Conferences often provide the chance to renew old acquaintances and at the recent Hard Assets San Francisco Conference we ran into Adrian Day of Adrian Day Asset Management. As he always has interesting thoughts, we took the opportunity to get his views on the current economic situation.
Nothing Changed
In effect, although the US elections have taken place since we last spoke, he doesn’t believe much has changed and nothing has really been resolved. “It’s the same President, the same policies controlling each house of Congress and we’ve got the same problems,” he observes. “When you look at that situation, I made a comment to my readers the day after the election that gold is really the obvious beneficiary of it.”
Obama’s victory and re-election removes the threat of Ben Bernanke leaving soon, Adrian believes, which means the availability of easy money and low interest rates will continue. That, in turn, is positive for gold. With the Republicans still controlling the House and the Democrats still controlling the Senate, he doesn’t see an immediate resolution of the problem of the so called fiscal cliff, which is an expression he hates. The probability of an overall solution to the deficit problem is really not very likely and he doesn’t expect any positive outcome by the December 31st deadline. In fact, he believes all the parties will simply agree to agree later on, which is the way Washington does things.
Adrian concludes: “If we get into a very rancorous discussion right up to deadlines, then that’s going to be extremely positive for gold, as it was when they tried to raise the debt ceiling eighteen months ago. Remember, they tried to raise the debt ceiling and, during those negotiations, Standard & Poor cut the US credit rating and gold zoomed. I think the potential for that is there again.”
His recommendation is that investors should hold onto the gold position they have and, of all the assets out there, should buy more gold. He reckons some of the gold stocks are remarkably inexpensive but that’s partly because they’ve just been slammed for tax loss selling. There are some good buys out there, particularly good quality companies whose stock prices have been hit by tax loss selling.
Strong Balance Sheet
However, Adrian doesn’t simply recommend that investors should buy any gold stocks and advises caution when choosing suitable ones: “I think, among the juniors, you have to be extremely selective and the best thing I would focus on above all else is the balance sheet. Do they have money because, in aggregate, there are a lot of companies out there that are running very low on cash and are going to have to raise money. If everybody is trying to raise money at the same time, they’re not going to be able to do it on good terms so you need to be able to find companies that don’t need to go out and raise money.”
Two of his particular favorites, which he says he always comes back to in uncertain times, are Virginia Mines (TSX: VGQ) and Altius Minerals (TSX: ALS). Both of these fit his requirement of having cash and a strong balance sheet. Virginia’s stock price at the time of talking was $9.80, having come back from a recent high point of over $10. It has about a $320 million market cap, a little over $40 million cash on the balance sheet and a royalty that’s scheduled to begin at the end of 2014 on Goldcorp’s Eleonore, which has a Net Present Value for future cash flow that is more than the entire market cap. So, everything else the company does is free. With $40 million of cash, they don’t need to raise another penny if they don’t want to, so that’s one he likes a lot.
Altius Minerals is a similar story, although in other metals rather than just gold. “The company has less than a $300 million market cap, they’ve got $200 million of cash and they’ve got shares in other companies worth about $40-50 million,” explains Adrian. “So, virtually the entire market cap of the company is taken up by cash and shares of other companies, and these are liquid shares we’re talking about. They have a royalty on the Voisey’s Bay nickel deposit that more than covers their overheads so they’re in a superb position as well. They don’t need to raise money if they don’t want to. But if things get bad enough, companies like Virginia and particularly like Altius can go out and make acquisitions and find other things to do.”
Stock Recommendations
Adrian’s company provides two services that, he emphasizes for regulatory reasons, are completely separate and distinct. One is the newsletter, which is almost purely a stock advisory service. It recommends stocks and follows the stocks but doesn’t do a lot of market commentary or anything like that. “I do take jabs at Obama once in a while but it’s mostly recommending stocks,” he remarks.
The second service is managing money for clients, in both global areas and in resource areas. They’re all individual accounts, all segregated rather than being intermingled and are managed separately — more aggressively or less aggressively, depending on particular needs. Anyone interested in either service can access the website (http://www.adriandayassetmanagement.com) and then select the appropriate section to find what they need.
Adrian’s overall message, however, is quite clear — take the opportunities that the current economic situation presents. “It’s always difficult to buy something when things look so bleak,” he says. “But the time to buy is when things look really bad, we know that. In the broad market, things look bad but they’re not cheap enough in my view. You’re not seeing a lot of stuff selling for single digit P/Es. But in the junior gold space and in the senior gold space, the gold stocks are selling very close to cheapest values relative to bullion ever.
“They were a little cheaper earlier in the summer but, on a historic basis, they’re basically the cheapest they’ve ever been. This shows this is the time to buy juniors when you can find companies that are selling for cash or less than cash, definitely for less than hard asset value, maybe that’s the time to step up and buy.”