In this interview, Adrian Day of Adrian Day Asset Management also talks about copper and what mistakes to avoid as a resource investor.
The Investing News Network caught up with Adrian Day of Adrian Day Asset Management at this year’s Vancouver Resource Investment Conference to get more insight on the gold price and gold stocks.
Although the gold price increased more than 13 percent last year, gold stocks underperformed the yellow metal. But will that continue in 2018? “I think gold has definitely turned the corner, and I expect a much stronger gold market this year,” Day said.
Day believes the mining industry is facing challenges that are impacting investment in gold stocks, but it continues to be a good time to buy shares. “The biggest challenge right now is finding enough ounces to replace the ounces we are producing, as discoveries are in a 20-year downtrend,” he said.
He also shared his thoughts on copper and why it’s the other commodity he likes this year. “I am very interested in copper, [even though] it has moved a little bit too much too fast … looking ahead in the next four to five years we will have a shortage of the metal,” Day added.
Watch the video above or read the transcript below to learn more about Day’s thoughts on gold stocks, the gold price and his top stock picks.
INN: Last year we saw a rebound in the resource sector as a whole. Do you expect that to continue in 2018?
Adrian Day: I do. I have a bit of caution in the near term with some of the base metals because I think they ran a little bit too far too fast. But overall, I think the trend is definitely upwards.
INN: And speaking specifically about gold, we saw gold prices gain more than 13 percent in 2017, will that continue this year?
AD: I’m definitely bullish on gold. It’s interesting that you mention the 13 percent because most mainstream investors didn’t even notice it. In any normal year, 13 percent would be considered very good. I think gold has definitely turned the corner and I definitely expect a much stronger gold market this year. How much higher? It is difficult to say. I think a lot depends obviously on the dollar, but the US dollar is turning down. A lot of it also depends on the broad stock markets. Now because of the stock markets continue to be strong, people feel less of a need to invest in gold. But I sense we’ll probably see some kind of brake in the stock market this year.
INN: And, what about Gold Stocks?
AD: Gold stocks is you know, lagged gold not just in the last twelve months but in the last you know, five to six years. I always tell people when you are new to the sector to buy gold, before you buy gold stocks. Gold is a kind of hedge, but in terms of what is a better buy right now, I think the gold stocks are by far the better buy right now. As I said, number one they have lagged. If you look at gold stocks versus the broad market. Gold stocks versus gold, the valuations of gold stocks and all these indicators, gold stocks are very cheap right now.
INN: You explained before that gold stocks had underperformed the gold price in recent years are you saying that will continue in 2018?
AD: No, I think at some point we’re going to see the reverse, but in order to see the reverse I think we need a much stronger gold price. So, gold might move up to $1,400 to $1,500 and then I think we will start to see people get attracted to the gold stocks.
INN: What is the biggest challenge that the mining sector is facing right now that may be affecting investment in Gold?
AD: Well, the biggest challenge, which is a long-term challenge, is finding enough ounces to replace the ounces we’re producing. I’m sure other guests have talked about this because right now, the numbers of discoveries and the amount of ounces that have been discovered is really in a 20-year downtrend. I mean it goes up and down of course but it’s at 20- year down point.
For the last several years, we have not found the ounces to replace the ounces that we’re mining. So, that means that the ounces that we do have become much more valuable. So, that’s one of the reasons that I much prefer the exploration companies which are looking for gold deposits as opposed to the big miners that have to replace those ounces of mining. I think that is the biggest challenge.
INN: In that environment, are you still positive about gold stocks, is it still a good time to invest in gold stocks?
AD: I think so, and I will differentiate between four types of gold stocks. First, you have the royalties, and the royalty companies even though they are well priced. I think they are great buy and a great buy is the foundation of a portfolio. Whether you are talking of Franco-Nevada (NYSE:FNV) which is the blue chip or Osisko Gold (TSX:OR) which I think is probably the cheapest and the best buy right now of royalties. The thing about the royalty companies of course is they do participate in the up side but they don’t participate in the down side. To the extent that miners do.
The big miners are the most problematic area of all, for the reasons I’ve just mentioned. The cost is going up, it’s difficult to find new ounces, they have to go out and acquire ounces, they have to overpay you for ounces, ounces are expensive. That is the most difficult sector, but right now that sector is very cheap. Whether you look at it as gold stocks versus gold, gold stocks versus the rest of the market, price per value, price to cash flow, they are just very cheap. Typically, when the gold stocks starts to move, the big mining companies move first. If you buy some of these stocks at the valuations where they are now and gold stocks move, you’re going to get a good move.
The irony is that I see the big mining companies as trading stocks and I see some of the exploration companies as investments. That is a sort of irony. Then of course you have the juniors, the up and coming producers, which are likely or potentially are going to be taken over. And, then you have exploration companies.
INN: In your opinion, what is the biggest mistake resource investors should try to avoid this year?
AD: There are so many. I think one big mistake people make is not always recognizing what they own. People will often say, “you know I sell when I have a fifty percent move”. Well, that’s okay, but does it really make sense to be indiscriminate in your role? Shouldn’t you actually look at what you own and maybe this company should be sold in entirely but this company you should buy more even if the stock has gone up?
I think the selling is the most difficult part. Some people never sell, some people sell automatically, as I said at a fifty percent move. I think the more important thing in this sector is to really differentiate, really discriminate between the good companies and the bad companies. I’m not going to name names, but you know there are 3,000 gold mining stocks, listed in Vancouver and Toronto, and probably only 200 or 300 of those are really good companies.
You really need to focus on the best quality companies. And to me, best quality means good management, just proving itself, and it means companies with good balance sheets. Those are the two most important criteria to me.
INN: And this year aside form gold, are you interested in any other commodities?
AD: I am very interested in copper, but I think copper has moved a little bit too far and too fast, so I’ll wait for a pullback in copper. But when you look ahead four or five years we are going to have a big shortfall in copper production. And that’s ‘baked in the cake’. You can say it is ‘baked in the cake’ because with copper you have such a long lead time that you can look ahead to 2022/2023 and you can say with almost 100 percent certainty that there will not be a copper producer in 2023 that we don’t already know about.
So the people that do the analysis of future production already have those number baked into their models. We just have a short fall of copper in the years ahead. That’s without any increase in production from increase in demand from China recovery or from electric cars or anything else. Without any increase in consumer demand, we still have a shortfall in production. I like copper, but I think I would wait for a bit of a pullback. Same goes with the most of the base metals, I like to see a pullback yet. So gold, gold and silver are my two favorites at the moment.
INN: Finally, would you be able to share with our audience what are your favorite stocks or companies that you like right now?
AD: That’s a huge question because it really depends on what kind of investor it is. I’ve already said Franco-Nevada would be my number one pick. It’s a blue chip, you buy it you put it away, that is my number one pick.
Osisko I think that of the big royalty companies is the cheapest. Among the smaller royalty companies, there is one called Metalla (CSE:MTA) which has grown significantly over 16-18 months. It has four producing royalties and streams doing very very well. So I thinks that’s one to buy and give it a few years.
Among the exploration companies I like Midland (TSXV:MD) a lot. That’s a prospect generator, they’ve got about 10 active joint ventures that we see drilling on 6/7 properties this coming year, that’s a lot of drill – that is a very active program and they got about $30 million in cash.
Riverside Resources (TSXV:RRI) I like as a smaller prospect generator, very disciplined people, working in Mexico. Very disciplined, they’ve got an alliance and they’ve got about four different joint venture projects.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.