Generalist Fund Managers at Denver Gold Forum?

The Denver Gold Forum is held every September and is considered to be one of the most prestigious gold and silver mining stock conferences in the world.  It attracts mining investment professionals from all over the world. The cost to attend is too high for me to justify attending the entire show, but I always try to set up off-site meetings with the management of the mining companies we own in the fund.

Yesterday I met with the top brass (CEO and the Co-Founder) at Exeter Resources (XRA) and the CEO of Alamaden Minerals (AAU).  Without going into the details specific to each company, let me just say that based on what is going on in terms of resource development at each, the stocks are very cheap at $1300 gold as “value” plays.  They are 5-10x home runs if gold does what we all know what it is going to do.  I’ll leave it at that and you all can do your own due diligence.

I did happen to post an article on AAU last week on Seeking Alpha, which you can read here:  AAU Is An Early Christmas Gift.  I will update it eventually based on my conversation with CEO Duane Poliquin.  But after an in-depth discussion of the potential size and quality of their primary resource in Mexico, AAU is easily worth over $3/share in the context of today’s price of gold.  As for XRA, it is sitting on one of the largest untapped gold reserves in the world (30 million ounces) down in Chile.  If the price of gold does what I think it can do in the 12-18 months, it is highly likely that a major producing gold company like Goldcorp will take out XRA at a hefty premium to yesterday’s closing price (76 cents/sh).  In the meantime, XRA has nearly 50 cents per share of cash on the balance sheet and a slow burn rate.

Having said that, both companies independently commented to me that this year’s gold forum was the most well-attended in the history of the conference.  I found this quite surprising, considering that the market sentiment toward gold, silver and the mining stocks is near all-time lows.  XRA specifically said that their one-on-one investor meeting schedule was fully booked this year, vs. last year when it was completely empty.

Both XRA and AAU told me that the majority of the attendees – aside from the usual bankers, analysts and mining stock fund analysts – were “generalist” fund analysts, meaning analysts and portfolio managers who run the large macro-oriented diversified institutional stocks funds.  They said that this cohort of investors was there because they think the mining shares have become too cheap relative to their fundamental value (ya, no shit) and that these large macro funds are looking at taking their allocation to the sector up significantly.

One of the primary components of my investment thesis for this sector has always been that eventually the big institutional investment funds would significantly increase their allocation to the mining shares – as in from almost nil to at least 5%.  Let me put the size of this capital flow into perspective.  There’s roughly $17 trillion in retirement assets.  5% of this is $850 billion.  The combined market cap of every publicly traded mining stock – in total – is less than the market of each of the individual top 10 companies by market cap in the S&P 500.  So, for instance, the market cap of Intel (INTC) is roughly $117 billion.  Imagine the affect it will have on the smaller cap mining shares when some part of that $850 billion starts to buy into these companies, at least up to the point at which they are no longer “value” plays.  I know that AAU, for instance, is fundamentally worth $3/sh at $1300 gold.  What is it worth at $2000 gold?

One last point, for those of you who are not aware of this fact:  since the Fed started QE in 2008, gold and silver have been the best performing asset class.  Also, since the FOMC announced last Wednesday that it was not going to taper, gold has outperformed the S&P 500.  In fact, gold is up 1.4% since then and the SPX is slightly negative.  I know both facts don’t seem likely, but that just demonstrates how bad the sentiment is toward the precious metals.  Historically, when the sentiment is in the gutter for any asset class it, has been the best time buy into that asset class with both hands.