CM: At the beginning of 2014 we had inflows into the fund, and then they flattened out. When we had the big one-day pop in the gold price in June when gold went up $44/oz, we actually had outflows from the fund. That might be telling us that we have some people who are playing gold for a quick bounce and aren’t looking at gold from a long-term perspective.
TGR: A recent Gabelli Gold Fund report suggests that Russia may want to diversify its foreign exchange holdings and could look to gold.
CM: Russia has around $500 billion ($500B) of foreign exchange reserves in the form of U.S. dollar treasuries and euro denominated bonds, largely German, French and some other smaller European country bonds. If there is further geopolitical unrest in or around Russia and increased rhetoric from countries like the United States, Germany, and France meant to impede Russia from taking action in places like Ukraine, Russia might get the sense that the United States and other countries in NATO might impose financial sanctions on Russia.
If broad financial sanctions are placed on Russia, then there could be a question as to whether Russia would be repaid by the countries that they’ve lent money to. In a new Cold War scenario, you would think that Russia would want to diversify out of the bonds of those countries and into something else. What else is there? Gold is an answer. Gold is no one’s liability.
TGR: Where is China in the gold demand picture?
CM: Chinese consumers are the largest buyers of gold in the world. That’s related to their fear of holding their currency in the bank or holding it in their mattress. There’s a significant amount of inflation in China, so real interest rates are negative. It behooves the Chinese to diversify out of cash, which is losing its purchasing power. Holding gold is a way to insure against inflation or some kind of issue with the Chinese banking system.
China has around $3.7 trillion of foreign currency reserves. The People’s Bank of China also might want to diversify. If China were to diversify 10% of its foreign currency reserves, $370B, that would be a huge amount of gold to buy, or roughly 3.5 years of the world’s total mined supply of gold.
TGR: A significantly higher gold price would float all boats. But until that happens, what’s your method for picking gold stocks?
CM: We try to own the companies that can survive and even benefit from this downturn and then prosper in the upturn. We look for companies that have good assets, good management and a good valuation. Good assets alone should allow the companies to survive; their management teams should help them prosper. We’re looking to buy these companies at reasonable prices.
TGR: Do you visit mines and mining projects?
CM: Yes. I was recently in Quebec’s Abitibi region where I visited Agnico-Eagle Mines Ltd.’s (AEM:TSX; AEM:NYSE) Goldex and LaRonde mines, and a couple of others.
TGR: Will Agnico ever recoup its capital costs at Goldex after the mine’s underground instability issues?
CM: Probably not its initial capital costs. Agnico should be able to produce 100,000 ounces (100 Koz) a year for a few years at an all-in cost of around $1,000/oz. To get those ounces the company had to spend $80–100 million ($80-100M). It will more than recoup that incremental investment. The company has done a good job of making the best of a bad situation.
TGR: Ore from the Goldex mine won’t last long. There are a handful of explorers working in the area. Do you think Agnico has eyes for one or two?
CM: We own a very small position in Alexandria Minerals Corp. (AZX:TSX.V), which just sold the Akasaba property to Agnico for $5M. Agnico is talking about open-pit mining Akasaba, with the low-grade ore being processed in the Goldex mill. Agnico is in the driver’s seat relative to the explorers now because Alexandria needed capital and Agnico had capital to deploy. Agnico got that project at a really good price.
TGR: What else did you visit in the Abitibi?
CM: I also visited AuRico Gold Inc.’s (AUQ:TSX; AUQ:NYSE) Young-Davidson mine, and Primero Mining Corp.’s (PPP:NYSE; P:TSX) Black Fox. The big thing to take away from the Abitibi is that it is a mining region. There are families there who have been mining for generations.