Gold and the Market: Adrian Day's Insights
Source: The Gold Report (11/9/07)
The Gold Report recently spoke with Adrian Day, President of Adrian Day Asset Management, a pioneer in global investing, with a reputation for discovering big winners. Day, the editor of Adrian Day's Global Analyst, gives us his insights on what's going on in these interesting times for gold and gold equities.
TGR: I would like you to start by first giving a quick brief assessment of what you perceive as the current investment environment for gold stocks. Are, the continued credit worries and problems and the rate cut going to affect gold stocks? Because the last time we started having trouble like this, it did affect gold stocks.
DAY: A couple of thoughts if I may. First of all, the old saw is that gold stocks are stocks and they often react like stocks, although not always. What seems to happen, in my view, is that gold stocks will tend to act like stocks in the initial phase of any problem. So last week we had a big sell-off in global markets, particularly in Europe and North America. We had a big sell-off because people think the Federal Reserve may not make any more cuts and they’re through cutting. I think that is just whistling in the wind, frankly. But that’s why stocks came off along with the other weak economic news. Gold stocks came off along with everything else.
What tends to happen is that things will start to shake themselves out after a little while; we certainly saw that in August. And I think we can fully expect gold stocks to do better than the broad market in a continuing weak market, a continuing environment of credit problems. Gold will do better in that kind of environment. And gold stocks will reflect, at least partly, what is happening to gold, but in the initial phase they get sold off like everything else.
TGR: Okay, Newmont Mining Corp. (NYSE: NEM) had a strong day the other day. It was earnings. Typically, historically, most gold stocks don’t have earnings. Obviously Newmont is one of the largest companies, and has earnings and has assets. Do you see this as a change, a sign, or just another day and another stock?
DAY: I think it’s a little bit of both. It’s not only Newmont, of course, that has done well over the last several weeks; many of the gold stocks have rallied very, very strongly. Goldcorp (TSX: G; NYSE:GG), for example, from the low 20s up to $33, $34. A lot of them have performed very well over the last several weeks, admittedly from a lower base.
If you go back last three to four years, the gold stocks are still under-performing bullion, but I think that’s beginning to change.
Specifically with Newmont, personally I don’t think it was the earnings per se. What was critical is we’ve had the change at the top. A lot of people are watching Newmont to see what this means, and what difference it is going to make. And to me, it’s not just the fact that they had earnings, but more importantly, the fact that their operations seem to be a little better.
There was an improvement in their operations, but also I think the fact that Richard O’Brien was very forthright and open with the market helped. People have been watching Newmont and this was an opportunity to jump on board for those who weren’t on board. That’s the way I sense it.
TGR: In the broader market, do you see gold as still connected to the dollar and to inflation? Or if the dollar were to increase or stay flat, can gold still rise?
DAY: The answer to both of those questions is yes; I think at the moment gold is very, very much tied to the dollar. But perhaps it is becoming less so over the last several months. I think it is becoming less so than it has over the last several years. In my view, the dollar is still the primary factor, but it no longer the only factor, and it is no longer the dominant factor. It is just one factor of many. We’ve begun to see gold move up in terms of different currencies, of course, over the last six months or so. So that’s a positive.
Going forward, I think the dollar will be a main factor, but by no means the overwhelming factor. The credit problems, not just in the U.S. but in many places around the world, are unquestionably a positive for gold and a major factor for gold.
TGR: But not a positive factor for the U.S. dollar or those currencies that are involved in the credit problems?
DAY: Well, correct, absolutely. Definitely not a positive for the dollar, which only tends to exaggerate gold’s up-move. But I think gold is also reacting to things other than just the dollar.
TGR: What are some of the other dominant factors that are now emerging?
DAY: From a fundamental basis, you have macroeconomic factors. You’re getting lower interest rates around the world, a pause in rates going up in Europe and lower interest rates in many other countries. That’s positive for gold. I think there’s a clear concern, but if the Fed in the U.S., the European Central Bank, and other central banks continue to flood the market with money, that could lead to inflation. I don’t think inflation is a factor at the moment, and I don’t think that gold is really reacting to inflation or the lack of it at the moment. But if monetary authorities continue to flood the market with money, then inflation could easily become a problem, and I think gold is sensing that.
But just generally, the credit problems and concerns, so much leverage, the whole derivatives issue, the securitization of debt and mortgages and everything else, are good for gold because people really know what they’re buying. In times like that you turn to gold because when you buy an ounce of gold, you know what you’re buying. It’s very, very clear. But with so many other investments, there’s so much leverage and so much re-packaging that people don’t really know what they’re buying or what they own any more.
There was a wonderful quote I saw from a fund manager who was talking about securitization. And this was a couple of months ago, before August. This person said that “all too often, doing due diligence means missing the deal.” And I thought it was just wonderful because it was so true. There is so much money in the world, so much demand for yield, so many people just stretching for yield, so that if you wanted to find out what it is you’re buying; don’t bother, because someone else will buy it anyway.
TGR: Exactly. They’d say, “Don’t insult me. Just take my word.”
DAY: Exactly. What we’re finding out now, of course, is that people really don’t know what they own and they don’t know what it’s worth, so we’ve got this super SIV or whatever it’s called that the banks have set up. It is really nothing more than a way of postponing and delaying marking to market the value of the things that they own. But when you buy gold, you clearly know what you’re buying, so I think people are turning to gold in that kind of market.
All of this is against a fundamental—at the micro level, at the supply and demand on gold, you know – we all know how difficult it is to find big deposits, to permit big deposits, and to actually produce the gold without some government somewhere or some NGO somewhere trying to shut you down or stop you expanding or whatever. We all know how difficult it is to produce gold, and so for the last five years, even though the price of gold has gone up like crazy—tripled in five years, six years – but production is basically flat.
I think we have to realize that right now, the dollar has had such a sharp decline and gold has had such a good run, I think we have to say there’s a reasonably high possibility that gold will have a significant pullback. I don’t want to put a number on it, but a significant pullback in gold means that gold stocks will fall. So I would tend to be relatively cautious about adding gold stocks now. As always in these kinds of circumstances, the best value tends to be among the very smallest or more speculative because they don’t all necessarily move.
TGR: What are maybe five stocks you like, Adrian? Not necessarily something to buy right now, but companies you like?
DAY: Among the seniors, I think the closest one to being a good buy right now is Gold Fields (NYSE: GFI), the second-largest South African gold producer. It has a rock-solid balance sheet, long reserves, 100 million ounces of reserve, long-lived, very conservative, perhaps even a little bit boring. But it’s a reasonable value right now. If someone insisted on buying something, that’s what I’d say.
I like Goldcorp a lot, but at $34 I wouldn’t be buying it because of that pullback I think we’ll get, and unfortunately, I think that’s true about some of my other favorites too.
And the second thing I would say is that we’ve just had a huge run. September and October were very, very nice months. In this kind of market, I think it’s not inappropriate to be looking to at least lock in some profits. What I would suggest to people is that they avoid the temptation to simply sell the biggest winners because the biggest winners may be, in fact, their best stocks. And perhaps people could take this as an opportunity to clean up a portfolio, either to raise cash or maybe to sell holdings that have really lagged.
And so, that’s just two preliminaries, and unfortunately some of my favorite stocks – and the ones we talked about last time, I think are just a little too expensive to be buying right now. Stocks like Virginia Gold Mines (TSX: VGQ) , or Vista (ASX, TSX: VGZ), Almaden (TSX:AMM/AMEX:AAU). They’ve all moved.
It’s very difficult to time, and perhaps that’s what I am saying on the sell side. I would avoid selling some of your biggest winners with the idea of buying them back, because you will probably miss them.
My favorite junior continues to be Virginia Mines. It’s up to $8.42 right now. That’s up from under $5 just in August. So it’s had a really good run, but you know its market cap is still only C$230 million. So it’s still pretty small. They’ve got almost C$50 million in cash; they’ve got a royalty that is a marketable asset. They could sell it someone right now – estimates are C$40 million to C$60 million – so let’s say basically C$100 million taken up with cash and the royalty that could be sold. And so you’re getting the rest of the company for about C$150 million. A year or two ago they had this Éléonore gold deposit that they sold to Goldcorp. They have about 18 different projects that are joint-ventured; they’ve got four active drill programs right now. They’ve got a track record with very good people, and they’ve got this huge new discovery. Now they’ve got this huge new venture with Breakwater which is the Coulon, which is a base metal, a polymetallic discovery, which is still wide open—four or five deposits on the property, continuing to grow, active drilling, three drill rigs, drilling through the winter.
Although it’s not gold, it looks as though this could be as big or as valuable as the Éléonore. It will be another year or 18 months before we know, but I guess the point is you’re buying people with a good track record, lots going on and a good balance sheet. So, to someone who is brand new to the market, I wouldn’t be worried about buying that so long as they realize they may have to suffer something of a downturn first.
It can be tough to make recommendations, though, when everything is so expensive.
TGR: But if you’re looking at it as the long-term investor, and you believe that gold still has a ways to go? Sure, it would be nice to know if you could buy it at 5 points less or half a buck less or whatever—
DAY: But if you’re got a two- to three-year ride, it’s better to have it.
TGR: Right. So, if you look these as opportunities, and some may buy less or pay higher, but at the end of the day, as you just said, you want to own Virginia Mines.
DAY: Exactly. And another one that I think you may want to own is Allied Nevada (AMX, TOR: ANV). This, as you may know, is a spin-off from Vista, which spun off their Nevada holdings and merged it with a private company, with a chap called Carl Pescio. Carl had accumulated over 100 properties. And this company, Allied Nevada, is now the second-largest private landowner in Nevada. It’s got a lot going on. They have a mine in Hycroft that they’re going to reactivate and bring into production by the end of next year. They’ve got about a $300 million market cap and $25 million in cash. They have a lot of properties, a huge pipeline, and a number of properties at different stages of production. Many of these are joint-ventured, with other people spending money to develop them. They are doing exploring themselves, some grassroots work, and some like Hycroft are getting ready to go back into production.
Hycroft, you know, will be a pretty good money spinner for them. It was shut down several years ago, not because there was something wrong with mine, but because of reclamation problems that have since been solved. So, I like Allied; it’s got a lot going on, and I think the risk in the company is very, very low.
Of all the silver stocks—although again it has had a good run—I like Silver Standard (Nasdaq:SSRI; TSX: SSO) a lot. Silver Standard has more than a billion ounces of reserves and resources now—one of the largest reserve bases of any silver mining company in the world. Pretty well spread out in terms of geographical diversification, mostly Central Mexico, Latin America, Peru and Argentina, but also in the U.S., Canada and Australia.
They had the business model of accumulating ounces, uneconomic ounces that they could accumulate cheaply. They did that very, very successfully and built up this huge base of reserves. Now they’re moving forward, changing into a producer, with two properties actively moving toward the production stage. Solid balance sheet, about $240 million in cash, no debt at the moment, good people. I think they’re going to continue to be very, very successful. A lot depends on what happens to silver. But I like that one.
TGR: Would this be another anchor position like your Virginia?
DAY: I think that’s an anchor position. Virginia and Silver Standard in particular are two that you don’t have to think about. If they drop, you can think about buying more, but you don’t have to worry about them.
One that I think you will have to watch a little bit more, but only a little bit more—would be Miranda (TSX, TSX-V: MAD), an exploration company and prospect generator. Apart from the fact that I like it, I mention Miranda because I think it’s at a good buying price right now. You don’t have to grit your teeth while you buy it at this point, $1.17 in Toronto right now. They stake land, explore and then they try to get back; they focus on Nevada; I think virtually everything they have is in Nevada. They’ve got two active joint ventures now—one with Barrick (TXS, NYSE: ABX) and one with Romarco (TSX: R), a smaller company – both of which have just started drilling. Barrick has had the one property, Red Hill, for a couple of years. Romarco did the joint venture after Newmont dropped the property. And interestingly enough, Newmont had some attractive—very attractive—results, but just determined that it wasn’t likely to be big enough for them.
Miranda’s focusing on trends that are certainly well known and well defined, but less well picked over than Carlin. They are focusing on the Battle Mountain Trend and the Cortez Trend. Market cap of C$50 million. It’s just not a lot to pay for a company that has cash, has joint ventures, currently two active drill programs with hopefully a third in the new year. And it has already had some good experience. So I think that’s an attractive one; but you do have to watch that one. It’s not just a "buy and put away."
And there are so many little ones. I will mention two more if I may, and neither of them is exclusively gold. And really, at the moment, not majority gold. One of them is International Royalty (AMX: ROY), trading at $6.50. I think again it’s a good buy right now. You don’t have to be worried about buying it now, and even though it’s a relatively new company and still a relatively small company, I don’t think it’s one you will have to be watching it every day of your life. You can feel comfortable with it. It’s a royalty company. Their biggest royalty at the moment is a royalty on CRVD-Inco, and Voisey's Bay, a nickel deposit in Newfoundland. But they also have a portfolio of almost a 100 royalties. Most of these are not producing, but they’ve got a handful of attractive royalties on gold properties that over the next few years could be producing and bring in some good cash flow. They have a good balance sheet, good cash flow at the moment, and I like that one.
And one of my favorite stocks continues to be Altius Minerals (TSX: ALS) . Again, they’re a prospect generator in Newfoundland. They’ve got very, very good contacts in Newfoundland, so they’ve been able to get things done that a lot of outsiders haven’t been able to. And, of course, from the Newfoundland vantage point, even those from Quebec are outsiders.
Altius has three active uranium joint ventures and a couple of attractive gold exploration joint ventures. They have a large portfolio of land that is ready for joint venturing, but more important than that, what has really moved the stock in the recent year or two is that they are about to become the majority owner of the Newfoundland refinery company.
And this is just a phenomenal idea, and it was Brian Dalton, who is CEO of Altius, who came up with it. His idea is to build a refinery in southern Newfoundland, the first new refinery built in North America in 20 years, in an area that is pretty isolated, pretty desolate, where people need jobs and they want jobs. They don’t have the “not in my backyard” syndrome. And yet it’s very close to the heavily populated area of the Northeast U.S. So, it’s ideally situated and when built – I should say if – it would be one of the largest and most modern refineries in the entire world.
Altius just raised $50 million Canadian in a bought deal with the intention of buying more of this Newfoundland refining company, which at the moment is a private company with three major shareholders. And the intention is to take them over the 50% mark so that they will really be in the driver’s seat. They have a balance sheet of over $100 million cash on the books. So they’re really in a very, very strong position to drive it through. They’ve just got their environmental permit from Newfoundland for this, so it’s moving along. There can always be hiccups in things like this, but it looks as if this is going to be a reality.
Altius obviously will have to sell down from 50% because they are going to raise several billion dollars to build this thing. They’re going to have to bring in a major partner, such as Shell or Exxon or someone. But they’re in a very strong position to negotiate, and I’m betting they will wind up with perhaps a small equity position, but a small royalty.
Altius is at $27.50 right now. Honestly, it would not surprise me if this was a $100 a share within five years. It would not surprise me at all. And I also think that one of these days, you will see Altius paying a decent dividend. So, to me that’s just one you buy and hold; you don’t think about selling.
TGR: What about Eurasian Minerals , Eurasian Minerals (V: EMX) and Bravo Venture (TSX: BVG), Bravo Venture (TSX: BVG), two obviously completely different from what we’ve been talking about.
DAY: I like Eurasian a lot. David Cole is the president – very aggressive, very energetic. They’ve got assets in the Black Sea area – the Kyrgyz Republic – and in Haiti. They also had some properties in Turkey that they just divested, but some of these properties are in joint ventures. They just joint ventured their original big property in Turkey to a small company called Chesser (ASX: CHZ).
And in Haiti, they’re obviously looking for big major properties similar to some of the big Dominican Republic properties. And, of course, it’s the same territory, the same land; it’s just got a political line down the middle. But there is no reason to think that you won’t get similar success on that side of the border. And Haiti’s been very, very unexplored, not just in recent years, but in recent decades, really for very obvious reasons. Haiti does not have a history of mineral exploration. But I think the potential for success is just enormous, and they do have a lot of money. As you probably know, the Lundin Group just bought into them, which basically gives them access to money at any time when it’s appropriate. So, I think the potential there is very, very high, and you know it’s one we like.
Some things we like about Bravo are that it’s got a good balance sheet and it’s still cheap. They’ve got a $100 million market cap. They’ve got attractive properties—more than one attractive property – -you’re not betting the farm on one thing. They’ve got Homestake Ridge property up in British Columbia, close to Eskay Creek, which was a discovery of a decade ago, and so far they’ve had very, very attractive results. They’re very aggressive; they’re drilling, and as I say, they have the two different programs—one out in Eskay Creek and one in Nevada, and a market cap of $100 million. And so I think it’s very attractive.
TGR: And I assume you still believe in having a portfolio of stocks, not just one, but buying several of different shapes and sizes.
DAY: Absolutely, and also my own preference within each of those stocks is to have more than one thing going, because if you’re betting the farm on one thing, you obviously have a higher probability of failure. But as I mentioned with Bravo, they’re very, very aggressive. They’ve got a fourth drill rig on Homestake Ridge. A fourth drill rig—that’s quite aggressive.
TGR: Especially in this market, not only do you have to be aggressive, you have to have connections.
DAY: To get four rigs?
TGR: Or in some cases, one rig. Major drilling has just been a spectacular stock boom over the last four to five years, and they can’t get enough of them.
DAY: Absolutely. Absolutely. We both know several attractive properties just waiting to be drilled.
In any case, I think companies like those I mentioned —Miranda, Bravo, and Eurasia, which has high potential for the earlier stage and more risky, perhaps – yeah, one of these is going to hit, no question.
TGR: And if we get lucky, all three.
DAY: Well, that’s what we’re looking for.
Contact: Adrian Day Asset Management
410-224-2037- Phone/ 410-224-8229- Fax
Contact Adrian Day Asset Management