The Gold Report: Charles, at the beginning of the summer, you forecast that gold and silver prices would go up based on quantitative easing (QE) in the U.S. and Europe. Since then gold did take a leg up and has stayed above $1,700+/ounce (oz) and silver has stayed over $30/oz. QE3 was recently announced in the U.S., but some say pumping liquidity into the system is having diminishing returns. Have precious metals reached a ceiling or is there still room to go up?
Charles Oliver: I expect precious metals prices to rise significantly over the next decade. A large part of it as a result of QE and other money printing programs. The U.S. did announce QE3 recently. Having said that, it hasn't started running up the printing press. A good rise in precious metals is yet to come.
TGR: Will the November election impact that?
CO: I definitely believe the election is impacting it. The election could delay the implementation of QE3 because the Federal Reserve doesn't want to do any tampering that would be seen as influencing the election. I believe that QE3 will take place after the election this fall or early next year—and I expect to see significant programs embarked upon.
In terms of the gold price, I have forecast that it would hit $2,000/oz this year. There's still a very good chance of that, but it's more likely that it will go through $2,000/oz next year. Some of the trend lines on the chart indicate a $2,200/oz gold price sometime next year.
TGR: Have the higher metal prices been figured into the equity prices yet?
CO: Equities have underperformed the gold price for the last couple of years and are trading at some of the cheapest valuations of this decade based on price to earnings and price to cash flow. I expect over the next year and a half that equities will play catch-up and get back to a more normal level. One of the things we've been trying to figure out is what some of the potential tipping points are for that. We've come up with several of them.
"I expect precious metals prices to rise significantly over the next decade."
First and foremost would be the valuations. They are just incredibly cheap. Second is dividend increases. For most of the decade, gold companies didn't pay dividends. In the last few years, many gold companies initiated dividends and increased those dividends several times. Generally speaking, dividends were 1% or less for the industry seniors and mid caps. Today, we're seeing many of them reach 2% and could be at 3–4% in the not-so-distant future.
Investors in this climate are starved for yield and are looking for anything that will provide it. At some point investors will look at gold stocks as a way to receive dividends, which would be very positive for the valuations.
TGR: Those would be the two main tipping points—valuations and increases in dividends?
CO: There are other things out there, including mergers and acquisitions (M&A). A number of M&A transactions have occurred during the last couple of months. There has been a lot of commentary and interest by some of the senior folks at gold companies about the attractive valuations of gold and precious metals companies. There also seems to be buying coming out of Asia.
TGR: What's behind the Asian buying? Do you think we will see more of that?
CO: There have been a number of transactions recently. I'd highlight Zijin Mining Group Co. Ltd.'s acquisition of Norton Gold Fields Ltd. (NGF:ASX) and Shandong Gold International Mining Corp. Ltd. taking an interest in Focus Minerals Ltd. (FML:ASX).
"Equities have underperformed the gold price for the last couple of years and are trading at some of the cheapest valuations of this decade."
In talking with a number of gold companies, it appears that the Asian groups have been showing a significant, increasing interest in taking stakes or complete ownership in materials and precious metal companies.
It almost makes me wonder if there has been a call from the top for people to start redeploying fiat paper currency into hard assets. That would run into my thesis that a lot of countries are shunning paper assets because they're being debased by all this printing and, hence, moving into hard assets is a very logical thing to do. It would not be at all surprising to hear that Asian groups, and other countries for that matter, are trying to move away from paper assets and into hard assets.
TGR: How does Asian buying play into your gold price forecast?
CO: There should be a lot of conversion out of paper money into hard assets, including gold and gold companies. Many of the statistics out there show that over the last decade, entities, including governments and individuals, have shifted from being net sellers of real assets to playing the role of considerable buyers of hard assets and gold.
The governments of the world were selling about 500 tons (t) gold per year a decade ago. Mine production was around 2,800 t/year, so that was a fairly significant impact upon the market. Today, governments of the world are buying about 500 t. That's nearly a 1,000 ton (Kt) shift in a market that has mine production of 2,800 t. That's an absolutely huge number.
"We have increased the weighting of silver stocks quite dramatically during the last couple of years."
And that's just by the governments. There's a huge proliferation of coin and mint sales and exchange-traded funds for individuals. There's a huge increase in consumer demand in China. The Chinese consumer has gone from owning no precious metals about a decade ago to approaching the same levels as India, which is one of the largest consumers of gold.
TGR: The $438 million Sprott Gold and Precious Minerals Fund, which you manage, holds 7% silver bullion, 20% silver equities and 62% gold equities. Is that a shift to more silver than a year ago? What's the thesis behind that?
CO: For most of the last decade, I've had single-digit levels of silver companies within the portfolio. A couple of years ago, Eric Sprott was doing some work on the silver-to-gold ratio. Looking at the work that Eric did really opened my eyes to how attractive the valuations look for silver and silver companies going forward. The general argument is that if you look over the last 2,000 years, about 95% of the time, the silver-to-gold ratio has been at 16:1. Today, it's at 50:1, which makes silver stocks very attractive. Therefore, we have increased the weighting of silver stocks in the Sprott Gold and Precious Minerals Fund quite dramatically during the last couple of years.
TGR: The last time we talked, you said that all of the silver names were attractively valued and that the mid and large caps would move first. Has that happened?
CO: We've seen some great performance out of silver names in the last few months. Just to give you an example, Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE), which is a significant holding within our portfolio, has gone from around $16/share to just shy of $30/share in the last four months. Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ), one of the largest U.S. producers in the world, has gone up from around $14/share in July to just shy of $22/share.
TGR: Were those increases based on increased profits due to the silver price, on the market changing its mind about silver or on individual news out of the companies?
CO: I think one of the most important factors was actually QE, as silly as that may sound. The market had been selling off gold and silver stocks in a fairly irrational manner. The valuations became incredibly compelling and are still incredibly compelling despite the recent lifts. In the late summer, there was a very big change in sentiment as Federal Reserve Chairman Ben Bernanke announced QE3 and European Central Bank President Mario Draghi announced that the bank would do whatever it takes to protect the European Union, which means it will print as much as it needs to.
As much as I'd like to say the rise in silver share prices was from great earnings and profits, it was really a shift in sentiment by investors. The valuations were incredibly attractive in June. They were incredibly attractive in July. They're still exceptionally attractive today. But the market seems fixated on how much printing will go on and whether or not it's risk-on or risk-off. The market seems to be taking on the risk-on trade as printing appears on the horizon.
TGR: What mid caps could take advantage of that?
CO: There are lots of great silver names. We own a whole smattering of names in the mid-cap section, companies like MAG Silver Corp. (MAG:TSX; MVG:NYSE), which has one of the highest-grade undeveloped silver bodies in Mexico, and Tahoe Resources Inc. (THO:TSX; TAHO:NYSE), which is building what's going to be one of the world's largest silver mines in Guatemala. The valuations on these things—on ounces in the ground or at potential earnings and cash flow metrics—all look very attractively priced at the current silver price.
TGR: What about Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) and SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT) in Mexico, which are also in your portfolio?
CO: The whole junior space, including Fortuna and SilverCrest, is trading at very cheap valuations. Mandalay Resources Corp. (MND:TSX), which is run by Brad Mills, who used to run a platinum company in South Africa, is a well-experienced mining CEO. You'd think with good people and assets that you'd get a premium valuation, but companies like Mandalay are trading at single-digit price to earnings ratios. There are great values and opportunities out there.
TGR: How about some near producers or mid producers that could take advantage of the upward push from QE?
CO: There are lots of opportunities on the upside including companies that we've owned for quite some time. Bear Creek Mining Corp. (BCM:TSX.V) has one of the world's largest, undeveloped mines in Peru and significant cash on its balance sheet. It's waiting for permits. Alexco Resource Corp. (AXR:TSX; AXU:NYSE.MKT) is a fairly small silver company that produces just north of 2 million ounces, but has the old Keno Hill mines that have been around for more than 100 years and have produced a significant amount of silver. The company is ramping up production. The valuation on it has been under a lot of pressure as the risk trade went off last year.
TGR: Would you put Fortuna in that bucket? It has had some good news come out recently.
CO: Yes. Fortuna is a small-cap that continues to grow and ramp up its production. It is getting to that level where it is going to get the eyes and ears of the generalist investor as it grows to a midtier company.
TGR: Let's shift from silver to gold.
CO: Just like the silver names, the gold names are very attractively valued. I've been trying to focus on high-grade projects because they generally have lower capital expenditure requirements and potentially better internal rates of return.
Some of the names that I've been looking at are companies like Roxgold Inc. (ROG:TSX.V), which has been drilling 20+ gram/ton (g/t) material, and Dalradian Resources Inc. (DNA:TSX). Dalradian is run by Patrick Anderson, who was the CEO of Aurelian Resources Inc. (ARU:TSX), which was sold to Kinross Gold Corp. (K:TSX; KGC:NYSE) several years ago. Dalradian has an Irish asset that's showing a couple million ounces with 0.5+ oz type material. It has had some great drilling success.
Colossus Minerals Inc. (CSI:TSX; COLUF:OTCQX) in Brazil has one of the highest-grade gold-platinum-palladium deposits on the planet—an asset I visited earlier this year—and is currently developing a mine. It appears to be fully financed. It's developing an adit down to the ore and should reach there within the next month or so. It will be mining the deposit next year.
TGR: Do you think there will be more deals out there this year than in the last few years?
CO: Prior to Bernanke's announcement of QE3, the market for financing had dried up and the small guys were in a very tough position. But in the last couple of months, we have started to see the market open up. Usually, it goes to the mid caps first and slowly starts to trickle down to the small caps. Barring any disasters out of Europe, I would hope to see this trend continue.
TGR: We're getting to tax sell-off time. How are you approaching that?
CO: One of my objectives is to minimize taxes. I have spent a good portion of the year making sure I was in a good position. During tax-loss selling there are some great opportunities as investors suddenly say, "Well, I have to eliminate my taxes," and they sell stocks at some ridiculous prices. I keep a bit of powder dry to take advantage of that. I'm hoping that the work I did earlier this year will put me in a fairly good position to take advantage of that.
TGR: Thank you for your time today.
CO: Thanks so much.
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.
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1) JT Long 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: MAG Silver Corp., Tahoe Resources Inc., Fortuna Silver Mines Inc., SilverCrest Mines Inc., Mandalay Resources Corp., Roxgold Inc. and Colossus Minerals Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Charles Oliver: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.