Amanda Van Dyke of Palisade Capital is confident that China's reforms will ensure that the commodity supercycle will continue for some time to come. In this interview with The Mining Report, Van Dyke argues that investors should worry less about the right balance of specific commodities and more about the right mix of early-stage, development-stage and producing companies. She expands on a dozen she believes have the right stuff to succeed.
The Mining Report: In December Federal Reserve Chairman Ben Bernanke announced a $10 million ($10M) cut in monthly quantitative easing (QE). He also said that interest rates would remain at zero for the foreseeable future. What effects will these decisions have on the economy and on precious metals?
Amanda Van Dyke: Precious metals have been trending down for a number of reasons. One was the perception, starting about March 2013, that the Federal Reserve was going to taper QE and an end to QE was in sight.
The Fed is shutting down the printing presses because they were never intended to be a permanent crutch to the economy, and because there are green shoots in the economy that would suggest the time has come to begin tapering. Car sales and home sales are up, which are very good indicators. Gold prices react to money supply only in relation to the velocity of money. When the economy as a whole picks up, the stalled velocity of money within the economy picks up as well. But all the money the Fed has printed in the last five years is still out there. And as the velocity of that money begins compounding via the money multiplier, gold prices will change. The real question is when and how much the gold price will go up in relation to the money that's been printed.
TMR: Previous hints of tapering have panicked the markets. Do you think the Fed is really committed to this new policy?
AVD: I don't think it has an option. The market has gotten addicted to cheap money, but governments must pay this money back, so there is a limit to the amount of debt that can be issued.
TMR: If interest rates remain at zero, how can private capital be saved for lending?
AVD: Zero rates are good for the banks, but they're just not tenable. In the past, there was a 1% or 2% premium on money re-lent in mortgages or in loans by general commercial banks. We're not seeing that anymore; we're seeing 4% and 5% for major corporate loans and mortgages, and for corporate bonds we're seeing anywhere from 6% to 12%. The government is trying to stimulate the economy with low rates, but the people who need stimulating aren't benefitting because they're still paying higher rates.
TMR: Your presentation at the New Orleans Investor Conference stressed that gold is not a commodity like any other. What are the drivers of its worth?
AVD: Regular commodities are a function of demand and supply. as well as their price of extraction. But the demand for gold is not as a consumed commodity; it is largely stockpiled. I've heard that up to 95% of the gold ever produced is still around. Demand for gold largely depends on three areas: consumers who invest via jewelry, coins and bars; professional and institutional investors who buy tradable investment commodities; and central banks that add it to their reserves.
Consumer sentiment in the Western world might be down, but investor sentiment is definitely very, very down. That has had a huge effect on gold prices because investors have been selling, and there is extra supply in the market. But I don't believe this trend can persist because the real factors that affect the gold price are all positive.
TMR: It seems that Asia continues to believe in gold bullion.
AVD: The Asian countries have believed in gold for 3,000 years, and events since 2008 have certainly justified that belief. While the Western world doesn't love gold right now, its importance to the gold market is decreasing because the major buyers of gold are no longer in the West.
China, Singapore, Thailand and the Philippines are buying bullion and jewelry at a very rapid rate. The Chinese government is increasing the amount of gold it buys on the open market, has officially encouraged its population to save money in gold and is tapering its purchases of U.S. Treasury bonds.
TMR: Could China's gold be used to backstop its currency or its U.S. treasuries?
AVD: China has said that it aims to have as much gold as the U.S.—8 million tons (8 Mt). I believe it only has around 2 Mt now. That's an indication that it believes gold is a more secure currency than America's. It isn't a big stretch to conclude that China's gold purchases represent its belief that gold is a secure form of investment as a reserve.
TMR: How long do you think the commodity supercycle will last?
AVD: The commodity supercycle is the exponential increase in demand for commodities associated with urbanization and economic development in heavily populated Third World countries that began around 2000. Urban development also requires intensive phases of commodity use for infrastructure creation. This process was led by the half of the world's population living in the BRIC nations: Brazil, Russia, India and China.
That process is, I believe, still largely intact. What's changed is that it isn't happening in a smooth line; the steep growth curve was interrupted. The global recession caused a hiccup. The commodity-intensive portion of the supercycle still has many more years to play out, and even when that development slows to a long-term moderate rate—let's say sometime in the next 15 years—we'll still need double or triple the amount of raw materials we needed 10 years ago. I'm very happy with 5–10% growth; it bodes well for the long-term consumption and demand for commodities.
TMR: China is growing at 7% annually, down from 14%. How important are China's reforms to the supercycle?
AVD: China has announced 11 key features of its new 10-year plan. A new role for the government and market-driven resource allocation, state-owned enterprise reform, fiscal reform, integrated rural urban development, democratic consultation, judiciary reform, an anticorruption campaign, social media and Internet management, a new state security committee and environmental protection.
This plan is excellent news for the natural resources industry. It means that uneconomic, subsidized, environmentally dangerous Chinese mines are going to be slowly shut down over the next 10 years. It also means that China is going to actively develop the poor rural regions of China. They will need to source a number of commodities they presently get from their own mines on the global market, and they are going to continue to develop and urbanize in new areas of the country. That is a clear indication for the continuation of the global commodity supercycle.
TMR: You've said that the three most important factors in mining success are management, management and management, but all successful managers were once novices. How can we spot those novices likely to demonstrate great success?
AVD: A successful mine requires the management of the resource itself, management of the mine plan and management of the local communities, governments and the environment. Really good management manages to balance all those factors. It's an art form.
As for young blood, I stick to people who have worked on mines before and performed a variety of tasks within the industry. A young person who grew up in a mining family would probably be a better bet than, let's say, a 40-year-old geologist who's only ever done geology and hasn't been exposed to other parts of mining. Ultimately, you need to find talented, smart people who have had the foresight to try to work in many different facets of the mining industry.
TMR: You place great importance on proper corporate governance. What is your checklist of required attributes in this regard?
AVD: A good board, in my opinion, has a minimum of six elements. You need a mining engineer. The best management team with the best deposit cannot necessarily build a mine, a mining engineer can. You need a geologist, someone who can properly educate and guide the rest of the board as to the realistic potential of an ore body.
You also need an accountant. A mine is first and foremost a business that needs to make profits. What was recently one of the best mining companies on the planet, Xstrata PLC (XTA:LSE), was run by an accountant. A lawyer is also very useful in guiding the decisions regarding the thousands of contracts, permits and licenses required.
A banker or someone with a finance background is quite important. The single largest determining factor in a mining company's success is its ability to finance itself and maintain its share price. Last, but certainly not least, you need a local, someone who knows the political and social lay of the land.
TMR: What else does a good board need?
AVD: For a board to be effective, it needs to be more than a rubber stamp. It needs to be the company's sober second thought, it needs to use its experience to guide a company and steer it in the right direction, and it needs a vested, significant interest in the company. Finally, board members should demonstrate diverse backgrounds in age, gender and ethnicity.
TMR: Can the benefits of diversity be quantified?
AVD: McKinsey & Co. Inc., Catalyst Inc. and KPMG have all done studies on listed companies. I've done studies on mining company boards. There is a direct correlation between better sales, profitability, reserve ratios, enterprise value and risk mitigation to the number of women on your board.
But I don't want to sound like a gung-ho feminist who thinks companies should put women on their boards just because. Mining boards globally are largely made up of older men of very similar backgrounds. The reality is that modern global business needs guidance from new technology, new ideas and a sound understanding of the many and myriad risks of operating a mine today. It's not that I don't think age and experience aren't valuable, but rather that you need many types of experience on a board to make it valuable. A board completely composed of similar people will not be able to compete and effectively protect shareholder interests.
TMR: What mix of precious metals commodities and fuels do you recommend for investors?
AVD: I personally have about 30% in precious metals, 30% in energy and about 40% in other commodities, but such weightings are not particularly important. People need to think more in terms of a broad mix of early-stage, development-stage and producing companies. Specific commodities are less important than a specific company's quality. This is a stock picker's market, so investors want to pick good-value, well-managed companies.
TMR: Which gold companies do you like?
AVD: I'm a big fan of Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE), AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE), Columbus Gold Corp. (CGT:TSX.V) and Belo Sun Mining Corp. (BSX:TSX.V).
TMR: What's your opinion of Randgold's new Kibali mine in the Democratic Republic of the Congo (DRC)?
AVD: Kibali is a world-class mine, no question. There are risks involved in operating in the DRC, but CEO Mark Bristow has built and developed mines all over Africa. He knows what he's doing.
TMR: Randgold's other big project is its Loulo-Gounkoto project in Mali. How do you rate Mali after the recent disturbances?
AVD: There are areas of Mali that are still quite dangerous to operate in, but a lot of the trouble is regional, and there are lots of areas where miners are effectively getting on with business and doing quite well. In general, the situation there has quieted down. Companies need to have significant local knowledge to effectively operate in Mali, and they need to do their homework about its various regions. Companies that have stayed throughout the trouble have gained themselves a great deal of credit by sticking with Mali and not abandoning it, and I believe they will be rewarded by the new regime, which is very aware of the fact that it needs mining revenues to rebuild the country.
TMR: What do like about AngloGold?
AVD: Besides Kibali, which is AngloGold's joint venture with Randgold, it also has Tropicana in western Australia. That's two mines coming on this year with fairly low gold prices. I think that both will produce profitably within the present gold-price environment. There are not a lot of companies that have significant catalysts coming in this year, but this is one of them.
TMR: How does Belo Sun's Volta Grande project in Brazil stand for funding?
AVD: It's not fully funded yet. That said, Volta Grande is a world-class gold deposit. It's huge. I think that a lot of the dampening of the share price on that particular stock has been based on people thinking that it won't go ahead because of a misunderstanding of environmental concerns and the regulatory environment in Brazil. But the federal government and the government of Para, which is one of the poorest states in Brazil, are very motivated to get that mine permitted. Once the market is reassured that it will be permitted, then we will hopefully see a rerate in the stock price.
TMR: Columbus Gold's Paul Isnard project in French Guiana is also huge, right?
AVD: Yes, and it's fully funded by Nord Gold N.V. (NORD:LSE), which has a significant amount of money invested in making it a successful operation. One of the major problems for gold companies everywhere that are in the development stages is that they simply don't have the money to effectively develop. Columbus Gold is completely carried by Nord Gold up to the bankable feasibility study.
TMR: Are there any other gold companies in Mali that you like?
AVD: There is a small miner, Legend Gold Corp. (LGN:TSX.V), that I have been watching for some time. Its geologists have about 20 years of experience in Mali and know where and how to build a mine effectively. When it comes to Africa, local knowledge cannot be underestimated. Legend Gold also has some very serious backing from well-known mining investors that believe in the management team's ability to build an African mine. The company is fully bent on consolidating West African gold companies and land as a prospect generator model. It's doing exactly what you should be doing in these market conditions—a hell of a lot of M&A!
TMR: Can you suggest a gold micro cap?
AVD: Inca One Resources Corp. (IO:TSX.V) is actually a toll-milling operation in Peru. It makes about $250/ounce on everything it treats. This is a great margin at a time when many gold companies have no margin. It will make good money consistently. This is a slightly alternative pure mining investment in the gold space, but I think a very good one.
TMR: Many companies in Peru have suffered a great deal of political difficulty in recent years. Is this a countrywide problem or more of a local issue?
AVD: My understanding is that it's a local issue. There are several gold processing operations in Peru that are exporting millions of ounces illegally every year. The Peruvian government has given these companies two years to shut down, and in the future, processing may go only to government-approved mills like the ones Inca One owns.
Peru is trying to modernize its mining industry and make it more environmentally sustainable. Success in Peru requires a very good relationship with the Peruvian government. It's all about mining in a modern way. Peru has a longstanding mining tradition and a lot of in-country investment. I'm always inclined to invest in a company where people have significant skin in the game. Investors should look for mines in Peru that have been endorsed by the Peruvian people. There are a quite a few of them.
TMR: Which copper companies do you like?
AVD: I like Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) quite a lot. It has historically been a gold company in Eritrea and has just gotten into the copper-heavy area of its deposit. Many people aren't fond of Eritrea, but anyone who's gone there knows that it's a much safer jurisdiction—at least where the Nevsun mine is—than is popularly believed. The company is paying a 4% dividend, and it has tons of free cash flow. In this market, that's a really nice thing.
Central Asia Metals Plc (CAML:LSE) is interesting as well. Its Kounrad waste-retrieval facility in Kazakhstan is producing quite profitably. And it has just paid $3.2M to buy half of Copper Bay Ltd. in Chile (with an option to acquire up to 75%). Coppers Bay's Chañaral Bay project has a resource of 288 Mt copper. I think Central Asia Metals could do quite well.
TMR: Any others?
AVD: I generally like Discovery Metals Ltd. (DML:ASX) and its Boseto project in Botswana.
TMR: Botswana is rated quite highly in Africa.
AVD: Deservedly so. It is like the Switzerland of Africa. It has a small, relatively peaceful population that supports development. Anyone I know who's ever worked in Botswana thinks it's heaven compared to most of the rest of Africa.
TMR: Which fertilizer and fuel companies do you like?
AVD: If you have to have one uranium company in your basket, I'd go for Fission Uranium Corp. (FCU:TSX.V). It's a no-brainer. Its new project, Patterson Lake in Saskatchewan, has the most exceptional grades I've ever seen, and it's close to surface. It has a management team that has shown that it's very effective in doing deals that are accretive to shareholders.
TMR: You're confident in the future of the uranium market?
AVD: Very confident. I know that's controversial, especially given how horrible the current price is. The Fukushima disaster put the market into oversupply, but this cannot continue indefinitely. There are too many reactors under construction, and they will require fuel. China is building something like 50 reactors, and five are being built in the Gulf States. The world needs more energy, and nuclear energy is the cheapest, most efficient form there is.
Even Japan will eventually need to put its reactors back online; it simply cannot afford to keep buying gas. So the short-term outlook is bad, but everything points to a much higher uranium price in the long term.
TMR: Are there any phosphate companies you like?
AVD: I'm quite fond of Arianne Phosphate Inc. (DAN:TSX.V; DRRSF:OTCBB; JE9N:FSE). It has a beautiful deposit in Quebec, a fully bankable feasibility study and a good internal rate of return in a safe jurisdiction. We don't know when Lac à Paul will be green-lighted, but it is a great long-term investment. I have no doubt that eventually Arianne will be a significant part of the phosphate mix in North America.
Great Quest Metals Ltd. (GQ:TSX.V) is a small company in Mali. Its Tilemsi deposit could be significant, given that Africa has a huge population that desperately needs fertilizer but has very little domestic supply. An African company producing fertilizer for Africa might do very well.
TMR: This malaise in the mining industry has gone on a lot longer than most people ever imagined. How long will it last?
AVD: They say that when you're at the absolute bottom, when everybody is out, that's when you buy. I think we've reached the absolute bottom; every generalist investor has walked away. So I don't think there's any place to go but up.
TMR: Amanda, thank you for your time and your insights.
Amanda Van Dyke is managing director, Europe for Palisade Capital. Palisade Capital is an offshore merchant banking group that invests principal capital with a focus in the natural resource sector. It strategically supports its investments by applying bespoke business development strategies specific to junior resource companies. She worked previously for Dundee Securities, Ocean Equities and GMP as a mining specialist in equity sales, and has raised more than $500M in mining-related financing. She worked as a gemologist before getting her master's degree in business administration and a master's degree in international economics from SDA Bocconi. Van Dyke is also the executive chairman of Women in Mining UK, sponsored by Rio Tinto, Anglo American and BHP Billiton.