TORONTO - The Gold Report: Among the 14 investments in your Outstanding Investments portfolio of precious metals companies and funds, there are 10companies and 4 funds. All 10 companies have market caps above $1billion. How did you select them? Byron King: Let me answer the question by referring to something that ChuckNoll said when he coached the Pittsburgh Steelers in the 1970s.Every year, during the National Football League draft, people wouldask him what position he was going to draft for. Noll's answer wasthat he didn't draft for position; he looked for the bestall-around player. I do the same for the Outstanding Investments list.
I don't pick a particular type of play or method ofoperations. I look for the best particular company in any givenmonth when I'm making a recommendation. I want a company withlong-term potential and portfolio staying power. TGR: Is it important that all of those companies pay a dividend? BK: It is.
I want paying the shareholders to be part of management'sphilosophy. I want paying the shareholders to be as important tomanagement as paying their own salary, or paying the electric billor anything else. TGR: Was that important to you before 2008 or is it is a more recentpreference? BK: I've always liked dividends, certainly from large companies. Largecompanies with large cash flow spend money for all sorts of things.Companies pay big bucks for executive salaries, headquarters andcorporate jets. Okay, I get it.
Still, the company had better havemoney for its shareholders. Companies need to include shareholdersas regular creditors. TGR: What do the funds add to the portfolio? BK: Trading flexibility, more than anything else. If you want to ownphysical metal, then own physical metal. Take delivery.
But if youwant to be able to trade in and out of metal movements, funds areokay. Also, funds offer investors a way to expose their portfolioto the upside of the gold and silver plays without lockingthemselves into a particular company. If you own a fund that owns avariety of gold mine companies or precious metals, you don't sufferthe big hit from a one-off disaster at a particular company. TGR: Some of the companies in the Outstanding Investments portfolio have large mines or significant exposure to Africa.South Africa, with its prolific Witwatersrand basin, is still thecontinent's largest gold and platinum group metals (PGMs) producingregion, but gold production in South Africa went down in 2011 andthere are whispers that the ANC wants to nationalize at least aportion of the country's PGM mines. What is your take on thecurrent state of mining politics in South Africa? BK: I was just in South Africa, in May.
First, South Africansgenerally are nervous about what's happening with the euro, thedollar and the Chinese economy. As a major resource-exportingcountry, those economies are South Africa's markets. They're thecash register for South Africa. So with all the issues in Europe,North America and Asia, South Africans feel as if they are beingpulled along by events that are far out of their control. In addition, as the price of gold and other South African commodityexports drops, the South African national income account drops.What's more, because much of the accounting is done in U.S.dollars, the strengthening dollar is creating cost inflation in theSouth African mining industry.
The country is getting less moneyfor its products, yet it is paying more to operate its mines. Thatis very troublesome for the political powers and for the industry. Unfortunately, the way to deal with the immediate situation is tolay people off. In a country where unemployment is as rampant as itis in South Africa-5% officially, and more like 50% when you countunderemployment-that becomes a very dicey political issue. Rightnow, the big issue in South Africa is the day-to-day economics ofthe mining business.
When you get into the bigger, pie-in-the-sky takeover questions,the South African political structure has to account for the factthat many of the largest mining operations are extremely expensiveto operate because the mines are so deep and technicallychallenging. The future of deep mining in South Africa is notputting people in the ground to do the work; the only way SouthAfrica can remain a large-scale miner, certainly in theWitwatersrand basin, is with robotic mining. But automation and robots raise all kinds of technical and culturalissues. One miner down below might support 10 people working in theplant on the surface, and those 10 people working on the surfacemight support 100 people in their local village.
So, one mining jobunderground in South Africa might be the key to 100 people eatingor not eating. TGR: Some of the bigger mines employ 10,000 people. They do not havethe mechanized infrastructure of a North American operation. BK: No, and mechanization is a very contentious issue with theNational Union of Mineworkers in South Africa. However, theeconomics and safety issues are such that many of the large SouthAfrican mines must move toward more automation or they will have toshut down the mines.
The mining companies are already doing theresearch and development. I know this. I've seen some of thefuturistic technology. TGR: Is South Africa a safe place to invest? BK: I am OK with investing in large, well-known, name-brand companieswith liquidity on the markets in Johannesburg, London, the U.S.
orCanada. I am nervous about South African politics there in themedium to long term. For the average North American investor whowants an array of mining or energy stocks, owning shares in a fewSouth African companies listed on North American and Europeanexchanges is fine, but keep your eyes open. TGR: Are there rosy days ahead or should investors expect continuedvolatility? BK: I think we will have to live with volatility for the foreseeablefuture.
The good news is that the world needs resources. There areseven billion people out there. A billion are doing all right, justnow, and the other six billion want to get there, too. The next big issue is whether the world economy supports theinvesting model we've grown up with. The China story is beginningto unravel.
The Chinese are pouring less steel, and even rejectingshipments of iron ore. It's a slowdown that's been building for awhile, and now we have to deal with it. We have unending problems in Europe. No need to elaborate there,right? Meanwhile, the U.S.
is in the middle of a presidentialelection season. Everything that anyone says for the next sixmonths will be nothing but political propaganda; you have to workreally hard to decipher the truth. As the summer wears on, the U.S.will reach its debt limit and we'll have those arguments and thethreat of a U.S. government shutdown all over again. All of thesebig picture things are weighing down on people's willingness toinvest in the future.
I was at a conference last week at Harvard University. I was in theroom with senior executives from high-tech firms, large moneymanaging firms and such. Everyone talked about how nervous they areabout the future. One person explained why he's sitting on a hugewad of cash and not spending.
He said, 'I can deal with a recessionevery 10 years, but if we are going to have recessions every two orthree years, I am going to accumulate as much cash as I can. I willsit on it and ride things out, good and bad.' People are nervous about the future, about investing, about whetherthey will ever see a return on their investments. We're living in aworld of return-free risk. Where's the future in that? We have to learn to live with market volatility. That does not meanthere are no opportunities out there.
It just means that the riskprofile of owning for the long term will be much more problematic. TGR: You said the world needs resources, but does the world really needgold? BK: Easy question. Yes, the world needs gold. Gold prevents the peoplewho make and run fiat currencies from doing anything too stupid,although I seldom fail to be amazed. The people in charge arereally pushing the limits of that stupidity-envelope.
TGR: Thank you for your insights. Byron King writes for Agora Financial's Daily Resource Hunter . He edits two newsletters: Energy & Scarcity Investor and Outstanding Investments. He studied geology and graduated with honors from HarvardUniversity, and holds advanced degrees from the University ofPittsburgh School of Law and the U.S.
Naval War College. He hasadvised the U.S. Department of Defense on national energy policy. Article published courtesy of The Gold Report - SUBSCRIBE to Mineweb.com's free daily newsletter now.
