Finding Fundamentals Key to Gold Investing: Byron
Source: Brian Sylvester of
The Gold Report
The market isn't rewarding fundamentals just yet for precious
metal miners, according to Byron King, editor of
Daily Resource Hunter, Outstanding Investments
Energy & Scarcity Investor
published by Agora Financial of Baltimore. But in this exclusive
The Gold Report,
King maps out when rising gold prices will actually lead to
rising stock prices for companies with quality projects and solid
The Gold Report:
Byron, anyone who reads your reports knows two things: you like
to tell stories and you like precious metals. The gold price has
spent the last 11 years trending higher. Do you see it continuing
I anticipate that gold, silver and platinum will all continue to
rise in price. There are currency-driven reasons why metal prices
are going to keep rising, as well as other issues with overall
supply and falling production.
In terms of production, the gold and the platinum production
spaces are very precarious. A few very bad things could happen at
random and knock global production for a loop and seriously
impact supply. Think in terms of a major mine accident in, say,
South Africa. Supply could fall off a cliff overnight.
In terms of politics and monetary issues, precious metals
create an outside limit on people's political power. Thus I
expect massive amounts of manipulation as we roll along, too. The
dollar value of gold, silver or platinum will tend to rise over
time, but we could see price spikes up and down due to that
The junior precious metals sector fell hard in 2011. You tend to
stick toward the midtier and major precious metals producers with
strong cash flow. Those names often have lower risk, but risk can
rear its head in that space, too. Major gold producer Kinross
Gold Corp. (K:TSX; KGC:NYSE) watched about $3.1 billion (
) of its market cap get buzz sawed off in mid-January after it
announced that it would take a $4.6B write-down on its Tasiast
gold mine in Mauritania. Kinross spent $7.1B acquiring Tasiast
and other assets in the September 2010 takeover of Red Back
Mining. Does this serve as a warning to the other majors?
It might be 15 years past the Bre-X scandal, but when it comes to
buying and selling gold mines, no amount of due diligence is too
much. It gets back to Mark Twain's comment about how to define
the term gold mine. It's a hole in the ground with a liar
standing at the opening of the shaft.
The Kinross writeoff is scary. They're supposed to be better
than that. So when you own physical gold, you can go to bed and
close both your eyes. With gold mining shares, you still need to
keep one eye open.
Were you recommending Kinross?
Kinross has been in the
portfolio for over four years. I'm hanging on to it in the hopes
that it will go higher, but it's been disappointing. It's not
been able to get the share price up and keep it up despite a gold
price that has quadrupled.
Its strategy was to grow through acquiring assets. Apart from
buying Red Back Mining, Kinross bought Underworld Resources in
the Yukon and Aurelian Resources in Ecuador. Do you believe that
was the wrong strategy?
Much of the gold mining investing business is about takeovers.
The large companies with, say, 10 million ounces (Moz) a year of
output couldn't discover that much just by sending out their own
geologists with rock picks. Gold mining requires an entire
process of prospect developers, generators and joint ventures.
The better assets get picked up by the larger companies. In fact,
Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) just announced a
takeover ofMinefinders Corp. (MFL:TSX; MFN:NYSE) . Minefinders is
a one-trick pony, but it's one heck of a pony. It's the Dolores
play in Mexico.
Sure, acquisitions are key, but many analysts believe that
Kinross paid too much for Red Back and it's now writing down
three-quarters of what it paid. Will companies be more loath to
spend big dollars in takeovers now?
The acquiring companies have to be smarter and cheaper about
takeovers. They have to pay less. Then again, you're lucky if you
get what you pay for, and you never get what you don't pay
The news from Kinross could serve as a wet blanket for the
rest of the intermediate and junior mining space. Future takeout
plays might see more lowball offers.
It gets back to the idea that an allegedly savvy company like
Kinross could make as bad a mistake as it did-at least in
retrospect. It's a wakeup call to the industry. I suppose in the
boardrooms of the big mining companies they're sitting around
saying, "We're much smarter than those guys at Kinross." All I
can say is to be careful of admiring yourself too much in the
mirror because I'm sure Kinross thought it was doing the right
In an ironic twist, some analysts are now speculating that
Kinross could become a takeover target. Keith Wirtz, chief
investment officer at Fifth Third Asset Management, said, "Every
dollar lower pushes the stock higher up the list of potential
takeovers. That will attract the sharks in the water." Do you
think Kinross will be taken out in 2012?
Kinross has made a big mistake. Now the company has a big bull's
eye pinned on its back. Kinross has some very strong assets. I'm
sure other companies are looking at these assets and thinking
they could do a much better job at managing them than the guys
running the show right now.
Something else of note in the large-cap gold space is the
increase in dividends as gold companies jockey for investor
attention with other instruments like real estate investment
trusts, exchange-traded funds and even master limited
partnerships. One company in particular,Goldcorp Inc. (G:TSX;
GG:NYSE) , recently raised its dividend again. Do you prefer gold
companies with a significant dividend or are other factors more
All things considered, I like companies that pay dividends. I
like the idea that they bring the shareholders into the equation
by sharing some of the wealth. There's a certain capital
discipline in running a company that comes with the knowledge
that it has to write a check to the shareholders as well.
What are some of the major gold producers that are running a
dividend that you like?
Newmont Mining Corp. (NEM:NYSE) ,Barrick Gold Corp. (ABX:TSX;
ABX:NYSE) ,IAMGOLD Corp. (IMG:TSX; IAG:NYSE) and Goldcorp are
nice dividend players.
Which one has the strongest growth profile?
Goldcorp. Five years from now, it could be the best overall
Are you following any midtiers?
I've been following Minefinders, but it just got bought. I'm
waiting for the development at Donlin Creek, Alaska, to come
through forNovaGold Resources Inc. (NG:TSX; NG:NYSE.A) .
Investors are going to have to be patient with this one. It's
over 30 Moz of gold. It's partnered up with Barrick, but the
development has been slower, longer and more painful than I
expected. However, over enough time, NovaGold could be quite
rewarding to a patient resource investor.
What undervalued junior or midtier producers could rebound in
Carlisle Goldfields Ltd. (CGJ:CNSX) at Lynn Lake, Manitoba. It's
an old copper-nickel producing area, but it has had a very
aggressive drilling program. I am waiting for an updated NI
43-101 to come out, which could show an expanded resource
Reservoir Minerals Inc. (RMC:TSX.V) , a spinout of Reservoir
Capital Corp. (REO:TSX.V), is a play on mineralization in Serbia.
Reservoir Capital was a hydropower and geothermal company with
some mining assets as well. Last fall, it spun out the mining
assets into Reservoir Minerals.
It's now a copper project that is joint ventured with
Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE). It has had
extremely good drilling results in a historic gold producing area
in Serbia that was one of the richest gold mines in Europe in its
day. It was sealed up just before World War II and not unsealed
until about two years ago.
Reservoir also controls numerous other mineralized areas in
Serbia, which is a very well-run, mining-friendly jurisdiction.
That is, we're not dealing with the Serbia of the 1990s. This
isn't the Serbia that NATO bombed in 1999. This is a modern,
European country that is looking desperately for investment.
Reservoir Minerals is a key part of the future of Serbia.
Carlisle has the historic MacLellan mine. What stood out when you
visited that project?
It's in Precambrian greenstone in a shear zone, in a known
mineralized district. The greenstone and the shearing outcrop at
the surface. Carlisle has great land position in terms of
following the strike. It has a very aggressive drilling program,
and while results aren't out officially, from what I can gather
from my own examination of the cores, there is a very nice
consistency of mineralization all along the strike. I think that
when Carlisle gets done with its analysis we're going to see a
very nice resource number at very respectable, mineable
What investment themes do you expect will be prevalent in the
gold space this year?
The gold price should continue the 11-year trend of increasing
nearly every year with the possibility of a big jump if a one-off
type of event, such as a mine accident, chokes off a large amount
of the world's gold supply. I know accidents aren't ever supposed
to happen-nuclear plants in Japan and cruise ships in Italy are
failsafe, right? We have to watch that.
What about increasing tension in the Middle East?
Tension in the Middle East always seems to drive up the price of
oil and the price of gold. People move their resources from one
jurisdiction to another, from one form of investment to another.
I went to one of the gold souks at the grand bazaar in Istanbul
about two years ago. I was astonished that people were mobbing
the gold souks, throwing money down and grabbing all the gold
coins that they could get their hands on. I saw Russians and
people from across Europe just peeling out these €500 notes and
buying as much gold as they could take. It was fascinating.
It was surreal to literally watch people scoop up gold, put it in
their pockets and walk out of the stores. People were trying to
get rid of cash and buy gold. There's an entire gold-buying
culture that a lot of people in the West are not used to
What about the protests, violence and economic sanctions being
brought to bear on certain Middle Eastern countries? It seems
like the tensions there are certainly hotter than they have been
since the early '80s.
War is bad for business, but the rumors of war are sometimes good
for business. I think if the Strait of Hormuz closed or if there
was a shooting war in the Middle East, it would drive the price
of gold upward. As the price of gold goes up, it's going to lift
the share price for the miners that have good fundamentals.
Right now the stock market is barely paying for fundamentals.
It really doesn't respect stories, let alone blue sky. But if the
price of gold keeps going up, the companies with decent
fundamentals will also rise.
Thanks for your insight, Byron.
Byron King is the resident energy and natural resource expert
at Agora Financial, LLC. A geologist by training, he worked for
the former Gulf Oil Co. and has followed oil industry
developments for over 30 years. King's career path also took him
into the U.S. Navy, both in active duty and reserve. In the 1990s
and 2000s, King engaged in a vigorous private law practice. For
the past five years, King has been writing about energy and
natural resource issues for an international audience. Currently,
King writes and edits
Daily Resource Hunter, Outstanding Investments
Energy & Scarcity Investor
. He holds degrees from Harvard, the U.S. Naval War College
and the University of Pittsburgh.
Clickhere for a free copy of Bryon King's award-winning
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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:
Goldcorp Inc., Minefinders Corp. Ltd., NovaGold Resources Inc.
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3) Byron King: I personally and/or my family own shares of the
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