Gold had a banner year in 2020. In your view, what were the most compelling reasons for this?
We think gold is in a cyclical bull market which started in 2018. With the outbreak of the COVID-19 pandemic, the liquidity in the general equity and fixed income markets virtually imploded and investors had to come up with immediate collateral to cover their leveraged bets – which turned into big losses. We think these events have been a wake-up call for many market participants and they show how fragile the current financial system really is.
As a response to the panic, central banks around the world have flooded the markets with liquidity. But investors are recognizing that throwing more liquidity at an increasingly insolvent system does not fix the underlying problem. Consequently, investors have continued to add to their gold position as a tailwind hedge, should the next liquidity problem appear. Gold is an unlevered asset class with no counterparty risk whereas central bank money is the product of debt, which can be expanded in infinite ways.
Central banks are not done yet and will continue to print and, with governments now backstopping the loan market by guaranteeing all sorts of COVID-19 stimulus and green loans, the newly created digital money is finding its way into the economy and is now pushing inflation rates up. In this regard, 2020 been an inflection point for gold as it became very clear that reckless central planners will use any measure at their disposal to expand their debts while simultaneously inflating it away by creating exponential growth in the broad money supply.
You are a long-term shareholder of Victoria Gold Corp. (TSX: VGCX) (see full profile on p.100), and the company’s Eagle Gold Mine produced strong results last year. Please explain a little about your investment strategy for Victoria Gold.
We have been investors in Victoria Gold for many years. The company developed the Eagle mine in Yukon, which is Canada’s newest gold mine targeting an annual production of approximately 200,000 ounces per year. Following the Yukon mining euphoria around 2010, the territory was considered by many as a new mining frontier. However, the challenges of operating in such a remote area, with its short spring and summer seasons, have clearly been underestimated.
Back in its heyday, prospecting gold companies in Yukon, such as Kaminak Gold Corporation or ATAC Resources Ltd (TSXV: ATC) gained a lot of attention from the seniors, including Goldcorp and Barrick Gold Corporation (NYSE: GOLD; TSX: ABX). But ten years later these projects are still not being developed. During gold’s down market, Yukon lost its appeal. However, and luckily so, Victoria Gold did not engage in any M&A transactions and maintained its corporate flexibility. This allowed the company to develop its Eagle project while simultaneously exploring new targets in its Dublin Gulch district. Despite some initial production hiccups in Q4 of last year, Eagle is now ramping up to commercial production and we expect the stock to rerate which will hopefully allow Victoria to pay off its project debt as quickly as possible. Over the longer term we consider Victoria Gold to be a takeover target.
You are portfolio manager of the Precious Capital Gold Mining and Metals fund. What do you look for when investing in precious metals companies on behalf of the fund?
We have always favoured the mid and small-cap companies for multiple reasons. Our strategy really is to identify miners who trade at inexpensive valuations and offer investors with near and long-term operational catalysts to increase the valuation over time. In our view, a gold company should not be considered as a proxy to gain leverage on the gold price, because leverage works both ways – either up or down. Therefore, our focus is on companies with “high-impact” projects which create incremental value regardless of where the gold price is trading.
Whether it is a good drill hole, a solid mineral resource estimate, or a series of good quarters which provide cash flow to fund other projects internally without shareholder dilution, we view that such milestone developments should primarily drive the share price, whether gold is trading at US$1,400 or US$1,800. Therefore, our strategy is really more about internal idea generation rather than buying fully priced companies which are typically constituents in ETFs.
How important is geographical location to the way you select companies for the fund, such as a focus on Canada or Australia?
For any new mining project, jurisdiction is key to minimize permit and execution risk, and therefore we stick to countries with a proven mining and permitting regime where things can get done. However, we also feel that there are interesting new frontier markets which are less known to the investment community, but where mining has always played a key role historically for economic development. Companies operating in such areas typically trade at discounts to their better-known peers, which is attractive from a valuation standpoint.
Over the longer term, we think this gold cycle is still in a fairly immature stage and has a few more years to run
There’s been a lot of discussion recently about balancing ESG compliance and shareholder expectations in mining. What is your view about how to find equilibrium?
ESG in mining – and potentially in most other industries – is really more a marketing-driven concept and has little to do with corporate strategy and execution. A successful mining company is always required to operate as a good corporate citizen and will use best corporate and environmental practices to save energy and limit environmental liabilities. ESG in our opinion is just a new label for something that should be in the DNA of any mining company.
Do you foresee another strong year for gold in 2021, or do you think it will be more subdued compared with last year if there is less market volatility?
In the short-term we see headwinds for gold from a stronger U.S. dollar and the changing cycle in the bond market where yields have recently seen a significant pickup. Nevertheless, gold is showing remarkable strength given these two forces working against it, but we think investors will remain on the side-lines and watch these developments closely before entering new positions. Over the longer term, we think this gold cycle is still in a fairly immature stage and has a few more years to run.
