Charles Oliver, a senior
portfolio manager for Sprott Asset Management, is
keeping the faith that gold and silver stocks will eventually appreciate this
year as Europe and the U.S. continue to print money. In this exclusive
interview with The Gold Report, Oliver says that an
indicator that juniors are about to take off could be an improvement in
certain bellwether mid-cap stocks.
The Gold Report: Last February, you
forecast that stocks would rebound in 2012. What signs indicate that's about
to happen?
Charles Oliver: I had expected that the
money from the European version of quantitative easing would start to get
into circulation and, with the continuing debasement of currencies, be very
positive for gold and other asset classes. However, I miscalculated how weak
the banks of Europe actually are; most have very weak balance sheets. Indeed,
they took most of that money to try and prop themselves up and keep afloat.
Having said that, I
maintain my long-term thesis, which is that the governments of Europe are
going to continue to print money. The things that are going on in Europe,
China and the U.S. lead me to believe that there is going to be significant
printing down the road, which ultimately will lead to higher gold and silver
prices.
TGR: This liquidity being
forced into the system will drive gold prices higher?
CO: Yes, absolutely. Banks
in Spain, specifically Bankia, are in need of
funding and injections of equity. The central banks of Europe are already
running very large deficits and don't have any money available for this. The
only reasonable conclusion is for them to turn to the printing
press—whether it be directly printing or some other quasi form of
printing, such as a long-term repo operation—to ultimately do a
significant amount of the funding.
More money will also be
printed should Greece exit the euro. Every day, it seems more and more likely
that it may happen. One of the catalysts could be the election June 17. If
Greece were to exit the euro, there would probably be a significant default
and many of the European banks that hold Greek debt would be in an awful lot
of trouble and require further injections of capital. In that scenario, it
would be similar to 2008 when U.S. Treasury Secretary Henry Paulson went to
Congress and asked for a blank check to backstop the whole financial system.
If Greece were to leave the euro, the European central banks may have to
write a blank check to make sure that the entire European banking system
doesn't collapse.
TGR: Are you anticipating
more blank-checkwriting in the U.S. or has that
already been done?
CO: I expect more printing.
Whether or not it will be done in the same fashion as in 2008, I don't know.
I'm a big believer that demographics are going to force the U.S. to continue
to run very large budget deficits over the coming decades. The first baby
boomers are retiring, which means they'll stop paying income taxes and begin
to draw down on Social Security. Healthcare benefits will rise rapidly over
the next decade. The U.S. will continue to require printing to help meet
these gaps in funding deficits. The U.S. has to be very careful how it goes
forward.
TGR: You have been closely
following developments in China. How will what happens in China impact your
portfolio?
CO: It seems that on a
global basis we're getting the triple whammy. There's job weakness in the
U.S., massive debt problems in Europe and sluggish economic indicators in
China. A laundry list of China's economic indicators, from gross domestic
product, which was at double-digit levels over most of the last 20–30
years and is now creeping down to the 8% level and continuing to show
weakness; to the purchasing managers index, which is considerably lower than
expectations at 50.4, just on the verge of showing declines in the economy;
and weakness in industrial production.
TGR: In the midst of all of
that, about 90% of the companies you're invested in are headquartered in
Canada, but the bulk of their operations are overseas. In a report on your
fund, you commented on the impact of the coup in Mali on your stocks. Are
there any countries you're avoiding now?
CO: A couple of years ago,
I reduced my exposure to West Africa because of the issues in Mali, Egypt and
Libya, and the attempted coup in Burkina Faso. There continue to be ongoing
concerns in Mali. Companies such as IAMGOLD Corp. (IMG:TSX; IAG:NYSE) have deferred some of
work on projects on the Sadiola sulfides in Mali.
A lot of countries in
many jurisdictions are trying to increase royalties—some of them rather
aggressively, some of them at a reasonable rate. I have concerns about many
of these places. Argentina is also a big concern. President Cristina Kirchner
has come in and made a number of changes. She is asking mining companies to
buy domestically in Argentina. Unfortunately, Argentina does not necessarily
have everything they require, which is making it very difficult for some
companies to secure some of the items, whether it be
drill rods or plant equipment. I'm watching Argentina. I'm a little cautious
about what's going on there.
Peru, which historically
has been a very good place to invest, has also recently given me cause for
concern. It increased a windfall profits tax that has reduced the overall
profitability of companies operating there. There have also been a lot of
anti-mining protests. Although it looks like the Peruvian government is
trying to continue to encourage mining, there are some challenges.
One of the companies I'm
watching just as a bellwether for how the wind is blowing in Peru is Newmont Mining Corp. (NEM:NYSE). It has a project called
Minas Conga, which was delayed/deferred last
December when there were a number of protests that caused considerable
damage. We do not know yet if Newmont is going to proceed. I think it would
like to, but there are some hurdles.
One of the things that
I've been trying to do in terms of my investments is look for safe
jurisdictions, including at home. North America has actually been one of the
more stable areas over the last period.
TGR: Are you talking about
Canada, the U.S. and Mexico?
CO: Yes. Mexico has some
issues in terms of safety. In the U.S., there are certain areas where it's
challenging to get permits. Everywhere has its challenges.
In Ontario, where I'm
located, a lot of new mines have come on-line over the last decade. When I
look at a country, I want to see who's involved there, what they're doing and
whether they've been able to permit, build, drill—all of the different
aspects.
TGR: Are there any countries
in South America that you like?
CO: Brazil and Guyana are
probably two of my favorites. Colombia also has some great potential. Having
said that, we have yet to see a new mine built over the last decade, but
there have been some great exploration success stories. Hopefully, going
forward, several of these will be built.
TGR: In April, the $478.4
million Sprott Gold & Precious Minerals Fund
showed a 2.5% decline, compared to a 6.7% decline for the S&P/TSX Global
Gold Index. You said in a report, "The relative outperformance of gold
bullion is far above historical norms, but we maintain absolute conviction
that many gold stocks will deliver exceptional earnings and, accordingly,
remain very optimistic on the long-term prospects of the sector." Are
you buying more equities based on this long-term gold sentiment?
CO: I've been pretty fully
invested since that period. The valuations, just as in April, are absolutely
spectacular. In fact, they've gotten even cheaper. It's quite frustrating as
a portfolio manager when you see such great value and increasing earnings,
cash flow and production, yet share prices go down.
Right now, the general
investor seems to be avoiding gold stocks. I'm still convinced that at some
point these stocks will be recognized for their values and they'll
significantly outperform relative to the gold price.
I'm still very bullish
on the gold price, don't get me wrong on that, but I see the seniors out
there trading at seven or eight times price/earnings (P/E) or six times cash
flow, and I just think these valuations are ludicrous. Sometimes you have to
be patient.
"Right now, the
general investor seems to be avoiding gold stocks. I'm still convinced that
at some point these stocks will be recognized for their values and they'll
significantly outperform relative to the gold price. " –Charles
Oliver
TGR: The overwhelming bulk
of your sector allocation is gold equities. What were your best performers?
CO: I wish I had a whole
bunch of best performers, but what we've seen over the last period is the
least worst performers. Over the last year investors
have taken the risk trade off. The small caps have been brutalized. There are
companies trading at a discount to cash, like Mundoro
Capital Inc. (MUN:TSX.V), and companies trading
close to cash, such as Keegan Resources Inc. (KGN:TSX;
KGN:NYSE.A). On a relative basis,
it's been the large caps that have done the least worst and held up the best.
However, when you look at all segments, they have suffered in the prevailing
market.
TGR: You own the producers Barrick Gold Corp. (ABX:TSX;
ABX:NYSE) and Osisko Mining Corp. (OSK:TSX). How did they perform?
CO: Osisko
is a mid cap and is just starting on its
production. It's a great company. Mid cap is probably a good area to be when
this market takes off. Yet, when you look at Osisko,
it's trading at half-price of what it was about a year ago. It's very sad,
but many companies out there are trading at big discounts to where they were
last year. When you look at the silver companies, they're down about
50–60% from a year ago when the silver price was pretty close to where
it is today. These markets are very perplexing.
TGR: What about the juniors?
CO: The valuations are
great, but having said that, we're going to see the valuations stay great for
a while. A lot of these companies need to fund and are dependent upon the
markets, which are not available. I have added some names recently, although
it's probably an area that will move after the mid caps
and rest of the market start to firm up.
TGR: One of your juniors is Colossus Minerals Inc. (CSI:TSX; COLUF:OTCQX). Are you still excited
about the Serra Pelada project in Northern Brazil?
CO: I'm really excited
about it. It's a significant position for me. It was one of the first names I
bought. When I moved to Sprott, it was just doing
its initial public offering. The stock's price has been cut in half, just
like many other good stocks. I had the chance to go down there a couple of
months ago and look at it. I actually came back feeling better about the
stock than when I went down.
It still has lots of
challenges and hurdles to overcome, but it looks as if it's doing a good job.
Colossus has been developing its underground mine and is very close to
getting into a very high-grade ore zone. It should be there within the next
couple of months. Come this time next year, it should be producing.
This could be a very
exciting stock. It's just another one of these names that has been under
significant pressure. There seems to have been a seller in the market over
the last couple of months, and it has really taken a big hit. It has nothing
to do with the execution of its strategy.
TGR: What about silver? Are
there any names that you find interesting right now?
CO: Just about every name
under the sun is attractively valued.
TGR: Is there a bellwether?
CO: The first area to move
will be the mid caps and large caps. Some of the
names in the silver space that fit that criteria would be Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE) and Pan American Silver Corp. (PAA:TSX;
PAAS:NASDAQ). They are two of the
biggest silver companies out there and trade about eight times P/E. Pan
American pays a dividend. Coeur d'Alene could introduce a dividend this year.
It's very attractively valued. On a yearly basis, it's down about 50%. It's
been a victim of a very weak stock market.
TGR: Is there a mid cap on the gold side that is a
bellwether that will indicate mid caps are
finally moving?
CO: There are a number of
bellwethers out there, like Yamana Gold Inc. (YRI:TSX;
AUY:NYSE; YAU:LSE), Eldorado
Gold Corp. (ELD:TSX; EGO:NYSE) and IAMGOLD. They're the
midtiers that aren't quite in that large-cap space.
They are three good companies to keep an eye on as an indication of how the
overall sector is going.
TGR: Are you holding IAMGOLD
right now?
CO: We have some IAMGOLD,
Eldorado and Yamana.
TGR: What advice would you
give someone who is just now starting to invest in this sector?
CO: What a great time to
get in because it's a half-price sale. I look at what's going on around the
world. It feels very much like 2008 when it looked as if the world was about
to end, especially in Europe. Equities and the gold price were under
pressure, which was kind of ironic because the U.S. embarked upon a major
printing program then that was very bullish for gold. Now, it looks as if
Europe is about to embark on a major printing program that should be very
bullish for gold. So it's a great time to buy. You have to be patient. These
markets will not stay like this forever. When they turn, they can turn fast.
For those who have been
invested in this market: The fundamentals look very good. Be patient. Don't
lose faith. This story for higher gold prices and higher silver prices is
still very much intact and looks very positive. Just be
patient.
TGR: That is great advice.
Thank you for your time.
Charles Oliver joined Sprott Asset Management in January 2008. He is co-manager
of the Sprott Gold and Precious Minerals Fund, Sprott All Cap Fund, Sprott
Opportunities Hedge Fund L.P. & Sprott
Opportunities RSP Fund. Prior to joining SAM, Charles was at AGF Management
Ltd., where he led the team that was awarded the Canadian Investment Awards
Best Precious Metals Fund in 2004, 2006, 2007, and was a finalist for the
best Canadian Small Cap Fund in 2007. At the 2007 Canadian Lipper Fund
awards, the AGF Precious Metals Fund was awarded the best five-year return in
the Precious Metals category, and the AGF Canadian Resources Fund was awarded
the best 10-year return in the Natural Resources category. Oliver obtained
his Honors Bachelor of Science degree in geology from the University of
Western Ontario in 1987 and obtained his CFA designation in 1998.
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Disclosure:
1) JT Long of The Gold Report conducted this interview. She personally
and/or her 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: Colossus Minerals Inc. Streetwise Reports does not accept
stock in exchange for services. This interview was edited for clarity.
3) Charles Oliver: I personally and/or my family own shares of the following
companies mentioned in this interview: Barrick Gold
Corp. 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 story.
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