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Gissen & Berol: Cautious Optimism at Denver Gold Forum
Source: Sally Lowder of The Gold Report (9/24/10)
Optimism is in the air at the Denver Gold Forum, according to Encompass Fund Founders Malcolm Gissen and Marshall Berol. The Gold Report was on location at the Forum to get the scoop on their "cautiously optimistic" forecast for precious and base metals, as well as rare earths. In this exclusive interview, Gissen and Berol also explain their company-selection process, which appears to be paying off.
Marshall Berol: I'd say the mood is certainly upbeat. I understand the attendance is at an all-time high, close to 1,100 people. I think it's a reflection of the fact that gold and silver prices are up. Gold's at an all-time high.
The people here are very optimistic, although still somewhat cautious. There's still the question: Is it the top? Are we in a bubble?
TGR: Yes, there does seem to be quite a bit of excitement in the air. Maybe you could call it cautious excitement. What's your opinion on that, Malcolm?
Malcolm Gissen: I agree with Marshall. I think that people tend to be very confident and obviously, cash flows are terrific with a lot of these companies because they're selling gold and silver at very high prices. Their stock prices have appreciated in almost all cases. So people are feeling pretty good about all of that.
As investors, however, we feel that we have to be very cautious and not get carried away by this optimism. In 2009, our fund gained 137%, and we would like to perform very well again this year. In evaluating the companies we're meeting with, we're seeing lots of exciting opportunities. We still have to be very cautious, however, very circumspect, and spend a lot of time and due diligence before we would invest in any of these companies.
TGR: Absolutely. Now in terms of your investment strategy, do you focus exclusively on junior stocks, or do you have seniors in the portfolio as well?
MG: The fund is called Encompass Fund (NASDAQ:ENCPX) because it encompasses almost all sectors of the market—we can do anything in terms of investing domestically or internationally or investing in micro caps or large caps. We do have large-cap companies. We have healthcare companies. We even have a couple of fixed-income companies in the portfolio. So we're very diversified.
We emphasize resource companies because that's an area we think will perform very well over the next several years. At this conference, we have met with executives of a number of companies that we think are very exciting and offer terrific upside potential. We need to evaluate the downside, however, because we often focus on downside in making investment decisions. I believe we will come away with at least one or two companies that we've talked to at this conference that The Encompass Fund will invest in.
TGR: Excellent. Do you want to add to that, Marshall?
MB: I think Malcolm has hit it on the head. We like resource companies and resource areas. We have for a number of years. Why? Because there's growth and increased wealth throughout the world. People want gold. They want gold jewelry and gold coins. And growing economies need silver, which is not only a precious metal, but also an industrial metal. Growing economies also need other commodities such as copper, zinc or lead.
So that's what's contributing to driving precious metals' prices up. Gold is its own investment vehicle and is a storehouse of value. Its price is being driven by a number of factors, including the concerns about inflation or deflation.
TGR: Going back to the Encompass Fund, tell us a little bit about the due diligence that is required before you invest in a stock.
MG: We spend a great deal of time on due diligence before we will put a company into the portfolio. In addition to seeing these companies and meeting them, we frequently talk with analysts who may follow only 5 or 10 companies. So they know these companies very well. They have visited their resources, as we have. They've met with the executives and they do a lot of modeling. We do some of our own modeling; we have two analysts who work with Marshall and me, so there are four of us that work for the fund.
The four of us will discuss our impressions of the company and whether or not it fits into the portfolio. So it takes a significant amount of time and it leads us to select companies that have extraordinary upside potential and hopefully not that much downside, although these are risky investments. We need to make that clear. They're not 100% of our mutual fund, but they are in the fund.
MB: On the due diligence side, we'll also will visit the project sites. Not in all cases, but in a number of cases. We find that very helpful.
TGR: Malcolm just mentioned record attendance this year at the Denver Gold Forum. Have you noticed companies this year at the Denver Gold Forum that you've never seen before?
MG: Certainly. There are more companies than we've seen before and a number of companies that we had not heard of. But gold is up 26% this year. That definitely brings companies to this kind of a forum.
I want to also add that a number of foreign countries have been buying gold. For example, on September 9th, Bangladesh bought 10 million ounces from the International Monetary Fund. We're seeing Russia, China and India all buy gold. So in addition to the ETFs that have record amounts of gold, we're seeing nations now buying substantial amounts of gold. All of this is driving the prices higher. People's concerns about the economy, the currency and government debt are also factors that have not gone away and are not going to go away. That's why for several years Marshall and I have said we think gold prices are going higher.
TGR: Interesting. So obviously there are several gold companies that are in the Encompass Fund. You mentioned base metals and some of the strategic metals needed for growing economies. Do you also invest in base metal companies and also other types of metals?
MB: Yes. We invest in base metal companies and we also invest in industrial metals. In particular, more recently we have been investing in the rare earth metals companies or companies that are exploring for it. Increasingly, rare earth metals are utilized in the alternative energy sector—for example, lithium is used in lithium ion batteries. A Prius, a hybrid car, will have 40 or 50 or 60 pounds of rare earth elements in it, which is about double what's in a regular automobile. So that has led to an increased drive to locate those minerals throughout the world.
TGR: Yes, the rare earth story has been heating up a lot in the past 18 months. We have noticed that as well. Could you give us a couple of names of rare earth companies that are in the Encompass Fund?
MB: I'd be glad to. One of them we've been in for several years is Avalon Rare Metals Inc. (TSX:AVL; OTCQX:AVARF), which is exploring a project they have in Canada. Another company that is in the portfolio that's a bit different is Dacha Capital Inc. (TSX.V:DAC; OTCQX:DCHAF). Dacha is acquiring rare earths in China, then storing them outside of China and selling them to companies that are interested in rare earth metals. Ninety-seven percent of the rare earths are produced in China. There are concerns about that, so Dacha feels that having rare earths that are stored outside of China available to sell to companies is a valid business model. We would agree with that.
TGR: Excellent. Did you want to add something to that, Malcolm?
MG: As Marshall has indicated, we think there will be more and more uses for rare earths. We're also in some base metals. We think copper is probably undervalued in that copper prices will stay pretty high and probably go higher. We want to be invested there.
TGR: Do you own any copper names that you could speak about?
MB: Yes, we own Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), which is copper and also gold. A very large-cap company, a very well-known company, the second largest producer of copper in the world behind the Chilean government company, Corporación Nacional del Cobre de Chile (CODELCO).
TGR: Let's talk about the existing gold stocks in the Encompass Fund.
MG: We can talk about a couple of names. Aura Minerals Inc. (TSX:ORA) is a company that has resources in Latin America as well as in the United States. Excellent company, excellent resources. We think it's undervalued.
Another one in our portfolio that we like is Avion Gold Corp. (TSX.V:AVR; OTCQX:AVGCF), a Canadian-based gold mining company focused on production and exploration in West Africa. It is currently producing gold from two mines in Mali, and in 2010 has made several acquisitions of nearby exploration properties, and properties in Burkina Faso (also West Africa).
It acquired its Mali projects in 2008 (at about $0.20 on the dollar invested by the seller, as the seller needed cash), and proceeded to get the mines into production. It had gold production of 51,000 ozs. in 2009, estimated production of 75,000–85,000 ozs. in 2010 and plans to ramp up to a 200,000 oz. run rate in 2012. We like that the company has a proven management team, sufficient capital, and a present and future growth profile. It's a very attractive, and undervalued, company. We believe that West Africa is a growing gold production area that is not well understood by many investors and offers attractive opportunities, of which Avion is one of the best.
TGR: Did you want to add to that, Marshall?
MB: Sure, but I'd like to mention another company. One of the companies that we've owned almost since the fund began four years ago is Seabridge Gold Inc. (TSX:SEA;NYSE.A:SA), which is developing one very, very large resource project in British Columbia and another one in the Northwest Territories. It's not a producer and likely never will be. But it has these very, very large resource elements in the ground and will likely be bought out by a major company.
Exeter Resource Corp. (NYSE.A:XRA; TSX:XRC; Fkft:EXB), which is in Chile in the high Andes, also has a very, very large copper and gold resource and is developing it for greater things.
TGR: We've seen some fairly major M&A activity. Do you see that accelerating? Accelerating at a greater pace than what we've seen recently?
MB: I don't know about a greater pace. But it is happening and it is something that we think will continue to happen in this space, particularly the gold space. The smaller companies still have some difficulty raising money and they need money for developing their projects. There is an increased level of activity of the mid- and large-sized companies buying the smaller companies. The merger and acquisition activity that has been going on over the last 6 to 12 months is likely to continue. We don't buy a company because we think it's going to be bought out. That's frosting on the cake.
Goldcorp Inc. (NYSE:GG; TSX:G) currently is offering $3.6 billion for Andean Resources Ltd. (TSX:AND, ASX:AND), which has a project in southern Argentina, close by Extorre Gold Mines Ltd. (TSX:XG; Fkft:E1R; OTCQX:EXGMF), another company that we own. It's a small junior company that's developing a host of developable mines in southern Argentina. That has increased the price of Extorre's stock because a neighbor is being bought out at a very high price on a per-gold ounce basis. So I don't know if the pace will accelerate, but I think it will certainly continue actively.
TGR: Excellent. Would you like to comment on that, Malcolm?
MG: I would. What's very interesting and ironic about Marshall's comment is that within the last 10 minutes, I ran into the chief geologist of Seabridge, one of the companies that Marshall was just talking about that we invested in at about $3.00 and it's now at $30.00. Seabridge is likely to be acquired by a major company because they have two very large resources.
I asked him what it would take to have a major buy the company. He said their feeling is that the majors have to become comfortable with where their stock price is right now. Most of the major gold companies have seen substantial appreciation in their stock prices. Once they feel comfortable with those prices, they'll use their stock to make these acquisitions. They think that'll happen.
In the last five minutes, I also ran into the CEO of Extorre, which Marshall was just talking about. Extorre is an excellent gold company in Argentina that we got through the spinoff from Exeter. I asked him about his company. They're going to get into production in the next year and a half. They also would be a very attractive target for a major company because they'll get into production that quickly and they have very high-grade resources. As we all know, grade is very important.
MB: I want to make sure so that nobody misunderstands, when Malcolm talks about Seabridge being acquired by a major company, this is not any kind of inside information. Seabridge CEO Rudi Fronk has said for many years that they are not going to go into production. They're going to develop these projects to be sold to a major company. So it's nothing that is unknown.
TGR: Very good. Do either of you have any parting thoughts for our readers?
MG: We continue to believe that metals prices will remain high and gold and silver will probably go higher. We think that there are some excellent opportunities. I may be biased, but I think our fund offers investors an opportunity to invest in a lot of these companies that they would not otherwise have access to, including the gold funds. We find a lot of unknown and little-known companies that have extraordinary upside and invest in them. And by investing in our fund, I think you get exposure to those companies.
MB: My parting comment would be that we often get the question, is gold in a bubble? Is it all over? Have we seen the top? We don't feel we have. Nothing we've heard or seen over the last several days here at the Gold Forum changes our view. We think there is still more to go with regards to the price of gold and silver and the companies that are involved in those areas.
TGR: Well, that's definitely the hopeful feeling here. Thank you so much, gentlemen, for your time. Enjoy the rest of the conference.
Malcolm Gissen founded Malcolm H. Gissen & Associates Inc., an investment advisory services firm, in 1985. He has been an investment advisor since 1985 and has managed separate accounts since 1999. Mr. Gissen's management experience has focused primarily on investments in publicly traded companies, including real estate investment trusts. Mr. Gissen received a BS degree from Case Western Reserve University and a JD degree from the University of Wisconsin. Marshall Berol has been engaged since 1982 as an investment manager in San Francisco, CA. Since 2000, he has been the chief investment officer of Malcolm H. Gissen & Associates, Inc. In addition, for more than 20 years, Mr. Berol has owned his own investment firm, BL/SH Financial. Mr. Berol's investment management experience has focused primarily on investments in publicly traded companies. Mr. Berol did his undergraduate work at the University of California (Berkeley) and received a JD degree from the University of San Francisco School of Law.
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1) Sally Lowder of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Avalon, Avion, Dacha, Goldcorp, Extorre and Exeter.
3) Marshal Berol: I personally and/or my family own shares of the following companies mentioned in this interview: Encompass Fund, Avalon Rare Metals, Dacha, Freeport Copper and Gold, Aura, Avion, Seabridge, Exeter Resources and Extorre . I personally and/or my family am paid by the following companies mentioned in this interview: None.
4) Malcolm Gissen: I personally and/or my family own shares of the following companies mentioned in this interview: Encompass Fund, Avalon Rare Metals, Dacha, Freeport Copper and Gold, Aura, Avion, Seabridge, Exeter, Goldbrook and Extorre. I personally and/or my family am paid by the following companies mentioned in this interview: None.