Eight years is a long time to test the patience of a contrarian. Legendary gold manager John Hathaway, general partner and portfolio manager at Tocqueville Asset Management, and Whitney George, chief investment officer of Sprott Asset Management, think it’s time to start investing in gold equities again.
Tocqueville and Sprott, which specializes in precious metals and real assets, have formed a joint venture to co-manage a precious metals mining strategy and are now raising money from investors. Sprott, which manages almost $8 billion in assets, also offers specialized financing and other banking services specifically for mining companies.
“The valuation of many of these mid-sized to small companies are in the single digits for enterprise value to EBITDA,” said Hathaway. He and George spoke about the strategy for the first time during a recent interview with Institutional Investor. “I’ve never seen these kinds of valuations,” he continued. Since the peak in April 2011, an ETF tracking gold mining companies has declined almost 80 percent.
The joint venture gives the managers the ability to invest in public gold mining companies, while also leveraging financing and Sprott’s technical, advisory, and M&A capabilities. After the long bear market, stressed gold mining companies have little access to capital.
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With widespread skepticism about how long the bull market in equities can continue, George said he is countering investors’ skepticism about precious metals with a counterargument that the strategy is a good hedge against an inevitable downturn.
“With gold mining stocks in a bear market since 2011, investors ask, what makes you think they’re going to go up now? My answer is because they’re counter-cyclical to equity markets,” said George, who was the number two executive at small-cap manager Royce & Associates before joining Sprott. “Equities have been up for 10 years. Mining companies are at the lowest relative valuation against their own benchmark that we’ve seen in 20 years. For me, as a generalist, having gold experience is interesting, but it’s where we are in the business cycle for this industry that’s really interesting.”
Hathaway said the first run-up in technology stocks was not much different. “In 1998, we were sitting around strategizing and looking at what was going on in the markets, which we thought was pure lunacy. I blurted out — to show my true contrarian colors — that we should start a gold fund. After everyone was done laughing, the founder of the firm said, ‘that’s not crazy. And why don’t you be the manager?’ That’s how we got started.” Tocqueville’s gold strategy, which he has been running for 20 years, has returned 6.5 percent annually versus the benchmark’s return of 1 percent between 1998 and the end of 2018, according to public information.
As part of the strategy, Hathaway will be active with the companies Tocqueville holds. “With Sprott, which has banking capabilities, we’ll get a leg up to influence decision-making without being overly activist,” he said.
The markets may be close to bottom, but the manager is nevertheless hedging. “We are trying to provide an intelligent way to get exposure because of the valuation aspect and the potential trigger in terms of M&A,” said Hathaway. “It’s a way to have investment success without depending on the tailwind of gold prices rising.”
