This is part four of a multi-part interview with Joe Boskovich Sr, Chairman and Chief Investment Officer of Old West Investment Management. The interview is part of ValueWalk’s Value Fund Interview Series.

Throughout this series, we are publishing weekly interviews with value-oriented hedge funds, and asset managers. All the past interviews in the series can be found here.

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The Old West Investment interview has been divided into several parts available at the links below and is downloadable as a PDF at the bottom of this page.


Value Interview With Old West Investment Management [Pt. 4]

Continued from part three...

You also like gold and owned several gold miners earlier in the year. Is this a theme you still like and are you still buying gold miners after recent gains?

Yes, we still do own several gold miners, and I am very excited about the outlook for these companies.  Much of what I see going on in the world today favors the ownership of gold in one’s portfolio. I believe there are several dynamics that will push the price much higher in the near future.

Consider the following factors:

  • Interest rates at a 500 year low. Today’s low rates could cause another financial crisis, bankrupting pension plans, putting retirees at risk, and hurting stocks. Gold, which has no yield, now has as good of a yield as holding cash!!!
  • Every central bank in the world is implementing monetary easing, which results in the steady debasement of fiat currency.  I believe gold is a form of currency, yet it is the only currency in the world that is limited in supply.
  • The constant threat of terrorism
  • An explosion of debt in China, with thousands of bad loans being rolled over into new loans. China’s banking system is now $35 trillion, which is larger than that of the U.S., with a much smaller economy.

Keep in mind we are not investing in gold bars or the GLD ETF. We are investing in companies that produce a product with ready and growing demand.  How did we choose the mining companies in our portfolios? First, following our investment process, we own companies run by owner/managers. Management teams that are heavily invested in their company, combined with modest compensation packages that are respectful to us shareholders. Second, when a company’s revenue is dictated by the price of a commodity, a strong balance sheet is imperative. The price of gold can be at or below breakeven for long stretches, and too much debt can be crippling. Third, reserves must be in business friendly and stable countries. Many mining companies have reserves in countries like the South Africa and the Congo, and if the price of gold was high enough, nationalization would be a real possibility. Our miners have reserves in Canada, Chile, Mexico and the good old U.S.A.   Our two biggest gold mining positions are New Gold and Novagold.

NEW GOLD, INC (NGD)

New Gold is a Vancouver based mining company with properties in Mexico, Canada, the U.S., Australia and Chile.  If the price of gold goes as high as I might speculate, I take comfort in the fact that NGD’s mines are in countries that are politically stable.  

Randy Oliphant is the long time CEO of NGD, and he has done a wonderful job of positioning NGD as one of the low cost producers in the industry with an all in cost of just over $800 per ounce.  With today’s price of $1,340 per ounce, the company is operating well in the black.  Oliphant owns $20 million of stock in the company, so our interests are truly aligned.  The company has $500 million of liquidity with $219 million in cash.  Although NGD has not been profitable the past two years due to the low gold price, they could become extremely profitable in the future as the gold price recovers and new production comes on board.  Pierre Lassonde, known as the godfather of mining, has been a long time director, and he owns 6 million shares of stock.  Better known companies like Newmont and Barrick are mostly mentioned in the media, but I much prefer New Gold as a long term investment.

NOVAGOLD (NG)

Novagold has no income and doesn’t even generate revenue, but they are sitting on one of the largest known reserves of gold in the world.  The Donlin project is located in Alaska.  The proven reserves of Donlin are 40 million ounces of gold, plus huge amounts of copper and silver.  Dr. Thomas Kaplan is Chairman of the Board, and owns 80 million shares of NG, or 25% of the company.  Dr. Kaplan has a long history of successfully investing in precious metals and energy.  The second and fifth largest investors in NG are legendary investors John Paulson and Baupost Group’s Seth Klarman.

The Donlin project is a 50/50 joint venture with Barrick Gold Corp., and production is still a few years off.  I love the fact that they haven’t been burning fuel, tearing up equipment and depleting resources the past few years at low prices.  Hopefully, once production begins the gold price will be much higher.

NG has $117 million of cash and short term investments, and they are burning $20 million per year as they continue through the permit process. They have plenty of liquidity to bring this project to be construction ready, at which time I predict they will sell their interest to a major miner and possibly Barrick.        

The market seems to be reaching new highs almost every day valuations continue to rise. What’s your playbook for the rest of the year, are you preparing for a downturn?

I do not know what the markets will do for the rest of this year and next.  I think there are a lot more negatives than positives, and investing in the broader market today would really scare me.  I think index funds might be in for a rude awakening over the next few years.  I believe holding cash or having a large short position needs to be a function of a research process rather than making some sort of macro prediction, which is unknowable.  On that note, our short book is abnormally high. The ratio of insider selling to buying in companies is extraordinarily high.  

What I do know is we own a collection of high quality companies run by great management teams, whose interests are aligned with ours, and that are selling at attractive prices.  We are excited about our portfolio companies and think that they have bright futures.  

And lastly, what experiences have shaped you personally as an investor?

Before

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