As Chairman and CEO of Adrian Day Asset Management, Adrian Day has been speaking at the Hard Assets New York Conference at the Marriott Marquis. His view is that investors, because they’re concerned about the US economy as well as Europe and China, are looking for liquidity and selling whatever they can. That, he believes, is totally the wrong approach.
“You sell when things are up and you buy when things are down, it’s very simplistic,” Adrian says. “We don’t know of course how long this liquidity phase will go on. What’s different between now and 2008 is that then it was largely forced liquidity, margin calls, hedge fund redemptions, people who lost their job and needed money to live. This is not forced liquidity but people are choosing to go liquid. They don’t really know how long this is going to last but there’s a point when people stop liquidating and begin to buy because the value is so extreme. I think we’re close to that point frankly. There’s a lot of excellent value in the resource phase right now.”
He reckons investors shouldn’t worry about missing the low because he believes gold stocks are going to go up 50% to 100% over the next twelve to eighteen months, depending on whether they’re large or small companies. However, he recommends focusing on companies that have strong balance sheets and low risk, with the biggest protection for the downside being to have cash. Of less concern right now is the potential upside and he’s wary of companies that have a diversity of assets and need to raise money quickly, possibly selling for less than asset value. He believes that companies needing to raise money in the near term are going to be ‘slaughtered’ in this kind of environment
The problem is that many juniors are running out of money and have to raise more, no matter how great the dilution. And, providing there’s sufficient incentive in terms of discount, warrants or whatever, there will always be investors willing to put up the money. However, Adrian is worried about companies that have no choice but to raise money. So he is looking elsewhere to invest. He says: “The seniors are just a very compelling value right now. When you think that the whole XAU is trading at 8-8.5 times earnings and yielding over 2%, this makes the XAU index of senior gold and silver stocks cheaper than the broad market.
“I can’t remember a time when that was true before; it wasn’t true even in 2008 because everything fell. You’ve got gold stocks like Barrick, which has great growth in the past and a great pipeline for the future. It’s selling at seven times earnings multiples, which is astonishing for a gold stock, it’s got a good balance sheet and it’s got a 30% ROI, which is very good. A lot of the seniors are like that where they’re selling at just very depressed prices. Many are selling at valuations that are cheaper than the broad market and that is very unusual.”
As for individual companies to follow, Adrian has some specific picks:
· Franco Nevada (TO:FNV) is by no means as fundamentally inexpensive as some of the other companies but it has a great growth profile and its net income was up about 140% last year. If the price of gold doesn’t alter and the company doesn’t make any more acquisitions, Adrian believes its earnings will still double in the next three years. The company has $1 billion in cash, about $0.25 billion cash flow per year at the current price and great management. If Adrian could only buy one gold stock, he reckons it would be this one because the risk is so low.
· Virginia is his top pick among the juniors. It’s trading at around $9, which is less than $300 million market cap although it has $45 million in cash and a royalty that has a net present value at today’s price of gold at about $300 million. So the whole market cap is covered by the net present value of one single asset, which effectively means all the exploration, the joint ventures and the ounces in the ground are coming for free.
· Riverside is a smaller junior that generates prospects in Mexico, finding some major companies as partners and having a strategic alliance with Newmont. Adrian believes it’s following a good business model and has good people although it’s a very small company with a $10 million market cap. However, he thinks it has as good a chance as many of succeeding and, if it does, the response will be very positive.
Dividend Paying Stocks
Adrian’s company manages accounts for clients and he finds some believe it’s the time to buy while others want to sell to raise money. “Where I don’t have those sorts of restrictions from clients, we’re buying dividend paying stocks, both in the US and overseas,” he recounts. “We’re not buying anything in Europe right now or anything which is dependent on the European continent. We own stocks in a holding company in Switzerland, trading at a 38% discount to NAV with yields at 4.8% and cash on the balance sheet. You can buy good quality companies at a 38% discount, companies like Total, the energy company, and Suez Environment. We’re buying very little in Europe but we’re buying quite a bit in Asia, particularly Singapore and Hong Kong, the larger Asian companies and the larger Asian markets, picking up yields of anywhere from 5 to 7%.”
In the US, he’s buying companies at very good prices, with yields of over 10%. One is Ares Capital (ARCC), a big company with a lot of cash on the balance sheet that’s trading at about $15.60 with a dividend yield of 9.8% that’s covered by net operating income. He reckons it’s possible to pick up good dividends, good yields in the market when people are selling off stocks.
Anyone wanting more information can access the website (www.adriandayassetmanagement.com) or send an email to email@example.com. However, Adrian’s overall message is that the resource boom will only be over if China implodes rather than simply experiencing slowing growth, which he doesn’t think is going to happen. He says: “With the ongoing industrialisation, they’re going to continue to need and buy more resources across the board. Resources are inherently volatile, so you’ve got to try to use volatility to your advantage and, at a time like this, don’t panic and sell. This is a time to be buying and I can’t tell you whether the declines will go another 10 or 20%, or whether they’ll last another month or more. But I’m reasonably sure that if you buy Freeport today at $34 with a 3.5% dividend yield, a month from now you may not be happy but a year from now you’ll be happy. The same applies to some of the senior gold stocks and the better, stronger juniors. I think it’s just a matter of how long this liquidation phase lasts.”