Tom Wallace: Ladies and gents, welcome to Today I'm privileged to be joined by Adrian Day, founder of Adrian Day Asset Management. Adrian is a native of London, graduating with honours from the London School of Economics. He spent many years as a financial investment writer where he gained a large following for his expertise in searching out unusual investment opportunities in the world. He's authored two books on the subject of global investing, International Investment Opportunities, How and Where to Invest Overseas Successfully, and Investing Without Borders. His latest book widely praised by readers, is Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks. Today Adrian is going to talk with us about mistakes that people make when they invest in the junior mining sector, how interest rates effect gold, and common misconceptions on risk when it comes to the majors versus the juniors. Here is the interview.

Adrian, thanks for joining me.

Adrian Day: Well, thank you very much for having me.

Tom Wallace: We're at the sidelines of Jayant Bhandari's Capitalism and Morality Conference, and I wanted to talk to you about what's going on in the junior mining sector. My first question for you relates to, especially new investors. What are some mistakes that people make when investing in the junior mining sector?

Adrian Day: Well, that's a big question. I think there's several, maybe four mistakes that a lot of investors make and not necessarily new ones. I think one is not looking at resource stocks, particularly gold stocks, as a part of the holistic portfolio, and that leads to some investors putting far too much into the gold area, into the junior area in particular. Of course gold stocks as we know are inherently volatile. They're one of the most volatile sectors out there, which is one of the reasons that people are attracted to them of course, because it's possible to get five for one, ten for one on your money in relatively short periods of time. But that sometimes leads people to put too much in there.

I think the second major mistake people make is timing. It goes along perhaps with the last one. Timing. If you have too much in a particular sector, you obviously, or not obviously, but a lot of people start to freak out when things go down. Timing is critical in this sector just because it is so volatile. We don't all get the timing right, of course. Of course, but I think putting more money in when things are low, and then remembering to take some money off the table when things go up is a good idea.

Perhaps a third one is know your self. It's interesting, when a client comes to me I'll look at their financials and their obligations and everything else, and I can judge reasonably well how much should be allocated to risky assets. Whether it's coal stocks or emerging markets, it doesn't matter. How much is appropriate to be in volatile and risky assets, I can judge that on a financial basis, but people have to answer for themselves and they have to be honest with themselves whether they can tolerate volatility. One of the saddest things in my business is to have people put half a million dollars into gold stocks at a reasonably good time, and then on the first decline, which will happen, on the first sort of monthly decline, say, "I've had it. I can't stand this volatility. I can't sleep." I've had people say to me, "Adrian, I can't sleep at night." Well, if you can't sleep at night, you shouldn't be in this sector because they are volatile. Yeah.

Then the fourth one, the last one, following on from know yourself is know the companies. It's astonishing to me how many people invest in any area, but in gold stocks in particular without really knowing more about what they're investing in. One of the things that I've found, I found it for myself in managing money for other people. When stocks go down and I'm happy because I can buy more at a lower price, it means I, A, understand the company, and B, I really know it. I've found if I really don't know a company, perhaps someone else recommended it, I did a bit of work, it sounds good and I invest in it, but I don't really know it and the stock price goes down, your first instinct is to sell. Because you don't know why it went down, but if you really know the company you'll able more to judge whether the decline is likely to be temporary and you should actually buy more.

Tom Wallace: Yeah. Moving on to metals, for investors that are looking for a different metal besides gold to get involved in, what's on your radar at the moment?

Adrian Day: Okay, well gold is definitely my number one for a risk-reward basis. Copper is looking very attractive to me, and it's a matter of supply and demand. In the early part of this millennium, in the early 2000s of course we had a run up in the copper price, we had a huge demand from China. You had a big increase in demand for copper, primarily from China, big increase in price, and so a lot of mining companies started plans, gave the green light to develop and build some major mines. We had a few big mines come on in 2011, 2012. As always happens in this cyclical industry, the mines finally starts producing just when the price starts to turn. But of course with mega projects one you put them on, you don't just turn them off because the price has gone down a little bit, so for the last few years we've had a slowdown in consumption from China. We've also had an increase in supply where Togo came on for example, probably 2012 I'm thinking, one of the top ten mines in the world. So we've had pressure, we've had excess supply.

The thing about copper mines is it typically takes ten to twenty years after discovery before they come into production minimum. That's important, because it means that if you look ahead five or ten years, you can say with a reasonable degree of certainty, you don't know what the production is going to be, but you can say with a reasonable degree of certainty, that nothing's going to be producing five or seven years from now that we don't already know about, that's not already in the works, so you can project production reasonably well. When you look at the declines in some of the old mines, those Chilean mines, the big mines, the number one, two, three, four mines, Escondida and so on, they're over a hundred years old. They're getting old. They're going deeper. As you go deeper and deeper, things become more unstable, so the mines have lower grades, lower production, and more stoppages because of rockfalls or whatever. When there was an earthquake in Chile it closed the mines for a while.

You're getting declining production from some of the old mines, and we do not have major new mines coming on stream in the next few years to replace that production, so even if the demand from China does not pick up again, and I suspect it will, even if the new demand from China for green energy, green cars in particular. A lot of people don't know that electric cars take a lot of copper. Even if we don't see a pickup in demand, we're still going to have a short fall in production, and therefore excess consumption. There's going to be a shortfall in production over the demand, therefore higher prices. That's going to start in maybe 2020, 2021. The market, of course being a forward looking vehicle, this is the time. It's only three years away. This is the time to start buying copper I think.

Tom Wallace: Yeah, you just mentioned before that gold was your favourite metal. With all the central banks around have the world have close to zero interest rates right now for the most part, but they're starting to rise. What effect do you think that's going to have on gold?

Adrian Day: Good question, because I think if you ask most gold investors what's the one thing that really hurts gold, they'd say rising interest rates. Yes and no. It's not that simple. It's not so much rising interest rates, it's rising real interest rates first of all. That's nominal interest rates less the rate of inflation, so rising real rates and rates that are rising at an accelerating pace. We can look back before you were born in my first gold market in the 70s. You look at 1970 to 1980, interest rates were moving up, but of course there was a phenomenal gold market from 200 to 800 before Volcker came in and raised rates into the high double digits and got ahead of inflation. That's the important thing. I don't see that happening any time soon. Think of a shorter time period more recently, end of 2004 to middle of 2006. There were a series of six or eight incremental interest rate hikes by the fed at that point, and yet gold went up during that period, so higher rates do not necessarily hurt gold. I think, as I said, what's important is real rates.

At the moment, the Federal Reserve in the United States and most other central banks are terrified of raising rates too soon and too quickly and putting the economies into another recession. They're terrified of that. I think they're going to err on the side of ease, so even though they want to raise rates, they don't want to raise them too quickly. I'm not worried about high rates at the moment. I think this is an excellent time to be invested in gold. One last thing if I may, gold, like any asset, when investors are deciding whether to put some money into gold, they're looking at gold versus every other asset out there. Not just silver, not just copper, but stocks, bonds, real estate. You're looking at gold versus other things. With the stock market, certainly in the USA can talk to, you know, the stock market has year continuous, uninterrupted bull market. We're now selling at valuations at higher than 90% of the last century. That doesn't guarantee a stock market crash any time soon. Not at all. What it does mean though, and this is the way I look at things, it does mean that the risk has increased.

As the risk increases, and that's true of bonds. Bonds have very long cycles. We've had a thirty year body cycle. That's typical for bonds, but the odds are that the next major move in bonds will be downwards, downwards in prices, upwards in yields, particularly as the fed starts to sell off its bond portfolio. Real estate in many markets is at record highs relative to income, which is how I look at real estate, so with other assets very, very expensive, it seems to me the risk has increased, and investors should be putting a little bit of money into an asset class, gold and gold stocks, which tends to historically act in a contrary manner to other assets.

Tom Wallace: Yeah, we're touching on gold stocks again. Specifically the junior market is often viewed as exceptionally risky, and in the vast majority of cases most of the companies there are worthless, but there's good value there. My question is in regards to the risk, what do you see the difference is in risk between the junior market and your major producers, where should investors be?

Adrian Day: That's a good question, because often a new investor to a sector will go to the major companies. You're looking for drugs stocks, well you don't buy some little biotech stock right out the gate. You buy Merck or Syngenta or something. Well, that's a seed company, but you get the point. I think a lot of people are looking at gold, they think, particularly traditional investors, bigger investors, they think they're safer if they stick with major producers. That's a major mistake. Big mistake. You mentioned that the junior sector can be very risky. Not question. A lot of the companies are essentially worthless as you mentioned, your words not mine, but I think selected expiration companies and junior companies in a perverse way, are lower risk that the major miners. Why do I say that? Because mining is a difficult business. It's an inherently risky business. Robert Friedland, the big mining entrepreneur likes to say, "The murphy works overtime in the mining business," and if you're a major company like Barrack or Newmont and you've got seven or six or five million ounces that you're producing, that means you've got to find five to seven million ounces every single year.

That's a very, very difficult job, so what these companies do inevitably, because companies typically don't like to shrink, what they do inevitably is they overpay for marginal ounces in order to replace ounces that they're mining, so I think those mining companies are inherently risky as a broad group. The irony or the perverse thing is that for me and my money management, I look on the senior mining companies more as trading vehicles, because when gold moves, they do move. They're the first to move and they will move. There's no question. Very little question about it, and I look at selected expiration companies more as my long-term, low-risk bets. They may not necessarily move immediately, but if you pick the right ones you have a much better of a chance of a more sustained and a bigger one.

Tom Wallace: Can I twist your arm and ask for one of your favourites?

Adrian Day: Yeah. Yes, of course. I always say to people, and there's another sector, let me just mention another sort of sub-sector. Those are the royalty companies, and the royalty companies or streaming companies, royalty streaming companies as you know, they are companies that give money to mining companies, and in return get a piece normally off the top. It might be in that smelter return, 1.5% or something that they get off the top, so these companies completely obliterate the risk of mining because they're never obligated to put more money in, and yet they do get the benefits of the major mining companies going out and producing. One company that I like a lot is a company called Franco-Nevada, which trades in New York as well as Toronto, and that's a major company. It's an eight billion dollar company, but as I've often said for people who are new to the sector, that's a great one to start with. Among the juniors, oh my gosh, there are so many good quality juniors that are so cheap right now. One I would name is a company called Evrim, EVM on Toronto, which has joint ventures with other companies. Right now two joint ventures and one regional alliance, regionalized with Newmont, and then one of the joint ventures is with Antafagasta, the big copper company.

Two JVs and one regionalized. What that means is that other companies are spending most if not all of the money in exchange for buying into the projects that Evrim finds. Again, that's a very low risk way of playing expiration, so Evrim, and there are other companies like this, goes out and finds projects, generates projects, but brings in partners to get 50%, 60%, 70% of a project, but spend all the money. That's a low risk way of exploring.

Tom Wallace: Where can investors find out more about Adrian Day Asset Management?

Adrian Day: Well, we have a website. It's www.AdrianDayAssetManagement, one word.

Tom Wallace: Nice. Adrian, thanks for taking the time.

Adrian Day: Well, thank you very-

Tom Wallace: Ladies and gents, I hope you enjoyed today's interview. I encourage you to grab copies of Adrian's books. The Amazon links are found in the description box below. Make sure you hit subscribe so you don't miss out on any videos that I'll be releasing in the near future. I'll speak to you all shortly. 


Tom Wallace