Source: Streetwise Reports 06/25/2020
Ralph Aldis, portfolio manager at U.S. Global Investors, in this interview with Streetwise Reports, looks at precious metals during the global downturn, and discusses M&A in the industry as well as companies he sees as undervalued.
Streetwise Reports: Ralph, thanks for joining us today. Let’s start with gold, which has seen a steep rise in the last few months amid the global pandemic and moves by central banks to shore up the economy and the markets. What do you think is ahead for the metal?
Ralph Aldis: I think that the backdrop of government spending and monetary intervention by the Federal Reserve to keep interest rates low provides a solid foundation for gold to still move higher. You throw in a potential change in leadership in the White House in November and maybe we will see gold take out its previous high. In 2016, gold rallied pretty hard for the first nine months but lost its momentum with the election of President Trump and the focus on wealth creation and the stock market. All the uncertainty risk that tariffs and other unexpected policies have created have really raised the foundation for higher gold prices. I think that’s why we’ve seen it steadily march higher over these last three years despite the focus on the stock market.
SWR: Gold has long been outperforming silver, and the ratio is around 100 right now, after coming down a little bit. What do you see ahead for the relationship between the two metals?
RA: There has been a lot of excitement about the gold-silver ratio recently. The last time it was at 80 roughly was back in September 2019, but with this first wave of COVID coming through, the ratio blew out as far as 124:1. It’s now tightened back to about 100:1. But we know what was driving that was low industry demand for silver with the lockdown and increased investment demand for gold going up at the same time. That’s what really drove it so far out there.
Perhaps a good indicator of where it could go next would be again to look back at July of 2016 when we had that last rally. The ratio at that point compressed down to 66:1, so that was quite a bit of contraction. We’re at 100:1 right now. A 60:1 move would be great. But should this gold market really get a new round of buyers as we head into 2021, I think silver will be recognized as a cheaper entry point into the precious metals trade.
SWR: Do you feel at this point people should be investing in the physical metal, mining stocks or both?
RA: We typically recommend a 10% allocation to precious metals and mining stocks as a prudent allocation. Investors now have an easier access to bullion price moves through exchange-traded proxies, but the capital gains tax rate is still 28% for collectibles versus 15% for most other investments. So that really favors the mining stocks. And the leverage to rising metal prices is best captured through owning mining stocks, which offer more upside. But holding bullion can be less volatile than owning the market. There are periods when bullion outperforms the mining stocks and vice versa. But traditionally, you typically get 3 to 1 leverage out of the mining stocks versus the bullion, and so that’s probably an attractive place to start to have exposure.
SWR: You run the Gold and Precious Metals Fund (USERX) and the World Precious Minerals Fund (UNWPX). What are some of the trends that you’re seeing with mining stocks?
RA: Much of the focus on price action in the gold space up until now has been concentrated on new leadership teams at Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) and Newmont Corp. (NEM:NYSE), and they deserve the attention. The returns on invested capital for both companies have been rising in each of the last three quarters. Their asset sales have largely been completed, and now there are even some investments being made by these companies in the junior space. Barrick bought into Reunion Gold Corp. (RGD:TSX.V) last year, and Newmont made a strategic investment in GT Gold Corp. (GTT:TSX.V), which has an exciting discovery. So I think the fear of doing a transaction in the gold space is now behind us.
For our Gold and Precious Metals Fund, consolidation is good as we tend to be more positioned in the midtier precious miners and that’s where consolidation tends to play out. The larger cap miners have had their valuations lifted with the money flows into the exchange traded funds (ETFs), and many analysts are now suggesting that investors look downcap for smaller companies that have lagged. We’re starting to see more deals materialize in the midtier space, too, and we can talk about that here in a little bit.
I would say for our World Precious Minerals Fund, the tune of underperformance may be changing. For instance, coming off the bottom of the COVID-19 low on March 18, the fund is up 96.32%, while the VanEck Vectors Gold Miners ETF (GDX:NYSE.Arca) and the VanEck Vectors Junior Gold Miners ETF (GDXJ:NYSE.Arca) gained 76.52% and 87.36%, respectively. This is a short time window, but we’ve outpaced them coming out of the bottom, so I find that to be very encouraging. Over the last few years, we’ve had an investment mania in cannabis and Bitcoin. They were really competing for the speculative dollars, and mining was not really doing that much. Now those trades have largely faded away, and investors are beginning to sniff out the value proposition that these junior miners and exploration development companies present.
For World Precious Minerals, there is not an ETF available for exposure to these companies, and no other mutual fund has more junior miners and exploration exposure as a percentage of the fund than World Precious Minerals. The seniors, they’ve touched a toe on some of these stocks, and we’re also seeing some activity with the midtiers: Alamos Gold Inc. (AGI:TSX; AGI:NYSE) has been taking investment positions in the exploration space with GFG Resources Inc. (GFG:TSX.V; GFGSF:OTCQB) and then Red Pine Exploration Inc. (RPX:TSX.V; RDEXF:OTCMKTS) along with a couple of others. So the miners see the deep value in the space, and they are now buying these names. What we haven’t seen is the retail buyer show up yet, so I think that is where the opportunity is. If the seniors and the midtiers are buying the juniors, I think it won’t be too long before the retail space wakes up and starts paying attention to these names and tries to get a position.
SWR: What are some of the resource companies on your Buy list?
RA: TriStar Gold Inc. (TSG:TSX.V) would be one of my top ones. It has a real geological science team of professionals creating value through the drill bit. TriStar’s last resource update increased its ounces by a factor of seven. It mainly was because prior to that there was no money being allocated to drilling budgets for exploration. But once it got some money, the resource grows sevenfold. Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) has also provided TriStar some money, so it is continuing to work. It has cash; it is not going to go bankrupt. And this deposit is a Tarkwa/Jacobina-style deposit, but there are modern day analogs of these deposits of this type of genesis right now forming off the coast of Nome, Alaska, and off the coast of New Zealand. The exploration markers for finding more gold in this type of system are pretty well understood now. I was at the site in Brazil in February and got to see a lot of it firsthand. It was a great site visit, and this is, I think, a name that’s going to be a big mine at some point in the future.
Another company that I think actually offers a lot of opportunity right now is Roxgold Inc. (ROXG:TSX). When we look at companies and model them, we look at the resource base and we look at the quality of that resource base, whether it’s grade, the covariance of the resource and the science and the statistics behind it. We try to assess what an equivalent asset trades for in the market. For Roxgold, we see the company as being 60% undervalued relative to other operating assets that have equivalent type ounces and grades. The returns on invested capital have fallen with the average grades coming down, but Roxgold did an acquisition from Newcrest Mining Ltd. (NCM:ASX), Séguéla, in the Ivory Coast, and that looks to be a very prospective land package. Roxgold has conserved its capital, and it has made a very good capital allocation decision on this property. I think it is going to be a game-changer for it.
Another one that is in both of our funds and is a top position is K92 Mining Inc. (KNT:TSX.V). We see that one right now 31% underpriced relative to other operating assets, and it has a lot of exploration potential yet to be fully recognized. So there may be still a lot in there.
So those are my Top 3 buys right now.
SWR: You alluded to M&A activity, and there has been a fair amount recently. We have Argonaut Gold Inc. (AR:TSX) and Alio Gold Inc. (ALO:TSX; ALO:NYSE.American); Silvercorp Metals Inc. (SVM:TSX; SVM:NYSE)/Gran Colombia/Zijin Mining bidding for Guyana Goldfields Inc. (GUY:TSX); Wallbridge Mining Co. Ltd. (WM:TSX; WLBMF:OTCMKTS) and Balmoral Resources Ltd. (BAR:TSX; BALMF:OTCQX) and, most recently, Evrim Resources Corp. (EVM:TSX.V) and Renaissance Minerals Ltd. (RNS:ASX). What trends are you seeing with these mergers? Do you expect to see more deals?
RA: Yes. The seniors, for two or three years there, it is like they were petrified to do an acquisition because they figured they’d get taken out to the woodshed and shot because some of the capital allocation decisions historically have been guided by net asset value models, investment bankers and so on, and not based on where real assets are actually trading and what they should be valued at. But I think the companies’ capital allocations are much better now, and they are willing to do transactions.
Argonaut brings a wealth of knowledge to Alio on improving the productivity of that asset. I think Silvercorp’s bid for Guyana Goldfields was opportunistic, meaning, if it got it, great, but obviously it was willing to walk away at a price. Then Wallbridge and Balmoral, they basically brought a lot of synergies together with a good mineral property and the mill that they can actually work with, too. So I think the M&A is on. Right now, we’re just at the beginning of the game.
SWR: If we’re at the beginning of the game, what companies would you put on your list that you expect to see as merger candidates?
RA: Well, I worked on this last night and the serendipity of the way it happened is that this company had a takeover offer today, a second one. I think the key thing right now is that single asset companies that have shovel ready projects could be at the top of the list. And the example I was using is Cardinal Resources Ltd. (CDV:ASX). It certainly fits that description. And the government of Ghana is totally backing the project with its purchase of the debt that Sprott Resource Lending had with the Ghana Infrastructure Investment Fund, a Ghana-owned investment vehicle, buying the debt. It looks like in taking that out, that may have been one of the catalysts.
But all of the major gold mining companies have operations in Ghana. So where are you going to go to replace a potential steep depletion rate with a new mine when the country has your back? So I think the government is certainly behind this. I wrote this last night, and when I came in this morning I found out that Shandong Gold Mining Co. (600547:SHA; 1787:HK) has made an all-cash bid for Cardinal, topping the bid made by Nordgold by 31%. I think this is a real question right now: Will there be a counterbid or a new interloper entering the mix? We will see. But I think the bidding is on for assets. As I review recent filings, both MM Asset Management Inc. and Macquarie Bank Limited have lodged reports showing they raised their exposure to Cardinal since the Shandong offer was announced.
There are other companies, too. Just think about single asset companies. Any single asset company is probably a target, but also a single asset company could be looking at another project to combine with it to get some synergies. So I think the game is on right now.
SWR: Is there anything else that you’d like our readers to know?
RA: I recommend investors stick to a sound asset allocation plan. Don’t put all of your wealth into gold by any means. A small part will give you good benefits in terms of reducing your overall portfolio volatility. When we look at the economy right now, there’s a lot of push to keep interest rates as low as possible. The Fed has some bullets, but it’s tough right now. I think the bigger issue also that we’re dealing with is social reforms are coming. That may imply higher taxes, but a lot of those things have been sorely underinvested. If you’re not investing in people, then you don’t really have a business or a country if you don’t really take care of the population and give people opportunity, and not just a few people, but lots of people.
SWR: Thanks for your insights, Ralph.
Ralph Aldis, CFA, portfolio manager of U.S. Global Investors, is responsible for analyzing gold and precious metals stocks for the World Precious Minerals Fund (UNWPX) and the Gold and Precious Metals Fund (USERX). In addition, Aldis serves as co-portfolio manager for the Global Resources Fund (PSPFX), Holmes Macro Trends Fund (MEGAX), All American Equity Fund (GBTFX), Emerging Europe Fund (EUROX), Near-Term Tax Free Fund (NEARX), U.S. Government Securities Ultra-Short Bond Fund (UGSDX), the China Region Fund (USCOX), and the U.S. Global Jets ETF (JETS). In 2011, and again in 2015, Aldis was named a U.S. Metals and Mining “TopGun” by Brendan Wood International. In 2016, he and Frank Holmes were named Best Americas-Based Fund Manager by the Mining Journal. Aldis received a master’s degree in energy and mineral resources from the University of Texas at Austin in 1988 and a Bachelor of Science in Geology, cum laude, in 1981, from Stephen F. Austin University. Aldis is a member of the CFA Society of San Antonio.
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1) Patrice Fusillo conducted this interview for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or members of her immediate household or family own, shares of the following companies mentioned in this article: None. She is, or members of her immediate household or family are, paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this interview are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Ralph Aldis: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: N/A. I, or members of my immediate household or family, are paid by the following companies mentioned in this article: N/A. My company has a financial relationship with the following companies mentioned in this interview: N/A. Funds controlled by U.S. Global Investors hold securities of the following companies mentioned in this article: Barrick Gold Corp, Newmont Corp., Reunion Gold Corp., GT Gold Corp., TriStar Gold Inc., Royal Gold Inc., Roxgold Inc., K92 Mining Inc., Argonaut Gold Inc., Alio Gold Inc., Silvercorp Metals Inc., Gran Colombia Gold Corp., Cardinal Resources Ltd., Balmoral Resources Ltd. I determined which companies would be included in this article based on my research and understanding of the sector. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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