Award-Winning Gold Fund Manager Explains His Angle

Kevin MacLean's Select Precious Metals Growth Fund has won the Lipper (Precious Metal) Fund of the Year award ranking, thanks to its three- and five-year performance metrics. His angle is to invest in smaller gold companies, avoiding the senior producers because they have no growth potential in a flat gold market. Even if gold's going nowhere, though, juniors have growth potential if they can expand their reserves and/or bring new production online.

The first question of this interview webbed by the Globe and Mail contains words that gold-stock speculators should pay attention to:

Why are you so cautious during mine construction?

It may take two to 21/2 years to build a mine. Six months before it is complete, I try to get on a plane and fly down to the property. I'll have a look and see that things are hopefully going well – that there is money left to finish the construction, nobody is picketing the project, there are no environmental issues, the government is not trying to impose new taxes or royalties, etc. If everything looks to be as advertised, I can start buying the stock because typically they would be discounted in the market at 15 per cent or more of future cash flows.

Another point made was that the sell-off which began on December 3rd was, in his opinion, triggered by Barrick closing its hedge book. Hedge funds basically sold on the news.

MacLean, of course, a gold bull. Noting that new supply is well below normal demand, and that demand is currently depressed, he believes that a resultant imbalance will push gold prices higher.


His stance could be criticized by people who note that demand is currently depressed because prices are so high and suggest that normal demand won't return until "normal" prices do, but the recent recession has had its influence too. Also, people holding off because of high prices eventually get used to them. This acclimatization process gibes with the spurt-and-pause nature of the long-term bull market. Except when exaggerated by the 2008 financial crisis, this pattern is how gold's moved up since the beginning of 2003.

His point about juniors adding value even in a flat gold market overlaps with a bit of lore from the exploration-stock world. [I got it in part from one of Casey Research's free E-letter publications, if memory serves me correctly.] Gold peaked in January of 1980, but several gold stocks didn't peak until the fall. Thanks to the underlying bull market, a lot of exploration efforts got rolling. A large majority of them came to naught, of course, but some minable deposits were brought onstream at about that time. It takes time to develop and build a mine; one encouraged by a huge bull market, and which has the underlying economics, is not going to be stopped by an end to the bull. There was at least one development-stage junior that saw a huge gain in 1981. [I note, however, that it was one of the lucky few. The economics of a project have to be right even at a much lower gold price for this kind of action to be expected.]

Here's a case in point, one whose timeframe is a little later: Hemlo Gold. Until it closed, the Golden Giant mine was one of Canada's biggest. The claims for it were staken in 1979, when the gold bull was reaching its climax. The drill hole that revealed a huge deposit was taken in 1981. Between then and 1985's first pour, the stocks of the two companies amalagamted to form Hemlo went from sub-dollar to above $10. That was due entirely to value creation, even though gold went from $300 to almost $500 from 1982 to 1987.

However - I reiterate - Hemlo was the luckiest of the lucky few. The trouble with selecting exploration stocks in a hot bull market is, gold fever makes even a marginal (or submarginal) deposit look like a sure money-maker. Many are chosen; few are destined.