Chris Mancini's Keys to Successful Gold Stock Picking
The Gold Report www.TheAUReport.com
COMPANIES MENTIONED
Agnico-Eagle Mines Ltd.
Alexandria Minerals
Corp.
AuRico Gold Inc.
Barrick Gold Corp.
Comstock Mining Inc.
Eastmain Resources Inc.
Elgin Mining Inc.
Franco-Nevada Corp.
Goldcorp Inc.
MAG Silver Corp.
Mandalay Resources
Corp.
Midas Gold Corp.
Newmont Mining Corp.
Osisko Gold Royalties
Ltd.
Primero Mining Corp.
Royal Gold Inc.
Silver Wheaton Corp.
Virginia Mines Inc.
Streetwise Reports LLC
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THE ENERGY REPORT
THE GOLD REPORT
THE LIFE SCIENCES REPORT
THE MINING REPORT
07/09/2014
Chris Mancini, an analyst with the Gabelli Gold Fund, spends his days finding
value in gold equities—and he thinks he's found a recipe for success. Take a
long-term outlook, add excellent management, fold in a great project in a
quality jurisdiction with low-cost minable ounces in the ground at a huge
discount to the spot price—et voila! Mancini calls this "optionality" and in
this interview with The Gold Report he says that equities with optionality will
not only survive the downturn but also provide excellent leverage to an
inevitable upward move in the gold price. Check out some rising names in the
Gabelli Gold Fund.
Source: Brian Sylvester of The Gold Report
The Gold Report: Cash has flown out of gold funds and into non-gold equities
during this bear run in gold. What's the current Gabelli Gold Fund pitch to investors?
Chris Mancini: Gold should be a long-term allocation to everyone's portfolio.
Owning gold is an insurance policy against the malfunctioning of the world's
monetary system. The current actions of the world's central banks are
unprecedented. Any investor who is unsure of the ultimate outcome of these actions
should have a larger percentage of his or her portfolio in gold.
We recommend that investors have a certain portion of that gold allocation in gold
stocks. Gold stocks provide income, accretive growth and "optionality." That
optionality is gold in the ground at a discount. Right now investors can buy gold in
the ground, in some cases, at less than $100 per ounce ($100/oz) and if gold goes
to $2,000/oz then they could see that optionality manifest itself in a big increase in
the price of the stock.
TGR: So it's possible to have security and performance in the same fund?
CM: If you pick the right stocks and have that optionality and gold goes up, the
performance of the fund will be really good. By the same token, if gold goes down
and you own some of these stocks, the price of the fund will most likely go down. In
owning a gold fund like ours investors are getting exposure to gold and leverage to
a move in the gold price.
TGR: Gold witnessed modest safe-haven
and inflation-hedge demand in June after
U.S. Federal Reserve Chairman Janet
Yellen said that low interest rates are here
to stay. Should gold investors expect
anything more than a temporary upward trend in gold prices?
" MAG Silver Corp.'s
management has proven
that it can add value."
CM: That depends on the expectation in the markets of where real interest rates are
going. Yellen stated that interest rates would be lower for longer but that was
coupled with data that showed that inflation in the United States could be
accelerating. That shows that real interest rates might become more negative than
they are now. And that means that holding cash is a money-losing proposition
because cash is losing purchasing power. If interest rates become more negative,
that will be positive for gold and it won't be a temporary phenomenon.
TGR: What's your price target for gold through the end of 2014?
CM: We don't have one. Our view is that the price of gold is going to be higher at
the end of 2014 than it is now. And it's going to be higher in 2015 than it will be in
2014 and we're positioning the portfolio to take advantage of that.
TGR: What impact have redemptions from gold exchange-traded funds (ETFs) had
on the gold price?
CM: Last year 900 tons came out of gold
" Mandalay Resources
ETFs and it was a huge contributing factor
Corp. is taking advantage
to the price of gold declining by 27%. Total
of the downturn in the gold
annual gold demand is roughly 4,200 tons
price."
so if the supply from ETFs goes to neutral
then the supply/demand balance this year
should shift in the other direction. This year we've seen a tiny negative outflow from
ETFs, but they've been pretty flat. Inflows into ETFs would be a big positive for the
price of gold.
TGR: How do the inflows and outflows in your fund compare with 2013?
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.
" Virginia Mines Inc. is one
of the best explorers in
China has around $3.7 trillion of foreign
of the best explorers in
northern Québec's James
Bay region."
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.
TGR: What were your impressions of Black Fox?
CM: There's a lot of exploration potential there at depth. That mine was
undercapitalized when Brigus Gold owned it. Primero has a lot of underground
development work to do to get production up to 1,000 tons per day (1,000 tpd).
Once it does, there is potential to go beyond that level. To go beyond 1000 tpd,
Primero must first find more gold at depth and then develop underground. The
company has the capital and it has committed to explore at depth to try to unlock
that potential.
TGR: What stood out at AuRico's Young-Davidson?
CM: The ore body is similar to Goldex and is amenable to low-cost bulk mining but
the grade is a lot better than at Goldex. It's a wide ore body with big stopes, so the
company has put the infrastructure in place to allow the deposit to be mined cost
effectively. The production shaft has been sunk; development work in the upper
mine is mostly complete. AuRico's goal is to go from 2,700 tpd to 4,000 tpd, and
then eventually to 8,000 tpd once the lower mine is fully developed.
TGR: Young-Davidson produced about 120 Koz last year and AuRico has issued
guidance that could be as high as 160 Koz in 2014. Is that realistic?
CM: Yes, that's realistic. The ultimate goal is to get to around 230 Koz/year on a
sustainable basis. Once AuRico gets there unit costs should decline to below
$500/oz from around $700/oz because to get that incremental tonnage it won't have
to add as many underground miners. The mine should reach full capacity by the
end of 2016.
TGR: What are some other equity positions currently held by your fund?
CM: One that we've been buying recently is Mandalay Resources Corp.
(MND:TSX). That's a company that is taking advantage of the downturn in the gold
price. It has two mines that are generating cash flow. One is an epithermal vein
system in Chile, the other is an underground mine in Australia. The company has
done a good job of adding to the life of both mines through drilling. Mandalay
recently bought a project from Silver Standard Resources Inc. (SSO:TSX;
SSRI:NASDAQ), another epithermal vein system in northern Chile. And a couple of
weeks ago Mandalay announced a friendly deal to buy Elgin Mining Inc.
(ELG:TSX), which owns the Björkdal gold mine in Sweden.
TGR: Was that a good deal?
CM: I think so. This is an undercapitalized mine in Sweden that has a lot of
exploration potential. If Mandalay gets the mine up to production capacity and then
creates value through the drill bit again, we will look back on that as a good deal.
TGR: What else are you buying?
CM: Another one that we bought recently is Virginia Mines Inc. (VGQ:TSX). Virginia
has a royalty on what should be one of the best gold mines in the world—Goldcorp
Inc.'s (G:TSX; GG:NYSE) Éléonore deposit in northern Québec. It will become a
high-grade, bulk-tonnage underground mine in a great jurisdiction with a lot of
exploration potential on the entire land package. The gold deposit is getting bigger
at depth and Goldcorp could find another economic deposit on the property.
Virginia's royalty would be attractive to any of the gold mining royalty companies,
including Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) or Royal Gold Inc.
(RGLD:NASDAQ; RGL:TSX). Even if Virginia chooses not to sell, the royalty will
generate lots of cash flow. Hopefully, the company will pay dividends, too. Then
there is the potential that Virginia finds something else that's minable.
TGR: How is Virginia putting its royalty cash to use?
CM: It has the Coulon base metals project that it believes has a very good chance
to be feasible. Virginia is trying to define that project more completely and put
economics around it so that it could eventually become a mine or perhaps another
royalty stream. Virginia is one of the best explorers in northern Québec's James Bay
region.
TGR: What are some other small-cap gold equities that the Gabelli Gold Fund
owns?
CM: We own Comstock Mining Inc. (LODE:NYSE.MKT). Comstock is primarily an
exploration company, but it did a good job of bringing its Lucerne project into
production so that it could weather this downturn relatively well. The company
should be cash flow positive from Lucerne while it explores and defines the Dayton
deposit in Nevada—still one of the most prolific gold and silver bearing regions in
the world. We're waiting to understand the economics of the company's total
mineral inventory in the region before taking a larger position.
Last year Comstock mined around 20 Koz gold. It should increase to around 40 Kt
this year, but the real key is the economics around the millions of ounces that
Comstock has found in the district. Can Comstock become a 200 Koz heap-leach
producer in a great jurisdiction with some underground exploration potential? This
is the Comstock Trend in Virginia City, just south of Reno, that was mined in the
1800s. The city of San Francisco was essentially built from the cash that was
generated from the Comstock mine.
TGR: Do you have other positions in equities with projects in Nevada?
CM: We own Newmont Mining Corp. (NEM:NYSE) and Barrick Gold Corp.
(ABX:TSX; ABX:NYSE). A lot of the value of those two companies is in their
Nevada operations. I think Newmont and Barrick should merge and then spin off
their combined Nevada operations into what would be one of the biggest gold
mining companies in the world. Call it Nevada American. It would be huge. The
market would love it.
TGR: What are some sub-$1 billion market-cap names that you are buying?
CM: We've been buying Midas Gold Corp. (MAX:TSX). Midas has a very good
asset and very good management. Golden Meadows is a multimillion-ounce
deposit in Idaho with an antimony byproduct credit. It should be a long-life, low-cost
operation once built. If and when the gold price does turn around, that's the type of
deposit that the major producers will want to own. There's a lot of exploration
potential there, too.
TGR: What steps is Midas taking to develop Golden Meadows?
CM: Midas has some cash on its balance sheet and is focusing on optimizing the
deposit; it's no longer drilling. It is getting the permitting process started. Once the
gold price goes up, the value in the Golden Meadows project should become more
and more apparent to the market and the stock should do well.
TGR: Some of your largest positions are in royalty companies. Tell us about those.
CM: Our second biggest position is Franco-Nevada. We also have big positions in
Royal Gold and Silver Wheaton Corp. (SLW:TSX; SLW:NYSE). I mentioned
Virginia, and we also own Osisko Gold Royalties Ltd. (OR:TSX), a spinout from the
Osisko takeover by Agnico-Eagle Mines and Yamana Gold Inc. (YRI:TSX:
AUY:NYSE). These companies are perfect examples of being able to survive the
downturn and benefit from it.
Franco-Nevada, for example, purchased a royalty on Midas Gold's Golden
Meadows project. Midas needed some cash so Franco-Nevada bought a royalty on
the property for $15M. Midas survives because it has a very good asset. Franco
benefits by getting a royalty on what could ultimately be one of the best gold mines
in the world. Franco, Royal Gold and Silver Wheaton are taking advantage of the
downturn. And when the gold price turns around, these companies will be
generating more and more free cash flow.
TGR: What are some royalties that give Royal Gold and Silver Wheaton leverage to
a dramatic rise in the gold price?
CM: Both companies have royalties on Barrick Gold's Pascua-Lama gold-silvercopper project on the border of Chile and Argentina. Royal Gold has a sliding scale
royalty that at this gold price would be 5.23% on the gold on the Chilean side of
Pascua-Lama, whereas Silver Wheaton has a stream on 25% of the silver.
It would cost another $4B for Barrick to build Pascua-Lama, even if it gets the
environmental permit and green light from the government, but at $1,300/oz gold
and $21/oz silver the project is not viable. Once it's built it should produce 800
Koz/year gold at zero dollar cash costs (after silver byproduct credits) and should
have a 20-year mine life. It's a great project at a higher gold price.
Both companies also have royalties on Peñasquito in Zacatecas, Mexico.
Peñasquito is Goldcorp's biggest mine and it is currently mining a higher-grade
portion of the mine. The mine also has underground potential.
Royal Gold can benefit if Goldcorp brings a copper circuit into production because it
gets a portion of revenue from all metals produced. If precious metals prices go up,
both companies will immediately start accruing lots of cash flow from those
royalties.
TGR: What about some small gold and silver explorers that you either have
positions in or that you're following?
CM: We like Eastmain Resources Inc. (ER:TSX). Eau Claire, its primary asset, is
just south of Goldcorp's Éléonore deposit in the James Bay region. Eau Claire is a
high-grade deposit that could be mined using open-pit methods. The defined
resource in the open pit is small, but the company has been conducting exploration
drilling for two years and should publish a new resource on that deposit by the end
of the summer. Eastmain could define a deposit that has over 1 Moz gold at
relatively high grades—more than 4 grams per ton. The company hopes it can
delineate a deposit that can produce 100 Koz/year for 10 years at relatively low
cash costs. There is also greenfields potential in Eastmain's land package and the
company has had some good high-grade intercepts at depth. It's virgin territory in
terms of exploration.
TGR: How about a silver play before we let you go?
CM: We own MAG Silver Corp. (MAG:TSX; MVG:NYSE) and we have owned it for
a while. Its Juanicipio deposit is a great asset in Zacatecas, Mexico. I visited the
Fresnillo Plc (FRES:LSE) silver mine and saw the Juanicipio drills spinning up on
the ridge from Fresnillo's Saucito mill. The deposit is a very high-grade epithermal
vein system with further exploration potential.
Fresnillo has been mining in the Zacatecas region for decades. There's almost zero
risk with building the Juanicipio mine because Fresnillo is the majority partner. It
should generate lots of cash once it is up and running. MAG Silver also has
exploration potential in its Cinco de Mayo project in northern Mexico where the goal
is to define another economic silver deposit. It's nice to have a good asset and
management that has proven that it can add value.
TGR: What's one thing a gold investor should know about the current market?
CM: The best thing to keep in mind is that even though this market is extremely
volatile, you're in it for the long term. It was very volatile to the downside last year;
so far this year it's been volatile to the upside. Don't lose hope or exit on a quick run
up. You're getting insurance at a relatively cheap price by owning gold and gold
mining companies.
TGR: Buy and hold still works?
CM: Yes, if you have the stomach for it.
TGR: Thanks, Chris.
Chris Mancini is a research analyst for the Gabelli Gold Fund, specializing in
precious metals mining companies. He has over 15 years of investment
management experience, including research analyst positions at Satellite Asset
Management and R6 Capital Management. Mancini earned a bachelor's degree in
economics with honors from Boston College and is a holder of the CFA
designation.
Read what other experts are saying about:
MAG Silver Corp.
Mandalay Resources Corp.
Virginia Mines Inc.
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IMPORTANT DISCLOSURES
1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report
and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the
following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Comstock Mining Inc., MAG Silver Corp., Mandalay
Resources Corp., Primero Mining Corp. and Virginia Gold Inc. Goldcorp Inc. and Franco-Nevada Corp. are not associated with Streetwise Reports.
Streetwise Reports does not accept stock in exchange for its services.
3) Chris Mancini: I own, or my family owns, shares of the following companies mentioned in this interview: Agnico-Eagle Mines Ltd., AuRico Gold
Inc., Goldcorp Inc., Franco-Nevada Corp., Royal Gold Inc., MAG Silver Corp., Comstock Mining Inc., Barrick Gold Corp., Osisko Gold Royalties Ltd.
and Eastmain Resources Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has
a financial relationship with the following companies mentioned in this interview: None. The Gabelli Gold Fund holds the following companies:
Agnico-Eagle Mines Ltd., AuRico Gold Inc., Goldcorp Inc., Franco-Nevada Corp., Royal Gold Inc., MAG Silver Corp., Comstock Mining Inc., Barrick
Gold Corp., Osisko Gold Royalties Ltd., Eastmain Resources Inc., Primero Mining Corp., Mandalay Resources Corp., Virginia Gold Inc., Midas Gold
Corp. and Silver Wheaton Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my
own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the
content of the interview.
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Chris Mancini - Gabelli Gold Fund – Portfolio Research
The above article is from Streetwise Reports - The Gold Report, published on July 9, 2014. The
article is made available by Streetwise Reports website and is provided on GAMCO's website for
your convenience only.
GAMCO is providing these links as a matter of general information. We do not intend for these
links to be a complete description of any security or company and it is not an offer or solicitation
to buy or sell any security, nor is it a research report with respect to any of the companies
mentioned herein.
As of June 30, 2014, affiliates of GAMCO Investors, Inc. owned 1.24% of Agnico-Eagle Mines Ltd.,
3.09% of Alexandria Minerals Corp., 2.37% of Aurico Gold Inc., 1.68% of Comstock Mining Inc.,
1.47% of Eastmain Resources Inc., 1.15% of Mag Silver Corp., 1.38% of Newmont Mining Corp., 2.3%
of Osisko Gold Royalties Ltd., 1.1% of Royal Gold Inc. less than 1% of Barrick Gold Corp, Franco
Nevada Corp., Goldcorp Inc., Mandalay Resources Corp., Midas Gold Corp., Primero Mining Corp.,
Silver Wheaton Corp., Virginia Mines Inc. and no shares of Elgin Mining Inc. The Gabelli Gold Fund
owned 553,433 shares of Agnico-Eagle Mines Ltd. (representing 8.07% of the fund), 5,500,000
shares of Alexandria Minerals Corp. (less than 1% of the fund), 1,005,000 shares of Aurico Gold Inc.
(1.63% of the fund), 501,361 shares of Barrick Gold Corp. (3.49% of the fund), 500,000 shaares of
Comstock Mining Inc. (less than 1% of the fund), 1,500,000 shares of Eastmain Resources Inc. (less
than 1% of the fund), 504,700 shares of Franco Nevada Corp. (11.05% of the fund), 543,800 shares
of Goldcorp. (5.78% of the fund), 330,000 shares of Mag Silver Corp. (1.19% of the fund), 390,871
shares of Newmont Mining Corp. (3.79% of the fund), 158,660 shares of Osisko Gold Roylaties Ltd.
(less than 1% of the fund), 336,750 shares of Primero Mining Corp. (1.03% of the fund), 167,000
shares of Royal Gold Inc. (4.83% of the fund), 160,000 shares of Silver Wheaton Corp. (1.6% of the
fund) and 50,000 shares of Virginia Mines Inc. (less than 1% of the fund). These securities are not
necessarily reflective of the entire portfolio.
The Gabelli Gold Fund’s share price will fluctuate with changes in the market value of the Fund’s
portfolio securities. Stocks are subject to market, economic and business risks that cause their
prices to fluctuate. When you sell Fund shares, they may be worth less than what you paid for
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have the ability to return the principal investment.
Investments related to gold and other precious metals and minerals are considered speculative.
The Fund may be subject to significant volatility and investors may experience substantial loss of
value in a short period. Investing in foreign securities involves risks not ordinarily associated with
investment in domestic issues. Fund’s concentrating in specific sectors may experience greater
fluctuations in value than funds that are more diversified.
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