Golden Favorites

04/24/2015 10:00 am EST

Focus: STOCKS

Ralph Aldis

Senior Mining Analyst, US Global Investors Inc.

Ralph Aldis manages two leading gold and precious metals funds at US Global Investors. Here, he offers his outlook for gold and discusses his favorite gold producers, explorers, and royalty stocks.

Steven Halpern: Our guest today is Ralph Aldis, a money manager specializing in gold and precious metals at US Global Investors. How are you doing today, Ralph?

Ralph Aldis: Very good, sir.  

Steven Halpern: First off, can you give us a brief overview of the two funds you manage—Gold and Precious Metals Fund (USERX) and the World Precious Minerals Fund (UNWPX)—and while you are telling us about these, perhaps you could touch on the differences between the two funds?

Ralph Aldis: Okay. Certainly. The main differences between these two funds—just to start off at the beginning—is that the Gold and Precious Metals Fund invests mainly in companies that are currently in production. They are currently generating revenue from their operation.  

There are no exploration or development companies in there, which gives a slightly different risk and reward opportunity too to the companies, but this is where we focus on those companies that are currently producing gold or other precious metals and they kind of de-risk that early stage part of the development cycle.  

The World Precious Minerals Fund is not entirely just exploration and development companies it does have probably 40% of the fund, at least, is in producers.

But we do have those exploration development-type stories in there, where the companies are either trying to make a discovery or have a discovery and they are trying to take it to the next level, and to achieve production, or in some cases, this is the shopping platform where companies, sometimes, when they are looking for discovery—that they didn't make themselves—but they are looking for where can I buy ounces efficiently, that's where you sometimes get those takeovers a little bit more often in that fund.  

One thing that's different about the two funds also is: Gold and Precious Metals—which is the producers—it normally in a gold cycle, when gold is moving, it's the producers that typically move first.  

Those stocks—that's where the money is going to go to first—to those companies that are in production and then monetize the gold at this time and then as you start getting further into the gold cycle then World Precious Minerals is where the next lift in the stock prices comes from.  

These funds don't perform exactly next to each other but one of them is going to benefit very early in the cycle and the other one can benefit tremendously in the later stages when people are scrambling to try to find where else do I need to get gold exposure.  

Steven Halpern: Let's take a quick look at the overall cycle towards the gold sector. It has been a very difficult few years for gold investors. Do you see things improving?

Ralph Aldis: Yeah. I think we have gotten, maybe, to the main pain points.  Late last year, Eric Zaunscherb at Canaccord, did a study looking at gold and the Venture Index in Canada and he took about 30 years' worth of data.

There has been, say, four bull markets, four bear markets and we now have officially gone into the longest bear market, so far in the Venture Index and the reason I use that sort of as a proxy is that it's not dominated by mining companies.  

It's not just mining companies, this is where capital formation takes place and we have kind of come to where we are now on probably 48 or 49 months now as far as it being the longest bear market yet.  If you look at his reports, he also shows what has happened to that index after that and there has been some very good runs out of those type of bear markets.  

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I'm optimistic on that phase and I'm also very.well, look at the gold price. We've held in very tightly around $1200.  Yes, there have been days that we have traded below that, but, you know, $1200 seems to have been a pretty good floor and the dynamics of the gold market have changed dramatically over the last 20 years.  

You have now where China is now the largest producer, but they don't export any of their gold to the market for sale, at least not to the world markets.  It used to be South Africa was the biggest producer and all of their gold was sold to the market. The other thing that is different now, in the last five years, or so, central banks have been net buyers of gold to the tune of close to 500 tons per year.  

Prior to that, central banks, for probably 15 years there, were net sellers of gold to the market on the border of 400 to 500 tons per year and that has turned around.  It think the supply/demand dynamics of the gold market are very supportive, certainly if we are going forward right now and plus we have had a very long bear market right here and maybe we are due for a turn here.  The probability would favor that.  

Steven Halpern: Let's look at some of the individual stocks that you think would benefit from these trends and one mining stock you recently highlighted is Klondex Mines (KDX.TO).  What is the outlook here?

Ralph Aldis: Klondex is.there is still a lot of opportunity in this name.  The reason I say that is, one, if the gold price, even if it doesn't move very much from here, this is one company that's going to do very well.  Reason being, they have a very high-grade deposit.  

It is in a safe jurisdiction in Nevada and it's got a great team and they have actually two different mines that they are working from right now.  One is the Fire Creek Mine and the other is the Midas Mine.  

The CEO of Klondex, Paul Hewitt, he was the general manager for Newmont (NEM), running the Midas Mine for probably about ten years before Newmont, basically, sold that last year to Klondex.  

During the interim, Paul had actually joined another company and had come back to Klondex, and so, he knows that asset very well.  They had the Fire Creek Mine, which is in its final stages of per mining.  

They are producing gold from there right now as they are in the development phase but they are very low cost. They have free cash flow.  There is a little bit of debt that they will probably pay down this year and that debt came from the transaction when they bought the Midas Mine from Newmont.  

These guys are, they have a great ore body and as they have done additional exploration in the past year, they have made several new discoveries and new veins and the same thing at the Midas property.

Newmont had approved a $50 million exploration program there and they just never followed through on it because that mine was—in the scheme of things for Newmont—wasn't big enough, but for Klondex, this is a great opportunity and I think there are plenty of new discoveries to be made there at the Midas property too.

Steven Halpern: Now, you're also bullish on Mandalay Resources (MND.TO), citing it as one of your favorite gold producers.  Can you briefly share your thoughts on that firm?

Ralph Aldis: Yeah.  Mandalay is, this is another one that is profitable and they pay a dividend and the yield right now is roughly about 5.5%.  

These guys—Bradford Mills is the CEO and the President is Mark Sander—what they have done in the 2008, 2009 period when things sort of just went—when markets just sort of tanked—these gentleman looked around and they found some acquisitions to make, so they bought, kind of, basically at the bottom and that helps when you are trying to do an acquisition to buy at the right price.  

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Both of those mines that they bought at that time, there was nothing really wrong with the mines, other than probably the existing companies that were running them weren't doing the right methods of mining them efficiently and they came in turned both those operations around and you can see that they are profitable and paying a dividend.  

They recently did another transaction and they bought the Bjorkdal Gold Mine from Elgin Resources (ELG.TO). That mine is in Sweden, another safe jurisdiction in that part of Sweden there is lots of mining and they are in the process of turning that one around right now.  

Again, they bought it right here at the end of this or in this bear market and paid a very reasonable amount of money to control that property and they are starting to turn on that one too.  I expect to see some positive things going forward with these guys too.

Steven Halpern: Among royalty streaming companies, you highlight Osisko Gold Royalties (OR.TO), what's the attraction there?

Ralph Aldis: Well, you know Osisko Gold Royalties is very interesting to me because—out of the royalty companies—this is the only one right now that is a pure gold royalty company and the royalties are on two very good mines.  

One of them is on the Malartic Mine that Agnico Eagle (AEM) and Yamana (AUY) recently purchased from Osisko and they have a 5% royalty on that.  

The other one came from the transaction where Osisko Gold Royalties bought Virginia Mines (VGQ.TO) and they have the royalty on Eleanore, which Goldcorp (GG) is mining, and that is one of their new mines that they are ramping up and getting into production.  They have two very good properties that they have royalties on.  

They also have cash from the recent financing to do additional transactions but what I like about it also is that when you look at Franco-Nevada (FNV), they have an oil component to their revenue stream and oil is obviously down 50%.
We don't know when oil is going to turn around, but if it stays low for a while, then that will be a drag for Franco.

The other side on base metals—if we have interest rates start to go up somewhat—sometimes base metals don't perform quite as well in that type of environment because that's basically a tax on industrial-type manufacturing.

And for Royal Gold (RGLD), they have their newest mine in coming on production and it's main products is lead and zinc and if those prices aren't doing as well, that mine could run the chance of maybe not continuing.  That's a pretty slim chance that would happen, but it is still something I don't have to worry about at night so I think these guys are set up very well.

Steven Halpern: Well, we are out of time but I was wondering—before I let you go—are there any other stand-outs in the sector that have caught your attention that you might want to mention to our listeners?

Ralph Aldis: Yeah, today, Comstock Mining (LODE)—on the US exchanges—reported their first quarter earnings and they actually showed a profit and that is fantastic.  

Last year they were ramping up their production—their first year of production—and they had not achieved quite the economies of scale yet, they have hit those metrics now.  They are profitable and that stock has actually jumped a pretty good amount today as much as 18%.

I think a lot of people were betting on that name not delivering and they have delivered and I couldn't be happier with that one right there because that's another one that's in Nevada—a safe jurisdiction—and they have a land position there that took them quite a long time to get it consolidated from all the interest but it has been undeveloped for such a long time and they have a lot of opportunity there going forward.  

Steven Halpern: Again, our guest is Ralph Aldis, money manager at US Global Investors.  Thank you so much for sharing your insights today.

Ralph Aldis: Thank you.

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