ASA Limited: A Closed-End Fund Worth More than Meets the Eye

Includes: AEM, ASA, GG, GLD, SLV, SLW
by: Marc Courtenay

One aspect of my work that I love is interviewing interesting people. On June 4th, 2009 I had the pleasure of speaking with David J. Christensen, the CEO of ASA Limited (NYSE:ASA).

ASA Limited closed-end, non-diversified investment company registered with the United States Securities and Exchange Commission. The Company was organized in Bermuda and is the successor to a closed-end investment company of the same name organized in the Republic of South Africa in 1958.

The Company provides investors a vehicle to invest in a portfolio consisting primarily of the stocks of companies engaged in the exploration, mining or processing of gold, silver, platinum, diamonds or other precious minerals. It may also invest in gold, silver and platinum bullion or securities that seek to replicate the price movement of gold, silver or platinum bullion.

To coax you to read this article carefully, I'm going to reward you towards the end of the article with Mr. Christensen's prediction concerning the prices of gold and silver going forward. You might be surprised by what he said.

I asked him,"Do you choose the portfolio for ASA Ltd.and serve as the portfolio manager? His answer was an unequivocal "Yes"! And he has the experience to do so competently.

Mr. Christensen, before being named CEO in February 2009 was Vice President – Investments since May 2007. Before joining ASA Ltd he served asVice President, Corporate Development of Gabriel Resources Ltd. 2006 to 2008; was an independent financial consultant from 2003 to 2006; a former Director of Fundamental Equity Research for Credit Suisse First Boston from 2002 to 2003; and former First Vice President, Global Coordinator of Mining Research at Merrill Lynch 1998 to 2001 and Precious Metals Analyst at Merrill Lynch from 1994 to 1998.

As an analyst, Mr. Christensen earned numerous awards from the Wall Street Journal, StarMine, Insitutional Investor Magazine, and Reuters for his research and investment recommendations.

I asked him about the unbelievable volatility we are experiencing in gold and silver investments. He believes one of the big reasons is that the US dollar doesn't have the same benchmark status it has had in the past. "The rise in the commodity prices reflects in part, the decrease in the demand for the dollar. Commodity prices have become a sort of a surrogate currency, especially gold. China is a buyer of commodities, and they are diversifying foreign reserves into gold and metals."

Then I explored with Mr. Christensen the subject of silver and asked about the silver exposure in ASA's portfolio. He said they invest in silver more indirectly by owning shares of companies like Agnico-Eagle (NYSE:AEM)and Goldcorp (NYSE:GG) which produce a great deal of silver, often as a byproduct.

Concerning silver miners he said, "We don't own a lot of primary silver companies. We don't own any Silver Wheaton (NYSE:SLW) either because it's more like a bank... they purchase royalty rights. They finance upfront promising silver development projects. We'd rather own the iShares Silver Trust (NYSEARCA:SLV) which reflects directly the movement of the price of silver."

I asked, "Does ASA directly own the physical metals?" He surprised me by saying "There is no physical metal in the ASA portfolio right now. From time to time we own some Spider GLD ETF (NYSEARCA:GLD): it is easier to move in and out of and simplifies our operating costs and custodial requirements."

I was curious to know if he felt safe using ETFs, so I asked, "Do you have any "trust issues" with ETFs like GLD and SLV?" Mr. Christensen answered, " For short-term needs, very few. none at all. It's the most convenient way to buy and sell in relationship to the underlying metals."

He reminded me that "the gold that GLD own and has stored is segregated in a similar manner to The Central Fund of Canada (NYSEMKT:CEF). "CEF and GLD both have quality custodians."

Back to ASA - I recommend you read their web site's explanation of their history. Their web site is easy to read and nicely designed.

Then I asked Mr. Christensen, "Why do ASA shares often sell at a discount to NAV?" He replied, "A better question is 'Why do all closed-end funds seem to trade at a discount to NAV?' With ASA, it is because many investors now prefer to buy gold and precious metals stocks directly, so our share price reflects a built-in discount to reflect that factor."

He went on to say, "The board and management review the discount each meeting and are working to reduce it. Clearly, we would rather it didn't trade at a discount. The Company has committed to conduct tender offers during the next two years to buyback shares close to NAV when the discount exceeds 10%. Last year, the company repurchased 25% of its shares at 98% of the NAV."

From an investor's perspective, when we buy shares of ASA we get to buy the same quality portfolio of holdings at a discount, plus we receive the professional management of the portfolio. Also, institutions and companies like ASA Ltd have the ability to participate in private offerings, convertible offering and can purchase investments with lower commissions than retail investors receive.

Mr. Christensen explained, "We have securities in the ASA portfolio that are difficult for retail investors to acquire. Also, because ASA is a closed-end fund, we aren't vulnerable to the "volatility of our cash position" and to liquidation pressures in the same way an open-ended fund is vulnerable. Open-ended funds have a lot of turnover of their portfolio. We have a much lower turnover of our portfolio."

ASA has never issued new stock since its initial offering back in the late 1950s, when it began with approximately $25 million worth of shares. Mr. Christensen said that ASA has no plans currently to offer new shares going forward.

So with ASA shares we don't have to be concerned with what I call "the dilution factor". The value of our shares won't be "watered down" by secondary offerings.

As mentioned, ASA's directors are more likely to do tender offerings whenever the value of the shares are selling at more than a 10% discount to NAV. Thus reducing the number of shares outstanding and making those shares that are left in the marketplace more "precious".

Now concerning Precious Metals Prices: I asked Mr. Christensen for his "Best educated guess---where will the price of gold and silver be a year from now?"

He answered by mentioning that at the annual shareholder meeting they sponsor a "where will gold's price be in a year?" game. Mr. Christensen said the same investor has won for three years in a row and "she's a long-term retail investor”.

He didn't want to give a numeric guess himself as far as where the prices of gold and silver will be a year from now, he just said he had every reason to believe it will be "considerably higher".

Mr. Christensen concluded our interview by reminding me of an old saying and an insight about himself. "I'm not a gold bug bears make money, gold bulls make money, but gold bugs get squashed".

"The global spending levels by governments, declining production globally, longer time periods needed for new projects, increased investment demand, and rising production costs, are all favorable for the price of gold", he added.

The CEO of ASA is both intelligent and experienced, and to top it off he's a good communicator. He told me that the current board of directors will continue their tradition of being "pro-shareholder and investor-friendly". The company is becoming much more active in portfolio management, careful research and investor relations.

I also asked him about his "selling disciplines". After helping me to remember that ASA has an obligation to stay invested, when it comes to individual holdings, "I take it on a case-by-case basis," he said.

So I just had to ask him, "How do you determine that an individual stock's price is getting ahead of itself?" He said there are a number of fundamental factors, but he added one I hadn't thought of. "When companies themselves are issuing additional shares, it's not because they think their shares are under-priced." Hint, hint!

ASA is a PFIC (passive foreign investment company). So Mr. Christensen stated, "Investors should know that the best place to hold an investment in ASA is in an IRA or a retirement account." For more concerning this see their web page on that topic.

Having been an investor in ASA Ltd. shares on-and-off for more than 25 years I was already very impressed by this closed-end fund. To be able to buy a diversified portfolio in the precious metals sector at a nice discount to its Net Asset Value and to also receive the professional portfolio management that someone like David Christensen brings to the table makes ASA a very compelling investment.

If you are interested in more information or would like to receive email notifications on ASA Limited financial information and disclosures you can go their link here.

Mr. Christensen said they plan on sending out regular updates, and if I heard correctly, perhaps a newsletter for interested investors and shareholders.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! - Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

Disclosure: Long GLD, SLV, CEF.Due to the shares of ASA recently hitting my price target of $70 a share, I decided to sell the shares in my personal accounts. I have placed orders to buy the shares back as soon as a correction I'm anticipating occurs. If that correction doesn't materialize I'll be sorry I sold. The 52-week high and low prices for ASA are $89.88 and $31.03.