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While gold equities
continue to trail the gold price, junior stocks are gaining traction
according to Doug Groh, co-portfolio manager and senior analyst with
Tocqueville Asset Management. He believes investors should not let the
market's risk aversion keep them out of a stock picker's market. The trick,
Groh reveals in this exclusive Gold Report interview, is to pick
managements, not jurisdictions.
The Gold Report: Doug, macro factors like the European sovereign debt
situation, U.S. monetary policy and an economic slowdown in China drove the
markets in 2011, with company fundamentals and stock valuations playing
second fiddle. How is the Tocqueville Gold Fund mitigating these factors in
2012?
Doug Groh: We remain very positive on the dynamics of the gold market
and are even more excited about the prospects for gold mining companies. We
really are not taking a different path, other than sticking by our positions
and seeking out good opportunities.
The market has been missing the tremendous margins gold mining companies have
right now, despite rising production costs. The average gold price is up more
than the cost increase over the past year, which has allowed for margin
expansion throughout the industry.
TGR: The Tocqueville Gold Fund received the 2012 Lipper Fund Award for
the best fund in the precious metal category for the three-year period ending
Dec. 31, 2011. Congratulations. What is the fund's current value and how did
it perform in 2011 compared with the Philadelphia Gold and Silver Index?
DG: As of March 28, the Gold Fund was at $2.24 billion and the net
asset value per share was $69.88.
As far as performance goes, as of Dec. 31, 2011, we were down 15.85%, while
the Philadelphia Gold Index was down 19.16%. So, we did a little better.
TGR: What do you at Tocqueville expect of the gold market in 2012?
DG: We are very optimistic. From our perspective, gold bullion is
still very much under-owned and gold mining equities are very much
under-appreciated and misunderstood.
There is a lot of risk aversion going on. Equity investors worry about
operating costs and about the volatility in gold equities. They are concerned
that the gold price has peaked.
These concerns ignore the margin expansion in the gold mining sector. They
ignore that gold bullion is under-owned. They ignore that central banks have
been significant buyers of gold for two years and will most likely continue
to buy gold to diversify their reserves away from the U.S. dollar.
While gold is susceptible to movements in interest rates and in the U.S.
dollar, the potential for a structural shift in people's interest in gold is
very strong. In particular, demand in India and China has a long way to grow.
Gold is a very important currency in the Asian market.
It is hard to say what the gold price will be at any given point in time. I
still think it is headed to the $2,000/ounce mark in the next 12 months. But
that is not the endgame for gold. It still has a long way to go.
TGR: When we talked in June 2011, gold had been outperforming equities
for five months. It's 10 months later; did you imagine then that equities
would still be lagging the performance of gold? How are you and your fund
managers adjusting to that?
DG: I did not think gold equities would underperform as much as they
have. I attribute it to risk aversion in the equity markets. Gold stocks are
equities first and foremost. In addition, investors have very high
expectations for gold mining equities and the companies have disappointed the
market's expectations.
We are holding to our positions. This is more of a stock picker's market than
for general exposure to gold mining equities. While the gold mining
exchange-traded funds may serve a purpose, one can add value by actively
managing a gold equity portfolio. That requires more due diligence and an
understanding of what the companies are trying to do and what they have
accomplished.
We focus on companies that are well financed and well managed, companies with
track records for building shareholder value and that, importantly, have a
very good asset base. We want to know: What resource is the company working
from? What is it developing?
TGR: Does stock picking become harder when macro drivers move share
prices more than the companies' fundamentals?
DG: In some regards it requires more patience. Stock picking is
difficult. You have to look at the higher quality companies. Understand their
strategies. Understand management's vision. It demands that you appreciate the
assets they are working with. That requires talking with the companies,
visiting their assets, observing what they are doing with those assets and
staying in touch with their progress.
TGR: Last June, the Tocqueville Gold Fund was 35% vested in small-cap
explorers and developers. Is that still the case or are you leaning more
heavily toward companies generating cash flow and perhaps offering a
dividend?
DG: We are shifting out of the junior explorers to some extent. We are
not necessarily trading out of our positions, but our positions are now that
much more advanced in terms of the companies' lifecycles. Thus, a greater
percentage of our portfolio now is in developing or producing companies as
opposed to explorers and discoverers. It is a natural evolution.
And, some of the larger companies have done a bit better than some of the
smaller names. So, we have a percentage shift to the larger caps.
TGR: Are you more selective now, given that the price environment
among gold equities has created so many bargains?
DG: It is interesting that, even though these companies produce the
same product, their valuations are all over the place. Companies are valued
differently for different reasons; they are getting different discounts for
different reasons.
This means investors have a lot to consider. They have to understand each
company and its situation: its capital needs, cash
flow, capital structure, strategy and where it operates.
TGR: What advice would you give retail investors in today's
environment?
DG: Investors have lots of choices for exposure to the gold mining
sector. If they have the network and ability to gather and assess a lot of
information, they can invest on their own. More power to them, they should.
An index fund is another approach. A third way is to invest in a diversified
portfolio of well-known names that is covered by various investment banks.
Both of these approaches can keep surprises to a minimum.
TGR: Are institutional investors like Tocqueville Asset Management
more likely to set the terms of private placements these days?
DG: Compared with a couple of years ago, yes. Investors can have a
greater input into how a financing is structured these days. Companies need
capital and the markets are not quite as friendly to general equity issuance.
That means management has to be more creative with financing projects. There
is more of an open discussion between investors and management.
TGR: Where do you see pockets of investment opportunity in the gold
space? You seem to be leaning heavily on royalty plays.
DG: The royalty companies have a very interesting model. They are
diversified and have less asset exposure and capital commitment than some of
the mining companies. I think this is a very profitable model in this
environment.
TGR: What are some other opportunities for investors?
DG: Detour Gold
Corp. (DGC:TSX) and Bear Creek Mining Corp.
(BCM:TSX.V) might be
considered. In the Yukon, there is ATAC Resources Ltd. (ATC:TSX.V).
Gold Resource Corp. (GORO:NYSE.A;
GORO:OTCBB; GIH:FSE) is interesting in that it is issuing a gold dividend, which shows
that companies are responding to investors' desire for return on shareholder
value. Companies are trying to differentiate themselves from gold
exchange-traded funds.
I think good opportunities remain for companies developing assets in the
right part of the world. That may be West Africa, Mexico, eastern or western
Canada, even Alaska.
TGR: Are you concerned about creeping nationalism today, given events
in South America, and even more recently in Mali?
DG: Yes, nationalism is a bigger concern today. Nationalism can be
expressed in many ways including higher taxes on companies, royalties or
participating interests.
Nationalism is not surprising. The industry is very profitable. Jurisdictions
recognize that and are trying to capture more of that value for their
national needs. But some of those policies are so restrictive that they drive
capital and foreign investment away. That is a concern for investors.
TGR: Does that mean you have steered away from certain jurisdictions?
DG: Yes, Venezuela and Bolivia come to mind. Russia presents
tremendous opportunity, but we are concerned about governance and about how
business is conducted there.
The Middle East and North Africa have interesting potential, but again, there
are concerns.
TGR: Let us look at some of the positions in your gold fund. Randgold Resources Ltd. (GOLD:NASDAQ) has significant exposure to Mali, where a recent
coup is creating instability. What is your current approach to Randgold?
DG: We are taking a wait-and-see approach; we have not sold. Actually,
I see this as a buy opportunity. Randgold believes
the situation is more politically and socially complex than the media may be
portraying.
We believe that in a relatively short period of time the political
instability in Mali will resolve itself. Randgold
continues to operate its mines as it did during other political conflicts in
the region. For example, during a civil war in Côte d'Ivoire, Randgold held on to its property and built a mine during
the government transition.
TGR: You also have exposure to West Africa through Abzu Gold Ltd. (ABS:TSX.V), which owns the Nangodi
gold play in Ghana. Initial results from the company's current drill program
seem to indicate the potential for open-pit gold mining.
DG: Abzu has done initial exploration and
drilling. It seems to be on to a deposit that deserves more attention. My
sense is that the company has limited capital and will need to reassess its
position in terms of making the most of its land position and resource base
in Ghana.
TGR: You continue to hold a fairly large position in Osisko Mining Corp. (OSK:TSX). Now you have a position in Detour Gold, a similar story in the same
part of the world. What can you tell us about Detour Gold?
DG: It is very similar to Osisko, in that as
both companies build and derisk
their projects, their market valuations should rise as the market appreciates
their efforts. Both are meeting their goals and realizing success.
TGR: Osisko has been in production a little
less than a year. Are you satisfied with its results?
DG: Basically, yes. We understand the design and engineering
challenges a company can run into when it starts up a mine. Our understanding
is that the deposit is performing better than perhaps was expected. The
grades and recoveries are good. Osisko is producing
gold, perhaps not quite at the level originally expected, but we can work
with that. In the end, we think Osisko will have a
very successful operation. Given the gold price and its production costs, the
company should have this mine paid off relatively quickly.
We might be a little disappointed that the market is not giving Osisko the valuation we feel it deserves. I am not sure
why. It is in a favorable jurisdiction. Its costs are not out of line. It is
slowly meeting its targets. Maybe what concerns investors
is that the ramp-up is not happening soon enough. But in time, Osisko should deliver the project as it intended.
TGR: Do you expect Detour Gold to have similar success?
DG: We anticipate that. Detour Gold will probably run up against
similar issues. The project may not get the expected throughput initially, or
recoveries might be a bit off. But management will make the necessary
adjustments. In time, I anticipate management will deliver on its plan, with
the typical hiccups along the way.
TGR: You have exposure to silver production in Mexico. Are silver and
gold producers takeover targets?
DG: I suppose every company could be considered a target.
We see relatively small deposits with great potential in Mexico. Large
producers are looking for deposits that can be scaled up. Witness Goldcorp Inc.'s (G:TSX;
GG:NYSE)
acquisition at Peñasquito some years ago. Or
the numerous property/company transactions that have taken place since.
Scorpio Gold
Corp. (SGN:TSX.V), Levon Resources Ltd. and
Gold Resource are operating now. Some are generating cash flow. Yet, they
have not fully explored their properties. There is significant potential to
identify value where it is yet unrealized or unrecognized.
TGR: Overall, you seem pretty optimistic.
DG: You know a lot of these stocks performed quite well years ago when
the gold and silver prices were much lower. Companies were raising capital to
build out their mines or expand operations. In one regard, company valuations
were higher than they are now. That makes me ask, what is wrong with a market
that does not recognize companies like Osisko and
Detour that we believe will deliver?
I think the outlook is very good for precious metals and, in particular, for
gold mining equities. Maybe it is time to turn the corner into Q212 and think
about a new story, to let gold mining equities come into their own as the
year progresses.
TGR: Doug, thank you for your time and your insights.
Doug Groh has 25 years of investment
experience. Before joining Tocqueville in 2003, he was director of investment
research at Grove Capital from 2001–2003. Between 1992 and 2001, as a
senior sell-side analyst for JP Morgan and Merrill Lynch, he was recognized
as a ranked analyst by
Institutional Investor Magazine and The Wall Street Journal for his
coverage of basic material stocks in the non-ferrous metals, chemicals and
paper and packaging industries. He began his career as a mining analyst and
worked as a precious metals portfolio manager at U.S. Global Investors and
American Express Financial Advisors in the 1980s and early 1990s. He holds a masters in energy and mineral resources from the
University of Texas at Austin and a Bachelor of Science degree in
geology/geophysics from the University of Wisconsin–Madison.
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He
personally and/or his 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: Detour Gold Corp., Abzu Gold Ltd.,
Goldcorp Inc., Scorpio Mining Corp. Streetwise Reports does not accept stock
in exchange for services.
3) Doug Groh: This article reflects my views as of the date or dates cited
and may change at any time. The information should not be construed as
investment advice. No representation is made, nor is there any guarantee that
any projection, forecast or opinion will be realized. References to stocks,
securities or investments in this writing should not be considered
recommendations to buy or sell. Past performance is not a guide to future
performance. Securities that are referenced may be held in my personal
portfolio or in portfolios managed by Tocqueville or by principals, employees
and associates of Tocqueville, and such references should not be deemed as an
understanding of any future position, buying or selling, that may be taken by
either me or Tocqueville. I personally and/or my family own shares of the
following companies mentioned in this interview: Tocqueville Gold Fund. I
personally and/or my family are paid by the
following companies mentioned in this interview: as an employee of
Tocqueville Asset Management. I was not paid by Streetwise Reports for
participating in this story.
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