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Jim Rickards' Gold Speculator with Byron King

 

 

November, 2016

Good Management Is the Key to Gains in Mining

Byron KingDear Gold Speculator,

I was in New Orleans last week, attending and speaking at the 2016 New Orleans Investment Conference. I connected with reps from many companies in our Gold Speculator portfolio. I also met with management teams from several other promising plays. 

The New Orleans conference was in the Hilton Riverside hotel. So I wasn’t out in the field, kicking rocks. But I was meeting people, and that’s the point I want to emphasize this week. 

Making money via mining stocks is very much about the people — meaning the management teams and staff. What are they doing with shareholder money? How are they turning prospects into developments? That’s what I want to know. It’s about people, people and more people.

Along these lines, I sat in on a talk that included several other mining-savvy individuals. They were all being questioned by the irrepressible Rick Rule, of Sprott, Inc. Rick asked the group, “Who are the next superstars of the mining industry?” That is, per Rick, who are the up-and-comers who are developing great projects right now?

I was pleased at how many names popped up that are familiar to me and to you as a subscriber of Gold Speculator. If the respect of one’s peers is important, then we’re definitely running in the right circles.

Some of the “old” titans are still among us, of course. Rick mentioned Bob Quartermain, who built out Silver Standard (Bob is not all that old) and is now running Pretium Resources (PVG: NYSE).

In response to Rick’s question, Brien Lundin, who runs the New Orleans Investment Conference, immediately had a pained look on his face. He explained that he didn’t want to insult any of his wonderful exhibitors by failing to mention them. “They’re all great,” he said, but then he singled out Ivan Bebek, of Auryn Resources (GGTCF: OTCBB)

Brent Cook, one of the best geological analysts around, mentioned Jon Awde of Gold Standard Ventures (GSV: NYSE) and Steve Nano ofMirasol Resources (MRZLF: OTCBB).

Resource maven Gwen Preston, an excellent writer out of Vancouver, mentioned Steve de Jong of Integra Gold (ICGQF: OTCBB).

Another well-regarded resource writer, Nick Hodge, mentioned Amir Adnani of Brazil Resources (BRIZF: OTCBB).

As for myself, if a company is in our Gold Speculator portfolio, it means that I like and respect the management team. 

Still, the exchange in New Orleans prompted me to wonder how the performance of the five names of “young” executives stacks up, which brings us to this week’s Data Shot.

This Week’s Data Shot

How Our Portfolio Stacks Up

Here’s a comparison of year-to-date stock charts for the five companies named above by Brien, Brent, Gwen and Nick:

Auryn Resources Inc.

Clearly, we’re looking at gains of 100–300% and more, year to date, for four of the five companies (Auryn, Mirasol, Integra and Gold Standard). And we see 400–600% gains over the year for Brazil Resources. 

Note that these are all gold-focused exploration companies. In the case of Brazil, we’re talking about an early-stage developer that’s still exploring its various land packages. 

If these were tech companies or banks or hotel chains, the gains would be stunning. But they’re “just” gold exploration plays. These names and management teams don’t control tech patents or banking licenses, nor do they own real estate in cities across the world. 

Instead, these companies take land packages out in the boondocks — Nevada, rural Quebec, Argentina, Colombia, Alaska, etc. — and turn remote sites into prospective mineral assets. Of course, it all begins with management teams that can figure out where in the boondocks to look, and how to acquire that land package. 

Also, these companies are spending other peoples’ money (yours/ours). Along the way there’s no income or cash flow. Thus, it’s impossible to value these companies by conventional methods, such as Graham-Dodd analysis. Exploration companies have no cash flow, no earnings and, hence, nothing by which to create valuation metrics that one expects in typical investment methodology. 

All that these companies can offer shareholders is a management reputation for solid, efficient, effective work flow that delivers “new” ounces of gold into a resource package. Eventually, the idea is to achieve some sort of monetizing event, such as a joint venture or buyout, in which a larger player joins up to convert the resource into a producing mine. 

It helps to be in a rising environment for gold, such as we’ve experienced this year. Then again, as I pointed out in your Oct. 20 alert,

 
 the gold mining sector can dramatically outperform the increase in basic price for metal.

 

Still, you don’t get these fabulous gains with mining shares by throwing darts at a board. You get the gains by selecting the best management teams, with solid track records and deep understanding of what they need to do. “Gold is where you find it,” I like to say. So are great management teams. 

This Week’s Five Gold Nuggets

I. Winner of U.S. Election: Gold!

Gold has an 8% gain built in, whoever wins next week’s election — Hillary Clinton or Donald Trump. This is the view of the head precious metals analyst for banking giant HSBC, James Steel. According to this gold guru, if Clinton wins, expect $1,400 an ounce for yellow metal by year end, and if Trump triumphs, gold could quickly rise to $1,500 an ounce. "Gold is seen as a hedge against political uncertainty, and President Trump would bring more political unpredictability than any president for generations, particularly over the U.S. Federal Reserve’s leadership and monetary policy strategy," states Steel. Then again, it’s worth mentioning, a victorious Hillary would likely become impeachment bait from the moment she takes the oath of office, what with all the WikiLeaks revelations, and FBI investigations of Clinton Foundation baggage. Click here to read more. 

II. China Globalizes Its Currency for Gold “Pricing Power”

Then again, no matter who wins the U.S. election, the dollar price of gold is losing its historic cachet. Across the ocean last week, Shanghai’s Gold Exchange inked a deal with the Dubai Gold and Commodities Exchange, under which the Dubai organization will become the first foreign gold exchange to use the Shanghai gold benchmark, denominated in China’s renminbi. Note that this entirely cuts out the U.S. dollar from gold exchange transactions. According to a comment in China’s authoritative newspaperPeoples’ Daily, “China is among the world's largest producers, consumers and importers of gold, and it deserves pricing power that matches its position. It should have more say in an industry long dominated by London, which sets global spot prices.” Looking ahead, that’s exactly what is going to happen. Click here to see why this dovetails with an obvious trend in which the focus of gold price-setting has been shifting from the West to the East.

III. Why Gold Is a “Mandatory Portfolio Asset”

Along the foregoing lines, “we have long maintained,” writes Trey Reik of Sprott Asset Management in this week’s edition of Sprott’s Thoughts, that “the central thesis for gold is more complicated than a simple hedge against inflation, deflation or economic collapse.” Reik goes on to describe how gold is “a mandatory portfolio asset” in an investment world in which price discovery on productive assets — as reflected by prices for stocks and bonds — has broken down. “In essence,” declares Reik, “the decoupling of financial-asset valuations from any rational underpinning of productive output” supports the need to own gold and mining shares. Click here to see more of Reik’s comments. 

IV. Miners Moving into Position for Major Upswing

According to chart watcher Clive Maund, the correction in gold and precious metals stocks is coming to an end. In a long article at Mining.com in which he reviews data going back over 20 years, Maund explains how gold's recent price correction is finished. According to Maund, charts demonstrate that the “intermediate base pattern is completing.” We’re now, again, at an “excellent entry point” for investing in well-run mining companies, according to Maund. Looking back, the market knock-down of the past couple months was a “necessary correction” following the major price run-up earlier in 2016. Click here to see why Maund forecasts that “the index will go on to break out upside.”

V. Argentina Tax Reform Spurs Mining Investment

Last but not least, let’s look south to Argentina. Recall that, under the rule of former president Cristina Fernández de Kirchner, Argentina endured many years of underinvestment and capital destruction due to her quirky, kleptocratic approach to governance. This year, however, under the governance of newly installed president Mauricio Macri, businesses and capital are faring better. One of the first items on Macri’s new national agenda was repeal of a burdensome export tax on minerals that squeezed the economics of many a mining project in La Albiceleste (the Land of White and Sky Blue). Repealing that tax has already stimulated investment, particularly in mineral-rich areas of the Andes, along the border with Chile. Click hereto see why this bodes well for the future ability of miners to partner-up and succeed in Argentina, such as Golden Arrow (GARWF: OTCBB) and Mirasol (MRZLF: OTCBB)

 

Best wishes,

Byron King

Byron W. King
Senior geologist, Rickards’ Gold Speculator

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