By B.P.T., on February 11th, 2011
The federal government released its long awaited plan for Freddie Mac and Fannie Mae today, where it announced that it plans to wind down the two companies by slowly increasing their guarantee fees, reducing the maximum amount of money that they can lend on a home, and selling off their existing loans at a rate of about 10% per year. These changes, combined with increasing interest rates, are expected to have a negative impact on housing prices, so here is a look at a few high end markets that could see the greatest impact from the end of Fannie and Freddie:
Maui: Maui’s real estate market is still recovering from a decade long bubble as housing prices continue to decline, and are expected to show further weakness throughout 2011. There is hope for an improvement in the Maui real estate market in 2012, but average home prices that are significantly above the national average, continued weakness in the tourism sector, and the large number of vacation homes in the market could continue to hold prices down.
Manhattan: Home prices in Manhattan appear to be stabilizing and even improving as condo prices increased between 7.5% and 14% in the third quarter of 2010 compared to the previous year. This gain was attributed to the rebound in the financial services market, which added jobs over the last year and saw the stock market continue to post gains, but high prices and tighter lending standards are expected to keep prices from rising too quickly.
Washington DC: Home sales in the nation’s capital showed a strong gain in January, with sales volume up 31% over a year ago, and home prices up 7.5% compared to January 2010. Despite having some of the most expensive housing in the country, Washington area home sales have continued to show strength as the area’s economy remains strong.
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By The Energy Report, on February 11th, 2011
Philip Williams, Pinetree Capital’s VP of business development, says the spot price for uranium will likely explode above $100/lb. in 2011, much as it did in 2007 when it topped at $137. The good news, Philip says, is that even when uranium comes off its high, it will likely only fall to around $80. It’s around $73 now. If Philip’s right, we’re on the cusp of another round of uranium market madness. And you will want to read this Energy Report exclusive for some of Pinetree’s favorite uranium and lithium plays.
The Energy Report: In January, Macquarie Research said it expects the uranium spot price to reach $75/lb. in the first half of 2011 with the main driver being China’s growing energy demands. Where does Pinetree Capital Ltd. (TSX:PNP) see uranium trading at in 2011 relative to Macquarie’s forecast?
Philip Williams: We continue to be very bullish on the price of uranium. It’s had a very good run of late and we see that continuing for many of the same reasons that Macquarie does. I think for the early part of the year $75 is a good number, but it could surpass that substantially by year-end. By then, we think that the price will be at the $100 level and maybe even higher. We’ve got China doing quite a lot of stockpiling, especially on the spot market. We see the producers as being overcommitted right now. We also think that financial-speculator activity will come back to the market. All those events will culminate in a much higher price.
TER: The last time we saw a similar price spike in uranium was in 2007, when prices for yellowcake rose above $130 per pound. After that, prices dropped off dramatically. If these financial speculators are just looking for short-term money and getting out again, could we see a similar price drop?
PW: I think there are two things to think about. In 2006–2007, the uranium price was driven up mostly by financial speculators and I think they’re coming back into the market. When the run-up in the price was on, in some cases, a very small amount of uranium actually changed hands. With China’s recent uranium stockpiling, we’ve seen quite a lot of material go through the market at these prices. I think we’ll probably get a spike similar to the last one and it could be even higher, and then it will pull back. But I think we’re going to have a much higher base price this time than we did last time. After 2007, the price came back to about $40. I think it’s going to be substantially higher; it could be a price that falls back into the $80–$100 range.
TER: You mentioned China is stockpiling uranium, and China National Nuclear Corp. just received governmental approval to work on four new reactors. The European Commission just published a 10-year strategy plan that encourages development of nuclear energy as a means of clean energy. Japan’s Kyushu Electric Power Co., Inc. (TKY:9508.T) has submitted plans to build a third reactor at the country’s Sendai Plant, and India just brought a new reactor online. Where is North America in this global nuclear buildout?
PW: In a word North America is lagging. When it comes to nuclear, the U.S. is the largest generator of nuclear power with 30% of worldwide nuclear generation; but a reactor hasn’t been built in the U.S. in decades. While there are quite a few on the drawing board, only a handful is expected to come online by 2018. The real growth here is in the developing countries that you mentioned, China, India, etc.
TER: What’s largely responsible for the U.S.’ lagging nuclear growth?
PW: I think government policy is improving toward new nuclear energy but cost is still a big issue. Some of the numbers Macquarie recently published listed the cost of a new reactor built in China at about $2 billion versus $7 billion in the U.S.—that’s a huge factor. And natural gas-powered plants compete against new nuclear reactors. I think there’s still a lot of public opinion against new reactors being built. There are 104 reactors in the U.S. right now, so adding four is a very small growth rate compared to what’s happening in China and India. The U.S. was very successful on its first nuclear energy buildout but has since lost a lot of that technical knowhow, especially when it comes to building new reactors. Now, the U.S. is climbing back up that curve.
TER: Late last summer and into the fall, we watched big uranium producers like Cameco Corp. (TSX:CCO; NYSE:CCJ) and BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) dip into the uranium market to meet their supply contracts because it was cheaper to buy uranium on the open market than bring on more production. What minimum price level is necessary for new uranium producers to be profitable?
PW: I expect the spot price will get to around $85 soon, and I think everything that’s in—or very close to—production will be profitable at that level. Lots of groups out there have done cost-curve analysis for future production that suggests we need a much higher number. It’s hard to give just one specific number but I think it’s at least $80/lb. It could even be higher depending on cost inflation. The next generation of uranium projects are lower-grade, more technically challenging and farther from infrastructure and major markets than most of the current mines. So, these new projects require a significantly higher uranium price to make them profitable. You need a higher incentive just to get them into production.
TER: But just a few months ago, we had $40 uranium. What’s going to sustain the uranium price at $80?
PW: You need to distinguish between the spot price and the term price. The spot price tends to be a lot more volatile. That price was $40 but the term price was above that at the time. Now, the term price is below the spot price. But it’s that long-term price that applies to new projects because a lot of these projects will forward sell their production into that price.
Fundamental supply and demand issues are ultimately going to sustain the price. Going back to that Macquarie report you quoted, we’re seeing a lot of strategic buyers like utilities from Asia and other places buying projects outright. At some point, it’s going to be very difficult to get production at any price because it will be all tied up. The end users will be integrated in such a way that they’re already contracted for any material produced. When you get into that type of environment, the price can be as high as it needs to be.
TER: But JP Morgan was far less bullish on the short-term price for uranium. It predicted uranium prices in the neighborhood of $60–$65 in 2011. Why is one big bank so much more bullish than the other?
PW: I think the difference, which Macquarie discusses in its report, is that they missed the China stockpiling. Again, you’re talking about what’s happening today between buyers and sellers that need material today—not what people are looking for in the future. When China comes in and buys close to 3,000 tons of uranium oxide in December alone, that really impacts the spot market. Because the spot market represents just a fraction of the total uranium required in any given year, it is subject to much more swings in price than the term price.
TER: How large is that fraction?
PW: I think it’s 20%–30%. Last year and the year before were particularly active years on the spot market. That’s what gives us the confidence that this move on the spot market is real and can be sustained because of the volumes that are trading on the spot market. The spot price is much more transparent; the term price is far less so. It’s a referenced price that’s provided by the pricing groups, but it’s not as transparent as the spot price in terms of where it might actually be on any given day. It could be higher; but until an actual contract transacts that meets those specific criteria, it doesn’t actually change.
TER: What’s the term price right now?
PW: About $73.
TER: As of Sept. 30, 2010, Pinetree Capital had 55 different investments in uranium. That accounted for 18% of your holdings. I dare say that that’s even greater now based on stock-price appreciation since then. Either way, that’s a sizeable bet on uranium. Could you tell us about your investment thesis and why you own so many positions in so many different plays?
PW: That September number also includes coal. We have one very significant coal position that represented a large portion of that amount and that’s Cline Mining Corp. (TSX:CMK). Cline has done great since the end of September and we think there’s a lot of potential there. As you pointed out, there have been some tremendous performances by the uranium stocks since September. We’ve always been big fans of this space.
We saw the long-term picture early on, or our Chairman and CEO Sheldon Inwentash did. This is a very simple macro argument—the world needs more electricity, especially clean power, and nuclear is in the best position to provide that. With that in mind, we wanted to have a big exposure to the uranium space, especially after the price pullback from $138 to $40. There were junior explorers and developers whose stock prices went so low that their value was basically being discounted to almost nothing. At that point, we decided to take a very proactive position in the space and rebuild the portfolio. We sold quite a few of our uranium names at the peak in 2007. We made a strategic decision to return early to the space and identified a number of juniors that were well positioned. I think our thesis has proven correct to this point.
TER: What are some of your more promising uranium holdings?
PW: We have a number of names. We focus mostly on the junior and the development-stage companies. We like names that have great assets but have been mispriced in the market and good management teams that can see those assets forward. Some of companies we are most bullish on would be names like Mega Uranium Ltd. (TSX:MGA), a long-held holding. It’s an Australia-focused uranium developer, and Australia has the most uranium of any country in the world. There are some mines in production now. A change in politics and philosophy in the country called for even more uranium mines. Mega’s Lake Maitland Project could be the very first, or possibly second, new mine to be developed. It’s in the feasibility study stage and soon the company will have some detailed information about the economics of that project.
TER: And it has a Japanese partner at Lake Maitland Project, correct?
PW: Yes, Mega has a very strong partner in the Japanese group JAURD (the Japan Australia Uranium Resources Development Co. Ltd.). And shortly it will be in a position to capitalize on the increasing price and shortage of advanced-stage uranium projects and companies. We’re excited about that one.
One of our names that’s had a tremendous amount of success in the last few months and really has just started to get a following is a company called Rockgate Capital Corp. (TSX:RGT). It has a growing resource in Mali, West Africa. We’ve seen a number of African names build and be taken over, including Mantra Resources Ltd. (TSX:MRU), which was taken over by Russia’s AtomRedMetzoloto (ARMZ) Uranium Holding Co., a Russian uranium miner that is wholly owned by Atomenergoprom OAO—a subsidiary of Rosatom and an extension of Uranium One Inc. (TSX:UUU) for a very attractive premium to the price that Rockgate’s trading at now. We’re starting to see monies that were invested in Mantra start to shift over to Rockgate as the company grows its resource. Rockgate’s recent financing puts the company in a very strong position to expand its resource and move its project ahead through economic studies.
One of the geographic regions we focus on that a lot of people have not is in South America. One of our key positions there is a company called U3O8 Corp. (TSX.V:UWE). U308 has projects in Guyana, Colombia and Argentina. This year, U308 is slated to expand its NI 43-101 resources at all of those projects by almost tenfold. We think there’s a lot of upside as other investors start to see South America the way we saw it two years ago—as the next frontier for uranium development.
One company in the U.S. is Energy Fuels, Inc. (TSX:EFR). We’ve been around that story for quite some time. What we saw last year was a very strong management team moving toward a new license to permit and build a mill in the U.S.—something that hasn’t been done for a long, long time. It paid off when the company successfully got that approval earlier this year. We think Energy Fuels is well ahead of the pack in terms of conventional uranium mining in the U.S. In the U.S., there’s a scarcity of uranium supply. We see Energy Fuels as a consolidator in the space. It’s just in a tremendous position to capitalize on what we think is a very strategic place to be in the U.S.
TER: And there’s some vanadium in the mix there on the Colorado Plateau.
PW: Yes, these Colorado Plateau projects, and even those in Utah contain certain ratios of vanadium to uranium. So, you get a nice kick from the vanadium byproduct, even though they’re still fundamentally uranium projects. Energy Fuels is well positioned to deliver new production and the first new mill permitted in the U.S.
Another one that we’re quite keen on right now is a company called Mawson Resources Ltd. (TSX:MAW; OTCPK:MWSNF; Fkft:MRY). This is in an interesting story because it’s much like Energy Fuels, but it’s actually uranium and gold. I would say almost freakishly high-grade gold and uranium. The company acquired a portfolio of projects in Finland from AREVA (PAR:CEI) last year. In prospecting at one of the projects, the company found probably the highest-grade gold and uranium anyone has ever seen on surface—over 20,000 grams per ton (g/t) gold in some places and more than 40% uranium in some places. It’s very early stage exploration at that project, but the company’s been able to delineate a 6 km. strike length to the trend at over 200 meters in width. These high-grade showings are pervasive across the trend and it’s never been drilled. It’s a new discovery with very limited work; but when you see those kinds of results on surface, it’s very, very encouraging.
TER: Does that mean Mawson is putting some of its other projects next door in Sweden aside for the moment?
PW: To a certain extent, yes. There’ll be some money spent on those projects but the bulk of the funds will be directed toward the Rompas Project, the high-grade uranium/gold project in Finland. Why? It’s the results. Mawson is waiting to get the final permits for a drill program that could commence as early as February. There’s just a lot of blue sky in that story and a lot to be learned about what could be there.
TER: Let’s move away from uranium, toward another clean energy commodity that’s getting a lot of play—lithium. Increasingly, lithium is being used in batteries to power electric vehicles (EVs). Those were nickel-metal hydride batteries just a few years ago, but now they’re mostly lithium-ion batteries. Lithium is also finding its way into some other new technologies. Judging by the number of investments that you have in lithium plays, Pinetree is betting heavily in its investment potential. Why did you get into lithium?
PW: A couple of years ago, we saw the potential in this space in terms of electric cars. Our analysis showed that even though some other battery types would fit into the mix, lithium would ultimately be the dominant player. There are a very small number of players that dominate on the production side; in fact, there’s a lot of room for juniors to come in and acquire projects—brine, hard rock or clay projects. You can acquire projects for relatively low costs and add a significant amount of value through exploration and development. We saw that as a great opportunity to make some very strong returns.
TER: Does Pinetree show a preference for brine versus hard rock lithium plays?
PW: We have in the past but we don’t like to make general statements about one type of project versus another. We really look at the individual investment opportunity. In some cases, the hard rock assets might be so mispriced that you could make a much better return even if you took a stance ideologically that the brines were going to be the better projects overall. For example, we’ve been quite positive on Canada Lithium Corp. (TSX:CLQ; OTCQX:CLQMF) even though we’ve spent most of our time focusing on the brines and names like Lithium Americas Corp. (TSX:LAC), Orocobre Limited (TSX:ORL; ASX:ORE) and others in South America. But really we try to find those mispriced or misunderstood assets where management has the wherewithal to move ahead, add value and realize the right price in the market.
TER: Yes, but some of those brine lithium deposits have potassium in the mix. If your processing circuit is developed properly, you could get potash as well as lithium.
PW: Absolutely. There’s tremendous opportunity in those kinds of plays.
TER: What are some that Pinetree is rather bullish on?
PW: Lithium Americas is at the top of our list. We’ve been involved in that story from the very early days, and it’s just blossomed into a tremendous story. It’s one of the largest brine deposits on the planet. The company’s made tremendous strides on the technical side, as well as understanding the economics. We’re going to see two major studies published this year with a prefeasibility study first, and then a feasibility study by year-end. The story has come together in a very short amount of time, but we see tremendous upside.
TER: And Lithium Americas’ Salar de Cauchari lithium project is not far from one owned by another company you mentioned, Orocobre.
PW: In fact, Cauchari and Orocobre’s Olaroz project are abutting each other.
TER: Given the proximity to each other, did Pinetree make its investment in Lithium Americas with an eye toward potential consolidation?
PW: In general, we always look for assets that we think will ultimately be consolidated or could be the consolidators. We certainly see that as something that should happen in that particular region. We’re not sure whether Lithium Americas will be the consolidator or not, but the company has tremendous partners and could easily go it alone. As I said, it’s one of the largest brine resources on the planet; so, it’s not a requirement but it’s certainly an exit that’s possible for LAC.
TER: Are you vested in Orocobre, too?
PW: We’re not a disclosed holder of Orocobre.
TER: Could you leave us with thoughts on how these clean technologies are influencing the mining sector and some of the opportunities they are creating?
PW: One area that we didn’t touch on is rare earth elements, which are used in a lot of cleantech applications. We also have quite a few investments in that area. We believe there will be strong opportunities in the cleantech space over the next few years for many reasons. China is dominating rare earths production, and finding supply outside of China is an absolute must for companies that want to be in those cleantech spaces. We’re tremendously bullish on rare earths, at least for the next year or two. Clean energy is certainly one reason we’re in the uranium space. When you stack up nuclear versus coal-generated power, uranium is a hands-down winner. We see more and more people getting behind nuclear energy, and it’s a great place to be vested.
TER: Thank you for talking with us today, Philip.
Philip Williams joined Pinetree Capital in January 2009 and was appointed to the position of resources analyst. Philip brings almost 10 years of financial market experience to the company. Prior to joining Pinetree, he spent five years working for several institutional brokerage firms in the equity research department. Most recently, he was a uranium analyst focused on companies with advanced development projects in Australia, the United States and Namibia.
By B.P.T., on February 11th, 2011
At 8:30 AM EST, the International Trade report for December will be released. The consensus is a deficit of $40.5 billion, which would be $2.2 billion more than November.
At 9:55 AM EST, Consumer Sentiment for the first half of February will be announced. The consensus is that the index will be at 75, which would be an improvement of 0.8 points from the level reported in the second half of last month.
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By The Gold Report, on February 10th, 2011
A lot of short-term peaks and troughs can make things messy in the resource space, and the associated volatility can whipsaw people out of investments. “Still,” says Pathfinder Asset Management Limited’s Associate Portfolio Manager Taylor MacDonald, “the long-term picture itself is very much intact.” The U.S. dollar is in the process of breaking down, and that will ultimately be supportive of gold. “And when you sidecar the dollar breakdown with quantitative easing, he says, “you essentially have a perfect storm forming for gold.” Find out why Taylor expects the junior mining space to shine even brighter in 2011 in this exclusive interview with The Gold Report.
The Gold Report: There was certainly a buzz surrounding junior mining at the recent Cambridge House Conference, but first please tell us a little bit about your mandate at Pathfinder Asset Management in terms of companies you invest in and clients you serve.
Taylor MacDonald: Since we last spoke in August, we’ve evolved from a family office to a registered fund, which just went live on January 1st. We’re gradually going to shift assets from the family office to the fund, and initially invite close friends, family and associates—people we do business with—into the fund. We may open the fund to the general public eventually but, for the time being, we’re keeping it quite closely held and largely with just people to whom we’re close.
TGR: So, it’s essentially a private fund at this point but will be accepting new clientele as things progress. About how much do you have under management?
TM: $60 million mostly focused on the resource space. I’d say roughly two-thirds of the fund would be some sort of commodity, precious or base metals or oil and gas. The balance would be tech, special situations and a bit of healthcare.
TGR: What is it about the resource space that interests you? Do you feel it’s an area where investors can get a lot of value in terms of growth in their portfolio?
TM: Sure. Of course, a lot of short-term peaks and troughs can make things messy and the associated volatility can whipsaw people out of investments. Still, the long-term picture itself is very much intact. We’re still bullish on gold and I think the macro picture is robust. I’d say the U.S. dollar is in the process of breaking down, and ultimately that will be supportive of gold, oil and any other commodity prices.
And when you sidecar the dollar breakdown with quantitative easing, you essentially have a perfect storm forming for gold. Going forward, the U.S. will just continue to print money and debase its currency. Other nations will do the same. Unless you see unemployment down at least in the United States, quantitative easing (i.e., blatant money printing) will remain in place. That’s one of the best possible tailwinds for gold.
TGR: In light of the continuing currency debasement and flight to hard assets, do you stick with precious metals companies for the resource stocks in your fund, or do you bring in other equities from the sector, as well?
TM: We do own some base metal companies, but we’re primarily focused in the precious metal space when it comes to mining. While we like the broader gold space, we tend to focus on quality small- and micro-cap names, looking for significant upside potential. We naturally tend to take larger positions on those we like, and they’re always on what we call our shopping list any time the market corrects or these particular names correct.
One we discussed last time was Otis Gold Corp. (TSX:OOO; OTCBB:OGLDF). Back in November, we put more money into the company alongside Galena Asset Management, a well-known mining fund out of the UK, and we are putting even more chips in on the current round. The company has ticked a lot of boxes since we last spoke, including acquiring 100% of the Kilgore Project. It acquired this from Bayswater Uranium (TSX.V:BYU) for just under $1.8M and 2M shares. A 2% net smelter royalty (NSR) was also eliminated, so about $3M in consideration all told. It’s acquiring these ounces for essentially $12/oz.—dirt-cheap vis-à-vis the comps. But it’s even cheaper if proven resources go well beyond 1 million ounces (Moz.), which is likely.
TGR: What leads you to believe that?
TM: The company’s had some really good exploration success, hitting 88 meters of 1.2 g/t with a 32-meter interval and, within that, 3.5 g/t. Of the 44 holes drilled and released since 2008, 43 have been mineralized. Results of the remaining 12 holes drilled in 2010 are expected within 30 days. An updated NI 43-101 will be released later this year, and this will likely approach 1.0 Moz. Further, the deposit is open in at least three directions. As a result, the Mine Ridge deposit alone will likely overshoot that million-ounce target significantly. If it hits on Dog Bone Ridge, Otis could be one of the stories of the year for sure. From what I hear, the geologists are seeing the right kind of rock. Dog Bone Ridge has five different targets, each with the potential to be as big as the main Kilgore deposit. If we see some good results out of Dog Bone and can continue strong numbers out of Kilgore, I’d expect it to go a hell of a lot higher.
TGR: Right. I’ve been to that property. Idaho seems to be a mining-friendly state, and it looks as if Otis is making progress there in terms of defining that resource.
TM: Absolutely. I think we’ll see a lot of other companies come to the forefront here in 2011. There’s one, a private company right now but I’d watch for it—Midas Gold, Inc. It’s developing the Stibnite district in Idaho. It’s refractory ore, so it’s going to be difficult to process; but I think with Midas and recent success from companies like Premium Exploration Inc. (TSX.V:PEM), Idaho could really come into the limelight in the mining space.
TGR: Shifting to the other side of the world, last time you mentioned you felt pretty comfortable with a gold exploration company in the Republic of Mali in West Africa.
TM: Yes. That’s North Atlantic Resources Ltd. (TSX.V:NAC), which will be no more as of February 16 or so. It’s going to be renamed Legend Gold Corp. (TSX.V:LGN). Legend will focus on gold exploration in Mali and is involved in both of the prolific gold belts there. The company is well cashed up, with $3.4M cash on hand, plus it expects another $6M from warrants in the near term. If I had to characterize this company, I’d say it’s a clean investment with a clear exit strategy. Management will be able to extrapolate a lot of value from its projects.
With multiple work programs ongoing, there should be steady news flow in the coming weeks and months to keep Legend’s investors updated and keep the company’s face in the market, so to speak. It’s got an aggressive drilling program over the next six months—30,000 meters of drilling on two projects between now and June is very aggressive.
The company mobilized drills at its FT Project in December and should be drilling 20,000 meters over the next six months. There’s a 600,000 oz. (600 Koz.) resource there at present, but I’d expect that to grow significantly with great success in exploration drilling both at the main zone and on nearby, parallel structures. Back in August of last year, it drilled 0.75 oz. over 6 meters, 13 kilometers away from the main FT zone. I’d expect the company to find more of these structures and possibly grow the resource. I’d anticipate somewhere in the ballpark of 1.5–2.5 Moz. from FT when all is said and done.
At Kantela, the company has a non-compliant resource of 130 Koz. that sits within spitting distance of the Sadiola Gold Mine. There’s considerable upside from there. The mine itself is in decline at Sadiola, which is operated by AngloGold Ashanti Ltd. (NYSE:AU; JSE:ANG; ASX:AGG; LSE:AGD). In that scenario, one could easily see Kantela as a tasty morsel for its next-door neighbor, either to partner with or buy outright—especially if the company encounters success with 10,000 meters of drilling slated for this year.
TGR: West Africa seems to be getting more and more attention as a mining district.
TM: We own companies that have operations in Ghana, Burkina Faso and Mali, and we’re comfortable with all three of those countries.
TGR: Obviously, Pathfinder’s investors are comfortable with some level of risk. Would you characterize all these junior mining stocks as highly speculative?
TM: That depends on where they are on the exploration spectrum in the mining cycle. There’s a high level of risk with grassroots and early stage exploration, but you can also mitigate that risk by investing early and having a tight structure with a good management team. At the end of the day, you really don’t know what’s going to come out of the ground but that’s also why you’re rewarded with much higher torque, much higher leverage and the potential for huge upside.
TGR: Can you tell me about any companies you like that fit that description?
TM: A Mexican precious metals explorer that we really like of late and falls into that category is Westminster Resources Ltd. (TSX.V:WMR), which recently financed and has $4 million in cash in the bank. Westminster boasts an underexplored, high-grade copper/gold/silver target in mining-friendly Sonora State where Alamos Gold Inc. (TSX:AGI), Timmins Gold Corp. (TSX.V:TMM) and Capital Gold Corp. (TSX:CGC; NYSE.A:CGC; Fkft:CGU) all have producing properties. This project has never been drilled and it’s quite appealing to us because it’s a past-producing mine.
TGR: Which mine is that?
TM: It’s the Anita Copper Mine, located on Westminster’s El Cobre Property. It was a producing mine up until 1910 when the Mexican Revolution forced all of the American operators off the property and north of the border. Historical reports on the Anita Mine indicate 42,000 tons of “waste rock” on surface on low-grade tonnage yielded 5.8 g/t Au, 52 g/t Ag and 4% Cu in sampling. This is all bulk-sample testing; it’s non-compliant but it shows immense potential, and the company has now traced the surface expression of Anita 600 meters. Three kilometers to the south, it has traced Los Amigos 400m on surface.
TGR: Will the company be drilling on this asset around the Anita Mine?
TM: It’s in the process of drilling now and is about halfway through a 3,000m drill program. Several assays are pending and some have been released. It’s what I would call a “recognizance-drilling program.” Westminster conducted a geophysical survey that shows an anomaly in the hill where the Anita Mine is located. It starts where the old mine shaft is—exactly where the company’s pulling out all this high-grade rock. As you move into the hill, the anomaly grows larger and larger. Assays from a drill hole announced on Monday confirmed the potential for high-grade mineralization with the company reporting a 9m intercept of 2.4% Cu, 22.7 g/t Ag and 1.2 g/t Au—translating into $310/ton rock at current prices. Now, as the company works into the hill, hopefully it’ll come up with some longer intercepts.
Assuming this mineralization corresponds directly to the survey, you have up to 40 million tons (Mt.) just based on what the company has delineated so far—and that’s just the hillside itself. Who knows if there’s a deeper structure, or whether it’s connected to Los Amigos and there’s something beneath that. But the fact that this “waste rock” grades so high and it’s a past-producing mine—these are all the ingredients for success. So just doing an arm wave you could have up to 40 Mt.; even if you get 2 g/t, that’s 2 Moz. right there.
TGR: Any other companies you want to discuss?
TM: Another small-cap gold explorer we’re very keen on is Confederation Minerals Ltd. (TSX.V:CFM). It’s focused on a high-grade gold exploration project in the Northern Ontario’s Red Lake Mining District, which is the Newman Todd Project. It’s earning a 70% stake from Redstar Gold Corp. (TSX.V:RGC). The project is right in the middle of one of the most-prolific mining districts in North America—the Greenstone belt, situated within 10 km. of six major present and past producers.
TGR: So good infrastructure, too.
TM: Yes, needless to say infrastructure is considerable. And there’s a skilled workforce. So, the project itself is situated on an underexplored structural corridor 2 km. long. And, something I’ve rarely seen in the mining business, the company has encountered significant gold mineralization in each and every one of the 24 holes it drilled. But what really excites me is that the structure itself extends over the northeast to the tenement around to HY Lake Gold Inc. (CNSX:HYL; Fkft:HYK). And the Goldcorp Inc. (TSX:G; NYSE:GG) property is on the exact same structural trend. This thing sticks out like an elbow; the company encountered 26.4 g/t over 0.5m last October and also 2.0m of 42 g/t and as high as 168 g/t over 0.5m.
The core itself is geologically and visually very similar to the F2 Gold Zone discovery at Rubicon Minerals Corp.’s (NYSE.A:RBY; TSX:RMX) Phoenix Gold Project. That property has 4 Moz. of 20 g/t with geological potential of up to 16 Moz. And all this is wrapped up in a company with $3.2M in cash and maybe 27M shares outstanding, with management and insiders owning a total of 9M. It’s mostly escrowed; so, you’ve got one-third of the stock locked up, a great management team behind it and good geological talent. This is cheap by any measure, and the company hasn’t missed on a single hole.
Of all the investments we own right now, I’d say I’m most excited about this one in terms of sheer upside potential. This could be monstrous. It’s well structured, and between management and us, 40% of the stock is put away. Expect news flow in the next couple of weeks or so.
TGR: Any other names that come to mind?
TM: North Country Gold Corp. (TSX.V:NCG) is another gold development company that we’re very interested in. It has a strong management team and is backed by the Discovery Group, which has an excellent track record for exploring and developing large precious and base metals, Kaminak Gold Corporation (TSX.V:KAM) being the highlight. Discovery is also involved with a couple of other companies, including Kivalliq Energy Corp. (TSX.V:KIV), which is working in Nunavut right now. It’s trying to replicate a model that was amply demonstrated by Cumberland Resources Ltd., a privately held coal miner that was bought out by Massey Energy Company (NYSE:MEE), and Comaplex Minerals Corp., which was taken over by Agnico-Eagle Mines Ltd. (TSX:AEM; NYSE:AEM).
So you’ve got a developing mining district in Nunavut. A couple of majors in the region are looking to consolidate, but this is an open-pittable, high-grade deposit with a very large land package and huge potential. The company’s got a resource in its back pocket that it’s waiting to pull out. It’s fully cashed up and has been drilling this aggressively. From what I’ve seen and heard, we’re likely looking at 3–5 Moz. in average grade at 3–4 g/t. And there are a lot of suitors in the region, Agnico-Eagle and who knows—maybe Kinross Gold Corp. (TSX:K; NYSE:KGC) starts consolidating in the area, as well (as they’re starting to do in the Yukon).
TGR: Well, we know that Agnico-Eagle and Newmont Mining Corp. (NYSE:NEM) have to replace those ounces as they mine through them. If this deposit looks compelling to them, assuming that the resource continues to be outlined and increased, it could be an acquisition target down the road.
TM: Definitely. So, we really like North Country. We’ve also done really well on another one, Batero Gold Corp. (TSX.V:BAT), and we still think there’s a lot of upside left. We were involved early but we continue to buy and will keep supporting the story. The company is exploring and growing its Quinchia Project, which is an attractive series of gold/copper-porphyry assets in Colombia’s prolific Middle Cauca Belt. That’s the same belt that AngloGold Ashanti’s La Colosa, Medoro Resources Ltd.’s (TSX.V:MRS) Marmato, Titiribi and Sunward Resources Ltd.’s (TSX.V:SWD) La Mina call home. Previous work done resulted in a historic resource—4.4 Moz. gold, and I believe there’s potential for up to 2x that.
Batero recently announced a rocket of a hole—452 meters bringing 0.6 tons gold and 0.12% copper from surface. This was a 180-meter stepout from AngloGold Ashanti’s discovery hole.
Over the next five months, Batero’s very aggressive exploration program will be progressing, as it works seven simultaneous exploration targets with four drills running. With the deposit kicking up gold showings at surface and being open in all directions I really don’t want to put a cap on where this could go. Judging from what I’ve seen, though, I’d say 6–10 Moz. is well within the realm of possibility.
TGR: Colombia has a very well-documented mining history, and it just keeps growing and growing. Any other nuggets you’d like to share with our readers?
TM: Sure. I can mention a few companies that I would recommend people put on their watch list. Revolution Resources Corp. (TSX:RV) operates in North Carolina. It shares the same belt and has similar geology to Romarco Minerals Inc. (TSX.V:R), which boasts 3.1 Moz. (M&I) and 1.1 Moz. (Inferred), as well as a $1 billion market cap. And lastly, Ryan Gold Corp. (TSX.V:RYG).
Revolution Resources is part of the same group that built Underworld Resources—a Yukon gold explorer that Kinross took out for $140M in March 2010. High-grade intercepts at surface in the early part of the drill program show considerable promise. The company just raised $9M. We took a piece of that placement, and it’s financed for years—not months. Some of the top-notch gold funds took part in this raise. A lot of the similar names you see in Romarco. I’d say the best and brightest in this space are definitely involved in this story; it’s one to watch. There’s a 5,000m drill program underway now, completion of and results for which should be out by the end of the quarter.
Another company being put out by the same group is Entourage Mining Ltd. (OTCBB:ETGMF). It’s exploring in the Haile district in Ontario. It’s exploring in the shadow of the head frame, which is always one of the best places to go. The company’s managed to steal away some top talent from Barrick Gold Corporation’s (TSX:ABX; NYSE:ABX) Hemlo property and acquired a great land package around it. Entourage will be exploring it as high-grade deep underground stuff; there’s some phenomenal potential there. The gentleman who’s running the geological portion of the program won an award for mine development for adding all the ounces he did to Hemlo when everyone thought it was going into decline. I just wanted to make that a very brief mention because it’s highly speculative and in a very small market cap.
As for Ryan Gold—the sharpest minds in mining are involved in the story, including Pat Dicapo, Murray John, Ned Goodman, Mike Skead, Sean Roosen and, of course, Shawn Ryan—the legendary Yukon prospector with a wealth of major gold discoveries coming from the stable. If you want to play the Yukon in 2011, this is one of the best bets. It’s got a suite of excellent projects and all but guaranteed access to capital in the pipeline to come.
TGR: So, obviously you see the junior mining space is advancing even beyond what we saw in 2010 as we move into 2011. You don’t see any price-appreciation pullback in the select junior stocks in which Pathfinder’s invested?
TM: I mean things may get rocky. I think one of the biggest things we have to be cautious about out here, especially in the junior mining space, is that a little bit of selling can really impact the market. In 2010 people made phenomenal money and there’s a massive income tax bill coming for a lot of people on capital gains. Come April and May, you’re going to see a lot of people selling because they have a tax bill they have to pay.
The Canadian or U.S. government will come knocking; people are going to have to get that cash somewhere, and it’s likely to be from their portfolios. While I like the space long term and think you can never hurt yourself by going with quality, if I had to read the tea leaves here, I’d say that we’re likely due for a correction sometime between March and April when people realize the magnitude of what they’re going to owe the government. I wouldn’t be surprised if the summer is slow, but I think we’re going to have a rocking end of the year as long as the world economy holds together. At the end of the day, I really have no choice but to be bullish.
TGR: Good conversation. We’ll be watching Pathfinder Asset Management as it grows.
Taylor MacDonald is an associate portfolio manager at Pathfinder Asset Management Limited. He graduated from the Wharton School, University of Pennsylvania with a bachelor in economics in 2004. Prior to Pathfinder, he worked in equity research at Raymond James Ltd. in Vancouver, investment banking with Haywood Securities (UK) Ltd. in London, England and institutional equity sales at RenCap Securities in New York. He has been a CFA Charterholder since 2009 and is a Level II CAIA candidate.
By Winton Bates, on February 10th, 2011
In a recent post ‘Does big government weaken the social fabric?’ I presented a table showing the percentages of the population in various countries who say that falsely claiming government benefits, cheating on taxes and accepting a bribe are never justifiable. I was using this data as a measure of the strength of the social fabric in different countries.
A commenter (Lorraine) suggested that ‘never’ is a pretty powerful word and that my ‘inner paleoconservative’ was showing. On reflection, I agree that it is difficult to argue that any of these forms of corruption are never justifiable under any circumstances. For example, I would find it difficult to argue that a person living in a society where corruption is the norm has as strong a moral obligation to refrain from corrupt activities as a person living in a society where there is little corruption. That is why corruption is so insidious – the more prevalent it is, the more difficult it becomes for anyone to resist it. (I suppose that kind of reasoning must make me some kind of moral relativist, but I don’t think I will lose too much sleep worrying about that!)
Survey respondents are asked to give a rating from 1 to 10, depending on whether they consider each behaviour is never justifiable (1) or always justifiable (10). In the following tables I have labelled ratings of 1 and 2 as ‘very rarely or never justifiable’ and ratings of from 1 to 3 as ‘rarely or never justifiable’.
The relaxation in degree of opposition to welfare fraud, tax evasion and bribery does make some difference to the rankings. The general picture remains broadly the same, however. There is generally more red at the bottom of the tables than at the top, suggesting greater opposition to corruption among people in the countries with smaller governments.
By B.P.T., on February 10th, 2011
At 8:30 AM EST, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 412,000 new jobless claims last week, which would would be 3,000 less than the unexpectedly low number released last week.
At 10:00 AM EST, the Wholesale Trade report will be released for December, showing inventory levels for wholesalers in the United States.
At 10:30 AM EST, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.
At 2:00 PM EST, the Treasury budget for February will be released. The consensus is a deficit of $225 billion, which is larger than the historical average, and about $5 billion more than last February.
At 4:30 PM EST, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
Also at 4:30 PM EST, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
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By Ajay Shah, on February 9th, 2011
One important part of capital account decontrol is commitment. If there is risk that capital controls will be brought back in the future, this can have a variety of unpleasant effects. If there is a fear of fresh restrictions coming in on inflows, a surge of money will rush into the country. If there is a fear of fresh restrictions coming in on outflows, a surge of money will rush out of the country. A long-term commitment to openness is required, in order to rule out such behaviour.
As a consequence, when a country moves to full convertibility, this requires not just the removal of restrictions. It also requires the
removal of bureacratic process including reporting requirements. As long as forms have to be filled up for `automatic approval’, this
can easily swing back and become a capital control through breakdowns of rule of law (as has happened in India). See the MoF
Working Group on Foreign Investment on issues of rule of law in India’s capital controls. It is important to pour concrete on the
decontrol so as to give confidence that the controls are gone.
We don’t have the exact facts, but in the UK, when they moved to convertibility (back in the late 1970s) this was accompanied by dismantling of reporting requirements.Korea is very open; there are no restrictions on capital flows. But Korea has kept the reporting requirements and through this, they have retained controls in a certain sense. The reason is that people fear that if they report transactions, then the government may come and investigate, and ask why they are doing it. They might also ask where the money is coming from. So, even though the rules may allow capital transactions, people — especially individuals, but also small businesses — remain very wary of these, and refrain from wiring large amounts in and out of the country, apart from some outward investments via mutual funds, where the government can’t actually see who is sending the money out. Through this, reporting requirements perpetuate home bias and inhibit international economic integration.
Today we became aware of one mechanism through which some countries have committed themselves to an open economic system: When the US signs free trade agreements and bilateral investment treaties, there are provisions which limit the extent to which capital controls can then be brought back.
A curious letter has brought this to our notice. It says: Under these agreements, private foreign investors have the power to
effectively sue governments in international tribunals over alleged violations of these provisions.. How interesting. So
that locks down the possibility of a reversal of reforms in countries where the US has free trade agreements, and quite
a few more where the US has bilateral investment treaties.
It makes sense for investment and trade treaties to mention capital controls. Trade and finance cannot really be separated: finance
follows trade, and enhanced de facto integration in each feeds the other.
Trade requires currency risk management. When an Indian firm signs a long-term contract to buy/sell with invoicing in Yen, the
Indian firm needs to be sure that Japan will stay open so as to enable INR/JPY hedging in the future.
If an MNC makes a direct investment in a country, it needs some assurance that it can bring in funds (equity and loans) to
finance the investment, take them out when it wants to run down its operations, and repatriate profits in the meantime. It also
needs to be able to hedge its currency exposure.
Hence, entering into trade/investment contracts today is assisted by confidence that liberalisation put in place today will still be there tomorrow.
More generally, there is a big difference between (a) a move today and (b) a move today + a commitment about behaviour tomorrow. Permanent tax cuts yield a much greater consumption response. Permanent capital account liberalisation leads to more FDI and trade. A variety of mechanisms need to be found through which reforms can be given stronger commitment so as to rule out risk of reversal in the future.
By The Gold Report, on February 9th, 2011
 Do old investment strategies apply to the new gold market? Doug Groh, a fund manager and senior research analyst with Tocqueville Asset Management in New York City, has been analyzing basic materials and gold equities for more than 25 years. In this exclusive interview with The Gold Report, Doug explains how to view gold’s history when making investments in its future.
The Gold Report: Gold dipped from about $140 per ounce in the bull market of January 1976 to below $105/oz. in September of that year. Ultimately, it proved only a pullback on the way to gold’s peak of $850/oz. in 1980. Are we seeing a similar pattern now, or is this correction simply much ado about nothing?
Doug Groh: It’s hard to say if this is a similar pattern. The market conditions are different than they were 35 years ago. However, cycles can be somewhat repetitive. I think the more important questions are: What does this correction mean and how long will it take?
Looking back at 2010, the gold market did very well with a nearly 30% rise in price. It’s normal to have some type of correction after such an upward surge. Whether the market will experience a 25% correction like back in the late 1970s is hard to tell. But it is not out of the realm of possibility that gold could consolidate at levels seen during 2010 to what was the year’s annual average of about $1,225/oz. before it marches to a higher level.
A correction is a healthy thing because it can shake out the weak players, traders and undedicated investors. It solidifies a base.
TGR: Has the correction led to any changes in the way Tocqueville is managing its gold fund?
DG: It hasn’t motivated any immediate changes. However, we would like to see how this pullback plays out. It appears that we may be through most of it. At the end of last year, we were a little bit more cautious about investing new funds into gold equities. We felt that some of the gold equities were getting overpriced. We were accumulating cash and taking the opportunity to reposition ourselves for when a correction would come along. The market is going through profit taking from last year and a value-seeking phase. Now we’re more interested in some of the companies that we had been looking at last year, but were waiting for better valuations. That is still playing out.
TGR: What market-cap segments did you view as overpriced?
DG: Different segments of the gold mining space were performing better than others on a relative basis at different times. In the middle of last year, the developers and liquid equities did very well. In late October and November, the juniors and small-cap companies did well. In late November into December, the micro-cap names were doing very well.
The market’s imagination was at a point where resources in the ground became more valuable at higher gold prices and the leverage was very compelling to investors. That’s still going on to some extent. Investors are selectively seeking out those micro-cap companies that don’t have any cash flow or earnings yet and bidding them up. Some of the appeal is the fact that they are micro caps and a move from a penny to a dollar stock can be quite a performance enhancement.
TGR: What segments do you see value in now?
DG: The large, liquid major producers are a value opportunity. These companies should do very well as they report earnings during the next month and a half. They had a fantastic gold-price environment. They’ve kept their costs relatively stable. The margins, cash flow and earnings have expanded during the last year.
While companies constantly need capital to redeploy into their operations, there should be excess capital available for dividends and other corporate activities. We don’t feel that the market has fully valued that margin expansion or the fact that there should be excess capital available for distribution. I think that will be somewhat of a surprise. As that occurs over the next several months, some of those major names should get bid up as they demonstrate that they can generate stable and profitable margins.
TGR: You talked a little about the major gold producers. They’ve been hit somewhat hard but seem to be offering value until their results come out in the earnings reporting period during the next five to six weeks. Should investors be looking at those major producers and possibly adding some of those names to their portfolio?
DG: I think a good approach is to dollar-cost average your investments. Certainly, when things get pricey or start performing very well, investors want to back off a little bit on averaging in. Generally, we see an initial pullback earlier in the year. As we get into the reporting season, investors become a little bit more comfortable with their gold positions and may add to them. Springtime to the early summer is probably the best time to add to a precious metals portfolio as that tends to be the weakest point in the year for the sector as far as the gold equity market goes.
TGR: What are some names on your radar right now that are offering value in the large-cap space?
DG: Some of the top holdings that we continue to like have pulled back, such as Osisko Mining Corp. (TSX:OSK), which is developing a new mine in Quebec that should be up and running by midyear. I think investors have discounted the fact that growth will be realized and have sold off the name.
TGR: Osisko is developing the Malartic Project near Val d’Or, Quebec. As one analyst once said to me, “It’s got first world cost and third world grade.” Could that be the reason that funds and other entities are selling off, or do you think that it’s just not the flavor of the day anymore?
DG: Whenever a mine is starting up, typically there are teething problems or initial kinks that need to be worked out in order to get the operation to work to design. There’s probably some concern among investors that there will be delays. There may be problems, which also could mean cash flows aren’t realized as anticipated. I think that’s being reflected in the market at this point. The risk of startup is a concern for the marketplace. However, that is not unusual and it’s understandable that the market would be concerned. Over time, as the operation is up and running and managers gain experience with the facilities and the equipment, I feel that in time Osisko will do just fine.
Another company that we have followed closely is Ivanhoe Mines Ltd. (TSX:IVN; NYSE:IVN). It is building a gold/copper mine in Mongolia. We think it offers a compelling investment opportunity because it is near such a large consumer in China and the resource is so large.
TGR: Do you think there’s a chance that Rio Tinto (NYSE:RIO; ASX:RIO) could just buy Ivanhoe outright?
DG: That is a possible scenario. Rio could take a majority position, dilute out Ivanhoe or perhaps Ivanhoe allows itself to become a minority investor in the project by selling its interest down. It would certainly seem that owning a majority stake or a large percentage is more meaningful to Rio Tinto than just being a partner.
TGR: What about jurisdiction risk? Does the agreement that Ivanhoe and Rio have with the government of Mongolia provide enough security?
DG: It took them a very long time to come to an understanding on the investment policy and an investment agreement in the country. I believe that most of the risk has been addressed and dealt with at this point, yet we appreciate that governments can change. No one knows what could befall Mongolia in the future. However, at this point, it seems as if a solid understanding has been established for how investments are to be made in the country and what is expected of all stakeholders.
TGR: What are some other names that are particularly interesting?
DG: Gold Resource Corporation (OTCBB:GORO; FSE:GIH) is an interesting stock in that the company is producing from a property in Oaxaca, Mexico that has a polymetallic deposit. It’s not just gold/silver, but also zinc, lead and copper. It is on a rather large trend in Oaxaca, where it initially developed its mine. The company has used most of its capital in the last several years to develop the mine and is now, I believe, in a position to generate cash flow to explore further along that trend. There’s a really exciting opportunity to expand its resource base and fully utilize its mill and plant facilities to generate more cash flow.
International Tower Hill Mines Ltd. (TSX:ITH; NYSE.A:THM) is developing an ore body in Alaska in the Livengood district, which historically was a gold producer. Now it is likely to become a large open-pit facility that could go on for the better part of 20 years. The development of this project is a long-term proposition due to the permitting and the various engineering studies that need to be done prior to receiving the mining permit and other regulatory approvals. So far, what we’ve seen is very compelling on an economic basis.
TGR: There are companies with a number of large, impressive deposits in that area, such as Donlin Creek and NovaGold Resources Inc. (TSX:NG; NYSE.A:NG) and the Pebble Deposit with Northern Dynasty Minerals Ltd. (TSX:NDM; NYSE.A:NAK). The capital expenditures (capex) needed to build these mines is quite excessive in the $5–$6 billion range. Does that make Tower Hill more attractive because its smaller, low-grade, open-pit deposits can have capex of $1–$1.5 million?
DG: I think so. Mining companies are depleting their asset base just because they’re mining the ore bodies that they’ve developed. They need to replace those ore bodies. Rather than replace them with medium-sized deposits, the major companies are looking at opportunities where they can actually develop a district. For example, Kinross Gold Corp.’s (TSX:K; NYSE:KGC) acquisition of Red Back Mining Inc. or Goldcorp Inc.’s (TSX:G; NYSE:GG) acquisition of Andean Resources Ltd. (TSX:AND, ASX:AND).
The major companies want to deploy their skills, talents and capital into an area that’s going to be meaningful to them over the long term. Companies the size of International Tower Hill or even Allied Nevada Gold Corp. (TSX:ANV; NYSE.A:ANV) are more compelling for the large gold-mining companies.
TGR: Are there some other projects in the Alaska area that could potentially be open-pit operations with a smaller capex to build?
DG: Alaska offers a lot of potential in terms of exploration for precious metals and related base metals. There’s a company operating in Alaska, Kiska Metals Corp. (TSX.V:KSK), which acquired its property during the past year as Rio Tinto backed away from its involvement in that project. We believe that Kiska offers an interesting opportunity for investors over the long term. It is now exploring and finding resources on its 100%-owned properties and it has potential to expand its resource base to a meaningful degree. This could potentially lead it to become a target of a major mining company, such as Newmont Mining Corp. (NYSE:NEM) or Barrick Gold Corporation (TSX:ABX; NYSE:ABX).
TGR: Kiska had some pretty impressive results at the Raintree West discovery—85 meters of 2.5 grams per ton (g/t) gold equivalent (Au Eq.). That’s pretty good. It also had another hit on Island Mountain.
DG: I think that the Island Mountain area is a very compelling exploration situation. I expect that the company will continue to come up with very good drill results as it develops that project and spends more time on drilling in the area.
TGR: Kiska is planning a 35,000-meter drill program this year.
DG: Right. It has a number of very interesting prospects throughout their property.
TGR: The company must be fairly well cashed up given that kind of drill program. Do you think its likely to find some new discoveries?
DG: Kiska’s land position is very compelling and there are a lot of different targets on which it can drill. My sense is that the company will spend a little money on resource development and a little on identifying new opportunities. So, while the quality of the resource is improved from its drill program, it’s also reasonable to think that with increased geologic information, discoveries will be made.
TGR: In an interview in October, you said investors should keep 5%–10% of their investment portfolios in gold bullion and equities over the long term. Is this strategy still a fit for the current gold market?
DG: I do. Looking back at the past 10 years, equities have not generally provided as generous of a return as gold and commodities. We would argue that a blend of exposure to the gold sector and the general equity market would have provided a better return than just an equity investment. Such an allocation could also reduce volatility. Over time, a diversified approach should reduce risk and enhance returns.
TGR: How much of that gold allocation should be in bullion and how much in equities?
DG: Every investor is different, obviously. People have to consider their own risk tolerance. But I think a fair and good representation of the precious metals market would include 2%–3% of a portfolio in bullion or gold ETFs and 7%–8% in gold mining or precious metal equities, which would include silver and platinum group metals.
TGR: What should investors expect from the gold market through the remainder of this year and beyond?
DG: Gold goes in and out of favor relatively quickly, and I expect a fair bit of volatility throughout the year. Gold had a great year in 2010 and we believe the long-term bull market is still very much intact, which could lead to higher gold prices over time. Having said that, we have to be prepared for some corrections from time to time. And, as we discussed earlier, the market is in a corrective phase right now.
I still think that gold is under-owned by institutional investors, including pension funds, endowments and retirement-managed money. To us, long-term exposure to gold makes a lot of sense considering the overwhelming debt that is accumulating within our economic system globally.
It’s hard to say when the gold price is going to correct and when it’s going to rise. It can respond to anything at anytime. I expected a more bullish response due to the political unrest in Egypt, and yet it seems that the market is looking through Egypt and recognizing that stability will be established eventually, with the current government or a new government. It appears the market is making the foregone conclusion that stability will be the result of the current crisis. If that is not the case in the end, it could present an investment opportunity in this current gold market.
TGR: Thanks for sharing your acumen, Doug.
Doug Groh has 25 years’ investment experience. Before joining Tocqueville in 2003, he was Director of Investment Research at Grove Capital from 2001–2003. Between 1992–2001, as a senior sell-side analyst for JP Morgan and Merrill Lynch, he was recognized as a ranked analyst by Institutional Investor Magazine and The Wall Street Journal for his coverage of basic material stocks in the non-ferrous metals, chemicals and paper and packaging industries. He began his career as a mining analyst and worked as a precious metals portfolio manager at U.S. Global Investors and American Express Financial Advisors in the 1980s and early 1990s. He holds an MA in Energy & Mineral Resources from the University of Texas at Austin and a BS in Geology/Geophysics from the University of Wisconsin—Madison.
By Eldon Mast, on February 9th, 2011
According to the ICSC-Goldman’s retail sales report on Tuesday, same-store sales skyrocketed in the February 5 week, up 2.2 percent.
It was the largest weekly gain since the Easter surge of last March.
The year-on-year the rate jumped nearly one full percentage point to plus 2.5 percent.
The Redbook report, also released on Tuesday, was right in line with a measure that showed a 2.7 percent year-on-year same-store sales growth in the February 5 week.
Additionally Redbook offers a month-to-month comparison which registered a blistering 1.7 percent gain. Keep in mind that annualized that would point to a 20.4 percent retail gain in one year!
Early next week the government will post the January retail sales report amid most predicting a solid gain.
The economy accelerated at the end of 2010 as consumer spending climbed by the most in more than four years. Gross domestic product grew at a 3.2 percent annual rate, Commerce Department figures showed on Jan. 28.
And remember last week the ISM Manufacturing Index pointed to an overall economy in the month of January growing at a GDP annualized rate of 6.4 percent.
By B.P.T., on February 9th, 2011
The Mortgage Bankers’ Association purchase index was released at 7:00 AM EST, and there was a week to week decrease of 1.4% in the Purchase Index and a week to week decrease of 7.7% in the Refinance Index.
At 10:00 AM EST, Federal Reserve Chairman Ben Bernanke will testify before the House Budget Committee on economic, employment and budget issues.
At 10:30 AM EST, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.
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