Bargains Pop Up When the Market Goes Down
Source: The Gold Report Interview with Alfred Wirth (6/6/08)
As the chief investment officer for Sun Life, United Funds, and Crown Life, Alfred Wirth developed an enviable track record managing investments for multi-billion dollar corporations. As president of Wirth Associates Inc., which he founded, he now manages private portfolios for high-net-worth individuals. In an exclusive interview with The Gold Report, Wirth explains why he thinks the gold bull market could easily run for another ten years and looks at those nasty corrections as just another opportunity to snag some real bargains.
TGR: What are your impressions of the precious metals sector?
AW: You can't look at this sector without factoring in the explosive growth of regions like Asia. Raw materials are essential to the early stages of industrial development. That has provided a strong impetus for the growth of a bull market in the metals, oil and gas. The real question here is whether we are witnessing a fad. Is it going to be over any day now or will it continue for another few years? We believe the demand will continue.
We think that raw materials, particularly metals, may not be as cyclical in the near term as they have been historically. After the industrialization of the developed world was completed about 100 years ago, metals only did well in times of war. Now the eastern world is industrializing, so raw materials have again done well, even without all-out war. I'm not saying commodities are not cyclical any more; I am saying the cycle will run longer—perhaps 10 or more years as the peoples of Asia get their share of better housing, appliances, and vehicles.
Within this super cycle, there will be ups and downs. The present super high prices in base metals will correct. But fluctuations make a market. If there were no downs, we’d never have an opportunity to buy any bargains.
TGR: Are you saying that you expect to see a correction in, say, some of the base metals, copper notably?
AW: I’ve been very surprised that copper prices have stayed high for as long as they have; that they haven’t corrected significantly yet. I would have thought that they might be back at the $2 or even $1.50 level, but instead, after $3, we went to $4 a pound. A correction can come at any time and will stampede a lot of short-term investors and traders out of the base metals. That will give those who missed the first time around, another opportunity to buy. But of course, corrections are never fun for the guys who already hold them—they’ll have to be brave and ride through the inevitable valleys.
TGR: Based on your super-cycle analysis of China and Asia, you regard corrections as temporary before the sector marches onward and upward? I remember hearing Frank Holmes, CEO of U.S. Global Investors, about a month ago predicting $8 to $10 a pound for copper. He didn't say prices would go there overnight but he did list the same reasons you’re talking about—the massive infrastructure build-out not only in Asia, but around the world. This is going to require an enormous amount of copper.
AW: It's important to remember that the US dollar is weak, and copper prices, which have tripled in U.S. dollars, have only doubled in many other currencies. Although Frank may well be right and copper may hit $10, I’m certainly not counting on that. It’s not necessary for making some money, and any highly inflated price will accelerate substitution and more conservation. 20 years ago in Argentina, people would climb up office building airshafts and harvest the copper wire. They’d actually cut down the telephone cords. Companies would come in the morning, and their phones were out because some guy had recycled their wire.
TGR: In parts of San Francisco, people are stealing the platinum or palladium from catalytic converters.
AW: It’s sad but it makes my point. I think copper is unlikely to go below $1.50, or at least not for long, because the production costs are higher—probably double what they were 5 years ago. These days it’s expensive to start a new mine and it takes years—as many as 10! Even after proving up reserves, it’s hard to get permits; it's hard to get the plant and equipment, and it’s hard to get trained personnel and miners. A whole generation of engineers and geologists is missing because so few studied mining at university. That was the rational response to past market conditions, when low metal prices led everybody and his brother to shut down and get out of the mining business. But it’s a problem now.
TGR: I see how those kinds of shortages can impact the price.
AW: Precious metals have 3 additional pluses going for them: They can be seen as inflation hedges. Low interest rates make carrying bullion a whole lot cheaper. And gold is a pretty good hedge against a weak dollar. It's one of the few dollar hedges available to someone who doesn’t feel comfortable investing in international stock markets. Buying gold bullion or gold coins and taking them home is a pretty straightforward transaction.
We see the recent drop in gold and silver prices as a correction, and expect gold to recover to above $1000, and perhaps go higher. And that means that the companies with increasing production or new mines coming on stream will make a lot of money.
TGR: What about the short-term?
AW: I never know what happens in the short-term. Long term, I’m looking for companies that will do well with gold around $1,000. No one can know what the price of nearly anything will be tomorrow because there are a lot of wild cards, unforeseeable events, that can wreak havoc in the short term.
TGR: There certainly are no shortages when it comes to the element of surprise.
AW: Whether it’s 9/11 or SARS or weather or an unexpected disruption in the oil supply…disruptions happen all the time. Luckily such events don’t usually make a big difference over a 2 to 3 year timeframe, but they sure do in the short term. That’s why we make our financial decisions looking further out, at the longer term. And luckily, that’s not a very competitive area because most investors, and very smart ones at that, focus on the 3 to 12-month timeframe, which is subject to greater volatility.
TGR: What is your investment approach to this sector? Do you have some precious metal stocks that you like?
AW: Yes we do. I like to have several things going for me, not just the commodity price. Holding actual gold is betting purely on price movement. While I think the gold price will rise, I want more than that, so we don’t hold bullion. ETFs are really just a slightly more convenient way of holding bullion, so they don’t really suit us either. We prefer dealing in equities, where we can find additional factors eventually culminating in higher values. There are some very big producers, where this applies.
We like Goldcorp Inc. (G.TO, GG.NYSE) because it’s a low cost producer. But right now Goldcorp is experiencing the worst quarter in terms of its cost structure—it’s bringing on new operations. That may cause some weakness, but I’d be surprised if I didn’t see Goldcorp above $60 in a couple of years. And that’s without assuming a very weak U.S. dollar. If it were to fall a lot, a higher stock price is likely. I’d think you’d probably be able to buy Goldcorp below $35 or thereabouts if investors are surprised or discouraged by what we believe will be temporarily higher costs that will be reported in the short run.
TGR: What about the juniors?
AW: The smaller guys are even more interesting, because it’s easier to get production increases from a lower base. I like the relatively low-risk Vista Gold Corp. (VGZ.TO, VGZ.AMEX). Management are competent, honest people. They're following Ross Beatty's Pan American Silver concept of assembling a diverse group of properties with good resources. The idea is to assemble such properties and then gradually—without spending too much—grow their resources and convert them into reserves through exploratory drilling. Then you progress from reserves to pre-feasibility and eventually a feasibility study. Then you get permits, finance it, build a mine, and operate it—at every successful step, the value approximately doubles. If it’s a big property, a major will buy it long before you build a mill; but if nobody wants to buy it, you do have to be prepared to become an operator. For that, Vista would probably spin it off into a separate company, which they’ve done several times in the past.
Allied Nevada Gold Corp. (ANV) was such a spin-off from Vista Gold. And we think Allied is very attractive as a potential double. It has a good looking property likely going into profitable production plus it offers additional gains if the metal price goes up.
Another smaller, less diversified but very interesting play is African Gold Group, Inc. (AGG.V). They’re in two African nations, Mali and Ghana both of which have raised some political concerns in the past. But I’ve recently met some of their government resource people, and believe that they want the employment and foreign exchange that new commercial mines bring. Historically these properties have been operated by locals with pick-and-shovel. It's an interesting speculation, which if things go very well, will trade at $5.00 in three to five years—up from under $1.00 now. If things go badly, you could lose 1/2 or ¾ of your investment. But you don’t need to buy a lot when the potential returns could be a quintuple. You don’t need a big exposure to get a meaningful return. We never put more than 1% of a portfolio into such ventures—but we make sure we hold at least 5 different ones so the winners much more than make up for the losers. Luckily there are a lot of stocks like that, I’m just giving you a few examples.
Another, bigger company that I think is a potential double is Minefinders Corp. Ltd. (MFL.TO, MFN.AMEX) in Mexico. It’s much further along, coming on-stream now. There may be short-term metallurgical problems, but Minefinders is trading at only $10.50. If all goes well, with a gold price of around $1,000, we think it’ll be worth well over $20.
TGR: They are producing?
AW: They are producing but still in the tune-up days on the mill and the mine operation, but it’s built. And Minefinders is not a small company—their capitalization is in the range of $500 million.
TGR: What’s going to take it to $20?
AW: They will have to prove that they can operate, which the management has proven in the past. I expect that Minefinders will have decent start-up, but metallics can be tricky and it can always take an extra few months to get the bugs out. That’s the risk. But if you compare such ratios as dollars per ounce of reserves, it’s selling for 40 cents on the dollar.
TGR: Great. Our readers always want to hear what companies the professionals are considering so if you want to give us 2 or 3 more, that would be excellent.
AW: Back to very big size, we’d certainly look at Newmont Mining Corp. (NEM.NYSE). After many good years, it has marked time for the last few with modestly falling production, but that’s been reflected in the share price. Now it again looks like a good story, and we think this year will mark the bottom. Newmont will have four new projects starting up in 2009 that will take the company from 5.25 million ounces to more than 6 million ounces per annum.
TGR: What if we have a bigger sell-off in the dollar? What would that do to gold stocks?
AW: Well, a lower USD will probably mean higher gold prices. And a weaker currency should be good for nearly all the companies with operations here in the U.S. Americans will benefit because many of their costs will go down. The United States is gaining competitiveness against a lot of other countries precisely from a lower dollar. And, when they can make an economic case for it, most companies prefer to pump oil, mine, or even manufacture in the U.S. despite relatively high wage costs. There are a lot of reasons including political stability, the legal system, the good infrastructure, the domestic system and IT skills, and the comfort of operating at home.
Thanks for your time.