Siddharth Rajeev's Commodities Rundown, From Au To V

By The Gold Report, on March 8th, 2011

There is more to the periodic table—and to investing opportunities—than gold, silver and copper. Siddharth Rajeev, vice president and head of research at Fundamental Research Corp., sums up the market prospects for rare earth elements (REE) and a host of metals. He unearths some new names and some historical finds in this exclusive interview with The Gold Report.

The Gold Report: Sid, today we’re going to talk about a number of different metals: gold, silver, vanadium, copper and rare earths. Could you handicap each of those metals for us, starting with gold, copper and silver?

Siddharth Rajeev: Let’s look first at the factors that have been driving up commodity prices. We think two key factors are responsible. Number one is increasing global demand; the second is the continued weakness in the U.S. dollar.

Let’s look at increasing global demand. We believe in the Brazil, Russia, India and China (BRIC) story and we expect continued growth from those countries. We believe that the U.S. economy will continue to see a gradual recovery. So, we expect increasing demand from the U.S. and continued demand growth from the BRIC countries to keep the demand side strong. Thus, the first factor looks good for the commodities market.

However, we expect the second factor, which is the U.S. dollar, to gradually improve with respect to other currencies as the U.S. economy improves. That should have a negative impact on the commodities market.

So, we expect to see some sort of correction this year. For example, copper is at $4.45/lb. We do not think these prices are sustainable in the long term and therefore we expect to see some kind of correction.

In terms of gold, we believe that as the U.S. economy recovers and the U.S. dollar strengthens, investors would move away from safe-haven assets such as gold and put their money where it could achieve higher returns. So, over the long term we expect the gold price to soften. But, in the near term, uncertainty regarding the U.S. and European economies and inflationary scares should give us high gold prices.

As to copper, we don’t think it’s sustainable at such prices over the long term. Even though demand looks very strong, we expect prices to drop with the gradual recovery in the U.S dollar.

Silver is unique as it behaves like a capital preservation asset, such as gold, as well as like a commodity due to its industrial applications. The uncertainty in the U.S. and Europe and inflationary pressures, combined with continued demand growth from Asia and the BRIC countries, are some of the reasons we think silver has been one of the best movers recently.

Although we think silver should soften in the long term, we think that silver should stay strong in the near term due to the same reasons as gold. In our valuation models, we use a long-term (2014+) price of US$18.35/oz.

TGR: What price are you using for gold price?

SR: We use a long-term gold price of US$1,000/oz.

TGR: What can you tell us about vanadium and rare earths?

SR: Unlike other commodities, vanadium prices have not been as volatile in the last 18 months. They’ve stayed around $7/lb. for over a year. Over the long term we have a good outlook on the commodity. We believe strong growth in steel consumption, especially from China and India, will be the key demand drivers. Steel accounts for 90% of vanadium demand; so vanadium demand is highly correlated to the steel segment.

The use of vanadium in battery and renewable energy storage devices is expected to drive the demand up. Vanadium supply is expected to remain quite stable from the three major producing countries—China, Russia and South Africa. We think the demand side should keep prices high.

The main factor driving up rare earth prices is the supply side. China accounts for 97% of all production, and has been cutting down significantly on its rare earth exports. China also has been increasing the demand for rare earths. The U.S. currently imports nearly 100% of its rare earths consumption. We are bullish on REE prices primarily because of the concentrated supply conditions.

TGR: So, the more obscure you get, the better the outlook. There seems to be a bit of a contradiction in that you see softening prices for copper, but strengthening prices for vanadium. Both of those metals have the same sort of investment thesis. Why are you bullish on one and not so bullish on the other?

SR: That’s because copper has moved up by 40%–50% in the last 12 months, while vanadium has stayed pretty constant. For the last 12 months vanadium has been around $7/lb. It has not really moved up, while copper has moved up significantly. So we think copper will have a higher price correction.

TGR: What would have to happen in the Middle East before you would be willing to be bullish on the gold price?

SR: Obviously the turmoil in the Middle East is positive to commodities such as gold and oil. But, we think those factors are short-term catalysts. Over the long term, we do not think these incidents should play a role. Historically, all of these geopolitical tensions around the world cause sudden and short-term spikes in prices. They’ve not really had an impact over the long term.

TGR: In the 1970s there was an oil crisis that lasted about five years that paralleled a run in the gold price. Five years is pretty long term.

SR: High oil prices typically result in high inflation and high gold price. So if the problems in the Middle East somehow impact long-term oil supply, we will see high gold prices for a prolonged duration. We have not seen anything so far in the Middle East that brings up concerns over the long-term supply of oil.

TGR: The other thing to consider is that if a company looks good at $1,000/oz., it will look very good at any price above that.

SR: Certainly.

TGR: Quite a few of the small cap companies in your coverage universe are exploring for gold. Many of them have never appeared in The Gold Report. Could you give us a few under-the-radar names that our readers should know about?

SR: I will name three companies today that we really like. I’ll start with Rio Alto Mining Limited (TSX.V:RIO; BVL:RIO; OTCQX:RIOAF). It has an advanced-stage project. We picked them up for coverage in January 2010, when they were at $0.46. Today, its price is over $2.40. The main deposit is the La Arena Deposit, which has over a million ounces of gold in oxide. The company also has a copper gold sulphide resource (adjacent to the oxides), which has close to 2.9 billion pounds of copper and over 3 million ounces (3 Moz.) of gold. The company plans to put the oxide into production in Q211. Construction commenced in August 2010. The sulphide should go into production in the next three to four years. The company has an extremely strong management team. They recently raised close to $58 million in equity financing.

TGR: One noteworthy thing about La Arena is that it’s not too far from Barrick Gold Corporation’s (TSX:ABX; NYSE:ABX) Lagunas Norte project. Do you see Rio Alto as a possible takeover target?

SR: Yes, especially these days when investors and majors are more interested in higher quality assets because of the volatility in commodity prices. Investors and majors are looking for more advanced, quality projects. We believe Rio Alto fits into that category. We cover about 150 small- to mid-cap companies, and we think Rio has one of the best deposits in our coverage.

TGR: And your second gold name?

SR: Evolving Gold Corp. (TSX.V:EVG; Fkft:EV7) has made a huge discovery at its Rattlesnake Hills Gold Project in Wyoming. The company also has the Carlin project in Nevada. They have done aggressive drilling in the last couple of years and the results have been extremely impressive. Evolving Gold doesn’t have an NI 43-101 resource estimate, but we came up with an internal resource estimate. We think the project should have at least 1.5 Moz. gold. This company also has a strong management team and a strong cash position. In July 2010, Goldcorp Inc. (TSX:G; NYSE:GG) invested $15 million in Evolving Gold, which is a huge vote of confidence for investors.

TGR: What’s the next stage for Evolving? Could we see a preliminary economic assessment (PEA) in the near term?

SR: I think the next step is a NI 43-101- compliant resource estimate.

TGR: When can we expect that?

SR: We would like to see it sometime this year.

TGR: And your guesstimate was 1.5 Moz. But, you tend to be on the conservative side.

SR: Right. For valuation purposes we’re slightly on the conservative side. Our fair value on Evolving is $1.40 per share. We have a BUY (Risk 5: Speculative) rating.

TGR: And your third gold name?

SR: This is a slightly different company from the previous two I mentioned. The company is called 49 North Resources Inc. (TSX.V:FNR). It’s a resource investment company based out of Saskatchewan. It is Saskatchewan’s first publicly traded resource investment company, with close to $65 million in assets under management. It invests in early stage resource projects, including minerals, oil and gas. Right now, the majority of the investments are in oil and gas and precious metals.

We think this company offers investors a very good opportunity to hold a diverse portfolio of assets in different sectors, different regions. Investors also get the opportunity to participate in the upside potential of private company investments. FNR shares are currently trading at a 30% discount to the NAV (net asset value). We will be initiating coverage on this company shortly.

TGR: It’s quite a diverse group of assets that 49 holds: coal, diamonds, uranium, base metals, a little bit of gold. What are your thoughts on that business model? It is a bit unusual.

SR: Yes. For example, the company owns 150 to 200 stocks in its portfolio, but the top 15 of its holdings account for over 60% of its NAV. We think it’s a very good business model, especially because the CEO and President Tom MacNeill has a lot of experience and is well known in the industry.

One of its best success stories so far include its investment in Athabasca Potash, which was later acquired by BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF). FNR made a 611% gain in that investment.

Basically, this model offers investors an opportunity to get exposure to the upside of the junior resource market with lower risk due to the fact that the company holds a diverse portfolio. We think the return/risk ratio is higher for this kind of model.

TGR: Let’s move on to silver. Silver outperformed gold in 2010 on a percentage basis and is off to a very good start in 2011. Although you see some softness in silver, what are some silver names that our readers might be interested in?

SR: We cover two very good silver stories right now. One is an advanced stage company called SilverCrest Mines Inc. (TSX.V:SVL). In September, the company announced the first gold and silver pour at the Santa Elena Project in Mexico. We expect commercial production to be announced this quarter. SVL expects annual production of 35,000 oz of gold and 0.6 Moz. of silver. This is an open-pit, heap-leach operation. The company plans to expand operations to over 100,000 ozs. in the next couple of years. Again, this company has a strong management team; something which is important for any junior. Our fair value for SilverCrest is $2.84 per share.

TGR: What’s the second silver name?

SR: It is a relatively under-followed, under-explored company called Thunder Mountain Gold Inc. (TSX.V:THM, OTCBB:THMG). Its key property is the South Mountain Project in Idaho. It’s a past-producing mine. It currently has a resource of 3.4 million tons (Mts.) of indicated and inferred resource. It’s a polymetallic deposit, in which the primary metal is silver. The deposit is open at depth and along strike. The company is also developing a new gold target close to the historic mine which we think should add more resources. It’s working on a PEA and an updated resource estimate.

Our fair value on the stock is $0.70 and it’s trading at $0.25 per share. To value the stock we looked at the average enterprise value to resource ratio of its peers. Thunder Mountain is trading at $0.47/silver oz., while the peer average ratio is $1.34. We think that it’s undervalued at this price.

TGR: That’s precisely the kind of name we’re looking for. Now let’s move on to rare earths. Their price appreciation was dramatic in 2010. What are some companies with REE projects that could show some promise in 2011?

SR: We cover a lot of companies in the rare earth segment. I will talk about three of our top companies, starting with Commerce Resources Corp. (TSX.V:CCE; Fkft:D7H; OTCQX:CMRZF). It’s focusing on its Blue River Project in British Columbia, which is an advanced stage project. Then it has an early-stage exploration project in Eldor, Quebec, where it’s done some aggressive drilling and is getting very impressive results. Based on the results at Eldor we believe that the continuity, depth and thickness of the mineralization are positive signs for a near-surface REE deposit. The company announced an updated resource estimate at Blue River in February, with significant increases in tonnage and tantalum oxide and niobium oxide content.

REE prices have gone up significantly. Let’s look at tantalum. Its price moved up by 42% in the last four months, from $120/lb. to $171/lb. We continue to believe that demand for tantalum, which is used in electronic products, will increase. The supply side is very concentrated. For example, Australia and Brazil alone account for 50% of the production. The concentrated supply and increasing demand, and lack of production in the U.S. shows the importance of advanced stage tantalum explorers like Commerce.

Our fair value on Commerce Resources’ stock is $1.51 per share. Right now, I think it’s trading at around $1.00. To get that valuation, we used long-term tantalum price of $120/lb.; the current price is $171/lb. For niobium, which is used in making steel, we used $15/lb.; the current price is $23/lb. Even based on our conservative price forecast, we think it has an economic deposit at Blue River.

TGR: Any other REE names?

SR: Another name is Quantum Rare Earth Developments Corp. (TSX.V:QRE; FSE:BR3; OTCQX:QREDF). It’s developing the Elk Creek carbonatite complex in the U.S. It has had historic exploration. The historical resource is 39 Mts. of 0.82% niobium oxide. According to the U.S. Geological Survey, this property may hold one of the world’s largest resources of niobium and REE. A few months ago, the company raised close to $6.5 million. Our valuation on the stock is $0.85 per share, and it is trading at $0.53.

TGR: What do you think of Quantum’s CEO Peter Dickie?

SR: We’ve been following Peter Dickie and his associates for several years. They’ve been involved in some good projects in the past. We believe Quantum has a good management team.

TGR: Can you give us one more name?

SR: In the rare earth segment is a lithium company called Rock Tech Lithium (TSX.V:RCK; Fkft:RJIA). It’s exploring for lithium and rare metals in Ontario and Quebec. The main project is its 100%-owned Georgia Lake Project, which has historic resources of 9.8 Mts. with grades of 1.18% lithium oxide (Li2O). The company is conducting a 4,000-meter drilling program that should be completed in the first week of March. The company expects a NI 43-101 resource by mid-2011.

TGR: It’s hit high-grade spodumene there. And you can get lithium out of spodumene, correct?

SR: Yes, that’s right.

TGR: In terms of other similar deposits around the world, is the Georgia Lake project similar grade, higher grade, lower grade?

SR: I would say the grades are good..

TGR: What’s your fair value on Rock Tech?

SR: We are currently updating our valuation on the company.

TGR: Do you cover any vanadium plays?

SR: There’s a company called Apella Resources Inc. (TSX.V:APA; Fkft:NWN), based out of Vancouver. It’s exploring for vanadium and titanium in central Quebec. Its Iron-T property has a resource of 11.6 Mts. inferred and 0.73% vanadium oxide equivalent.

But this resource estimate covers only a small portion of the known mineral-bearing complex. We feel that the company can significantly increase the resource outside of the current resource area. We valued the stock by looking at similar stage vanadium projects. The average ratio of enterprise value to vanadium resource is around $0.06/lb. We used that multiple to value Apella’s projects. Our fair value on APA is $0.65. The shares are currently trading at $0.21.

TGR: To close, what do you see happening, on a macro level, over the next year or so?

SR: Overall, we expect to see some sort of correction in the commodities market with the gradual recovery in the U.S. dollar. Precious metals should stay relatively strong in the near term due to the continued uncertainties in the U.S. and Europe and inflationary pressures.

For investors at this point, because of the uncertainty in the markets and the volatility in commodity prices, the main strategy should be to look for companies with quality advanced stage assets.

TGR: Sid, thanks for your time.

Siddharth Rajeev joined Fundamental Research Corp. in April 2006. At FRC, he oversees the research department, and also covers a broad array of companies, primarily in the energy, mining, and technology sectors. Prior to FRC, he has had a mix of engineering and finance experience including corporate finance experience at a leading Investment Bank in Kuwait. Sid has ranked as a four-star analyst in the energy and mining sectors by Deutsche Asset Management, a division of Deutsche Bank.

Sid holds a bachelor of technology degree in electronics engineering from Cochin University of Science & Technology, and an MBA in finance from The University of British Columbia. He is a CFA Charterholder, and has completed studies in exploration and prospecting at the British Columbia Institute of Technology. Sid is sought by the media for commentary on the valuation of small cap stocks and industries he covers, and is a speaker at various investment conferences.



Leave a comment   Financial Markets   , , , , , ,  

A big step forward on interest rate derivatives

By Ajay Shah, on March 8th, 2011
For the backdrop, here are two key facts. First, the dismal failures of policy in the field of interest rate derivatives has led to a peculiar situation where substantial trading on the INR yield curve now takes place outside India. Second, while RBI has permitted one exchange traded interest rate derivatives, there are a host of problems with this contract. The process of policy reform in this field has been a disappointing experience. RBI seems to have quaint notions that cash settlement is harmful, that derivatives trading on short-dated bonds could interfere with monetary policy, etc.

In this setting, here’s a big move today: cash-settled futures on the 90-day treasury bill.



Leave a comment   Financial Markets   , , ,  

Compare Pennsylvania to its neighbors....

By Christopher Briem, on March 8th, 2011

Here is a headline… all of the states bordering Pennsylvania are listed among Intuit’s list of the worst states for business tax laws.

Funny that…  you listen to the talking heads and you would be sure Pennsylvania was the very worst place in the world for business taxes.    I wonder how we compare on personal income tax rates?   Or sales tax rates when compared with our real competitors which are our neighboring states.



Leave a comment   U.S. Economics   , ,  

Economic Events on March 8, 2011

By B.P.T., on March 8th, 2011

At 7:45 AM EST, the weekly ICSC-Goldman Store Sales report will be released, giving an update on the health of the consumer through this analysis of retail sales.

At 8:55 AM EST, the weekly Redbook report will be released, giving us more information about consumer spending.

Join the forum discussion on this post - (1) Posts


Leave a comment   U.S. Economics   , ,  

UFC: NatGas vs. the Neutron

By Christopher Briem, on March 7th, 2011

Because of the NYTimes article last week there is heightened new interest across Pennsylvania over radiation in the fracking water being used in Marcellus Shale development.  Just saying that we mentioned the whole radiation in shale issue here just over a year ago. So clearly some folks are not surprised by this.  So why is this news all of a sudden?  Someone was not thinking ahead.

Which isn’t to say I have any insight into the scale of this as an issue.  If anything I am geology challenged, but it should highlight the real problem of radon in Pennsylvania. I still wonder a bit when someone will float the idea of mining for uranium in Pennsylvania… or potentially even refining the shale itself for uranium.

But my old post was just pulling something from blogger AtomicRod who in addition to talking about all things nuclear has brought up what may be the real underlying debate over the impact of shale gas development worldwide. We are the nexus of the biggest energy cage fight that is emerging.  Some have framed the debate over the future of energy in the US as between nuclear and natural gas.  The future will not be absolutely one or the other, but clearly there is a lot of marginal investment that may go toward one or the other dependng how the economics of the two energy sources evolve.   Before the escalation of shale gas development, nuclear was beginning to reawaken as we all know from Westinghouse’s expansion locally.  Is the development of Marcellus Shale, and other shale gasses, putting that at risk in the future?

In related news:

Hey look, economics still works and the low price of natural gas is impacting development - Dow Jones yesterday: US Natural Gas Rig Count Falls To 1-Year Low – Baker Hughes

This literally just popped up.  From Arkansas: 2 firms to suspend earthquake zone injection wells I do wonder if the MSC folks have a PR already prepared just in case one of those occasional Pennsylvania earthquakes occurs…  The header would be “Not our fault!”.

And I was on the turnpike yesterday and noticed a pro-coal billboard that I had never seen before.  It was kind of remarkable.. It said something like “Wind dies. Sun sets. You need reliable, affordable, clean-coal electricity.“  Like really? Now the sun setting is cause for concern?   That or I should go start the portable generator every time the wind peters out?

I sense that ad it really a reflection of some angst in the vast PA coal industry over shale gas.  It may be an even bigger food fight impacting shale gas in the future actually.  In terms of net job creation, if natural gas does grow as some say it will, what does it say for the future of the coal economy in Pennylvania?



Leave a comment   U.S. Economics   , , , ,  

Endgame: The End of the Debt SuperCycle and How It Changes Everything

By Claus Vistesen, on March 7th, 2011

I won’t hold it against my readers if they find that macroeconomics is complicated and that the course and solution of the financial crisis (let alone the road ahead) seem to constitute a very complex system of processes. Indeed, if this is the case it is obviously because it is and this is precisely why it we are still, by and large, stuck in the mire.

Still, help is readily available and the recent book entitled “Endgame: The End of the Debt SuperCycle and How It Changes Everything” by John Mauldin and Jonathan Tepper is a fine example of how to make a complicated topic easy to understand without compromising on detail.

The Endgame essentially reads as a blueprint of the global economy and her financial system. It provides a detailed and rich analysis on the financial crisis, what led up to it and what is likely to follow. In its core, it is built on the simple premise that taking on debt today will impact on your ability to maneuvre financially tomorrow. However, once you transfer this idea to the level of sovereign states and their interaction through an immensely complicated set of feedback loops and interconnected processes most analysts and economists fall short of an adequate explanation.

Enter Jonathan Tepper and John Mauldin.

With a concise style of writing and a sharp sight for taking the argument straight to the core, the authors lay bare the global financial system and its reckless production of excess debt. The book provides a clear and crisp analysis of what must be done and what is likely to happen if adequate action is not taken.

I would highlight in particular the chapters on individual countries which excellently convey the idea that all economies now face choices which range from difficult to disasterous. Here, it is easy to file the book under the heading of eternal pain and damnation. But it never transcends into a spiral of doom and gloom which means that it emerges as an extremely well balanced account of the current state of the global economy and the challenges that lie ahead.

Personally, I have long held that the main unspoken and untold macroeconomic consequence as a result of the crisis is how the next decade invariably will see a number of more or less spectacular and costly sovereign defaults in the OECD. What matters is how we deal with these and which choices the individual countries make. If the right choices are made, we will have less defaults rather than many but I don’t think we can avoid them altogether.

Within this framework, the Endgame provides an indispensable guide to the macroeconomic landscape going forward.

–

Full Disclosure: I know and work together with Jonathan Tepper but I have no financial interest in the book whatsoever so I can safely recommend it as a strong, nay necessary buy on Amazon.

Join the forum discussion on this post - (1) Posts


Leave a comment   Book Reviews   , , ,  

Economic Events on March 7, 2011

By B.P.T., on March 7th, 2011

At 3:00 PM EST, the Consumer Credit report for January will be released.  The consensus estimate is that there will be an increase of $2.5 billion in the consumer credit available from December to January, after an increase of $6.1 billion last month.

Join the forum discussion on this post - (1) Posts


Leave a comment   U.S. Economics   ,  

Charles Oliver: Out of Africa, into Americas

By The Gold Report, on March 4th, 2011

Sprott Asset Management Senior Portfolio Manager Charles Oliver says the social unrest in the Middle East could lead to a premium for junior companies operating in North and South America. He’s even betting on it, saying, “I believe juniors will give you the best long-term outperformance and alpha.” He’s taken profits on companies with exposure to Africa and moved that cash into others with primary assets in the Americas, where, he says, there is much lower risk. Charles discusses a basket full of those names in this exclusive interview with The Gold Report.

The Gold Report: Charles, the Sprott Gold and Precious Minerals Fund (TSX:SPR300) had an impressive 74.7% gain in 2010. That same fund was up 114% in 2009. Congratulations!

Charles Oliver: Thank you very much.

TGR: Most of those gains came from dramatic rises in gold and silver juniors but more recently you trimmed back a lot of those positions in exchange for positions in large-cap gold producers. Why the change in philosophy after having such success with the juniors?

CO: It’s not actually a change in philosophy. I love the juniors. I believe juniors will give you the best long-term outperformance and alpha. I’m continually upgrading the portfolio and improving it. Generally speaking, I like to have about one-third large caps, one-third mid caps and one-third small caps. The large caps give you liquidity and act as an anchor. In 2009, we saw great performance from the mid caps, but in 2010 they slowed down and a lot of the small caps took off.

In 2003, I did something very similar. I took some of my stocks, which were getting a little expensive on a relative basis, trimmed those positions and redeployed them into the best opportunities out there. Right now, I’m finding the large caps are the cheapest segment out there. I am still buying some mid and some small caps, but I’m looking for those companies that are significantly underpriced. It’s a continuing philosophy; there is no change.

TGR: But what’s going to make those large caps move? We haven’t seen a dramatic movement in large-cap share prices despite having a gold price above $1,300/oz. for some time.

CO: You’re absolutely correct. The large caps have performed terribly over the last four or five years for a couple of reasons. When the gold exchange traded funds (ETFs) came out, a lot of money that had been in large caps migrated to the ETFs. That’s been going on for several years. When people migrate out of the large caps they help depress the price. So when I look at the large caps today I’m seeing valuations that are cheaper than I’ve seen this decade. If you look at companies like Goldcorp Inc. (TSX:G; NYSE:GG) and Barrick Gold Corporation (TSX:ABX; NYSE:ABX)—the big boys out there—these companies are trading very close to where they were in 2006 and 2007 when gold was at $600–$700/oz. Today, we’ve got nearly double that gold price.

These companies are making huge profits and generating a lot of cash flow. I think there’s going to be a day when people suddenly wake up and say, “Wow, look at the value!” I think part of the driver will be new investment from dividend-seeking individuals, dividend funds and value funds. If you look at dividend funds, they never held a gold stock because, during the 20-year bear market in gold, most gold companies weren’t paying a dividend and those that were certainly weren’t increasing it. Today, companies like Barrick are actually increasing their dividends and have the potential to do even more. I’m looking for that tipping point and I believe it will come.

TGR: In a June 2010 interview with The Gold Report, you said gold would go above $2,000/oz. based largely on further paper currency debasement. But, supply/demand fundamentals don’t seem to support a higher gold price. A recent World Gold Council report said total investment demand for gold fell about 14.3% in 2010 and scrap supply continues to pour in at record levels, reaching about 1,650 tons that year. Obviously, social unrest in countries like Libya and Bahrain continue to push gold higher based on the safe-haven bid but does it concern you that total gold demand is, in fact, retreating?

CO: It doesn’t, actually. If I thought that was a long-term theme, it would be a big concern. But, having said that, I think you have to look at the numbers and make sure you put them in proper perspective. Investment demand is often a plug for all the other numbers that go into the supply/demand numbers. Consequently, many numbers actually don’t get included in that final demand number.

Let’s look at it in a slightly different way. Gold mine supply today is roughly 2,650 tons. We use the numbers from Gold Field Minerals Services and if you look at investment demand over most of the last decade, basically it’s been flat. You didn’t really get significant investment demand until 2009 when, by GFMS’ calculations, it was around 1,400 tons. Now going from practically nothing to 1,400 tons when mine supply is only 2,500 is a huge difference.

If you look at 2010, GFMS has an investment demand number of 967 tons. Is it a significant decrease? On first blush it seems quite significant, but it’s the second-highest level of investment demand in the last decade. The trend is clearly up. I’ve been reading reports that Chinese and Indian citizens are increasing their gold purchases at record levels. When I look at the other things around me, they suggest that we are more likely to see higher demand in the future. When you look at sales from the U.S., Canadian, Australian or any other Mint, you’ll find most of them are running at record production levels due to individuals buying coins.

TGR: And central banks have stopped selling their gold, too.

CO: Yes, that’s another good example. If you go back to 2005, the central banks, as a group, were selling about 600 tons of gold annually. When you have mine supply at 2,600 tons, and then you get another 600 tons on top of it, there’s a fair amount of gold out there. Today, those 600 tons are no longer being sold into the market. And we are seeing central banks actually buying gold.

In 2010, we saw India announce that it added 200 tons. We’ve seen some of the smaller banks buying, too, like Mauritius, Sri Lanka. We’ve seen China indicate that it’s been buying over the last several years, though, the country doesn’t officially report that on a regular basis. And a Russian minister said the country was looking at adding about 100 tons of gold on average each year to its reserves. So, a lot of the anecdotal evidence suggests that investment demand is actually increasing.

TGR: Let’s go back to the Middle East for a moment. The unrest there has pushed gold up about $100 over the past couple of weeks. Have the ongoing issues there or in northern Africa caused you to change your investment strategy in the near term?

CO: One slight difference is that I’ve become a little more cautious on Africa in general. Many gold companies have exposure to Africa. The speed at which some of these countries are destabilizing has caused me concern. I think that most of the countries where mines operate will be fine; but having said that, I am cognizant there could be some nervous investors who decide they want to reduce their ownership in those areas. I’ve taken some profits from those areas and redeployed them back into what I deem are safer jurisdictions like North and South America.

TGR: Do you believe what’s happening in northern Africa and the Middle East is the “mania” catalyst the gold bugs have been seeking?

CO: Generally speaking, most crises pass and get resolved. Frequently, you see the gold price run up only to fall back down the next day. I try to block out these events because often they don’t really change the long-term value of gold. The concern, however, would be if this becomes more systemic and global in nature. In that case, I certainly think it would have a larger, more-lasting impact. But, again, I think you want to look at how destabilizing this is on Europe and the U.S. If it spreads to Saudi Arabia, that would cause me great concern.

TGR: Well, King Abdullah recently announced $37 billion in appeasement money over the next few years in an attempt to stave off any unrest.

CO: That’s a nice way to put it. The fact that they’re actually doing that leads one to believe that these guys must be getting a little bit nervous about the situation.

TGR: You mentioned safe jurisdictions like North and South America. Is there a price premium on companies with gold projects in those jurisdictions due to the unrest elsewhere?

CO: Over the last decade, there’ve been periods when I would say there was a price premium on North American projects and some of the other countries have versus those in other less-desirable or more-risky areas. I think we may be embarking upon that situation once again, but we haven’t seen a huge movement occur yet. As I said, I’ve started trimming and moving more money out of my African countries. Again, that’s commensurate with the discount rate that should be used for different countries and their associated risks.

TGR: Are you still finding value in companies with projects in North and South America?

CO: When I look at the basket of opportunities in North America, some companies are expensive and some are dirt cheap. I’m finding lots of opportunities to add in the North American space.

TGR: What are some juniors with projects in North America that you believe can be had at good value?

CO: There are companies like San Gold Corporation (TSX.V:SGR); we’re big shareholders of San Gold. We’re also big shareholders of Kirkland Lake Gold Inc. (TSX:KGI). The company is producing 100,000 ounces (100 Koz.), has the potential to triple that production and is trading at dirt-cheap valuations relative to most of the other companies out there.

TGR: And Kirkland Lake’s conducting more underground drilling so it could further increase its resource, too.

CO: Yes, I visited the property last summer and looked at some of the new underground drill platforms. I remember asking about how much drilling the company would be doing from this one particular platform. Kirkland said, “Well, we’ve got this new area that’s never been drilled before. It’s right beside our existing underground mine. We’re going to drill it for two or three years.”

Just this past month, the company announced some of the first drill results from that campaign. It’s very early stages but it looks like Kirkland Lake will be adding more resources to an already very significant resource, which would increase its ability to expand production.

TGR: What are its cash costs there?

CO: The cash costs are a little high, about $700/oz. right now. The company’s trying to bring it down to a more reasonable level. The precise cash costs for the Macassa mine are $709 in Q111 and $809 in Q211.

TGR: What are some other names that offer value?

CO: Another company I quite like is Osisko Mining Corp. (TSX:OSK). Osisko has had a great run up recently as it’s moved toward production. My understanding is it’s just about to start running the mill and producing gold.

TGR: Did it alarm you when Goldcorp sold off its 10% interest in advance of production?

CO: No, I think Goldcorp has lots of opportunities. I think it would’ve liked to have gotten Osisko at a dirt-cheap price because Osisko has done a great job of building up the company—not just with the new Malartic mine in Quebec, but the company also bought Brett Resources Inc. and its Hammond Reef project, which it’s drilling extensively. Osisko also got the Duparquet joint venture (JV) with Clifton Star Resources Inc. (TSX.V:CFO).

TGR: And you still have a position in Clifton Star, right?

CO: Yes, I do hold some Clifton Star, as well. We trimmed our position in Osisko earlier this year. It had done very well but we’ve seen the company consolidate over the last number of months. As it’s done further drilling and gotten closer to production, I think the story has improved. You’re looking at a company that’s trading in the low double digits. I think this company has the potential to be one of the premier emerging gold companies, and it’s Canadian.

TGR: You also have a position in Fire River Gold Corp. (TSX.V:FAU; OTCQX:FVGCF). Why do you own shares in Harry Barr’s company?

CO: We invested in Fire River Gold almost two years ago. I remember when Harry came in to talk to me in 2009, talking about an asset he bought from a company that was in financial distress. Many companies were caught off guard by the magnitude of the 2008 correction.

TGR: Was he talking about St Andrews Goldfields Ltd. (TSX:SAS)?

CO: Yes. He managed to come up with $5 million to buy the Nixon Fork Gold Project and plant. Harry bought those assets for a song. It’s going to be small scale, but Fire River will be starting production in the next several months. It’s got cash on the balance sheet, no debt and some of the highest-grade ore out there—it’s nearly 1 oz./ton. And it’s planned further drilling programs.

TGR: Some of that is to better understand the geology of the deposit because St Andrews didn’t really understand the deposit, so it got into some issues with the recovery circuit and dilution.

CO: Yes, mining is a very tough business. You’ve got to find the gold, and then extract it economically—that’s often quite a challenge. But Fire River has all the parts. It really comes down to execution now.

TGR: Harry certainly has the financing connections and the experience to lure the kind of expertise needed to bring Nixon Fork to production. Another project in Alaska that you have a position in is Kiska Metals Corp.’s (TSX.V:KSK) Whistler project.

CO: Yes, I took a position in Kiska last year. I always liked the management team; I’ve known them for quite some time. It was probably around the Prospectors & Developers Association of Canada (PDAC) conference last year where I met up with them again and looked at the Whistler Project and thought that looks like a very interesting project. One of the issues I had at the time was that Rio Tinto (NYSE:RIO; ASX:RIO) had a back-in right to the project.

TGR: Not anymore.

CO: Not anymore. I talked to management several months later to schedule a follow-up meeting. This was around the time that Rio Tinto looked like it was about to walk away. As soon as I recognized that it would no longer be involved in the play, I basically decided it was time to become a shareholder.

Kiska has been drilling up the Whistler Property. I think it’s got just over 5 million ounces of gold equivalent (Moz. Au Eq.) there now. It’s moving on to drilling some of the other peripheral targets where it has some discoveries. That drilling will ultimately decide whether or not Whistler is economical. One thing to remember is that a lot of these plays in Alaska are very remote, so infrastructure is always something you have to consider. Barrick has been looking at using a natural gas pipeline as part of the development model for the Donlin Creek copper-gold project in Alaska.

TGR: That’s a 50/50 JV with NovaGold Resources Inc. (TSX:NG; NYSE.A:NG), right?

CO: That’s correct. If Barrick builds that nat gas pipeline, basically, it would go right by Kiska’s Whistler property. If that happens, Kiska would get some pretty good infrastructure put into place, which would really be a big win for the company—one of those things that’s outside of Kiska’s hands—but, I’m keeping a close eye on what Barrick does.

TGR: Do you see Kiska as a takeover target, Charles?

CO: At this point, I don’t expect it to be taken over. Should the natural gas pipeline get the go-ahead, then I think it would definitely be a takeover target.

TGR: Could you give us one more name before we let you go?

CO: I hate to give you one. Can I give you a whole bunch? We haven’t really talked about South America. I always like to give a basket of names because they all have different risks. The companies in which we have significant positions are, alphabetically, Belo Sun Mining Corp. (TSX.V:BSX), Guyana Goldfields, Inc. (TSX:GUY), Magellan Minerals Ltd. (TSX.V:MNM), Minera Andes Inc. (TSX:MAI; OTCBB:MNEAF) and Torex Gold Resources Inc. (TSX:TXG).

TGR: Let’s start with Belo Sun with a Brazilian gold project where it’s been busy proving up ounces.

CO: Yes, it’s got north of 2 Moz. One of the things that’s been a really nice surprise this year is that as Belo’s done some infill drilling it’s actually been able to increase the grade of the resource. What you often see with a rising gold price is that companies use a lower-grade resource. It’s nice to see that going the other way.

TGR: You mentioned Guyana Goldfields. Do you see an opportunity for Sandspring Resources Ltd. (TSX.V:SSP), which also has a gold project in Guyana, to join forces with GUY?

CO: I don’t think the two will join forces. You’ve got two very different management teams. Guyana Goldfields looked at Sandspring’s properties before Sandspring had even acquired some of them. It would probably make sense to have all these properties under one umbrella, but I doubt it will happen. At some point, I expect somebody will take out Guyana Goldfields. One of the logical buyers would be a company like IAMGOLD Corporation (TSX:IMG; NYSE:IAG), which already has a presence there. But if Sandspring continues to build ounces, and it’s had some great drilling success to the north where it added quite a few ounces, then maybe it, too, could get acquired at some future point.

TGR: You mentioned Minera Andes, too. Tell us about that one.

CO: Minera Andes is Rob McEwen’s company that has the JV with Hochschild Mining (LSE:HOC).

TGR: And Mr. McEwen is Minera’s largest shareholder.

CO: Yes, McEwen’s the largest shareholder at 33%. Rob has done very well for those people who’ve gone along with his investments. I think he’s done a great job. Minera Andes has a couple other assets besides the silver play. It also has the Los Azules copper-porphyry deposit, which probably should be spun out. The other thing that gets me excited is that Goldcorp recently bought Andean Resources for about $3.5 billion. Rob McEwen has all the properties surrounding that area.

TGR: Yes, he’s hoping some of Andean’s high-grade mineralized structures run onto his claims. And there is some evidence of that.

CO: The company will certainly get some. The question always is: Will it be economic? Will the company find enough? And you can’t do that without putting in the proper legwork.

TGR: But Goldcorp’s never going to take out a Rob McEwen majority-owned company.

CO: I’m going to bite my tongue on a comment right now.

TGR: Right. Well, what should we expect in terms of the near-term gold price?

CO: I’m still extremely bullish on the gold price. As I said, I expect gold to be at $2,000/oz. in the not-too-distant future. Otherwise, I will have to shave all the hair off my head.

TGR: Back in April 2008, you made a statement that gold would reach $2,000/oz. in four years and if it didn’t you would shave your head. Are you still standing by your statement and is the deadline April 16, 2012?

CO: Yes. My view is really based on the fact that anywhere I look, I see governments continuing to print money left, right and center. I see deficits continuing to spiral out of control. I think governments are helpless to do the right thing, which is cut spending, because if they cut spending they get voted out of power. Without any other answers, they ultimately decide to print some money. That’s easy enough. Nobody complains about that.

TGR: Could gold eclipse $1,500/oz. in the near term?

CO: I wouldn’t be at all surprised to see gold break out, make a new high and take out $1,500 in a very short period of time.

TGR: We’ll look forward to that. Thank you for talking with us today, Charles.

Bringing more than 21 years of experience in the investment industry, Charles Oliver joined Sprott Asset Management (SAM) in January 2008 as an investment strategist with a focus on the Sprott Gold and Precious Minerals Fund. Prior to joining SAM, Charles was at AGF Management Limited, where he led the team that was awarded the Canadian Investment Awards Best Precious Metals Fund in 2004, 2006 and 2007 and was a finalist for the best Canadian Small-Cap Fund in 2007. At the 2007 Canadian Lipper Fund awards, the AGF Precious Metals Fund was awarded the best 5-year return in the precious metals category, and the AGF Canadian Resources Fund was awarded the best 10-year return in the natural resources category.

Join the forum discussion on this post - (1) Posts


Leave a comment   Financial Markets   , , ,  

Is Bhutan's GNH experiment a success or failure?

By Winton Bates, on March 4th, 2011

This charming little video provides some history of the concept of Gross National Happiness and its application in Bhutan.

It is amazing how much passion has been aroused by Gross National Happiness outside Bhutan. In August last year Jeffrey Sachs, a distinguished development economist, suggested that western countries should follow Bhutan in adopting Gross National Happiness as a national objective. His concern is that trends toward ‘hyper-consumerism’ have accelerated in the United States in recent decades and that this is destabilizing social relations and leading to aggressiveness, loneliness, greed, and over-work to the point of exhaustion. It is not self-evident that Sachs’ claims are true – and he provides no evidence in support of them. More importantly, it is not clear how he thinks adopting Gross National Happiness as a national objective in western countries would lead to better outcomes. I fear that the remedy he has in mind for alleged hyper-consumerism is additional paternalistic interventions by governments to further remove from individuals the responsibility to control their own lives.

On the other side of the canvas, Julie Novak, a free market liberal whose views I normally respect, has described Bhutan’s adoption of the GNH objective as a failed experiment. Julie’s reasoning seems to be that the experiment must have failed because Bhutan has a relatively low per capita GDP level and its ratings on various social indicators are also relatively low. However, I doubt whether many people would claim that adopting GNH as an objective can immediately lift the average well-being of people in a low-income country like Bhutan to a level comparable to that attainable in the most affluent countries. That would be just as silly as claiming that an increase in economic freedom can convert a low-income country immediately into a high-income country.

It makes more sense to compare Bhutan’s performance on various economic and social indicators with that of other low-income countries. The comparison I made between Bhutan and India, here, suggests that Bhutan has performed reasonably well. For example, Bhutan’s average economic growth rate of around 8 per cent per annum over the decade to 2007 was substantially higher than that for India.

It seems to me that it is far too soon to come to a judgment about Bhutan’s GNH experiment, particularly since it is only in recent years that a serious attempt has been made to measure GNH and there is little evidence to suggest how this information will actually be used in policy development. I concluded my research on this topic for APEL by suggesting that it is not yet clear to what extent the judgments implicit in the methodology reflect the values of the people of Bhutan on such matters as the dimensions of well-being that are important and the weighting that should be given to each dimension. One of my concerns is that the weight that people living in urban centres may wish to give to resilience of cultural traditions may differ substantially from that of people living a traditional rural lifestyle. It would not make sense to claim, for example, that the happiness of any individuals can be enhanced by forcing them to adopt traditional lifestyles if they would prefer more cosmopolitan lifestyles (or vice versa).

Join the forum discussion on this post - (2) Posts


One comment   Economic Theory   , , ,  

Economic Events on March 4, 2011

By B.P.T., on March 4th, 2011

At 8:30 AM EST, the Employment Situation report for February will be announced, and the consensus for non-farm payrolls is an increase of 200,000 jobs compared to a gain of 36,000 in the previous month, the consensus for the unemployment rate is that it will increase by 0.1% to 9.1%, the consensus average hourly earnings rate is expected to increase 0.2%, and the consensus for the average workweek is 34.3 hours.

At 10:00 AM EST, the Factory Orders report for January will be released.  The consensus is that there was an increase of 2.0% in orders from the previous month.

Join the forum discussion on this post - (1) Posts


Leave a comment   U.S. Economics   , ,  
« Newer Entries  
  Older Entries »