SmallCapPower.com: Robert, you’re the lead portfolio manager for the Dynamic Precious Metals fund and Dynamic Strategic Gold Class with Toronto-based Dynamic Funds. Tell us a little about you and your firm.
Robert Cohen: After getting a degree in mining and mineral process engineering, I worked at various copper and gold mines throughout Canada and Chile. I went back to school to do an MBA in the late 1990s and joined Dynamic Funds during a summer internship back in 1997; I have been here full-time since 1998. I later did the CFA designation and I’ve been lead portfolio manager for over a decade now.
As far as looking at mines and company valuations, I was actually doing that before I joined Dynamic. I worked for mining companies and did a lot of that type of work; looking for acquisition targets, building discounted cash flow models, and I just developed a good nose for good projects with good management teams and tried to adhere to that philosophy.
SmallCapPower.com: The Dynamic Strategic Gold Class was launched in August 2009, and was up 41.3% in 2010. It’s down a little so far this year but the fund is noteworthy given that it’s the only fund that mixes equities with gold bullion. Whose idea was that?
Robert Cohen: Well, that was our Chief Economist Martin Murenbeeld’s idea. We found that there are times in the market when gold stocks don’t behave well even when the gold price is relatively stable. We created this fund in order to try to smooth out some of the periods when equities are being sold off and gold bullion, which is more macro economically driven, hangs in. Stocks usually outperform bullion but pension funds, often due to mandate reasons, are forbidden from owning gold stocks, but can own gold bullion.
There has been a huge preponderance of ETFs and bullion funds created in recent years and it’s attracted massive amounts of capital. We asked ourselves: “Should we set up our own bullion fund?” And said why don’t we combine Martin’s and my expertise where we run a quantitative model that will look at the valuation of equities vis-a-vis the bullion price and oil price and a few other factors where we try to counterweigh the market. We use the equities like a gas pedal on a car; just a little gold bullion where we hedge the currency, we add some torque to it with certain low-risk stocks or lower-risk stocks. We run the Dynamic Strategic Gold Class as a very conservative fund for people that were never comfortable with an all-equity fund and its volatility.
SmallCapPower.com: What’s the approximate ratio of bullion to equities right now in the Strategic Gold Class fund?
Robert Cohen: As we speak it’s 42% bullion and 57% equities and 1 % cash.
SmallCapPower.com: Given the amount of bullion in the fund and the need for performance to attract investors, what were some of the price projections for gold that you were throwing about before you launched the fund in 2009?
Robert Cohen: We only forecast the gold price out only six quarters at a time. So presumably in August 2009 we probably would have been projecting a gold price US$150 higher than the spot price at the time.
SmallCapPower.com: You mentioned oil and its relationship to the gold price. Could you please explain how gold trades in relation to oil?
Robert Cohen: Basically, gold is a currency and it’s not so much that the gold price is going up, it’s that the value of paper money is falling. As paper money falls, it takes more paper money to buy hard assets, whether it be gold or oil. You can look at the cross reference of gold to oil because that would be, in a way, a bit more of a measure of a real oil price. While people say, “Wow, the gold price has gone up and the oil price has gone up,” if you look at the oil-to-gold ratio, it’s fairly stable.
We are seeing price increases in hard assets, whether it be real estate, gold or oil. But gold is really your stable monetary currency that is the only commodity that central banks use as a monetary asset. They don’t use other metals. They don’t use oil. You don’t have central banks around the world diversifying their foreign exchange reserves into anything other than other currencies and gold.
SmallCapPower.com: That’s true but Central Banks are not diversifying into gold as much as they used to.
Robert Cohen: No, I disagree with that. The United States is still the biggest holder of gold and they haven’t sold any. You now have India trying to collect gold. A lot of the Asian currencies are trying to get their hands on gold. And you have this competition between investors trying to buy gold to protect their purchasing power along with central banks trying to diversify out of paper money that’s losing value.
SmallCapPower.com: The spot price for gold recently eclipsed US$1,500/oz. When you launched this fund, did you think we’d get to US$1,500/oz. this quickly?
Robert Cohen: Certainly, yes. We’ve been looking at the United States for the last decade and saying, “You know, they’re in a lot of trouble.” We still see the gold price propelling up fairly steadily for years to come. We are looking already into next year at prices as high as US$1,900/oz. and we might be revising that upward still. We look at a full range of gold prices and where they could be; probability-weighted they’ll likely be north of US$1,600/oz. within a year. Now, if we test the model, we can get to just about US$2,000/oz. in about a year from now.
SmallCapPower.com: Mr. Murenbeeld, whom you mentioned earlier, was at the Denver Gold Show last year where he said that we’re roughly in the middle of gold’s bull run. We’re about 10 years in at this point. Do you think there’s another 10 years or so left?
Robert Cohen: Well, you never know. I just look at what’s gone on in terms of the printing of money, the devaluation of currencies and international trade with countries like China. Nothing’s reversing. We’ve lost manufacturing capacity. We’ve got problems in Europe. We have a lot of problems with a lot of paper currencies in the world. We got problems with the yen. We’ve got problems with the euro. We got problems with the U.S. dollar, all of which are the key currencies in the world. And even gold has gone up in Canadian dollar terms, which tells you that at the margin there are problems with just about every paper currency. Gold is how you protect yourself. I look at gold as a pier that extends out into the ocean. And the ocean level represents the value of paper currencies and the tide’s going out. Last time I checked -- piers don’t grow. I think gold is your bastion of what everything is worth relative to gold. We’ve had total erosion of paper money for hundreds of years. But we’re seeing a very fast erosion of the value over the last 10 years or so and it’s been spurred by huge, huge trade imbalances and currency imbalances in the world.
SmallCapPower.com: Mr. Murenbeeld argues that gold is becoming an asset class unto itself.
Robert Cohen: Resources as a whole are becoming an asset class unto itself. For instance, real estate was marginalized for a long time but now we see real estate picking up. I think the theme is hard assets versus other types of stocks as an emerging asset class. Hard assets like real estate and commodities. They’ve often been rejected by the masses as being risky or what have you. But it’s really been the best value. I think the worst investment is paper money. If you put a hundred dollars in your mattress in the 1960s and pulled it out today, all you have is $100. Even if you had it in a bank account your purchasing power would have been hugely eroded. The best investments are in other asset classes and gold’s a really good way to protect your purchasing power through time. One analogy is a man’s suit. They said the ancient Greeks bought a suit of armor with an ounce of gold and today it would buy you a suit at Harry Rosen.
SmallCapPower.com: A nice Coppley or Hugo Boss suit.
Robert Cohen: Yes, it would have to be one of the higher end ones -- not Moores.
SmallCapPower.com: Let’s get back to your funds. The Strategic Gold Class fund has a position in San Gold Corp. (TSX:SGR), which is a company in Ubika Research’s Gold 50 Index. But you have positions in a number of producers. Tell us about some of those companies.
Robert Cohen: San Gold has a market cap of about $900 million. It’s lost a bit of its value due to some production hiccups in the fourth quarter. The fund’s biggest company is Goldcorp Inc. (TSX:G; NYSE:GG) with a $42 billion market cap. We basically own equal-weighted stocks in that regime and there’s not a lot of gold producers to pick from in there. But we own most of them. There’s only one development company in there and that’s Perseus Mining Ltd. (TSX:PRU) but they’re going to be in production in July. And we owned Osisko Mining Corp. (TSX:OSK) since we started the fund and they recently went into production.
SmallCapPower.com: You mentioned San Gold and you said it has had some production hiccups at its San Gold mine in Manitoba. Do you expect those to be resolved in the near future?
Robert Cohen: San Gold has excellent geology. I’ve never seen a situation where you have great geology and the mine can’t produce. Usually when you have failures in this business it’s because you have bad geology. Even with the best management teams you can’t make bad geology work. San Gold has the right geology.
SmallCapPower.com: But how do you determine which equities are going to be among your positions? Do you focus more on management or do you focus more on assets?
Robert Cohen: Mostly on assets but on good management, too.
SmallCapPower.com: How do you quantify good management?
Robert Cohen: People who understand how to manage their companies, how to build a mine; those who can execute a plan.
SmallCapPower.com: Do you get out and visit projects?
Robert Cohen: Yes, probably at least a dozen per year. I also have an analyst that works for me. So, for example, on the same day he’ll be at one project in Idaho and I’ll be at one in Mauritania.
SmallCapPower.com: Is there a particular threshold in terms of a resource estimate that you’re seeking?
Robert Cohen: I’m looking at everything from geology for a junior company to the senior companies that are attractively valued with good assets. We prefer Barrick Gold Corp. (NYSE:ABX; TSX:ABX) and Goldcorp over a Newmont Mining Corp. (NYSE:NEM; TSX:NMC), so we exclude owning Newmont. We like things like Kinross Gold Corp (NYSE:KMC; TSX:K) and Agnico-Eagle Mines Ltd. (TSX:AEM) and Eldorado Gold Corp. (NYSE:EGO; TSX:ELD) among the larger-cap producers.
SmallCapPower.com: What are some things about those companies that you find attractive?
Robert Cohen: Well, good management and world-class gold deposits.
SmallCapPower.com: What about the growth curve in terms of production?
Robert Cohen: Usually there’s a growth curve or companies that have an attractive history of astute acquisitions. In my opinion an astute acquisition is not buying another producer, it’s buying a development company at a much cheaper valuation and completing the execution of that mine build and seeing it through to production. I don’t really care for an operating company merging with another operating company. I do like development companies merging with each other because if there are synergies you can make the combined company even more palatable to a senior company.
I have more respect for companies like Agnico-Eagle, which has never bought another producing mine. Agnico has only bought development projects. That’s the type of discipline I like. Or I like a Kinross, which bought Red Back Mining and its operating mines. There’s something game-changing about that acquisition. People have not fully appreciated the geology; by buying Red Back, Kinross now has a world-class greenstone belt in Mauritania.
SmallCapPower.com: So you like Kinross’s Red Back deal. What about Goldcorp’s $3.5-billion deal for Andean Resources?
Robert Cohen: That was a great deal because it was a producer buying a world-class development project that was not yet in production. They were getting it at a very attractive valuation and now Goldcorp has a world-class epithermal vein system in Argentina.
SmallCapPower.com: What about some names that may be off the radar for some readers? Perhaps some companies that are showing good prospects for growth but that aren’t well known.
Robert Cohen: Well, Perseus Mining is about to go into production in Ghana, West Africa. That’s a $1.3-billion market cap company.
SmallCapPower.com: Is there a bit of a jurisdiction risk there?
Robert Cohen: Well, you never know with West Africa but Ghana has, thus far, shown to be fairly stable. Ghana has a very advanced mining code but some of these countries can be unpredictable. I think everything outside of Canada is unpredictable.
SmallCapPower.com: Perhaps one more name, Robert?
Robert Cohen: We like Sabina Gold and Silver Corp. (TSX:SBB). Sabina has some world-class precious metals and base metals deposits in Nunavut, like the Back River Project.
SmallCapPower.com: Do you ever dabble in silver?
Robert Cohen: When the opportunity arises where there is something that’s undervalued. But I don’t look at silver as a key thing to chase.
SmallCapPower.com: But silver outperformed gold last year and is continuing to outperform gold this year.
Robert Cohen: I agree. I’ve stubbornly missed that but I’m not a silver pundit. It doesn’t have the monetary characteristics that gold does. Our work and Martin’s work on silver concludes that it’s a high-beta version of gold. Therefore it’s got double the volatility of gold, so it’s not without its risks – and it’s purely retail driven. If the retail ever decides to exit, you don’t have central banks or other things backing it up. I think the reasons that silver pundits give for owning silver are the reasons why you don’t want to own it. Silver’s a byproduct of a lot of gold mines and we have a lot of silver components in companies like Sabina Silver. But I don’t think it’s a be all and end all of investing. I look at gold as a far more attractive monetary asset than silver.
SmallCapPower.com: Gold has had a pretty good run so far this year, but it’s not necessarily translating into a run up in the prices of most gold equities. Most notably junior and mid-tier gold companies, many of which actually have seen share price declines. What do you attribute that to?
Robert Cohen: Perhaps analysts have been putting too much emphasis on production. Slight production misses, for example, are panicking the market. I think the analysts on the street have collectively panicked investors on most stocks.
SmallCapPower.com: You mean it’s a sentiment-driven phenomenon?
Robert Cohen: Yes, it’s largely sentiment-driven. I mean we have oil prices moving up and profit margins are not growing as fast as people think the profit margins should grow based purely on the gold price going up. The cost of getting gold out of the ground is related to oil prices and steel prices and that sort of thing. Say, for example, that the gold price goes up and the Canadian dollar goes up and the oil prices move up. That means profit margins are not growing as robustly as a simpleton might assume.
SmallCapPower.com: What should investors expect from gold for the rest of 2011?
Robert Cohen: For the rest of 2011, I can project anywhere from US$1,575/oz. to $1,700/oz. I think that’s a reasonable projection but probably toward the upper end of that. It’s really hard to project it precisely.
SmallCapPower.com: Thank you for spending time with SmallCapPower.com
Robert Cohen’s Disclosure: Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any funds managed by Goodman & Company, Investment Counsel Ltd. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.
Interview Disclosure: This interview was conducted by Brian Sylvester on behalf of SmallCapPower.com. Mr. Sylvester and/or his family may own shares of the companies mentioned in this interview.