With more than 20 years of experience in the investment industry, Sheldon Inwentash, chairman and CEO of both Pinetree Capital and Mega Uranium sheds some light on the future of gold and navigating the ďmurky and trickyĒ junior space.
The Gold Report: Sheldon, from a macro overview, where do you see the precious metals going? The U.S. government and all central bankers are jumping in at unprecedented levels. The Fed says itís going to throw in everything itís got to stimulate. Is it going to be enough and what will that mean for commodities? Or, if it doesnít work, what does that mean?
Sheldon Inwentash: I look at whatís occurring now as just part of the continuum of how, from a macro basis, I viewed the unwinding of the Internet bubble in 2,000 and my refocusing on the commodity sector.
When I originally looked back on í01, it became obvious to me that gold would have a role, from a currency standpoint, but the big problem with gold historically is that the main holders are the central banks. Individuals as well, but individuals always held it because they felt if there was a cataclysmic event in the world it was the way they could survive. It was just a defensive mechanism. They didn't have a money-making objective.
But with central banks there was a core asset value that reflected upon how much money they could earn on the money they held, and the opportunity loss of holding gold was whatever the compounded minimum yearly yield was of Treasury Bills or preferred shares or bonds; maybe 4% or 6%. Gold had zero return, and it had cost of safekeeping.
So the historical argument was always that gold had no income value, so why own it? It really had no value in the financial system anymore. It was an archaic relic, which is how I heard people describe it.
My view was the opposite. I thought, goldís been around and itís a brand. Now what has happened is that the price of gold has been grinding up. Itís three times the price it was in í02, but thereís less gold around, ostensibly because the rise in all the other commodities caused the margins of these big mining companies to shrink. People used to say you could mine gold for $150 or $200 or $250. Now for many companies itís $500-$600, all in. Itís a very, very difficult business. So even though weíve seen a rise in the nominal price of gold, weíre seeing less gold produced.
But whatís happened here is the bubbleís burst, the fat ladyís sung, the realityís setting in and everything is pointing to a massive risk of deflation. Deflation is much more dangerous than inflation because itís hard to get out of that hole, especially if you have debt, and itís a very, very negative scenario.
So the system is responding to real problems and the real problems are very serious with the debt and so forth. To me, all this points to an absolutely explosive rise in the price of gold. The problem is that weíve gone through a multitrillion-dollar liquidation in the financial markets and a lot of that liquidation happened in gold and arguably a higher percentage than deserved happened in gold because it was liquid.
Look at the gold argumentógold has no liability against it, itís a brand, itís a currency, and it will appreciate in value if you believe in the whole supply-demand model and so therefore, will provide a real rate of return as well. So youíre getting downside protection and potential extraordinary upside participation.
TGR: If weíre looking at deflation, would gold necessarily have this explosive growth or will it just keep at its current level and everything else will deflate around it?
SI: When you have deflation, you have asset decline. If youíre holding bonds and you have deflation, thereís less and less business, more and more defaults, and the asset protection side is going to be hugely important. If you have everybody thinking, "I want to be protected, so Iím going to hold some gold," the demand will kick in and the price of gold will have to rise for that purpose alone. I also believe because of the desperate nature of whatís going on, for every action, you have a reaction. Without question, over time, nobody wants another depression, but there will be some inflation or hyperinflation that comes out of this and gold will also anticipate that. So gold, in my view, wins in both a positive and a negative scenario. I believe gold does well in both environments.
TGR: Are you suggesting that people should be trying to grab onto physical gold or do you think there are some paper alternatives that are valuable and wonít be wiled away with derivatives?
SI: I believe that everybody should own some physical gold. I think you do it for peace of mind.
I donít get involved in ETFs, I donít get involved in these hedges, futures, and all those. Those are good for traders. My particular business in gold is building gold companies and selling them. We were original financiers on a company called Gold Eagle, which was recently sold to Goldcorp (TSX:G) (NYSE:GG). We invested in every stage of the companyís development and growth from initial start-up, to discovery, to buy-out.
So I look at small companies, which Iím beginning to look at more, that have minable ounces in the ground, but theyíve been neglected. Theyíve been neglected for a long time, theyíre orphans, and thereís sort of a quasi call on gold and the majors who have really found no new mines on their own are going to be acquisitive. I looked at companies like Kinross that have done a phenomenal job of turning themselves around and acquiring assets and building their production profile. And there are only a few of them. Today we like Colossus Minerals Inc. (TSX:CSI) óthey already have defined ounces proven and very high grades. When looking at the junior space you need to do your due diligence because itís a very murky and tricky field.
TGR: We saw a collapse of all equities in September-October, including senior gold stocks. Weíre hearing we could be entering to a rally that could go on till May, which will take all stocks up. But then we've heard from some of our interviewees that they predict a breakdown in the Dow and S&P after the first quarter. Are you seeing that the gold stocks, assuming that we get this downturn, would be resilient to that, unlike last time?
SI: Itís a good point. When you go through a market decline, youíre going to sell the stocks that are easiest to sell and have the most liquidity. When you get into the fear cycle, everybody sells everything.
The big problem was the creation of ETFs. The ETFs are stocks, but are essentially calls on gold. So every time you have all this money come in to the ETFs, it has to go out and buy more gold. But then when the market falls, they sell the ETF and they have to sell the gold and that puts more pressure on the physical market.
What I think weíre seeing to a certain degree is a decoupling. I watch it very, very closely. Iím noticing that for whatever reason, the Dow fell and gold fell. Dow goes up, gold goes up. And I thought thatís a bit strange. It wasnít the way it used to work, but has been happening in recent times. I think the decoupling is occurring now where the Dow has some rally days, and gold declines. This is the old relationship that seems to be returning. So, we certainly think gold can rally big time in a declining Dow situation.
What is also important is how gold trades in other currencies. I think thereís more of a waking up to gold having a role in the currency side. And if you have that and you look at the whole market of gold, which they used to say was less than the market cap of Microsoft, youíre really dealing with a situation where it wonít take a lot to just overwhelm the availability of it and it stands against that grain. The more it stands against the grain, the higher and higher itís going to go.
TGR: Will silver resume its place as a monetary unit as opposed to industrial as gold increases?
SI: I think so. I think silver has a much higher beta. I think itís been overdone. Not being an expert in the whole silver logistics, I think itís overdone, and I think it will track well. Will it change the historical gold-silver ratio and come to a different number? Probably, but silver does have some very unique connectivity characteristics that in the evolving world of electronics are pretty compelling, so there is a real demand there.
TGR: On the equity side, in terms of having a mixture of seniors and emerging juniors, obviously the big concern everyone has with the emerging juniors is weíre not geologists. We can only try to find people who know about geology. How do you really find out if thereís proven gold in the ground?
SI: Itís a bit of an art, not a science. You have to talk to people. You have to find out who the winners are. Youíve got to look at management teams. Youíve got to look at analysts and what their views are. Youíve got to do your own due diligence and I think a lot of people have been hurt because the investment community, the brokerage firms, are in it for commissions and if itís the flavor of the day, theyíll say how this is great or theyíll maybe pull back and not put as much of their own view on the line.
And then you have a lot of new players come in and it just creates deals and investments, but you really have to do your own homework. Even many of the analysts out there, their workís tainted because theyíre really just trying to help their firms. From our standpoint at Pinetree, we really do our own homework and weíve had a number of successes where weíve invested and help found companies like Aurelian Resources (TSX:ARU), Gold Eagle and Guyana Goldfields (GUY.TO). We have a number of junior gold investments that have been sold to majors. At the end of the day thatís the real test because the majors really understand how these deposits evolve.
TGR: So you have a team of geologists and quasi analysts at Pinetree?
SI: We have a couple of analysts internally, but we really go out and speak to other people that we know. We sometimes contract them to look at things. I invest with other people, too, who are very, very knowledgeable, who are geologists or have run companies, so we have an extensive network that help us with our appraisal of what separates the real stuff from the junk.
TGR: If we look at Pinetreeís investment philosophy and your enthusiasm related to gold, and I look at the last several investments that Pinetree made, I see germanium, moly, nickel. I see really only one that I can identify specifically as gold.
SI: Yes, there are others. Weíve been exceptionally successful in uranium. Iím quite a strong uranium enthusiast. With these corrections out there, weíve been actually buying gold and uranium, but what you see in press releases is just where we get above a critical percentage ownership. So itís not the disclosure of all the things we buy. Itís just what meets a certain threshold for regulatory reasons. For example, last week we announced that we went over 10% of a company called Queenston Mines (TSX:QMI) and the value of that investment is substantial and itís actually one of our favorites right now. So you have to look at it in context. Some of the others have an immaterial value, but we own the larger percentage of the company and have to report it.
TGR: Could you give us some senior mining stocks that you like and junior emerging companies that you would recommend people invest in or, as you say, do their own due diligence on and why you like them?
SI: Iím a fan of two seniors, Goldcorp and Kinross Gold Corporation (K.TO) (NYSE:KGC), because of management and because of their pipeline of projects; the fact that theyíre willing to acquire new deposits and theyíre aggressive. I believe you have to be aggressive into a rising gold price/gold market and theyíre willing to make moves, whereas many other companies just sit on their hands and donít do anything.
In the juniors, we like Queenston (QMI), which recently came up with some spectacular results. We think itís absolutely one of the top ones to own. The other one we really like is Colossus Minerals (CSI). Itís in Brazil. Itís the old Serra Pelada Mine. Grade is extremely important in investing today and both of these names have terrific grades.
There are a lot of companies that announce massive holes of 2 grams over big widths. They say they have all these ounces of gold, but the cost of mining is expensive. Itís a big dirt moving operation or underground operation that makes a lot of these things not as attractive from an investment standpoint, so we like higher grade. We think thatís very crucial. Aurelian and Gold Eagle were both bought by majors and we think it is the grade that resulted in those deals.
TGR: Any other companies come to mind?
SI: There are lots of them, but these are nicely advanced. We think Guyana Goldfields is very cheap now. Itís got almost 5 million ounces of gold, so that is also an encouraging one and weíve added to that recently.
TGR: What about Evolving Gold (TSX.V:EVG)? Whatís the story there?
SI: Yes, we own Evolving Gold. They just came out with some more results on their Rattlesnake deposit, some higher grade, some lower grade. Theyíve got a lot of projects. I have a lot of respect for management there. Theyíre all geologists; some worked at big companies and have some interesting theories. They have raised money, and at this price, we think there may be some value. These ďjuniorĒ juniors are not getting as much attention yet in the gold space and weíre going to have to wait for the trickle down theory to occur, but I believe that if you bet on the right people and if youíre patient theyíll come through for you.
TGR: You briefly mentioned Colossus. Iím looking at its chart. It seems to have found its bottom at 50 cents and has moved up. The same thing here? Things look good for í09 as their project in Brazil moves forward?
SI: Itís one of these projects that in some ways is almost too good to be true, but it needs more drilling. Itís got a partnership with the local people, and thatís very strategically important. Vic Wall and Augusto Kishida are tremendous geologists. I know them both. So I know that geologically youíre dealing with great people and they are also are shareholders in the Company. Theyíre not just advisors or consultants.
The other thing great about this project is that there is a historical database that was done by Vale (formerly CVRD) where they drilled this up and this is quite a unique project where you have very high grade gold, platinum, palladium all together in a geological setting unlike anything else in the world. And the deposit metallurgy seems to be really good.
TGR: How would you describe Pinetree for the typical investor? Why should an investor look at Pinetree?
SI: Why investors have looked at it and bought it is because they find it very difficult, as you said before, to pick which junior to buy just looking at the geology. We own a lot of companies, so this is a way of participating in sectors, by having other people (us) do the due diligence.
We have a great track record. Weíre going to be volatile with the space because thatís our business. Weíre in the junior market, so weíll get hurt when the junior market gets hurt. But we have a pipeline and a record of finding new deals that become winners. For the average investor, itís a good way to participate in a space without having to spend the time and take the risk. Also, they can buy the shares. If they donít like it, they can sell the shares. Weíre very transparent. We list many of our holdings on our website.
TGR: If somebody buys into the precious metals market, itís a leverage bet.
SI: Exactly. If you look at Queenston, our position is trading at 20% to 30% of the whole value of Pinetree and we have investments in a lot more companies than just Queenston.
My feeling is right now this is one of the best buying opportunities that we will see, for those that care about this particular space, junior resource, gold first, uranium second. There are so many companies trading at a discount to cash that have qualified assets and are trading at 10 cents on the dollar and thatís what I do daily. We are buying millions of shares of these little ones and people are justópardon my expressionójust puking them up.
TGR: Again, going to a prediction, where do you see gold going in 2009?
TGR: Higher. Substantially higher?
SI: Substantially higher. Iím not a numbers guy. I think it will get a life of its own. Everybody gets fixated on these numbers and they donít realize today, with inflation and costs, these numbers arenít the same as they used to be. These companies arenít making a lot of money at $800 gold.
Sheldon Inwentash is Chairman and CEO of both Pinetree Capital (TSX:PNP), a Canadian investment company with a portfolio of investments primarily in the resource and energy sectors, and Mega Uranium (MGA-TSX), one of the fastest growing junior mining companies. Mr. Inwentash has more than 20 years of experience in the investment industry. A Chartered Accountant, he was an Ontario finalist for the 2007 Ernst & Young Entrepreneur of the Year Award. He founded Pinetree in 1992. T he fair value of Pinetree's investments surpassed $100 million for the first time in 2005, and in 2006, Pinetree ranked 5th out of 300 small-cap companies by Canadian Business Magazine for total 1-year return.
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