The Gold Report: Gold has been hovering between $1,250 and $1,300/ounce ($1,300/oz). How have supply-and-demand factors shifted since earlier in the year, when things seemed more bullish?
Joe Foster: At the beginning of the year, gold was being driven by risk concerns. Investors started worrying about risk when we saw problems in emerging markets like Thailand, Turkey and, eventually, Ukraine. The Chinese economy seemed to be slowing down.
It was less of a supply-demand story and more one of people looking at gold as a safe haven and a hedge against some of the risks in the world.
TGR: Is the world less risky now than it was three months ago?
JF: I don't think so, but these things move in phases. Since then, the stock market is hitting new all-time highs, and people have become complacent again. The market is not that worried about risk right now.
TGR: You have talked about the impact of exchange-traded funds (ETFs) on the market. Do you see demand coming back for ETFs any time soon?
JF: I think the ETFs have stabilized. We saw inflows into the bullion ETFs early in 2014. We have seen some outflows the last couple of months. The best we can say is that ETFs have stabilized; the relentless selling pressure of last year is gone.
TGR: Has the rise of ETFs added volatility to the market that wasn't there five years ago?
JF: I don't think so. Gold has always been a relatively volatile market. The ETFs have added depth to the market, and they've brought people into the market who probably would not have been there otherwise.
TGR: A lot of people are saying that China, while still growing, is growing at a slower pace. Will that change in the near future?
JF: I'm not an expert on China, but I know a little about what drives gold demand in China. We have to look at two things. One is the wealth effect and the growing upper and middle classes in China. That creates demand for gold as an investment and as jewelry.
The second angle is gold as an investment asset. The Chinese don't have very many places to put their money outside of real estate, stocks and gold. Even in a weak economy, gold is a safe investment.
TGR: If India relaxes its import restrictions, as rumored, what impact could that have on the gold price and, by extension, the mining equities?
JF: If India should relax its gold taxation and its import restrictions, the impact could be big in H2/14. There is a lot of pent-up demand in India. That's one of the catalysts we're looking for as we move through H2/14.
TGR: Could that move gold up as much as 5% or 10%? If gold increased that much, how long would it take to move the gold mining stock prices up?
JF: One of the things missing over the past year was the seasonal pattern brought on by Indian demand. If we have a normal fall season in India, we would expect a stronger gold market moving into the fall and year-end.
I'm not sure about putting a number on that effect. With normal Indian demand, I could see the gold price at $1,300/oz, even $1,400/oz is not out of the question.
As far as gold stocks go, they're strongly correlated with gold. Where gold goes, the stocks will follow. I'm convinced of that. If we see strength in the gold market going into year-end, that will be reflected in the stocks.
TGR: A lot more mines are economic at $1,400/oz than they are at $1,250/oz, aren't they?
JF: Definitely. A lot of mines are struggling at current gold prices.
TGR: When we last talked, you were bullish on the prospects for the midtier and small-cap stocks. Is that still your sweet spot?
JF: We still like those companies. Even at current prices, we're finding companies that can grow. This year, we've had some exciting mergers and acquisitions (M&A) activity that has panned out for us.
TGR: You're talking about the Osisko Mining Corp. (OSK:TSX) deal?
JF: Osisko, yes, but we just had an announcement that Papillon Resources Inc. (PIR:ASX) is being taken out by B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX) and Sulliden Gold Corp. (SUE:TSX; SDDDF:OTCQX; SUE:BVL). We hold all of those stocks.
TGR: Is this the start of a lot more M&A?
JF: It's possible, but I don't think this year will be any different than the last couple of years. In the current environment, a lot of companies are undervalued. Management doesn't want to sell their companies if they're at low valuations. I think this will be a below-average M&A year.
TGR: So far this year, how are the stocks in the Van Eck International Investors Gold Fund doing?
"We added Castle Mountain Mining Co. Ltd. to the portfolio this year; it is redeveloping a property in California."
JF: The fund is up 11% year to date, though it doesn't feel like it, because all the positive momentum from early in the year has dissipated. That said, to be up 11% when gold's at $1,244/oz is an accomplishment. The stocks so far this year are outperforming gold. We've been looking for that for quite some time.
TGR: That's very impressive. What have been the top performers?
JF: Osisko, because of the takeover opportunity, has been a great performer. Other M&A targets like Papillon have also done very well.
Also, the royalty companies— Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) and Franco-Nevada Corp. (FNV:TSX; FNV:NYSE)—have done well for us. In the junior stocks, Roxgold Inc. (ROG:TSX.V) has performed well.
TGR: When you're looking at companies like Roxgold and Papillon, are you looking for geographic diversification or for individual companies that might have catalysts and good prospects?
JF: It's a process that looks at quite a few things. First we look at company management and the location of the properties to determine if there is any geopolitical risk. If there is geopolitical risk, we want to know how the management will deal with it.
Once we get comfortable with where the properties are located, it's all about the geology, the metallurgy and the engineering for the jurisdiction. It comes down to whether we think it can become a profitable mine in the future, or an attractive acquisition target for a larger company.
TGR: Do you want to talk about any of your Top 10 companies?
JF: Tahoe Resources Inc. (THO:TSX; TAHO:NYSE) is one; it's another good performer. It has done a fantastic job starting its mine in Guatemala. It's becoming one of the dominant midtier silver producers.
TGR: Have you held Tahoe for a long time?
JF: We've held Tahoe pretty much since the company was created.
TGR: Are most of your holdings long term? How much do you change the portfolio every year?
JF: We have very low turnover. We do a lot of due diligence. Once a company gets into our portfolio, we tend to hold it. As long as the company is doing the right things and creating value, we become very long-term shareholders.
TGR: What smaller holdings do you have, perhaps companies that are just starting to get traction?
JF: I would put Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB) in that category. It's developing some high-grade, underground properties in Nevada that we're excited about. It has a great management team.
TGR: When you visited the Klondex site, what excited you?
JF: It came down to the geology—very high-grade, near vertical veins—and it looked as if the mining isn't that complicated for an underground mine. The continuity of the veins and the overall geology of the deposit are such that it could become a very profitable underground operation.
TGR: Do you have some recent additions to the portfolio?
JF: We added Cayden Resources Inc. (CYD:TSX.V; CDKNF:OTCQX) and Castle Mountain Mining Co. Ltd. (CMM:TSX.V) to the portfolio this year. Both are works in progress. Cayden is doing some drilling, which we hope will prove meaningful.
Castle Mountain is redeveloping a property in California. It is doing studies, still figuring out the best way to go about it.
Both companies are working through issues, whether they be metallurgical or strip ratios or finding more ounces. Whatever the issues, they're robust properties that will enable them to create value as they develop.
TGR: Before you bring on a company, do you visit the site?
JF: Not always, but we do a lot of traveling. It just depends on the situation.
TGR: Are there any other companies you want to call out from the portfolio?
JF: Others that we think could become acquisition targets include Continental Gold Ltd. (CNL:TSX; CGOOF:OTCQX). Its project in Colombia looks really promising, a multimillion-ounce deposit.
Torex Gold Resources Inc. (TXG:TSX) has a Mexican property under development. That will be a big mine, and the project may become an acquisition target. Even if it doesn't, it will become a core cash-flow generator for Torex.
TGR: You have given our readers lots of good ideas to think about. With all that's happened in H1/14, how are you adjusting your portfolio to prepare for H2/14?
JF: I think the market is in the process of finding a bottom. Gold will probably struggle through the summer, but I think $1,200/oz should prove to be a solid floor under the gold price.
While we're in this bottoming process, we want to prepare the portfolio for the next upswing in the gold market. That's what we're doing now; using these times when gold has fallen out of favor to position ourselves in companies and get ready for the next upswing.
TGR: Makes sense, Joe. Thanks for your time and your insights.
Joseph M. Foster earned his Master of Business Administration at the University of Nevada-Reno and his master's in geology at its Mackey School of Mines. He joined Van Eck Associates' hard assets team in 1996. He currently serves as lead investment team member for its flagship fund, Van Eck International Investors Gold Fund, and investment team member of Van Eck Global Hard Assets Fund and Van Eck Worldwide Insurance Trust's Worldwide Hard Assets Fund.
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1) JT Long 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 employee. She owns, 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 Streetwise Reports: Tahoe Resources Inc., Klondex Mines Ltd., Cayden Resources Inc., Castle Mountain Mining Co. Ltd. and Continental Gold Ltd. Franco-Nevada Corp. is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services.
3) Joseph Foster: I own, or my family owns, shares of the following companies mentioned in this interview: None outside of participation in the fund. 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. Van Eck funds hold shares of the following companies mentioned in this interview: Papillon Resources Inc., B2Gold Corp., Sulliden Gold Corp., Royal Gold Inc., Franco-Nevada Corp., Roxgold Inc., Tahoe Resources Inc., Klondex Mines Ltd., Cayden Resources Inc., Castle Mountain Mining Co. Ltd., Continental Gold Ltd. and Torex Gold Resources Inc. 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.
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