Asset TV Alts Summit: The Value of Gold and Gold Equities
Asset TV's Remy Blaire interviews Ed Coyne, Senior Managing Director of Global Sales at Sprott Inc., on Sprott's outlook on gold bullion and gold equities heading into 2022. Coyne highlights the fundamental backdrop for precious metals and the mining sector with insight into how the sector can provide protection and portfolio diversification.
Remy Blaire: Welcome to Asset TV. 2021 was an eventful year for all assets. With 2022 upon us, there's plenty to discuss on the market as well as the macro and micro front. Joining me today for an update on gold and gold equities is Ed Coyne, Senior Managing Director of Global Sales at Sprott. Ed, great to have you here today.
Ed Coyne: Thanks for having me.
Remy Blaire: We have a very exciting discussion planned, but before we get into it, can you tell us a little bit about Sprott?
Ed Coyne: Sprott's a unique firm in that we focus exclusively on precious metals. If you think about other firms, they may have a precious metals fund or a suite of funds, but that's not their primary focus. For over four decades now, Sprott has focused exclusively on precious metals. What's unique about that is that it's allowed us to have a full suite of offerings. We do everything in precious metals not only on the physical side but also on the equity side, even the debt and the brokerage side. With over $19 billion in assets, being a public traded company, both on the New York Stock Exchange and the Toronto Stock Exchange under the ticker symbol SII, we cover the waterfront. We allow investors to allocate directly to physical gold, physical silver, a combination of gold and silver, even platinum and palladium, and more recently uranium, which we'll talk about a little today.
Ed Coyne: We also have an active mutual fund, the Sprott gold equity fund managed by John Hathaway and Doug Groh, which is an active approach to the equities. We also have factor-based ETFs that give you exposure to both the senior or large-cap mining companies, as well as the junior small-cap mining companies. As I mentioned, we provide lending predominantly for operating leverage purposes to mostly mid to junior type mining companies to help grow their business, and we have a brokerage business as well. Over the years, we've had nice growth because more and more investors, as they look to get educated on precious metals, we're finding more are turning to Sprott and so we're excited for our firm and what we've done.
Remy Blaire: Ed, I think you've given us a great overview of Sprott. I want to ask you about mining since you mentioned that keyword. We've seen plenty of action across different asset classes, whether we're talking about precious metals, as you mentioned, equities or commodities, but it does look as though mining stocks have stalled. Can you walk us through what we're seeing right now?
Ed Coyne: A lot of it goes back to the narrative that you see in the market. The Fed has been talking about tapering for the better part of the year. The Fed has been talking about potentially raising rates some time in the next year or two. And there's this old saying in traditional stocks where you buy the rumor, sell the news. And precious metals, it's really the opposite. You sell the rumor, the rumor being they're going to raise rates, the rumor being that they're going to start tapering. You buy the news when the Fed does it because we don't believe that the Fed can effectively raise rates. We don't think the Fed can effectively start to taper without causing significant disruption to the marketplace.
Ed Coyne: But because of that narrative right now, we have seen the market step away a bit from precious metals in general. Or I'd say another way to think about it, we've seen the market step away from risk-off assets across the board, not just precious metals. When you have the S&P 500 climbing more than 20% this year, and even in the last couple of weeks where we've seen some volatility, the market's bounced right back. There's so much cash on the sidelines. The need for risk-off assets has all been evaporated. As long as you have an accommodating Fed and have the market delivering double-digit returns, why have a risk-off trade? I think that's what's happening.
Ed Coyne: What's interesting, though, is people say, why hasn't gold done better, or why hasn't silver done better? I would flip that around and say, why haven't they done worse? I say that because with gold priced around $1,750 to $1,850 an ounce and silver at around $22-$24 an ounce, I would say that if S&P 500 was up over 20%, I would expect precious metals to be doing much worse than they are. We think that's a huge bullish sign long term. We welcome the narrative. We welcome the Fed trying to get back to business as usual.
Ideally, the Fed steps away and lets the market be a free market. We do think the cream will rise to the top. We think some companies that have been doing well will struggle because frankly, the cost of capital has been so cheap for so long. Warren Buffet said it best: "When the tide goes out, you'll quickly find out who's swimming naked and who's not." We like that methodology, and we want the market to reward those who are good actors and doing well. We think this short-term sell-off in precious metals is temporary. We believe that longer term, as the market requires companies to be more accountable for their balance sheets, that will cause disruption if the Fed starts to taper or raise rates. We think gold is well positioned to take advantage of that. Short term, the volatility has been there. Short term, the asset class has softened, but mid to long term, we like gold's prospects.
Remy Blaire: Ed, I think you've given us a good understanding of what you expect to see in terms of Fed Reserve action and the implications on gold, the precious metals. But what about gold equities? What do you expect to see in the next months and years?
Ed Coyne: First and foremost, I always say, physical first, so gold equities are a byproduct or a reflection of what's going on in the physical market. If gold was selling off substantially, then the margins of these companies would be shrinking; they'd be contracting. All-in sustaining costs (AISC) for a mining company are around $900 to $1,100 ounce. Several variables go into that, whether you're talking about an open pit mine versus a closed pit, where is that mine in the world, is it an existing mine that they're expanding or is it a new mine? At the $1,750 - $1,850 gold price range, these companies are wildly profitable right now, but no one cares. Things like cryptocurrencies are absorbing all the risk on allocations right now.
Ed Coyne: Physical bullion has held up nicely. Physical has done its part, but that's a risk-off trade, so that's something where people say, okay, I'm going to use physical gold as a replacement or a complement to my bonds, or is a complement to my cash position is a way for me to stay invested in the market. Or if I'm putting new capital in the market at these current market highs in the S&P 500, I'm going to use some physical gold to offset some of that potential volatility. On the equity side, that's more of a risk-on trade and so the equity story is more of a reflection of directionally what the price of precious metals is doing, going up or going down or staying the same. Yet, mining companies are very profitable right now, and they have little to no debt. Many of these companies are paying one-time dividends, creating dividend payout policies, or those that were paying dividends are increasing the dividend.
Ed Coyne: In fact, I'm going to skip through a couple of slides here and get to a one that I think is interesting, which looks at the quality matrix of these mining stocks. These numbers are staggering to me when you think about the quality of these companies today. If you look at enterprise value (EV) to EBITDA, it's more attractive. You think about free cash flow, for the miners it is two times the S&P 50; return on capital is even higher. Net debt to EBITDA is lower. The miners are generally lower leveraged companies and the profit margins are stronger. These mining equities represent the ultimate value trade right now. But the reason why people aren't allocating to precious metals, as I mentioned, is that the risk-on trade is being absorbed by other assets like cryptos and like SPACs and the special interest vehicles out there, things that are more dynamic than a traditional gold mining or silver mining or extractive industry type mining companies, publicly traded stock — these stocks used to be the risk-on trade.
Ed Coyne: But if you look at it from a pure quality standpoint, investors will find that mining equities are an exceptional value right now. The question is, is it a value trap, or is it a value trade, a value allocation? Ultimately, you have to look at the narrative for the physical market. If you believe that the physical market is stable and climbing over time, which we do, then gold equities and the mining equities look like a tremendous value right now.
You can go back and look at history, and there have been times where we don't like the mining stocks. It depends on what's going on in the global narrative for the metal itself. We like them right now. We think the market is cautiously looking at them. You only have to look at the last couple months when you had gold rallying 2%- 3%, the mining stocks were up more than 10%. Some were up as much as 20% from an index standpoint. Individual stocks were up much more than that. The torque component to these mining stocks is substantial. Given the global narrative, we believe that gold will likely test new highs of over $2,000 in the coming quarters or years. That will be tremendous for gold mining stocks. That, coupled with the quality of their balance sheets, is exciting. We fully understand why they're not performing better right now. The bottom line is people don't care right now.
Remy Blaire: Ed, you've given us a good understanding of the dynamics that are affecting gold, as well as gold equities. And you mentioned the word narrative. Before we completely move away from the Federal Reserve, we have heard the word transitory being removed from the language. What does that mean for what we're seeing in precious metals as well as gold equities?
Ed Coyne: Okay. This is interesting because I'm not saying the Fed took any direction from me, but about two months ago, I was talking about transitory. Now let's define transitory, is transitory six months? Is transitory two years? Is transitory five years? At what point did this stop being transitory? And when the Fed came out a couple of weeks ago and said, we're dropping the word transitory from the inflation narrative. I had to smile — everything's temporary. But the reality is that inflation will be here for the foreseeable future.
I think it was right of them to drop the term, but the reality is, we just don't know. We don't know. Some things may become cheaper over time. Some things may become wildly more expensive over time. If we are going to move into a carbon-neutral footprint from an energy standpoint truly, you have to believe many hard assets will go up in price. Those kinds of things are probably permanent. If you look at housing stocks, you have to think that prices aren't going to come back down for many of these communities. This is a very different market than 2008. But I think the Fed woke up and said inflation will probably be around much longer than we anticipate. Again, self-serving for us, but this serves the global narrative for precious metals in general.
We find over time that in inflationary markets, all hard assets tend to do very well in that environment, particularly gold, because gold's an alternative currency. If you think about gold, what is its purpose? It's a backstop to printing dollars. It's an alternative currency to hold value. It maintains purchasing power. If you look at gold over multiple decades, it's kept up with and slightly outperformed inflation. And so those kinds of narratives that go out there when the Fed says something like that, we're dropping transitory, nerd or not nerd, we're all high-fiving each other in the boardroom. It's wonderful to get that type of backing and say, okay, there will probably be more issues down the road, not less. Precious metals, in general, love nothing more than uncertainty, love nothing more than change. That's where precious metals do very well. Dropping that narrative of leaving off transitory when discussing inflation, we think bodes very well for our space.
Remy Blaire: That brings me to my next question, which is about portfolios, that you talked about volatility at risk and how it affects gold and gold equities. So unlike the traditional 60/40 portfolio, what do you expect to see in terms of where gold and gold equities play a part in the portfolio?
Ed Coyne: Sure. I might get some hate mail on this from the bond managers out there, but there's a great quote in here that I like to show. And it's something that John Hathaway talks about, which speaks to bonds and speaks to the 60/40 model. And unless you're managing duration or unless you're accepting low yields and holding a bond to maturity, a bond fund is now becoming one of your most risk-on assets because if rates do eventually go up over time, you will see the bond prices roll over. And as John Hathaway likes to say, bonds are dead as a portfolio diversifier in a 60/40 model. Again, no disrespect to bond managers. They earn their keep by trading duration and so forth, but the old set it and forget it approach to 60/40 stock-bond portfolio just isn't getting it done.
Alternatives in general, not just precious metals but real estate and other assets out there, are becoming a mandatory part of an allocation. We're seeing gold from a narrative standpoint, we're seeing gold from an allocation standpoint, move out of the traditional commodity basket and into the alternative asset basket. I've said it on Asset TV many times, the few actual people that watch multiple videos of ours, they've heard me say it. Gold's the original alternative. Gold is an asset that has traditionally zigged over multiple market cycles when the market has zagged. You only have to look back at history and see time and time again, gold has done a wonderful job of protecting purchasing power, gold has done a wonderful job of going up when the markets are going down, and over a full market cycle, gold ultimately keeps you invested in the market.
Ed Coyne: That's where I think gold can add value to a traditional 60/40 model. Maybe not replace your bonds, but compliment your bonds with some physical gold. Maybe add some gold to your cash position. Use that as a portfolio protector; use that as a preservation of capital type allocation. In the old 60/40 model, unless yields go up 2-3 times from here, they're just not going to drive the returns that they drove, and they're not going to provide the protection they've provided in the past. You need to think outside the box and gold has certainly become one of those solutions.
Remy Blaire: Ed, I want to shift gears and move away from the physical market. You did touch upon this earlier, and this is mining stocks. How are they looking?
Ed Coyne: As I mentioned earlier with the quality of these balance sheets, they look great. And the other thing I would say is, if you think about management of these companies, most of the managers rightly or wrongly have been replaced since the market peak of 2011. And they're thinking about their businesses very differently today than they did back then, making acquisitions at any cost. That's not happening anymore. Spending the absolute last hour to dig a little deeper, do those kinds of things isn't happening anymore. They're thinking more logically about their businesses. The fact that they're paying dividends, they're acting more like a traditional business in that regard. Now, you ultimately still need gold to be flat to positive for these companies to continue to have growth, but their margins look great.
Ed Coyne: Their management is strong. The communication level is better than ever and they're becoming more relevant. If you think about all the things in this room right now, and the things that we're doing, the technology we're using for these videos, those have silver in them. Those have some gold, but really silver, other metals, things that come from the extractive industry in general. We can't function as a society without bringing things out of the ground. Whether you're talking about electric cars, windmills, solar panels, 5G network, you need hard assets to make all these things work. We think the mining space is permanent, obviously, but also things like ESG are going to allow the cream to rise to the top, the better management companies, the better actors, the better companies with balance sheets and communication. ESG is going to hold those companies accountable.
Ed Coyne: We really like the narrative for the mining space today. It's becoming on the forefront. People aren't just talking about it as a one-off trade. It's becoming part of the conversation. Whether you're a Republican or a Democrat, they're talking about the carbon neutral footprint, being carbon neutral by 2050. Mining is part of that solution. So we really like the space right now from a quality standpoint, from a balance sheet standpoint, and from just an interest level standpoint across both aisles, politically, as well as from an investor view. We think the space looks really attractive right now.
Remy Blaire: And taking a closer look at the mining universe when you compare it, what we're seeing in that sector, in terms of market cap, number of companies, they are smaller. What are your views on the space?
Ed Coyne: Well, so often they say, Microsoft could buy the entire mining industry tomorrow. Bill Gates could own all the mining companies out there. It's a small market for sure. And most people understand what the S&P is. That's large multinational companies. In many cases, they have a large global footprint and they understand not as much, but most people understand what the Russell 2000 is, smaller regional businesses, sometimes US-based companies, that kind of thing. But in the mining space, we use a little bit different narrative or a little different tag just to confuse the world. We don't call them large cap and small cap, we call them seniors and juniors, but effectively it's the same thing. A senior mining company would be one and a half, $2 billion market cap, or above.
Ed Coyne: In many cases, they would have multiple properties in multiple jurisdictions. They would maybe have a property at late stage development, have multiple properties in different phases of production, maybe some phases they have another 10 years of extraction. Others, they may only have a few years left and they need to replace those reserves. That's going to be a broad diversified mining company. Those are great companies. They're liquid companies. There are companies that, when the gold equity market starts to move, like we saw a few times this year, they're the ones that get the capital flow first. But longer term, we actually really like the junior mining companies. These are typically like a small cap company, like a Russell 2000 type company. They're smaller in market cap. They're going to be typically below a billion dollars in market cap. Many times they're single mines.
Ed Coyne: And many times they're late stage development. They're not even in production yet, or they are early production and they've got a long runway. We really like the small cap companies a lot, the junior mining companies, as we like to call them. And we think those companies can win in multiple ways. They can win through margin expansion, which we're seeing. They can win by being acquired by a large cap company that needs to replace their reserves. There's a lot of ways that these small cap companies can win in this market cycle. Senior would be large caps, junior would be small caps and it is a small market, but it's a dynamic market. And as I mentioned, from a quality standpoint and from a management standpoint, these companies look really great now. We're probably more excited now than we have been in a while in the equity space, but yeah, large caps are seniors and small caps are juniors. That's the way we think about them.
Remy Blaire: I think it's a very helpful overview since it can be confusing.
Ed Coyne: Yes, it can.
Remy Blaire: And speaking of the mining sector, what about the health of the sector? What do you expect and what is your overall outlook?
Ed Coyne: As I said, the balance sheets are rock solid. They're very healthy. We don't see that going away anytime soon. Even if gold were to trade down to 1500, the margins still there, contracting, but still profitable. I really think the health in mining is very good. And what I would also say is, so often people think about mining is just gold mining and that's it. And there's many different industries out there. We see it on the equity side, we see it on the private lending side. We just recently, as I mentioned at the start of this interview that we've gotten into uranium and it will not surprise me to see us get into other metals in the coming years as relates to battery technologies, lithium and cobalt and so forth. I expect you'll see us continue to have a voice because we are one of the larger firms out there. We do get more and more conversations with people looking to deploy capital. And we tend to be first to a lot of these conversations. Again, the mining space looks really great right now.
Remy Blaire: And Ed, we've touched upon gold and you've also brought up uranium. Are there any other metals you're watching or opportunities that you're seeing in the market?
Ed Coyne: You can think about just the industry in general, copper. Copper gets talked about a lot. Steel, all these different metals that are out there are interesting. We don't have products in all those metals, but it just raises the awareness of what mining actually is, why it's needed, and how to estimate. And I touched on it briefly, but we think the battery metals are something that are going to be in higher and higher demand. If silver's at $25 ounce versus $50 ounce, you still need it to put it in a reflective technology for a car, into 5G networks, into solar panels. So they're still going to buy. The demand is still going to be there. Same with cobalt and lithium and so forth. So electric vehicles are growing, not shrinking, different parts of the world, that's becoming the majority of the cars being manufactured.
Ed Coyne: You can't walk down a street in New York City or drive on any major highway anymore without seeing an electric car. So we think the battery metals market is very interesting, and I suspect we'll have more and more involvement in that down the road as well, because of the things I mentioned, because of our footprint on the physical side, our footprint on the equity side and our footprint on the lending side. And then just a circle back with uranium, we like nuclear a lot. I know in the past that's been sort of a dirty word, but the reality is there is no way we can go carbon neutral without nuclear, and there's no way to do nuclear without uranium. And so we think that part of the market is very interesting right now also, and we think of it as a backup generator.
Ed Coyne: It's not the energy source, but it's an energy source. If you look at what happened in the UK this summer, they had to fire up coal plants because the wind speeds, historical wind speeds died down, so the windmills weren't producing enough energy. Those kinds of things are real issues. And wind, solar, hydro, all those things are going to be our future, but you still need a base load. And we think new nuclear will be that base load. And we think uranium is going to be a very important component to the future of mining in general. As that market continues to move forward, we're obviously going to remain engaged in that. We have almost a $2 billion uranium trust where we own physical uranium. We announced earlier this month that we acquired a uranium ETF that owns the equities themselves. We're creating a huge footprint in that space as well. I expect, as you continue to learn more about us as a firm and see what we're doing, our reach will continue to broaden in really all precious metals, in all other metals that are out there, whether it's on the battery technology side, on the energy side or the precious metal side.
Remy Blaire: And Ed, before we wrap it up, I think we've had a very engaging conversation about what we're seeing in precious metals, as well as mining and gold equities, as well as the other metals that you just mentioned. But before you depart, do you have any thoughts or words you like to leave for our viewing audience?
Ed Coyne: Sure. I'd say the biggest thing is to try not to fall in love with the asset class when it's working. It's very addictive. When goals starts to really work, and we saw this a little bit at the peak of COVID, new investors coming in for the first time, buying at market highs. But when precious metal starts to really work, you feel like you're the smartest guy in the room. You're like, how did not everybody see this? And I would caution people that when it's really running, like you saw during the peak of COVID, and it becomes an outsized part of your portfolio, you have to have the discipline to trim it back. Do not double down because it's a wonderful way to lose a lot of money very quickly when you do that.
Remy Blaire: Well, thank you, Ed, for joining me today. It's always great having you in the studio, and I wish you a great holiday season.
Ed Coyne: Thank you.
Remy Blaire: Thank you for watching. I was joined by Ed Coyne, Senior Managing Director of Global Sales at Sprott. From the Asset TV studio in New York City, I'm Remy Blaire.
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