The Gold Report: You seem much more positive about gold
right now than when we talked in June.
Based on the chart you have on Katusa Research of the U.S. dollar versus gold and in the
wake of the Federal Reserve's inaction at its last meeting, what's your
thesis for gold for the rest of 2015?
Marin Katusa: As I said in the spring, I don't see the Fed raising
rates this year. Using some simple game theory, for the Fed not to raise
rates is the best decision. I still believe that. Gold has fared well
compared to the price of the U.S. dollar, better than any other hard
commodity. Gold is holding its own. The reality is, because the commodity markets
are down, very little capital is being invested to replace the production of
gold.
In the long run, I'm very bullish on gold. It's something I'm paying very
close attention to through my fund. We've started writing checks on assets
that I believe are very cheap and well priced in today's currency commodity
markets and that I believe a major will want in its portfolio in a few years.
Gold is the currency of kings and silver is the currency of gentlemen; it
always has been, and always will be. When you see living legends such as
Stanley Druckenmiller and well-known successful fund managers plowing
hundreds of millions of dollars into gold, it's obvious gold is appealing at
these prices.
TGR: Will the power of gold help the majors or the juniors more?
MK: I don't think the majority of juniors will take off until the
majors take off, so watch the majors first. They will be the first ones to be
repriced when gold really starts to take off. If a junior finds a world-class
asset, it will rise based on its own success rather than on the strength of
the market. We've seen many examples of that. But the producers will get the
party started.
TGR: The majors are not all equal. What are some of the majors that
you're watching that are doing a better job than the others?
MK: Balance sheet and debt risk is the first place to start. Also,
consider whether a company has really written down all its crappy assets that
it should. I know of a few companies that still haven't written assets that
they should. Pay attention to the debt covenants. Everyone compares Goldcorp Inc.
(G:TSX; GG:NYSE) to Barrick Gold Corp. (ABX:TSX; ABX:NYSE). But Goldcorp
is in a much better situation than Barrick when it comes to the balance sheet
and debt. The chairman of Goldcorp is a friend, so I'm biased and cheering
for Goldcorp, but it's completely true regardless of my own bias.
I like Goldcorp's assets better than Barrick's. Companies like Kinross
Gold Corp. (K:TSX; KGC:NYSE) had a tough go because of its debt, high-risk
assets and high cost to put in new production. Check the debt levels on these
companies before you invest to determine if they would be able to survive the
next two to three years in low commodity prices. At the end of the day, debt
is the currency of slaves, so be very careful.
Investors looking at the top-tier companies also have to consider the
royalty streaming companies, like Franco-Nevada
Corp. (FNV:TSX; FNV:NYSE) and Silver Wheaton
Corp. (SLW:TSX; SLW:NYSE). I would argue that they are in better shape
than the producers themselves.
TGR: What about some of the midtier producers? Are there any you
like in that category?
MK: In May, I was the first analyst to publish a research report on
Newmarket
Gold Inc. (NMI:TSX; NMKTF:OTCQX). That company has had a fantastic run.
It has moved over 50% since then. This has been a great market for companies
that are cashed up and have good assets. Similar to Canadian producers,
Australian producers like Newmarket have the advantage of a devalued currency
to make the selling price higher and the operating costs lower—using the
currency crisis to their advantage.
TGR: Newmarket has been doing quite a bit of consolidating. Are you
expecting more deals?
MK: Newmarket was an idea backed by some really good guys. CEO Doug
Forster and Executive Vice President Blayne Johnson are backed by Lukas
Lundin, Ian Telfer and Mike Vitton, and my fund is a big shareholder.
Newmarket raised a bunch of cash and used that money to buy Crocodile Gold
Corp. (CRK:TSX; CROCF:OTCQX), which was struggling. The Newmarket team took
advantage of Crocodile's misfortune and increased production to over 200,000
ounces (200,000 oz) annually. In addition, Newmarket has been putting dollars
into drilling and hitting very high-grade gold. It has been a nice win for all.
I think Newmarket will continue consolidating. For now, the near-term
catalyst is to do more of what it's been doing. When the share price gets a
bit higher, it will probably consolidate a near-term producer or a
100,000–150,000 oz annual gold producer.
TGR: What about the juniors? What are the juniors that you're
watching?
MK: The first thing I look for is an excellent management team that
is invested heavily in the company. Then I want to see if it owns a
world-class asset. If this isn't an asset that a major would want to buy in a
bad market, I avoid it. The world does not need another 400,000 oz gold
deposit. A project has to be a game changer for a major.
TGR: What are some examples of the best people in the business?
MK: Ross Beaty, who after a number of successes is now focused on Alterra
Power Corp. (AXY:TSX), has a great track record of delivering shareholder
success, but more importantly, he's always the largest investor in his own
deals. My fund and I are very large shareholders in two of Ross' companies.
Alterra is an example of a stock that was significantly undervalued even
though Ross Beaty and his team keep delivering great value. So I took a big
position. Another one I like that Beaty is doing and nobody is paying
attention to is Odin Mining & Exploration Ltd. (ODN:TSX.V). Beaty is
quietly consolidating these world-class assets in Ecuador. It is super high
risk but Beaty is definitely adding value, and I am a happy shareholder.
You cannot count out Robert Friedland with Ivanhoe Mines
Ltd. (IVN:TSX). A lot of people are betting against him and his company.
I've taken a large position in Ivanhoe in our fund. Those are two great
examples of guys who are getting a discount in today's market but I believe
will deliver significant success. For me, this is a dream come true market,
as I can get proven management teams, such as Ross Beaty and Robert
Friedland, at very low valuations.
TGR: What other companies fit the criteria?
MK: Midas
Gold Corp. (MAX:TSX) is a fantastic project that I believe a major will
eventually want to own. I am down on my position, but Midas has a solid
management team, although they are promotionally challenged. It's suffering
from two issues in this market: the permitting process—nobody cares about
companies in that permitting period—and the capital cost to build the mine in
this market is being frowned upon. A company like Osisko Gold Royalties Ltd.
(OR:TSX) or Goldcorp will come up and buy that asset. Will it be this year or
in three to four years? I don't know. But that asset is a past producer, very
high grade and has over 5 million ounces of gold. That's why I've taken a
large position. It has the right management team and the right project. It
has the right type of geology in the right jurisdiction. That's a contrarian
bet on gold. Most people are undervaluing it today, and that's when you want
to buy. That doesn't mean it's not high risk. All junior resource
speculations are high risk. That is why fortune favors the bold.
TGR: You also have an interesting chart comparing zinc inventories
to price. How are you positioning yourself in that space?
MK: I'm just starting to focus on zinc. I'm not an expert by any
means. Literally, outside of Ivanhoe, I have zero zinc exposure in our funds.
So I haven't positioned myself in zinc. I just thought it was a very
interesting data point to publish. Interestingly enough, many people have
contacted me regarding the zinc chart, which tells me there are a lot of
eyeballs on the sector.
TGR: You are one of the names along with Cambridge House putting on
The Silver Summit & Resource Expo in San Francisco at
the end of November. What do you hope people will come away with from this
conference?
MK: The same thing that I'm hoping to come away with: deal flow to
put my capital into the market and make money. There is no better place to
meet management teams than a conference like this. You get to meet the Ross
Beatys of the world, the man who built silver-producing mines through Pan
American Silver Corp. (PAA:TSX; PAAS:NASDAQ). You get to ask questions of
Silver Wheaton's management. These are the people who really understand the
market. This will be one of the best conferences of its kind in the world with
some of the most knowledgeable individuals in the resource sector present for
you. All you have to do is make the effort of showing up. The beauty is that
in a bear market, an average retail investor can spend time with key mining
executives. I hope people at the show will walk the booths and ask questions.
One question I like to ask is, what other company would you invest in with
the same type of market cap, sector and risk level as your own if you
couldn't invest in your own company? That's a simple question that can really
lead you to other opportunities. Plus, I will be there and you can ask me any
question you want.
We have a fantastic line-up of fund managers and well-known market
commentators, and you get to rub shoulders with people like Frank Curzio,
Ross Beaty, Brent Cook and Grant Williams. These are fascinating, interesting
people, and you get a chance to talk to them, learn from them and, hopefully,
make money from the conference. That essentially is the point, to make money.
TGR: Thank you, Marin.
Marin Katusa is the author of the New York
Times bestseller, "The Colder War." Over the last decade, he has
become one of the most successful portfolio managers in the resource sector,
such as his 2009 Fund Partnership (KC50 Fund LLC), which has outperformed the
comparable index, the TSX.V by over 500% post fees. Katusa has been involved
in raising more than $1 billion in financing for resource companies. He has
visited over 400 resource projects in more than 100 countries. Katusa
publishes his thoughts and research at www.katusaresearch.com.
