Mining Stocks and the Gold Price

SO WHEN might a rising Gold Price actually lead to rising stock prices for companies with quality projects and solid treasuries?

In this interview with The Gold Report, Outstanding Investments editor Byron King shares his roadmap.

The Gold Report: Byron, anyone who reads your reports knows two things: you like to tell stories and you like precious metals. The Gold Price has spent the last 11 years trending higher. Do you see it continuing upward?

Byron King: I anticipate that gold, silver and platinum will all continue to rise in price. There are currency-driven reasons why metal prices are going to keep rising, as well as other issues with overall supply and falling production.

In terms of production, the gold and the platinum production spaces are very precarious. A few very bad things could happen at random and knock global production for a loop and seriously impact supply. Think in terms of a major mine accident in, say, South Africa. Supply could fall off a cliff overnight.

In terms of politics and monetary issues, precious metals create an outside limit on people’s political power. Thus I expect massive amounts of manipulation as we roll along, too. The Dollar value of gold, silver or platinum will tend to rise over time, but we could see price spikes up and down due to that manipulation.

TGR: The junior precious metals sector fell hard in 2011. You tend to stick toward the midtier and major precious metals producers with strong cash flow. Those names often have lower risk, but risk can rear its head in that space, too.

Byron King: When it comes to buying and selling gold mines, no amount of due diligence is too much. It gets back to Mark Twain’s comment about how to define the term gold mine. It’s a hole in the ground with a liar standing at the opening of the shaft. When you own physical gold, you can go to bed and close both your eyes. With Gold Mining shares, you still need to keep one eye open.

TGR: One strategy is to grow through acquiring assets. Is that sometimes the wrong strategy?

Byron King: Much of the Gold Mining investing business is about takeovers. The large companies with, say, 10 million ounces (Moz) a year of output couldn’t discover that much just by sending out their own geologists with rock picks. Gold mining requires an entire process of prospect developers, generators and joint ventures. The better assets get picked up by the larger companies.

TGR: Sure, acquisitions are key, but many analysts believe some companies have overpaid. Will companies be more loath to spend big Dollars in takeovers now?

Byron King: The acquiring companies have to be smarter and cheaper about takeovers. They have to pay less. Then again, you’re lucky if you get what you pay for, and you never get what you don’t pay for. Future takeout plays might see more lowball offers.

TGR: Something else of note in the large-cap gold space is the increase in dividends as gold companies jockey for investor attention with other instruments like real estate investment trusts, exchange-traded funds and even master limited partnerships. Do you prefer gold companies with a significant dividend or are other factors more important?

Byron King: All things considered, I like companies that pay dividends. I like the idea that they bring the shareholders into the equation by sharing some of the wealth. There’s a certain capital discipline in running a company that comes with the knowledge that it has to write a check to the shareholders as well.

TGR: What investment themes do you expect will be prevalent in the gold space this year?

Byron King: The Gold Price should continue the 11-year trend of increasing nearly every year with the possibility of a big jump if a one-off type of event, such as a mine accident, chokes off a large amount of the world’s gold supply. I know accidents aren’t ever supposed to happen—nuclear plants in Japan and cruise ships in Italy are failsafe, right? We have to watch that.

TGR: What about increasing tension in the Middle East?

Byron King: Tension in the Middle East always seems to drive up the price of oil and the price of gold. People move their resources from one jurisdiction to another, from one form of investment to another. I went to one of the gold souks at the grand bazaar in Istanbul about two years ago. I was astonished that people were mobbing the gold souks, throwing money down and grabbing all the gold coins that they could get their hands on. I saw Russians and people from across Europe just peeling out these €500 notes and buying as much gold as they could take. It was fascinating.

TGR: Surreal.

Byron King: It was surreal to literally watch people scoop up gold, put it in their pockets and walk out of the stores. People were trying to get rid of cash and Buy Gold. There’s an entire gold-buying culture that a lot of people in the West are not used to seeing.

TGR: What about the protests, violence and economic sanctions being brought to bear on certain Middle Eastern countries? It seems like the tensions there are certainly hotter than they have been since the early ’80s.

Byron King: War is bad for business, but the rumors of war are sometimes good for business. I think if the Strait of Hormuz closed or if there was a shooting war in the Middle East, it would drive the Gold Price upward. As the price of gold goes up, it’s going to lift the share price for the miners that have good fundamentals.

Right now the stock market is barely paying for fundamentals. It really doesn’t respect stories, let alone blue sky. But if the price of gold keeps going up, the companies with decent fundamentals will also rise.

TGR: Thanks for your insight, Byron.

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