Mostly: Classical

[Frank Pembleton]

John Embry: Outlook on Gold
Interview by Donna Guzik

The price for bullion will increase more than the price of gold stocks this year. But with expectations that gold will hit $500 an ounce this year, gold stocks will still do pretty well, says Sprott Asset Management President and Portfolio Manager John Embry

Queenstake Resources Ltd (T.QRL)
Southwestern Resources Cp (T.SWG)

Transcript
IC: Welcome to InvestorCanada.com. I’m Donna Guzik.
2003 was a good year for gold. How will 2004 shape up? Joining me now is John Embry.

He’s President and Portfolio Manager of Sprott Asset Management. He manages the Sprott Gold and Precious Metals Fund.

What were the driving forces really behind gold prices for 2003, John?

Embry: Well, I think was obviously a growing recognition that currencies, and particularly the US dollar, you’re in the early stages of dramatic debasement.

And, you know, there’s a growing recognition that gold is returning to its currency status. It’s the one currency that can’t be debased.

And when money decides to seek an outlet in that direction, the gold market relative to the paper market is quite small and the impact on the gold market can be dramatic and I think we’re in just in the very early stages. We haven’t seen anything yet.

IC: You mentioned we’re in the early stages. Are you anticipating, first off, that the US dollar will remain weak?

Embry: Yes. I think it’s unquestionable that the US dollar will remain weak.

They may have the periodic rally, but the fact is the fundamentals are God awful and there’s only one direction it’s going to go over time, and that is down.

IC: How much will it go down over the next year?

Embry: That’s a really hard call. Why I’m particularly bullish on gold is that none of the other countries want their currencies to go up particularly.

So they are taking action. You have to look no further than the Japanese who are buying dollars hand over fist to prevent the yen from appreciating so their trading position doesn’t deteriorate vis-à-vis the Chinese and other countries in the Far East.

And, so consequently, I can’t tell you how far the dollar’s going fall against a basket of currencies because I think, as I said, the other countries will prevent their currencies from rising too much.

So what I would say is that the currencies and the dollar, in particular, will fall significantly against a basket of commodity and most particularly against gold, which is both a commodity and a currency.

IC: Is there a geographical location or a country that will have an increase in demand and moving away from paper money? Is it going to be Asia or China in particular?

Embry: I think there’s no question that, I mean, to date the leading consumer of physical gold has been India.

And interestingly, I mean the Rupee has been getting much stronger at the same time that the Indian stock market has been on wheels. So consequently it is sort of underwritten even better demand in India.

But I think the real important factor going forward is going to be the Chinese because they don’t trust their paper that much and I mean, now you’re freeing up the whole gold market in China allowing the individual to buy it and I also think the Chinese Central Bank would like to see more backing for the Renminbi with gold.

So I think you’ve got a double-barrelled effect there. I think both the Chinese public and the Chinese authorities will be gold buyers.

IC: You have said previously that gold production around the world will fall over the next few years.

Embry: I stand by that statement. We’re seeing a lot more exploration now, but there’s a, you know, a lag time from the time you sort of find something until you get into production.

And we’re paying for what happened in the post-Bre-X period, when there was very little exploration and very few new ore bodies found.

And as a result, there’s a gap in sort of the production schedule and as mines exhaust themselves and as other ones that have been severely high graded return, the life of mine grade and what have you, production is going fall in the next three or four years.

I think, right now, we’re in the neighbourhood of 2,500 tonnes. I would think we could fall somewhere close to 2,000 or, you know, 2,200 hundred tonnes.

To me, that’s already baked in the cake. You can’t avoid that.

IC: Does this mean we’re going to see more consolidation in the gold sector?

Embry: Don’t know. I think we’ve seen some degree of consolidation. The big problem is that as I see, you know, I sort of promoted consolidation at certain times, and you can never seem to get agreement.

Everybody seems to think their properties are worth more than the other guy’s, so when they try to put them together, they can never get an agreement.

But there should be more consolidation. But there’s probably not as much as you’d like.

IC: Well, how will this fall in production affect gold shares?

Embry: It won’t affect gold shares particularly, in the sense that it may affect the ones that have the large production that is declining.

But I’m sort of more focused on ones that are trying to uncover new ore bodies or that at least are maintaining or increasing their production for the simple reason that the real metric that’s going to drive the price of gold shares is going to be the rise in gold price.

IC: Let’s talk about some of these gold shares.

Embry: Sure.

IC: These companies, which ones do you like going into 2004?

Embry: Well, one that I’ve had great success with in 2003 that is really checked back here late in the year is Queenstake Resources.

It was sort of financed when it purchased the Jarritt Canyon property from Anglo and Meridian at $0.22 and it rallied as high as about the mid-90s and now it’s checked back into the high 60s.

I think that these people are putting together a significant reserve base. They’ve got the capacity to produce 300,000 ounces.

The plant and everything is producing at that rate now. The issue was always whether or not they were going to have the reserve base to support this for a long time.

I think it’s becoming more and more evident that they are, and so I suspect there’ll be a revaluation of this stock next year. I like that one particularly.

IC: Do you still like Wheaton River?

Embry: No, not particularly. I think Wheaton River has been a stock that’s done extraordinarily well.

I was buying it earlier last year at $1.20 and it touched $4. I think it’s sort of in the pack. I think it will perform with the gold area.

I don’t think it will necessarily out perform the gold sector.

IC: So no upside.

Embry: No, it’s not one that I am sort of wildly enthusiastic about. An area that I do like quite frankly are some of these emerging China plays.

And, you know, Southwestern, I still hold a large position and I will continue to. But clearly, this thing went up by 12-13 fold in the past year.

It was going to do nothing of that ilk, but I think it’s going to continue to move higher and I like the prospects for it very much.

It just doesn’t have the same upside magnitude. But some of these other ones that are sort of coming to the fore in China, one that I particularly like that I’ve bought a lot through my fund is something called Mondoro Mining and they are an advancing project in a very favourable area over in China.

Great access, great state support and what have you.

I think that, you know, this is an area where, you know, they haven’t used a lot of modern mining techniques and exploration techniques, so I think the prospects of uncovering some interesting stuff in that part of the world is going to be very high.

IC: What’s your view of the larger ones, Barrick, Placer Dome?

Embry: Same as ever. I mean, Barrick to me is far too hedged and even though they’ve stated they’re going to sort of cease hedging, I don’t think they can get off the hedges that they do have without an enormous cost.

And if the gold price rises as rampantly as I think can, I think people are going to start focusing on sort of their mark-to-market losses and their existing hedge book.

I don’t like the stock.

IC: So, for investors is the way to go looking at the juniors and perhaps bullion?

Embry: Yes. I think that you can look at certainly the quality juniors. I’m concerned that because of the enthusiasm that’s sort of developed for this area that an awful lot of junky stuff has gotten financed and you've got to be very selective.

I think good juniors will do exceptionally well. I think some of the, you know, like I still continue to like the large, unhedged companies.

Some of the South Africans because of the strength of the Rand, have gotten really hit. I think Goldfields, for example, is a great buy under $13 for the ADR in the States.

IC: So looking forward to 2004, another good year for gold?

Embry: Yes.

IC: Just how good?

Embry: I think it’ll be better than this year in terms of the gold bullion. I’m not so sure that the stocks will necessarily reflect it to the same degree as they did.

I think there was an enormous anticipation priced into the stocks last year, but I think if the gold price achieves my targets for this year, which would certainly be at least $500, I think the stocks will do relatively well against a list of other types of stocks.

But whether or not they’ll have the type of appreciation they’ve had over the last two years, like 2002, as you know, my fund was up over 150 percent, in 2003 it was up about 65.

I mean, those are pretty staggering appreciations and the gold price, in that time frame has only moved from the sort of the high 270-290 area, up to just over 400.

I think we may be coming up to a period where conceivably the bullion might post equally as good a percentage gain as a basket of stocks.

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