INTERNATIONAL. Portfolio Manager Joe Foster calls himself a "stock picker." And he's pretty good at it. Class A shareholders in Van Eck Global's International Investors Gold Fund have seen an average return of almost 25% for 10 straight years under his care.
"I'm looking for the gold companies that are going to outperform the indexes, my peers and gold," Joe says. And he shares some of those companies with you, in this exclusive interview with The Gold Report.
The Gold Report: Joe, in your view, what are the catalysts that will push gold to the next level?
Joe Foster: Well, there could be a range of catalysts, any one of which could rear its ugly head.
TGR: Which ones are most likely?
JF: The financial system has not yet recovered from the shock of the credit crisis. We're in the midst of a historic credit contraction that could turn into a deflationary credit contraction. As the Fed and the economy deal with this, there is a range of possibilities that could create a catalyst.
One would be further implementation of quantitative easing, where the Fed steps in and buys securities in order to prop up the financial system. A second is the housing market, which looks like it's weakening again. If we see a double dip in the housing market, it could create the financial stress that provides a catalyst.
The sovereign debt issues are something that, to me, will be on the table for quite some time. They could flare up again in Europe and elsewhere. State and municipalities' finances are in very difficult shape right now. We could see some form of stress in the municipal bond market that could cause some sort of a catalyst for gold, as well.
So there's a range of catalysts that could come into the market over the next year or two that drive it higher.
TGR: The Fed may look at more quantitative easing, but it doesn't really have a lot of room to operate as far as interest rates go. What sort of economic policy does America need at this point?
JF: I think our monetary system needs an overhaul. I guess some sort of stimulus, whether it be quantitative easing or some more fiscal stimulus, might be necessary to keep the economy from going into a deeper recession. But I think plans to create a more sound monetary system would go a long way toward boosting confidence in the government's ability to handle these crises in the future or to prevent them from happening.
TGR: Do you think what is happening now will ultimately result in a new currency down the road? Perhaps even a global currency?
JF: A global currency would be very difficult. Just to have a sound dollar again would create a lot of stability around the world. Many other countries still peg their currencies to the dollar, so proper management of the dollar would, in effect, create a sound global currency. The dollar is still the world's reserve currency. I'm calling for some sound money policies that we haven't seen since the dollar was floated back in the 1970s.
TGR: In a June commentary on gold you said, "states across the country are undertaking austerity measures to counter gapping budget deficits." Could a state, or states, defaulting on loans or even declaring bankruptcy be the next leg down that turns the recession into something worse?
JF: Well, I doubt it would go as far as a state actually declaring bankruptcy. Congress looks like it's going to approve another round of state aid to keep the states afloat. I think you would see the federal government step in before we saw a bankruptcy. But states like New York and California and others around the country are in serious financial trouble. We'll have to see if the austerity measures that they're implementing will keep them out of bankruptcy. I think this is more of a slow burn. I don't see it as being the catalyst for the next leg in the gold market. I think we'll reach the next leg in the gold market before any state reaches such a desperate situation.
TGR: How high do you see gold getting by the end of this year and through the end of 2011?
JF: I'm looking for it to make new highs as we trend into 2011, moving through the fall of 2010. The high was around $1,265 in June. We've been on a steady trend higher. There's a lot of volatility in the gold market, but I would expect that trend to continue. It wouldn't surprise me if it moved through the $1,400 level sometime during 2011.
TGR: You said that you believe that the government would step in and prevent a state from declaring bankruptcy or becoming insolvent. Do you believe the government is, to some extent, manipulating the gold market?
JF: I think that's speculation. I haven't seen solid evidence that the government is manipulating the gold market one way or the other. Even if they are, I think the market will determine where the gold price goes in the longer term.
TGR: You have managed assets for investors since 1998. In the post-2008 era, are you managing your gold fund the same way you did in the pre-2008 era?
JF: Well, we're using the same strategies or similar strategies now that we have since this bull market began in 2001. Relative to our peers, we're probably overweight in juniors and mid-cap companies and underweight in the large-cap companies. Some of the fundamental strategies that we use remain in place.
I would say that the big difference is that, prior to the credit crisis, we spent a lot of time explaining to investors why they should invest in gold as a hedge against financial stress. Since the credit crisis we don't spend much time explaining why you should invest in gold because investors get it. Everybody gets it now that gold functions as a sound currency and as a financial hedge in times of turmoil.
I spend more time describing how we construct our portfolio and manage the fund because investors are now asking: "How do I invest in gold? Do I want bullion? Do I want an ETF? Do I want a managed fund? Do I want an equity ETF?" Those are the questions that investors are asking now that we weren't hearing prior to the crisis.
TGR: That's noteworthy. But your asset allocation must've changed some since the crisis. You said it's heavier than your competitors on juniors and mid caps.
JF: I've got an entire range. I've got companies from juniors all the way up to the largest producers in the fund. We play the whole spectrum of gold companies. It's just that I've got a higher weighting in juniors and midtiers than I do in the large-cap companies. We're stock pickers, we're bottom-up, fundamentals-driven stock pickers. I'm looking for the gold companies that are going to outperform the indexes, my peers and gold.
TGR: You've certainly done a good job. Over the last 10 years, Class A shares in your International Investors Gold Fund are up almost 25%. Does gold's steady climb upward provide a greater margin for error in gold fund management?
JF: Not really. When you look at gold mining, gold production peaked in 2001 and it's been on a slow decline ever since. In an industry that's in decline, you know you're going to have winners and losers. The market likes companies that can provide growth. But in a declining industry those types of companies become fewer and farther between. And there are lots of gold companies that have underperformed gold in this cycle. So stock picking becomes very important. It's not always easy to outperform gold in this type of an industry environment.
TGR: How do you go about picking stocks? What are you looking for?
JF: We look for growth. Companies that can develop properties at reasonable cost and that can increase their margins. The best kind of growth is organic growth, where companies discover deposits and develop them. That's the first thing we look for—organic growth. The second thing would be growth through acquisitions. We look for management that can identify creative acquisitions and grow that way.
TGR: Is it still cheaper for companies to go out and raise money and drill for organic growth versus acquiring assets through M&A?
JF: It's very difficult to do. For most of the industry, it's almost impossible. The reason gold production isn't increasing globally is that all the easy stuff has already been found. The prolific gold fields of South Africa, Nevada and Western Australia are all mature areas that are in decline. The industry hasn't found another prolific gold area like Nevada. Instead, they have to look all over the world and into remote areas. There are new discoveries being made; it's just not at the pace that we saw 20 years ago when Nevada and Western Australia were emerging.
TGR: You mentioned Nevada. When I was looking at your fact sheet on the International Investors Gold Fund, only about 10% of your holdings are based in the U.S. Does America need more gold mines?
JF: The U.S. is still one among the top-five gold producers in the world. It's still a substantial gold producer. I don't know if we need more gold mines. It's a function of geology. Probably 90% of the gold production in the U.S. comes out of Nevada. As I said earlier, Nevada is past its prime; it's a region wherein production is in decline.
TGR: But California has banned new gold mines and Montana has banned heap leaching as a form of gold extraction. We're seeing some exploration success in places like Wyoming and Idaho. The U.S. is still the fourth-largest country in the world by area, so you would think there are lots of areas that remain unexplored.
JF: Well, if the United States was more mining friendly, there's no doubt it could be a much larger gold producer than it is; but, in all practicality, that's not going to happen. Mining is such a miniscule part of the U.S. economy that it's not politically feasible to revise the mining laws in states like California and Oregon. It's a bit much to ask in places like that.
TGR: As of December 31, 2009, gold companies in the mid-cap space accounted for 44% of your International Investors Gold Fund. What are some of your favorite names among the mid caps?
JF: In what we define as mid caps, we like Randgold Resources Ltd. (NASDAQ:GOLD). Randgold's our top holding. That goes back to what I was saying earlier. Randgold is one of the few companies that has been able to generate organic growth. They're located in West Africa and their team of geologists has had tremendous success.
TGR: What do you think of Randgold's management?
JF: They're great at finding world-class deposits. They've been struggling on the operating side. But that's not entirely their fault; I mean they're victims of their own success. At Loulo, their flagship property, they keep finding more ore. They've been in expansion mode ever since they've started operating and they have not had time to reach steady-state production. When you're always in expansion mode, it can be difficult to manage. We're looking forward to them correcting the problems and reaching steady-state production.
TGR: Do you see room for growth with projects other than Loulo?
JF: They're starting gold production at Tongon in the Ivory Coast in the fourth quarter. They've got projects in Senegal and the Congo that they're developing. We're going to see tremendous growth out of that company over the next five years.
TGR: What are some others?
JF: IAMGOLD Corporation (TSX:IMG; NYSE:IAG) is another mid cap. Startup at Essakane, their new mine in Burkina Faso, is going very well. We're looking forward to the company naming a new CEO. Operationally, they seem to be doing very well. They have some projects that will allow the company to grow. That's another one that we like.
TGR: You mentioned Randgold growing its assets in West Africa. Kinross Gold Corp. (TSX:K; NYSE:KGC), is among your top-10 holdings and they just acquired your number-two holding, Red Back Mining Inc. (TSX:RBI), which owns the Chirano Gold Mine in Ghana and the Tasiast Gold Mine in Mauritania. Then you have IAMGOLD, which also has West African assets. You have a significant exposure to African gold plays and, more specifically, West African gold plays. Why do you like that area so much?
JF: It's a geologically favorable region for gold and it's an area that's underexplored. That's one of the premier emerging areas for gold production when you look around the world. Politically, many of the governments in West Africa are very mining friendly. It's a good jurisdiction for developing a gold mine.
TGR: What did you think of Kinross' $7.1 billion takeover of Red Back?
JF: As you know, we're big holders of Red Back. We really like the assets, especially the Tasiast mine in Mauritania. I think in the end the market will look favorably on the transaction because I think Tasiast will probably become much bigger than the market realizes. If you give Kinross a year or two to do some work and a lot of drilling, I think the market will look back at this acquisition as being value accretive.
TGR: Do you like this more than Kinross' Aurelian Resources Inc. purchase?
JF: When you look at the two deposits, they're different. Geologically, Aurelian's Fruta del Norte is a high-grade, world-class deposit. But Tasiast is also world class. They're both great assets to have. When you look at the mining jurisdictions and the governments, you would have to say that Mauritania is a more mining-friendly jurisdiction than Ecuador. It remains to be seen how things pan out in Ecuador and if Kinross can cut a deal with the government there. That may turn out to be just fine. We'll wait and see. But I'm looking at Mauritania and a property there that's going to be relatively easy to further develop.
TGR: What are some companies you like in the small-cap space?
JF: Among the small caps, we like Osisko Mining Corp. (TSX:OSK) a lot. Osisko is a company we've owned for quite some time, and we've grown our position as they've developed the property. They're developing a mine in Val d'Or, Québec. I think Osisko will emerge as the next midtier once they get the Canadian Malartic mine into production. That's something we're looking forward to.
TGR: It's something of a trend—these large, low-grade operations in Canada. Detour Gold Corporation (TSX:DGC) has one, too. Certainly, Osisko is a little closer to production. Is the market waiting to see if Osisko can have the kinds of volume and recoveries that they're projecting in their feasibility study? The share price has had significant appreciation over the last couple of years, but could there be another jump if they're as successful as they hope to be?
JF: The stock's been strong recently on takeover rumors and on anticipation of them having a successful startup. When they go through their startup next year, and if it is indeed successful, then I think the stock will be up for another rerating higher.
TGR: I was looking at some different gold funds and their top-10 holdings. Dynamic Mutual Funds has a couple of funds that hold Andean Resources Ltd. (TSX:AND, ASX:AND). Your fund has a position in Andean. You talked about that company in your last interview with The Gold Report. What's the Andean update?
JF: Well, Andean is another of our junior holdings. The company has found what has turned out to be a world-class vein district in Argentina. It's become quite large and extensive. This is another company that, if they don't get taken out and wind up developing it, could become a new mid-tier company, as well. The project is fairly substantial and it should generate high levels of gold production. Andean is kind of behind Osisko. Osisko starts production next year. If Andean goes all the way, they'll start production two or three years down the road and, with good management, will become another mid-tier mining company at some point.
TGR: About 65% of your holdings are domiciled in Canada. What are some Canadian small caps that have your attention?
JF: When we break down the portfolio according to where the reserves are, about 16% of the fund is Canadian mining properties. Companies up there that we like are Rainy River Resources Ltd. (TSX.V:RR), which is developing a property in Southwestern Ontario. This is another one that's building a team to go to production, if they need to. They're working on their planning. They've had some very encouraging drill intercepts that tell us this could be a substantial underground mine in the future.
Another one is San Gold Corporation (TSX.V:SGR) out in Manitoba. They've got some very nice drill results. They've had some operating problems; but I think, once they get their operational issues resolved, the Bissett mine could be very profitable and produce high levels of gold.
And Lake Shore Gold Corp. (TSX:LSG) just announced some very nice drill results this morning. They're still finding some good drill targets on their property in Timmins, even after they started production earlier this year.
TGR: Yes, and they took over West Timmins Mining to consolidate the property.
JF: Yes, they merged with West Timmins, which had an adjacent discovery. Now they're creating a bigger mining complex there in Timmins.
TGR: What about the senior producers? Do you have some senior producers in Africa that you like?
JF: Most of our holdings in Africa are midtiers. I mean, we like AngloGold Ashanti Ltd.'s (NYSE:AU; JSE:ANG; ASX:AGG; LSE:AGD) management, but they're a large company and they're having difficulty growing. They are implementing some cost measures and things to make the company more efficient. We like that. Among the majors, though, Goldcorp Inc. (NYSE:GG; TSX:G) and Kinross are the two majors that we have the most exposure to.
TGR: Goldcorp is ramping up production at its Peñasquito gold/silver mine in Mexico. What are Goldcorp's prospects for further growth?
JF: That's why we like Goldcorp; they have a growth profile. The startup at Peñasquito is going extremely well. Following that, they'll start up the Pueblo Viejo property—their joint venture (JV) with Barrick Gold Corporation (NYSE:ABX; TSX:ABX) in the Dominican Republic. They've got a string of other properties that they plan on developing beyond that. So, they have a decent growth profile.
TGR: Do you have some parting thoughts for us?
JF: Well, we talked about the gold market more in the near term, but this gold market's been in bull mode for almost 10 years now. As far as we can tell, it could go on for another 10 years. Who knows? I think the actions we're seeing among the monetary and fiscal authorities around the world are setting up a situation wherein we could see another inflationary cycle once we get through this credit contraction. I think in the longer term, the risk of an inflationary cycle is going to be with us for quite some time. That's going to be the ultimate driver of this gold bull market.
Notes. Joseph M. Foster is a member of Van Eck Associates' hard assets team, which rates as one of the most experienced investment teams in the business devoted solely to the natural resources asset class.
Joe earned his MBA at the University of Nevada-Reno and his Master's in Geology at its Mackey School of Mines after graduating with a BS in Geology from Tennessee Technological University. Before signing on at Van Eck, he spent eight years with Pinson Mining Company, where he was responsible for exploration, reserve/resource delineation and modeling, geologic input and/or strategy on mining issues, supervising up to 30,000 feet of exploration drilling annually and mapping mine areas and other properties.
He joined Van Eck as precious metals mining analyst in 1996, and also currently serves as lead investment team member for its flagship fund, Van Eck International Investors Gold Fund; investment team member of Van Eck Global Hard Assets Fund and Van Eck Worldwide Insurance Trust's Worldwide Hard Assets Fund; and consultant to Market Vectors ETF Trust—Gold Miners ETF.
He has published articles in Mining Engineering as well as the journals of the Society of Economic Geology and the Geological Society of Nevada, been quoted in The Wall Street Journal, Barron's and The Wall Street Reporter, and made appearances on Reuters TV, CNBC, Fox News and Bloomberg TV.
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