Gold Guru: “Like a Kid in a Candy Store”

10/13/2014 10:00 am EST

Focus: COMMODITIES

Adrian Day

Chairman and CEO, Adrian Day Asset Management

Global resources expert Adrian Day sees a light at the end of the tunnel for gold miners; here, the money manager and editor of The Global Analyst offers his outlook for the gold market and some favorite investment ideas in the sector.

Steven Halpern:  Our guest today is global investing expert Adrian Day, editor of the Global Analyst and portfolio manager with Adrian Day Asset Management. How are you doing, today?

Adrian Day:  I’m fine, thank you, and you?

Steven Halpern:  Very good.  Thank you so much for joining us.  You’re well known as one of the market's leading experts on resources, particularly the precious metals.  So tell me, what’s going on in the gold market?

Adrian Day:  Well, one word, really, the dollar. You know, for the last three months, in particular, the US dollar has been exceptionally strong and that hurts gold.  

You know, it hurts anything that’s priced in dollars.  It hurts oil, it hurts all the resources, but most notably, gold. There’s other factors, of course, but that’s the main one, by far.  

Steven Halpern:  In your latest newsletter, you said, looking at gold miners and resource exploration companies now is like being a kid in a candy store.  Can you expand on that?

Adrian Day:  Yes, absolutely.  Well, I’m a value investor and, you know, I don’t mind holding cash, even when cash pays nothing.  I’d rather hold cash than make an investment that is overvalued.  

This is something I don’t often say, but, I mean, frankly, right now in the resource sector, particularly the gold stocks, there are just so many good buys.  

There are good buys among the seniors.  Mining is a difficult business, right?  It’s a very difficult business and I tend to be very, very selective about the actual large mining companies that I buy.

But you look at something like Goldcorp (GG), for example, which is the largest gold mining company in the world by market cap and that’s selling at 20 year lows in terms of valuation.  

It’s yielding 2.7%. It’s trading below book value and it’s a good company.  It’s got a great balance sheet, it’s got a good pipeline, it’s in politically safe jurisdictions, you know, all the boxes are ticked and yet it’s trading at just these ridiculous multiples.  

Then I like some of the exploration companies, that, you know, obviously, exploration is a very risky business.  

There’s no guarantee of success but you know you can look at companies now that are trading very close to their cash—or cash represents a large part of what they have—and the businesses are coming very, very cheaply indeed and there’s a lot of those out there.  I mean, I can name them if you want, but they’re very small, very small companies.

Steven Halpern: Certainly.  In your fourth quarter review for your portfolio management firm, you noted that you’re focused on good projects, good management, and good balance sheets.  Perhaps you’d share a name or two that fall under that criteria.

Adrian Day:  Well, okay.  One I’ll mention is Reservoir Minerals (RVRLF), which is not really a gold—it’s got gold projects—but the excitement is about a copper discovery they have.  It’s a $200 million market cap company, $44 million in cash, so a lot of cash.  

They have a joint venture with Freeport (FCX), so Freeport is spending the money, where they had an astonishing discovery.  One of, frankly, some of the best drill holes that I’ve ever seen in copper.  

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The stock has come off a lot but that’s just weakness about, mostly, concern about copper and concern about the economy.  That’s one I like a lot and they’re drilling.  They had some 100% ground that they’re also drilling.  

Oh my gosh, it’s like a kid in the candy store.  What do I mention?  Which one do I mention?  There’s so many.  Riverside Resources (TSX: RRI) is a Canadian company.  You know it’s a small market cap.  

It’s about just $12 million market cap, but they’ve got a solid balance sheet, about $5 million.  They’ve got seven joint ventures with other companies.  Again, other companies are spending their money.  I like that business model.  

Exploration is a very, very long odds business, very speculative, but if you can develop projects or properties and get other people to spend the money, obviously you give away 50%, or 60%, or 70% of the project, but you’re minimizing your risk tremendously.  That’s another one I like a lot.

Steven Halpern:  I know you generally focus on individual mining stocks but I found it particularly interesting in your fourth quarter review, you mentioned that you buying an ETF, which is called Sprott Gold Miners (SGDM).  Would you explain the rationale for that?

Adrian Day:  Yes.  Typically, I’m not a huge fan of ETFs, or many ETFs.  I think you have to be very, very careful when you look at ETFs, because when you buy—most ETFs are based on market cap, you know, the size of the company—so there’s two major problems there.

One is you know, in certain markets, a handful of companies can dominate the market.  Even a market like Brazil, you know a lot of people might say, well, I want to own Brazil because there’s a very middle class and, you know, the consumer is going to become dominant, and so on.

But you buy the ETF and most of what you’re buying are a handful of resource companies including Petrobras (PBR) and Vale SA (VALE).  

Now you may like Vale.  You may like Petrobras.  You know Petrobras right now is about 14% of that particular index and that’s at a time when the stock is down. It has been as high as 20% of the index.  

The point I’m making is you may or may not like Petrobras but you better find out if you like Petrobras and Vale before you buy a Brazil ETF.  

The same goes for the gold ETFs.  You better find out what’s in them and the problem with the ETFs is you’ll find the good along with the bad.

So, when you’re buying based on market cap, and so in most of the gold ETFs—Barrick (ABX), Newmont (NEM), AngloGold (AU)—these are the largest holdings and you may not want those companies.  

Sprott has a very interesting idea where they don’t select their holdings based on market cap but based on what they call proprietary criteria, but basically, they’re looking at growth in the company and other metrics for companies that have done well in the past.

And when I look at the list of stocks that they own, I find it’s almost identical to the stocks that I like.  

You know, I think that makes a lot of sense of someone who doesn’t want to pick individual stocks.  It trades from New York—SGDM on the New York exchange—and it’s relatively new.  It only came out in June, but it’s already fairly liquid.

Steven Halpern:  Well, we really appreciate you taking the time today.  Thank you so much for joining us.  

Adrian Day:  Well, thank you.  Thank you.

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