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Mosseri and Loud: Hedge Your Bets
Source: Brian Sylvester of The Gold Report (9/1/10)
Everyday New York-based investment gurus Jeff Mosseri and Doug Loud make key decisions for their high net-worth clients. Many of those decisions involve strategically positioning investors in small- and micro-cap gold and silver plays. In this exclusive interview with The Gold Report, you will learn some of the names of those plays and how they use Mosseri and Loud as hedges against a failing economy.
Jeff Mosseri: We are paid by our clients to invest in small- and micro-cap stocks. We get very close to a company with a unique or very desirable product and that has recently had a problem or a corporate reorganization. We look for that problem to be solved by new management or with a new business plan. Then we look for an exciting growth picture over the next three years to five years, where we can make a lot of money for our clients. That takes us to mining because we believe that with the slow economy, the Fed will continue to print ad nauseam. The result of that will be that the precious metals, and probably all commodities, will benefit as a protection of buying power.
Doug Loud: As a policy, we hedge a great deal; we often take a hedge-based approach to lot of our precious metals investments.
TGR: Given the uncertainty in the economy and volatility in the markets, what advice are you giving your clients?
JM: Basically, we're expressing caution to our clients. We are as confused as everybody else about where this market is headed. That's why we hedge, because we really don't want to be committed to any one particular direction. We believe that the American economy will probably grow between 0% and 2% over the next three–five years. As such, we want our clients to look for very strong growth possibilities, which should be as immune as possible to the gyrations of the economy.
TGR: What did you think earlier this month when the Fed issued 10-Year Notes at 2.73%, which was the lowest yield ever?
JM: In Economics 101, we learned that part of the growth circle was for the money created to get into the hands of both the consumer and the investor. Right now, the money is circulating between the banks and the government. It's a closed circuit, and the rest of the economy is not benefiting. There is a lot of talk about the banks having all this money on their balance sheets; all they're doing is shoring up what was a huge hole in their balance sheets. They're just paying for past sins. As such, why would they lend to you or me when they can lend to the Treasury at 3.5% or 4% when they borrow at close to zero?
TGR: Could you give us your economic forecast through the end of this year and into 2011?
JM: We think that the big run-up in the market from the lows last year was caused by an anticipation of the numbers that we are seeing in today's economy. We think the fact that the market seems to have topped out and is heading south is basically an indication of where the economy is likely to go over the next several months.
TGR: What in the economy do you fear most?
JM: It's very simple. Everybody is afraid of uncertainty. Everybody is afraid of high taxes coming next year. Management at all kinds of companies is not making investment decisions in people or equipment because of this fear—of not knowing what their income statements will look like next year. They're also afraid of what demand will look like because the unemployment figures don't look particularly exciting either.
DL: You have lots of new regulations and laws coming into effect, but they don't yet have those regulations, so you don't even know what their impact will be.
JM: You've got 2,000+ pages each, in the new health plan legislation and the financial regulation bill recently passed by Congress. No one in Congress has read them all, and no one actually knows what's in there and how the regulations will affect them. Not knowing how your company is going to be taxed, or on what, makes hiring very difficult. They have the uncertainty of the extra charges that are going to come for every existing employee and each one they hire. They just don't know.
DL: You can't always pass all those costs on. Theoretically, manufacturers will push all the costs on to the consumers; but the consumers don't have any money, so that may not happen.
JM: That's why we are protecting ourselves to such a degree. There's a misconception that gold goes up under inflation and gold goes down in deflation. Gold actually goes down when there are higher interest rates. There are no higher interest rates right now. Gold will do well in inflation or deflation. The only thing it doesn't like is nothing happening; it goes sideways with nothing happening. But the key to gold, which people forget, is interest rates. With low interest rates, there are no costs of holding something. An old boss of mine once said, "gold is sterile, oil is cash flow." Well, it doesn't matter because if you own a producing mine, you'll have cash flow. Either way, we believe precious metals are the kind of place to hide until things get clearer and you know what you're doing.
TGR: Specifically, how are you going to protect your clients?
JM: By hedging—using ETFs, options and all kinds of vehicles to hedge them. We have only four places or "pockets" where we put money.
TGR: What are those pockets?
JM: Anything that comes out of the earth, which includes mining, minerals and energy.
TGR: You mean hard assets?
DL: Well, stocks in hard assets. We don't actually take delivery of the underlying commodities.
TGR: No, but those companies are producing something tangible.
DL: Yes, or explorers, who will.
JM: Exactly. The second pocket is anything that receives government expenditures because we believe that to be a great growth area over the next five years. Third is medical devices and biotechnology, and the fourth is technology. That's basically where we put the money. We consider those pockets to be protective.
TGR: Let's talk about gold and precious metals. What sort of clients do you deal with?
JM: I would say mid to high net worth.
TGR: In general, what's the asset mix for these clients?
JM: Well, we are approximately between 30% and 40% in cash. That's the first protection we have. Precious metals are a good portion of the rest, probably between 25% and 30% across precious metals, mining and energy. The rest falls into those other three pockets. We are protected against the U.S. dollar because many of the investments we have are outside the USD area. Actually, of the investments we have, I would say 60%–80%, depending on the time, are outside the USD area.
DL: We joke here that, if you buy a Canadian junior and it does nothing, you're still going to make money.
TGR: Because of the exchange rate?
DL: Absolutely. Next time you see gold or oil screaming upward, ask yourself: Is it up because it actually is worth more or just because the USD is worth less?
JM: We view gold and oil as currencies.
TGR: What are your thoughts on the gold price now and through year-end?
JM: We generally don't like to give specific prices or targets; but I suspect over the next few months, gold will work its way higher. Seasonally, gold tends to bottom out around this time of year, and then the next movement is up. We also think that the fundamentals are such that, as they continue to print dollars—and they will because they signaled that earlier this month—we think that will benefit gold, silver and any other store of value. It's buying power that's the key. That's what we're trying to protect. We are not trying to protect anything else. We're trying to protect buying power.
TGR: Earlier, you mentioned micro caps. A couple of the companies that you're fond of are Silvermex Resources Ltd. (TSX.V:SMR) and First Majestic Silver Corp. (TSX:FR; OTCQX:FRMSF). First Majestic produces silver. Silvermex remains an explorer. Why do you look favorably upon these companies?
JM: I'll let Doug take First Majestic, and then I'll take Silvermex.
DL: We really like to get to know management in the companies, so we actually go to the mine sites and things like that. We're old-fashioned that way. I just visited First Majestic's silver mines in Mexico. One of the great things about a producer, especially one like First Majestic, is that they're in the manufacturing business. They're producing silver, and it has more and more uses so it's easy to sell it. It's not like you build cars and now you've got to go sell them like car manufacturers have to do. And First Majestic keeps finding more silver. If you look at the company's plans for the future, they're constrained by their production capacity—not how much silver they've got. They'll produce more and find more. It keeps going around like that.
They're very well run. One of the things you have to pay attention to is the people on the ground. That's why we go see them. You get really great managers that show up in New York, but you've got to go see the guys working on the ground at the site. They have great depth of management there.
TGR: Are you talking about CEO Keith Neumeyer?
DL: Yes, and COO Ramon Davila, who runs everything down in Mexico. I mean when you're in Mexico, it's Keith and us gringos—and everybody else is Mexican. They are all very well spoken and educated, and everyone knows exactly what they're doing.
TGR: That helps get the locals on side, too.
DL: Oh, yes. They have lots of locals from the area.
TGR: Alright, Mr. Mosseri, what about Silvermex?
JM: In short, Silvermex has superb management that it's imported from Hecla Mining Co. (NYSE:HL) and from Silver Standard Resources Inc. (TSX:SSO; NASDAQ:SSRI), in Chairman Art Brown and President Mike Callahan, plus several other senior people.
TGR: When are they expected to bring Rosario into production?
JM: Before the end of next year.
TGR: Do you have a price target on Silvermex?
JM: Yes, I do; but, again, we don't give out specific numbers. Let's say they will be considerably higher than the price at which they did a financing about four months ago, which was CAD$0.45.
DL: The reason we do mining stocks is because you can later sell them in multiples of the original price. It's very disappointing if they only grow 5% or 10% in a year.
JM: But the key to Silvermex is great management, ease of production and low capital expenditures. They should have a capex of less than $25 million to put the mine into production. When they acquired Rosario, they bought basically everything (including the tailings ponds—everything except the mill itself). It should be relatively easy to put Rosario into production.
TGR: But the share price is slumping some now.
JM: We view it as a buying opportunity. In fact, we have bought stock around these prices.
TGR: Another company you follow is Paramount Gold and Silver Corp. (NYSE.A:PZG; TSX:PZG), which is also in Mexico. It has the San Miguel Gold Silver Project there and just did a deal with X-Cal Resources Ltd. (TSX:XCL), which owns the past-producing Sleeper Gold Mine in Nevada. These are both exploration plays. The market has not been kind to those lately. What's your take on this deal?
DL: I haven't seen Sleeper; I've been to San Miguel. We have great confidence in their ability to find good things. For them to be in the U.S., especially with all the money they have behind them now, they should be well ahead (after the takeover).
If you look at a map of Paramount's San Miguel Project, you discover that Coeur d'Alene Mines Corp. (NYSE:CDE; TSX:CDM) Palmarejo Project is at the other end of it. In fact, to get there, you have to drive on Paramount's roads. The mineralized system is sort of shaped like a big seven. There's all this silver in the seven. Then, in the armpit of the seven, are two gold domes. Paramount is bringing San Miguel along and drilling it out. Now they've gone off to get the Sleeper Project, which should turn out very well for them. I haven't seen it yet, but I know people who have and they liked it very much.
TGR: They are trying to establish themselves as a takeover target?
DL: Possibly; a lot of companies do that. A lot of the work companies do makes it look like they'll mine it, but they're really de-risking the project. Having studies already done makes a buyer feel better, because that's money they don't have to spend if they take over the company.
When the Spanish arrived in the 15th Century, with a cross in one hand and a pick in the other, they could mine only what they saw. They couldn't go below the water table, so there's all this stuff at San Miguel where this artisanal work was done. And now they're finding lots more. It's very exciting down there.
TGR: Do you think we're going to see more M&A in this sector as commodity prices rise?
JM: Definitely, because what's happened is that the usual sources of cash have pretty much dried up. It's very tough to get financing. There are lots of junior explorers with very exciting projects that don't have the money to take them to production or continue to develop them. Those will be takeover targets.
DL: This so-called de-risking costs a lot of money, in terms of the extra drilling and more studies, and a lot of companies can't afford it.
JM: I think it's more a question of ounces than money.
DL: Yes, there's a whole game of how many ounces do you have. And not all ounces are created equal. As an explorer gets closer and closer to being eaten by a producer company, the price goes from $30 or $60 per-ounce-in-the-ground to $100 or, in some cases, $200/oz. This depends on location, grade and ease of production, plus the amount of estimated capex required to get into production. These days it's a buyer's market. The producer sometimes can get the ounces for under $50–$60.. But, once the deal is done, the explorer ounces with a low value now get valued at the producer's higher value.
TGR: Do you see some specific takeover targets among the junior gold/silver explorers?
JM: Yes, we hope we own a lot of them.
DL: That's a tricky question. It's very hard to tell because the buyers aren't always who you think they will be. A couple of years ago, everyone thought various projects were going to be eaten by larger North American companies, for example. Then, out of nowhere, comes an unknown Chinese smelting company.
TGR: Indeed. Let's look at some other Latin American explorers. There's Extorre Gold Mines Ltd. (TSX:XG; Fkft:E1R; OTC:EXGMF), which has the Cerro Moro Project in Argentina. I believe Doug visited that project.
DL: Awhile back, Exeter Resource Corp. (NYSE.A:XRA; TSX:XRC; Fkft:EXB) basically divided its assets. Exeter took the Chilean properties; the Caspiche copper-gold porphyry is the big one. There's also a little one called Zodiac and you get to it in a Zodiac boat, which is why they call it that. All the Argentinean properties went into Extorre.
The guys who run Exeter are really smart, and they're really good at what they do. They went out and got all these projects that the big guys couldn't be bothered with, started exploring them and found wonderful things. There are about 30 projects, other than Cerro Moro, inside of Extorre that they can work on.
TGR: What are the production prospects for Cerro Moro?
DL: They intend to go into production at Cerro Moro within two years, but I'm not sure they will need to. That project could well be taken over before they get it into production. I can tell you this—four small children with some buckets and a spade could work Extorre. The stuff's sticking out of the ground. When I was there with some silver guys, they just went crazy; they grabbed their rock hammers and were whacking away at pieces of outcropping rock. The mineralization gets even higher grade deeper down.
TGR: Andean Resources Ltd. (TSX:AND, ASX:AND) is probably the most talked about gold play in Argentina right now. It certainly has a lot of institutional support. It's over $4. Extorre is around $3.50. Do you see Extorre, and to a lesser extent, Exeter being undervalued right now?
JM: We do.
DL: In theory, somebody is going to come along and eat Exeter. It could take a price in the mid-teens or higher to get that big porphyry. There are all sorts of companies that just want copper/gold porphyry deposits, including their next-door neighbors, Barrick Gold Corporation (NYSE:ABX; TSX:ABX) and Kinross Gold Corp. (TSX:K; NYSE:KGC). Their Cerro Casale property is very close to Exeter's Caspiche, if you look on the map.
TGR: Copper/gold porphyry deposits seem to be fetching a premium right now.
JM: Usually, the grades are lower in porphyries than they are in vein systems; so they have to be very big, and Caspiche is very big.
TGR: That's why copper/porphyry deposits are developed almost exclusively as open pits.
DL: Yes, Exeter's management jokes that when they get their pit built, you'll see it from space. The more important thing is that Barrick's getting ready to go to work next door at Cerro Casale. That will provide a lot of infrastructure in the area because both projects are in the mountains.
TGR: Are both projects part of the same mineralized system?
DL: They're not the same system, but they're right next to each other. Think of two footballs standing together on a shelf.
TGR: Just about every company that we talked about today has a Latin American connection. What do you like about South America and Latin America?
JM: It's not just South America and Latin America—it's the whole Americas' land mass. We believe there are serious metal deposits all the way up the Andes and the Rockies. That doesn't mean they are not anywhere else. We just feel very comfortable with that area. We own shares in a lot of companies operating in Canada; we have plenty in Mexico, South America and in the United States, as well. We look for jurisdictions that are friendly to mining and friendly to oil and gas. They also tend to be in that North-South axis.
DL: We're really not as interested in Indonesia, Kurdistan or places like that. There are one or two projects we like in Africa; but, other than that, we're not interested because there's too much other trouble in those jurisdictions—and we always try to minimize risk.
One point I would like to make is that we've talked about producers with First Majestic and Silvermex and explorers with Paramount and Exeter. What's nice is that the producers also continue to explore.
TGR: So there's a catalyst for growth.
TGR: Do you have some parting thoughts for us today?
JM: There's a whole world out there. The U.S. and Europe may or may not be going in the right direction. But there's a whole world out there that is growing very nicely. You've got huge demographic pressure on food and fertilizers, those kinds of things. Those demographic pressures are not going away. Even with the one-child rule in China, its population is growing. India's population is growing very fast. Brazil's population is growing. They need to gentrify those populations. It's imperative because the alternative in those lesser-developed countries is revolution. No government wants that.
DL: Let's say you just give everybody in India, who wants one, a refrigerator and the electricity to run it, then we don't have enough copper. And that doesn't count China's need for copper.
Jeffrey N. Mosseri, president, established Greystone Asset Management in November 2005 and joined Axiom Capital Management Inc. in May 2009. Before serving as Greystone's president and as Murphy & Durieu's director of Private Clients Group from November 2005 until May 2010, he worked for 20 years as a stockbroker and investment manager at Goldsmith & Harris. Previously, he worked for seven years as a stockbroker and investment manager for Carnegie Capital, the investment advisory division of Prescott Ball & Turben, where he also ran the international arbitrage division and developed the gold mining research and investment department. Prior to that, he was a stockbroker and investment manager at L.F Rothschild in Montreal and at White Weld & Co. Mr. Mosseri holds a Masters Degree in International Affairs from the Graduate Institute for Higher International Studies, Geneva. He currently holds the Series 7, 24 and 63 licenses from FINRA.
Douglass N. Loud, executive director, joined Greystone at its founding in November 2005 and has been executive director of Axiom Capital Management Inc. since May 2009. Prior to that, he was with Murphy & Durieu from October 2005 until May 2009, where he served as executive director of the Private Clients Group. He has over 35 years of investment management and securities industry experience. He is a graduate of Phillips Exeter Academy, Yale University and has a law degree from the University of California, Berkeley. He is admitted to practice law in New York and Hawaii and is a member of the Board of Trustees and the Executive Committee of Fay School, Southborough, MA. He currently holds the Series 7, 9, 63 and 66 licenses from FINRA.
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1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his 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: Exeter, Extorre, Silvermex and First Majestic.
3) Jeff Mosseri and Doug Loud: We personally and/or our families own shares of the following companies mentioned in this interview: Paramount Gold and Silver, First Majestic, Exeter, Extorre and Silvermex. We personally and/or our families are paid by the following companies mentioned in this interview: None.