HardAssetsInvestor

Mike Norman: Hello everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. And I’m here with the second part of my interview with Adrian Day, president of Adrian Day Asset Management.

In our last interview, we discussed the macro picture. You talked about how we’re in the midst of another commodity super cycle. This one is going to be longer, perhaps, and bigger than the last one. In your book [“Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks”] you discuss some ways to take advantage of this. What would be some of the simpler ways to get involved? And also, let’s take into account the fact that we’ve already seen 10 years of this bull market play out. So if you were talking to a new investor who has interest in getting involved, what would you tell him?

Adrian Day, president, Adrian Day Asset Management (Day): OK, that’s a good question. First of all, as a value investor, I’m always reluctant to chase prices when they've moved up. But also, of course, you have to look where you are today. You know, we didn’t invest five years ago, 10 years ago; where are we today? So I think it’s important for investors, if they buy into the argument, to realize we’re only near the beginning, or at least no more than halfway through this commodity super cycle that’s going to take prices much higher. So you want to avoid the temptation to sell too soon.

I like the fact that you said, “simple ways to invest,” because I think a lot of investors make investing too complicated, and particularly in this area, where stocks can be very volatile. And let’s face it, a lot of expiration companies have a lot of risk. People take on too much risk, and make it too complicated.

So some of the simplest ways … if an ETF is a good ETF − meaning they hold the commodity itself, and the costs are relatively low − they don’t have that contango problem with contango’s rolling …

Norman: I want to get into that.

Day: OK. Then I think some of the ETFs can be good. We own GLD for gold. We own the palladium ETF, PPLT. There’s also, it's not an ETF, but it’s a closed-end fund in Canada, that holds uranium. Obviously, the costs are a little bit more, because it costs more to store uranium than other things. That’s the uranium participation certificate.

So those are excellent ways to invest, and they are direct ways. The price of platinum goes up, PPLT goes up. You don’t have to worry about the mine flooding or costs of production, or the government changing or anything like that. So I like that first of all.

Now you come to some other commodities. If we have a really good company, with good reserves, diversified reserves, I’ll buy that. So in copper I love Freeport. Freeport is the largest publicly traded copper mine in the world. But it’s also a great company, a great balance sheet, great management, strong dividend. They just doubled their dividend. So I love Freeport.

So you know, I like the most direct way possible.

Norman: You wouldn’t use, let’s say, derivatives or futures, or that sort of thing, options?

Day: Well, we use options a lot, but we don’t use futures, only because I’m not licensed to do that. That’s just not what I do. I’m not recommending someone doesn’t do it. It’s just not what I do.

Norman: In options then, what would you buy? Far-out-of-the-money calls … ?

Day: We normally sell puts, to be honest. And we normally sell puts when the stock’s moved up a little bit above where we actually want to buy it. So we’ll sell the puts. Now in that case, if it’s a stock where we actually … we only have a seller put on a stock we want to own anyway. And the premiums can be very attractive, because commodity stocks, resource stocks, tend to be so volatile that you can pick up some pretty darn attractive premiums. So we will often do that.

We have bought long-term calls. In this area, I prefer to pay up for the longer-term calls, even if I sell it shorter term. But you don’t want to pay too much of a premium for call.