Gold Is Not a Growth Industry-It Can Just Pay Investors
Big: John Hathaway
Source: JT Long of
The Gold Report
John Hathaway is the senior managing director of Tocqueville
Asset Management, where he manages all gold equity products and
strategies. In an exclusive interview with
The Gold Report
he shares why he is and will remain bullish on gold, the advice
he most often gives mining companies and the investing advice
that has stayed with him for almost 50 years.
The Gold Report:
When we spoke last October, you were bullish on gold and gold
equities. You blamed lagging gold?mining stock performance on
competition from exchange?traded funds (
), lack of investor confidence and investor doubts on the
sustainability of higher gold prices. Now that prices are
hovering around $1,600 an ounce (oz), will that dynamic
The dynamic will change based on higher gold prices. When one
Newmont Mining Corp. (NEM:NYSE)
, which is trading at about five times cash flow, one has to
scratch one's head and say, in a world of $1,600/oz gold, what is
that discounting? The market expects gold prices to go lower.
Otherwise, at $1,600/oz gold, a Newmont could trade at least at
an eight or nine times multiple of cash flow.
I'm using that as an example. Looking at the research material
on Newmont-we included input from 29 sell?side analysts-the
consensus expectation for gold prices in five years is
That is just one example that not even $1,600/oz is
to be a sustainable gold price.
sustainable. Up to $2,000/oz is sustainable. It's something that
we can get to. The monetary debasement that we're in the midst of
is ongoing. Federal Reserve Chairman Ben Bernanke said on Feb. 29
that there won't be any more quantitative easing (QE). The Fed's
minutes reiterated that about a month later. Both times gold took
a hit, but it didn't go to new lows, which I thought was pretty
interesting. Because for the average person, the narrative for
the last two years has been all about QE.
So if there is no QE, what takes it to $2,000/oz?
Gold was going up before QE was even a term in the English
language. Gold went from somewhere around $300/oz to $800/oz
before we had QE. The thing that drives gold is not dramatic-it's
not like a new round of QE and it's not geopolitical; it's the
fact that real interest rates are negative right now, close to
3%. So, if you have money that's saved up and you want to put it
in a bank or want to put it in treasuries, you're losing about 3%
a year. And you have to think about something else.
You could consider a lot of options. Gold is certainly on that
list. Last summer, when gold got to $1,900/oz, the story was
overcooked. The press was hyperventilating about the government
shutdown over the debt ceiling and the downgrade of the U.S. debt
We've gone from that situation, where it was basically boiling
over, back to a simmer. The stove is still on. Real rates are
still negative-with the promise of more of that. I can speculate
as well as the next guy can on what's going to be the next thing,
and it may be QE. QE could come about simply because the Fed has
been buying 61% of all new treasury issuance for the last year.
If it goes away, as Bernanke says it will at the end of June,
what's going to happen to short?term rates? What's the market
going to demand if the Fed's not there buying treasuries?
China's buying a little bit, but it's way down from what it
used to buy. In theory, we've got the two biggest supporters of
the treasury market, and the principal reason for low interest
rates, not being around in a big way after June 30.
China has been a hot topic: Whether it's growing. . .whether it's
shrinking. . .just not growing as fast. What impact can China,
India, Russia and Europe have on the price of gold?
Certainly, financial repression is not uniquely American. The
Indians see it. The Chinese have it. So, yeah, there's definitely
a non?U.S. bid for gold. It's not based on what's happening on
the Comex. It's based on the fact that liquid capital cannot get
a decent return.
If interest rates went to 5%, which would be a decent return
in a world with 3% inflation, that would add in the U.S. $800
) to the budget deficit. So whatever fiscal rectitude we might be
able to gather would be a drop in the bucket compared to another
$800B. That would take our annual deficit to well over $2
trillion every year. It's hard to imagine that. I don't have any
answers-I just know that this simple arithmetic doesn't show any
path out, other than some kind of money printing.
I know it's hard to predict dates, but Dec. 31 could be an
important date, because tax cuts are going to expire and there
will be cuts at the Pentagon and there will be debt ceiling
issues. Do you see a lot of hand?wringing leading up to Dec. 31,
similar to last summer?
Whoever gets elected in November is going to be on the hot seat.
There will be fiscal drag in spades when the tax cuts expire.
We talked about companies being profitable at $1,600/oz gold.
High energy prices have taken a toll on mining company
performance. How many companies can be profitable at these
At $1,600/oz gold, most existing mines are very profitable. Any
company that has a producing mine that's out of the startup
stage, where all the money has been spent, is gushing cash flow
at $1,600/oz gold.
You'd have to go case by case for the new mines that they're
building. But there are some new mines that are on the drawing
board that require $1,600/oz gold or more to be profitable. The
return on capital is likely to be less than anything that's in
existence. The market sees that and that's a reason the gold
stocks have been penalized, because in order to regenerate what
they have, they may not be as profitable as they are right
So the lagging share price would be because they're forward
That's a possibility. When a Newmont says that it's going to add
40% to the current production base, you know that that's a big
capital expenditure (capex). I talked to
AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE;
the other day. Last year it generated $800 million (
) of cash flow, which is pretty good. I think the market cap is
around $13B. This year it's spending $2.2B and it'll eke out some
free cash, according to what it's saying right now. That's still
pretty good. Here's a market cap of $13B and the equivalent of
about 20% of that is cash flow. What's the presumed return? I
know what AngloGold's projects are. They're by and large going to
be good projects.
But that's the issue that the mining industry faces-and maybe
a reason for the trepidation-is about the possible blowout in
capex. So you have to go on a case?by?case basis and see which
companies actually have projects where most of the costs are
already dialed in. There are others that are further out in terms
of permitting and ordering the long lead?time items-pouring
concrete and all that stuff-that might not be producing for five,
six, seven years. There you have an issue.
One thing I've been saying to most of these companies is they
don't need to grow. They just need to maintain what they have.
The market won't mind that, as long as they pay it back in
Is paying a dividend a big plus in your stock?picking
Do you see more companies moving toward that?
Yes. They should be paying out more and more. At the current gold
price, the payout ratio among large producers is less than 20%.
It's way too low. One reason it's too low is because mining
companies think they have to build all these new projects. But
they don't. Their stocks would probably double if they said,
"We're just going to maintain steady?state production and declare
a dividend of X amount."
But these guys don't think that way because they want to build
big mines with shiny new trucks and they want to send their
exploration guys out to all corners of the earth. That's their
modus operandi. So it's going to take time for the industry to
change. The more enlightened management will start to look more
and more at restricting capex.
It's not a growth industry. It's a capital?intensive business
that's fraught with risk. Why not just take a time?out, generate
cash for the next five years and pick spots? They have to build
new mines to replace what they have, but they don't have to build
so many new mines. If you take the 11 largest gold stocks, gold
producers, which account for something like 40% of global
production, and you go from 2008 to now, there's been no growth
at all in production. They're producing the same ounces that they
were producing then. These guys are crazy if they think they can
grow. Consider the scale of these big mines and then the risks
that the mining companies undertake with government intervention
at the host?country level, excess profits tax and you name
it-obstacles come in many forms, many disguises. There's going to
be a huge headwind.
Is acquisition the better way to go, instead of exploration?
Yes. There have been takeovers every year. That's something
companies could do. But they can't overpay. Newmont paid way too
much for Miramar because it's the frozen north and that mine just
isn't going to get built. Newmont has better opportunities. So,
acquisitions are fine, but companies have to do a better job of
Some countries are a bit more difficult to do business in than
others. What's your take on risk versus opportunity, and what
countries do you favor or stay away from?
We do not invest in China or Russia. Rule of law is the first
thing that we look at. But every country has issues, even the
U.S. It's a very localized business. You have to ask which state
in Argentina is the mine located, for example. Which part of
Mexico is the mining company dealing with? You have to generalize
about countries, and we do that, but once you've done that, you
have to ask about specific locations.
But my general rule of thumb is that local governments will
try to hold companies up because they see a gold price of
$1,600/oz. Companies have bull's?eyes on their backs. It's cold
extortion. "Resource nationalism" is the polite term. It's a way
of life; it's nothing new. And so the differences are in how
these companies deal with it. It obviously affects margins and
The game is worth it if the company has a good asset; if the
gold price is going to do as we expect it to in a world of
monetary debasement; and if the country has good geology, a
mining culture and some infrastructure. So, for me, the only
countries that are off?limits are Russia and China. Also,
probably Bolivia, Venezuela and Pakistan. We also look for
countries that have a bad temporary rap, as Indonesia does right
now. It has just passed a mining law that basically takes some of
the equity 10 years out. But then, if the stock discounts all of
that, and the company gets enough of a reflection of the obvious
problems and it still has a good asset and a decent team of
people, then we'll look at something like that.
You hold about 10% in physical gold; 40% in the larger cap
companies, with some royalty companies; 30% in near or small
producers and the rest in the juniors. Are you adjusting your
portfolio after some of the declines recently?
We've taken a little money out of the ones that are very fully
valued. When something like
Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE)
gets beaten up, then we'll look at that as a buy.
We typically have a low turnover; we're not very active in
trading. Our basic mix hasn't changed. And we wouldn't change it
dramatically because the thing that's given us excess return over
the years has been the fact that our average market cap is
smaller than that of our peers, at 60% of our peer group, which
tells you we're skewed to smaller cap size. Those companies are
the ones that
grow. They're the ones where discoveries can make an impact on
the valuation of the whole market cap. So, if you don't have
those, then you might as well just own Market Vectors Gold Miners
ETF (GDX:NYSE.A). You might as well just own the ETF of big?cap
stocks. And we try to do better than that.
But we always keep our eyes on companies, and if the story
changes or if there's a valuation question, we'll look to see if
we can deploy it in a better way.
A number of companies have mentioned you as a key piece of the
junior mine?building process. How do you decide which companies
to participate in, and what are some examples of when you've
really been able to make a difference in a company?
Osisko Mining Corp. (
is the best example; we were an early supporter of Sean Roosen.
This goes back five years or so. He had an interesting thesis
that most of the mines in Quebec were very deep because people
were chasing grade to great depths. Roosen said they missed all
the stuff on the surface. It is much lower grade, but as the gold
price went up, what was considered to be not worth mining had
We backed Osisko early on. And then we backed it in several
subsequent financing rounds. The miracle of that stock is that
Roosen financed a huge capital expenditure through the meltdown
in 2008. I would never want to do that again. The result is that
here's a company with a new mine-it just started producing about
a year ago. It has the usual startup issues, but they're not
fatal. And we figure that at these gold prices, Osisko's going to
generate a lot of cash flow, maybe $600M a year. This is a
company that had a market cap five years ago of probably less
than a $100M.
That is dramatic. And you supported him based on the fact that he
had an interesting idea.
And also because every step of the way he had a credible way to
deal with whatever came up. And there was always something coming
up. He had to move a town. He had big financing problems, as all
these companies do when the markets dry up. But he met the
challenges very believably.
We do hold investments in some companies that we think are
good assets, but we're disappointed in the management. That's
better than having bad management and no assets, but it's not
ideal. And we make our displeasure known.
So you're active investors.
We're very vocal backseat drivers. We see these guys all the
time, in all these conferences that we go to and mining trips we
take. We're in constant contact. They know who we are. They know
where to come for the money, but they know it's not a free
Any other examples you want to give of how you were an active
International Tower Hill Mines Ltd. (ITH:TSX;
has been very frustrating recently. But I've been through it
before. The stock has been very disappointing lately, but when I
see a good asset like that, it's worth sticking with. We'll get
it right. Not on a timing that will make everybody happy, but
we'll get it right. And we view it as a partnering. We're vocal
shareholders, but we never want to seem abrasive or hostile.
Basically, everybody's got an interest in making the thing
We've been a long?time investor in International Tower Hill.
The market is scared right now because there's a big capital
expenditure program. But we've financed the company in several
rounds. Before there wasn't more than just a couple million
ounces there and today the company claims it could have as much
as 20 million ounces in various categories. And it's in Alaska.
So when you read all these terrible headlines about Mali and
Indonesia, Alaska sounds pretty darn good. Alaska's got
infrastructure. International Tower Hill is in a mining?friendly
jurisdiction, near Fairbanks. There's every reason in the world
it would want to get this thing permitted and built. I think it
will. We just have to figure out how to get from here to
What was the best investing advice you ever received-whether you
took it or not-or the best investing advice you ever gave?
I had a finance professor at the University of Virginia in
business school, before it was called Darden, back in the 1960s.
He was a very conservative guy: He wore both a belt and
suspenders-he had backup systems. He said something that I've
never forgotten: "To be successful in investing, there's only one
thing you need to know. You have to know when to sell." Is that
ever true. The most successful investors are the ones who know
when to sell. And you only know when that is with 20-20
hindsight. I look back and say, "Should we have sold this stock
or that stock, when gold was $1,900/oz and the pot was boiling?"
But then I remember that I'm such a bull on gold. Even though
this seems like a short?term peak, I expect the precious metals
stocks are going to trade much higher.
, senior managing director of Tocqueville Asset Management,
manages all gold equity products and strategies at Tocqueville
Asset Management. He holds a bachelor's degree from Harvard
University, a Master of Business Administration from the
University of Virginia and is a chartered financial analyst. He
began his career in 1970 as an equity analyst with Spencer
Trask & Co. In 1976, Hathaway joined investment advisory
firm David J. Greene & Co., where he became a partner. In
1986, he founded Hudson Capital Advisors and in 1988 he became
chief investment officer of Oak Hall Advisors.
Hathaway was one of 31 financial luminaries on hand at the
recently concluded Casey Research Recovery Reality Check
Summit, where 300+ attendees absorbed three days of expert
economic analysis, little-known investment and asset-protection
strategies, actionable investment advice-including specific
stock picks-and more. While you may not have been able to
attend, you can hear every recorded presentation with the
Summit Audio Collection
, which are available as downloadable MP3 files or CDs. Either
way, you'll get over 20 hours worth of recordings that will
provide you with valuable insights and timely investment
recommendations that are off the radar of the Wall Street
Learn more here
Want to read more exclusive
interviews like this?
for our free e-newsletter, and you'll learn when new articles
have been published. To see a list of recent interviews with
industry analysts and commentators, visit our
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:
2) The following companies mentioned in the interview are
The Gold Report:
None. Streetwise Reports does not accept stock in exchange for
3) John Hathaway: I personally and/or my family own shares of the
following companies mentioned in this interview: International
Tower Hill Mines Ltd. 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
The Gold Report
is Copyright © 2012 by Streetwise Reports LLC. All rights are
reserved. Streetwise Reports LLC hereby grants an unrestricted
license to use or disseminate this copyrighted material (i) only
in whole (and always including this disclaimer), but (ii) never
The Gold Report
does not render general or specific investment advice and does
not endorse or recommend the business, products, services or
securities of any industry or company mentioned in this
From time to time, Streetwise Reports LLC and its
directors, officers, employees or members of their families, as
well as persons interviewed for articles on the site, may have a
long or short position in securities mentioned and may make
purchases and/or sales of those securities in the open market or
Streetwise Reports LLC does not guarantee the accuracy or
thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are
listed on the home page in the In This Issue section. Their
sponsor pages may be considered advertising for the purposes of
18 U.S.C. 1734.
Participating companies provide the logos used in
The Gold Report
. These logos are trademarks and are the property of the
101 Second St., Suite 110
Petaluma, CA 94952
Tel.: (707) 981-8999
Fax: (707) 981-8998
For more information, go to