Bill Natbony heads two natural resource investment strategy funds for Tom Kaplan, AKA the guy who Paulson and Soros followed into NovaGold.
One of those, the Electrum Group, focuses almost entirely on a unique strategy for investing in gold that is much more interesting than buying gold itself.
“In 2001, Dr. Kaplan reached the conclusion that gold was at the very very early stages of a major bull market,” Natbony explains. “And at that time, he started putting together the first building blocks of the Electrum Group.”
One of the strategies pursued by the Electrum Group is to send geologists out on exploration missions to find properties that they think will yield gold (and other metals).
“We look for surface anomalies that suggest there is gold.” he says. For example, “it would be nice if you found gold popping out of the ground, or you found a silver or copper vein that was sheared off in an earthquake or one on the side of a cliff, but those are rare. Surface indications are most often more subtle.”
A second strategy Electrum pursues is to invest in companies that do the exploring themselves, like Novagold. Once they’ve found it, actually extracting the gold can cost billions of dollars. But just holding the property costs relatively little.
“We view these (for example NovaGold, and another company Electrum invests in, Gabriel) as comparable to long-term calls on gold,” says Natbony, “There’s no necessary upkeep, no significant overhead cost to maintain the positions – They give us the opportunity to capitalise on what is going to be unfolding in gold, which is an enormous appreciation in the value of gold as gold’s currency value is realised.”
Electrum’s strategy is betting that the values of the exploration companies will increase as the price of gold drives higher. “We believe we’re in the early stages of a gold bubble,” says Natbony. “Gold is going to see very significant appreciation over the next number of years.”
And in fact, investors in these companies can make a good deal of money before any gold is ever excavated and sold on the market.
Tons of investors were interested in Novagold as soon as news broke that Paulson and Soros bought stake in the company (which they still hold today) and many called up NovaGold looking to get a piece. The company is public, so it’s easy enough to invest.But here’s the catch. “Close to 99% of the time these properties don’t yield any minable gold,” Natbony told us. “It’s very risky finding precious metals. No matter what you see on the surface, you don’t know what’s underneath until you drill the exploration holes.”
That’s why you drill – to determine if there is gold. Drilling thousands of holes ultimately determines the “proven” and “probable” reserve figures of the property.
“In NovaGold, the necessary exploration holes were drilled proving that there is a great deal of gold in the ground,” says Natbony.
He explains how they prove it:
“Just imagine that there is gold ore in the ground. It can run for kilometers or it can be very small, and it can start and stop and twist and turn. So in order to prove it out, you have to establish what the limits are. Second, you have to determine what the grade of the metal is throughout the ore body. Holes are drilled, cores are examined and the assay results tell the story.”
Now we’re back to why investing in exploration companies is so risky.
It’s not that difficult to find some gold in a variety of places, but it is hard to find gold that is commercially viable.
“It depends on the concentration, what other minerals are with it (because those minerals might make it more difficult to extract the gold and the other minerals might not be any value). It depends on where it is, too. If it’s at the source of the Amazon river, it’s going to be difficult to get it out at anything less than a prohibited price.”
Nationalization and chaotic local conditions also are significant risks. For example, in Venezuela, Chavez believes that everything should belong to the Venezuelan government. Darfur is not a safe country in which to look for and find ore. Similarly, Afghanistan does not provide a stable environment in which to find or extract gold.But the spoils could be incredible. Natbony gives the example of Leor Energy, a natural gas exploration company.
“That was the largest discovery of onshore natural gas in North America in the past 30 years. In that circumstance, the return was 100 to 1. 25 million was put in, and it paid off $2.5 billion.”
And now check out which big hedge funds are invested in gold right now –>
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