Preston Pysh  1:12  

Marin, let’s go ahead and just dive into the topic at hand which is gold. 2020 has just been a fantastic year for gold, especially when you compare it to the S&P 500. It has outperformed most companies, excluding the top 10 probably on the NASDAQ. 

Talk to us about where you see gold today and where you kind of see things going in the future. You’ve been right every time we’ve had you on the show as to where you’re seeing things moving next. I’m kind of curious where you see things moving now.

Marin Katusa  1:42  

With MMT, there is going to be more money printing and more digits. We’re just at the beginning of this. It doesn’t matter who wins the US election on November 3. It’s going to be a stimulus like we have never seen before. Gold benefits from MMT, it’s been a great place to be. 

However, I just want to caution people to be careful about where they’re putting their money. You don’t need to take crazy risks. The last time we talked I think was about six or seven months ago. 

I talked about Equinox Gold. Now, look how it rocked the markets. I didn’t have to take any risk. It has outperformed gold, the sector, the GDX, and every comparable index by just sticking to what most will call a boring approach. Making money is fun so stick to the game plan.

Preston Pysh  2:35  

I think what you’re getting at is you’re getting an equal, or close to equal or maybe even better, in the case of Equinox return, but you’re not risking the volatility downside that’s associated potentially with the stock market because of how all the units are being added into the system. Am I capturing your point with that comment?

Marin Katusa  3:01  

Mostly, and you can still be… This whole market is saying that value investing isn’t getting rewarded. That’s not true at all. 

In the gold space, I’m just using Equinox as an example, because we’ve used it for a year on your show. It’s traded at a massive discount to NAV, and it’s still under NAV. I’m not using 1900 and change gold. My numbers are using $1,500 gold. It’s fully-funded to get to a million ounces of gold. 

By sticking to the fundamental value principles and sticking where your skin in the game is at the same price as the insiders’ and good management teams’, you can be a value investor without taking the crazy geopolitical risks. Mining is a tough sector and you don’t need to take abnormal risks to get abnormal returns.

Stig Brodersen  3:51  

Marin, you previously mentioned that the gold miners are liking the performance of the underlying price of gold. Could you please talk to us about that idea?

Marin Katusa  4:01  

You’re not seeing the capital that we saw in the last cycle come from the big funds towards the more mature juniors of the mid-tiers. The game has really changed. 

If you look at just from the glow of capital, since January 1, 2019, about $25 million net positive has entered the GLD, which is the passive exposure to the gold metal. Yet, during that same timeframe, we’ve seen an outflow of $2 billion out of the GDX. That’s the exposure to the majors. 

Now, when you start peeling the onion back and you ask yourself, “Okay, there’s the GDX and GDXJ?” Those are ways for generalists and retail investors to get exposure to the minors without picking specific stocks. 

What’s interesting is GDXJ used to be for junior and mid-tier companies. About three years ago, they changed the rules that a million ounce gold producer is in the junior index. So the whole rules changed for the whole sector. By that definition, you’ve had such an incredible run-up in select few stocks that get into the GDXJ or GDX. 

Then once they’re kind of bought up, they underperform the general index of whether people say, “Well, why did the sector underperform gold?” 

Well, that’s just why those individual stocks have had incredible run-ups. Then they get into the index, they don’t have that continuous run as a peer group. 

My thesis two years ago was saying this is what’s going to happen if you believe in the price of gold. Stick to the best, lowest cost producers. Again, if you want to use any of the companies as examples, as it gets into the GDXJ, you have incredible run-up in the share price. 

Then at that point, you and I, as retail investors or if you’re a fund manager, you have to predict where the puck is going. As these massive passive funds start buying that stock, and you’re sitting on a 400% or 500% gain, there’s nothing wrong selling 20%, taking a free ride, and sticking for the long run, because I do believe these things are going a lot higher. 

However, there’s nothing better from a true portfolio manager standpoint, if I can just reduce my position by 20%, recap all my cash, cover my taxes, and have 80% to still go long, how could anyone attack that thesis?

Preston Pysh  6:21  

I think it’s smart that you’re talking about the tax implications, too, especially when you’re dealing with inexperienced traders. They’ve got these great ideas. They’re stepping into the market and they’re making these decisions, but they’re failing to think, “Did I hold this for a year? That I step into a different tax bracket consideration and then account for the risk of me even being right to put on that subsequent trade?” It’s such an important consideration. 

That’s a really interesting point. The way you outline it in your report is in a significant amount of depth. I was thoroughly impressed with the level of detail that you went into of how to do this in a methodical way. 

For example, which ones are in the index and which ones aren’t in the index. Then thinking of it in value terms as far as strong management, how efficient are their operations, all those kinds of things are such important metrics, if you’re going to try to outperform some of these indexes in 2020.

Let’s move on to something else that I read in your recent report, which was about rare earth metals. Why do you think that this sector is important? 

I guess I would ask you… because I think most people are really interested in gold right now, for obvious reasons. Everyone’s familiar with the monetary policy type stuff, maybe not the nuances, but they’re familiar with the printing that’s taking place. Compare and contrast the arguments that we were just talking about with gold to these rare earth elements.

Marin Katusa  7:49  

Before I was doing building copper mines, or what I’m doing with gold companies, I started out in tungsten and rare earth. 

Now I’m seeing this whole transition period, where 40 years ago, America was a major supplier of these rare earths. Today, you got very little going on. It’s not just from a production standpoint. It’s in the refinement and manufacturing the fabrication of this. 

I took a very interesting approach about three years ago, where we bought all of the available refined rare earths of two. One was a lanthanide series where it’s a light, rare earth. That one was a heavy, rare earth, everything that’s outside of China refined. So, we kind of bought everything that was available through the traders and we stored it at the docks. It’s in the US. That was the first step of my re-entrance into the rare earth game. 

Think of it as holding all of the 17 rare earths. We bought two of all of them available outside of China. People will think that they can buy it from China. Good luck getting it out of China. Then, when you run your assays, good luck getting what you actually bought. Buyer beware. You have that aspect. 

Number two is with what’s going on moving forward, regardless if the Democrats or Republicans win. No one’s going to argue that there’s going to be massive stimulation coming from digit printing, right? 

So this is going to result in massive projects. Yet, when it comes to many of the magnets, there’s not a facility in the US that can fabricate these requirements with what’s needed to build these factories and do what the stimulation will need. 

With these digits that will be built, you got cheap power and you got robotics innovation coming in. Now the infrastructure will be there. It was once there then it got sent off to China because it was cheaper. You’re seeing this deglobalization or a recreation of the supply chains. America is going to start refabricating these things here. 

That said what I tried to emphasize, I’ve been to so many of these projects, and you got this management team thinking that they’re going to do a flow sheet. Then they’re going to create a mind and the rare earths are very niche. It’s not just about you pouring gold at a mine. You send it to a refinery or a smelter, and then you’re going to get a check back. 

Copper is a bit different with concentrates, whether you got impurity levels and all that. With rare earths, it’s very, very different. It’s much more complicated than what I just mentioned with the copper cons. 

What you’re going to have to get is the fabrication process. That takes many years. Even if you build your mine and you get it permitted, which takes many years to get things permitted. Then you have to have your offtake agreements and it’s going to take them two or three years to put that through their own testing within their supply chain. 

So you really need to know what you’re doing. That’s kind of what I was trying to really get down and show in my 17 years of being active in the sector. Then saying, “Again, you don’t need to take crazy risks to do really well in the rare earth sector. It’s a sector that very few people are talking about. When you look at the big generalist funds and the money coming, it’s not going to flow to the early stage guys. It’s going to the permitted more advanced storers.”

Stig Brodersen  11:14  

Let’s talk about this from a supply chain standpoint. How do things look upstream and downstream for the rare earth element product? Is the infrastructure in place?

Marin Katusa  11:25  

In the US, not yet. Right now, we have a lot of one specific rare earth in Europe. Ironically, there’s no fabrication of that in the US, even though they’re a major importer of it. That will come. 

The one thing is never bet against the market finding the solution to its needs, because with this stimulus, they will not be able to be vulnerable to the games being played ahead. That will happen with all of these sanctions and all these different things moving forward. So it will come. That’s why I’m telling people to be very aware of the risks moving forward.

Stig Brodersen  12:04  

Your opinion is that regardless of who wins the election, it wouldn’t really have an influence on how this plays out in the US moving forward?

Marin Katusa  12:13  

Exactly. I think regardless of who wins the election, a massive stimulus is coming. Let’s spend to stimulate. 

With that, the sector will realize, “Well, with the new technologies and where the growth is, you don’t want to be reliant on China, even though the democrats will have a more friendlier version than what Trump will publicly show the Republicans.” 

But the end result is the same. Companies are going to want to secure a stable supply of the material and the refinement of it.

Preston Pysh  12:44  

Let’s talk a little bit about the global economy. I’ve had some talks with Lyn Alden, I don’t know if you’re familiar with Lyn. She’s kind of emerged on the scene as a major macro thinker this year. 

She seems to think that the liquidity of this provided via fiscal stimulus, not necessarily on the monetary side, but more on the fiscal side, is the key component to continue the drive in the overall market behavior. I’m kind of curious if you would agree with that or if you think there are other components that are a key ingredient to this.

Marin Katusa  13:15  

I’ve been writing since March that stimulus is going to come, whether fiscal or monetary. It’s going to be coming in. It’s definitely propped up. Look at the bond market, whether it’s the US or Australia. Look what’s going on in Europe and Japan, without a doubt it’s propping it up. 

What direction does the Fed or the government have? 

You’re seeing in Canada, we’re seeing all forms of both fiscal and monetary things that you would have thought were not possible two or three years ago. 

The politicians have no choice but to do this, because of the reality of the situation, whether COVID gets worse or not. It’s kind of like taxes. They say taxes will be a short term model. Name me one tax that was short term, the ship has sailed. 

It’s going to continue. It’s the new normal of what we’re working with.

Stig Brodersen  14:08  

When we look at the auto sector, it just went through this crazy downturn. When the market collapsed and we had negative prices, we saw a swift rebound. Now it’s looking like it’s going to fall off again. How do you see everything that is going on with oil right now?

Marin Katusa  14:22  

It comes from the industry itself. I always state that because the bond market was there. These companies weren’t going bankrupt. They’re meant to extend and pretend that everything’s okay. 

Let’s take for example, just two days ago, Canada’s largest producer of oil came out and said, “Well, we’re going to move forward with our second train and that’s just in the heavy oil sands.” 

You sit there and say, “Wow, their cost of production, or cash costs are higher than what they’re selling it for, but they’re making that long term commitment for their agreements for market share. So they’re taking the near term pain on their balance sheet rather than taking the market share pain in the future. They’re hoping to kill the strategy of wiping out your competitors.”

Now, this has happened many times before. Again, it comes with the consequences because the money is there. The government stepped in to make sure that the jobs were there and the management felt pretty comfortable that rather than laying off 22,000 people, they would step in. You see that across the board. 

With oil, it’s very specific. There has been a significant improvement to the airline industry, which is a big catalyst for the demand. Still, it’s going to be a few years before it gets back to where it is before people’s comfort level and business have changed. 

However, with the producers, there’s no shortage of oil, right? So that’s what you’re seeing with the fundamental supply and demand, and with the amend, extend and pretend. That’s where we’re at with it. There’s no reason to be excited about any catalysts in the oil producers moving forward in North America. 

Moving forward, if the Democrats win the federal election on November 3, you’ll see a big stimulus check come in actual reclamation of what is it? 2.5 million or 3 million wells drilled in the US that have not been reclaimed? 

Someone like Halliburton, who’s made their history of drilling wells to produce oil… Their probably near term catalyst is reclaiming the wells. Rather than getting paid by the producers who live off the international domestic price of oil, their customers are going to be the US government, which is a much more stable budget planning for them. 

The costs are going from a Halliburton standpoint or Schlumberger standpoint. They’re looking at doing things like that already for the budgets. That’s what they’re preparing for. 

The sector’s definitely changed. Again, you don’t need to take those insane risks that people were taking for $80 or $100 oil or $80 or $100 Uranium. You don’t need to do that in the sector, because it’s not going to change any time soon.

Preston Pysh  17:01  

Tomorrow, when you’re saying this, and I think that’s something that a lot of people in the market lose sight of is just how competitive the commodity sector gets, especially when there’s blood in the water. It’s similar to, “Alright, well, let’s add even more supply in here, so that we can snuff out all of our competition.” 

From your just wealth of experience, which sectors do you see that competitiveness to be the fiercest? I’m just kind of curious. 

Marin Katusa  17:29  

The smaller the sector, the easier to execute the “cut to kill strategy.” Now, I coined that the cut to kill strategy. A couple years ago, I wrote about what the former Soviet states, such as Russia, Kazakhstan, Uzbekistan, were trying to do in the Uranium market through the full vertical integration from production to refinement and building of the nuke. So you see it in rare earths and you see it in the Uranium sector. 

In local areas, you do see it from the takeaway capacity in the pipelines and who it’s owned by. You just got to trace who the owners of the MLPs are and the different rates that come in for takeaway capacity. 

However, the bigger the sector comes, for example, if you look at the gold sector, even though when you compare it to the tech sector, it is small. You look at there’s something close to 765 operating gold mines in the world and you have over 300 owners of it. It’s a lot harder to apply that cut the kill strategy in the gold sector. 

Where you see deflationary pressures in certain areas in the resource sector, what I love about gold is you’re going to continue to see inflationary pressure, because why would gold have a sell off now? It might have a near term correction, but I’m yet to see an argument that brings gold to 1,100, 1,200 1,300 that is truly fathomable. 

The costs and the risks… You look at how the governments locally are increasing taxes and the wages. It’s only going to be harder to bring on new production to replace the previous ounces that have been depleted from these mines. Gold is just getting in the way and we’re going to see over $2,000 prices here. 

When you look at the generalist funds, they still haven’t bought the price of gold. They think that it’s a near term corrections because you’ve seen the management teams overspend, overcapitalize, and overpay for M&A to replace those reserves.

In this round, you see the leaders of the industry, whether it’s Berico or Agnico Eagle, they’re staying very disciplined. You see what Ross Beaty is saying publicly that we’re not going to pay for market prices for spots. 

So you’re seeing a much more disciplined approach because everyone remembers what happened between 2007 to 2012 of CAPEX projects going from$ 1,000,000,003 to $5 billion. That’s incredible CAPEX inflation. 

Now companies are doing much more prudent approaches and that’s where you see the sector moving forward. Another reason to be very cognizant of the risks in a sector because so many guys think, “Hey, I’ve got this million ounce gold deposit in the middle of nowhere with no infrastructure and I’m going to get the permits, but there’s never been a permit issued in that country.” 

Who’s going to develop that, or who’s going to buy out that deposit? That’s where the sector’s really changed from even just 10 years ago.

Preston Pysh  20:18  

For people who aren’t familiar with the technical side of the price chart on gold, they might not realize how explosive this could get as it goes back through the 2000 all time high level because you don’t have any type of resistance above this. 

To be honest with you, when I’m looking at momentum, I like to look at the MACD on a daily or weekly level. Right now, it’s looking like this consolidation is starting to get ready for a move again to the upside. So when you think about the potential upside for gold in this coming year and the coming 12 months, I mean, what’s the range that you’re looking at?

Marin Katusa  20:59  

I actually look at it very differently. That’s a great question you bring but I’m using… 

Let’s use Equinox as an example. It’s profitable under $1100 US gold per ounce. That’s what I talk about value investing. For example, if $2,100 or $2,300, I don’t know. I don’t pretend to be one of these gurus who know where it’s going to go. I just base my stuff off of valuations and cash flow models. 

I look at it and say why would I take any risks that need to get exciting at $2,200 gold or $1,800 gold when I’ve got something that is exciting at $1,200 dollars? Then you’ve seen the performance of it. 

I know the market, especially the financial Twitter world and the YouTube world, $2,000 gold or $2,200 fold, it’s kind of irrelevant to me. It’s fantastic. Don’t get me wrong, it’s great, but it actually causes me a bit more difficulty with the companies because as the price gets higher, you’re going to have a lot more fly-by-nighters who come in and don’t really know the sector and are going to offer wider premiums to these companies. That becomes competitive… Now I have more competitors for these financings of these companies. 

In a way, I kind of like gold just here where it is because it’s not bringing in the New York vampires of the financial world that I got to compete with. Whereas I know all these guys, they know my style. We’re able to get full warrants on both of these companies, whether it’s Equinox or Artemis. We got warrants out of it. It’s a total value play backing management teams in tier-one jurisdictions that don’t have crazy geopolitical risks. 

Now, there are still incredible risks in mining. You can have pit walls, you can have accidents, all sorts of stuff happens. Specifically COVID, you see how COVID has spread in a few mines and how mines shut down because of COVID. So it’s a very risky business. 

Why stack the odds against you? You don’t need to own 30 gold companies. That’s another mistake a lot of people make. Just pick the 5 or 6. Maybe 10 best companies and stick with them. 

Stig Brodersen  23:03  

I’m happy that you say that you look at this from a discounted cash flow basis, and less on price patterns. Some of the lofty projections that you hear people talking about for gold, the margins that you will then see if they would materialize will just be… Well, let’s just call it quite extreme. 

However, as you said, that might be a potential upside, but that’s not what we should be looking at. Really just to summarize the essence here, we should take care of the downside first and invest in companies that are profitable, if the price of gold is, call it $1,100 or $1,200. Then, let the upside run.

Marin Katusa  23:38  

When we first talked about Equinox, the market cap of the company just two years ago, was less than the cash they have in the bank today. In two years, the market cap of the company is less than the cash in the bank today. Those are the types of things that you’re going to see in the sector. 

The scary part is people forget about the liquidity factor. Everyone’s going to be speculating that this stock will get taken out or whatever. You can always check into these stocks. Buying them is never going to be a problem. 

How do you get out of these things? Your allocation, how do you go about buying these? How do you go about selling them? There’s a whole process to it. You have to focus on liquidity. These are things that it’s still early days for the new investors, if you just got in since let’s say early this year, because gold was $1,400 at the beginning of the year. Now you’re touching $1,900 and change. That’s been a good run. 

Until you start converting those shares to cash, you haven’t really played the cycle yet. It’s a very cyclical game. It just takes a few large holders that weed out for whatever reason that could reduce the juniors. One of these exploration companies market cap by half. I’ve seen it. It happens in all the markets.

Preston Pysh  24:52  

Just to give folks a little taste of what we’re talking about here. For Equinox, Marin was talking about the last two years since he’s been talking about coming on the show. The S&P 500 since September of 2018 is up 17%. Equinox is up 170%, since two years ago, so pretty crazy performance. 

I think what’s even crazier is all signs are pointing to your exact point, which is it gets cut more to potentially *inaudible* if the price of gold keeps going. I have no base case argument of how it’s not going to keep running based on our expectation for monetary policy.

Marin Katusa  25:31  

I agree with you 100%.

Preston Pysh  25:33  

Let’s talk about monetary policy here a little bit. Jay Powell, in your August report, you had a whole section about this big announcement that Jay Powell recently came out and talked about… Tell our audience the Marin Katusa point of view and your opinions on what’s going on in the big announcement,

Marin Katusa  25:55  

It’s very clear that what keeps him up at night is deflation. Stuff that I wrote about a year ago and they’re going to do whatever they can. He’s openly stated and he’s creating the call it the outline, if this was a new playing field, a new rule set for whoever wins the election in November. 

It’s almost as if he’s encouraging massive stimulus. He kind of put the outer bounds around it and has facilitated that, “Look, this is what you’re going to need: high rates of employment.” Low unemployment rate does not correlate with inflation. They’re going to jam this as much as they can.

Fundamentally, you got to look at it from an MMT standpoint, they don’t view that as debt the way you and I would look at it, if you’re running a business. They’re looking at it as an investment into the market. A lot of people don’t fundamentally understand that.

I’ve used different ways to try to educate people and my background used to be teaching. So I try to have fun with it and write it in a fun way but it comes down to they’re going to do whatever they can. When people keep saying all they’re running out of tools in their toolkit, no, they’re not. I’ve been saying that for a long time. 

I’ve also said interest rates are going to go lower for longer. That was something I wrote a year and a half ago, which people were mocking me about. I said, okay, well look where we’re going. 

Yes, everyone focuses on the stock market but the bond market is where the true tea leaves are at because it’s so much of a bigger market. Not to disrespect the equity guys in the stock market but it’s really the bond market where you want to focus on if you’re trying to get a feeling of where it’s moving forward. 

Just like in the mining sector, I’ve always focused on the debts in the sector and looking at the balance sheet. People focus so much on the equity market, but you look at the debt market, and yes, streaming and royalty is known also on the balance sheet. They are ahead of the equity guys. 

I would look at where that market is. It’s so big and it’s so misunderstood by the average investor. I think that this is going to be just the beginning and the stimulus is going to come. That’s all very supportive for gold.

Stig Brodersen  28:01  

Please talk to us about the modern monetary theory, which we refer to as MMT here in the episode. Could you please first define what the intention is of MMT? Then what do you expect will play out over the next few years?

Marin Katusa  28:15  

I think you have to look at Japan because they were really the first guinea pig of all this. Some will argue that it works. Some will argue that it wasn’t, but you just look at the ownership of the government assets, the balance sheet versus private ownership. You look at how it’s almost been three decades of loss growth in a nation. Now there are many reasons and arguments over the applied demographics and all sorts of things.

However, I think the playbook moving forward is to keep one eye on what Japan’s done. You look at the Euro. You see the whole Brexit issues and what they’ve attempted. Similar to a version of what Japan’s trying to do with their concept. 

Powell came out and said this is what we’re going to be doing too. So fundamentally, as we discussed, when you look at budget deficits and all these things, those are just now talking points. 

What you’re getting there into COVID was the excuse to execute it, but when COVID comes and passes, which one day it too shall pass, MMT will still be here, and they’re going to continue with that process. 

Powell said that even if we do get periods of over inflation, you’re going to see, just like you saw in Japan, areas that have severe deflationary pressures and then pockets of inflationary pressures. 

The number one key of this is to fight deflation because that is the worst thing from a Federal Reserve, from a government standpoint, because deflation brings out all of the nasty truths of the market. The last thing that the government wants is to imagine what would have happened if this massive unemployment continued post COVID? They’re going to have a much bigger problem on their hands.

When we talked about digits they don’t look at it as debt that you’re going to have to repay. They believe in investing into the markets in different forms. Of course, they’re going to go down the food chain. We’ve seen what’s going on. They don’t think through these processes where the stock market and the equity guys, they’re having credible inflation in their share prices. They’re using these government guarantees to buy back stock to reward themselves. 

Eventually, the masses are going to have such disdain. There already is, but it’s just going to continue to grow. You’re going to have more of that through MMT, but they’re going to throw the digits at it. 

I don’t see what’s going to change that in the near term. I think this is going to be many decades of this, as crazy as that sounds. Look at Japan, and it hasn’t changed. They’re fighting that natural inflation. He said it himself and that that was a really important conference from Powell as the biggest shift in his strategy.

Preston Pysh  30:52  

Yeah, because I mean, at the end of the day, if they allow deflation to actually take hold of all of the spending, all of this debt, the trend of this debt… They just can’t allow for that to happen.

Marin Katusa  31:04  

The problem that so many people haven’t… They talk about flow of funds and with this deflation, your equity values and the growth would be wiped out, but the debt doesn’t get wiped out. Debt is number one on the balance sheet, it takes ahead of everyone else. Whichever way you want to look at it in an inflationary market, while you fundamentally inflate the debt away, because it doesn’t matter at that point. However, we’re nowhere near that standpoint and the demographics.

You look at all of the facts moving forward. These are serious deflationary pressures that you’re seeing. There’s such a software eating the world and the companies weren’t set up for it. You look here. I’m in Vancouver, Canada, and they just closed out all of the bars and said, “That’s it, we got to shut it down. We’re not controlling COVID.” Then they just shut down. 

What happens to all of those employees of that sector? Now they’re talking about, “Well, we may or may not have to shut down all the restaurants.”

Think about the impact of that. Is the government just going to keep funding salaries and the mortgages? They’ve extended the grace period for mortgages for three months. 

What about all the REITS, all of the rent, the residential rent market? The whole definition of cap rate is going to have to be rethought out here. So there’s a lot of deflationary pressures. This just happened from March to where we are now. It seems like a long time, but from a cycle standpoint, it’s still early days. I think we’re nowhere near to working this out and the impacts it’s going to have in the economy. Again, that’s very bullish for gold.

Stig Brodersen  32:35  

Let’s shift gears here. Marin, in one of your Katusa Research Reports, you talked about free trading stocks. Could you please define what you mean by free trading stocks and what you expect to happen in the near future for these stocks?

Marin Katusa  32:51  

Let me explain what that was all about. At the end of every year, you have something called tax loss season where people try to readjust their portfolio to position themselves to pay for taxes in the new year. This has been such a strong year that you’ve had $4 billion come into financings to through whether it’s private placement or prospective financing. A few IPOs but really, the main part of the business is PPs or private placements. 

So, $4 billion came in between roughly… Majority of that came in from July to now. Then there’s a four month period. It’s called the whole period of the exchange, that that stock that has just been invested in is restricted. That means that they can’t trade it. 

Because all this money came into the sector, people are seeing their share prices go up, but they haven’t been allowed to sell the stock during the four month period. I’ve been warning everybody that with that paper comes free trading.

When you calculate the mathematics of the volume that trades on these stocks, versus how much new papers coming to hit it, there’s going to be a lot of selling pressure, because people are going to take some money off the table, which is prudent. However, there’s no new buying power coming in to meet that selling pressure, right? 

Think of the bid, ask, and supply and demand for that paper so you know that there’s going to be more selling than buying stocks that are going down. Out of the 600 companies that did financings, we narrowed it down to six companies that I want to buy. I said, “These are the ones that we’re going to watch during this period. Let’s see where it goes, we may or may not get hit.”

That’s exactly the kind of concept that I did in March before this crash. I said, “Here are my five big caps.” 

Now, when things sell off, you want to upgrade your portfolio. You don’t need to go down the food chain of super early stage high risk stuff. Though if there’s a massive sell off, you want to go up the food chain because it’s discounted in such a way that if I can get a producer at like 0.5 NAV, and it’s a quality asset, that’s a low cost producer and good management teams, I’m going to use that market inefficiency or market sell-off to my advantage. 

That was the concept that we kind of showed in the next 60 to 90 days, there’s going to be $4 billion worth of original financings, that’s worth about $7 billion that the market can’t absorb. There’s going to be a massive sell off so let’s figure out where it’s going. The good companies, those six that I highlighted, they’ve used that money to advance their production and enhance the value of the stock.

Preston Pysh  35:21  

Marin, a lot of people, with our show specifically, are familiar with Warren Buffett. I think the dichotomy of decades of Warren Buffett saying that gold doesn’t serve any purpose in the portfolio, this and that. Then all of a sudden, we find out he’s been buying Barrick’s Gold, not a huge position, but he has been buying a position. I think everybody’s eyebrows and the whole industry said, “Say what?” 

I guess this is my question for you because people who hear that don’t even go and do the analysis. They say, “Well, if Warren Buffett’s buying Barrack’s, that’s the one I’m going to buy.” 

Why would this be a smart strategy versus a bad strategy? How else should a person look at this? We all know Warren has enormous capital so maybe he’s entering that specific company for a reason, because he doesn’t want to create issues for himself because of his market size. He might be basically bidding himself out of a position.

Talk to us about some of the specifics on how you would think about this news. Maybe if you’re a smaller investor, whether you should just follow his tracks or go looking somewhere else?

Marin Katusa  36:27  

A few things there. It wasn’t actually Warren Buffett that did the analysis. It was one of the managers. You have that aspect. It really is a small portion of his fund and the size of his fund is so large that by default, Barrick or Newmont are the only kind of companies that he could entertain other than playing maybe the GLD or something like the GDX or GDXJ, which he would still move the needle on. 

He went with Bristow’s company. Bristow is kind of the leader of the industry when it comes to preaching discipline. I think that’s the approach and I think fundamentally, it came down to the joint venture between Barrick and Newmont on the Nevada production. 

If they spun that company out, which is two-thirds. I think it’s a little over two-thirds Barrick, one-third Newmont. That really is the industry’s jewel and it’s a private company, obviously owned by those two big boys. That was why Barrick wanted to buy out Newmont for control of that. 

I think everyone’s thinking that Buffet has this, “He’s always been a supporter of Buy America. Now, he’s kind of reverting on that.” No, he’s just thinking that with that joint venture, that’s the place to be. So that’s my take on it.

Stig Brodersen  37:42  

A lot of good points there, Marin. There has been a lot of confusion about Buffett buying into gold. It almost sounds like he bought tons of mined gold and stored it in the vault in Omaha. Obviously, that’s not the case.

As you said, it’s likely one of his portfolio managers, Ted or Todd who built the position. Even so, for Berkshire, it’s a minor investment into a company that is producing gold. The marginal cost for the company is around $900 per ounce of gold. 

Now, perhaps it wasn’t the cheapest company to buy into in the first place on the valuation basis. But what would you say to investors who are investing with a smaller sum of money and have more flexibility of which company to invest in?

Marin Katusa  38:29  

Neither of them pay an impressive dividend. I think if you just do a little bit of work, you can get much better upside with, in my opinion, equal risk because of the discounts to the NAV that you’re getting. 

Now, when you rip into Barrick, Warren Buffett talks about fundamental value and being a value investor. The Barrick investment was not a value investor. He’s paying above NAV. That’s something that no one really talked about. 

So he’s paying a premium for the production that they have, the infrastructure and all that, but I’m not an above NAV payer, I’m an under NAV payer. Then as it gets above NAV, I take my profits. So that’s my fundamental approach. 

If you want to just follow Warren, I’m sure long term, you’ll do that. However, I think in the gold space, he does not have an advantage. If anything, he has a disadvantage over everyone else because of the size that he needs to deploy to make it somewhat meaningful. I think there’s better options for the average investor than that approach.

Preston Pysh  39:30  

If you could say the thing that you just feel like the market is missing right now, but for you, you just see this plain as day, what is that thing?

Marin Katusa  39:41  

I get more negative comments about what I’m going to say right now than anything else combined. I believe people are mispricing risk, that geopolitical risk, big time. I get all of the reports from all of the institutions and from all of the analysts. You cannot tell me that you’re going to put a discount rate on something in the middle of Africa that is on diesel production. Also, when it’s so politically unstable as a mine in Nevada. It just doesn’t make sense. 

The interesting thing about this cycle is where the analysts have come. First of all, a lot of the analysts have turned over because the performance was so horrible in 2012 and 2013, just like the management teams of these big gold companies turned over. 

A lot of people failed to understand that a lot of analysts got turned over. A lot of the consultants and engineers got turned over. The geologists also in these firms [got turned over]. So there’s been a huge turnover. 

The analysts aren’t the ones that make the money in the institutions, the bankers do. So if you’ve got some experience, and you figure the game out, you want to make dough. As you’re learning it, you go in towards the analysis of the side. That’s how these institutions work, right?

So the point here I’m trying to make is, you have a lot of analysts that haven’t been to these countries, they haven’t lived through 15 years, 20 years, 30 years cycles in the sector, and because they want to do a peer-to-peer analysis, the discount rates they’re applying, do not include the discount that you should be applying for the geopolitical risk. 

That, to me, is the biggest difference that I’ve seen from past cycles. I remember in the early 2000s, when I was one of the first guys to set up a company in the Balkans, and we were in Serbia. People said, “Oh, my God. I got to apply at a 20% discount rate for Serbia.” 

I said, “What the hell are you talking about a 20% discount?” They replied, “Oh, it’s risky. There was a war there.” I said, “Yeah, 10 years ago.”

However, in the previous cycles, I had to deal with the market being at least somewhat understood and added whether it was right or wrong. Sometimes it’s too much and sometimes it was enough. But you had this discount rate somewhat approximating the project’s jurisdictions and areas that were known.

Now, it’s a carte blanche development project in Kazakhstan. Gold 5% discount. I’m sitting there going, are you serious? Like, have you been to Astana? Have you been to those projects? Do you really believe you’re going to apply the same discount rate of something in Nevada that I can take my kids to? 

It’s just understanding the engineering and the mathematics of it. I don’t need to go in the middle of a jungle that has no infrastructure, and the people don’t want you. Does the Amazon need another mine? Ask yourself these questions.

I’m just not there. So I think that’s the number one thing I think people are totally neglecting, and if you look at it, look where the money is going. Nobody wants to talk about it, because the institutions and the investment bankers make money from raising financing, so they clip 10%, and they want to be able to sell products. 

Preston Pysh  42:45  

Well, Marin, I can tell you the research and the amount of depth that you get into on a monthly basis is exceptional. For anybody else that’s listening to the show, give them a hand off where they can learn more about Katusa’s resource opportunities and everything that you do. 

Marin Katusa  43:03  

You can go to my website, katusaresearch.com. I’ve got lots of free material. My stuff’s not for everyone. If you’re looking for a hot stock pick and a flyer, I’m not that guy. I’m a guy that if you want to get into finance and at the same time at the same price as what I’m doing. I’m always the lead investor in every financing I do, then you should look at what we’re doing. 

Think of me as if you’re to buy a gym pass, you actually have to go to the gym. Each report is somewhere between 30 to 40 pages long. We get into the analysis. I show the math. I try to make it as entertaining as possible, but you have to be disciplined to actually read the material to understand it. 

It’s not copy, it’s not promotion, it’s just flat out “this is the market.” I will never write about something that I’m personally not going to invest in. More importantly, when you invest with me, you get to sell your stock before I do. That’s a big difference between myself and anyone else. It’s completely independent. You can’t buy your way onto our list. If I’m willing to write a check at this price, you get in at the same time and price and you get out before.

Stig Brodersen  44:11  

Marin, I think I speak for everyone when I say it’s always a pleasure to have you on our show. What a time to be talking with you, given the financial markets and the opportunities ahead. You and your team have set up a deal for the audience. The audience can find the offer at katusaresearch.com/TIP. We will of course make sure to link to that in the show notes. 

Marin, as always, thank you for taking time out of your busy schedule. We hope to bring you on soon again.

Marin Katusa  44:47  

It’s my pleasure. Thank you.

Stig Brodersen  44:49  

Alright guys, that was all that Preston and I had for this week’s episode of The Investor’s Podcast. We will see each other again next week.

Outro 44:56  

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