A lackluster U.S. economy is creating a positive environment for gold, according to Michael Fowler, senior mining analyst with Loewen, Ondaatje, McCutcheon Ltd. By calculating ounces-in-the-ground values and assessing for risk, Fowler has concluded that the junior/midtier sector offers the best growth potential. He expects to see companies of all sizes try and control costs instead of looking for mergers and acquisitions to add value. Read on in this Gold Report interview for Fowler's take on companies that he believes fit the bill.
The Gold Report: Michael, in August you said $2,000/ounce (oz) gold would push up equity prices in 2013. Are you still of that mindset?
Michael Fowler: Yes, although it has taken longer than I expected. The U.S. dollar price of gold was up 6.2% in 2012, but the real increases in the gold price took place in other currencies. For example, in 2012 gold was up about 15% in the euro. The strengthening U.S. economy has been a headwind to gold. I remain bullish on gold and am keeping my $2,000/oz average for 2013.
TGR: A $1,675/oz gold price would require an increase of almost 20% to reach $2,000/oz. Will it require a downturn in the U.S. economy to accomplish that?
MF: To some degree, I hope the U.S. economy will not speed up because that would be a major risk to my analysis. The U.S. economy is relatively lackluster. We think the Fed will continue with quantitative easing and increasing the money supply. Interest rates will continue to be low. All of that creates a very positive environment for gold.
The risk factor here is that if the U.S. economy does speed up and outperforms expectations, it will create a renewed headwind for gold. However, that is not my scenario right now. I think the U.S. economy will move along at 1–2% growth rate per annum, basically static.
I expect more quantitative easing around the world will cause gold to rise. Japan, for example, is intent on devaluing its currency. In Washington, D.C., the recurring debt ceiling debate may be a potential flashpoint. Potential downgrades by the rating agencies and the Federal Reserve continuing to buy up bonds are other factors.
TGR: Tom Albanese, CEO of Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK), was sacked in mid-January due to a $14 billion (B) write-down on assets, mostly owing to overpaying and takeovers. Similar firings have happened in the gold space. Do these dismissals signal a changing mindset toward merger and acquisition (M&A) activity among the largest players?
MF: Yes, I think so. I am not predicting numerous M&As, although I would suggest that this is a good time to acquire.
The CEOs you mentioned made acquisitions at the top of the market. Major strategic mergers are, in my opinion, value destructing. I do not think we will see another Rio Tinto-Alcan merger or takeover in this environment.
TGR: You cover Aurizon and know its assets well. What do you think of the Alamos offer; is it fair value?
MF: No, I do not think it is fair value. I also am surprised at the move by Alamos because there are no synergies here. Alamos' assets are in Mexico and Turkey. The company has nothing in Canada, so there are no synergies with Aurizon, whose mines and projects are in Québec.
As far as valuation, over the last three years Aurizon's stock has traded mostly over $4.65/share. Alamos' bid is too low. Alamos will have to bid over $5/share. Before the offer was made, my target price on Aurizon was $5.90/share.
Having said that, kudos to Alamos for picking a time when Aurizon is fairly weak in terms of its production in Q4/12, spilling over into Q1/13.