How to Approach a Gold Mining Stock Investment

The importance of a good management team...

WHAT SHOULD you look for in a Gold Mining investment?

In this interview with The Gold Report Pathfinder Asset Management's Taylor MacDonald explains why well-structured deals, quality assets and high-octane management teams are what he reckons makes for solid Gold Mining companies.

The Gold Report: Taylor, many investors are confused by today's unpredictable market. Are you as confused as most market observers?

Taylor MacDonald: We have come to expect the unpredictability. Since 2008 volatility has become the new norm. You have to learn how to protect yourself in these hazardous times. 

TGR: How has 2011 tested your bag of investment tricks?

Taylor MacDonald: We focus on the long term, taking large positions in smaller companies. We look for unique assets, strong management teams and structure. In the past couple of years, we have learned to stick to our knitting, to what we do best. 

TGR: And what would you say you do best?

Taylor MacDonald: Our strength is identifying undervalued opportunities in the precious metals, energy, commodities and technology sectors. We like to find what I call concept companies early on. If necessary, we will provide whatever help we can to management teams as the investment theses unfold. 

TGR: Recently The Gold Report interviewed a former fund manager who cautioned retail investors to stay away from hard assets for at least the next 12 months and sit in cash until the global economic picture becomes clearer. What is your view?

Taylor MacDonald: There is some truth to that. However, it is in the times of the greatest uncertainty that the greatest opportunities are created. If you can find well-structured deals, quality assets and high-octane management teams with enough cash to get through the next year or two, I see this as a great buying opportunity. Valuations have been crushed; there are a lot of good buys out there. 

The one thing you want to avoid is financing risk. Look for companies that have a nice war chest. Stick with those that will be able to carry out their business plans when everybody else is suffering. There are a lot of companies on the Toronto Stock Exchange Venture board that I don't think will be around a year from now. 

TGR: In January, you nailed the call on the combination of the US Dollar breaking down and quantitative easing 2, "the perfect storm" that would push gold higher. While the Gold Price has appreciated considerably since then, it has fallen 15% from its high of $1,920/ounce (oz) in early September. What's your outlook for gold in 2012?

Taylor MacDonald: I think 2012 will likely be a flat or somewhat off year. I can see $200–300/oz more downside in gold at most, though. 

In 2008 and early 2009 there was a lack of faith in many equities, especially when currencies were failing. With the Euro tumbling, the US Dollar becomes the go-to currency. Unfortunately, anything that is good for the US Dollar is bad for things priced in Dollars. 

But, looking at the long-term picture, I see a very bullish picture for gold. You can still find a lot of good investments in the gold space and we think that it deserves a space in portfolios from both a valuation perspective and an insurance perspective. 

TGR: In late December the European Central Bank (ECB) offered European banks loans totaling the equivalent of $640 billion, the largest infusion of credit by the ECB into the banking system in the history of the Euro. What's your perspective on the ECB's action?

Taylor MacDonald: Only time will tell. This appears to be another Band-Aid solution. Until countries like Greece and Italy are forced to be more fiscally responsible, these loans are just temporary solutions. Taking from Peter to pay Paul, if you will. The issues in Europe are long term in nature and this is another reason that we have built volatility in as the new normal in our macro thesis. 

TGR: Early in 2011, two-thirds of your fund was in resource-based equities: precious and base metals, oil and gas. Has that changed? 

Taylor MacDonald: Yes. We were fortunate to have pared back our precious metals positions into the bull run on gold. We reduced our exposure in the commodity space and were lucky to get out of some of our positions at or close to their highs. 

We are now sitting at roughly half resource and commodity companies as a whole, with the balance in technology, special situations and the like.

TGR: How are you further mitigating risk in your fund?

Taylor MacDonald: One way is by refocusing on a list of core names. We are investing in fewer new deals and trying to play them much better; buy once and get as much as you can. We are looking to positions that are much more consolidated and focused, to know the companies better and be much closer to them.

Typically, we look for companies with a fair bit of cash on the balance sheet. The only exception to that would be investing in a company with a really high-torque management team that will be able to raise money irrespective of the markets. There are certain guys I would be confident in even if the treasury is looking a little skinny.

TGR: Do you follow certain people in terms of management?

Taylor MacDonald: We are trying to figure out whom the next mining industry "rock stars" will be. So far, I would name Amir Adnani, Ian Slater and Nolan Watson.

TGR: And are you happy to see 2011 in the rearview mirror?

Taylor MacDonald: Absolutely. While there is more turbulence to come—the proverbial black swans getting sucked into jet engines—overall I am optimistic. I think the long-term, bullish picture for commodities in general is still intact. 

TGR: Taylor, thank you for your insights.

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