US Global's Golden Strategy
10/19/2016 10:00 am EST
Frank Holmes, CEO of US Global Investors, explains the stock selection process behind the World Precious Minerals Fund (UNWPX), a fund that has returned 135% over the past year. He also highlights several specific minerals stocks that stand out in his proprietary ranking system.
Steve Halpern: Our special guest today is Frank Holmes, CEO of the top-rated fund management company U.S. Global Investors. How are you doing today, Frank?
Frank Holmes: Excellent my friend, excellent.
Steve Halpern: Mines & Money recently recognized U.S. Global World Precious Minerals Fund along with both you and manager, Ralph Aldis, as the number one gold fund in the world. Can you give our listeners an overview of this fund -- and also, congratulations.
Frank Holmes: Well thank you, thank you, and we had lots of competition, and one of the things we have discovered we received this away back in 2006 also. That process is reinventing yourself and trying to identify what's driving these gold stocks at the level they're going in. We have a Rubik's cube we like to call it of factors that we look for catalysts.
What we saw is that fundamental quant analysis makes up more than 55% of the trading. It is not your normal gold fund manager; there's not been that many assets going into the gold funds.
There's been gold mining funds — GDX and GDXJ — which we outperform. How you do that is appreciating how the quants look at gold stocks which is very different then most of the brokers analysts that sell the ideas to you.
Steve Halpern: Explain what this portfolio manager's cue is and expand on what makes that up.
Frank Holmes: What we did is we did regressional studies and looked at the factors that gave you better performance, and so we said in trying to understand as a change, as a momentum, as a catalyst. You see that it shows up in the revenue per share. Production per share drives a lot of that revenue per share and the price of the commodity gold.
The most important overarching factor is the value per share. A lot of gold mining companies do so many silly transactions and financings they diluted the gold value per share faster than they increased the reserves or production. Those that didn't had much, much better performance.
With that, we said okay let's identify the key factors and let's start doing some quantitative approach on it, and looking at data that says if I use this factor such as cash flow per share for the past quarter or the past four quarters, those stocks that have the past quarter over the four quarters rising do they outperform, and they outperform.
Another factor we looked at, which was unique, was the GNA to revenue. You look at the overall company's GNA which is the CEO and expenses of salaries and depreciation and depletion, and who had the smallest relative to the revenue.
Those stocks in the first quarter jumped 88% so we look at a universe of 88 gold producers, 60 of them are over $200 million in market cap and we drilled down and say just give us the top 10 and what does it look like.
Then when we look at the cash flow -- where to invest the capital, a key factor that Warren Buffet looks at, and we said if you have the revenue per share growing faster than the past quarter over the four quarters and you have the cash flow return investor capital growing faster, then how do they perform.
They just hit the ball out of the park. That was sort of the things we looked at in addition to knowing management, meeting management, and also understanding where their growth is and then we discount.
Whenever a gold mine comes in, Steve, and says we're going to grow at 20%, we say that's zero; when they say we're going to grow at 10%, we assume that's minus 10% because there are so many things they don't control to bring on that production.
That could be environmentalists, government taxation so you have to understand the lay of the land where they're mining, what day it is, what country it is, and other sort of risk factors you have to identify.
Then you discount what their production is and then we do a relative comparison and that's how we create a basket of names. World is also special because 15% of their portfolio area in SMIDs — small and mid caps — the little guys, and some of these stocks are up 200% to 300% for us.
Steve Halpern: Now I know you hold a number of stocks in the World Precious Minerals Portfolio, but maybe you could highlight a few of the gold stock names that stand out now for our listeners.
Frank Holmes: Yeah. Well in the big case we've always recommended royalty companies and royalty companies when we do the analysis enjoy high revenue employee. To give you an example, Franco-Nevada (FNV) has royalties on Barrick Gold (ABX) in Nevada and Newmont Mining (NEM).
Newmont trades at around $500,000 of revenue per employee whereas Franco-Nevada is $15 million -- so they have much greater margins and management owns a big slug of Franco-Nevada and they have a model to increase their dividends.
They're very smart. When Glencore (London: GLEN) had problems at raising capital, they can easily raise capital and they're able to buy very attractive royalties on existing production.
So Franco-Nevada, Silver Wheaton (SLW), and Royal Gold (RGLD); they're known as the three amigos. They're all three different royalty companies. They seem to have this race that one year Franco does better than the other, then Silver Wheaton is doing the best this year, and two years ago it was Royal Gold.
We like to have a basket of those names. Then we drill down into more junior ones, the SMIDs you would call them, is Sandstorm (SAND), is another royalty company. Very volatile, but it's a superior business model.
Then when we drill down to the sort of smaller I call it almost like micro caps, it's companies like Klondex (KLDX), which has high cash flow returns investor capital, it's done exceptionally well this year, great management, proven track record. We have a big slug of Klondex.
We like Jaguar (JAGGF), which is in Brazil with a great mining turnaround artist that's gone in there and has done a spectacular job of turning Jaguar around. They're the type of companies that we like.
Another one is called Wesdome (Toronto: WDO). It's up in Canada. We have one of our analysts flying up on Monday night or Monday morning to go look at the operations. We have geologists, financial engineers that do great modeling, but also we go kick the tires and look at these assets. I think that helps in the performance.
Steve Halpern: Finally, I'd like to let our listeners know that you will be a featured speaker at the upcoming Dallas MoneyShow and I'd encourage anybody, from all who is listening to this, who will be at the show to attend. Again our guest is Frank Holmes, CEO of U.S. Global Investors. Thank you so much for your time today.
Frank Holmes: Thank you. Happy investing.
Editor’s note: Frank Holmes will be a featured speaker at the upcoming MoneyShow Dallas, October 19th through 21st. Register for free here.
By Frank Holmes, CEO of US Global Investors