The financial risks associated with Greece are now mostly forgotten. Its
place was taken over by worry over the migrant crisis and ISIS-both issues
came suddenly from nowhere and grasped hearts and minds, and then slowly
receded in memory. Somewhere within these events, Russia's problems with
Ukraine came up, and then the drop in the oil price. Neither provokes much
anxiety any more. People have also grown tired of regurgitating about
America's "never-ending wars" and "religious fanaticism"
and what came first.
Happenings in Venezuela and particularly in Brazil have shown the
difficulties of the emerging markets and their huge intellectual, financial
and trade dependence on the West-despite claims to the contrary. Then there
is the huge fear of China slowing down. India has consistently failed to meet
expectations, but the West's enchantment refuses to go away, mostly
underpinned by desperate ideological support for democracy. When it comes to
walking the talk, investors instinctively abstain from India. The most
recently worry has been about BREXIT.
The market has its moods and fascination with headlines. Investors often
anticipate what Federal Reserve Chair Janet Yellen might say next for
investment decisions. Quite to the frustration of the value investor,
big-money has become extremely speculative, investing in currencies, bonds
and ETFs. The need to keep up with the indices has forced money managers to
follow the herd. If any of this leads to wealth creation, it is a mere
unintended consequence. Bottom-up valuation-of politics, society and
economics-has taken a back seat.
Every crisis-real or imagined, economic or social-seems to have one
panacea: Buy the U.S. dollar.
Of course, this does not mean that the universal laws-value-investing and
that wealth cannot be created by printing currencies-no longer assert
themselves. They do in a quiet and, to the taste of many, boring fashion.
While gold has frustrated many investors, it has been among the best
performing financial instruments of this century, the last 16 years. It has
gone up about 300%, beating virtually every other major financial instrument.
Indeed, the last five years have been a time for consolidation for gold,
underpinned mostly by the fact that big money in troubled times moved to the
most deep and liquid asset class, the U.S. dollar.
Despite its own problems of migration from the south, a stagnant economy
and a very uncertain political future, the U.S. looks stable in comparison to
events outside. But stable the U.S. isn't, certainly not economically.
In the U.S. and Europe, the fundamental nature of the economies is of
financial repression. Their economies have stagnated and are increasingly
negative yielding. Contrary to the expectations of many, emerging markets
have failed to take a leadership position. They have failed to become
creative and nurturers of the future growth of the planet. A large part of
emerging markets-perhaps with the exclusion of China-have grown through
merely consumption supported by debt, rather than by building more factories.
These emerging markets are starting to stagnate and mostly revert back to
their historical norm, negative yields. On top, their huge debts and
consumption patterns have created massive systemic risks.
While many reasons are attributed to why people buy gold, the major
reason is negative yields. Gold is a zero-yielding asset, hence better
than negative-yielding assets. Gold has done very well in the last 16 years,
and there is nothing on the horizon that shows a reversion in the
negative-yielding economic environment. With periods of consolidation, gold's
rise of this year should continue. When investors have accepted that the U.S.
stock market has indeed stagnated-which has gone nowhere for the last one
year-and when the property markets in cities like Vancouver have burst, all
eyes will move to gold, setting in place what might become mania.
Now to investing. It has been the nature of the mining industry that
investors tend to build in their valuation metal prices that are higher-often
much higher-than spot prices. This corrupts valuation and diverts money into
projects that are not yet (and perhaps never will be) economical. This
enables promoters with polished presentations to positions of lifestyle. If
nothing else, building higher metal prices in equity valuations results in
giving away upside from metal price appreciation.
While gold has done quite well so far this year, mining companies have
gone up far more than what could be justified by the increase in gold price.
I offer two names that have either generated more value than their share
price increase reflects or have gone unappreciated by the market.
Reservoir
Minerals Inc. (RMC:TSX.V) is being acquired by Nevsun Resources Ltd.
(NSU:TSX; NSU:NYSE.MKT). Despite being one of the most successful mining
companies in the recent memory, Nevsun has suffered because of its
jurisdiction, Eritrea. Owning Reservoir offers an arbitrage upside of a
couple of extra percent and a small possibility that another bid might come
for Reservoir. The merger of these two companies gives them the fuel to
finance the Serbian project that Reservoir brings to the table. This will put
Nevsun's cash pile to use. Nevsun's unused cash was being discounted in the
market valuation, and Reservoir's lack of cash was seen as its shortcoming.
With the merger, discounts from both sides should disappear. I prefer to buy
Reservoir for extra icing on the cake, an arbitrage upside and a possibility
of a better acquisition bid.
Callinex
Mines Inc. (CNX:TSX.V; CLLXF:OTCQX) has done very well over the last two
years. It has managed to raise money from significant investors including
Resource Capital Funds, to fund ongoing exploration at its flagship Pine Bay
project in Manitoba, where the company has recently discovered two new
mineralized zones. If enough economic quantity of rock can be found, it can
be very easily trucked to the facilities of Hudbay Minerals Inc. (HBM:TSX;
HBM:NYSE), which needs new sources of ore. Callinex has also acquired three
primary zinc projects in Canada, for insignificant cost to its treasury.
There are very few juniors that offer significant exposure to zinc,
particularly with a strong management team. I'm looking ahead to upcoming
drilling programs and more acquisitions-supported by recently raised money.
Jayant Bhandari has been an Asia-based institutional
investor adviser for the last three years. Prior to that he worked for six
years with U.S. Global Investors in the United States, a boutique natural
resource investment firm, and for one year with Casey Research. Prior to his
involvement in the investment industry he established and managed Indian
subsidiary operations of two European companies. He received his Master of
Business Administration from Manchester Business School (UK) and holds a
Bachelor of Engineering from SGSITS (India). He frequently writes on
cultural, political and social issues for several publications.
