Markets & Finance

A Deep Knowledge of Gold


This wasn't your ordinary fund manager courtesy call. Joe Foster, manager of the Van Eck International Investors Gold Fund (INIVX), schlepped to South Africa and drove several hundred miles around the country's Witswatersrand Basin a few years ago to gather some information on a big gold producer. At Gold Fields' (GFI) Kloof gold mine, one of the deepest in the world, Foster had to take an elevator two miles underground. At the bottom, he crouched inside the meter-high room where the company mined its ore.

The ground, heavy with gravity, squeezed the frame that supported the room. Even with air refrigeration, heat from the earth kept the temperature at about 98 degrees Fahrenheit. Foster's clothes became drenched with sweat.

Foster prefers such in depth investigation to find the companies he figures will prosper in the long term, even while the speculators rush in to make a quick financial killing on the metal's rise. As gold prices soared during the first three months of this year, Foster's $400 million fund returned 27.2% and beat 96% of its peers. Over the past five years, the fund raked in 40.85% total return, performing better than 84% of its peers, according to the Chicago investment research firm Morningstar.

FROM MINER TO MANAGER. Gold has continued to charge ahead. June gold-futures prices surged to $620 an ounce on Apr. 18 from the $600 range in the prior week, as investors watched the dollar losing ground and worried about inflation (see BW Online, 3/30/06, "Metals Are Burning Up the Market").

But Foster, who wears a mustache and speaks with a drawl, didn't start his career searching for money. He was studying geology at the Tennessee Technological University in 1980 when inflation-panicked people crowded into dealerships to buy coins and gold shot up to a peak of $850 an ounce. Miners used those profits to discover a way of extracting the microscopic gold in Nevada that the '49ers didn't see, so Foster got a job in 1983 exploring for Reno (Nev.) mining company Nicor Mineral Ventures. Sometimes Foster would drive out to potential gold-mining areas in a pickup truck. He would scan Nevada's barren ground for promising earth samples to submit for geochemical testing.

Then gold prices fell to under $300 an ounce in the mid-1980s. Miners were getting laid off left and right, so Foster went back to school for an MBA and a Master's degree in geology at The Mackay School of Mines at the University of Nevada, Reno. When Van Eck hired him 10 years ago to manage their fund in New York, the gold industry was still struggling for survival.

"A DIFFERENT VIEW." Foster isn't letting the recent frenzy in the gold market sidetrack him. He's looking for investments in companies with mines in business-friendly countries, such as Canada and Mexico. He doesn't invest in exploration companies, either. "I need a discovery -- something I can put a value on," he says.

Foster's top holding is Toronto-headquartered Agnico-Eagle Mines (AEM). Last fall, he moved the fund's investment exposure in the stock to 5% of its portfolio value, from 2%. The company has been long established in Canada and owns the country's largest gold deposit, LaRonde Mine, but recently it has also been developing projects in other countries. Agnico completed its acquisition of the Pinos Altos Project in Mexico's Sierra Madre in March and bought Finland's Suurikuusikko gold deposit in 2005.

"The market either didn't know much about or didn't have a high opinion of the properties, and I took a different view," Foster says. "The company was being transformed from an underground miner to developing several properties in politically stable areas that were favorable for mining."

Agnico's share price has rocketed to around $33.50 per share from $14.8 in early October, now accounting for about 7% of the assets of Foster's fund.

BEST BETS. "When you go in and have a meeting with someone like Joe, you have to go through the nuts and bolts," says Agnico CEO Sean Boyd. Foster asks not only about the company's financial metrics, growth, and cost structure but also about its gold deposits, whose differing characteristics determine the cost of extracting ore, Boyd says.

Foster always values his investments by breaking them down mine by mine, constructing models that evaluate the quality of the gold deposits. About 20% of his fund is invested in large companies, 45% in midsize ones, and 30% in the smallest companies, known as "juniors."

He prefers smaller companies, which don't have to strike gold as often in order to grow their businesses. When a company's value is tied up in one or two properties, he says, you can dig deeper into its engineering, management, and other particulars about how and where the business operates. "[Those are,] in fact, the ones that I enjoy analyzing," Foster says. "You really need to understand the properties."

FROTHY MARKET. He likes juniors, such as Vancouver-based Aurizon Mines (AZK), which is developing a mine in Quebec. And he says Nova Scotia's Gammon Lake Resources (GRS) has "nice" gold and silver deposits in the State of Chihuahua, Mexico.

Among midsize companies, Foster recommends Reno-based Glamis Gold (GLG), Meridian Gold (MDG), also based in Reno, and the Channel Islands' Rangold Resources (GOLD). He says they still have potential for growth, solid company management, and good exploration projects under way. Glamis Gold is mining in areas such as Nevada, Guatemala and Mexico. Meridian Gold has mining projects in Chile and other areas of the Americas, while Rangold Resources mainly is mining in West Africa (see BW Online, 4/14/06, "Mining for Metals").

What does Foster think will happen next? He knows from experience that spring is a seasonally weak time for gold, since jewelers won't have to restock their holiday inventories for many months. As a result, most of the recent demand underpinning the market has come from investors. "There's a lot of speculation and froth in the market right now, and that's hard to predict," Foster says.

DEFICIT CONCERNS. After the market has run so hard and fast this year, Foster wouldn't be surprised if he came into work one morning to find that the price of gold had plunged by $30 an ounce. All it would take is some unanticipated strength in the U.S. dollar, he says.

While he thinks there could be a correction during the next couple months -- a hard one, at that -- Foster still expects gold prices will go higher in the long term. He says people will continue buying gold to protect against a possible downturn in the global economy.

One factor in particular concerns Foster: "The [U.S.] trade deficit has never been so out of whack," he says. While the gap narrowed to $65.7 billion in February from $68.6 billion in January, as the U.S. cut back on Chinese imports, it still remains near historically large levels. Indeed, the trade gap hit a record high of $725.8 billion in full year 2005 (see BW Online 3/6/06, "Breaking Down the Deficit").

Foster notes that during the second half of 2005, gold started rising against all currencies, an indication that investors are losing confidence in paper money. Those conditions haven't been seen since the 1970s. With all the uncertainty, gold may continue to gleam for some time to come.


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