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  • David Sadowski: Are You Ready For Upward Pressure On Uranium Prices?

    Source: Peter Byrne of The Mining Report (8/5/14)

    www.theaureport.com/pub/na/david-sadowsk...

    David SadowskiTake advantage of the temporary bear market in uranium juniors, David Sadowski tells The Mining Report. The Raymond James mining analyst explains why uranium prices are low and why they will rise in the medium term. Hint: It has something to do with how orange juice is produced. And he talks about why a gold lining makes the metals market a solid bet.

    The Mining Report: In past interviews with Streetwise Reports, you predicted that the price of uranium will rise this year. But that has not panned out. Why not?

    David Sadowski: Simply put, there is a short-term supply problem in the uranium industry. We believe, however, in the long term, supply will not be able to keep up with demand growth. The point at which we previously expected demand to outstrip supply has been pushed out by a couple of years. That development has impacted the price in recent months, as well as Raymond James' outlook for the price going forward.

    The three main reasons for continued global growth of uranium mine production are the persistence of long-term fixed-price sales contracts, the intransigence of government producers who believe that security of supply is more important than mine economics, and byproduct uranium production. Secondary supply sources also remain robust.

    "Fission Uranium Corp is our top pick among uranium juniors at current price levels."

    TMR: Would you explain how these situations interrelate?

    DS: Demand is lagging because Japan has been slower than expected to resume operations at its nuclear reactors. The Japanese reactors are not consuming uranium at the moment, but the Japanese utilities are continuing to take delivery on many of their supply agreements, causing their inventories to rise. A belief in the market that uranium might be dumped has, in part, kept other global utilities on the sidelines, resulting in lower levels of uranium buying and lower prices. And while uranium oxide "yellowcake" deliveries have continued to Japanese buyers, those buyers have slowed the movement of that material into the rest of the fuel cycle, which has decreased demand for conversion and enrichment products.

    On the enrichment side, excess capacity has resulted in "underfeeding." The centrifuges at the enrichment plants are always spinning. The plants are paid to supply a certain level of enrichment to their customers. And during times of lower demand, they can utilize otherwise empty centrifuges to squeeze out more uranium product.

    An apt metaphor for this process is orange juice. Imagine that you are running a juice bar with 10 juicing machines that are always spinning. Your customers bring you oranges and sign a contract to take delivery of a set amount of juice from those oranges. But suddenly you lose 20% of your customers. They stop bringing you oranges and they no longer pay you for the juice. What are your options to make up for that lost revenue? Given that all 10 juicing machines must continue to run, you can take the oranges that would under normal circumstances be squeezed by eight machines and instead run them through 10 machines, squeezing more juice out of each orange. The juice in excess to what the eight remaining customers have agreed to buy is available to the juice bar owner to sell to other customers.

    "Probe Mines Limited has a stellar underground deposit."

    That is the same type of activity that is going on in the uranium space. Enrichers with excess capacity especially during a period of relatively weak enrichment or "SWU" prices can squeeze more enriched product out of the material being provided to them, which generates excess uranium that the enrichers sell to others. Given the protracted outage of Japanese nuclear reactors, this squeezed source of supply has been greater than expected. In part due to our revised estimate that only one-third of Japan's nuclear fleet will return to operations, we expect underfeeding to continue to exacerbate oversupply for some time.

    TMR: What about the uranium extracted from Russian nuclear warheads?

    DS: Similarly, with respect to Russia, the end of the Megatons to Megawatts high-enriched uranium (HEU) deal was long anticipated to usher in a new period of higher uranium prices. But the same plants that were used to down-blend those warheads can now be used for underfeeding and tails re-enrichment. In this way, the Russian HEU-derived source of supply that provided about 24 million pounds (24 Mlb) to the market did not disappear completely; the supply level was just cut roughly in half. Meanwhile, uranium mines, in aggregate, have increased their output-even though prices are now well below average production costs. Kazakhstan, for example, has continued to grow its uranium industry, despite recent guidance from officials in Kazakhstan to the contrary.

    Furthermore, since Fukushima, only one major uranium mining operation has closed down due to weak prices, Paladin Energy Ltd.'s (PDN:TSX; PDN:ASX) Kayelekera in Malawi. The high-cost Ranger mine in Australia, which has been processing its stockpiles since 2012, has defied protests from locals and restarted production following a major accident in late 2013. And Cigar Lake in Canada and Husab in Namibia are charging into production, even in this oversupplied environment. The bottom line is that oversupply will persist until 2020.

    TMR: How will that solemn reality affect future prices?

    DS: Current prices are untenably low and some producers are refusing to sell at rock-bottom prices. Upward pressure on prices into the $35 per pound ($35/lb) range should occur as utilities buy more uranium in the marketplace, and as secondary trading activity among financial entities picks up. The biggest factor is the behavior of the end-users of uranium, the nuclear utilities. Given what we know from available data, global utilities are going to have to sign a lot of new supply contracts to meet their uncovered reactor requirements in the years 2017 and beyond.

    "MAG Silver Corp. is truly an asset-rich company."

    But looking at current utility-held inventories and the global supply/demand picture over the next five years, we predict that the utilities will not be rushing to sign new deals. A major upswing in prices toward mine incentivizing levels of $70/lb is thus at least a couple of years down the road. The spot price is $28/lb today. It should average $35/lb in 2015-a 20% rise and we see US$70/lb in 2018. Furthermore, it should be noted that this outlook can change in a split second. A flood at Cigar Lake, sanctions against Russian nuclear fuel exports, a major mine shutdown-if any of these events occur, the equation changes and prices could rise a heck of a lot faster, comparable to the rise in 2006-2007 and in late 2010.

    TMR: What do you look for in a uranium mining junior?

    DS: The best junior opportunities are to be found in companies with best-in-class assets, access to capital, and the potential for value-added news flow. Solid management teams, clean capital structures and trading liquidity are also key. For example, Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT) has world-class discovery potential at Wheeler River, and also another high-grade project that it is aggressively exploring. Denison will generate up to $7 million ($7M) annually in Cigar Lake toll milling revenues. And the company could bring several deposits into production in the medium term. Valuation is an obvious consideration when looking at investing in the juniors, but after peaking in late February and early March, most of the junior equities are now trading at attractive levels. Denison is one of our top picks among juniors in the Athabasca Basin.

    TMR: What other companies do you like in the Athabasca Basin?

    DS: Fission Uranium Corp. (FCU:TSX.V) has similar qualities to Denison. Fission's Patterson Lake South has emerged as the best undeveloped uranium project in the world. There simply are no other high-grade, open-pit uranium assets left un-mined, so the value of Patterson Lake is off the charts. Based on assay results released by Fission through the winter program, we estimate 70-80 Mlb of contained metal has been defined. We anticipate that its aggressive summer exploration campaign will add even more to that total. All of the zones are wide open along the strike and to the north and south, not to mention the numerous coincident geophysical and radon anomalies in the region. There are question marks, such as the price and timeline to construct a new mill, but we look forward to seeing a maiden resource estimate at the project, which should come out in early 2015.

    TMR: Fission Uranium spun out of Fission Energy Corp. (FIS:TSX.V) last year. Was that a good move?

    DS: It was a great move. Fission Energy sold its Waterbury Lake and other uranium assets and spun out the Patterson Lake South project and ancillary assets, including a project on the Macusani Plateau in Peru. It turned out to be a fantastic deal for shareholders. Not only did they get shares in Denison Mines, they also got shares in Fission Uranium. Fission subsequently acquired Alpha Minerals Inc. and is now the 100% owner of the Patterson Lake South project, which in our view has lowered the hurdle for the company to get taken out. Fission is our top pick among uranium juniors at current price levels, with a Strong Buy rating and $2 target price.

    TMR: Which uranium producers do you like in the United States?

    DS: Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT) is our top pick among uranium producers. Since starting up production in late 2013, its Lost Creek mine in Wyoming has performed exceedingly well. Ur-Energy has a good operating team, well-executed plant build, solid ore body and is in an attractive jurisdiction. One of the company's key advantages over its competitors is the high fixed prices in its contract book. Over the balance of 2014, we estimate that Ur-Energy will deliver into sales agreements with an average realized price of more than $60/lb. Meanwhile, cash costs are expected to be very close to $20/lb, implying a stellar operating margin.

    In a higher uranium price environment, Ur-Energy looks even better with its ability to scale production to 1 Mlb/year at its core operation at Lost Creek. Plus, it can go to 2 Mlb/year by incorporating its low-cost satellite mining operation at Shirley Basin. The company is highly leveraged to improved uranium prices, but it is also downside protected by its attractively priced contracts, which extend to 2019.

    TMR: Is there synergy in going after both uranium and gold?

    DS: Uranium deposits can occur alongside other metals, improving mine economics. In South Africa and Australia, uranium is mined as a byproduct of gold with a positive impact at those mines. In other cases, gold, nickel, molybdenum, and other metals can be an encumbrance to primary uranium production and can negatively impact costs.

    TMR: What gold success stories are out there?

    DS: We like Probe Mines Limited (PRB:TSX.V). Its Borden gold discovery is 2 million ounces (2 Moz) at 5 grams per ton (5 g/t) amenable to bulk underground mining techniques one kilometer off a highway and 90 minutes from Timmins, Ontario. In fact, at its 3 g/t cutoff, the high-grade zone hosts 1.8 Moz at a 5.9 g/t average grade. We believe additional drilling along the strike to the east will further extend the deposit and underline what is already one of the best undeveloped gold assets in Canada.

    The project also features a 2.3 Moz, 1 g/t pit-constrained low-grade zone that makes sense for open-pit mining, either in a higher gold price environment or as funded out of cash flow from the underground mine. The company is now closing a $26M flow-through financing, which will enable it to complete a maiden preliminary economic assessment at Borden in the fourth quarter, close an acquisition to tie up the regional land package, and facilitate aggressive exploration drilling through 2015. We believe Probe is a story that is seriously misunderstood. It is a real opportunity for investors looking at higher-grade, earlier-stage names.

    TMR: How is Probe's share price performing?

    DS: After being one of the darlings of the TSX Venture Exchange in 2013, Probe had a leg down this year. There were a few reasons for that. Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) had been viewed as a natural buyer for Probe. When Agnico made a bid for Osisko Mining, the market surmised that Agnico may not want to buy Probe in the short term. Also, some analysts regard Probe's recent resource update as ho-hum, a view I certainly do not agree with. Probe has a stellar underground deposit and maintains the open pit as a great option in a higher gold price environment.

    TMR: What other gold firms do you have an eye on?

    DS: We cover Kaminak Gold Corp. (KAM:TSX.V); it owns the Coffee gold project, a nice leaching deposit in the Yukon that could host a highly economic open-pit heap-leach mine. Roxgold Inc. (ROG:TSX.V) is advancing its high-grade Yaramoko project in Burkina Faso into development later this year. Orezone Gold Corporation (ORE:TSX) is moving its Burkina Faso Bomboré heap-leach gold project into the feasibility and permitting stages over the balance of 2014. We are bullish on each one of these companies.

    TMR: What about precious metal plays in silver?

    DS: MAG Silver Corp. (MAG:TSX; MVG:NYSE) is our top pick among silver juniors. MAG is truly an asset-rich company. It owns 44% of the world's highest grading silver project, Juanicipio, which is currently under development with its joint venture operating partner, Fresnillo Plc (FRES:LSE). We model production startup in 2018 with extremely low cash costs and low operational risk. Fresnillo has been engaged in very similar underground epithermal vein mining for decades, and it is one of the world's top silver producers.

    MAG's second asset, 100%-owned Cinco de Mayo, is very intriguing. Cinco is a zinc-dominant carbonate replacement deposit or "CRD" target featuring very high zinc grades and a massive exploration upside. MAG has been temporarily expelled from the property by the locals, but we remain hopeful for resumption of drilling in the near future. It is an excellent undervalued company and we have a Strong Buy rating on it.

    TMR: What will it take for MAG to reopen Cinco de Mayo?

    DS: MAG is working to sign an agreement with the local ejidos in a small town called Benito Juárez, which is located in the Cinco de Mayo area. MAG negotiated a similar deal to restore access at its flagship Juanicipio project and given the particular circumstances surrounding Cinco, we believe an analogous outcome is likely.

    TMR: Thanks for your time, David.

    DS: My pleasure, Peter.

    David Sadowski is a mining equity research analyst at Raymond James Ltd., and has been covering the uranium and junior precious metals spaces for the past six years. Prior to joining the firm, Sadowski worked as a geologist in western Canada with multiple Vancouver-based junior exploration companies, focused on base and precious metals. Sadowski holds a Bachelor of Science in geological sciences from the University of British Columbia.

    Want to read more Mining Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Fission Uranium Corp., Probe Mines Limited and MAG Silver Corp. Streetwise Reports does not accept stock in exchange for its services.
    3) David Sadowski: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. Raymond James disclosures are available here. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview, July 22, and am responsible for the content of the interview. All ratings, facts and figures are reflective of the date of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Aug 07 3:00 AM | Link | Comment!
  • John Hathaway And Doug Groh: Buy Gold Like It's 1999

    The overall markets are exuberant. Valuations rise regardless of value created. And gold is conspicuously not at the party. All of this sounds very familiar to John Hathaway and Doug Groh, portfolio managers of the Tocqueville Gold Fund. It is like 1999 all over again. In this interview with The Gold Report, the pair of fund managers discuss the impending upside they see near on the horizon and why a diversified portfolio can minimize risk and maximize profit.

    The Gold Report: In a 4th of July investor letter, you wrote that the precious metals complex, both mining shares and bullion, appear to be in the process of completing a major bottom, and you're more comfortable with the proposition that the downside potential has been fully exhausted. What are the signs that it's really turning this time?

    John Hathaway: The gold futures chart is showing that we are in the process of a reverse head-and-shoulders pattern, which is a sign that a bottom has been completed. It means that downward momentum has been exhausted. This bottom will be confirmed when gold trades above $1,400/ounce [$1,400/oz], which is a stretch from where we are. At least we can say fairly credibly that it's shaping up to be a bottom, but we may test it over the summer.

    Source: International Strategy & Investment Group LLC

    TGR: Are statistics on money flows telling you that investors are starting to get interested again?

    JH: Yes. If we look at the SPDR Gold Shares Exchange-Traded Fund (NYSEARCA:GLD), which is one proxy for money flows into the gold space, the outflows that have been predominant over the last couple of years have pretty much run their course. Now, we're starting to see assets build in the SPDR Gold Shares ETF. At Tocqueville, our fund has seen steady inflows all year, in some cases, very substantial inflows. I don't know if what we're seeing is comparable to other managers in the precious metals space, but our experience this year has been positive.

    Source: Meridian Macro

    TGR: Headlines about conflicts in the Ukraine, Iraq and Gaza have bumped gold prices visibly lately. Can these events act as long-term fundamental supports or do they represent short-term volatility that will fade just as quickly as the headlines?

    JH: Anything geopolitical always has a knee-jerk impact. I would never recommend gold based on today's headlines, yesterday's headlines or speculation about future headlines. Having said that, geopolitical issues away from the headlines influence the demand for gold. Europeans are probably more conscious of gold today than they might have been six months ago. People want to get their wealth in a safe place. That will reinforce demand for gold as time goes by.

    TGR: You have compared gold's fundamentals today to the situation in 1999. What were the fundamentals 15 years ago?

    JH: Fifteen years ago, we were at the end of a 20-year bear market, so the psychology was very negative. Gold was never mentioned in polite discussions. We're not that different today from where we were then. Considering the drop from a high of $1,900/oz to slightly less than $1,200/oz, that's a pretty big decline in the space of two and a half years. That makes the setup similar to what we experienced in 1999. Back then, the markets were flush with optimism, and I would say that's the case today. I think there are many parallels.

    TGR: One unique thing that is happening right now is that the mining share valuations seem to be leading the commodity prices. What's causing that?

    JH: It's not an ironclad relationship, but when the shares outperform the metal, which they've done this year and by a fairly substantial amount, that's generally a favorable setup for a better phase in the gold market. In 2011, the opposite occurred. Gold reached a new high and was in the headlines in every newspaper on the planet, yet the shares were conspicuous by their underperformance. That was a sign that the shares were not confirming the new highs in gold, and we've seen the result. A lack of confirmation between the shares and the metal prices can sometimes indicate the future direction of the gold price, or vice versa, of the share prices.

    TGR: One thing that you and I have talked about before is the impact of quantitative easing [QE] on the dollar and the gold price. QE never did seem to weigh down the dollar. Are investors on the sidelines waiting for the impact of liquidity to buy gold?

    JH: I think the rationale for owning gold is as strong as ever. Radical monetary policy probably won't end well and any thinking person should be concerned about it. That's why we believe you need to have some exposure to gold. Markets today are over-exuberant: pumped up equity valuations, nonexistent spreads between quality and junk, record issuance of low-grade paper, all of these things are typically indicative of an endgame in financial assets. Gold is not at that party. It's conspicuous by its absence. In our view, it's pretty hard to say that anything represents value these days except precious metals. Gold is wealth insurance.

    When we started the Tocqueville Gold Fund [TGLDX] in 1998, we all said, "If this works, we'll be glad we did and if it doesn't work, everything else we're doing will be successful, rewarding and profitable." As it turned out, gold was a terrific thing to be in from 1998 through 2011. And we believe it will be again.

    TGR: The Tocqueville Gold Fund was named by Lipper, the Thomson Reuters fund analytical arm, as the Best Fund in the Precious Metals category for the past five years. What is your investment thesis for this fund?

    Doug Groh: The gold fund is an alternative to the monetary policies that we're seeing among central banks around the world. While the gold fund has about a 10% direct exposure to gold bullion, we're also invested in precious metal mining equities. Our goal is to capture the optionality to the gold price as these companies make discoveries, build out production and benefit from price volatility.

    TGR: Last year was a challenging year for gold mining companies. How are you adjusting based on those challenges?

    DG: We're emphasizing those companies that are well managed with good assets and quality balance sheets. Explorers are not as attractive today as they were a few years ago. Right now, we're focused on companies in the mid-cap sector of the gold industry.

    TGR: Your quarterly report defines your approach as a growth fund made up of mid-cap companies. How does it compare with the investment styles of the other Tocqueville funds?

    DG: Portfolio managers at Tocqueville Asset Management employ a contrarian value investment philosophy that generates attractive risk-adjusted returns over the long term. In fact, the gold fund was created as an expression of this contrarian thought process when physical gold was significantly out of favor in 1998. Although the Tocqueville Gold Fund is the only precious metals strategy at Tocqueville, we do offer other investment styles for those clients who prefer a more traditional allocation to equities. These offerings include a U.S. large-cap fund, a mid-cap value fund, a small-cap value fund, an international value fund, a liquid alternative strategies fund and a mid-cap growth fund.

    TGR: Just over 10% of the $1.3 billion Tocqueville Gold Fund is invested in physical gold. Are you adjusting that based on some of the trends we have discussed?

    DG: That's about what we're comfortable with. We don't really trade around that position. It's a core position for us. We think that as a gold fund, we should have direct gold exposure. While the gold equities can provide more return, they are more volatile. Physical gold has a stabilizing effect so we keep it at about 10%.

    TGR: Let's talk about some of the best performers in the fund on the equity side.

    DG: Now we are holding Osisko Gold Royalties Ltd. (OTC:OKSKF) [OR:TSX], as well as Agnico-Eagle, which is one of the only companies that has increased its original guidance for 2014 after reporting year-end 2013, and is likely to increase guidance again for 2014 as it integrates the Malartic joint venture. It is enjoying a very good year so far and the market is recognizing that.

    One of the other names that has done well in the portfolio has been Detour Gold Corp. (OTCPK:DRGDF) [DGC:TSX]. The market looks at Detour as a potential takeout, similar to Osisko. It has built a new mine in Canada. The market is recognizing that North American operations are more compelling than other parts of the world and worth a premium.

    TGR: What is the role of royalty companies in the portfolio?

    DG: Royalty companies such as Royal Gold Inc. (NASDAQ:RGLD) [RGL:TSX] and Silver Wheaton Corp. (NYSE:SLW) mitigate risk and maximize discovery upside. These companies, through their royalties, have a direct interest in ore deposits and the revenues or profits from the operations that mine those deposits, often before shareholders of the mining company that operates those mines. The market has embraced the royalty companies because of the limited risk exposure from a capital and diversification perspective. The business model can also allow for greater return potential.

    TGR: How do you decide which royalty companies to include?

    DG: Our gold team at Tocqueville is research intensive. We cover and follow the entire gold resource and gold mining industry. In that effort we seek to be well informed regarding the quality of gold resource assets around the world and the royalties associated with them.

    We recognize that some of the larger royalty companies, like Royal Gold have been very good in the deals they have made to either acquire or establish royalties. Our exposure to these companies was relatively early compared to the general market's interest, because we recognized the inherent value of a royalty before the rest of the broader market.

    For instance, the new Osisko Gold Royalties, a spin-off from the takeover of Osisko Mining, starts out with its Malartic mine royalty, which provides it with a solid base to build upon.

    TGR: Is the Osisko takeover a sign of more mergers and acquisitions [M&A] coming?

    DG: M&A of varying sizes has been going on for some time. Many were just not quite as significant in terms of market cap. I think we will see more deals, whether it's actual corporate takeouts, joint ventures or property sales.

    The decline in the gold price these last three years has been destructive for mining companies. It has caused them to rethink their business models and their capital spending plans. It's become more difficult for companies to raise capital to move forward. That is why consolidation is underway. That is the nature of the industry. A lot of explorers and developers are good at doing just that. Meanwhile mining companies need to replace the reserves they're producing. They may be good at operating a mine but not quite as agile at doing exploration, making discoveries and developing ore deposits. So we should see more M&A.

    TGR: When you are considering adding a company to the portfolio, do you place a value on the chances of it being an acquisition target?

    DG: Yes, in a form and fashion. Ultimately we are looking at the assets of a company and the merits of those assets to expand and to attract other investors into the company's register. The potential to get bigger is always of interest to us. If something is getting bigger, it will attract capital, whether it's investors or corporate entities.

    TGR: How about one from your top 10?

    DG: Eldorado Gold Corp. (ELDKF) [ELD:TSX; EGO:NYSE] has been a staple in the portfolio for quite a few years. In some regards, it has been considered a growth stock, but with the pullback in the gold price, it has slowed down growth plans. Still, it is well capitalized and, as we expect the gold price to improve, we anticipate that Eldorado will restart some of its initiatives. Right now, it is more of a value stock. But it has a very good portfolio of assets and projects that once the gold price rises to a higher level and warrants development of those projects, it should be very well capitalized to execute on those projects. So we're pretty enthusiastic about its future as well.

    TGR: What words of wisdom do you have for investors who may have been in the gold space over the last three years or are just thinking about getting back into it?

    DG: We believe that investors should consider gold and gold exposure as an alternative asset class and as part of an overall portfolio. While there are attractive values in the gold space, investors should think about having broad exposure to the gold sector, whether it's through bullion, mining companies in different stages of development, or producers. Each avenue carries different opportunities and risks. That is why a group of precious metals stocks mixed with an exchange-traded fund or a gold mutual fund like the Tocqueville Gold Fund can serve an investor better than having just one name.

    Additionally, I would recommend that investors average their investment over time instead of buying all at once. The gold price is volatile and it's very difficult to get the low points. Averaging over time when the price dips can help financially and mentally even out the ups and downs.

    Finally, consider gold as a very long-term investment, not just a two- or three-year investment. We believe it should be a permanent part of an overall portfolio as a non-correlated asset. It doesn't really have counterparty risk and it trades to a different type of profile than other financial instruments. That's why we recommend having a portion of a portfolio allocated to gold and gold mining equities.

    TGR: Thank you, John and Doug.

    DG: Thank you.

    JH: My pleasure.

    This interview was conducted by JT Long of The Gold Report and can be read in its entirety here.

    John Hathaway, senior managing director of Tocqueville Asset Management, manages all gold equity products and strategies at Tocqueville Asset Management. He holds a bachelor's degree from Harvard University, a Master of Business Administration from the University of Virginia and is a Chartered Financial Analyst. He began his career in 1970 as an equity analyst with Spencer Trask & Co. In 1976, he joined investment advisory firm David J. Greene & Co., where he became a partner. In 1986, Hathaway founded Hudson Capital Advisors and in 1988, he became chief investment officer of Oak Hall Advisors.

    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 a Master of Arts in energy and mineral resources from the University of Texas at Austin and a Bachelor of Science in geology/geophysics from the University of Wisconsin-Madison.

    Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
    3) John Hathaway: I own, or my family owns, shares of the following companies mentioned in this interview: Tocqueville Gold Fund. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: the Tocqueville Gold Fund owns all the companies mentioned in this interview. Funds operated by Tocqueville Asset Management hold shares in all the companies mentioned in this interview. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. 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.
    4) Doug Groh: I own, or my family owns, shares of the following companies mentioned in this interview: Tocqueville Gold Fund. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: the Tocqueville Gold Fund owns all the companies mentioned in this interview. Funds operated by Tocqueville Asset Management hold shares in all the companies mentioned in this interview. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. 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.
    5) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    6) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    7) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Aug 04 3:20 PM | Link | Comment!
  • Ralph Aldis: Don't Get Married To Your Stocks—It's A Performance-Based Relationship

    Ralph Aldis, portfolio manager with U.S. Global Investors, is a well-respected mining analyst. His detailed knowledge of the companies in the U.S. Global Investors Gold and Precious Metals Fund and across the entire precious metals space has taken years of meticulous work and dedication to his craft. Aldis urges investors not to get married to their stocks, but in this interview with The Gold Report, he discusses lots of names that are good for a fling right now.

    The Gold Report: U.S. Global Investors recently published a report outlining the two trades that drive gold demand: fear and love. Which one is more powerful right now?

    Ralph Aldis: The love trade is the foundation of owning gold stocks and gold because 70-80% of gold goes into jewelry. On the margin, the fear trade is driven more by the headline risks that we've seen in the Ukraine and the Middle East, or by inflation spikes. That's what drives people to take action.

    TGR: Do you expect recent events in the Ukraine and Middle East to further spur gold's fear trade over the course of the summer?

    RA: Yes. We have some geopolitical situations where the tension is elevating. It's unfortunate. There are different brokerage firms saying that investors don't need to own gold or gold stocks because the S&P 500 is going to be much higher later in the year. That's assuming we live in a perfect world. Unexpected geopolitical events happen that make gold a reasonable thing to have in a small part of investment portfolios.

    The fall season is always a strong demand driver for gold as the jewelry industry returns to replenish its stocks.

    TGR: Could we see a better-than-expected late summer gold rally as these two demand drivers converge?

    RA: It's hard to say. We normally see about a 10% seasonal uptick in gold in the fall. But these geopolitical issues are problems that are not going away in a matter of weeks.

    TGR: Improved U.S. employment numbers and the expectation of further U.S. economic growth has pundits offering forecasts on the impact of inflation on investments. What's yours?

    RA: The general consensus is that inflation is not going to be a problem, yet wage growth has been very stagnant. People are pushing for a higher minimum wage, while businesses will have to pay more to retain workers as the economy improves. The costs of things have gone up over time, yet wage growth has not. When that wage growth starts, we'll see some inflation. But I don't expect it to be extremely strong inflation in the near term.

    TGR: The current U.S. rate of inflation is 2.1%; when you combine that with interest rates that are even less, you get negative real returns. That's typically a positive environment for gold prices, isn't it?

    RA: Historically, low interest rates have been fairly positive for gold because when Treasury bills earn 6%, that's going to pull money away from gold. Federal Reserve Chairman Janet Yellen is talking about having low rates for a lot longer than we expected. That has set the stage for a positive environment for the gold price. When gold gets down to $1,230 per ounce [$1,230/oz] or even $1,300/oz, half the industry doesn't make money. That's another issue where we have good fundamentals on the support side.

    TGR: Goldbugs have been predicting hyperinflation for six years or so. Are we any closer?

    RA: When you hear hyperinflation that's not because you have growth-that's because there is no growth. In places like Zimbabwe, which is operating on a socialist model and people don't know where their next dollar is going to come from, inflation continues to skyrocket because there isn't any economic growth. If someone is selling something, he better get as much money as he can. In the U.S. we have some growth and we'll continue to have reasonable growth. We could still see some inflation from wage growth but certainly not hyperinflation.

    TGR: What's your current pitch to investors given the malaise in the gold space?

    RA: Gold stocks really fall into an asset class that's largely uncorrelated with the S&P 500. That makes it a great asset for portfolio diversification. Our recommendation is that investors should have something around 5-10% of their portfolios in assets that are uncorrelated with the S&P 500. Gold or gold stocks fit that very well.

    Investors should also rebalance every quarter or at minimum once a year. When the S&P 500 is soaring they should take a little money off the table and buy some gold stocks and vice versa. The gold stocks had a big rally in H1/14. It probably wouldn't hurt to take some money off the table and rebalance to an asset mix that's appropriate for one's investment horizon.

    TGR: Do you recommend raising the percentage of gold and gold equities in an investment portfolio during times of greater global uncertainty?

    RA: That would be contrary to what I would normally think if you always have a gold allocation. Gold prices typically rally when the broad market falls. That may be your opportunity to take some money off the table and buy another asset class that's lagging. If you're adding to your portfolio during a period of higher global uncertainty, you may be buying when the price has jumped as much as 5%. As soon as that uncertainty goes away, you've lost money. It's better to have that allocation on a consistent basis and then take advantage of the volatility.

    TGR: The U.S. Global Investors Gold and Precious Metals Fund [USERX] is up about 28% year-to-date and has averaged about 6% over the previous 10 years. Do you have a code when it comes to positions in your fund?

    RA: First and foremost, we try to focus on the fundamentals. We're looking for that growth in revenue, which is normally a derivative of the growth in metals production.

    We also want to make sure that these companies have positive margins, that they're not just growing production and losing money.

    We look, too, at the relative value of these companies versus their resource statements. We find that there's a very high correlation between the valuation of a company and its resource statement.

    Then we try to balance those things with what the market is telling us. Everybody has access to balance sheets, but the current action of that stock tells us something else. If the stock is outperforming its peers, there may be something that's not in the historic financials, but that may be influencing what's happening now. Likewise, stocks sometimes hit on all of our metrics, but the performance isn't there. That's when we need to dig and find out why.

    When it comes to stocks, I want a performance-based relationship. Companies may have great fundamentals, but if the performance tells me something is wrong, I'm probably going to walk away. We have to marry the metrics of the fundamentals with the price action.

    TGR: Are valuations lagging the size of the resource more in this market than would have been the case perhaps five years ago?

    RA: Yes. The markets got pretty frothy in 2008 and are risk averse now. We've seen that with transactions.

    Stocks in the junior space that aren't in production are selling for less than they should. The issue is that no one wants to be the person who buys a company and takes on the risk of getting that project into production. About 30 mining CEOs have lost their jobs in the last 24 months. I think mining CEOs look at Kinross Gold Corp.'s [K:TSX; KGC:NYSE] takeover of Red Back Mining Inc. in 2010 for $7 billion [$7B] and get nervous-that's when people started thinking about the cost of capital. You can't spend $7B to buy something that's worth $7B and then spend another $5B to build it. In this market the capital requirements often get priced into the valuation.

    TGR: Are there other tenets in your code?

    RA: Management is one thing that is difficult to put a dollar value on but we can estimate it by looking at the resource statement to determine what the company is worth and then seeing the premium the company sells for. One example is Randgold Resources Ltd. (NASDAQ:GOLD) [RRS:LSE]. CEO Mark Bristow has done a phenomenal job. Some might say the stock is expensive but here's a company with a manager that delivers-and he owns quite a bit of Randgold stock. Quality of management is another factor that fits into our model.

    TGR: As of June 30, 2014, about 16% of the fund was in cash. Is that about where you prefer to be?

    RA: That was probably just timing. Right after a quarter ends it's not uncommon to see hedge fund managers dump their stocks because they've already locked in their quarterly bonus. So we had a slight move in the gold stocks and there was some repositioning happening. That is not the normal cash position.

    TGR: Should retail investors keep 10-15% of their portfolios in cash?

    RA: A retail investor should always have some cash available to take advantage of any opportunities. Warren Buffett is a vulture investor in the sense that he likes to see turmoil and pain because that's when he's going make a sweet deal for his shareholders.

    TGR: What other companies is the fund holding large positions in as of June 30?

    RA: Northern Star Resources Ltd. (OTCPK:NESRF) [NST:AUX] was a 100,000 oz [100 Koz] gold producer in Australia and then about seven months back it bought a 52% stake in the East Kundana joint venture, as well as the Kanowna Belle and Plutonic gold mines in Australia, from Barrick Gold Corp. (NYSE:ABX). Now it should be a 200 Koz producer. In our models, Barrick's Australian assets were worth about $1B. In two separate deals, Northern Star paid a little under $100M for them.

    Barrick wanted to exit Australia and those were considered small assets, sold based on the Proven and Probable reserve value-that meant that the Measured, Indicated and Inferred resources were essentially gravy. Northern Star's valuation has moved up a lot since those transactions. It has a great management team, too. These people are great operators.

    Another holding is Dundee Precious Metals Inc. (OTCPK:DPMLF) [DPM:TSX], a stock that got hurt in 2013 when the markets crashed on gold stocks. Originally led by Jonathan Goodman, Dundee brought Rick Howes into the fold a few years ago, and he has since become CEO. There are two primary assets. One is the Chelopech copper-gold mine in Bulgaria. The other asset is the Tsumeb smelter in Namibia. Both of these assets were underperforming. It's taken some time, but the company turned the Chelopech operation around. With the cash it was generating Dundee modernized the Tsumeb smelter to handle Chelopech's high-arsenic copper concentrate-only a couple of smelters in the world can handle it. Dundee also expanded the capacity at Tsumeb to 240,000 tons per year [240 Kt/year] from 180 Kt. In 2013 the company was getting $450/ton and its operating costs were $433/ton. In Q1/14 its revenue per ton was $569, with operating costs of $307, a margin of $262. Raymond James recently launched coverage on Dundee.

    TGR: Dundee also has the Krumovgrad gold project in Bulgaria. When will that asset reach production?

    RA: It's basically in the final permitting stage; it will go into construction in the next 6 to 12 months. The grade at Krumovgrad is about 4 grams per ton gold and it will cost less than $250M to build. That's another leg of growth for Dundee. It also owns stakes in Sabina Gold & Silver Corp. [SBB:TSX.V; RXC:FSE], Dunav Resources Corp. [DNV:CVE] and Avala Resources Ltd. [AVZ:TSX.V].

    TGR: Parting thoughts?

    RA: As I said earlier, don't get married to any stock. It's a performance-based relationship. If the stock is not behaving and it's going down, you can probably make money someplace else.

    TGR: Thank you for your time and considerable insight.

    This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.

    Ralph Aldis, CFA, rejoined U.S. Global Investors as senior mining analyst in November 2001. He is responsible for analyzing gold and precious metals stocks for the World Precious Minerals Fund [UNWPX] and the Gold and Precious Metals Fund [USERX]. Aldis also works with the portfolio management team of the Global Resources Fund [PSPFX] to provide tactical analyses of base metal, paper, chemical, steel and non-ferrous industries. Previously, Aldis worked for Eisner Securities, where he was an investment analyst for its high net worth group and oversaw its mutual fund operations. Before joining Eisner Securities, Aldis worked for 10 years as director of research for U.S. Global Investors, where he applied quantitative skills toward stocks, portfolio tilting, cash optimization and performance attribution analysis. Aldis received a master's degree in energy and mineral resources from the University of Texas at Austin in 1988 and a Bachelor of Science in geology, cum laude, in 1981, from Stephen F. Austin University. Aldis is a member of the CFA Society of San Antonio.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
    3) Ralph Aldis: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, 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. Funds operated by U.S. Global Investors hold the following companies mentioned: Detour Gold Corp., Dundee Precious Metals Inc., Kinross Gold Corp., Newmont Mining Corp., Northern Star Resources Ltd., Randgold Resources Ltd., SEMAFO Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. 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.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998

    Email: jluther@streetwisereports.com

    Jul 30 3:08 PM | Link | Comment!
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