For all the talk of gold sinking remorselessly to $1,000 an ounce, the metal has risen to $1,200 per ounce and has held its ground. Have we seen the bottom? Money managers Doug Loud and Jeff Mosseri of Greystone Asset Management say that if we haven’t seen the bottom, we will soon. In this interview with The Gold Report, they predict that the next bull market will result in patient investors realizing gains in the multiples and suggest several companies poised to break out.
The Gold Report: David Stockman noted Nov. 13 that after an 8% correction in October, equities came roaring back, gaining 12% in less than a month. How long can this last?
Jeffrey Mosseri: It’s really a question of interest rates. As long as they remain close to zero, equities can continue to run with periodic 5–10% corrections.
Douglass Loud: And I don’t think the Federal Reserve wants to raise interest rates. If it does, the U.S. government will have to pay more interest on its debt, and that would be difficult, given all the money it’s been printing.
TGR: Sure, but stocks can’t have an infinite value. There must be some correlation between actual worth and share prices.
DL: That’s the theory. Look at 1929!
JM: What we don’t know is what happens in a period of extended zero-interest rates. In the 1980s and 1990s, we had low interest rates for a short period of time, and the price-to-earnings (P/E) ratios reacted accordingly. Those P/E levels we have today do not seem as out of whack as what we had then.
DL: And these high P/E ratios are not yet manifested in a lot of stocks. A few hot stocks with large P/E ratios greatly influence the entire S&P 500.
TGR: Tech stocks in particular are characterized by high P/E ratios. Are they vulnerable?
JM: They’re always vulnerable. But the hedge funds are piling on so as to have better results by the end of the year.
DL: When the end of the year comes, if they are not in Apple Inc. (AAPL:NASDAQ), Alibaba Group (BABA:NYSE), Ambarella (AMBA:NASDAQ), those kind of companies, their clients are going to wonder why not. So the hedge funds are buying them, but who knows what will happen after Jan. 1.
“Exeter Resource Corp. has always been extremely well run.“
JM: Will we be in a bubble then? There’s a very strong case to be made that we will.
TGR: Why aren’t gold stocks benefiting from this equities blowout?
JM: They should. I use the metaphor of the U.S. dollar being the cleanest dirty shirt in the laundry basket. Most people have forgotten, however, that there is a clean shirt in the laundry basket, and that’s gold.
DL: Gold is denominated in U.S. dollars, so when the dollar goes up, gold goes down.
TGR: Doug, when we last spoke in July, when gold was around $1,300 per ounce ($1,300/oz), you said, “There are games going on. Institutions can profit by shorting gold and then buying it back before it rises in price or so the conspiracy theorist in me thinks.” Some conspiracy theorists are now saying that these institutions are determined to bust gold down to $1,000/oz. What do you think?
DL: These institutions short gold and write reports saying that gold is terrible and investors better get out. Then, after the price falls they can buy and cover their shorts. The price turns around, and the institutions can say it’s time to for the investors to get back in. I’m not sure that the trader knocking the price down ever talks to the institutional adviser. He’s not supposed to, but you never know.
JM: I’m not sure that the shorts can get gold down to $1,000/oz. There is tremendous physical buying, particularly in Asia, and central banks are buying as well. The U.S. and Canadian Mints have stopped making silver coins because they’ve run out of silver. Demand for gold and silver bullion is quite high, but the paper market is about 50 times the size of the physical market. So games can be played in the paper market.
TGR: Something interesting happened Nov. 7 and 14. On Nov. 7, gold went up 3.15%, and on Nov. 14, it went up 2.3%. And these gains have not been reversed. Have we reached a bottom?
JM: It’s difficult to pinpoint. One positive factor is that gold has broken through an important technical number at $1,170/oz. Both gold and gold stocks have been beaten down to such a degree that value hunters have come in.
DL: Geopolitics is also involved as well. On one of those Fridays, it was discovered that Russia had sent 32 tanks, trucks and supplies into Ukraine. Vladimir Putin hasn’t gone away, and neither has Ebola.
JM: Or ISIS.
TGR: The bear market in gold equities is now in its fourth year. If ordinary investors come to the conclusion that gold is a rigged game they can’t win, won’t the gold space become a ghost town?
JM: If you go to some of these gold conferences, it seems like it.
Many marginal explorers have gone bankrupt or have been taken out, but there is still some cleansing that needs to be done. What’s interesting about this bear market is that the classic relationship between gold and gold stocks has been reversed. Gold has led the stocks down and not vice versa. We are seeing signs in the last month that the classic relationship is being re-established, with gold stocks leading the metal up. This gives cause for optimism.
DL: Another thing to remember is that efficient, producing gold miners are always finding more gold. If you own the miner instead of the metal, there’s always going to be more gold under the stock, and you’re going to be more liquid. One of these days all this will pay off. There are funds being set up to buy cash-poor companies with good projects. They’ll eventually make a lot of money, if they’ll just be patient. And when the gold and markets pay off, they pay off in tens of multiples. Not so long ago, Seabridge Gold Inc. (SEA:TSX; SA:NYSE.MKT) was $50 a share, not $5.
JM: The trillions of dollars created by central banks are chickens that will one day come home to roost. Eventually, people will flee from paper currency to gold.
TGR: Silver, unlike gold, is primarily an industrial metal. Yet it has fallen in lockstep with gold. Why?
JM: Silver is an industrial metal, no question, but it is also a precious metal and regarded as such. For instance, India has now forbidden the ownership of gold, and the Indians are buying silver instead.
DL: The silver to gold ratio, which was previously at 50 or 60:1, is now 70:1. I think this ratio must come down. But does gold fall, or does silver rise? I don’t know.
TGR: How do you rate the prospects of the pure silver mining companies?
DL: I love First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE). Many people got all bent out of shape when the company announced supposedly negative Q3/14 earnings. If you read the press release, however, you’ll find that the company kept close to a million ounces of silver off the market, hoping to get a better price. Which First Majestic did, but this won’t be reflected in earnings until Q4/14. First Majestic is always finding and mining more silver. It is doing what it is supposed to do.
TGR: Do you think that other companies, gold and silver both, will follow First Majestic’s lead?
DL: I think that in the future we’re going to see two types of mining companies. There will be companies like First Majestic that are in the silver market, and then there will be companies that are basically in the manufacturing business.
TGR: The day after First Majestic’s Q3/14 report, it’s stock was up $0.51, 9.4%. Does this suggest a breakout from the bottom for silver stocks?
JM: We hope so.
DL: It’s also a matter of investors doing their homework and actually reading the report.
JM: First Majestic’s stock price will bounce back because investors are looking for good management. This company cuts costs consistently and dramatically. We should see the results next year. When the market turns around, the leverage of such well-managed companies will be quite dramatic as well.
TGR: Do you have any thoughts on other pure silver miners?
JM: We like Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE).
DL: And MAG Silver Corp. (MAG:TSX; MVG:NYSE).
JM: Companies like these will lead the rebound.
TGR: You have a particular interest in the Yukon. How do you rate this jurisdiction?
DL: Yukon miners have a big regulatory problem. They now have as many regulators as Nevada, which has, of course, a many times larger mining industry. Take Alexco Resource Corp. (AXR:TSX; AXU:NYSE.MKT). It worked out a deal with Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) and built a mill. Then Alexco found far under the mill a whole other possible mine, which it wants to build. But the Canadian federal government has passed a Yukon environmental bill, which in my opinion could only have been devised by people who know nothing about mining.
Alexco has an entire district, and now whenever it finds more ounces at any of its more than a dozen sites, it must redo the paperwork on all its individual mining sites. These regulations must be changed. Otherwise, Yukon miners will not be able to get any investment. Some people are hopeful it will take a year or two to get them changed, and, if they do, the situation should turn around.
Another one of our Yukon favorites is Golden Predator Mining Corp. (GPY:TSX.V). The company published a new preliminary economic assessment Nov. 12 showing an all-in life-of-mine capital expenditure of only $89.4 million ($89.4M). But Golden Predator is stymied because of the new regs. It’s almost as if the regulators don’t want any mines, even though we need the jobs very badly.
TGR: Why are politicians so unfriendly to miners?
DL: Miners work with their hands and don’t give a lot of money to political parties. Take, for instance, our good friends at PolyMet Mining Corp. (POM:TSX; PLM:NYSE.MKT) in Minnesota. The company bought the plant for its NorthMet project and has huge reserves ready to be produced: 72 million pounds of copper (72 Mlb), 15.4 Mlb of nickel, 720,000 pounds of cobalt and 106,000 oz of precious metals annually. This is a whole mining district. It’s taking PolyMet forever to get permitted. It doesn’t make sense, except maybe politically.
TGR: Doesn’t this suggest that the mining industry needs to step up its PR and lobbying and to teach the politicians how many good jobs mining creates and how beneficial mining is to the economy?
JM: Yes, absolutely. It takes a high level of pain to get people to move, and I think we’ve reached that level. The miners are getting together, and their voice will be louder.
TGR: What other Yukon projects do you follow?
DL: I love Victoria Gold Corp. (VIT:TSX.V). I have been there and like what it has been doing. It has 2.3 million ounces (2.3 Moz) gold at Eagle and will produce it at $600/oz.
TGR: There was an article at Seeking Alpha recently stating that Victoria is a possible takeover target for Kinross Gold Corp. (K:TSX; KGC:NYSE).
DL: That was interesting. A lot of the big companies that go around eating other companies have a lot of issues of their own these days.
The article also mentioned Exeter Resource Corp. (XRA:NYSE.MKT; XRC:TSX; EXB:FSE). Exeter is a very special situation. Everybody thinks that Caspiche is this gazillion-dollar project 14,000 feet in the Chilean Andes, but in reality there are 2 Moz of oxide that can go straight to doré bars. That’s a much more doable project for a company like Kinross. Exeter has almost as much cash as its market cap; it’s always been extremely well run.
I’m pretty sure Exeter is going to find a way to get Caspiche running. If it means selling out to another company, that might happen. I would also point out that besides the 19.3 Moz gold, it has 4.62 billion pounds of copper buried under the oxide. There are a lot of people who’d love to get their hands on that copper at the right price, specifically the Chinese.
TGR: Are we going to see a flurry of takeovers of well-managed companies with products but low share prices?
DL: Definitely. The situation for so many miners today is similar to that of the beautiful but poor maiden of Victorian times. Sometimes her only salvation was to marry the mean old miser because he was the only person who could save her family’s house and farm.
Not so long ago, miners got money every three months. Need another million? Sure. This can’t happen today because the money’s no longer there. After the financial crisis, the mining stocks got dumped, and many of the funds that bought these stocks disappeared. Now, if we get a couple of high-priced acquisitions, this will bring attention back to the gold space.
TGR: Which other companies are you keen on?
JM: There are a couple I’d like to highlight. One is HudBay Minerals Inc. (HBM:TSX; HBM:NYSE), a copper producer that also produces gold. The company has changed management, and it was a change for the better. HudBay is about to turn on the Constancia mine in Peru, and this will increase production greatly.
TGR: HudBay has expanded rapidly. How well has the company handled this?
JM: Extremely well. It has bought Augusta Resource Corp. and its Rosemont project in Arizona. I like HudBay very much. This is a New York Stock Exchange company. It’s one that a lot of people can buy. Unlike other metals, copper has held its ground. It remains above $3.
TGR: If the price of copper rises, as many think it will, which companies besides HudBay would benefit?
JM: The natural reaction of most institutions would be to buy Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE). It’s a company they know already. I think they’ll be buying it for the wrong reasons, however, because the big leverage in Freeport will be when its gas properties really start paying off. That will happen in the next two to three years.
TGR: What else do you like?
JM: Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB) has superb management. The company is producing gold from Midas in Nevada and bulk sampling from Fire Creek upstate. It has plenty of cash.
One of the larger companies we like is Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE). This is one of the better-managed intermediate gold companies.
Among the near-term producers we like Pretium Resources Inc. (PVG:TSX; PVG:NYSE) and its Brucejack project in British Columbia. Its grades are superb: 11.5 Moz of half-ounce material. The CEO is Bob Quartermain, the man who took Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ) from $50M to $2.5 billion. I think that he’s going to shepherd Brucejack into production within three years. It’s going to be a real superstar.
DL: We talk about people having to do their homework. Next door to Pretium is Seabridge Gold. People completely overlook its huge copper find. People look at Paramount Gold and Silver Corp. (PZG:NYSE.MKT; PZG:TSX) and they see two Mexican projects. They completely miss the fact that it also owns Sleeper, which was a hugely successful gold mine in a prior life and should be again.
TGR: How will the market for gold and gold stocks change in 2015?
JM: If we haven’t bottomed, we’re pretty close. Investors will come to realize that gold is the only clean shirt in the basket. Gold stocks will move first, and bullion will follow. There’s a lot of upside.
Douglass N. Loud joined Greystone Asset Management at its founding in 2005 and has been senior managing director of Axiom Capital Management Inc. since 2009. Prior to that, he was with Murphy & Durieu, where he served as executive director of the Private Clients Group. Loud has over 35 years of investment management and securities industry experience. He holds a degree from Yale University and a law degree from the University of California, Berkeley.
Jeffrey N. Mosseri established Greystone Asset Management in 2005 and became a director of Axiom Capital Management Inc. in 2009. He was a stockbroker and investment manager at Goldsmith & Harris for 20 years. Mosseri also worked as a stockbroker and investment manager for Carnegie Capital, the investment advisory division of Prescott Ball & Turben, where he ran the international arbitrage division and developed the gold mining research and investment department.