In this exclusive interview with Byron King, editor of Daily Resource Hunter, Outstanding Investments and Energy & Scarcity Investor published by Agora Financial of Baltimore, believes 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.
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. Major gold producer Kinross Gold Corp. (K:TSX; KGC:NYSE) watched about $3.1 billion (B) of its market cap get buzz sawed off in mid-January after it announced that it would take a $4.6B write-down on its Tasiast gold mine in Mauritania. Kinross spent $7.1B acquiring Tasiast and other assets in the September 2010 takeover of Red Back Mining. Does this serve as a warning to the other majors?
BK: It might be 15 years past the Bre-X scandal, but 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.
The Kinross writeoff is scary. They're supposed to be better than that. So 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: Were you recommending Kinross?
BK: Kinross has been in the Outstanding Investments portfolio for over four years. I'm hanging on to it in the hopes that it will go higher, but it's been disappointing. It's not been able to get the share price up and keep it up despite a gold price that has quadrupled.
TGR: Its strategy was to grow through acquiring assets. Apart from buying Red Back Mining, Kinross bought Underworld Resources in the Yukon and Aurelian Resources in Ecuador. Do you believe that was the wrong strategy?
BK: 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. In fact, Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) just announced a takeover of Minefinders Corp. (MFL:TSX; MFN:NYSE). Minefinders is a one-trick pony, but it's one heck of a pony. It's the Dolores play in Mexico.
TGR: Sure, acquisitions are key, but many analysts believe that Kinross paid too much for Red Back and it's now writing down three-quarters of what it paid. Will companies be more loath to spend big dollars in takeovers now?
BK: 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.
The news from Kinross could serve as a wet blanket for the rest of the intermediate and junior mining space. Future takeout plays might see more lowball offers.
It gets back to the idea that an allegedly savvy company like Kinross could make as bad a mistake as it did—at least in retrospect. It's a wakeup call to the industry. I suppose in the boardrooms of the big mining companies they're sitting around saying, "We're much smarter than those guys at Kinross." All I can say is to be careful of admiring yourself too much in the mirror because I'm sure Kinross thought it was doing the right thing, too.
TGR: In an ironic twist, some analysts are now speculating that Kinross could become a takeover target. Keith Wirtz, chief investment officer at Fifth Third Asset Management, said, "Every dollar lower pushes the stock higher up the list of potential takeovers. That will attract the sharks in the water." Do you think Kinross will be taken out in 2012?
BK: Kinross has made a big mistake. Now the company has a big bull's eye pinned on its back. Kinross has some very strong assets. I'm sure other companies are looking at these assets and thinking they could do a much better job at managing them than the guys running the show right now.
