John Embry, lead manager ofSprott Gold and Precious Minerals, is preparing for a significant rise in gold prices this year, triggered by weakness in the U.S. dollar and other paper currencies. He is therefore positioning his fund aggressively by weighting it heavily in junior gold producers rather than blue chips.
"The real opportunity lies in smaller companies that are producing gold," says Embry, president and chief investment strategist of Sprott Asset Management Inc. "When the gold bullion price rises, production means higher cash flow, and therefore any producing companies will be viewed in a favourable light. But right now there is a big difference in valuation between small producing companies that are off the radar and large cap, socially acceptable gold companies." Embry's bold stance has hurt his performance as gold bullion has fallen from higher levels hit in late 2003. For the year ended Jan. 31, the $293.3-million Sprott Gold and Precious Minerals dropped 16.8%, a bigger decline than the category's median loss of 14.9%.
"My positioning kept me behind last year, but has great upside leverage when the bullion price rises," Embry says. "Do I like lagging? No, I hate it, as I'm competitive by nature, but my approach has stood me well through the years. It's tough to be early, but the worst thing you can do is change your strategy."
Embry has been overseeing the Sprott fund only since March 2003, but with 42 years as a money manager he is an industry veteran. He graduated in 1963 from the University of Manitoba with a bachelor of commerce degree, and immediately joined Great-West Life Assurance Co.
At first he was a bond analyst, but quickly became a stock analyst and then a portfolio manager on the pension side. After 23 years, he joined United Bond and Share, an investment counselling firm that managed mutual funds for Royal Bank of Canada.
The bank bought the company in 1987, and it became the nucleus for what is now RBC Asset Management Inc. Embry managed $5 billion in assets by the time he left the RBC organization for Sprott, includingRBC Canadian Equity andRBC Precious Metals.
Embry examines three key areas when choosing gold companies. Firstly, key people must have a good reputation and a record of past successes. "The mining business attracts a lot of sleazeballs," he says. "There are not a lot of great things about being old, but I know a lot of mining history, and I know who to call for information."
Secondly, he looks for good mining prospects in places where gold has been found before. "A property in the middle of nowhere is a pig in a poke." Thirdly, companies must be good at promotion, and therefore capable of raising funds to keep exploring and adding to reserves.
With exploration plays, Embry says there are two types -- those with advanced ore bodies where he can assess possible reserves and valuations, and those that are "pure wildcat, where you're buying people and prospects." Many of these don't succeed, but if they do, the gains can be enormous, he says.
Embry's mix of juniors, intermediates and seniors depends on relative values. Currently, junior exploration companies are "trading down to the value of the cash on their balance sheets, which means you're paying nothing for the properties," he says. He also sees opportunities in companies with significant ore bodies that trade at a discount because they are in "areas of concern" such as Colombia or China.
Embry limits his investment in any one company to less than 7% of fund assets. Typically, he has more than 80% of the fund in 30 to 40 companies, but may bring the total up to 70 by holding several small positions in companies "around the periphery that could rise significantly if things click."
He may also diversify into cash or gold and silver bullion, and the fund is one of three funds for which Toronto-based Sprott is seeking regulatory approval to engage in limited short selling.
There could be short-selling opportunities in cases of extreme overvaluation or fraud, Embry says. Some predominantly precious metals companies also have interests in uranium or coal, areas where he is also bullish.
Embry's turnover has been low in the past year as he waits for his strategy to bear fruit, but he will switch from juniors to seniors as conditions warrant. His portfolio turnover can range up to 150% a year. "By and large I am not a big trader," he says. "I seek situations that I think are undervalued, then sit and wait for my ideas to be manifested."
