Gold bullion and gold stocks are different asset classes that serve different purposes; the former is a currency that hedges against fiat currencies, while the latter is more risky and gives leverage to the metal, said Whitney George, president of Sprott Inc.
What does 2021 hold for the economy, stocks, precious metals and mining companies. We're here to discuss this with Whitney George, president of Sprott, Inc. Whitney. It's your first time on Kika. Welcome to the show. Thank you very much for having me. It's a delight. It's a delight to have. Yeah. View. Let's a walk through before we talk about the economy and your outlook.
Can you introduce yourself to the audience and tell us a little bit about your investment style, your fund, and what sectors you like right now? Okay, thank you. Um, well, I've been at this for quite a while, I think 40 years now. Um, and um, most of the time in the asset management business, most of the time is a portfolio manager, uh, very early on in my career.
I started to pay attention to, um, What Warren buffet was doing and reading all of this is annual reports. And so on a bit of a long-term value investor, although I'd characterize it more as sort of 1980s and nineties Warren buffet. Um, so I'm not in this mess in utilities, for sure. Um, as president of Sprott, Inc.
Um, I joined the firm and a half years ago after 23 and a half years at Royce and associates. And, uh, at the time I saw an opportunity, uh, to help the team build a world-class investment firm that specialized in gold and precious metals, uh, as well as, uh, mining equities, um, at the time, uh, we were in the middle of the bear market, uh, Um, and again, as a longterm investor, uh, for me, that's the best time to get involved.
And so currently, um, I'm helping manage Sprott, Inc. While on the side, I'm running a small, uh, portfolio closed-end fund, uh, sprawled focus trust, which is a general portfolio, uh, that uses, uh, the discipline that I've been using for more than 20 years. Now, you said you were a value investor, you must be familiar with the workers.
Benjamin Graham. He famously, well, I'm paraphrasing his book here, but he famously said that the, the, the difference between investing and speculating is a degree of risk you take. So would you consider yourself an investor or a speculator? Uh, I'm an investor. And, um, I would suggest that it has more to do with one's time horizon, uh, than anything else.
So I, I tend to look at things and think about them, um, over a three to five year horizon at a minimum, uh, obviously as buffet said, the best investment horizon is forever. It's forever. Uh, let's talk about your portfolio now. Uh, what are your favorite sectors? What are you overweight in? And, uh, can you tell us a little bit about your process for picking securities?
I know you're a bottom up investor. So what does that mean for, uh, for the viewers who may not be familiar with that term? Oh, bottom up means that I'm looking for interesting companies. Um, you know, one by one, uh, it's not driven by a macro view or a prediction on economic growth, um, or, or even predictions on an individual company growth.
It's, it's trying to identify, um, what I think are great businesses, um, that have strong balance sheets, uh, so that there's no risk there. Uh, that typically earn high returns on their own capital so they can share that with their shareholders. And then I like to bond them when they're out of favor. Um, and very often that's driven by macro fundamentals, um, and, and various parts of the business cycle.
So, um, I am trying to buy those things that, uh, the inexpensively, because something is bothering other investors at the time and then hold them for the long run and hopefully things turn around and work out or, or, um, mean revert. Um, so biggest sectors, um, should be no surprise to everybody would be a materials which would include precious metals and mining stocks.
Uh, that's about 19% of the portfolio. I kind of tend to limit one sector to 20%. So I'm fully in, uh, When it comes to the mining sector, um, gold has rallied and responded to all the stimulus this year. I think COVID provided, you know, a tipping point. Um, and we're on our way to modern monetary theory. I E uh, print, whatever we need to accomplish, what our society wants.
Uh, and gold tends to do very well. Uh, when, uh, rates are low and particularly when real rates after inflation are negative. And we're certainly there right now. So I, our gold price obviously, is very good for the mining sector. Um, and we are witnessing all the things that any fundamental investor would like to see, which is expanding margins, uh, free cash flow.
Increased dividends, uh, growth. Um, it's one of the, um, one of the few sectors you can point to where across the board, even with the, um, the impacts of COVID, uh, we're, we're seeing robust growth this year, and I think that's going to continue for the next few years. These tend to be long cycles. Um, Well, can you talk about the cycles and just a bit, I'm curious as to what you think about other sectors, not including your portfolio.
Is tech a big part at all? I know you follow Warren Buffet's work in, uh, for a long time. He famously was not invested in and big name tech companies, but now Apple is one of his core holdings. So he definitely shifted his views along the way. How do you feel, do you feel the same way? Um, well, Apple was my number one holding for about six years.
Um, um, I, I bought, I bought it actually the day after Steve jobs unfortunately passed away. Um, and that was a value moment for Apple. And that will remain devalue, you know, for a long, long time, you know, eventually Warren buffet discovered it, um, as well, I think in 2016 or 17, uh, hard for me, uh, you know, based on the math right now, uh, I know the outlook is very, very bright.
Um, and I know it's been a major beneficiary of, you know, the current conditions, but, um, from my perspective as a business, um, it looks pretty fully priced. So it's no longer in the portfolio and that's true of. Um, a bunch of other, um, tech, you know, semiconductor companies, things like that, that we have traditionally owned in the portfolio.
Uh, those are cyclical businesses and, and fall out of favor from time to time. But right now they're very much in favor. And so there's not a lot of tech waiting. It's probably the lowest waiting in my portfolio that it's been in in quite some time. Um, on the flip side, I'm a huge fan of the asset management business, um, being, you know, being involved in one myself and, um, uh, it's um, probably close to another, uh, heavyweight probably close to 20%.
In financials and all of those financials would be asset managers. Um, what I like about the business is the operating leverage that these companies have without taking on the financial leverage. Um, that's required in banking or, or most forms of insurance. So asset management would be another area.
Heavily overweight. Okay. Let's talk about the gold and mining sector now. So you said that Apple and some tech stocks are fully priced. Let's walk through why you think the miners are not yet fully priced. Can you, can you describe your evaluation process from looking at the company to coming up with a valuation to finally asserting that, uh, the true net asset value should be a lot higher than maybe what is trading at now?
Sure. Um, I use the same metrics across all industries. And, um, what I'm looking for is, um, buying companies, uh, at a business valuation. That makes sense to me. Um, typically that's somewhere around 10 times earnings, but I tend to look at operating income and it to kind of get an apples to apples comparison, uh, as, as compared to its enterprise value.
And right now, um, even if the metal prices don't move higher, um, many mining companies are generating free cash flows in the 10% range. They have very strong balance sheets, um, after a lot of repair and maybe overdoing it in the last cycle. Uh, but currently they're conservatively managed. Now they're using some of that free cash flow to, um, to develop new, uh, new projects, but more and more, uh, larger dividends for their shareholders.
Um, so I'd use the same metrics for asset managers, minors, um, technology. You know, Apple computer traded at 10 times earnings for years. Um, you know, now I don't even know what the multiple is. I wouldn't necessarily say in a zero interest rate environment, uh, any equity is overpriced, um, but certainly on a relative basis.
Um, I think that you've got better real growth prospects in, um, in earnings and the metrics investors look for, um, in the mining sector than you do in tech right now. And, and the industry is not widely owned. Um, I think you could put all the, the mining companies large and small, um, into Facebook's market cap.
Well, first of all, do you prefer the juniors or the seniors in terms of mining? Um, I tend to prefer the, as a generalist, um, we have a deep, deep bench and staff of, uh, portfolio managers and analysts in Toronto and actually spread around the country, um, that specialized in that. And so I rely heavily on their work.
Um, but for the most part, um, I'm wanting to probably be in, in recognizable names. Okay. So if an investor would have come into the producing space and were to pick a stock for himself, what are some of the valuation metrics that he first needs to screen for? Uh, in terms of, uh, the level. So like what's the industry average PE or Evie EBITDA that, uh, that you're looking at.
And as a benchmark, it depends on what an investor is looking for. If you're looking at a major company, um, you know, I like to look at things that are trading at about, um, 10, 12 times earnings, um, um, or a free cashflow yield. Somewhere between five and 10% at a senior, a senior mining company, you know, if they're looking for growth, um, you know, they might to get into an emerging producer or even an exploration company.
So I, um, for, I, I would, for my own money, I've invested in, um, sprouts, ETF, uh, which is broadly diversified. Um, we have a junior mining ETF and a, and a senior mining ETF, and they're both factor based as opposed to market cap weighted. Um, but again, um, when generalists come, you know, they're going to start with the big recognized names.
Um, and I would expect them to do very, very well until you get deeper into the cycle and you have to dig a little bit deeper, no pun intended, uh, to kind of find the valuations that I would be comfortable, but at this stage, um, I think you could, you could, you can own the majors because, um, again, I expect the amount of.
Rotation that could come into this space among generalist. Um, you know, and they're not a lot of specialists left around the world anymore after the last bear market, um, you know, will, will flock to those liquid names. Can you, can you share with us a few of the names that you do? Like yeah, we, we tend not to like, uh, to do, to talk about stocks, but again, I.
I, you know, I, if I were making a recommendation because this is not my area of specialty, I, I would look at one of our ETFs and because I think it is a risky business, there are all kinds of risks. And I think diversification is very important in this space. Well, if you were to. If someone were to give you a financial statement for a mining company, just, just, just the three statements, the income statement, balance sheet, the cashflow statement.
And if you were to just ignore the notes for a while, what w w what are some of the first things you read the top three things you would be looking for on those three financial statements, uh, to screen out any companies that you would not invest in? I'd start with the balance sheet. Um, I have a broad rule, uh, which is very simple.
Um, it's part of. What was called the old DuPont model, uh, where, um, I measure, um, assets divided by a shareholder equity. Um, anything, a two or higher is a no-go for me, uh, that picks up all forms of debt, um, working capital and things like that. So I that's where I start. Um, the next thing I would look at is, uh, is the operating income, um, and, and, and an estimate of what operating income might do.
Um, the operating leverage in a mining company is enormous to the price of gold. Uh, their costs are relatively fixed. Um, in some cases recently, even down like energy, uh, and labor in certain parts of the world. Um, so a, you know, two or $300 move in the price of gold, um, dramatically increases their operating margins.
So some sort of estimate of, of what kind of operating income they're going to earn over the course of the next year. And, you know, can I buy it, um, at a business valuation? That makes sense to me, um, uh, a price where I'll do well. If another mining company comes along and acquires them as opposed to a price that's based on some very far out forecast of metal prices or, or, or earnings for the company.
Okay. What about their costs, Whitney, the all-in sustaining costs of the industry. Have you noticed a trend in the last couple of years? Whether or not cause a be going up or down and what, what to you is an appropriate level of all in sustaining costs on a pronounced basis? Um, well, I think it's, it's probably, you could build a new mind today if you were so inclined at a thousand dollars an ounce, all in, um, and that's, that's very profitable, double with $1,870 gold.
Um, I think you'd want a margin of safety. Um, I certainly wouldn't want to invest in something that is. Yeah, North of $1,200. Um, if you look at Mark Risko at, um, at Barrick, Amy, I think he's an 800, is his event smart for his projects, but again, um, if gold prices stay around where they are now, I suspect that that will come up because again, um, these companies are depleting their assets and are going to have to replace them, uh, either through exploration and development or acquisition.
Um, so, um, the margins are great right now. I suspect as you get longer into the cycle, if I'm right about, you know, general inflation, uh, their costs will go up. Uh, but it's really a function of, um, how far they're going up relative to the price of the end product. When you, one of the arguments that I've heard against investing in gold companies is that gold companies inherently are more risky than the metal itself.
For example, the management team mismanaged as costs that presents. Um, a risk to the investors. Why not just invest in the metal way if you're going to be into the space? Um, I think, I think they're different. Um, you know, for me personally, um, the metal represents a currency. Um, You know, and a hedge against, um, you know, this country and others, United States and others mismanaging their currencies.
Um, so it's almost a bond surrogate and certainly it performs, um, and provides the kind of, uh, insurance that you would get in a bond portfolio, particularly when rates are so low. Or, or, you know, negative in real terms. And I think, I think it might even be the bond investor type, uh, that has been looking at the actual commodity or the, or, or goal is a currency.
Um, minors are risky. Um, they have, they give you the, uh, the leverage to the rising prices. Um, So their earnings can grow exponentially, um, in a rising gold price, you know, two or three X of the returns that you might get, um, owning the physical metal. So I think of owning gold equities is a little bit more.
Tactical a little less permanent. Um, I think you've got to pick your spots. Um, I happen to think right now, uh, it's a particularly good time to be investing, but it's not a forever kind of thing. Now the cycles do run very long, you know, 10 years, um, their business cycles. That's, you know, that's probably the minimum of what it takes.
To get a new mine into production. Um, and the returns over those cycles can be very, very robust, but the, um, but the corrections are, are obviously, you know, steep and fast and, and can deliver a very bumpy ride. Gold miners have seen a great year this year as gold prices have risen. Do you think that.
Suppose next year, gold prices stay flat. Let's suppose it doesn't go anywhere up or down. It stays the same level as it, as it is today. Do you think Myers still have room to expand in that scenario? Absolutely. Um, I don't think, um, the consensus forecast for, um, earnings for these go Myers among the sell side research.
I've read. You know, bacon, the current kind of price, the current pricing of flat pricing for gold, but I think most models, longterm of gold prices falling back off to 1400 or more or something in that neighborhood. So, um, I think you will see positive earnings. I think you'll see earnings, revisions, upward earnings surprises, you know, all the things that get, uh, general equity investors excited about stocks.
I think, um, a lot of that's baked in, in a flat pricing environment. That's interesting. How let's talk about the economy now, your outlook on the economy and how that relates to your outlook on gold prices. Now you mentioned just now that, uh, some analysts have forecast a much lower gold prices, and I'm curious as to why and whether or not you agree with them.
Um, I think they do it for conservatism. I mean, nobody, nobody wants to get out over their skis on these things, and we all know gold prices are volatile. Um, I, I happen to believe that we are going to be in a permanently higher gold price, you know, certainly priced in dollars. Um, just because the world can't afford a more expensive dollars.
Um, the only way out of our current financial situation is currency debasement. Um, because we're not paying it back. Um, no one's going to get reelected on an austerity program. Uh, and we certainly don't want to default. So there've been times in our history and I was a history major in college. Um, where, um, rates were held, um, artificially low, uh, to allow it the currency to re-establish itself at a lower level to make the, the large debt pile, uh, more affordable.
And I think that's exactly where we are now. And I think it argues for much higher gold prices, you know, not. They forecasted back down to 1200 or 1400. Um, but again, I, I can't speak to how the sell side research model works. Um, I just, you know, know what goes on and in, in good markets, you know, the analysts are always trying to play catch up, um, on their earnings forecast.
Um, earnings surprises occur. And most of what we've seen, certainly in the last reporting period have been better than expected earnings with accompanied by increased dividends. And again, you know, factors that, uh, that investors tend to, to flock, to, to get to the economy. I think, um, I'm, I think the economy has recovered faster than people thought.
Obviously we're in a bit of a pause here with the pandemic and in the winter season. Um, my expectation and the market seems to start is starting to price this in is for. A more robust year in terms of GDP. Um, a lot of pent-up savings, uh, that, that, uh, that can go into the market. I would expect, um, under the new administration, we'll finally get some sort of infrastructure, um, kind of program, uh, that will, uh, will give, uh, the economy an added boost.
And with that. I would expect that, you know, generally prices or inflation will be on the rise maybe to the surprise of many who have now pretty much forgotten that it can ever exist again. And so I would think that the economy is going to do well. And I think inflation is going to pick up. For the market in general, that may mean, um, slightly lower mobiles due to inflation on higher earnings or a push.
Um, it wouldn't surprise me if we have some more steep, sharp corrections along the way. This has been a liquidity driven market up until now all the money that created to get us through COVID has nowhere to go. Uh, other than into the markets, you know, if the economy actually starts to pick up speed in the spring, um, some of that money may come out of the markets and go into the, the general economy.
Um, and that could produce some challenges, but in my way of thinking, it will certainly produce some opportunities. So given the, uh, your outlook on inflation and potential corrections along the way, what other sectors do you like besides materials and precious metals and mining companies? Well, so I'd like anything that's related to, um, infrastructure at this point.
I think it's something we just have to do. We've been talking about it forever. Um, and you know, now there's no reason not to. Um, so that would be aggregate companies. It would be, uh, steel, uh, distributors. Um, it would be, uh, any, anything in, in the construction, AWP, PVC pipe for infrastructure. Um, it would be, um, basically hard assets.
Uh, I also like, uh, protein as a long-term theme, um, that would be chicken processors or egg producers, um, because as prices rise and I expect grain prices to rise the cost of. Food protein will go up. The world is, is increasingly increasingly growing its appetite for protein. Um, and I would look for the most affordable proteins as being the best place to be positioned.
Um, And then again, um, I think energy is going to do a, do a lot better than it's done for the last couple of years. Um, uh, particularly, um, natural gas in the United States. I see it as the long-term transition fuel, uh, to get us from, uh, where we are now with fossil fuels and coal to, um, to, uh, clean energy.
Um, it's, it's the cleanest form of fossil fuel. We it's abundant and I would, um, I would expect a recovery and. Energy and energy service companies when Nate, thanks very much for that recapping for the outlook. I appreciate it. My pleasure. Happy new year to you. And, uh, I look forward to speaking with you in 2021.
Again, that would be great. Thank you very much and happy holidays. Happy new year. Happy holidays. Thank you very much for watching Kitco news. I'm David Lynn.