Gold Expert's Alpha-Based Buys

11/02/2015 10:00 am EST

Focus: COMMODITIES

Ralph Aldis

Senior Mining Analyst, US Global Investors Inc.

Gold specialist Ralph Aldis looks for catalysts that will allow select gold miners to outperform the sector; here the manager of the US Global Gold & Precious Metals Fund (USERX) discusses his "alpha-based" strategy and highlights some of his top stock holdings.

Steven Halpern:  Our guest today is Ralph Aldis, Money Manager with the US Global Gold and Precious Metals Fund.  How are you doing today, Ralph?

Ralph Aldis:  Very good, sir.

Steven Halpern:  I’d like to get your assessment on the outlook for gold looking both from a short- and long-term standpoint.  Let’s begin with the shorter-term focus, perhaps looking towards yearend and into 2016.

Ralph Aldis:  Okay, very good.  Coming into yearend right now, I mean, gold has been—really, for the first nine months of this year—has been kind of like in a downtrend, while we had an initial run up in February and we’ve been sort of in a downtrend. That has sort of shifted a little bit as we see in this last quarter right now.  

What’s going on there is—they call it the fall rally—and there is a seasonality here in the sense that jewelry manufacturers come back into the market and replenish their stocks for fabrication.  

What happens here in this fourth quarter, you have natural buyers return when they haven’t been buying any during the summer, because we don’t have any holidays, really, that are going to drive any fabrication for jewelry demand.  

That’s what we’ve got going on right now going into yearend, so I expect gold probably to be a little bit stronger in the fall.  Historically, this relationship, about 80% of the time, at least, you normally have this fall rally.  It’s not guaranteed, but it’s something for yearend that normally picks up.  

Steven Halpern:  Aside from the shorter-term factors there, do you also see longer-term fundamentals that would support a bullish move over an extended period?

Ralph Aldis:  Yes, yes, and the sentiment right now has been very negative towards gold and you have almost all of the analysts out there citing we’re going to have rising interest rates by the Fed and so you don’t want to own gold.  

Well, I mean, real interest rates have already gone up and the Fed—be a lack of inflation—so we’ve really had an interest rate hike already. The issue that we have out there, you know, to go to the elephant in the room is the Fed itself, there’s always the possibility of a policy mistake going on.  

You’ve got to think, we’ve never really done this type of monetary experimental stuff before, in terms of expanding the balance sheet, plus $4 trillion, so we’re kind of in uncharted territory, so I think that in itself is enough of a reason that an investor might want to have 5% to 10% of their portfolio in gold or gold stocks.  

That’s actually a pretty smart thing, even just long-term, because gold and gold stocks are one of the few things that are sort of uncorrelated with the overall market.  If the overall market is really streaming higher your gold stocks probably won’t perform as well.

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But if the market starts to go down, your gold stocks will probably offset some of that volatility and you’ll always want to remember to rebalance.  Set your position sizes and periodically rebalance; sort of take gains and stuff that’s gone up and roll some of that money into stuff that’s gone down.  

Steven Halpern:  So, let’s turn to the strategy behind the US Global Gold and Precious Metals Fund; you suggest that your goal is to deliver what’s called "alpha" rather than "beta" exposure.  Can you explain what you mean by that?

Ralph Aldis:  Yes.  Beta, in this sense, is really the market performance.  I guess what I would say if you took all the stocks in the gold sector and you just, sort of, aggregated them based on their market capitalization, and track that performance, you’d be getting the average performance or just what’s the beta of the gold stocks.  

Alpha is when you’re really looking for factors for individual names where this company will outperform the market.  Obviously, I’d like to be able to pick stocks where all of them outperform, but that’s really not feasible.

But, on average, if I can get an edge and find some good stories that are working, and management knows what they’re doing, and if I position the fund maybe outside of that market weighting and sort of hierarchy and go with a weighting hierarchy where I want to overemphasize a name—and if that name performs—then I’m delivering a positive outlook for the shareholders.  

Steven Halpern:  Are there any kinds of specific catalysts that you are looking for when analyzing a gold mining stock?

Ralph Aldis:  Well, I would suggest for investors you kind of want to think about the lifecycle of a mine, so you can kind of put the company that you are looking at in some sort of framework of where is it in the lifecycle.

And then you can kind of put—and that would allow you—say, if the company is in the development stage or exploration stage—that’s where sometime the stock may have potentially the biggest percentage of price move.

Because if there’s a discovery, then the stock will move up quite a bit, or if, you know, sometimes there are permits in the timeline that the company has to get to allow to do things, and permits being awarded or not being awarded, would be a big catalyst for a positive or a negative price reaction.  

If you lay out that timeline and you kind of understand what are the factors through time that you’d be looking for—you can usually get that by going through a slide presentation of the company, and just trying to diagram it out, and think about what are those events that are coming—and try to be positioned to take advantage of those.  

It’s sort of unique to each company in the sense of just trying to outline it and that’s where you’ve really got to do your studying, but that’s what we try to do here, is try to find those things that are going to allow the stock to outperform and try to take advantage of that weighting of having a significant weight in there.

Steven Halpern:  Now one of your largest holding is Klondex (KLDX); what’s the attraction here?

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Ralph Aldis:  Well, this is our biggest holding and it has gotten that way, a large part, because of price appreciation over the last three years and I would still say on my price, on our model here, we still have at least a double left in the stock and what we think is easily attainable over the next year or so.  

With Klondex, what really is unique about this story, this is a fairly high grade mine where they are really putting about one ounce per ton of gold through their milling circuit right now.

That’s almost, like, say 30 times higher than the average company who's typically working with one gram per ton, these guys are working with one ounce per ton, which is around 32 grams or 33 grams.  These guys have flexibility.  When you have high grade...there’s a saying, "grade is king," and this allows management to have a lot of flexibility.  

Also, at Klondex, they have two mines, and about a year back, they actually was able to purchase one of those mines and a mill from Newmont Mining (NEM).

That allowed them to basically control their own destiny by having the milling operations and the mining operations together. These guys have worked for Newmont before in the past when Newmont owned some of these properties.  

Now, these people who work there, they know the assets very well.  They have a history of working there and we’ve seen significant improvements with this company.  

The management understands capital markets, so we still expect a number of positive things, and like I said, KLDX is the US symbol and KDX is the symbol in Canada for this one, so it’s available in both markets—US and Canada—for purchase.

Steven Halpern:  Another large holding in your fund is Osisko Gold Royalties (TSX: OR); what’s the story there?

Ralph Aldis: Osisko Gold Royalties, as an intro, this is a royalty company, and royalty companies, there are about four major ones out there right now. The royalty model is these guys aren’t actually running the mine, but they are almost like me in the sense of they’re trying to put together a portfolio of income streams on properties.  

They generate these income streams by providing capital to companies as another venue for financing.  A company could issue stock, or issue debt, or they can sometimes go into like a royalty agreement and this is where they agreed to deliver a percentage of their production to this company in exchange for the cash right now.  

What I like about Osisko Gold Royalties is they’re operating strictly in Quebec right now and that’s sort of their area of influence.

And some of the royalty companies have been attacked by tax authorities in Canada, saying, because they have some offshore streaming royalty agreement and the Canadian tax authorities are looking for some tax collection on some of those.  

Osisko Gold Royalties—with having all of their properties in Canada and no offshore agreements—they are not going to have any of those tax investigations by the authorities.  

This is a very smart team.  This management team has had success in the past with Osisko Mining and now this reincarnation of Osisko Gold Royalties is their new vehicle and they’re highly respected in the market, so I still expect some good things to happen with these guys going forward.  

Steven Halpern:  Again, our guest is gold sector expert Ralph Aldis of US Global Gold and Precious Metals Fund.  Thank you so much for your time, today.

Ralph Aldis:  Okay, thank you very much Steve; thanks.

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