The Calm Before the Storm - Eric's Weekly Wrap Up

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Craig: Happy Friday from Sprott Money News at sprottmoney.com It's Friday October 16th, 2020, and it's time for your weekly wrap up. I'm your host, Craig Hemke, and joining us as usual on a fine Friday morning is Eric Sprott himself. Eric, good morning.

Eric: Hey, Craig. Great to be with you. It's sort of a ho-hum kind of week, but we're holding in there. Could have been a lot worse. We've come off the lows here, so things are looking better.

Craig: Yeah, yeah, we had a very nice end of the week last week. Maybe we'll get something still happen today. Hey, before we get going, thanks to all of our listeners out there who continue to send in questions and comments to the email address submissions@sprottmoney.com. And again, whichever channel you are currently using to listen to our podcasts, please be sure to subscribe and hit the like button if you're enjoying these weekly conversations. And just a reminder, once a month, we record something called "Ask the Expert." I'll be recording that next week with one of Eric's favorite technical analysts, a man by the name of Chris Vermeulen. So if you have any questions for Chris, again, you can use that email address of submissions@sprottmoney.com to send them in.

Eric, it has been an interesting week. We had a bank holiday here in the U.S. We had Canadian Thanksgiving as well. And now, here we are trying to wrap up the week. You said it's kind of listless. You're right. Any other thoughts of what you've seen as we've made our way from last week to this?

Eric: Yeah, I can make a very good prediction with one week closer to the election, and that election I think, might be a bit of a quite a focal point post-election. And one of the things that I'm coming to think is that President Trump will win the election. And I say that for a number of reasons. First of all, the pollster, and I wish I would have remembered their name who predicted he would win last year, has predicted he will win this year. It was obvious to me before the election last year that he was going to win, sorry, in 2016, last time. And I just see events unfolding that are very analogous to 2016, where for example the Trump rallies are way, way, way more attended than the Biden rallies. There's other undercurrents. I think the biggest undercurrent, by far the biggest undercurrent, is the average person's concern for their own physical safety.

And that's a very primary concern. And a lot of us might, you know, throw out our political will, our political leanings, for the sake of safety. And, you know, with all the chaos that reigned in various cities down there, I think the population has decided that Trump will be better for their own personal safety than Biden and the Democrats, and I think it might have a big impact on the vote.

Craig: You know, and Eric, I sense that there are really kind of less people willing to take a position at present. You know, you mentioned the pending election impacting thing and now a week closer. Do you kind of sense that as well, that, you know, folks are really on kind of standby, not taking any major positions, kind of a wait and see action?

And then, for on, kind of follow up on that, we've had several questions this week, people wondering what your personal thoughts are about how do you position yourself, ahead of and after the election, depending upon who wins?

Eric: Okay. Well, first of all, when it comes to markets, and as you know, there are no markets, there are only interventions.

Craig: Right.

Eric: Which I think is a statement that I just believe more and more and more as you see the weird things that happen on an intraday basis, inter-hourly basis, you know, the weird stuff that happens in a split second, and then it reverses itself another split second later. I mean, it's just, it's very difficult for rational people to explain the logic of why certain things are manifesting themselves. But I think one of the overarching realities is that the volume keeps going down. So the people playing the markets, who are, I'm gonna call them active, is quite frankly, probably pretty de minimis right now. And I know you wrote an article for Sprott Money of how the algo traders can have a huge effect on things. I know that Ted Butler believes that these high frequency algo type traders will have more dramatic intraday impacts on things, because the banks are less involved in precious metals now, and might be less involved in the general markets.

So that's, you know, any little bit of FOMO, one way or the other, kind of rules the day. Not that it necessarily makes any sense. What will happen if Trump gets elected, it concerns me a lot, because I actually believe that the left/Democrats are way more prone to creating the chaos than even the right wingers, who are probably considered to be the most physically active group. But we've seen Antifa and other groups that seem to be quite willing to damage things. So I don't know. I suspect that if Trump was to win, there might be a lot of unsettling news following that election.

Craig: Yeah. I think a lot of people feel that way, and that may be impacting that drop off in volume, like you said, kind of a wait and see. There are a number of other news items out there that we're watching. One of them is that the production results that are beginning to come in from some of the major miners ahead of the earnings season, which will start here in just a couple of weeks, just some ideas of what you've seen so far?

Eric: Well first of all, I think most of the news that we see has not been price shaking, whether it's, you know Kirkland, with their production numbers, or the Karora or Jaguar, Barrick. There's nothing that's been kind of off the wall that has been surprising in my mind. It's more like steady as she goes. Now, there's production and there's earnings. The earnings might surprise a lot of people, because we did have the roughly $300 change in the price of gold, third quarter over second quarter, so there should be some pretty dramatic changes in earnings here. And I think we've seen a bit of a precursor to what is likely to happen, and essentially we're getting these dividend changes and notices. Kirkland increased their dividend, Yamana increased their dividend, Kinross initiated a dividend. And I see the dividends and earnings as playing a very critical role here going forward.

I actually think that the gold group will prove to be very valuable relative to the rest of the stock market, and particularly in comparison to the bond market, where you're buying a safe asset, but you're also getting a return.

Craig: Right.

Eric: And if the dividend-paying companies are sort of insisting on paying out a higher part of the earnings, which seems like what they are doing, then those yields can be, look pretty juicy to a bond investor who basically, on a real basis, loses money every day. So I still think there's lots in front of us in terms of value appreciation, due to the recording of increasing earnings all the time. And I say that, I think back to Kirkland Lake Gold, when I was the chairman, and you could see what was happening from a production basis and you knew, oh man, look what the earnings are going to be two years out.

And sure enough, you get two years out, and the stock goes from $15 to $50. And it was all pretty apparent. But you gotta keep reporting the earnings, you gotta keep showing that you're making progress, and most of these companies I refer to, they're all making progress. And of course, the biggest help is the price of gold going up. They will should all have rather stunning earnings reports, and we look forward to seeing, as you say, in two to three weeks.

Craig: And just to double back on that paying of the dividends, because a lot of folks think, well, they should be saving that money for other times, or they should be using it for acquiring new resources, things like that. But I asked that question of Rob McEwen last month, who I know is a longtime friend of yours. He was the expert last month for "Ask the Expert." And he echoed those same thoughts, Eric. He said it makes the stock more attractive on an institutional basis to start paying out something that is a couple multiples higher than maybe a 10 year treasury. Is that what you think, too?

Eric: Absolutely. And, because we've gotta bring the generalists in here, right? I mean, first of all, there's hardly any money goes into specialty gold funds anymore, so you gotta get the generalists to step in and realize that on a fundamental basis, cash flow multiples, earnings multiples, dividend yields, these are excellent investments to have. I might also say it the other way. I mean, these companies, collectively could almost get dangerous amongst themselves because when the price of gold's $1900 and you're making almost 50% margins, I mean, if they ever came into the market to invest that money, it would be chaos. You know, making acquisitions and things like that. And I think that was what happened to them before that, they all came in at the last time and paid excessive prices, and, you know, because one guy bid for somebody, some other guy bid, and you end up overpaying. And of course, a lot of times they were taking on debt, which, most of them are still paying off that debt.

So, I think a value having a more conservatives, sort of longer view, that hey, let's just give the shareholders some decent return here, they can do with the dividend what they want to do with the dividends. They don't have to throw it back in the ground and it's probably actually good for all of us that they pay dividends rather than everybody chase each other to recklessly bring on gold production. Let's just keep it where it is, and enjoy the party when it's on.

Craig: Yeah. Hey, and one more thing about those Kirkland Lake production numbers. There were some questions about that, the internals of that, and what was happening in the Macassa area. Is there any color you can add for folks?

Eric: Yeah, well I was surprised that Macassa's numbers were as weak as they were. And I think the number was something like 39,000 in the quarter, down from 62,000 in the same quarter a year ago. And considering we're on a, theoretically, a steady-state mining operation, that was a little shocking. And I found it even surprising that one of the reasons they gave was the lack of equipment. It seemed like a very bizarre thing to have to admit to, that you lacked equipment for some reason, even though your production was way down. So that was not a very good result. I think they suggested that that result should be better this coming quarter.

And the grade, of course, at Macassa, was way down. I think it went from something like 0.24, or 24 grams down to 15 grams, something like that. So obviously, they got in a sequence of the mining, where the grade wasn't as high. And, you know, it's funny I thought about that, because when you lose 20,000 ounces or 25,000 ounces, that's almost $50 million in revenue. Believe it or not, it's almost $50 million of profit. You know?

It doesn't cost any more to produce 62,000 than 39,000. Trust me, they have the same equipment, the same people, the same everything. It's just the grade that made a difference, so that's a lot of money to leave sitting on the table in a quarter.

Craig: Yeah.

Eric: So that, but the stock's so dirt cheap anyway that even that slight disappointment, I don't think, had any impact in the market. Oh, and I might add that some of the generalists [inaudible 00:13:01] I think BlackRock has become the largest investor in Kirkland Lake Gold. And I don't think it's a specialty fund. I don't know for certain, but they are even a larger holder than the ETF. And that's all been very, very recent, so I'm happy to see that generalists would recognize the value in these companies and really going forward, that's what we all need to have manifested [inaudible 00:13:26].

Craig: That leads me to a question about the PSLV, actually, Eric. We had several people write in this week wondering about this kind of persistent discount that the PSLV is trading at. I had some people point out to me the bank and institutional holdings of the SLV and what's going on there, and why are they getting in line as big holders? Why are they not getting in line as big holders in closing that discount in PSLV? What are your thoughts on why that persists?

Eric: It's a very, very strange thing. Now, mind you, the SLV in market cap is so much bigger than the PSLV, and a lot of institutions, you know, their number one concern is liquidity. That's first off. But when I look at PSLV, to an American purchaser, there's tax advantages to owning PSLV versus SLV, significant advantages. It's redeemable in smaller quantities. In fact, you can't redeem...a person, an institution, can't redeem the SLV, but you can redeem the PSLV. So I have no idea why you're at that discount, and here's a very interesting thing. The U.S. Mint, on Tuesday, raised the price of a silver round at the mint, U.S. silver round, to $67 an ounce, $67. And you can buy the PSLV at less than the spot price. You know what? That's an easy trade. That's a very easy trade. And why would the price have to go up 25% on a punched out silver round? I mean, it's ridiculous. Obviously, it's probably done to prevent, try to prevent people from buying them. So, I can't explain the discount. I know, and I don't watch it every day, like I might have when it first started. But it can go to premiums. It can go to a discount. Any time you can buy silver at a discount, you gotta get in there and own it.

Craig: Yeah. Yeah. You gotta look at it that way. I've got a list of stocks that have been sent in this week for your opinion, but before I get to my list, I'm just wondering what's on your list.

Eric: Well, let's see. I want to talk about, first of all, the World Health Organization apparently came out and said that they're not in favor of lockdowns.

Craig: Yeah.

Eric: And as you know, it's sort of been going that way in the last few weeks, that the economic cost of the lockdowns might far outweigh the cost of COVID-19. Now, it's hard to prove. And we've covered up a lot. You know, these trillions and trillions and trillions of dollars we're throwing at the economy, not really seeing the collateral damage, but I suspect it's coming. And you have the Barrington Convention, Declaration, I should call it, where there was, I think it was 6000 scientists and medical people. There's apparently another one in Europe where they got 80,000 scientists and medical people saying, hey man, we've overstepped it here. And that's my belief, that we really should face the consequences of it, and I think we'll be better off facing the conscience of COVID-19 than the consequences of bankruptcies and loss of houses, and permanent loss of jobs, and things like that. And perhaps an indication of the permanent loss of jobs, I can hardly believe that we had almost 900,000. Now the key word is the initial, initial claims for unemployment insurance. You're telling me that 900,000 people came in and claimed, initially, unemployment insurance in a week?

And these numbers are staggering. And it happens every week. I mean, yeah, at 930, you're talking about 45 million people a year, filing initial claims. The numbers are mind-boggling. So, I think it indicates that, you know, without all the government support that we put out there for, you know, helping people who aren't paying their mortgages, who aren't paying the rent, who aren't receiving money but [inaudible 00:17:43] somehow get a check from the government, I mean, if it wasn't there, stand aside. And of course, we're creating haves and have nots. Because some groups, of course, are making a fortune off of COVID-19. And then again, there's those people who are absolutely being decimated by it, and it's already bad enough, you've seen the study this last week when, what was it, the top 50 people in the United States, from a wealth point of view, had as much as the bottom, was it 65 million people, something like that?

Craig: Yeah.

Eric: I mean, it was ridiculous numbers. And now we're creating this on a more general macro basis that there's people that are winning in this game and people that are losing, and the people losing are losing because of decisions that were made to lock things down. So, it seems a little unfair.

I also wanted to talk about what's going on in the COMEX. That we've continued to have, every day, increasing notifications of deliveries in both gold and silver. Every day, somebody comes in and says, "You know what? I'm wanna buy some of that stuff spot, right now," I'm kind of wondering why they wouldn't buy the PSLV, by the way, and pays the going price. And there's hardly been any reduction in open interest here. In fact, the open interest in December, I mean, it's just staggering. It's sitting there at 450,000 contracts. It went up 6000 contracts last night. And, you know, we're getting close to December. How many trading days do we have left?

Craig: Thirty?

Eric: We maybe have, like, 27 trading days left to get rid of 450,000 contracts? And yesterday it went up by 6000. Wow, that's a lot of gold, my friend.

Craig: Yep.

Eric: So, there's been no reduction there. The only reduction in open interest has been because of deliveries. In fact, the deliveries have been greater than the reduction in open interest, and that is disregarding EFPs, exchange for physicals, which are even bigger than the deliveries. So, there's things going on at the COMEX that are telling us we have a physical problem in both gold and silver.

Craig: Yeah, and December will be the month to watch. We'll all have an interest in that. That's typically the largest, or I guess busiest, delivery month on COMEX, and we'll have all that by about the time of American Thanksgiving in late November.

Eric, I've got a lengthy list. We had a whole bunch of questions. I always try to look through them all, try to find the companies that are most asked about, to try to lay them on you. I want to start with some that we talk about quite a bit. Maybe Discovery Metals, Jaguar. Some interest in Karora and Wallbridge.

Eric: Sure. Sure, well each of them had news items out this week. Discovery had some drilling results which were good. When you have a large market cap, you need good results to maintain your market cap. You need, sort of, not earth-shattering, but significant, significant changes in the way people would have to look at it, because of a drill result, to move the stock, and I would say those results didn't quite do that. So it's hanging in there around $1.80. They've still got a great deposit. Deposit gets better all the time. But it does take time for the market to realize how big something's getting. And we'll need more news to finally get there.

And the same is true of Wallbridge. They came out with some great results in the sense of increasing the dimensions of the property, some fairly high-grade intersections. But still, in my mind, nothing that really shockingly moves the needle. I think those results will still come, where we, if they keep drilling in the Tabasco, deeper down, which, I don't know when they're going to be able to drill that hole, but I'm sure looking forward to it. That will move the needle.

And/or, you know, you never know, somebody could come in and [inaudible 00:21:50] say, you know, this area looks so prospective that I'll take a run at it. I have no reason to believe that's happening, but you know that everybody's looking at, all these strategic people are looking at everybody's drill results. There's other companies that had news, like a Karora released their drill results. I'm sorry, their production results. But I think what will move Karora is we need to find out what we're going to find in the, where they have the coarse gold. Hopefully, they'll start drilling there. Hopefully, we can get some word on production [inaudible 00:22:24]. We don't have any word on it yet or any proof of it. So we'll have to hold back until they announce something like that.

In the case of Jaguar, good production numbers. What we need to find out is that the drilling is successful, and/or that there will be some increase in production, and there's no indication of that yet.

Craig: All right.

Eric: We discussed Kirkland Lake. Are there other companies that the listeners were asking about?

Craig: Yes. I had two others that were frequently mentioned, and we just talked about Pure Gold last week, but people were just wondering if you could double back to that because there's a lot of interest in that one, and then a company that we haven't discussed in a while, called Fosterville South, if you have anything on either of those two you can add.

Eric: Well, there's really nothing new on Pure Gold, but I love the fact that they're going to be pouring their first gold in December. That's not very far away. And one of the things that I hope we find out is that the grade that they recover, and the ease of recovering the ore, is better than the market might have anticipated. And I think we're gonna find out that the grade is better, and that the production is going to be higher, and that the likelihood of increasing the life of this ore body is going to be quite surprising. I love it in their present presentation when they say that we're only at the tip, or that we're, I think they used the word "barely," at the tip of the iceberg.

Craig: Wow.

Eric: Barely at the tip of the iceberg. Well, so I'm kind of looking forward to see the drilling in West Madsen, and how big this thing can get. In the case of Fosterville, they're attempting to duplicate what, the results of Fosterville, which Kirkland purchased. They've had some good results. I don't know that I've seen any results that tell me that they're any closer to unraveling it, which is what we're all hoping for, but certainly the initial results were very impressive. And they're in the right neighborhood. So, I'd say they have a very good chance of coming up with something pretty spectacular there.

Craig: Hey, and just one last question I thought I'd tag on at the end. Person written in with a question about market cap, and how much it matters, in that, and it's more just kind of the math of it. Does it make any difference to you if a, let's call it a $300 million market cap is 30 million shares at $10 a share or 300 million shares at $1?

Eric: Yeah, 300 [crosstalk 00:25:10].

Craig: Does it matter how you get there?

Eric: Well it's a very interesting question, and some people think it makes a difference. To me, you're asking me, it doesn't make a difference. Whenever I look at a company, my first question, before they even start talking to me, what's the market cap? Okay? The market cap is what the market is valuing the company at. That's the first thing I need to know. Don't tell me about drilling this and this and that. I've got, everything's relative to the market cap. And I don't even have to ask him the price per share. And if the guy says my market cap's $100 million, the market cap's $100 million. Stock could be at $10, stock could be at $1, stock could be at $100. What's it matter? The market cap's the price of the company, so... But the only exception I would make to that is, there's some prices per share where certain people don't like to participate, i.e., institutions. So most institutions don't like to participate in what we're gonna call penny stocks.

There's also certain levels where stocks become marginable. In Canada, I think typically the minimum is something like $1.50, but if you're trading through a bank-owned firm, I think it's actually $5 Canadian before it's marginable. So those things do make a difference, like I sometimes encourage people to consolidate their shares, because if something's trading at 50 cents and it consolidates 5 for 1, now it's trading at $5, so the stock's marginable, which gives the investor some financial flexibility. So, those things are helpful. But in terms of, you know, the valuation process of how good is the stock gonna be? Once you know the market cap, then the metrics have to either justify it or not justify it, and compared to other market caps.

Craig: The math is the math, regardless of how you got there.

Eric: There you go.

Craig: All right. All right, well, before we wrap up, just a reminder about Sprott Money. Sprottmoney.com is the people that bring these conversations to you every week. So always keep them in mind when you're out there searching for bullion or bullion storage, and of course, precious metals prices are in a bit of a holding pattern ahead of the election, so this is always a good time to invest, especially with Sprott Money, running its annual autumn sale. For a limited time, prices are falling on selected bars and coins, so don't miss this opportunity to rake in some savings. Visit sprottmoney.com, or of course, you can call us at 888-861-0775. My friend, I kept you a little over time this week, so thank you for all your time.

Eric: Hey, that's fair enough, Craig, and the more I think about it, to our American listeners, don't pay $67, okay? We can find your coin a hell of a lot cheaper than that. It's the same silver content.

Craig: Yeah, just because it's shiny doesn't make it more valuable.

Eric: Right.

Craig: All right. Hey Eric, have a great weekend.

Eric: Okay, you too, Craig.

Craig: And from all of us at Sprott Money News at sprottmoney.com, thank you for listening. We'll talk to you again next Friday.