Adrian Day of Adrian Day Asset Management is a seasoned investor, speaker, author, and adviser. In this interview, Adrian shares key takeaways from the Beaver Creek Precious Metals Summit and Denver Gold Forum. He also addresses CPM Group CEO Jeffrey Christian’s recent statement that the junior mining sector is dead. Adrian discusses Osisko Gold Royalties’ purchase of Barkerville Gold Mines and offers his thoughts on how he’s managed his gold portfolio in the past five months.
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0:05 Introduction
2:02 Key observations from Beaver Creek Summit and Denver Gold Forum
11:21 Is junior mining dead?
16:10 Osisko Gold Royalties purchase of Barkerville Gold Mines
18:41 How have you managed your gold portfolio in past 5 months?
21:32 Gold bull market without industrial metal bull market?
22:44 Overlooked commodity you are bullish on now?
TRANSCRIPT:
Bill : We’re going to be talking about the resource markets today with one of my favorite people, a veteran resource manager, Adrian Day of Adrian Day Asset Management. Adrian, thanks for coming back on Mining Stock Education and could we kick it off by you sharing some of your key observations from the two recent conferences, the Beaver Creek Precious Metals Summit and the Denver Gold Forum, please.
Adrian: Yeah, absolutely, and thank you, Bill, for having me. Both shows, both conferences were very well attended, I thought. There was, among the investors, what I would think of as a realistic optimism. I think perhaps the more interesting thing to talk about would be some of the approach if you want all the sentiment among the mining companies themselves. Beaver Creek, of course, tends to have more junior companies, a lot of exploration companies, and those companies will be having meetings both with investors but also with more senior companies looking for assets.
A lot of the exploration companies where I think extremely optimistic about the number, the interest from more senior companies in their projects. But I think, frankly, to some extent, that was misplaced optimism. I mean, for example, just as a hypothetical example, this is not referring to any particular company, a senior or mid-tier mining company operating in Mexico, in silver, is going to look at every silver exploration project. But companies have in Mexico, it doesn’t mean that they’re necessarily going to make an offer to the company next week. And I think a lot of the juniors got a little carried away at just how many meetings they had with the seniors. Nonetheless, there’s no question that the major companies, major and second-tier are looking. There’s no question about that because one of the fundamental themes of the gold business remains and that is there aren’t enough good quality gold or silver projects around.
The senior mining companies, companies producing anywhere from a million to 5 million a year, have to replace those ounces and that’s not an easy job. So they’re always going to be looking. But the interest this year I think was, definitely a little higher. At the same time. I would have to say that the producers generally were taking a pretty cautious approach on M&A; frankly, on a lot of things. They were taking a cautious approach despite the increase in the price of gold. On M&A, no question, but among the senior companies and the second tier producers; by second tier, I’m talking about big companies like Yamana or B2 Gold, I’m not yet talking about the juniors; Among the producers, there was a lot more talk about assets. In aggregate, there were a lot more assets to sale than there were people ready to buy.
The comments you got from a lot of people was just how few quality assets there were. They had looked at this, they had looked at that. They thought this would be a good synergistic buy fit because it was next door or whatever. When they dug deep, they found problems. That I think was a theme that came up a lot, a lack of quality projects. Sorry, this answer will probably be the longest of all, because it’s not really observations on Colorado, but it’s sort of observations on the way the business is thinking. That was certainly one thing.
I think the other thing is that the mega mergers we had last year, Barrick-Randgold and Newmont and Goldcorp, both companies said they would be disposing of non-core assets. We’ve had very few, very little of that come onto the market yet. I think a lot of potential buyers of assets are probably waiting to see what comes out from Barrick and Newmont because that’s a sort of a one-off opportunity, if you know what I mean. If you’re looking at some exploration play that’s developing a project in, wherever, Peru and you like it and you’re interested, you’re watching it, well it’ll probably still be the six months or a year from now. If Newmont wants to spin something off, it’ll be a one-off. Okay. So I mean a lot of these companies are really just waiting to see what assets come from Barrick and Newmont.
I mentioned a sort of generally conservative, if you want, or businesslike might be a better word, approach; and it wasn’t just M&A. It was with the prices that are being used, not so much for [mineral] reserve reports because there’s various rules that they have to follow on that. There’s some flexibility, but there’s still rules that have to be followed. But companies that were looking internally at projects as to whether or not they should be developed, some of them were still using $1,250/oz gold and in fact, in one company I was at, one of the people said to me, “We’ll probably increase that to $1,300.” The CFO said, “No you won’t. $1,275 at the highest.” I mean, that was sort of interesting when we’ve got a $1,500 gold price.
I think people have been hurt before, both developing projects…when gold moves up, developing marginal projects, they’ve also been hurt with, just like investors, with the gold price going up and then falling back. Overall, there’s a more, you can call it what you like, conservative businesslike rational, but certainly, certainly not rational exuberant, irrational exuberance yet.
Bill: Two of the adjectives that other people I’ve had on the show recently have used were “disciplined” and “positive” to describe the sentiment at those two conferences.
Adrian: Absolutely. Disciplined would be another word for what I’m saying. Conservative, businesslike, yes discipline, definitely, no question. People were not, and whether it was the exploration companies or the producers, they were not running around like crazy yet. Obviously, people are positive on the gold price. I mean, it’s nice to see the gold price up and there was, certainly, some optimism, no question about that. I think, generally, a more cautious optimism or rational optimism if you like. Having said that, I mean, I think a lot of people definitely felt that gold had turned, and I certainly agree with that. I mean, I’m very optimistic on the gold price. I think we just sometimes expect too much from gold. So when it goes from $1,300/oz to $1,500/oz in four months or whatever it is, we sort of expected to reach $2,000/oz by the end of the year and that obviously may not happen. I think sometimes we expect too much. But I think definitely gold as turn for a lot of reasons, primarily the monetary factors. We’ll see higher prices at the end of the year and next year, in my view.
Bill: Adrian, I’d like you to respond to a recent quote. I believe this quote comes from an article in the Financial Times. Jeffrey Christian, who is the chief executive of the CPM group, which is a metals statistical and advisory service was quoted as saying, “Junior mining is dead and I have been running CPM Group for 33 years. And for 32 of those years, we were talking to people about investing in mining companies or metal. Now institutional and retail investors are simply not investing in junior mining companies because they have lost money at it for so long.” What’s your response to this quote here?
Adrian: Well, I have the highest respect to Jeffery, by the way. No, I don’t really agree. I think time will change that. You know, as human beings we all tend to forget things fairly. We forget lessons fairly quickly. I think there’s no question and that at the moment, investors are not looking at the junior sector, because they’ve not just lost money; they’ve lost, as Jeffrey knows, they’ve lost a lot of money. The juniors, it’s easy to lose 80 or 90% of your money in junior gold mining stocks. I mean, I know for a fact, because I have some accounts transferred to me from people. They’ll say to me, “It used to be a million, but it’s probably a couple of hundred now.” Of course, when I get it, it’s nowhere near a couple of hundred. It’s $80,000 or something. I mean, so people have lost significant amounts of money.
Those people won’t come back anytime soon, but a lot of them are hanging in because they want, they think, they want to get the money back. Those people are not going to be adding money and so on and so forth. Then you also have the phenomenon of dad lost half his money in the gold market, and the kids, when they inherit, they’re not going to do the same thing. I don’t think this is permanent. I get back to the thing that I said earlier. I’m not going to talk about peak gold or running out of gold or anything like that, but it is becoming increasingly difficult to find major deposits, big deposits. The statistics show that they hold that up over, not just over the last couple of years, but over 15 or 20 years of a number of large deposits that are being discovered is going down, is trending down. In the last few years, significantly down.
It’s not a matter of just a lower gold price, so people aren’t looking. You can look at the amount of money that’s being spent around the world on looking for gold. Last year, of all the nonferrous metals spending, half of it was on gold, looking for gold deposits. Gold, of course, is nowhere near half of the size of the whole non-ferrous metal market. People are spending money looking and they simply are not finding. And yet the company that’s producing 3 million ounces [per year] has to replace those ounces just to stay where it is. Very, very, very few companies, in any sector, will have a deliberate plan to shrink the business. Very few companies want to do that. Sometimes, they grow unnecessarily for growth sake just to get bigger. But even if they’re not planning on getting bigger just to get bigger, they don’t want to shrink. And because it’s a depleting asset mining, you have to replace those ounces. It’s very, very difficult. Most major mining companies no longer have exploration departments. It’s astonishing.
During the downturn from 2011 for the next several years, companies like Barrick, Newmont, lots of them, they just got rid of their exploration departments and they rely on the juniors who have become the sort of exploration arm of the seniors. The juniors, admittedly, a lot of exploration companies will raise too much money, spend too much money, most of it on G&A and salaries. The salaries are extremely bloated for exploration companies, in my view that don’t produce anything, as a rule. But anyway, the point I’m making is that the juniors will explore, and when they have a discovery, money will flow back in. There’s no question about that in my mind.
Bill: Adrian, you like the royalty model and we’ve actually done a webinar together where you talked about the royalty model. One of the royalty companies, Osisko Gold Royalties, has just made a bid to acquire a Barkerville Gold Mines. They already own 33% of the company, but now a royalty company wants to buy this development company. What are your thoughts here? I mean, is this kind of like deviating from the business plan to where investors could rightfully look at Osisko and say, “Hey, that’s not what I signed up for?”
Adrian: I think so. Now, Osisko of course has always been a hybrid royalty with their incubator or accelerator model where they put large amounts of money as in Barkerville, they own 33% of the shares as you said. They have this incubator model where they put money and large amounts of money into exploration companies to help them drill and being sort of either on the board or certainly, lending technical assistance or whatever, so more than just passive investors. It’s always been a bit of a hybrid. Yeah. I think I have two thoughts on the subject. One is I think the deal for Barkerville may indeed turn out to be a very good one. They’re getting it at a good price, about 0.6 of net present value for a development project isn’t too bad. And Sean Roosen, the CEO of Osisko, and his team are very, very good. They’re aggressive, but they’re very good mine developers and builders. Let’s face it, they built the Canadian Malartic, the largest gold mine in Canada in the last whatever, 15 or 20 years. They’re very good at this. That’s number one.
Number two, however, yes it deviates from royalty model. People buy royalty companies because of the low risk model. When you buy a junior mining company and aim to develop the project, you remove that low risk aspect. I think it may be a good deal for Osisko, but definitely Osisko does not deserve to and will not trade at the sort of royalty multiples because it’s just isn’t a pure royalty anymore. But it’s cheap now in my view but sell-off is overdone.
Bill: In the last five months since gold has been rising, Adrian, is there anything different that you’ve done with your gold portfolio or what you’ve recommended to clients or were you pretty much positioned already in advance of this move and you just left your portfolio alone?
Adrian: Well, to a large extent the second but the change, yes, there’s definitely been some changes. That is we’ve jumped on some of the senior stocks, a bit, we’ve jumped on some of the senior stocks that we think will benefit, be the initial beneficiaries of the gold move. We all know this but remember when gold moves and when it begins to move, typically, the senior companies move first and then the junior producers. The exploration companies really don’t move at all for quite a while until the market’s well developed. We’ve seen that already. The exploration companies that have moved in the last six months have been ones that have had a specific development, either a great drill hole or whatever. But there’s been a specific positive development and they will move on that; no question.
Whereas two years ago, companies could put out good news and people took it as an opportunity to sell the stock. Now it’s different. Good news is responded to. What I call the good company with good people doing good work, but without any particular news, they hadn’t benefited from this yet at all. The irony, of course, Bill, and I mean we’ve talked about this before I think, maybe not online, but the irony is that at the beginning of the bull market, sometimes, the stocks that do best are the stocks of the worst companies. By worst, I mean high cost of production and high debt. If you have high cost of production and high debt, you have much more leverage to a rising gold price than the company with below cost of production and no debt.
And so at the beginning of a bull market, those stocks will sometimes do better than the stocks of the good quality companies. That doesn’t last because typically, what I’ll very generally call a bad company, remains a bad company even when the gold price goes up a couple hundred dollars. Certainly, at the beginning of a bull market, leveraged companies and the senior producers will move first. We try to sort of move into some of those, as opportunistic plays, yeah.
Bill: Adrian, this question, I’ve asked a couple of recent guests and it is, do you believe that we could have a really nice gold bull market but not see the industrial metals are come along so that it wouldn’t be a full natural resource bull market, but it would just primarily be a gold bull market?
Adrian: Oh, absolutely. I mean remember, I mean everybody listening knows this, but gold and then to a lesser extent, silver and platinum and palladium respond to certain factors, but the base metals don’t respond to. Now, there are certain factors that they all respond to – a lower dollar, etc.; higher inflation. But there are other factors that gold will respond to that the base metals won’t. We’re sort of in that environment now where we have a slowing global economy. We have concerns about deflation and of course, at the same time, we have the money supply exploding like crazy. So that’s very positive for gold, but it’s not so positive for copper, for example, or any of the other base metals.
Bill: Outside of gold, are there any metals that are maybe less followed or even some sort of area of natural resource investing that you could share that you might be poised for an upswing?
Adrian: There’s no question. I’m most positive on gold right now as a risk reward, no question; and silver, secondarily. But to answer your question, I still am very favorably inclined to copper. I just think you might have to wait a couple of years, but if you look out say three years, there’s very, very little doubt in my mind that there’s going to be a supply deficit, which means higher prices, and that supply deficit is going to come not from an increased demand necessarily, but it’s going to come from a shortage of large scale production, mines, coming on stream to replace the depletion of the mines that are already producing. So copper I think would be my main one. Some of the others I’m a little less optimistic on in the near term, to be on this, like uranium. I mean 10 years from now, yes, it might wonderful. Five years from now it might be, but I don’t think there’s any particular rush. Some of them we’re just slowly accumulating, but copper would be the one I’m most favorably inclined to.
Bill: Adrian, as we conclude, could you share your contact information if listeners would like to reach out to you?
Adrian: Oh, it’s very I kind of you. It’s Adrian Day. The company is Adrian Day Asset Management and the website is AdrianDayAssetManagement.com, and the email is assetmanagement@adrianday.com.
Bill: I always appreciate your insights, so thanks for joining me on Mining Stock Education today.
Adrian: Well, thank you! Thanks for having me!