Royalty Favorites for Golden Gains

08/19/2013 10:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

Global resource expert Adrian Day has joined with Peter Schiff to launch the Euro Pac Gold Fund. Here, he updates us on the new fund, his outlook for gold, and some current favorite stock ideas.

Steve Halpern: We're here today with Adrian Day of Adrian Day Asset Management and the editor of the well-known newsletter The Global Analyst. How are you doing Adrian?

Adrian Day: Well, I'm fine, thank you Steven, how are you?

Steve Halpern: Very good. You've had some exciting things going on there, I was hoping to talk to you about. You've just added a new project to your list of achievements, and along with Peter Schiff, you've launched the Euro Pac Gold Fund. It's an interesting time for the gold market. Can you tell us a little about the new fund?

Adrian Day: Yes, I mean, physical business of gold fund, Peter and I have been talking a few times at seminars and we thought this was just an excellent time to launch a gold fund, because of values we both feel were, and still are, just amazing.

I should point out an excellent time from the investment point of view, not necessarily an excellent time to market a fund, but you know, because people generally, generally people tend to like a little bit of shall we say confirmation before they buy assets like gold. We launched a gold fund basically because we think it's a great time to do it.

It's a gold fund, which means 80% of the assets will be gold related securities, or gold bullion, and we're going to be primarily, as most of the gold funds are, we're going to be primarily in the gold stocks and then the other 20% can be in other precious metals and so on, and diversified resource companies that include gold, but primarily gold.

Steve Halpern: Do you have a symbol for the fund yet in case any of our listeners are interested in finding out more information.

Adrian Day: It's (EPGFX).

Steve Halpern: Okay, great.

Adrian Day: Because it's new, it's just a little over two weeks yet, some of the services don't yet have prices, but they will very soon.

Steve Halpern: Okay, let's consider your outlook on gold and let's start with the short-term. We recently noted that gold may well have bottomed when it declined below $1200 last month. Are you comfortable now that a bottom is in place?

Adrian Day: Yeah, very much so, and I'm not a technician, I'm also not a short-term investor, I tend to be a long-term investor, but from a sort of short-term, technical point of view, if you like, I think the recovery from that low at the end of June has been very, very powerful.

We've had one, two, three, four, five six, we've had six, seven pullbacks, but other than one of those, other than one, each pullback has only been for one day. In other words, gold has come down and then the next day it's gone back up.

That's very, very powerful, and in each of those cases, within two days, it was above, except one, it was above its previous high.

Again, that's very, very strong. Because typically coming off an extreme low like that, you get people who say "wish I could have sold," and when the market moves back up a bit, you always get people—it can be a market or a stock—people who wanted to sell, who take the opportunity at a rally. Gold's up $140, $150 from the low, and we're just not seeing that resistance yet, so I'm very positive.

Steve Halpern: Okay, now you're also bullish from a long-term term standpoint, and you've noted that the combination of positive fundamentals, the sharp price declines, and low valuations all add up to a great buy opportunity. Can you explain that a little further?

Adrian Day: Yeah, especially on gold itself. I think the sell-off that we've seen this year, particularly from April, has just been grossly overdone. I think the market has overreacted to the Federal Reserve and Ben Bernanke's comments about possible tapering.

I think the market is beginning to realize now that it overreacted. All that the Fed said was that they might—later in the year—cut back on their additional stimulus if the economy continued to be strong. That's an awful lot of qualifications.

All the market is looking at, with the Fed, the worst expectations or the best, whichever way you want to look at it, but the monthly bond buying will cut back from $85 billion a month to $65 billion a month.

Note, we're still adding, the Fed is still expanding the money supply, even if it reduces the stimulus to $65 billion a month; that's still a lot of additional stimulus. Nobody but nobody is talking about actually shrinking the Fed's balance sheet, and of course, monetary expansion is good for gold, so basically I think the market just overreacted.

Steve Halpern: When it comes to selecting individual stocks in the gold sector, you've always highlighted selectivity. Could you explain some of the factors you look at and perhaps share a few individual names that are attractive to you now?

Adrian Day: Sure, I mean, first of all, obviously if gold goes up from $1200 to $1350 or $1500, pretty much every gold stock is going to move, but I believe, and in this sector you have to be very, very selective, and the reason for that is that mining and exploration are both extremely tough businesses. They're very, very, very difficult businesses.

Add to that the fact that some of the senior mining companies have actually not been very well-run companies recently. I don't think that's necessarily completely changed for some of them. I think you need to be selective.

What do we look at? Well, first of all, with the seniors, we look at strong balance sheets, we look at a diversified base of strong mines, preferably low-cost mines, and we also want companies that have good pipelines of future projects, so we see where the growth is coming from, so they don't have to go out and make expensive, and sometimes very expensive, acquisitions just to stay where they are. They've already got the projects in hand.

On a junior end, we look particularly at gain for strong balance sheets, the companies don't have to keep going back to market to raise money, and also strong management that has proven that they have an ability of either finding mines, finding deposits, and running a good business. Those are the things we look for.

The names, yeah, I'll give some names, and, of course, everything depends, I mean, all the qualifications, it depends on the person and depends on the price when you go to buy, but you know, I love a company like Franco-Nevada (FNV) which is a royalty company; it's the largest of the royalty companies.

It's a $6.5 billion company, so, not tiny; that's big for gold. As a royalty company, it buys royalties on other people's properties, or it creates royalties on other people's projects so that the other company can get funding, and so it avoids most of the risks that are inherent in the mining business.

That's one we really like. Super strong balance sheet, $800 million of cash, no debt, and so on.

Steve Halpern: I was going to ask if there's a name in the junior sector that you'd also fare.

Adrian Day: Yeah, you know, my favorite company in the junior sector remains Virginia Mines, (VGQ) in Toronto, this is, at basis, an exploration company that has built its business by what's called a prospect generator model, meaning they go out and generate prospects, which they then try to farm out to other people to spend the money.

In the case of Virginia, because it's been successful at this for a long time, it never gives away more than 50% up front, so the other company gets 50%, or has the right to earn 50%, for spending the money on the project.

The beauty of this is that Virginia—and there are other companies like this—can maintain its balance sheet and doesn't have to keep raising money, which is the biggest problem in the mining business.

I could also quickly point out, Virginia has a royalty on gold called Eleonore Mine that comes on stream at the end of next year, and this will start generating about $20 million to $30 million for them for about 17 years, so it's very well set.

Steve Halpern: So rather than invest directly in a company like Goldcorp, you'd rather buy Virginia as a secondary play on that.

Adrian Day: Yes, yes, I like the concept of looking up the secondary plays. I mean, you know we own Altius (ALS) for example, rather than Alderon (ADV). Altius owns 30% of Alderon, that is more diversified, has a better balance sheet. If Alderon succeeds, Atius will succeed.

With Franco you're getting exposure to the Barrick (ABX) gold strike mine which is a key cornerstone project; you're getting exposure to Detour Lake, the new mine that is just coming on stream in Ontario. You're getting exposure to a whole bunch of mines around the world, so yeah; I like that concept very much.

Steve Halpern: Well again, congratulations on the launch of the new Euro Pac Gold Fund and thank you for taking the time to be with us today.

Adrian Day: Well, thank you Steven, thank you.

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