Resource Analyst Craig Stanley of Pinetree Capital
Biography: Craig joined Pinetree Capital (PNP: TSX) in January 2009 as Vice President of Research. He is responsible for aiding the management of Pinetree’s existing portfolio as well as researching and analyzing new investment opportunities. Prior to joining Pinetree, Craig worked both as a buy-side and sell-side analyst, the former at a firm with over $1 billion in mining investments in actively managed mutual funds, exchange-traded closed-end funds and flow-through limited partnerships. Craig holds a Master of Science in Geology from The University of Western Ontario and is a member of the Society of Economic Geologists, the Society for Geology Applied to Mineral Deposits and the Prospectors and Developers Association of Canada.
Q: Mr. Stanley, according to an article you published on Seeking Alpha in June 2009, you saw headwinds to the price of gold making sustained moves above $1,000/oz, with gold currently at 1150/oz – what would be you’re view of gold moving forward (is this the end of the bull run or does gold have a ways to go)? Additionally, why do you think gold stocks are under-performing gold and do you think that disconnect will narrow soon?
A: Real interest rates are the only metric that is correlated with the gold price. If you can hold U.S. dollars via Treasury bills, notes or bonds and they are paying a positive real interest rate that is not being inflated away, then why hold gold that doesn’t pay anything?
However, it is not a linear relationship. Instead, gold prices tend to significantly increase only if real rates become negative. The current bull market in gold that started in 2001 corresponds to U.S. 3-month Treasury bill real rates falling below 0%.
During the summer, the gold price in U.S. dollars stagnated as the 3-month nominal rate was flat. Then starting in September, the 3-month yield started to fall as inflation expectations (as measured by The University of Michigan one-year inflation expectations) rose, meaning real rates went negative and gold price went higher.
Given the U.S. dollar’s role as the world’s reserve currency, I look at U.S. interest rates. The gold price starts to rise when 3-month real rates go negative (when rates are positive, you’re getting paid to hold dollars whereas gold doesn’t pay anything). However the gold price really takes off when 10-year real rates go negative. That’s what happened in 1979 and very briefly at the end of 2007. The 10-year real rate is positive right now, around 1.6%. As the 3-month rate is negative, it’s positive for the gold price but if the 10-year real rate goes negative and stays in negative territory, look out. The gold price could really spike.
The equities of the senior gold producers have underperformed the gold price due to a number of factors, including lack of relative margin expansion and reserve replacement, dilution via share issuance and the growth of the gold ETFs which have given investors, especially institutional investors, a method of investing in gold without having to spend the time and effort analyzing individual companies.
Q: On a related note, what is your/Pinetree’s call on base metals (copper, nickel, and iron ore) and their corresponding stocks? There appears to be a massive build-up of copper inventories but the price of copper remains around the $3/lb - what do you make of the disconnect? Do you favour any of the base metals over others - if so, why?
A: Pinetree’s mission is to identify long-term trends then invest in small-cap companies that can benefit from such trends. We’re a long-term buy and hold investor. We believe we’re in a very long-term cycle whereby metal prices are supported by factors that have become well known over past few years: demand from emerging markets, especially China; limited exploration and resulting discoveries of large deposits over the past few decades; and the secular downtrend of the U.S. dollar.
Given this long-term outlook, we don’t spend time trying to forecast short-term price levels.
In regards to copper, though we’re bullish long-term, I would argue that the positive correlation between the copper price and inventories cannot go on, especially as it is rumoured that 75% of inventories are held by speculators.
Q: Given the recent run-up and ensuing correction in rare earth stocks, what is your/Pinetree’s opinion of this sector and do investors need to pay attention to it for the future or has the sector had its heyday? Are there any deposits or companies you like in this sector (if you like, Sir, you can simply highlight an investment in Pinetree’s portfolio and why you like it)?
A: We don’t believe that the rare earths sector has already had its heyday. The sector could garner additional attention on the back of the US National Defence Authorization Act for Fiscal Year 2010 which mandates the General Accounting Office (GAO) to assess “the availability of rare earth materials and components containing rare earth materials in the defense supply chain” A report is expected to be released in April of this year. Investors should however be aware that the size of the rare earths industry is quite small relative to other commodities; hence you have to be selective.
Companies exploring for rare earth elements that Pinetree has invested in include Ucore Uranium (UCU), which is exploring the Bokan Mountain property in Alaska, Matamec (MAT) and Fieldex (FLX), which are exploring the Kipawa alkaline complex in Quebec, and Rare Earth Metals (RA), which is focused on the Clay-Howells property in Ontario.
Pinetree also owns a position in Stans Energy (RUU-TSXV), which has acquired 100% of the past producing Kutessay II REE mine, along with 100% of the Kalesay beryllium deposit and surrounding exploration license, in Kyrgyzstan. The Kutessay II mine produced 80% of the former Soviet Union’s REEs from 1960-1991 and is located 140 km by paved road from the capital city of Bishkek.
Q: Mr. Stanley, could you please opine your thoughts and forecasts for the uranium sector? Are there any deposits or companies you/Pinetree like in this sector?
A: We think the long-term fundamentals for uranium are great. Global mine production accounts for approximately 65% of demand, with the remainder coming from finite above ground supplies such as decommissioned warheads and government stockpiles. Based on the number of new nuclear reactors either under construction or planned, the industry will have to source an additional supply in the order of 60 million pounds per year or just over half current production.. However mine production increased less than 2% annually during the past decade. Given the geological, financial and regulatory challenge of finding new deposits and bringing them on stream, the uranium price will have to move higher to incentive such new mines.
Pinetree has a big position in Mega Uranium (MGA) which is developing the Lake Maitland project in Western Australia. The company sold 35% of the deposit in 2009 for US$49 mm to a consortium of Japanese utilities.
Q: Lastly, can you please highlight 1-2 stocks/themes that you think offers the best value moving forward and your reasons for liking it? If you like, Mr. Stanley, you can simply mention some of the larger holdings in Pinetree’s portfolio and describe why you like them?
A: You have to differentiate between a short-term trade and a long-term investment. Pinetree is focused on long-term investments. We think gold and gold equities provide great long-term fundamentals.
The three largest gold equities that Pinetree held at September 30 were Queenston Mining (QMI), Colossus Minerals (CSI) and Evolving Gold (EVG).
Queenston Mining is a gold explorer focused on the Kirkland Lake camp in northern Ontario. On the west end of the camp it has a joint venture with Kirkland Lake Gold Inc. (KGI) as well as 100% owned ground. KGI is in production and has had great exploration success with the discovery of the high-grade South Mine Complex which trends onto QMI’s ground. On the eastern side of the camp, QMI is advancing four gold deposits towards production: Upper Beaver, McBean, Upper Canada and Anoki
Colossus Minerals has a 75% interest in the high-grade gold-platinum-palladium Serra Pelada project in Brazil. It’s a very unique project that was mined in the 1980s by garimpeiros. Colossus has reported phenomenal grades and widths, such as 70.7 metres of 53.59 g/t gold, 20.77 g/t platinum and 31.30 g/t palladium.
Evolving Gold is a gold explorer focused on the Rattlesnake Hills project in Wyoming. It’s still relatively early but they’ve produced intercepts that indicate the rocks were subjected to a large gold mineralizing event similar to the Cripple Creek mine in Colorado. Quinton Hennigh, EVG’s president and chief geologist, previously worked at Newmont and is a great geologist.
All three companies have healthy cash positions and provide great gold price and exploration leverage.
Thank You Mr. Stanley!
Share This Post:
