Don Durrett | Breaking Through $1,375/oz Gold Will Signal The Return of the Gold Bull Market

Professional mining stock investor Don Durrett of GoldStockData.com returns to the show to discuss the current gold market and his approach to investing in junior gold stocks.  Don has been investing in mining stocks since the early 1990’s.  He is the author of “How to Invest in Gold and Silver: A Complete Guide with a Focus on Mining Stocks” which conveys Don’s well-thought out and tried approach to mining stock investing.

0:05 Introduction

2:43 Don’s future gold/silver price assumption & how that determines which miners he invests in

6:25 Don’s outlook on the gold price in the short and medium term

10:30 Is now a good time to invest in junior gold stocks?

14:17 Managing risk & quickly identifying losers in mining stock investing

17:50 Dealing with misleading mining company management

22:05 Don comments regarding royalty companies

26:57 What key thing Don has learned as an investor in the past 9 months

31:35 Overview of GoldStockData.com

BEGIN TRANSCRIPT:

Bill: Thanks for tuning in, ladies and gentlemen, and welcome back to another Mining Stock Education expert interview. I’m Bill Powers, your host, and in this episode I’ll be speaking with returning guest and professional mining stock investor Don Durrett of goldstockdata.com. Don’s been investing in mining stocks since 1991. He’s the author of the book, “How to Invest in Gold and Silver: A Complete Guide with a Focus on Mining Stocks”. It conveys Don’s well-thought-out and tried approach to mining stock investing. So, Don, it’s been nine months but thanks for joining me again on the show.

Don: Hey, Bill, nice to have me back. I just wanna make one comment as far as a professional. The only way I’m a professional is I do have my website does charge for memberships, but that would be the only way I’d be considered a professional.

Bill: You have 17 or 18 years of experience as well, so you’ve learned a thing or two.

Don: Yes, I have a lot of experience, that’s for sure. I think my book…my book on how to invest in gold and silver mine stocks is one of the best on the markets.

Bill: And I told you I think I’ve read it three times, especially as I was learning how to invest in mining stocks. So I know your approach or philosophy to investment quite well. But, for new listeners that haven’t heard of you and you haven’t been on my show in nine months, I’d like for you to talk a little bit about the assumptions that you have on the future price of gold and silver, and how that affects how you decide to invest in certain mining stocks.

Don: Interesting question. That’s the reason why I got into gold and silver mining stocks, is because my expectations on the price of gold. So, I’ve always thought that the price of gold during our lifetime right now is kind of a once in a lifetime thing that gold would spike. It you would basically make this big move in conjunction with the bond market. So, I associate the price of gold to the bond market, the global bond market and the bond markets in the major countries such as the U.S., Japan, China and Europe. So, the bond market, for me, is the trigger, if you will, for gold prices. So, I’ve always thought that Keynesian economics has gotten out of control, and I was doing this back in the 1990s before things really got out of whack after we got to the turn of the century. Now everybody starts to recognize how crazy things have gotten with regards to debt.

So I’ve been doing…the reason I’m in gold mining stocks goes way, way back. I actually bought a gold mining mutual fund in the early 1990s because of the bond market and what it represents. So, you have everybody… If you look at Exter’s pyramid, gold is actually considered the safest asset you could hold, even above T-bonds or even cash. Gold is the pinnacle. So, why is gold the pinnacle? Because it has no counterparty risk, because it’s rare. So, eventually gold’s gonna spike. When it spikes, the miners are gonna do extremely well. That’s a long answer to your question.

Bill: And then with that expectation of a future higher gold and silver price, you use that to factor in the future market cap and profitability of the mining companies before you invest.

Don: Yeah. And I created my website which came out in 2012. The whole focus of it was how to value companies based on future cash…future gold price and future valuation of a company, and I don’t know anybody else who does this. So, all of my valuations, my website shows you exactly what the future upside potential is of any company, any producer, and any company that’s building a mine. So, I basically calculate their future market cap based on their future reserves, and I multiply that by the future gold price, and then I multiply that by a few other things and I come up with a future market cap value. And I compare that future market cap value with their current market cap value, and I use fully diluted shares to do that. And I’m only interested in companies that have returns of at least 300%, and I’m really focused on returns above 500%. So, yeah, I’m basically projecting out saying, “Okay, this is what I expected the gold price to be, this is what I’m expecting the future cash flow to be for a company.” And those are the ones that I buy based on a bunch of other criteria as well. So, I’m very future oriented.

Bill: This year has been painful for gold and gold stock investors, as we were chatting about some of the challenges and losses that we’ve experienced in our portfolio, chatting before the recording started. What’s your perspective on gold, with where gold is at now in short and medium term? We know you have a bullish long term perspective, but let’s say in the next one year to two years, do you see any solid, for-sure catalyst for gold that we can rely on for a higher gold price?

Don: Everybody has an opinion about, you know, all of the various macro data points where they’re currently at, where they’re going. It’s really hard to predict, you know, near term, what exactly is going to happen. But, I would think that this business cycle is kind of getting long in the tooth. You know, we kicked into gear, so we started having a growth cycle in, I think, June 2009. So we’re nine years into this. At what point do the markets roll over? I mean, last October, which we’re now at, what is it, November 3rd. So last month we had a bit of a sell-off in the markets and people were starting to get nervous. And we have Jerome Powell, the new head of the Feds, seems to be very, very bullish and he keeps raising rates, and he said he’s gonna raise rates again in December, and he’s gonna raise rates again in 2019. And so we have these higher rates. I was just reading where LIBOR rate, which a lot of corporate loans are based on, has doubled. It’s went up 100% in the last year.

So, we have a lot of higher rates that people are paying. And so that’s impacting the economy, which should create a fair trade in gold, if the markets sell off some more. So, what I’m looking at right now, I wanna see the markets go under the 200-day moving average which is around 20,000 in the DOW. So that’s quite a drop from here, we’re at 25,000. But, if we can go down under 23,000, I think you’ll have enough negative momentum where we probably will sink under that 200-day moving average, and that would be kind of… And then if we stay under that moving average for, you know, a week or two, that confirmation should kick in if you’re trading gold in between, you know, now and then. I would expect that to happen over the next 12 months, the sell-off that I’m thinking could happen in the markets, but you never know. Things could muddle on, you know, the Fed could change course and they could lower rates and stable things out. But, I mean, you mentioned this year has been, you know, a really big sell-off in the miners, and it has. I mean, we have the HUI under 150. Any time it’s under 150, that is, you know, really, really weak. For instance, it was over 600 in 2011. So, HUI is the majors miners index.

So, the majors, from here, if we got a new high, that would be a three-bagger for the majors. So, that’s big return. We’re talking 300% on the majors, on the average. So, some of the quality majors are gonna go up 5x. So we’re basically bouncing on the lows. I mean, you were talking about those kind of returns, and the HUI was at 100 in 2016. I don’t think we’re gonna go back to 100, but when you’re down at 100, I mean, that’s just…you’re talking all-time lows. That would be, you know, 5x return for the average on the majors. So you can imagine the kind of returns that you could have in the mid tiers and the juniors. So, you know, we’re kind of bouncing from the bottom. Once things turn, once…and I think the markets…and I talked about the bond market is crucial here. I mean, we’re gonna have to see what happens without it, because if money flows out of the bonds into gold, that’s when you’re really gonna have some huge returns.

Bill: Do you consider where we’re at right now on the junior gold stocks, a good entry point for somebody looking to allocate cash?

Don: Yeah, I do. I think any time you’re under 150 in the HUI, that it is kind of just…it’s kind of like a fire sale type of situation. We’re not quite at fire sale prices. You have to go all the way down to 100, which would be a 33% drop here. So, there’s potential. So if you bought here, you could be catching a falling knife because I think it’s possible we could go all the way down to 100 HUI. I don’t expect it to happen, but we could easily go down to 125, 135. So you’d be catching, you know, a falling knife if you bought here, but, it’s still really, really cheap. But the thing about the miners right now, is any time that I think for it to get to a healthy situation where you need to have $1,400 gold and $20 silver. When I say healthy, at $1,400 gold, basically the majority of your companies are gonna be making money. Your producers are gonna be making money and your development stocks are gonna be able to raise money to build… For instance, if you have an IRR at 25% or higher, you should be able to finance it at $1,400 gold. I mean, the IRR at $1,300 gold of 25%. So once you get to $1,400 gold, the banks are a little bit more, you know, confident that those IRRs are gonna hold.

So, we’re not even close to a healthy market and we’re not gonna be there. We’re not gonna get to $1,400 gold anytime soon. I mean, I would think maybe we could get to $1,300 in the first quarter next year. So, we’re a long ways away from a healthy market. So, if you’re investing today, you’re not really gonna get great returns in the near term. You’re really investing for the long term. So, anything that’s under $1,200 gold, $14 silver, it’s very, very unhealthy. And we’re kind of close to that. We’re like $1,230 gold, $14.50 silver. So we’re really close to, you know, a very, very unhealthy. And right around $1,300 gold, $16 silver, that’s kind of a struggling area, it’s not…you’re still not healthy, you’re kind of struggling. So, I am looking for gold prices to get over around $1,310, which was a really important area level that I wanted to hold, and we didn’t hold it.

I call the last battle for gold between, say, $1,310 and $1,375. That’s the battle ground for people that don’t want gold to break out and those that do, because I feel that once we get over $1,375, we’re probably gonna go to a new high. That’s probably gonna signal the return of the gold bull market, and that’s when the miners start to perform. But if you’re buying gold…if you’re buying miners now, just know that you’re buying in an unhealthy market and you have a lot of risk because it’s just…it’s a tough market. I mean, look at this year. I mean, it’s been absolutely brutal because it’s just been unhealthy and that’s just the way things have been. If we can get back to…get above $1,400, then we get in a healthy market. And then from there up, then things can really, really start looking up. Once you get to, say, $1,600 gold, that’s kind of the euphoria phase. That’s when miners are just really printing money, and then it can just get better from there. But we’ve got to get to, like I said, $1,310 first. Below $1,310, it’s kind of ugly.

Bill: Don, we were chatting prerecording because of how difficult this year has been as investors, regarding managing risk and quickly identifying losers. Can you speak regarding that topic as it relates to investing in junior resource stocks?

Don: Let me start here. So, down here at…because the one place that you’re gonna get bit by management teams, you know, basically not executing, it becomes really, really hard to raise money and to make money down here at these prices. And so it’s really…quality management teams really become important. It’s so easy for any tech management teams to get exposed, if you will. So, you see these stocks just crash. They just, you know, start falling, falling, falling because, you know, it’s just an ugly environment and any mistake that they make just gets magnified. So, you have to be really careful. That’s why I like to buy the quality producers. Anything under the…once you get down here, you can always buy stocks, cheap stocks. They’re always gonna be there. But when the HUI is low, that’s when you can find quality producers that are on sale.

So, I tell people, “You wanna buy…” This is when you wanna buy producers, down here, you know, 125 HUI, 135, 145. This is when you wanna buy the producers. And the reason why you wanna buy the producers is because they’re more reliable. So, when the price of gold goes up, you can count on those producers to basically follow that market higher. They’re less likely to dilute if they’re producers and they’re less likely to go bankrupt. I mean, it’s possible that they will. I mean, you have to look at their balance sheets involved. And you can just decide how much…you can look at their balance sheet and you can kind of decide, you know, how much risk you wanna take on. But those are the stocks that have huge leverage to the gold price because they get healthy very, very quickly.

So, if you look at the producers and you look at the ones that have been selling off, and, yeah, there’s some risk there on their balance sheet but you’re taking a lot…you’re getting a lot of leverage, a lot of bang for your buck versus a development stock which is not gonna really perform as well as a producer once the price of gold goes up because they still gotta build that [inaudible 00:14:52], so there’s a lot of risk still there. There are stocks that have not been de-risked. Near term producers are another one you can take a look at. But exploration stocks, those stocks are always kind of available, if you will, because that’s all really about chasing results. But back to kind of your point on management teams, it’s so difficult in this…to make money on exploration and development stocks, and it’s so easy to lose money. So, you have to be really careful. So that’s where you need to…I really think you need to kind of initially focus on producers because they have less risk, you can kind of manage a portfolio a lot better, and people like to go after exploration stocks, or they like to go after cheap stocks. And then they find out that the management teams aren’t quite as exemplary as they were expecting, and then you see kind of…it really kind of, like I said, it really magnifies as the price starts to crash, so you’ve got to be careful there.

Bill: And sometimes, as we were chatting beforehand, you can almost feel from the investor’s perspective that it was like a bait and switch, where you read the MD&A, you thought you knew what the management wanted to accomplish with a specific property and resource. And then six months, nine months down the road, you know, it turns out to be something completely different.

Don: Yeah, yeah. That happens more than we would hope in this industry. I’ve seen it on multiple occasions where it’s kind of…management is kind of leading you, kind of misleading you in what you’re expecting them to do with the property or what you’re expecting them…what kind of decisions that they’re gonna make, how they’re gonna invest, how they’re gonna dilute shares, how they’re gonna raise money, and you think they’re gonna go one way and they go another. And a lot of times exploration stocks and development stocks too, they…you think that they’re gonna…the plan of approach of how they’re going to monetize that project is not how it ends up. I’ve seen a lot of development stocks, for instance, get sold at a low premium, and when they’re first developing them, you know, they give you this impression that they’re gonna build the mine. But they always say, “Well, we’re gonna be open for offers.” But then they end up…the management…I mean, these aren’t hostile takeovers. The management team will accept a 40% or 50% premium but they sell down here at the bottom of the market.

Well, those 40% and 50% premiums, those can be made up in a week if the price of gold goes up. So it’s like, “Wait a minute, you said you’d give me a 40% premium, and then the price of stock goes up 40%, you know, like a week or a month later just because of the price of gold went up.” So you never get…they never will factor in the future price of gold. That’s what drives me nuts. And so, if you factor in the future price of gold, you’re practically giving these projects away, and I see that happen so often. It really frustrates me because the company that does the takeover ends up with all the value. I hate to name names, but there have been stocks that have dropped 70%, 80%, 90%, right, this year, this year alone. Maybe not 90% this year, but, I mean, we’ve seen 60% move, 70% down this year alone, and definitely over the last two years. And so if those companies, if they sell at a 40% premium, everybody that bought them, bought the stock a year ago, is gonna lose money. So how does that help shareholders, long-term shareholders? And you see that happen a lot.

So, it’s just a really, really risky thing. And so, you know, it’s hard. And I mean, anybody that’s got into this business and has bought these shares for the long term has went through this, where they’ve basically seen dilution, you know, their value get really, really diluted. And these companies kind of use it as kind of like a bank where they can print money. And so that’s just part of the game and that’s where you have to, like I said, focus on the producers because they’re not gonna dilute as much, and probably their management teams are a little bit better quality. Focus on those and then use the juniors as more of kind of a speculation stock. And so, you don’t invest as much. For instance, you know, in my book, I say that the most, absolutely the most that you wanna invest on a high risk junior is 1% of your cost basis. And that’s the upper end. You really won’t wanna do a 0.5%. You know, you can even go lower than that. You know, 0.5% so that if the stock does go south and you lose, you know, 60%, 70% ,you know, 80% of that stock that, you know, you’re not as exposed.

Bill: You like the growth oriented, mid-tier producers within that, you know, $100 million to $400 million market cap. Have you looked into some of the growth oriented royalty companies like Sandstorm, which is a sponsor of this podcast? But those companies also seem very attractive at these levels.

Don: Yeah, it’s a good question. I have never been enamored by the royalty companies, the royalty model, even though it makes so much sense. I mean, I analyze stocks, you know, I analyze at least 10 stocks every week, and I come across a lot of royalty companies. I have 800 stocks in my database. I mean, they’re all the gold and silver miners in the royalty companies. Just about every one, you know, in the world with a market cap over $3 million. So, I analyze a lot of royalty companies, and I analyze a lot of stocks that do deals with royalty companies. And just yesterday I was analyzing another one, and these deals are always one-sided for the royalty companies. The one I did yesterday, a company gave a company $55 million, said, “Here’s your $55 million. And now I want back approximately 12% of your production and I’m going to get…the maximum I’m gonna pay you is $600 an ounce. That’s the maximum. And I’m gonna pay you 30% of spot until it gets to the maximum.”

So, they’re gonna start out…you know, at $1,500 gold, they only have to pay $500 an ounce. At $1,200 gold, they pay $400 an ounce, or a little bit more than that, maybe $450 an ounce. So they’re paying for the gold, they’re making back a boatload of money on that $55 million. Now, they say they’ll take the risk because, you know, maybe they don’t get some of this money back if they don’t go into production. But, when you’ve got those type of margins, it’s a good business to get in. And these are locked in prices for the life of the mine. So, you know, the royalty model, I mean, it’s fantastic. And as a matter of fact, I’m seeing a lot of project generators switch over to the royalty model.

Bill: Or they’re a hybrid. There’s a lot of hybrids emerging now between the prospect generator/royalty company.

Don: Yeah. I know two off the top of my head that have just converted over to the royalty model, even though they have, you know, a lot of…they have a lot of the exploration properties that they own. So, you know, they hear called hybrid but they’re actually calling themselves royalty. And the reason why is because the margins are so high, and it seems to make a lot of sense. But, I personally have never been enamored by it and I have not bought any royalty companies just because there’s just something about that model that just seems so one-sided. It just doesn’t sit well with me. I just think that when the price of gold goes to $2,000 that, you know, something has to give on these models. They’re just so one-sided. We’ll see what happens, because they’re all fixed.

You know, there’s a couple things in the mining business that, to me, are just kind of…you know, don’t make a lot of sense. And you just see this a lot in capitalism and just…things are just kind of get one sided, and one of those is this model where you kind of get fixed prices.

The other thing that I mentioned earlier is this whole mindset that the price of gold is never gonna go up, that I’m not gonna value my company based on future prices. Those are two things in this whole business that just is kind of unsettling to me, but it’s just part of how things work. But you can kind of use it to your advantage. For instance, if they’re not gonna use the future price of gold, I’m going to do it when I value these companies. But as far as, you know, this…looking at investing in the royalty companies, I think it makes sense if you’re just looking to make, you know…say, you’re just looking for returns. If you’re just looking for returns, this model makes a lot of sense because they have great margins. So, I’ll just end my answer there.

Bill: Yeah, and I would just point out too that there’s also the exploration upside off and free up…free exploration upside with this model because they have, you know, the royalty on 700 square kilometers and the company that they have the royalty with, the agreement with, discovers another deposit or increases the ounces of gold by $5 million to $10 million, and that’s all free cash flow to the royalty company. So, you do get some of that exploration upside with a good structured royalty company.

Don: Right. True.

Bill: So, I’m curious, we haven’t spoken in nine months, as an investor, what have you learned? What stands out the most in your own development and growth as an investor over the nine months that you’d like to share?

Don: Gosh. I guess I should write another book or I update mine. The one thing I’ve learned…I mean, this has been a really good interview. I think it’s been a lot of good stuff I’ve shared. I would just go back and repeat, the one thing that I’ve learned, and this goes back, you said, 16 years, and that’s about right. The one thing that I’ve learned is that you want to diversify and focus your portfolio…if you’re a long-term investor and you’re looking for returns, you wanna focus on the producers because they have more reliability on the upside of the price of gold. It’s reliable in that… For instance, First Majestic. I always give one example. I haven’t mentioned one company name in this whole interview. First Majestic Silver. So, if the price of silver goes to $25 tomorrow, First Majestic Silver stock is gonna go up at least 25%, maybe 50%. Because that movement up in the price of silver, it makes First Majestic…it reduces their risk tremendously because now at $25 silver, they have cash flow. So their balance sheet, it got better overnight, so they have more profit. And any debt that they had on their balance sheet just got…the risk just went down.

Now, they have…in addition, their company just got stronger, in that now they can start looking for acquisitions. So, a producer gets healthy in a number of ways. Whereas if you’re a development stock and you haven’t built your mine and you’re still permitting it, and the price of silver just went up, you just got marginally more valuable but you’re…you didn’t really de-risk your project because you still have to permit it, you still have to finance it. And if you’re an exploration play, yeah, you became marginally more valuable but not nearly as marginally more valuable than a producer. So, you really want to…you wanna have a lot of producers in your portfolio because those are the ones that are more reliable, have more upside to the price of silver, they become marginally more valuable, and you know, that’s what I’ve learned. That’s where you’re gonna make your money.

So, let’s say that the price of silver goes to $100, you can imagine how much marginally more valuable a producer such as First Majestic Silver is going to be or Pan American Silver, Endeavor Silver is going to be when if the price of silver goes to $100. Because all that value, all that price of silver just goes right to their bottom line. Everything that I just mentioned becomes, you know, marginally more valuable. Whereas if you had a development stock, that exploration stock, it just doesn’t transfer over to the value of the company. And one final thing I wanna make about, you know, what you’re looking for, “Okay, Don said that you wanna be buying producers down here at HUI 150 or below,” you wanna look at, you know, what is the cost structure?

So you really wanna look at for gold… Well, I mentioned silver producers. You wanna look at, you know, all-in cost, you know, around $14 or $15, and that’s free cash flow, if you will. And gold producers may be around, you know, $1,100 or $1,200 or below that. But anything that you have all-in cost above those, you know, it becomes more…you’re adding risk. Yeah, they have a lot of leverage but the risk goes up. So, you wanna be looking at these, you know, these cost points. You know, where is kind of the, you know…where does the leverage really kick in for these companies? You wanna be looking at that. And then you wanna be looking at their growth structure. And the life of their mines. You don’t wanna be buying companies who don’t have long lives. You’re looking at 10-year plus mine lives, is what you wanna be looking at. So, you wanna look at the growth potential. What’s in their pipeline? You know, are they gonna be growing? Are they stuck? Are they stagnant? You wanna look at these things. And that’s kind of a…that’s not an all-encompassing look at how to look for a producer. That’s just some of the points, some of the higher-level points, if you will.

Bill: Don, for listeners that aren’t familiar with goldstockdata.com, can you give a quick overview as we conclude?

Don: Yeah, yeah. Thanks for offering that. As you guys know from listening to this interview, I’m an investor in gold and silver mine stocks, and I was before I created the website. So, the website is created by an investor and it’s designed to help you find stocks. So, I have a search engine, so I have 800 stocks in there. The most powerful feature in Gold Stock Data is the search engine. So you can search by just about anything. You can search by cost, you can search by upgrade potential, you can search by category. If you wanna see all the producers, all the near term producers, you can do that. I’ve broken the companies into, like, 10 different categories.

So the search engine’s very powerful, and it’s not really…my website is not built for people that are new to this, although if you wanna get into it, you can. It’s really made for people that kind of have a little bit of understanding, so they wanna go and look for stocks with potential. So, I really created it for, like, myself. Okay, so I’m…back in the early 2000s, I’m a gold and silver mining investor. I wanna find stocks, but how do I find them? So, this search engine is what I created so people can find stocks. They’re like, “Okay, I wanna find, you know, all the silver producers.” That’s what it’s for, that’s who it was created for.

Bill: All right. Well, Don, I appreciate the conversation. Thanks for stopping by and sharing your insights.

Don: Let’s do it again in six or nine months, Bill.

Bill: Sounds great. Have a great day.