Why one gold mining stock analyst has turned traditional wisdom on its head...
MICHAEL BALLANGER joined the investment industry in 1977 with McLeod Young Weir, Ltd., and currently serves as an investment advisor at Union Securities, Ltd. His substantial background in corporate financing is further informed by his 30 years of experience as a junior mining and exploration specialist.
In this interview with The Gold Report, Michael Ballanger reveals why he is taking the opposite approach to the traditional "Sell in May and go away"...
The Gold Report: In your last interview with us in April of 2010, you predicted higher precious metals prices and inflation. Both came true. We continue to see more "quantitative easing" (aka money printing), global civil unrest and high unemployment. Do these factors portend higher prices for precious metals?
Michael Ballanger: Approximately three years ago, I read Ayn Rand's "Atlas Shrugged" for the first time, after which I urged every client to do the same. Of the hundreds of books that I have read over my 34-year career, no book has ever mirrored the current investment landscape like this one. You have big government in bed with big business on a global scale at the expense of the middle class. Period.
History has proven that capital moves to locations in which it is fairly treated and since the G20 nations are hell-bent on debasing the purchasing power of their respective currencies, capital has been fleeing currencies in favor of hard assets of every flavor — gold, silver, copper, oil, grains and so on so forth…where that capital is "fairly treated."
TGR: What about near term, over the summer months?
Michael Ballanger: Near term, until around mid-August, the junior mining sector will be very, very quiet as measured by the TSX Venture Exchange. Not only do we have the seasonally quiet summer months, we also have a sector that rallied from 1,400 to around 2,460 since our last interview. Any market up 75% in 13 months is ripe for a correction and we have already seen a 20% haircut off the highs in early March.
TGR: The old market maxim dictates: "Sell in May, go away." We're through May and apparently survived the Rapture. Do you have a plan for summer investing?
Michael Ballanger: For the junior mining sector, it is actually March that historically marks the peak and tends to coincide with the PDAC (Prospectors and Developers Association of Canada Mining Investment Convention) held in Toronto each year. However, I have patented a new phrase which applies to the Canadian Yukon explorers. "Buy in May and make some HAY!"
The traditional rationale is based upon climate, money and precedent. Climate constraints make it impossible to drill in the winter months, so all of the activity fires up in June. As for money, last year the Yukon attracted around $70M in exploration.
This year, the junior Yukon companies have raised over half a billion Dollars for exploration that has to be compressed into a five-month period. With a 12-fold increase in exploration capital going into the Yukon, there are going to be more discoveries and enhancements of the existing discoveries. Therein lies the strategy of being underweight the TSX.V (non-Yukon) but overweight the Yukon.
TGR: You're a real veteran of the junior resource investment market going back into the 1970s. How does the current investing environment compare to years past?
Michael Ballanger: Nowhere does the dynamic duo of fear and greed play a stronger role than in the junior mining sector. And nowhere do the merciless matrons called Lady Luck and Mother Nature exert a greater control over our fates. That was the case in the 1970s and it is the same today.
The only method that I have learned to overcome the random nature of success in this sector is through investing in companies with extraordinary management. By that, I do not refer to companies with superb promoters at the helm — I refer to companies where management excels in execution on the ground.
It is very difficult in today's environment to find managers with the experience and knowledge to execute. By contrast, it is easy to find great promoters talking up their deals. I have rarely made any money focusing on the "sizzle" rather than the "steak."
TGR: In your last interview, you gave your criteria for investment in juniors. Any changes in your criteria since then?
Michael Ballanger: In today's market, I'm paying more attention to execution than at any other time in the cycle. The easy money made in the advance from $300/oz. to $1,500/oz. in gold is not going to repeat itself in the next 12 months.
If you want to make money from here on, you better have successful projects that can fly at current prices rather than praying that you are going to get skated onside by rising prices. That's a sucker's bet after the kinds of advances we have seen.
TGR: Last year, you were hot on silver as the better precious metals play over gold. You were right and it had a great run. What are your thoughts on it now?
Michael Ballanger: It was a delightful run, but I am even more delighted that we have now corrected that heavily crowded trade that marked the move from $30/oz. to $50/oz. No one was saying anything about silver when we did the interview a year ago, but it sure was the metal du jour in April 2011.
Any time you get so many "experts" coming on to CNBC and Bloomberg for "commentary," you know the market is ahead of itself.
TGR: What are the challenges faced by and benefits to companies exploring in the Yukon?
Michael Ballanger: The fact that there is such a short exploration window is the major challenge. Accelerated costs due to a relative paucity of infrastructure is also a challenge. However, therein lies the benefits to Yukon explorers. Little systematic exploration has been done in the area, until now.
Considering that the 1903 Klondike Gold Rush has yielded over 18 Moz. of gold to date from placer deposits, one can only speculate how many ounces might be discovered if these companies locate the bedrock, up-elevation sources of these placer deposits.
TGR: Do you like other jurisdictions?
Michael Ballanger: Talk to me in mid-August. Then we can look at politically friendly areas like the provinces of Ontario and particularly, Quebec, which is the best mining jurisdiction on the planet.
TGR: What final thoughts do you have?
Michael Ballanger: As I have stated numerous times since gold moved beyond $300/oz. some 10 years ago, never underestimate the replacement power of stocks within an inflationary spiral.
Today, policymakers are conflicted by rising prices everywhere in the cost of living, except for the area where it's causing the greatest pain — housing. Politicians in the US and abroad are empowering their central banks and treasury departments to reflate in order to liquefy the system, but the quantitative easing (QE) exercises are reflating everything except housing.
If they now tighten, housing will continue to be a deflationary nightmare to a great many American families. In my view, they must turn housing around in order to save the American middle and working classes. I believe that there will be a QE III and QE IV and as many QEs as required until we see the Case-Schiller Index begin to turn.
Until that happens, the conditions for rising gold and silver prices will put a serious bid into the TSX Venture Exchange until well into 2012. Unless we see citizens in the US and Europe coming after the policymakers with pitchforks and torches, currencies will continue to rot, commodities will advance and the TSX Venture Exchange will continue to forge ahead to my longer-term target of between 4,000 and 5,000.
TGR: Thank you for taking the time to give us your current insights and ideas.
Michael Ballanger: Thanks for the opportunity.
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