John Doody's Doody-Free Picks
Source: Brian Sylvester of
The Gold
Report
6/23/10
http://www.theaureport.com/cs/user/print/na/6611
In the last decade,
Gold Stock Analyst
Editor John Doody has seen his top-listed equities skyrocket a
combined 1,000%, including an eye-popping 130% in 2009. John's
tried and true methods have little to do with luck; this student of
the gold business rarely fails to find value at any gold price.
Subscribers pay a lot for his knowledge and expertise in the
Gold Stock Analyst;
but in this exclusive interview with
The Gold Report,
you get a few of his favorites
Doody
-free.
The Gold Report:
We're about 1.5 years into the Obama administration's
multi-trillion dollar bailouts and expansion of the Fed balance
sheet to $2.3 trillion from about $800 billion. What are your
thoughts on that?
John Doody:
I think it's a bailout that continues with $1 trillion-a-year
deficits as far as the eye can see. There's no end to it; unless we
get some significant tax increases and/or spending cuts, there's no
hope to ever to pay down the debt. The best hope is to get the
economy growing faster than the debt so that, as a percentage of
GDP, the debt level shrinks.
TGR:
Do you agree with the administration's fiscal policies?
JD:
Oh, yeah. I really don't know where we'd be if we didn't undertake
all these remedies from the Treasury side on the deficit side, as
well as the Federal Reserve side. The mess that this economy was in
as a result of the Wall Street and housing collapse continues. You
go by a strip mall here in South Florida with 10 stores, and at
least one or two are empty. Almost 10% of workers are still without
jobs. I was surprised to read that about 11% of all prime
mortgages-these are the best mortgages-are either in foreclosure or
delinquency. People are hurting.
TGR:
How do you see all of this affecting the gold market?
JD:
Everything that's being done creates inflation. You don't really
care if somebody gives you a $1,000 government bond as payment for
a debt or $1,000 cash. They're equivalent. We're creating a
tremendous amount of money trying to get the pump primed to get the
economy moving, but it's obviously a very difficult task.
TGR:
You mentioned inflation and, in your last interview with
The Gold Report,
you said: "Bernanke and the Fed are pursuing a loose monetary
policy with a 0% interest rate. There's actually no way we cannot
end up in inflation." We're starting to see signs of it now. How is
gold going to act in an inflationary environment and, perhaps, even
in a hyperinflationary environment?
JD:
Gold's going up now; it's going to go up more. One of the uses of
gold is to protect your purchasing power from inflation, and it's
done a damn good job! It always drives me crazy when these talking
heads on TV talk about gold now vs. $850 in 1980. They say, "Oh,
look where it's gone!" It's gone nowhere. That was a one-day high.
The next day the gold price was $738. More important is to look at
the gold price from when it was set free in 1968. It was fixed at
$35 for over 30 years. If you just took that $35 from March '68,
and I did in a recent issue of the
Gold Stock Analyst,
and adjusted it by the Consumer Price Index (
CPI
), gold would have grown from $35 to about $225. That's your
inflation protection; everything above $225 all the way up to the
current price and the next $1,000-that's all investment gains. From
'68 to the present, gold had had an 8.6% compound annual growth
rate that was 4.4% above the inflation rate for the period.
TGR:
But you hold gold equities, and you don't hold bullion. In the last
market crash, everything crashed-even the gold equities.
JD:
That's true. The reason that I hold gold equities is because you
get better leverage to the gold price. We always have to remember
that while the stocks are derivatives of gold, they are stocks
first. If the buyers disappear for stocks, they disappear for gold
stocks too. But when they come back, they come back with a
vengeance. In 2009, the gold price was up 28% and the XAU was up
37% but the
Gold Stock Analyst's
Top 10 was up 130%. That's the leverage you can get from owning the
right stocks.
TGR:
Congratulations on being up 130%.
JD:
We're up 1,000% for the last decade.
TGR:
That's impressive.
JD:
Investors in exploration stocks got killed in the 2008 crash. There
were no fundamentals underneath those stocks. All the stocks I
cover are producers or very near producers. We know there's
something there, so we're not just arm waving over some drill
results. That's one of the things that makes
Gold Stock Analyst
unique: We don't cover the exploration stocks because I'm not a
geologist. I can't interpret drill results. I want data. I want
data that you can analyze and that's productions and reserves.
TGR:
In a recent issue of
Gold Stock Analyst
you said: "As we're in a bull market underpinned by negative real
interest rates, loose monetary policies and exploding government
deficits, it's best to keep riding the bull and don't let it throw
you off." How high can the bull ride through the end of 2011?
JD:
First we've got to understand what the real interest rate is.
That's the risk-free return on money, such as short-term U.S.
Treasuries. The U.S. Treasury can't default. They can always print
more dollars and give them to you. I like to use 90-day T-bills. Or
you can use savings-account rates, which are about 0.1%. It's
trivial. If you have in a savings account or in 90-day Treasuries
and you start the year with $100, at the end of the year you're
going to end up with $100 plus 0.1% interest. But if inflation is
2%, the money is going to buy you only $98 worth of goods. When
real interest rates are negative, and people can't get positive
return on their money by putting it in the bank or risk-free
situation, they naturally flock more to gold to protect the
purchasing power of their money. Gold has been a sanctuary in
monetary crises and inflation for centuries. In the 2000s, Chairman
Greenspan lowered the Fed Funds rate to 1% and the inflation rate
has generally been higher. That's why gold has done so well.
TGR:
What gold price will we be looking at through the end of this year
and 2011?
JD:
Well, I'm not a guy who predicts the gold price because my
philosophy is I can find value at any gold price. I'm just looking
at the next $100 ahead. People who predict $1,500 or $2,000 or
$5,000 are foolish because there's no basis for that. I don't doubt
gold will get to those levels, but I have no idea when. I find
undervalued stocks now and profit as Mr. Market discovers them. So,
if gold does nothing, we can still profit. If gold goes up, then
we've got two ways to profit.
TGR:
Alright, how long do you think gold's bull run will last?
JD:
I think it's got a lot longer to run because the negative real
interest rate environment is going to run a lot longer. When's the
Fed going to raise interest rates significantly? They can't raise
them now. We've got almost 10% of the country unemployed and that
much, again, underemployed. So, until the economy gets going, we're
not going to see any real change.
TGR:
What about holding bullion vs. equities?
JD:
The reason the stocks give you more leverage than physical gold is
because all of the ounces are yet to be mined. Typically, a gold
mine is going to have 10 times or more reserves in the ground than
what they're producing in the current year. If a company is
producing one million ounces a year and the gold price goes up by
$1, that dollar falls right to the bottom line. That's $1 million
more in profits. But because they've got 10 million ounces still in
the ground, those ounces are now worth $10 million more than
before. That's what gives you the leverage that owning bullion just
doesn't give you. If you own bullion and gold goes up $1, your
coins are worth $1 more. No big deal.
TGR:
Let's talk about some gold equities, starting with the majors:
Barrick Gold Corp. (TSX:ABX; NYSE:ABX)
,
Newmont Mining Inc. (
NEM
)
and
Goldcorp Inc. (NYSE:GG; TSX:G)
.
JD:
Goldcorp is a
Gold Stock Analyst
Top 10 stock. Barrick is not, though there's nothing wrong with the
stock now that they bought back their hedge book.
TGR:
Please explain that deal.
JD:
What Barrick spent to buy back its hedge book was more than all the
profits it earned over the whole time the company was hedging.
Ultimately, its average hedge delivery price was about $400/oz.
They bought back the book at about $1,100/oz., so it cost them $6
billion. That offset all the earnings they ever had from hedging.
It was a lousy strategy for a rising gold market. That's not a
reason not to like Barrick. I think it's definitely a blue chip
company-great management, great bunch of projects.
Barrick's producing around 7.8 million ounces (Moz.) of gold a
year. They've got three great projects coming online that they're
going to have to fund. These projects are going to require about $8
billion worth of capital. They're going to deliver about maybe 3
Moz. more a year, but the $8 billion is a lot of money to come up
with.
One is Pascua-Lama. It straddles the Chile/Argentina border at
16,000 ft.; two is Cerro Casale also at 16,000 ft. in Chile; and
third is Donlin Creek, of which they own half in Alaska. The
problem there is we don't know if it's going to get permitted.
They've got a partner,
NovaGold Resources Inc. (NYSE.A:NG;TSX.V:NG)
. How they'll raise their half of the $4+ billion of capital needed
for Donlin Creek we don't know. It might be possible for Barrick to
get a bigger percentage of Donlin Creek by helping NovaGold with
the capital cost. Great company, but not a
Gold Stock Analyst
Top 10.
TGR:
And Newmont?
JD:
I don't have anything against Newmont; also a great company. It had
a change in management style. They're not looking for growth.
There's sort of flat production over the next few years at around
5.5 Moz./year. What they're looking to do is maximize cash flow,
which is a good objective, but we don't know what they're going to
do with the cash flow. Are they going to use it for acquisitions or
are they going to raise dividends? I think it's best to invest in
growth. Barrick's going to give some growth. I think Newmont, by
not giving growth, may be penalizing investors unless they start
paying out a dividend higher than the current $0.40.
The third one you listed, Goldcorp, pays a smaller $0.18
dividend but it's got growth. It's the only miner growing from an
intermediate stage. Right now it's the largest intermediate at 2.6
Moz./year with a cash cost at around $300. It's growing to 4
Moz./year and a cash cost at around $300. That's a cash cost that
really is better than anybody else's in the business. They have
that because of the big copper byproducts. They seek out mines that
have a copper byproduct.
The nice thing about Goldcorp is it's all self-funded. The mines
are in the pipeline. You can see how the new mines are going to
come online. Beyond that are projects they're working on but are
not yet in the development pipeline. Those are going to add another
one million ounces a year. Goldcorp could be a 5 million ounce
producer by the end of this decade.
TGR:
In the June issue of the Gold Stock Analyst, you raised your short-
and long-term target prices for
Golden Star Resources Ltd. (
GSC
)
,
Golden Queen Mining Co., Ltd. (
GQM
)
,
Northgate Minerals Corp. (TSX:NGX; NYSE:NXG)
and
Terrane Metals Corp. (
TRX
)
. Can you tell us about those decisions?
JD:
Both Golden Star and Northgate are highly leveraged to the gold
price. They both have high cash costs of about $600/oz. We do this
target price analysis that incorporates gold price, proven and
probable reserves, the recovery percentage, the cash cost per
ounce, number of shares outstanding, debt, capital costs to build
mines and the stage of production a company is in. Is it at
feasibility stage, in construction or in production? All these are
incorporated into our nifty formula and the formula told us that
Golden Star's and Northgate's target prices should be raised
because gold had increased to $1,200/oz. The increases weren't big;
they were about $0.50 a share, but type of adjustment can happen
regularly. We incrementally raise or lower target prices as
information comes available as part of our ongoing analysis.
We raised the target price on Terrane because they did an equity
financing. Terrane's got 6 Moz. of proven and probable reserves,
fully permitted and ready for development in British Columbia.
Those ounces are now selling for $60/oz. Gold is $1,200, and you
can buy their ounces at a 95% discount, making Terrane pretty
interesting. The only fly in this ointment is it has to raise the
money to build the mine. It did a $100-million financing and has
enough equity to be able to move forward over the next year. The
bigger financing is likely going to come from an Asian smelter, as
it's a copper/gold project and somebody like
Mitsubishi Corp. (TK:MC)
or
Sumitomo Metal Mining Co. Ltd. (
US
)
is going to end up buying 25% of it for $250 million or something
like that. Plus,
Caterpillar Inc. (
CAT
)
will finance $100 million over their equipment. There'll be some
development loans. There'll be some project debt. Low and behold
this time next year, they'll be in construction. But, at this
point, the stock's only selling at around $1 and there's some
uncertainty as to how all this is going to shake out. That's what
creates the opportunity. We raised our price on their success
raising $100 million in equity, which they did at $1.10.
TGR:
What would it take for Goldcorp take Terrane out?
JD:
Goldcorp owns about 53% of the company. Frankly, it was my
expectation that they would take out Terrane. But at decision time,
they had the opportunity to buy El Morro and beat Barrick to the
punch for about the same amount of money, roughly $500 million. I
still think there's a possibility that Goldcorp will buy out
Terrane. It's got everything that Goldcorp wants-6 Moz. in a
politically safe location and a negative cash cost per ounce due to
the copper byproduct. It may take Sumitomo saying: "Alright, we're
going to buy 25% interest in the mine." Will Goldcorp let that
happen, or do they want the whole mine to themselves?
TGR:
In your last interview with The Gold Report, you mentioned several
royalty companies including
Franco Nevada Corp. (
FNV
)
,
Royal Gold Inc. (NASDAQ:RGLD; TSX:RGL)
and
Silver Wheaton Corp. (NYSE:SLW; TSX:SLW)
. Please update us on those.
JD:
I love the royalty model. It's not one that a lot of investors know
about or understand. Typically, royalties are generated in two
ways. When a property is sold, the seller gets either cash or
shares upfront; and they'll often take back a residual royalty.
Sometimes it's a percentage of profits, which is not the best
royalty. The best is a percentage of sales.
A great example of royalty transaction was Kennecott (a
subsidiary of
Rio Tinto Ltd. (LSE:RIO; NYSE:RTP; AUS:RIO)
, the original owner of Peñasquito in Mexico. Goldcorp is
developing that property into a twin mill mine. One 50,000 ton/day
mill is in production and the second will be in full production
this summer. It's a polymetallic mine that, over its 20+ year life
will average 500,000 oz./year of gold, 30 Moz. of silver and about
400 million pounds (Mlbs.) of zinc and lead. That's huge
production.
At current prices, the revenues from Peñasquito will be about
$1.6 billion annually. Kennecott sold that property to Western
Silver Corporation (TSX:WTC; NYSE.A:WTZ), which was acquired by
Glamis Gold (
GLG
), and then Glamis was acquired by Goldcorp. The 2% NSR royalty
that Kennecott initially kept was sold to Royal Gold for $100
million about three or four years ago, and will now generate $32
million a year in royalty income at current prices. Because Royal
Gold has issued only 50 million shares, that's roughly $0.60 a
share. That's going to continue as long as the site is producing,
which is probably going to be another 30 years.
Royal Gold has another royalty that comes online in August from
Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A; TCK.B)
's Andacollo copper/gold mine in Chile. which was originally and
open-pit oxide mine. As mining went deeper, the ore turned more
sulfide and they had to build a mill to process the sulfides. Teck
was in financial trouble in 2008, when the markets crashed, and had
to sell a gold stream to Royal Gold for roughly $260 million in
order to build a mill to keep getting the copper. They effectively
sold Royal Gold 40,000 oz. gold a year out of Andacollo at no cost
per ounce. So 40,000 oz. times $1,200 oz. is $48 million a year.
That's almost $1 a share for Royal Gold starting in August.
My target for Royal Gold is a double from here. It's about $50
now. They have a history of paying out 20% of their earnings in
dividends. I can easily see at current prices a $5-a-share royalty
income stream, which could be $1 a share in dividends. You look at
any of the dividend-paying gold stocks, and they're all going to be
between 0.5% yield and 1.5%. If we just take the average 1% yield
with $1 per share dividend, that's a $100 stock.
TGR:
What about Silver Wheaton?
JD:
Silver Wheaton is a royalty company of a little different flavor
because it's focused purely on silver. They buy royalty streams
where they put up money upfront to help build the mine. Once the
mine has been built, they buy the silver from the mine at $4/oz.
Sometimes it's even the silver byproduct from a base metal mine.
They spent $475 million to buy 25% of the silver output from
Goldcorp's Peñasquito, which is about 7 Moz. a year. On the royalty
streams in place now, this year they're going to receive about 23
Moz. They pay on average about $4/oz. for the silver. Silver is now
$18 an ounce. If they're paying $4, they make a $14 profit on every
ounce that comes in. If you carry existing projects through to
2013, they'll have a royalty income on 40 Moz. That 40 Moz. of
silver at $18, less the $4/oz. cash cost gives them $560 million a
year in royalty stream income. That's $1.64 a share in royalty
income. Silver Wheaton doesn't pay a dividend yet, but they're
saying they will soon. If they stay at the typical 20% payout
ratio, that gives us a dividend of around $0.30 a share of Silver
Wheaton. If we simply use the 1% rule of thumb that I'm using for
dividends, that's $30 for Silver Wheaton, which is now around
$20.
Franco-Nevada was a Top 10 stock last year. It has great
management and is really the originator of the royalty stock
concept. I would never bet against these guys. Franco was one of
these situations where we bought it at $17, and it got to $27-our
target price. We couldn't justify a higher target, so we took it
off the list. Boy, we'd love to buy it back at $17 again; and, if
it gets there, we'll be first in line to buy it. It's just fully
priced right now, so its upside is not as clearly defined as the
other two.
TGR:
Where should a value investor go to find value among the
mid-tiers-something like
Yamana Gold Inc. (TSX:YRI; NYSE:AUY; LSE:YAU)
?
JD:
Yamana's a good play. Yamana is a mini Goldcorp. It's got growth.
It's going to produce about 1.1 Moz. from its mines this year. The
company's in politically safe areas of South America; growth will
reach 1.5 Moz. in 2012 or 2013, and then the next year 1.7 Moz. are
from mines currently in the development pipeline. It is
self-funding all its growth-no need to sell any shares or borrow
any money. Because of the copper byproducts, Yamana's got a cash
cost of about $200/oz.-which, for a 1.1 Moz. Producer-is the lowest
of any of the equivalent size guys.
Then there's
Agnico-Eagle Mines Ltd. (NYSE:AEM; TSX:AEM)
, which is at about the same production level; but Agnico's cash
costs are around $400. I love the Yamana story. The stock is
suffering a little bit right now because it's not clear what's
going to happen with Agua Rica, a 7 Moz. project in Argentina. They
really don't have any new mines entering production until the end
of 2011. The market is just letting it mark time. When it becomes
clearer that these mines are getting ready to come into production,
I think the market will start bidding up prices. I'd rather be
early on a stock because that's how you get the biggest percentage
gains. Our long-term target for Yamana is $20.
TGR:
Any other names people should get in early on?
JD:
One of the most undervalued ones out there in my opinion is
Minefinders Corp. (TSX:MFL; NYSE:MFN)
. It has a single gold/silver mine in Mexico coming into
production. This year, it will produce about 134,000 ounces of gold
equivalent at around $400/oz. The cash cost is coming down because
they're still ramping up to their 180,000 oz./year gold equivalent
for 2011. So it's definitely time to get on the train for
Minefinders. Our target for Minefinders, when they're in full
production, is $15. It's a big deposit. It's simple metallurgy.
It's the kind of project a Yamana could fold into its mine
portfolio. I think it's a great target for an acquisition.
An Economics Professor for almost two decades, John Doody
became interested in gold due to an innate distrust of
politicians. In order to serve those that elected them,
politicians always try to get nine slices out of an eight slice
pizza. How do they do this? They debase the currency via
inflationary economic policies. Success with his method of
finding undervalued gold mining stocks led Doody to leave
teaching and start the
Gold
Stock Analyst
newsletter late in 1994. The newsletter covers only producers
or near-producers that have an independent feasibility study
validating their reserves are economical to produce.
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DISCLOSURE:
1) Brian Sylvester of
The Gold Report
conducted this interview. He personally and/or his family own the
following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors
of
The Gold Report:
Goldcorp, Terrane, Franco Nevada and Minefinders.
3) John Doody: I personally and/or my family own shares of the
following companies mentioned in this interview: All. I personally
and/or my family am paid by the following companies mentioned in
this interview: None.
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