The Gold Report: In 2017, gold has traded within roughly a $200 range, from a low of about $1,145 to a high of about $1,345. What do you anticipate in 2018?
Ralph Aldis: I anticipate that we'll see gold prices probably edge up again. Gold is very likely to rise in the first quarter of next year because of jewelry buying and seasonality-type factors that we normally get. I envision a range of $1,250 to $1,350 in price.
Gold prices are a wild card. They could swing as much as 30% in any given quarter, depending on price action and news, and we are certainly in a newsy-type world these days.
We don't do our investments based on getting a higher gold price. We try to buy stocks that we know will work at current gold prices. That's our game plan; we're not out there trying to buy projects out of the money.
TGR: When we spoke last July, U.S. Global Investors had just launched the U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU:NYSE.Arca), which is based on an algorithm that takes into account, among other things, selling, general and administrative expense to revenue ratios. And at that point, royalty and streaming companies were making up 30% of the portfolio.
Now that you've had six months as a functioning ETF, what have you learned? What companies have been the standouts?
RA: The royalty companies have not necessarily been the standout, but they certainly have not been a drag. They have been middle of the pack for the first six months' launch of the gold fund.
If I look at the performance of GOAU since June 28, the inception date, the GOAU fund is up 87 basis points over that six-month window. That doesn't sound spectacular. But if you compare it to the Market Vectors Gold Miners ETF (GDX:NYSE.Arca), which is a more mainstream product, that's actually down -1.6%. So we're 247 basis points better than the GDX. It's probably not necessarily comparable to the VanEck Vectors Junior Gold Miners ETF (GDXJ:NYSE.Arca) because the GDXJ is really much more of a smaller-cap space. I think that's down about 8% or so year-to-date.
Another benchmark could be the Sprott Gold Miners ETF (SGDM:NYSE.Arca). It looks at the beta that stocks exhibit to gold, among several other factors. That fund is off 60 basis points over that window, and we're up 87. Right now, GOAU is working as expected because you do all this back testing and very often, people don't do it very rigorously and the model gets trained to the historic data. So I think right now we're seeing good results.
Some of the companies that have been performing well: Kirkland Lake Gold Inc. (KL:TSX; KLGDF:OTCQX), since that date of inception, is up about 43.5%. Right now, the Australian miners are dominating, because after Kirkland Lake is Saracen Mineral Holdings Ltd. (SAR:ASX), up about 32.6%; Northern Star Resources Ltd. (NST:ASX), up 23.7%; and Santa Barbara Resources Ltd. (SBL:TSX.V), up 19.9%.
At the bottom of the list is Tahoe Resources Inc. (TAHO:NYSE; THO:TSX), off 49.24%, and we do know that's been largely on the court action in Guatemala. Klondex Mines Ltd. (KDX:TSX; KLDX:NYSE.MKT) is off 31.3%, and that's really off with shorting going into the index kick-out on the GDX. I'll talk more about that in a little bit. And then Silvercorp Metals Inc. (SVM:TSX; SVM:NYSE) is off 24.42%.
I have the Top 10, Bottom 10 displayed on the screen since inception. As I said, the royalty companies are in the middle. That's what we expect in that these are highly diversified companies. Because they have so many projects, they have largely diversified geologic risk away. They've been more stable than many of the mining companies. Some of the royalty companies have 300 to 400 royalties, and there aren't any mining companies out there that have that many projects. So, it is a highly diversified revenue stream.
TGR: Are there any royalty companies that stand out to you?
RA: Looking forward, Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) has Cobre Panama coming on. If that comes on as expectedâ€”start-ups are not necessarily always perfectâ€”it will be a huge contributor to Franco-Nevada in the coming year. When you look at the supplemental research book that Franco put out on its royalty equivalent units to try to help investors understand the space, Cobre Panama is 3,811 of the 11,618 royalty equivalent units on their Measured and Indicated Resources.
These companies typically do not get paid until the projects go into production; the market doesn't recognize it in the share price until you start seeing production coming online. That's why we think there'll be a rerating with Franco. Plus, with the oil transactions that Franco did in the past year, STACK was more of a buildout of the last bit of infrastructure, and so that one really just started paying this year, while the Midland Basin deal still has to ramp up. I think we're going to see some positive things for Franco-Nevada.
Hopefully for Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE), we would see a settlement of some kind with the Canada Revenue Agency. I don't have any recent updates on that, but if it can get that cloud off its back, I think Wheaton Precious Metals has very good prospects ahead of it, too.
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) has been a company that's been well managed historically and often gives Franco-Nevada a run for its money on who can be the best in the space.
Between the three of them, that's been a pretty good royalty portfolio and is the foundation of GOAU.
TGR: Here we are in December, so deep into tax-loss selling season. Do you have any battered stocks that offer real values that you would recommend investors take a look at?
RA: Klondex is one; it's been a long-time holding. The company has had a terrible year. It had an accounting change in the first quarter that wasn't communicated to the Street in what it meant in switching to U.S. GAAP (generally accepted accounting principles) when the analysts were calculating earnings based on IFRS (International Financial Reporting Standards). That surprised the Street and made it look like a miss. The company also didn't process all of its ore in the first quarter due to weather logistics, so people were thinking, well, that's not good. But it processed everything in the second quarter and got right back on track. Then in the third quarter, it was starting to process the Hollister ore but it was not seeing the recoveries that it wanted, so it stopped and said it had to make sure it tuned this out right. So, the company stockpiled some of the Hollister ore in the third quarter, and again, the market said, wait a second, you didn't process this and sell it. It got put in the penalty box with that.
Then you had the shorters come in during this last month or so, saying, hey, if we can knock the market cap down a little bit further, we can kick it out of the index and basically cover the short after that. And that's what has transpired in the past week. It did close Klondex below the price level, which will force it out of the GDX. Hence, you're going to have the selling coming, but a lot of it's already covered by the existing shorts that are out there. They'll pick it up.
Let me give you a contrast. When we bought Kirkland Lake back in early 2016, we could probably still easily see 100% on the current share price, and our model was telling us that we should be in Kirkland. And we loaded up on that. It was about 8% of our Gold and Precious Metals Fund, and it went to nearly 20% of the Fund. And we just continued to trim it down.
But with Klondex, on that same modelâ€”and these are very similar things in terms of being high-grade underground veinsâ€”Klondex is basically closer to a $7 value for us in terms of where it probably should be priced. That doesn't mean it's going to go there right away, but it's been there before. So, we think with all that's happened related to kicking it out of the index and earnings misses because of not processing ore, the stock is probably set up pretty good. For it to be down around 50% this year, that's probably more than it needs to be. And you have had tax-loss selling come in on that one. It was more than one little event that put it in the penalty box.
Another one we've seen some tax-loss selling on probably is Barsele Minerals Corp.. It's been knocked down as we've gone through the year.
Barsele had a resource calculation from 2012. Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) has a joint venture on the project, and it's doing all the work right now. Agnico had been working on this project for two years or so, but the resource it put out was pretty much the same as Barsele's 2012 resource in terms of the number of ounces. There are all these other areas with ore grade holes that were excluded as they were not contiguous with the main ore body, some drilling gaps left in the plan perhaps. Agnico did say that it had calculated a mineable resource. So, it was a little bit of trickery. You can't blame Agnico in the sense that you don't want to make a potential takeover target even more attractive. So that's one that I think Agnico has been biding its time on. It's in a very safe jurisdiction in Sweden. Agnico is already operating in that region. I think Barsele stands a good chance of having some good returns next year because Agnico now is putting out a monthly report to Barsele. That means Barsele can put out some news releases on a regular basis.
Another company that's also been hit, down close to 50%, is Algold Resources Ltd. (ALG:TSX.V). This is the original team of SEMAFO Inc. (SMF:TSX; SMF:OMX). It's been operating in Mauritania and it picked up a lot of the ground that Kinross Gold Corp. (K:TSX; KGC:NYSE) let go of after the Red Back Mining acquisition. It's been finding some very interesting results. Management, when they go, stay in-country. They're developing the right relationships within the country to move forward. That's one of the things that Kinross had problems with. When Kinross took over that project from Red Back, management didn't stay in the country. They moved it offshore. We've seen that they've had those labor problems periodically there. There's probably some potential to get Algold's share price higher next year.
Another one that is not very well known yet, but I think investors should be looking at, is a company called VR Resources Ltd. (VRR:TSX.V). The company has been public for about one year. It has a large property called Bonita in northwestern Nevada that is outside of the main gold trends that it has worked for several years. According to the press release that it put out recently on a new discovery about 50 kilometers away from some of the land it originally staked, some of the grab samples are double-digit copper with high silver concentrations, along with a reasonable amount of gold. It is going to do geophysics next and try to figure out where it's going to drill. Mike Gunning is the CEO, and he's well respected in the industry. He's doing good geologic work. That's probably just one of those gems that hasn't been noticed yet.
One last one that is probably undiscovered is a company called Barksdale Capital Corp. (BRO:TSX.V). The unique thing about it is it acquired the other half or the main feeder zones for Arizona Mining Inc.'s (AZ:TSX) property. Arizona Mining has a billion-dollar market cap, and Barksdale Capital has a market cap of $32 million. The property line goes right down between them, and Arizona Mining has drilled right up to that property line. Peter Megaw, a well-known economic geologist familiar with this type of deposit, is one of its advisers to Barksdale. To him, it looks like Barksdale has the feeder zone for what Arizona Mining has a billion-dollar market cap for. So there's just a huge valuation difference between these two companies. This is almost a lay-up in terms of just potential for price appreciation, I think.
In summary, for me, Klondex is one of the more compelling names. I think Barksdale Capital is an easy way to make money. I believe Barsele will get bought out at some point. It's one of my top holdings. I feel pretty confident about the reason I own these shares and what they should eventually do in terms of performance and price action.
TGR: Thank you, Ralph, for sharing your insights.
Ralph Aldis, CFA, portfolio manager of U.S. Global Investors, is responsible for analyzing gold and precious metals stocks for the World Precious Minerals Fund (UNWPX) and the Gold and Precious Metals Fund (USERX). In addition, Aldis serves as co-portfolio manager for the Global Resources Fund (PSPFX), Holmes Macro Trends Fund (MEGAX), All American Equity Fund (GBTFX), Emerging Europe Fund (EUROX), Near-Term Tax Free Fund (NEARX), U.S. Government Securities Ultra-Short Bond Fund (UGSDX), the China Region Fund (USCOX), and the U.S. Global Jets ETF (JETS). In 2011, and again in 2015, Aldis was named a U.S. Metals and Mining "TopGun" by Brendan Wood International. In 2016, he and Frank Holmes were named Best Americas-Based Fund Manager by the Mining Journal. Aldis received a master's degree in energy and mineral resources from the University of Texas at Austin in 1988 and a Bachelor of Science in Geology, cum laude, in 1981, from Stephen F. Austin University. Aldis is a member of the CFA Society of San Antonio.
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1) Patrice Fusillo conducted this interview for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or members of her immediate household or family own, shares of the following companies mentioned in this article: None. She is, or members of her immediate household or family are, paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this interview are billboard sponsors of Streetwise Reports: Wheaton Precious Metals Corp. and Klondex Mines. Streetwise Reports does not accept stock in exchange for its services. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Ralph Aldis: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I, or members of my immediate household or family, are paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this interview: None. Funds controlled by U.S. Global Investors hold securities of the following companies mentioned in this article, as of 09/30/2017: Kirkland Lake Gold Inc., Saracen Mineral Holdings, Northern Star Resources Ltd., Tahoe Resources, Klondex Mines, Franco-Nevada Corp., Wheaton Precious Metals Corp., Royal Gold Inc., Barsele Minerals Corp., Algold Resources Ltd. and VR Resources Ltd. I determined which companies would be included in this article based on my research and understanding of the sector. 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.
5) 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 immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article, until one week after the publication of the interview or article. As of the date of this interview, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Wheaton Precious Metals Corp., Franco-Nevada Corp. and Barksdale Capital, companies mentioned in this article.