The Gold Report: This year could be described as a hangover from the high gold prices of last fall. The price of gold hit a high of around $1,900/ounce (oz); it is now about $1,760/oz. Yet, we do see some bubbling and some positive news in the space. I'm sensing a cautious optimism among institutional investors.
David Christensen: In recent weeks, there has been a general uptick in enthusiasm for gold mining shares. As you pointed out, it's been a very tumultuous year for mining shares and the gold price. While the gold price has stabilized, it hasn't set a new high in more than 12 months. That has led to some investors withdrawing money from the mining sector.
At the same time, the shares of many gold miners failed to perform. Cash flow was generally less than investors expected given the relatively high prices. Mining companies weren't generating the growth investors desired and internal rates of return have been much lower than investors had been seeking.
"Dividend distributions are up by about 30% year-on-year from most of the major mining companies."
As a consequence, there was a selloff in the gold mining shares. Part of the selling pressure was newer money that came into the sector over the last few years, such as hedge funds, looking to make an early exit from the sector. Gold funds typically remain fairly static in terms of their overall portfolios, while hedge funds come in and out of the sector. As the sector lost momentum and the general equity markets began to improve, hedge funds found alternative places to put their money. The consequence was that there were no buyers and a lot of selling pressure. Many of these shares are down more than one-third from where they were a year ago.
TGR: Still, there are so many gold producers, many of which are in your portfolio, that are still operating at very impressive cash flows with impressive balance sheets. How are they attracting new money—the hedge funds and the generalists—back into their shares?
DC: It's really pretty simple. They have come out of a very rapid period of growth and are beginning to generate very strong cash flows and earnings. Moreover, gold producers are increasing their dividends. Dividend distributions are up by about 30% year-on-year from most of the major mining companies. We have companies today that are distributing three times what you could get from a safe T-bond investment here in the U.S., while providing added portfolio diversification from investing in a gold mining share.
TGR: That's pretty compelling to a lot of investors who are looking for income right now.
DC: We see some good value in the sector at the present time due to the increasing volume of distributable cash flow. The simple cash flow multiples or multiples to net asset value (NAV) for the industry are at the lowest valuations we've seen in several decades—perhaps during my career. Many of the mining companies on the senior side are trading at 0.7–0.8 times NAV. Mid-caps to juniors are at about half of their intrinsic value. Now is a good time to consider many of the gold mining shares.
TGR: ASA has around a half-billion dollars in assets. How many stocks do you own in the fund?
DC: It fluctuates between 30–34 positions. Right now, we're probably at about 32 positions in the portfolio. We're very heavily weighted toward some of the quality benchmark companies that most people would be familiar with, such as Barrick Gold Corp. (ABX:TSX; ABX:NYSE), Newcrest Mining Ltd. (NCM:ASX), Goldcorp Inc. (G:TSX; GG:NYSE) and, of course, one of the all-time stellar performers, Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE). Randgold has been the largest or second largest position in our portfolio for a good part of the last five years.
Beyond that, there are a number of small companies that make up much of the growth component of the portfolio. They are names that aren't on everybody's radar screens, such as Silver Lake Resources Ltd. (SLR:ASX), Osisko Mining Corp. (OSK:TSX), Detour Gold Corp. (DGC:TSX), Lake Shore Gold Corp. (LSG:TSX) and Stornoway Diamonds Corp. (SWY:TSX). These will change over time depending on how we feel those companies are doing, but they do provide a lot of the growth for the portfolio.
TGR: I noticed a couple of platinum names and a silver name in the portfolio. It's not a gold-only fund, but certainly is very heavily weighted toward gold.
DC: It is a precious metals fund, which typically will mean that we may underperform some of the purer gold shares in a rising gold price environment. However, we tend to look at these investments over a longer cycle. For example, we invested in platinum mining shares for the long-term positive attributes of the platinum industry several decades ago and during that time, they have been some of the best performing investments in the portfolio. We have found that a more diversified precious metals portfolio has outperformed the gold portfolio over longer periods. But a gold fund, at times, will provide more leverage to a change in the gold price.
DC: The royalty sector is one of the stronger business models in the precious metals space, and Royal Gold and Franco-Nevada are the two big players. They have historically been phenomenal companies in the portfolio. We are very long-term shareholders in those names.
TGR: What about Silver Wheaton Corp. (SLW:TSX; SLW:NYSE)?
DC: ASA does not own Silver Wheaton. There are a number of reasons for it. At the moment, we prefer to get most of our silver exposure through a little company called Tahoe Resources Inc. (THO:TSX; TAHO:NYSE), which has been a strong performer in the portfolio during the last year. Tahoe is developing a high-grade silver asset in Guatemala, which we think is very attractive.
TGR: What progress has Tahoe made on that asset?
DC: Tahoe has commenced construction of its project. It is starting the second decline into its operations, and things seem to be going very well. It doesn't have its operating permits yet, but it wasn't expecting to have them by this time. Tahoe doesn't need them for another nine months or so before it commences operations. At this point, the development of the asset seems to be on time and on budget, and the stock has continued to perform very well. We believe it has one of the better management and operating teams in this industry.
By the way, there have been no issues with its location in Guatemala either.
TGR: Guatemala doesn't seem to be having the political or jurisdictional problems that have been impacting other Latin American countries.
Do you have a favorite jurisdiction? Your assets are really all over the planet.
DC: Gold deposits are put where Mother Nature put them. I don't have the option to move an asset. As a result, we don't have the benefit of picking countries first. What we do is choose a quality project. If the quality of the project is sufficient to offset the risk of operating in a given jurisdiction, then we'll consider it. Nobody in their right mind would take a low-quality project in a high-risk jurisdiction.
"Now is a good time to consider many of the gold mining shares."
At the same time, we might take a lower-return project in a safer jurisdiction as part of our portfolio makeup. That risk adjustment is a constant ongoing process within the portfolio. You know, there was a time when a gold fund, such as ASA, would have been largely a South African portfolio. Up until the 1970s, there were only a handful of gold mining operations outside of South Africa.
TGR: The Carlin Trend hadn't been discovered at that point.
DC: Newmont Mining Corp. (NEM:NYSE) existed, but it was also a significant copper producer. There was Homestake Mining, which is no longer in business, and Hecla Mining Co. (HL:NYSE). That was largely the North American gold mining industry. At that time, ASA was largely a South African portfolio of gold mining shares. As the world has developed and exploration techniques have improved, we've become more diversified.
TGR: It was interesting to hear in presentations today about some of these large capital-expenditure projects that are taking place in far-flung locations all over the planet that one would never have thought of in the 1950s.
DC: I'll be honest—I have favorite countries that I like to travel to and visit operations. They aren't necessarily where I prefer to invest.
TGR: Your fund has obviously struggled in the last several quarters because of languishing equity prices in the gold and silver space, even with the strength of the commodity price. Have you adjusted the portfolio at all based on the relative weakness of equity prices? I know you're a long-term bull in the space.
DC: ASA does tend to be a very long-term investor. There are securities in our Top 10 holdings that we've owned for decades. They didn't become Top 10 holdings because we bought 10% of the fund in the stock. They became Top 10 because we bought 1% that grew 10 times. They've just gotten there through success.
"The royalty sector is one of the stronger business models in the precious metals space, and Royal Gold and Franco-Nevada are the two big players."
In the course of the last year, as the crisis in the industry broke and mining finance wasn't available to develop projects, those companies that were going to be in need of financing in the next year were some of the ones that we quickly ejected from the portfolio. We knew that they were going to be under significant pressure and that we were going to be able to buy those back as the market environment improved. There was a lot of turnover in the portfolio that wasn't typical for us.
TGR: I'm assuming that those were some of the smaller- and mid-cap companies.
DC: Absolutely. There were some adjustments from a risk standpoint in the larger caps, as well. The market began to deteriorate in the gold sector. Some valuation gaps broke out where companies that we considered to be very high-risk assets that weren't being discounted by the market became overweight positions and some that were lower risk had taken the brunt of the selling. Some adjustments were made to lower the overall risk of the portfolio and hopefully improve its returns going forward.
TGR: Do you have a mandate? Will you look at a company of any size?
DC: We look for asset quality and good management teams first and foremost. When it comes to market cap, we don't have a hard and fast rule. We generally like a portfolio position to be at least 100 basis points of the portfolio or 1% of assets under management. If we're a $500 million (M) portfolio, I have to be able to move $5M of stock in and out of that position at any one time. If the liquidity isn't there to do that, then the company is simply too small. It's a simple math problem for us.
TGR: You have to have the liquidity. The only company that I don't really know in your holdings is Silver Lake. Tell me a little bit about that one. Is that still in the portfolio?
DC: We actually met with Silver Lake management about 30 minutes ago. One of the benefits of being in Denver is all the major companies in the industry are here at one time.
Silver Lake is developing several assets in Australia, which we think are very strong. Most of the management comes from Western Mining Co., previously one of the largest mining companies in Australia, predominately in nickel. The strength of the management team and its approach to the industry is a combination that could make it an outperformer going forward. We're looking at this asset very carefully.
TGR: The company is not listed on a North American exchange at this point.
DC: It is only listed in Australia.
TGR: The Australian stock exchange is looked on with a little bit of a jaundiced eye. When you buy an Aussie stock, do you take a closer look at their balance sheet? Do you do more due diligence on a stock like that than you would on a North American-listed issue?
DC: I hate to be flip, but honestly, no. There are certain financials that we look at in any asset. The level of modeling and the diligence is the same regardless of where they're listed. The exchange they're listed on is a tertiary consideration.
Newcrest Mining is one of the largest Aussie mining companies in the world.
TGR: And it's in your top five holdings.
DC: Yes, it's our number three position.
TGR: We haven't seen too much discovery. There was GoldQuest Mining Corp.'s (GQC:TSX.V) big discovery in the Dominican Republic. Is CGA Mining Ltd. (CGA:TSX; CGX:ASX) still in your portfolio?
DC: Oh, yes, very much so.
TGR: That's in the Philippines. We've seen some interesting things out of the Philippines.
DC: Historically, we haven't done well in the Philippines as investors. CGA, for us, is a bit of, for lack of a better term, a concept stock that we believe will be a good performer for the portfolio going forward. It has a good project and strong management team. It provides a little bit of exposure to that jurisdiction.
TGR: You're on the board of the Denver Gold Forum. What are your responsibilities?
DC: The Denver Gold Group is a not-for-profit organization that puts on conferences to assist the gold mining industry reach out to investors, like myself, for potential investment consideration. We host these conferences every year. The board tries to take the concerns of our members, the companies that are here, and reflect them in the conference to do the best job we can for the industry.
TGR: The general attitude here is one of measured optimism. It feels as if we're all moving forward cautiously in this space. There's a little more excitement today than there was even a month ago.
DC: Look at what's going on in the world today: concerns about political and economic situations in the United States, Europe and the Middle East, what's going on with the euro and the U.S. dollar. People can't help but consider gold as an alternative investment. Gold prices will continue to do well for the next 12–24 months. Many countries, in fact, are looking to diversify their holdings—as are investors—into gold bullion, as well as dollars and euros. It's only a natural process. It's smart for investors to keep anywhere from 2% to 5% of their portfolios in precious metals. It provides a good diversification for an overall portfolio.
TGR: Thank you, David. I appreciate your time.
David Christensen is CEO, president and chief investment officer of ASA Gold and Precious Metals Limited. He joined the company in 2007 as vice president of investments and assumed his current positions in 2009. Prior to joining ASA, he worked with Gabriel Resources, a junior gold company, from 2004 to 2007, where he worked on the feasibility study and financing plans for the Rosia Montana project. He has earned a StarMine ranking for some of the most accurate earnings estimates, and has been consistently ranked by The Wall Street Journal and Reuters as one of the precious metals industry's best analysts. Christensen earned his Bachelor of Science degree in business administration at California State University, Chico. He earned his Master of International Management from the American Graduate School of International Management.
Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.
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: Goldcorp Inc., Detour Gold Corp., Franco-Nevada Corp., Royal Gold Inc. and Tahoe Resources Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) David Christensen: I personally and/or my family own shares of the following companies mentioned in this interview: ASA Gold and Precious Metals Limited. I personally and/or my family am paid by the following companies mentioned in this interview: ASA Gold and Precious Metals Limited. I was not paid by Streetwise Reports for participating in this story.