Ask The Expert-Michael Kosowan - April 2018
Michael Kosowan is the President and CEO of Torq Resources. No stranger to the Sprott Money family, Mr. Kosowan is an industry expert with over 20 years experience in the junior mining sector, having led mining investment and financings in the USA and Canada through his work with Sprott and other premier brokerage houses. Currently a Director at Auryn Resources, he has also worked as a project Engineer for top-tier Canadian mining companies such as Placer Dome, Falconbridge and Inco, and as an Exploration Manager for Atapa Minerals in Indonesia and Peru.
This month, Michael stops by to answer seven listener questions and tells you:
• The most important supply and demand fundamentals for gold and silver RIGHT NOW
• Which gold/silver backed cryptocurrencies he likes
• The specific mining companies he expects to outperform this year
Don’t miss this incredibly informative edition of Ask the Expert. Listen to Michael’s answers to these and other questions here:
Announcer: You're listening to "Ask The Expert" on Sprott Money News.
Craig: Well, greetings once again from Sprott Money News and sprottmoney.com. This is your "Ask The Expert" segment for April, 2018. I'm your host Craig Hemke, and joining us this month is Michael Kosowan. Michael is the CEO of an exciting company that you can find on the Toronto Venture Exchange called Torq Resources. He's also an expert in the mining sector and in the economy. What a great guy to have on as our expert this month. So, Michael, thank you so much for spending some time with us.
Michael: Well, my pleasure, Craig, and thank you very much for the kind introduction.
Craig: And before we get started, just a reminder that these "Ask The Expert" segments are brought to you by Sprott Money where you can always find some exciting offers, whether you're looking for let's say Canadian maple leaf gold coins or maybe some silver coins. There's always gonna be specials. There's always gonna be great deals versus spot. Again, check out sprottmoney.com or call 888-861-0775 any time when you're looking to add some physical metal. Michael, before we get started, let's just kind of give everybody a little bit of background about your career and where you are now because you actually for a while you worked for Sprott.
Michael: I definitely, Craig. I crossed the street so to speak to be on the issuer side now in taking on the role as CEO of Torq Resources. As you mentioned, a gold exploration company, Canadian listed, Canadian domiciled. And my previous incarnation and previous job was really working at Sprott as a investment advisor, and what I did there was really look at strategically placing my clients into natural resource types of equities principally for Canadian clients but also for an American base of clients as well. So I have a great fond memories and a great history of working with Sprott.
Craig: And you hail from Northern Ontario, which means mining is in your blood. I know you're a mining engineer as well with a master's degree in mining and engineering. And now this new company of yours is called Torq Resources. You're the CEO. Tell everybody a little bit about that.
Michael: Sure, happy to. I mean, we're a newly minted company, and we are aggressive explorers. We've got a very strong management team where our mandate is really to look for gold exploration projects that are newly developing in North America. Our first and foremost project is located in Newfoundland. Newfoundland has really been put on the map recently with a few discoveries and a few production profiles that have really hit the ground running well and shown that Newfoundland is, in fact, a good gold frontier jurisdiction to be working in with the idea that you can get these larger sized deposits. And that's what we aim to do with our technical team and the capital that we currently have within the company to really make those exploration programs come to life. So we're really excited about the aspects there.
But clearly, we're not happy with just one project. We're gonna be on the hunt in this market to look for other accretive properties that we will look to grow and springboard from. And having already raised the capital and having a strong Treasury behind this already means we don't have to worry about the street or be too sensitive about the current market situation, which continues to be weak certainly on the gold equities side and hence creates an opportunity for us.
Craig: Again, your background is working with Rick Rule, Eric Sprott, and this company Torq Resources can be found on the Toronto Venture Exchange with the symbol T-O-R-Q, right?
Michael: Absolutely, 100%, great mentorship from both Rick and Mr. Sprott and really enjoyed my time working with them, and obviously that may have added to my Gold Bug fever to some extent with having both of those gentlemen tutor me along so to speak.
Craig: That ought to do it, no doubt about it. All right, well, Michael, let's dive in. Again, when we have "Ask the Expert" here at Sprott Money News, the questions are submitted each month by Sprott money customers, and this month I have a total of seven questions for you, Michael. So I think we'll just dive in and hit the first one. I think this first one really goes into your expertise having been in the securities industry and watching the markets all these years. It just simply is do we need to see a correction in the stock market for gold to have a solid move to the upside, and what major catalyst do you foresee for gold in the next year or so?
Michael: Sure. No, that's a great question for me. You know, having fielded these types of questions in my past in my previous career means that there's always a long answer and a short answer. So I'll try to be succinct to keep the attention of our audience here today. So the short answer is really no. I don't think we need to see a correction in the stock market per se. My preference is actually that you don't because if there is a massive correction, it means that there's probably a lot of other things that have gone wrong. But what I would say to color that answer a little bit better is the idea that maybe the gold market would find it preferable if the large cap stocks in the large market started to do less well. And what I really mean by that is the 20% and 30% returns that the large cap stocks have been showing over the last 3, 4 years in addition to the high liquidity that they represent has been a daunting opponent for the gold space. And that has created let's say a lack of interest in general towards gold, gold equities in the short term. Also the leadership provided by the tech stocks, the so-called FAANG stocks as they're typically called or the acronym is meaning Facebook, Apple, Amazon, Netflix, Google. They have really shown strong leadership. It's a matter of this high liquidity and high performance they've provided of, "Why not just keep life simple and invest in these types of issues?" However, now I feel that there's a rotation going on. All of these stocks I've just named have taken it on the chin so to speak or at least proven that they're mortal to some degree. And the idea that it's a slam dunk to see these 20% and 30% returns is now let's just say at the very least more suspect. And my guess is that there's a changeover of leadership in that regards.
As far as the second part of your question, what's the major catalyst? I think it's, to my mind as a somewhat junior economist possibly, I like to think in terms of it's an inflationary driver and you're seeing with high employment numbers and pressures in commodity prices that are occurring, including by the way things like $70 oil, are all pointing the meter towards higher inflation. But the real spiking or the real spice to that market may very well be geopolitical in some shape or form, whether it's missiles flying around or potential trade wars.
Craig: Yeah. Well, all right, I think the second question then follows up pretty well with your answer to the first one. And this one I guess it kind of speaks in broad terms, but what do you see here in 2018 are the major supply demand fundamentals for gold and silver?
Michael: Well, I see this big transition that's occurring from west to east. And this idea that the physical market is really going to continue to relay itself to eastern shores in some shape or form. The Chinese gold production is already staying completely domestic, and their demand seems to be insatiable. You've got other participants, whether it's let's say Russia and China wanting to trade more together and wanting to keep each other on par. That trade program, should it really develop, will require the backing of more gold behind those trade systems and the various currencies involved.
I mean, they do trust the valuation represented by gold, and that it is the fundamental part of that trade system. So I think that demand will continue. As far as the supply part of it, I think this is where you're running into the problem that the gold miners that are out there don't have the capability of keeping up, and the so-called production cliff that's imminent, imminent in the context of the next two to three years, is very much in our faces and their...our faces as an industry. And the problem is going to become of replenishing the reserves of the seniors in the short term. So I think you've got that downward path in the context of supply, and I think you've got this at least very robust continual demand. And my guess would be it even gets stronger as the U.S. dollar gets weaker.
Craig: Yeah, that is definitely the road we seem to be heading down. It's quite the conundrum with price where it is versus the cost of production and you know a lot about that in your role as CEO of Torq Resources. The third question though, does dovetail exactly into what you just discussed right there at the end of your answer to question number two, Michael. And this is a question near and dear to the hearts of a lot of listeners who are both in the U.S. and in Canada. And it's just simply do you have a forecast for the U.S. dollar but also the Canadian dollar going forward?
Michael: Yeah. Not a complete tale of two different worlds. I think Canadians in a sense pride themselves that their currency is different. Internationally, I think it's considered more of a natural resource currency. My real belief is that it's some form of a petro dollar in talking about the Canadian side of things. Because Canada is such a great trading partner with the United States, there's always this symbiosis that's going to exist. There's always some relative measure that does exist and ought to exist due to the high trading that goes on between these two countries. So I think that there's similarity on the Canadian dollar in it to not move too far away from the U.S. position.
But I think, talking about the U.S. dollar now in particular, the current administration in particular, the current goals behind the trade imbalances that are out there really point toward a lower U.S. dollar. And that solves a lot of the tensions that are currently being created on the trade side. I think it also at the same time generates this domestic production component that the basis of the current administration basically got voted in on so it satisfies both the political and the economic scope of things. So in that sense, because something does...because it really makes sense for it to happen and more or less will happen. I think you can count on it happening in some shape or form. So, that in turn means a lower U.S. dollar. The Canadian dollar may stay buoyed a little...in relative terms, a little bit stronger visa visits U.S. counterpart if you're a believer in this idea that oil prices continue to do well and commodities continue to do well in the face of all of that.
Craig: We've often mentioned...the old adage is you don't want fight the Fed. You also don't want fight the administration and their policy. And it seems like almost both are urging for a weaker dollar at this point, so maybe don't want get in the way.
Michael: Well, exactly, Craig. I think you hit the nail on the head there. I think you don't want fight the Fed and certainly the trade issues that are coming up of late and are really a topical issue. This is an easy way for them to cure both of those problems.
Craig: Exactly. All right, let's move on to question four then, Michael, and this ought to be a fun one. I mean, we're mainly just looking for your opinion as if just as with all the questions here. And I don't know what your opinion is on this one, but the question states, "In your opinion, do the bullion banks or the...we'll call it middlemen hold the miners hostage by not offering a fair value for the miners' product in a sense that they manage the price, restrain price?" A lot of folks think that mining CEOs are kind of numb to what's going on around them. What do you think of that?
Michael: Well, I'd like to think that they don't, but having said that, I'll harken back to what I was speaking about earlier is that if you look at the traditional bullion banks that are out there, big American, big North American banks, the JP Morgan’s, the Morgan Stanley’s, they've traditionally dominated the space. And it's been a matter of them really setting the price and tone of how that mechanism works on the bullion banks side. And their interest hasn't necessarily been a runaway gold market or a run-away precious metals type of market. Here again, you're seeing the transition of that power move away from the west to the east. So there are de facto bullion banks that are let's say Chinese in name that aren't necessarily on that roster of what you would consider a typical bullion bank, but here again, because of the physical demand that exists on the eastern side, you're starting to see them develop and become very important and significant precious metals traders. So I would say that will speak to a more clear market, which I would say is the biggest knock against the current set-up system as far as the bullion banks in your question. I mean, this lack of transparency that exists. When you think about it, there's only about 95% of the transactions that occur on allocated metal, which means that there's a lot of room for let's say hypothecation that exists since you don't have to deliver and nor do you really expect to deliver when most of the trading is 95% on paper.
So I think that the greater transparency that will produce itself and will be, in fact, demanded by let's say the bigger custodians and the bigger players within the bullion bank system will take care of one of the problems that exists. And being a little bit suspicious of things that may be why some of the larger North American bankers are starting to back out of becoming bullion bank representatives.
Craig: Yeah, that's a good point. All right, we got three questions to go, Michael. This one I think is a rather interesting question. We had a big surge in cryptocurrencies in 2017, especially late in 2017. And now in 2018, we're hearing about several new cryptocurrencies being launched, but they have gold and or silver backing them, and that's basically the question. Do you like any of these new cryptocurrencies that are backed with gold and silver?
Michael: Yeah. From my perspective, they haven't existed long enough for me to tell you I like or I don't like one over the other. What I would say is I like the matrimony of gold and crypto or more accurately blockchain is something that I do like. It's a marriage of polar opposites in a sense. And if opposites do attract, this might be a fit that works extremely well. On one side, you've got gold that has all the value but little liquidity. On the other side, you've got blockchain technology which has ephemeral value but great liquidity. And as that acceptance begins to increase, I think that that's how you're going to achieve a real balance between those two sides of the ledger. So you've got a well traded high-value type of a product. And I think getting the comfort and the history developing with that platform should spell a bullish scenario for gold and precious metals in general. So I do like the integration that can exist between those two areas. Now, having said that I'm certainly in looking at the industry. Tradewinds is the new platform, and you've had some buy-in from some of the major gold producers. Goldcorp, for instance, comes to mind. Certainly, Sprott is put their stamp on that space as well in getting their involvement there. I think we're off to a good start. I'd just like to see a little bit more of a track record before I weigh in too strongly one way or the other.
Craig: Might kind of fit in to the previous question about middlemen and bullion banks too.
Michael: Exactly, yes.
Craig: All right, question six. And again, I think the person that submitted this one is respecting your background as an investment professional and also in the mining sector, just simply are there any specific mining companies that you like at present?
Michael: Well, in answering that question, I may show part of my bias and part of the bias is towards the North American gold miners. I think that they are transparent. Their operations are well regarded. It's not that hard to buy all of them. Realistically, you can look at an index, for instance, which could encapsulate or try to minimize the risk that any one particular operation represents. So I think that if you look at names that we've been involved with, I mentioned Goldcorp. Agnico Eagle, of course, has been a big player in the Canadian space with very high grade reserves relative to its peers, which is why it trades quite well and is well regarded in American circles. So I think that would be my leaning in a sense. Instead of picking one though, I might look at playing a bit of a basket of them. And now I'm speaking in terms of general investors, but for the non-general investor, the point I made earlier about the production cliff is a problem. And the way to replenish the problem is really to look at the juniors, and that may give you a good insights as to why I did cross the floor and look at heading the charge of a junior exploration company that is looking to find additional resources that these senior companies would then in turn want to acquire. So your risks are higher, but your rewards are much higher as well. And in this kind of market where junior equities are trading at very low levels, this is a very good time to be looking at that space because from my perspective, the downside is limited.
Craig: Yeah. All right, Michael, I've got one last question, and this definitely draws upon your experience as an investment professional, came from a guy named Pete, and he just wants to know what's the best way to educate someone nearing retirement, yet only invested in regular mutual funds? I would imagine you saw this type of thing a lot folks that are in I guess we'll call it traditional equity mutual funds, bond funds, and the like, and you want them to diversify into precious metals and miners. I think that's what Pete's getting at. What's the best way to help somebody with that process?
Michael: For sure. I mean it's a great question, and I think a lot of people are going to be thinking about this as looking to gold as a counterbalance in their accounts. And I think that you have to look at...change your paradigm somewhat and think of the gold space in a couple of senses. In one sense, you want to think of it as an insurance policy. So the actual physical metals represent that. To my mind, its calamity insurance, it's an inflation hedge. It represents a real benefit if things really go wrong, and that's where the physical plays a component. Sprott has, for instance, a very good and solid gold ETF that they have, PHYS, P-H-Y-S and also on the silver side PSLV. So you've got a couple of products there that are good choices to hold the metal per se on a stock exchange type note.
I think the other thing is for somebody who's been buying mutual funds, they like the concept of diversification, which speaks to the idea of owning a basket of [inaudible 00:21:20], which is what I touched on a little earlier, so not just relying on any just one individual stock but buying a type of an index, let's say a GDX type of a fund for those fans of ETFs and again, as a commercial maybe towards Sprott, there are several funds that they also have in the gold’s arena as well where you're trusting in a manager to help you make those decisions along the way. So I'd say a combination of those two, especially for early investors in order to get comfort in this space. That might be a great way for them to start looking and educating themselves.
Craig: I think that's great stuff. Again, we've been speaking with Michael Kosowan. He's the CEO of Torq Resources. You can find them on the Toronto Venture Exchange under the symbol T-O-R-Q. Michael, thank you so much for your time. I think this has just been tremendous and extremely valuable for everybody that's been listening.
Michael: That's excellent, Craig. Thanks again for the kind introduction and it's been a pleasure.
Craig: And from all of us at Sprott Money News and sprottmoney.com, thank you for listening. We'll talk to you again next month.
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