Play On The Glittery Stuff
By Jack Willoughby
BARRON'S: Pure Gold
2002/12/27
amex.com
Joseph M. Foster, manager of the Van Eck International Investors Gold Fund,
looks more like an adventurous prospector than a buttoned-down portfolio
manager. Lanky and somewhat disheveled, he prefers field vests to pinstripes
and readily admits to being more at home in the gold mines of Nevada than the
concrete canyons of New York. After all, this is a man who spent eight years as
a senior geologist for a mining concern before moving East to try his hand at
investing.
Foster, 44 years old, still grabs any chance he can to connect with the
outdoors, often heading to the Adirondacks with his family for backpacking. But
on most working days, he boards a commuter train in New York's semi-rural
northern suburbs and rides down the edge of the Hudson River, joining the
throngs at Grand Central Terminal. He then jostles two blocks south and climbs
to a mahogany-paneled office filled with rock samples and other mining mementos
from Canada, South Africa and Australia. This is Foster's window on the world
-- and the view right now is decidedly bullish.
Indeed, Foster believes that gold prices have begun an ascent that could last
for at least 10 years. His theory: Mining companies scrimped on exploration
during the fierce bear market for gold from 1996 to 2001 -- and thereby set the
stage for a long-term shortage of supply. Even if they crank up exploration
now, the efforts could take years to pay off. "Mines are hard to find," Foster
says. "I can tell you from experience -- I've drilled a lot o's portfolio.
Foster does take a concentrated approach to gold. In 2001, he traded out of
platinum, tantalum and palladium to focus on the relatively small world of
publicly traded gold companies. Those outfits have a combined market value of
$60 billion, or less than one quarter of General Electric's value. Among his
favorites: Glamis Gold of Reno, Nev., an efficient company that has been
expanding through acquisitions. Foster figures Glamis will double its
production during the next five years. Glamis shares have been trading recently
at a 52-week high of 18.20.
In general, Foster favors companies that don't hedge their production -- and
thus benefit the most when gold prices rise. Foster says a full 80% of the
names in his portfolio refrain from hedging. In a further sign of
concentration, the fund's top 10 holdings account for nearly 60% of its assets.
During the past three years, Foster has pared his holdings in big gold
companies with old, tired mines and put the money into smaller outfits with
greater risks but potentially higher rewards. Right now, he says, about 17% of
his portfolio is devoted to such junior mines as Cumberland Resources, which
trades on the Toronto Stock Exchange; Miramar Mining, which is quoted on the
American Stock Exchange; and Minefinders, which trades over the counter.
Junior mining stocks historically have been a favorite stomping ground of
scamsters. In 1996, shares of Calgary-based Bre-X Mineral soared from pennies
to more than $100 on news an Indonesian subsidiary had discovered gold. But the
shares collapsed in 1997 after geologists discovered the mine was fraudulent;
gold dust had been "salted" into worthless rocks.
Says Foster: "You have to know what you're doing." And it would appear he
knows plenty. Before joining Van Eck in 1996, Foster managed the geology
department of Pinson Mining Partners. Its mine, located in Winnemucca, Nev.,
produced gold at a rate of 80,000 ounces a year. Foster oversaw exploration,
drilling and reserve development. Before that, he worked for some other gold
outfits in Reno. A native of California, he holds an undergraduate degree in
geology from Tennessee Technological University and earned a graduate degree
from the University of Nevada's Mackay School of Mines.
Foster routinely visits mines and pokes around before making investments. His
approach is to first assess the gold price at which each mine breaks even; he
then makes an investment decision based on where he thinks prices are headed.
"The rule of thumb is that gold is a crummy business if the price is $300 an
ounce and a fantastic business if the price is above $400," Foster says.
With prices recently approaching the psychologically important $350 mark, up
from a low of $255 in 2001, the bets are paying off handsomely. Foster says
that a $25 rise in gold prices often translates into an earnings increase of
30% or more for mining companies, because the higher prices go straight to the
bottom line.
And at some point within the next years, he says, gold could hit $500 an
ounce.
Until recently, Foster had a tough time winning converts to his bullish view.
The market has been "so beaten up these last few years that it's been hard to
get people to take a serious look at gold," he says. From a peak of $415 an
ounce in 1996, gold tumbled 38% by 2001. But the recent surge "has convinced a
lot of doubters that the current increase will hold," he adds.
Foster believes that the metal is benefiting from a major shift in investor
psychology. "What worked in the 'Nineties won't work anymore," he says. "Rather
than chasing stock-market returns, investors are turning to alternative
strategies that include hedge funds, real estate and gold."
But the main reason for Foster's bullishness is supply. During the next five
to 10 years, he says, gold production will actually decline for the first time
in 20 years, reflecting the aging of existing mines and the likelihood that few
new mines will start up. Not only is it difficult to find new gold; it's also
expensive. Successful exploration ends up costing anywhere from $25 to $75 an
ounce, Foster says.
A survey by Toronto-based Beacon Group found that worldwide gold production
by 2010 could be nearly 30% lower than in 2001, assuming a long-term average
price of $275 an ounce. The Beacon study, performed last year at the behest of
major gold producers, suggests that the crunch may not be fully evident until
after 2005.
Foster already sees a clear sign that the major gold companies are preparing
for price increases: They're allowing the hedges on their gold production to
run out. Such contraction in the hedging business should also put upward
pressure on spot, or current, prices of gold. That's because supply should
decline as companies sell less of their production into the future.
Of course, Foster's scenario could turn out to be wrong. Many a surge in gold
prices over the years has proved to be short-lived, causing hope to vanish like
the morning mist on the Hudson. But this time around, the fund chief insists,
things will be different.
As he waits for his bullish future to unfold, Foster sometimes pulls his
mountain bike from his garage and pedals three miles to a notably steep hill.
Pointing down it, he reaches speeds of up to 40 mph. Investors can only hope he
keeps delivering high-speed returns without taking a spill.
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(END) Dow Jones Newswires
12-27-02 2301ET
23:01 122702
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