The Gold Report: Last February, you forecast that stocks would rebound in 2012. What signs indicate that's about to happen?
Charles Oliver: I had expected that the money from the European version of quantitative easing would start to get into circulation and, with the continuing debasement of currencies, be very positive for gold and other asset classes. However, I miscalculated how weak the banks of Europe actually are; most have very weak balance sheets. Indeed, they took most of that money to try and prop themselves up and keep afloat.
Having said that, I maintain my long-term thesis, which is that the governments of Europe are going to continue to print money. The things that are going on in Europe, China and the U.S. lead me to believe that there is going to be significant printing down the road, which ultimately will lead to higher gold and silver prices.
TGR: This liquidity being forced into the system will drive gold prices higher?
CO: Yes, absolutely. Banks in Spain, specifically Bankia, are in need of funding and injections of equity. The central banks of Europe are already running very large deficits and don't have any money available for this. The only reasonable conclusion is for them to turn to the printing press—whether it be directly printing or some other quasi form of printing, such as a long-term repo operation—to ultimately do a significant amount of the funding.
More money will also be printed should Greece exit the euro. Every day, it seems more and more likely that it may happen. One of the catalysts could be the election June 17. If Greece were to exit the euro, there would probably be a significant default and many of the European banks that hold Greek debt would be in an awful lot of trouble and require further injections of capital. In that scenario, it would be similar to 2008 when U.S. Treasury Secretary Henry Paulson went to Congress and asked for a blank check to backstop the whole financial system. If Greece were to leave the euro, the European central banks may have to write a blank check to make sure that the entire European banking system doesn't collapse.
TGR: Are you anticipating more blank-checkwriting in the U.S. or has that already been done?
CO: I expect more printing. Whether or not it will be done in the same fashion as in 2008, I don't know. I'm a big believer that demographics are going to force the U.S. to continue to run very large budget deficits over the coming decades. The first baby boomers are retiring, which means they'll stop paying income taxes and begin to draw down on Social Security. Healthcare benefits will rise rapidly over the next decade. The U.S. will continue to require printing to help meet these gaps in funding deficits. The U.S. has to be very careful how it goes forward.
TGR: You have been closely following developments in China. How will what happens in China impact your portfolio?
CO: It seems that on a global basis we're getting the triple whammy. There's job weakness in the U.S., massive debt problems in Europe and sluggish economic indicators in China. A laundry list of China's economic indicators, from gross domestic product, which was at double-digit levels over most of the last 20–30 years and is now creeping down to the 8% level and continuing to show weakness; to the purchasing managers index, which is considerably lower than expectations at 50.4, just on the verge of showing declines in the economy; and weakness in industrial production.
TGR: In the midst of all of that, about 90% of the companies you're invested in are headquartered in Canada, but the bulk of their operations are overseas. In a report on your fund, you commented on the impact of the coup in Mali on your stocks. Are there any countries you're avoiding now?
CO: A couple of years ago, I reduced my exposure to West Africa because of the issues in Mali, Egypt and Libya, and the attempted coup in Burkina Faso. There continue to be ongoing concerns in Mali. Companies such as IAMGOLD Corp. (IMG:TSX; IAG:NYSE) have deferred some of work on projects on the Sadiola sulfides in Mali.
A lot of countries in many jurisdictions are trying to increase royalties—some of them rather aggressively, some of them at a reasonable rate. I have concerns about many of these places. Argentina is also a big concern. President Cristina Kirchner has come in and made a number of changes. She is asking mining companies to buy domestically in Argentina. Unfortunately, Argentina does not necessarily have everything they require, which is making it very difficult for some companies to secure some of the items, whether it be drill rods or plant equipment. I'm watching Argentina. I'm a little cautious about what's going on there.
Peru, which historically has been a very good place to invest, has also recently given me cause for concern. It increased a windfall profits tax that has reduced the overall profitability of companies operating there. There have also been a lot of anti-mining protests. Although it looks like the Peruvian government is trying to continue to encourage mining, there are some challenges.
One of the companies I'm watching just as a bellwether for how the wind is blowing in Peru is Newmont Mining Corp. (NEM:NYSE). It has a project called Minas Conga, which was delayed/deferred last December when there were a number of protests that caused considerable damage. We do not know yet if Newmont is going to proceed. I think it would like to, but there are some hurdles.
One of the things that I've been trying to do in terms of my investments is look for safe jurisdictions, including at home. North America has actually been one of the more stable areas over the last period.
TGR: Are you talking about Canada, the U.S. and Mexico?
CO: Yes. Mexico has some issues in terms of safety. In the U.S., there are certain areas where it's challenging to get permits. Everywhere has its challenges.
In Ontario, where I'm located, a lot of new mines have come on-line over the last decade. When I look at a country, I want to see who's involved there, what they're doing and whether they've been able to permit, build, drill—all of the different aspects.
TGR: Are there any countries in South America that you like?
CO: Brazil and Guyana are probably two of my favorites. Colombia also has some great potential. Having said that, we have yet to see a new mine built over the last decade, but there have been some great exploration success stories. Hopefully, going forward, several of these will be built.
TGR: In April, the $478.4 million Sprott Gold & Precious Minerals Fund showed a 2.5% decline, compared to a 6.7% decline for the S&P/TSX Global Gold Index. You said in a report, "The relative outperformance of gold bullion is far above historical norms, but we maintain absolute conviction that many gold stocks will deliver exceptional earnings and, accordingly, remain very optimistic on the long-term prospects of the sector." Are you buying more equities based on this long-term gold sentiment?
CO: I've been pretty fully invested since that period. The valuations, just as in April, are absolutely spectacular. In fact, they've gotten even cheaper. It's quite frustrating as a portfolio manager when you see such great value and increasing earnings, cash flow and production, yet share prices go down.
Right now, the general investor seems to be avoiding gold stocks. I'm still convinced that at some point these stocks will be recognized for their values and they'll significantly outperform relative to the gold price.
I'm still very bullish on the gold price, don't get me wrong on that, but I see the seniors out there trading at seven or eight times price/earnings (P/E) or six times cash flow, and I just think these valuations are ludicrous. Sometimes you have to be patient.
"Right now, the general investor seems to be avoiding gold stocks. I'm still convinced that at some point these stocks will be recognized for their values and they'll significantly outperform relative to the gold price. " –Charles Oliver
TGR: The overwhelming bulk of your sector allocation is gold equities. What were your best performers?
CO: I wish I had a whole bunch of best performers, but what we've seen over the last period is the least worst performers. Over the last year investors have taken the risk trade off. The small caps have been brutalized. There are companies trading at a discount to cash, like Mundoro Capital Inc. (MUN:TSX.V), and companies trading close to cash, such as Keegan Resources Inc. (KGN:TSX; KGN:NYSE.A). On a relative basis, it's been the large caps that have done the least worst and held up the best. However, when you look at all segments, they have suffered in the prevailing market.
TGR: You own the producers Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Osisko Mining Corp. (OSK:TSX). How did they perform?
CO: Osisko is a mid cap and is just starting on its production. It's a great company. Mid cap is probably a good area to be when this market takes off. Yet, when you look at Osisko, it's trading at half-price of what it was about a year ago. It's very sad, but many companies out there are trading at big discounts to where they were last year. When you look at the silver companies, they're down about 50–60% from a year ago when the silver price was pretty close to where it is today. These markets are very perplexing.
TGR: What about the juniors?
CO: The valuations are great, but having said that, we're going to see the valuations stay great for a while. A lot of these companies need to fund and are dependent upon the markets, which are not available. I have added some names recently, although it's probably an area that will move after the mid caps and rest of the market start to firm up.
TGR: One of your juniors is Colossus Minerals Inc. (CSI:TSX; COLUF:OTCQX). Are you still excited about the Serra Pelada project in Northern Brazil?
CO: I'm really excited about it. It's a significant position for me. It was one of the first names I bought. When I moved to Sprott, it was just doing its initial public offering. The stock's price has been cut in half, just like many other good stocks. I had the chance to go down there a couple of months ago and look at it. I actually came back feeling better about the stock than when I went down.
It still has lots of challenges and hurdles to overcome, but it looks as if it's doing a good job. Colossus has been developing its underground mine and is very close to getting into a very high-grade ore zone. It should be there within the next couple of months. Come this time next year, it should be producing.
This could be a very exciting stock. It's just another one of these names that has been under significant pressure. There seems to have been a seller in the market over the last couple of months, and it has really taken a big hit. It has nothing to do with the execution of its strategy.
TGR: What about silver? Are there any names that you find interesting right now?
CO: Just about every name under the sun is attractively valued.
TGR: Is there a bellwether?
CO: The first area to move will be the mid caps and large caps. Some of the names in the silver space that fit that criteria would be Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE) and Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ). They are two of the biggest silver companies out there and trade about eight times P/E. Pan American pays a dividend. Coeur d'Alene could introduce a dividend this year. It's very attractively valued. On a yearly basis, it's down about 50%. It's been a victim of a very weak stock market.
TGR: Is there a mid cap on the gold side that is a bellwether that will indicate mid caps are finally moving?
CO: There are a number of bellwethers out there, like Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE), Eldorado Gold Corp. (ELD:TSX; EGO:NYSE) and IAMGOLD. They're the midtiers that aren't quite in that large-cap space. They are three good companies to keep an eye on as an indication of how the overall sector is going.
TGR: Are you holding IAMGOLD right now?
CO: We have some IAMGOLD, Eldorado and Yamana.
TGR: What advice would you give someone who is just now starting to invest in this sector?
CO: What a great time to get in because it's a half-price sale. I look at what's going on around the world. It feels very much like 2008 when it looked as if the world was about to end, especially in Europe. Equities and the gold price were under pressure, which was kind of ironic because the U.S. embarked upon a major printing program then that was very bullish for gold. Now, it looks as if Europe is about to embark on a major printing program that should be very bullish for gold. So it's a great time to buy. You have to be patient. These markets will not stay like this forever. When they turn, they can turn fast.
For those who have been invested in this market: The fundamentals look very good. Be patient. Don't lose faith. This story for higher gold prices and higher silver prices is still very much intact and looks very positive. Just be patient.
TGR: That is great advice. Thank you for your time.
Charles Oliver joined Sprott Asset Management in January 2008. He is co-manager of the Sprott Gold and Precious Minerals Fund, Sprott All Cap Fund, Sprott Opportunities Hedge Fund L.P. & Sprott Opportunities RSP Fund. Prior to joining SAM, Charles was at AGF Management Ltd., where he led the team that was awarded the Canadian Investment Awards Best Precious Metals Fund in 2004, 2006, 2007, and was a finalist for the best Canadian Small Cap Fund in 2007. At the 2007 Canadian Lipper Fund awards, the AGF Precious Metals Fund was awarded the best five-year return in the Precious Metals category, and the AGF Canadian Resources Fund was awarded the best 10-year return in the Natural Resources category. Oliver obtained his Honors Bachelor of Science degree in geology from the University of Western Ontario in 1987 and obtained his CFA designation in 1998.
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Disclosure:
1) JT Long of The Gold Report conducted this interview. She personally and/or her 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: Colossus Minerals Inc. Streetwise Reports does not accept stock in exchange for services. This interview was edited for clarity.
3) Charles Oliver: I personally and/or my family own shares of the following companies mentioned in this interview: Barrick Gold Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.
