Bruce Campbell: No $2,000/oz. Gold in Forecast
Source: Brian Sylvester of
The Gold Report
Not long after a
New York Times
headline quipped, "Now the Gold Rush Is to the Exits," Campbell
& Lee Investment Management Cofounders, Bruce Campbell and
Joe Lee, hung out their shingles in Oakville, Ontario. That was
late in 1999. With the price of the precious metal (
) sinking toward its lowest level since 1975, when the U.S.
abandoned the gold standard, the new investment management
company had no reason to focus on PM companies. Obviously, as
Bruce tells us in this exclusive
interview, the company has since shifted its focus.
The Gold Report:
Tell us a little bit about Campbell & Lee Investment
We provide investment management for individuals. We have
continued the same positive, long-term track records we had at
larger places but because we are smaller, we can have more fun
and be a little bit more nimble.
So, you give your clients at least some exposure to gold in their
Yes; in fact, we have the highest percentage of gold and silver
in our equity model portfolios that I've had in my 35
years-approaching 15% at the moment. It's primarily gold with
some silver spread out among five or six holdings at any one
That's a huge change from when you started your business because,
at that time, the gold price was headed downward.
The complete bottom might have been $240 for a short period. To
show you how the business has changed, at that time we had a
minimal gold weight. Anecdotally, I remember visiting Geomaque
Exploration Ltd. at its San Francisco mine, a small, low-tech,
heap-leach mine in northern Mexico just a couple of hours drive
over the border from Arizona. At that time, gold was at around
$270/oz. and the company's costs were about $230; so, it was
eking out in survival mode. The mine shut down shortly thereafter
and Geomaque was taken over, but it sounds as if it's worth
bringing it back with gold at $1,460 now. I understand that
Timmins Gold Corp. (TSX.V:TMM)
, which formed in 2005 to acquire the San Francisco Mine, is
resurrecting this property now and expects to start producing
later this year.
Until the last few years, gold served mostly as an insurance
policy in investment portfolios. It didn't appreciate much, nor
did it depreciate greatly. But with gold's 30% or so rise in
2010, investors are now increasing their exposure and expecting
large returns from their gold holdings. What do you tell your
clients when it comes to investing in gold and silver?
That's a great question and one that all investors should ask
themselves. There are a few components to consider. One, the
aspect of portfolio insurance remains valid-particularly
post-crash; late 2008 and early 2009 is the first time we raised
our gold weight. Two, we're now starting to see inflation creep
back in, at least as a possibility; so, gold is a nice hedge that
With the rise in the gold price, I'm also searching for
companies that can raise their production substantially so that
I'm not depending solely on the price of gold for the higher
stock price. A high gold price becomes a great bonus and produces
some really, really high returns; but, given the run we've had,
what if we go sideways for awhile? You want good operators who've
figured out how to grow a business or are discounted in the
market due to some previous problem or whatever the combination
might be. With these companies, you can make money in a flat gold
environment or make a ton of money in an up gold environment.
On April 6, gold popped above $1,460/oz., hitting a new all-time
high of $1,476.20/oz. two days later when silver hit a 31-year
high of $40.63/oz. These levels bring a lot of media attention
and buying interest from large funds. Will that "hot money" and
renewed retail interest add volatility to the precious metals
I think the answer is yes. In that same period, when gold and
silver went up a little bit more each day, the stocks were all
down; so, you see this volatility even inside the equities market
versus bullion. In other words, the stocks aren't necessarily
tracking the price of the metals closely-and haven't been for
awhile. Once the market recognized that the stocks were lagging,
a number of the stocks went up 5%-7%. First it was the larger
caps, and then the juniors as investors got around to them.
The direction is up here. There will be some momentum and fast
money players saying, "Gold goes through $1,500/oz.," but it
probably won't be without huge volatility.
One reason for the $30 spike that drove gold up to $1,460/oz.
within a span of 24 hours, apparently, was the euro's strength
against the U.S. dollar (
). That seems odd, given that Ireland is being bailed out with
Portugal next in line, and we're hearing more about sovereign
debt problems in Spain and Italy. What does all of this tell us
about the USD?
I think it was a weak-dollar story as opposed to a strong-euro
story that triggered that price spike. It's the same with oil.
It's been around $105 per barrel lately, but the Canadian dollar
got through CAD$1.05 today. That's more a weak USD story than the
Canadian dollar being dragged up-and it's not just the Canadian
dollar, but also the Australian and New Zealand dollars and the
Brazilian real. The euro happens to be caught up in it, as well.
All the nice alternatives to the USD are strong. If you looked at
the price of gold in euro or yen, you'd see the chart's not
nearly as compelling as it is in U.S. dollars.
With political instability in the Middle East, inflation creeping
into developed world economies, a $1.4 trillion U.S. deficit and
monetary debasement, is this the "perfect storm" for gold?
To have all of those things going, yes, I believe it is. But just
in case that perfect storm reverses somewhat, I think investors
should be buying gold producers that will be growth companies. It
wouldn't deter a long-term story but gold going down $100-$200
would be a normal pullback. Were it do that and stay down, you'd
want companies that can grow their way through it by
You've said that, typically, equities rise 4% for every 1%
increase in the gold price. Is the opposite true?
That has been the historical case, but it's not been working
quite to that extent lately. In the last year or two as prices
have gone up to the stratosphere, that relationship has broken
down. Some days it's something like 1.5%, not 4%. It's just that
they're not going up as much. And one of the primary reasons for
that is because costs are rising more significantly than normal.
The price of oil is up, which is the highest single cost for a
gold producer, followed by labor costs. With oil up, the gold
producers aren't benefiting to the extent they would normally
When dollar-related strength causes gold to pull back along
with oil, the gold producers tend to go down more than the gold
price. It's an instance where they probably shouldn't, but the
initial reaction would be as we saw with the recent $100
pullback. The stocks went down more than they should have just on
the basis of the historic relationship.
Beyond the factors you've already mentioned, how do you determine
which equities you pick and which you leave on the shelf?
In contrast to non-mining/non-PM companies, where
price-to-earnings (P/E) and price-to-book (P/B) are things to
consider, in gold companies we look for price-to-net-asset-value
(P/NAV), which encompasses the current value of all of the
production coming out of mines, minus the cost. That gives us a
feel for a company's potential growth and upside. Gold stocks
tend to trade on anticipated higher gold prices, increased
production growth, increased reserves or a combination of all
Any other metrics you watch?
We also consider price-to-cash-flow (P/CF), which is more of a
look at the value of current production. This removes non-cash
items (depreciation, etc.) and simply measures the cash being
generated relative to the stock price. Generally, companies with
a low P/CF are discounted for either geopolitical risks or lack
of growth potential.
We look at the balance sheet, too. Depending on their size,
it's easier for companies to raise money right now. Juniors,
certainly, have been doing a lot of that. As far as senior
companies, they don't have to raise new equity that way if
they're doing a takeover. I guess
Kinross Gold Corp. (TSX:K; NYSE:KGC)
might be the last one of size, after taking over Red Back
Any other important considerations?
The production profile has become key for us right now, as well
as the ability to replace production. The really big guys-the
Barrick Gold Corp. (TSX:ABX; NYSE:ABX)
types of the world have to consider this. If they produce 8
million ounces (Moz.) this year, they have to pull 8.5 Moz. out
of their mines next year to show growth-that's a lot. A small
producer can mine a fraction of that and show growth.
What's the story on that Red Back acquisition?
Kinross is another rerating story, and I think it's now the
cheapest senior by far. The stock is probably a full $5 to $7
undervalued on a $15 base, but it looks as if it'll be fine. The
company just took analysts and investors on a tour of Tasiast,
the Red Back mine in Mauritania, in the western region of North
Africa. It's already started working down the $900/oz. it paid
for the mine, which is very expensive relative to, say,
Goldcorp Inc. (TSX:G; NYSE:GG)
getting it out of the ground for $190 (net of byproduct
We think it will take until this fall to fully prove it up;
but having proven a bunch of extra reserves up so far, it's off
to a good start. The company probably has to find up to 40% more
to get that $900 number down to something more reasonable.
Where do you come by that Goldcorp figure?
Goldcorp just announced the results of an updated feasibility
study for the Cerro Negro project in Argentina, which it gained
through its acquisition of Andean Resources last fall. This
update indicated average gold production of approximately 550,000
ounces (Koz.) per year during the first five years at a
production cost of $190 (once you factor in the silver byproduct
credit). If you do this in gold terms, at $1,460 minus $190,
it'll make $1,200/oz. for the gold with silver as a bonus. And as
I've said, the seniors have lagged a little bit; so, there's some
value there. Goldcorp is as cheap as it's been for a couple of
You recommended a small-cap stock among your top picks in a
February interview with BNN, indicating that it would be a $7
stock by year-end if gold prices remained static. Clearly, prices
have been anything but static. How do you feel about that pick
Argonaut Gold Inc. (TSX:AR)
, and I still very much like the company. Since that BNN
interview, I met with management when they were in town and spoke
to them again at the quarterly conference call a couple of weeks
ago. Argonaut fits all those parameters. It has growing
production; in fact, by 2013, it probably will be four times what
it was in 2009. Argonaut will double in production this year, and
then double again over the next couple of years. If you put that
together with my $7 target, Argonaut would still be a discount to
net asset value (
). And it's the only gold producer I can find that trades at such
a substantial discount; the seniors trade at premiums. If AR was
to trade at a premium, it would be an $8 or $9 stock.
Why, in your estimation, is it trading at a discount?
The market cap is roughly $400 million; so, it's under the radar
for a lot of large investors. It's also relatively new; the
management team that built up Meridian Gold over the years and
sold it to
Yamana Gold Inc. (TSX:YRI; NYSE:AUY; LSE:YAU)
in 2007 has come back to do it again. Basically, the company is
only about one year old and has already acquired Pediment Gold;
so, it now has a second producing mine coming onstream. Here I am
spreading the word, as are some others, but I'd say probably
80%-90% of senior, large investors in North America still haven't
heard of it.
Currently, Argonaut's only producing mine is El Castillo in
Durango, Mexico, correct? How much production should we expect
from that operation in 2011?
We're looking at somewhere in the range of 70-75 Koz. I believe
El Castillo's number for 2009 was 30 Koz.-so there's your first
double. And as I said, the management team has a chance to do
again what it did at Meridian. I wouldn't be surprised to see
Argonaut do another small acquisition before year-end that may
take that 75 Koz. higher, or at least have something with
additional production to bring forward before the Pediment Mine
comes in 2013.
So, we can look forward to further growth. That's great. You also
imply a preference for precious metal producer versus explorer
equities. Could you talk about some specific mid-cap equities
where you continue to see value?
Sure. One example, which we bought last summer, would be
Allied Nevada Gold Corp. (TSX:ANV;
. It fit all the criteria and was a discount to NAV. The company
is in Nevada and has one producing mine and an exploration
project a little ways west of that mine. Another criterion that I
failed to mention earlier is that you want good finders-good
drillers. On that score, Allied Nevada has proven up so much in
extra reserves that the stock has gone wild lately. It's obvious
that the company has a whole other mine with a large silver
content. So, the stock is trading at about $36 on the Toronto
exchange and $37.46 on AMEX now. We bought it last June at $19,
so it has doubled for us, and we continue to hold it.
You mentioned silver there.
On the silver side, we've owned
Great Panther Silver Ltd. (TSX:GPR;
, which had a nice run. We currently own
Tahoe Resources Inc. (
, which is doing well with the old Glamis Gold management team
from before Glamis was taken over by Goldcorp. This team has come
back around again, and it's doing well with a silver project in
Guatemala-that one's also pretty good.
Any other companies you want to mention?
Minefinders Corp. (TSX:MFL; NYSE:MFN)
, with a market cap of almost $1 billion, is expecting greater
production of both gold and silver from its Dolores Mine in
Mexico just across the Arizona border. The company has overcome
some operational problems that made 2010 a pretty challenging
year; so, its stock, which had been lagging and looked quite
cheap for a long time, has perked up lately.
IAMGOLD Corporation (TSX:IMG; NYSE:IAG)
is another one. This midtier producer's biggest mines are located
in Quebec, Guyana (South America) and West Africa. We thought it
had the best short-term growth of players in Africa and that's
proven true. The stock has done well.
Could you quickly map what you see as gold's path between now and
the end of the year, if not year-end 2012?
My crystal ball gets hazier the further out you go, but I believe
that the perfect storm we were talking about earlier will allow a
$1,500/oz. price tag on gold at some point this year. We have a
bit of momentum here, so I think we might see that-it's only a
couple of percentage points away. After that, what's next? Unless
there's some further disaster, I don't see why it wouldn't just
keep going. Of course, nothing goes in a straight line; so, it
would make a lot of sense for both gold and silver to pause-maybe
go sideways-and have gold end the year at $1,550/oz. or something
And if you go further out?
If you go into next year, I think the key will be the U.S.
economic recovery. If it's strong enough to take higher interest
rates, Canada raises rates and rates start to go up generally, it
makes gold less attractive because the dollar will be stronger.
But it's also because the costs of holding gold will become
higher. That's when you could see a pullback. To me, that's more
likely than a doomsday scenario; so, currently, I don't think
gold will see $2,000/oz.
No, just in the relatively near term. We'll have inflation over
the next few years because we've just postponed it with all this
liquidity in the system. With inflation, gold will climb its way
upward over the long term, but I don't see a 20%-25% lift right
Thanks so much for your time and insights, Bruce.
Bruce Campbell is a money manager with more than 35 years
of experience. The research, portfolio construction and
buy-and-sell strategy that he brings to his work produces
above-average returns. Bruce began his career as an investment
analyst with CIBC and Ontario Hydro, after which he joined
Royal Trust Capital Management. As senior vice president there,
he managed more than $10 billion of Canadian and U.S. equity
money for pension plans and mutual funds. He subsequently
served several years as chief investment officer and partner
with Nisker Associates. For the past 11 years, Bruce has been
president and portfolio manager for
Campbell & Lee Investment Management
, which he and Joe Lee cofounded. He earned his bachelors
degree from McMaster University in 1976 and a masters in
economics from York University in 1981.
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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:
2) The following companies mentioned in the interview are
The Gold Report:
Timmins, Goldcorp, Argonaut, Allied Nevada, Great Panther and
3) Bruce Campbell: I personally own shares of the following
companies mentioned in this interview: Kinross, Goldcorp, Allied
Nevada, Tahoe Resources and IAMGOLD. I personally am paid by the
following companies mentioned in this interview: None.
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