2018 has brought potentially positive catalysts for gold, but even with trade war concerns and other geopolitical issues the yellow metal has not performed as well as
Speaking at the recent Mines and Money conference in New York, Adrian Day, president of Adrian Day Asset Management, explained that he believes “people expect too much from gold.”
He explained, “gold, after all, should be a store of value. It should simply preserve your purchasing power. If you read a textbook or think of a theory, that’s why you invest in gold: to preserve your purchasing power, not to get a double or triple on the price of a commodity. So I think we expect too much from gold, frankly.”
Day also discussed prospect generators and royalty and streaming companies, outlining the advantages and disadvantages of both models.
Overall, he said, his favorite metal right now is copper. Why? “I like copper in particular [because] copper’s supply deficit … four, five, six years out is purely based on the supply. In other words, you do not need the demand to pick up in order to have a supply shortage in copper,” Day said.
Listen to the interview above for more insight from Day on the gold market and more. You can also view the transcript below.
INN: We’re here at Mines and Money in New York, and you’ll be on a panel tomorrow discussing royalty and streaming companies as well as prospect generators. Can you start by telling me what you liked about those models?
AD: Both of the models are different obviously, but from my point of view they share one big feature in the gold space, which is they mitigate the risks of the competitors in their space. So if you look at royalty companies for example — or let me switch. If you look at mining companies, for example, miners have a lot of risks. We know about huge capital expenses, many years in many cases before you get a return and mines once built can be confiscated by governments or taxes can be raised; and that’s in addition to just things that go wrong with mines. Robert Friedland likes to say that Murphy works overtime in the mining business. So a royalty company mitigates a lot of those risks because you put money in to buy a royalty. Once you put the money in you’re not responsible for what goes wrong in the future.
And in many ways it’s similar to with the prospect generators. If you compare a prospect generator with the traditional exploration company — exploration as we know is an extremely high odds venture. Rick Rule this morning said one in 3,000 anomalies becomes a mine. So the odds are very, very long, and if you invest in a prospect generator you’re giving yourself exposure to multiple opportunities. So you reduce those odds significantly. I like to look at it as buying a little bit, having a little bit of many, many lottery tickets instead of just one lottery ticket.
INN: Lots of benefits there. Are there any disadvantages you would point out for those two types of models? I don’t know if I’ve ever heard any.
AD: Certainly prospect generators have a couple of disadvantages. One obvious but very important disadvantage is that once you’ve done an earn-in agreement with another company who’s spending the money, they are the ones that control to a large degree, they control the pace. They control sometimes where the money’s spent, and they control also things like the release of news, which can be very important for a junior company. Basically you’re no longer in control of your own destiny, and there’s many, many, many stories of companies that have done JVs with large companies — we won’t name names — the company met the terms of the agreement, but [only] just, and five years later after having done a minimal amount of work they gave the project back. And for the junior, that’s five wasted years essentially. Now, I’m making it as extreme as possible because of course you get the work that’s been done. You find out … what’s a good target, what’s not a good target and so on.
People say, “but royalties” — the knock on royalties is that they don’t have the leverage of a mining companies, and they certainly don’t have the operating leverage. But in terms of stocks — and I don’t know if you were going to ask me about this, but I’ve done some work looking at — there’s obviously four big royalties, Franco, Royal Gold, Wheaton and Osisko, and then there’s a bunch of smaller ones from Sandstorm downwards. I’ve looked at those royalty companies in various times against the XAU index Philadelphia gold and silver mining index. I’ve looked at them in strong markets, I’ve looked at them in weak markets, and the royalty companies tend to outperform over … medium-term periods whether they’re strong markets or weak periods, and I think that’s because they tend to have better balance sheets and the balance sheets help mitigate the risk in the mining business.
INN: You mentioned a number of the key players in the streaming and royalty space. There’s not a huge amount of choice out there. So, do you have any favorites or how should investors go about choosing these kinds of companies
AD: I mentioned the four big ones, and I’m talking about gold and silver here. Obviously outside of gold and silver you’ve got companies like Altius, but we’re focused on gold and silver here. So if you ask me which are my favorites, I’d say I like all four of them. I often say for people, “if …read more
From:: Investing News Network