The Gold Report: "Sell in May and go away" is a common investing axiom but does it have any validity?
Charles Oliver: I recently went through some research on seasonality in the gold price. March has been negative in the gold space in six of the last eight years, April has proven negative four out of the last eight years, and May and June have both been negative five of the last eight years. However, we see a fairly dramatic turnaround in July where six of the last eight years have been positive. In August, another six of the previous eight years have been positive; September has been positive five of the last eight years. The "sell in May" adage could actually represent a great buying opportunity on the pullback.
TGR: What are some investment themes you expect to dominate through the rest of the year?
CO: It really comes down to printing money. The U.S. has reduced its money printing but it is still aggressively printing. Now we're hearing about the Europeans potentially getting into quantitative easing. The debasement of currencies is an ongoing theme.
The other key theme is the demand for physical gold. China has become the world's largest gold buyer, consuming about 40% of the world's mine production. India, which historically had been the world's largest gold consumer, has established some tariffs on gold imports, so there's been some pullback there.
It's noteworthy that over the last couple of decades the European central banks have been collectively selling gold. That stopped a couple of years ago. Some numbers from the Swiss Customs Authority show that Germany, France, Singapore, Thailand, even the United Kingdom, are fairly significant gold buyers. These are very positive events.
TGR: What about geopolitical events? Do you expect those to dramatically influence gold prices?
CO: Historically, wars and the risk of wars have been quite positive for the gold price yet recent events in the Ukraine haven't seen gold do anything. In fact, it's trading near the bottom end of its recent range. But should things escalate, I feel strongly that it will have a positive impact. I certainly hope that it doesn't come to that but the risk seems significant.
TGR: What is the investor pulse in the precious metals space?
CO: A year ago investors were selling a little, as they had been for some time. The selling had mostly stopped by the end of the 2013 and the people who didn't have long-term conviction had left. In early 2014 I was a bit surprised to see U.S. value investors streaming in because we had been through a period of net redemptions. When the Americans come into the market they can have quite a dramatic impact on prices. I'll call it sporadic because it has not been a consistent stream.
TGR: What happened to those bids?
CO: Generally speaking, American investors, portfolio managers and pension funds were saying at the end of 2013, "We've had some good returns in the general market but the market is looking somewhat expensive." They were looking for areas where there was good value. The gold price had been hammered over the last couple of years so they were starting to move some of their allocations into that space. We've also seen some private equity buying assets and taking them private. And some Asian interests dipping their toes in the water. People are starting to wake up and show some interest but they are still waiting for some sort of trigger in order to say that this is the time to jump in.
TGR: Any idea what that could be?
CO: I've spent a lot of time thinking about that question. I liken the 1974 to 1976 period to today. In 1974, the oil price was going up after the oil embargo and inflation was going up, too. It was peculiar because the gold price went from about $200 per ounce ($200/oz) to $100/oz over the next couple of years. Then in 1976 gold suddenly went from $100/oz to about $800/oz. I have spent a lot of time trying to determine the trigger for that event. Sometimes it is just time. When I look back at 2013, I see a lot of positive fundamentals—strong Chinese demand, huge amounts of money printing—yet the gold price went down. Sometimes it's just the way the markets time themselves.
TGR: Do investors need to revise their price expectations for precious metals equities? There is zero froth in this market.
CO: I think that's a good way of putting it. I'm continually trying to figure out where the market may go. Not too long ago I said that by the end of this decade gold should be approaching something like $5,000/oz, which would have a huge impact upon the markets and stock valuations. The market is valuing equities as if gold is going to stay at $1,200–1,300/oz forever. I believe that the market will be proven wrong over time.
TGR: Gold is trading at roughly 67 times silver. Does that make silver your preference?
CO: Yes. It was Eric Sprott who came up with the thesis and I fully embrace it. For over 1,000 years, the silver-gold price relationship was close to 16:1, so that implies that if gold is $1,600/oz, the silver price would be $100/oz. The last time that happened was 1980 when the gold price was roughly $800/oz and the silver price was around $50/oz. Over the next couple of years, I expect to see that 67:1 ratio migrate toward 16:1.
TGR: Yet the trend is moving in the opposite direction.
CO: In the short term sometimes these things happen. About 25% of the weighting in the Sprott Gold and Precious Minerals Fund (SPR300:TSX) is in silver equities, which is probably among the highest in the peer group for precious metals funds.
TGR: What's your investment thesis for silver versus gold?
CO: About two-thirds of mined silver is used in industry, whereas gold has virtually no industrial usage. Gold is considered a reserve currency whereas silver is not. About 150 years ago many countries had silver reserves backing their currencies. Today they don't but China has trillions of U.S. dollars that it is converting into hard assets. The Chinese are buying a lot of gold but if they ever decide to be a silver buyer we would see a huge shift in the price of silver. Look at every mined commodity out there today—copper, nickel, zinc, iron ore—China accounts for 40–50% of global consumption.
TGR: Is it all about margin for precious metals equities?
CO: A lot of these companies are producing gold at $1,000/oz or silver at $18/oz. Should silver go up to $30/oz, that $2/oz margin suddenly becomes $12/oz—a sixfold increase. Shifts in commodity prices could have huge impacts on the profitability of these companies.
TGR: Tell us about some of your top silver holdings.
CO: Among my top 10 silver holdings, I have Silver Wheaton Corp. (SLW:TSX; SLW:NYSE), Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) and Tahoe Resources Inc. (THO:TSX; TAHO:NYSE), which operates one of the world's newest silver mines. I visited Tahoe's Escobal mine in Guatemala earlier this year to check out its ramp-up period because that can be challenging. The company is doing a very good job of ramping up to nameplate capacity. Tahoe's Q1/14 results beat the expectations of most analysts and a number of them are revising their forecasts upward.
TGR: I thought the Osisko story was finished.
CO: A byproduct of the Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE)/Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) takeover bid for Osisko is a potential Osisko spinout company. For every Osisko share, investors would own one share of the spinco. It means roughly 15% of an Osisko share is represented by the value of the spinco and the other 85% consists of shares in Agnico-Eagle, Yamana and cash. An Osisko shareholder today will end up owning a combination of all three companies, plus the cash component of the offer.
One thing that keeps me excited about the spinco is that it is going to have a 5% royalty on the Canadian Malartic gold mine. It would also have a 2% royalty on the Hammond Reef and Kirkland Lake assets, as well as a large land package in Mexico. The Osisko spinco would be Canada's newest royalty company and royalty companies often get a premium valuation.
TGR: Does the new company have a ticker?
CO: Osisko shareholders will have to vote to accept the Agnico-Eagle and Yamana bid. I expect it will pass and the Osisko spinco should be trading sometime in June.
TGR: Osisko was targeted largely because it had a large low-grade, low-cost asset in a safe jurisdiction. Does that make companies like Detour Gold Corp. (DGC:TSX) and Tahoe Resources takeover targets?
CO: Certainly both Detour and Tahoe would fit the model sizewise. Goldcorp Inc. (G:TSX; GG:NYSE) walked away from the Osisko bid and clearly it wants to continue to grow through mergers and acquisitions. What will Goldcorp do? I'm not expecting the company to come out tomorrow and make an acquisition on either of these names, but I think it will certainly do the diligence work.
Goldcorp already owns 40% of Tahoe, which has a world-class asset with world-class operating statistics. Goldcorp is already in Guatemala; I'm not sure if it wants to increase its weighting there.
In the case of Detour, yes, it's in Canada, and from that point of view, quite attractive. Detour is still in the ramp-up stage and perhaps it has finally reached the point where it is producing and reducing its cash costs. But I think Detour is still a year behind Osisko on that front.
TGR: Detour just published Q1/14 results. It had an adjusted net loss of $0.20/share, while it produced roughly 107,000 oz gold. Your thoughts?
CO: I was impressed at what Detour was able to achieve because it was a tough winter. I had some concerns that the weather might have proven to be an impediment, but the company produced a significant amount of gold. I think the grade was 0.9 grams per ton. Some of that was from stockpiles to buffer the grade at the mill. There are always a few bumps in the road but Detour has done very well.
TGR: In early 2013 that stock was above $25/share. Now it's about $11/share. What's going to get it back above, say, $15/share?
CO: A couple of things. As I said earlier, I believe the gold price is going higher. With higher gold prices come higher margins. And I think the market is still putting a discount on Detour as it's in the ramp-up phase. As the company brings down cash and operating costs quarter by quarter and approaches Detour Lake's nameplate production capacity, the stock will get back to a higher valuation.
TGR: Do you have any more gold names for us?
TGR: What is the Dalradian story over the next 18 months or so?
CO: The company will continue to derisk the Curraghinalt project in Northern Ireland. Dalradian will go underground and through further drilling convert a fair amount of the Inferred resources to the Measured and Indicated category. As the market gets confidence with those numbers, it will start to rerate the company. A lot of people were concerned about whether mining would occur in Northern Ireland. To address that, Dalradian is looking to make a concentrate instead of using cyanide. The company is doing things that will ultimately make it more attractive.
TGR: Why do you own Asanko?
CO: It used to be called Keegan Resources. The management of Asanko bought into the project for around $27 million. These are the people that ran LionOre Mining, which under a decade ago was the subject of a bidding war between Xstrata Plc (XTA:LSE) and Norilsk Nickel Mining Co. (GMKN:RTS; NILSY:NASDAQ; MNOD:LSE). They're good people with good operational experience. Asanko merged the PMI Ventures assets with those that were in Keegan and now has two projects within about 10 kilometers of each other, which are expected to have synergies. The company also has a significant amount of cash.
TGR: The Sprott Gold and Precious Minerals Fund has held positions in Pretium Resources Inc. (PVG:TSX; PVG:NYSE), Guyana Goldfields Inc. (GUY:TSX), Unigold Inc. (UGD:TSX.V) and Kirkland Lake Gold Inc. (KGI:TSX). Does it still have positions in those names?
CO: Pretium and Guyana are among my top holdings. Unigold, which you mentioned, is a small-cap name in the Dominican Republic. Unfortunately it has been the victim of the small-cap market where investors have turned their backs on these types of companies through no fault of management. I think Unigold has an interesting property with lots of opportunities and drill targets, and could potentially have a mineable resource one day.
TGR: Guyana Goldfields' flagship Aurora project has outlined 6.5 million ounces Measured and Indicated, yet the stock price is falling.
CO: The company is at the point where it is ordering equipment, getting its financing in place, and then it will start building and moving Aurora forward. Again, it's time and execution.
TGR: Pretium had a bumpy ride in 2013. Do you still have faith in management?
CO: Yes. I visited Brucejack in British Columbia last year. It's a "nuggety" project that's difficult to model. It takes a lot of drilling to get that necessary level of confidence. Last year the company processed a 10,000-ton bulk sample that produced around 6,000 ounces (6 Koz) or about 0.6 ounces per ton. In February, Pretium sent another 1,000-ton sample to the mill and it produced around 3 ounces gold per ton. The important thing to look at with this company is that there is lots of gold underground; the model still needs work to figure out how best to mine it. Pretium is proceeding with further studies on Brucejack, but I think it will be a mine. It's also a potential acquisition as it is a high-grade deposit in Canada.
TGR: Kirkland Lake Gold forecasts roughly 126 Koz in production in 2014. Is that realistic?
CO: It will probably come close to that number. Kirkland Lake has a new CEO, George Ogilvie, and a fairly dramatic change in ideology. A couple of years ago the company was focused on mining everything in the mine. Ogilvie is focused on mining more profitable ounces.
TGR: I understand that Kirkland has been attempting to lower costs. Is that working?
CO: Kirkland Lake is not yet profitable, but it has instituted a new program to mine higher grades. It will focus on the high-grade ore because that is where it will make a profit. This is the same strategy that Rob McEwen put into place at the Red Lake mine. I think Kirkland has huge potential but it ultimately comes down to strategy execution.
TGR: In March you said that gold would reach $5,000/oz within a few years. That seems optimistic.
CO: It's based on the historical relationship between the Dow Jones Industrial Average and the gold price. Over the last 100 years there have been three times when it has cost 1 to 2 ounces gold to buy the Dow. The last time was 1980 when the gold price was $800/oz and the Dow was 800.
People roll their eyes when you forecast big numbers. In 2004 or 2005, I said gold would reach $1,000/oz. When it reached $1,000/oz, I moved to $2,000/oz and we almost got there. With the willingness of the market to continue to print money, I believe that we are going to get that 2 or 3 to 1 relationship with the Dow. With the Dow at 16,000, I think $5,000/oz is achievable. It's not really that the gold price is increasing, it's that paper currencies are depreciating in value.
TGR: Thank you for your time and commentary, Charles.
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) Brian Sylvester 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 independent contractor. He owns, or his 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: Guyana Goldfields Inc., Pretium Resources Inc., Tahoe Resources Inc. and Unigold Inc. Goldcorp Inc. is not associated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services.
3) Charles Oliver: I own, or my family owns, shares of the following companies mentioned in this interview: None. 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. The Sprott Gold and Precious Metals Fund owns all the companies mentioned in this interview. 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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