TORONTO (ResourceInvestor.com) -- In an exclusive interview with Resource Investor as gold breached $500 per ounce in New York, John Embry of Sprott Asset Management answered a number of relevant questions about the price of gold, the gold sector, and the companies at various stages of development within it.
DAVID DESLAURIERS: With some of the world's other major economies looking so weak, and with events like the recent rioting in France, is it going to be difficult to see another down-leg in the dollar any time soon?
JOHN EMBRY: There have been a number of factors that have buoyed the dollar, not the least of which is this repatriation of corporate cash to the United States, the stuff that has been held outside the U.S. is being brought back at a preferred tax rate, and that ends at the end of this year. I think this has led to a far greater flow of money than I realized when this all got under way, and I think that has been a huge underpinning to the dollar.
As well as the fact that with the rising rates in the U.S., the carry trade is back on, alive and well, people borrowing Yen and selling it and re-investing in U.S. treasury bills, etc. that is also pushing up the U.S. dollar.
In the end, I think the fundamentals for the U.S. dollar which are horrific, will assert themselves. The twin deficits are going nowhere but up and particularly with the rising dollar, and eventually I think this will take its toll. I think this has been a massive counter-trend rally in the dollar, which I suspect will come to an end next year. One of the real reasons, I think, for that, is that I believe that the U.S. will suddenly realize they can’t raise rates much more, and when people become aware that the direction of rates is going to be down at some point, I think that is going to take the underpinnings totally out of the U.S. dollar.
DAVID DESLAURIERS: Where do you stand on the inflation/deflation debate?
JOHN EMBRY: This is THE question, really. One thing I will say is, I think that we face either increasing inflation, or ultimately deflation. We’ve lost the middle ground, so consequently with all the debt that is in the system, they are going to have to print more and more money to keep that debt load afloat, and this will lead to mounting inflation. And because we’re dealing with fiat currency, and Ben Bernanke coming in at the head of the Fed has already telegraphed what he wants to do with his speeches 3 years ago, talking about printing presses and money from helicopters, etc. I basically believe that the greater risk is hyperinflation than it is at this stage, deflation. Eventually it will probably end up with some deflation, but not before we go through a bout of infinitely worse inflation.
Gold wins, I believe, history would say that gold wins in either inflation, particularly mounting inflation, or deflation. Where it doesn’t do well is what we’ve had for the last 21 years – disinflation.
DAVID DESLAURIERS: Why do well known gold prognosticators keep making such short term predictions when clearly it is very difficult to predict what gold could do in the next quarter?
JOHN EMBRY: I think that is another excellent question in the sense that, given the fact that there is a management of the gold price by official sources, I think trying to predict the gold price in the short term is a mug’s game. Every time you think it’s going to go up, suddenly this unusual selling comes in and it doesn’t go up. I think trying to predict short-term gold prices is stupid really.
On the other hand, I understand why people do it – because the long term is made up of a number of short terms. I think what you have to realize is that in a world where there is going to be more and more paper currency created, the gold price has nowhere to go but up, over time. But people feel the need to do their little short-term projections, which I tend to ignore.
I thought one of the better prognostications I’ve seen recently is when Pierre Lassonde came out and said he thought gold would be trading north of $1,000 in the next five to seven years. The only thing I would say is he’s probably conservative.
DAVID DESLAURIERS: Considering the lack of interest in junior miners, is it best to stick to companies for the time being, that are attached to metrics that must be paid heed, like production, cash flow, etc.? It seems as though all of these companies can raise money, but the follow through is nil. How might you account for this?
JOHN EMBRY: It depends on your time frame. I’m more comfortable right here buying juniors because they’re depressed, I don’t have a lot of competition, and I’m getting them at prices that I think are sort of reflective of a really bad condition of the gold business, which I think is dead opposite – I think we’ll have great conditions in the gold business going forward. I would say in many instances some of these juniors are trading at valuation metrics not terribly dissimilar from where they were when the bull market in juniors started back at the end of 2000. I think they’re really cheap, and if you’re playing the gold market you’re going for maximum upside, and I think the maximum upside is clearly in the juniors. But I can’t tell you that it’s going to pay off in the next three months, if you’re a short-term trader you probably have a better chance playing the bigger ones, because that’s where investor money flow is going right now.
But one part of the question which really deserves a response and irritates me a bit: It seems like all of these companies can raise money – and that is a problem because a lot of these companies they don’t even believe in their own properties, because they are raising far more money in my estimation than they have to, and that is creating a problem because it is soaking up investor money that might be otherwise used to drive up the price of these companies in the market.
I think this will all be addressed when the gold price breaks out, there will be more than a sufficient flow of investor money that will lift the whole sector, and that will basically solve the problem in the short run here which has been irritating because juniors have done so poorly - I think that will be behind us. I think we need a clear breakout into new high ground, like beyond $511 to get the degree of confidence so that people will flood into the juniors.
DAVID DESLAURIERS: What are some of your favourite developers in the sector (defined for these purposes as feasibility stage or construction stage)?
JOHN EMBRY: There is a merger taking place between Westdome [TSXv:WDG] and River [TSX:RIV]. When these are combined this will be a stock, which I think people will take notice of. It is extremely inexpensive at this point.
New Gold [TSX:NGD; AMEX:NGD] has a robust copper-gold project in BC, which has sort of flown under everybody’s radar screen and the NAV is materially higher than the current stock price – I like it a lot.
Western Silver [TSX:WTC; AMEX:WTZ] just had a feasibility study done in Mexico on their massive low-grade, silver poly-metallic ore body. I particularly like silver, I love gold but I like silver even more, and I’m looking for well-levered, legitimate plays in silver. This is one at the development stage that I think has been overlooked.
One that has just currently become very topical is Atna Resources [TSX:ATN], they just pulled an amazing hole in Nevada. I own 10% of the company, and they just did a deal today in which we participated. I think David Watkins who runs the company is a first-class individual, and I think this a great project, and it is just getting into the development stage.
The last one that I particularly like is Viceroy Resources [TSX:VYE]. They are reaching that stage where they’ll be doing a feasibility, and it’s a big project, at least 3 million ounces, and its good quality open-pit stuff, probably heap-leachable, so I think that is a really attractive situation too.
DAVID DESLAURIERS: What are some of your favourite juniors?
JOHN EMBRY: One name that people don’t pay much attention to, they like spending other people’s money, and that’s Almaden Resources [TSX:AMM]. They have projects with Comaplex down in Mexico, and another interesting one with Strongbow in BC, and they are a magnificent group of people, and they have a lot on the go, and big potential.
I like Intrepid Minerals [TSX:IAU] run by Laurence Curtis who is an excellent guy, and they actually have a resource on a property in Argentina, but he is more of an exploration company, and I think Intrepid is severely undervalued.
I think Rubicon [TSX:RMX; AMEX:RBY] which has got a major exploration effort at Red Lake, but perhaps even more interesting, they have a piece of a company called Africo in the Congo, which will be coming public in the next couple of months, and I think that will highlight the fact that Rubicon is significantly undervalued.
And a company that is currently doing a financing, Axmin [TSX:AXM] is progressing towards feasibility stage, it has a large resource in the Central African Republic, which is an area that I think is becoming more respectable. I think this one is severely undervalued, and has great sponsorship, so I think Axmin is a particularly good play here.
DAVID DESLAURIERS: What parts of the non first-world are you most/least comfortable with?
JOHN EMBRY: Right now I still have many doubts about Russia, I just don’t know about the rule of law there, but having said that they really do have interesting geology. I’m not really involved in Russia, because I’m not comfortable.
Clearly Venezuela is an obvious one, I think with Hugo Chavez at the helm there, it’s a pretty dicey situation. I consider myself extraordinarily fortunate that the only exposure I had there, Bolivar [TSX:BGC] is being taken out at a nice profit for me, so to come out of Venezuela with a win, I consider a major score for me.
I never really warmed up again to Indonesia after that whole Bre-x fiasco there nine years ago.
And just as a general comment, I’m getting a little less comfortable with certain areas of South America. There is a huge swing to the left down there. Peru is a country, I love the geology, I don’t love the politics as much, I still will invest there. I think there is more political risk in South America – Bolivia and Peru and places like that then there has been for a while.
DAVID DESLAURIERS: With Venezuela in mind, what is your take on Goldfield’s valuation of Bolivar?
JOHN EMBRY: There is a Venezuela discount. If it weren’t in Venezuela, Bolivar would probably be, I don’t know, C$5 anyway. The fact is that it is in Venezuela, and Venezuela is what it is.
There are enough other things to play, I’m glad to sell it and move on.
DAVID DESLAURIERS: It seems that in many areas of the world the decision for developers and miners these days is greens vs. graft? Graft is simple because at least companies know what is required, and timelines are not impacted as severely. Does that reality play into your investment decision-making process?
JOHN EMBRY: That’s an interesting question, as you know the greens are a problem big time now, the NGOs sort of descend upon any project now that looks like it has merit. I guess if you can sort of fend them off with sort of under the table stuff, I’m not sure its as easy as some people think, some of these NGOs are really dedicated, they’re not even looking for money. It’s the government people that are looking for the money, and the locals.
I guess it does factor into my decision, I don’t know that I’d back somebody because I thought they had the ability to grease off the locals, but it plays into my investment decision in a more negative sense, because the minute that I see something that could be severely impacted by NGO activity, even if it can be dealt with, unless I’m getting a big discount, I’m a little shy about getting involved. I’ve been blown up with a couple of situations, which have worked out subsequently, but it’s an issue and it’s not going to go away. Every day something is coming up, you can’t get away from it.
DAVID DESLAURIERS: With your prediction of much higher gold prices a couple of years down the road, will low cost producers like Goldcorp suffer as new entrants into the sector chase leverage in the form of higher cost producers like Queenstake, Kinross?
JOHN EMBRY: I don’t know if suffer is the right word, I just don’t think they’ll perform as well on the upside. I mean companies that are particularly safe in terms of low cash cost, its in their price to some extent and they don’t have the same leverage obviously to the upside in earnings when the price goes up sharply. I would prefer higher cost guys certainly to Goldcorp these days. One low-cost company that fascinates me these days is Meridian [TSX:MNG; NYSE:MDG]. They are really well levered to silver, and I don’t think people are fully cognizant of what a silver play Meridian is.
But as a general response to the question, I would much prefer at this stage of the cycle to be looking for the ones that would benefit because of their higher costs, and their greater leverage to a rising price.
