Charles
Oliver, lead portfolio manager with the Sprott Gold and Precious
Minerals Fund, believes the only thing between investors and bigger
investment returns on precious metals equities and bullion,
especially silver, is time. In this interview with The
Gold Report,
Oliver discusses silver and gold demand drivers, as well as portfolio
ideas that figure to get bigger with time as the trigger.
The Gold Report: “Sell
in May and go away” is a common investing axiom but does it have
any validity?
Charles Oliver: I recently went through
some research on seasonality in the gold price. March has been
negative in the gold space in six of the last eight years, April has
proven negative four out of the last eight years, and May and June
have both been negative five of the last eight years. However, we see
a fairly dramatic turnaround in July where six of the last eight
years have been positive. In August, another six of the previous
eight years have been positive; September has been positive five of
the last eight years. The “sell in May” adage could actually
represent a great buying opportunity on the pullback.
TGR: What are some investment themes you
expect to dominate through the rest of the year?
CO: It really comes down to printing
money. The U.S. has reduced its money printing but it is still
aggressively printing. Now we’re hearing about the Europeans
potentially getting into quantitative easing. The debasement of
currencies is an ongoing theme.
The other key theme is the demand for physical
gold. China has become the world’s largest gold buyer, consuming
about 40% of the world’s mine production. India, which historically
had been the world’s largest gold consumer, has established some
tariffs on gold imports, so there’s been some pullback there.
It’s noteworthy that over the last couple of
decades the European central banks have been collectively selling
gold. That stopped a couple of years ago. Some numbers from the Swiss
Customs Authority show that Germany, France, Singapore, Thailand,
even the United Kingdom, are fairly significant gold buyers. These
are very positive events.
TGR: What about geopolitical events? Do
you expect those to dramatically influence gold prices?
CO: Historically, wars and the risk of
wars have been quite positive for the gold price yet recent events in
the Ukraine haven’t seen gold do anything. In fact, it’s trading
near the bottom end of its recent range. But should things escalate,
I feel strongly that it will have a positive impact. I certainly hope
that it doesn’t come to that but the risk seems significant.
TGR: What is the investor pulse in the
precious metals space?
CO: A year ago investors were selling a
little, as they had been for some time. The selling had mostly
stopped by the end of the 2013 and the people who didn’t have
long-term conviction had left. In early 2014 I was a bit surprised to
see U.S. value investors streaming in because we had been through a
period of net redemptions. When the Americans come into the market
they can have quite a dramatic impact on prices. I’ll call it
sporadic because it has not been a consistent stream.
TGR: What happened to those bids?
CO: Generally speaking, American
investors, portfolio managers and pension funds were saying at the
end of 2013, “We’ve had some good returns in the general market
but the market is looking somewhat expensive.” They were looking
for areas where there was good value. The gold price had been
hammered over the last couple of years so they were starting to move
some of their allocations into that space. We’ve also seen some
private equity buying assets and taking them private. And some Asian
interests dipping their toes in the water. People are starting to
wake up and show some interest but they are still waiting for some
sort of trigger in order to say that this is the time to jump in.
TGR: Any idea what that could be?
CO: I’ve spent a lot of time thinking
about that question. I liken the 1974 to 1976 period to today. In
1974, the oil price was going up after the oil embargo and inflation
was going up, too. It was peculiar because the gold price went from
about $200 per ounce ($200/oz) to $100/oz over the next couple of
years. Then in 1976 gold suddenly went from $100/oz to about $800/oz.
I have spent a lot of time trying to determine the trigger for that
event. Sometimes it is just time. When I look back at 2013, I see a
lot of positive fundamentals—strong Chinese demand, huge amounts of
money printing—yet the gold price went down. Sometimes it’s just
the way the markets time themselves.
TGR: Do investors need to revise their
price expectations for precious metals equities? There is zero froth
in this market.
CO: I think that’s a good way of
putting it. I’m continually trying to figure out where the market
may go. Not too long ago I said that by the end of this decade gold
should be approaching something like $5,000/oz, which would have a
huge impact upon the markets and stock valuations. The market is
valuing equities as if gold is going to stay at $1,200–1,300/oz
forever. I believe that the market will be proven wrong over time.
TGR: Gold is trading at roughly 67 times
silver. Does that make silver your preference?
CO:
Yes.
It was Eric
Sprott who came up with the thesis and I fully embrace it. For
over 1,000 years, the silver-gold price relationship was close to
16:1, so that implies that if gold is $1,600/oz, the silver price
would be $100/oz. The last time that happened was 1980 when the gold
price was roughly $800/oz and the silver price was around $50/oz.
Over the next couple of years, I expect to see that 67:1 ratio
migrate toward 16:1.
TGR: Yet the trend is moving in the
opposite direction.
CO: In the short term sometimes these
things happen. About 25% of the weighting in the Sprott Gold and
Precious Minerals Fund (SPR300:TSX) is in silver equities, which is
probably among the highest in the peer group for precious metals
funds.
TGR: What’s your investment thesis for
silver versus gold?
CO: About two-thirds of mined silver is
used in industry, whereas gold has virtually no industrial usage.
Gold is considered a reserve currency whereas silver is not. About
150 years ago many countries had silver reserves backing their
currencies. Today they don’t but China has trillions of U.S.
dollars that it is converting into hard assets. The Chinese are
buying a lot of gold but if they ever decide to be a silver buyer we
would see a huge shift in the price of silver. Look at every mined
commodity out there today—copper, nickel, zinc, iron ore—China
accounts for 40–50% of global consumption.
TGR: Is it all about margin for precious
metals equities?
CO: A lot of these companies are
producing gold at $1,000/oz or silver at $18/oz. Should silver go up
to $30/oz, that $2/oz margin suddenly becomes $12/oz—a sixfold
increase. Shifts in commodity prices could have huge impacts on the
profitability of these companies.
TGR: Tell us about some of your top
silver holdings.
CO:
Among
my top 10 silver holdings, I have Silver
Wheaton Corp. (SLW:TSX; SLW:NYSE), Pan
American Silver Corp. (PAA:TSX; PAAS:NASDAQ) and Tahoe
Resources Inc. (THO:TSX; TAHO:NYSE), which operates one of the
world’s newest silver mines. I visited Tahoe’s Escobal mine in
Guatemala earlier this year to check out its ramp-up period because
that can be challenging. The company is doing a very good job of
ramping up to nameplate capacity. Tahoe’s Q1/14 results beat the
expectations of most analysts and a number of them are revising their
forecasts upward.
In
the gold space I have companies such as Osisko
Mining Corp. (OSK:TSX) and IAMGOLD
Corp. (IMG:TSX; IAG:NYSE).
TGR: I thought the Osisko story was
finished.
CO:
A byproduct of the Yamana
Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE)/Agnico-Eagle
Mines Ltd. (AEM:TSX; AEM:NYSE) takeover bid for Osisko is a
potential Osisko spinout company. For every Osisko share, investors
would own one share of the spinco. It means roughly 15% of an Osisko
share is represented by the value of the spinco and the other 85%
consists of shares in Agnico-Eagle, Yamana and cash. An Osisko
shareholder today will end up owning a combination of all three
companies, plus the cash component of the offer.
One thing that keeps me excited about the
spinco is that it is going to have a 5% royalty on the Canadian
Malartic gold mine. It would also have a 2% royalty on the Hammond
Reef and Kirkland Lake assets, as well as a large land package in
Mexico. The Osisko spinco would be Canada’s newest royalty company
and royalty companies often get a premium valuation.
TGR: Does the new company have a ticker?
CO: Osisko shareholders will have to
vote to accept the Agnico-Eagle and Yamana bid. I expect it will pass
and the Osisko spinco should be trading sometime in June.
TGR:
Osisko
was targeted largely because it had a large low-grade, low-cost asset
in a safe jurisdiction. Does that make companies like Detour
Gold Corp. (DGC:TSX) and Tahoe Resources takeover targets?
CO:
Certainly
both Detour and Tahoe would fit the model sizewise. Goldcorp
Inc. (G:TSX; GG:NYSE)walked away from the Osisko bid and clearly
it wants to continue to grow through mergers and acquisitions. What
will Goldcorp do? I’m not expecting the company to come out
tomorrow and make an acquisition on either of these names, but I
think it will certainly do the diligence work.
Goldcorp already owns 40% of Tahoe, which has a
world-class asset with world-class operating statistics. Goldcorp is
already in Guatemala; I’m not sure if it wants to increase its
weighting there.
In the case of Detour, yes, it’s in Canada,
and from that point of view, quite attractive. Detour is still in the
ramp-up stage and perhaps it has finally reached the point where it
is producing and reducing its cash costs. But I think Detour is still
a year behind Osisko on that front.
TGR: Detour just published Q1/14
results. It had an adjusted net loss of $0.20/share, while it
produced roughly 107,000 oz gold. Your thoughts?
CO: I was impressed at what Detour was
able to achieve because it was a tough winter. I had some concerns
that the weather might have proven to be an impediment, but the
company produced a significant amount of gold. I think the grade was
0.9 grams per ton. Some of that was from stockpiles to buffer the
grade at the mill. There are always a few bumps in the road but
Detour has done very well.
TGR: In early 2013 that stock was above
$25/share. Now it’s about $11/share. What’s going to get it back
above, say, $15/share?
CO: A couple of things. As I said
earlier, I believe the gold price is going higher. With higher gold
prices come higher margins. And I think the market is still putting a
discount on Detour as it’s in the ramp-up phase. As the company
brings down cash and operating costs quarter by quarter and
approaches Detour Lake’s nameplate production capacity, the stock
will get back to a higher valuation.
TGR: Do you have any more gold names for
us?
CO:
I’ll
mention some of my larger holdings of nonproducers: Dalradian
Resources Inc. (DNA:TSX) andAsanko
Gold Inc. (AKG:TSX; AKG:NYSE.MKT) that form part of a diversified
portfolio.
TGR: What is the Dalradian story over
the next 18 months or so?
CO: The company will continue to derisk
the Curraghinalt project in Northern Ireland. Dalradian will go
underground and through further drilling convert a fair amount of the
Inferred resources to the Measured and Indicated category. As the
market gets confidence with those numbers, it will start to rerate
the company. A lot of people were concerned about whether mining
would occur in Northern Ireland. To address that, Dalradian is
looking to make a concentrate instead of using cyanide. The company
is doing things that will ultimately make it more attractive.
TGR: Why do you own Asanko?
CO: It used to be called Keegan
Resources. The management of Asanko bought into the project for
around $27 million. These are the people that ran LionOre Mining,
which under a decade ago was the subject of a bidding war between
Xstrata Plc (XTA:LSE) and Norilsk Nickel Mining Co. (GMKN:RTS;
NILSY:NASDAQ; MNOD:LSE). They’re good people with good operational
experience. Asanko merged the PMI Ventures assets with those that
were in Keegan and now has two projects within about 10 kilometers of
each other, which are expected to have synergies. The company also
has a significant amount of cash.
TGR:
The
Sprott Gold and Precious Minerals Fund has held positions in Pretium
Resources Inc. (PVG:TSX; PVG:NYSE), Guyana
Goldfields Inc. (GUY:TSX), Unigold
Inc. (UGD:TSX.V) and Kirkland
Lake Gold Inc. (KGI:TSX). Does it still have positions in those
names?
CO: Pretium and Guyana are among my top
holdings. Unigold, which you mentioned, is a small-cap name in the
Dominican Republic. Unfortunately it has been the victim of the
small-cap market where investors have turned their backs on these
types of companies through no fault of management. I think Unigold
has an interesting property with lots of opportunities and drill
targets, and could potentially have a mineable resource one day.
TGR: Guyana Goldfields’ flagship
Aurora project has outlined 6.5 million ounces Measured and
Indicated, yet the stock price is falling.
CO: The company is at the point where it
is ordering equipment, getting its financing in place, and then it
will start building and moving Aurora forward. Again, it’s time and
execution.
TGR: Pretium had a bumpy ride in 2013.
Do you still have faith in management?
CO: Yes. I visited Brucejack in British
Columbia last year. It’s a “nuggety” project that’s difficult
to model. It takes a lot of drilling to get that necessary level of
confidence. Last year the company processed a 10,000-ton bulk sample
that produced around 6,000 ounces (6 Koz) or about 0.6 ounces per
ton. In February, Pretium sent another 1,000-ton sample to the mill
and it produced around 3 ounces gold per ton. The important thing to
look at with this company is that there is lots of gold underground;
the model still needs work to figure out how best to mine it. Pretium
is proceeding with further studies on Brucejack, but I think it will
be a mine. It’s also a potential acquisition as it is a high-grade
deposit in Canada.
TGR: Kirkland Lake Gold forecasts
roughly 126 Koz in production in 2014. Is that realistic?
CO: It will probably come close to that
number. Kirkland Lake has a new CEO, George Ogilvie, and a fairly
dramatic change in ideology. A couple of years ago the company was
focused on mining everything in the mine. Ogilvie is focused on
mining more profitable ounces.
TGR: I understand that Kirkland has been
attempting to lower costs. Is that working?
CO: Kirkland Lake is not yet profitable,
but it has instituted a new program to mine higher grades. It will
focus on the high-grade ore because that is where it will make a
profit. This is the same strategy that Rob McEwen put into place at
the Red Lake mine. I think Kirkland has huge potential but it
ultimately comes down to strategy execution.
TGR: In March you said that gold would
reach $5,000/oz within a few years. That seems optimistic.
CO: It’s based on the historical
relationship between the Dow Jones Industrial Average and the gold
price. Over the last 100 years there have been three times when it
has cost 1 to 2 ounces gold to buy the Dow. The last time was 1980
when the gold price was $800/oz and the Dow was 800.
People roll their eyes when you forecast big
numbers. In 2004 or 2005, I said gold would reach $1,000/oz. When it
reached $1,000/oz, I moved to $2,000/oz and we almost got there. With
the willingness of the market to continue to print money, I believe
that we are going to get that 2 or 3 to 1 relationship with the Dow.
With the Dow at 16,000, I think $5,000/oz is achievable. It’s not
really that the gold price is increasing, it’s that paper
currencies are depreciating in value.
TGR: Thank you for your time and
commentary, Charles.
Charles
Oliver joined Sprott Asset Management in 2008. He is lead
portfolio manager of the Sprott Gold and Precious Minerals Fund.
Previously, he was at AGF Management Limited, where his team was
awarded the Canadian Investment Awards Best Precious Metals Fund in
2004, 2006 and 2007. His accolades also include: Lipper Awards’
best five-year return in the Precious Metals category (AGF Precious
Metals Fund, 2007), and the Lipper Award for best one-year return in
the Precious Metals category 2010.
Want
to read more Gold
Report
interviews like this? Sign
up for our free e-newsletter, and you’ll learn when new
articles have been published. To see recent interviews with industry
analysts and commentators, visit our Streetwise
Interviews page.
DISCLOSURE:
1) Brian Sylvester conducted this interview for
Streetwise Reports LLC, publisher of The Gold Report, The Energy
Report, The Life Sciences Report and The Mining Report,
and provides services to Streetwise Reports as an independent
contractor. He owns, or his family owns, shares of the following
companies mentioned in this interview: None.
2) The following companies mentioned in the
interview are sponsors of Streetwise Reports: Guyana Goldfields Inc.,
Pretium Resources Inc., Tahoe Resources Inc. and Unigold Inc.
Goldcorp Inc. is not associated with Streetwise Reports. Streetwise
Reports does not accept stock in exchange for its services.
3) Charles Oliver: I own, or my family owns,
shares of the following companies mentioned in this interview: None.
I personally am, or my family is, paid by the following companies
mentioned in this interview: None. My company has a financial
relationship with the following companies mentioned in this
interview: None. The Sprott Gold and Precious Metals Fund owns all
the companies mentioned in this interview. I was not paid by
Streetwise Reports for participating in this interview. Comments and
opinions expressed are my own comments and opinions. I had the
opportunity to review the interview for accuracy as of the date of
the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity.
Streetwise Reports does not make editorial comments or change
experts’ statements without their consent.
5)
The interview does not constitute investment advice. Each reader is
encouraged to consult with his or her individual financial
professional and any action a reader takes as a result of information
presented here is his or her own responsibility. By opening this
page, each reader accepts and agrees to Streetwise Reports’ terms
of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC
and its directors, officers, employees or members of their families,
as well as persons interviewed for articles and interviews on the
site, may have a long or short position in securities mentioned.
Directors, officers, employees or members of their families are
prohibited from making purchases and/or sales of those securities in
the open market or otherwise during the up-to-four-week interval from
the time of the interview until after it publishes.
Streetwise
– The
Gold Report
is Copyright © 2014 by Streetwise Reports LLC. All rights are
reserved. Streetwise Reports LLC hereby grants an unrestricted
license to use or disseminate this copyrighted material (i) only in
whole (and always including this disclaimer), but (ii) never in part.
Streetwise Reports LLC does not guarantee the
accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from
companies that are listed on the home page in the In This Issue
section. Their sponsor pages may be considered advertising for the
purposes of 18 U.S.C. 1734.
Participating companies provide the logos used
in The Gold Report. These logos are trademarks and are the
property of the individual companies.
101 Second St., Suite 110
Petaluma, CA 94952
Tel.: (707) 981-8999
Fax: (707) 981-8998
No comments:
Post a Comment