Opportunities abound across the spectrum of precious metal equities, which remain undervalued as bullion prices continue their upward trends. That's the word according to Charles Oliver and Jamie Horvat, both senior portfolio managers at Sprott Asset Management. In this exclusive interview with The Gold Report, Oliver and Horvat express cautious optimism about the prospects for gold stocks in 2012.
The Gold Report: When we talked in the wake of the debt ceiling crisis last fall, Charles, you expected volatility to be good for gold and forecast a continuing long-term bull market for precious metals. These days, the scary stories pertain to the European Union (EU). Will negative headlines continue to play a role in the price of gold and silver?
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Charles Oliver: Absolutely. The headlines about the European Central Bank (ECB) infusion of billions of euros into the banking system has been very good for the price of gold. Since the ECB announced it would be issuing €489 billion in December, gold has had a nice little rally off its lows. I expect in the next couple of weeks a further issuance of money will be quite supportive for gold.
Europe is still a mess. Greece seems to be heading to bankruptcy in slow motion. That problem has been going on for two years and we could find these issues still persisting a year from now. Ultimately, central banks around the world will continue to print and debase their currencies, which will be very good for the gold price.
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TGR: Jamie, do you agree with that? Or might Greece strike a deal to pay off its debt, turning the price of gold down?
Jamie Horvat: I think the deal is based on the fact that the only tool governments have at their disposal is the continued monetization of debt and the continual printing of money, which is always good for gold. On the other hand, if Greece does not get the sought-after debt relief and restructuring or, if it is kicked out of the EU, it could result in the unwinding of the European banking system and could have larger implications globally. If that happens, we'll see a short-term hiccup in the gold price as it is used as a source of liquidity and investors sell their future in an attempt to live and fight today. That may be the tail-risk event as we continue to see additional quantitative easing (QE) programs all over the world. From Japan to the UK, more than $1 trillion could be spent in the next few months to provide ongoing liquidity in Europe. That is why the longer term outlook for gold is still positive.
TGR: In a November television interview, Charles, you expressed concern about China's growth. Has that changed? And what are the implications for precious metals?
CO: The China story affects the industrial metals more than the precious metals, but I'm still concerned that we see weakness in China. The volume of loans being done now and the contraction we're seeing there both signal that weakness. A number of other economic statistics indicate that China is clearly slowing down; the only question is how big a slowdown it is. Ultimately I think it will impact the base and bulk metals more than gold and silver—copper, iron ore, steel, those types of things.
TGR: Your $644.5 million Sprott Gold and Precious Minerals Fund ended 2011 with a tough quarter, off 10.6% compared to an 8.7% loss on the benchmark S&P. Your quarterly report cited tax-loss selling as one of the reasons for thinly trading stocks performing poorly. Have you adjusted your portfolio since then?
CO: The portfolio is continuously being upgraded. We made a number of changes during the last quarter. We did some of our own tax-loss selling in the portfolio. When I sold some of those stocks, I tried to redeploy the proceeds into some of the other names that I wanted to own that were also experiencing tax-loss selling. A lot of companies in the junior space were down 70%. It wasn't through any fault of their own; it was just because the market had no interest in small companies because it was risk averse last year.
TGR: Were the other names you were buying into mainly juniors?
CO: Yes, there were a fair number of juniors, but every segment of the gold stock market is very cheap today. I can find great valuations in small-, mid- and large-cap stocks.
All of them are extremely cheap. That's not always the case. You might think all segments would move together, but in reality one segment often does much better than the others during a particular year.
TGR: It appears as if about 30% of the fund is dedicated to the small-cap issuers, which have a little bit higher risk profile then the large caps. Do you see those small caps as the way to drive growth in the portfolio?
CO: If you look over the last decade, a lot of the alpha that's being generated in the gold fund has been through small- and mid-cap names. That's across the board. Whether in the gold space, the oil space or any other type of stock, generally speaking, small-cap stocks have better growth and long-term growth returns.
TGR: What are some of the juniors you picked up as you were redeploying at the end of the year?
CO: I can mention a few names from my most recent year-end report for investors. Canaco Resources Inc. (CAN:TSX.V) is a small cap with a project in Tanzania. It did a financing at around $5.40/share back in March 2011. It's a good stock, but through tax-loss selling and an aversion to small-cap stocks, it has traded down to below $1.50/share. What a great opportunity.
I looked at Canaco several years ago. It was really interesting, but it was a little on the early-stage side and it got away from me. I'm not one who likes to chase stocks; I don't run after them. And then last year, Canaco had a lot of cash on its balance sheet and suddenly came under severe selling pressure. I thought, "Great, I'm getting a second opportunity to buy something at a much better price." Additionally, I expect its property in Tanzania will one day be a mine.
TGR: How many years away is that?
CO: Probably 5 to 10 years. The lifecycle in the mining industry is usually at least that long from a grassroots discovery through permitting, construction and ultimately getting into production. In the small-cap space, I'm always on the lookout for companies that I believe will have a mine at some point in the future. Canaco is a good example of that.
TGR: Any other examples of companies that could be big movers in 2012?
CO: Another company, Lake Shore Gold Corp. (LSG:TSX; LSG: NYSE) was down 70% in the last year. I actually owned it a couple of years ago, and thought it got expensive. It was trading north of $4.50/share not too long ago, and went down to almost $1/share. The company had a few hiccups in terms of its mine plan, but the stock has been overdone. I sold it up much higher and took this as an opportunity to get involved with it again.
TGR: How high could it go?
CO: There is no reason Lake Shore Gold can't get back to the highs it made last year if it executes on its strategy.