Ryan McIntyre is a Portfolio Manager at Tocqueville Asset Management L.P. He serves as a Co-Portfolio Manager of the Tocqueville Gold Strategy. Additionally, he holds research responsibilities for other commodity-related investments.
He joined Tocqueville in 2008 and focuses on generating ideas and monitoring investments related to precious metals. Prior to joining Tocqueville, Mr. McIntyre was an analyst and then an associate focused on mergers and acquisitions in the metals and mining sector with Macquarie Bank.
Mr. McIntyre holds a Bachelor of Commerce with Distinction (majoring in finance) from Dalhousie University and an MBA from the Yale School of Management. He also holds the CFA designation.
Ryan, thanks for joining The Assay. To start us off, what drew you to the mining investment world?
I came into the metals and mining sector in 2002 after finishing my undergraduate degree, which was focused on finance. I took a job with Macquarie Bank and, through random luck, was assigned to the M&A advisory group that focused on metals and mining. After four years at Macquarie, I went to business school. One of my professors introduced me to John Hathaway at Tocqueville, which is how I came to the buy-side.
Can you provide insight into the investment approaches of the Tocqueville Gold Fund? How do gold miners meet the criteria for investment?
Our overriding objective is to get exposure to companies that have value creation potential independent of the gold price. That is, the potential for management to add value, usually through exploration, project development, or production optimization to the company’s assets assuming a flat gold price. While we are positive on the gold price, we view it as an enhancement to a company’s already-established value creation potential which should have an influence on share price performance.
Typically, we focus on high-quality companies. One of the most critical aspects is investing with a management team that is trustworthy, capable, and aligned with shareholders. The quality of the underlying mining project or mine is also critical. A country’s rule of law and local community acceptance are of paramount importance for the start of a sustainable business. Quality and size of the asset are also important. Typically, we have focused on projects and mines with above-average operating margins and good potential for reinvestment in exploration or expansion. Ironically, we have observed over time that good management teams and good assets often come together. However, periodically, you get situations where you have one or the other, which makes things more difficult. A company’s financial position is also considered, but analyzing the underlying assets is where we spend most of our time.
Ideally, we tend to invest in companies when we feel comfortable about the underlying asset potential. There are two “sweet spots” of investment for us. First, early-stage exploration; and second, project financing stage. Both spots are typically at the beginning of a major potential value creation stage when there is likely to be less completion, which often translates to a relatively low valuation for the stock. However, we would rather pay a fair price for high quality assets with really good value creation potential than a “good” price for low quality assets with little or no value creation potential.
Can you point to a specific case where a junior checked all the Tocqueville investment boxes?
One that comes to mind is MAG Silver (TSX:MAG), a junior mining company that has ticked all of the aforementioned investment criteria we ideally like to see. MAG’s primary asset is a 44% interest in the high-grade Juanicipio silver-gold-lead-zinc project. The project is being developed in partnership with Fresnillo Plc (LON:FRES) who own the remaining 56% of the project. Our interest was first piqued when MAG acquired the Juanicipio ground in the Fresnillo silver district in Mexico. It’s one of the most prolific silver districts in the world with a long history of mining. FRES is currently operating the large, high margin Fresnillo and Saucito mines adjacent to Juanicipio and has significant resources and experience with these types of deposits in Mexico. Therefore, it seemed logical to us that the Juanicipio project could have potential similar to that of FRES’ mines in terms of scale and economics. FRES recently released the results of a feasibility study for Juanicipio that forecasts production of 12 Moz/ yr Ag + 43 koz/yr Au for 12 years beginning at the end of 2020. The initial investment required is US$395M. Additionally, FRES/MAG have been having significant exploration success that is likely to increase the project’s reserves/resources. Given the already long mine life, it could mean that a further production expansion in the future is possible.
The gold price has been on a bullish run this past year. Why do you believe this has happened?
The increase in the gold price is a response to two main changes. First, decreasing interest rates; and second, increasing uncertainty around the world.
Historically, the gold price has done well in times of low real interest rates. Until December 2018 it was thought that interest rates were on an upward trajectory, but many central banks reversed course which has made the opportunity cost of holding gold much lower. Additionally, there has been an increasing amount of geopolitical uncertainty, and financial markets do not like uncertainty. Tariff disputes between the US and China, China’s economic slowdown, Brexit, Argentina’s potential change in government, and other events have reduced investors’ clarity and, therefore, their willingness to take risks. Financial assets globally have also risen substantially over the past decade and many are at extreme levels compared to traditional valuation metrics. Gold has had a low correlation to many financial assets and people are moving to it because of its traditional safe haven status.
What are your thoughts on where the price will go in 2020?
We believe gold should continue to benefit from decreasing real interest rates and the increasing geopolitical uncertainty. Furthermore, financial asset valuations are stretched and permeate the landscape of “alternatives.” The risks in the financial markets far outweigh prospective returns. Therefore, a return to normality or a questioning of the soundness of government policies could lead to an abrupt change in risk taking. Until recently, gold has been long out of favor and very few have made an allocation to the metal. Finally, from a gold mining industry perspective, the industry needs gold prices above US$1,200-1,300/oz Au to sustain global production. Therefore, we feel comfortable that gold and the related equities will continue to do well.
Does Tocqueville AM have any preferences over the countries/regions it invests in?
Yes, as previously mentioned, we prefer to invest in companies with projects or mines in countries with an established rule of law. Property rights, government integrity, and judicial effectiveness are critical because you obviously can’t move the asset. Community acceptance and environmental considerations are also critically important for a long-term investment. Countries with a strong mining history, established laws, awareness, and relevant skills helps increase the chance of success.
Are you bullish on any region in particular?
Company management is critical in any country so we are bullish on the management teams that have the capability to deal with different stakeholders in many different regions. We would go further afield with strong management we feel comfortable with and would be less apt to go to exotic places with management that does not have the capability to operate sustainably in a particular region.
In our 2018 Gold Edition, your colleague Douglas Groh said that 15% of your fund’s exposure is to silver producers. Has that number changed? What are some of the criteria behind your investments into companies that market themselves as silver producers?
The fund’s exposure to silver is approximately 15-20% today. The silver price has lagged and we believe it will revert at some point. The key question is ‘when?’ because gold has outperformed silver for a while now. The gold price to silver price ratio is currently 88:1, which is bordering on an all-time high. The long-term average has been 57:1, which implies significant catch-up potential for silver. Gold is viewed as a monetary metal while silver is viewed as both an industrial and monetary metal. Therefore, it is not terribly surprising that gold is leading silver at the moment. One significant indicator of value is that silver miners are currently shutting down mines because they are unprofitable. The decrease in silver supply will, at some point, support a higher silver price.
Is there any investment interest beyond precious metals? For instance, would technology metals be of interest?
Our focus is exclusively precious metals, but we continue to monitor many commodities for possible opportunities.
Do you have thoughts on some of the political instability in the world? There are a host of issue from Brexit to the US-China trade war. What should miners keep in mind regarding these events?
One of the biggest elements of instability that I currently see is China. China has been growing rapidly for the past couple of decades and helped the world overcome the global financial crisis. We noted in our Q1 2019 Tocqueville Gold Monitor that the People’s Bank of China reported M1 money supply growth of 0% in January (after averaging 15%/yr for the past 20 years). Coincidently, China started buying a lot of gold in December 2018 after a two-year hiatus in buying. The last time a major economy had M1 money supply growth of zero was the United States and Europe in advance of the global financial crisis.
Miners should continue to focus on things they can control, which is trying to add value to their assets and ensure that they have the social license to operate.
