The Gold Report: This year started with a bang as China's
machinations rocked markets all over the world and set off a gold rally. Is
that sustainable? What did we learn?
Ralph Aldis: China was the main driver of the volatility that started
out the year. The economy is not collapsing. Growth will just be a little bit
slower than expected.
I also think people are losing faith that the Federal Reserve will be able
to maneuver the markets this year. What's really been disturbing to me is how
much central banks all around the world are intervening in stock markets. To
me, that's a recipe for disaster.
Gold was the beneficiary of these dark notes. Investors need to understand
that, regardless of what the pundits are saying. All investors need an asset
plan designed around individual timelines. Then they have to stick to it and
rebalance.
TGR: Frank Holmes pointed out in his Frank Talk that gold actually performed well in 2015
in some currencies. Where are you looking for gold to do best this year? What
does that mean for North American investors?
RA: The Canadian dollar was a standout last year. We are looking at
$1,600/ounce gold prices in Canada right now. The same is true for Australia.
In other countries-Russia and Brazil for instance-it has been even more
pronounced because of the ruble and the real, but there just aren't that many
names to invest in there right now.
I think the Canadian dollar is still going to weaken a little bit more
this year. We saw the Bank of Canada hold off on cutting rates at its last
meeting. I still think the bank is going to end up having to cut rates at
some point in the not too distant future. The Canadian dollar will get weaker
and that will be very positive for the metals prices. On the Aussie side, I
see the same trends happening. Gold companies operating in those regions have
an advantage over some of the other miners out there.
TGR: And do you believe the U.S. dollar will continue to be strong?
RA: Yes, but I don't think we're going to see a runaway U.S.
dollar. Cornerstone Research has shown that historically the dollar rallies
up into the first rate hike and then generally tends to fade after that. With
the emerging markets' currencies down so much, that's probably going to
trigger some growth in those regions, too.
TGR: One of the things that you and Frank follow is the Purchasing
Managers Index to measure economic health. What is the cross-above trend
telling you about global growth?
RA: The most recent global manufacturing chart showed cooling in
December, which resulted in the one-month reading falling below the
three-month moving average. The average had been rising slightly since
September, but the last two data points from November and December were kind
of trending down. The recent market turmoil indicates we are probably still
looking at some weakness this year.
TGR: The other thing that you've written about is the strategy of
royalty companies to buy when the streams are on sale. What companies have
been the most active? What does that tell you about where we are in the
cycle?
RA: That's an interesting dilemma right now. The royalty companies
have traditionally been one of the best places to be long term, and I think
that still probably holds because they have a very diversified risk
portfolio. The big challenge now is they don't have the capital available to
do more. They could borrow. Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) has done that,
but historically one of Franco's strengths is that it doesn't like to have
any debt on the balance sheet.
Another one that's been pretty active is Osisko Gold
Royalties Ltd. (OR:TSX). It is taking a completely different approach by
working in the junior gold space to line up future royalties. That could be a
very successful strategy long term.
Royal Gold
Inc. (RGLD:NASDAQ; RGL:TSX) is facing a situation similar to Agnico Eagle
Mines Ltd. (AEM:TSX; AEM:NYSE) when it wrote off $200 million ($200M) on
Goldex, and the market took $2 billion out of the market cap. A year later,
Agnico was a great entry point and subsequently turned into one of the best
performers. Royal Gold's share price has been hit because of fears over
Thompson Creek, the Phoenix royalty and so on, but that may be oversold.
Silver
Wheaton Corp. (SLW:TSX; SLW:NYSE) has some tax issues hanging out there
that make it difficult to go out and tell the story. But the controversy could
result in a very good entry point for some people.
TGR: With all of this going on, how are you adjusting the U.S.
Global portfolios to prepare for what could happen in 2016?
RA: We haven't changed too much. Most of our big positions are
still oriented along the same weightings. If we do get a gold rally, some of
the highly leveraged names may be the bigger beneficiaries. I always have to
be cognizant of that. Last year, I avoided some of the highly leveraged
names, but that may change this year. I do feel that we're getting closer to
a turning point.
There are a lot of reasons for that. The Fed is trying to raise rates. In
a news article recently, Goldman Sachs advised selling the 10-year treasury
bonds, and Morgan Stanley was saying buy the 10-year because its analysts are
expecting 10-year yields to drop another 50 or 60 basis points. All of this
stress could lead to a big pull away where the market just loses confidence.
Historically, when the Fed and all these governments make a mistake, people
decide it is a good time to own some gold.
TGR: Let's talk about some of the specific gold mining companies in
your portfolio that are doing well or have significant catalysts coming up.
RA: Gran Colombia Gold Corp. (GCM:TSX) is one that we've been
involved with for a number of years. The challenge of operating in Colombia
isn't as much the narcotics drug lords as it is the socialist slant of the
government. We have seen a restructuring of the board members, and we would
like to see the management team strengthened. Rodney Lamond, Mark Ashcroft
and Mark Wellings are three new board members. Wellings was one of the people
who ran GMP Securities for a very long time for Griffiths McBurney & Partners.
He's highly respected on the Street. All three people have a great track
record. Gran Colombia has also formed a technical committee of the board.
Having a plan and executing on that plan will be important for Gran Colombia
going forward. With these new board members, I think we could have great
opportunity on this one.
The common share price is very cheap. The real play right now is to buy
the depressed debt securities because those will see the rerating first. The
silver notes have a 1% coupon, but the gold notes will have a 6% coupon. The
yields of 25% to 30% are very attractive in this market. So once the market
gets some clarity on how Gran Colombia is going to be led, that could be a
game changer for the company.
TGR: In addition to the changes on the board, Gran Colombia also
just completed a debt restructuring. How important is that for reducing
costs?
RA: That's a big deal because bringing down the interest payments
will free up a lot of cash flow to do more things. It will give the company a
lot of flexibility on the operating side.
Plus the Colombian peso has fallen quite a bit. That is another example of
where a company benefits from paying its labor with the Colombian peso, but
profiting from a higher gold price.
TGR: Let's talk about another one that could do well in 2016.
RA: A company we have talked about since we've been doing the
interviews is Klondex
Mines Ltd. (KDX:TSX; KLDX:NYSE.MKT). Success really depends on the people
running these companies. It was a game changer when Paul Huet, CEO of
Klondex, came on the scene three years ago.
Klondex recently completed an acquisition and the market got jittery. It
bought the Rice Lake mine out of bankruptcy for around $30M from a
controversial name, San Gold Corp. (SGR:TSX.V). There is still some $20+M of
mobile mining fleet at the mine site and the mill was on care and
maintenance. I think the real problem with San Gold was that it was trying to
grow this asset beyond the natural mining rate. The trouble is if a company
upsizes the mill and the underground operation can't keep up, it is forced to
mine lower grades to get the tonnage and that is a losing proposition.
Klondex is looking at turning it into perhaps a 50,000 ounce (50 Koz)
producer, maybe 70 Koz. That is much more economic.
TGR: We did see a little bit of a selloff when the acquisition
came. Is there going to be some kind of a catalyst in 2016 that will prove to
investors that this was a good decision?
RA: Klondex is going to re-evaluate the mine plan. In nine months
or so we should have a better understanding of how it will operate. We may
have other catalysts before that related to Fire Creek and Midas exploration
results. That is why I'm pretty confident this thing is going to be a very
good performer for us this year.
TGR: How about an update on another one we've talked about before?
RA: Integra Gold Corp. (ICG:TSX.V; ICGQF:OTCQX) is becoming
more timely with each Eldorado Gold Corp. (ELD:TSX; EGO:NYSE) press release.
Eldorado took a small stake in Integra. With the write-downs the major is
taking, I think it makes more of a case that at some point Eldorado will take
this company over provided Integra finds the right stuff. I think that this
year could be very important for Integra.
Integra also has its Gold Rush Challenge that it's going to highlight at
the 2016 PDAC Convention. Rob McEwen did that with Goldcorp Inc.
(G:TSX; GG:NYSE) and it had great success. You put up some cash for
experts outside the company to look at the data and you don't know what
you're going to get, but you may get an answer that's much better than what
just one firm would recommend. I'm excited about this one.
TGR: Is the upside the harvesting of crowdsourcing insight or the
publicity that comes from doing something out of the ordinary or is it a
combination of the two?
RA: I think a combination. It does bring more eyes to the stock.
I'm hopeful that a great target comes out of the exercise, but Eldorado
making a move to consolidate its ownership is really what I'm looking for.
TGR: Let's talk about another one.
RA: Newmarket Gold Inc. (NMI:TSX; NMKTF:OTCQX) is a company
that has a couple of assets in Australia where people have never really paid
much attention. AuRico Gold had these and I guess Northgate Minerals before
that. When Alamos Gold Inc. (AGI:TSX) took over AuRico, it didn't really have
any interest in those assets. But recent drill results are hitting some high
grades that could result in a longer mine life at Fosterville.
The other thing is that the management team is pretty smart and they
understand the value drivers for getting a company's share price higher. So
I'm positive on this one. It's one of the few gold stocks that has actually
been able to go up in the last year.
TGR: Is that mainly because of the Australian dollar or is it
because of the new mine plan and the management?
RA: The Australian dollar has been a big tailwind, so that's part
of it. But the new mine plan and the additional drill holes are very
promising for a long mine life. Some of these mines can go on for 100 years
with underground operations. So I'm pleased with this one.
TGR: How about one that's a near producer?
RA: Pretium Resources Inc. (PVG:TSX; PVG:NYSE) is getting
there; 2017 is the expected date for Brucejack to be in production. It
continues to put out very good drill holes. After the drama with the initial
bulk sample in late 2013, it delivered 4 Koz as estimated. The company just
released the fifth set of fan drill definitions and it is continuing to hit.
I think it had one hole that was 20,000 grams per ton (20,000 g/t). One of
the brokers jokingly suggested measuring in number of Rolexes per ton. I
think Pretium is doing the right work to understand the geometry of the ore
body. That's so important. Pretium is getting the right three-dimensional
picture of the ore and its distribution.
The great thing is it could literally mine here and repay all its capital
in a modestly short period of time. Even after it depletes the high grade, it
will still be a huge gold camp. Who knows where gold prices will be in 10
years? Maybe all that other 1 g/t gold will actually be worth something.
TGR: Does the company need to raise more money?
RA: Working capital as of Sept. 30, 2015, was $432M. We should get
an updated funding capital expenditure estimate for the project this quarter
because there are other cost savings that will probably come in. Certainly,
the exchange rate is very favorable. Sourcing the equipment with the market
in a distressed state could lower prices as well. Pretium still has a little
bit more funding to do, but I don't really look at that as a major headwind.
I was very pleased with the deal that it did for this last set of funding
where it negotiated with private equity. It also put a cap on the royalty. So
the company has been very astute about trying to preserve the value for the
shareholders, and the management team owns a lot of stock themselves. I'm
pretty happy with what Pretium is doing.
TGR: Let's get an update on another long-time holding.
RA: I talked to Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) CEO Bill
Howald recently and he has been very busy. Funding hasn't been an issue
because of the royalty on Coeur Mining Inc.'s (CDM:TSX; CDE:NYSE) Rochester
Mine. He just picked up some additional land positions near the old Florida
Canyon mine, which is owned by a large Asian operator. It is up for sale. I
don't expect Howald to necessarily buy that, but he has a lot of land
positions around that. So if a company does decide it wants to make a run at
it, Howald certainly has a lot of land in that area.
Rye Patch also recently renegotiated its terms with the Barrick Gold Corp.
(ABX:TSX; ABX:NYSE) group on the Patty project to give it more time. It is
fairly complex geology and the company doesn't want to drill and make a
mistake, so it is taking a little bit of extra time. Howald has a lot of
irons in the fire. I've been very happy holding on to this company because
it's been run very solidly and it doesn't have a funding issue.
TGR: How about one more?
RA: Tahoe Resources Inc. (TAHO:NYSE; THO:TSX) just released
its 2016 production and cost guidance. I didn't see major issues there. I
think at Shahuindo it was planning a 10,000 ton per day (10 Ktpd) plant
versus a 30 Ktpd version, but in this environment, a company is probably
better off risking less capital until it knows the conditions. Tahoe has
actually underperformed year-to-date compared to its peers, but this is a
company that is not going bankrupt and is run by good people who own a lot of
stock. I think the stock is probably a reasonable Buy at this level. The
worst thing would be if silver prices continued to drop, but if gold goes up,
silver should follow that.
TGR: Are there some catalysts coming up on Tahoe we should watch?
RA: There are some more engineering studies going on. The bigger
deal will just be continuing to operate and not have any big hiccups. The
guidance may be overly conservative. It's hard to say. But Tahoe's management
team has a lot of experience and has maneuvered a lot of markets before, so
we're sticking with that one.
TGR: How about some last words of advice for investors looking to
make the most of their portfolios in 2016?
RA: Investing is a discipline. I always stress the importance of an
asset allocation plan and rebalancing that plan regularly. Gold is always an
important part of that asset allocation mix, which so many investors just
don't consider. Even brokers don't always know what's going to happen, so a
good balanced asset allocation plan tethered to where you are in life is the
key to building wealth.
TGR: Thank you for your time, Ralph.
Ralph Aldis, CFA, rejoined U.S. Global Investors as
senior mining analyst in November 2001. He is responsible for analyzing gold
and precious metals stocks for the World Precious Minerals Fund (UNWPX) and
the Gold and Precious Metals Fund (USERX). Aldis also works with the
portfolio management team of the Global Resources Fund (PSPFX) to provide
tactical analyses of base metal, paper, chemical, steel and non-ferrous
industries. Previously, Aldis worked for Eisner Securities, where he was an
investment analyst for its high net worth group and oversaw its mutual fund
operations. Before joining Eisner Securities, Aldis worked for 10 years as
director of research for U.S. Global Investors, where he applied quantitative
skills toward stocks, portfolio tilting, cash optimization and performance
attribution analysis. Aldis received a master's degree in energy and mineral
resources from the University of Texas at Austin in 1988 and a Bachelor of
Science in Geology, cum laude, in 1981, from Stephen F. Austin University.
Aldis is a member of the CFA Society of San Antonio.
