The Gold Report: Ralph, there have been some high-profile mergers and acquisitions (M&A) in the mining space in Q1/18. Would you tell us about some of that activity and do you see some trends within it?
Ralph Aldis: U.S. Global Investors funds were beneficiaries of two of the transactions that were takeouts, but we did not have any exposure to the third one.
The most significant one to us is Hecla Mining Co. (HL:NYSE) buying Klondex Mines Ltd. (KDX:TSX; KLDX:NYSE.MKT). Hecla paid a reasonable price. We were up about 6% on that day with that takeout. Klondex had gotten itself in a bind, and Hecla is probably the right operator with the right underground experience to take over and optimize that operation. Hecla has much deeper pockets and a deeper skill bench than Klondex, plus Hecla knows those assets. At one point, it actually owned the Hollister mine, and Hollister got away from it. I think it makes a lot of sense for Hecla to come in and buy out Klondex.
On the same day, Alio Gold Inc. (ALO:TSX; ALO:NYSE.American) announced that it was taking over Rye Patch Gold Corp. (RPM:TSX.V; RPMGD:OTCQX). It took about nine months for Rye Patch to get ramped up from when it initially took over the operations at Florida Canyon. Weather set it back in the first quarter of its start-up, and it just never really hit its full footing. Alio took advantage of the opportunity that we saw there.
Both of those projects are in Nevada, which is on people's mind in terms of where you want to invest. Many projects that we're seeing around the world are being hit with higher taxes or are experiencing social issues. People are looking for politically safe jurisdictions. There is a lot of nationalism out there right now, partly starting with the U.S., in terms of some of the policies the government has been espousing. And we're seeing other countries in the world take that same stand; as opposed to America first, it's their country first.
The third acquisition that we saw during the last quarter was really a quasi-type acquisition, where Gold Fields Ltd. (GFI:NYSE; GFI:JSE) purchased at the project level Asanko Gold Inc. (AKG:NYSE.MKT; AKG:TSX); it purchased a 50% stake in Asanko's 90% interest in the Asanko Gold Mine. This is the second time Goldfields has done a purchase at the project level. Previously, it was with Gold Road Resources.
There are several things that come to mind with M&A. One, M&A hasn't really heated up that much yet. CEOs of many of the major mining companies, or even intermediates, are still looking in the headlights and wondering they’ll lose their jobs if they do an acquisition and it turns out to be a bad acquisition. I think that's been a real headwind to having M&A at a higher pace.
Then there are the exchange-traded funds (ETFs): the Market Vectors Gold Miners ETF (GDX:NYSE.Arca) and the Market Vectors Junior Gold Miners ETF (GDXJ:NYSE.Arca). From stories I've seen on Bloomberg, in one week, half a billion dollars went into the GDX. Half a billion dollars is bigger than many of the actively managed gold funds out there. That means there's no ability to fund many of the companies out there, and that's where we're seeing alternative funders, such as the royalty companies. For instance, Victoria Gold Corp. (VIT:TSX.V) got funded through nonconventional financing from Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) and others; it wasn't a typical money raise of the past, where equity investors such as myself would contribute to funding that operation.
I think what we're seeing, and this is the opportunity that many of the gold companies are missing to some extent, is that a lot of the names that aren't in those two ETFs are orphaned at the moment, and they're not getting the valuation that some of the companies probably would have. It's a function of these money flows. There's a disconnect out there. There are companies that you can buy that are not in the ETF, and if you're there for the long term, you can probably end up making some money on some of these. But right now, the seniors and juniors, as far as takeovers, they haven't been very active. We've seen them invest in companies but not take them over.
TGR: Some people say that these M&A activities could be a harbinger of a rise in the gold price and lead to more M&A activity. What's your view of this?
RA: I think that more M&A tends to happen after the rise in the gold price. It seems like people tend to have the fear of missing out. Once they see the gold price rise, I think that M&A activity will probably heat up a little bit more. All the companies will look and say, well, my paper is much more valued now, I can do this transaction. I think we'll see more M&A as we get further down this road. I don't know when it's going to pick up rapidly.
TGR: Are there any companies that you believe could be the next M&A targets?
RA: There are a couple that are fitting the mold of what people have been buying. Klondex and Richmont Mines are being taken out, and are 100,000-ounce (100 Koz) producers. We haven't seen too much stepdown into the companies that aren't producing yet.
Wesdome Gold Mines Ltd. (WDO:TSX) is a company—with the drilling intercepts we have been seeing recently and with the restart of Kiena—that fits that bill of potentially becoming a 100 Koz producer again. That one is in Canada, a politically safe jurisdiction. It has production. Some people have stayed away from the stock because of one of its largest shareholders, Resolute Funds Ltd., being in there. But I think Resolute has cut its position down to very little, so you don't have to worry about competing with another fund.
Pure Gold Mining Inc. (PGM:TSX.V) is another one. It's not in production, but it is certainly showing some interesting results. I think this is one that certainly would be on people's radar.
Another company that's a little bit smaller is Nighthawk Gold Corp. (NHK:TSX.V). It consolidated an entire district around past-producing mines. It has been getting some good drilling results. It has been putting together the land package over the previous two years, which gives it a step up in making it more attractive to a senior that wants to have that land package to explore and show that once it bought Nighthawk, it gained the potential to find an additional 2 million ounces (2 Moz) on top of the 1 Moz it paid for.
So, with those three, one, Wesdome, is a producer. One's a little bit further down the road—Pure Gold—but not a producer. And Nighthawk is exploration-stage. So I think those are three good ones and all are in Canada.
Then there is Barsele Minerals Corp. (BME:TSX.V), which is in Sweden and has a joint venture with Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE); I think at some point Agnico will move on that. But it has been taking its time. Agnico's been working with it for two or three years. Sweden is a very safe jurisdiction, mining friendly, and very different than when we saw Agnico sell its Belo Sun position in Brazil, where it was not happy with the way the project was moving through the permitting process.
I think those are some companies that investors could consider as potential takeout targets. I don't buy companies just for takeout reasons. But I think those certainly fit the size for someone to be able to take out. Plus, once they bought it, they could probably show additional ounces and additional upside to that acquisition, which is what they want to do. They don't want to buy something and have it look like they made a mistake.
TGR: Just under a year ago, you debuted the U.S. Global Gold and Precious Metal Miners ETF (GOAU:NYSE.Arca). How would you assess its performance since its inception last year?
RA: It's done very well. I have the numbers printed as of the end of May 7 close. Inception was June 28, 2017. The GOAU fund is up 9.02% total return. As for its competitors, the GDX is only up 1.78%, so we got better than 700 basis points above that one. And the GDXJ for the juniors is -1.97%, so GOAU has done very well.
I also track myself and all the peers, and GOAU is leading pretty much all of its peers, too. It's either in the Top 1 or 2 funds in terms of its performance on the trailing period. So we've been pretty happy with the way it's performed.
TGR: Could you talk about some of the companies in the ETF? Who's been at the top of the list and which ones have lagged?
RA: We rebalance quarterly. We've looked at a quarterly snapshot of what performed; some companies were in the fund and went out. I'll hit some of those in just a second.
But of the three that have been fairly consistently the best performers, the top one is Kirkland Lake Gold Inc. (KL:TSX; KLGDF:OTCQX), which was up 71% over this period, since the fund's inception. That's been our biggest leader. Kirkland Lake actually had a stellar year last year on just results out of Australia, and the operations in Macassa have been doing very well, too. It's been a real standout company last year.
Behind that, the royalty company Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) is our second biggest contributor to our performance. Again, the royalty companies are highly diversified. Also, with their model of buying royalties or streams, they always have very good margins. They also do very well with the metric of revenue per employee. Royal Gold is one that we expected to be up at the top.
The third best performer is Saracen Mineral Holdings Ltd. (SAR:ASX). It brought Thunderbox into production over the past year. It has been adding cash to the balance sheet and actually delivering. Even with the most recent results, it beat on production and guidance, and raised guidance. It has really been doing very well.
St. Barbara Ltd. (SBM:ASX) is another one that's performed well. It's running neck and neck with Saracen. Since Bob Vassie took over St. Barbara, he's optimized it, made very smart decisions and turned it into a cash machine.
So those are the leaders that we've had.
At the bottom, the laggard's really been Tahoe Resources Inc. (TAHO:NYSE; THO:TSX), which has hurt us the most. It hasn't been in the fund the entire time, but Tahoe seems to have a long list of social license issues with either strikes or the courts in Guatemala. In terms of valuation, yes, it's very cheap. If some of those problems get resolved, that could have a big pop. But at the moment, it's still very much in the penalty box.
And then Klondex was eliminated from the fund at Dec. 31, 2017, because of the metrics it was demonstrating at that time. I held onto it in our other funds because I felt it was going to end up getting taken out. The GOAU ETF doesn't really consider forward-looking factors. It's looking at the numbers and trying to figure out what makes sense. So the ETF did sell it and did not participate in the buyout that happened in Q1/18.
The third worst was Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE). That was one that went in at the very beginning on the first launch. Then it missed on its August reporting in 2017, and the stock dropped 16% in one day. The company announced some project delays and missed on the earnings. And that affected the numbers as far as the inputs to the model. Now, it has basically rallied back.
So those have been our three worst ones to deal with. There's always going to be something. But overall, it really wasn't too bad. And the fund as a whole, on average, has significantly outperformed the other two leading ETF products in the gold space for gold stocks.
Hopefully, we'll see investors beginning to pay attention because right now, investors are just chasing beta on these gold stocks. They are not doing any analysis as to what's the underlying risk that they're taking on by buying some of these ETFs that are just selling liquidity and beta. They're not selling you alpha performance.
With our ETF, we're trying to hit quality measures to try to deliver stocks that actually outperform. At least, that's what's happening right now. We're under a year in performance, and that's too early to declare a victory by any means for anybody. But right now, we're pretty happy with the results at this point in time.
TGR: When you rebalance every quarter, on average, how many names do you drop and gain?
RA: It's probably anywhere from 25–30% roughly. It can vary depending on if it happens to be one of the bigger weights, but so far, I don't think it's been that big.
TGR: Are there other companies that are on your radar that you think investors should be paying attention to?
RA: There are a few more in terms of acquisition potential for the moment, and I have a couple other ones that are just deep value ones, too. If someone is still thinking about acquisitions right now, there is Cardinal Resources Ltd. (CDV:ASX). It has a deposit in Ghana. Ghana has historically been a pretty stable place in West Africa. And it has roughly around 7 Moz at this deposit. It's certainly big enough for any of the seniors like Newmont Mining Corp. (NEM:NYSE) to take a serious look at. I know Gold Fields has an ownership position in it, but there are some other names there, too.
Roxgold Inc. (ROXG:CA) is another name in Africa that I would say is significantly undervalued. It has the Houndé project in Burkina Faso. For some reason, there seems to be just open-pit operations in the region, and only Roxgold has an underground mine. To me, that's the perfect lay-up. If you have an open pit and an underground, you can balance some of the volatility in your quarterly numbers a little better because with an open pit, you don't have as much flexibility. But if you have two different mines of different qualities, that would be a great asset for one of these other companies to pair up with.
Golden Star Resources Ltd. (GSS:NYSE; GSC:TSX) is another one that's a producer. Golden Star, for such a long time, was a disappointment. Then new management came in, Sam Coetzer, and he's done a good job turning things around. The market is still not even hardly paying attention to it yet. But it has significant upside in terms of a rerating.
And there are a couple of other companies in West Africa. Oklo Resources Ltd. (OKU:ASX) is another one that is very close to B2Gold Corp.'s (BTG:NYSE; BTO:TSX; B2G:NSX) Fekola operation. Oklo has had some gold anomalies, and it's been drilling them out and growing that resource. So, it's getting people's attention. Resolute also owns a chunk of that one. It's probably one that could be a takeout.
Then there is Acacia Mining Plc (ACA:LSE) in Tanzania. I think Barrick Gold Corp. (ABX:TSX; ABX:NYSE) would be more than willing to sell, but it needs to get the tax situation resolved. Acacia is certainly deep value. But you'd have to be cautious on that one in terms of how you want to approach that.
There are two or three other companies that are smaller in terms of capitalization, and we've talked about some of them before. Barksdale Capital Corp. (BRO:TSX.V) is still a deep value opportunity. It's right next door to Arizona Mining Inc. (AZ:TSX). It looks to me and some of the other experts, like Peter Megaw, that the deposit goes onto its property. I think there'll be some sort of resolution that will happen there at some point.
VR Resources Ltd. (VRR:TSX.V) is in Nevada, a politically safe jurisdiction. It's early-stage exploration, but the team has done it before. So I think that's one that should be on somebody's radar screen, maybe own a little bit of it.
Another one is Chakana Copper Corp. (PERU:TSX.V), which listed late last year. It has about a dozen copper-bearing tourmaline brecchia pipes in Peru. And these pipes are basically 2–3% copper and 2 to 3 grams gold on some of the drilling results. It's very high grade in terms of the total value of the unit of rock. I think that's an early-stage one that probably should get some attention. It put out three to four sets of drill results. They're all very positive. Previous operators were looking for porphyry copper deposits. The operators now are looking at mining these pipes, and with there being about a dozen in close proximity, they could probably do an underground operation. You have enough vertical relief on the mountains there that you could enter low and go directly into the base of some of these pipes and mine them with gravity. So that one I think could end up being something special to somebody.
TGR: Any parting thoughts for our readers?
RA: The last stock that I would mention is outside of the resource space, a company called Nano One Materials Corp. (NNO:TSX.V). You've heard a lot about lithium and electric car batteries. Nano One has the technology, and everything's patented, and it's working on more of them, to grow these lithium cathodes at the atomic level. It's actually controlling how these things fit together molecularly.
One of Nano One's breakthroughs is it has created a high-voltage spinel. Basically, it's a cobalt-free cathode cell, but it's actually able to achieve six volts of electricity versus the two-volt typical cell. A Tesla has 8,000 two-volt cells in the floorboard of the frame. But if you can do a stable six-volt cell without cobalt and be free of all those problems, that's one-third of a footprint that you would need for the battery. Or you could add more cells and get more range. So, it could be a game changer for the entire electric car industry and for many applications. Right now, if you buy a 12-volt cell, it's just basically six two-volt cells in series. The industry has typically never been able to get past a two-volt cell in terms of stability. If what Nano One has done is commercial and it can prove it, it could be a game changer for the battery industry.
TGR: That's something to watch. Thanks for your time, Ralph.
Ralph Aldis, CFA, portfolio manager of U.S. Global Investors, is responsible for analyzing gold and precious metals stocks for the World Precious Minerals Fund (UNWPX) and the Gold and Precious Metals Fund (USERX). In addition, Aldis serves as co-portfolio manager for the Global Resources Fund (PSPFX), Holmes Macro Trends Fund (MEGAX), All American Equity Fund (GBTFX), Emerging Europe Fund (EUROX), Near-Term Tax Free Fund (NEARX), U.S. Government Securities Ultra-Short Bond Fund (UGSDX), the China Region Fund (USCOX), and the U.S. Global Jets ETF (JETS). In 2011, and again in 2015, Aldis was named a U.S. Metals and Mining "TopGun" by Brendan Wood International. In 2016, he and Frank Holmes were named Best Americas-Based Fund Manager by the Mining Journal. Aldis received a master's degree in energy and mineral resources from the University of Texas at Austin in 1988 and a Bachelor of Science in Geology, cum laude, in 1981, from Stephen F. Austin University. Aldis is a member of the CFA Society of San Antonio.