your must-have checklist for precious metals
companies?
CR: Everyone should have their own checklist but all companies have
to have enough money in the treasury to survive turbulent precious metals
prices over the next 12–18 months. They have to have good management with
significant ownership stakes. And each company should have a project that is
likely to get financed. And then you buy in stages. You establish a position
and if the market is gets weaker, you buy more. And over the next few months
buy another portion as the company publishes positive news. But you want to
hold these positions for the long term; that means that if the gold price
goes back to its former highs or higher, which I think is possible in the
next couple of years, then those companies will become cash cows. And if they
are developers like Hummingbird or like Altona, then the metals in the ground
will be valued at higher multiples. This is my strategy.
TGR: Provide our readers with some hard-earned German wisdom as
they ride the waves of a choppy summer in the gold market.
CR: Do your homework and buy companies you believe in by building a
position in different stages in different tranches on the way down and sell
as the stock moves higher. You never hit the bottom or the top. Go with the
company through all the ups and downs but also take some profits. If you are
up 100%, maybe take 20–25% from your profits and choose another name with an
outstanding management team and good project. Another bit of wisdom: be your
own central bank. Hold precious metals in your hands because when all else
fails, gold and silver are money.
TGR: Thank you for your time.
