Equities.com recently spoke with Adrian Day of Adrian Day Asset Management to discuss his thoughts on the current natural resource market from truly global perspective, as well as the many different ways that investors can play the mining sector. As a renowned financial expert in both global investing and the natural resources sector, Day's perspective is worth its weight in gold. Day will be joining a roster of notable and influential speakers at the upcoming New York Metals and Minerals Investment Conference on May 13-14, 2013 at New York Marriott Marquis.
EQ: I’d like to start off by discussing Adrian Day Asset Management. Your firm focuses on three pillars of global, value, and resources. Can you talk about that and how that’s integral to the various services you provide?
Day: Everything we do is globally oriented and value oriented, and we tend to be long-term investors. We offer accounts to people in gold, in resources, as well as in global equities. All our accounts are individually managed according to the person’s own objectives, time horizons, and so on.
We’ve been doing this since 1991, and at that time there were very few good alternatives for people who wanted managed accounts in the gold or resource sectors. Now, of course, there are a lot of good mutual funds, and some of them just introduced in the last 10 years. But in the early ‘90s, there were relatively few funds in this area, and just a handful of managers.
The global area was much better covered, but I would say that in the early ‘90s, most managers, even those with a global orientation, still very much looked at global as an add-on. So you would advise investors to have perhaps 10 percent to 20 percent, as an example, of their assets overseas in international markets.
Well, we don’t look at it that way. We look at it very much on a global area, so not from the standpoint of someone in the U.S. looking outwards, but almost as though we were from the moon looking downwards on everything.
So if we are looking at the automotive sector, whether it’s a U.S. or Japanese company, German or Brazilian company, it doesn’t matter to us. We look and compare all of those things to see which one represents the best value, the best growth opportunity, and the lowest risk going forward. It doesn’t matter to us if we’re investing in the U.S. or a foreign country. And that is something that differentiates us.
EQ: In terms of looking at the market through a global aspect, it is almost like you were a bit ahead of your time. That seems like the thing that is the trend now, but you were doing it for over two decades already.
Day: That’s right. In fact, I wrote two books on global stock markets in the early ‘80s: Investing Without Borders and International Investment Opportunities. The first one came out in ‘82, and at that time it was pretty much the first book on international equity markets for retail investors.
I come from England, which is a small country, and we’ve had an empire. So people from England, as well as people from Switzerland, as an example, if you’re managing money in Switzerland or England, you’re used to buying stocks around the world. That’s just part of your nature and part of what you do. It could well be that you don’t buy anything in Britain in any particular period.
When I came to the U.S., I found a much more inward-looking attitude, and I used to get comments from a lot of people saying, “The U.S. is big enough! Why do we have to look somewhere else?” Glob al investing was a new viewpoint and in the '80s in particular, it was quite groundbreaking. There were only a handful of people like Sir John Templeton, who took a truly global approach. He was extremely successful, of course. Still, he was one of only a handful, but that’s not true anymore.
EQ: Looking at the current state of gold prices, about three weeks ago we saw a huge, steep sell-off, and you subsequently said that it was a good buying opportunity. The precious metal subsequently traded up about 8 percent. What is your near to intermediate outlook for gold right now?
Day: I have a bit of a different view on gold and gold stocks at the moment. I’m quite positive on gold, I have to say. One of the things that was a little bit surprising, but also very positive, was the physical response around the world to the collapse. Generally, when you see a big collapse like that in the markets, it rattles retail investors who do the worst thing possible, which is start liquidating and dumping at the bottom in a panic.
We didn’t see that this time.
On the contrary, as everybody knows, we had a rush to buy physical gold around the world, with long lines in Tokyo and China. We saw record premiums in many parts of the world and coins running out. So that was very encouraging, but it showed me two things. It showed me there was pent-up demand because when the price dropped, people were prepared to buy. It also signifies that we’ve probably seen the bottom, and gold will climb back towards where we were. It’s not necessarily that we’re going to get to $1,900 anytime very soon, but it will definitely get to $1,500 or $1,600 pretty soon, which is more or less where we started the decline.
EQ: Do you see gold staying in that range for a while, or possibly break out higher?
Day: Anytime we get a big drop like this, and let’s face it, you have people who wished they’d sold at the higher price, so I suspect that we’re going to get to the $1,550 to $1,600 level and probably churn around there a little while.
But the question I would ask is this: has anything fundamentally changed?
If we look back at the last five years and think about why people have been buying gold and why gold has gone up, there’s really nothing that is different today. Despite all the talk of exiting the stimulus program, the Federal Reserve is clearly in no rush to reduce the stimulus program, and we saw that when the latest FOMC minutes were released.
So there’s been a concern that stimulus is going to be withdrawn, or at least reigned in during the coming months, but there’s actually no indication in my mind that that’s going to happen in the U.S. And if you look abroad, it’s quite the contrary. In Japan, the Bank of Japan governor has pledged to double the money supply. I repeat: double the money supply! The Bank of England’s new governor, Mark Carney from Canada, says more stimulus measures are needed. And of course we have Mario Draghi from the ECB talking about negative interest rates.
So it’s clear that around the world, the very accommodative money supply and the very accommodative monetary policy is just going to continue. That is positive for gold. All of the reasons people were buying gold in the last few years are still intact today. People are concerned about the global monetary structure and they’re concerned about the value of their own currencies. They’re not getting paid because there are negative interest rates. I think 37 countries around the world today have negative short-term real interest rates. That is just astonishing.
Negative interest rates are, of course, positive for gold. All of these conditions are going to continue for the foreseeable future, and I’m very positive about that. So yes, I think we’re going to get a breakout.
Is it going to come next month? Are we going to have to wait another six months? That I don’t know. But I’m very positive toward gold, and think we certainly haven’t seen the end of this bull market.
EQ: What is your opinion on playing the mining companies in the materials sector? You seem to implement a diversified approach with a mix of majors, juniors, and royalty companies.
Day: The next several months—from now through September—is going to be an astonishing period for investors to pick up bargains in the junior sector. Contrary to what we saw in the physical market, there hasn’t really been much of a rebound in most of the gold stocks. There are some exceptions, however.
Virginia Mines Inc. (TSX: VGQ), for example, has done an actual round-trip, and is back up where it was before the collapse. But most of them haven’t bounced much off their lows. Now we’re heading into the summer period, which is traditionally—though not always, but typically—a weak period for juniors. So we could see even further drifting for the next few months. In my view, some of the values are really quite astonishing. So this is a very good time for investors to buy juniors, but I would focus on those that were cashed up. “Cash is king”, as they say.
In this market, having cash means that you avoid a negative in that you don’t have to go out and raise money in a very difficult environment for raising money. The terms being offered now are onerous. Also, if you have cash, you’re in a position where you can actually pick up some good properties from other companies that are cashed out. So I would focus on companies with cash, because the values are really quite astonishing.
EQ: What is your opinion for the larger companies in this sector?
Day: Seniors are a little bit different to me. The sector is a great buy is right now, but to me, they’re more trading vehicles than long-term plays. Seniors really face, as we know, tremendous pressures. They have cost pressures, which make mining not as profitable as you would think it is just from looking at the spot-price and cash cost to production.
Also, if you’re a mining company, if you’re a Newmont Mining (NEM), as an example, and you’re producing over five million ounces a year, you’ve got to find or acquire five million ounces every single year just to stay flat. That is not an easy task. I mention Newmont as an example, but that’s true all of them. So I would focus on majors that have good pipelines, and who don’t have to go out and buy anything for production purposes in the near term. I would also focus on those that are in politically safe jurisdictions, inasmuch as anything is politically safe these days. So we like, for example, Goldcorp, Inc. (GG) and Yamana Gold, Inc. (AUY). They strike me as the best of the big miners.
EQ: And your thoughts on royalty companies?
Day: I love the royalty companies which I view as core holdings. Of course, royalty companies are not immune to declining prices, because if the price goes down, their revenue goes down. Also, some of the properties on which they own royalties are less likely to come into production or increase production. Having said that, they do avoid some of the biggest risks of mining companies, which include political interference and increased cost pressures. If you’re Franco Nevada (TSX: FNV) or Royal Gold (RGLD) and you own a net-smelter return on a mine, it sort of doesn’t matter if the government raises taxes on the mine, or if there’s an earthquake and they have to rebuild the shaft, or whatever. You’re not responsible for those costs. You simple get your 2 or 3 percent off the top.
So royalty companies typically have very low risk. They have very high margins, and also tend to have good balance sheets. Franco Nevada, for example, has about $1.2 billion in cash on its balance sheet, and no debt. It’s a $6 billion market cap company. So I like the royalties very much, and I regard the top ones as core holdings.
But a portfolio with a mix of all three—juniors, seniors, and royalties—is good.
EQ: For the upcoming NY Metals and Minerals Investment Conference, can you talk about what you’re most excited about?
Day: I’m very interested in hearing what some of the themes are. These conferences often have a theme. Several years ago, the theme was hedging, and what to do about hedging. I think the theme at the moment might be cash, frankly, particularly among the juniors. So, do you have cash or don’t you have cash? And how long can you go without raising more money?
For individual investors, I think a show like the New York show is just invaluable, because you get the opportunity to actually meet top management. If you’re investing in a Franco Nevada or a Goldcorp, knowing the management is perhaps less important for a retail investor.
But if you’re looking at junior companies, I’m not a geologist, and given that I’m not a geologist, management is the number one criterion that I look at, followed by balance sheet. You can look at a balance sheet by filings, but you can’t get a feel for management other than actually meeting them. And at these shows, you generally get top management, and you need to spend time talking to them and getting to know them, and get a feel for them.
EQ: What are some of the things that you look for when you do meet a management team?
Day: First of all, you get a good feel for technical competence. You look at what they’ve done in the past, and whether or not they have been successful in the past. If they haven’t, find out why. This is a very long-odds game, so you can have very good people who just have never made a discovery, through no fault of their own. It just happens.
You also want realistic management. I don’t like management that is always bragging about what they’re going to do, without any particular history to show that they can do it. You want management that is realistic, particularly in exploration. You want people who are optimistic and positive, because if you’re not optimistic then you shouldn’t be a geologist, because the odds are so long. However, you also want people who are realistic, and who can tell you what the risks and pitfalls of a particular project or property might be. It’s sort of a gut feel, and the only way to really get that is by talking to them in person.
Adrian Day manages separate accounts for individual and small institutions in global equities and gold and resource stocks. You can find more information about his company, Adrian Day Asset Management. Or call 410-224-2037.
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