Portfolio manager spotlight: Joe Foster

As gold touched 24-year highs earlier this week,at least one portfolio manager says the driver behind the recent surge is the same old driver that’s been behind many a bullish gold run in the past — economic uncertainty.

The Northern Miner spoke to mining expert and portfolio manager Joe Foster about how it all happened and where gold prices are going.

Foster is the manager of Van Eck Global’s international investors gold fund. He joined Van Eck in 1996 as a precious-metals mining analyst and became portfolio manager in 1998.

Foster spoke to The Northern Miner by phone from his New York office.

According to Foster, who has 15 years of experience in precious metals mining and exploration, including a 3-year stint as the senior geologist at Pinson Mining, investors are turning to gold as warning signs over the global economy begin to glow red.

“Debt levels are very high, the housing market is in bubble mode, there are huge trade imbalances around the globe, and there is a distortion in allocations of currencies around the globe,” he says. “All of these thing have reached extreme proportions.”

Foster says the trade imbalance has never been as severe as it is now and in its wake, a “painful” re-balancing of the global economy will occur. “A lot of investors are quite worried about how this will play out,” he says.

It’s the kind of fire-and-brimstone scenario that makes gold investors gleam.

Countering the widely held notion of US$500 per oz. as the psychological barrier for gold, Foster believes 1983’s high of US$509 was a marker of greater significance.

“Seeing the market move so strongly through that level convinced me of the strength of the momentum,” he says. He believes more buying will continue to push the spot price higher.

How high? Foster predicts a US$580 gold price for the next quarter.

Looking further into the future, Foster remains bullish. While he says painful corrections will occur, long-term, prices will be strong.

Putting it into hockey terminology, Foster says we are at the end of the first period of a secular bull market that will last “at least through the decade.”

While Foster concedes speculation is always a part of any big market surge – as made evident by Wednesday, Dec. 14’s US$10 drop credited to a potential slowdown of Japanese speculative buying – he doesn’t believe it to be excessive.

“We’ve seen that corrections in the gold price are shallow and short lived,” Foster says. “It tells me a lot of fundamental buying is coming into the market. There’s a strong demand in India, petro-dollars are coming in and Chinese demand is increasing.”

In addition to those bullish indicators, Foster points out we are currently in the strongest season of the year for gold demand.

As for concerns about the share prices of gold companies lagging behind the spot price of gold, Foster says share performance is improving. While stocks have not performed as they would in a “raging bull market,” the gold beta – a measure of share’s volatility in relation to the price of gold – has been coming in-line with historic averages.

Foster says share prices were being held back by steep cost increases that have plagued the industry.

“Costs were rising just as fast or faster than the gold price,” Foster says. “But since gold is keeping ahead, cost pressures have become somewhat lessened.”

Foster believes costs will continue to rise, albeit less rapidly, as companies adjust to higher energy prices and look for alternatives to help mitigate the increases.

Fosters largest holding in the portfolio is Randgold Resources (GOLD-N, RRS-L). Foster says the company’s assets in Mali, in particular its Loulo mine, have “tremendous” potential, and he expects Randgold to double its production over the next two years.

“Loulo mine is a world class asset and a potential takeover candidate,” Foster says.

Randgold began pouring gold at Loulo in late September of this year. The company says mill through-put regularly exceeds 5,000 tonnes of ore a day. To date the company has mined 540,000 tonnes of ore from its open-pit operation, with a grade averaging 2.95 grams gold.

As far as his investment discipline, Foster says the number one factor in choosing a mining company is its organic growth, or its ability to generate growth from within.

“Funding projects internally is the best situation for creating value,” Foster says. “We see that with Randgold.”

Next on his priority chart is value. Foster says he looks for companies the market may have oversold due to operating problems or other factors.

Agnico-Eagle Mines (AEM-T) is just such a case.

“The market punished Agnico-Eagle a couple of years ago, and now they’re one of our top five positions,” Foster says.

Agnico-Eagle has soared 25% or $4.22 since Nov.15. Its shares closed at $20.70 on Wednesday, Dec. 14.

“The turnaround has finally come,” Foster says of the Toronto-based company. “The complexion of Agnico-Eagle has entirely changed. It’s not a one-mine company anymore, so it falls into the growth category now.”

Agnico still lists its underground LaRonde mine as its primary focus it has been in operation since 1988 and draws from a reserve of 6.5 million tonnes averaging 2.79 grams gold and probable resource of 15 million tonnes averaging 2.48 grams gold — but it expects operations at its nearby Goldex and Lapa properties to be producing gold by 2008.

Turning to the best of the juniors, Foster likes Vancouver-based Aurizon Gold (ARZ-T).

Foster says roughly one-quarter of his portfolio is made up of juniors. He believes the market will soon realize that, as a group, juniors have “dramatically underperformed,” and predicts sales of their shares will pick up.

As for assessing which juniors are best, Foster expounds a simple philosophy: “We have to see the potential in whatever property they have.”

Aurizon’s Casa Berardi project in Quebec fits the bill.

Foster says the market has largely missed the potential at the property, but as the company has recently raised money towards financing the project into production, recognition is soon to follow.

Production at Casa Berardi is slated to begin in November. The mine will average 175,000 oz. gold per year for the initial six years at a cash cost of roughly US$219 per oz.

Reserves for the mine currently stand at 4.9 million tonnes averaging 7.7 grams gold per tonne. Measured and indicated resources stand at 2.7 million tonnes with an average of 5.1 grams gold and inferred resources stand at 5.6 million tonnes averaging 6.5 grams gold.