Juniors Operating From The Driver's Seat: Adrian Day

by: The Gold Report


When you have a market that's declined the way gold has, it would be a mistake to imagine that it's going to bounce back quickly.

At the early stage of a bull market or a recovery from a correction, we tend to see everything move.

Investors should focus on companies that have good balance sheets because that enables them to move ahead with their plans without excessive dilution.

Adrian Day has spent years making money for clients by steering them into and out of positions in precious metals equities. While higher commodity prices are always welcome, the founder of Adrian Day Asset Management says in this interview with The Gold Report that he maneuvers toward more telltale fundamentals like strong balance sheets and sound business plans. He believes investors should shift toward companies helmed by experienced managers with skin in the game and with exceptional projects, and names a handful that fit the bill.

The Gold Report: In an interview with The Gold Report after the March Prospectors & Developers Association of Canada convention, you said that gold had bottomed and that it would be a mistake to sell it too soon. Since then the ongoing situation in the Ukraine and mixed buying and selling news from China has further blurred the gold picture. What is your near-term forecast for gold?

Adrian Day: When you have a market that's declined the way gold has, it would be a mistake to imagine that it's going to bounce back quickly. There's little question that gold has bottomed. I think we're going to see higher prices for the rest of the year.

TGR: Gold fell back in late March. What was behind that?

AD: Two major items hurt gold in March. One was the Chinese economy. The manufacturing and export numbers have not been good. History tells us that recessions are bad for gold and if the Chinese economy went into a recession that would have a negative impact on gold.

The second item was concern over monetary tightening, particularly in the United States. U.S. Federal Reserve Chairman Janet Yellen initially made statements that focused on ending additional bond buying. That set a negative tone. More recently she and other Fed people have made it clear that monetary policy is going to remain easy for some time.

I think the market grossly overacted. China is still growing at over 7% a year with under 2% inflation. That's real growth of more than 5%. Frankly, it's not that much different from when China was growing at 10% with 5% inflation.

TGR: What's the trade in gold now?

AD: At the early stage of a bull market or a recovery from a correction, we tend to see everything move. But the senior miners go first for obvious reasons: they have more liquidity and the names are well known. We saw that in the rally from December through March when even names like Barrick Gold Corp. (NYSE:ABX) and Kinross Gold Corp. (NYSE:KGC) moved up.

Frankly, we can talk about everything that's wrong with the senior miners but they're very cheap and they're the ones producing. If the gold price moves up, the companies that actually produce gold should move up too.

TGR: What is your prognosis for investors in the junior gold sector?

AD: In May or June we'll probably see gold move up to $1,350-1,370 per ounce [$1,370/oz] and I suspect we will begin to see some of the juniors move up more. The juniors move more rapidly as a recovery develops.

TGR: With so many juniors out there, where should investors focus?

AD: Investors should focus on companies that have good balance sheets because that enables them to move ahead with their plans without excessive dilution. They should also look for projects that could potentially be taken over. The senior gold producers are hungry for both reserves and mines. We've seen this recently with the takeover of Osisko Mining Corp. If you're Barrick producing 7 million ounces a year [7 Moz/year], that means each year you have to find another 7 Moz. That's difficult. Juniors and exploration companies with coveted assets will be in the driver's seat.

TGR: Investors want to know how they should manage their gold portfolios through the summer months. Refresh? Reload? Rebalance? What's your advice?

AD: A little bit of everything. If there are stocks that have moved ahead of themselves, it would be a good idea to sell them and raise the cash for any additional market weakness, which I would expect to see over the summer.

Another strategy, unless you are trading in an individual retirement account, is the opportunity to take tax losses. That's always a sound tactic in the gold space.

TGR: Adrian Day Asset Management [ADAM] has had some success with the prospect generator model. These companies find economic deposits and then bring in partners to help or fully fund further exploration. Is that the biggest asset of these companies?

AD: Prospect generators' biggest asset is their ability to preserve their balance sheet. The average exploration company has to spend a lot of money to find economic deposits. By its nature an exploration company constantly has to go to the market to raise more capital. The prospect generator model obviates that huge downside by using other people's money. The other big asset prospect generation gives these companies is exposure to multiple mining projects. A lot of exploration companies might only be able to drill one or two projects at a time. While the majority of a project likely belongs to someone else, some of these prospect generators have 5 or even 10 drill programs going on at the same time using other people's money. If investors buy a basket of prospect generators, they are getting exposed to perhaps 60 or 70 drill plays, which is a good thing.

TGR: Royalties are another staple of ADAM's gold portfolios. You stick mostly with large royalty equities like Royal Gold Inc. (NASDAQ:RGLD). Are there some small-cap royalty equities that you're buying?

AD: We largely stick with the larger ones because if you have a lot of money to put to work you go to the big-cap names first. If I could only pick one gold stock I would pick Franco-Nevada. That's a cornerstone of a portfolio. The reason I like royalty equities is the same reason I like the prospect generator model-it minimizes risk and the upside takes care of itself.

TGR: Another one?

AD: I like Callinan Royalties Corp. (OTCQX:CCNMF) a lot. The stock has a yield of 4.6%. Much of its cash flow is from HudBay Minerals Inc.'s [HBM:TSX; HBM:NYSE] 777 mine, which is a base metal mine near Flin Flon, Manitoba. The 777 mine is good for at least another eight years. President and CEO Roland Butler is an extremely good steward of other people's money. Butler is Callinan's largest shareholder and I always like to see management with strong positions. Butler thinks most royalties for sale are overpriced because there's a lot of competition. He's taken the unique approach of trying to generate royalties through exploration alliances with prospect generators. Callinan has about $28M and is buying back shares.

TGR: You're on a roll.

AD: Another is Solitario Exploration & Royalty Corp. (NYSEMKT:XPL). Solitario has three main assets. One is the majority-owned Mt. Hamilton gold project in Nevada. Money is being raised to put that into production. The second is the Bongará zinc project in Peru. There's not a lot of a big zinc mines coming onstream over the next three or four years. Solitario is carried to production on Bongará but I would not be surprised if it converted its 30% interest to a royalty. The same goes for the joint-venture Pedra Branca platinum-palladium project in Brazil with Anglo American Platinum Ltd. [AMS:JSE], the largest platinum producer in the world. Solitario is carried to production there, too, and if you're a South African platinum producer with all the headaches in South Africa, you're looking for platinum deposits elsewhere.

TGR: It's noteworthy that you're long on all these names.

AD: By nature I'm not a trader. I much prefer to find a really good company with good management and a good balance sheet that I can hold for many years. If investors have a really good position in Callinan, for example, and see the stock run up to $2.20, I have no objection with trimming a little-with the emphasis on "a little"-and then look to buy it back if it drops back to $1.80. These are definitely long-term positions; they're investments, not trades.

TGR: What are some other well-funded juniors with promising projects that could warrant a long position?

AD: A well-funded junior is Asanko Gold Inc. (NYSEMKT:AKG), the former Keegan Resources. Asanko has a strong balance sheet, an experienced management team and a very large gold resource at its flagship Esaase gold project in Ghana, West Africa. Development is moving slowly but all the ingredients are there. To me, this is a long-term hold while Asanko develops Esaase and puts it into production.

TGR: Parting thoughts for investors?

AD: If gold goes to $1,800/oz, Barrick, Kinross, Newmont Mining Corp. (NYSE:NEM) and others are all going to do well. But until then you need to stick with companies that have good people, good balance sheets, and strong business plans. Stick with the best whether it's the seniors, juniors or exploration companies. Don't be too quick to take profits, but keep an eye on companies that deviate from their business plan.

TGR: Adrian, thank you for your insights.

Adrian Day, London born and a graduate of the London School of Economics, heads the eponymous money management firm Adrian Day Asset Management [www.adriandayassetmanagement.com; 410-224-2037], where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the new EuroPacific Gold Fund [EPGFX]. His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."

This interview was conducted by Brian Sylvester of The Gold Report.


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 The Gold Report:

Goldcorp Inc. is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Adrian Day: I own or my family owns shares of the following companies mentioned in this interview: Goldcorp Inc. and Royal Gold Inc. Clients of Adrian Day Asset Management own shares in all companies recommended in this report. 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. 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.

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