Can you start by telling us about your role at EuroPAC Gold Fund and your approach to investing in the precious metals space?
The approach of the Euro Pacific Gold Fund is to try to build a foundation of solid, relatively low-risk equities that will give you exposure on the upside, such as the major royalty companies, for example. They’re low risk, but they’re an excellent foundation for the fund. Then we try to have exposure to pretty much all of the sectors, the major miners, intermediate miners, and also the exploration and smaller companies which can give you a lot more upside in a good market.
We’ve seen continuous record-breaking gold prices this year. Can you talk about how the global geopolitical forces on the market are impacting pricing and what we might see in the gold space moving forward?
The gold stocks, particularly the major stocks in the US, but really worldwide, have done very well over the last 12 months. If you look at the Philadelphia Gold and Silver Index (XAU), this is primarily an index for the major North American gold and silver miners and it has gone up 48% in the last 12 months. The smaller companies though, both the intermediates, but also the smaller exploration companies until very, very recently, really have not moved much at all.
Part of the reason for this, why gold has been moving up for the last two years, is to consider who’s been buying, and then also who hasn’t been buying. The North American investors, both retail but also small institutions, have simply not been buying. If you look at the VanEck Gold Miners Index (GDX), which is the largest gold mining index in North America, and probably in the world, we’ve only had one day this year of net inflows. Now, when you think that gold is over US$3,000, at these historic high levels, it boggles the mind that we’ve only had one day of net inflows in the North American Index.
The GDXJ is for the juniors and smaller companies. For this index, you have to go all the way back to August 2024 to find a day of net inflows. This is a good explanation for why the juniors are not moving, but some of the majors are because if you’re a very sophisticated investor and you want exposure to gold stocks, you would probably buy Barrick or Kinross or Goldfields.
In a lot of the conversations that we’ve had recently, people have been saying that the juniors in the gold space are quite undervalued. Do you see that changing?
Well, that begs the question, do I think that they’re undervalued? If you look at stocks like Agnico Eagle (TSX:AEM | NYSE:AEM) or Barrick Gold (TSX:ABX | NYSE:GOLD) or really all of the XAU, despite the fact that they’ve gone up by 50% over the past 12 months, and in many cases by more on a valuation basis, they are still at very reasonable valuations and in the lowest decile of their long-term historic valuation. I think the majors are undervalued.
Now, if you move down the food chain, it depends what we mean by juniors, of course. If we get to the small exploration companies, the kind of companies that dominated the exhibit hall at PDAC, I think it’s true to say that at least half of those companies, in my view, have no business existing as separate companies.
I think if you look at the 3,000 gold mining companies around the world, probably only 25 or 30% of those are what I call real companies. And those companies are indeed very undervalued. There’s no question about that. The others are cheap, but whether they’re undervalued is a different question. I definitely think the sector is very undervalued as a whole, and that includes the companies that have the stocks that have moved up because among that subsector, they’ve moved up for good reason, and I think they still have a lot further to go.
How do you determine what makes a real or an investable opportunity for you?
Well, part of it comes down to market cap. I’m not afraid of investing in very small market caps. The problem is, do they have cash? Do they have access to cash? Do they have a way of generating cash without excessive dilution? If you look at some of these companies, the shares outstanding may have gone up five or tenfold in the last five years, but the underlying value of that company has not gone up five or 10 times. There’s nothing wrong with issuing shares if you do something valuable with that cash. But if you are simply raising money to keep going, then you’re diluting shareholders. We see that over and over again.
When companies raise money, how much of that money is going to general and administrative expenses, particularly salaries, and how much of it is actually going to work in the ground? It doesn’t have to be drilling. It can be mapping, it can be geophysics, it could be looking for projects. How much of that is going to furthering the business as opposed to just continuing existence as a public company? There are a lot of very energetic people that work their butts off, they’ve been working hard for 20 years, and they just haven’t achieved anything. One can give them credit for trying, but when you are just too small and you’re continually raising money just to keep going, to pay the accountants, to pay the overhead, that doesn’t make a legitimate public company in my view.
We caught up at PDAC last month. Did you see any interesting investment opportunities, especially within the junior space?
There’s two areas where I would look among the juniors. One is the juniors that have some kind of business model that enables them to continue in advancing the business without that constant dilution I talked about earlier. It could be a prospect generator where you get a partner to spend the money. It could be a small company with a royalty where they have royalty income that’s going to last for five or 10 years and pays the bills. There’s a lot of examples of companies like that, and while that doesn’t guarantee success, it does mean that at least the company doesn’t have to keep diluting.
The other area to look at is companies that have the potential to make a worthwhile discovery. There is no question that the world is starved of worthwhile discoveries. There simply aren’t that many. At PDAC, every time you had a drink with someone, it was always, “Who’s the next takeover?” We’re going to get the takeover mania pretty soon. But we’re not going to see majors buying juniors unless they have worthwhile projects, and the truth is that the number of worthwhile discoveries is very small. With all the work that companies are doing, and all the money that they’re raising, the result is just not a lot of good discoveries, unfortunately, but those good discoveries are going to be snapped up at nice premiums.
Finally, any predictions on the market moving forward? What should we be on the lookout for?
The reality is that I think gold is ahead of itself. It’s overdue for a pause, if not a pullback, and in fact, a pause will be kind of healthy. If you look at the graph of gold, this year has been not quite exponential, but it’s certainly moved well above trend of the last two years. Now, I’ve been saying that for a little while, and every pullback in gold for one or two days is very quickly reversed. Gold is being remarkably resilient right now, so what I would say to people, particularly those who aren’t in the market yet, is just try to look past the next week or month or three months. Let’s look ahead to where gold’s going to be at the end of this year or next year.
It’s going to be meaningfully higher in my mind, and so if you happen to invest tomorrow morning and gold happens to start its correction tomorrow, don’t get too discouraged. You can’t time it. The reasons that people have been buying gold over the last two years and increasingly over this year have not gone away. We still have the desire of central banks to diversify away from the dollar. We still have weaponization of the dollar. We still have high government debt everywhere you look. Pretty much every government in the world has excessive debt. We still have inflation. All of this is very positive for gold, and the new US administration’s policies are also positive for gold.
