By The Gold Report, on January 31st, 2012
 After a tough year in 2011, there is definitely a good selection of underpriced junior resource stocks available for astute investors to focus on before the rest of the herd finally wakes up and smells the gold. In this exclusive interview with The Gold Report, Matthew Zylstra, mining analyst at Northern Securities, reviews the gold, silver and PGM markets and tells us why he believes that better times are ahead for junior miners in 2012 and which ones he particularly likes at current price levels.
The Gold Report: When you last spoke with The Gold Report in early March of last year, gold was trading around $1,420/ounce (oz) and silver was around $36/oz. Silver peaked about $49/oz in late April and then gold hit around $1,900/oz in September. Now we’re back up above $1,700/oz on gold and about $33/oz on silver. Where do you see these prices going this year, after it appears that they have likely bottomed out?
Matthew Zylstra: We’re long-term bulls on both metals. Gold has been correcting since September and it looks like it bottomed out around $1,500/oz. We believe the recent decline is a normal pullback in a longer-term uptrend where nothing has really changed to the outlook. We see a perfect environment for the metal—concerns over our currency debasement, negative real interest rates, geopolitical friction, etc. I expect gold will reclaim the 2011 highs and could reach $2,000/oz.
For silver, the picture is less clear. Silver is, in part, an industrial metal accounting for around 50% of demand and less of a currency. Silver peaked at almost $50/oz in April 2011 and the price has been very volatile. We think the move is a correction, again, in a longer uptrend going back to 2003. I expect silver will trade around the mid-$30/oz range this year.
We actually feel platinum has a lot of potential. South Africa, Zimbabwe and Russia account for about 90% of platinum production and there’s a scarcity of good platinum metals group (PMG) projects outside those countries. We expect increased investment demand and believe that supply disruptions, as well as resource nationalization concerns, will drive the price higher. We note that Sprott Asset Management has formed a physical platinum and palladium trust, which could boost investment demand.
TGR: So, what really happened to the platinum market? Historically, platinum traded at a 30–40% premium over gold. Does it have to do with industrial demand or what happened to cause it to trade below gold?
MZ: The main industrial use for platinum/palladium is automotive catalysts. With fears of a global slowdown, their prices came off. But our view is that supply is not going to be able to meet the demand going forward. And, as you mentioned, platinum has historically traded at a significant premium to gold but the value is now only about 95% of the price of gold.
TGR: Getting to the actual equities, the gold and silver stocks certainly didn’t track the metals prices very well the last year. What’s been the problem?
MZ: Gold stocks have performed poorly compared to the metals. We believe this has to do with investors being leery about another period similar to what occurred in 2008 when credit markets froze. Exploration and development companies, in particular, are sensitive to what’s going on in the capital markets since they require capital to continue exploration. Take, for example, Trade Winds Ventures Inc., which was acquired last year by Detour Gold Corp. (DGC:TSX). Shares of Trade Winds traded down to $0.03 in the 2008 crisis. Trade Wind shares were later bought for cash and stock, which at the time amounted to about $0.45 a share. My point is that people are nervous but that creates opportunity especially with what I believe will be a catch-up in equity prices.
TGR: I hope with metals prices staying up, the credit markets will be a little more optimistic and will loosen up a bit.
MZ: We certainly don’t expect another period like 2008. I think that was an aberration.
TGR: So, I hope the stocks start picking up here and not continue acting like gold is $800/oz and silver is $15/oz.
MZ: That is what we expect and the precious metals stocks could really get a boost on QE3 or other stimulus programs.
TGR: So, what do you think is going to be some sort of catalyst to get people more excited faster? Or is this just going to have to be a gradual progression and we are going to have to wait for $2,000/oz gold and $50/oz silver for people to really get into this market?
MZ: The disconnect between gold/silver prices and mining company equities has grown considerably. The sector is cheap by historical standards when you consider the price of gold miners’ shares relative to the price of gold. The Philadelphia Gold and Silver Index (XAU), which is an index of 16 precious metals and mining companies, is close to the lowest level it has been since the 2008 crisis relative to gold. We expect this ratio to gradually work its way back to the average. If we see gold mining stocks move up to even the low end of their historical range versus gold, it will mean a significant gain for many of these companies.
Increased merger and acquisition (M&A) activity in the sector will get people interested in a lot of these companies. As the price of gold and silver continues to rise, the economics become very compelling, especially for large- and mid-cap companies to acquire smaller players.
More interest in precious metals will help too. With what I see as a developing currency war—a race to devalue—I think more investors are going to turn to precious metals and related equities.
TGR: It certainly seems like there are a lot of smaller companies out there with some interesting looking projects that may be sitting ducks for being taken over. If they have to keep going back to the market to raise more money and create more dilution, that could be a problem. What’s your thinking on that?
MZ: Small exploration companies are going to continue to need funds to advance their projects, and costs have been increasing. That’s a major problem. The need to raise capital isn’t going to change but we are seeing alternative ways of financing such as gold and silver streams, alternative debt arrangements and joint ventures, which mean less dilution.
TGR: A lot of companies that were able to load up with plenty of cash at reasonable prices are obviously happy in this market. Do you think they’re going to get pushed to go out and do acquisitions?
MZ: I think what we’re seeing now are mining companies with the ability to acquire languishing juniors taking advantage of the environment. The seniors and intermediates, which have filled up their treasuries with robust gold and silver prices, certainly have the ability to do the same. At the end of the year we saw companies like Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) acquiring Grayd Resource Corp, AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE) acquiring Northgate Minerals, and New Gold Inc. (NGD:TSX; NGD:NYSE.A) acquiring Richfield Ventures Corp. and Silver Quest Resources Ltd. We see this trend intensifying, especially if mining company valuations don’t keep pace with rising metals prices.
TGR: That brings us to a little follow-up on some of the companies that you talked about last time. A couple of the junior producers you talked about were Barkerville Gold Mines Ltd. (BGM:TSX.V) and Orvana Minerals Corp. (ORV:TSX). Can you tell us what’s going on with them?
MZ: The market has been disappointed with production from both companies. Barkerville recently got a boost after receiving a permit for its Bonanza Ledge property, which is a high-grade open-pittable gold resource. The delay in getting that permit meant that production was not what we had originally expected. Updated resource calculations for the company’s Bonanza Ledge, Cariboo Quartz and B.C. vein zone in the first half of 2012 could be a positive there.
Orvana has two properties that were both put into production in 2011. In Spain, the company’s El Valle-Boinás/Carlés is an operating gold mine, which is not seeing the head grade we had expected. Grades are slowly increasing from around 2 grams per tonne (g/t) to an expected 3.5 g/t. Its other project in Bolivia, the Don Mario mine, has a different problem. It’s an open-pit, copper-gold mine where recoveries have been less than expected—around 50% versus 70–80% for copper. We look for recoveries to improve and think a lot of the bad news has been priced into the shares. We’re also encouraged by the fact that Bill Williams has now taken the helm of the company. Bill has exceptional operational technical expertise.
TGR: So you feel both of those are reasonable values at this point?
MZ: On Barkerville we’re taking a wait-and-see approach and have the stock rated as a hold. On Orvana we believe the negative news has been priced into the shares and valuation looks compelling.
TGR: So, how about some of the near-term producers that you follow, such as Canadian Zinc Corporation (CZN:TSX; CZICF:OTCBB)?
MZ: Canadian Zinc is a situation where the valuation has not kept up with the project. The company recently passed the major hurdle for environmental approval of its Prairie Creek mine. It’s a really interesting story—an old Hunt Brothers mine that could be in production in 2014 or maybe even as early as 2013. For readers who don’t know the history of the Prairie Creek mine, it is in the Northwest Territories and was just a few months away from going into production when silver prices collapsed in the early 1980s and the Hunt Brothers went bankrupt. It’s a high-grade silver-lead-zinc mine with much of the infrastructure in place that we think has a lot of potential. We actually believe this is an ideal time to own shares of the company since fundamentals have improved and the share price has drifted lower with the sector.
TGR: So that’s another one to watch closely and this may be a good time to be picking some up. What about some of the other junior explorers that you like and have talked about in the past?
MZ: For very near-term production I have followed but do not cover Armistice Resources Corp. (AZ:TSX). The company expects to produce 25,000 oz gold in 2012. At around $0.22/share, which is about 50% less than last year, valuation looks interesting. Two that I cover, which are exploration stories, are NioGold Mining Corp. (NOX:TSX.V; NOXGF:OTCPK) and Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:FSE). NioGold continues to drill at its Marban project in Val-d’Or, Québec. This is a joint venture with Aurizon Mines Ltd. (ARZ:TSX; AZK:NYSE.A) where Aurizon is funding $20 million for exploration. We think the resource could grow fairly significantly from the current 960,000 oz to 1.4–1.5 million ounces (Moz). We actually think Marban could give Aurizon’s other project, Joanna, some competition. I think the valuation looks fairly attractive here, trading at about 60% lower than our calculated net asset value.
We’re also excited about the potential of Prophecy Platinum. Prophecy has the Wellgreen deposit in the Yukon, which contains 12 Moz of combined PGMs and gold plus 2.4 billion pounds (Blb) of nickel and 2.2 Blb of copper. The in-situ value is around $50 billion and we think a preliminary economic assessment due out in Q112 will show some strong economics for an optimized open-pit. The company is carrying out other work to derisk the project, including metallurgical studies and additional infill drilling for which we’ll start seeing results early this year.
TGR: So, that one is well priced at this point and a buy as far as you’re concerned.
MZ: Absolutely. The price drifted down after the excitement over the updated resource estimate, but it’s come down to a level where we think it offers very good value. We have a $6.40 target price.
TGR: So then, let’s look at some silver juniors. One that you follow is Cream Minerals Ltd. (CMA:TSX.V; CRMXF:OTCBB; DFL:FSE). What’s going on with that one?
MZ: Cream is a company I cover and which I visited late last year. It’s an exploration company with a 41 Moz silver deposit called Nuevo Milenio. It also has about 300,000 oz gold. We believe the company has the potential to really expand the current resource. Cream completed about 20,000 meters (m) of drilling in 2011 and we expect an updated resource out late Q112. This should actually upgrade a fair amount of the Inferred resource to Indicated and could add about 30% to that resource. We also see it doing another round of drilling of 20,000–30,000m in 2012, which we think has the potential to more than double the current resource.
TGR: That sounds promising.
MZ: Another one I don’t cover but I think is very interesting is Oremex Silver Inc. (OAG:TSX.V; OARGF:OTCBB; OSI:FSE). This is a small-cap silver exploration company with assets in Mexico. The company recently moved up on good initial results on its Chalchihuites project. The project is in the same area as First Majestic Silver Corp.’s (FR:TSX; AG:NYSE; FMV:FSE) Del Toro project, and we understand First Majestic is aggressively acquiring property in the area. The company’s flagship property, Tejamen, has a defined 51 Moz silver deposit. We think the president and CEO is also a real asset for a company with a market cap of around $20M. He’s been manager of exploration and development for Barrick Gold Corp. (ABX:TSX; ABX:NYSE) in South America.
TGR: So, are you expecting that 2012 is going to be the year that mining stock investors finally wake up and smell the gold and realize it’s time to get into this market?
MZ: I think this is the year! Investors have been cautious and focusing just on the downside, holding their money in cash. I think investors should be opportunistic and look for well-run companies with strong management and great assets.
TGR: Well, we’re certainly hoping for that also. We appreciate your joining us today and look forward to talking with you again.
MZ: Thank you and I appreciate the opportunity.
Analyst Matthew Zylstra joined Northern Securities in 2010 after having worked at Sprott Resource Corp. and investment counsel firm Foyston, Gordon and Payne Inc., a unit of Affiliated Managers Group Inc. He is focused primarily on junior precious metals producers and also follows some base metals miners. Zylstra has worked in the finance sector since 1999.
By Simon Grey, on January 31st, 2012
The anti-SOPA crowd argues that this is a matter of basic liberty. But it’s not. In a free society, you don’t have the freedom to steal your neighbor’s property. And that should include intellectual property. Moreover, it is the function of the state to enforce those rights. We don’t leave it up to civil litigation to protect property rights (although that is part of the solution). We give the state substantial powers to stop theft. Just as owners of tangible personal property have good cause to call for a police force and a system of criminal courts, owners of intellectual property have good cause to ask the state to stop those who would infringe on their rights.
It’s like he doesn’t understand the difference between copying and theft. If I have a book and someone copies it, they do not deprive me of the book (except for the time spent copying it). If they steal the book, I never see it again. If I write a song and someone decides to copy it, they do not deprive me of my ability to play it. On the other hand, if I have an apple and someone takes it, then they deprive me of what belongs to me. As Thomas Jefferson once said, “He who receives an idea from me receives it without lessening me, as he who lights his candle at mine receives light without darkening me. Also note that the supreme law of the land (the constitution, for MIT economics professors too stupid to familiarize themselves of the law under which they live) never refers to intellectual property in terms of theft. In fact, they refer to it primarily in terms of special monopoly privilege. Incidentally, this is why the constitution prescribes “exclusive Right” for authors and inventors for “limited times.” The founders never believed thoughts were real property, which is why they allowed these rights to expire. Thus, Mankiw’s assertion, which is nothing more than pious posturing, is verifiably false. SOPA is not a matter of preventing theft or protecting property rights. It is, like all other forms of intellectual property law, just another form of government-enforced monopoly. And like all other monopolies before it, it is just another way to reduce freedom.
By Eldon Mast, on January 31st, 2012
I happened across this article today and wish I could claim that I wrote it. Here is the opening…
Sen. Marco Rubio (R) of Florida delivered his party’s weekly address on Saturday morning, and made a provocative claim about President Obama.
“The bottom line is this president inherited a country with serious problems,” Rubio said. “He asked the Congress to give him the stimulus and Obamacare to fix it. The Democrats in Congress gave it to him. And not only did it not work, it made everything worse.”
What a crock!
So have a look at the full article here and see the Rubio claim debunked soundly.
Not only has the U.S. economy grown for the last 10 quarters, but the workforce has ADDED jobs for the last 22 months straight.
Can we do better? Sure. Did Obama policies make things worse?
I don’t think so!
By B.P.T., on January 31st, 2012
At 7:45 AM Eastern time, 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 Eastern time, the weekly Redbook report will be released, giving us more information about consumer spending.
At 9:00 AM Eastern time, 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 9:45 AM Eastern time, the Chicago PMI Index for January will be announced. The consensus index value is 63.0, which is 0.5 points higher than last month, and is above the break-even level at 50.
At 10:00 AM Eastern time, the monthly report on Consumer Confidence for January will be released. The consensus index level is 68, which would be a 3.5 point increase from last month’s number.
Also at 10:00 AM Eastern time, 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.
At 3:00 PM Eastern time, the Farm Prices report for January will be released, giving investors and economists an indication of the direction of food prices in the coming months.
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By The Gold Report, on January 30th, 2012
 Kwong-Mun Achong Low, an analyst with Northern Securities in Canada, thinks that copper and gold juniors are in for a better run this year. He’s ferreted out the juniors with the most promising management and assets that are on a path to production—not to mention rising stock prices. In this exclusive interview with The Gold Report, Achong Low discusses why copper may have a slight edge on gold in 2012 and what companies are the crown jewels of his coverage list.
The Gold Report: Kwong, what are some themes or common ground within your Buy recommendations in the junior mining space?
Kwong-Mun Achong Low: When I look to initiate coverage of a company, I go through a checklist of must-haves with emphasis on the management team and the assets. Excelsior Mining Corp. (MIN:TSX.V), Golden Predator Corp. (GPD:TSX), Probe Mines Ltd. (PRB:TSX.V) and Sunridge Gold Corp. (SGC:TSX.V) have solid management teams with proven track records and they’ve either built and sold companies before or they have tremendous experience in the countries that they operate in. All of those companies’ flagship assets are close to infrastructure, and they have a clear path to production. They’re not just speculative stories. They also have good streams of news to keep investors interested and are supported by the commodities that they are focused on, which are gold or copper.
TGR: Even very good news wasn’t really moving share prices a lot in the last half of 2011. Do you expect that to change in 2012? Will good drill results move share prices this year?
KAL: I think so, but a lot of the speculation has come out of the space. Really and truly, things were looking dire at the end of 2011, in part because of redemptions of funds and tax-loss selling. This year, investors will look at the quality projects and, when good drill results come out, they’ll say, “Okay, we’ll reward this company because it continues with good news.” I think share prices will respond to suit.
TGR: Are you more bullish on copper or gold in 2012?
KAL: The underlying fundamentals of both are still pretty good. Gold’s use as a store of value should be of real interest to investors because of the ongoing quantitative easing and the loose monetary policies by central banks that are devaluing major currencies. Historically, gold has responded well to that.
For copper, our bullish case comes from supply-demand fundamentals. Many commodity houses are forecasting a supply deficit for 2012. For instance, stockpiles in Asia as tracked by the London Metal Exchange (LME) are at a two-year low and heading lower, which is likely because China is buying and stockpiling copper again. The broader LME stocks are at a one-year low and also heading lower. That’s really good for copper and gives it an edge over gold this year.
TGR: But copper was down about 3.5% last year.
KAL: It just got caught up in all of the economic worries. When you go back to basics, which are supply-demand fundamentals, copper is still a really good story.
TGR: Northern Securities’ 2012 Top Picks List includes Golden Predator and Probe Mines, but not Sunridge or Excelsior. What factors put Golden Predator and Probe above the others?
KAL: At the time we chose those two names to highlight, the stock market was more volatile and investors were in a real risk-adverse mood.
Golden Predator stood out because it’s in the Yukon, which is a good mining jurisdiction. It has near-term production potential and current cash flow from its royalty portfolio. In a real cash crunch, it would come out OK.
Probe Mines, in Ontario, came on the scene with a really good resource update. It has a good opportunity for more resource growth, which puts it on a short list of takeover candidates.
TGR: Would it surprise you if the companies not on the top picks list outperformed those that are?
KAL: No, not at all. Both Sunridge and Excelsior are solid companies with robust assets. Sunridge has four polymetallic deposits in close proximity to one another. The biggest deposit, Emba Derho, is of world-class size by itself. It’s a 62 million tonne (Mt) volcanic massive sulphide (VMS) deposit with almost 0.6 million ounces (Moz) gold, nearly 1 billion pounds (Blb) copper and 2 Blb zinc. Something that size could attract takeover potential as well.
Excelsior’s preliminary economic assessment (PEA) on the Gunnison copper project in Arizona in December really impressed me. It could advance its project quickly to production and I would put it on a short list for potential acquirers given the project economics.
TGR: What in that PEA did you find particularly interesting?
KAL: It’s expecting annual production of 85 million pounds (Mlb) copper for a capital expenditure of $240 million (M). Not many companies could do that. If it builds a sulfuric acid plant for $85M, it could get its cash costs down from a projected $0.94/pound (lb) to about $0.68/lb. That could make it one of the lowest cash-cost producers in the copper space.
TGR: It plans to use in situ recovery, which involves drilling holes into a land mass, injecting liquid into those holes and then pumping it out and recovering the metals in those liquids. Given the recent concerns regarding fracking in the oil and gas space, do you expect getting environmental permits could pose a problem?
KAL: I’m not concerned with Excelsior getting its permits because the same process has been successfully permitted and used in the past in Arizona during the 1980s and 1990s. In situ recovery is often misunderstood because it’s not commonly used in the copper industry though it is quite common in the U.S. uranium industry. When at full operation, more of the dissolving liquid is removed than is pumped into the ground. That creates a cone of depression where the basic physics of high and low pressure prevents any fluid from traveling where it’s not supposed to go.
TGR: What catalysts are going to push Excelsior, which currently trades around $0.57/share, to your 12-month target of $2/share?
KAL: It intends to do a prefeasibility study by the end of this year. To do that, it will have to continue with its hydrology and metallurgical studies. Even though the initial tests came back positive and show a good case for in situ recovery, investors would be happy to see more detailed tests confirming those results. That should push this toward the target.
TGR: Golden Predator, which is the largest holder of active exploration properties in the Yukon, receives royalty payments from a property portfolio in Nevada. What sort of cash flows are those royalties creating and how is Golden Predator using that cash?
KAL: The land package and the royalty portfolio are two of the best things about Golden Predator. It already has cash flow coming in, which could be used for general and administrative expenses or to offset large financings. We expect about $1M in royalty payments this year, gradually increasing to about $8M by 2015. Also, as the company has done before, non-core segments in the royalty portfolio and land package could be monetized for additional gains.
TGR: Golden Predator released some results from the Sleeman zone on the Brewery Creek project in the Yukon recently. One hole returned 35.1 meters (m) of 1.63 grams per tonne (g/t) gold and 136.72 g/t silver. Within that intercept, there were 20m of an even higher grade intercept. What were your impressions of those results?
KAL: They were quite good. It’s not often that we see a sizable silver intercept at Brewery Creek, but that adds another dimension to go along with the gold. One of the holes on the westernmost part of Sleeman returned some decent results as well, showing that the zone is still open in all directions. That step out hole would not be included in the resource update at the end of January. Because of this, and the over 100 holes to be assayed, the company is planning another resource update for the middle of the year.
TGR: Golden Predator has a number of properties. Do you think as these sorts of results come back that it will begin to focus more on Brewery Creek than the others?
KAL: It already is focusing mostly on Brewery Creek given its near-term production potential possible because of its past-producer status. So Brewery Creek is both an exploration story with the good drill results it keeps returning and also a development story that could see itself in production by the end of the year. The other properties will also see some drilling this year and could add production growth a few years down the line, but they are not the focus now.
TGR: What other catalysts are you expecting to take Golden Predator to your 12-month target of $1.60/share?
KAL: It still needs to come out with some engineering tests on the existing heap-leach pad to see if a quick production start-up is possible. Those are due in the next few months and if they continue to show that it can start production sooner than most people think, that should really push the stock up.
TGR: Golden Predator has made some management changes. Do you think those are positive?
KAL: Definitely. It hired a chief operating officer and a chief mining engineer, which shows that it really is gearing up for production.
TGR: Probe Mines has gone from being primarily a chromite play to a gold play. The junior now sits with a resource of almost 5 Moz at the Borden Lake project in Northern Ontario. In 2009, Osisko Mining Corp. (OSK:TSX) bought out Brett Resources Inc. (BBR:TSX.V), which had a resource of similar size in Northern Ontario. It’s a distance away, but there are some similarities. Do you believe Probe is a takeover target?
KAL: I think so. Probe really has reinvented itself and capitalized on its grassroots Borden Lake gold discovery. It is expecting another resource update later on in this quarter, which should get it past the critical 5 Moz mark and put it on the radar for intermediate and senior producers. The orientation and structure of the ore body are close to ideal for mining a low-grade, bulk-tonnage deposit. A lot of that resource will end up mineable, and that’s what companies are looking for.
TGR: Have you visited that project?
KAL: I have. Dave Palmer, the chief executive officer, really keeps a close eye on what’s going on there and he regularly takes analysts and investors up to the property. What I really like about the project is that it’s about a 15-minute drive from the airstrip and the town of Chapleau, and you can walk straight from the road to the drill rig.
TGR: What are some catalysts we can expect in 2012 for Probe?
KAL: Apart from the updated resource, it also has some further metallurgical studies and drill results coming due. What I like about Borden Lake is that there are some really good geophysics in the northern part of the property that show that it could have another main Borden Lake deposit there. It’s drilling that now and if successful, that could easily double the resource.
TGR: Are you saying it could hit 10 Moz?
KAL: It could, but it may not this year. If it hits some good results up to the north, it could get really big.
TGR: If that’s the case, then it must be a takeover target.
KAL: For sure.
TGR: In a report, you suggest that Sunridge Gold is one of the more misunderstood stories in the junior gold sector. What misconceptions about Sunridge would you like to correct?
KAL: The biggest misconception is that Eritrea is a bad place to do business. I visited the property in November and saw firsthand that it is a very determined country working to put additional business-friendly policies in place. The people are very friendly and hard working. The United Nations Security Council clouded that view when it put further sanctions on the country in December after some neighboring countries accused it of supporting militant groups, but I think the accusations are politically motivated. Russia and China both abstained from the vote. Also, Russia went on record saying that the evidence of Eritrea’s link to the planned attacks in Addis Ababa was not conclusive.
TGR: But there is unrest in the region. Are you factoring that into a discount rate?
KAL: Definitely. Whether it’s true or not, the market does perceive additional risk in Eritrea. We only use a multiple of 0.4x our net asset value whereas other companies in our space could get from 0.5–1.0x.
TGR: What were your thoughts about the Asmara project when you visited?
KAL: It is very close to infrastructure. You can drive to the site in a matter of minutes. The topography is very supportive of open-pit mining as it is very flat with lots of room to put the mill facilities and tailings pond. It’s also very close to a willing workforce.
TGR: Are there any majors operating in Eritrea right now?
KAL: None that I know are active in the area. There are a number of Chinese companies with interest including the Shanghai Construction Group that recently bid for Chalice Gold Mines Ltd. (CXN:TSX; CHN:ASX), though the others have nothing as advanced as Sunridge or Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.A).
TGR: Does Nevsun have the cash flow to pull off a takeover?
KAL: For sure. It is producing a lot of gold at one of the lowest cash operating costs in the industry. Last year it produced about 380 thousand ounces of gold and the cash costs for the first three quarters were about $285/ounce (oz). However, I’m not sure that, if it were to expand, it would want to get another asset in Eritrea.
TGR: On the one hand, you’re saying there’s not as much risk as people think, but in this example, you are intimating that there is still a significant amount of risk there?
KAL: There is perceived risk. If a company like Nevsun has a main asset there and it’s not getting the full value that it should for it, then there’s no need to wait around for the market to clue in. It can just take its cash and go after something that the market will recognize.
TGR: What should move Sunridge stock to your 12-month target price of $1/share?
KAL: Of its four main deposits, it has combined three of them into one prefeasibility study due out in about four months. The fourth deposit, the Debarwa deposit to the south of Asmara, has a feasibility study due in the next couple of months. As the market sees that there is real economic benefit to these projects and there is a clear line to their production, Sunridge should get rewarded for that.
TGR: Debarwa is really the crown jewel here, right?
KAL: It’s the highest grade and it may be the closest to production, though I think the crown jewel is Emba Derho, with 62 Mt of VMS.
TGR: What’s the resource there?
KAL: It’s almost 600,000 oz gold, 1 Blb copper and 2 Blb zinc at Emba Derho.
TGR: What’s the estimated production timeline there?
KAL: It could be as early as 2015. After the feasibility is completed, it could start applying for its permits. Sunridge has already started talking with government officials, so I don’t think that will take as long as it has for other companies, like Nevsun.
TGR: Are there any other companies that you would like to discuss today?
KAL: It’s not one that I cover, but it is in a very stable country: Seafield Resources Ltd. (SFF:TSX.V:). It is advancing its Quinchia gold project in Colombia. It is expecting a resource update at its Miraflores deposit by the end of this month and a PEA in a few months. Quinchia currently has 2.5 Moz in global resource and with the new management appearing settled, the relative valuation and news flow makes this stock one to watch.
TGR: Do you have some parting thoughts for our readers?
KAL: Investors need to take the speculation out and do additional due diligence because it’s a stock-picking market. Investors need to look for companies that have good news flow, really good management and an asset that is good enough to put into production when they invest in it.
TGR: Thanks.
Kwong-Mun Achong Low is a mining analyst with Northern Securities with a focus on both precious and base metal equities. He previously worked at a Canadian bank owned dealer and at a U.S.-based brokerage. Achong Low obtained both his Master of Business Administration and Bachelor of Science degree in mechanical engineering from the University of Toronto.
By Simon Grey, on January 30th, 2012
Make no mistake, the problem does not lie with The Fed per-se. The Fed’s “low interest rates” are there to permit the profligacy of the government, yet the longer it goes on and the more the government abuses this deadly embrace the further into the coffin corner The Fed and Congress go. As the debt accumulation rises the maximum interest rate that can be absorbed goes down until finally you reach the boundary where even a slight increase in rates results in instantaneous bankruptcy.
Denninger is a smart man—well-versed in the law, particularly constitutional law, and has an immense knowledge of politics and economics. And yet, here he is once again calling for enforcement of the laws governing The Fed even though history has shown repeatedly and conclusively that it is politically impossible to manage inflation through a central bank. In theory, it is possible that a central bank will act prudently and responsibly, and not inflate the currency. In reality, though, a central bank is nothing more than yet another mechanism by which the government can tax the people.
This is why the solution to inflation is ending the fed, or at least government-mandated fiat currencies, and to allow multiple competing currencies. Relying on the government to properly manage a monopolistic money supply is an exercise in futility. Though it would be theoretically better to do it this way, history has shown quite clearly that a competitive currency market is preferable to a government-controlled currency, and it is therefore better to accept the fluctuations of market-based currency system over the guaranteed degradation of a government monopoly.
By Christopher Briem, on January 30th, 2012
So this is interesting and no, this isn’t really about assessments. I mean, it is about assessments, but there are so many bigger issues rolled into this new legal development.
In the new litigant a week merry-go-round in Judge Wettick’s courtroom (it really must be getting crowded), the latest is the (collective) property owner of one R.J. Casey Industrial Park who has a slew of issues.
One of many points is a contention that it is against Pennsylvania’s uniformity clause to assess commercial property differently than residential property which is indeed how it is done here and most everywhere else. Problem with that is that commercial properties across the state have been assessed different than residential properties for decades. So I will let the attorneys fight over that one, it is just one of the issues.
Then they seem to point out the dearth of information on the assessment. Here are points 16 and 17 in their filing:
16. Regarding commercial properties, the Property Record Cards available for purchase on the Third Floor of the County Office Building, do not contain any information on the New Assessments.
17. Accordingly, unlike residential property owners, commercial property owners evaluating their New Assessments have no access to any information that the County used to determine the New Assessments.
Lots of capitals in that, but to be sure I feel their pain. Though I do get a chuckle of someone really digging up (and dusting off) a property record card and expecting to find much relating to the latest machinations written down in ink. Are those things still written in cursive? For the record, the online information is just a small part of what what went into determining new residential values. I see no reduced form from any of the many regressions that were used. ‘Comps’ are at most part of the equation and many overinterpret their role in the assessment I am pretty sure. There is a funny story back from when the original 2001 Sabre numbers came out which didn’t really used comps the same way CLT did. The county web site did not list any ‘comps’ for a property, but people so expected to see them that eventually the web site was altered to show a few comparable properties that were picked ex post… though the properties listed really had no specific input into setting a particular property value becuase of the way the Sabre Systems algorithms worked. (that is a very short version of a very very long story.. but I digress).
To be fair I should go back to point 15 in the filing which is clearer and shows they did start out digitial:
15. Regarding Commercial Properties, the county provides no information online regarding the comparable sales used to determine New Assessments or even the gross square footage of an improvement on a commercial property. The County does provide this information online for residential properties.
Well, some information at least. Otherwise ditto.
Nonetheless, the motivation in the end must be to get a lower assessment and a lower tax bill. First off realize that for commercial property across the nation the standard for property assessment is not market valuation that it commonly is for residential values but “Highest and Best Use of the real property”. For a lot of properties that distinction may not be such a big deal, but for some in certain unique locations it could be a big deal.
So here the property owner is upset having seen their assessment for 6 properties jump from $2.7 million to $11.3 million. A scary 340% increase in nominal value. Even with our notional revenue neutrality it works out to a potential tax increase of 280%, so more than enough to be upset. So.. is the increased assessment some gross error on the part of the assessors, or is something else going on? Could it be the highest and best use for the property has changed?
Again, like the Mt. Washington parking space, we may have found the most exceptional case out there. Is there anything unique about this property?
So where is this property? All of the properties at issue in the filing are located in the otherwise depopulated Chateau neighborhood (why we still call it a neighborhood is another issue since literally no more than 10 people live there.. likely a lot less.. unless you count folks sleeping under the slots machines I guess). The properties in question are all along the riverfront a helf mile from the edge of a property recently redeveloped and otherwise known as 777 Casino Dr. Nice new bike trail cuts through the properties in question and there are some nice marinas there it looks like.
So lets ponder the ‘old’ assessment values which everyone likes to refer to as 2011 values which they really are not. They are, again, base year assessments based on what circumtance were in 2002, if not prior. Yes, the 2002 base year assessment really means that the ‘old’ values were based on what the market would bear for a property in 2002. Back then the idea of a casino was not yet really formed, and even if it was there was no thought the casino would be placed over on the North Shore there where the Rivers Casino wound up. Remember Don Barden really came in with a somewhat unexpected bid and was clearly not expected to beat out the Penguins backed project slated for the Lower Hill District, nor the Station Square locations that everyone was focusing on. The location on the North Shore and the big empty plot of land on the North Shore there was fallow and without anyone really expecting much to be made of it anytime soon. I am pretty sure that was a big drag on all nearby real estate. Even the North Shore Connector was so far from completion, and opposition so loud, that it would not have been reasonable for it to have had any impact on real estate values at the time. Now it is on the verge of opening. Could it not have some positive impact on land values anywhere near it.
So now, 10 years later.. it is not to say there is any vast demand for land over there and I am unclear was nearby development the casino has wrought… but would it really be reasonable to think there has not been any impact on nearby property which. In this case the 5 properties in question are add up to either 5 or 10 acres (I am confued because the itemized parce 22-J-67 is listed as being owned by the URA?? even though there is no mention of the URA in the filing??) of land all effectively riverfront parcels though I am not sure if they own all the way to the river itself.
Someday when we ever really see data out of all this I will work up a map of the value per acre along all of Pittsburgh’s rivers before and after the reassessment. It might be interesting to see how the price gradient moving away from the river has changed over time. It would be an interesting factoid at least to see if any of the vast efforts to redevelop our riverfronts have had any meaningful impact capitalized into real estate values of real estate close to the riverfront. Just imagine the counterfactual if they did not and what that would mean?
So there is a bit of Henry Georgism in the highest and best use construct. It is certainly true that the parcels might not currently be ‘worth’ the new higher assessments placed on them.. but if assessments stay low, and taxes stay low, there will that much less incentive to ever fully develop those properties to the “highest value” use. There is only so much riverfront property near the Casino (and the stadia and the science center) to be had. I think that is the core reason commercial properties are assessed differently to begin with.
I’m thinking there is a future casino-annex hotel latent in the geography there. Best and highest value use?
By B.P.T., on January 30th, 2012
At 8:30 AM Eastern time, the monthly Personal Income and Outlays report for December will be released. The consensus for Personal Income is an increase of 0.4% over the previous month and the consensus Consumer Spending index change is an increase of 0.1%.
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By Bron Suchecki, on January 27th, 2012
Worth reading this response by Victor the Cleaner in FOFOA comments to this question: “At the moment, in order to influence the Gold price downwards, all that needs to be done by the authorities in LBMA and COMEX, is to raise the margin requirements.” This is complete and utter nonsense.
LBMA is a trade association and not an exchange and as such does not set any ‘margin requirement’. The LBMA member firms are typically those banks and other financial institutions that trade gold and silver OTC in London, but non-members around the world also trade OTC with these institutions.
When Newmont has some trucks on the road on the way to the refiner, they might want to sell that gold immediately to eliminate any further price volatility from their accounts, and so they might phone JPM and sell that stuff forward. None of the two counterparties is a speculator here. Newmont does have the real stuff, and JPM does have the cash. So even if they would require collateral, this would not influence the price.
Yes, there are probably some raw recruits who follow websites such as TF and who trade COMEX futures in under-capitalized accounts. Yes, CME occasionally raises the margin. Yes, they may just be checking who is the under-capitalized novice and who really has the cash in order to purchase the gold for the contracts they hold. Yes, they may just rip off the clueless novice for fun (and money). But to think this would set the spot price of gold is quite a hubris.
The OTC market is ten times bigger than COMEX, and so it pushes COMEX around in a way that most COMEX-fixated goldbugs don’t understand.
If you want to keep gold cheap in the long run, you need to create a huge volume of gold loans, expand the ‘money supply’. If you want to manage the price of gold intra-day (and yes, there is indeed statistical evidence for this), you need to sell a lot of gold at spot in a short period of time. But you can do this only if you are a credible financial institution and only as long as you can hand over the allocated whenever your counterparties request it. So you need to understand extremely well what you are doing and how much physical per paper you need to be able to show. Hiking the COMEX margin is a side show.
What I find rather disappointing is the extremely poor quality of the discussion that is presented on the typical precious metal websites. This is financial product pushing of the same quality as pre-1999 when they IPO’d the companies that sell dog-food online.
Here are FOFOA, people discuss a very good reason for owning gold. For some reason, the mainstream goldbug websites totally ignore the good reason and push gold with inconsistent nonsense instead.
Why is that? Want to scalp PSLV? Want to create a mania, sell them financial products (including GoldMoney which is no longer ‘money’ by the way) and then when the big blackout comes, grab the gold for cheap from those who sell in panic because they never understood why they owned it in the first place? Very sad. And when the Financial Times calls the goldbugs confused idiots, sadly, there is even some truth in this statement.
If Victor keeps this up I’ll be out of a blogging job.
By The Energy Report, on January 27th, 2012
 The lithium market is currently dominated by a handful of major producers, but investors naturally look to smaller junior exploration and production (E&P) companies for the real growth. Economist Daniela Desormeaux of Santiago, Chile-based signumBOX takes a global macroeconomic view of the lithium industry and concludes that supply will meet demand, but if the adoption of vehicular lithium ion batteries occurs sooner than the market expects, demand could overtake supply. In this exclusive interview with The Energy Report, Desormeaux discusses some of the juniors that could ultimately add some energy to portfolios.
The Energy Report: Daniela, over the past three months the small-cap lithium developers have on the whole been in positive territory. Are we at the beginning of a
long-overdue bull market in lithium equities?
Daniela Desormeaux: Most of the smaller-scale suppliers trading in the open market are young, junior mining companies. The stock price fluctuations observed during recent months reflect the market’s sensitivity to the companies’ announcements and news.
TER: What is currently driving lithium demand? What will drive it in the future?
DD: Lithium demand has a promising future. Rechargeable batteries are the largest application, accounting for about 30% of the lithium demand. This is also the segment with the highest growth rate for the next 10–15 years, by which point we believe batteries will represent more than 50% of demand. The main driver is the automotive industry. Electrification of transportation is now driving the use of lithium in energy storage devices for hybrid and electric cars. The amounts of lithium required in these batteries are significant, from between 5–60kg lithium carbonate equivalent (LCE) depending on the battery type and specification. When compared with the lithium required for mobile phone batteries, for example, the difference is huge. A mobile phone battery device requires less than 5g LCE. Other battery applications will also show very interesting growth rates in the coming years. These include smartphones, tablets, power tools and batteries for grid storage, among others. Other current lithium applications include glass and ceramics as well as lubricating greases. Considering all of its applications, we estimate lithium’s average demand will grow around 10%/year, which is greater than the growth of the economy.
TER: How are lithium prices holding up currently?
DD: In the last few months we have seen lithium prices going up in response to announcements made by FMC Lithium Corporation (FMC:NYSE) and Chemetall (a unit of Rockwood Holdings Inc. (ROC:NYSE)). Both companies announced price increases of around 20% on all of their lithium products last year. According to the companies, the main reason behind the rise in prices was higher raw material costs. So, we might be seeing an inflation phenomenon in this industry. In real terms, prices have remained stable, and probably will go down since new capacity is being added. Talison Lithium Ltd. (TLH:TSX) is expanding capacity in Western Australia, and Chemetall is also expanding in the U.S. Other new projects are in the pipeline coming from Galaxy Resources Ltd. (GXY:ASX) in Australia and from other projects in Argentina and Canada.
TER: So, for the moment there is currently some pricing power in the market?
DD: In general terms, prices are driven by the balance between production capacity and demand. If the market is tight, prices go up. Nevertheless, this industry has been, and still is, very concentrated and the largest, lowest-cost lithium chemicals producers drive prices. However, we have seen more competition in the market. Chinese lithium hydroxide producers have entered with an aggressive price strategy in order to gain market share from the other producers.
TER: But not all the large producers are raising prices, right?
DD: So far, Sociedad Química y Minera de Chile S.A. (SQM:NYSE; SQM-B:SSX; SQM-A) has kept prices stable. It hasn’t announced any price increase the way FMC or Chemetall have. The company probably wants to give a signal to the new competitors that they can “afford” higher costs. Most of the Chinese lithium hydroxide is produced from lithium concentrate, which is obtained mainly from spodumene. Producing lithium hydroxide from hard rock pegmatites has competitive advantages compared with producing from the lithium carbonate like Sociedad Química y Minera de Chile does, and so the Chinese can compete better in this field.
TER: Here in the U.S. we are seeing proliferation of TV ads for hybrid and electric cars (EVs). Manufactures are beginning to advertise these cars with some zing. Will this jump start hybrid and EV sales?
DD: It is difficult to know because these are still considered “luxury” cars because of their high price. We have tested a statistical model on how hybrid car sales in the U.S. responded to changes in the economic cycle and changes in gasoline prices. Conclusions are very interesting. We found some price elasticity with gasoline prices, as higher gasoline prices incentivize decisions to buy more efficient cars. But income elasticity is huge, which means these cars are very sensitive to the economic cycle. Of course these conclusions will change in the future when these cars become more affordable.
TER: Investors need to see double-digit sales and real increases in cash flow, and small companies have the tremendous advantage of not having the law of large numbers work against them. Can any of the companies you follow begin to double production and revenue and create exciting bottom lines?
DD: In the short term I don’t think so, but it’s likely in a future. Main sources of uncertainty are how fast/slow hybrid and electric cars will enter into the market in a massive way (at lower prices), and how fast/slow producers will respond to the demand. In the last years we have seen that in more than 90 projects under evaluation. We believe that 4–5 projects have chances to become part of the lithium supply very soon. That means that more competition will be added in the market.
TER: I’m recalling the way the mobile phone industry took off in less-developed countries in Asia and elsewhere because there was no pre-existing buildout of copper wire infrastructure. Mobile phones were an instant success in those areas. Why then are we not seeing large lithium ion storage batteries powering neighborhoods in the developing world where power grids have not been developed?
DD: Well, the thing is that batteries are expensive. The technology has only been in development since the early 90s. It took 30 years to make progress in developing batteries for mobile phones and electronic devices, and these are small batteries and less costly than larger batteries. This is where the industry has been focused, and now we are seeing a shift from batteries for cell phones and electronic devices to electric cars.
The requirement in terms of energy storage capacity is huge, and so the cost so far is also huge. That’s why we haven’t seen implementation of these batteries in neighborhoods and in small towns. There are also some projects that try to store energy for the grid, but in order to make these projects profitable, you have to store an important amount of energy. For a power grid, the main issue is cost.
TER: With a lot of new lithium supply coming onto the market over the next few years, will supply overpower demand, or will it be the other way around?
DD: Again, while demand is growing, so is supply. Talison Lithium Ltd. in Australia, for example, is performing a very aggressive expansion plan. We see expansions in Argentina and in the U.S., and the Chinese are also expanding capacity. The main question mark is how fast or slow electric cars will come into the market. But without subsidies and without incentives from the government, it’s very difficult to enter the market because the electric and hybrid vehicles are expensive right now. If demand for lithium grows sooner than expected, we might see a delay if supply is unable to meet demand, but I don’t think this is going to happen. In short, I think supply will meet demand.
TER: Which types of projects do you favor?
DD: There are projects based on pegmatites and projects based on brines. These are two completely different worlds. I think projects based on lower-cost brine have better chances to compete with current low-cost producers.
TER: What companies are interesting to you?
DD: Australian company Galaxy Resources Ltd. extracts lithium from pegmatite and has already started producing. Apparently, the company is competitive, and it has started to ship concentrated spodumene to its lithium carbonate plant in China.
Other pegmatite projects include Canada Lithium Corp. (CLQ:TSX; CLQMF:OTCQX) and Nemaska Lithium Inc. (NMX:TSX.V; NMKEF:OTCQX). All of these projects have a chance to become part of the lithium supply. In Argentina there’s Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX), Lithium One Inc. (LI:TSX.V) and Orocobre Ltd. (ORL:TSX; ORE:ASX). These and the previous ones I mentioned have the highest project ranking by our methodology and have more chances to become part of the lithium supply.
TER: What about Li3 Energy Inc. (LIEG:OTCBB)? Back in December, it executed a letter of intent to acquire a 100% mining interest in one of the biggest assets to be had near the Maricunga Salar in Northern Chile. That makes Li3 Energy a potential major player in Chile and one of the few developers inside of Maricunga. What does this mean to the company, particularly with regard to the ban?
DD: Li3 is developing a project in the Salar de Maricunga, the second-best salar after Atacama in Chile. The company has a project and has a strategic partner (POSCAN), but current Chilean regulation does not allow newcomers to exploit lithium. We have a ban that only allows lithium extraction from those mining concessions that were assessed before 1984, which is the case of most of the mining concessions at Atacama. I think that the ban will be removed this year, but we really can’t yet know the formula that the government will use.
TER: Lithium One is close to production, and it has established a good relationship and a joint venture with Korea Resources Corp. I believe the stock has been supported by this relationship. What are the prospects here?
DD: Lithium One is in a very advanced stage of development, and it is very well ranked in our signumBOX ranking. One of its upsides is that it is located in Salar del Hombre Muerto. It’s the only startup that actually is operating in Argentina. So it has really good prospects for the future.
TER: Back in November, Rodinia Lithium Inc. (RM:TSX.V; RDNAF:OTCQX) delivered results of a preliminary economic assessment (PEA) for the Salar de Diablillos lithium brine deposit. There are estimates of 15 kilotons (kt)/year production of lithium carbonate and 51 kt/year of potash. This implies a 34% internal rate of return (IRR), which is excellent. Is this a viable project?
DD: I think it can work, but Rodinia faces huge competition. The company estimates costs will be in the range of $1,500/t lithium carbonate. But I think that it is very different to have an estimated cost before starting production than when you’ve already started producing. I think that Rodinia can be a player in the lithium industry, but like other players in Argentina it will face huge competition. It will have to be competitive because new production is coming from China and Australia. And if Chile removes the ban, they will have to deal also with that.
TER: Talison Lithium is the leading global producer of lithium, and it’s a pure play. It’s a mature company. How much can it grow?
DD: Yes, Talison is the largest lithium concentrate producer, but it’s not the lowest-cost producer. It produces lithium concentrate in Australia and most of its product is shipped to China, where it’s converted into chemicals. I think Talison will face more competition, and that’s why it has expanded production capacity. It has performed a very aggressive expansion plan at its Greenbushes project in Australia. Nevertheless, its deposit has a short mining life; that’s why it is looking for other sources of lithium and performing an evaluation project in Chile.
TER: Daniela, thank you very much for your time.
DD: Thanks to you.
Daniela Desormeaux is an economist and an expert in industrial chemicals and natural resources. She runs signumBOX, a Chilean-based company with extensive experience in the lithium industry. signumBOX has issued several reports regarding the use of lithium in batteries and vehicles and its prospects and trends.
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