Financial Sense Newshour
The BIG Picture Transcription
August 23, 2008
- Sean Boyd, Vice-Chairman & CEO, Agnico-Eagle Mines Ltd.
- Peter Marrone, Chairman & CEO, Yamana Gold Inc.
- John Hathaway, Senior Managing Director & Fund Manager, Tocqueville Asset Management LP
- Big Picture with Eric King & Dr. Alan Lemerande
Sean Boyd, Vice-Chairman & CEO, Agnico-Eagle Mines Ltd.
ERIC KING: Welcome back to the third hour of Financial Sense Newshour. This is Eric King sitting in for Jim and John. Joining us today is vice chairman and CEO of Agnico-Eagle Sean Boyd. Sean, I want to first of all thank you for taking time out of your busy schedule to join us here on www.financialsense.com.
SEAN BOYD: It's great to be here.
ERIC: Sean, I remember shortly after we first met, I told you that you reminded me of a gentleman who was a trusted friend of mine and a senior official at one of the safest banks in the world that I've known for many, many years – and where I'm heading with this is that it's so important when people or investors talk about taking their hard earned money and investing it with someone, it's so important who is running the company and that they have honesty, integrity and that they run their company in a shareholder-friendly manner. And you have all of those qualities, which makes you, in my opinion, one of the great CEOs, not only in the mining industry but in the world today. You've grown this company quite a bit in terms of production, and have much more growth of production in the future. And we'll get into that in a moment, but you've managed to do all of that with less than 150 million shares outstanding, which gets back to being a shareholder friendly company. Your shared account increased about two-and-a-half fold from 1998, but your gold reserves are up during that time almost 13 fold. Looking in from the outside, I kind of marvel at that and wonder how did you accomplish all of that with so little dilution.
SEAN: Well, that was, as you mentioned, Eric, that is the focus and has been a focus here and certainly I was fortunate when I started Agnico way back in 1985 to work closely with the founder Paul Penna. He was very shareholder friendly. He was a large shareholder himself, but he was always focused on that, but we made out a framework about four years ago for our board that, you know, we've got a great base in Quebec. We need to diversify, we need to go into new areas, we need to build a platform. And we believe we can do it, and here is where we want to get to.
We said we wanted to get to a million ounces of annual production. We want to get to 20 million ounces in reserves. But the key wrapper around all of that is we wanted to do it with less than 160 million shares outstanding. So it's not where you get to. It's what you look like when you get there. And so that was, as you mentioned, a focus for us. So here we are sitting fully diluted at 148 million shares. And that's what's allowed us to grow our per share value. [2:39]
ERIC: You know, you talk about the growth of Agnico and you’re sort of poised to increase production tremendously in the next couple of years. Where are you today in terms of production, and where will you be by, let's say, 2010, into 2010?
SEAN: This year we're forecasting around the 300,000 ounce level. We're looking to double that in 2009 to more than 600,000 ounces and looking to double that again in 2010. And these are from existing projects in the pipeline currently either built or in construction. But the nice thing about the portfolio, and this goes back to your initial question on per share value and share dilution, we were fortunate that we had some regional opportunities through reengineering and discovery which we could advance which basically we're at zero or no cost. And then we were lucky on the acquisition side where we got ourselves involved in situations for a combined 720 million dollars we bought 9 million ounces of reserve, 4 million ounces of resource, and these projects are still wide open.
So taking that back to the growth, we can see additional growth in several of these projects which are currently under construction. So we feel we have another leg of growth beyond 2010 from the existing pipeline. So what that does, again going back to the initial question, is allow us to create more value with minimal dilution to the existing shareholder. [4:08]
ERIC: The falloff of the price of zinc, which has been rather substantial was a drag on your earnings, but going forward, I noticed zinc production will be exhausted by 2011 or so according to Yves, so the company will be going forward much less reliant on income from zinc production. What will be the makeup of production in terms of, say, gold and silver and other metals going forward for Agnico now that zinc is becoming much less of a factor?
SEAN: Well, in 2010, when we have the six projects all up and running, revenue mix will be 90% gold and the balance will be the byproduct mix, so that is going from about 50/50 now, it will go to about 90 percent gold, 10 percent other metals. So we are in a major transition here. And essentially what we've done is we've used the extra cash flow that we benefited from on the zinc side, high zinc prices. And we're using that to fund the build-out of five new gold mines, so it's a major and dramatic shift for us towards gold. [5:11]
ERIC: And you guys, as a long standing policy, have always been unhedged so shareholders get the full ride on gold; correct?
SEAN: That's correct. We've never, ever sold an ounce of gold forward here. [5:24]
ERIC: When you look at three of your mines, Goldex has a cash cost, I believe of 430 or around 430. Kittila, if I'm pronouncing that correctly, 330 and LaRonde did a cash cost of minus $85 with a base metal credit for a net cash cost of, say, $80 for your production profile. And as this zinc becomes less of a factor at LaRonde, where does that put future cash cost projections for LaRonde and subsequent years for all production costs then as a whole?
SEAN: Well, the combined cash cost when we get all of the mines up and running in 2010, there are variables in there such as the exchange rate and as you mentioned byproduct prices. We're forecasting to be in that $275 to $300 per ounce range in 2010. [6:14]
ERIC: When you look at the movements in gold and certainly there has been volatility lately, but you're a value guy, and with gold and silver and the shares dropping, are you looking at any other acquisition possibilities at this time; and secondly, the price of gold, where would it have to fall to create problems for the industry?
SEAN: As far as looking for new opportunities, as a mine company, you're always looking for new opportunities. It's getting much harder now than it was, let's say, five years ago because things are not as obvious, so you really have to do your homework. With that as a background, we've chosen to be a little bit more deliberate. We've taken a couple of strategic investments in the last two months by taking significant stakes in smaller companies. We did that to position ourselves either on the board or get close enough to the company so that we can evaluate those opportunities and see whether there is a fit someplace down the road, and we did that successfully with Kittila. We did that successfully with even Goldex and LaRonde in the much earlier years. So our focus will be on continuing to make those strategic investments, trying to get close enough to the assets so you can make a proper assessment before you take a bigger step if a bigger step is warranted.
In terms of the gold price, we agree it's been extremely volatile, but volatility is generally, we've seen in the past the sign of a market that wants to go higher even though we've seen some weakness here. We're not really concerned about this weakness. We saw it come off in 2006 by 20%, so we've come off of highs here in 2008 by about 20%, so I think that's natural and that can be healthy in the long run.
As far as what price would make us change our plan, it would have to be a lot lower than where it is now because when you look at our all in cost, our all in cost including acquisition is still very low. Our all in cost at something like a Lapa is around $300, $350 dollars an ounce. At Goldex at $350 an ounce. We bought right. If you look at the acquisition cost of Kittila, Pinos Altos and Meadowbank, we paid less than $100 per reserve ounce. And when we convert resource, it will be far less than that. With an average extraction cost of, let's say, $275, we're still well under $400 in terms of acquisition and extraction. And the capital cost to build those deposits is around $100. So all in, we're still under the $500 number, so then that includes all costs, and a lot of those are sunk now. So it would take a really significant drop for us to change our plan. So there is a lot of cushion there. [8:53]
ERIC: By year end in 2008, you are expected to reach 18 to 20 million ounces of gold reserves through exploration on your existing properties. How is that coming along and is there still potential for upside a little higher than that, or are you still within that band?
SEAN: We'll still be within that band as we conclude this year. We look to raise that band for the end of 2009 based on the types of the deposit, what we're seeing at the deposit, particularly what we're seeing in Finland and what we're seeing at Meadowbank and also what we're seeing in Mexico at Pinos Altos. Those were the properties we acquired in the last three years. We acquired them because we felt they would continue to grow. Our theory or our geologist's theory have been proven out by drilling, so the key, I think, for our story as we move forward in an industry that's having difficulty finding large, big quality deposits in the right parts of the world, we're fortunate to own several very large deposits in our small portfolio relative to the senior companies. And what we like to say is Newmont’s been on record as saying only one of 25 deposits in the worlds, so around 4% of all deposits end up exceeding 5 million ounces. Well, of our six deposits, three will be above five million ounces and a fourth could be, so that's top quality in the right parts of the world because we avoid political risk and that's the foundation for the company. So it's our job to continue to drill them. We gain more knowledge as we drill them, we gain better access to good targets as we put infrastructure in. And it's that platform that hopefully will allow us to continue to grow these deposits. [10:32]
ERIC: That brings me to two more questions, then, Sean. And this is such an important part of the business, the fact that bigger operations are located in mining friendly regions such as Canada, the United States and Mexico with low political risk and long-term mining camp potential. We’ve seen many companies burned by locating operations in countries that eventually turned on them and you have avoided that by choosing wisely. If we see acquisitions in the future by Agnico, first question here. Would they be in those three countries? I know you're in Finland, but would it be more, you know, the Canada, US, Mexico situation. And then secondly, what do you credit to your ability to pick these and have them be, as you said, these 5 million ounces of these wonderful deposits, who do you give the credit to on that on your staff or inside your company in terms of location where we're looking?
SEAN: If you look at the last two strategic investments, they were both in Canada, both underground deposits, both high grade, both with the potential to get bigger, so that's certainly things we like to look for in terms of how have we done it, I think a big part of that is the team has been together and worked together for over 20 years. And so there is a lot of confidence in the ability of the team that's making the assessment. And I think what we have been particularly good at is when you look at any sort of deposit, there are always pluses and minuses. From a technical point of view, almost any gold deposit in the world is going to have a technical challenge or an issue to deal with, so the key is not to get lost in that technical issue to the point where you can't focus on the opportunity, and I think the key for us in going in for the last three acquisitions is the fact that our geologists stood up and said, “These deposits are going to get bigger, here is why they are going to get bigger, and here is what we're going to do over a certain period of time to make them bigger.” And they've been proven right, so that allowed us to buy early, but at a good price and build value for our shareholders because we've owned them 100%. And the other key is that's part of our overall strategy is to own these things 100%. Not only do they have to be in mining friendly regions where you just have to focus on the technical aspects of the project plus the opportunity, you look at owning 100% of project gives us the flexibility to move our people where they can do their best work, moving equipment where they can be put to the best use, recycle infrastructure. Those are the types of things we've been able to do to help keep the CAPEX down, the operating costs down, and that's been a little bit of an added bonus for us. [13:07]
ERIC: CAPEX, I'll cover that in a minute because I think that's an industry situation also. There was some increase in your CAPEX, but I think everybody is going through that. But the shareholder friendly way in which you run this company, during this expansion, I think recently you projected north of $300 million of debt because you wanted to keep around $100 million as working capital on the balance sheet.
Two questions here then. Looking at your future growth and the fact that you could fund that growth with debt which could be repaid with cash flow as opposed to stock dilution, doesn't that create potential for investors to realize a dramatic increase in earnings per share going forward as opposed to using dilution? [13:05]
SEAN: Yes. And not only earnings but cash flow per share, which I think is critical to valuations for gold stocks, though certainly we are working now and are now close to finalizing an increase in our bank facility which we've talked about on the most recent quarterly conference call. We have a bank facility of $300 million now. We're looking to increase that by 2 or 300 million, so possibly doubling it, which will give us the capacity to build the current pipeline of growth as we go forward with minimal dilution to our existing sharebase. [14:23]
ERIC: I'll go to the second question, which I have a third one for you based on that, but with the takeover of Gold Eagle by Goldcorp and the highly profitable investment you made there, does that change those debts projections because you put, what, $50 million into that and you're up something like 50% just in a few weeks; is that right?
SEAN: Yes. Well, certainly that is helpful as far as cash availability goes. What we're looking at doing is putting up a large enough bank facility to give us the flexibility going forward, but certainly having the initial investment of $50 million come back with a nice tidy profit, we'll certainly look to apply that to the investment program as we go forward. [15:00]
ERIC: You may have missed your calling. Maybe you should have been a finance manager there or investment manager. I have to say that's a pretty big return in a short period of time.
SEAN: Well, we liked the asset. The plan was to make that initial investment because we liked the upside of the investment.
ERIC: Of course.
SEAN: So that gave us the opportunity to put our key operating person on that board, and we always looked at that as sort of a long term investment, and because it entailed an underground program. And so with Goldcorp's bid that certainly derails the plan that we had to look at this from a long term perspective, so it makes sense for us just to take that process and move on. [15:41]
ERIC: With regards to your taking on debt to kind of do this expansion in your ounces of production and what not, when do you see being able to use cashflow or free cashflow to eliminate that debt, or do you even think about that?
SEAN: We've done our modeling and there is a lot of room there. The CAPEX comes off substantially in 2010, and that's at the point in time where we're producing 1.2 to 1.3 million ounces, so we’ll be generating significant free cashflow in 2010. But what we're looking at as well is because the Kittila, Pinos Altos and the Meadowbank project continue to grow, and that growth in size of the deposit is creating a further internal production growth opportunities for us, so we're in the process now of assessing what those are. And if we can maximize those assets by putting some more investment into them and generate a high return, then we'll look to do that with the added cashflow that we expect to get in 2010 and beyond. [16:45]
ERIC: Your CAPEX has increased for a variety of reasons, and I wonder if you can address that and briefly talk about what happened with that situation, because doesn't this get into increased costs in general for mining companies, the fact that it's more costly to mine than it was, say, five or six years ago? So this isn't just an Agnico situation, but rather more of an industry situation?
SEAN: It is an industry situation, and it's not just increasing costs from five years ago. It's increasing costs from a year ago.
SEAN: And I think the big component in our portfolio of assets has been the impact of fuel prices, the impact of steel prices and the impact of contract services, and that certainly had an impact as we build out big projects like Meadowbank, finish up Kittila and look forward to finishing off Pinos Altos, so that's certainly had an impact. The biggest impact by far on that capital expenditure projection was the foreign exchange impact of a stronger Euro and a stronger Canadian dollar. And at the time when we came up with that number in July, we were using exchange rates which were much more conservative than where they are currently right now. So the exchange rate in the last three to four weeks has actually gone in our favor in terms of the estimate we put out, so it is a bit of a moving target. But what we try to do now is put an analysis based on spot foreign exchange rate and then announce to the market what those numbers are. So that was 40 percent of that increase was due to foreign exchange. [18:15]
ERIC: What about the dividends, Sean? Yves started to answer on the last conference call regarding the dividend, he said, well, that's -- and then there was a pause. He said, “We will revisit that in December.” Then you jumped in and you talked about how Agnico has paid a dividend for 26 years and that the dividend will be maintained and spoke about the upside in the assets that Agnico possesses. So what about the dividend, and not to be critical at all here, but was Yves maybe a little bit out of line or maybe didn't handle that question the best way with that indecision?
SEAN: I'm not really sure of the dynamics there because we were actually in separate rooms. They were offsite and I was here in Toronto, so I wasn't in the same room. As far as the dividend, I've been at Agnico for 23 years, so closely involved in the dividend decisions for over 20 years, and that's been sort of a hallmark of this company is to try to give something back. And our expectation is that we will continue to pay dividend for many, many years to come. In fact, our ability to pay those dividends is as strong as it’s ever been when you look at the quality, the assets, the growth from the production and the growth from the cashflow. So that's something that we've always been focused on, and that is part of the focus on shareholder return.
We had many years when gold was at $250 when we were struggling to pay that dividend, but we always thought it was important to maintain the track record as a form of self-discipline on ourselves to always make room to give a little bit back to the shareholders. So that's certainly something that we pay a lot of attention to when we're doing our budgeting and we hope to continue to do that as we go forward, and in fact, we're in a better position to continue that record than we were a few years back. [19:57]
ERIC: You know, it says a lot about the character of the company. And along those lines, you guys are kind of mavericks over there, and what I mean by that is you guys will use the banking system to your advantage, but you go out and you find the deals. The banks don't bring them to you. You go find the deals. And if you need money, you'll go to the banks, but you’re just – and I don't want to get critical because you're kind of renegotiating and got some things going on the banking finance side here, so I'm trying to do this delicately, but you've not always been the biggest fan of the banks in all honesty and you've sort of done your own thing.
SEAN: Well, we generally over the years have been adverse to debt. We had some situations 20 years or so ago where we got in a bit of a bind and the banks weren't behind us. But this current syndicate has been very supportive of us and some of the banks have been with us in that syndicate when they put that first credit facility up back in the late 90s when gold was $250. So they've just been very good to work with, and this group has been extremely good.
But in terms of the general way we run our business is we are a bit unique and we tend to generate our own ideas and work our own ideas and we tend not to follow the convention. The convention was to hedge years ago. We never got caught up in all of that. The convention was not to pay a dividend. We never paid attention to that. We just went ahead and paid our dividends. The convention was to move away from Quebec and go to Africa, go to Russia, go to all of these places. We never got caught up in that. So we just don't get caught up in the flavor of the month. We just tend to have a formula that works for us that we're comfortable with, and we just as long as it's working, we stick with it. And that's been our approach, and we expect to continue with that same approach. [21:43]
ERIC: And along the lines of this banking syndicate, it is international in nature, I would point out; correct?
SEAN: That's correct. Yes. [21:50]
ERIC: If you don't mind it as we close here, Sean, two things: One, where do you see gold heading? Meaning do you see – do you look at the United States and see or are you just running the company, but do you look at the United States and say, “The US is a mess; we’re probably in for a big secular bull market in the metals?” Can you answer that first?
SEAN: Yeah. I think sure we're in a bit of a pocket of strength for the US dollar, and oil prices coming down. I think the combination of those two have, you know, in the last month or so got people more comfortable with the general market and the underlying conditions and away from the metal commodities, but I don't think much has changed fundamentally. I think that the issues here as we've seen in the last two days on the credit side are a long way from being fixed and there is going to be lingering problems for a while. And I think it's that uncertainty on the financial side that's going to drive people towards gold. I think it's on the supply and demand side, the industry is not growing production, but I think that's positive. The demand will follow in terms of safe haven buying. There is still inflation in the system, global inflation, so I think that's going to be helpful for gold.
So we can see gold – you have to look at it in steps. And the first step is to retest the old highs of $1030, and I think that can be done within the next six months. Once we get through there, it's not out of the question that we can get to the $1200, $1500 range after that. So I think it's a good place to be right now. There is certainly a lot of noise that gold has seen its best days. We certainly don't believe that given a lot of issues that are out there in the financial market. So if you're in that space, we think the best way to play it is to play it in companies with growth because if there is no growth and there is no quality, you might as well just buy the GLD, the ETF. But I think what Agnico gives is it gives you that leverage because we're growing, and we're growing it on a per share basis, and I think that's what your gold investor, that's what you should be looking for. [23:47]
ERIC: And then, finally, the same day that I was interviewing yourself and also Peter Marrone from Yamana. I know that Cramer was interviewing you guys, and he kind of went on the air saying the vibe, but that was at the high up there, but I remember the call you and I had, and this goes back to the honesty and the integrity, you said, You know, Eric, it's kind of a mixed bag up here. Some of the analysts are doing this, and some of them are doing that based on our share price, but at the highs up there, I went onto this network and told people do not purchase shares of Agnico and Yamana. And it wasn't that I didn't believe in the story. It's more just that things were kind of getting in, were just – stocks get ahead of themselves, as you know, Sean, in a bull market. But let's do the flip side of that now. Right? Over the weekend, I was telling people to purchase shares in your company and in Peter's company Yamana. You were up at like $84 or so. I know at one point you were $44 and change here in the States. I think end of the week when I was recommending it at $48 and change, you had a bit of a balance. We're doing this on a Tuesday, and you're at the $54 and change level, but what do you say to the shareholders? Because it seemed to me there was a bit of jumping out of windows. I heard some panic going on in the industry. Because people should be looking at this as a sale. They should be looking at this as an opportunity to get involved in your company and buy during those kind of declines. What do you say to them?
SEAN: We would agree with that. I think that's the way I would view it. We've certainly heard from many, many players including the large institutions when our stock was $70 plus, “Well, we missed it. We missed it. We were chatting with you at 35, 40. We missed it.” So I would say to those who were telling us that several months ago, well, here is a chance now as gold has come off a small percentage of what the shares have come down, there has been a disconnect there, so if you can get into a good quality gold names, I think now is the time to be certainly doing that. But another point is that in terms of selling or recommending people sell the stock, I can remember our founder Paul Penna, you know, he was very close to the shareholder base and we have a very large retail following, and he would get upset with a lot of the longtime holders who didn't take some profits when the profits were there, and you're there to make some money and we're happy when people phone us up and say, “You know what, I rode it up to here, I got out, I made a lot of money, I'm thinking of getting back in.” That's what you're supposed to do. At the end of the day, they are all stocks, and you can still have a long relationship with Agnico over many, many years, and you don't necessarily always have to own the stock as long as you're following it and you can pick your own spots to go in and out, and if you're making money, that's what makes us happy. [26:35]
ERIC: Well, Sean, in closing, let me just say that I appreciate you taking time with all of this happening and you just getting back from holiday to spend time with us here on financialsense.com, I really appreciate it and want to thank you for your time.
SEAN: Well, thanks, Eric. And good to be able to give everybody an update.
ERIC: All right, sir.
Peter Marrone, Chairman & CEO, Yamana Gold Inc.
ERIC: Joining us today from Europe on the Financial Sense Newshour is chairman and CEO Peter Marrone. Peter, thank you for taking time to join us. I know you are on holiday and have taken time to share the Yamana story with us today.
PETER MARRONE: I'm happy to be on the call and to provide whatever insight I can to you and your listeners.
ERIC: This morning of this interview -- we're doing this on a Wednesday -- but it appears RBC has upgraded your stock. I don't know if you've heard that or not, but we've known each other for many years and I go back to 2004 when I first spoke with you. We set up a meeting in San Francisco at the gold show there, and Jim Puplava went with me, but not that it was a pipe dream back then because certainly it wasn't but your stock was in the twos and the idea that people were sort of starting to look at this company or possibly maybe be looking to buy you out I think was something that investors had on the radar.
But what made you unusual as a CEO was the fact that I knew you were extremely bullish on gold and understood what a big secular bull market of gold was in front of the industry and foreign investors. And I commented to you at the time that I thought it would be a mistake to sell Yamana when you could build a large company instead and become an acquirer, and you've taken this company and you've grown it tremendously. You've made acquisitions. This stock is almost $20 (United States) before a significant correction. We'll talk fundamentals in a minute for Yamana, but if you wouldn't mind, could you talk about your evolution as a CEO from where you started this journey from the idea where people thought you were going to be acquired to becoming an acquirer or a Pacman.
PETER: The evolution of all companies, I think, take it through a certain process. And I think at the time that you were referring to at this plant, it was part of our strategic and business plan to grow the company in a variety of different ways, clearly by the drill bit, so in other words, exploration. Adding to that, we had some advanced exploration, near development stage projects, the largest of which was Chapada, which is now our flagship mine in Brazil. And added to that was an intention at least that I would look to grow the company by acquisition as well. But as all things, we were a small company at the time and we had a comparatively low price. We had this plan in front of us with an obligation to our shareholders to maximize value. And at the time we had not financed. In 2004 I had not yet delivered the feasibility study for Chapada and for one other project. And we had one small producing mine that was producing approximately 90,000 ounces per year. And with that in mind, I had to look at all of the alternatives that included the possibility of acquisitions. I'm very happy to say that we didn't go down that path. We financed the company. We financed the construction of our Chapada mine. It has now been in production since early 2007. I know you are aware that we not only delivered that mine on a budget, we delivered that mine ahead of schedule. And so with that, in late 2006, and seeing where we were in 2006, I embarked on a further path, which was the third leg of the strategy of growth, which is acquisitions. So in 2006, we completed three corporate acquisitions that delivered to us an advanced exploration project in Argentina, which is now by the end of this year will be our Gualcamayo mine, a producing mine with a plan to expand production in Brazil. And those were the two principal acquisitions, a very small acquisition that delivered to us the San Andres mine in Honduras. So with that, when Chapada was in production in early 2007, the next leg of the growth strategy of the company came with a large corporate acquisition, a three-way transaction that we completed in the summer – started in the summer time last year and completed by the end of the year.
So in 2008, without all of that behind the company, in 2008, we start this company with seven producing mines, five development stage projects. We are in all of the major parts of the Americas and principally South America and Central America in some of the best jurisdictions to be mining. And by the end of this year, we'll have two more mines in production, our Gualcamayo mine being the most significant. And that's interesting, Eric, because we took Gualcamayo in 2006, we purchased a company called Viceroy and it had an advanced exploration project. By the middle of 2007, we delivered a feasibility study and permitting for that mine and started construction. And by the end of 2008, we will have completed construction and more interestingly is that the construction will be on the main open pit mine, but there are two other deposits at Gualcamayo that have since been discovered that will add to production in the years to come. The company has grown a lot, but it's grown a lot in three different ways, and even in the context of acquisitions, we've always looked at it from the point of view of where is the value added; and Gualcamayo is an excellent example of value added. In 2006, it had less than two million ounces of total resources. We're well in excess of three million ounces. We will be in production at the main open pit, which is known as QDD, and by the end of the year, we'll deliver an update of our feasibility study to an entirely new area called QDD Lower West, and with the three deposits, we plan to be in production at a level of 300,000 ounces per year starting in late 2010. A mine that was supposed to produce when we acquired it from Viceroy – when we acquired Viceroy – was supposed to produce 150,000 ounces per year and we're now at the level next year of more than 220,000 ounces, and then in the years to come, more than 300,000 ounces of production. Double from that 150,000 ounces when we first purchased it. [32:42]
ERIC: You know, I can tell you that from our meeting back in 2004, I came on the network and said to people to buy your stock at that time in the high twos, and certainly that's worked out very well for them. But at the recent highs, I was also telling people there would be professional selling of GLD and SLV, the gold and silver instruments on the exchanges; and I told them to avoid stocks and do not purchase shares of Agnico-Eagle and Yamana. And it wasn't that I didn't believe in the story. It was just, you know, in bull markets, you know, things will get a little bit ahead of themselves, and I think we saw some of that. But I think at this point, we've had some significant markdowns on this reaction and I told people to begin to purchase your stock over the weekend again because it hit the single digits in the United States. When you look at growth in production, you know, you have a target of over 2 million gold equivalent ounces in 2012; and I think you're probably around 1.1 gold equivalent ounces in 2008. Talk a little bit about the growth in production and your confidence in your ability to hit that target in 2012. [33:52]
PETER: Well, we have, as with all things, Eric, we have mine plans that are based on – that are based on feasibility studies, and we have less advanced projects. But even in the context of less advanced projects, mining is not static, and so from the point of view of a mining company, mining companies often have significant amounts of data, all of which is when it reaches a materiality level is published, but it doesn't fit into the parameters always of resource estimates that are official resource estimates or feasibility level studies. And one has to go through a process to get it to that point, but that doesn't mean that we're in a static world. And so a mining company – and we're not different from other mining companies. Many are very similar to us. We can often say here is where we anticipate being even though we have not yet delivered a feasibility study, even though we have not yet delivered an update to a feasibility study. And largely, the reason for that is because we have in this company today, we have more than 7,000 employees. And with that in the company, we're able to look at the drill data, we're able to look at metallurgical test work and we're able to come to our own conclusions to where we anticipate our production being. What we've said is that by 2012, we anticipate that our minimum production level will be 1,150,000 ounces of gold and gold equivalent. And that is based on no information today. What we've also said is based on what we anticipate with what we see of the drilling results coming from certain projects where we're not yet at feasibility study, we've not yet made construction decisions. What we anticipate in terms of what we see from the metallurgical test work is that we can be as high as 2.5 million ounces. So that's the bidding between 1.9 million ounces – approximately 2 million as you say – and 2.5 million ounces at the higher end. And that does not include any exploration success, and it does not include any other projects that are not part of that five development stage projects that I've referred to, so between now which is 2008 and 2012, I'm confident that we'll continue to have exploration successes as well. So you should be very comfortable with my position, as I am, that by 2012 we will be producing at least at approximately a 2 million ounce level based on what we know today and based on what we have in front of us today.
And then with the continuing successes of some of the less advanced projects, we anticipate that we will be higher than that 2 million ounces. Our stated objective is 2.2 million ounces. We continue to be confident that we can get to that 2.2 million ounces by 2012. And I think it's important to also say that we have to look at it from the point of view of where we were, as you said, to where we are and where we intend to be. Part of the success of a company and part of its ability to deliver on that growth is: have you been able to deliver up until now? And if we go back to your example of 2004, in 2004, we were producing barely 90,000 ounces of gold per year. And today we're producing over 1 million ounces of gold and gold equivalent. Next year, we're expecting to produce approximately 1.6 million ounces, so roughly – I wouldn't be able to do the math fast enough to be able to know what the percentage is, but approximately 40 to 50% more production next year. And that continues to increase progressively after that.
So very confident in being able to see that by 2012, not including any new exploration success, we expect to be at least at a 2 million ounce gold and gold equivalent production level. And in addition to that, copper production, which we use as you know as an offset to production costs for every ounce of gold that we produce. [37:26]
ERIC: Now, let's talk about that for a minute because you have very low cash costs, and you kind of are one of the industry leaders in cash costs. What are your cash costs looking like for this year and into the future?
PETER: We should look at it in one of two ways, Eric, and the first is on a coproduct basis, and coproduct, as you know, means what are the costs for the production of every pound of copper and what are the production costs for the production of every ounce of gold and not applying a byproduct –and a byproduct would mean copper, in other words – as an offset to the gold production cost, so that's clearly a good way to look at what is the true costs for the production of every ounce of gold. But if we look at it on that basis, we're producing every pound of copper from our Chapada mine at approximately 98 cents per pound. And copper is trading today at more than $3.30 per pound, so huge margin for every pound of copper that we produce. And on the gold side, we're producing gold at approximately $380 per ounce, and again, gold is trading today at more than $800 per ounce and I'm a fundamental believer that gold will continue to go to higher levels than that. So on that basis, we have a huge margin under the gold price. So in an industry where the average cash cost, as I understand it – and I'm getting this from other sources, but where the average cash cost is now more than $430 per ounce if producing it at $380 per ounce is a very low cash cost.
Perhaps if I could make two other observations. That average cash cost is across all of our mines, and as all companies, some produce better than others. If we look at our core mines and the ones that deliver better than 80 to 85 percent of our total earnings and our total cash flow, which is El Peñón and Chapada, last quarter we produced gold at Chapada at $340 per ounce, well below that industry average. And we produced gold at El Peñón at approximately $280 per ounce, very much below industry average with copper as I mentioned at 98 cents per pound, so you can see we have huge margins to the commodity prices, which is what allows us to be able to generate a significant earnings and in my view, more importantly, cash flow.
The second observation that I would make is that it is important to look at the secondary metal, the byproduct which is copper, and the margin that we have to the copper price and applying that to an offset to our cash costs for every ounce of gold that we produce. So the simple way to look at it is if we look at the margin between what it costs us to produce copper and the copper price, that difference we can apply as a credit to our every ounce of gold that we produce. And last quarter we produced every ounce of gold at less than negative $100 per ounce. So your listeners and you will pick your own view as to where the gold price will go. But if we take a simple example of an $800 gold price, and for every ounce of gold that we're producing, we're getting a margin of $800 plus $100 because we're producing every ounce of that in the negative $100 cash cost. And that gives us a $900 margin to every ounce of gold that we produce. [40:35]
ERIC: Before we go any further because as I said earlier, you really understand the secular bull market and I'm just wondering, because I was able to get Sean Boyd from Agnico to comment on this yesterday, but where do you see gold heading? Getting away from Yamana for just a minute because I know you're a big believer in this market, and silver as well?
PETER: Eric, I look at it from this perspective. We are in a secular bull market for precious metals, for all commodities, but for precious metals in particular. And it is, in my view, too easy to look at it and say, “Look at where gold was trading a few months ago relative to where it is today.” It's just as important to look at it and say, Look where it was trading two years ago to the month, and last year to the month. Last year we engaged in the purchase of Meridian North and Orion. That's what gave us the platform, as I mentioned to you, with the seven producing mines, five development stage projects and the exploration concessions. Gold at the time was trading at approximately $650 per ounce. And silver was in the range of $11 to $11.50 per ounce. Today we're well in excess of that. One year later well in excess of that. And if you look at that pattern, it seems to suggest that it has considerable room to go higher than where it is today, and while there are going to be adjustments and corrections on a short term basis, on a longer term basis, I continue to be very bullish in the commodity prices and particularly bullish on the precious metals.
And then when we look at what's happening in the world stage, and you've heard me describe it before as a perfect storm of events that lead to higher precious metal prices, we have geopolitical conflicts; we have supply and demand imbalances where there is more demand than supply for precious metals, and then it's coming from parts of the world that are developing parts of the world that have these astronomical growths in their economies. We appear to be coming out of a recession in Europe and perhaps in the United States. We have a financial crisis that seems to be deeper than people had anticipated. And while everyone wants to take the position that perhaps inflation is under control, it seems to me that there are inflationary pressures in the world. On that basis, we have this perfect storm that leads to higher precious metal prices, and so I continue to be very bullish and very confident that gold and silver prices will continue to go up and copper prices will continue to remain strong. [42:54]
ERIC: With regards to copper, and then we'll come back to revenue earnings, cash flow, things like that for Yamana, but you have a situation where from UBS, today, I believe, the world's largest copper consumers may increase imports by as much as 60% after a price slump. This gentleman was talking about the fact that refined copper may jump between 100,000 and 120,000 tons a month, and he was saying demand from these inquiring buyers is quite inelastic as they are users and not speculators. So that kind of goes with your theme that this is – if you look at BHP, BHP talked about the fact that the world is confronting supply constraints for energy and mineral resources. While there are enough resources to satisfy the world's appetite, the industry has not moved quickly enough to meet the growth in demand, so they remain very confident that – and of course with the Olympics in China, they kind of shut things down, but as those wind down, then they'll start to ramp up production again. And then again, I noticed that they are coming into sort of start loosening monetary policy there a little bit; with the big drop in the stock market, they are going to start to pump money into the system. So assuming we ramp back up, and that's how things certainly look, that puts Yamana going forward in a very good position, doesn't it? [44:17]
PETER: I certainly think so. Eric, I had a thesis in 2003. It was about this time in 2003. Yamana has been in existence for five years, so five years ago, almost to the month when Yamana was formed, I had a thesis, which is we would be going into an inflationary episode in the world, and when that happens, there is no company that can say to you that they can control costs. The company should be saying to you and to your listeners that they can contain costs. But part of containment of costs is to look at it from the point of view of what will happen to other metals that are byproducts to a company that is dominantly about precious metals. And Yamana is about precious metals, but my thesis was –and remains – that in a world where there will be some cost escalation because of inflationary pressures, it's always good to have a secondary metal because that will have gone up in price too. And because that has gone up in price then it applies as a good offset to your production costs for the principal metals, which in this case are gold and silver. And that has proved to be true, and I think it will continue to be proved to be true.
I’m not an economist, but it certainly seems to me that there continues to be a robust demand for metals across the world and why I am a firm believer in precious metals is because while there are cyclical events, I think that there are fundamentals behind the cyclical events. And why gold price goes up is because other commodities have gone up and because as a result of all of that, there are inflationary pressures and precious metals always do well in inflationary environments.
And again, I'm not an economist, but I was reading that sometimes when one is outside of North America, one gets a fresh perspective. And you mentioned that I'm on a brief holiday in Europe, and when I read some of the European papers, I was reading today that wholesale prices in the United States rose twice as fast as was predicted, and it is the largest monthly increase in 27 years; that goes back to the late 70s and early 80s. Now, we all saw what happened in the late 70s and early 80s, and we all saw what happened to the gold price, and so it seems to me, with those inflationary pressures, we're bound to do well with the precious metals that we produce at Yamana. [46:27]
ERIC: When you look at your revenue, your earnings and cash flow; and obviously there has been a number of acquisitions that have been plugged into the company, but it's been rather dramatic. I mean you had a rise in revenues, $46 million in 2005 to $747 million for 07, and you've had extremely strong cashflow growth as well with roughly 50 cents a share in the first half of this year. Where do you see cashflow the rest of this year and next; and what about revenues because revenues for the first half of 2007 were 329 million and 693 million for the first half of this year, so what about revenues and cashflows going forward?
PETER: Well, in my view, it is about aggregate, but it is also about per share. And on aggregate, as you mentioned in the first half of this year by comparison to the first half of 2007 we’re almost at a level of double the revenue that we generated in the first half of 2007. So simply put, this company is generating revenue in half of a year for what it was for the entirety of the year in 2007. So I continue to look at it from the point of view that our revenue will continue to be as strong in the second half as it was in the first half. And in a rising commodity price, then that revenue will be even stronger. In 2009 which is even more interesting than 2008, in 2009, our production level increases by about 40 to 50 percent as I mentioned and that would further increase the revenue expectations of the company. And if we look at cashflow, cashflow has had an equally dramatic increase as you've mentioned, and so if you look at the first half of this year by comparison to the first half of last year, we're almost at a double in terms of aggregate of total cash flow.
Now, it's also important to say, though, that we need to look at it on a per share basis. In my view, cash flow is really the proper marker for a gold mining company. Clearly, earnings is important, but earnings has some variability to it. Some companies are better able to report higher earnings because of the jurisdictions that they are in, tax rates in those jurisdictions and comparative simplicity of intercorporate events that take place in companies that are multi-jurisdictions versus any one particular jurisdiction. But cashflow is about generation of cash, and it's the best measure of a comparison of one company to another company. And if we look at the cashflow expectations of this company, my recollection is that the expectation in consensus, so that's all analysts that have research coverage on the company was that for the first half of the year we would be producing 42 cents of cashflow, and we generated as you said almost 50 cents – 49 cents of cash flow. And that will continue into the second half of the year and should be at least at a higher level into 2009 if we assume that commodity prices continue to stay at least at these levels because our production will increase. And so that cash flow generation will increase, and our share count will remain the same. So our cash flow per share should increase as well. So I'm very, very bullish in terms of the expectations in Yamana to generate increasing cash flow and increasing cash flow per share.
And if I may, I'll make one further observation. In the first half of the year, we generated on an adjusted basis 35 cents of earnings for the half year when consensus expectations for the half year was 29 cents. So we're beating expectations in terms of earnings. We're beating expectations in terms of cash flow, and we will be generating increasing cash flow in earnings until the second half of the year; and then into 2009 with our production levels increasing into 2009 and then the years to follow.
And perhaps one of the questions that you have, and I'd be delighted to address is because you started with this is the stock price of the company. And today where we're trading by comparison to a multiple to our cash flow. If we take that cash flow, and just for the sake of an example, we double it this year, so that that roughly 50 cents becomes a dollar per share, we're trading at approximately –in terms of our share price today – above 10 to 11 times the cash flow. And that is comparatively lowered by comparison to industry standards and certainly by comparison to our peer group.
So Yamana has growth. Yamana has low cash costs. Yamana has this significant cash flow and earnings that it is generating aggregate and per share, and we have a true value proposition for potential shareholders because we're trading at a multiple to that earnings and cashflow that's at a discount to our peer group. [50:57]
ERIC: Let me ask you this, Peter, because you're scheduled to get a growth in production next year of around 40 percent if I'm not mistaken. If that's, and I don't know if that's going to be from existing mines or maybe less profitable in terms of cash flow or not, but if commodity prices were constant year over year and it didn't have any appreciation at all, would you theoretically be able to get to $1.40 per share cash flow?
PETER: It's a good question, and it's always difficult to predict, Eric, but if we look at it from a point of view of your analysis which is a constant price and let's assume constant cash costs as well because if gold price stays at the constant level, then I will assume at which I think is a fair assumption that the industry cash costs will remain at the levels that they are at or approximately at those levels, so our production will go from 1.1 million ounces to approximately 1.6 million ounces. And again, as I said before, I'm not quick enough to be able to do the math, but that should be somewhere between 40 and 50 percent. And if we applied that, then, to the cash flow generation, then we should be increasing that cash flow expectation for 2008 by the same level. That dollar that we were describing in approximate terms would go up by the comparable amount, so it's not unrealistic in your hypothetical and your example, with commodity prices staying where they are and cash costs staying where they are, it's not unrealistic to expect that that would be the cash flow potential for the company in 2009. [52:21]
ERIC: So if we were trading at we were at the lows recently when you had this pullback and we bumped up just a little here, but that would put you approximately seven times cash flow for 2009?
PETER: That's correct. [52:34]
ERIC: That starts to look very attractive, Peter.
PETER: Well, Eric, you are more of a market participant than I am, but my understanding is that the industry average for companies like Yamana with the profile that we have is between 20 and 25 times, and in some cases, more than that multiple to that cash flow. So yes, I told you we think that there is significant potential for increase in the share price of the company. [52:59]
ERIC: Let me ask you this, and I hope I'm not getting too personal here, but you sold a little bit of stock or some of your holdings in this company, but you're a big believer in the sector, and stop me here if you don't want me to go here, but you actually redeployed money into the sector. We won't name any names, but you went into juniors, did you not? Or would you mind commenting on that because I think as a big picture guy –as somebody who gets this secular bull market, you know, I think, longer term where some of those quality juniors are heading and took your hard earned cash that you had made and sort of redeployed it there. I hope you're not offended that I said that. I just am pointing out that you're a big believer in this market and that you see in the future good things, and I know these juniors have been kind of killed here, but could you comment a little bit on the junior market. [53:49]
PETER: I'm happy to and no, I'm not offended at all. I think it's always prudent to take a little bit of money off of the table. My objective with Yamana was to create a company where any investor could look at it and say it has all of the things that one looks at and that includes one would look at and that includes liquidity. And as you know, Eric, it is about the ability to buy and sell shares at the end of the day. That's why companies become public companies. And as one of the more liquid companies in the market place with more trading volume than many of the other companies that are in the peer group, I think that is an important thing that we've been able to do in the brief five year period since the creation of the company. So I would always encourage shareholders to continue to hold shares of Yamana, but equally, I understand that sometimes it's not a bad idea to take a little bit of money in that very liquid market and come into it at the right time and exit it at the right time. I understand the sentiment.
From my personal perspective, I continue to be significantly invested in Yamana. I continue to have the overwhelming majority of the shares that were first acquired when I formed this company in 2003, and of the amount that would have been generated from the sale of some of the shares over the course of time, I've redeployed almost 100% of that back into the market. [55:06]
ERIC: I appreciate you saying that because that to me is a sign of somebody who believes in this bull market, and I don't mean to interrupt you. Continue on. I'm glad you said that.
PETER: You know my philosophy, Eric. My view is that there is, if you believe in something, then you put your money where your mouth is. I did that in 2003 with the purchase of stock of Yamana when that company was taken public. We all came in at the same price in 2003. The vending of the assets was at the same price as the public offering, $1.20 per share which included a share and a half warrant. I'm happy that I purchased the share position that I did, and it has done remarkably well, and I continue to believe that it will continue to do remarkably well.
There are lots of opportunities out there, and my view is that we are in a correction that is taking place. It is natural for these things to take place, particularly with the more junior market. But many of these junior situations will become far more successful in the years to come. And I'm happy to continue to be invested in this sector. [56:04]
ERIC: Well, Peter, I want to say thank you for joining us, particularly being on holiday and on such short notice. I thank you for coming on Financial Sense Newshour and sharing the Yamana story and being gracious with your time.
PETER: Eric, I'm happy to be here and as always, if there is any other insight that I can provide on Yamana or on the sector, I'm more than happy to do that. [56:25]
ERIC: All right. Thank you, sir.
John Hathaway, Senior Managing Director & Fund Manager, Tocqueville Asset Management LP
ERIC: Well, we’ve had a wild ride here in the precious metals markets in recent weeks and joining us this week from the Tocqueville Gold Fund is fund manager John Hathaway.
John, before we get started I want to thank you for being here and joining us on Financial Sense this week.
JOHN HATHAWAY: My pleasure, Eric.
ERIC: John, I wanted to start off with current market conditions because there’s been a panic in the market recently and gold and silver and the shares are trading based on a lot of emotion and out right panic, and frankly, people are seemingly jumping out of windows here. Talk, if you will, about where we are in the gold market as you see it, and where you see the gold market heading in the future?
JOHN: I would say, as scary as this has all been, I think we’ve made a substantial low that could be valid for some time to come, and by that I mean everything has been thrown at the gold price that you can think of and it’s kind of held its ground in the mid-770s and I would say that’s a pretty good bottom that’s been made, so I’m not sure whether we continue to back and fill for a while, but I do think it’s a springboard for a move to higher highs. You’ve taken out a lot of the weak players, a lot of the momentum players. The sentiment has turned sour to say the least. So you have all the kind of technical and emotional hallmarks of an important low. And where can it go? I think easily 1000 – well over 1000, based on the macro picture as I see it. It’s simply this credit crisis is just not going to get better any time soon and the policy responses of central banks – not only the Fed, but others – will be to throw money at the fire. [1:54]
ERIC: Let’s talk for a minute about investors’ perceptions about commodities because I think people, funds et cetera, have been looking at the commodity markets as a currency safe haven to some degree; what are your thoughts on investors’ perceptions on commodities? Meaning, are we in the process of eliminating two perceived currency safe havens: one the euro, and the other commodities?
JOHN: Yeah, absolutely. I’ve really for some time been commenting and it’s really bothered me that there’s a sense that all commodities, if they’re tangible assets, are a form of safe haven against the dollar. And you can just see that in the commentary out there – and I’m not for or against commodities on their own – I think you can certainly make a very bullish case for commodities based on a number of different things, but one thing I would really shy away from is saying that commodities have the monetary characteristics unique to gold that make it a safe haven in a time of financial distress, which is what we’re in right now. And frankly, what we’ve seen is the pitfall in thinking of commodities that way because high commodity prices do in fact destroy demand – as they like to say on TV – and they’re economically disruptive. So to some extent high commodity prices are self-correcting, but high gold prices are not; and I know that will be controversial with people who think that gold is really a commodity and it’s only really of value as jewelry or industrial usage, but my view is that the primary force driving the gold price is capital market flows driven by a desire for safety. [3:37]
ERIC: If you look at today’s economic environment, we have the PPI and the CPI shooting up, but at the same time – and you’ve touched on this but I’ve talked about it for years on the show about a speech Greenspan gave in Belgium – and you were just talking about some money printing – but he gave it in Belgium in 2002 where he talked about the fact that banks make off-table bets in the form of derivatives, and at that time the number was around $110 trillion, and that number has skyrocketed since then. But Greenspan made the statement that “we stand ready to create money without limit.” So in the case of banks and their derivatives bets, if they win those bets they keep the winnings, but if they lose those bets, systemically, the taxpayer will bail them out. And he repeated that statement that “we stand ready to create money without limit” five times during that speech in Belgium – almost like a disclosure. [4:31]
JOHN: You know, one of the questions really is how inflation and certainly the price reporting – the CPI and the PPI – suggest inflation is a growing problem, and yet at the same time, we have falling asset prices because the banks are afraid to lend and they’re tightening up their credit standards. And it’s kind of an unprecedented combination. It’s the sort of thing, getting back to your point about printing money what will the Fed and other central banks do if this credit crunch continues and leads to continued economic weakness? And I think we’re on the verge of seeing the Fed in particular open up the spigots. If you look at their balance sheets, it’s already over-committed, having swapped their Treasuries for junky paper that the banks can’t get rid of, and they’re about at the limit of where they can go and the only thing that they can do from this point on in my opinion is to increase reserves which means – stating it another way – that the Fed funds rate will be effectively zero and we’ll be essentially – using Bernanke’s phrase of a couple of years ago – we’ll be dropping money from helicopters. [5:39]
ERIC: So in that environment what that means is that people’s savings of a lifetime can be either greatly devalued or wiped out in the blink of an eye. Now we’re in that phase where the Fed and the Treasury stand ready to create money without limit, and we have gold correcting ahead of this massive money printing where we bail out Fannie Mae and Freddie Mac and the banking institutions – many of them. With all of the inflation and money printing, what do you see going forward in terms of how people are going to begin to view the US dollar from overseas and what that means for gold?
JOHN: Well, it can’t be good for the dollar. As much as I dislike the euro as a store of value, it’s an anti-dollar trade – and let’s face it, the euro is a very flawed instrument. It doesn’t really represent a country, it represents a region; the central bank doesn’t really tie into any particular national treasury. I could go on and on about the flaws of the euro, but the one thing it has going for it is it’s not the dollar, and if these events come to pass, then I guess we should not be surprised to see the euro rising against the dollar – all its flaws notwithstanding. But at the end of the day – and I think people have started to realize this – the euro is not a real safe haven, partly for the reasons I’ve mentioned. You can look at what’s going on in terms of political development with Russia and the sort of helplessness that the European Community has evidenced with what’s going on in Georgia and may soon happen in Ukraine and all that kind of thing, and that should scare people out of the euro. But I think at the end of the day what we’ll see is that the euro could be a least worse alternative to the dollar if the Fed does start to create reserves without limit. Now, what does that do for gold? I mean it seems to me by then there really aren’t any safe havens left of any real value, and I think that that could be the point at which gold really starts to take off. [7:37]
ERIC: We had this technical break of say, near 80 on the dollar index, which was really multiple decade support – maybe 40 years – and we sort of broke through that very casually, and now we’re having a little retrace of that. As a professional, when you look at that – because we’re kind of seeing investors jump from currency to currency right now, and I’m hearing the yen tossed around as a gold alternative right now, but when you talk about people waking up globally and realizing the only true currency is gold or maybe silver, the second question is – and George Soros was talking about this and basically talking about the fact that the US dollar is headed lower over time, but he made a statement that I’m going to talk about for a while now, but he said “there is no suitable alternative.” So I think for people who understand the metals markets the way you do and other professionals, eventually that does mean in fact – isn’t he saying that, really, people are going to be flocking to gold and/or silver at that point; right, John?
JOHN: Yeah, for sure. I mean gold is scarce. I mean we know it’s hard to mine. Its production is declining in some of the key producing regions. There’s a limited supply above ground and yet on the other hand you have an increasing supply of paper and you know, if it was increasing a month ago, it’s going to be increasing at an even faster rate with all of these bailouts still to come. So, we do a ratio of gold to financial assets with gold being the numerator and financial assets being the denominator, and in 1980 which was kind of the peak of the previous gold bull market, that ratio of gold to financial assets stood at around 26, 27 percent – that’s marking all the gold above ground to market. You can go to our website on Tocqueville to see how that works. Today, that ratio is only 4%, which tells me, with everything yet to come that the dollar price of gold could rise substantially, well into the thousands and still not even come close to that ratio peak back in 1980. [9:35]
ERIC: John, when you look at that – you just talked about the 4% currently versus the 26, 27 percent – we have this if you want to call it stagflation again, and we have Buffett commenting about this that he expects the ‘stag-’ to get worse and the ‘-flation’ as well. Looking at the problems of the United States today versus the 70s, do you look at the situation today and say to yourself that, no, this could be much greater in terms of a secular bull market because we had gold up 25 fold, silver was up 38 fold in that stagflation. Can this be an even bigger bull market is my question?
JOHN: Oh, absolutely. The 70s look like child’s play compared to what’s going on now.
ERIC: Meaning we could exceed 26 or 27 percent?
JOHN: It easily could. It just depends on how much more creation there is on the paper asset side. In constant terms, I think we could easily exceed that ratio in 1980. It seems to me that the events that we’re going through today, you’ve got the inflation rising as it did in the 1970s. You didn’t really have a banking crisis of the kind that you have today.
JOHN: This is a secular event that only probably happens maybe every like a hundred year flood superimposed on an inflationary uptick. This process of debt deflation and falling asset prices – asset prices which underpin the creditworthiness of banking assets is something that I don’t think we’ve been through in any generation since the 1930s. [11:01]
ERIC: Turning to sentiment, near the recent peak in the metals market there was tremendous bullishness and you kind of brushed on that in the opener there, but I know for example, the bullish consensus on silver was 94% bulls at the peak – I think an all-time record. But when you contrast that to today, it’s only 49% bulls on silver, what are your thoughts on sentiment because investors – and even some professionals – are badly shaken here, and what does that say to you as a contrarian as a buying opportunity here in a secular bull market?
JOHN: That’s how we got started in gold in the first place. We started our gold fund in 1998 when gold was the Rodney Dangerfield of investment ideas. I mean it was really a joke, you know, and there was really no place for it to go but up. It was just a matter of time. And I kind of think that we’re maybe not quite at that point because it’s much more front page now, but certainly, between fear and scorn and you know, you have people on CNBC telling people to sell gold who never told you to buy it in the first place, it’s really – they’re really piling on. So you have that and you have some of the benchmarks that I look at – I look at daily sentiment index which moves a lot faster than the market vane – the bullish consensus that you referred to – but that has just plummeted in the recent months, somewhere from the mid to high 70s down around 30% today. [12:19]
JOHN: And it could go lower I suppose, but think it would go lower if we – even if the bottom is in but we just do some backing and filling and people will just feel worse and worse about it. But it’s just this kind of move from which you get these parabolic shots higher when everybody’s just been frightened out of it and suddenly something flips out there and who knows what it could be – I mean we can only suggest a number of different things – but it can flip on a dime and leave everybody who got frightened out of it just sold out bulls. [12:53]
ERIC: When we were at the peak on gold and silver – just over 1,000 – 20 on silver – I was telling listeners on this network that there would be professional selling of the instruments GLD and SLV, and it’s sort of an art form when you look at a top, but there were people throwing around 2100 gold, 30 dollar silver. And I know for pros like you that’s sort of a red flag, sort of a we-better-lighten-up situation but now I said over the weekend for people to start buying aggressively both the metals; told them there would be professional buying of the instruments GLD and SLV, and I find it interesting because at the top there were these people trying to outdo themselves on how much higher we would go but I feel there are five to eight times more people telling us how low we’re going to go and everybody is trying to outdo the other guy. Are you seeing that? [13:43]
JOHN: I saw an article written the other day by a very good service – I won’t mention its name – titled “Gold, a failed investment strategy.” You see more and more of that sort of thing. You know, the bears or the nay-sayers are much more courageous now with the price down than they were at the top. So definitely you do see that sort of media drum beat to talk the gold price lower. [14:06]
ERIC: One of the networks I think was talking about gold being down an additional 300 dollars this week and so far that –
JOHN: You know, anything is possible but it’s crazy because the industry is struggling to produce gold at current prices.
ERIC: I agree.
JOHN: There are very few of these major mining companies that are profitable and I think it was Gold Fields that came out the other day that if you did an all-in costing of what it takes to produce an ounce of gold – and that’s not cash cost which is baloney as a benchmark, you know, the analysts all obsess about it but to my way of thinking, you know, it should be return on capital and you have to look at the sustaining cost, capital expenditures, environmental, exploration – all of those things. If you do that I would say that this industry is barely breaking even at today’s prices. So if gold did in fact go down two or three hundred dollars, I mean you would shut down half of the production in a period of time. [15:00]
ERIC: See, that sounds correct to me. People always want to talk about the cash cost but that was interesting for Gold Fields and very honest of them, by the way, to make that statement.
JOHN: Yes, I thought so too.
ERIC: And I’m glad you brought that up because you know, when you look at the low cost producers, there are some that are doing well but a lot of others really are not.
JOHN: Most of them are not. [15:17]
ERIC: Correct. I want to go to a different subject now about shortages. We have word spreading of physical shortages of products of silver and gold in the dealer market; people like James Turk commenting on that, as well as GATA. Could you talk about what observations are regarding these reports of shortages.
JOHN: Well, what I see is probably what anyone else can see if they go to those sources. I mean on the Kitco website you see a sort of bulletin saying we can’t process orders in the normal time because of the volatility and shortages; I talk to people in Dubai and they tell me that gold is flying off the shelves and they have shortages there, so the only over-supply of gold is on the COMEX where people can trade it without having to have physical to back it up. But if you go to the real world – and Jim Turk would be a good example, who would have his finger on that pulse – it’s a totally different story. So in my opinion, the market is extremely short right now – and there’s something else on the GATA website today about the US Mint informing coin dealers that they’re no longer going to be producing gold Eagle coins. So, you add all that stuff together and you get a picture that the real metal is being rapidly absorbed – added to the world economy – and it’s just black box macro hedge funds which flipped all their long gold into short gold positions when the euro broke through certain resistance points. I mean I think that’s really what you’ve had happen. [16:42]
ERIC: The other thing - because we have two distinct markets in silver, don’t we, John? Where we have sort of the dealer stuff for people with the little rounds and the silver Eagles and the bars and what not, and then we have the commercial or industrial thousand ounce bars. Since there’s this shortage on the physical side of things where it’s being hoarded now, basically people are going to have to start tearing into those thousand ounce bars that are normally used for industry – and I’ve heard Johnson Matthey is 300,000 ounces behind as an example on there of 100 ounce bars. And then, we have hordes of investors who are wealthy picking up five, six hundred thousand ounces of these thousand ounce bars, taking delivery and now putting them in storage, so as we begin to see investor demand tear into that industrial market, could we see dislocations at some point? [17:36]
JOHN: Oh for sure. The dislocation will be reflected in higher prices. And you bring up a good point. I mean you compare what’s going on in the COMEX market and then you look at the gold ETF which is the one that I follow more closely than the silver, but the physical backing the gold ETF has fallen off just a small amount even though we’ve had this vicious correction in the gold price. And that tells me there’s solid long term money accumulating physical. You know, the COMEX is not what I would call long term money, but I think for the ETF – both the silver and the gold – I think that’s what it represents. [18:08]
ERIC: How do you view the gold and silver shares at this point because there seems to be a disparity between large cap stocks and juniors? Why the disparity and what do you see going forward in those?
JOHN: There is a huge difference in the performance. I have never seen such a – I guess the word would be ‘bifurcation’ in performance between the larger cap and the small cap, and a number of reasons come to mind, one is when the generalist hedge funds piled into gold at the end of last year, they bought the names that had a lot of liquidity and were recognized and had a lot of research coverage on the sell side, and so those stocks took off; but you know, a generalist hedge fund wouldn’t want to dig down into the junior names. One, they don’t have the time to do it, and 2) you can’t trade them. That was one factor. But the second factor is the smaller cap companies are much more about exploration and mine building, so they really do not participate in high gold prices in the current environment. What they represent are what I would view as an out of the money call on future higher gold prices, and so they are not as immediately connected to a very strong gold price. You really have to look out a couple of years I suppose.
The other thing that they’re faced with, and have more difficulty handling is if they are in the process of either drilling for gold or silver or building a mine – a mine facility – they have to go to the market at a time when credit is contracting, and even though they’re gold stocks, the threat of a large share issue is much more daunting in a very risk adverse climate that we’re in now than it might have been two or three years ago. And I think those are the big reasons why the small cap stocks have been such laggards, and it’s my view that when gold trades through 1,000 next time, and looks like it belongs there, instead of “Gee, it was just a fluke because of Bear Stearns or Fannie Mae” then I think those stocks will get a second wind and actually be very good performers. [20:11]
ERIC: One of the CEOs that I know in the industry did quite a bit of selling, actually when his stock was on the fly there up into those spikes we got there –
JOHN: Yeah, I’m sure there were more than one. I could name quite a few.
ERIC: You’re right about that actually, but the reason I bring him up is he was looking to reallocate into a basket of juniors and he was in a hurry because he knows what’s in front of us. And we have companies like – and I found that very interesting because it was a tremendous amount of capital – but we have companies like Barrick Gold announcing they’re going to start to buy these two million ounce deposits or higher and some of these other companies announcing right now. But the problem here is that these companies are so depressed in price that we really can’t do that so don’t we have to have a substantial repricing of the juniors, say, two or three times higher – for the quality issues – so that we can have acquisitions or start to looking to having that happen because nobody’s going to sell down here? [21:06]
JOHN: Oh yeah. Well, of course, the big companies like to play the vulture game and build and wait until a company is just about out of cash and make a low ball bid, and you’ve seen some of that. But over time, the typical acquisition price for an ounce of reserves is somewhere between 8 and 12 percent of the spot price, so that means that if you have a junior company that has legitimate assets and you’re trying to think “well, what could this sell for if it were a take out?” I would take 8 to 12 percent of the spot price and adjust within that range for specific factors like political risk, location – all of that sort of thing. [21:43]
ERIC: Isn’t this the time – we look at your fund, the Tocqueville Gold Fund, or I look at a Sprott’s gold fund or Jim has a gold fund – but isn’t this the time, John – and people get scared, but let’s talk as professionals for just a minute here because I’ve been buying aggressively, isn’t this the time that the people in those funds that have wanted to increase their allocation, they should do that right now, shouldn’t they? Things are on sale, and this is the time to add to those.
JOHN: Absolutely. I mean this is – the time to buy wasn’t when Bear Stearns was going under or Fannie Mae or what have you, when gold was at 1,000. The time to buy is when everybody is worried to death is gold going to fall another hundred or two hundred dollars. I mean it takes guts for sure. I know most people find it very difficult to do, but it’s – what’s the old investment axiom? You buy when there’s blood in the streets. Well, I would say there’s blood in the streets right now for this sector. [22:32]
ERIC: In closing, would you talk about – you know, when we look at these phases of a bull market as an example, and I’m trying to figure out where we are – maybe you can help me here – but you have phases one, two and three – three being the mania at which we’re going to be just in an internet-type of environment – where are we now in terms of this bull market in your opinion? Which phase are we in, where are we?
JOHN: Yeah, I’ve always said that a bull market has four phases: there’s the beginning, the end of the beginning, then the beginning of the end, and then the end. I think we’re still at the end of the beginning, even though this has taken approximately eight, nine years since gold hit 250, it’s basically been a back-page story, so – you know, every so often it gets front page press and usually incorrectly covered and all that sort of thing and I can tell you from managing portfolios and making a number of investor presentations, it is definitely not a mainstream strategy for institutions or individuals. Sure, there are plenty of people out there that – more likely to be individuals who believe strongly in a higher gold price and have a big allocation, but I would tell you that most people that I talk to think gold is just too marginal a strategy to allocate to. And I think until that changes we’re still relatively early days. [24:00]
ERIC: When you look at the mania before we close here, say, 1979-80, we had some of those juniors go from a buck to four or five or six hundred, and then they collapsed after that and a lot of them went broke, but do you see that in the juniors this time round? Do you see that kind of insanity happening?
JOHN: Yeah, I think that’s still ahead of us, and I think that would be a sign for someone like myself. Watch out. We had a little bit of that two or three years ago, when the juniors were flying and provided great performance, but now they’re by and large really kind of cast offs, and people are afraid to go into them. But I can tell you this, if you wanted to take a position – a decent sized position – in a good junior today, you’d have a very hard time doing it. So that’s where the big price moves will come when that switch flips and people decide, yeah, this is – you know, gold at 1,000 is just a floor, it’s not a ceiling, and then you start thinking about what a major company like Barrick would pay for a good two million ounce reserves and 200,000 ounce a year producer in that environment, and that’s how you get these 10-to-1 shots. [25:02]
ERIC: Well, John, I’d like to thank you for joining us this week on Financial Sense. If somebody wanted to get involved with your fund, or learn a little bit more about what you guys do at the Tocqueville Fund, how could they do that?
JOHN: I would say the best thing to do would be just go to our website which is www.tocqueville.com and just follow the cues and it should be fairly self-evident. [25:32]
ERIC: All right, John, well, thank you again for joining us.
JOHN: All right, Eric, it’s a pleasure Eric.
Big Picture with Eric King & Dr. Alan Lemerande
ERIC: Well, joining us this week on the Financial Sense Newshour, Dr. Alan Lemerande. Al, thanks for joining us on the show.
ALAN LEMERANDE: Eric, thanks for having me. Eric, we’ve know each other for quite a while now, and I know some listeners to the show have had some questions and I’m going to hit you with some of those questions today, if that’s okay.
ERIC: Go ahead.
ALAN: Last year, we met at the Denver Gold Show. Gold was trading around 680 dollars – I think it was right around there – here we are a year later with gold in the low 800s, you have sentiment really poor. As you said earlier in the show, even some professionals are badly shaken here, why do you think investors are so worried here when gold has gone up so significantly in the past year?
ERIC: That’s a good question. What people should be doing, they should be thinking like a professional and I know some professionals were sort of badly shaken by this, but if you look at the interviews earlier today with Sean Boyd, Peter Marrone, John Hathaway – when you’re the CEO of a mining company like a Sean Boyd or a Peter Marrone, you don’t think about what the price of gold is next week or next month, you care about what it’s going to be next year and in the coming years because building mines is a capital intensive business. You just don’t make these kinds of investments by looking at what the price is this month and with energy prices and steel prices and other inflationary factors affecting the CAPEX or capital expenditures and increasing them sort of across the board in the industry in the form of increasing cost for production, the CEOs whose share price performance has been solid for investors, those CEOs who planned for this to be a long term secular bull market in gold, so those are the people who are really not shaken – and then some other professionals. But most of the rest of the group was pretty rattled and I think as you said, net, gold is up in the last year. But when you take the kind of dive down like we did in silver, over 40 percent, and in gold over 20 percent and it just sort of rattles people and the stocks had a big, almost straight down move and I think people were sort of jumping out of windows as I said earlier, and the sentiment was very bad. They need to stop and look at where we are in the bull market and what happens in bull markets, and how you have these corrections, and I think if you get away from the emotion and the fears and some of the other things that people go through and just stop and look at where we were a year ago and where we are today, it really is a situation where we’re up in gold. And it certainly doesn’t feel that way with the way things have felt for people lately, so I think people just need to step back and look at this and try to look at it more like a professional does and that is we’re in a bull market – a secular bull market. We don’t know where the lows are going to be necessarily, but we know that before it’s over it’ll be much higher. [28:32]
ALAN: Absolutely. Eric, for many years now on the show you’ve made the point of talking about a speech that Alan Greenspan made in Belgium where he repeatedly said, We stand ready to create money without limit. You really stressed that statement over the last five years as a very important one. It now appears that we’re going to move – if we’re not already moving – into this time frame where government spending will dictate that money will have to be created almost without limit. What Greenspan said could be done. I remember clearly you always seemed to emphasize would be done; and now that is coming to pass. What was it that made you believe so strongly that that day would have to come?
ERIC: You’re right, Al. I tried to look at some general themes so we can try to focus on something, and certainly over the years I did harp on and on about that speech in Belgium. I consider it to be a disclosure. That’s how I look at it. And so now, here we are at the time where, as you said, we’re going to have to create money without limit or we’re going to go into this massive money paper printing process, and you look at the rescues of Fannie Mae and Freddie Mac. But going back to that Greenspan speech, he bought up derivatives (at the time being 110 trillion, and I think that it’s up ten fold from that now – and that was 110 trillion with a ‘t’ right?) So as you look at that type of market and the ramifications for that if something goes wrong, the system can end up in a lot of trouble. That’s why Warren Buffett said derivatives were created and devised by mad men and likened them to hell because they were easy to get into and hard to get out of. I think looking at those factors it became obvious at some point we’re going to have derivatives problems; at some point we’re going to have credit problems, the way that the money pumping was going in the system.
So, as we’re starting to have all of this come together – Jim might call it sort of a perfect storm – and I think that gets back to why people were afraid recently because they really did have to intervene. And I got some emails on this but I speak of the governments of the G-7 had to come in and sort of bring these prices down because we’re about to go into the phase now where we have massive money printing. And so as they run the printing presses and they bail out the Fannie Maes and the Freddie Macs, the banks, and they begin to monetize things – and God only knows what will be monetized on a go forward basis – but I think it puts us in a situation where as Sean Boyd said, as soon as we can get above 1,000 – 1,033 – we’ll start to have gold go to 12 to 1500 and move from there. So I think that the bottom line here is that investors – it’s time for this massive money printing. Did I know this day was coming? You know, the fact that I talked about it for so many years on this show was sort of an indication that I thought it was coming, and now it’s coming to fruition now. So as we go back into this massive money paper printing, the last thing you want to be doing is unloading your gold and silver because longer term you’re looking at much higher prices. [31:23]
ALAN: There seem to be a very large number of physical gold and silver purchases occurring around the globe right now. I was hoping you might share some of your thoughts about this. To me it just seems it a little bit out of the ordinary. I’ve been wondering: what do you think about the situation?
ERIC: You know Al, what I think we’re witnessing here is in real time really a train wreck. The paper markets have dominated the physical markets and this orchestrated drop has generated one of the largest physical buying sprees that has ever happened in history. That’s why three of the top people in the gold industry have their own money invested in the gold and silver markets. Look, Al, what we have is the largest continuous gold buying and silver buying in any gold bull market in terms of time. In previous bull markets before this began, you would see physical off take increase and this would last maybe 24 to 30 months. This time, we have seen seven years of record gold buying. The US Mint has sold more silver Eagles in the first three months of the year than they sold all of last year. The US Mint has also suspended sales of US gold Eagles indefinitely. What we are seeing is melting down now of these 1,000 oz industrial bars on the silver side, and that will be done for fabrication in the secondary dealer market because you do have these two markets where you’re going to have the 10 oz and the rounds and the 100 oz bars and because everybody is hoarding those, the market has disappeared. So now they’re going to have to take these 1,000 oz bars and fabricate them and I think Johnson Matthey was behind 300,000 ounces on the 100 oz bars, and we’re also seeing wealthy individuals at the same time pick up five, six hundred thousand ounces in bulk. These thousand ounces of silver – plus or minus mind you because they come off the COMEX by thirty different people that produce these. Some of them are going and taking them straight from BHP, but the bottom line is these were bars that were intended for industry. So we have the wealthy purchasing by the tonnage, we are now going to see the fabricators begin to take these thousand ounce bars to take care of this demand in the secondary market, and I know of one billionaire who is putting tens of millions of dollars into physical purchases of gold and silver et cetera. So I think investors, if they look at this gold market and they look at the silver markets and really get a handle on what’s happening right now and why maybe some of this decline was halted, it has to do with the demand. And this came out – this is called The Eagle Has Been Grounded and this is from the Wall Street Journal here today:
As gold prices tumbled from their highest level ever, investors and collectors loaded up on one ounce American Eagle gold bullion coins. The buying spree came to an abrupt halt this week after the US Mint stopped selling the coins; the first time since production began 20 years ago. “Due to the unprecedented demand our inventories have been depleted,” the Mint of the US Department of the Treasury said, and have told the dealers Friday, who are therefore temporarily suspending all sales of these coins. The move shocked sellers and collectors of the coins, which are the most widely traded in the US. Suppliers became angry as they turned away customers. [34:21]
Again, you can look at this even in terms of the junior market. When the investors turn to the junior market – which they will – and it will become apparent there are very few high quality junior companies that I think that are out there, and I can tell you, just as they are developing shortages in the physical market the buying of the junior companies in this, say, 25 to 40 dollars per ounce of gold in the ground will not last. That is why you have guys like chairman and CEO, Peter Marrone, who was on the show earlier put almost 100% of his asset sale money from Yamana back in, recycle right back into the sector into the juniors because Peter knows what’s coming. He believes in this bull market and placed his bets accordingly. As Peter said, if you believe in something, you put your own money into it. [35:07]
ALAN: Eric, that’s interesting that you bring up that article in the Wall Street Journal because I read that this morning too. I was wondering because it’s interesting when you think about investor sentiment there because didn’t you get the feel from that article that the price of gold has been dropping, but it seems like the investor response, rather than thinking it’s going to go back down, these people are just lining to buy these gold Eagles as quickly as they can. Did you get that feel from that?
ERIC: I think when these guys orchestrated this or started to orchestrate this and they began to crash gold and silver down, they probably thought they would put fear into people and maybe create some selling, and instead we’re not seeing selling at all, we’re seeing a lot of physical buying and that’s it. I don’t think the people who orchestrated this really planned for that, Al, because usually if you take stocks and start to crash them you’ll generate panic, you’ll generate selling, you’ll get people jumping out of windows – this kind of thing – But the people who buy physical gold and silver are a little different breed. They tend to buy and hold, and so as you get this hoarding – and globally; I mean this is happening not just in the United States but Asia, India, the Middle East, et cetera – so as you get this hoarding begin to take place and you get this massive buying come back in. Over in India for instance – and this is just unbelievable – there’s no gold to be had. No gold. There’s virtually no gold there and it’s gotten worse in this last week. So we’ve had all of this physical buying and we’re really not seeing the product because I think the product is in strong hands, so as the people orchestrated this and thought they would bring it down and create some selling, it’s been totally the reverse and we’re seeing a lot of buying and so we’re seeing the market basically emptied of inventory. And you can still get the thousand ounce bars of silver. Don’t get me wrong. But the question becomes, Alan, that I brought this up with Dave Morgan: Can you start to get dislocation in that market as you have this tremendous off take? And I think if we continue to see this on the silver side and we continue to see such tremendous money flows into the physical silver market taking delivery and this melting down of these thousand ounce bars and these wealthy individuals going and picking these up and vaulting them as well, you could see dislocation in the physical silver market. And we’re not there yet, but who knows, it could be coming. [37:21]
ALAN: Last week, you were on the show with Jim, you were telling people they should seriously consider buying Agnico-Eagle, Goldcorp, Yamana and you made a variety of recommendations, including the gold and silver ETFs (symbols: GLD and SLV). What made you think that was a good time for people to start purchasing these things? I say this because many of the companies you recommended are already trading significantly higher. We are doing this on a Thursday, Agnico is already up 20% from where you recommended it; Goldcorp was up 20%; I think Yamana is up around 16%. What was it that made you feel that this was such a good time for investors to step back in and buy these companies? [37:56]
ERIC: You know, time will tell whether that’s a bottom for this market, but when you look at – and it is sort of a proprietary group of things that I look at, but at a top when we had this market topping off and I was telling people on this network that look, you’re going to see this professional selling of GLD and SLV, which are the gold and silver equivalents on the exchanges; and then as far as Agnico-Eagle and Yamana I was telling people, do not purchase shares of these stocks, and it’s not because I didn’t believe in the story, it’s just things get ahead of themselves in bull markets; this is just what happens. And that was the case in that situation. So one of the other things is you had a lot of people calling for higher prices, and over time they’ll be right but the thing is it was just at that time there seemed to be a group who kinda could outdo the other guy on the higher prices. And then we had 94% bulls on silver on the consensus –highest in history. So there were clues up there as to what to look for in terms of getting some type of a top. Now reverse it. Now you come down. It was the opposite. We had the silver bulls go from 94% to 49%; and I mentioned to John Hathaway, it seemed to me that there were five to eight times as many people down here at these recent lows trying to outdo each other and say gold was going to go to 750. No. It’s going to 727. I’ll do you one better. 650. 600. Maybe some 500s in there; right? And so sentiment was about as bad as I’ve heard it during this bull market, and I was talking to Frank earlier and we talked about the put-call ratios got very extreme. There were just again, looking at all of these indicators – and it’s a bit of an art form, but it just seemed at least a tradable rally was setting up there.
The other thing is, Al, when you are in a secular bull market, you just want to buy the major pull backs because you’re right, I did recommend those stocks again that I was telling people to avoid at the top. And I had recommended Agnico very inexpensively, Yamana in the high twos and low threes I had recommended and that got to 20 bucks as an example, US, basically. So I was telling the investors to avoid those, and do not chase those stocks but down in single digits on Yamana, it’s a pretty strong cash flow story going forward as we move through this bull market. And we don’t know what gold and silver will do on a day to day or week to week basis necessarily, but there’s a case to be built. And now you’re starting to get into fundamentals. Now you’re starting to get into panic, and you start looking at some of the valuations. We had Agnico-Eagle move from almost $84 to $44, so you know, as you start chopping some of these stocks in half – which we had seen – or better than half, that’s probably a pretty good time to take some long term positions in those stocks. Could it get worse? Yeah, maybe. But the thing is you just kind of dollar cost average and you continue to buy the declines. In secular bull markets like in the 70s, we had a nasty correction and people have been talking that recently that took place from 74 to 75 where gold was taken down pretty aggressive. But they were different bull markets in the sense that in the 70s you had gold out of the gate at 600 percent very quickly, and we didn’t really see that in this bull market. You saw kind of a lumbering seven years down the road, and gold had barely quadrupled. So, having said that, I think we could expect the correction to be different as well. So, to answer your question: There were a variety of things, Al, that said that that was a good time to get in, and I’m glad we broadcast that on this network and people got involved and they’re making money on those and some of the traders – they’re in and out of this stuff. They’ll take profits as they go on and the people who are long term are usually just buy and hold. [41:34]
ALAN: Eric, how do you go about accumulating a large position in a quality company? As an example, let’s say we’re talking about the junior sector. Okay. These are companies, they’re not very liquid in general, maybe you could talk for a minute about how you go about accumulating a large position in a quality junior.
ERIC: Well, that’s actually a very good question. Okay. How do you accumulate a large position in a junior? Let me bring in my good friend, Jim Puplava, who is off this week. Jim is a value investor, I’m a value investor and Al, when someone marks something down 50 percent or more – in some of these cases much more – liquidity, because people are panicking, those are the ideal buying opportunities that we look for. That’s how you accumulate a large position in a high quality company inexpensively. So in the case of some of the juniors, I was surprised because on one of them I was able to pick up 50,000 shares in a three-day period, which may not sound like much, but it really is and in that junior because it’s not a very liquid junior; and I think the paper that’s left and the people that own it are mainly very strong hands, so you don’t have many people panicking and selling that. So you can use that as an example. So when you get the panics, and you have something that you want to accumulate, get in there. Go bid. I was hitting offers. I was going bid. I was just trying to pick up as much paper as I could, Al, but not in such a way that you want to have the paper who are making a market in the stock pick up on it because they may start changing the price on you and marking it up a little bit and having you pay more. So, be patient and stay on the bid and accumulate that way. [43:14]
ALAN: You’ve repeatedly mentioned on the show this concept of different time tables and how investors in gold juniors need to be patient because companies, like these juniors, can move on their own time table. Could you just go over that again for a few minutes, this concept of different time tables.
ERIC: Al, when you look at the different time tables, I think that’s a good example in the juniors. Look, companies have announced publicly like a Barrick Gold for instance, we want to start accumulating some of these late stage juniors. Well, they want two million plus ounce deposits they said, and there have been other announcements that have been made, so this is becoming quite public. But let me say this: The problem is that people are going to want to still go start buying juniors and on the quality side these juniors are too depressed, Al. So there’s a little bit of a misconception there, and a friend of mine who’s one of the cofounders of a company Xilan [phon.] and they sold it for two billion with a ‘b’ in cash in the tech run there, but the situation that he said to me was, you know, there’s a misperception on the idea by the public that when stocks are real cheap there’s these likelihoods of acquisitions and he said it’s the furthest thing from the truth because the founders of those companies will not sell them at those prices. So you’re more likely to start to see these types of junior acquisitions in this case as they are being marked up, so they are going to have to double or triple in some of the cases of these quality juniors – the price of those stocks – before they can really go to those founders or those people that have put their blood, sweat and tears into those companies and try to purchase it – pay a premium above where it’s trading at that time. So I think that might a little bit give you an idea of the situation on the juniors. For those acquisitions, they’re going to have to have a mark up period first. [44:48]
ALAN: In 2005, you were on the show with John Embry from Sprott Asset Management, Bill Murphy from GATA – I remember that show particularly because you were very passionate about your belief that people needed to purchase gold and silver, not just as an investment but as a way to protect themselves and their families. I remember you were very concerned about the idea that there could be tremendous inflation going forward in the US, and there could even be hyperinflation. Where are you today concerning that?
ERIC: Well, we have seen that come to pass, we have seen – and Jim has talked about this quite a bit too, with John Embry and Bill there, so there have been people out there I think that have looked at this and have looked at this inflation that’s coming, and I think we’re finally into that now with this massive paper money printing and the fact that we’re having to do all of these things that we’re doing as a country just to kind of keep things – keep the system floating along. So, where am I today? I remember sitting at a dinner one time – I go back – take a little trip back in time and Jim and I were in the San Francisco gold show and I hope Marc doesn’t mind me saying this story, but we’re there with Dr. Marc Faber and we’re talking on the side but he said to me he thought there could be hyperinflation in the United States – which is really ahead of the time back at that time, but probably a good call – and let’s hope, not but that may come to pass. But he said to me, why don’t you and Jim leave the country? And I remember saying, “No, Marc. We’re stubborn. I love this country. I don’t want to leave.” And I don’t know if we’re going to go into a hyperinflation, but I do think we are going to go at least into a very serious inflation over time and I think the odds unfortunately are sort of probably beginning to favor this concept or idea of hyperinflation. And there are a lot of people today talking about deflation, but I think as we go through this and we begin to see the monetization of some of these assets by the United States Treasury and these bank bailouts and a lot of the paper money printing that’s going to happen and what they’re going to do to inflate because really, truly the United States cannot afford to go into a deflation. People may say, well, we had one in the 30s. Yes, but we had sound money back then. We have fiat money backed by nothing today. And they say, well, the Japanese though. The Japanese had a deflation. But the Japanese were savers and in many ways they did have the similar problems in the banking system for sure in terms of the assets spiraling downward and those banks becoming sort of the walking dead. But let me just say about that, the United States is really as a debtor nation not in a position in any way to experience that type of deflation. I think that the powers that be know that; they’re going to turn on the printing presses and they’re going to do what they have to do. And a lot of people say if you turn the printing presses on it doesn’t necessarily mean that you’re going to create inflation because credit may become available but people might not want to use it. There’s more ways…go read Bernanke’s paper on the helicopter drops. If they want to create inflation, they can create inflation. [47:54]
ALAN: You’ve been bullish on silver for quite a while. I know you purchased three tonnes of physical silver when it was in the fours and took delivery of that. I know that you bought gold as well around the 300 dollar range. Where do you think personally that we’re going with these metals. Where are we headed from here, are you still just as bullish?
ERIC: Let’s tackle one market at a time. The silver market I’m particularly bullish on because I do think that there’s potential there for dislocation as we talked about earlier. All of the gold mined in human history basically all of it is above ground right, so it’s available for purchase or sale based on price unless we end up with an artificially depressed price I think like we’re showing at least in the short run right here, and then you get this hoarding and this demand overwhelms what is available for sale. But moving to the silver market, a lot of the silver is just consumed and ends up lost forever. Right. So if you have a keyboard with 12 or 15 or 20 cents of silver in it and it ends up in the dump because it stops working, nobody’s going to go – it’s not economically feasible to go in there and pull that out, so you have this consumption of silver where it’s sort of used and lost forever, and in a variety of other ways it ends up in the dump as waste. So I think because of that – and I think Ted Butler will be proven correct over time – and Dave Morgan and people like that – but I think over time as you see that start to really be felt and people start to realize that this is next to oil truly an incredible strategic resource because you have to have it to industrialize, I think that – and it is money also, so I think you’re going to start to see a very, very, very large move in the silver market that outdoes gold. So could we go over $100 silver? Yes, we can. The old highs in 1980 were 50. We’ve reached those on gold, right, because we got through 850 and we’re having this correction. But on silver the old highs were around the 50 dollar level and there’s this old gold and silver ratio of about 15, 16 to one, so I think that you’re going to see this explosion at some point in silver, and I think you’re going to see it go and pass that 50, say 100 dollar area, so lots of upside there. [49:56]
ALAN: All good stuff. Eric, I know listeners to this show have wanted you to start a newsletter for quite some time. I also know that you’ve decided to go in a little bit of a different direction and instead put together a group of investors to finance some of these undervalued juniors. I know we’ve had a little bit of a rough ride in the gold markets over the past few months, but it’s been particularly rough in the junior sector. Your group of investors in the first offering completed earlier this year are still up over 50 percent, which is quite good – that’s excellent, actually, considering how rough it’s been in the junior market. If investors would like to get in touch with you and join your group of investors to finance some of these undervalued juniors, how would they go about doing that?
ERIC: Well, I’ll just give out my email address like I usually do, which is EricKing5@live.com. [50:44]
ALAN: Eric, thanks for sharing your thoughts on those issues. I’m sure there are a lot of listeners out there – certainly many people that I know that are going to appreciate everything that you had to say, so once again, thank you very much.
ERIC: Well, Al, thank you for joining us here this week. I needed a fill in for John Loeffler hosting the show here as he’s out on vacation as well, and I appreciate you joining us. So thank you.
ALAN: Thank you.
ERIC: That wraps up the Financial Sense Newshour. This has been Eric King sitting in for Jim and John. On next week’s show, Jim has done an interview on the global oil situation with WD Lyle and L. Scott Allen. And in the second hour, John will have the futurist, James Kunstler, as well as Paul Mladjenovic author of Precious Metals Investing for Dummies. Jim and John will be back with the regular show on September 6th. This has been Eric King and it has been my pleasure to sit in for Jim Puplava and John Loeffler today. So join us again next week on Financial Sense.