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Ron Struthers: Timing the Gold Market
Source: Brian Sylvester of The Gold Report (11/18/11)
Every investor knows that it's hard to time the market. But Ron Struthers, editor of Struthers' Resource Stock Report and a 25-year investment veteran, has been able to weave his way in and out of the market with aplomb this year. In this exclusive interview with The Gold Report, Struthers tells what he's seeing in his technical analysis that is signaling it's time to buy back in after selling off many gold equities in April.
Ron Struthers: Most of these stocks have been valued at $1,100/ounce (oz) of gold. They're not pricing the rise in the price of gold at all yet. There's a disconnect or disbelief in the market.
Precious metal stocks have corrected way too far, to valuations we have not seen since the 2008 credit crisis. Following that crisis our average yearly return on my precious metal picks was 155% in 2009 and 99% in 2010. I see this opportunity again.
TGR: Is that because the market is expecting the price for gold to come down?
RS: That is the expectation, of course not among a lot of the goldbugs, myself included. Some see higher prices, but the general view of the mainstream investment community is the gold price is expected to come down. It is seen by them as rising too far, they do not understand what influences the gold market, and they mostly hear that it is another bubble.
TGR: Canaccord Research uses a sentiment indicator based on insider trading tracking by INK Research. The sentiment indicator uses a ratio of companies with buy-only transactions from insiders divided by companies with sell-only transactions from insiders over 30-day and 60-day periods. Some recent results from the sentiment indicator look quite positive.
RS: Insiders typically know best because they're running the companies, so it's always positive when there is more insider buying. I like the sentiment indicator ratio. A lot of companies have insiders buying and selling, which produces a clouded picture. By using the ratio of buy-only to sell-only, it gives a clearer picture of what insiders are doing. I don't necessarily say they time the market that great, but it's another positive sign that the insiders think the stocks are too cheap.
TGR: Are there more insiders buying than selling across the board?
RS: That's what that ratio is saying in regard to precious metal stocks: Insiders are buying more aggressively into the market; they see the best place to put their cash is in these companies.
TGR: You rely heavily on market charts to time your investment decisions. What charts do you rely on most?
RS: I always look at the broad-based market by using the S&P 500. Then look at the PHLX Gold/Silver Sector index (XAU:NASDAQ) and the AMEX Gold Bugs Index (HUI:NYSE). I also track the TSX Venture Exchange, which is a good benchmark for the junior resource market.
TGR: What key things are those charts telling you right now?
RS: They've all come down a fair bit. The S&P had a nice run from a bounce off support around 1,100 points in early October, but it has pulled back. That market is in a sideways pattern, which is just fine for gold equities. Steep sell offs in the general equity market have often in the past been negative for gold equities, so I watch this and for signs that gold stocks are breaking free from the influence of the general market.
The AMEX Gold Bugs Index had a breakout to a new high over 600 points about two months ago. What I've noticed on the AMEX Gold Bugs Index is that the gold stocks have not been going down with the market every time. They've been holding or rising. They're bucking the trend, which is a really positive indicator. For example, at the end of October, the S&P sold off big two days in a row while the AMEX Gold Bugs Index bounced back the second day, completely recovered by the third day and went on to much higher levels from the selloff while the S&P has yet to recover to its previous October high.
The Venture Exchange had quite a correction from about 2,400 to 1,350 points. The juniors corrected much further than the senior and midtier golds. In September, the Venture Index was at its high from last year, about 1,750 points, a support level, and then there was a big sell-off in gold at the end of September as the gold price was knocked down about $300/oz with central bank Intervention. The index also took a quick, sharp drop on that sell-off in gold. That really hammered a bottom into that market, down to 1350. Since then, it's rallied up a fair bit, but I'm still looking for about another 200 points. I'd like to see it get over 1,800 to be sure that it's in a new bull move for the juniors. That would be a higher high, above the level where it fell from in September.
TGR: Is that what you're anticipating?
RS: Yes, but I want to see proof or confirmation that it happens. I want to see a move in that index. That will seal the case that it's going much higher. But if it gets to that 1,800 level and isn't able to go through that, I might take a more conservative stance on the junior market, lighten up a bit, and go more to cash.
TGR: What did you notice in April that caused you to start liquidating your portfolio?
RS: The biggest influence on my decision to time the selling then was the price of silver. It was having a very strong move. I figured silver wanted to get to that $50/oz mark, which was the old historic high, but would then see a good correction. It moved up so strongly and so fast, so a good correction would be normal. Gold and silver equities had both been strong up to that point, the TSX Venture Index had a 1,000-point rally, the Amex Gold Bugs Index 200 points, so my feeling was silver was going to have a peak in the intermediate term when it reached that $50/oz mark and its correction could be a catalyst for a good correction in both silver and gold stocks.
TGR: You noted over the summer that some strength was coming back into the gold price. Why didn't you jump back in then?
RS: Actually, we were starting to buy back in during July and August, just not that aggressively. I was looking for a bottom around then, but in hindsight the bottom came later. We've started buying more aggressively these last couple of months. It's always difficult to time the market exactly.
TGR: There are a lot of concerns about sovereign debt problems in Greece and Italy. In a Nov. 2 research report you said, "Greece deserves to go bankrupt and will go bankrupt in time along with all of Europe followed by Great Britain and the U.S." That's a bit extreme. Some well-known economists believe that there may not be any bankruptcies necessarily, but there could be 20 years of static growth.
RS: Europe is prolonging this in the hopes that the economies will pick up, tax revenues will grow again and things can continue as they always have. The real problem is simply too much debt and the debt problem can't be fixed by adding more debt. The only way to fix that problem is to settle the debt, liquidating to pay down and/or restructure defaulting on some or all of the debt as what happens in a bankruptcy.
In the case of Greece, it's not called a bankruptcy, but when debt holders accept pennies on the dollar or, in the Greece case thus far, 50% on your bonds, it is basically a default or like a bankruptcy agreement. At 50%, this is still not enough and will not work; even with rosy projections the Greece debt will be back up to 120% of GDP in a few years. Assuming this agreement goes through, it will default again and more debt will be defaulted on; in the end it will probably work out that bond/debt holders receive closer to $0.20 on the dollar. Call it what you like, I say bankruptcy.
This excessive debt problem, either way too much sovereign debt like Greece or too much private debt like we have seen in the U.S.—and a combination of the two—is a problem around the world, including most of Europe, Ireland, Britain, Japan and the U.S. All this debt will be defaulted on within the next several years.
The U.S has not resolved the debt problem that came to light in 2008. It has basically moved the bulk to the Fed balance sheet. The U.S. has 50 states and many of them have a larger GDP than Greece and just as bad of a debt problem. Perhaps the U.S. has 25 Greece-like problems yet to deal with, on top of the private sector debt problem and eventually a sovereign debt problem because it will keep piling on $1+ trillion Federal debt a year, as long as the bond market allows it. In other words, it is just like a ticking clock with a too short fuse.
TGR: What are some of your favorite companies?
RS: With the seniors, I more or less have kept them on my list a long time. I don't trade them much. I like Goldcorp Inc. (G:TSX; GG:NYSE) and Barrick Gold Corp. (ABX:TSX; ABX:NYSE). Goldcorp is one I haven't had on my list for quite a while, but I added Barrick back on last year. Barrick took the hit writing off its hedge book and has some big new mines coming onstream, so I expected cash flows and earnings would rise. Barrick's latest quarter showed that, and the stock now pays over a 1% dividend yield, but like most gold stocks, it has yet to show much of this in the share price.
I also like Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE). In silver, there's Pan American Silver Corp. (PAA:TSX; PAAS: NASDAQ). I Iike First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:Fkft) as more of a senior producer as well.
TGR: Earlier this year, Pan American had production guidance of 23–24 million ounces (Moz) of silver. It revised that around the middle of the year to about 22.5 Moz. Nonetheless, its third-quarter profit was $0.49/share or $52.5 million (M). It's getting unprecedented revenue. Is that sustainable?
RS: I think so because the silver price has come down and has been in a sideways pattern, so it has really built a base now at higher levels. I think it will be moving higher with just the strong growing demand from the solar industry, and then there is the growing demand as a currency or investment, the poor man's gold. That is obviously going to help all of these producers. What I find with Pan American, and some other more senior stocks, is that they are under-owned. From various analysis I have seen, total investment funds have less than a 1% allocation in precious metals. Once buyers come back into the market, these are among first things the funds are going to buy in the underweight sector. Meaning Pan American is a go-to silver stock that a lot of those funds would buy.
TGR: Would you purchase Pan American over Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ)?
RS: I would have to compare the two charts, but they're both major silver producers that funds would consider in the silver market. Both have been way oversold compared to action in the silver price.
TGR: Some of the senior companies are having record quarters in terms of free cash flow. What do you like about these companies on a long-term basis?
RS: With the seniors, I'm always looking for a good pipeline of new projects coming on so there will be growth in gold production. That way there is not only the valuation rise on the price of gold, but increasing production. That's one thing I liked about adding Barrick back on. It has some new mines coming on, like Donlin Creek and Cerro Casale. Kinross Gold Corp. (K:TSX; KGC:NYSE) is another one I have on my list for that reason. It has a few new mines coming onstream, the Tasiast project, Fruta del Norte, Lobo-Marte and Dvoinoye.
TGR: Do you think some of the intermediates and the senior producers will merge or suggest takeovers?
RS: Yes. I'm expecting to see more activity there. It's getting harder to build and find producing mines. Especially with these valuations, it's much easier just to buy them on the stock market. I think there will be increased merger activity in the next several months.
TGR: It's interesting, too, when you look at a company like Agnico-Eagle—its executives Sean Boyd and Ebe Scherkus are not young men anymore. You have to wonder about their long-term appetite for this game at this point.
RS: That's a widespread problem in the industry. Not a lot of young people are coming up. There's definitely a shortage of those skill sets, another reason that mergers might make more sense.
TGR: What about some intermediate producers on your list, Ron?
RS: I have a number there that I like: Richmont Mines Inc. (RIC:TSX; RIC:NYSE.A), B2Gold Corp. (BTO:TSX; BGLPF:OTCQX), and Claude Resources Inc. (CRJ:TSX; CGR:NYSE.A), which is another one that we recently bought back. These are more small-to-intermediate producers, because I think there's better value in the smaller producers.
Claude Resources is actually a junior producer in Saskatchewan, where its Seabee mine is located. Its production is pretty good and will be expanding with the Santoy mine within trucking distance. Claude is acquiring the remaining percentage of the Amisk project from its partner, so will have 100% of about 1.5 Moz defined there. In Red Lake, another mine advancing is its Madsen project, which it has been exploring and ramping up, currently up to about 1.2 Moz gold. Madsen was a past-producing mine, which makes it quicker to permit to production; the company should experience a significant bump in production when that comes onstream. That is a ways out yet, but Claude is not even being fully valued on its current mining operation. Its total gold resources in the ground are just being valued at about $70/oz. Investors are really getting one of the other projects, Amisk or Madsen, for nothing.
TGR: What about Avino Silver & Gold Mines Ltd. (ASM:TSX.V; ASM: NYSE.A; Gv6: Fkft)?
RS: That's one of my favorite silver juniors. It is just starting production. There is typically a boost in stock price when production starts because the company is moving into a phase of cash flow from a long period of no cash flow. I like it for that reason, but it's also undervalued as well.
TGR: It's mining the Avino Mine in Durango, Mexico. There is further potential to expand the resource through the Guadalupe deposit, which is part of Avino. Tell us about that.
RS: In addition to starting production, I like a company that can increase that production and reserves. Avino Silver & Gold can easily do that at the Avino Mine. The zones at both Guadalupe and San Gonzalo are still open, so they can be expanded along strike and depth. A lot of the other zones on the property have not been drilled that much, so there's room for expansion on practically all the zones there, including the original Avino vein still open at depth.
TGR: In some areas, it's getting about 300 grams per ton (g/t) of silver and the recoveries have been around 80%. That's certainly well above average.
RS: Both are certainly very good numbers. It's typical of what can be found in Mexico—very rich veins as long as there is good-enough width and Avino has that so we can expect a very profitable mine operation.
TGR: What about some junior names that are offering a strong value?
RS: One of the recent ones I've picked is Sandspring Resources Ltd. (SSP:TSX.V). Its Toroparu deposit in Guyana has been growing steadily. It's up to 9–10 Moz Indicated and Inferred. That stock's price is between one-half and one-third of its high.
TGR: Sandspring has millions of pounds of copper there, too, but the market's not really giving it credit for that.
RS: It's not even giving a good value for the gold. When I looked at the company, I said to myself, "Just ignore the copper because it's not getting valued at all for that." Why? It's the same thing with all these stocks that are valued so low. They're just out of favor and not getting the valuation they deserve. It's just market sentiment, not anything specific with Sandspring.
TGR: In July, Agnico-Eagle made a foray into the Red Lake Camp by investing $70M in Rubicon Minerals Corp. (RBY:NYSE.A; RMX:TSX). In 2008, Agnico lost out on a bid for Gold Eagle Mines with Goldcorp. Now both senior producers have a presence in the Red Lake camp. Agnico's corporate secretary Greg Laing holds a seat on the board of Hy Lake Gold Inc. (HYL:CNSX; HYK:Fkft), which is also in Red Lake. But Hy Lake has a joint venture with Goldcorp. What do you think about the prospects for Hy Lake given its relationship with both producers?
RS: I think that's ideal. That is really what a junior needs to do. Down the road, when it has proven out the reserves, it wants to have competition to buy it out. Agnico-Eagle and Goldcorp are the two gorillas in that neck of the woods. They are the two you want to have fighting over your stock when you discover a mine. It's an excellent move.
TGR: What do you make of the Rowan property?
RS: It's excellent. There were three past-producing mines near Rowan and the adjacent properties, so we know there's still gold there. And it is finding robust gold grades in the drill results all the time. It's just a matter of time to do enough drilling there before it proves up a mineable deposit.
TGR: Paramount Gold and Silver Corp. (PZG:NYSE.A; PZG:TSX) has a new resource on its Sleeper gold deposit and it's had some good results from the San Miguel project in Mexico. What do you make of it?
RS: Those are two excellent projects and I like them both. The Sleeper project still has a lot of room to expand its resource numbers. So does San Miguel. The company has been actively drilling both projects. There should be an updated resource number on San Miguel within a few months.
TGR: Sleeper has about 3 Moz outlined. How does that compare to other projects in the area?
RS: It compares very well. Although the grade is a bit lower than many, the recoveries are good, up to 89% and with just $1,100/oz gold used in most studies currently, it can be very profitable. It needs to get up to the 3–5 Moz mark, where it is headed to really interest the major producers. The seniors need fairly large mines to have any impact on replacing their reserves. The 3–5 Moz mark is a minimum, but 10 Moz would be ideal.
TGR: What do you expect the new results on San Miguel to clock in at?
RS: The last time it was calculated around 1.7 Moz; it only updated some of the zones. I understand this next calculation is going to include all of the zones on the property and new discoveries. I'm looking for the number to get up to 4–5 Moz. These new resource calculations that still have plenty of room to grow will soon get the company up in the league of 10 Moz with the two projects.
TGR: What's one last investment idea that you could leave our readers with?
RS: I like Levon Resources Ltd. (LVN:TSX.V; L09:Fkft; LVNVF:OTC). It's proving up a Penasquito-type target that Goldcorp is mining in Mexico. It's growing very quickly with a current phase 4, 130,000-meter drill program underway; that is a huge drill program. It has about five drills running and it already has over 300 Moz silver Indicated, almost 1 Moz gold and billions of pounds of zinc and lead. Its stock got sold off steeply in this correction, so it's an excellent buying opportunity now. Levon has no need to finance as it has about $66M in the bank and only $20M budgeted in the current program.
TGR: With so many unvalued names, how are you choosing among them?
RS: I look at management, of course. You want good mining management that is experienced, has put mines into production, or has brought them up to a point of being producing. The jurisdiction is important. Right now, you can find good values in a lot of the primary areas, like Nevada, Canada, Mexico, and other mining-friendly jurisdictions. I look in those jurisdictions first when there's great value in the market. I look farther out as the market gets pricier. I look for companies with ample cash on hand because it is difficult to raise money without a fair bit of dilution.
TGR: That's one thing about Levon that investors might question. It has about 200M shares outstanding.
RS: The stock was up over $2/share even with 200M shares outstanding. It all speaks to the size and quality of the asset. I'm not too concerned when a company has a solid asset the size of its Cordero project; it is a monster already, around 11 Moz gold equivalent Indicated and will probably end up over 20 Moz equivalent. The larger share float also attracts institutional investors since it's a more liquid stock.
TGR: Thanks for your time.
Ron Struthers, editor of Struthers' Resource Stock Report, retired at an early age from IBM, where he spent many years as a system, business and inventory analyst. He began investing over 25 years ago. He began the Struthers' Resource/Tech Stock Report almost 20 years ago. With his background as an analyst for a multinational computer giant, he is able to research and analyze vast amounts of investment data with the aid of the most technically advanced computer hardware and software. He also has numerous inside contacts.
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1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or her family owns shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Goldcorp Inc., B2Gold Corp., Hy Lake Gold Inc.; Rubicon Minerals Corp., Paramount Gold and Silver Corp.; and Avino Silver & Gold Mines Ltd. Sandspring Resources Ltd.
3) Ron Struthers: I personally and/or my family own shares of the following companies mentioned in this interview: Levon Resources Ltd., Goldcorp Inc., First Majestic Silver Corp., Avino Silver & Gold Mines Ltd., Paramount Gold & Silver Corp., Sandsprings Ltd. and Hy Lake Gold Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None.