But that's the issue that the mining industry faces—and maybe a reason for the trepidation—is about the possible blowout in capex. So you have to go on a case-by-case basis and see which companies actually have projects where most of the costs are already dialed in. There are others that are further out in terms of permitting and ordering the long lead-time items—pouring concrete and all that stuff—that might not be producing for five, six, seven years. There you have an issue.

One thing I've been saying to most of these companies is they don't need to grow. They just need to maintain what they have. The market won't mind that, as long as they pay it back in dividends.

TGR: Is paying a dividend a big plus in your stock-picking scorecard?

JH: Absolutely.

TGR: Do you see more companies moving toward that?

JH: Yes. They should be paying out more and more. At the current gold price, the payout ratio among large producers is less than 20%. It's way too low. One reason it's too low is because mining companies think they have to build all these new projects. But they don't. Their stocks would probably double if they said, "We're just going to maintain steady-state production and declare a dividend of X amount."

But these guys don't think that way because they want to build big mines with shiny new trucks and they want to send their exploration guys out to all corners of the earth. That's their modus operandi. So it's going to take time for the industry to change. The more enlightened management will start to look more and more at restricting capex.

It's not a growth industry. It's a capital-intensive business that's fraught with risk. Why not just take a time-out, generate cash for the next five years and pick spots? They have to build new mines to replace what they have, but they don't have to build so many new mines. If you take the 11 largest gold stocks, gold producers, which account for something like 40% of global production, and you go from 2008 to now, there's been no growth at all in production. They're producing the same ounces that they were producing then. These guys are crazy if they think they can grow. Consider the scale of these big mines and then the risks that the mining companies undertake with government intervention at the host-country level, excess profits tax and you name it—obstacles come in many forms, many disguises. There's going to be a huge headwind.

TGR: Is acquisition the better way to go, instead of exploration?

JH: Yes. There have been takeovers every year. That's something companies could do. But they can't overpay. Newmont paid way too much for Miramar because it's the frozen north and that mine just isn't going to get built. Newmont has better opportunities. So, acquisitions are fine, but companies have to do a better job of it.

TGR: Some countries are a bit more difficult to do business in than others. What's your take on risk versus opportunity, and what countries do you favor or stay away from?

JH: We do not invest in China or Russia. Rule of law is the first thing that we look at. But every country has issues, even the U.S. It's a very localized business. You have to ask which state in Argentina is the mine located, for example. Which part of Mexico is the mining company dealing with? You have to generalize about countries, and we do that, but once you've done that, you have to ask about specific locations.

But my general rule of thumb is that local governments will try to hold companies up because they see a gold price of $1,600/oz. Companies have bull's-eyes on their backs. It's cold extortion. "Resource nationalism" is the polite term. It's a way of life; it's nothing new. And so the differences are in how these companies deal with it. It obviously affects margins and profitability.

The game is worth it if the company has a good asset; if the gold price is going to do as we expect it to in a world of monetary debasement; and if the country has good geology, a mining culture and some infrastructure. So, for me, the only countries that are off-limits are Russia and China. Also, probably Bolivia, Venezuela and Pakistan. We also look for countries that have a bad temporary rap, as Indonesia does right now. It has just passed a mining law that basically takes some of the equity 10 years out. But then, if the stock discounts all of that, and the company gets enough of a reflection of the obvious problems and it still has a good asset and a decent team of people, then we'll look at something like that.

TGR: You hold about 10% in physical gold; 40% in the larger cap companies, with some royalty companies; 30% in near or small producers and the rest in the juniors. Are you adjusting your portfolio after some of the declines recently?

JH: We've taken a little money out of the ones that are very fully valued. When something like Agnico-Eagle Mines Ltd. (NYSE:AEM) gets beaten up, then we'll look at that as a buy.

We typically have a low turnover; we're not very active in trading. Our basic mix hasn't changed. And we wouldn't change it dramatically because the thing that's given us excess return over the years has been the fact that our average market cap is smaller than that of our peers, at 60% of our peer group, which tells you we're skewed to smaller cap size. Those companies are the ones that cangrow. They're the ones where discoveries can make an impact on the valuation of the whole market cap. So, if you don't have those, then you might as well just own Market Vectors Gold Miners ETF (NYSEARCA:GDX). You might as well just own the ETF of big-cap stocks. And we try to do better than that.

But we always keep our eyes on companies, and if the story changes or if there's a valuation question, we'll look to see if we can deploy it in a better way.

TGR: A number of companies have mentioned you as a key piece of the junior mine-building process. How do you decide which companies to participate in, and what are some examples of when you've really been able to make a difference in acompany?

JH: Osisko Mining Corp.