On a mining investment spree, billionaire Sprott complains press ignores the 'gold conspiracy'

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Billionaire Eric Sprott Dishes on His Golden Investment Spree: 'It's Like Being at a Table with a Winning Run'

By Gabriel Friedman
National Post, Toronto
Wednesday, December 18, 2019

https://business.financialpost.com/commodities/mining/billionaire-eric-s...

One week before Halloween, Canada's biggest gold enthusiast, the septuagenarian billionaire Eric Sprott, wearing a neatly pressed tuxedo, bounded onto a stage in a downtown Toronto ballroom and accepted his induction into Canada's Investment Industry Hall of Fame.

He declared himself both humbled and honoured, and then rollicked into the wee hours of the night at his home in a nearby tower with expansive views of the city's sparkling skyline. The next morning, though 75 and technically retired, he showed up at his office, grumbling about a lack of sleep, but dressed in a magenta-coloured, paisley button-up, ready for a 9 a.m. meeting with a penny stock exploration company.

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"I keep reading that people are never making (gold) discoveries, the rate of discoveries is going down," he said, occasionally rubbing his temples and closing his eyes. "The funny thing, well, I guess I'm the sucker then because I keep buying guys who say they're making discoveries."

But Sprott added he believes there are discoveries, not by the major miners, but by junior gold and silver explorers.

Just as the price of gold often moves in the opposite direction of the stock market, Sprott has a strong contrarian streak that means he also often moves in the opposite direction of the market. For example, this past spring, after years of middling precious metal prices and declining discoveries had led most investors to abandon Canada's gold and silver explorers, he decided to go all-in.

An investment blitz in precious metal juniors

Sprott launched an investment blitz, the likes of which the junior mining precious metals sector had seldom seen, doling out somewhere between $200 million and $300 million in a matter of just a few months to acquire large stakes in about two dozen companies, most of which have never earned a dollar of revenue.

His investments between May and July accounted for about one in every four dollars raised by junior miners, according to Vancouver-based market research firm Oreninc. During that time, gold prices started to rise, breaking through US$1,400 in June for the first time in six years, bringing some investors back to the major miners -- exactly where Sprott doesn't want to be.

"They're the worst place to put money, OK?" he said.

Putting his money where his mouth is, he has been selling his position in Kirkland Lake Gold Ltd. -- one of, if not the lowest-cost gold producers and one of the best-performing stocks on the S&P/TSX Composite Index since 2016.

Sprott was an early investor in Kirkland Lake, was appointed chairman in 2015, and one year later helped engineer its merger with Newmarket Gold Inc., a small gold producer in Australia. Not long after, the newly merged company discovered high-grade veins at two mines, which propelled its stock upwards to $63 per share.

Many investors pride themselves on not selling when a stock hits a bump, but Sprott said it is equally important to not sell when the stock rises, at least not until it's gone up five or even 10 times, a so-called tenbagger.

"I've had lots of tenbaggers and the important thing is to stay in it," he said.

But when his stake in Kirkland Lake reached about $1.3 billion earlier this year, and it looked like gold prices would keep rising, Sprott said he decided it was time to sell.

"Here's what I say to the management of Kirkland Lake: You will not be the No. 1-performing stock this year," he said during an interview in October. "You will not be, because companies like Eldorado (Gold Corp.) and Detour (Gold Corp.) are going to kick your butt."

In November, Kirkland Lake announced it was buying Detour Gold Corp., and its stock fell by 15 percent in a day, wiping out what he estimated to be around $140 million of his net worth.

And yet Sprott -- who found out about the deal on a day he was meeting with a junior mining company seeking investment -- elected to support the deal, and waxes enthusiastic about Detour.

Gold's rise will boost higher-cost miners most

Sprott's logic for why higher-cost producers may shine now is straightforward. Since June the price of gold has risen by approximately US$200, or 15 percent, to around US$1,467 per ounce. The gold miners that could barely cut a profit when gold was worth less than US$1,200 per ounce because their costs were too high could now be in line to double or triple their thin profits. But lower-cost producers, already reaping huge profits, will see only incremental gains from gold's price increase.

It's one of the reasons why Sprott doesn't much care about Canada's major gold miners.

The best-run companies might provide 20- or 30-percent returns, or maybe 100 percent in a few cases, but Sprott would rather invest in a company that might strike gold and give him a 500-percent return, or even a coveted 1,000-percent return.

Indeed, as merger activity heats up in the gold space, another one of Sprott's investments, Continental Gold Inc., announced a $1.4-billion cash buyout at $5.50 per share.

In July, Sprott had bought about 10 million shares at $3.10, meaning he made about $25 million or a 75-percent return in just a few months. But he was nonplussed, saying the buyout may have come a little early.

"You've got to have the dream, right?" he said. "You've got to have the dream you're going to find something."

Therein lies Sprott's biggest paradox: He is eager to believe that junior gold miners are on the verge of striking the motherlode, but skeptical of nearly everything else related to the gold industry.

News organizations 'never talk about the gold conspiracy'

After a five-decade career in the financial services industry, during which he worked as an investment banker and founded an eponymous empire that includes fund and asset management firms, a brokerage firm, bullion storage, and more businesses, he is skeptical of commercial banks, major precious metals miners, central banks, the stated rate of annual inflation, and, perhaps above all, gold and silver prices.

"One of the things about the media, they never talk about the gold conspiracy," he said. "Look at the guys who are paying fines for spoofing the precious metals markets. Every two weeks some guy's paying a fine."

Case in point, U.S. prosecutors in September filed criminal charges against three JPMorgan Chase & Co. bankers for allegedly spoofing the precious metals market, which means placing fake orders and then quickly cancelling them to manipulate the price. The indictment alleged a decade-long conspiracy.

Sprott believes the futures market -- where investors can buy options that essentially allow them to place bets on the price of gold or silver without actually having to own any of the metals -- allows commercial banks to exert way too much influence on the market for physical metals.

As someone who stockpiles bullion, and often gives it out as a gift, he watches the prices of silver and gold so closely it often colours his mood.

This fall Sprott was out fishing for grouper on a staffed boat somewhere warm on a Friday when he normally records his podcast. In spite of his idyllic circumstances, he sounded distinctly downtrodden when he called in to the podcast.

"I've had better days, you know. It's a bit of a tough one," he said.

As the podcast progressed, it soon became clear that gold and silver prices were both down, about 4 and 6 percent, respectively, and options market manipulation appeared to be the reason to him.

World Gold Council doubts market manipulation

Juan Carlos Artega, director of investment research at the World Gold Council, is skeptical that banks are having a significant effect on gold or silver prices through the futures market, but believes options do have an impact on short-term prices.

"What you find is that the gold price is responding to demand-and-supply dynamics including those on the (options) market, but it's only one component," he said.

Artega said central bank and consumer buying, production numbers, recycling, investment in gold-backed exchange-traded funds, and a host of other factors play a role in determining long-term prices.

Sprott would hear none of it, and said he's long disagreed with the World Gold Council about many things. His skepticism of the futures market ties in to his skepticism of the financial market writ large.

"We have a weird financial system. It doesn't make any sense to a rational thinker," he said.

Gene McBurney, co-founder of GMP Securities LP, once a competitor of Sprott Inc. in the investment business and now a friend, said part of the key to understanding Sprott is that he enjoys entertaining other people with provocative comments.

"He's told people there's no gold in Fort Knox. That kicks off an interesting conversation," he said.

But McBurney added that he believes Sprott is extremely well-versed in the companies in which he invests, and he has even given some of his personal money to Sprott to manage.

Sprott more than a 'gold bug' -- a 'savant'

Peter Grosskopf, chief executive of Sprott Inc., the asset management firm Sprott founded and a mentee, said Sprott is always covered as being this "unbelievable gold bug," but there's a lot more to it than that.

"He's a savant at what he does," said Grosskopf, who added that it's not easy to explain how Sprott does what he does.

That's mainly because Sprott is investing in companies that have no revenue, which means tdhat standard investment metrics, such as internal rate of return, aren't necessarily useful, never mind that he said they're not something he would use.

Instead, he attempts to value companies based on whether they are likely to discover a deposit of precious metals.

Of course, even if a company discovers a deposit, it would still need to figure out whether it makes economic sense to extract the deposit, including how much it would cost to build and operate a mine, which requires further calculations about energy costs, transportation, processing and refining, and so on.

Sprott said he focuses solely on the deposit and how big it could be. Though he has no education in geology, he said he has devised his own valuation method, which involves looking at a few variables to determine the potential size of a deposit.

"I want to turn it into numbers, like, OK, what could this thing earn?" he said. "You multiply the strike by the depth by the width by 2.7 specific gravity times the ounces -- it's just four or five things you've got to multiply, five things."

People close to him said he studies junior mining companies and can recall the details of his investments better than most fund managers.

"The guy gets up at ungodly hours. He might get up at 2 a.m. studying," said Conor O'Brien, a former capital markets manager who joined Sprott in May to help with the investment blitz. "Neither one of us are geologists. We're just financial people who can do mathematics, as opposed to the geology. We more kind of conceptualize, and dream and kind of multiply."

'Stealing value' by buying mispriced assets

Putting his latest investment spree of more than $200 million in perspective, the TSX Venture Exchange's junior mining sector through August was on course to raise $2 billion for all of 2019, about 27 percent less than it did in 2009.

Grosskopf said Sprott calls it "stealing value," not because he's conning anyone but because he's investing in assets the market has mispriced. He said the billionaire is an expert trader, adept at sizing up an opportunity and timing his entrance and exit.

And because of his outsized profile, recently juiced by his epic returns while chairman of Kirkland Lake, there are hordes of investors who will follow his lead, Grosskopf said.

Not all of Sprott's bets work out, of course. In 2017 Sprott said he invested in Garibaldi Resources Corp., a nickel explorer, based on comments he read on an online chat board.

Its stock surged 1,731 percent that year, and Sprott has continued to invest even though two years later its stock has declined from a peak above $4 in late 2017 to 87 cents today.

"They're for sure drilling, we know that, and they've announced some holes, and they've got more to go," Sprott said. "They haven't found the motherlode they're looking for. Even I'll say that."

Sprott's vast ownership may also have a downside: It's not easy to liquidate his positions in companies without attracting attention. But his vast wealth also means he's relatively insulated from a lot of threats, such as dilutive financings or litigation, that smaller investors can't afford to participate in.

Sprott takes a birdshot approach to investment that spreads his money far and wide, so that his portfolio contains companies exploring for high-grade and low-grade mines, potential open-pit and potential underground mines, and so on.

"Most of them won't make it," he said. "But what about the ones that do? If I'm in early and I stay the ground, I press the bet. It's like being at a table with a winning run -- you keep doubling down."

He also owns a private gold mining company in Nevada called Jerritt Canyon Gold LLC, which he said made its first profit in the third quarter.

Kevin Small, vice-president of operations at that mine, said Sprott likes to be generous. In April, he said, Sprott showed up at the site and handed out silver coins to several hundred people who work there.

"He said when you guys make lots of money, I'll give you each a gold coin, but he hasn't been back yet," Small said.

But he added that Sprott has been investing heavily in the operation, which has a capacity to produce 280,000 ounces of gold per year, and predicted the company would soon be well known.

Unrelenting judge of financial performance

Colleagues also add that he can be unrelenting when judging a company's financial performance. Case in point: One of his biggest gripes with Kirkland Lake is that he wants it to increase its dividend, an issue he once again raised in October after the miner posted solid quarterly results.

Kirkland Lake pays a quarterly dividend of 4 cents, and chief executive Tony Makuch said he may consider raising it, but the company still needs to spend money on exploration so it can improve its reserves of gold.

"We're not an industry people should be buying for dividends," Makuch said. "You should be buying bank stocks or something else. If you look at our share price, that comes from investing in new projects."

It's a sentiment that Sprott would likely agree with.

"I still have a lot of money in Kirkland and it's a great company, but it's not a tenbagger from here," he said. "And I like tenbaggers as opposed to 100 percent. It's just my nature."

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