While the
markets have been on edge for the past year or so and have left most
investors bewildered as to what to do next, portfolio manager and author John
Stephenson thinks that the course is set for higher gold prices. In this
exclusive interview with The Gold Report,
Stephenson explains why he thinks we will avoid a worldwide economic crash
and how the continuing QEs and foreign government bailouts will push more
investors into the gold and mining share markets as gold moves above
$2,000/ounce. He also talks about some of his favorite gold mining names that
should be good vehicles to profit from this move.
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Companies Mentioned : African Barrick Gold Plc : Barrick Gold Corp. :
Claude Resources Inc. : Detour Gold Corp. : Eldorado Gold Corp. : Franco-Nevada Corp. : Goldcorp Inc. : IAMGOLD Corp. : Kinross Gold Corp. : Newmont
Mining Corp. : Osisko Mining Corp. : Yamana Gold Inc.
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Related Companies : Allied Nevada Gold Corp. : Detour Gold Corp. : Franco-Nevada Corp. : NOVAGOLD : Pretium Resources Inc.
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The Gold
Report: Since you last spoke with The
Gold Report in January, we've had a seemingly self-feeding cycle of
expectations, plans, bailouts, lack of results and back-to-the-drawing-board.
Do you see any ultimate resolution to the world's economic dilemma, or will
we somehow just muddle through, or have to go through an actual crash of some
sort?
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John
Stephenson: I think we'll basically muddle through
from here. We've had several important developments over the last few weeks.
The Federal Reserve's Quantitative Easing 3 (QE3) $40 billion program
targeting mainly mortgage securities has the potential to move the needle.
There was a big rally to risk assets when that was announced but that has
faded somewhat. The other huge thing is the announcement by European Central
Bank (ECB) President Mario Draghi that he would
defend the euro at all costs. Later he talked about a bailout plan called the
Outright Monetary Transactions (OMT) program that would involve unlimited
purchases of sovereign debt for up to three years. The devil is in the
details and it may not get implemented in the way the market interpreted it,
but nonetheless, that was very positive.
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Then the
Bank of Japan turned positive with its stimulation of the economy. Lastly,
China announced a ?1 trillion stimulus program directly linked to real
infrastructure. So, we think that with the ECB, the Fed, and to a lesser
degree the Bank of Japan and the Chinese, we have a very promising case for a
slow upward grind in the market. I think the Armageddon or crash scenario has
essentially been removed from the marketplace and stocks and commodities are
biased higher in this environment. Is it going to be a
resumption to robust growth? No, because the West, primarily Europe
and to a lesser degree the U.S., still have slow growth ahead as consumers
deleverage and as the economies get back on track.
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TGR So,
basically, the world got ahead of itself in this big race to develop, and all
it really did was mortgage its future. Now it's having
to pay back the mortgage.
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JS: I think
that's absolutely right. People took out these big bets on real estate,
mainly in countries like Spain, Ireland and the U.S. As a result, we had
bubbles forming in much of the world, in sunny places where people wanted to
retire like Florida, Nevada and California. The same is true in Europe,
whether it be Spain, Italy, Greece, etc. So, real estate became the flavor de
jour over the last decade or so and we're still dealing with the overhang and
will be for some time.
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"Things
are looking better in the U.S. and housing prices and consumer confidence is
turning up."
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Things are
looking better in the U.S. and housing prices and consumer confidence is
turning up. I think the Fed has done a great job of getting the economy
going. Is it perfect? No, far from it. We still have far too many people
unemployed in the U.S. Nonetheless, it's looking a lot better than it was a
couple of years ago. So, that's the good news and the silver lining. In time
we can work our way out of these problems. And, that's why I'm a little more
optimistic than pessimistic right now.
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TGR: The other
big asset class is obviously stocks. Have the markets turned into little more
than a big poker game with mainly short-term maneuvering and no real
long-term investment strategy, or is this about all that most investors can
do in this market environment?
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JS: You've
keyed on a couple of important things. I would say the markets certainly
appear somewhat range-bound; I don't see much more upside going forward.
We've had a good run with the S&P 500, up 16% year-to-date. The Toronto
Stock Exchange is up roughly 4%. The Canadians have lagged and it's harder to
find good value out there. Markets are trading around 12? to 13 times
next year's earnings, which is not that expensive, historically. But, the
problem is the things that seem to be working, the dividend paying stocks,
are getting to be quite a crowded trade.
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And, I
think the other thing that's happened is many people have been sitting on the
sidelines waiting to get involved. You see that in mutual fund flows, where
in spite of the very strong returns on the S&P 500, equity funds have had
net outflows for almost all of the last 52 weeks that have been going mainly
into fixed-income. Investors are scared and don't know what's going on. They
see the pain, at least in their neighborhood or their community, with high
levels of unemployment and lack of hiring. All the cheerleading out of
Washington and even out of Wall Street just can't overcome that things are
still tough. But, the reality is, at least by the numbers, that things are
starting to improve. Ultimately, that's a good thing. And, it will be very
good for equities going forward. I think we just need to see unemployment
start falling before some enthusiasm returns in the space.
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TGR: So, people
just need to feel better about taking a little risk, and right now they're
just parking their money and doing nothing?
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JS: I think
that's right. People run back to the safety of U.S. government debt when they
start worrying about the bigger problems out there, like Europe and to a
lesser degree China. They would rather just get a return of capital then a
return on capital. But, once rates start going up, bond funds will start
losing money and maybe they'll rethink their strategy and perhaps go into
equities where there seems to be some growth. At that point in the cycle, I
think you'll see a reversal, which will be good for equities and potentially
good for commodities as well.
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TGR: So, next
month you'll be speaking at the big World Money
Show in Toronto. What's going to be the
theme in your discussions?
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JS: The talk
is titled "Booms, Busts and Bailouts." I think that's what we're
experiencing globally and we're going to see these rallies as news is
unveiled about another round of quantitative easing?we'll probably have
QE4 and QE5 before all is over. Then we'll have little busts as some of these
issues disappoint. It wasn't too long ago that Spain didn't look as if it was
going to approach the two European bailout funds for help. Now it looks as if
they may. So, you're going to have these mini-booms and mini-busts for the
next year at least and maybe well into 2014. The banking sector in Spain is
one of the current issues of concern, so we'll be talking about that. We'll
also be talking about the slowing in China and the potential problems looming
in Japan around the corner. There's lots to talk
about and I'm expecting a great turnout. We look forward to seeing as many of
you there as possible.
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TGR: It seems
that everybody has been banking on China to carry the rest of the world. Has
that been more hope and expectation then reality?
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JS: China is a
developing economy and some countries, like Australia, are much more linked
to China because of iron ore demand and prices that have tumbled down to
$88/ton from close to $200/ton. So, it's been a tough year for many of the
bigger mining companies, like BHP Billiton Ltd. (BHP:NYSE;
BHPLF:OTCPK) and Rio Tinto Plc (RIO:NYSE; RIO:ASX;
RIO:LSE; RTPPF:OTCPK). China can only do so much, which Chinese officials
have been saying for years. They've also been saying for years that they want
slower growth and are concerned about a potential housing bubble on that gold
coast. The Shanghai, Hong Kong and Beijing markets are now showing domestic
inflationary worries, primarily over food, even though China's inflation is
down to about 2% from around 6%. China matters now primarily as a commodities
consumer. The rate of change is toward slower growth economically, which is
bad for commodity prices generally. The good news is that it's trying to
stimulate and there's lots of room for that. The problem is that it's going
to have to do all of that in order to light a fire under commodities.
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TGR: In
connection with that, Australia's Resources Minister, Martin Ferguson, was
quoted a few days ago saying that he thinks the global boom in commodity
prices is over. Is he taking the Australian perspective in the iron ore
market or do you think he's right overall?
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JS: I don't
think he's right overall. He's probably right as far as base metals and maybe
iron ore are concerned. If you talk about other metals, like gold, I think
he'd be much more bullish about it. Oil has a very bullish case unfolding
because the days of low oil prices are dead and gone. So, I think it's really
an Australian view. But, I think it's fair to say that the best days for
commodities may be behind us, although it's certainly not universal. We've
seen some very strong moves also in the grains over this period of time. Of
course, with the exception of wheat, it's not really a market that Australia
is dominant in. So, I think he's talking up his book or talking down his
book, as the case may be.
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TGR: On the
other hand, Merrill Lynch just came out with a projection for gold to hit
$2,400/ounce (oz) by 2014, based on QE3 and what
may follow. That seems to be a pretty optimistic price projection from one of
the big names in the investment business, if you compare that to where the
Dow would go on a 35% move?18,500. It seems as if they may be being
overly optimistic. What do you think?
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JS: I tend to
agree with you. Could I see $2,000/oz or even
$2,100/oz gold? Absolutely. It's fairly realistic
to think that might occur in the next four to six months. The argument for
gold is really that it is a currency and a hedge against the debasement of
fiat or paper currency. But, in reality, that's not what's happening on the
ground. The Fed is doing what it can but it's not increasing the money
supply. All it is doing is buying up bonds, creating deposits at the Federal
Reserve that member banks can access. The commercial banks are increasing
their reserves, but until they start lending, there's really no multiplier
out in the market and therefore the money supply isn't growing. Can it? Yes,
but it depends on the credit health of Americans getting better, which
thankfully it is. So, hopefully, we'll start seeing more lending and more
spending in the economy, but right now that's not the case.
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TGR: We'll have
to see how realistic its projections are because Merrill Lynch is talking
about all the way into 2014.
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JS: That's a
long way. We'll be a couple of more Money Shows down the road before we see
on that one. Investors should look for higher gold prices but I think $2,000/oz is probably a more realistic target, within 6 to 12
months.
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TGR: Turning to
the companies in the mining business, obviously the majors would get the
first crack at investor money. What do you like these days in the majors?
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JS: One of the
most attractive majors right now is Barrick Gold Corp. (ABX:TSX;
ABX:NYSE). It's dirt-cheap and has really been
weak for many years. It now has a new CEO, an internal guy who's focusing
much more on operations to run it like a real business with a portfolio
management approach. Mines will have to compete for capital. There's going to
be an emphasis on total return, with shareholder dividend payments and
repaying some of the debt.
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"I'm
a little more optimistic than pessimistic right now."
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It also
has this African Barrick
Gold Plc (ABG:LSE) piece. It
could spin that out with the likely buyer being a Chinese gold company or an
arm of the Chinese government. Barrick is now a
focused company and the largest gold producer in the world with so much
potential upside. Once people see that higher gold prices in the
$1,800?1,900/oz range are here to stay, with
many years of quantitative easing coming, then I think this will be the go-to
name for generalist investors and big mutual fund complexes.
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TGR: What else
do you like in the majors?
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JS: Kinross Gold Corp. (K:TSX;
KGC:NYSE) is another great name that's finally
turned the corner. It has a new CEO named Paul Rollinson
and there's a management change coming on. Kinross has a big asset in
Mauritania called Tasiast, which Kinross has
essentially bet the farm on. The new CEO has decided to take a wait-and-see
approach there, after the previous CEO bet his whole reputation on it. It's a
major project but the grade is relatively low and we're finally seeing a more
realistic communication with the Street. The stock has come off because of
concerns over management, the project feasibility and the large capital
expenditure required. With this more measured approach, Kinross' valuation is
dirt-cheap.
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I also
highlight Newmont Mining Corp. (NEM:NYSE) as a good larger-cap name.
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Among the midtier players, Eldorado Gold Corp. (ELD:TSX; EGO:NYSE) is a name
that I would highlight as a good buy. It's had some hiccups in Romania where
the government tried to tear up an environmental permit on its fully
permitted Certej project. It does have production
coming from several areas: China, Turkey, Greece and Brazil. It has
disappointed investors in the last year, but is now well positioned as a
lower cost producer.
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The other midtier name worth talking about is Yamana Gold Inc. (YRI:TSX;
AUY:NYSE; YAU:LSE). This is a company that is growing
its production and producing almost 300,000 oz. It's
operations in Brazil, the Chapada mine, and the
Mercedes mine in Mexico have done better than forecast. Yamana
is one of the names that probably has the best
growth in the midtiers. We like it because it's
been consistently meeting or outperforming expectations.
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"The
argument for gold is really that it is a currency and a hedge against the
debasement of fiat or paper currency."
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Claude Resources Inc. (CRJ:TSX;
CGR:NYSE.MKT) is a name that was causing some worry
for its shareholders for a while but it looks as though it is managed to be
fairly cash-flow positive on its Seabee mine in Saskatchewan. It doesn't
really get any credit for its prospective properties?the Madsen project
in Red Lake and the Amisk in northern Saskatchewan.
Its balance sheet has improved and I think this is one that new money can go
into and get a little bit of upside in.
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TGR: Claude
goes back into the early 1980s, as I recall.
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JS: It's a
survivor. It's been in these near-death situations several times and has been
able to ride them out. Management is great and I think this is a name that
many small-cap investors could look to.
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TGR: Do you
think it's going to take $2,000/oz gold before
people start getting really excited about the smaller explorers, or are we in
an age of a hundred survivors and a whole bunch of little derelicts floating
around?
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JS: We could
see a little culling of the herd because financing has dried up for them.
Capital is a huge problem and many of these guys are reluctant to sell
production forward to someone like Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) because
they feel that they'd be selling away their future.
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I think
investors are still skeptical about the strength of the gold market. Although
the actions of the Fed, the ECB and the Bank of Japan, acting in concert, are
providing a good tailwind for the sector, many gold companies have had high
costs and have disappointed investors for some time, so they've lost a bit of
institutional following.
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My
suggestion to investors is to concentrate first on some of the bigger players
that are also cheap relative to historical multiples. They've started to get
a bit of a lift finally in the last month or so. Then, once you make a little
money on those larger-cap names, you can look to the juniors that have
survived and gone through some of these hiccups. Chances are those survivors
are going to be around for a while longer.
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TGR: So,
what's your takeaway position on how investors should approach the current
market?
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JS: I think
you'll certainly get lots of upside if Merrill Lynch and people like First
Asset are correct, that gold will go higher. There's plenty of time to start
picking away at some of these smaller names. Many of them are going to be
news-flow driven. Valuations are certainly cheap. You just want to be careful
to pick a few of the winners that will be survivors and are going to be able
to hang through the tough times.
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TGR: How has
your First Asset portfolio performed since we last talked?
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JS: We've done
well with a lot of them. We have Barrick Gold Corp.
and Yamana Gold and they have been terrific. IAMGOLD Corp. (IMG:TSX; IAG:NYSE) is
another one we like a lot that's been good for us and is still extremely
cheap. One of the smaller names we've done well with in
the past is Osisko Mining Corp. (OSK:TSX). Detour Gold Corp. (DGC:TSX) is looking good as well, as
more of a development play at this point. We're starting to warm up to the
bigger-cap names that I mentioned, such as Barrick.
We've previously has good success with Goldcorp Inc. (G:TSX;
GG:NYSE) although I'm a little worried about
some of the grade issues at Red Lake. This is one to keep on your radar
screens, but it's not necessarily anything you need to buy today.
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TGR: Well,
there are a few good names to consider and things are looking reasonably
optimistic from here. Thanks for checking in with us, John, and let's keep
our fingers crossed until next time.
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JS: I look
forward to it.
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John Stephenson is a senior vice president and portfolio manager with First Asset Investment Management Inc., where he is responsible for a wide range of equity mandates with a particular focus on energy and resource investing. He has been recognized by Brendan Wood International (BWI) as one of Canada's 50 best portfolio managers for the past three years. He is the author of The Little Book of Commodity Investing (John Wiley & Sons, 2010), which has been translated into five languages, and Shell Shocked: How Canadians Can Invest After the Collapse (John Wiley & Sons, 2009), and writes a free bi-weekly investment newsletter, Money Focus, which reaches a global audience of more than 125,000.
Stephenson is regularly quoted by Bloomberg News, Reuters, The Associated
Press, The Wall Street Journal and The Globe and Mail and is a
frequent guest on Bloomberg TV, CNBC, CNN, Fox Business and Canada's Business
News Network (BNN), Sun TV and the CBC. He is frequently the keynote speaker
at investment conferences throughout North America. Stephenson holds a degree
in mechanical engineering from the University of Waterloo, an MBA from
INSEAD, as well as the Chartered Financial Analyst (CFA) and Financial Risk
Manager (FRM) designations. He lives in Toronto.
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DISCLOSURE:
1) Zig Lambo of The
Gold Report conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Franco-Nevada Corp., Detour Gold Corp. and Goldcorp Inc.
Streetwise Reports does not accept stock in exchange
for services. Interviews are edited for clarity.
3) John Stephenson: I personally and/or my family own long shares of the
following companies mentioned in this interview: Barrick
Gold Corp., Kinross Gold Corp. and Yamana Gold Inc.
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 interview.
4) First Asset Investment Management Inc. owns long Barrick
Gold Corp., Kinross Gold Corp., Yamana Gold Inc., Osisko Mining Corp., IAMGOLD Corp. and Detour Gold Corp.
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