At the recent Cambridge House Resource Investment Conference in Toronto Canada, we spoke to Adrian Day of Adrian Day Asset Management. Mr. Day’s insight and contrarian perspective always provide a great view of the current markets for investors who want to know what to do next.
Mr. Day is the founder of the firm Adrian Day Asset Management, a firm that provides investors with individually managed portfolios that are built around their unique risk tolerance and timelines, usually in resource and global stocks.
Mr. Day shared some great stock recommendations with us, but first he told us what he was speaking about at the conference: “My message is quite simple: The correction of gold, in my view, is grossly overdone; it’s based largely on a misunderstanding of Fed policy.”
The price of gold and the activities of the Fed have both been topics of heated conversation (and worry!) among investors. So Mr. Day’s insight was more than welcome: “When you look at what’s really driven gold for the last 5 years, it’s easy money around the world. The Fed’s talk about tapering has spooked the market. But I think it’s overblown because you’ve got $85 billion a month of bond buying and the Fed is talking about cutting that back some time this year if the economy continues to improve. Most of the analysts are talking about $65 billion or $75 billion; that’s a reduction from $85 billion to $75 billion… but it is still $75 billion dollars of new money every single month. At this rate, the Fed is on track to a $4 trillion dollar balance sheet by spring of next year, before the supposed end of stimulus. So no one is talking about cutting stimulus; no one is talking about exiting stimulus. We’re just talking about reducing the rate at which it grows so I think the market has misunderstood it, frankly.”
He continued: “Gold is down and there’s devastation in the gold market – in the real business and in the equity space. There are a lot of reasons for that. We’ve had a lot of write-offs from the big companies; we’ve had cut-backs in dividends from the big companies; it’s very difficult for any companies to raise money right now, even companies looking for half a million are finding it not so easy. So many investors have seen gold from $800/ounce to $1900 and now back to $1300. Even $800 to $1300 is not too bad but [many investors] have lost their shirts on the stocks. Sso there is a reluctance to add to their positions.”
As a result, Mr. Day is advising his clients to focus on long-term value. “I like to buy good-quality companies when they are selling below their intrinsic value. We’re contrarians. Our global accounts are building up the cash and the gold accounts are almost fully invested in gold.”
So, what should investors do right, given the condition of the markets? Mr. Day said, “A savvy investor should be looking for the best stocks, and they should be buying. Gold mining is not going away. If I’m right, the price of gold is going up because it’s going to get more and more difficult to find deposits. So if you find companies that have good balance sheets and that have cash, that don’t have to keep going to the market for more money, that have good projects, I think you’re going to do very, very, very well.” And later he added: “I’m not a geologist. Someone who is a geologist is looking at properties and trying to make an assessment about whether the property has potential. I’m not doing that and I really respect people who have the ability to do that. For me, I look at the company as a business: I want to know how much cash they have and how much they are spending. What are their assets and their liabilities?”
Then he shared some of his favorite companies with us – companies that he owns and recommends to others. “I favor companies with strong balance sheets. I think balance sheets have always been important but at a time like this and in a sector like this, they are more important than ever. So among the bigger companies – a company like Franco-Nevada (TSX: FNV), which has $800 million of cash, unused lines of credit, no debt, cash flow coming in quarter after quarter; that’s just a superb company. It’s well run. Sure, if the price of gold goes down, the revenue they get from their royalties go down, you can’t escape that. But the company is not in danger. There’s volatility in the stock price but no risk in the company. At the same time, a company that has $800 million in cash and access to capital is able to pick up some real bargains in this environment.”
Next, he said: “I continue to like Virginia Mines (TSX: VGQ). They have a $300 million market cap, they’ve got a royalty on Gold Corp’s next mine in Quebec, which comes on in the last quarter of next year (2014). Gold at $1200 will still generate to them about $20 million to $22 million a years in free cash flow. If you get gold up to $1500, that’s $30 to $35 million a year free cash flow. That’s a lot of money for a small company. A stock price in the low $10’s I would regard as a bargain for this company.”
“Those two companies are my favorites. Those two companies are low-risk companies with good business companies and a lot of cash for the size of the company,” he concluded.
But he also briefly shared a couple of other companies he likes: “Midland Exploration Inc. (TSX-V: MD) is a prospect generator. It’s a small company, with over $4 million cash. They have 5 different joint ventures at the moment. They can run that business on $4 million if the world continues the way it is for the foreseeable future; they’re not in danger of running out of money.”
“I like Royal Gold (TSX: RGL). It has debt. I think they have more near-term potential, which is not really factored into the share price.”
“Another joint venture prospect generator company that I like is Almaden Minerals Ltd (NYSE: AAU). They are developing a very attractive property in Mexico. Every drill hole more or less expands their project.”
“Reservoir Minerals (TSX-V: RMC) started with the idea of being a prospect generator in Serbia and the Balkans. But their flagship property is a joint venture project with Freeport that my geologist friends say has the best looking assays of any deposit anywhere in the world. Freeport is earning in and it wouldn’t surprise me at all if Freeport made an offer for Reservoir Minerals.”
Although investors may feel the weight of declined values in their resource portfolios, Mr. Day brings a ray of hope to the doldrums facing investors. His long-term value, contrarian investor outlook, and his interesting stock recommendations show that there are exciting things happening in the resource industry now and in the future.
REFERENCES:
Cambridge House Resource Investment Conference: http://www.cambridgehouse.com/node/13165
Adrian Day Asset Management: http://www.adriandayassetmanagement.com
ADRIAN DAY ASSET MANAGEMENT
801 Compass Way, Suite 207
P.O. Box 6643
Annapolis, MD 21401
Phone: 410.224.2037
Fax: 410.224.8229
Email: AssetManagement@AdrianDay.com