Euro Pacific Capital has a $0.75 Price Target on this $0.25
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(00:21) Daniel: Greetings, and thank you for joining us at FutureMoneyTrends.com. I’m here with Charles Cannon-Brookes. He’s the investment director at Arlington Group Asset Management. I wanted to get his opinion on the global economy, the stock market, investment ideas right now… it’s good to talk to people from across the pond, as well as people who travel. Some people like to kick the tires. But the important thing is that you’re talking to a lot of different people, because if you’re in your own little bubble, relying on your local media, or even your own personal experience, it really depends on where you live. So it’s important to talk to other experts, especially people who are outside of your own sphere – your own localized bubble economy. Charles, thank you so much for joining us.
(01:09) Charles: Daniel, thank you very much for having me on. It’s a pleasure to speak to FutureMoneyTrends today.
(01:13) Daniel: Well, Charles, I wanted to just ask you… from across the pond in London, what is your world view of the economy right now? Is the world slipping into another global downturn? Because some of the numbers out of China, some of the numbers from even the E.U., and even the U.S… I mean, it does look like there’s a slowdown. Is that what you’re seeing as well?
(01:35) Charles: Well, I think it’s an interesting question. The truth is today’s an interesting day to ask it, Daniel. You had the Chairman of the U.S. Federal Reserve, Janet Yellen, talking about the U.S. economy yesterday. She said the U.S. economy has recovered substantially since the great recession. She talked about the current rate of growth being sufficient enough to steer the U.S. labor market towards full employment, and the growth rate being sufficient to push inflation back up to the Fed’s 2% target. I think this indicates that the U.S. economy is generally in fairly robust health. I think it also indicates that there’s a very large likelihood of an interest rate rise in the U.S. in December. Then you compare that to what the ECB – the European Central Bank, for those that don’t know –announced today which has led to a big fall in the equity markets this side of the pond… Mario Draghi, from the ECB… he has cut the overnight deposit rate from -0.2% to -0.3%, which, in effect, means the banks are charged to lend money to the ECB. This is a very, very strange situation we’re seeing here. The ECB also extended its current QE program which unnerved investors. So we’ve got two very different situations in the U.S. and in Europe. The U.S. economy is in a later stage recovery, coming out of recession. Its economy is performing much better than the European economy, which has anemic with growth and almost zero inflation. As a result the European economy is requiring significant additional stimulus through these current QE packages being announced. So you have two very different markets, as I say, between Europe and the U.S. This situation is being highlighted by the significant weakening of the euro against the U.S. dollar recently. So those are probably how I would look at the two main economies, U.S. and Euro, but I think that I agree with you, there is also some concern in China.
There is no question that the Chinese growth rate is definitely slowing, and I think a lot of people genuinely believe the slow-down is a lot higher than perhaps the reported numbers indicate. China as you know is a very big driver of global GDP growth given its position as the world’s second largest economy so its slowdown is obviously going to having a material effect on overall levels of global growth. This is a concern.
And when you look at emerging markets more generally, one has to understand their close relationship to the strengthening U.S. dollar. Emerging markets currently have very high levels of US dollar denominated US debt, having been able to access the swathe of US dollar liquidity that abounded post the 2008 financial crash as a result of several QE programs. With the U.S. dollar Index now trading at multi year highs, this has added to refinancing concerns within many emerging markets. Investors have been tasking flight as a result of this.
So to answer your question, I don’t think it’s as simple as saying there will or won’t be a global downturn , I think one has to recognise that there are many different segments of the global economy all of which are at different stages of the economic cycle, all dealing with different challenges
(05:04) Daniel: Charles, I’m glad you brought up the currency, because a lot of U.S. citizens and politicians look at the $19 trillion of debt and essentially, it’s got zero chance of ever being paid back in the U.S. And a lot of people wonder what is the world thinking, why do global investors continue to finance what is probably—and this is also coming from even the U.S. accountability office – but essentially, it’s an unsustainable situation, the trajectory of U.S. debt. What is the rest of the world thinking, where they continue to buy U.S. bonds?
(05:43) Charles: Well, I think probably because they’re better than the European bond equivalents. That’s not to say very much, though, Daniel. Recently, the Italian economy… probably your readers don’t know too much about the Italian economy, but it’s one of the highest-geared economies in the world in terms of debt as a percentage of GDP. Now, the Italian government just recently issued some sovereign debt. This had a negative interest rate, Daniel – a negative interest rate in one of the highest-leveraged economies in the world. Its economy productivity has hardly grown in the last 15 years. It’s suffering badly within the European Union because of the effects of an overvalued euro, which is not at the right level for its domestic economy. So the question of why are people buying U.S. debt: because it’s the best of a bad bunch, I guess is the honest answer. The question of will the U.S. ever repay $19 trillion of U.S. debt, I think the answer is that there are only three ways of repaying debt. The first way would be if the U.S. government can generate sufficient surpluses to repay it and I think that everybody is very dubious that the U.S. will take the hard political decisions required to internally generate sufficient budget surpluses to pay this debt down. The other way is, of course, to generate a higher economic growth, and for the debt to be reduced a percentage of the overall GDP. That’s another way, obviously, of dealing with the debt problem. And the final one, which often is what central bankers have historically fallen back on, is to try to inflate the debt away. Interestingly, the inverse of inflation is deflation, which increases the level of a country’s debts and I think this is what many central bankers truly fear and why such large amounts of QE and ultra-loose monetary policy have been employed. So those are the three ways to deal with debt: surpluses, high economic growth, and inflation. I think the best the U.S. can hope for, and I think the best a lot of western economies can hope for, is for a period of higher growth with a little bit of inflation to stabilize the system and the current situation. I don’t see any the repayment of the current debt numbers anytime soon.
(08:05) Daniel: Charles, when looking at investments right now, in what sectors do you see good value?
(08:12) Charles: Well, Daniel my company focuses on individual stocks rather than on sectors per se. We prefer to employ fundamental analysis and stock-picking within the small cap universe. You know, the global equity universe is so big out there that there are always going to be stocks that are attractive and when I say attractive this could be attractive on an asset basis, an earning basis, or a yield basis.
(08:52) Daniel: For investors looking for a near-term opportunity, what is a stock that you like right now that you can share with us?
(09:01) Charles: Well, as I just said, you know, we specialize in this smaller sector of the market. And one particularly interesting situation in the small cap market is a company called I-Minerals.. The ticker is IMA on TSX-Venture. I genuinely believe this is a fantastic opportunity. It’s emerging in the industrial minerals market. This is not a well-known market segment. To date, the company has been bankrolled by a local Idaho businessman by the name of Allen Ball. It will shortly be completing its definitive feasibility study (DFS) on its Idaho based industrial minerals property. I’m expecting this DFS announcement to demonstrate a low-CAPEX, high-margin and long life mining project that’s going to sell quartz, feldspar, kaolin, and halloysite products to domestic North American customers. I’m pretty sure that your readers will not be aware of many of these products, they’re not well-known when you compare them to other commodities, such as, say, copper or gold, but their uses are well-known. These are used in sectors such as glass, ceramics, paint, plastics, and even certain high-margin pharmaceutical products.
When it comes to mining, I tend to like simple operations and especially simple ones that reside within safe jurisdictions. I-Minerals ticks both of these boxes. This mine is also going to benefit from very low strip ratios. And when I say low strip ratios, Daniel, what I mean is the amount of waste material to ore material is very favorable in this mine. We’re not having to move huge amounts of waste material to access the ore. The processing method is another area you need to focus on when you’re looking at mining companies and I-minerals have an easy, off-the-shelf mining process. The DFS numbers should be released in January 2016 and I believe they will show a very robust project. When you realise that this company has a market capitalisation of C$25 million, the upside looks extremely attractive. The reality is that the company has suffered from the general malaise in the commodity sector but the impending release of this DFS study should clearly demonstrate to the market the inherent value of the company’s project.
(11:21) Daniel: I’ve noticed with these smaller companies that management is very, very important. What does the management look like?
(11:31) Charles: Well, the management is absolutely key, Daniel, obviously. In any small company, management is key. The CEO of this company is a guy by the name of Thomas Conway. He’s got significant experience in mining, permitting and feasibility work and has managed much larger mining operations for the likes of multi-national companies such as Newmont. I-Minerals is developing a much smaller mining project in Idaho, in the U.S., so putting an operation like this into production really should be much less of a challenge for Tom and his team. I mean, Tom has operated mines in much more difficult jurisdictions so you have a CEO who has done it before with bigger companies in harder places. That is always a good sign.
(12:27) Daniel: Before we close, Charles, I wanted to ask you one last question, and that’s about gold. You know, depending on where you are in the world, and even in some circles, whether you’re in China or the U.S., people either love gold, they hate gold, some want it as insurance… I wanted to ask you, what is your personal view on gold and its role in a portfolio?
(12:50) Charles: I think it has a role, Daniel, but it’s a minor one. I think if you’re looking for an overall balanced portfolio, gold has a place, but maybe a 5 to 10% weighting. I would caution your investors: gold is a non-yielding asset. It’s really there as an insurance policy. So some exposure without going over the top. At the current time, I think I mentioned earlier we have a strongly appreciating U.S. dollar with the U.S. dollar index trading at multi-year highs. U.S. interest rates are likely to rise in the short-term in America making holding US dollars more attractive and that’s why the short-term outlook is bleak for gold. It’s not a favorable macro-environment for gold in the short term. Saying that, you should be buying gold for protection and for insurance reasons so it still has a role to play at any point in the economic cycle.
(14:02) Daniel: Yeah, it’s interesting right now, especially, you know, gold is rallying in all the currencies except for the U.S. dollar, as you just noted, the U.S. dollar is having a very strong rally. Charles, thank you so much for your time. If someone would like to visit your website, where can they go?
(14:19) Charles: Yes, the website’s www.agam.co.uk. I’d be delighted to answer any questions your readers might have.
(14:31) Daniel: Okay, thank you so much for your time, sir. I appreciate it.
(14:33) Charles: Thanks, Daniel. Speak to you later.