Patience is the key to a golden future for both investors and miners. Thomas Drolet of Drolet & Associates Energy Services Inc. is an energy expert who is also an avid gold investor. He typically visits the mines in which he has a stake and talks turkey with managers. He has found a sweet spot for gold in his basic portfolio—and he shares a few of his favorites with The Gold Report.
The Gold Report: Why is the price of gold stuck?
Thomas Drolet: The central banks of the world are fighting gold in order to save their fiat currencies, so there is a fight to the bottom, and gold suffers. I surmise that the U.S. dollar will continue to dominate world currencies for the next decade. That makes gold produced outside of the U.S. in some of the safer jurisdictions a very valuable investment going forward. And it also helps domestic production for the obvious reason of predictable laws and regulations at home.
TGR: When you talk about the U.S. dollar being dominant for the next decade, what do you base that prediction on?
TD: The Chinese and the Russians are talking about trading oil and gas, mining and building pipelines within the yuan and the ruble currency axis, bypassing or ignoring U.S. dollars for normal worldwide fossil commodity trades. That will gradually lead to less use of the U.S. dollar, globally. Those U.S. dollars will stay home, creating a shortage of available U.S. dollars for the rest of the world. That will keep the U.S. dollar high.
Our markets are doing better than other export markets. China is looking inward, trying to supply its domestic markets via internal sources. That means less use of U.S. dollars by the Chinese, and less accumulation of U.S. dollars worldwide, which adds to the shortage of U.S. dollars in the market. Now that quantitative easing is over in the United States, that will mean the Federal Reserve will stop printing money, which is a sign that the supply of U.S. dollars is turning a corner. As interest rates rise, investors will return to buying shares in the U.S. and Canadian gold miners.
TDR: Who is positioned to benefit from that resurgence in gold investing?
TD: I am very high on Nevada and the Carlin Trend of gold mines operated by juniors such as Terraco Gold Corp. (TEN:TSX.V) and Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX). Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Coeur Mining Inc. (CDM:TSX; CDE:NYSE) are also doing really well in the Nevada gold fields. Terraco, by the way, has a nice royalty position in a property that is being developed there by Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.MKT) and Barrick Gold.
TGR: How does the royalty arrangement work to Terraco's advantage?
TD: Once the Barrick mine goes into production, Terraco will receive a royalty of a few percent based on the net smelter basis. Terraco's value is enhanced by that potential royalty stream. A few other junior gold mining companies have potential royalty streams that are not being valued by the market. I prefer to take royalty streams into account when valuing a company going forward.
TGR: Who runs Terraco?
TD: I know the management of Terraco quite well—Todd Hilditch, Charlie Sulfrian—the company geologist—and Matt Johnston. Having a fantastic geologist like Charlie on the team makes a major difference.
TGR: What qualities do you look for in mining administration?
TGR: Smart managers are patient managers. Gold mining is a long-term game. It requires perseverance and expert knowledge about how the overall financial and precious metals markets work. A savvy manager creates value for his company without having to dilute its share price. Playing to the royalty game is one sign of clever management.
TGR: What other companies do you like in the gold junior space?
TD: I am impressed by Pershing Gold Corp.'s (PGLC:OTCBB) play at the south end of the Trend. Pershing just raised $10 million in a private placement for its Relief Canyon play. The Carlin Trend is a consistently good place to invest. It has sustainable gold resources. The big guys, in this case Goldcorp Inc. (G:TSX; GG:NYSE) and Barrick, are increasingly taking strong positions there. Nevada is a solid, stable mining territory.
On another note, I like Midway Gold Corp.'s property, which is located just south of Terraco's property in Nevada.
TGR: What do you like about Midway?
TD: The project is highly developed. The highway from Reno goes very close to Midway's property. It has power; there have been four or five years of drilling on the site. Reserves are building nicely.
TGR: What is up with Coeur Mining's operation in Nevada? It does a fair amount of silver production along with gold production.
TD: Coeur Mining is redeveloping the Rochester silver-gold mine in an area of Nevada that has been mined for close to 100 years. Coeur is bringing in more modern, efficient tools for drilling. This is a story well worth looking at as it proceeds. The Street has an eye on it because Coeur is beating its own projections.
TGR: Are precious metal prices bound to go up, or are they going to stay flat for a while?
TD: Gold is highly responsive to geopolitics, but I see the price as turning from a bottoming process. Selective, smart gold investors look for more than one product line, a combination of gold and silver and royalties. Patient investors will be well rewarded for waiting out this period of a strong U.S. dollar. But for a quick buck, gold mining is not for the faint of heart.
TGR: As an energy and gold investor, you have been through many short-term market fluctuations. How do you ensure that your portfolio is positioned for long-term success?
TD: A smart approach is, as always, a portfolio with lots of variety. Don't get carried away by believing in ten-baggers. Assume that your best investments will double in seven years. Spread the money around. Not just in mining, but in energy, infrastructure and so forth. I come out of the big utility electricity world. The successful big electrical utilities are those that have coal plants, hydroelectric plants, natural gas plants, nuclear plants. Successful utilities are investing cash in renewable energies, be it solar, wind or geothermal. Look what has happened to coal, as impacted by the Environmental Protection Agency in the U.S. The coal generating side of the electricity business is in decline. A utility that had bet the house on coal would be out of business now. A solid, sustainable business, be it energy or mining or any type of endeavor, spreads its risk.
TGR: Thank you for being with us today, Thomas.
Thomas Drolet is the principal of Drolet & Associates Energy Services Inc. He has had a 44-year career in many phases of energy—nuclear, coal, natural gas, geothermal and distributed generation, with expertise in commercial aspects, research and development, engineering, operations and consulting. He earned a bachelor's degree in chemical engineering from Royal Military College of Canada, a Master of Science degree in nuclear technology/chemical engineering and a DIC from Imperial College, University of London, England. He spent 26 years with North America's largest nuclear utility, Ontario Hydro, in various nuclear engineering, research and operations functions.
