John Hathaway – Gold: The “Third Rail” of Capital Allocation

The following is the transcript of John Hathaway’s interview with Real Vision, titled, ‘Gold: The “Third Rail” of Capital Allocation.’

Gold john hathaway

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Synopsis: What are the best gold equities to own right now? Legendary investor John Hathaway of the Tocqueville Gold Fund sits down with Dan Tapiero of DTAP Capital to discuss gold’s recent breakout and to review his favorite companies in the space. Hathaway lays out the bullish macro environment for the yellow metal, walks through the difficulties of building new mines and the impact on global supply, and notes why he expects more M&A activity in the sector. He also expands on current opportunities for investors and explains just how inexpensive gold stocks are right now. Filmed on October 15, 2019 in New York.

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JOHN HATHAWAY: I think we're back on a path towards monetary debasement. And that is what we in the gold world have always expected would take place. And now it's sort of out there for everyone else to see.

Even when I talked to somebody who could allocate to gold, they may do it personally, but they will not do it for their clients because there's career risk. And frankly, it's the third rail of investment ideas. It's to the point where-- we figured this-- that you can buy a new mine by buying an existing company at a 35% discount to what it would cost, let's pretend you're Newmont or Newcrest or one of them, to start from scratch. I've never seen that in 20 years of doing this.

DAN TAPIERO: Hello, everybody. Dan Tapiero, founder, DTAP Capital and a co-founder of Gold Bullion International. And today, I have the pleasure of interviewing JOHN HATHAWAY. John, good to see you.

JOHN HATHAWAY: Good to see you, Dan.

DAN TAPIERO: John is a legend in the gold space for you who are not aware or who don't know of him. I would say certainly, one of the two or three most successful, and as I said, certainly well-known gold equity fund managers. And he's been with Tocqueville for a very long time.

JOHN HATHAWAY: 22 years.

DAN TAPIERO: 22 years. Currently the chairman of Tocqueville Management. And he's just done a deal recently with Sprott Gold of Canada. And so I thought we just start off talking a little bit about what he's doing now and what this deal means. I think it'd be interesting for the viewers to hear.

JOHN HATHAWAY: Great. So we're very excited to be joining Sprott. Sprott is I think, becoming the go-to name in precious metals space. They are 100% about promoting what we do. They have closed end bullion funds, they have lending to the junior mining space, they have some ETFs that are basically Canadian-based. And so by joining them, we now have access to their due diligence capabilities, particularly in the smaller cap space. They have numerous relationships throughout the business, which is helpful to us. And last but not least, they have a full time marketing group that I hope will be very successful in raising a lot of money for what we do.

And I think the timing is terrific because I think gold has finally turned the corner. And hopefully, we have the wind at our back instead of in our face as we've had for the last six years. So I'm very excited, as is the rest of the team. We'll be continuing to do what we've always done, which is basically very granular due diligence on specific companies, active management for our mutual fund and our European funds that we sub-advise.

DAN TAPIERO: Yeah, that's very exciting. I think it's a fantastic platform. Why don't we just get right into it and start with your view on-- I mean, I think you're right that after six years of slog gold, has broken out of $100 range, and is now at a six year high, touched 1550. But let's talk a little bit about your view of the macro backdrop, because I know that plays into your overall view on gold.

JOHN HATHAWAY: For sure, I think that's sort of the bell ring. And when gold broke out of the six year base, you can trace it back to the change in the mindset of the market, where going into the end of last year, the expectation was that the Fed would continue to be on a path towards tightening, running off their balance sheet, and basically less and less accommodative in terms of providing liquidity.

And then when Powell had that press conference in late January, and after the market had basically completely fallen apart in December, said, well, maybe we won't be running off the balance sheet maybe we'll just stand pat. That was kind of a hint that they were going to change course, which of course they have done and are probably going to go even further. And you can sort of identify the breakout to that and then also I think he said similar things in June.

But clearly, I think the expectation of tightening-- the pretense that they were going to be a responsible central bank is just totally out the window. And they're joining the crowd and creating more and more liquidity. We saw what they recently did in terms of the repo market they're not calling a QE. But I don't know how they get away with that. $60 billion a month is bigger than QE 2, I think.

So I think we're back on a path towards monetary debasement. And that is what we in the gold world have always expected would take place. And now it's sort of out there for everyone else to see.

DAN TAPIERO: That's one thing. What are some of the other things that make you think that the gold price has more legs here?

JOHN HATHAWAY: Well, another thing that I think about a lot is you have something like, $15 to $17 trillion nobody really knows how much of sovereign debt that has a negative yield and to me that is evidence of systemic risk that's huge way bigger in my opinion, than the housing market or the mortgage market, toxic mortgages of '07, '08. When interest rates go up-- and they will go up in my lifetime and yours-- there's going to be a huge amount of capital loss. It'll be held by pension funds it'll be held by institutions that are from a regulatory point of view have to have so-called safe assets. Obviously, I suppose central banks have it as well.

But there will be capital losses that will dwarf what we saw in '08. And I'm not sure the repercussions of that. But I think there will be negative for financial assets in general.

DAN TAPIERO: But you know, gold has been very tied to the real rate. So if you think rates really aren't going up a lot, that's not necessarily positive for gold.

JOHN HATHAWAY: If the real rate goes up, I would agree with that, because higher real rates are poison for gold, but if you go back to the 1970s, we had nominal rates on the short end near 20%. And 30 years were 13 or so. But the real rate was basically neutral to negative. And that's because of inflation. So another thing that nobody expects, and why gold is a very cheap option with asymmetric returns on the return of inflation, which is the only way governments will be able to deal with the unfunded liabilities in pension funds and entitlements, will be to devalue through inflation. And just how that comes into play, we don't know.


JOHN HATHAWAY: But to me, if rates were to go to 1% or 2%, two things two things are going to happen. One is highly valued financial assets bonds and equities are going to take it on the chin. And two, that's most likely to happen under conditions of inflation.

DAN TAPIERO: Is that your base case? I mean, we've talked quite a bit about this. Is that it's your base case that we at some point in the next few years have that return of inflation?

JOHN HATHAWAY: I wouldn't say that everything rests on that. But why not take a free option on the possibility, which is where we sort of have to go? Yeah, I don't know if we're going to have the kind of inflation we saw in the '70s. But I think we'll probably have more inflation than we have now. But again, I would not rest everything on that particular point.

DAN TAPIERO: Right. And that's very strongly linked to a view of the dollar. You're probably not thinking that we have inflation rates backing up and the dollar continues to be strong.

JOHN HATHAWAY: No, just the opposite. I would say the dollar, and how you measure it-- the DXY is basically a pair trade with the euro. Could the euro go up against the dollar? I think it can. I can think of reasons why it would. But that's not really fundamental, because when I hear this thing in the financial media that the dollar is the best house in a bad neighborhood, I think to myself, this is ridiculous, because the neighborhood is going down the tubes. And so maybe the dollar is the tallest midget, all these stupid analogies.

But at some point, capital will seek out safety, which is what gold represents. And I have to point out that gold has outperformed every stock market since 2000. I mean, most people don't even think about that.

DAN TAPIERO: And that's been in a relatively benign-- I mean, over a 20 year period, we've had ups and downs.


DAN TAPIERO: So I mean, I think that's almost separate from what your view or my view or anyone's view is. It just is a fact.

JOHN HATHAWAY: It's a fact.

DAN TAPIERO: In the last 19 years, since 2000.

JOHN HATHAWAY: Gold has outperformed bonds and stocks. Not only the S&P. And gold is at record highs. And yen, I think Canadian dollars, the pound, the euro, and Aussie dollars.


JOHN HATHAWAY: And just the US dollar, we're still sort of struggling. And it's because the dollar has been relatively strong compared to other currencies.

DAN TAPIERO: Yeah, I want to get back to sort of talking more about some other things that you think are impacting the price. And we talked a little bit about the geopolitics, what's your sense there? What are the drivers there for you?

JOHN HATHAWAY: There's so much to talk about there. You and I talked before this about what's going on in Turkey. And what's happening there is a disaster. And it's basically alienating centrist type Republicans who voted for Trump, holding their nose maybe the last election. And you just wonder if he's going to keep them. And the point of all that-- going from Turkey to Trump and the election cycle-- is the chances that you would get a more radical, very liberal populist left-leaning administration is downright scary in terms of what it could mean for future budget deficits, for tax rates. And if you're, for example, allocating capital for a major corporation, and you're thinking about making major investments somewhere in the world, in the US or elsewhere, and you don't know what the tax rates are going to be, you're not going to do a darn thing until the election is over.

So I think there's a very good chance we could be in recession territory next year. Which would do a couple of things. One thing would be the budget deficit, which just crossed a trillion this year in a time of economic expansion, could easily go to a trillion and a half or $2 trillion. I mean, it's going to be way higher than anyone thinks. So that will do wonders for the credit rating of the US dollar. And that's how you could get a much weaker dollar, which gets back to investors, capital looking for a diversifier, a non-correlated asset that could protect capital during under those circumstances. Which is what I would imagine to be adverse capital markets.

DAN TAPIERO: I mean, it looks to me like Trump has this thing already in the bag. But it sounds like you think that Warren has a decent shot here.

JOHN HATHAWAY: I don't know. I mean, I just don't know. But I think that he is beginning to lose the center that had held together for him in '16. And it may mean that just some of those people will not come out to vote. I don't really know. If it's scary enough on the left, maybe he's he still gets in. But I do think it's more in question today than it might have been three or four months ago.

DAN TAPIERO: Mm-hmm. And what about the China-US--

JOHN HATHAWAY: The China deal?

DAN TAPIERO: Yeah, or no deal, or who knows, exactly.

JOHN HATHAWAY: And that's a joke to me. Because when gold got pounded a couple of weeks ago, because we were going to have this fantastic once in a lifetime tying all the loose ends together deal, that's when gold got smacked. And the thinking was, I'm sure, in terms of the sort of reflex action was, all our problems, all the sort of volatility we've had over the summer in the equity market, the uncertainty about the economy, was all because of tariffs, and because of no deal, and Trump playing tough.

And so what we have is a show of American weakness and the Chinese playing Trump like a fiddle. Because Trump said it's the best deal ever. The Chinese are saying, well, maybe, but we still have to talk. They're talking about staging it. Everything I read about it makes me think that they're really we're not sure if there's a deal. And being in an election year, I think the Chinese have the strongest hand and that's going to come out in many different ways.

So I don't think that the so-called Chinese deal, whatever it is, we don't really know, is the cure all for what was taking place, causing market volatility and downside risk.

DAN TAPIERO: OK, so you you've put together a few of the macro points that I think are driving your view. So what's the forecast on the gold price in your head let's say, 18 months, and let's go five years out?

JOHN HATHAWAY: The way I've heard it put best, and I've learned after all these years never to put a number and a date in the same sentence terms of any kind of price.

DAN TAPIERO: That's OK. Let's just--

JOHN HATHAWAY: I know we're among friends.

DAN TAPIERO: What do you got? Right.

JOHN HATHAWAY: So I thought it was very well put by David Rosenberg of Gluskin Sheff. And David gave an interview with the National Post in Canada. And then he and I sat in the same stage at Beaver Creek and we talked about it further. And what he said, and I think this makes a lot of sense, is that we have a cycle high in bonds in terms of valuation. We have a cycle high in stocks in terms of valuation. And the one major asset class that's been left behind is gold. And the interviewer said, would you be surprised by $3,000 gold?

Now this is a guy who's not a gold guy. He's a rational economist, made his career-- you're shaking your head.

DAN TAPIERO: Somewhat rational. I've read his stuff over the years.

JOHN HATHAWAY: OK, but he's a well-respected guy. He's not in the gold camp. But he said he would not be surprised by $3,000 gold. And I think that his point was that gold needs to make a cycle high-- and pick any number.

DAN TAPIERO: So let's talk about that for a second. Why do you think it hasn't? Why have people been hesitant? it just broke out a few months ago. And it was dead to the world for years. So what's kept them back from buying? And then what's going to get them to allocate?

JOHN HATHAWAY: Great question, and that's what I think about it all the time. So I think the fact that mainstream investing, S&P names, tech, SOXX-- all that has done fine. So why would you venture into something that hasn't performed? And frankly, it's the third rail of investment ideas, because I've heard of your partner getting tossed out of an office because he was going to talk about gold. He said, don't you dare talk about gold to my team. You know, some RIA in Wisconsin or someplace like that.


JOHN HATHAWAY: So why is it the third rail? Because it hasn't performed for six years.

DAN TAPIERO: No, it's the number one performer from 2000. People ignore that.

JOHN HATHAWAY: Memories are short. And we understand that. But the other thing is that even when I talked to somebody who could allocate the gold, they may do it personally, but they will not do it for their clients, because there's career risk. If you underperform, if you're a mainstream investor, and you're 20 basis points let's say, behind the S&P, and you had a 5% allocation to GLD or GDX or the kind of thing we do, you could get canned. You certainly would find tremendous disapproval.

DAN TAPIERO: Well, doesn't that mentality have to change?

JOHN HATHAWAY: Well, there was a time, and I remember it, when gold was really doing well and everybody wanted in at the top.

DAN TAPIERO: You mean '10, '11 or do you mean 78--

JOHN HATHAWAY: '10, '11. Well no, I'm old enough, but I wasn't doing gold then. But that just shows you how cycles work, and how psychology changes. So we're kind of just coming out of a six year nuclear winter. And it's hesitation, early stage stuff. Just an interesting little fact is that even though the gold-backed ETFs have gained AUMs this year, GDX has lost like, a billion six, even though it's up 35%.

DAN TAPIERO: GDX is the gold miner ETF. We're get into that in a minute.

OK, again, you say nuclear winter. And I'm still trying to figure out-- so what gets people to have a different mentality? And the way you respond to that was really to refer to the US institutional investor. But we know 70% of global demand for gold is China, India, and the emerging markets. And so maybe the US institutional investor is not changing their view until it's at 2,500 or 2,800.


DAN TAPIERO: So isn't the next leg here going to be driven by-- we've seen huge Russian central bank buying. We know the Chinese are buying. Do you have any sense as to what might drive them to take this to the next level?

JOHN HATHAWAY: You're talking about the USRAA?

DAN TAPIERO: No, I'm talking about the foreign demand. They've been steady, but is there something that-- because I don't know that the IRAs is without something more obvious, like OK, MMT is coming in, something really obvious like that, I don't know that they'll switch. And this concept of career risk, I don't really understand that, but I know it exists. I just wonder is there something on globally that you think could get the global buyers. Because we're here in America, and America is still the wealthiest country in the world. But we're not a driver for gold.



JOHN HATHAWAY: We will be.

DAN TAPIERO: OK, so you think we will be.

JOHN HATHAWAY: I think the marginal buyer are investment flows in Western capital markets-- Europe, the US, and so forth.

DAN TAPIERO: So why haven't the Europeans with all those negative bonds, all their bonds are yielding negative, you would have thought that they would have taken gold up to 2,000, 2,500.

JOHN HATHAWAY: I think there is-- I know in Germany, where we sub-advise UCITS, there has been physical buying and substantial-- I don't have the number off the top of my head-- but there has been substantial buy in particularly in Germany. But I don't think, and people would disagree with me-- on this point I do not think that physical buying of metal has been steady and particularly by central banks rising-- I don't think that that drives the gold price as much as people might think. And we can talk about supply and demand in a second.
I think that it's the movement of capital into gold surrogates, which would be futures, COMEX futures, derivatives, and options, all that sort of thing.

DAN TAPIERO: The leveraged money.

JOHN HATHAWAY: The leveraged money. That really is more of a market moving explanation than the steady sort of absorption of physical metal in the 70% of the world we just talked about. So that's almost always there. And what happens actually now that the gold price has moved up this year, the Indians have backed away. They'll come back. But they'll wait for a while, and see if the price sort of settles in, because it's kind of in the DNA of most Asians to have physical metal. And it's almost always there.
Central banks are taking up a huge amount of gold, but I think the swing factor comes down to the leverage players--

DAN TAPIERO: So you mean Paul Tudor Jones sticking up his hand and saying, it's my favorite bet over the next two years, and I see 1,700. That's going to get--

He did. He said that.

JOHN HATHAWAY: I know he said. You've got a lot of these really elite luminaries like Ray Dalio, and Rick Rieder, the bond guy at BlackRock, they're all saying the right things. And you kind of wonder, say, well, why aren't people doing anything about it? And I think it comes back to what I said earlier, is it's just been in so much of a penalty box for so many years, and the career risk that goes with it-- that'll change, but that's kind of--

DAN TAPIERO: That's good. It's got to climb a wall of worry. And if everyone were jumping up and down about it, it's done already.

JOHN HATHAWAY: Exactly. Right.

DAN TAPIERO: OK. So let's move a little bit now to the supply/demand picture which you know a ton about.

JOHN HATHAWAY: Yeah. You can get the numbers from the Gold Council. I mean, they're out there pretty much the Bible when it comes to that. You kind of have to look at it.
The picture is really, you have supply, which is new mines supply, is sort of flattening out. And it probably is on a glide path lower.

DAN TAPIERO: That's interesting.

JOHN HATHAWAY: It's a glide path lower maybe for five, six, seven years. I don't know.


JOHN HATHAWAY: And that's because of how hard it is to build a new mine today. And these big miners, little miners, big miners, collectively have a reserve life that's the lowest it's been in 30 years. And I think on average, it might be 10 years on something like that.

DAN TAPIERO: All the gold critics always say, oh, well, you can always dig more out of the ground.

JOHN HATHAWAY: Well, you can if you can get permits. If you can go to a-- a lot of the gold is located in--

DAN TAPIERO: Turkey, you mentioned.

JOHN HATHAWAY: Turkey, which is one of the better ones right. Try Burkina Faso. Try places-- Argentina. Rule of law is very changeable. So is capital going to go into a place like that? Well, in some cases, yes, but mostly, no. And so you've got that at work.

You've also got PSG is a huge thing now. And so get environmental--

DAN TAPIERO: Oh, so where it's coming from.

JOHN HATHAWAY: Where it's coming from and permitting.

DAN TAPIERO: So maybe just explain that a second. I mean, the ESG.

JOHN HATHAWAY: Just getting permits-- the mining industry has a bad rap of having you raped the landscape. And that was probably deserved maybe 50 years ago. But you cannot build a mine today anywhere, I don't care what country, without complying with first world standards on emissions and dealing with toxic things like cyanide, which is--


JOHN HATHAWAY: And getting the permitting is excruciating, and getting more so all the time. So what used to take maybe five years now takes 10 years. 10 years, maybe longer. There's a mine that probably could be a great mine in Romania that everybody's known about for-- God, I've known about it since I've been doing it, 20 years.

DAN TAPIERO: Yeah, I even know about it.

JOHN HATHAWAY: Yeah. And it's not getting built, because the environmental movement, the green-- not to be pejorative, but they have successfully blocked it. So when I say a glide path down for five years, it could be longer, just because the hurdle is so high.

DAN TAPIERO: So it would take a significantly higher gold price to really tease that gold out?

JOHN HATHAWAY: Exactly. And I don't know what number that is, but it isn't another $200 or $300. It's probably five years of steady prices closer to 2,000.

DAN TAPIERO: Yeah, that's interesting. And I think that that's important to think about it in within that framework, because it sort of puts a base underneath the price. So it's 1,500, if you're concerned it might go back to 1,100, 1,200, if we're on a glide path lower and supply, it's going to be very difficult for it to stay down if it goes back down for whatever reason.

JOHN HATHAWAY: Let's pretend it goes to 1,300. It's going to scare the devil out of investors. It's going to scare the mining companies. They'll just going to a bigger shell, hide further under their desks, whatever.

So the mining companies, the big ones like Newmont and maybe Barrick, for example, are still using $1,200 gold to value their reserves. And if they're using it to value their reserves, that's how they value a potential new mine. And the numbers don't work at 1,200, period.

DAN TAPIERO: It's almost more bullish long term if we do go back down. In a way.

JOHN HATHAWAY: I wouldn't enjoy it.

DAN TAPIERO: I wouldn't, either. Trust me, I don't. But the way--

JOHN HATHAWAY: Yeah, it would just give you another five years of no new significant supply.

DAN TAPIERO: So you said something recently-- we were chatting that you were at a conference or meet up, your team met over 60 companies.


DAN TAPIERO: So I don't think many of these viewers get to talk to even one company.

JOHN HATHAWAY: They wouldn't want to.

DAN TAPIERO: Well, anyway, you've got a whole team, and you're very engaged. So maybe some of your observations from those conversations would be interesting for people to hear.

JOHN HATHAWAY: Sure. There are a couple of mining conferences every year that I go to. They're very helpful for me and the rest of the team. One is the Denver Gold Show, which takes place in September every year. Another one is the precious metal summit, which takes place in Beaver Creek every year. Very close to--

DAN TAPIERO: To where you live.

JOHN HATHAWAY: To where I live.

DAN TAPIERO: So it's very easy.

JOHN HATHAWAY: It's convenient. But it also is good, because it has all the smaller companies. And then BMO has one in Florida-- Hollywood, Florida near Miami every February. So that's how I stay in touch.

Now the team, basically, they're in touch all the time. But I get to see in the space of those four or five days, 60 different CEOs.

DAN TAPIERO: So what were some of the you note your observations that really stuck out that you found really interesting?

JOHN HATHAWAY: Essentially, they don't believe the gold price. They're not excited about it. They're, I think, conditioned by years of having been beaten down by investors, by low stock prices, to be ultra conservative. And there's just not a lot in the pipeline of new mines as a result. They've cut back on exploration. When you see Barrick and Randgold getting together, I think there's a lot of vacant office space in Toronto as a result of that. And when Goldcorp and Newmont got together, there was a lot of vacant office space in Vancouver, where Goldcorp used to be headquartered.

And so the intellectual capital of the business and the lifeblood of new mine development is your geological staff. And if you cut back on that the way it's been cut back on, basically truncated completely, you don't see it in the numbers so much. But certainly, there might be fewer projects that are looked at, fewer projects that are advanced. And so that would be one observation.
But I think basically, they look at, as most people do in the investment world, and it happens in business, too, they look at life with a rear view mirror. And they look at the past five or six years. And they're super reluctant to stick their neck out to spend $2, $3, $4 billion, which is what it takes to build a significant new mine.

DAN TAPIERO: But you're very bullish generally on the sector. And I think you mentioned before the GDX, which is the VanEck ETF--


DAN TAPIERO: On a larger gold miners. I mean, I looked at the chart recently, and it's the same price, basically, that it was in 2008, which is totally crazy given what looks like to be a pretty good future.


DAN TAPIERO: So what's your sense just broadly about the sector? Can we go back up to those highs that we were at in '06, '07?

JOHN HATHAWAY: It has to be driven by the gold price. You look at the fundamentals, and every company has different aspects to it. There's local political risk. There are so many different things in terms of vetting and asset and vetting and management. But at the end of the day, there's only one thing that really matters. And that's the gold price.

DAN TAPIERO: Well, it's also how they manage their businesses.

JOHN HATHAWAY: There's all of that.

DAN TAPIERO: Right. But it's not going to have a big move without gold.

JOHN HATHAWAY: You're not going to get generalist investors coming into the space unless you have an eye popping move in the gold price.

DAN TAPIERO: But these things are really super cheap. I mean, some of them trading at four or five times EBITDA.

JOHN HATHAWAY: They're ridiculous. Particularly the smaller ones.


JOHN HATHAWAY: And it's almost to the point where-- we figured this-- that you can buy a new mine by buying an existing company at a 35% discount to what it would cost-- let's pretend your Newmont or Newcrest or one of them, to start from scratch.

So the make or buy-- you can buy a premium in the market for a single asset company and have it be accretive to obviously, the target and also, to your own shareholders. And you're saving all that money on building a new mine. So I've never seen that in 20 years of doing this.


JOHN HATHAWAY: Never seen it.

DAN TAPIERO: Wow, that is cheeky.

JOHN HATHAWAY: To me, that just suggests that when the psychology changes somewhat-- this is again, in the corporate suites of the larger companies-- you will see some not merger of equals, which was Barrick-Randgold, for example, but larger companies swallowing up smaller ones.

DAN TAPIERO: Yeah, that's exciting. So why don't we talk about some of those companies are your favorite? I think that later on, we're going to actually talk a little bit about Bitcoin, if you can believe that or not, and crypto.


DAN TAPIERO: Only a little bit. John's probably the only person in the entire world who can speak about gold mining equities and Bitcoin at the same time. But the reason I mention that is that there are companies in this space that have the ability to go up three, four, or five, even 10 times. And those are sort of Bitcoin type numbers. And so I know you have some favorites. And maybe just tell us what's your thoughts?

JOHN HATHAWAY: In fact, with Sprott, we launched a special situations fund in February of this year. And the thesis really was what we've just talked about, which is the inevitability of M&A. And the observation that there are companies that are generating free cash trading at four and five times EBITDA. Having been a value investor back in the '70s, I remember that was pretty cheap. And you look around in the markets and say well, what else is there? And come back to the space as being a standout in terms of valuation.

DAN TAPIERO: Especially given that the backdrop both macro and what I would call macro gold are so positive. There seems to be a complete disconnect.

JOHN HATHAWAY: And I think that's because you've sort of gone to this passive investing where sort of hyperactive capital flows can go in and out of something like GDX. And when you look at the array of research that's done on the sell side, it's basically there to serve the investment bankers.

So we have extreme value. You have reason to think that earnings will rise substantially because of you on the gold price. Not everybody would agree. But if you think that, you can make a case-- and then you have the possibility of M&A-- that you have a lot of 10 baggers in market caps of a billion dollars.

DAN TAPIERO: So give us a few names.

JOHN HATHAWAY: Sure. A handful of names.

One would be Detour gold. It's a low grade but long live mine in Canada. We've just gone through a very constructive replacement of the old board, installed a new board, and new management at the highest level. Where all the blocking and tackling that you need to do in a large open pit of low grade mine needs to be done. But suddenly, this company, and we're not all the way there yet, is starting to gush free cash. Even at these gold prices, call it--

DAN TAPIERO: What's in the market cap?

JOHN HATHAWAY: It would be a couple billion Canadian, roughly. And in my mind, it's a crown jewel for the kind of asset, because if the mine life of the industry is collectively say 10, 11 years, you want something in Canada that has 20 plus year mine life. And that's just knowing what we know now. I mean, we haven't even talked about discovery around the existing mine life.
So that would be one example that's liquid that you could easily buy and maybe get out of if you change your mind. But that would be a top favorite, let's call it.

And another one would be Torex, which has a mine in Mexico that is generating tons of free cash. I think it's trading at four to five times EBITDA. And I forget the multiple on free cash, but it's significant. And it's a single asset company. So there's a single asset company discount. And one thing I didn't mention is that when a new mine would come along, all the headline worries about labor strife and so forth in that particular state of Mexico, which there has been, would go away, because it's sort of taken up into the fact that-- pretend it was Newmont-- has 13 mines that people don't focus on local issues the way they do on a single asset company.


JOHN HATHAWAY: So that's part one. Part two is that they have a new technology, which can take 30% out of mining costs. And I won't get into it, but it has been developed by them. And it basically has to do with mechanization. Some of it's off the shelf, some of it is proprietary. It's all patented. And what I think will happen with Torex is that they will be able to buy stripper-type assets, stripper wells, but assets have been given up for dead by the existing owners. But with their technology, they can bring them back to life, and maybe get another 10 years out of them.


JOHN HATHAWAY: And that single company discount, single asset discount, if they're successful in doing this, and I expect them to start actively doing this in the next 12 months. Then it disappears. And suddenly, Torex has mines all over the place that everybody thought were no good. And so I think that's another one.

DAN TAPIERO: That's interesting.

JOHN HATHAWAY: One more, maybe. MAG Silver, which has a joint venture with Fresnillo in Mexico. It is called Juanicipio, which is neither here nor there. But very high grade. Will start producing in 2020 at the end of next year. And cash generation, will be, because of the grade, and without any sort of heroic assumptions on the silver price, very substantial. Fresnillo operates the mine. The ground has tremendous exploration potential. So in our minds, in our analysis, the initial production of 4,000 tons per day will double soon thereafter to 8,000. None of that's in the share price. There's nothing in the share price for a better silver price.

DAN TAPIERO: Yeah, which I see as sort of a leveraged gold, without getting into the specifics.

JOHN HATHAWAY: It's gold on steroids.

DAN TAPIERO: Yeah. So those are two in. Mexico and you did mention you're concerned about jurisdictional issues. So I wonder, is there something in the US or something else in North America that you like, for people who don't want to venture outside?

JOHN HATHAWAY: Sure. Again, the world is shrinking in terms of what you your comfort level with specific jurisdictions. To me detours, is sort of the icon of that. But you could also mention something like NovaGold, our friend, Tom Kaplan, is very prominent in it. But the mine is located in Alaska. It's own jointly with Barrick. It will get built. And when it gets built, it will be the biggest gold mine in the world, the biggest longest life. It will be a fantastic asset.

They're biding their time. Barrick is biding its time. It's going to happen, because it just has to happen.

DAN TAPIERO: But does that contradict your comment earlier about supply sort of running off?

JOHN HATHAWAY: None of what I've talked about is big enough, even this mine, to change that.

DAN TAPIERO: Or big enough, quick enough.

JOHN HATHAWAY: Big enough, quick enough. It's episodic. It's not like oil, where you can suddenly punch a bunch of-- or a new technology that would suddenly make uneconomic ground become economic. So you just don't have that. So NovaGold would be, AGAIN safe. Jurisdiction and fabulous assets, smart people. Well financed.

DAN TAPIERO: Super leveraged to gold price.

JOHN HATHAWAY: To me, it's a perpetual call on the gold price.

DAN TAPIERO: Yeah. So that's very interesting. And I would say-- I mean, these days. I don't really hear about gold miners from anybody. Not even in passing. I mentioned to somebody that I was interviewing you and they're like, oh, John, great guy. Like, one of the few survivors of the last six years, but is now in a very good position. And so basically, if you haven't had to be in the market or weren't in the market in the past six years, now is a wonderful time.

JOHN HATHAWAY: I mean, I'm excited. And yeah, we've done a lot of work, we know all the assets and stuff that's still in development. So I think we have concentrated in our small group, a lot of intellectual capital that's going to be very hard to replicate, at least for a few years.

DAN TAPIERO: OK, let's make a slight little shift, a detour to talk about Bitcoin a little bit. Because I think there's a universe out there, of which I'm a part, that think that Bitcoin really is hard money. I don't like using the phrase digital gold because I think that Bitcoin is a lot more than that. I think it's-- as I've said, it's 20 things and maybe this is one of them. Coming from a traditional gold background, I think it's interesting that you've engaged with it. And so why don't we just tell the audience some of your thoughts and what you think of it?

Because there are a lot of people in the gold world who are not friendly towards Bitcoin. And people, I would say, generally over the age of 50, 55, their immediate response is that it's magic hooey phooey money. And it's a fraud or they talk about Mt. Gox still. Or whatever it is. So I think it's fascinating that you don't see it that way.

JOHN HATHAWAY: Yeah, and again, I mean I'm way less knowledgeable on this than on gold. But what I think it's important to know about-- because some people think of it as money, used in a transactional form, maybe as a store of value. And in my position, I need to know about at least something about it. My observation would be that money is never constant. It's always changing, it's evolving.

I just think back a few years ago, you would pay for things in cash. I mean, who uses cash now? Credit cards are the only way to go. And so why can't it go beyond that to digital transactions, and it's so much more convenient. That has nothing to do with the merits of gold. I look at I look at Bitcoin as it's related to gold. It's part of an evolution of what money is all about. And I don't think Bitcoin threatens gold, but I think it can be useful, and used in a monetary sense. It can be an investment, speculation, whatever you want to call it. I don't understand it beyond that.

But I think people in the gold space need to know that it's not a threat. I mean, if anything, it's an ally, because I see it as having been invented, sponsored by people who did not trust the financial system as it stands-- paper currency, central banks, all that. Anybody who's sort of that persuasion has to be thought of as in some way or another as an ally. And that's how I see it.

DAN TAPIERO: The biggest problem with this whole space is it's like a language problem, that every person you speak with-- and this is no joke-- articulates what Bitcoin is to them differently. So it's not like saying gold, yellow metal. We all agree on that.

JOHN HATHAWAY: But everybody has a different--

DAN TAPIERO: Bitcoin-- if I say Bitcoin, what does that mean, you're going to get something different from each person. So someone might say, a gold person might say, oh, Bitcoin scarcity. Because Bitcoin is supposedly scarce. Someone might else say digital money, someone might say, programmable money. Someone might say, fraud. I mean, it's unbelievable. So the way you articulate it--

JOHN HATHAWAY: To me, the last thing I would do is get in a pissing contest about Bitcoin. As far as I'm concerned, if it works, that's great. It's not a threat to, gold, but it's kind of like a fellow traveler.

DAN TAPIERO: Thanks for that talk an update on your views. I think it was a fantastic interview.


DAN TAPIERO: Fantastic.


About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at) - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver