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Opportunities abound across the spectrum of precious metal equities,
which remain undervalued as bullion prices continue their upward trends.
That's the word according to Charles Oliver and Jamie Horvat,
both senior portfolio managers at Sprott Asset
Management. In this exclusive interview with The Gold Report, Oliver and Horvat
express cautious optimism about the prospects for gold stocks in 2012.
The Gold Report: When we talked in the wake of the debt ceiling
crisis last fall, Charles, you expected volatility to be good for gold and
forecast a continuing long-term bull market for precious metals. These days,
the scary stories pertain to the European Union (EU). Will negative headlines
continue to play a role in the price of gold and silver?
Charles Oliver: Absolutely. The headlines about the
European Central Bank (ECB) infusion of billions of euros into the banking
system has been very good for the price of gold. Since the ECB
announced it would be issuing €489 billion in December, gold has had a
nice little rally off its lows. I expect in the next couple of weeks a
further issuance of money will be quite supportive for gold.
Europe is still a mess. Greece seems to be heading to bankruptcy in slow motion.
That problem has been going on for two years and we could find these issues
still persisting a year from now. Ultimately, central banks around the world
will continue to print and debase their currencies, which will be very good
for the gold price.
TGR: Jamie, do you agree with that? Or might Greece strike a deal to
pay off its debt, turning the price of gold down?
Jamie Horvat: I think the deal is based on
the fact that the only tool governments have at their disposal is the
continued monetization of debt and the continual printing of money, which is
always good for gold. On the other hand, if Greece does not get the
sought-after debt relief and restructuring or, if it is kicked out of the EU,
it could result in the unwinding of the European banking system and could
have larger implications globally. If that happens, we'll see a short-term
hiccup in the gold price as it is used as a source of liquidity and investors
sell their future in an attempt to live and fight today. That may be the
tail-risk event as we continue to see additional quantitative easing (QE)
programs all over the world. From Japan to the UK, more than $1 trillion
could be spent in the next few months to provide ongoing liquidity in Europe.
That is why the longer term outlook for gold is still positive.
TGR: In a November television interview, Charles, you expressed
concern about China's growth. Has that changed? And what are the implications
for precious metals?
CO: The China story affects the industrial metals more than the
precious metals, but I'm still concerned that we see weakness in China. The
volume of loans being done now and the contraction we're seeing there both
signal that weakness. A number of other economic statistics indicate that
China is clearly slowing down; the only question is how big a slowdown it is.
Ultimately I think it will impact the base and bulk metals more than gold and
silver—copper, iron ore, steel, those types of things.
TGR: Your $644.5 million Sprott Gold and
Precious Minerals Fund ended 2011 with a tough quarter, off 10.6% compared to
an 8.7% loss on the benchmark S&P. Your quarterly report cited tax-loss
selling as one of the reasons for thinly trading stocks performing poorly.
Have you adjusted your portfolio since then?
CO: The portfolio is continuously being upgraded. We made a number of
changes during the last quarter. We did some of our own tax-loss selling in
the portfolio. When I sold some of those stocks, I tried to redeploy the
proceeds into some of the other names that I wanted to own that were also
experiencing tax-loss selling. A lot of companies in the junior space were
down 70%. It wasn't through any fault of their own;
it was just because the market had no interest in small companies because it
was risk averse last year.
TGR: Were the other names you were buying into mainly juniors?
CO: Yes, there were a fair number of juniors, but every segment of the
gold stock market is very cheap today. I can find great valuations in small-,
mid- and large-cap stocks. All of them are extremely cheap. That's not always
the case. You might think all segments would move together, but in reality
one segment often does much better than the others during a particular year.
TGR: It appears as if about 30% of the fund is dedicated to the
small-cap issuers, which have a little bit higher risk profile then the large
caps. Do you see those small caps as the way to drive growth in the
portfolio?
CO: If you look over the last decade, a lot of the alpha that's being
generated in the gold fund has been through small- and mid-cap names. That's
across the board. Whether in the gold space, the oil space or any other type
of stock, generally speaking, small-cap stocks have better growth and
long-term growth returns.
TGR: What are some of the juniors you picked up as you were
redeploying at the end of the year?
CO: I can mention a few names from my most recent year-end report for
investors. Canaco
Resources Inc. (CAN:TSX.V) is a small cap with a project in
Tanzania. It did a financing at around $5.40/share back in March 2011. It's a
good stock, but through tax-loss selling and an aversion to small-cap stocks,
it has traded down to below $1.50/share. What a great opportunity.
I looked at Canaco several years ago. It was really
interesting, but it was a little on the early-stage side and it got away from
me. I'm not one who likes to chase stocks; I don't run after them. And then
last year, Canaco had a lot of cash on its balance
sheet and suddenly came under severe selling pressure. I thought,
"Great, I'm getting a second opportunity to buy something at a much
better price." Additionally, I expect its property in Tanzania will one
day be a mine.
TGR: How many years away is that?
CO: Probably 5 to 10 years. The lifecycle in the mining industry is
usually at least that long from a grassroots discovery through permitting,
construction and ultimately getting into production. In the small-cap space,
I'm always on the lookout for companies that I believe will have a mine at
some point in the future. Canaco is a good example
of that.
TGR: Any other examples of companies that could be big movers in 2012?
CO: Another company, Lake Shore Gold Corp. (LSG:TSX; LSG: NYSE) was down 70% in the last year. I actually owned it
a couple of years ago, and thought it got expensive. It was trading north of
$4.50/share not too long ago, and went down to almost $1/share. The company
had a few hiccups in terms of its mine plan, but the stock has been overdone.
I sold it up much higher and took this as an opportunity to get involved with
it again.
TGR: How high could it go?
CO: There is no reason Lake Shore Gold can't get back to the highs it
made last year if it executes on its strategy. These things usually just take
a bit of time.
TGR: Eric Sprott is probably one of the
leading silver bulls in the world. In your view, what's the ideal balance
between gold and silver equities and bullion in an investors' portfolio?
CO: I believe it makes a lot of sense to have a combination of both
stocks and bullion. It really depends on the individuals in consultation with
their financial advisors to get the appropriate allocation. Bullion is an asset
that helps preserve capital. You're not there to make a killing. You're there
to protect capital, especially in the context of the currency debasement that
is going on. Gold stocks are more of an asset used to capture capital gains
during the bull market we are in. Many studies have suggested that
5–10% on a long-term basis is a good allocation to precious metals.
I've heard some numbers much higher at the Sprott
organization, but again, I think it ultimately depends on an individual's
goals, propensity for risk and capital preservation requirements due to age
and circumstances.
TGR: What are some of your favorite names among silver equities?
CO: I like the large caps. Pan American Silver Corp.
(PAA:TSX; PAAS:NASDAQ), which is trading at about 9–10 times its price/earnings (PE)
ratio, has potential to double production over the next five years as it
builds its Navidad mine in Argentina. Pan American
is fully funded to get that growth.
Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE) is another one trading at about 9–10 times
its PE ratio. It has doubled production over the last four to five years.
This company actually has done a great job; it's one of the few over the last
couple of years that have managed to do a pretty darn good job of keeping
cash costs very low. If you look at almost all of the large-cap silver names,
you'll find most of them trading either at high single-digits to low
double-digit PE ratios. They are extremely cheap.
TGR: What are some catalysts that could take Coeur d'Alene to the next
level?
CO: I think it's just a matter of time and execution. Ultimately these
companies will make good earnings and cash flows at the current price. One of
the things we've seen in the gold sector, and are certain to see a bit in the
silver sector, is that a lot of these companies are starting to initiate
dividends. Last year Hecla Mining Co. (HL:NYSE) announced a plan to pay a dividend
linked to the silver price. In a recent presentation I attended, Coeur
d'Alene suggested that it might start looking at paying a dividend sometime
next year.
TGR: Could that have a big impact on the share price?
CO: We will have to wait and see, but I think investors look for good
companies that pay nice yields.
TGR: What are some other promising silver names?
JH: On the development and exploration side, Tahoe Resources Inc. (THO:TSX) has great potential as it moves toward production on its flagship Escobal project in Guatemala. We like what we see in
Tahoe's exploration there—the whole development story. It may have a
world-class asset with the resource and reserves it currently has on
hand—plus significant exploration upside as well.
Scorpio Gold
Corp. (SGN:TSX.V) is a junior that has come off the bottom. Scorpio
has been viewed in the past primarily as a base metals company and a zinc
producer, but most of its upside in terms of both exploration and production
now comes from silver exposure. I continue to like Scorpio.
TGR: With so many companies in the small- and large-cap area beaten
down, how do you determine which ones will deliver?
JH: As Charles mentioned, valuations are pretty depressed. Looking at
the large caps broadly, you have to distinguish between those that are
executing projects and those that aren't. Among the companies reporting
recently, Agnico-Eagle Mines Ltd. (AEM:TSX/NYSE) and
Kinross Gold Corp. (K:TSX; KGC:NYSE) are two examples of companies that
unfortunately lost some ground. Agnico enjoyed a
premium thanks to its growth profile, but lost that premium because it didn't
execute on that growth profile. Kinross, too, has declined due to the lack of
execution.
On the other hand, Barrick Gold Corp. (ABX:TSX;
ABX:NYSE) was in
line and Goldcorp
Inc. (G:TSX; GG:NYSE) was above estimates. Both Barrick and
Goldcorp have growth projected into 2016, but they're trading at depressed
multiples to the group. Goldcorp has 60% growth ahead of it.
Investors who have been going to the price participation of exchange-traded
funds or gold bullion will slowly start coming back to the market if some of
these companies continue to capture that cash-flow margin and continue to
increase dividend payments. They will be attractive to investors if they show
a willingness to return capital to shareholders. In terms of the market in
general, investors seem to want to be paid to participate in the market, so
they are looking for companies with yield.
TGR: What names fit the criteria you mentioned for companies that have
upside ahead of them?
JH: Based on projects in development and assuming they continue to
execute and move the projects forward, some of the names I like are Belo Sun Mining Corp. (BSX:TSX.V), Colossus Minerals Inc. (CSI:TSX), Continental Gold Ltd. (CNL:TSX), Premier Gold Mines Ltd. (PG:TSX) and Perseus Mining Ltd. (PRU:TSX;
PRU:ASX). These
are all things I continue to monitor and continue to like.
TGR: Belo Sun is sitting at about $1/share now. What do you like about
it?
JH: Belo Sun's 100% owned Volta Grande project in Brazil is located in
an area with good infrastructure and the government is building the world's
third-largest hydro-damming facility just to the north. It's a really good
project with recent—and continuing—exploration success, in a good
jurisdiction with good economics around the project. I believe that has the
potential to be a mine one day.
Belo Sun also has added significantly to the resource and continues to move
the project forward. I'll continue to like those types of projects as long as
they continue to execute. So far, though Belo Sun hasn't been rewarded for
its success. Small caps were down 38% on average in 2011.
TGR: Do you have favorite jurisdictions?
CO: When you look at the jurisdictions in our portfolio, about 80% of
the companies are domiciled in Canada while 80% of the operations are
international. We do have some big concerns about politics and country risk.
A couple of years ago, when a lot was going on in Africa, we decided to cut
back on some of our African names. Not eliminate them, but reduce the
weighting and redeploy those funds into operations in North and South
America. Now we are unfortunately experiencing some issues in South America,
such as what is going on with the governments and some of the mining projects
in Peru today. As with Africa earlier, last year we made an active decision
to reduce exposure in Peru because of those concerns.
You can't pick where the mines are—that's geologically where the gold
deposits are and it takes you to some challenging places. That is why we like
to be in a lot of different countries, to diversify that risk. I have
concerns about Peru but I've got a little bit of Peru. I don't like Russia
particularly, but I've got a little bit of Russia. Having a basket of these
cases can minimize the risk. Having said that, I should be able to buy these
companies in higher risk regions at cheaper valuations. Otherwise I certainly
wouldn't invest there.
TGR: Do you agree with that Jamie?
JH: Definitely. Taking a basket approach and diversifying the risk
within the portfolio has been our practice for a long time. There have been a
lot of discussions around people seeking more politically secure
jurisdictions. But even in Canada, even in British Columbia, we have seen
mines not get permitted based on native land rights issues, water usage
issues and other local issues. So risk isn't confined to places such as
Africa or Peru. Using that basket approach definitely helps mitigate the jurisdictional
risk.
TGR: You mentioned investors might start moving from bullion back into
the stocks after a year when equities weren't performing in line with the
metals prices. The cliché is that investors are always wavering
between greed and fear. What will give investors
confidence to take a chance on some of these undervalued juniors?
JH: I think it all comes down to execution. Are you executing on that
project? Are you moving it forward? Are you building per-share value by
growing the resources and converting them into reserves? Are you advancing
the project and doing the feasibility studies? Are you wrapping the economics
around the feasibility of the project and the value and the leverage that you
can obtain from putting that into production in the market? Companies that
continue to execute and build their resources and reserves will get rewarded.
Unfortunately, a lot of companies have made some missteps in the market.
TGR: Any other thoughts you would like to leave our readers with
before we say goodbye?
CO: Gold equities didn't do very well in 2011. It was a tough year.
The last time we had equities perform so poorly was 2008. Then 2009 and 2010
were exceptionally good years for gold stocks. That pattern makes me
cautiously optimistic that 2012 will be a very good year for gold stocks.
JH: I totally agree—2011 was a "lite" version of 2008.
Small caps were down 78.5–79% in 2008, and last year they were down 38%
on average. The U.S. banks and the mortgage-backed securities issue were at
the heart of the 2008 liquidity crisis, and in 2011 the issues have rolled
into a European bank and sovereign debt crisis—with the U.S. opening up
the swap lines again, with unlimited U.S. dollar amounts to help with
liquidity to European banks through to February 2013, I believe. Taking all
of that into account, I'm cautiously optimistic. I'm hoping that as in the
second half of 2009 into 2010, when we had a significant recovery in the
precious metal space, we will see a similar type of recovery in 2012.
TGR: Thank you, gentlemen.
Bringing more than 21 years of experience in the investment industry, Charles
Oliver joined Sprott Asset Management (SAM) in
January 2008 as an investment strategist with focus on the Sprott Gold and Precious Minerals Fund (TSX:SPR300).
Prior to joining SAM, he was at AGF Management Ltd., where he led the team
that was awarded the Canadian Investment Awards Best Precious Metals Fund in
2004, 2006, 2007, and was a finalist for the best Canadian Small Cap Fund in
2007. At the 2007 Canadian Lipper Fund awards, the AGF Precious Metals Fund
was awarded the best five-year return in the Precious Metals category, and
the AGF Canadian Resources Fund was awarded the best 10-year return in the
Natural Resources category. Oliver obtained his Honors Bachelor of Science
degree in geology from the University of Western Ontario in 1987 and his
Chartered Financial Analyst (CFA) designation in 1998.
Jamie Horvat joined SAM in January 2008. He is co-manager of the Sprott All Cap Fund, the Sprott
Gold and Precious Minerals Fund, the Sprott
Opportunities Hedge Fund LP and the Sprott
Opportunities RSP Fund. He has more than 10 years of investment experience.
Prior to joining SAM, Horvat was co-manager of the
Canadian Small Cap, Global Resources, Canadian
Resources and Precious Metals funds at AGF Management Ltd. He was also the
associate portfolio manager of the AGF Canadian Growth Equity Fund, as well
as an instrumental contributor to a number of structured products and
institutional mandates while at AGF. He joined AGF in 2004 as a Canadian
equity analyst with a special focus on Canadian and global resources, as well
as Canadian small-cap companies. Horvat spent five
years at another large Canadian mutual fund company as an investment analyst
before joining AGF. He holds a diploma in mechanical engineering technology
from Mohawk College and earned an Honors Bachelor’s
of Commerce degree from McMaster University. He is a member of the
International Research Association and a licensed international financial
analyst. He is also a member of the Ontario Association of Certified
Engineering Technicians & Technologists.
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DISCLOSURE:
1) JT Long 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: Colossus Minerals Inc., Continental Gold Ltd., Premier Gold
Mines Ltd., Scorpio Gold Corp. (SPM: TSX), Goldcorp Inc., Tahoe Resources
Inc.
3) Charles Oliver: 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.
4) Jamie Horvat: 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.
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