The Gold Report: David Stockman noted Nov. 13 that after an 8% correction
in October, equities came roaring back, gaining 12% in less than a month. How
long can this last?
Jeffrey Mosseri: It's really a question
of interest rates. As long as they remain close to zero, equities can
continue to run with periodic 5–10% corrections.
Douglass Loud: And I don't think the
Federal Reserve wants to raise interest rates. If it does, the U.S.
government will have to pay more interest on its debt, and that would be
difficult, given all the money it's been printing.
TGR: Sure, but stocks can't have an infinite
value. There must be some correlation between actual worth and share prices.
DL: That's the theory. Look at 1929!
JM: What we don't know is what happens in
a period of extended zero-interest rates. In the 1980s and 1990s, we had low
interest rates for a short period of time, and the price-to-earnings (P/E)
ratios reacted accordingly. Those P/E levels we have today do not seem as out
of whack as what we had then.
DL: And these high P/E ratios are not yet
manifested in a lot of stocks. A few hot stocks with large P/E ratios greatly
influence the entire S&P 500.
TGR: Tech stocks in particular are
characterized by high P/E ratios. Are they vulnerable?
JM: They're always vulnerable. But the
hedge funds are piling on so as to have better results by the end of the
year.
DL: When the end of the year comes, if
they are not in Apple Inc. (AAPL:NASDAQ), Alibaba Group (BABA:NYSE),
Ambarella (AMBA:NASDAQ), those kind of companies, their clients are going to
wonder why not. So the hedge funds are buying them, but who knows what will
happen after Jan. 1.
JM: Will we be in a bubble then? There's
a very strong case to be made that we will.
TGR: Why aren't gold stocks benefiting
from this equities blowout?
JM: They should. I use the metaphor of
the U.S. dollar being the cleanest dirty shirt in the laundry basket. Most
people have forgotten, however, that there is a clean shirt in the laundry
basket, and that's gold.
DL: Gold is denominated in U.S. dollars,
so when the dollar goes up, gold goes down.
TGR: Doug, when we last spoke in
July, when gold was around $1,300 per ounce ($1,300/oz), you said,
"There are games going on. Institutions can profit by shorting gold and
then buying it back before it rises in price or so the conspiracy theorist in
me thinks." Some conspiracy theorists are now saying that these
institutions are determined to bust gold down to $1,000/oz. What do you
think?
DL: These institutions short gold and
write reports saying that gold is terrible and investors better get out.
Then, after the price falls they can buy and cover their shorts. The price
turns around, and the institutions can say it's time to for the investors to
get back in. I'm not sure that the trader knocking the price down ever talks
to the institutional adviser. He's not supposed to, but you never know.
JM: I'm not sure that the shorts can get
gold down to $1,000/oz. There is tremendous physical buying, particularly in
Asia, and central banks are buying as well. The U.S. and Canadian Mints have
stopped making silver coins because they've run out of silver. Demand for
gold and silver bullion is quite high, but the paper market is about 50 times
the size of the physical market. So games can be played in the paper market.
TGR: Something interesting happened Nov.
7 and 14. On Nov. 7, gold went up 3.15%, and on Nov. 14, it went up 2.3%. And
these gains have not been reversed. Have we reached a bottom?
JM: It's difficult to pinpoint. One
positive factor is that gold has broken through an important technical number
at $1,170/oz. Both gold and gold stocks have been beaten down to such a
degree that value hunters have come in.
DL: Geopolitics is also involved as well.
On one of those Fridays, it was discovered that Russia had sent 32 tanks,
trucks and supplies into Ukraine. Vladimir Putin hasn't gone away, and
neither has Ebola.
JM: Or ISIS.
TGR: The bear market in gold equities is
now in its fourth year. If ordinary investors come to the conclusion that
gold is a rigged game they can't win, won't the gold space become a ghost
town?
JM: If you go to some of these gold
conferences, it seems like it.
Many
marginal explorers have gone bankrupt or have been taken out, but there is
still some cleansing that needs to be done. What's interesting about this
bear market is that the classic relationship between gold and gold stocks has
been reversed. Gold has led the stocks down and not vice versa. We are seeing
signs in the last month that the classic relationship is being
re-established, with gold stocks leading the metal up. This gives cause for
optimism.
DL: Another thing to remember is that
efficient, producing gold miners are always finding more gold. If you own the
miner instead of the metal, there's always going to be more gold under the stock,
and you're going to be more liquid. One of these days all this will pay off.
There are funds being set up to buy cash-poor companies with good projects.
They'll eventually make a lot of money, if they'll just be patient. And when
the gold and markets pay off, they pay off in tens of multiples. Not so long
ago, Seabridge
Gold Inc. (SEA:TSX; SA:NYSE.MKT) was $50 a share, not $5.
JM: The trillions of dollars created by
central banks are chickens that will one day come home to roost. Eventually,
people will flee from paper currency to gold.
TGR: Silver, unlike gold, is primarily an
industrial metal. Yet it has fallen in lockstep with gold. Why?
JM: Silver is an industrial metal, no
question, but it is also a precious metal and regarded as such. For instance,
India has now forbidden the ownership of gold, and the Indians are buying
silver instead.
DL: The silver to gold ratio, which was previously
at 50 or 60:1, is now 70:1. I think this ratio must come down. But does gold
fall, or does silver rise? I don't know.
TGR: How do you rate the prospects of the
pure silver mining companies?
DL: I love First Majestic
Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE). Many people got all bent out of
shape when the company announced supposedly negative Q3/14 earnings. If you
read the press release, however, you'll find that the company kept close to a
million ounces of silver off the market, hoping to get a better price. Which
First Majestic did, but this won't be reflected in earnings until Q4/14.
First Majestic is always finding and mining more silver. It is doing what it
is supposed to do.
TGR: Do you think that other companies,
gold and silver both, will follow First Majestic's lead?
DL: I think that in the future we're
going to see two types of mining companies. There will be companies like
First Majestic that are in the silver market, and then there will be
companies that are basically in the manufacturing business.
TGR: The day after First Majestic's Q3/14
report, it's stock was up $0.51, 9.4%. Does this suggest a breakout from the
bottom for silver stocks?
JM: We hope so.
DL: It's also a matter of investors doing
their homework and actually reading the report.
JM: First Majestic's stock price will
bounce back because investors are looking for good management. This company
cuts costs consistently and dramatically. We should see the results next
year. When the market turns around, the leverage of such well-managed
companies will be quite dramatic as well.
TGR: Do you have any thoughts on other
pure silver miners?
JM: We like Endeavour Silver
Corp. (EDR:TSX; EXK:NYSE; EJD:FSE).
DL: And MAG Silver Corp.
(MAG:TSX; MVG:NYSE).
JM: Companies like these will lead the
rebound.
TGR: You have a particular interest in
the Yukon. How do you rate this jurisdiction?
DL: Yukon miners have a big regulatory
problem. They now have as many regulators as Nevada, which has, of course, a
many times larger mining industry. Take Alexco Resource
Corp. (AXR:TSX; AXU:NYSE.MKT). It worked out a deal with Silver Wheaton
Corp. (SLW:TSX; SLW:NYSE) and built a mill. Then Alexco found far under
the mill a whole other possible mine, which it wants to build. But the
Canadian federal government has passed a Yukon environmental bill, which in
my opinion could only have been devised by people who know nothing about
mining.
Alexco
has an entire district, and now whenever it finds more ounces at any of its
more than a dozen sites, it must redo the paperwork on all its individual
mining sites. These regulations must be changed. Otherwise, Yukon miners will
not be able to get any investment. Some people are hopeful it will take a
year or two to get them changed, and, if they do, the situation should turn
around.
Another
one of our Yukon favorites is Golden Predator Mining Corp. (GPY:TSX.V). The company
published a new preliminary economic assessment Nov. 12 showing an all-in
life-of-mine capital expenditure of only $89.4 million ($89.4M). But Golden
Predator is stymied because of the new regs. It's almost as if the regulators
don't want any mines, even though we need the jobs very badly.
TGR: Why are politicians so unfriendly to
miners?
DL: Miners work with their hands and
don't give a lot of money to political parties. Take, for instance, our good
friends at PolyMet
Mining Corp. (POM:TSX; PLM:NYSE.MKT) in Minnesota. The company bought the
plant for its NorthMet project and has huge reserves ready to be produced: 72
million pounds of copper (72 Mlb), 15.4 Mlb of nickel, 720,000 pounds of
cobalt and 106,000 oz of precious metals annually. This is a whole mining
district. It's taking PolyMet forever to get permitted. It doesn't make
sense, except maybe politically.
TGR: Doesn't this suggest that the mining
industry needs to step up its PR and lobbying and to teach the politicians
how many good jobs mining creates and how beneficial mining is to the
economy?
JM: Yes, absolutely. It takes a high
level of pain to get people to move, and I think we've reached that level.
The miners are getting together, and their voice will be louder.
TGR: What other Yukon projects do you
follow?
DL: I love Victoria Gold
Corp. (VIT:TSX.V). I have been there and like what it has been doing. It
has 2.3 million ounces (2.3 Moz) gold at Eagle and will produce it at
$600/oz.
TGR: There was an article at Seeking Alpha
recently stating that Victoria is a possible takeover target for Kinross Gold
Corp. (K:TSX; KGC:NYSE).
DL: That was interesting. A lot of the
big companies that go around eating other companies have a lot of issues of
their own these days.
The
article also mentioned Exeter Resource Corp. (XRA:NYSE.MKT; XRC:TSX; EXB:FSE).
Exeter is a very special situation. Everybody thinks that Caspiche is this
gazillion-dollar project 14,000 feet in the Chilean Andes, but in reality
there are 2 Moz of oxide that can go straight to doré bars. That's a much
more doable project for a company like Kinross. Exeter has almost as much
cash as its market cap; it's always been extremely well run.
I'm pretty sure Exeter is going to find a way to get
Caspiche running. If it means selling out to another company, that might
happen. I would also point out that besides the 19.3 Moz gold, it has 4.62
billion pounds of copper buried under the oxide. There are a lot of people
who'd love to get their hands on that copper at the right price, specifically
the Chinese.
TGR: Are we going to see a flurry of
takeovers of well-managed companies with products but low share prices?
DL: Definitely. The situation for so many
miners today is similar to that of the beautiful but poor maiden of Victorian
times. Sometimes her only salvation was to marry the mean old miser because
he was the only person who could save her family's house and farm.
Not so
long ago, miners got money every three months. Need another million? Sure.
This can't happen today because the money's no longer there. After the
financial crisis, the mining stocks got dumped, and many of the funds that
bought these stocks disappeared. Now, if we get a couple of high-priced
acquisitions, this will bring attention back to the gold space.
TGR: Which other companies are you keen
on?
JM: There are a couple I'd like to
highlight. One is HudBay Minerals Inc. (HBM:TSX; HBM:NYSE), a copper
producer that also produces gold. The company has changed management, and it
was a change for the better. HudBay is about to turn on the Constancia mine
in Peru, and this will increase production greatly.
TGR: HudBay has expanded rapidly. How
well has the company handled this?
JM: Extremely well. It has bought Augusta
Resource Corp. and its Rosemont project in Arizona. I like HudBay very much.
This is a New York Stock Exchange company. It's one that a lot of people can
buy. Unlike other metals, copper has held its ground. It remains above $3.
TGR: If the price of copper rises, as
many think it will, which companies besides HudBay would benefit?
JM: The natural reaction of most
institutions would be to buy Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE). It's
a company they know already. I think they'll be buying it for the wrong
reasons, however, because the big leverage in Freeport will be when its gas properties
really start paying off. That will happen in the next two to three years.
TGR: What else do you like?
JM: Klondex Mines
Ltd. (KDX:TSX; KLNDF:OTCBB) has superb management. The company is
producing gold from Midas in Nevada and bulk sampling from Fire Creek
upstate. It has plenty of cash.
One of
the larger companies we like is Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE). This is one
of the better-managed intermediate gold companies.
Among
the near-term producers we like Pretium
Resources Inc. (PVG:TSX; PVG:NYSE) and its Brucejack project in British
Columbia. Its grades are superb: 11.5 Moz of half-ounce material. The CEO is
Bob Quartermain, the man who took Silver Standard Resources Inc. (SSO:TSX;
SSRI:NASDAQ) from $50M to $2.5 billion. I think that he's going to shepherd
Brucejack into production within three years. It's going to be a real
superstar.
DL: We talk about people having to do
their homework. Next door to Pretium is Seabridge Gold. People completely
overlook its huge copper find. People look at Paramount Gold
and Silver Corp. (PZG:NYSE.MKT; PZG:TSX) and they see two Mexican
projects. They completely miss the fact that it also owns Sleeper, which was
a hugely successful gold mine in a prior life and should be again.
TGR: How will the market for gold and
gold stocks change in 2015?
JM: If we haven't bottomed, we're pretty
close. Investors will come to realize that gold is the only clean shirt in
the basket. Gold stocks will move first, and bullion will follow. There's a
lot of upside.
TGR: Doug and Jeff, thank you for your
time and your insights.
