John Doody on Jim Puplava's FSN November 23, 2007. http://www.financialsense.com/transcriptions/2007/1123.html

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PART 1

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And where you will see: John Doody, Editor Gold Stock Analyst. Or . . . you can read the interview below.

JIM:

My next guest is familiar if you've been listening to this program, he often joins us in our Expert Series in the first hour of our radio broadcast. He's John Doody. He's editor of Gold Stock Analyst. And as pointed out the newsletter writers that I have invited on the show this year were based on track record, objectivity, and the fact that they do not take any payments from companies which keeps them objective.

John, let's talk about your newsletter. You cover about sixty companies, actually more today because you've added a silver component to the report. Talk about these companies, a lot of them are mainstream companies, up-and-coming producers, a few exploration plays or development play, talk about the companies that make your universe.

JOHN: All right. Well, let me tell you to start off with, Jim –and again, thanks for having me on the show –but let me start off by telling you how I got into the business because I think that that sort of leads into to the nature of how I write and do the research for the publication. And as you know, I was a professor of economics for about 20 years. I got interested in gold in the 80s, really, because of a distrust of politicians. I came to realize that the real business that politicians are in is to get reelected and that means that they are always trying to get nine slices out of an eight slice pizza. So they are always trying to get more, to promise more to voters and try to deliver, and that means you've got to spread the pizza pie around further than it really wants to go. And how do you do that in economics? You debase the money supply. And whether it's getting Federal Reserve governors appointed who are going to have loose monetary policies; you know, a little inflation is always good in economics to grease the economic wheel, so to speak, and deficit financing is essentially just a different way to print money. There is no difference between a thousand dollar Treasury bill and a thousand dollars worth of currency. And so whether it's fiscal or monetary policy, they are always going to be debasing the money supply and as you know, that's partly why gold is at $800. It's not that gold went up. It’s the dollar has gone down.

So I started playing around with gold stocks, as a way to protect my own personal investment monies, scarce as they were then as a college professor; and I had a hard time figuring out which ones to buy. I was never interested in the "stories stock" part of the business –and even though there are a lot of good exploration stories out there – because I'm not a geologist and I didn't have really any great intuition on which exploration stock was going to hit it, and which not. But I thought that the – there was a unique industry in that you had a bunch of producers then (and even more now) who produce exactly the same product. An ounce of gold is an ounce of gold. It doesn't matter whether Barrick got it and mined it or Newmont or anybody else. And I thought with that as a common denominator there ought to be ways to compare the valuations of one company versus another company to try to figure out whose ounces are overvalued and whose ounces are undervalued, then, to come up with market-wide industry wide valuation metrics. And it turned out there was a metric (I didn't invent it, but I think I probably popularized it) and that's the concept of market cap per ounce where you take a company's stock market capitalization – [the price of the shares] times the number of shares it has outstanding – and that's the total value of the company that the stock market assigns to it. And then you divide that by their forecast production for the year. So that gives you a market cap per ounce of production. And right now the average market cap per ounce of production is running around $5000 industry wide and you can also look at their reserves – their proven and probable reserves. These are the reserves that the SEC says companies can count because somebody – an independent engineering firm – has looked at the drill data and the information and says "yes, those ounces are probably there," because, as you know, drills may be 50 feet or 25 feet apart, so you have to make an interpolation as to what the kind of grade is between those drill holes. So the closer the space the drilling is, the more confidence you have. That sort of gives rise to these whole different classifications of resource ounces: Mineralized ounces, indicated ounces, inferred ounces and so forth. The SEC says you've got to have close enough spacing to be quite confident the ounces are there, and either be in production with those ounces or have a feasibility study where somebody has run the economics on the deposit and said "yes, if you spend this amount of money, and you build a production facility and mine you're going to make money."

So those are proven and probable reserves. And you can take those numbers, which companies report, and divide that into the market capitalization and you get an average valuation across the industry for reserve ounce. And right now the average value for an ounce of proven or probable reserves industry wise is about $260. So with those two metrics in hand, I could begin to start looking at who is overvalued and who is undervalued in the industry. And I still do that. And as you point out, I cover about 60 gold mining companies and about 15 silver mining companies.

The gold miners have evaluations that really run all over the board from as low as 50 bucks an ounce versus an industry average for an ounce of reserves of 260, to double that, $500 an ounce. So you have to begin to then look deeper in the company and figure out, well, are these valuations justified? Now, we know that some ounces are cheaper to produce because the grade is high and other factors, maybe the labor costs are low and so forth; other factors are important. And so an ounce that can be produced from maybe $150 cash cost is more valuable than an ounce that can be produced at $500 cash cost – even though at $800 gold would be profitable. So you begin to make subjective valuations or evaluations of the relative values of the ounces that a company produces and so forth. And once you understand the company and, you know, a lot of people have called me the Joe Friday of gold stocks, "nothing but the facts, ma'am, nothing but the facts" and as you know, the detailed analysis I go into about the company and its mines and so forth. So it sort of lets me in my own brain come up with some kind of a subjective evaluation and say, yeah, these ounces are undervalued or these ounces are overvalued. And overtime...in fact, since we started the newsletter in the beginning of 1995, the top 10 portfolio, and that what we end up with this analysis, of a list of the top ten. It's kind of like a personal mutual fund: The average of these top ten stocks through the end of last month through October has been an average gain – if you take the gain over the whole period and divide it by the length of the period – it’s average gain has been 37% a year.

And part of my whole philosophy in this is you can't simply identify one or two stocks. The risk of one or two stocks is just too high. You never know when there is going to be an underground mining problem or political problem or whatever, so you have to have a group of 10. And I suggest companies that people buy all ten of the stocks that I recommend and they all sell for well under their target prices. And we make as you know, three or four changes a year, or more if necessary to keep the, you know, when companies get closer to their targets or something happens that we don't like, we may take them off the list. And in a general sense, we're always focused on the whole industry, the whole sixty –roughly sixty – producers and that is almost all of the producers. When something happens to a stock, it falls out of bed or makes some kind of a – some kind of a deal that really changes the nature of the stock, we can be ready too add it to the buy list.

We made three changes this year that come to mind. One where the stock fell about 30% below where it had been trading in the prior past and had made a company changing move that let us put it on our top ten, and that's the company called Royal Gold (RGLD); it trades on the NASDAQ.

And then another company that made a dramatic move was Silver Wheaton where they have been buying royalty streams – income streams of silver – and they've been paying in the beginning mostly with shares. But they made a huge purchase of Penasquito (which is Goldcorp's new mine in Mexico that I visited and wrote about in the October issue) but they bought 25% of that silver production for debt, without needing to hedge it or anything. They borrowed the money and gave it to Goldcorp and they are now going to own roughly 7 million ounces a year of silver ounces and for that they are going to pay $4 an ounce and as you know, silver is around $10 an ounce now. And this is going to be a huge mine. It's got almost a billion ounces of silver reserves. And so Silver Wheaton bought 25% of those, or 250 million –and more ounces, I believe, to be discovered – and they'll be paying $4 an ounce for them and earning $10 minimum on a profit, and higher as silver goes up. So those are two companies we added to the top ten.

One company we took off the top ten, partly because we're a little confused by a move that they made and that's Yamana which has been a top ten stock from $2 when we started covering it in 2003, and we rode that all of the way up to around $12 a share. And we took it off because they made a deal and bought Northern Orion and Meridian at the same time. Now, the mines they bought aren't bad. What scared us was the shares that they issued. And we're still apprehensive when we think of the selling that may come by year end or early next year as people want to take their gains that own Meridian or Northern Orion and we think the gains which are now translated into the Yamana shares may drive Yamana back down in price and create a new buying opportunity. And I'll be visiting three of Yamana's mines by the end of this month and be writing about it in the December update. You know, we put out – we speak to, I call it speaking anyway – to subscribers twice a month and a major issue that comes out at the beginning of the month, 16 plus pages; and then an update that comes out sometime between the 10th and 20th and that's anywhere from two to six pages. We just put the November update and that was the six pages went up about – I guess it was last night on the website. [51:54]

JIM: So in the case of Yamana where it was on your top ten list, if a company either pursues a strategy that might be over-dilutive or, for example, it becomes overvalued, you're not afraid to take it off the list until –

JOHN: No. We're in this to make money. People often criticize me and say why don't you like this stock. And I mean people sometimes fall in love with stocks and this is a money making proposition. It's not a love affair. We like stocks. When we think we're not going to make any more money, we change. And if a stock falls back and we took Yamana off once before; and it fell back 30% and we put it back on. Goldcorp has been on the top 10 list three or four times over its life history and you know, it's always price driven and we don't hesitate to take profits. We know the stocks well enough and we know that nothing goes up forever and you have to take profits in this business to be able to really make money. [52:49]

JIM: So at its current price, what would make you interested in the company again, where would you look for...?

JOHN: In Yamana?

JIM: Yes.

JOHN: I'm going to know a lot more after my five days with the company and management in late November, early December, because I want to get a better handle on where it's going. They've got five or six mines to build over the next couple of years. It's a huge cash generator because it's a company-making mine, Chapada, that they have in Brazil. It's a terrific mine. But you know, I think back in the single-digit range Yamana is going to look very attractive. And we may...selling at the end of the year or early next year because of the nature of the owners of Northern Orion, certainly, which was an exploration-oriented company, not a production-oriented company. Those people are going to want to sell the shares they got from Yamana and probably go back into other exploration plays; and Meridian is probably a different subscriber base too to some extent. So if we get some price weakness, we'll put it back on and we'll be fresh up to date with everything going on in the company. I was at an analyst day meeting in October with the company in Toronto and, you know, we definitely...It's not that we don't like the company. We don't like the price at the moment. [54:06]

JIM: Well, John, if our listening audience would like to get more information about your newsletter, tell them your website and how they could find out more information.

JOHN: Sure. Well, you just have to let your fingers do the dialing and turn their computer to www.goldstockanalyst.com. It's all one word, www.goldstockanalyst.com, and they'll find on the site they will find information about the newsletter, sample issues; we post the front page of the last, three or four years on the site. You'll learn lots about it. You’ll get somewhat of a repeat of what I said earlier about how I got into the business. You'll find a very nice quote from a pretty well-known hedge fund guy, Bill Fleckenstein, who has been a big supporter of us over the years. And we have a pretty professional subscriber base of about 25% are money managers and professionals of one form or another from Fleckenstein to Fidelity to Tocqueville to US Global, all of the big funds subscribe. But there is a lot of very interested retail people who don't have the time and energy to figure out which stock to buy and they understand they need some help. As you know, there is not a lot of help available from the big brokerage firms anymore. So they need people like me or others to get information that's usable and not biased, because the most a company can do is subscribe. We're not – we don't take any options or payments or any of that kind of stuff that other people might. [55:44]

JIM: That's why you're on the show, John, and excellent work that you do.