In this exclusive interview with The Gold Report, Doug Groh, senior analyst with Tocqueville Asset Management, likens the gold price to a mirror that reflects peoples’ concerns about global economic and political events. And he likes what he sees in the long-term prospects for gold equities.
The Gold Report: The situations in Greece, Ireland, Spain and Portugal are proving the unsustainability of deficit financing and are effectively killing the euro as a safe haven currency. As these worries escalate, have you seen more money come into your fund?
Doug Groh: Yes, we’ve seen funds flow into our gold fund product, but that’s been the case over the last year or so. I attribute it primarily to the rise in the gold price. Some investors see gold as an attractive alternative to other investment vehicles and they’re buying the gold ETF (exchange traded fund) and gold equities.
Gold bullion itself has outperformed equities this year. Some people feel there’s security in owning gold, but it seems they’re reluctant to buy the equities because of the risk. In addition to the market and equity risks, mining companies have risk—whether operational or political—with regard to developing their deposits.
TGR: What’s the Tocqueville Gold Fund worth right now?
DG: As of June 27th, the fund is valued at about US$2.4B, with about 6% of the fund in bullion.
TGR: Are you buying bullion now?
DG: No. We’ve been pretty steady in terms of the number of ounces in the fund for five to six years, although it has appreciated in value over the years. In percentage terms, it can go up or down relative to the equity positions in the fund. We have that position because we feel that, as a gold fund, we should own gold as well as gold mining equities. It’s not something we necessarily trade; it’s just a core position for us.
TGR: In 1980, about 22% of all financial assets were invested in gold-related instruments. Today, estimates put the current global investment at around 3%. Why aren’t more investors buying into the thesis that gold will only go higher as paper currencies or fiat currencies lose value?
DG: We think gold is a unique investment vehicle. You can look at gold as a mirror that reflects concerns about a number of factors around the world: uncertainty in Europe, the Arab Spring, U.S. monetary policy and debt, for example. When you analyze it, you might conclude that there’s no real utility to gold. In fact, gold’s utility is that investors see it as an alternative asset. Gold collectively expresses the notion that money isn’t worth what it used to be.
TGR: People are starting to whisper about contagion, much like what happened in Thailand in the mid- to late-’90s and spread to other Asian economies. Do you see contagion as a real risk?
DG: It seems appropriate that one consider that risk in one’s investment analysis. Greek debt is owned by a number of European banks; banks that also own debt from Spain, Portugal or Ireland. If Greece defaults, restructures its debt or cannot meet its obligations, its debt will be worth a lot less. This would put pressure on the balance sheets of those institutions holding Greek debt.
TGR: Would that spread to the United States?
DG: I think it’s certainly possible. If there’s a problem with debt in any part of the world, people will make comparisons. That’s where I think there’s a real risk. People would start to say, “If it could happen there, it could happen here.” That kind of mentality is what concerns me most. As a result of that mentality, you’re going to see the markets start to price that probability into the market. In essence, you’re already seeing that. I believe that’s why we’ve had a pretty tough couple of months in the equity market.
TGR: Let’s turn back to gold. Does the Tocqueville Gold Fund invest in junior mining companies that are strictly exploring for precious metals?
DG: We have exposure to gold mining equities across the spectrum, from those that are exploring and aren’t even mining yet to those that are developing and those that are actually producing gold.
Our approach is to have about a 35% weighting in smaller cap, exploring/developing-type companies. It’s a little hard to characterize because some of the explorers are actually developing. We think of them as exploring/developing companies. They comprise about a third of the fund. Others are producing cash flow and trying to become bigger. One can consider those as major producing companies and they account for another 40% to 50% of the fund
TGR: And the fund was up about 58% in 2010, correct?
DG: Net of fees, the Tocqueville Gold Fund was up 53.33% during 2010, which compares to the Philadelphia Gold and Silver Index, which was up 35.94% during 2010.
TGR: That’s very impressive. In February, you told us that you were “cautious about investing new funds into gold equities.” Is that still the case or has the pullback in gold equity prices created a buying opportunity?
DG: At the end of last year and beginning of 2011, many of the equities that we held had performed very well. It seemed as if the market was well ahead of itself. Year-to-date, however, gold equities in general have not performed well and in particular, since about the time Barrick Gold Corp. (TSX:ABX; NYSE:ABX) announced its plans to outbid Minmetals Resources Ltd. (HKSE:1208) of China for Equinox Minerals Ltd. (TSX:EQN; ASX:EQN). The gold mining equities in general are down relative to gold, which is up. That spread between the rising gold price and the decline in gold equity values, in our view, has created a very good investment opportunity.
At this time of year, you’re probably best served by adding more aggressively to your gold equity portfolio, I believe. Seasonally, we generally see a low valuation point this time of year. The second half of the year, particularly September through November, has seen good performance for gold equities over the past several years. In that regard, now may be an appropriate time to get positioned for that.
TGR: Do you still believe in a dollar-cost-averaging approach to buying equities?
DG: Yes. If you’re not working full time on the gold space, the best way to invest, I think, is to average the cost of the investment over the course of the year. If you’re paying close attention to the gold equity market, you can appreciate that these values don’t reflect what’s going on in the gold price. There can be some good buys in the space. And so, for those that have the time and ability to pay closer attention, it makes some sense to take advantage of the attractive values in the current market. However, the discipline of averaging the investment costs over time is also a good strategy.
The gold price is up over US$100 since the beginning of the year. That US$100 is falling right to the bottom line for gold producers, generating significant cash flow. The gold equities aren’t reflecting that cash-flow-generating ability. The margin has expanded, even though costs are up somewhat, but the investor base has lost interest in the cash flow that’s being generated.
A number of catalysts are coming into the market that could reinvigorate investors in gold mining equities. First of all, you’ll see good earnings and cash flow per share for the second quarter. Companies may increase their dividends. That’s an important element to get investors refocused on companies’ profitability, I believe. Additionally, in the latter part of the year, we expect to see more acquisitions.
TGR: Let’s get to some specific companies in your fund. Seven years ago, you bought Osisko Mining Corp. (TSX:OSK) at US$0.50. It’s now trading at around US$14.50. The company recently poured its first gold bar as it entered commercial production at the Malartic Mine in Québec. At the end of the first quarter 2011, about 4.3% of your fund was vested in Osisko. What’s that percentage now?
DG: Osisko is one of our more important holdings; it’s in the top five and is about 5% of the fund. They announced commercial production this week, about a month ahead of schedule. The reports we’re getting say that the plant equipment and operations are working better than planned. The new mine at Malartic is only part of the story. Osisko is developing other assets. They made some acquisitions over the last year or so that will add to their growth profile. The Osisko story isn’t over, and from our perspective, it’s not fully valued.
TGR: One of those assets is the Hammond Reef deposit in northwestern Ontario, which Osisko acquired when it bought Brett Resources in March 2010. Is Osisko going to plow some of the cash-flow from Malartic into Hammond Reef?
DG: That would be the expected business strategy. We believe the Hammond Reef project offers a lot of merit. They’re now de-risking the project by identifying the resource and a mining plan. That should be the best use of proceeds for them. I wouldn’t be surprised if they announce a property or a project acquisition. I don’t see Osisko acquiring another operating company unless it came with a tremendous amount of growth. At this point, I think Hammond Reef is really the next platform for Osisko to grow ounces from.
TGR: Hammond Reef has a 6.7Moz. inferred resource. So that’s not a small project.
DG: No, there’s good life to that project.
TGR: Another one of your holdings, NovaGold Resources Inc. (TSX:NG; NYSE.A:NG), is developing a mammoth project in the Donlin Creek gold/copper project in Alaska. When is NovaGold going to join Osisko as a gold producer?
DG: I haven’t seen their latest timeline. I think it’s quite a few years out. NovaGold has some significant engineering projects to complete, such as power facilities and road work and permitting; permitting being the more important element of de-risking that project. The company has been working to revise a feasibility study for Donlin Creek that incorporates a natural gas pipeline. That study is scheduled for completion during the second half of 2011.
It’s the type of mining project that major companies wish they had their hands on. Yet, the majors seem to be reluctant to build out assets in that part of the world. They’d rather gain copper and gold exposure in the far-off reaches of Africa and the Middle East as opposed to North America.
TGR: I should mention that Donlin Creek is a 50/50 joint venture (JV) with Barrick Gold. A few years ago, Barrick tried to buy NovaGold outright. Do you think that Barrick might try that again as the project develops? After all, NovaGold has 17 Moz. in the proven-and-probably category.
DG: It would seem to make a lot of sense for Barrick to attempt to acquire NovaGold. But, while it may be logical, it’s odd to us that Barrick was divesting its African assets a year ago and is now acquiring African assets to gain copper exposure, when NovaGold’s other major asset, Galore Creek, has a significant copper endowment along with gold and silver. Logic isn’t always the business principle that’s pursued in the mining space.
TGR: Right. The Galore Creek project is a 50/50 joint venture with Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A, TSX:TCK.B), another major. Teck almost went under in the crash of 2008, but it’s rebounded nicely and has good cash flow.
DG: Teck likes to be diversified, and I think would rather share the cost of that project with somebody else. So, I don’t necessarily see Teck making that bid for all of NovaGold. It would have made more sense for Barrick to gain copper exposure by acquiring NovaGold in Alaska than it does for Barrick to acquire copper exposure in eastern Africa and the Middle East.
TGR: NovaGold’s prefeasibility study includes a proposal to build a gas pipeline from Beluga, Alaska to the Donlin Creek project. That would greatly reduce operating costs in terms of fuel and could benefit many projects in the area. Have you begun to examine that as an investment thesis?
DG: The viability of that gas pipeline should be more apparent with the release of the Donlin Creek revised feasibility study; that’s something we’ll have to check as we go through the study. Certainly development into central Alaska with a gas line and fuel source will open up the center part of the country to mineral exploration and development. Kiska Metals Corp. (TSX.V:KSK) is operating not too far from the proposed natural gas pipeline and they’ve reported some very good drilling success. We’ll probably see them broadening their footprint.
TGR: Do you have a position in Kiska?
DG: Yes, we do have exposure to Kiska.
TGR: Kiska expects another resource estimate in 12 to 18 months and is testing new targets at Island Mountain and Muddy Creek this summer. What are you hoping for from those drill programs?
DG: I’d like to see higher-grade results than we’ve seen in the past. I also hope that the geometry of the deposit can improve. As Kiska gains more information, they’ll have a better understanding of the geology and be able to position their drills to define the geometry at both Island Mountain and Muddy Creek.
TGR: Are there any other companies you’d like to talk about?
DG: One of the companies in our top 10 that doesn’t get much coverage is Gold Resource Corp. (NYSE.A:GORO; OTCBB:GORO; Fkft:GIH) in Oaxaca, in southern Mexico. Over the last year, they’ve had a fair bit of success developing their property and initiating production, finding additional ore on their property and generating cash flow. They’ve even started to provide a special monthly dividend. That’s a unique thing for a gold mining company, to initiate production and issue a dividend in such a short period of time.
TGR: Gold Resource put up guidance of 90,000 oz. (Koz.) in 2011. Is the company still on target for that?
DG: It doesn’t seem realistic for this year. Flooding this spring slowed production down. Perhaps by the end of the year they could get to a 90 Koz. per-year run rate.
TGR: The company plans to ramp up to about 150 Koz. in 2012. Is it more likely to achieve that target?
DG: I think the characterization might be at a 150 Koz./year run rate by the end of 2012, as opposed to generating that kind of gold-equivalent oz. during the entire year. It seems reasonable, although I think it’s ambitious. Gold Resource management wants to be ambitious. I think investors have to be a little bit cautious with ambitious statements.
TGR: You were going to mention another company; what is it?
DG: It’s ATAC Resources Ltd. (TSX.V:ATC). The company had two significant discoveries last year in the Yukon. One was a lead/zinc/silver discovery. More importantly, they came across very sizeable gold intercepts with high-grade gold on the eastern edge of their property. Many suggested that it had the look of the Carlin District in Nevada. ATAC is going back into the property there in the Osiris region to drill it off and see what else they can find. I think you’ll hear some good drill results from ATAC in mid- to late-summer.
TGR: Before you go, please leave our readers with a few words of advice on how to play the current market.
DG: One point to keep in mind is averaging costs over time. I think that’s the best way to get exposure. Secondly, it’s important to assess a company’s prospects and to think about a price target before investing. If it reaches that price target, reassess the investment. Third, assess each investment within a certain timeframe. Explorers and developers can take a long time before they realize the value of their assets, whereas producers are not on as extended of a timeline to realize the value of their assets. One has to match one’s expectations with the nature of a company’s operations.
TGR: Doug, thank you for your time and insights.
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 and mineral resources from the University of Texas at Austin and a B.S. in geology/geophysics from the University of Wisconsin—Madison.
The problem of measuring the price
In a liquid and transparent financial market, there is no doubt about the price. There is high pre-trade transparency, because orders are visible on the limit order book, and the best estimate of the true price is (bid+offer)/2. You glance at the screen and you know what is the price.
In a non-transparent market, it is hard to know the true price. Special schemes have to be constructed in order to measure the price. Price measurement does not happen `for free’ as a minor side effect of the very trading process.
Why price measurement matters
As a thumb-rule, the best design for a derivatives contract is to use cash settlement, as long as you can be pretty certain about observing the price. If you can’t measure the price, then physical settlement is better.
Cash settlement is a great technology. But it requires sound measurement of the price.
Measuring price on an OTC market
In an OTC market, information is not visible at a glance. It is dispersed. Many traders have private information about the price, but
you do not. If you could setup an electronic order book, you would see bid and offer at a glance: these are the prices at which a small buy and a small sell transaction could be done. On an OTC market, the dealer has a sense about where the market is, but you don’t. So a natural strategy is that of asking the dealer what he is seeing.
Dealers have positions on the market, so we have to worry about what they say. Standard schemes used involve removing extreme
observations, and thus coming up with a more robust price measure. These schemes have been used in India with the NSE MIBOR (the dominant price measure on the interest rate swaps market), the CMIE measurement of commodity spot prices for NCDEX, etc.
RBI’s measurement of the INR/USD exchange rate
In India, RBI is an information producer in reporting the INR/USD exchange rate at 12 noon. This `official RBI price’ is widely used in
computing the settlement price for cash-settled derivatives on the rupee. It is used for the official closing price on the NSE currency futures/options market, which in many ways is shaping up as the main market where the INR exchange rate is discovered. As an
example, yesterday (an expiration day), the open interest closed at $7.2 billion, and turnover was $6.2 billion.
RBI has not had a formal methodology for how this price is computed and reported.
I have always been a bit uncomfortable with RBI producing this vital information, since RBI has many other goals which can conflict
with the goal of producing high quality information. But for a while, this seemed to be working.
New methodology at RBI
On 1 July, their methodology will change to something new:
- They will choose a random five-minute window from 10:30 to 12:30 (i.e. a two-hour window).
- The reference rate will be computed using these five minutes.
- It will be released at 13:00.
I cannot imagine the logic which led up to this, but I have to say that this is not a good idea.
A two hour window is a lot of time in the life of a market. The RBI reference rate is then no longer a reference rate of the market. It is
a measure of the price at a randomly chosen time in that window. This makes it much less informative.
As an analogy, imagine if the official NSE closing price for Nifty was plucked out of a randomly chosen time from 2:30 PM to 3:30
PM. This would be a lot less informative as compared with the present methodology (value weighted average of all trades from 3 PM to 3:30 PM). It would be even better if NSE were to do a call auction from 3:15 PM to 3:30 PM and report that price as the official closing price. That would be sharp and interpretable.
All cash derivatives settling on the RBI reference rate will now suffer from a new source of uncertainty: the randomly chosen time at
which the price is reported. The cash-and-carry arbitrageur needs to sell his spot position at the exact time at which the derivatives
expire. In the case of the Nifty futures, there is a simple trading strategy which roughly approximates the Nifty closing price: In each
of the last 30 minutes, do 1/30 of your required trade. This is typically automated, i.e. it requires algorithmic trading, but it’s fully feasible.
With a randomly chosen timepoint over a two hour horizon, the arbitrageur does not know when to closeout. This will exert a negative impact on pricing efficiency and thus basis risk on the derivatives market.
If the INR/USD exchange rate is a random walk in trading time, then the 9% annualised volatility maps to a standard deviation of 28 basis points over a two hour horizon. On a base of Rs.45 a dollar, this is a standard deviation of 12.6 paisa. This is quite a bit for traders and arbitrageurs. These small issues have a disproportionate impact in contaminating market efficiency.
But wait. There are some people who know at what time the pricing is done: the banks who are polled! So suppose there is a fixed panel of banks who are asked by RBI. The moment the RBI phone call comes in, they closeout. These banks will find it profitable to do currency arbitrage while others are not. Such shifts in the currency arbitrage constitute a distortion induced by RBI’s new method of price measurement.
RBI needs to cultivate improved knowledge of finance amidst its staff.
This illustrates the importance of legal process in rule-making. If RBI had gone through a formal notice-and-comment process, then they could have heard from external experts and desisted from doing this. I wasn’t able to find a document on the RBI website explaining the rationale for what is being done.
Information production should be done by specialised information organisations. If information is produced by people who have other conflicting interests, then such sub-optimal decisions are more likely to arise.
Alternative information producers, such as Reuters, should leap into this opportunity by producing a better INR/USD reference
rate. FEDAI already has an alternative reference rate. We should all switch away from the RBI reference rate towards alternatives.
Unfortunately, many people in the trade are fearful of the RBI and would not evaluate alternatives rationally. This tells us two
things. First, RBI needs to be enveloped in the rule of law so that there is no fear of RBI on the part of market participants. Second,
RBI should not be a producer of information. As long as two private agencies are producing INR/USD reference rates, the decision in the derivatives trade about what information measure to use will be based on technical merits alone. If someone then tries to come up with a scheme where a randomly chosen time over a two hour window is used for the measurement, his market share will go to zero.
At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 420 ,000 new jobless claims last week, which would would be 9,000 less than the previous week.
At 9:45 AM EDT, the Chicago PMI Index for June will be announced. The consensus index value is 53, which is 3.3 points lower than last month, but is still above the break-even level at 50.
Also at 9:45 AM EDT, the weekly Bloomberg Consumer Comfort Index will be released, providing an update on Americans’ views of the U.S. economy, their personal finances and the buying climate.
At 10:30 AM EDT, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.
At 4:30 PM EDT, 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 EDT, 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.
Uranium and potash prices seem to be inversely correlated lately: As potash prices reach their highest levels, uranium prices have suffered. But Richard (Rick) Mills, host of Ahead of the Herd online and editor of the Ahead of the Herd newsletter, believes the prospects for both industries are bright. In this exclusive interview with The Energy Report, Rick explains why the U.S.’ commitment to nuclear power and even biofuels is helping to propel both markets.
The Energy Report: German Chancellor Angela Merkel recently decided to shut down the country’s nuclear reactors that began operating prior to 1980. Germany will ultimately disband its nuclear energy program in favor of gas and wind power following the fallout from Japan’s nuclear disaster in March. Meanwhile, Japan is also attempting to lessen its dependency on nuclear power. How has that disaster permanently changed the uranium market?
Rick Mills: It’s a short-term hiccup and it’s probably presenting us with one of the greatest buying opportunities for carefully selected uranium stocks that a retail investor can get. The global nuclear renaissance that was underway in early 2010 was happening for specific reasons: concerns about climate change, reducing carbon footprints, energy security and the rising cost of fossil fuels. And then the disaster hit. It gave pause to the renaissance, but none of these reasons have gone away.
Germany’s kneejerk reaction shut seven of its nuclear reactors. They won’t be opened again. Its other reactors will also be completely mothballed by 2022. But the thing is that in 2002 Germany’s center-left coalition enacted a law to phase-out nuclear power. Last autumn, Merkel’s center-right coalition government decided to extend the lifetimes of the country’s 17 reactors by an average of 12 years. That decision was based on a judgment that Germany could not meet its power demand using only natural energy sources, such as wind and solar. The country doesn’t have abundant natural gas reserves. So, I find it pretty ironic what’s happening over there. I think Germany may suffer when it finds it can’t maintain its manufacturing competitiveness. Germany is now burning more coal, and already buying more nuclear power-generated electricity from France and the Czechs, who use the old Soviet-style reactors.
TER: There’s a lot of talk right now about thorium replacing uranium as the fuel in nuclear reactors. These reactors could use thorium, which is much more stable than uranium, and roughly performs the same function. Do you think that thorium will ultimately replace uranium?
RM: Ultimately, but we’re 35 to 40 years away from incorporating that technology. Uranium’s got a long way to run. I believe thorium will be the answer one day, but not for several decades at least.
TER: What about the U.S.? It has some reactors slated to come onstream over the next 5 to 10 years. Do you think that the U.S. is going to follow suit with Germany?
RM: The U.S. is going to ramp up its nuclear power. On April 21, the U.S. Nuclear Regulatory Commission renewed the operating license for the U.S.’s largest atomic plant, the Palo Verde nuclear generating station in Arizona, for 20 years. The U.S. Department of Energy just dedicated a new research facility on May 3. The U.S. is accelerating the advancement of nuclear reactor technology. It’s studying the performance of light water reactors and developing highly sophisticated modeling that will help accelerate upgrades at existing nuclear plants.
That doesn’t sound like the U.S. is in any way, shape or form going to cut back. As a matter of fact, U.S. Secretary of Energy Steven Chu just said nuclear energy is the nation’s largest source of carbon-free power and it is an important part of the U.S. energy mix moving forward.
Uranium supplies are going to get very tight. There’s going to be fierce competition for available material in both the spot and long-term markets. Investors should be looking at uranium-focused juniors with money in the treasury. We’re being set up for the perfect storm in uranium.
TER: Since the disaster at the Fukushima plant in Japan, the spot price for uranium has fallen to about $50/lb. from around $73/lb. in early March. Many junior uranium miners and explorers have seen their share prices fall dramatically since then, too. What are some companies that you think offer a lot of value as a result?
RM: Uranerz Energy Corp. (TSX:URZ; NYSE.A:URZ) is one of the best uranium companies out there. The management is top-notch. These guys wrote the book on in-situ leach mining.
Uranerz is going to be included in the Russell 3000 Index again. If you want to see something interesting, pull up a chart from June 2009 when it was included on the Russell the last time. Funds that track that index have to include these new additions. We’re talking about an awful lot of money. It’s going to be interesting to see what happens to Uranerz’ share price as this becomes common knowledge.
Uranerz is waiting for its final permit to start well field construction and build its production facility. Currently, the company has $45M in the treasury; that’s $0.60 a share. Costs to get into production are estimated to be $35M, so the company has some money for contingencies. I expect Uranerz to be in production in 12 to 15 months. Currently, two drill rigs are performing exploration drilling. Uranerz has identified over 483 kilometers (km.) of alteration-reduction trends on its project areas which cover 38,000 hectares. Uranerz has explored only 15% of the identified trends. One drill is doing delineation drilling for the construction of the well fields.
TER: We’re talking about the Powder River Basin Project in Wyoming?
RM: That’s right. The Nichols Ranch project is expected to produce a maximum of 2 Mlb. of yellowcake annually. Initially, the project is targeting 600,000 to 800,000 lb. per year. The company has long-term offtake agreements signed for a portion of production with two major U.S.-based nuclear operators, including Exelon Corp. (NYSE:EXC). The U.S. produces 27% of the world’s nuclear power from 104 nuclear reactors—these reactors use 50–55 Mlb. of uranium a year but the U.S. only produces 4 Mlb.
Uranerz is a company that has its act together and is definitely sitting at a sweet spot for investors. While there’s a little bit of blood in the streets right now concerning uranium, people should be looking at this sector.
TER: That production could be coming on-stream right about the time when uranium prices could be rebounding.
RM: The spot market is definitely going to tighten up before then and people are going to be looking for long-term contracts. This setback, if anything, makes the market stronger. Prices will eventually move higher.
TER: Potash has somewhat of an inverse relationship to uranium prices. Earlier this month, corn futures reached an all-time high, which ultimately means higher food prices for all of us. It also means there’s a greater need for fertilizer and that bodes well for junior mining companies looking for potash. Do you believe that potash prices will remain as high as they are now?
RM: Yes I do and going higher. Food and how we grow it are going to be dominant investment themes for decades to come. Our population increases geometrically. Our food supply can only increase arithmetically. We’ve got major problems in addition to our growing population. One of the biggest threats we are facing is the loss of arable land that was used for food production. Land is being used for biofuels, topsoil is being eroded away and the agricultural land base is being paved over. We’re destroying our freshwater aquifers. But world population growth and three billion people climbing the protein ladder are the elephants in the dining room. Tonight, 220,000 new mouths will need to be fed at the dinner table.
TER: How does potash mining differ from gold or copper mining?
RM: Unlike other resource plays, potash does not have a cycle. Demand is always going to be there, which makes potash an excellent play in a long-term agricultural commodities bull market. Potash markets are never disrupted by political interference. Food shortages will always trigger social and political instability, such as the riots in the Middle East and Africa. All governments fear a hungry populous.
Companies like Agrium Inc. (NYSE:AGU) and PotashCorp (TSX:POT; NYSE:POT) have very solid bottom lines, but they are mature companies. Investors should start moving down the value chain to junior companies with big potash resources that are going to create value for their shareholders.
TER: What companies fit that bill right now?
RM: We’ve been following three companies on Ahead of the Herd for quite some time now.
Verde Potash (TSX.V:NPK), formerly Amazon Potash, is putting together a fairly large project in Brazil. By the time it finishes, I wouldn’t be surprised if it had enough potash to supply the Brazilian market, the largest potash market in the world, for 30 years.
The company also has phosphate at the Apatita Project and should have a resource calculation out by the end of the third quarter. It is also planning drilling on five other targets bordering their thermal potash product, the Cerro Verde. Recent news suggests they will have a limestone resource as well. This is a company that is definitely in the right area at the right time with the right resources.
The thing about this company that most people don’t realize is that if the potash price is $430/t in Saskatchewan, Canada, it would take $100/t to reach a port in Brazil. Then it would take another $100/t to get it to a blending facility near farmers. The price that Verde’s competing against is not $430—it’s $630—they are already close to that blending facility. According to the last test the company did on its product, thermal potash is about 17% to 19% more effective than KCI, or typical potash.
TER: Verde’s chairman, Peter Gundy, was an executive with PotashCorp. He certainly has some significant background in the potash mining business. He also has the right connections to get the money necessary to bring this company forward.
RM: Absolutely true, and let’s not forget to mention the tremendous efforts of President and CEO Cristiano Veloso, who has done an amazing job pulling it all together, and VP of Corporate Development Jed Richardson, who has been there from day one. Also the government of the Brazilian state of Minas Gerais has signed a memorandum of understanding regarding support for potential financing.
TER: What’s the next name you’re following on Ahead of the Herd?
RM: Western PotashCorp (TSX.V:WPX) has done really well for its shareholders and we were early into this one as well. It’s adjacent to BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) and Agrium’s exploration permits, and within 13 km. of PotashCorp’s Rocanville facility. The company has 34 Mts. of indicated potash with 245 Mts. of inferred.
Pat Varas and his team have done an exceptional job advancing this project so quickly. The company is doing a prefeasibility study to be completed in the fall, and is planning to start on its feasibility study in August. That’s an amazing amount of engineering going into the project right now. WPX has a memorandum of understanding signed with the city of Regina for water. It’s doing environmental studies and community visits.
Western’s land acquisition program has now successfully secured over 2,550 acres at the company’s preferred plant site location. Securing the plant site location is an important aspect of the ongoing feasibility process as the environmental and regulatory approval processes and project schedules are dependent on it.
TER: Is it a takeover target given its proximity to PotashCorp?
RM: It could be. One of the majors might want to take it and put it on the shelf; the Chinese or Indians have to be interested. I think that’s very possible.
TER: Is there a point where juniors get on the radar screen of larger companies and wake up the sleeping giants like BHP Billiton?
RM: Definitely. I think the major players, the BHPs of the world, are probably looking for at least a prefeasibility study. They want to see solid numbers—capital expenditures and costs of production, net present values and internal rates of return that actually have solid studies behind them. None of these majors have a history of moving too quickly. They’re trudging behemoths that do things at their own pace and need surety in a deal.
TER: There was one more potash company you wanted to talk about. What was that one?
RM: Encanto PotashCorp (TSX.V: EPO) in Saskatchewan, Canada. What makes this one interesting is that they are collaborating with several First Nations groups to develop projects on their lands.
TER: In fact, Encanto was developed with that in mind, right? It was developed with the idea that it would work with First Nations to develop these resources.
RM: Absolutely. The first project Encanto started was developing an 80-to-100-year resource on the Muskowekwan’s land. The goal is to develop a producing mine as quickly as possible. EPO’s upcoming preliminary economic assessment (PEA) remains on schedule to be released in the first half of August. The PEA is designed to determine the most economical method for potash extraction and will make a recommendation on a solution or conventional mining operation.
It hasn’t had the success in the market that Verde and Western have seen because the necessary reserve vote on continuing with development of the project hasn’t happened yet and that creates uncertainty. The vote will happen in the fall; it’s scheduled for late September.
TER: The whole operation hinges on that vote?
RM: Yes. Newly elected Chief Bellerose ran on a pro-potash forum. The majority of candidates also ran on a pro-potash forum, as did all eight successful councilors. I firmly believe it’s going to be passed. But there seems to be some hesitation in the market over it.
TER: If the vote does go through as expected, we could we see a bump in the share price. It’s at $0.23 right now.
RM: The band has approximately 1,050 eligible voters, many of whom don’t live on the home reserve. For the vote to be considered a legal vote, at least 51% of eligible voters must cast a vote. For the vote to be successful, at least 51% of those voting must cast in favor. If a sufficient number of voters don’t participate in the first vote then the vote is considered a failure; a second vote will be held on the home reserve 35 days after the first vote. For the second vote to be successful, a simple majority is required from those who vote. In an effort to ensure that all band members are fully aware of the benefits offered through the partnership with Encanto, Bellerose is holding open sessions in Regina, Calgary, Winnipeg, Saskatoon and Edmonton.
There are really two drivers for the stock: the vote and getting the Home Reserve Lands, which will double the land acreage (and potentially the resource). It’s been a long haul, but I believe that this is going to be a successful company and we’re going to see it move forward.
TER: What are some things that investors should keep in mind when investing in potash companies?
RM: It’s a long-term investable trend and with surging prices for agricultural commodities, farmers are looking to boost crop yields, opening the door for fertilizer makers to raise prices. There might be temporary weaknesses, but everybody has to eat and there are 220,000 more of us at the dinner table every night. So there are compelling reasons to be looking at these companies. Also, these are not cheap mines to build. The companies need management teams capable of going out there attracting the interest from the institutions and raising the money necessary (all three companies I mentioned do). Their neighborhood is also important. Who’s in the neighborhood? Could a company be a takeover target?
TER: Thanks, Rick.
Richard is host of www.Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 300 websites, including: The Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Uranium Miner, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, and Financial Sense.
Whether true or not, just the fact that this is someone’s perception out there is pretty amazing. From the Philadelphia Inquirer today is a young diasporan’s comment: “”If I was in Pittsburgh, I would have a guaranteed job,” When was the last period anyone even thought such a thing, let alone said it out loud and for the record?
Just a conincidece that story runs on the say we get the monthly data dump which is showing the regional unemployment rate ticked up a bit. The curious thing about the regional unemployment rate the last few months is that the trend has diverged from the state’s unemployment rate. Pennsylvania’s unemployment rate has trended down, while Pittsburgh’s has trended up. That is unusual over recent years. What’s it mean? If not a sample error issue that will converge, it is worth watching. Still the regional unemployment rate is well below the state and far below the nation. by 2.1 percentage points which is nearly a record.
I’ve been trying to figure if any period before 1970 is comparable to today and it’s a bit hard to compare The lowest recorded unemployment rate for the region since the state began regularly reporting Pittsburgh region labor force data in 1949 I think was 2.3% in November of 1966. But the labor market area back then was 4 counties and if you did any spatial adjustment it would not be so low. Still, even then, with a national unemployment rate of 3.6% the difference was only 1.3% points.
Which all goes back to our quote above. High local employment at 7% or not, people make the best choices they can. Regional unemployment rates in themselves are not very good predictors of population migration, but relative unemployment rates do much better. Things could be great in one location, but if things are even better elsewhere folks will move away. Similarly, things can be bad in one region, but if they are even worse elsewhere folks will move in. So we are at 57 months and counting since the national unemployment rate was lower than the region’s and most of that time by an unprecedented amount. Barring some unprecedented convergence we will get to 5 straight years in the fall.
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Is there a clear path to meeting growing global critical metals demand? An important first step, according to Laurentian Bank Securities’ Technology and Strategic Metals Analyst Jim Powell, would be to establish supply sources that aren’t concentrated in a single country—particularly one that isn’t inclined to share its resources with the rest of the world. In this exclusive interview with The Critical Metals Report, Jim points out some potential plays to look for while the landscape is changing.
The Critical Metals Report: There’s a lot of confusion about the future supply and demand equation for critical metals, which we’ve defined as rare earth elements (REEs), minor elements and strategic metals. What do you consider the most important minerals and why?
Jim Powell: In terms of investment options, I’d focus primarily on electrolytic manganese metal (EMM), fluorspar, graphite, tungsten and rare earths.
TCMR: Why is that?
JP: A lot of these are controlled by one supplier—China—in most cases. The overall EMM market isn’t huge, but it’s large enough to leave room for other suppliers. At this time, China supplies more than 98% of that market.
Fluorspar is used in acids and fluorine-based chemicals, so a lot of chemical companies need it, as do steel and aluminum manufacturers. Fluorspar is more than 50% supplied by China.
TCMR: How about graphite?
JP: Graphite’s another mineral that’s also controlled largely by China. There used to be a fair number of producers in North America and Europe, but most of them shut down over the last 10 years as China outpriced them in the market. Graphite is a refractory used primarily in nuclear reactors and batteries. Actually, there’s more graphite than lithium in lithium-ion batteries.
Tungsten is somewhat underappreciated for what it does. It’s widely used in tooling, in the mining industry—even in products, such as the Blackberry. Those little vibration elements used in the Blackberry are made of tungsten. China currently produces in excess of 80% of the global supply of tungsten with a handful of minor suppliers in Canada and Russia sharing the rest.
Of course, China also dominates the supply of rare earths, which are pretty mainstream because even though it’s a very tiny market, REEs are very critical elements. There are lots of investment options there—almost too many.
TCMR: You’ve mentioned batteries, manufacturing, tooling and electronics. Where is the major demand for these elements? Is it technology for alternative energy? Is it magnets? What’s driving the demand?
JP: A lot of it’s technology-related; the bulk of the rare earths go into technology-type applications. As I said, batteries use graphite and a variant of electrolytic manganese—EMD, electrolytic manganese dioxide. The current generation of batteries for cars, such as GM’s Volt, is manganese-type batteries. So, there’s another clean-tech focused use.
Industrial use is also important. Tungsten is pretty much all industrial use, and so is fluorspar. EMM is used largely to manufacture stainless steel and aluminum.
TCMR: You said that China dominates the market for the EMM that’s used in the new batteries?
JP: Yes, and probably the biggest issue with that is what happens if China uses it all domestically. If it can, it will. We’re seeing that with the export quotas China has on rare earths, and that could start with some of these other minerals as China runs out of internal supplies. The carbonate deposits from which China mines EMM are running low, and it might just decide not to supply the rest of the world anymore. As a result, we have a somewhat unreliable supplier—one that may at any time just use it internally to satisfy its own demand.
TCMR: Are you following any companies that have the potential to create EMM supplies outside of China?
JP: Yes. There’s only one company—let’s face it—that’s solely focused on it. American Manganese Inc. (TSX.V:AMY, OTCPK:AMYZF) is poised to become the lowest-cost EMM producer. That’s mainly due to the fact that the type of deposit AMY has is easily leachable into acid. In addition, the company has lower-cost power in Arizona versus competitors in China and South Africa. Those are its main technical advantages.
TCMR: You have a target price of $2.90 on that; is that correct?
JP: Yes. And that’s what I’m sticking with, even though it’s a fair bit away from current pricing. I actually felt the target was somewhat conservative—not aggressive at all; a relatively high discount rate. It’s just that AMY will be able to make EMM for around $0.50/lb., whereas it currently sells in Europe for $1.55/lb. to $1.60/lb., and around $1.80/lb. in the U.S. AMY’s production costs will be so low that the company could even make money selling their product into China.
TCMR: China’s lock on rare earth supplies, worsened by its export quota policies, has increased REE prices significantly. How will high rare earth prices and lack of supply affect future demand? Will manufacturers engineer alternatives to these elements?
JP: There are ways of doing things without some of the rare earths, but some of the heavy rare earth elements (HREEs) used in phosphorous, for example, are harder to replace. Neodymium as a permanent magnet is the most superior type of magnet. An alternative is an induction motor, which is larger and less efficient but can do the job. The Volt uses an induction motor, as does the Tesla Motors car in California, so those are examples that use a substitute for REEs that costs less but weighs a little bit more and delivers lower performance. So, there are ways around it.
You’re also seeing Sumitomo Corp. (TKY:8053; OTCPK:SSUMF) selling cerium, lanthanum and other products coming out of its deal with Molycorp Inc. (NYSE:MCP) in Japan where customers are either designing the REEs out of their products or learning how to use less. That’s partly because they just won’t accept the high REE prices anymore, but I think a bigger part is lack of availability. Besides, manufacturers don’t want to be tied to one supplier that could change its mind about shipping the product at any point in time.
TCMR: Are other companies positioning themselves to meet that demand outside of China?
JP: Yes, early on I think it will be Molycorp and Lynas Corporation (ASX:LYC) that help ease supply issues with many of the light rare earth elements (LREEs). I have no doubt that both of them will reach production within the year. It will probably bring pricing down quite a bit on the lights, though, and probably result in an oversupply of certain light minerals, such as cerium and lanthanum, in the short term.
TCMR: How about the heavies?
JP: I believe that over the longer term, the heavies will still be in demand, and that demand won’t be met until larger rare earth producers, such as Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF) and Quest Rare Minerals Ltd. (TSX.V:QRM; NYSE.A:QRM) come online, which isn’t until 2015–2016. So, they’re still some time away from production. In the short term, that’s going to keep the HREE prices high.
TCMR: Are you watching any other companies in the HREE space?
JP: Well, we’re focused primarily on the heavies, so we do cover Quest and Avalon and like the heavy nature of their deposits. Another interesting one that pops to mind that we don’t cover is Tasman Metals Ltd. (TSX.V:TSM; OTCPK:TASXF; Fkft:T61); it’s in Sweden. Its advantage over others has been its good geography, relatively low costs and the fact that you can actually drive there in a regular car. Avalon and Quest are fairly remote, in terms of getting in their supplies and people to mine their deposits, and both have fairly high capital costs—in the $500 million to $1 billion range. Quest has a great open-pit deposit, so it will be fairly low-cost once it gets to production.
TCMR: But you say the company won’t be producing until 2015–2016?
JP: That’s right. Avalon is about a year ahead of Quest, in terms of getting to production.
TCMR: Back in April, you had a speculative buy on Quest with a one-year price target of $10.80. Is that still what you’re targeting?
JP: That’s still what we’re looking at, even though there’s been a bit of a selloff. It’s not surprising; it’s just the way the markets have been selling off. So, yes, our targets are still current on Quest, and we continue liking it. We maintain our target on Avalon, too—at $8.70.
TCMR: Any other rare earth plays on your radar?
JP: Hudson Resources Inc. (TSX.V:HUD) has a deposit in Greenland that looks pretty interesting. It’s high in neodymium, which is going to be an in-demand element for a long time because it’s used to make the permanent magnets.
TCMR: One of the trends in the rare earth sector is the idea of vertical supply chains. What role will vertical supply chain integration play in creating strategic advantages for some of these companies?
JP: Well, some of them, including Molycorp and Great Western Minerals Group Ltd. (TSX.V:GWG; OTCQX:GWMGF), are moving from mining the minerals right through to manufacturing the magnets or developing the operations to produce them. I’m not a huge fan of a company buying its customers out in order to supply itself. I find it very rare for that to work in any industry.
My preferred way to go with vertical integration would involve strategic partnerships between the customers and the producers, or equity stakes. The companies doing this are going back in the supply chain and securing a supply, and this makes a lot more sense to me. It’s probably a better way to do it, in my view, than becoming your supplier or buying your supplier. I can’t find another industry where this actually makes sense and works well.
Once companies specialize in a certain segment, I don’t like them generally moving out of that segment into new areas just to capture a little bit more margin, which is what’s taking place here. The margin in the manufacturing of the magnet is in the 20%–30% range.
TCMR: And what about integrating the processing or milling into the mining company?
JP: Right now, it would be a strategic advantage to have a separation facility attached to a mine, and a few companies are looking at that. Avalon has scoped it out and is working on a plan to get there, but it’s a very expensive proposition and the knowledge isn’t necessarily readily available in the Western world. Still, to be the first mover on getting a separation facility would probably be a good idea for Avalon and any other company that’s looking to get into that market. In the short term, it’s advantageous to get those facilities online because the companies don’t want to ship the concentrates back into China for separation.
Once the separation facilities exist in the Western world, though, other companies—including smaller ones that will just mine and produce a concentrate—should be able to avoid that very large capital investment. They shouldn’t have a problem either sending or selling the concentrate to other companies for processing.
TCMR: How important is processing in the value equation? How much more could a company make on processing its own concentrates?
JP: The way it works now, the rare earth companies that don’t have these facilities—which now are available only in China—produce concentrates of all of their rare earths sort of mixed together. They then sell that to a facility that can separate it off into the individual oxides and maybe further process that, and some of it into metals. The difference between the concentrate sale price and a separated sale price is about 30%–40%. In other words, a company could realize a 30%–40% higher margin by separating it itself.
TCMR: That’s significant.
JP: It is but the cost of building and running a separation facility is also significant, so some of the juniors will be better off just producing a concentrate.
TCMR: With production still five years or more off for a lot of these companies, what’s Laurentian Bank Securities’ strategy for evaluating risk and investing in this sector? How do you determine which companies are likely to do well that far out?
JP: We start with the management. We meet with them and determine if they know what they’re doing, what their strategy is and if their plan for five years out makes sense. We also look at whether the elements these companies will potentially be producing will have value in the future.
That’s the juncture at which we split out companies that focus primarily on light rare earths versus the heavies. With Molycorp’s mine coming onstream and producing lights to add to the supply stream within the next year, we expect many of the LREEs to decline in value. We use different long-term price targets on the different elements just to determine where they are and where they’re going to be.
TCMR: What about some of the critical metals beyond rare earths?
JP: Again, our evaluation considers supply and demand and where we think costs will come in. For example, not many folks are looking at producing EMM in the market outside of China, so American Manganese’s deposit and its low-cost power put it in a good position to do well in that market and capture a large part of the market share outside of China.
There’s not a lot of new supply coming online in graphite, and we haven’t found many companies really engaged in working on that yet. It’s not like REEs, where several hundred companies are working on it. However, we’re aware of several smaller deposits, so we should see more plays in this space before too long.
With fluorspar, maybe two or three public companies are focused on it; so, as with graphite, fluorspar isn’t something that’s going to flood the market all of a sudden. There are a few tungsten producers and that market is very small, but I think the right producer with the right grade and right cost structure could do well in that market. And as I said, in our view, tungsten is an undervalued commodity.
TCMR: What tungsten plays do you like?
JP: There’s a combination of exploration companies and producers in the tungsten space. I cover Colt Resources Inc. (TSX.V:GTP; OTCQX:COLTF), which has what looks to be a significant deposit once it proves it out. Among the producers are Malaga Inc. (TSX:MLG) and North American Tungsten Corporation Ltd. (TSX:NTC). Malaga has its Pasto Bueno tungsten mine in Northern Peru, which has been producing for years. It’s a rather small-scale operation right now, but it is in production. North American has been producing for some time, as well.
TCMR: How far away is Colt Resources from proving out?
JP: Well, it’s doing a lot of drilling right now. The deposit is a historic resource of about 1 million tons (Mt.), which is very tiny, but it’s at .87 grade—a relatively high grade. Visiting the site, you can see tungsten outcropping in several areas; so, once the company completes the step-out drilling and gets an NI 43-101 resource estimate, I think it will grow quickly into a deposit of significance.
TCMR: Any last words you’d like to leave our readers with, Jim? What’s the most important thing for them to consider when they’re looking at this space?
JP: I think you have to look at where technologies and consumer trends are going in order to pick these plays. If you’d picked rare earths a year ago, you’d have done really well; but at the time, who realized it would take off the way it did?
We’ve been looking at a bunch of these different sectors that aren’t in vogue right now—not popular. We’ve focused our research on the fundamentals, which include controlled supply, few suppliers outside of China and areas in which we expect to see demand increase over the next five or six years.
TCMR: Thank you very much, Jim. This has been very informative.
Jim Powell, P.Eng. and Certified Financial Analyst (CFA), is a technology and strategic metals analyst with Laurentian Bank Securities.
The Mortgage Bankers’ Association purchase index will be released at 7:00 AM EDT, providing an update on the quantity of new mortgages and refinancings closed in the last week.
At 10:00 AM EDT, the value of the pending home sales index for May will be announced.
At 10:30 AM EDT, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.
At 3:00 PM EDT, the Farm Prices report for May will be released, giving investors and economists an indication of the direction of food prices in the coming months.
Some pundits are yelling for investors to take profits in junior resource stocks now. In this exclusive interview with The Gold Report, Richard (Rick) Mills, host of Ahead of the Herd online and editor of Ahead of the Herd newsletter, explains why $1,500 gold means investors should be cashing in, not cashing out.
The Gold Report: Last week, gold reached above $1,540/ounce (oz.) as fears escalated over Greece defaulting on its sovereign debt, most of which is owed to European banks. One telling figure is that the risk of default is so high that the interest rate on two-year Greek bonds is about 29%. Should we expect a continuing upward trend for gold throughout the rest of the year as Greece’s debt story and the fears of contagion play out in Europe?
Rick Mills: Greece is going to be bailed out. The EU cannot let Greece default and there is no precedent for leaving; the legal complications would be horrendous. Greece defaulting would trigger a train of defaults—European lenders reduced their risk tied to Greece by 30% to $136.3B, but they still have almost $2T linked to Portugal, Ireland, Spain and Italy. Gold will hang out at the $1,500/oz. mark for a while and may be a little soft during the summer. But come fall, we’re going to see gold continue its uptrend.
There are more than enough impetuses to keep gold prices from falling. Massive structural problems exist in the U.S. as well. The housing sector continues to be a problem and the fiscal deficit is large.
TGR: The Fed plans to stop buying bonds at the end of the month and interest rates are expected to go up, in turn strengthening the dollar. Could “safe haven” purchases of gold ease at that point?
RM: No, I don’t believe that will be the case. In fact, I believe that the U.S. is going to have a third round of quantitative easing, or QE3. The U.S. has committed itself to doing anything that it can to prop up its economy and is going to continue monetizing its debt.
TGR: Where do you think gold’s psychological floor is right now?
RM: For me, breaking the $1,000/oz. mark was extremely important. When India came in and bought the equivalent of 8% of a year’s production at $1,045/oz., that put a solid floor under gold at $1,000/oz. Now as gold consolidates around the $1,500/oz. mark, I think that’s going to be the new floor and the support for climbing even higher.
TGR: How do you think silver will react to gold? Will it continue to track gold much as it’s done historically? Or will their paths begin to diverge?
RM: Silver is definitely going to track gold.
TGR: Do you think silver could get back to that $50/oz. high that it reached earlier this year?
RM: I see no reason why not. Historically, the gold:silver ratio has been 15:1 but since silver made its nominal high in 1984, the gold:silver ratio has held fairly steady at 45:1. With gold at $1,540/oz. and silver at $36/oz., the gold:silver ratio stands at roughly 43:1.
Silver will have to rise to $102/oz. to get back to the historical average with gold at $1,540/oz. The higher gold prices go, the more consumers will step down to silver. As the much cheaper precious metal, silver will win market share from gold buyers—especially if they think silver is undervalued compared to gold.
There was news that gold and silver bullion buying in India was up 222% over one month. The country spent $22B on bullion in 2010 and in one month in 2011 they spent $9B. There’s also something going on in the Chinese market that most people don’t realize—we’re so worried about inflation in the Chinese market, but they actually want some inflation. China needs to have its currency strengthened against the U.S. dollar so they don’t get branded a currency manipulator. What that does for silver buyers in China is that it gives them a little bit of an advantage over the U.S. dollar buyer’s base. Last year, China’s currency went up about 3.5%. This year it is expected to rise 5%. That’s added leverage when it comes to the silver market. The manufacturing use of silver went up 16% in China and the demand is growing as well.
TGR: In an article posted on your website, Toby Connor of Gold Scents said, “Don’t let the perma-bulls fool you, this is not a normal correction, and it has nothing to do with Greece or Spain. This is the beginnings of the next leg down in the secular bear market and the start of the next economic recession/depression. And this time it’s going to be much, much worse than it was in ‘08.” What are your thoughts on that statement?
RM: The U.S. and EU are going to do anything that they can to keep their economies afloat. Beyond credit creation and debt monetization, I think that means we’ll see more investments in new infrastructure. Upgrading and maintaining power grids, railways, roads, bridges, sewers, water, airports and hospitals is another way of putting money into the consumer’s pocket. Greece is not going to be allowed to default. I really don’t see the worst case scenario happening here. I don’t believe it’s all gloom and doom. There are bright spots and I think they’re going to grow.
TGR: Is there a situation where Greece could default, but still stay in the euro?
RM: I don’t see how. If Greece defaults it would lead to an implosion of the EU. The only way out for many of the EU economies is to weaken the euro and this isn’t something the stronger economies want.
TGR: If the only way out of it is to devalue the euro, the U.S. dollar could rise against the euro and that’s generally bad for gold.
RM: Yes, if it happens from the coming bailouts. But in the meantime, European economic problems will continue, the U.S. economic recovery will continue to disappoint and doubts about China’s short-term growth prospects and the ongoing fighting and tensions in Africa and the Middle East will provide support for gold at $1,500/oz. There is still a lot of demand for gold. Consumption in China was 700 tons last year. The Chinese government has been doing everything it can to encourage gold buying by its citizens, including expanding the number of banks allowed to import bullion.
The World Gold Council believes that annual demand for gold in India will increase to more than 1,200 tons by 2020. Everything I see is bullish for gold. Gold is integral to all Indian wedding ceremonies—purchases relating to Indian weddings typically account for 50% of annual jewelry demand.
With 50% of the Indian population under 25 and approximately 150 million weddings anticipated over the next decade, the World Gold Council estimates that wedding-related purchasing will drive approximately 500 tons of gold purchases a year.
The Reserve Bank of India has granted licenses to seven more banks to import bullion; this too has helped push up demand.
TGR: Some pundits are telling investors to sell their shares in junior gold companies and take profits if there are profits to be had, and then buy those same stocks once they bottom out. Do you agree?
RM: Investors in this game need to look at the best times to buy and sell. Historically, the best time to pick up junior resources is during the summer doldrums. A company goes to work all summer, there is very little news flow and no one around to pay attention anyway. It does a large drill program and news from the drilling comes out in the fall. That’s traditionally when you want to be a seller. Then the cycle starts all over again in the late winter and early spring as companies put together work programs and a budget.
Right now, investors should be looking at the stories, looking at the management teams and slowly picking up promising stocks.
TGR: Are there juniors with some growth catalysts that you are watching this summer?
RM: Kootenay Gold Inc. (TSX.V:KTN) is a prospect generator and has numerous joint ventures, but I’m most excited about Kootenay’s 100%-owned Promontorio silver project in Sonora, Mexico. It has two drills working and a third diamond drill has been recently mobilized to the site. Promontorio already has an indicated mineral resource of 5.22 million tons (Mts.) averaging 52.7 g/t silver, 0.86% lead and 0.96% zinc, containing 8.9 Moz. silver, 99.3 Mlb. lead and 110.8 Mlb. zinc. This is a company that has great management, great projects, a tight share count, money in the bank and is drilling a very decent size program.
TGR: James McDonald heads up Kootenay. He’s had quite a bit of success before with Black Bull Resources Inc. (TSX.V:BBS), National Gold and White Knight. This is someone who’s been down the path a few times and knows what he’s doing.
RM: Exactly. Kootenay has a great management team, is fully cashed up and drilling 25,000m. I think Promontorio is only going to get bigger and better over the summer.
TGR: What are some of the other names on your list?
RM: Terraco Gold Corp. (TSX.V:TEN) is run by Todd Hilditch. He had some fantastic success with Salares Lithium Inc., which was sold to Talison Lithium Ltd. (TSX:TLH). The company has two properties that excite me. The Moonlight Project in Nevada is 100% owned. Gold and silver mineralization are known to be controlled by northerly-trending structures at Moonlight. The Black Ridge Fault Zone’s eastern boundary controls the eastern margin of precious metals mineralization at Rochester and Spring Valley. Mapping at Moonlight indicates that this district-scale fault system continues northward through the Moonlight Project properties. The company has been quietly consolidating and increasing its land position over the last three years. Terraco is going to drill it this summer. Moonlight could get exciting very quickly.
TGR: Even more advanced is Terraco’s Almaden Project in Idaho. It has just less than 1 Moz. measured, indicated and inferred there. Do you think that Terraco will spin that out and just focus on Moonlight?
RM: Almaden created a lot of unrealized value for Terraco shareholders. I don’t believe the company is going to spin it out. No one had ever drilled the Almaden below 400 feet before. Terraco put together a drill program because it believes that underneath the existing resource are high-grade feeder zones and shoots. The first hole, Hole 1, ended in mineralization at 1,400 feet. Another hole went down 1,700 feet. Hole 4 is at 2,000 feet and we’re awaiting assay results. This deposit already has 1 Moz. and it could be significantly larger.
TGR: Do they have enough cash to continue working on both projects?
RM: They have enough cash to get the results they need. And the right results could drive the share price higher.
TGR: What other companies are intriguing to you?
RM: I’m pretty high on a Robert (Bob) Archer play called Cangold Ltd. (TSX.V:CLD). Bob and his team are responsible for Great Panther Silver Ltd. (TSX:GPR; NYSE.A:GPL). He delivers on his promises and is very experienced. Bob found the Ixhuatan advanced-stage project in Mexico and signed a letter of intent with Brigus Gold Corp. (TSX:BRD; NYSE.A:BRD). This project has 89,000m of drilling in 342 holes. It’s over 4,000 hectares and host to the Campamento Gold-Silver Deposit. It’s got an NI 43-101 compliant resource of more than 1 Moz. gold and 4.4 Moz. silver. There is a lot of blue-sky potential in this project. I believe Cangold is going to garner a lot of attention.
TGR: What do you think about VMS Ventures Inc. (TSX.V:VMS)?
RM: I like the team behind it a lot and I think they have some exceptional properties. VMS made a discovery at Reed Lake. The deposit is 2.55 Mt. at 4.5% copper in the indicated category with potential to grow. VMS joint ventured this with HudBay Minerals Inc. (TSX:HBM; NYSE:HBM). VMS has a carried-to-production interest; HudBay is the operator with 70%. It’s a high-grade, near-surface copper deposit and HudBay has a smelter in Flin Flon, Canada. Permitting and prefeasibility are going to continue through 2011 and a construction decision could happen by year-end.
TGR: Is that a takeover target?
RM: I believe that in the future HudBay is going to have to look at taking VMS out. The interesting thing is that VMS has a joint venture with HudBay on Reed Lake and the four properties that surround it. But it also has an option agreement with HudBay on four properties next door. HudBay was drilling over there and made a huge discovery 1.8 km. northeast of the Reed Lake deposit—7.44% copper over 7.18m. HudBay is now drilling back toward the Reed Lake Mine. VMS is carried for $50M of expenditures on this option. So, what we’ve got here on the JV and optioned properties are very good backstops to what VMS is doing on its 100%-owned properties.
The North Shore Group, which heads up VMS, is experienced and made up of highly technical explorationists who have made several recent discoveries. It has $5M worth of drilling lined up on top of what HudBay is doing. It’s a perfect example of lots of work over the summer and huge news flow coming out in the fall.
NioGold Mining Corp. (TSX.V:NOX; OTCPK:NOXGF) is another good example of what to look for. It has a very good share structure and money in the bank. It has a joint venture with Aurizon Mines Ltd. (TSX:ARZ; NYSE.A:AZK) where Aurizon has to spend $20M to complete 200,000m of drilling during the next several years. ARZ has three drills working away right now.
NioGold is also working at Siscoe East with Alexandria Minerals Corp. (TSX.V:AZX) in a 50/50 joint venture. It is drilling between two of the highest grade mines ever in the Val d’Or camp, the Sullivan and the Siscoe.
A fifth rig is drilling right beside Osisko Mining Corp.’s (TSX:OSK) Canadian Malartic project They got some early very exciting results on this 100%-owned property and more assays are pending. NOX is a company with exciting properties, great management, money in the bank and large drill programs being conducted over the summer to give shareholders lots of news and increase interest in the company.
TGR: It certainly seems to fit your investment philosophy.
RM: Definitely. I look for a mine that’s going to get bigger or a property with the propensity to give up discoveries. I’m looking for the strongest management teams that I can find.
TGR: You believe that gold and silver plays are ultimately going to hold their value over the long term?
RM: Absolutely and if you look at the companies we talked about today, they are the kind of companies that you can do due diligence on and feel confident that you have a management team dedicated to increasing shareholder value through the drill bit, or acquisitions, and put together a properly managed exploration and drill program. Investors want to pick these up during market weakness in the summer doldrums so positions can potentially be sold for a profit in the fall.
TGR: That seems like sound advice. Thanks, Rick.
RM: You are welcome.
Richard is host of www.Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 300 websites, including: The Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Uranium Miner, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, and Financial Sense.
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From my Cincinnati peeps….. Has anyone thought of something similar here: Cincinnati suing banks over empty eyesores
Read the story carefully. Lots of financial institutions want it both ways. They essentially want to foreclose on you, but don’t want to file the paperwork to actually make the transaction and then incur the liabilities of actual ownership. Can’t have your cake and eat it as well. I bet we could come up with a list of properties comparable to what is being litigated over in Cincinnati in half a heartbeat. The legal netherworld lots of institutions are operating in when it comes to foreclosure is about as close to market failure as we come. Where’s Coase when you need him?
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At 7:45 AM EDT, 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 EDT, the weekly Redbook report will be released, giving us more information about consumer spending.
At 9:00 AM EDT, the monthly S&P/Case-Shiller home price index report will be released. Given that most economists don’t expect the overall U.S. economy to improve until housing prices end their decline, the market will be watching this number closely.
At 10:00 AM EDT, the monthly report on Consumer Confidence for June will be released. The consensus index level is 62.0, which would be a 1.2 point increase from May’s number.
Also at 10:00 AM EDT, the State Street Investor Confidence Index will be released, which looks at changes in the amount of equities held in the portfolios of institutional investors.