Legendary investor and Sprott Asset Management Chairman Eric Sprott explains why he expects a junior resource “renaissance” and how he became successful by “stealing value.” He also describes why gold price suppression is doomed to fail, how India could shock the silver market, and mentions three gold juniors in which he’s “putting his money where his mouth is.”
Announcer: The SmallCapPower Expert interview featuring Eric Sprott
SmallCapPower: Today, on the SmallCapPower Expert interview we welcome legendary investor, Eric Sprott. So what’s your take on the so-called ‘zombies’ on the TSX Venture Exchange? Is there a case to be made for some level of intervention into the markets or do you still think that it’s best to let things stabilize for themselves?
Eric: Well, there’s a lot of companies in the resource area who had a terrible year this year. It’s probably even worse in the oil and gas basin than it has been in the metal space, particularly the precious metals. My own view has always been that gold is seriously underpriced in the paper markets that it trades on the COMEX. And that the demand data suggests huge strength in the demand and far exceeding supply. So I think there’s gonna be a renaissance here for lots of juniors, either producers or explorers, more so, for sure, the producers, because they’ll get the immediate benefit of a higher gold price.
The explorers, obviously, will offer way more upside should we ever rally back to where we should be, which in my mind, is certainly north of $2,000, so a lot of things will come to life. I think investors have to pick wisely here, because certain companies are not gonna make it as they run out of cash resources and just have to file for bankruptcy. So you have to look at each one individually, make sure they’ve got some staying power here, because even with an immediate increase in the price of gold, it will take some time for those companies’ shares to get started and be able to liquefy their treasuries.
SmallCapPower: What’s your core investment philosophy, and how do you adopt it to down cycles?
Eric: Well, my core investment philosophy is going to sound odd putting it this way. You have to steal value. In other words, you have to go and find an investment opportunity where it’s incredibly inexpensive vis-a-vis the market. If it’s not inexpensive vis-a-vis the market, you just buy the market. So you’ve got to go out and look for something that’s particularly appealing, that perhaps there’s things that are likely to happen that the market’s not prepared to anticipate yet, but you can foresee that it should happen.
For example, if somebody’s exploring, and it looks like they got pretty good ground, and maybe they hit something, and you’ve anticipated that, the price of gold going up or silver going up, things like that that the market is discounting or perhaps even projecting things going the opposite where you might think they’re going. And you have to learn to take advantage of those opportunities, because, of course, the rewards are quite incredible. I’ve always been a huge believer in looking in the small cap area. That’s something that each individual can do if you have some kind of analytic ability and/or ability to find sources of analysis that you rely on who are pointing out great value. So I think it’s an area that is much, much more rewarding than just going with the market.
SmallCapPower: You still hold an unshakeable faith in the fundamentals of gold and silver. So what are you seeing that others aren’t?
Eric: Well, what I see is I look at weekly, daily, quarterly demand for gold and silver, where you see statistics that are just crying out to you that, “Oh my goodness, the yearly demand for gold and silver is way beyond supply,” that inventories are being diminished, and some day, they’ll be a reset. I could point to all sorts of things now that might show that, for example, in the COMEX right now. There’s all of five tons available for delivery.
As an example, the Shanghai Exchange, I think, it exchanges it at 10 tons a day. We see Russia, for example, about 30 tons last month, the month of August. So five tons represents nothing. The paper shorts against that five tons are 250 times larger. So that’s one example. We see the example of China now announcing their monthly goal purchases, which they hadn’t before. Now, I’ve always believed they’ve purchased some, but why might it be significant? Because, for example, the World Gold Council data has never included the People’s Bank of China ever buying gold.
So let’s say the People’s Bank of China comes in and buys 5% of the world’s gold demand out of nowhere, and supply hasn’t gone up, you would think that would lead to a tightness. The coin sales at the various mints are exploding, and there’s lots of delivery delays and so on. In silver, there was a very interesting statistic announced in India that they imported something like 1,426 tons in the month of August. The world supplies about 2,200 tons a month, so that’s an incredibly large number. Interestingly, three years ago, India imported a total of 2,000 tons for the year, so 1,426 tons in a month is a stunning kind of number.
I don’t even know where they get that kind of tonnage, to be brutally honest with you, but it must be running really tight. The metals are in backwardation here, which suggests there’s a shortage in the near term. I still am a great believer that gold was manipulated down to make the policies of zero interest rates and money printing seem like they were normal. I will guarantee you they are not normal, and there is going to be an unintended consequence of having this program in place for as long as we have.
SmallCapPower: So if there truly is a conspiracy to suppress the gold price, what’s to stop this from continuing?
Eric: Well, of course, the only thing that will stop it from continuing is, in fact, a physical shortage, where the demand in the physical market is way beyond the capacity to supply it. Throughout the last 15 years, it’s my contention that the Western Central Banks have supplied that marginal gold into the market on an annual basis, and that they are probably running very, very low. In fact, I believed for the 10 years of the last decade that the shortfall was about 2,000 tons a year. Well, that’s 20,000 tons. I think the Central Banks at the time might have owned 35,000 tons. We’ve got another five years since then, so I think that it’s very likely that this tightness and the inability of the Central Banks to supply the gold will manifest itself in the, certainly, short to medium term.
SmallCapPower: What do you think is the best way for an investor to make money in the precious metal space right now?
Eric: Well, I think the best way is to find an undervalued investment vis-a-vis what’s out there. There’s lots of data to use, whether it’s production per ounce or production per market cap, resources per market cap, cash flow per market cap or earnings per market cap. Those are all milestones that one would use, and if you can find someone that is arguably much, much cheaper than the norm, I think those stocks will certainly outperform in the medium term versus the regular market. It has been my experience that you can find those situations.
I remember buying Goldcorp back in 2000 when it was all of like $500 million market cap. And I think it might have got up to something pushing $20 billion. And just there were non-believers in the Red Lake deposit at the time, and as it turned out, it was a great deposit. One could have figured that out based on reading the annual reports. So if you do a little homework, you can find things that are incredibly great investments.
SmallCapPower: In a recent interview, you stated that the market is out of step with reality. What did you mean by this?
Eric: Well, I think the one thing that’s always amazed me is that the market was quite prepared to fade the Fed here, that this printing of money and zero interest rates in the long run was going to work, and it would appear today that it’s not working. The U.S. economy is not strengthening. I don’t believe the jobless numbers that the U.S. government produces. The labor participation rate keeps falling. There’s lots of studies that suggest that over the last, pick your number, 10 or 20 years of real incomes has gone down, and the only way to sustain the economy was to make credit available to people at almost minimal cost, so they could go out and buy their cars, buy their houses, etc., which was a great stimulus to the economy. Had we not had that, I would hate to think what the economy might have done.
And most of the forward-looking data analysis suggests that we’re in a very difficult time here. Leading indicators are weak, whether it’s the high tech area, the oil and gas area, the consumer area. Retail sales have been quite punky. I think there’s way more inflation than people think. I think the cost of living for the average American goes up quite, quite quickly, particularly, when you include healthcare in there, so his/her disposable income is being squeezed. So I think that’s gonna play out in the economy and, obviously, in the performance of stocks, which have a requirement for economic growth, which we’re not getting much growth in the world.
SmallCapPower: Our investor audience would be curious to know what you’ve been buying recently. Are there any favorite companies you can mention?
Eric: I bought a private mining company in Nevada recently. I’ve obviously accumulated a big position in Barkerville Gold Mines Ltd. (TSXV: BGM). I’m hoping that, like I said earlier, that it will have a lot of ounces that people don’t anticipate. I’m not sitting here saying the ounces are there. We have a drilling program going on right now, and I’m very hopeful for that. I’m a big holder of Kirkland Lake Gold Inc. (TSX: KGI). As you know, I’m the chairman of Kirkland Lake Gold. I’m a big owner of St Andrew Goldfields Ltd. (TSX: SAS). Those are probably amongst the biggest investments I have. Those aren’t recommendations per se, but obviously, I’m putting my money where my mouth is.
SmallCapPower: Thanks for taking the time for today’s interview.
Eric: Good luck. Thank you very much.
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