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Smaller gold miners get acquisition itch; Seabridge gets AMEX listing
By Matt Mossman
Bloomberg News Service
Wednesday, March 31, 2004
http://quote.bloomberg.com/apps/news?
pid=10000103&sid=a_gthC3UTolQ&refer=us
TORONTO -- Eric Sprott has transformed his Canadian Equity
Fund, the best performer in Canada for the last five years,
into what might be described as the Canadian Equity, Gold,
and Cash Fund.
Sprott, 59, is so bearish on the stock market that he won
an exemption from an Ontario Securities Commission rule that
prohibits mutual funds from holding more than 10 percent of
assets in bullion.
The fund has 16 percent of its C$335 million ($256 million) of
assets in gold bars, stored in bank vaults in Toronto. Another
27 percent is in cash.
Rising oil prices will crimp consumer spending and depress
corporate earnings, ending a rally that's lifted the Standard
& Poor's/TSX Composite Index by 35 percent in the past 12
months, in his view.
The fund owns shares of PetroKazakhstan Inc., an oil
producer in Kazakhstan, and Thunder Energy Inc., a
producer in western Canada. Sprott is opening a new fund in
April that will focus on energy stocks.
"There's going to be some carnage," he said. "That's what
we're trying to protect against."
The Sprott Canadian Equity Fund returned 44 percent
annually for the past five years on average, trouncing the
6.8 percent return for the S&P/TSX. The performance is the
best among 512 Canadian funds tracked by Bloomberg.
Along with the gold and cash, the fund has 28 percent of
assets in mining stocks and 20 percent in oil and gas
companies, said Sprott, overseeing the equivalent of $1.12
billion as chief executive officer of Sprott Asset
Management Inc. in Toronto. Stock investments in other
industries account for the rest.
"In a really bad market selloff, all stocks go down," he
said. "There's less risk owning the metals than the stocks
when things get bad, even though they don't give you the
same upside."
Sprott began in the investment business 33 years ago as
an analyst at Merrill Lynch & Co., and later ran his own
securities firm. He was a bull until 1999, when he decided
that too many new shares of companies were being sold.
He started buying gold and miners of the metal.
In October his fund became the first to win an exemption
from the securities commission that allows it to hold up to
20 percent of assets in gold bullion.
Gold has surged 64 percent since February 2001. The
rise will continue because there's not enough supply
from mines to meet demand from consumers such as jewelry
makers, Sprott said.
The precious metal's price may climb to $500 an ounce
this year as investors realize the stock-market rally in
the past year is a break from the declines of 2001 and
2002, not the start of a new bull market, Sprott said.
Also, he cited the weekly ABC News/Money magazine
consumer confidence index as evidence that there may be
a recession ahead. The index slid 18 points in eight
weeks from Jan. 26 to March 15.
There have been two recessions in the U.S. since the poll's
inception in 1985: from July 1990 to March 1991, and from
March 2001 to November 2001. The reading dropped 11
points in four weeks in 1989, and 14 points in nine weeks
in 2001.
"It's not difficult to imagine why a consumer would be upset
these days," Sprott said. "You don't like what's happening to
you on the geopolitical front, and you don't like what's
happening when you go to the gas pumps or get your gas
bill. The jobless recovery is an element of it too."
Sprott decided the market's losses may be so big that gold
stocks wouldn't be sufficiently safe. He expects declines to
be sharp enough that investors will sell shares without
considering the companies' earnings prospects.
"When there's a steep decline, people tend to sell whatever
they have to raise cash," he said.
He said he's not sure how long or steep any slide might be.
He attributes part of his success to ignoring benchmark
indexes such as the S&P/TSX, the yardstick against which
most Canadian stock-fund managers are judged. The only
index he watches is the American Stock Exchange's Gold
Bugs Index, which tracks 15 gold- mining stocks traded in
U.S. markets.
"We do a few things differently," he said. "We don't look at
the S&P/TSX index, and we seriously overweight things
that we believe in." Producers of raw materials, including
metals, account for 17 percent of the S&P/TSX's value.
Energy shares account for 14 percent.
Sprott said he's starting the Sprott Energy Fund in part
because crude-oil prices may surge another 69 percent,
although he didn't say by when. Crude for May delivery
closed at $36.14 a barrel on the New York Mercantile
Exchange yesterday.
"It's not going to surprise us to see oil at $50 or $60 a
barrel," he said, citing a theory called Hubbert's Peak.
The theory, as interpreted by some academics, argues
that world oil production will reach a zenith next year
and then decline. The projection is based on research
by the late M. King Hubbert, a geophysicist for Shell
Oil Co. who correctly forecast in 1956 that U.S. oil
production would peak in 1970.
Higher energy costs mean less money for consumers
to spend and increased cost of goods for companies.
Sprott forecast that the effect may crimp earnings in
all sectors.
The fund's holdings will include PetroKazakhstan and
Cameco Corp., the world's largest producer of uranium
used to generate nuclear power.
Sprott stands out in the money-management industry
for his willingness to make outsized bets, according to
investors such as Jim Hall, who helps oversee the
equivalent of $990 million for Mawer Investment
Management Inc. in Calgary.
"When he sees something, he's not afraid to ride it,"
said Hall, who knows Sprott from his days in the brokerage
business. Such big bets aren't the norm because if the
investments don't pan out, a fund can lag competitors,
said Hall.
"There's a tremendous business risk in doing that," he
said. "A lot of people don't want to bear it. His clients
probably understand that."
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