Tocqueville Asset Management invests in precious metals companies for the long term, looking for names that are innovative and creative in identifying properties and adding value to those properties, says Portfolio Manager and Senior Research Analyst Doug Groh. Geopolitical and financial concerns, as well as market fundamentals, favor gold over the longer term, he believes. In this interview with The Gold Report, Groh provides his analysis of the macro environment for precious metals and profiles seven companies with quality assets that he expects to create value.
The Gold Report: Doug, after the long run-up in the precious metals market for most of the year, October started off turbulently. What is your take on it?
Doug Groh: Gold has had a nice performance through the first nine months of the year, posting a 25% year-to-date appreciation. It’s not unusual for markets to correct in the fourth quarter, and we’re seeing that in gold.
There are a couple of developments to note. One is that gold did really well during the summer months after the Brexit vote. That was somewhat of a surprise to investors; they thought that gold was just a first-half phenomenon this year.
The concern markets have with regard to Federal Reserve policy is interesting since markets actually set interest rates, not the Federal Reserve. Be that as it may, markets are back and forth on their interpretation of comments from Federal Reserve officials.
“MAG Silver Corp.’s Deep Zone discovery is likely to be one of the best this decade.“
Gold has bounced around and was consolidating in August and September. Then British Prime Minister Theresa May’s recent comments that the government had set a deadline to initiate the Brexit process woke up a number of traders. It seems that whatever Brexit uncertainty was priced in the gold market was suddenly discounted. Currency markets shifted to a weaker yen and pound. We saw selling in the gold futures market in early October, causing gold to go through some technical support levels, down through $1,270.
Gold is around $1,260 per ounce ($1,260/oz), which is actually pretty interesting because that’s the year-to-date average, and it’s $100 more than the average for 2015. We can now look back and say that late 2015 was the bottom of the cycle. At that point, approximately $1,050/oz, the gold price basically broke through the industry’s average corporate cost of gold production.
Now, the gold price appears well supported at the mid-$1,200/oz level from the resurgence of interest in owning physical gold and gold ETFs. The demand for gold ETFs has been consistently strong throughout 2016, including the past few weeks. At this point, the gold mining industry is making some decent profits and good returns. Even though prices have come off recently, the sector is doing quite well.
TGR: What about silver?
DG: Silver follows gold to a large extent. It took a little while to get up its nerve and move strongly in late spring, primarily in response to the Brexit vote. Investors jumped on silver quickly and made that trade. Silver has come off with gold. I don’t know if I can make the same type of observation about silver being sensitive to monetary policy; silver seems to be more sensitive to gold action and industrial activity. But certainly there are opportunities in the silver market, since it generally trades in-line with gold.
TGR: Looking ahead in the precious metals market, what do you see?
DG: The fundamentals for gold exposure are still very sound. We have a lot of financial threats in the market and the global economy. There’s a tremendous amount of financial anxiety in various global markets, whether it’s economic issues with regard to trade or deficits, or concerns regarding foreign exchange policies and valuations. Certainly there is heightened political anxiety too, with the various populist movements gaining momentum around the world. The pound is hitting a new low. It is not clear yet how to resolve the European banking crisis and other related issues surrounding the Euro currency. Meanwhile, Japan struggles. And we are beginning to see OPEC come to a consensus on firming oil prices, which could initiate some more pronounced inflationary pressures in the coming year. So there are a lot of different aspects that should encourage investors to take advantage of the weakness in the gold price in this quarter.
“NOVAGOLD’s Donlin Gold project offers investors not just a sizable resource but also a favorable jurisdiction where a mining company can operate.“
Generally we see a soft October, and then a stronger November for the gold price—and this has been the pattern for the last 10 years—then a little bit of a weaker gold price for a brief period in December. We have observed in the past that investors seem to be taking profits for tax reasons or for reallocating their portfolios, but generally in November and December, they’re also rebuilding their positions for the upcoming year. So, now is a good time to pay attention to the gold price and gold stocks.
With the November elections in the United States, there’s going to be a lot of uncertainty in the marketplace. My sense would be investors are going to be somewhat sitting on the sidelines until the presidential election is over. But once that becomes clear, I think investors will be fortified in their commitment to gold, certainly by the results of the election, whichever way it turns out.
TGR: What criteria do you use to pick precious metal companies for your portfolio?
DG: We take the long-term view. Our approach is to find companies that we think are able to create value regardless of political circumstances or capital market situations or financial conditions. We’re primarily focused on good quality assets run by accomplished and thoughtful management groups. We are interested in mine management teams that have a well-thought-out strategy and are known for creating value and managing their financial positions prudently.
Going forward, as I mentioned earlier, a number of characteristics in the marketplace or in the economy would argue for gold—whether that’s monetary policy or rising inflation expectations on the back of higher oil prices and job growth. There’s also an important fundamental reason that gold prices should go higher. It’s the fact that the industry’s resources and mine lives are declining. Grades are down and resources are declining. So mining companies, if they want to stay in the business, have to replace their resources. They can either do that through the exploration process or acquisitions. We’ve seen a lot of acquisition activity year to date. Companies are beginning to position themselves to replace resources and seem to be more eager to do it in the market. We, too, are thinking about who might be the successful explorers and developers in this next cycle.
TGR: Let’s talk about some of the companies that fit that bill, starting with some of the larger developers.
DG: One is NOVAGOLD (NG:TSX; NG:NYSE.MKT). The company is in a unique position in that it has a 50% interest in a huge gold deposit in the Donlin Gold project, located in Alaska, that offers investors not just a sizable resource but also a favorable jurisdiction where a mining company can operate. Alaska is resource-development friendly. NOVAGOLD’s management has been very pragmatic and studious in its development of Donlin. I think it’s going to offer investors a very good return over the long term. We’re very much on board with its plans and activities as it goes through the process of permitting and developing Donlin.
TGR: NOVAGOLD recently released third-quarter results and a permitting update. Do you have any takeaways from that?
DG: NOVAGOLD is going through the permitting process for the Donlin Gold project in a very methodical way, while also making sure the community is informed and involved in the project. The U.S. Army Corps of Engineers is overseeing the process for the Environmental Impact Statement and is now reviewing the comments from the public comment period. Various permits are also being advanced with state and federal agencies—such as water discharge, wetlands, air quality, water use and fish habitat permits and other approvals that will give them right-of-way access.
Meanwhile, NOVAGOLD has been very engaged in community outreach among local stakeholders. The work and benefit from that effort cannot be underestimated. NOVAGOLD has made it a priority, and rightly so, to involve the local community from early on in the project. That’s a good thing for investors waiting to realize the tremendous value that resides in the Donlin Gold resource with its 39 million ounces. And while most of management’s effort to realize value is focused on the Donlin Gold project, it appears to us that investors have totally discounted NOVAGOLD’S 50% interest in Galore Creek, which could someday be one of Canada’s largest and lowest-cost copper mines.
TGR: Is there another larger-cap developer in your portfolio that you would like to discuss?
DG: There is MAG Silver Corp. (MAG:TSX; MAG:NYSE), which seems to have a deposit that keeps on giving. The company’s joint venture with Fresnillo Plc (FRES:LSE) has not only gained the market’s attention but, also, its partner’s full attention. Every time I speak to the company, the news gets better and better. In August the company confirmed an extension of high-grade mineralization from the Deep Zone discovery on the Juanicipio joint venture with Fresnillo. The deep Valdecañas vein now is offering further upside, great grades, great metal content, interesting geology. Its strike length has now been reported as exceeding 800 meters (800m) to a depth of 200m to 300m beneath the current resource estimate. Mineralized widths range from 5m to 30m of high-grade multimetal zones, including silver, gold, lead, zinc and copper. They report more consistent copper occurrences in the deeper levels. It is an amazing discovery and geologically fascinating as well. The Deep Zone discovery is still open in several directions and there is more to learn about the extent of that mineralization. There appear to be several veins that make up the broader zone, which has yet to be defined. It is the type of discovery that is likely to be one of the best this decade, if not beyond.
TGR: How about another larger developer?
DG: Pretium Resources Inc. (PVG:TSX; PVG:NYSE) is a very interesting developer. Over the last few years as the gold market turned down, it was up against the wind developing its deposit in the Valley of the Kings in northern British Columbia. There’s been a lot of criticism of the project, but I’m very hopeful and excited to watch as it goes into commercial production in the next year. It has identified amazing grades. I feel very comfortable that it is going to achieve its objectives. We might see sporadic production over the years because of the nature of that deposit and the nature of the high grade there, but I’m quite optimistic that it’ll work out well. I think the naysayers will be humbled in due course but there probably will be ups and downs along the way, which will make it exciting for investors if they like to trade.
TGR: Would you explain what you mean by sporadic production?
“Pretium Resources Inc. has an amazing ore deposit, which in time should yield tremendous value.“
DG: It’s my perception that the project, as a high-grade deposit that operates during the winter months, will face good as well as difficult periods of production. The project has the challenge of high country and weather as well as a relatively erratic ore body in the sense that the gold is high grade and located in relatively narrow veins. It is not so much a question of whether the gold is there, in my mind. The deposit has received extensive drilling to define the resource and as much as that is known, mining dilution is likely to occur from the narrower veins. I would expect that mining will encounter periods of relatively lower grade or dilution, and that might mean the mill will have to process lower grade ores for a period of time. It depends on the company’s ability to manage its ore stockpile for processing, to some extent. Pretium will face difficult weather conditions during the winter months at the Valley of the Kings, which has an elevation at over 1,300m and receives 10m to 15m of snowfall. It’s a challenging project, in terms of logistics and the nature of the ore body, so one can’t expect that it’s just going to go smoothly with a consistent outcome. As much as the mine management team is well prepared for operating in difficult weather conditions and mining a high-grade deposit with relatively narrow veins, there will likely be periods when operations don’t go as planned. And yet, it is an amazing ore deposit, which in time should yield tremendous value.
TGR: Could we turn to some of the smaller-cap names in your portfolio?
DG: Sure. Jaguar Mining Inc. (JAG:TSX) is a company that has been around a while but under new management in the last year. It has managed a significant turnaround at its Brazilian operations and is in a position to generate free cash flow. Jaguar is doing all the things that an investor expects a mining company to do, and that is generate cash flow, have a good sound balance sheet, add resources and look for opportunities in the marketplace.
Jaguar recently announced a joint venture on one of its properties. So it’s daylighting value, which is the thing that we’re trying to invest in—companies that have that knack for identifying value and can do it through a number of different avenues, whether it’s through property deals or through mining activities or through exploration. Those are all attributes that Jaguar Mining is exhibiting. So we’re pretty thrilled about Jaguar Mining.
Another company that we’re intrigued with is NuLegacy Gold Corporation (NUG:TSX.V; NULGF:OTCPK). It has a property in Nevada that it’s drilling on. The Iceberg was a discovery from several years ago but in the last month it has made another discovery, the Avocado deposit, which looks even better than the Iceberg.
That it is in Nevada is important to us because we’ve become more concerned about geopolitical risk. Its project is along a major trend just south of Barrick Gold Corp.’s (ABX:TSX; ABX:NYSE) operations at Goldrush, with geologic characteristics of a Carlin-style gold system. So we think NuLegacy is in the right place to make a major discovery. From the indications to date, it looks like it is onto something very significant. I think there’s quite a bit of upside in its story with the grades and mineralized widths it has encountered.
TGR: Any other companies you want to mention?
DG: We like Gold Road Resources Ltd. (GOR:ASX), an Australian company. It is developing the Gruyere deposit in Western Australia that has about a 6 million ounce resource. It’s east of Laverton, in the Yamarna Belt, a district that has not gotten attention. It’s a major new gold region not well recognized by the marketplace. Gold Road made the Gruyere discovery in October 2013 and announced a 3.4 million ounce resource in 10 months’ time, which has grown since then. While the company continues to find more gold zones in the district, it will have a feasibility study out in the next quarter on the Gruyere mine/mill project that is designed to produce 265,000 gold ounces per year for 12 years. Now the company is going through the process of financing and building the mine over the next two years. We think the project and Gold Road’s land position in the district offers some excellent upside for investors.
Another name that we’re excited about in Australia is Evolution Mining Ltd. (EVN:ASX). The company has done an excellent job of improving its balance sheet, trading its assets for higher-quality assets and reducing its costs. It’s doing all the things that we’re looking for to create value, whether it’s at the operating level or the financial level or exploration activity. Evolution is adding to its resource base, which is what gold investors are looking for, more resources at the end of the day, not just the mined output.
TGR: Do you have any parting thoughts for our readers?
DG: It’s an interesting time for gold. We often talk about the reasons for having exposure to gold, whether it’s for diversification or as an alternative asset class or as a hedge to monetary policy. Even with the solid performance for the year to date, we think there are a couple of other important fundamental reasons that adding gold exposure to a portfolio makes sense now. The gold sector has come out of a five-year downturn, having bottomed out early this year. Typically, a positive gold cycle can last four to five years. Supporting that observation is a dynamic not fully appreciated by the market and that is declining gold production. With the downturn over the last five years, with the exception of a few companies, re-investment or new investment in gold projects had been cut back significantly. It can take five, if not many more years, to find, develop and build a mine. Given the lack of development, it is likely in the next few years that gold production will decline by a substantial amount. Gold prices will need to rise to much higher prices to justify new mine projects and it will take time to respond to higher prices. So aside from the fact that the gold sector has started a new cycle, the fundamental scarce nature of gold and the fact that it will become more difficult to access a steady supply in coming years, argues a compelling case for gold exposure now.
As we go through a correction here in the fourth quarter, investors are presented with an interesting opportunity to reassess the long-term proposition for gold. Certainly, on a fundamental basis, the gold cycle looks very constructive as we see mining companies reduce their supply and look for new supplies either through mergers and acquisitions or through exploration. The industry’s exploration efforts for this new gold cycle have just begun.
I think there’s going to be a lot of interesting news that will bring more investors to the sector as a number of these companies either make discoveries or pursue their developments or expand their operations in a much better gold price environment. A lot of these companies are much better off than they were a year ago. They have a little bit more flexibility to create more value. In time, investors will recognize that opportunity. A downturn can be a relatively healthy thing for investors who have felt they missed much of the recovery year to date.
TGR: Thanks, Doug, for your insights.
Douglas B. Groh is a portfolio manager and senior research analyst at Tocqueville Asset Management and has 30 years of investment experience. Before joining Tocqueville in 2003, he was director of investment research at Grove Capital. While an analyst for JP Morgan and Merrill Lynch, he was recognized by Institutional Investor and The Wall Street Journal. He holds an MA in energy and mineral resources from the University of Texas at Austin and a BS in geology/geophysics from the University of Wisconsin—Madison.
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Disclosure:
1) Patrice Fusillo conducted this interview for Streetwise Reports LLC. She provides services to Streetwise Reports as an employee. She owns, or members of her immediate household or family own, shares of the following companies mentioned in this interview: None. She is, or members of her immediate household or family are, paid by the following companies mentioned in this interview: None.
2) The following companies mentioned in this article are sponsors of Streetwise Reports: NOVAGOLD, MAG Silver Corp. and Pretium Resources Inc. The companies mentioned in this article were not involved in any aspect of the interview. Streetwise Reports does not accept stock in exchange for its services. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Doug Groh: I own, or members of my immediate household or family own, shares of the following companies mentioned in this interview: None. I am, or members of my immediate household or family are, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. Accounts managed by Tocqueville Asset Management hold shares of the following companies mentioned in this interview including: NOVAGOLD, MAG Silver Corp., Pretium Resources Inc., Jaguar Mining Inc., NuLegacy Gold Corporation, Gold Road Resources Ltd. and Evolution Mining Ltd. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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( Companies Mentioned: EVN:ASX,
GOR:ASX,
JAG:TSX,
MAG:TSX; MAG:NYSE,
NG:TSX; NG:NYSE.MKT,
NUG:TSX.V; NULGF:OTCPK,
PVG:TSX; PVG:NYSE,
)