The late summer rally in gold equities is the beginning of the
outperformance that Joe Foster, portfolio manager of Van Eck International
Investors Gold Fund, has been looking for. QE3 and other monetary policies
will fuel both gold and gold equities. In the C-suite, more management
attention to cost control, shareholder returns and return on capital will
benefit both investors and the industry. Read more in this Gold Report interview.
The Gold Report: In the first decade of
this century, the Van Eck International Investors Gold Fund gave its
investors an annualized average return of about 25%. How has the fund
performed since we last talked in August 2010?
Joe Foster: Gold stocks have had a
tough time in the last couple of years and the fund was essentially flat
during that period. The stocks have underperformed the gold price, which is
up about 38%, and that is reflected in the fund performance.
TGR: How has the fund
performed against the NYSE Arca Gold Miners Index
(GDM), its benchmark index?
JF: Since our last
interview in 2010 their performances have been similar, roughly flat.
TGR: How much does the fund
have under management and how many positions does it hold?
JF: We have approximately
$1.4 billion (B) in the International Investors Gold Fund and have 55 stocks
in the fund.
TGR: As of May 2012, the Van
Eck International Investors Gold Fund was allowed to invest in a wholly owned
Cayman subsidiary, which lets it invest directly in commodities and commodity
futures. How has that changed your investment strategy?
JF: There are periods when
gold outperforms the stocks and vice versa. Given the underperformance of
stocks in 2011, we wanted to be able to invest in physical gold as needed.
The Cayman subsidiary gives us the flexibility to invest up to 25% of the
fund in gold bullion, gold exchange-traded funds or any commodity vehicle
that we like.
TGR: In percentage terms,
how much bullion is in the fund now?
JF: Zero. We have not yet
used the Cayman subsidiary, mainly because we see the gold stocks as very
TGR: In a September
management commentary on vaneck.com, you suggested that adding liquidity to a
heavily liquid market would not have a dramatic effect. Gold has been
trending lower for weeks and is now just about $1,700/ounce (oz). Has the effect of quantitative easing (QE) 3 come
JF: The comments on
liquidity reflect the pushing-on-a-string theory. The Federal Reserve can
only reduce rates so far and can pump only so much money into the system. At
some point, it no longer does any good. We may have reached that point.
"Gold responds to
debasement of a currency; it is a form of alternative currency."
The Fed's aim is to
reduce unemployment and get the economy going, but the massive doses of
liquidity already administered have not sparked the economy. We doubt further
QE measures will have much impact.
Gold responds to
debasement of a currency; it is a form of alternative currency. The QE does
just that: it debases the currency and gives investors a reason to go to gold
as an alternative. As long as the Fed continues this type of activity, it
should be good for gold.
TGR: Then why are there
signs of weakness in the gold price?
JF: The weakness in the
last two or three weeks is simply a correction from the strong rally in
August and September, leading up to the QE3 announcement. Things do not
always go up in a straight line. We are just having a bit of consolidation in
the short term.
TGR: You remain bullish long
JF: Sure. The Fed announced
it would be buying $40B of mortgage-backed securities a month, on an
open-ended basis. It will be keeping interest rates targeted at zero for two
or three years at least. These policies are very bullish for gold in the long
TGR: You have suggested that
one reason gold stocks have underperformed gold is rising
production costs. What are the other reasons?
JF: That is the core reason
and the other reasons are related to those higher costs. We have seen an
unprecedented rise in operating and capital costs over the last couple of
years. There is a global mining boom, and not just in gold. Gold miners have
to compete with iron ore producers, tar sands producers and base metals
companies. That has driven up the costs of labor, materials and equipment. I
think the rate of cost increase caught a lot of managements off guard.
"Because of rising
costs, many gold companies have missed expectations."
Because of those rising
costs, many gold companies have missed expectations. Higher costs put the
squeeze on earnings. The market hates it when companies miss their forecasts.
Missed expectations may be the reason for underperformance, but rising costs
have driven the missed expectations.
TGR: You have predicted
better performance for gold stocks once the investing environment takes a
positive turn. How far off is that positive investing environment and what
will signal its arrival?
JF: I think it has arrived.
With QE3 and gold breaking out in August, the gold stocks really kicked into
gear. Our fund's performance in August, September and October is up about
20%; gold is up about 6%.
This breakout looks like
the beginning of the outperformance in the stocks that we are looking for.
TGR: Do you expect that to
JF: Yes, for a couple of
reasons. First, the boards of the large gold companies that have been missing
expectations have woken up to the fact that management changes are needed.
Some very high profile CEOs and COOs have departed. There has been a shift in
focus toward more profitability and less growth. That shift toward
profitability, shareholder returns and returns on capital should bode well
for the industry.
Second, costs could be
coming more under control in the months to come. The slowdown in the global
economy caused a slowdown in mining activity across base metals, coal
companies and iron ore companies. More labor is now available. Lead times for
equipment and materials are shorter. That should translate into less cost
pressure as we move through 2013. That could be another catalyst for the
TGR: How will you position
the fund in the gold equities market? You have the majors, the midtier producers, developers and explorers. Where is the
sweet spot right now?
JF: Throughout this bull
market, we have been overweight in the midtiers and
junior stocks. That is where we find better opportunities for growth. We have
been underweight in the large-cap companies, the ones that have struggled to
generate growth. We will have to see if the management changes being made by
the majors will enhance their profitability and help them do a better job of
In the meantime, we are
happy to be overweight in the midtier and small-cap
stocks where we find more opportunities for growth.
TGR: What are some of the midtier names you have positions in and their stories?
JF: Some of our top midtier holdings include New Gold
Inc. (NGD:TSX; NGD:NYSE.MKT), Randgold Resources Ltd. (GOLD:NASDAQ;
Gold Corp. (ELD:TSX; EGO:NYSE) and Osisko Mining Corp. (OSK:TSX).
"While the gold
stocks have underperformed over the last couple of years, we see reasons to
believe they are reversing that underperformance."
All of these companies
are growing. They have good development projects, and they have managements
that can deliver the growth. Another important aspect is awareness of the
jurisdictions where these companies work. You want to see the CEO and the top
management engaged at the ground level, ensuring targets are met and that any
geopolitical or operating risk is mitigated.
TGR: New Gold just launched
commercial production at its New Afton project in British Columbia. How is it
JF: So far, the startup at
New Afton has gone smoothly. The mill is running at full capacity. It expects
to bring the conveyor on-line soon.
TGR: New Gold gives
investors exposure to several jurisdictions. Is that one of the stock's
JF: That is the common
characteristic of the midtiers we invest in. They
have enough diversification to bring multiple mines into their portfolios.
New Gold, for example, is focused on the Americas and has a mine in
TGR: Tell us about Randgold, which has most of its exposure in Africa.
has probably done a better job of delivering organic growth than any other
company on the planet. A lot of the deposits Randgold
is mining it discovered and developed itself, rather than through
acquisitions. It probably has the best geological staff in the business and
knows West Africa better than anybody.
TGR: Things did not get off
to a good start for Osisko's Malartic
open-pit mine in Québec. Has Osisko worked
out its issues related to grade and processing?
JF: Processing was the key
there. Osisko underdesigned
the comminution circuit. That resulted in startup
problems that the company is working out. But Osisko
is ramping up its mill production levels, and should reach capacity if not by
year-end, then early in 2013. We anticipate Osisko
will be at full production before long.
TGR: Eldorado Gold has been
a star performer on the Toronto Stock Exchange for years. A few years ago, it
made a run at Andean Resources Ltd. (AND:TSX;
AND:ASX), but lost out to Goldcorp Inc. (G:TSX; GG:NYSE). Do you see Eldorado
making more offers to juniors, given the low share prices?
JF: I do not expect that.
It acquired European Goldfields Ltd. (EGU:TSX;
EGU:AIM) early in 2012. That gave Eldorado some Greek assets it is developing
now. It also is expanding at Kisladag in Turkey and
has some new projects in China. Eldorado's development plate is very full
right now. I think it will be focused on delivering that growth to investors.
TGR: In September you wrote,
"There are some positive changes happening with the junior developers.
Many of them have attractive projects with robust returns at current gold
prices, but financing in the capital markets has been nearly impossible. We
met with companies in Denver that are now re-engineering their high capital
expenditure projects. By focusing on higher grades and slimming down
operations, some companies are able to generate plans for mines with less
output but higher rates of return and, importantly, lower capex
[capital expenditures]." That sounds like a great investment thesis.
Which companies in your fund fit that bill?
JF: Companies like Keegan Resources Inc. (KGN:TSX;
KGN:NYSE.MKT) with its project in
Ghana, Rainy River
Resources Ltd. (RR:TSX.V) in Ontario and Guyana Goldfields Inc. (GUY:TSX) in South America have
been re-engineering their projects and generating plans that have lower capex and often, better rates of return.
TGR: Keegan made some
management changes recently. Did you welcome those changes?
JF: Sure. The company brought
in management with a track record of building mines and putting them into
production. That is definitely a positive.
TGR: Rainy is in
northwestern Ontario, a very safe jurisdiction. What brought you to that
JF: The potential for a
multimillion-ounce deposit in Canada is what attracted us. We have been
invested in Rainy River for quite some time.
TGR: What is Rainy River's
next catalyst for growth?
JF: I think it is the
ongoing derisking of the project through the
permitting process. If Rainy River is not acquired by someone else and gets
through project financing, it can continue to take out the risk as it marches
TGR: Can Rainy River raise
the funds needed to reach production or will it need a partner?
JF: We will have to see how
it pans out. It may bring in a partner.
As the gold price has
improved, companies are beginning to be able to finance. Torex
Gold Resources Inc. (TXG:TSX) recently raised more
than $300M for its project in Mexico.
improvement in the gold price, there is no reason to doubt that Rainy River
would not be able to finance its project.
TGR: Guyana Goldfields has a
massive gold deposit in Guyana, South America. But it is in the middle of
nowhere with very little infrastructure. How does the company plan to get
JF: It has scaled the
project back. The company is talking about mining just the saprolite the first couple of years, which would be a very
low-cost operation and then bootstrap in the larger-scale, hard-rock
Guyana has very good
grades. Keegan and Rainy River have large, low-grade deposits, so they have
to finesse that, to figure out how to generate something with a higher grade
and a quicker return. Guyana has very good grades to begin with, so it is
just a matter of scaling the project properly in a place that is very remote
and requires a lot of infrastructure.
TGR: Guyana plans to publish
a bankable feasibility study by the end of 2012. Will that get the share
price moving in the right direction?
JF: I think so. As Guyana
Gold progresses toward production, it is derisking
the project at every step. Derisking also makes the
company more attractive as a takeover candidate.
TGR: Your fund has a fair
bit of exposure to West Africa, which is rapidly becoming a gold mining
district. Are there some names there you could share?
JF: We have positions in a
handful of large, low-grade properties in West Africa in various stages of
development. Gryphon Minerals Ltd. (GRY:ASX), Orezone Gold Corporation (ORE:TSX) and Volta Resources Inc. (VTR:TSX) have great projects.
Some may need a slightly higher gold price or more engineering to enhance the
rates of return. We see them all moving forward in the course of this bull
TGR: Volta has an open-pit
mine at Kiaka in Burkina Faso in the prefeasibility
stage. Recently, it had one really stellar drill result.
JF: It recently announced a
long intercept of 1.9 grams/ton (g/t); the overall grade at Kiaka is 0.96 g/t.
TGR: Do the recent drill
results at Kiaka give you hope that there is a
higher-grade element to this deposit yet to be discovered?
JF: Not that hole in
particular, although it certainly helps. Volta has been finding some
higher-grade material to the south of the Kiaka ore
body that would make a very nice starter pit. Finding more high-grade
material outside of the Kiaka deposit would
definitely sweeten the deposit.
Volta has several targets
peripheral to Kiaka that it plans to drill in the
coming year. We will see what it comes up with.
TGR: What is happening in
JF: Roxgold Inc.'s (ROG:TSX.V) discovery of a high-grade,
quartz-vein deposit in Burkina Faso is very exciting. The company has done
quite a bit of drilling and appears to have identified enough to support a
small-scale underground operation. That means Roxgold
already has something of value, and with more exploration and drilling may
locate more high-grade veins. It could even develop into a gold district, but
it is early days yet.
has $65 million in cash, a lot of money for a junior of its size.
JF: Yes, Roxgold's cash can support a lot of drilling, and the
company will not have to worry about financing for quite some time.
TGR: Could you give our
readers, some reasons to stay positive about investing in precious-metals
JF: All of the things that
have been driving gold prices throughout this bull market remain in place.
The U.S. is still running trillion-dollar budget deficits. Central banks all
over the world have incredibly easy monetary policies in place. They are
printing money in one form or another, holding interest rates at
extraordinarily low levels and generating negative real interest rates.
These trends are not
going away any time soon and are creating the financial risk that is driving
the gold market. We expect that to continue in the longer term. Gold stocks
will reflect the underlying gold price. While the gold stocks have
underperformed over the last couple of years, we see reasons to believe they
are reversing that underperformance. If the gold price trends higher, these
stocks could do very, very well.
TGR: Joe, thank you for your
time and your insights.
Joseph M. Foster joined Van Eck
Associates' hard assets team in 1996. He currently serves as lead investment
team member for its flagship fund, Van Eck International Investors Gold Fund,
and investment team member of Van Eck Global Hard Assets Fund and Van Eck
Worldwide Insurance Trust's Worldwide Hard Assets Fund. Foster earned his MBA
at the University of Nevada-Reno and holds a masters
in geology from its Mackey School of Mines.
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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: Goldcorp Inc., Guyana Goldfields Inc., Orezone
Gold Corporation and Roxgold Inc. Streetwise
Reports does not accept stock in exchange for
services. Interviews are edited for clarity.
3) Joe Foster: I personally and/or my family own shares of the following
companies mentioned in this interview: Van Eck International Investors Gold
Fund. I personally and/or my family am paid by the
following companies mentioned in this interview: None. I was not paid by
Streetwise Reports for participating in this interview.