Investors
want to know what’s going to happen to their resource stocks. For the past few
years, investors have struggled through a bear market and hoped for good news.
Many resource experts are bringing good news to investors lately, but also
suggesting caution.
That’s
also the message of Adrian Day. We met up with Adrian Day at the Metals and
Minerals Investment Conference, held on May 12 and 13 at the Marriott Marquis
Hotel in New York.
Adrian
Day is the founder of Adrian Day Asset Management, a company that provides
individually managed, globally focused accounts and gold and resource focused
accounts to individual investors.
Mr.
Day shared his market insight with us, as well as his outlook for the future.
“I’m
quite bullish on the gold complex,” he said. And then he provided a cautionary
footnote to his bullish prediction. “I’m very bullish on gold itself, for
various reasons, but I think we have to recognize that after a two and a half
year decline and a 43% decline, it’s not going to be all straight up. It’s
going to be very, very uneven recovery. I think we’ve seen the lows.”
But
that doesn’t mean that investors should rush out and buy every gold company
they can find. Mr. Day has some sharp words about some of the large cap gold
companies. “The senior gold stocks by and large, I think are badly run
companies. But at the beginning of a bull market or a recovery, money tends to
go to the bigger companies first. I would buy the bigger companies now,
selectively, and I would be even more selective among the juniors. I think some
of the juniors are extremely undervalued but there is an awful lot of junk –
companies that don’t have enough cash to do good work. So you have to be very
selective. I’m bullish with those caveats.”
Next,
we asked about the possibility of larger companies becoming better because of
the recession. He told us that the larger companies “finally ‘got religion’
last year. Barrick made that ‘wonderful’ statement: ‘We’re going to focus on
profits, going forward, not just getting bigger.’ What a novel idea for a
company – to focus on profits,” Mr. Day said sarcastically.
The
bigger companies, he asserted, should not be buying at the height of the bull
market but rather at the depth of the bear market: “This is precisely the time
when companies should be buying. All the big companies were going crazy on
mergers and acquisitions in 2009, 2010, and 2011, right at the top of the
market, overpaying for non-synergistic acquisitions just to get bigger. Barrick
was the poster child with their Equinox disaster but they’re not the only ones.
A lot of companies grossly overpaid for assets that are now being written down
or even written off. Are they any leaner? I think they’re leaner but this is
precisely the time when they should be buying. I applaud Goldcorp, making a
very opportunistic bid for Osisko Mining. They didn’t get it and they were
disciplined and say they wouldn’t pay anymore. I applaud them for making the
bid and not increasing the bid. This is the time when the big companies should
be buying the juniors and they’re not.”
Unfortunately,
Mr. Day doesn’t believe this bad habit will change any time soon: “When gold
goes up to $1600, $1700, $1800, all the big companies will be out buying.”
So,
what companies does Mr. Day like? He gave us several examples that readers may
want to take a closer look at.
His
first recommendation is Franco-Nevada (NYSE: FNV). “I continue to like
Franco-Nevada. It’s not cheap but I continually tell people, ‘If you want to
buy only one gold company that you’re not going to have to worry about, buy
Franco-Nevada - Great management team, Very diversified portfolio. You get
exposure to a lot of different company’s projects through royalties - $700
million in cash, no debt, very well run company and very disciplined company’.”
His
next recommendation is Goldcorp (NYSE: GG). “I like Goldcorp. I think they’re
one of the best operating companies - good balance sheet, disciplined, strong management
team, good portfolio, good pipeline, a good price.”
His
third recommendation is Yamana Gold (NYSE: AUY). “I also likeYamana Gold. They
did the winning bid for Osisko but I think they overpaid. But, I think the
market has severely over-punched them.”
His
fourth recommendation is Vista Gold (TSX: VGZ). “I think Vista is a very
interesting play. Vista has been hurt because people are worried about their
balance sheet. They’ve done some very attractive deals in the last six months
that have given them the ability to survive for an extended period of time
while we hope for the gold price to get back to the point where the big project
in Australia can be built, joint ventured, or sold.”
His
fifth recommendation is Midland Exploration (TSX-V: MD). “I continue to like
some of the prospect generators like Midland - six joint venture projects, $4.5
million in cash, but with a burn rate of a million or less.”
His
sixth recommendation is Riverside Resources (TSX-V: RRI). “I like Riverside,
which is another joint venture company. They’re primarily in Mexico. They have
seven joint ventures now and three alliances - $5 million in the bank and for
the last few years, their income from management fees has paid for everything.
Strong balance sheet!”
Next,
we talked about some specific commodities that Mr. Day is paying attention to.
“I’m
very attracted to gold because I think gold severely overreacted both to
concern about China’s economy slowing down and to the tapering and the
possibility of tightening. I like palladium. I like it more than platinum. In
China, the automobiles use palladium instead of platinum. Palladium comes from
Russia so there’s been a bit of a spike recently over concern with that
situation, but over a longer-term basis it’s attractive. It’s a necessary
product. Uranium is extremely underpriced, but I don’t know when it’s going to
turn. The current level – under thirty cents – it’s very cheap. I continue to
like copper. Copper was hurt last year because of the introduction of the
biggest new copper mine in 14 years, and also because there was expansion at
existing mines. But if you look ahead at the next 3 or 4 years, there aren’t
any major copper projects coming on stream. And if China’s economy continues to
grow at just 7% (not at 10% or 12% but just at 7%), we’re going to run short on
copper again in 2 years, which means higher prices.”
Mr.
Day is not just interested in resources – he’s also investing in property
management companies in Hong Kong, as well as business development companies
(BDCs) because of a change in their inclusion in some of the indexes.
Before
we left, Mr. Day briefly explained what his company does: “We offer
discretionary management and individual accounts. We offer those accounts in
the global area and in gold and resources. All our accounts are individualized.
For example, if we have a client who wants a global account, mid-risk, with
less gold than we usually buy because they already hold a lot of gold, we can
do that. Or if we have someone else who wants a global account, mid-risk but
wants us to buy more gold than usual, we can do that. Accounts are individually
managed. For more information, including returns and fees, they can go to
AdrianDayAssetManagement.com”
And
finally, Mr. Day gave some advice to resource investors as they start investing
in the recovery: “Be very, very selective of the companies you buy – large cap
and small cap. Barrick has done everything wrong for the last 20 years. Their
stock price today is the same price as it was in 1993. For 20 years, there has
been no return. And Newmont is the same thing. Look at balance sheets and
management and the business plan.”
REFERENCES
Adrian
Day Asset Management: http://AdrianDayAssetManagement.com
Metals
and Minerals Investment Conference: http://www.metalsandmineralsevents.com/ehome/index.php?eventid=81632&