₪ David Pescod's Late Edition April 19, 2007
An Interview with Eric Sprott of Sprott Asset Management
(From April 16, 2007)
He is one of the most successful investors in Canada and also
runs one of the best Funds in the country – The Sprott Canadian Equity Fund. Eric Sprott is definitely a joy to interview and we certainly appreciated the opportunities that he has given us!
His Fund has had one bad year in 1998 when it was down 16%,
other than that his Fund has been up. In 1999 his Fund was up 53%, or how about in 2000 when the Fund was up 44%, as well as the following—2001 up 43%, 2002 up 39%, 2003 up 30%, 2004 up 37%, 2005 up 13%, and in 2006 up 39%. He has made some pretty decent change if you put some money with him in his Funds. Well you get the drift!
He is one of the biggest proponents of the new world where commodity prices be it zinc, lead, nickel, uranium, oil, natural gas, or coal - with on-going demand increasing from Asia commodities could continue to do well.
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We are here with Eric Sprott, of Sprott Asset Management, whose Funds lately have been setting near records (for Mutual Funds), so it’s time to catch up with the guru behind the Funds and ask some questions, topical to the time, and Eric the first question would have to be about the markets in general.
Usually, you see a resource sell off in the spring and also in the United States they are talking about the highest level usage of margin since the internet bubble in 2000. Is there a correction coming, do you think, for the Resource sector?
Eric: I’ve always been sort of a bear on the U.S. stock market – I’ve been a bear on it ever since or before the NASDAQ peak, simply because, we had a “lending mania” in the U.S. and I think that there is going to be a fall-out for them – we’ve already seen a sub-prime problem. It will spill into other levels of mortgage lending and even price lending. We are going to see it in declining housing prices – I don’t know how we avoid that and I think that it will have an impact on the stock market and the economy.
When you asked about resources, I think we’ve evolved into the view that Asian growth might very well off-set a U.S. decline – its a little bit Malthusian, in the sense that there might be too many people and not enough resources in the world and it would certainly appear to the be the case in many materials now – both agricultural and industrial – and the prices are really starting to move along here. So, I think that the resource area might be able to withstand the type of stock market that we foresee.
David: When we get to specific minerals, moly has done amazing and of course the Sprott Fund is one of the biggest holders of Blue Pearl Mining – what a stock call on that one!
What do you see for that company, plus moly?
Eric: Obviously, we are great believers in molybdenum and it’s very analogous to what we all understand has happened to many metals, so for example when we look at nickel we saw that all the inventories went down – we all know why the price is up – copper the inventories go down and the price goes up, which is the same for lead and zinc.
The funny part about molybdenum is that you can’t see the inventories, but I would honestly guess that the inventories have gone down significantly, as I would guess they’ve gone down for every metal, because nobody spent money looking for metals for about the last 20 years and there has been very little in the way of new mines opening.
Most metals will have a supply / demand situation where demand has exceeded supply for the last few years, but the consumption of inventory has masked the whole process.
So with moly having done what it did - it came from about I think $3.00 or $4.00 up to $40.00 and then pulled back to the low $20.00 and now it is about $28.00, we suggest that the prices have a good chance of going higher and as it pertains to Blue Pearl, I guess the dominating thing in the Blue Pearl market today is the fact that China Molybdenum is going public and it would appear to us that the valuation at the high end – that they are putting on this China Molybdenum – would suggest that Blue Pearl can increase reasonably dramatically from these levels to get the same value as China Molybdenum. China Molybdenum apparently is 10 times over subscribed, they’ve raised the top price where it might be issued and I think to people looking at China Moly, which will be an International investment play, the next biggest stock in the moly area is Blue Pearl. So, I think some people are buying Blue Pearl as they are looking at the China Moly situation.
David: One of the ironies of recent times has been metals most people never followed like nickel, uranium and moly out-performing the metal people used to follow – gold! Can you see that following for a while, or is that about to change?
Eric: Well, the one unique difference between gold and those other metals is all gold ever produced in the world or 90% of it still exists. A lot of that gold unfortunately exists with Central Banks – Central Banks seem to be turning their back on gold and we think would prefer (quite frankly) to keep the price of gold under control.
So it’s our view that these sales by the Central Banks have the intent of dissuading buying by the public, because gold is the canary in the coal mine. And, that’s kind of the thing that has held gold back. I think if left with its own devices, in other words supply vs demand with- out Central Banks being involved gold would be a lot higher. But unfortunately the Central Banks sell 300 to 400 to 500 tonnes of gold a year, which is an incredible amount of gold to sell and it has kept the price a little suppressed.
David: What do you see for gold in the next year?
Eric: Well, I think gold will continue going higher. I think that quite frankly the Central Banks know that not withstanding their selling, the price is going up. It’s likely to keep going up. I can hardly say to what level but I am sure we’ll take out the $730.00 old high that we had last year and I for one, and I am sure my partner John Embry, as well, believe that we will see record highs, whether or not we see them this year or sometime in 08, I think it will certainly happen within the 07-08 time frame.
David: There is another commodity that had a big run up to 2 years ago and has sold off recently, but is in the news today on Bloomberg and that’s coal because China which has big reserves maybe changing from a net-exporter to an netimporter. That could change a lot of things for energy, couldn’t it?
Eric: It could indeed! The coal stocks are certainly catching a bid these days and coal has been a big bet of ours going back to 03 and that big bet really hasn’t paid off much. It certainly has been a non-performer relative to other energy plays, but if you believe in the peak oil thesis, as we do, one of the things you have to turn to is coal plus another one is uranium and at the rate of growth that China has, I think coal prices are likely to start moving back up again.
David: Is there a favorite stock that you have in the coal sector?
Eric: Well, we have a number. We have a number in Australia, we have a number in Canada – the Canadian ones are mostly metallurgical coal and there has been a lot of action on that front these days. I’ve actually recently bought Peabody in the U.S. – the largest coal producer in North America – obviously it’s my latest purchase, so it’s the one I think probably will get the most attention certainly at the beginning of this move.
David: Looking at a couple of stocks in particular – Delta Petroleum in the United States in the Columbia River Basin still seems to do big volume and attract interest on whether they do have gas in the area or not.
Eric: Right! Boy what an enigma. I remember that we thought this well was going to be drilled in January of 05 and here we are in April 07 and we still haven’t heard any results.
I happen to be a believer in the Basin Centered Gas Association thesis and we’re just going to hang in there until we get some results and even if one well doesn’t work typically Basin Centered Gas plays, once you get a successful one, you can probably bank on a lot of other successful ones, so we’re just going to sit here and ride it out and hope that we got our money on the right horse.
David: You’ve obviously had your money on the right horse in Corridor Resources. We’ve really enjoyed that run ourselves, as well, and I understand that there is going to be quite a few analysts and followers on site next Monday. Any comments on that play?
Eric: Well, it has been a great investment for us! It certainly went under the radar screen of most analysts in Canada, because it is in New Brunswick and people can’t fathom gas in New Brunswick, but they’ve had tremendous success with the drill bit so far and the opportunities in the two separate formations that they will be testing – the Fredericks Brook and the Dawson Settlement – could be something in the order of ten times bigger then the area they are now drilling. The area that they are drilling, they suggest, could have a trillion cubic feet of gas in place! So, this has all the makings of a potentially explosive situation if they get lucky on their drilling and so far the results look pretty good.
David: Your sidekick, John Embry, one of his favorite stories for a while has been gold based in China – Southwestern Resources. Any thoughts on that story?
Eric: Well it’s really a “John” story; he recommended Southwestern Resources. The property looks like it gets bigger and for some reason there’s not that many people seemingly paying attention to it.
I don’t know whether it is the Chinese thing or what it is, but I guess there has been more explosive exploration stories recently and I guess I would point to something like Aurelian, which is commanding a lot of attention. I am not the expert on Southwestern and I’ll leave that to John.
David: Before we get to your three favorite picks, is there a metal or a commodity that you would be concerned about?
Eric: That’s a good question! Our view happens to be that most commodities will be in short supply, so I think most of them will be heading up here. We’re quite positive on gas and oil and certainly most of the metals (if not all the metals). I think that the agricultural commodities are going to prove to be in short supply as well, so I guess we are in on all commodities!
David: Okay good! Now the fun part, what are your three favorite stories at this time?
Eric: Boy, that’s a tough one! My three favorite stories… well obviously we’re huge believers in the molybdenum story and I guess our biggest investment is Blue Pearl. I think there are lots of things that are happening there and I think that the fact that China Molybdenum is going to be popular is going to cause Blue Pearl to rise in my opinion. So I guess that is the work horse in the moly area and we are going to stick with it.
I could probably point to a number of uranium stocks – the price of uranium is now up to $113.00. One of my long time favorites has been a company called Strathmore Minerals. They were one of the first companies that saw uranium going higher back in the late 90’s, so they are a really early participant in it and it has been one of our big favorites here.
I guess I’ll mention one other in the precious metals. There is a play down in Mexico that two companies are involved with – the companies involved are Fortuna and Continuum.
We happen to be large owners of both of them. I think we own probably north of 15% of each one. They have some very interesting properties in Mexico that have had some pretty good results. So I would go with that package as a decent precious metals play.
David: Okay! We have mentioned some of your other favorites. Would a person watch Delta before they get and wait for news and Corridor, should you just wait for more drilling or would you put your foot in now?
Eric: Well I have been a continuing buyer of Corridor. It had a great run. I think it goes higher. I really enjoy increasing our ownership.
We’ve always been a large owner of Delta. I haven’t recently increased our ownership. I am just waiting to see some results here, so as much as I like the play and I realize how big it could be, (it could be very large) I am happy to wait for some results and if the results are where I expect them to be, we’ll be a continuing buyer.
David: What questions should we have asked that you wanted us to ask, but we didn’t ask?
Eric: When it comes to Canada, things are looking pretty good here. When it comes to the U.S., I really fear for the housing impact on the financial side and I think that is something that bears watching just to see how that unfolds, because it could get quite nasty for a lot of people down there.
David: Thank you very much for your time, Eric.
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