By B.P.T., on April 18th, 2011
From whitehouse.gov:
In his State of the Union Address, President Obama promised that this year, for the first time ever, American taxpayers would be able to go online and see exactly how their federal tax dollars are spent. Just enter a few pieces of information about your taxes, and the taxpayer receipt will give you a breakdown of how your tax dollars are spent on priorities like education, veterans benefits, or health care.
I think this is a great idea, since it will clearly show the priorities of our federal government, so I went to the site and entered my information. Once I had done that, I entered information for several other common scenarios, and found a problem:
Oops! Given that over 40% of American households pay negative income tax, it seems unfair that they wouldn’t be able to use this calculator. Someone should tell the White House about this accessibility error, since I am sure they would like every person in the nation to be able to use this handy tool, and not only those with a positive income tax bill.
By B.P.T., on April 18th, 2011
At 10:00 AM EDT, the Housing Market Index for April will be announced. This index is created from a survey of home builders, so it shows the confidence that the sector has in the overall economy and their business.
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By Simon Grey, on April 15th, 2011
As reported by ABC News, what started out as a program to hold unclaimed property, such as the contents of safety deposit boxes owned by people who have moved away without a forwarding address, has gone wildly out of control. The program is now using the flimsiest of excuses to drill safe deposit boxes and sell the contents, often for below-market value, the proceeds going to the state’s general revenue.
In a case reminiscent of the Monty Python organ donor skit (or perhaps the movie Repo Men), a San Francisco woman’s jewelry appraised at over $80,000 was sold even though she lived a few blocks from her bank, had not moved, and was current on all of her box rental feeds. In another case, a man’s retirement savings consisting of $4 million of stock certificates were sold; and “A Sacramento family lost out on railroad land rights their ancestors had owned for generations”.
There’s a reason why some have said that giving power and money to the government is akin to giving whiskey and car keys to a teenager: It’s because the government can be counted on to do wildly irresponsible things when given more power and money. Is it guaranteed to do so? Technically no, but history demonstrates, yet again, that the answer is a resounding yes. As it stands, it is simply best to deprive the government of as much power as possible, for it is certain that the government will abuse it.
By The Energy Report, on April 15th, 2011
There’s more to fertilizer than potash, according to Windermere Capital Managing Director Brian Ostroff. He touts the value to be found in phosphate and offers his take on how the unrest in Africa, environmental concerns, global food prices and basic geology drive the phosphate market in this exclusive interview with The Energy Report.
The Energy Report: Brian, please start by sharing Windermere Capital’s investment philosophy.
Brian Ostroff: Windermere is an investment manager. We currently oversee two hedge funds with a natural resource focus. The Breakaway Strategic Resource Fund and the Navigator Fund are both offshore hedge funds based in the Cayman Islands. They are open-ended funds designed for high net-worth individuals and institutional investors. They are quoted on the Irish Stock Exchange, but subscriptions are done directly with the fund. Most of the people here have technical backgrounds as opposed to a financial or capital markets background. We have two partners in our fund—Ocean Partners, which is made up of the former ores and concentrate trading team at Pechiney and Peter Hawley and his group. These guys have all been in the business for +30 years, building and operating mines.
The other area where we think differently from other funds is that we are active investors. We tend to take fair-sized stakes in the companies in which we get involved. Then, we try to help the company going forward by making additions on its board, perhaps helping it operationally, assessing its assets and either helping the company divest or find other assets.
Finally, we are extremely value oriented. We tend to look at a company and assemble a peer group. We try to understand why a given company is trading considerably cheaper than similar operations, and then we identify the issues and how we could close the gap. After that, we have a discussion with management to see that we’re all on the same page. Once again, we are active—not activist. We have a meeting of the minds and when everyone is comfortable with the business plan, we tend to make our investment.
TER: Would you tell us about the differences in your two funds?
BO: The Breakaway Strategic Resource is mining only. Due to the technical expertise to which I alluded, the fund can make investments anywhere along the spectrum. Originally, we looked to buy distressed assets, even outright buying the properties or the mines. We do structured debt through our partners and offtake deals all the way through outright investment in the company’s equity. I like to describe Breakaway as a complete “rocks to stocks” investor.
TER: And what about Navigator?
BO: Navigator is all natural resources. Aside from mining, it also does energy and agriculture, paper and forest, etc. Its investments are primarily in publicly traded equities; however, we do have some room for near-public investments (i.e., those that we think can go public within about six months).
TER: Aside from precious metals, does the Breakaway Fund invest in other mining operations?
BO: We tend to have a place in our portfolios for niche commodities, or what I call the funky metals. That would be strategic metals, not necessarily rare earth elements (REEs) but things like graphite or vanadium.
We’ve become fairly involved in phosphate, which is a necessary component of fertilizer. Currently, potash is on the minds of most agricultural investors as the area has done very well. I think we may be going into a time when people will start to look at phosphate. There are a couple of important things to understand in the world of phosphate. First, there are two types of phosphate deposits. Most—probably 90%—are sedimentary; the rest are igneous.
Most of the world’s production comes from the sedimentary deposits. But they tend to have a lot of nasty contaminants in them. And due to the mineralogy of the sedimentary deposits, the concentrate that comes out is not as high as the concentrate that you can get out of igneous deposits. That can be a confusing factor for people who are not that familiar with the industry and the types of deposits. People will look at a 25% sedimentary phosphate deposit, and then look at an 8% igneous phosphate deposit and come to the erroneous conclusion that the 25% deposit is better than the 8%.
TER: But you would make a better margin on the igneous because you don’t have to purify out all the cadmium and uranium and such, right?
BO: Right. A sedimentary deposit might start at a 25% grade, but when you beneficiate it, you’re not going to get much higher than the low- to mid-30% range. Whereas, because of the mineralogy, you can beneficiate an 8% igneous deposit as high as 40% grade. What you really have to look at isn’t your starting grade, but rather what the concentrate will be and, ultimately, the price you will be able to get for the product.
The other interesting thing about the world of phosphate is that, right now, China is the largest producer, but it doesn’t export. The biggest player in the world of phosphate export is Morocco. Morocco comprises roughly 35% of the entire phosphate export market, which really makes the country the swing factor. Other players in the space include Jordan, Tunisia and Egypt. Given the turmoil in North Africa, that could present a big problem to the world.
Right now, North America runs a deficit in phosphate. We have to import it now and will continue doing so for the foreseeable future. Canada, while rich in potash, only has one operating phosphate mine—and that mine will probably deplete within the next two to three years. The other big phosphate areas in North America are Idaho and Florida. Both of these are sedimentary-type deposits, which brings environmental issues into play. In Florida, environmental problems have brought shutdown threats. One Florida mine operated by The Mosaic Company (NYSE:MOS) was shut down. It currently has a stay of execution, pending appeal. But, if that were to close, it would only exacerbate the deficit that North America runs.
In terms of pricing, phosphate is very different from things like gold and copper, which have a global price. Gold is gold and it’s at or above US$1,450/oz. everywhere in the world.
TER: You can’t arbitrage gold.
BO: Correct. Gold coming out of Chile, Australia, South America or Canada will get the same price in the open market; whereas, phosphate is a negotiated market. Contracts and things like location, transportation and quality of the concentrate are going to be the driving forces. That means pricing on all phosphate is not the same. The closest thing that we have to a benchmark is Moroccan FOB (freight on board), and that’s roughly US$150–$160 per ton.
At the end of the day, it all comes down to what’s the investment opportunity in phosphate? Our current view is that the world is quite aware of potash; potash stories have done extremely well and are actually quite numerous. Now, people are waking up to phosphate—and there are nowhere near as many opportunities in phosphate as there are in potash.
As investors start to understand the importance and the dynamics of phosphate, there will be increased investor demand. With considerably fewer situations to look at relative to potash, even a small shift out of potash into phosphate will have a pretty significant effect. I anticipate the sector, as a whole, will perform quite well.
TER: It also serves as a nifty hedge against falling dominos in North Africa.
BO: Absolutely. Supply security has become an increasingly important investment theme. Certainly, in the case of phosphate, it would be very important.
TER: Where does an investor take advantage of this opportunity?
BO: There are several names in the phosphate sector. Our fund is a large investor in a company called Ressources d’Arianne (TSX.V:DAN; OTCBB:DRRSF; Fkft:JE9N), more commonly referred to as Arianne Resources Inc. The company is based in Québec, so that addresses the security of supply. And it has easy access to the deprived North American markets.
As North American phosphoric acid producers for fertilizer start to look for more phosphate deposits in North America, Arianne will be very well situated. It’s close to infrastructure; an overload road that currently carries timber runs right through its property. It is within easy trucking distance of both a deep-sea port and the railway.
Arianne has an igneous deposit that yields a very pure concentrate, near 40% grade. The company already has a scoping study and it’s drilling to expand that resource. Arianne should have its prefeasibility report out sometime this summer and the original scoping study shows very healthy economics on this project. Actually, we find it is more advanced than most of the phosphate stories out there. It currently trades with just a US$60M market cap. This goes back to the question of where Windermere finds value. Relative to its peer group, Arianne is definitely at the bottom end with what we consider a superior asset.
TER: How long have you owned it?
BO: We’ve owned it for a little less than four months.
TER: Arianne’s stock is up almost five times over the past six months. Any stock would be due for a pullback after that. Yet, you still see this as a value play?
BO: Absolutely. For us, value is a relative matter. So, although the stock has performed very well and is up about fivefold over the last few months, it also has pulled back about 40% from its highs. Arianne has a US$60M market cap. The closest peer would be somewhere around a US$130M market cap, ranging all the way up to about a US$300M market cap.
TER: Arianne Resources produces many different metals in addition to its phosphate division, but you’re saying that phosphate is the mover, the catalyst for this company.
BO: Yes, Arianne owns exploration assets in other commodities but its main focus is the phosphate deposit. That is where the company is focusing 100% of its energy.
TER: In the first half of February, we saw some really unusual activity in Arianne’s shares; in fact, it was so pronounced that the company put out a press release saying it had no knowledge of any material change. Was this a manifestation of home gamers, day traders, do you think?
BO: No, I think what happened was that, when the agricultural cycle started to heat up again as a whole, people started to take a look at Arianne in light of our investment. They came to the same determination that we had, which was, relatively speaking, this company looks really, really cheap. As the stock started to appreciate, it gained momentum. More people saw the name and took the time to understand the situation. That continued to drive it.
TER: There was a lot of press at the end of 2010 and continuing into 2011 about the rising cost of food all over the world. I know that had an effect on fertilizer stocks—both phosphate and potash—but there was also anticipation of Lac à Paul deposit results. Do you think that could have been part of it, as well?
BO: Certainly, Arianne put out some results. Those numbers will be reincorporated into its resources numbers associated with the prefeasibility study. Previous drilling in that zone had been done only to 200 meters. The drilling that came out in February was down to the 400-meter level and showed the continuity of the deposit.
TER: Does Arianne own any of its own supply or processing chain?
BO: No, the company is in exploration mode. I think the prefeasibility study will start to determine what needs to be done to put this thing into production.
TER: And therein lies the value.
BO: Yes.
TER: Do you have another name for us in the phosphate sector?
BO: Yes. Going a little further down the chain, we are currently in the process of making an investment in a company called Glen Eagle Resources Inc. (TSX.V:GER), which is very, very early stage. Drilling on its property isn’t set to commence until sometime this summer. The company picked up a property, Lac Lisette, which is 40 kilometers away from Arianne’s property, attached by the same main road. Preliminary results from some grab samples seem to indicate a similar type of deposit; but, of course, until the drilling is done, it is a bit of a question mark.
TER: Obviously, you saw something in it that you liked. In fact, your investment philosophy is to be early.
BO: Glen Eagle’s proximity to Arianne, the fact that it is an igneous deposit in the same general macro-phosphate and proximity to infrastructure are advantages. And given the North American deficit in phosphate, we think there would be room for a couple of quality assets in that area.
TER: Those are a couple of good phosphate stories, Brian. Thanks for your time.
Brian Ostroff joined Windermere Capital, Inc. in 2009 and is a managing director. His area of focus is the junior and mid-tier mining sector. His previous experience includes a stint as a proprietary trader at a major Canadian bank and four years trading on his own. He also worked at the M&A advisory firm Goodrich Capital, where he was the Canadian managing partner overseeing mandates across a spectrum of industries with a focus on display technologies and mining. He worked at RBC Dominion Securities, where his focus was on smaller-cap special situations and alternative investments. Brian is a graduate of the University of Toronto. He can be reached at bostroff@windermerecapital.com, 514-908-4202.
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By B.P.T., on April 15th, 2011
At 8:30 AM EDT, the Empire State manufacturing index for April will be released. The consensus is that the index value will be 17.5, which would be the same value as reported in March.
Also at 8:30 AM EDT, the Consumer Price Index report for March will be released. The consensus is that CPI increased by 0.5% last month, with a 0.2% increase in CPI when food and energy are removed.
At 9:00 AM EDT, the Treasury International Capital report for February will be released, showing the flow of capital in and out of the United States economy.
At 9:15 AM EDT, the Industrial Production report for March will be released. The consensus is that there will be an increase 0f 0.6% in production and an increase of 1.0% in industrial capacity utilization.
At 9:55 AM EDT, Consumer Sentiment for the first half of April will be announced. The consensus is that the index will be at 69.0, which would be an increase of 1.5 points from the level reported in the second half of last month.
By Winton Bates, on April 14th, 2011
I think individual autonomy should be viewed not just as a factor contributing to human flourishing but as a factor that is integral to it in the same way that good relations with other people and a feeling of competence are also integral to human flourishing. It seems to me that the nature of humans is such that they cannot achieve their individual potential for psychological growth and enjoyment of life unless they have control of their own lives.
That judgment is not beyond dispute. For example, Richard Kraut has suggested that individuals may sometimes benefit from being coerced to prevent them from harming themselves. I considered that argument here.
In this post I want to consider another possible argument against autonomy, namely that some people may prefer to have their autonomy restricted because they have difficulty in coping with a great deal of freedom of choice and control over their lives. There is some experimental evidence that beyond some point an increase in the range of options may make it more difficult for consumers to make choices – they may even prefer not to make a choice if the choice set is too large. Does this mean that people have less satisfaction with their lives when they feel they have a great deal of choice and control over the way their lives turn out?
No! At least that is the answer suggested by the research of Paolo Verme, using a large data set drawn from the World and European Values Surveys (‘Happiness, Freedom and Control’, 2007). Survey respondents were asked to rate on a scale from 1 to 10 ‘how much freedom of choice and control you feel you have over the way your life turns out they had over the way your life turns out’ where 1 means ‘none at all’ and 10 means ‘a great deal’. When this ‘freedom and control’ variable was included in a statistical analysis to explain life satisfaction it was shown to be more important than other significant variables, including subjective health and income.
I have done some research of my own using data from the 2005 World Values Survey to explore the relationship between ‘freedom and control’ and happiness and life satisfaction. The charts shown below have been constructed using data from about 80,000 respondents in 57 countries. In each chart the sum of the columns in the depth axis (happiness or life satisfaction) is 100%. So, for example, looking at Figure 1, you will see that the percentage of people who are ‘quite happy’ is higher than those who are ‘very happy’, ‘not very happy’ and ‘not at all happy’ irrespective of perceptions about freedom and control. The chart suggests, however, that people are much more likely to say that they are very happy when they perceive that they have a great deal of freedom of choice and control.
 A comparison of Figure 1 and Figure 2 suggests that there is a much stronger relationship between ‘freedom and control’ and life satisfaction than between ‘freedom and control’ and happiness. This makes sense to me. A well-treated slave might say that she is quite happy, even though she has little freedom, but she would be much less likely to say that she is satisfied with her life.
In case anyone is wondering, as discussed here, there is evidence that perceptions of freedom or choice and control from the World Values Survey are correlated with more objective indicators of freedom.
By Simon Grey, on April 14th, 2011
Students who attend Chicago’s Little Village Academy public school get nothing but nutritional tough love during their lunch period each day. The students can either eat the cafeteria food–or go hungry. Only students with allergies are allowed to bring a homemade lunch to school, the Chicago Tribune reports.
“Nutrition wise, it is better for the children to eat at the school,” principal Elsa Carmona told the paper of the years-old policy. “It’s about … the excellent quality food that they are able to serve (in the lunchroom). It’s milk versus a Coke.”
But students said they would rather bring their own lunch to school in the time-honored tradition of the brown paper bag. “They’re afraid that we’ll all bring in greasy food instead of healthy food and it won’t be as good as what they give us at school,” student Yesenia Gutierrez told the paper. “It’s really lame.”
Having eaten my share of school lunches, I can say with a high degree of certainty that there is no way that any lunch students bring from home is worse than the garbage schools pass off as food. Yes, it’s possible that parents send highly processed junk food with their children. But how is that different than the highly processed non-food that schools serve?
There is plenty of junk food available at every grocery store, so parents can still make sure that their children eat plenty of non-nutritious garbage at lunch, if they so desire. Of course, going this route is more economical than buying a school lunch, for it provides children with the same empty calories, just at lower prices. That’s probably why home lunches were banned: the school’s food supplier wanted a monopoly in order to make more money.
Of course, it’s entirely possible that some parents actually sent nutritious lunches with their children. If that’s the case, the school is actively working to destroy kids’ health.
And so we see how the government works: it creates a lose-lose situation for parents, for now parents must subject their children to higher-priced, less-nutritious lunches. All in order to ensure that someone can make a little extra money. Ain’t it grand?
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By The Gold Report, on April 14th, 2011
Not long after a New York Times headline quipped, “Now the Gold Rush Is to the Exits,” Campbell & Lee Investment Management Cofounders, Bruce Campbell and Joe Lee, hung out their shingles in Oakville, Ontario. That was late in 1999. With the price of the precious metal (PM) sinking toward its lowest level since 1975, when the U.S. abandoned the gold standard, the new investment management company had no reason to focus on PM companies. Obviously, as Bruce tells us in this exclusive Gold Report interview, the company has since shifted its focus.
The Gold Report: Tell us a little bit about Campbell & Lee Investment Management.
Bruce Campbell: We provide investment management for individuals. We have continued the same positive, long-term track records we had at larger places but because we are smaller, we can have more fun and be a little bit more nimble.
TGR: So, you give your clients at least some exposure to gold in their investment portfolios?
BC: Yes; in fact, we have the highest percentage of gold and silver in our equity model portfolios that I’ve had in my 35 years—approaching 15% at the moment. It’s primarily gold with some silver spread out among five or six holdings at any one time.
TGR: That’s a huge change from when you started your business because, at that time, the gold price was headed downward.
BC: The complete bottom might have been $240 for a short period. To show you how the business has changed, at that time we had a minimal gold weight. Anecdotally, I remember visiting Geomaque Exploration Ltd. at its San Francisco mine, a small, low-tech, heap-leach mine in northern Mexico just a couple of hours drive over the border from Arizona. At that time, gold was at around $270/oz. and the company’s costs were about $230; so, it was eking out in survival mode. The mine shut down shortly thereafter and Geomaque was taken over, but it sounds as if it’s worth bringing it back with gold at $1,460 now. I understand that Timmins Gold Corp. (TSX.V:TMM), which formed in 2005 to acquire the San Francisco Mine, is resurrecting this property now and expects to start producing later this year.
TGR: Until the last few years, gold served mostly as an insurance policy in investment portfolios. It didn’t appreciate much, nor did it depreciate greatly. But with gold’s 30% or so rise in 2010, investors are now increasing their exposure and expecting large returns from their gold holdings. What do you tell your clients when it comes to investing in gold and silver?
BC: That’s a great question and one that all investors should ask themselves. There are a few components to consider. One, the aspect of portfolio insurance remains valid—particularly post-crash; late 2008 and early 2009 is the first time we raised our gold weight. Two, we’re now starting to see inflation creep back in, at least as a possibility; so, gold is a nice hedge that way.
With the rise in the gold price, I’m also searching for companies that can raise their production substantially so that I’m not depending solely on the price of gold for the higher stock price. A high gold price becomes a great bonus and produces some really, really high returns; but, given the run we’ve had, what if we go sideways for awhile? You want good operators who’ve figured out how to grow a business or are discounted in the market due to some previous problem or whatever the combination might be. With these companies, you can make money in a flat gold environment or make a ton of money in an up gold environment.
TGR: On April 6, gold popped above $1,460/oz., hitting a new all-time high of $1,476.20/oz. two days later when silver hit a 31-year high of $40.63/oz. These levels bring a lot of media attention and buying interest from large funds. Will that “hot money” and renewed retail interest add volatility to the precious metals markets?
BC: I think the answer is yes. In that same period, when gold and silver went up a little bit more each day, the stocks were all down; so, you see this volatility even inside the equities market versus bullion. In other words, the stocks aren’t necessarily tracking the price of the metals closely—and haven’t been for awhile. Once the market recognized that the stocks were lagging, a number of the stocks went up 5%–7%. First it was the larger caps, and then the juniors as investors got around to them.
The direction is up here. There will be some momentum and fast money players saying, “Gold goes through $1,500/oz.,” but it probably won’t be without huge volatility.
TGR: One reason for the $30 spike that drove gold up to $1,460/oz. within a span of 24 hours, apparently, was the euro’s strength against the U.S. dollar (USD). That seems odd, given that Ireland is being bailed out with Portugal next in line, and we’re hearing more about sovereign debt problems in Spain and Italy. What does all of this tell us about the USD?
BC: I think it was a weak-dollar story as opposed to a strong-euro story that triggered that price spike. It’s the same with oil. It’s been around $105 per barrel lately, but the Canadian dollar got through CAD$1.05 today. That’s more a weak USD story than the Canadian dollar being dragged up—and it’s not just the Canadian dollar, but also the Australian and New Zealand dollars and the Brazilian real. The euro happens to be caught up in it, as well. All the nice alternatives to the USD are strong. If you looked at the price of gold in euro or yen, you’d see the chart’s not nearly as compelling as it is in U.S. dollars.
TGR: With political instability in the Middle East, inflation creeping into developed world economies, a $1.4 trillion U.S. deficit and monetary debasement, is this the “perfect storm” for gold?
BC: To have all of those things going, yes, I believe it is. But just in case that perfect storm reverses somewhat, I think investors should be buying gold producers that will be growth companies. It wouldn’t deter a long-term story but gold going down $100–$200 would be a normal pullback. Were it do that and stay down, you’d want companies that can grow their way through it by producing.
TGR: You’ve said that, typically, equities rise 4% for every 1% increase in the gold price. Is the opposite true?
BC: That has been the historical case, but it’s not been working quite to that extent lately. In the last year or two as prices have gone up to the stratosphere, that relationship has broken down. Some days it’s something like 1.5%, not 4%. It’s just that they’re not going up as much. And one of the primary reasons for that is because costs are rising more significantly than normal. The price of oil is up, which is the highest single cost for a gold producer, followed by labor costs. With oil up, the gold producers aren’t benefiting to the extent they would normally benefit.
When dollar-related strength causes gold to pull back along with oil, the gold producers tend to go down more than the gold price. It’s an instance where they probably shouldn’t, but the initial reaction would be as we saw with the recent $100 pullback. The stocks went down more than they should have just on the basis of the historic relationship.
TGR: Beyond the factors you’ve already mentioned, how do you determine which equities you pick and which you leave on the shelf?
BC: In contrast to non-mining/non-PM companies, where price-to-earnings (P/E) and price-to-book (P/B) are things to consider, in gold companies we look for price-to-net-asset-value (P/NAV), which encompasses the current value of all of the production coming out of mines, minus the cost. That gives us a feel for a company’s potential growth and upside. Gold stocks tend to trade on anticipated higher gold prices, increased production growth, increased reserves or a combination of all three.
TGR: Any other metrics you watch?
BC: We also consider price-to-cash-flow (P/CF), which is more of a look at the value of current production. This removes non-cash items (depreciation, etc.) and simply measures the cash being generated relative to the stock price. Generally, companies with a low P/CF are discounted for either geopolitical risks or lack of growth potential.
We look at the balance sheet, too. Depending on their size, it’s easier for companies to raise money right now. Juniors, certainly, have been doing a lot of that. As far as senior companies, they don’t have to raise new equity that way if they’re doing a takeover. I guess Kinross Gold Corp. (TSX:K; NYSE:KGC) might be the last one of size, after taking over Red Back Mining.
TGR: Any other important considerations?
BC: The production profile has become key for us right now, as well as the ability to replace production. The really big guys—the Barrick Gold Corp. (TSX:ABX; NYSE:ABX) types of the world have to consider this. If they produce 8 million ounces (Moz.) this year, they have to pull 8.5 Moz. out of their mines next year to show growth—that’s a lot. A small producer can mine a fraction of that and show growth.
TGR: What’s the story on that Red Back acquisition?
BC: Kinross is another rerating story, and I think it’s now the cheapest senior by far. The stock is probably a full $5 to $7 undervalued on a $15 base, but it looks as if it’ll be fine. The company just took analysts and investors on a tour of Tasiast, the Red Back mine in Mauritania, in the western region of North Africa. It’s already started working down the $900/oz. it paid for the mine, which is very expensive relative to, say, Goldcorp Inc. (TSX:G; NYSE:GG) getting it out of the ground for $190 (net of byproduct credits).
We think it will take until this fall to fully prove it up; but having proven a bunch of extra reserves up so far, it’s off to a good start. The company probably has to find up to 40% more to get that $900 number down to something more reasonable.
TGR: Where do you come by that Goldcorp figure?
BC: Goldcorp just announced the results of an updated feasibility study for the Cerro Negro project in Argentina, which it gained through its acquisition of Andean Resources last fall. This update indicated average gold production of approximately 550,000 ounces (Koz.) per year during the first five years at a production cost of $190 (once you factor in the silver byproduct credit). If you do this in gold terms, at $1,460 minus $190, it’ll make $1,200/oz. for the gold with silver as a bonus. And as I’ve said, the seniors have lagged a little bit; so, there’s some value there. Goldcorp is as cheap as it’s been for a couple of years.
TGR: You recommended a small-cap stock among your top picks in a February interview with BNN, indicating that it would be a $7 stock by year-end if gold prices remained static. Clearly, prices have been anything but static. How do you feel about that pick now?
BC: That’s Argonaut Gold Inc. (TSX:AR), and I still very much like the company. Since that BNN interview, I met with management when they were in town and spoke to them again at the quarterly conference call a couple of weeks ago. Argonaut fits all those parameters. It has growing production; in fact, by 2013, it probably will be four times what it was in 2009. Argonaut will double in production this year, and then double again over the next couple of years. If you put that together with my $7 target, Argonaut would still be a discount to net asset value (NAV). And it’s the only gold producer I can find that trades at such a substantial discount; the seniors trade at premiums. If AR was to trade at a premium, it would be an $8 or $9 stock.
TGR: Why, in your estimation, is it trading at a discount?
BC: The market cap is roughly $400 million; so, it’s under the radar for a lot of large investors. It’s also relatively new; the management team that built up Meridian Gold over the years and sold it to Yamana Gold Inc. (TSX:YRI; NYSE:AUY; LSE:YAU) in 2007 has come back to do it again. Basically, the company is only about one year old and has already acquired Pediment Gold; so, it now has a second producing mine coming onstream. Here I am spreading the word, as are some others, but I’d say probably 80%–90% of senior, large investors in North America still haven’t heard of it.
TGR: Currently, Argonaut’s only producing mine is El Castillo in Durango, Mexico, correct? How much production should we expect from that operation in 2011?
BC: We’re looking at somewhere in the range of 70–75 Koz. I believe El Castillo’s number for 2009 was 30 Koz.—so there’s your first double. And as I said, the management team has a chance to do again what it did at Meridian. I wouldn’t be surprised to see Argonaut do another small acquisition before year-end that may take that 75 Koz. higher, or at least have something with additional production to bring forward before the Pediment Mine comes in 2013.
TGR: So, we can look forward to further growth. That’s great. You also imply a preference for precious metal producer versus explorer equities. Could you talk about some specific mid-cap equities where you continue to see value?
BC: Sure. One example, which we bought last summer, would be Allied Nevada Gold Corp. (TSX:ANV; NYSE.A:ANV). It fit all the criteria and was a discount to NAV. The company is in Nevada and has one producing mine and an exploration project a little ways west of that mine. Another criterion that I failed to mention earlier is that you want good finders—good drillers. On that score, Allied Nevada has proven up so much in extra reserves that the stock has gone wild lately. It’s obvious that the company has a whole other mine with a large silver content. So, the stock is trading at about $36 on the Toronto exchange and $37.46 on AMEX now. We bought it last June at $19, so it has doubled for us, and we continue to hold it.
TGR: You mentioned silver there.
BC: On the silver side, we’ve owned Great Panther Silver Ltd. (TSX:GPR; NYSE.A:GPL), which had a nice run. We currently own Tahoe Resources Inc. (TSX:THO), which is doing well with the old Glamis Gold management team from before Glamis was taken over by Goldcorp. This team has come back around again, and it’s doing well with a silver project in Guatemala—that one’s also pretty good.
TGR: Any other companies you want to mention?
BC: Minefinders Corp. (TSX:MFL; NYSE:MFN), with a market cap of almost $1 billion, is expecting greater production of both gold and silver from its Dolores Mine in Mexico just across the Arizona border. The company has overcome some operational problems that made 2010 a pretty challenging year; so, its stock, which had been lagging and looked quite cheap for a long time, has perked up lately.
IAMGOLD Corporation (TSX:IMG; NYSE:IAG) is another one. This midtier producer’s biggest mines are located in Quebec, Guyana (South America) and West Africa. We thought it had the best short-term growth of players in Africa and that’s proven true. The stock has done well.
TGR: Could you quickly map what you see as gold’s path between now and the end of the year, if not year-end 2012?
BC: My crystal ball gets hazier the further out you go, but I believe that the perfect storm we were talking about earlier will allow a $1,500/oz. price tag on gold at some point this year. We have a bit of momentum here, so I think we might see that—it’s only a couple of percentage points away. After that, what’s next? Unless there’s some further disaster, I don’t see why it wouldn’t just keep going. Of course, nothing goes in a straight line; so, it would make a lot of sense for both gold and silver to pause—maybe go sideways—and have gold end the year at $1,550/oz. or something like that.
TGR: And if you go further out?
BC: If you go into next year, I think the key will be the U.S. economic recovery. If it’s strong enough to take higher interest rates, Canada raises rates and rates start to go up generally, it makes gold less attractive because the dollar will be stronger. But it’s also because the costs of holding gold will become higher. That’s when you could see a pullback. To me, that’s more likely than a doomsday scenario; so, currently, I don’t think gold will see $2,000/oz.
TGR: Ever?
BC: No, just in the relatively near term. We’ll have inflation over the next few years because we’ve just postponed it with all this liquidity in the system. With inflation, gold will climb its way upward over the long term, but I don’t see a 20%–25% lift right away.
TGR: Thanks so much for your time and insights, Bruce.
Bruce Campbell is a money manager with more than 35 years of experience. The research, portfolio construction and buy-and-sell strategy that he brings to his work produces above-average returns. Bruce began his career as an investment analyst with CIBC and Ontario Hydro, after which he joined Royal Trust Capital Management. As senior vice president there, he managed more than $10 billion of Canadian and U.S. equity money for pension plans and mutual funds. He subsequently served several years as chief investment officer and partner with Nisker Associates. For the past 11 years, Bruce has been president and portfolio manager for Campbell & Lee Investment Management Inc., which he and Joe Lee cofounded. He earned his bachelors degree from McMaster University in 1976 and a masters in economics from York University in 1981.
By B.P.T., on April 14th, 2011
At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 380,000 new jobless claims last week, which would would be 2,000 less than the number released last week.
Also at 8:30 AM EDT, the Producer Price Index for March will be released. The consensus is that the index increased 1.0% over last month, and increased 0.2% when food and energy are excluded.
At 10:30 AM EDT, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.
At 4:30 PM EDT, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
Also at 4:30 PM EDT, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
By Simon Grey, on April 13th, 2011
“He thinks it’s fundamentally wrong for a society to pin people’s best hope for a better life on something that is by definition exclusionary. “If Harvard were really the best education, if it makes that much of a difference, why not franchise it so more people can attend? Why not create 100 Harvard affiliates?” he says. “It’s something about the scarcity and the status. In education your value depends on other people failing. Whenever Darwinism is invoked it’s usually a justification for doing something mean. It’s a way to ignore that people are falling through the cracks, because you pretend that if they could just go to Harvard, they’d be fine. Maybe that’s not true.”
The question is, why doesn’t Thiel make it possible for anyone who wants to go to Harvard to be able to do it? After all, Thiel has made his fortune disrupting other hidebound institutions. Making it possible for motivated individuals to get the same quality of education that exists at the nation’s best universities without having to attend them would be the kind of disruption that would fit into Thiel’s social views and his economic ones.
We know from past history that highly motivated persons exposed to a quality education system will self-select for success. New York’s fabled City College is only one example.
The mistake that Barry makes here is that he mistakes schooling for education. Signaling theory holds that schooling exists primarily to show employers that one who has been schooled (as evidenced by possessing a diploma) is a superior candidate for employment. The more people that possess a diploma, the more the signal is distorted, and the less valuable schooling becomes. This is basic economics, for if supply increases more rapidly demand, the price will necessarily drop all else being equal. Schooled labor is no exception. If every worker has a Harvard diploma, a Harvard diploma necessarily becomes worth less. And the workers that possess said diploma are also worth less.
On the other hand, receiving a Harvard-level education is desirable. This doesn’t necessarily make it valuable, at least in the sense of getting a better-paying job, but it is desirable nonetheless. The mistake that Ritholtz makes, then, is that he views education as an investment when it should properly be viewed as a consumer good. Thus, the difference between schooling and education, though subtle, is important: schooling is an investment; education is a consumer good.
Within this framework, it becomes easier to analyze whether one should go to school and get a diploma. If one wants schooling, then one simply has to weigh the costs of college (including opportunity costs) against the benefits of college. If one wants education, one merely weighs the costs of college against alternative educational systems. I would imagine that college is the less desirable option in both cases, since college-educated workers are seeing their real wages decline while tuition costs are rising. Additionally, public libraries contain a wealth of information and are considerably cheaper than college.
Education is good, as is schooling. It doesn’t stand to reason, though, that one must go to school in order to be educated. It is likewise foolish to think that the laws of supply and demand don’t also apply to schooling. As it stands, it is generally best to recommend that young people spend more time in the library and less time worrying about getting into college.
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