Gold & Goldcorp

06/22/2016 10:00 am EST

Focus: COMMODITIES

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo believes now is the time for investors to be establishing long-term positions in select gold mining stocks. Here, the editor of Insiders Plus discusses the outlook for the metal as well as one of his new buy recommendations.

Steve Halpern:  Today, we're joined by one of my favorite guests, Jack Adamo, editor of Insiders Plus.  How are you doing today, Jack?

Jack Adamo:  I'm very well, Steven.  Thanks.

Steve Halpern:  Well, thank you for taking the time.  Now, you've recently turned bullish on gold, noting that you'd rather be early than late on this move.  Can you explain that?

Jack Adamo:  Sure.  When you're early on a move that you have correct, you just pay a bit more than you need to on your initial position, but you could always add more later at lower prices and still feel comfortable, but for myself, I find it psychologically difficult to jump into an investment that I could've had 30% cheaper a few weeks ago.  

My tendency is to wait for a pullback.  Unfortunately, if the move is strong enough, you never get that pullback, and you can miss the whole trend, and that's happened to me a few times in the past, so I've sworn off trying to catch the exact bottoms now.

And besides following insiders, I follow smart money, and I don't know of anyone who has been as correct on commodities, including gold, as Jim Rogers, and Rogers thinks that gold will come to $2,000 in the next few years, and everything I’ve looked at agrees with that assessment.

So at around $1300 an ounce now, we can make a lot of money on gold, and even if it revisits $900 before the big run-up, which is not out of the question, we'll still do very well.

Steve Halpern:  Now, we continue as your competing argument for the possibility of deflation on one hand and at the same time, the risk of high inflation.  Could you address your thoughts on this and explain how deflation and inflation impact the gold market?

Jack Adamo:  Yeah, but first let me say that I am not certain about whether it will have inflation or deflation over a given time frame.

So aside from gold, we own a lot of solid preferred stocks, which do very well during deflationary times, whereas gold, of course, is a hedge against inflation, as well as any kind of economic or political instability. But in the long-term, gold is infallible.  

There's never been any currency that's held its value over 50 years the way gold has, and in fact, gold has held its value over thousands of years, so the only problem with owning gold is that it can stagnate and lose value over a decade or two, depending on a lot of variables, and it doesn't earn interest during those periods.

So it's always good to own some gold for your long-term financial security and to protect against crises, but when there's a real risk of high inflation, owning gold becomes imperative.

Steve Halpern:  Now, could you explain how interest rates, and then even we're seeing negative interest rates in parts of the world, how this plays into the overall situation?

Jack Adamo:  Yeah, well, right now, countries, corporations, and to some extent, individuals all over the world are at historic levels of debt, and debt borrows from the future demand, so it creates a slow growth environment, as we've been seeing.  

Countries have tried to keep interest rates low so that they can make their big debt payments in this low growth environment.  

Unfortunately, low interest rates encourage more debt, as we can see from all the idiot companies borrowing money to buy back stock now, and these low interest rates also tend to force investors into riskier assets, and that's not working, given the older demographics in so many countries, including ours.  

A lot of people are just not being forced into it, so as a last resort, many countries have started charging people, you know, and entities to hold their money. In fact, the total government securities with negative yields has now surpassed $10 trillion, and those numbers continue to grow.  

We'll almost certainly see negative interest rates here, as well, so while gold doesn't pay interest, at least it doesn't charge interest other than the fact that if you own large amounts of physical gold, you may have to pay to store it, so gold is not just a hedge against inflation and instability, it's a hedge against the government charging you to save your own money.

Steve Halpern:  Now, some six weeks ago, you first moved into the gold space and recommended Newmont Mining (NEM). Despite having gains of 27% since then, are you still bullish on the shares?

Jack Adamo:  Yeah, first of all, let me say I didn't just move into gold; I just moved back into the gold space; we've been out for a few years, but yeah, I'm still bullish on Newmont.  

It's out of our buy range at the moment, but we're coming into a strong season for gold. The strong seasonal factors in gold purchases, so I may revisit the buy range in the next few weeks.  I like a lot of gold stocks right now.  I'm trying to get them at the right prices.

Steve Halpern:  So, you've recently initiated a new position in Goldcorp (GG), noting that the firm is in tip-top shape for a turnaround in the gold market.  Could you give us a little background about this company?

Jack Adamo:  Goldcorp operates mines in Canada, the United States, Mexico, and Central and South America, and these mostly are in regions that are very politically stable.  The company's been around since 1954.

Like most gold miners, they got overly aggressive during the recent boon years and had to dial back production and investment and took a lot of write-offs, but they brought in a new CEO to get back into shape, and he's done a good job.  

Its balance sheet and interest coverage ratio are strong, and production is growing nicely.  In fact, in the first quarter, gold production rose 8% in year over year, while production costs fell 14.8%, so that's a great combination.

Earnings from operations and affiliates came in 122% higher, and net earnings per share made a very pleasing swing from a 17 cent loss last year to a 10 cent gain this year.  

The PE is high; it's in the 50s, but its earnings growth rate is expected to be 50% this year, so the PE should come down quite quickly.  

One thing I note about Goldcorp that's especially interesting is that though the stock price crashed along with the other gold stocks through 2012, buying volume has remained amazingly steady during the entire period, so that's a very good sign.

Steve Halpern:  Now, in your recent research report on Goldcorp, you note that one of the most exciting parts of the story is something called Project Corridor.  Could you explain how that plays into the situation?

Jack Adamo:  Sure.  Project Corridor is actually a joint venture between Goldcorp and Teck Resources (TCK).  It's another mining company.  It is actually two separate mining projects, one each by own company.  

Now, the combined costs were forecast at $8.4 billion to bring those projects to fruition if done separately.  But by using the infrastructure that each company already has in place, it will cost a total of just $3.5 billion to bring them into play.

So the savings are going to be huge, you know, more than half on the cost for both companies, so that's really going to help Goldcorp's profits, potentially, going forward.

Steve Halpern:  Again, our guest is Jack Adamo, editor of Insiders Plus.  It's always fascinating to hear your thoughts.  Thank you so much for your time today.

Jack Adamo:  It's always great to talk to you, Steven.  Thanks for calling.

By Jack Adamo, Editor of Insiders Plus

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