Producer dehedging chokes gold options trade

Investing with John Hathaway, Tocqueville Gold Fund

By Carole Gould
The New York Times
Sunday, August 24, 2003
a href=http://www.nytimes.com/2003/08/24/business/yourmoney/24INVO.htmlhttp://w...

Gold prices appear poised to reach new highs, in the
view of John C. Hathaway, manager of the $280 million
Tocqueville Gold fund.

Gold prices were in a bear market for more than 20
years after peaking at $681.50 an ounce in January
1980. Since bottoming at $252 in August 1999, they
have since risen to $364.30 -- and Mr. Hathaway says
they should continue to climb.

quot;By year-end, gold will be trading over $400 an
ounce,quot; he said from his office in Midtown Manhattan,
quot;and within five years, there's a reasonable chance
that gold will be trading at four digits.quot;

Mr. Hathaway calls himself a value investor who saw
an opportunity in gold, a traditional market hedge,
when he started the fund in June 1998. The fund
returned 39.1 percent a year, on average, for the
three years through Thursday, in contrast to a loss
of 11.2 percent for the Standard amp; Poor's 500-stock
index, according to Morningstar Inc. The fund gained
52.4 percent in the last 12 months, compared with a
gain of 7.6 percent for the S.amp; P. 500.

To help build a diversified portfolio, he said, investors
should keep 5 to 10 percent of their portfolios in gold
investments.

Mr. Hathaway says the current environment for gold
reminds him of the 1970s, when the big buildup of
credit related to the Vietnam War created weak stock
and bond returns and strong gold prices. quot;In the 1990s,
artificially low interest rates created by Federal
Reserve intervention skewed the public markets,quot; he
said. quot;That's why we had such a mania, and they don't
get corrected overnight.quot;

Mr. Hathaway, 62, is a senior partner at Tocqueville
Asset Management, the fund's adviser. He also
manages about $100 million for institutions and
individuals.

He picks the fund's roughly 75 stocks from about 500
global companies that mine or process gold. He has
owned 25 core holdings since the fund's inception in
1997, adding to or trimming positions as valuations shift.

Those core companies, he said, typically have
high-quality assets and strong balance sheets and
operate in countries with minimal political risk. They
usually do not hedge production, which means that
their performance is linked closely to changes in gold
prices.

To value companies, Mr. Hathaway compares
enterprise value -- market capitalization plus debt,
minus cash -- to net present value, or the total value
of reserves minus the cost of production in today's
dollars.

Typically, he said, companies with multiple mines
trade for premiums to their net present value, so he
compares a company's current premium with those
of its past and those of competitors.

The premium also reflects how bullish investors are
about gold prices. Premiums averaged 31 percent at
the end of July, according to the Bank of Montreal
Nesbitt Burns index, at the low end of their five-year
range. They peaked at 120 percent in 1999, he said,
but had dwindled to zero by April.

Mr. Hathaway has been adding to his stakes in three
gold companies. One is Randgold Resources, an
exploration and mining company that is based on the
Isle of Jersey and operates primarily in the Ivory Coast,
Mali, Tanzania, and Senegal. Randgold is now trying
to acquire Ashanti Goldfields, a bigger company, but
Mr. Hathaway said the possibility of the merger's
completion was remote. He first bought the company's
American depository receipts in 2001 and has paid
$9.77, on average, for the position; the ADRs now trade
at $13.20. They sold for a premium of about 34 percent
at the end of July.

The company has a strong balance sheet, Mr. Hathaway
said, and assets in West Africa, which he called an
quot;exciting exploration frontier.quot; He projected that the
company would produce about 340,000 ounces of gold
this year, with current reserves that can last nearly nine
years.

Hathaway began buying ADRs of Gold Fields Ltd.,
a South African gold company, in 1998. Gold Fields
explores, develops and mines gold ore deposits in
South Africa, Ghana, and Australia. Mr. Hathaway
estimated that production this year would exceed
4 million ounces, with potential production for 60 years.
He described Gold Fields as quot;world class,quot; with the
quot;highest-quality, longest-lived mines in the world.quot;

He paid $10.47, on average, for the ADRs, which now
trade at $12.70. They sold for a premium of 60 percent
at the end of July.

The fund's biggest holding is Placer Dome, the gold
producer based in Vancouver, British Columbia. The
company has mining interests worldwide, including in
Canada, Chile, and the United States. Mr. Hathaway
called it an quot;unloved laggard which has substantial
value.quot; Investors have shunned the company, he said,
since its 1999 acquisition of Getchell Gold. Getchell is
just resuming production, and many investors think that
Placer Dome paid too much for the company. But the
current share price, he said, already reflects that
opinion. In July, the share's premium was 34 percent.

The fund began buying the stock in 1998, paying $10.31
a share, on average. It now trades at $13.07.