Why Gold Miners? Why Now?
Plus, much of the world has been in lockdown. Financial markets continue to operate often with spectacular results for investors, some of the greatest opportunities of our lifetime will unfold in the coming years and months. This is not the time to shy away from investment ideas. This is the time to embrace them and investigate the potential for our investment portfolio. We've asked experts from across a range of different markets about why we should invest in them and why now. In this episode, we're throwing the spotlight on gold and gold miners in the world of parabolic fiat money printing. Investors have been rotating into assets such as gold to retain their purchasing power play machines case, the editor of Gold Investment Letter and a thought leader in the gold mining and exploration space. I want to ask Eric why gold miners provide an opportunity for outsized returns and why now is the time to start investing. I believe gold is in a secular bull market and it started under 300 bucks an ounce in 2001. Golden was up for twelve straight years, which is pretty crazy within itself. We've seen a, I think, healthy five year correction. Last summer in 2019, though, gold had a huge technical breakout above fourteen hundred bucks. That was a six year ceiling. Several banks have opened the monetary floodgates and governments have embarked on a fiscal spending spree. Now there are fears of both inflation and deflation. So what are the macro tailwinds for this sector today? The macro backdrop, it's incredible for gold. I think it's going much, much higher, certainly in terms of price in US dollars than most other currencies are well into new high territory already above two thousand eleven levels. It's a space that's very under owned by investors. But we're coming out of the longest the most severe gold mining sector correction in 77 years, which happened from April 2011 through January of 2016. What I think is amazing is that after initially tripling in seven months during 2016, the sector, the gold stocks. They've basically been treading water until now. Jeannie Ex just finally broke through 2016 highs in March. Gold did so last summer. And smaller exploration and development companies are still trading near 2015 bear market lows. It's a big, big disconnect on the value side. Over the past decade, gold miners are down twenty five percent. And you look at the same thing with the S&P, which is triple. We only have one company in the S&P that's represented in the S&P 500 is a gold company, and it's Newmont Mining. So there's very little exposure abroad, especially with this passive investing bubble that we're we're involved in now. And the economics of drastically changed with seventeen hundred dollar gold. You know, these are companies that have tightened their belts and had to keep them tight for a very long time. Now we've got energy costs that are falling and plummeting, which is their their biggest cost. Higher gold prices that nobody's been modeling in. Certainly, I don't think any analysts on the street had sixteen hundred dollar gold into their projections for Q1, for example. But if you go back to even like late 2018, investors had it. They had a glimpse of what was starting to happen when the Fed was unwinding their balance sheet. The gold miners were up twenty three percent from their summer lows and the S&P corrected 20 percent into the end of the year. So. Forty three percent difference in performance until the Fed Reserve reversed course. But over the trailing 12 months from today, GDP X is up 75 percent versus three percent for the S&P. So how much longer is the big money going to ignore that? I don't I don't think they're going to ignore that for for long. And I think that the Q1 numbers are going to start to get even further attention in the space in this environment we're in. Goldminers actually have earnings growth. They're heavily discounted on the future cash flows. If gold goes to new highs, which I firmly believe that it will in the US dollar, who's got that modicum that these numbers? And the thing with the miners is the leverage they have, the massive leverage to the gold price because they have fixed costs. I'll give you an example. Newmont Mining, which is the company that is in the S&P 500 in late April. They increase their quarterly dividend by 79 percent, while obviously many sectors were just getting smoked or bailed out on May 5th during their Q1 earnings release, which they handily beat, they stated that they can produce a billion dollars a year in cash flow at twelve hundred dollars gold. But every one hundred dollar increase in the gold price gives them an additional 400 million annually in cash flow. That means that at seventeen hundred all gold, you're talking about three billion dollar cash flow, which is tripled from their projection at twelve hundred, and that's on a 40 percent increase in the gold price. That just shows you the power of the leverage on the upside in these markets. And, you know, again, you just have to consider that these these are these groups have been having to model in surviving and trying to make money between eleven hundred and thirteen hundred other gold for seven years. I also wanted to understand how gold acts as a store of value and helps to protect investors and ultimately consumers against the deterioration in government finances. Anyone who does not own gold at all, especially in this environment, just simply doesn't understand its function. The gold price since 1971, when it was obviously linked from backing the US dollar, is up 50 fold in 50 years. I don't think many people realize that. In addition, it's also compounded at over eight and a half percent the year over that same timeframe, the almighty U.S. dollar. You need over six times the amount, approximately two in dollars to purchase the same goods. People tend to measure gold's performance against equity markets, which is fine, but its primary role is as a store of value. You know, it maintains its purchasing power over time against fiat currency dilution. And it's done this for millennia. We've got exploding deficits in the US, obviously around the world, but we'll focus on the US. Falling real rates is always a big driver for gold and huge debt monetization view currency debasement and printing. The last thing that I think is, is something you have to throw into the mix for gold is any loss of confidence in governments will will drive demand for gold as well. You know, this whole it doesn't pay interest crowd. We'll even consider it now that they're going to have to pay 100 basis points or two an hour basis points for a 30 year note in fiat currency. That's if they're lucky, going to be worth half as much at the end of that duration in terms of purchasing. Power. If they're lucky. The average gold mining sector bull market has return. Four hundred and forty percent. That's going back to the nineteen forties. And they've lasted as long as almost 400 weeks, which is seven years. The current cycle that we're in, though, and the gold miners, which began in January 2016, is tracking most like the two thousand to two thousand and eight bull cycle. And also the nineteen sixty to sixty eight market. Both of those cycles peaked up over six hundred percent around 370. Right now we're two hundred and twenty weeks in and we're up under one hundred percent. We're up just over 90 percent versus the 600 percent average in those two markets. And they track very, very similarly. So the big juice in the miner move, I believe, is it's it's just ahead of us. And I also am a big believer in the perennial principle, you know, so 80 percent of this move should come in the last 20 percent of its duration, which is also exactly what happened in those two other timeframes. There are retest and indices on goldminers. But I asked Eric to outline a couple of individual gold mining equities that highlight the excellent opportunities that can be found within the sector in the gold investment letter. Yes, we cover producers, bigger companies, but we go down into the ghetto of the exploration juniors, you know, very, very tiny market caps. The two examples I give today are somewhat in the middle. They're both New York Stock Exchange listed trowels, stock exchange listed market caps between one hundred and five hundred million bucks. So their potential moves could be much greater than GDP X, for example, which is the main gold miner ETF just as of early May. We're starting to see some bids down in the bottom of the market. So we'll see if this continues. But the first deal I'll talk about, I think is very interesting. And it's a little leveraged development stage company called International Tower Hill Mines. They already have 18 billion dollars worth of golden reserves and resources in the ground, over twelve million ounces. Nine in the reserve category, which is important because it gets a higher value to untaken further. There's been more work done on that. And so the per ounce valuation on the ground should actually be fairly significant because of the stage. It's actually the largest gold only deposit in North America. That's not wholly owned by by a major mining company. It's beyond the pre feasibility stage. They've done tons of work on this thing. There's been like almost 800 holes that have been drilled on this project. When they calculated in the last study, the nine million ounces in reserves was done at twelve fifty gold. This 12 million ounce resource total is probably over 20 million. So the issue with the livingood deposit they have in Alaska. It's really simple. It's lower grade on the gold spectrum. So everybody's known that they need fifteen hundred dollar gold to get into the conversation of somebody who's going to get serious about building a mine here. But, you know, the net present value juice on this thing would in a rising gold environment is insane. It rockets up 15 X with just a point seven X move in the gold price. And I'm using this from their one of their slides showing the move from fifteen hundred to twenty five hundred dollars gold. And, you know, the stock was over 10 bucks in 2011. The asset was much, much smaller. It's trading like gold still at twelve hundred bucks. But this is probably one of the two cheapest stocks, I think in the other in the entire industry. But when you look at it, even though it's the quote unquote penny stock, they have over a hundred billion dollar market cap. They are exchange listed. So it's not a tiny little TSX view company. And the other thing you have to consider is the smartest money in the sector owns over half of the company. I think this is a temporary anomaly with symbol T HMD in the US trading at these prices. And ultimately, it's going to retest and we'll see what happens. My view is it'll even explode from the 2011 highs at some point. That's a lot of potential data on that name. And you'll notice that it's been basing for about five years, you know, ready for that breakout move. The second one is, is a deal that I've followed since 2006 called McEwen Mining symbol marks on the New York Stock Exchange and also on the TSX. I followed this thing where earlier on in my gold gold mining. Investing career and upon the news that Rob McEwan, who his name's on the door at McEwen Mining, was coming into his shell with just three Nevada based exploration projects. It went from pennies to ten bucks. Very quickly, lagoon's really well respected in the space because he grew Goldcorp from a really small, less than 50 million dollar market cap to multiple billions of dollars. And it was during the nineteen ninety three to 2004 timeframe. And that particular market was not so good until around 2002. Investors, though, that were with him during this during his tenure, they made a 31 percent annual compound return after the 2006 POB. Then we had the 2008 crash. I literally recall sitting at my desk at that point. It was called U.S. Gold Symbol. You actually and I was partially filled on a limit order at 38 cents a share, which is where it bottom ticked. Within two years of that bottom, it hit 10 bucks again. Then during the really bad bear market, the worst in seventy seven years that we had from eleven to sixteen, it hit a low of sixty four cents in late 2015. And then we did have a big run in the gold miners in 2016 into the summer and the stock went to five bucks. Now it just hit a low last month of fifty three cents. So this is way back down to other lows that we've seen in crisis situations. They've got five operating mines now versus back in those other days, it was it was either nil. I think in 08 they were just starting their first mine in Mexico. They've got four projects that are in the pipeline for new new mines. And this is a huge deal. Rob McEwen owns 20 percent of the company and he literally wrote checks for one hundred and sixty four million dollars to get that stock. So his cost average is about two bucks a share. And the stock right now is just below a dollar. He takes a dollar salary per year. And the only way that he gets any value is is by shareholder appreciation. In the back pocket of McGoo, in which people are giving no value to, is one of the largest undeveloped copper assets in the world. That's called losses. Euliss in South America. The aftertax NPV on this thing is two point two billion dollars. That's assuming Kopper's at three bucks and it would have a 36 year mine life. Plus, there's a lot of room for growth. It's huge. McEwen's entire market capitalization is 400 million bucks right now. And now with the seventeen hundred gold price, I'm very confident they'll be profitable going forward. And just this loss of Zulu's is a monster, and it's likely worth more than the entire market cap of mux. You know, the CEO is a world class operator. This thing isn't going anywhere. He's a billionaire. It go back to ten like it did twice before when they had 10 through a third of the assets they have now. I think so. And, you know, just like the International Tower Hill, depending on how high gold goes off, gold goes to new highs down to nineteen hundred and change, which I'm confident that it will. We could see it go even higher. So these are the type of risk reward situations that we're seeing in the space as you go a little bit down the ladder. What I try to do is we dig a little bit deeper in terms of the market capitalization of some of these companies that can have some real data and talk in a gold bull market, because the beauty of the gold mining industry is, is the leverage in a in a rising environment. And some of these smaller stocks, I mean, this is where you get the comps to Bitcoin, because if you go down to the junior realm, these are not small companies with tiny investors. They have huge asset bases with some of the smartest money in the world owning most of the companies. And just to go back to their old highs are going to be 10 to 13 X from where they are today. For those two to stop. But if you go even lower into the juniors, which are trading, you know, for some 50 million dollar, twenty five million, 10 million dollar market caps, you know, these are the type of stocks that in the 1970s and even then the move in the early 2000s. Twenty five fifty one hundred baggers, they occur and they'll occur again. So, you know, that's why it's an exciting space in the mining area vs. just gold. We're gonna have an entirely new generation of people when gold goes over two thousand bucks an ounce to new highs. They don't know anything about the space. They don't know who Rob McEwen is. They don't know about Electrum group. They don't know, you know, any of the players. Eric Sprott, the ones that Ross Beaty, the billionaires, the big players in this space that you want to bet alongside of. Lundeen ISM names that people don't know. We've had essentially a seven, eight year bear market that's happened up until now. And some of the valuations are very ridiculous here. And it's a great time to take a look at the space because, you know, things are cheap. What are the most important questions always around timing? I wanted to know how far this thing could run and its potential investors could be in danger of being left behind. We see adoption in the waves, in secular and cyclical bull markets and bear markets, you have value people that come in early after something's been decimated. Usually in phase two, you start to see the smart money, the smartest money, the institutions that come in. And then in phase three, you have the blow off top retail brokers, different folks that are chasing, you know, the action. What we've had happened in the last year or so with that technical break out, Gold's Ray D'Alessio, Paul Tudor Jones, Stan Druckenmiller. Peter, to you, these guys were smart money, right? They are very, very significantly positioned in gold and are typically early to the party. They're not linked. It's literally just getting started. The train is just leaving the station in terms of gold, silver as well, which is historically ridiculously cheap in terms of the silver to gold ratio and in particular the mining stocks. If you're not paying attention to it right now, the risk is gold to twenty five hundred thirty five hundred in a year and you're paying attention to it after these stocks have already gone up 70 or 10x. And you'll think they're safer, but they're not. There are clearly many tailwinds for gold. The aggressive money printing by central banks could now accelerating further the loss of purchasing power for many currencies. Today, institutional investors with their considerable firepower are beginning to engage with the sector for the gold miners. This opportunity is still in its infancy. These are stocks that have been overlooked in recent years. But when gold gets going, the miners can move multiple times further than the underlying commodity. So I haven't looked at gold miners before. Now could be an excellent time to engage in the sector in order to avoid the disappointment potentially being left behind.