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 The Gold Report, on January 17th, 2012
 When it comes to picking gold mining names in the current market environment, John Stephenson, author and portfolio fund manager at First Asset Investment Management, believes that buying the “best of breed” is the way to go. In this exclusive interview with The Gold Report, he explains his reasoning in light of how the current global economic environment is affecting prospects for the metals markets and valuations of mining company stocks. He also talks about his favorite picks in a range of three production classes and why he likes them.
The Gold Report: As a portfolio manager and an author of two books, The Little Book of Commodity Investing and Shell Shocked: How Canadians Can Invest After the Collapse, how do you see the prospects for the resource commodities in 2012?
John Stephenson: I think, in general, my prospects and outlook are very bullish. The story continues to be one of strong demand out of China. I don’t see that story changing. Obviously, there have been a lot of headlines and the Purchasing Managers’ Index data in China recently are not as robust as they were, but its economy is still going to grow at 8.5–9%. That’s pretty darn good. That’s really where demand for most of these commodities will come from. Certainly, any improvement in Europe and the U.S. will be good news for commodities.
TGR: Are there any specific ones you think will do better than others?
JS: I’d have to say that oil will do very well. I think we’ll see oil exit 2012 north of $130/barrel. Certainly, copper looks very strong. I could see that at $4.50/pound (lb) by the end of the year. Gold and precious metals will do well, also. Gold and precious metals are in a different category than the others, but, nonetheless, what I think is going to continue to drive that is Europe, and I think you’ll see $2,500/ounce (oz) gold.
TGR: So in that light, I guess $4.50/lb copper isn’t that far out of line, if you’re expecting gold in the $2,500/oz range.
JS: I think what you’re seeing across the board in commodities is very strong demand and weak supply. Nothing has happened that will improve that situation and the volatility we see daily has only made the situation worse. Suppliers have struggled to keep up. The smaller, more marginal players have had trouble getting financing as the volatility has increased. The eventual supply response, which would normally end a bull market, is going to be a long time coming.
TGR: In this recent semi-panic where gold dropped into the low $1,500/oz range and people were saying it was all over—you’re certainly not a believer in that if you’re predicting $2,500/oz gold.
JS: No. I’m not a believer in it. Gold shares some characteristics with other commodities in terms of supply and demand. Over the last 40 years, the average grade globally was around 9.6 grams/ton (g/t). It’s now around 1 g/t. So, we’re potentially facing a peak gold scenario as we may be in oil.
Look at Barrick Gold Corp. (ABX:TSX; ABX:NYSE). It recently acquired Equinox Minerals Ltd. (EQN:TSX; EQN:ASX), a copper miner. That’s how it’s struggling to find replacement gold reserves. It had no better idea than to buy a copper miner. This is typical across an industry facing very challenging supply conditions.
Gold is really taking on a different characteristic; it tends to be a commodity that is more of a currency than a commodity. I see it going higher ultimately because the solution to what ails Europe will be the need for the European Central Bank to step in line and start to print money. Once we have that, you’re going to see gold move higher. What’s kept gold down in the last few months has been that the U.S. dollar and U.S. Treasuries have become safe havens. But how much worse can things get in the world when you have the 10-year U.S. Treasury trading below 2%?
TGR:: So you’re pretty well convinced that we’ve seen the lows in the gold price?
JS: Yes. There were several reasons why the low price dropped recently. Fund managers facing redemption requests looked around and said, “Well, this has probably been the best-performing asset in my portfolio this year and maybe the last 11 years.” They felt that to meet these requests, they needed to sell. So there were a lot of things that were happening that weren’t really related to gold or to the bigger story of what was happening within Europe. We have an enormous amount of paper money out there being debased. And the solution for these debts really is to debase more of this paper money. In that environment, people around the world are saying, “I want something tangible. I want something real. I want something I can hold in my hand, store, put in the bank or under my mattress.” And the demand is going to remain very strong. I don’t see that changing.
TGR: So regardless of how all these problems evolve, as far as you’re concerned, gold is going higher, no matter what?
JS: No matter what!
TGR: Obviously, you’re a precious metals bull. What’s your preference among the equities, the physical metal and exchange-traded funds (ETFs)? Or is it a combination of all of them?
JS: A combination makes sense. The reason people have held the equities is because they get leverage to the gold price. So assuming that costs don’t increase at the same rate as the metal itself increases, you get increasing earnings and, therefore, on a consistent multiple basis, you get a higher share price and greater leverage to it.
The situation for gold miners has really changed over the last, say, four to five years. If we look back, 12 or even 15 years ago, we saw that for the first three or four years of that period, from early 2000–2004, the actual miners outpaced the metal by a three times multiple. Right now, evaluations have fallen so steadily for the miners that probably the smarter bet is to look at the equities. Certainly, the physical metal has some storage and handling costs associated with it. So I would say if you had to choose between the three, you would probably, at this point, look mainly to the miners, somewhat toward the ETFs and maybe hold a small amount physically for safekeeping.
TGR: In your portfolio management business, what criteria do you consider in selecting companies for your funds?
JS: Valuation is obviously one. We do a fair bit of work in terms of determining what we think the fair value is relative to what particular miners are trading at. We also look for reserve growth and the potential for production growth. Then I think a very important consideration is where in the world they are producing it, because geopolitical risk has taken on a whole new concern. As the traditional supply basins have started to run dry, companies have had to go further and further afield, creating additional problems. So we try to look at stable geopolitical jurisdictions that are attractive and mining friendly. We look for companies that have production histories that are strong and likely to continue, coupled with outstanding management.
TGR: Makes sense, although it is a moving target as things change, and what once appeared to be stable doesn’t look so stable anymore.
JS: That’s right. You can’t just buy and hold. You have to keep following up.
TGR: 2011 was a tough and disappointing year for a lot of investors considering what the metals did and the resource stocks didn’t do. What are you expecting to happen this year with the mining equities? Are they going to finally catch up with the commodities price?
JS: Yes. Our view is that mining equities will outperform the metals in 2012 and that now is a good time to be looking at the mining companies themselves. We think that the commodity itself will be very strong because the Europe situation is coming to a head and will be a catalyst to lift prices higher. The miners will play catch-up and multiples will go from compressing to expanding, or at least not compressing any further.
TGR: You do quite a bit of research and have become quite familiar with a broad range of companies in the mining development and production business. Can you talk about some of the ones you like, maybe starting with some of the seniors and working your way down?
JS: In terms of relative size and scale, you don’t get any bigger than Barrick. The stock is trading at less than 10x earnings, which in itself is phenomenal and less than 1x net asset value (NAV). It has better growth than Newmont Mining Corp. (NEM:NYSE), and it’s the largest producer in the world. It has struggled, there’s no question about it, but if you’re looking for a value play, something that is liquid, well managed and has very strong growth. Going with the largest in the industry at almost 9 million ounces (Moz) per year, you have to look at Barrick.
TGR: Barrick has gotten to be so big. Is it going to be able to grow internally or will it just have to continue making acquisitions?
JS: I think that’s the issue, and you have correctly identified why investors have been a little skeptical on the name. At some point, things get cheap enough that you have to look at it and give it some credit. Looking back over the history of Barrick, it had a hedge book and much of its upside was hedged. Then as gold took off, people said it wasn’t going to get credit for it if it had the hedge book on it. So the hedge book was taken off and unwound. Then people said it needed to show production growth, which it did. At some point, when the chips are down, people are going to say, “Here’s a company that’s delivered.” But, you’re right. It’s hard to see how it can become a 10–11 Moz producer from around 9 Moz and continue to replace reserves, particularly in a world of declining ore values. But, if you think that the world of investments is going to bounce all over the place as the headlines out of Europe dominate trading, then I think you need to be somewhere where they’re printing money, and this is what Barrick is doing.
The next senior I would highlight is Goldcorp Inc. (G:TSX; GG:NYSE). This is the third largest gold producer in North America. What’s unique about Goldcorp is that it offers a blend of things that are almost never found in one company. It has good growth and great production diversity—not just producing from a single mine. It’s the lowest cost major producer, with cash costs at roughly $550/oz. Typical industry average is closer to $875/oz. It has a strong balance sheet, and it’s operating in politically secure parts of the world. So the chance of expropriation is pretty low. And, it’s liquid. So we really like this.
TGR: How about Intermediates?
JS: On the intermediate producers, with production in the 800 thousand ounces (Koz) to 1–1.5 Moz per year range, we like IAMGOLD Corp. (IMG:TSX; IAG:NYSE). It has a number of mines around the world, largely in the Americas, but also in Africa. It has recently brought in a new management team, which is focused on really servicing value. It brought in someone who is not from the industry but a turnaround expert, and it’s looking at really harvesting this value. With its good mines and good operating profile plus a bent toward servicing value, this name should move higher.
Another intermediate that we like is Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE). It has a number of mines in Finland, Canada and Mexico. This was a company that was a Street darling for many, many years. It probably has the best management team out there. It has had a few stumbles lately. It actually closed one of its mines, Goldex in Quebec, and wrote off the asset, so the stock has fallen because people have probably lost a little confidence in management’s ability to deliver. It was essentially trying to bring on five mines in two years’ time, and that’s really just too high an expectation. But at this price level, it has excellent growth and still is a name to look at.
TGR: And then Juniors?
JS: In the junior producer category, there are two names I think are worth looking at. One is Osisko Mining Corp. (OSK:TSX), which is very quickly moving into the intermediates. Until we get robust global growth, a company that is going to make this transition very quickly is obviously desirable for that reason, if nothing else. Osisko is already producing from its Canadian Malartic gold deposit in Quebec even though it just finished the original mine plan. It’s already producing around 600 Koz/year and has some catalysts for growth. Once you start production, you see a re-rating in your shares. This is trading at a discount to its junior and intermediate peers in terms of a multiple basis, but we think that multiple will expand as it continues to produce. It also has another property that gives it some option value and some further upside.
Lastly, we like AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE) with three operating mines in Mexico and two in Australia. It recently commissioned a new mine at the Young-Davidson project in Ontario. We think this is another company that has a very strong growth profile and has been a bit in the penalty box, but it’s really too cheap at this point not to be looked at. So we think this is a potential double in terms of per-share value over the course of the next year to year-and-a-half.
TGR: AuRico has somewhat come out of nowhere with a name change and then these acquisitions. It’s actually quite a diversified situation with these properties spread out all over.
JS: Yes, it is. It used to be called Gammon Gold and then bought Northgate. We think that this is a name that should do very well. Given that it’s trading below its NAV at this point, it’s just too cheap to be ignored. It has a heap leach at its Ocampo property that continues to struggle a little bit. But I think all these issues are well known. At this level, this name and really all the others, should be bought, if you believe that gold prices will move higher, which we certainly do.
TGR: You probably look at a lot of other little companies that maybe are not suitable for your portfolio. Do you have any you might like to mention that you think are good speculations but not necessarily investment quality?
JS: Yes. Obviously, lots of gold companies come along that we think are interesting. I’m skeptical to mention some of these names because I think that for most investors, they’re a binary outcome. They either make it or they don’t, and in more cases than not, they struggle. I think, certainly, you could make a case for Pan American Silver Corp. (PAA:TSX; PAAS: NASDAQ) and some of these other names that are smaller, but they’re really a beta play on gold because when you start looking at some of these silver names, they typically trade in a much more volatile pattern than the gold producers. I think for many investors, the volatility isn’t worth the ride.
TGR: What sort of strategy are you suggesting investors use this year for maximizing their gains or not having the same sort of performance we had last year?
JS: We’ve seen mining company valuations trend down for many years. Now is a good time to start building positions by buying the best of breed—the ones that will do well in an increasing gold scenario that have little or no operational risk and are larger-cap names. Besides Barrick and Goldcorp, certainly, Kinross Gold Corp. (K:TSX; KGC:NYSE) would be another name to look at. I think its growth comes a little further out, probably in 2013, but you can start to take a look at that. I think turnaround situations like Agnico-Eagle Mines might be very good to look at. Keep in mind, if you’re buying a mining company, it’s making lots of money at $1,500–1,600/oz gold, but if you buy an ETF or the physical metal, you’re hoping it goes from $1,600/oz to $2,000/oz or $2,500/oz in order to make a profit. In the case of a mining company, you don’t need it to go anywhere. All you need is some recognition that there is value today in these companies, and there will be value tomorrow, as they, it is hoped, find more reserves and produce them.
TGR: Are there any parting thoughts that you’d like to leave with our readers?
JS: I would advise people to keep in mind that if there ever was a time for an investment in gold and gold equities, it is now. We have a very unusual situation in the global economy, where there really isn’t any obvious exit path other than the monetization of the debts. Gold companies have suffered because people have flocked to other safe havens, namely the U.S. dollar, but the U.S. has its problems as well. In general, if you’re with a company that has more than one operating mine in geopolitically safe parts of the world and has a demonstrated track record of increasing reserves and production, then I think those are the things that will, in the longer run, reward you. Short run speculating may be exciting but I think most people need to invest in things that have the potential to be higher a year from now than they are today. I think, right now, this is gold equities.
TGR: Thank you for your thoughts, input and insights. I hope 2012 will be a better year for everyone. We look forward to seeing how all of this comes about.
JS: I hope so.
John Stephenson is a senior vice president and portfolio manager with First Asset Investment Management Inc., where he is responsible for a wide range of equity mandates with a particular focus on energy and resource investing. He has been recognized by Brendan Wood International (BWI) as one of Canada’s 50 best portfolio managers for the past three years. He is the author of The Little Book of Commodity Investing (John Wiley & Sons, 2010), which has been translated into five languages, and Shell Shocked: How Canadians Can Invest After the Collapse (John Wiley & Sons, 2009) and writes a free bi-weekly investment newsletter, Money Focus, which reaches a global audience of more than 125,000 (www.reportonmoney.com).
Stephenson is regularly quoted by Bloomberg News, Reuters, The Associated Press, The Wall Street Journal and The Globe and Mail and is a frequent guest on Bloomberg TV, CNBC, CNN, Fox Business and Canada’s Business News Network (BNN), Sun TV and the CBC. He is frequently the keynote speaker at investment conferences throughout North America. Stephenson holds a degree in mechanical engineering from the University of Waterloo, a Master of Business Administration from INSEAD, as well as the Chartered Financial Analyst (CFA) and Financial Risk Manager (FRM) designations.
By The Gold Report, on January 10th, 2012
  Despite a pullback in growth for China, copper demand is likely to remain strong in 2012, according to Dr. Michael Berry, publisher of Morning Notes, and his co-author, Chris Berry, founder of House Mountain Partners. Other developing nations, such as Indonesia, should pump up demand, but supply from such regions remains a tenuous prospect. In this exclusive interview with The Gold Report, the Berrys explain how “home-brewed” U.S. copper companies will be an important part of the equation.
The Gold Report: In a recent edition of Morning Notes, you referenced some “sprouting” problems in China. What are those problems and are they likely to affect China’s economy?
Michael Berry: We spent a couple of weeks in Shenzhen, China, and Hong Kong last month. On the surface, there do not appear to be any real problems in China. The infrastructure is fabulous—new roads, tunnels, bridges and stadiums. There are a lot of institutional investors in China with a tremendous thirst for knowledge. But old China hands—and I’ve been there many times since the 1960s—feel that there are serious problems beneath the surface, including inflation, slowing exports, bad loans and overbuilding.
During our visit to China, investment bankers we met with indicated that there are vacancies and see-through buildings in many cities. This is always a precursor of problems to come. China has an export-led economy and the U.S. and Europe, two of its main customers, have slowed down considerably. We may see a recession in Europe this year, which would bode ill for China, which counts the Eurozone as one of its largest trading partners.
An important question is how quickly can China transform itself into an economy with healthy domestic demand? That’s going to take years. There are also concerns about whether China can continue to grow at a breakneck speed of 9% or 10% per year. Most of the forecasts show China’s gross domestic product (GDP) will slow considerably over the next six years; however, it will still maintain growth levels above the Western economies. But problems are lurking in China, no doubt. The best we can hope for is a soft landing in 2012.
TGR: Paul Krugman recently wrote in The New York Times that China is on the verge of a massive real estate bubble. The World Bank recently lowered its GDP forecast for China to 8.4% from 9.1% in 2012.
MB: Growth will certainly slow, but China is better positioned to handle problems with overbuilding and bad debt than the U.S. China has been running huge surpluses for years and has accumulated significant foreign exchange reserves by pegging its currency to the U.S. dollar at artificially low levels. Japan recently inked a deal with China to buy its bonds. The Chinese currency and economy are slowly coming out of their self-induced isolation.
We remain cautious, however. China has a cushion here, but as we said before, there are some lurking issues and Paul Krugman touches on one in his piece.
TGR: How could a slowdown affect copper demand?
MB: Copper is probably the single metal that reflects good times in the world and growth. It is called the metal with a Ph.D. in economics because it’s so necessary for and indicative of economic growth. Expect supernormal growth of 5–7% in a number of emerging economies, which will keep demand for copper strong going forward.
The real question is from where will additional supply of copper come? There are the beginnings of a supply crunch in copper, which is affecting a number of mines worldwide. We are witnessing a combined supply-demand issue, not just a demand issue. Resource nationalism, falling grades and adverse weather are just a few issues affecting copper today. This is troubling but ultimately a good omen for junior mining companies involved in copper exploration.
Chris Berry: China is responsible for about 40% of global copper consumption, and copper is a 16-million-ton-per-year market. If GDP growth in China slows even from 9% to 8%, copper consumption has to fall in line unless other countries can pick up the slack in demand. What countries hold the potential to do this? Looking at demographics, potential demand and infrastructure build-out, several emerging markets come to mind including Brazil and India as well as “second tier” emerging markets such as Indonesia, Turkey or Colombia. If these countries do indeed grow at above-trend growth rates, you must then ask where additional supply is going to originate from—and supply appears tight going forward.
A notable example of a supply disruption is Freeport-McMoRan Copper & Gold Inc.’s (FCX:NYSE) Grasberg mine in Indonesia, where company management recently declared force majeure on copper exports. You can add labor strife to the list of issues potentially curtailing copper supply. Labor issues at mines promise to remain front and center as high metals prices make mining a more financially attractive pursuit. Grasberg is one of the largest copper mines in the world and the employees there have agreed to a 40% increase in pay over two years, however, I don’t believe the strike is fully settled yet, highlighting how thorny labor issues can be. Issues at the Grasberg mine have some very serious implications for copper supply going forward. So to summarize, between supply and demand, I think copper supply is the more important of the two to focus on.
TGR: The junior resource sector had a difficult time in 2011. The Toronto Stock Exchange Venture Composite Index, which is mostly composed of junior resource companies, was at about 2,400 in April, but had fallen to 1,450 by the end of December. Do you think we’ll see a sector rebound in 2012?
MB: There are strong headwinds for a lot of these companies and 2011 was unkind to the junior mining space in general. Very few junior mining companies have escaped the wrath of the pullback in commodities and overall panic at issues that have developed around the world. Investors must now focus on which companies can sustain themselves until we’re over the hump. We’re not there yet. The question will be which stocks can stand the test of time, can sustain their exploration and development activities and raise sufficient capital to fund operations in a difficult environment, to put it mildly.
TGR: Revett Minerals Inc. (RVM:TSX; RMV:NYSE.A) had some potential catalysts coming to the forefront this summer. What’s new there?
MB: Revett produced 3 million ounces (Moz) silver equivalent and earned about $16 million (M) in the third quarter. The company also recently announced a $20M revolving line of credit from Société Générale. It produces the best copper-silver concentrate in the country from its Troy mine in Montana. The mine has a perpetual seven-year life because it keeps finding more copper and silver resources as it mines. It’s building in production and the kind of liquidity and strength it will need to manage any economic downturn.
We visited the company in early September. The management team is very much together. It got a good ruling from the Ninth Circuit Court of Appeals on the environmental impact of Rock Creek on grizzly bears and endangered fish. Rock Creek is a second ore body fully drilled out, and environmentalists have tried to block its development. It has 229 Moz silver and a couple billion pounds of copper in virtually identical geology to the currently operating Troy mine. There’s a good chance the company will be able to mine Rock Creek within the next couple of years.
Revett should prosper and could be the target of a takeout. It’s a very positive situation. The stock trades around $5/share, but it was $0.07/share a few years ago. That speaks well for the management and investors in Revett Minerals.
TGR: The line of credit is at London Interbank Offered Rates (LIBOR) plus 3.5%. Do you think that’s a bit high?
MB: Possibly, but certainly Revett can handle it. It’s producing and selling all the silver and copper concentrate it has, so a revolver is a good deal for it. These are catalysts that you want to see from time to time.
TGR: If Rock Creek moves ahead as planned, when would it reach production?
MB: I don’t think the environmentalist group will appeal to the Supreme Court. Even so, I don’t think the Supreme Court would hear it. It’s probably three to four years away from production.
The Troy mine will certainly sustain the company in the meantime. Management presentations indicate that Troy has perhaps 10 to 15 years of production left.
TGR: Is $5/share a good entry point for that stock?
MB: This stock is fairly volatile. If Rock Creek comes on, yes, I think $5/share will be an incredibly good bargain for investors. I’ve been watching Chief Executive John Shanahan now for several years and he’s completed everything he said he wanted to do.
TGR: In a recent edition of Morning Notes, you discuss some of the recent ups and downs of Quaterra Resources, Inc. (QTA:TSX.V; QMM:NYSE.A). You called the company’s Yerington copper project in Nevada “a company maker” even though Quaterra also has the high-grade Herbert Glacier gold project in Alaska.
MB: Tom Patton, the chief executive of Quaterra, bought Yerington out of bankruptcy for $250,000 in stock. Historically there are about 5 billion pounds (Blb) of copper at the Yerington Bear deposits. This past May, he announced he was exercising Quaterra’s option on it. There is going to be a large copper district there. There are three companies now in the area. Nevada Copper Corp. (NCU:TSX) has a very large, high-grade skarn deposit. Entrée Gold Inc. (ETG:TSX; EGI:NYSE.A) has some properties to the east of Yerington, which include the Bear deposit, a large, partially drilled out porphyry, and the MacArthur, an oxide-chalcocite run-of-mine project with 1.4 Blb of mine-ready, leachable copper. Quaterra drilled out the MacArthur oxide quite nicely and found a fair amount of higher-grade copper averaging about 0.5%. It could be leached directly and brought into production within two to three years for about $250M. The key to the entire district is the MacArthur property that Quaterra owns, in my opinion.
Quaterra has been cut in half in this pullback. We hope management will move to monetize some of its assets, either its Nieves silver property in Mexico, which may have 100 Moz silver in all categories, or even its 35% stake in Herbert Glacier, a high-grade, gold-silver resource north of Juneau, Alaska, which was recently discovered through drilling.
I may be a loner in this regard, but the MacArthur oxide-chalcocite deposit and the fact that it has a huge water resource are the keys to the entire Yerington district. I think the district holds 50–60 Blb copper. When I visited Yerington in September, Quaterra had five drill rigs turning. You don’t have five rigs turning on a property if you don’t think you’re really proving up and increasing the resource significantly.
TGR: Nevada Copper was shopping its project before its share price went down considerably. Which one—Quaterra, Entree or Nevada Copper—is most likely to be taken out first?
MB: Nevada Copper is the furthest along. A company like Antofagasta Plc (ANTO:LSE) might want to take it out. However, whatever company comes into the district is going to want to consolidate it. Having Nevada Copper would be a coup, but it would not help consolidate the district. From a strategic view point, Quaterra’s Yerington pit, MacArthur pit and Bear deposit are really the keys to the district.
There are already some big players in the district. Rio Tinto (RIO:NYSE; RIO:ASX ) owns 25% of Entrée Gold. Ivanhoe Mines Ltd. (IVN:TSX; IVN:NYSE) owns 12%. But Entrée is three years behind Quaterra and Nevada Copper.
TGR: Arizona has some vast reserves of copper as well. Do you see a renaissance in developing copper juniors in Arizona?
MB: I do. On our way to China, Chris and I visited Tucson, where there are several great porphyry discoveries. ASARCO LLC, Rio Tinto and BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) are there. One junior miner in particular, Redhawk Resources (RDK:TSX; QF7:FSE; RHWKF:OTCQX), has been drilling and it’s onto something.
Arizona, Nevada and Idaho are great states for mining. Given the unemployment in some of these regions, there is a new lease on life for junior mining companies to work in these states.
TGR: Redhawk is trading at about $0.42/share. Do you like that as an entry point?
MB: The stock is cheap, there’s no doubt about that. Its property, Copper Creek, is quite spectacular. When we visited in December, it had three rigs turning. There are close to 400 breccia outcrops of fairly small tonnage, but very high-grade copper, gold, silver and molybdenum. Red Hawk is looking for deep, but high-grade, thick veins that characterize big discoveries like Butte in Montana. I like the management team. It raised $20M earlier this year and it’s probably going to have to go back to the market again or do a joint venture. There’s lots of interest and it has confidentiality agreements signed with the big boys. There are smelters literally all around it. It’s got great infrastructure. There’s a good chance for a world-class discovery there.
TGR: What about Quadra FNX Mining Ltd. (QUX:TSX)?
MB: Quadra is a great case study. It has done a great job. You want to see that event that monetizes the shareholders. The Polish firm KGHM Polska Miedz S.A. (KGH:WSE) offered $15/share for the company. There is a lot of interest in U.S. deposits now. There’s a new life on mining and exploration, and there’ll be more takeouts in the future.
TGR: Do you have anything to add to that, Chris?
CB: There has been a lot of talk lately about what makes a metal critical. Certainly, copper is a critical metal based on its ubiquitous use throughout all facets of the global economy. Mineral deposits where resource nationalism isn’t a top concern, or a concern at all, like Arizona, Idaho or Nevada, deserve a second look and a premium in share price based on their location. I think we are sure to see more cross-border mergers or take outs like the KGHM/Quadra example as copper’s importance to economic growth is only magnified by an emerging middle class of billions in the years to come.
TGR: You gentlemen are about to launch a new product, the Discovery Investment Scoreboard. Tell us about that.
MB: About 10 years ago, I defined a technique called Discovery Investing because I was interested in discovery. All great wealth creation starts with discovery. I defined 10 rules or factors and continued to refine them over the last decade. Dr. Terry Rickard, a brilliant mathematician and former senior fellow at Lockheed, finally convinced me to put my discovery investing discipline in a software format. We use a powerful mathematical technique that he developed. It allows users to rate stocks in English vocabularies and develop an ordinal ranking. The number of companies that the system ranks, the database, is getting quite large. The most interesting aspect of the database is its ability to build a crowd score. It takes each individual user’s analysis and builds it into a single score, which allows investors to check their analysis against the crowd.
CB: The toughest part about the nano cap space is in trying to evaluate these companies, because traditional metrics don’t work. There are no earnings or cash flows so there is a great deal of guesswork involved. The Discovery Investment Scoreboard (DiS) is designed to take the guesswork out of evaluating these companies. We can rank any one of the companies we mentioned today—it doesn’t even have to be a nano cap.
We might look at the management of a company and you might say it’s average. I might say it’s excellent. At the end of the day, who’s right? Nobody really knows. There are still a lot of open questions. We’re aiming to quantify those opinions. The real bonus for the end users is the crowd score. Investors can see how their opinions rank relative to the crowd. Since I’ve been using the system, it has raised many questions about what I’m seeing that the crowd is not or vice versa. We think it has potential to shine a lot of sunlight on accurate valuations for junior companies.
TGR: Have either of you adopted a New Year’s investment resolution?
MB: In 2012, we hope to make DiS available to everyone who wants to analyze these companies. It’s going to be by subscription but we’re actually looking now for people who want to help us build the database. We’re planning to kickoff the system on Jan. 22 at the Cambridge House International Resource Conference in Vancouver. We haven’t priced it yet, but it will be affordable for the individual user. We’re going to have versions for institutional users that will be more detailed and quite a bit more powerful.
TGR: Jeepers. You might just put some analysts out of business.
MB: Chris and I actually sat with two analysts and two investor relations representatives in China and they loved it. We travel to Denver next week to conduct a focus group on the usage of the DiS.
CB: Once we explained the rationale and the background to them, it became a little bit addictive, because companies start popping up in your head and you think, “Gee, I wonder what the crowd thinks about this company or that company?” The whole idea of finding out what I’m missing or what I know that the crowd doesn’t is key. I think that’s what has a lot of people excited right now.
TGR: Thanks to both of you.
Dr. Michael Berry served as a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia from 1982-1990, during which time he published a book, Managing Investments: A Case Approach. He has managed small- and mid-cap value portfolios for Heartland Advisors and Kemper Scudder. His publication, Morning Notes, analyzes emerging geopolitical, technological and economic trends. He travels the world with his son, Chris, looking for discovery opportunities for his readers.
Chris Berry, with a lifelong interest in geopolitics and the financial issues that emerge from these relationships, founded House Mountain Partners in 2010. The firm focuses on the evolving geopolitical relationship between emerging and developed economies, the commodity space and junior mining and resource stocks positioned to benefit from this phenomenon. Widely quoted in the press and a frequent speaker at conferences throughout the world, Berry holds a Master of Business Administration in finance with an international focus from Fordham University and a Bachelor of Arts in international studies from The Virginia Military Institute.
By The Gold Report, on October 13th, 2011
 Legendary mining entrepreneur Ross Beaty is an optimist. He likes the opportunities present in both bear and bull markets. In this exclusive interview with The Gold Report at the Casey Research Summit in Phoenix, he explains his love of metals and alternative energy and what he is doing to position himself regardless of where the markets go.
The Gold Report: Your talk was titled “Gold, Silver, Copper, Nickel and Alternative Energy: the Commodities I Still Like.” Before we get into the specific commodities, I wanted to ask you about the distortions in supply and demand that you mentioned. As more investment is going into exploration, fewer discoveries are being made. Is that because the easy ones have already been mined? Are costs higher? Are there more regulatory burdens? And how does that impact share prices?
Ross Beaty: It is more expensive to discover resources because there are more barriers to development; there are more empowered people who don’t want a mine in their back yard. The U.S. is a perfect example where there are some great ore bodies that simply are not allowed to be developed. What used to take three years now takes 10 or 20. That means that supply just can’t respond quickly enough to rises in prices and prices stay higher longer.
Share prices are influenced by many factors—perceptions about long-term and short-term trends. The winds of change that affect profitability of a mine in a particular place present a very complicated picture. You have to look at operating and capital costs. If you work anywhere other than the U.S., in Chile for example where the currency has increased in value 30% against the dollar in the last three years, you have to consider the impact of the devalued dollar because suddenly all local costs have gone up 30%. All of this weighs on profitability. It is difficult to break out the impact of just the price of development alone on share price, but it does have an impact.
You also have to realize that exploration and mining companies are very different. Exploration companies won’t have cash flow for many years. It’s a much riskier business to evaluate compared to a mining company that suffers changes in revenue and costs minute by minute. For example, one of my companies, Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ), the second-largest primary silver producer in the world, produces 24 million ounces of silver each year. If we have a silver price change of year-on-year $10/ounce, that immediately translates into an extra $240 million (M) of cash flow. If I have a deposit in the ground that will take 10 years to dig out, short-term price fluctuations mean absolutely nothing to the profitability of the company. It’s a very different thing.
TGR: Do people have longer-term investing strategies toward exploration stocks if it takes so long to pay off?
RB: It always surprises me that people treat exploration stocks as if they were producing mining companies. Share prices go up and down based on the price of the metal. It makes no sense, but they do. They also judge the immediate value of an exploration company based on political changes when often the political situation will have changed completely by the time the mine is producing in five or ten years.
TGR: Does politics play an important role in the profitability of producing mining companies?
RB: Politics have greater impact on producing companies. We have an asset in Bolivia. In May, the president made a sweeping statement that he wanted to nationalize the mining industry. Pan American was hit by 15% share price drop overnight even though nothing happened, the rules didn’t change, the mine is still operating. And that mine is only about 6% of the net asset value of our company anyway. Investors sell on rumors. That is the world we live in.
TGR: Once a mining company finds a resource and gets through the long permitting process, is it difficult to find qualified people?
RB: The existence of a trained workforce—engineers and geologists—is a very serious problem today. Not enough are being educated. The same is true in the oil industry. Keep your bankers and lawyers, but send us your engineers and geologists. It’s the same in Peru, Argentina and Chile. That will impact how long it takes to get a mine built, how well it is built and how profitable it will be in the end. It is a very serious problem.
TGR: Is there a solution?
RB: There is a lag and often it ends up countercyclical. When the market is up, students go in, but it takes four years and by then the market could be down. I have seen this many times, but this particular construction boom is just sucking up everyone. We need more people going into these programs.
TGR: You said gold has great legs. How high can it go?
RB: I have no idea. I just know the forces driving metal prices are very strong right now. Gold is in a secular bull market with long-term upswing driven by governments printing money, lack of supply and increased demand from China. These are powerful forces. When they will stop, I don’t know, but I don’t see things changing anytime soon. That is especially good for gold and silver.
TGR: You sold Ventana Gold Corp. (VEN:TSX) last year for $1.5 billion. Now you are an investor in Keegan Resources Inc. (KGN:TSX; KGN:NYSE.A). Is that the same business model: explore, derisk and sell?
RB: I like the story. Keegan is basically the same business model as Ventana. The company is developing a gold deposit in Ghana. It hopes to sell it and that usually commands a premium. It could take a month or it could take three years. My money is on the shorter term.
TGR: You called silver the schizoid metal because it doesn’t know if it is a precious metal, an industrial metal or an investment insurance play and that can make it more volatile. Are ETFs bringing more investors and therefore making it even more volatile?
RB: The silver ETF has been the most important thing driving silver prices in history. It has created a whole new demand from people who want an easy way to buy physical silver.
TGR: Is it a new demand or does it cannibalize the equities?
RB: It definitely cannibalizes equities, so does the gold ETF. But I would rather have a higher silver price since that provides better cash generation and a more sustainable long-term business. They are both good ways to have exposure to silver. I was a big part of the establishment of the silver ETF and without a doubt that has profoundly contributed to the rise in silver prices.
TGR: Is that also true on the gold side?
RB: Not as much on the gold side. Silver is a much thinner market so a little bit of money on the silver side has a bigger impact than the same amount on the gold side. Gold is also held by central banks in significant amounts and that has its own impacts.
TGR: Pan American is selling for less today than it was a year ago when the price of silver was higher. What is causing the distortion?
RB: Forward-looking investors bought in the $10 range with the expectation that the price of silver would go up.
TGR: So today’s higher silver price was priced into the stock?
RB: Yes. Today a lot of people have taken money out of the equities because they fear perturbations in world economies that will drive down all metals.
The other factor is that Pan American had some unusual political exposure this year. For example, Peru. When Ollanta Humala was elected president, people thought he would be another Chavez and nationalize the mining industry, so they sold our stock. That didn’t happen, but the stock took a hit anyway. We also have an enormous asset in Argentina, but it needs some political changes before its value becomes apparent. These things weigh on our share price.
I am optimistic about the price going forward because these concerns haven’t been realized. We are taking advantage of the share price devaluation to buy back $150M of our stock. It is a great use of our capital. So, this market correction is a gift because it gives us a chance to increase the value-per-share for shareholders who want to keep their shares long term.
TGR: Are the same dynamics at play in copper?
RB: They call copper “Dr. Copper” because of its ability to reflect global economic conditions. In the last 50 years, it has had many cycles. The most recent bull trend is really driven by industrial demand from China. Copper is used in energy transmission, energy generation and, at the other end, all kinds of consumer goods. Cars use a huge amount of copper and electric cars use even more. Developing countries use an immense amount of copper to grow.
TGR: But if China experiences an economic slowdown, what does that do to copper demand?
RB: I have a different view of China. I don’t believe the enormous ship of China has turned course. It may have hit a few waves but it still has a long way to go to improve living conditions for its people. I don’t see growth stopping because there is a little bit more debt than it should have or it is acting a little bit more bellicose than it should. China will take its place as a world leader and remain an engine for economic growth.
TGR: Why aren’t stock prices reflecting Chinese demand?
RB: China has been the single most important factor in the metals bull market of the last nine years for fundamental reasons. The recent problems in the stock market haven’t been about China but because of the problems in the rest of the world. In early 2009, a lot of people were saying China’s run is over. That was the best investment opportunity in my lifetime. That was when you wanted to back up the truck because everything was so oversold. A lot of people said it was the end of the world, the end of the bull market. It turned out metal prices bounced right back and they have been like that for the last couple of years and are just slightly off that peak now. Copper is still at prices that most mining companies just love. I’m taking the view that this is a great opportunity to be a buyer. It’s the people who are contrarians and have the courage to buy when everyone else is selling who make the big money.
TGR: But this downturn is less about financial institutions collapsing than fears of a double recession. If “Dr. Copper” reflects economic growth, why are you still optimistic?
RB: I look at the whole world as a source of demand. Things are booming in Saudi Arabia, South America, India, parts of Asia. In all those places there is growth, which demands new infrastructure and that requires a lot of copper. Even though there is a slowdown in the U.S. and Europe, there is great growth elsewhere. Every day more people are born and more people want stuff. This is very supportive of long-term high prices. Nothing goes up forever in a straight line. Price corrections are absolutely normal and healthy.
TGR: Is this the same thing you are seeing in nickel?
RB: Nickel is less complicated. It has one use—stainless steel. You just have to look at demand for that and things look pretty good there. On the nickel supply side, it is changing radically. The cheap, easy-to-operate nickel mines are being mined out and being replaced by expensive-to-build and operate nickel mines. So you need high nickel prices to bring into production and sustain those mines. If nickel prices go down, those may be shut down, which will reduce supply and increase prices.
TGR: What is the magic number where nickel mining is no longer profitable?
RB: That might be $5–$6/pound on a global average, maybe more.
TGR: Lumina Copper Corp (LCC:TSX) and Anfield Nickel Corporation (ANF:TSX.V) are two metals companies you are involved in with an explore-and-sell business model. Mergers and acquisition activity has been off lately. Do you see that changing?
RB: I think there has been a lot of acquisition in the last year globally. A big deal was announced last week by a Chinese company for an African copper producer.
TGR: Is that the trend, that China will be the home of a lot of the acquirers?
RB: China has been the number one buyer for sure. It isn’t just limited to the Chinese companies, however. In the last cycle it was English, American and Canadian companies. Now it’s the developing countries: Indian and Korean companies are entering the space. They want to secure long-term metal supplies because they need them to secure supply for their manufacturing businesses. They are worried about buying on the open market and the prices going up, so they are taking action by buying assets in the ground. It also reduces their exposure to the U.S. dollar. I don’t see that changing anytime soon.
TGR: You said you are an optimist and the proof might be your dedication to renewable energy.
RB: I’m doing that as much for love as money. I think it is an important legacy for my children to wean ourselves from fossil fuels. Oil and gas are great for making a lot of things, but it is a terrible waste to burn them. Alterra Power Corp. (AXY:TSX) started up in 2008, went public in 2009 and already has $1.1 billion in assets, all generating clean power, profitably.
TGR: Your strategy has been to make it bigger. You started with geothermal and added wind and run of river. Will you keep growing it?
RB: Even though I am disappointed in the stock market reaction the last couple of years, I am proud of our execution of the business plan. We have a wonderful team of experts, adequate capital and we are building a large alternative energy company that is profitable and sustainable and will live way beyond my lifetime. This is based on development of energy sources that are free: wind, heat and water. You just have to hook them up to a turbine. This takes a lot of money, but once they get going, they run essentially forever at very low cost.
Alterra is already a medium-sized alternative power company that will survive and prosper for a long time. We are working on how much bigger we can get and with what technology: wind, water or geothermal. Do we want to grow organically or do we want to buy other businesses on an accretive basis? It has to be a winning proposition for everyone. This is the ultimate long-term business.
TGR: Long term and steady, but without big jumps in price.
RB: It’s the opposite extreme of mining where you have no control over your revenues. In this business, you fix the prices for the long term, 20–25 year contracts, so your revenues are steady and predictable. Banks love these long-term businesses. These are ultimately big dividend producers.
TGR: How long before it starts paying off?
RB: We are in a position to pay dividends today. But I think we can better reward our shareholders by growing. We might be there next year or sometime after that.
TGR: What are you most excited about?
RB: I am most excited about continuing to build Alterra Power into a bigger and better clean energy company. We can do this in any market, be it bear or bull. Bear markets aren’t all bad. It is often easier and cheaper to build things in tough markets when other companies are stressed. Slower markets usually also mean lower capital costs. But I also like bull markets; it’s always nice to see the share price go up.
I don’t know what is going to happen next week or next month, but if we keep our heads down and execute on our business plan, we will build value.
TGR: We are at the “When Money Dies” conference that says fiat currencies will die. Since you are so tied to U.S. dollars, do you believe that and how do you deal with that?
RB: I am involved in a natural hedge against dollar devaluation—metals mining. As currencies weaken, metals prices go up. It’s a good place to be today. And in alternative energy, once you have operating plants using wind, water or geothermal heat, you have long-term predictable revenues and no exposure to commodity prices. It’s another great place to be today.
TGR: But if the dollar weakens, don’t your operating costs go up as well?
RB: You have to hope that revenue increases faster than expenses and that is what has happened so far.
For the complete audio collection of the Casey Research/Sprott Inc. Summit “When the Money Dies,” click here.
Ross J. Beaty is a geologist and entrepreneur who currently serves as chairman and CEO of Alterra Power Corp. and Pan American Silver Corp. He also founded and divested a number of other public mineral resource companies. Born in Vancouver, Beaty has degrees from the Royal School of Mines, University of London, (M.Sc., Distinction in Mineral Exploration, 1975) and the University of British Columbia (LL.B. [Law] 1979 and B.Sc. [Honors Geology] 1974). Working in 50-plus different countries during the course of 37-plus years in the international minerals industry, he speaks English, French and Spanish, as well as some Russian, German and Italian.
Beaty is a past president of the Silver Institute in Washington, D.C., a fellow of the Geological Association of Canada and the Canadian Institute of Mining, recipient of the Institute’s Past President’s Memorial Medal, and a founder of the Pacific Mineral Museum in British Columbia. Beaty received the Association of Mineral Exploration of B.C.’s Colin Spence Award for excellence in global mineral exploration in 2007 and in 2008 the Mining Person of the Year award from the Mining Association of B.C. and the Ernst & Young, Natural Resources Entrepreneur of the Year award.
By Bron Suchecki, on September 21st, 2011
Record prices spawn new wave of China gold bugs: “More investors are moving into paper gold because of the lower capital costs. The prospect of making big and quick bucks by betting on gold’s ascent is beginning to look like a fairly easy way to make money.” Keep this in mind to temper they hype the next time you hear how China is going to be a huge physical market. One could argue that the gambling like nature of Leverage would have more appeal in the East than the West.
More than 2.8m tonnes of hidden copper stocks: “…how much copper is being stored ‘off market’ in private inventories…” Guess what, there is a lot of off market (in that we don’t know who and where) gold and silver. At least we know the overall stock figure is circa 160,000t. When you have that much overhang relative to new mine flow, “…sudden and violent liquidation could pose a major threat to market fundamentals…” Of course a sudden and violent flow of dollars into gold could cause the same problem.
Another Lawsuit Filed Against JP Morgan For Silver Price Manipulation: I nearly fell off my chair reading this from Zero Hedge – “a lot of the content in the filing is regurgitated filler” and “at time reads like a diary of a conspiracy nutjob, and unfortunately that is how the conflicted legal system will see it”. What happened to their usual goldbug ra ra ra? BTW, not much in the 100+ page filing and it wasn’t very convincing for me.
Dutch Socialist Party puts gold questions to treasury secretary: Note that the Reserve Bank of Australia, in contrast to most central banks, answers these two questions in its past annual reports -
“2) Why are gold and gold loans stated as one line item in the annual report 2010 instead of mentioned as two separate items?
3) Can you give an overview of the yearly yields of the gold loans during the past years?”
If the RBA can disclose this information, why not the other central banks? Interestingly, the RBA has wound back all of its gold leasing. Would you take counterparty exposure to a bullion bank for 10 or 20 basis points return?
By The Gold Report, on September 15th, 2011
 Dr. Paul Zweng, a portfolio manager with Resource Venture Advisors in Beverly Hills, Calif., has managed to make some big things happen with small companies. By investing in the tiniest of resource companies, he has grown the fund exponentially. In this exclusive interview with The Gold Report, Zweng tells why his biggest asset is his cast-iron stomach.
The Gold Report: Paul, the fund you manage for Resource Venture Advisors focuses on nano caps. What are the advantages of investing in the smallest of the small players?
Paul Zweng: We invest in companies with market caps from less than $10M up to $75M for two principal reasons: These companies have the greatest potential for outsize performance. You can literally generate 10x returns with these tiny companies. Second, it is a niche where we can be competitive.
I am not bold enough to say that I can see things in Newmont Mining Corp. (NEM:NYSE) or Barrick Gold Corp. (ABX:TSX; ABX:NYSE) that the other 35 sell-side analysts out there haven’t already evaluated. We can be competitive with these underfollowed companies that have little to no research because we understand geology and exploration. That’s what my background is in.
I’ve been in exploration for a long time. And I’ve actually run/co-founded Canadian juniors with successful outcomes (e.g., QGX and Antares). We wanted to follow the companies that the multiple-discriminant analysts, the certified financial analysts and the sell-side analysts are largely ignoring because if we can find a good one, two or three here—we typically have about 10 companies in our portfolio at any one time—and if they execute on the so-called promise, then there’s the chance for outsize performance.
TGR: Are the companies in this space more risky than small caps?
PZ: Yes. Most people would consider a small cap to have above $1 billion (B) in market cap. In the Canadian juniors sector, by the time a company is at $1B, it has an NI 43-101 and proven ounces or pounds in the ground. It is producing metal, generating revenues, profits, etc.
Even once a company gets above a $100M market cap, it generally has an NI 43-101. That takes a whole lot of risk out of the investment. But does that mean that you are home free? There is a lot to be said regarding the so-called quality of those ounces of gold or silver, or those pounds of copper, lead and zinc, or those tons of coal or iron ore. Those are different considerations than when you are investing in a little $10M or $20M market-cap company that literally has nothing but a good management team and some good prospects.
There is a considerable amount of risk and that is why you really need to understand the geology, the prospectivity and the management team. Are these people who can husband their money and their resources carefully? If they can’t, you’re probably going to be in for a bad investment.
TGR: Your master’s thesis focused on porphyry-copper deposits in Peru. Do you have a greater comfort level investing in micro caps with porphyry copper and porphyry copper-gold deposits?
PZ: By studying the Toquepala deposit as well as working in the industry at both a mine and in exploration of porphyry copper, I feel very comfortable there. That is the theme of our fund. We try to invest in those types of deposits and those commodities in which we have actual, direct experience. We have direct industry experience working with gold, silver, porphyry-copper and sediment-hosted copper.
For example, Hana Mining Ltd. (HMG:TSX.V) was one of our early investments. When I was at BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), I used to run new business development for the copper belt, which contains these sediment-hosted copper deposits like what Hana Mining has.
TGR: You were also the chief operating officer of QGX Ltd. (QGX:TSX) and eventually became the president and chief executive officer. You were also involved with Antares Minerals Inc. (ANM:TSX.V). QGX’s biggest project was a coal deposit in Mongolia and that was taken over. Antares—you sold at the absolute right time there—was bought by First Quantum Minerals Ltd. (FM:TSX).
You certainly have had experience on both sides—exploring for these deposits and then turning around and selling them. What are you looking for when you research a project based on that experience?
PZ: We are looking for juniors that can take a piece of ground, drill it and develop it—and then continue to derisk the project by doing metallurgical studies and preliminary economic assessments. We want to focus on those companies that can develop large deposits and be taken over.
We are less interested in vein deposits. If you look at most gold majors, I do not think they are mining vein deposits. We are looking for large-scale, open-pit, low-grade deposits. That is also what large-cap copper producers like Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE) and Antofagasta PLC (ANTO:LSE) want.
In coal, we are also looking for large, open-pit and, preferably, metallurgical coal deposits. That is where you have the potential to make that 10x return.
TGR: There has been a lot of volatility in the markets recently and the U.S. economy looks like it could be headed back into another recession. How are you managing your fund differently compared to the beginning of the year?
PZ: Probably 90% of your audience will disagree with what I am about to say, but this is really a tenet of our fund: We just ignore the macro picture. What is special about our fund is that we focus on the nano caps. These are companies that I jokingly say have two mules, a rock hammer and a pair of worn-out boots for assets. If a company drills a hole that delivers 200 meters of one-gram gold, I don’t care if the price of gold drops $25/ounce (oz.) the day it comes out with that press release, this company’s stock is likely to go up 10%, if not 20%. Where we invest, we are able to literally ignore the macro picture and that is a great comfort. If the price of gold goes down, but a company continues to build ounces, we are going to do just fine.
TGR: You’re on the board of two of your fund’s holdings: Goldgroup Mining Inc. (GGA:TSX) and Bellhaven Copper and Gold Inc. (BHV:TSX.V:). In fact, you are the interim CEO of Bellhaven.
PZ: I’m going to give you the real crux: Goldgroup has 121M shares issued and outstanding and is currently trading for $1.64. That is a market cap of about $190M, but we bought in when it had about a $75M market cap. At that time, it was the largest company we bought for our portfolio. It has a wonderful management team that is driven by Keith Piggott and Gregg Sedun—experienced people, highly motivated, and smart. It has three principal projects, but I zeroed in on one in my research even though the other two are wonderful deposits. I focused on Caballo Blanco, which I think could be producing 100,000 ounces of gold annually in a little over a year at $200/oz. It will be able to do that because it is an outcropping ore body. It is all oxide. It will be a low-cost, heap-leach, run-of-mine operation.
But let’s say I am wrong and it produces at $500/oz. That creates a margin of $1,300/oz. if gold is getting $1,800/oz. Multiply that by 100,000 ounces then that creates $130M of EBITDA. Just that one project would support a $1.3B market cap. Also, what is great about this story is that the company actually has $40M in the bank. The capital expenditure number is probably going to be somewhere in the range of at least $40M, but less than $65M. It has two-thirds of the money it needs to build the mines. Maybe there will be a small financing to get the other part, but then it is going to be in position to support a market cap of $1.3B based on just that one project. I love this story.
TGR: Are there any byproduct credits in the ore?
PZ: No, it is really only gold. It is the right kind of deposit. The company will be coming out with a new NI 43-101 in November. It has an NI 43-101 now, but it will be growing to a level that will support 100,000 oz. or more. There is little to no geologic risk here. There is no exploration risk. This is just a known miner and mine builder in a good place to be doing mining. The deposit is in a part of Mexico, Vera Cruz, that doesn’t have drug violence. It is a good place to be operating with infrastructure and trained labor. I see this as very low risk and high reward.
TGR: And what about Bellhaven, where you are serving as interim CEO?
PZ: Bellhaven is a completely different story. It is a much earlier-stage company that we got into when it had about a $10M market cap. The short and skinny is that it has 84.4M shares issued and outstanding, is trading at about $0.58 per share, has about a $41M market cap and about $3.2M in cash.
The prospect is called La Mina, located in Colombia. It is porphyry gold. Bellhaven’s principal prospect at La Mina is called La Cantera, and Bellhaven will soon be announcing an NI 43-101 resource there. We are hoping it is going to be about 1 million ounces (Moz.) of gold. The enterprise value—Bellhaven has no debt—is essentially its market cap. So, if it has 1 Moz., its $40M market cap is undervalued. According to Canaccord’s “Junior Mining Weekly” report, a company with 1 Moz of gold equivalent would be worth $117M on average. And that is zeroing out all the other prospects at La Mina, and all the other prospects it has in Colombia and Panama. I think Bellhaven should go from $40M up to $117M. That is a multiple of three, with everything else in the company thrown in for free. We love that story.
I am the interim CEO at Bellhaven, and it is one of the largest positions in the fund. Everybody should be aware that I’m “speaking my book,” as I am with Goldgroup.
TGR: In 2006, AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) and Bema Gold Corp. (acquired by Kinross Gold Corp. (K:TSX; KGC:NYSE) in 2007) drilled Bellhaven and found some gold on the property that they just left alone. Why would they just walk away from a project like that?
PZ: They drilled six holes at La Cantera, but one in three were complete misses. I have had a number of discussions with AngloGold geologists and this is what I’ve learned: Anglo had phenomenal success in Colombia. It came in when everybody was still afraid of narco-terrorism and ended up with an enormous land position. It found the La Colosa project, which is in the same belt as the La Mina. La Colosa has been a fabulous deposit. It publicly announced something like 10 Moz. Word on the street is it’s going to be up to maybe 20 Moz. or more.
But for whatever reason—this was back when gold was at a much lower level than where it is today—the board said, “Look, we have to cut back. We’re not going to give you more and more money.” The exploration staff was stuck in this quandary where it could not stop at La Colosa, but it didn’t know how to fund all these other prospects. The solution was to bring in Bema Gold on a joint venture.
What you will find is that most of the projects that the small Canadian juniors have, and this would include Bellhaven, Batero Gold Corp. (BAT:TSX.V) and Seafield Resources Ltd. (SFF:TSX.V:), used to be held by Anglo. Anglo dropped the property so it could focus on the few assets it had. That gave the opportunity for others to come in.
I would argue that this is the exact same thing that happened with Antares. It had a project that was then held by Phelps Dodge, which is now Freeport. It drilled 80 holes and said, “You know, guys, the times are tough and we can’t do everything that we want to do. The board is giving us less and less money. This is one we are going to have to stop working on, so that we can focus on other projects.”
And look at what happened: Antares ended up finding 11.9 billion pounds of copper at that Phelps Dodge project. The fact that a major has been there and has left is a very common story in our industry. It is funny, but we did studies when I was at BHP and learned that it is typically the fourth or fifth company that arrives at a project that actually turns it into a mine. The fact that AngloGold has been at La Mina and walked does not deter us at all.
TGR: Does it have a back-end right on La Cantera?
PZ: It has no percentage at all. Instead, we have a Colombian national who owns the ground. We are doing an earn-in whereby we can earn up to 100% control of the project with no back-end right.
TGR: What are some other interesting micro-cap stories that your fund has positions in?
PZ: Gold Canyon Resources Inc. (GCU:TSX.V) is a wonderful story. It is in between a very early-stage company like a Bellhaven and a more advanced explorer like a Goldgroup. Gold Canyon has 90M shares issued and outstanding and is trading at about $3.00. We got in earlier, but even at today’s level, I think this is a very interesting company.
Gold Canyon has the Springpole deposit in Red Lake, Ontario, a wonderful jurisdiction in Canada in an area with a long history of mining.
But Springpole is a little different. It is the closest analogy to what Osisko Mining Corp. (OSK:TSX) has just developed and put into commercial production in the Canadian Malartic deposit to the east. Osisko found that what used to be an underground, narrow-vein mine also contained significantly wide widths of about one gram gold that allowed for a large number of ounces to be mined by an open pit. That is exactly the same situation that is happening now at the Springpole deposit.
I think Springpole is going to have 6–8 Moz. of gold. There are a lot of holes and very little exploration risk. I think it could easily be a double or triple just based on an ounces-in-the-ground analysis.
The management is more of a geologic team. I don’t think they are actually going to try to put it in production. I think Gold Canyon Resources is going to be taken out within two years. I think it will put out its NI 43-101 and that will give the majors the comfort that the project has been sufficiently derisked. Given its large size and its Canadian location, particularly in Red Lake, this thing is going to be gone.
TGR: You use your industry knowledge to make your investment decisions. What are some off-the-radar resources that everyday investors could use to help them better understand resource companies coming into the market?
PZ: I use a lot of the same resources as everyone else. I start my day by going to kitco.com. But one resource that a lot of your readers don’t know about is a blog by this guy who goes by the alias “Otto” at www.incakolanews.blogspot.com. I find it is a very useful blog. Inca Kola is on a jihad of exposing the bad hats in our sector. It is wonderful insight. He’s not a geologist, but he’s very good at vetting management teams. He has a good eye for these really early-stage companies. That’s something that I look at on a daily basis. And a lot of it is a free service.
TGR: What investment advice do you have for our readers before we go?
PZ: Investors need to make sure that they take the time to understand what they are buying. Do some math—calculate how many cents or dollars per-share this thing is actually worth. Then compare that to what it is trading at and hopefully there is a big delta.
Next, find a good management team with a good project that has a number of catalysts that will serve for promotion. Try to understand the catalysts. Understand what a management team is going to do in the next six months to a year. And follow that company to see if it is delivering on those catalysts. Without catalysts, share price appreciation is not going to happen.
Ignore the macro picture. All it is going to do is make investors get overly confident, buy at the highs, get overly depressed at the lows and sell at precisely the wrong times. Investors need to develop a cast-iron stomach so they can handle the absolute extreme volatility that this sector offers. Investors literally want to be buying when they are throwing up, when they can no longer look at their portfolio. When they are at a cocktail party bragging to all their friends about how smart they are for buying this stock at $0.10 and now it’s at $3.00, that is when investors should want to sell. It is so counterintuitive, but that is what they have to do. It is about discipline. Investing is not about being smart, although obviously having smarts helps.
TGR: That’s really good. Thanks, Paul. It’s been a pleasure.
Dr. Zweng is currently interim COE of Bellhaven Copper & Gold Inc. and a managing member of Resource Venture Advisors, LLC, the general partner to Resource Venture Partners LP, an investment partnership designed to invest in early-stage exploration companies. He was the COO and later President/CEO of QGX Ltd., a TSX-listed company with mineral projects in Mongolia. Dr. Zweng received two B.S. degrees with distinction in geology and applied earth sciences (Mineral Economics) from Stanford University in 1980, an M.S. degree in geology from Queen’s University, Ontario in 1984, and a Ph.D. in applied earth sciences (Ore Deposits) from Stanford University in 1993. Dr. Zweng has published several articles and abstracts on geology and ore deposits in two languages in scientific journals. Dr. Zweng was a director and a founder of Antares Minerals Inc. (TSX-V: ANM) before Antares was purchased last December by First Quantum Minerals (TSX: FM).
By The Gold Report, on September 1st, 2011
 Rodney Cooper, a senior mining analyst with Dundee Capital Markets in Toronto, has some rather bullish forecasts for iron ore and copper prices. But given the worldwide economic malaise and a slowdown for China’s economic powerhouse, what’s his rationale? Cooper talks about his predictions in this exclusive interview with The Gold Report.
The Gold Report: Dundee Capital Markets recently revised its commodity prices, most of which are forecast to go higher. Dundee has a long-term gold price of $1,125/ounce (oz.) for beyond 2015. While that is up 5% from previous projections, what in gold fundamentals leads Dundee to such a bearish forecast?
Rodney Cooper: We review our metal prices quarterly. We increased our 2012 price by 11% to $1,750/oz. Today, gold is at $1,763/oz., so I would say that that’s a reasonable view. For long-term pricing of gold and silver, our team reviews the 36-month trailing average prices. That methodology is endorsed by the Securities and Exchange Commission for mining companies to estimate resources and reserves.
With base metals and iron ore, we review the marketplace for the marginal cost of production for the commodity. We typically set our long-term pricing with some reference to that marginal cost. Quarter-by-quarter and year-by-year, that marginal cost can change. In recent history, that marginal cost has been creeping upwards.
TGR: Dundee pushed up its price for iron ore by 24%, to $182/ton, in 2011. From 2012–2016, the average annual increase is about 35% each year. What are the catalysts behind that increase given that the economic outlook is fairly bleak and China’s economy is cooling down?
RC: I first got heavily involved in iron ore back in 2006 as chief operating officer for Baffinland Iron Mines—a baptism by fire into the iron ore space. Back in 2006, and ever since then, there has been a sense that the growth in steel demand has been relatively strong. Demand growth is moderating; nevertheless, demand growth is a reality in the marketplace. Industry observers have said, “Well, you know, there’s a lot of supply coming on.” We are finding that there are a lot of projects on the books, but the capacity of the mining companies to actually deliver on this new supply seems to be restrained.
My revisions to the iron-ore forecast in the near term reflected where the market has gone this year. Year-to-date, it is sitting at about $183/ton. My forecast is now at $182/ton. My long-term price, going out to 2018 or 2019, is down to $90/ton—half of where we are now.
I expect to see the marginal costs remain high. The marginal cost producers are in China. I expect to see prices eventually moderate because of new supply, but the timing for that new supply gets pushed out further and further each year as the news flow comes in and we hear about projects that are delayed or deferred.
TGR: Peter Hopely, a steel analyst with UBS Securities, produced a chart that has demand outstripping supply right now, but supply outstripping demand by 2014. Do you agree with that forecast?
RC: I absolutely agree that supply will catch up to demand. When I first started in iron ore in 2006, everyone was predicting that would happen in 2012. Now there are some forecasts that it will be 2014 or 2015. I’m forecasting that it will take a little bit longer for that to occur.
We’ve seen some capacity constraints. For example, there are infrastructure development constraints in Western Australia.
Most of the new projects are being sponsored by the large seaborne players in iron ore, such as Rio Tinto (NYSE:RIO; ASX:RIO), BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) and Vale S.A. (NYSE:VALE). These companies have seen their levels of relative debt come way down. They have very strong balance sheets. They’re flush with cash. These are all organizations with a great deal of capacity and ability to develop new projects, if they don’t have interference from governments and circumstances beyond their control. I’m not going to bet against the large companies bringing the supply on eventually—but the point is eventually. We will start seeing that gap, but I’m estimating a little bit further out in time.
TGR: What is China’s role in all of this?
RC: China is the driver for a whole variety of commodities. Chinese imports of seaborne iron ore are probably the most important driver in the iron-ore market. In the first half of this year, imports of iron ore into China increased 8% despite all the talk about the marketplace moderating. Levels of activity are still extremely high.
Steel output in China is 1.9 million tons (Mt.)/day, which is huge compared to an average 1.7 Mt./day last year. As countries urbanize, the intensity of steel production grows. In countries such as South Korea or Taiwan, the intensity of steel use is triple the intensity of steel use in China. Urbanization is at 80% of the population in some of those industrialized countries where China is only at 40%. Looking forward, we see literally hundreds of millions of Chinese moving into urban centers.
I absolutely buy into the recent economic outlooks that forecast that Chinese growth is moderating. While there will not be double-digit growth anymore, there will still be about 8% growth.
Looking forward just three or four years, Chinese imports of seaborne iron ore are expected to grow 20%, which would add an additional 200 Mt. of iron ore that has to be delivered into the Chinese marketplace. Layer on top of that coal and other ingredients required for making steel and there could be huge demand growth in seaborne requirements. In fact, just recently Vale sponsored a $4 billion (B) investment in Chinamax vessels. It is building about 35 400,000-ton vessels to ship iron ore from Brazil to China. That’s very tangible evidence of the growth in seaborne trade into China.
TGR: Are Chinese companies going to get into the mining game to the point where they’re competing directly with major players like Vale?
RC: There is a certain level of domestic Chinese iron-ore production, which represents about one-fifth of consumption. The Chinese government is trying to reduce the number of polluting, energy-inefficient operations. They are closing coal mines and small iron-ore mines and requiring many regional operations to consolidate.
I’ve looked at iron-ore projects in China where the company is actually producing a profit from ore that is grading less than 10% iron. Outside of China, this is virtually unheard of. Those are the kinds of operations that are dropping away. In fact, we don’t see any growth in domestic Chinese production of iron ore simply because there are so many of these small, inefficient operations that are falling by the wayside. As demand grows, the need for additional seaborne iron-ore increases.
TGR: The new target prices for some of the names you cover are surprising. The biggest jump belonged to Alderon Resource Corp. (TSX.V:ADV; OTCQX:ALDFF), which has the Kami iron-ore project in the Labrador Trough, an area known to hold large iron-ore deposits. Alderon jumped an impressive 20%, which means the junior is very sensitive to iron-ore prices.
RC: Companies that have undeveloped assets and are planning to be into production in three to four years are very highly leveraged to the longer-term price of iron ore. Alderon is certainly my top pick in the iron-ore space in Canada now.
This is a great company. It is staffed by iron-ore veterans from Rio Tinto, Iron Ore Company of Canada and Consolidated Thompson Iron Mines Ltd. (TSX:CLM). These are people who have the capacity and experience to help build a mine and operate a mine.
In general, I am not a keen investor in many of these junior stories. So many of the junior stories may have reasonable resources delineated, but they are talking billions of dollars and a decade to get into production. Railways and ports have to be built. Most junior iron-ore stories are going to struggle. If you buy into this thesis that supply is going to overtake demand and prices are going to drop, many of these mega-projects in the hands of juniors are just never going to make it. They’re just not going to be there in time.
Alderon, in contrast, has the use of a public domain railway, the Québec North Shore and Labrador Railway. It has the Port of Sept-Iles facilities at Point Noire. Here’s a junior with a high-quality asset that can build a mine for less than $1B in four years or so. It doesn’t have to build railways or ports. The simplicity of the project is the relatively low cost and being relatively quick into the marketplace. That is going to make all the difference in the world between the juniors that make it and the juniors that just don’t quite make it. So, we love Alderon.
TGR: Do you think it’s likely it will get offtake agreements and build partnerships? Or do you think it gets taken out before that?
RC: Anything is possible. There is a lot of merger and acquisition activity in iron ore. Cliffs Natural Resources Inc. (NYSE:CLF) did acquire Consolidated Thompson, but only after it built a mine and took a lot of the risk out of the story. That could easily happen. Other major players in the Labrador Trough would be less likely to go after Alderon, but it would be a complementary asset for Cliffs.
I think what really distinguishes Alderon is that the management team is fully capable of building and operating this mine. It’s not simply a junior group of geologists building a resource and trying to flip it to someone in a sale. These guys are the real deal who can actually make the mine happen.
Building a mine and starting to sell product is where the shareholder gets the tremendous uplift in value beyond simply defining a resource and selling it at a small premium. Alderon is going to have fantastic news flow for the rest of the year—resources in September, preliminary economic assessment, discussions with offtakers and the permitting process. That helps to drive and support my target price of $6.
TGR: What are some other plays in iron ore that Dundee is bullish on?
RC: One that I’m very excited about is African Minerals Ltd. (LSE:AMI). The company is currently trading around CAD$10 and I’ve got a CAD$22 target price within the next 12 months. It has a 12 billion ton deposit in Sierra Leone. The first phase of developing this Tonkolili Mine is a $1.4B investment that is largely complete now. We’re expecting the first ore to be put on the train next month and the first ore on a ship to the Chinese marketplace in the fourth quarter. There should be a tremendous uplift in value going into the end of the year.
Beyond that, African Minerals has got a $2B expansion adding 23 Mt./year of production over the next two years. That $2B is already largely financed. The company has just announced a deal with Shandong Metals & Minerals Corp., the large Chinese steel producer, to invest $1.5B in the venture for 25% interest. That represents a 100% premium over the current share price. We’re just waiting for the Chinese government to finally endorse that arrangement before the end of the year.
The capital for phase three will come from organic cash flow from phases one and two. Looking out five years, African Minerals will have a production rate approaching 70 Mt./year and step onto the stage as one of the top five iron-ore producers in the world. It is a great name to follow for people that are ready, willing and able to invest in the London market and in Africa.
TGR: Are you concerned about the project being located in Sierra Leone?
RC: Sierra Leone has come a long way from the days of blood diamonds. This is a democratically elected government with its second president now. It is a former British colony. Tony Blair grew up there. There are truth and reconciliation commissions and a lot of transparency in what is going on there.
I’ve been to Sierra Leone several times. You don’t see any guns or soldiers. You see Chinese construction workers. Sierra Leone has got a stigma attached to it, but in the last five years it has moved beyond that overhang. There are Sierra Leone peacekeepers now trained by the British who are in Darfur. Sierra Leone is a country that is surprisingly low in political risk.
This project could also be such an important economic step that the entire country is behind it. It has the potential to really be a game changer in the economic development of Sierra Leone.
TGR: Let’s move on to copper. Dundee also raised its price projects for the red metal, albeit only by 8% in 2011. But then it gets interesting. The revised price projections for copper jump an average of 25% from 2013–2015. What is driving those increases?
RC: We look at marginal cost of production. Year-to-date copper is at $4.26/pound (lb.), but we’re forecasting $4/lb. next year and $2.50/lb. over the long term. We’re dialed into the current reality. Much like iron ore, the Chinese are driving the demand for copper. We are expecting copper fundamentals to be favorable in the near term. There were deficits in supply last year and this year. Moving forward, we think that the marginal cost of production is somewhere around $2.50/lb. As time goes on, we may see a rerating.
The fundamentals for copper out a few years are exceptionally strong. Regardless of what level of future demand growth you project for China, the industry is running out of projects to fill the supply pipeline. This is going to be a fundamental realignment of the copper industry. We have gone to a new plateau and we are all accepting that as the new reality. In a few years, as cost pressures continue, we may very well see a rerating of copper prices up to a new plateau beyond where it is sitting now.
In the meantime, Dundee is sitting fairly conservatively with a $2.50/lb. long-term price representing the marginal cost of production. That’s pretty much in line with many analysts and market commentators. But I do think that there could be a long-term price rise—and it could perhaps rise dramatically.
TGR: The biggest jumps in your target prices were for Hana Mining Ltd. (TSX.V:HMG) and Western Copper Corp. (TSX:WRN), both of which jumped by 11%. Please tell us about those stories.
RC: Over the last year, I began covering seven junior copper-moly stories. So far, four of my seven picks have been acquired by larger companies. What’s left is Western Copper, Candente Copper Corp. (TSX:DNT) and Hana Mining. They all have high quality, undeveloped copper-gold or copper-moly assets. I fully expect that all three of these companies will be acquisition targets over the next year.
Western Copper has the Casino asset in the Yukon—24 billion pounds (Blb.) of copper. Candente Copper is about half that size in Northern Peru. Hana Mining has about 7 Blb. in Botswana in a new copper belt that’s emerging there, as well as silver. All of them are in reasonable political jurisdictions and any one of them could fall on the radar screen of the big mining companies going forward.
TGR: Do you have some final thoughts?
RC: Iron ore and copper are the two commodities that I highly favor at the moment. I’m constantly on the lookout for relatively early stage stories that have attributes that would lead them to capital appreciation and to put companies into an acquisition dynamic with bigger companies. In the last year, I have had seven of my names acquired, so I’m doing a reasonable job at picking the ones that are attractive to the big companies.
TGR: That’s great. Thanks.
Rod Cooper is a professional mining engineer with nearly 30 years of varied international experience in corporate development, engineering and operations. Prior to joining Dundee Securities as senior analyst in the base metals and iron ore areas in November 2009, he was chief operating officer for Baffinland Iron Mines, the owner of the Mary River project in Canada’s Arctic region. Prior to Baffinland, Rod was vice president, technical services for Kinross Gold Corporation. He has also worked for Homestake Canada, Echo Bay Mines, Inco Metals and the TD Bank. He graduated with a degree in mining engineering (Honors) from Queen’s University in 1980, and with a Master’s degree in business administration from the University of Toronto in 1984.
By The Gold Report, on August 26th, 2011
 Manganese’s many uses in infrastructure and building materials make its market a strong barometer for gauging the world economy. Soaring growth in countries like China and India has led to high global demand. In this exclusive interview for The Critical Metals Report, Helen O’Malley, a bulk manganese specialist with CRU International in London, discusses how manganese prices are closely tied to the economy and, in contrast to exchange-traded base metals, overwhelmingly determined by supply and demand.
The Critical Metals Report: Economists often use the price of copper as a barometer of global economic health because of its many uses in infrastructure and building materials. Could manganese prices be an even more effective barometer of global economic health? What is your prognosis of global economic health based on what is happening in the manganese market?
Helen O’Malley: Unlike copper and other base metals, manganese is not exchange traded. The price of manganese is overwhelmingly determined by supply and demand. Speculation and confidence levels do not really come into play. Manganese pricing has a lot to do with the general health of the economy. For instance, industrial production and, therefore, levels of demand for steel in the developed world have not recovered to levels seen before the financial crisis. Therefore, a state of overcapacity exists in the manganese ferroalloy sector, so prices have been struggling to reach previous records. This is even though global demand for manganese is at a record high because of soaring growth in countries like China and India.
TCMR: You wrote that for the first time in Q410, China became a net importer of silico-manganese and high-carbon ferromanganese. Will this continue?
HO: That was the first time China became a net importer of manganese alloys, specifically silico-manganese and high-carbon ferromanganese. China has always been self sufficient in manganese alloys and has a great deal of overcapacity itself. To become a net importer is quite surprising.
TCMR: What is the impact?
HO: It is a symptom of the oversupply in the global market. Prices have gotten so low that it is now economical for some mills in China to import manganese alloys. This is not likely to be the start of a meaningful trend nor is China going to suddenly become a major net importer of manganese alloys.
TCMR: China has been stockpiling copper and other base metals. Is it stockpiling and hoarding manganese?
HO: It’s true, stocks of manganese ore at Chinese ports have built up sharply in the last year. In early 2010, stocks were around 2 million tons (Mt.). In May of this year, they peaked to almost 4 Mt., but since then they have eroded back to around 3.5 Mt. The widespread belief is that most of these stocks are held by Chinese traders who bought the material back when the price was higher, in 2010 or even earlier. They will not be releasing this material into market until the price recovers.
The natural level of stocks is bound to be higher now because consumption levels are higher. On a consumption-adjusted basis, stocks are actually around 2008 levels.
TCMR: In July’s CRU Monitor, Bulk Ferroalloys edition, you wrote, “Offsetting the 5% year-on-year drop in Japanese crude steel production, South Korea output was 19% higher than it was in June 2010, while Indian production rose by 7.3%. Output gains have been much smaller in the European Union and the U.S., both in June and for the first half of this year as a whole.” This does not mention China’s percentage gains in steel production, but illustrates the ongoing shift of wealth from the West to the East. Is that permanent?
HO: We can see an extended period of weak and below-trend growth in Europe, the U.S. and Japan. In those countries, the structurally high levels of national debt and the measures taken to address this debt will most likely weigh down on growth for some years. This is a stark contrast to economic growth in China, India and other Asian nations.
TCMR: China now produces approximately 40% of the world’s steel. Would you prefer that steel production be spread over more countries?
HO: Traditionally, steel production facilities are located to serve local or regional demand. China produces so much steel because it consumes so much of it. However, some locations are more cost competitive than others because of factors such as access to raw materials, labor costs and energy costs. Over time, we could see a higher concentration of steel production in lower-cost regions of the world. On the other hand, it is very difficult and costly to permanently close steel facilities, which is perhaps why we are not yet seeing an obvious shift taking place.
TCMR: How is Chinese dominance in steel production influencing the manganese market?
HO: China now accounts for around 40% of global steel production. Five years ago that share was only 30%, and 10 years ago it was 15%. China’s increasing dominance as a steel producer has definitely had an impact on all raw materials markets. It has had an impact particularly on the market for manganese ore because China must import over half of its requirements for manganese ore. It’s a similar situation to what we see in the iron ore market.
TCMR: You said that the manganese ore market has been in a state of oversupply for about a year and that is pushing prices down. When will the market turn? Is the ore market structurally tight or are we on the brink of structural oversupply once a number of development projects in Africa come onstream?
HO: Manganese ore prices have been falling for the better part of a year now, but it seems that prices have been brought low enough to cut out a proportion of the higher-cost supply from the market. Port stocks have been falling for several months now and price stability has returned. This tells me that supply and demand fundamentals are in much closer balance now.
TCMR: When we spoke last May, manganese ore was priced at roughly $8/dry metric ton unit (dmtu). What is a dmtu going for now?
HO: The price of medium-grade ore—say 44% manganese oxide lump—is currently $5.30–$5.40/dmtu, delivered to China.
TCMR: We’re talking about the ore, so that is the straight mined product. What is your near-to-medium term outlook for the manganese alloy market?
HO: In the medium term, looking at the next five years, the drawn-out recovery in steel production in the West will ensure that overcapacity in the manganese sector remains an issue. Ultimately, this means that prices and margins for manganese alloy producers will remain under pressure. One thing to watch is the market for refined ferromanganese. This particular form of alloy is used mostly in the production of high-grade and specialty steel and can also be used as a substitute for electrolytic manganese metal in some steel applications. Intensity of use of refined ferromanganese is rising relatively sharply, so we could see some more upside with demand and pricing of this grade of manganese alloy in the medium term.
TCMR: You had discussed earlier how steel makers in Europe are starting to substitute out the more expensive ferromanganese in favor of the cheaper silico-manganese. What is the impact?
HO: Because ferrosilicon prices have been a lot higher than silico-manganese and high-carbon ferromanganese prices, it is thought that some steel mills in Europe are trying to switch away from the combination of ferrosilicon and ferromanganese by consuming more silico-manganese. Not all steel mills can do this switch for technical reasons and, in the U.S., most mills would not consider switching. We are now slowly starting to see the price gap between ferrosilicon and the manganese alloys close up. But another thing to remember is that ferrosilicon prices are also strongly governed by underlying production costs, which have come under strong upward pressure recently.
TCMR: Is it experimental?
HO: No, the concept of switching between alloys has always been known to the steel industry. It has to do with the economics of using the alloys at their current pricing. However, as I mentioned, technical limitations mean that mills wouldn’t necessarily do this on a short-term basis. Also, some mills are constrained by the type of steel they are producing.
TCMR: Can I get some base prices for a few of the main products you deal with? When you talked to The Gold Report in May 2010, you said they couldn’t manufacture steel without manganese, and manganese ferroalloy prices were 40%–50% lower than the peak levels of 2008. What is the per ton price of ferrosilicon, silico-manganese, silicon metal and high-carbon ferromanganese right now and do those prices compare to 2008 or even a year ago?
HO: Manganese ferroalloy prices have, on average, declined since May 2010. Back then, silico-manganese was priced at around $1,520/metric ton in the U.S. market. Now it is priced at around $1,370/metric ton. We’ve seen a similar decline in the other manganese alloy grades. The reason for this downward trend is the oversupply of manganese alloys. The other important factor is that the manganese ore price has been in decline with manganese ore being the main cost driver of alloy production.
TCMR: What are the main factors behind that fall in the price of ore?
HO: An oversupply. In 2009, rock bottom prices caused the manganese ore sector to aggressively cut its output. When prices recovered over the second half of 2009 and into 2010, production ramped back up to full capacity, ultimately pushing the market back into oversupply. You tend to get this lagged supply response in bulk mined markets because it takes time to ramp up or ramp down production at large scale mine operations and to tune output precisely to the level of demand. In the last year, there’s been a degree of oversupply, but now we are seeing that some of the mines are trimming output again. It is a cyclical effect.
TCMR: Is the sector less exciting to cover when prices are in decline?
HO: No, because you have developments such as production cuts. What becomes interesting is determining who is left in the market and who is going to be forced out of production first.
TCMR: You mentioned earlier that there are a number of development projects coming on in Africa, but we have oversupply now. Is that going to push back the development timetable with those projects or will prices be driven down even further?
HO: South Africa is an interesting example because if you add up all of the potential new supply, it comes to approximately 15 million tons per year (m tpy). This is huge in a market that is around 45 m tpy. In reality, though, in South Africa, restrictions on rail and port capacity will mean that only a portion of this will find its way onto the seaborne market in the next five years. Infrastructure is also a major issue in other African countries where miners are hoping to develop projects. The market for manganese ore could stay tight for some time because these projects will not come online at the advertised dates.
TCMR: Right now we are seeing approximately 95% of all rare earth production being controlled in China. Will we see similar control in the manganese metal side?
HO: Absolutely. Currently, China controls around 95% of the world’s supply of manganese metal and that represents a great deal of risk to consumers of manganese metal in the West, such as in Europe, Japan and the U.S. Not only is there a lot of price volatility, but security of supply is also an issue.
TCMR: Without recommending specific companies, what kinds of manganese or ferromanganese projects are of most interest to the Chinese?
HO: The Chinese and the Indians seem desperate to get their hands on any medium- and high-grade ore deposits. This is to provide them with a greater security of supply of the essential steel-making raw material. You cannot make steel without manganese, so it is a strategic move as well. The challenge is tracking down the remaining high-grade or even medium-grade projects. You want to find one that is not only economical to mine, but also has access to infrastructure.
TCMR: Like a port.
HO: Exactly, a rail or port. South Africa and other African countries have naturally attracted a lot of interest because of the abundant resources of high-grade and medium-grade manganese ore. There are also high-grade deposits elsewhere, such as Indonesia, Australia, Turkey and South America.
TCMR: Have you visited these projects?
HO: I just returned from South Africa where I visited a number of the mines currently in production, as well as a number of the companies in the development stage. It was a very interesting trip.
TCMR: Are there projects in more secure jurisdictions like North America or Australia that are coming onstream in the near-to-medium term?
HO: Australia has a long list of projects, and a number of companies have projects on the table in North America. North America does not have high-grade manganese ore or even medium-grade manganese ore, but there does seem to be, in parts, abundant supplies of low-grade manganese ore.
Some of these companies are looking to upgrade the low-grade manganese ore into a product that can be sold into the market. One of the major products they are looking at is electrolytic manganese metal, which has a variety of end uses, but the main end use is in the steel industry.
TCMR: How far off are those?
HO: Most of these companies are slating project startups toward the end of a five-year horizon. Some of them are making progress with exploration and defining their resource, but there are still several stages in the process to go, including raising finance and bankable feasibility studies.
TCMR: Are there any projects close to putting together a bankable feasibility study that could see greater interest as a result?
HO: Not that I know of, but that is not to say they are not at that stage.
TCMR: Can you provide me with a couple of themes in the manganese space that you expect to play out over the next year or two?
HO: In the next year or two, we could see some of these manganese ore projects develop. Some of the greenfield projects in Africa should move forward and even come into production. It will be interesting to see how that impacts market fundamentals. And I think it will be interesting to see what happens in the manganese metal space because we have definitely noticed interest for companies to try and reduce their current dependency on Chinese supply. With China currently the world’s main producer of manganese metal, steel producers, aluminum producers and other consumers in Europe and the U.S. are dependent on Chinese exports. People are seeking alternative sources of supply.
The structural dependence on Chinese supply has triggered great interest in investing in manganese metal outside of China. Some of these projects happen to be located in North America, but there are also projects in Russia. At present, there is only one manganese metal producer outside of China, and that’s in South Africa.
TCMR: What is the name of that company?
HO: The Manganese Metal Company of South Africa. A number of potential manganese metal projects are in the pipeline, including in North America, but also in other parts of the world. Certainly, that whole area of the market seems to be quite hot right now because prices are high and we have this structural dependency on China.
TCMR: Thanks very much.
Helen O’Malley is a bulk manganese specialist with CRU International in London, England. She manages research activities in the steel raw materials markets including iron ore, metallurgical coal and coke, and the bulk ferroalloys, including manganese, ferrosilicon and silicon metal. Since joining CRU in 2005, she has built up considerable expertise in the bulk raw materials markets with particular focus on iron ore and ferroalloys but more recently extending her involvement across all of the major raw materials markets.
By The Gold Report, on August 4th, 2011
 Move into gold and silver was the advice James West, founder of the Midas Letter Opportunity Fund, gave Midas Letter subscribers in June. He recommended moving from the junior stock market to 100% gold, silver and precious metals funds backed by bullion. For a while it looked like a bad call. But as markets tanked, gold and silver soared, and it turned out to be a smart strategy. Now might be a good time to sell the metals and get back into the juniors, he says.
The Gold Report: James, in June you advised selling off all stocks and investing directly in precious metals. What prompted you to dump juniors and go to gold and silver?
James West: It was evident to me that the risk to equities in our space, the junior miners, was going to increase as the debt issues in Europe and the United States continued to fester. Back in June, the likelihood of the U.S. not raising the debt ceiling in time for the August 2 deadline was considered very remote. But the last minute deal was nothing more than a Band-Aid on an open artery. The partisan politicking could result in rating agencies downgrading the U.S. triple A rating with or without a default. You can hardly rate the world’s largest sovereign debt load as triple A after this most recent fiasco. And when you consider that the only solution is to raise the debt limit, issue more debt, print more money and further debase the currency of the world’s largest economy—well, to me, it’s just plain dangerous to be holding equities in anything under those circumstances. That environment only bodes well for gold and silver prices.
TGR: So now that there is a deal, will equities rise and gold and silver fall?
JW: Temporarily, yes. That’s exactly what I think will occur. Given the gnat-like attention span of investors and the deluge of information flow we are all immersed in, it is what’s happening right now that dictates market movements. With these temporary deals done, for the next few weeks, it will seem like the problems have been solved, disaster averted and the party will be back on.
TGR: So we should sell gold and silver and buy equities?
JW: You bet. Sell the precious metals at the high, buy the juniors who have been beaten up in recent months and wait for the next batch of horrible news to make precious metals turn around and head north. It’s a volatile market, but junior precious metals explorers and near-term producers are finally going to get some of the attention that has been absent for the last few months.
TGR: We saw you on BNN last week in Canada, and you mentioned that you were looking at copper juniors as well. Is copper going to benefit from the same influences as gold and silver?
JW: Well, copper has been holding on close to all-time highs despite softening growth in China. That’s because speculative groups, like hedge funds and ETFs, are actually buying physical copper and storing it in warehouses. So not only do we have a growing portion of diminishing global production being taken off-line and stored for investment reasons, but copper consumption for industry, while it may weaken as China growth slows up a bit, is still strong in India and Brazil as those economies continue to expand rapidly.
TGR: We hear you have also launched a fund to invest in emerging miners. What’s that all about?
JW: The Midas Letter Opportunity Fund is a Luxembourg-registered Special Investment Vehicle, which is a sub-fund of the Commodity Capital AG fund. Tobias Tretter, the former top fund manager for Deutsche Bank’s gold fund, and I came up with this idea to capture all of the early-stage, pre-IPO opportunities that come my way as publisher of the Midas Letter. Up until now, I just haven’t had the bandwidth or the manpower to take advantage of these ideas. So we put together this fund, which is capitalized by members of the Canadian A-List of mining entrepreneurs on one hand, and the A-List of high net-worth, private family offices in Luxembourg and Switzerland, to provide a place where the two groups can access each other’s value propositions. The fund does well because it’s got access to pre-public deal flow, and the European investors do well because they have a window into these pre-public opportunities through the fund, where they get the chance to participate in secondary and tertiary post-IPO rounds.
For Midas Letter subscribers, it’s a win as well, because now the newsletter becomes the journal of the fund’s investing activity. While subscribers can’t generally participate in the fund, they can participate in what the fund is buying, and hear about pre-IPO opportunities that other newsletters generally don’t bother to cover because there is no way for the investing public to access these deals.
TGR: So, the Midas Letter now only covers what the fund is doing?
JW: No, no. Of course, I still have my personal investing activity that will make up a lot of the content of the newsletter, too. But most likely, my personal activity will reflect the opportunities that the fund has uncovered. This will also free us up to shoot more Midas Letter Mine Tour videos, where we visit developing projects around the world, and in a National Geographic- or Discovery Channel-level of production video, answer the questions that all investors, institutional and private, would want to know about these projects.
TGR: Wow. So, you are busy, to say the least. What companies do you see yourself investing in going forward?
JW: Well, as far as gold companies are concerned, we follow closely what’s going on at Baron Group in Vancouver, headed by David Eaton. He has a process where he gets companies to list inexpensively on the CNQ before moving over to the TSX Venture. Baron has an absolutely stellar collection of strong companies coming together.
TGR: For example?
JW: Well, where to begin? I guess we’ll start with the older ones, Evolving Gold Corp. (TSX.V:EVG; OTCQX:EVOGF; Fkft:EV7), which is one of Quinton Hennigh’s first big wins. Quinton is an epicenter of geological discoveries unto himself, and he figures prominently in a lot of the stories we like right now. As most people know, Evolving Gold has a joint venture with Agnico-Eagle Mines Ltd. (TSX:AEM; NYSE:AEM) on its Rattlesnake Hills project in Wyoming, and is owned at least 15% by Goldcorp Inc. (TSX:G; NYSE:GG). Despite that, the company trades at a great discount to enterprise value considering the advanced stage of the deposits.
United Silver Corp. (TSX:USC) is another excellent example of the Baron Group. It started life on the CNQ and raised $10M (million) there before moving over to the TSX senior board. Things were going well until Charles Pitcher was hired to lead the company. He blew the treasury and let the company stagnate before leaving it in shambles. Fortunately for USC shareholders, a deal with Stan Bharti’s Forbes & Manhattan merchant bank will see new leadership, another round of capitalization, and the advance of the company’s project at the Crescent Mine. If you don’t think it is cheap now, compare that to the $250M IPO planned for the Sunshine Silver Mines Corp. (NYSE:AGS) with participation from Morgan Stanley, UBS Investment Bank and RBC Capital Markets. The Sunshine Mine produced an astonishing 360 million ounces (Moz.) of silver since 1880, but the Crescent Mine, which has produced only 25 Moz. in its history, did so at a grade of 27 oz./ton—the highest in the district. Keep in mind that Sunshine has 17 other exploration projects and a second very advanced project in Mexico, so comparing USC to Sunshine is not exactly apples to apples. My point is that silver mining in the Coeur d’Alene belt in Idaho is attracting some weighty players.
Current offerings from the Baron Group include Golden Fame Resources Corp. (TSX.V:GFA), whose mission is to “acquire and put into production historically productive gold, silver and copper properties that have become economic due to the robust upward movement in metals prices.” The company has $7M in the kitty, and started work in July on the Algun Dia copper-gold-silver project located near the city of Guanajuato, Mexico, into which it is earning a 70% interest. Algun Dia is an advanced-stage exploration project with demonstrated past economic production of gold, silver and copper from a major vein-hosting structure with mineralized true widths exceeding 10m (meters). Historical reports indicate that 2002 through 2007, the property produced approximately 15,000 tons of ore during periods of test mining. That resulted in approximately 750 tons of gold, silver and copper concentrate processed at the Peñoles Mining mill.
Another one I’m looking forward to with great expectations is Novo Resources Corp. (CNQ:NVO), which has management in common with Gold Canyon Resources Inc. (TSX.V:GCU), a Midas Letter favorite for the last year. In particular, Quinton Hennigh, the geologic force behind many of the Baron Group’s deals, is said to be particularly excited about Novo’s prospects, and is the company’s president. Novo has the exclusive right to earn a 70% interest (as to gold and minerals associated with and normally mined with gold) in the tenements comprising certain mining leases covering the Beatons Creek conglomerates located in Western Australia.
I can’t stress enough the value in Confederation Minerals Ltd.’s (TSX.V:CFM) Newman Todd project, a joint venture with Redstar Gold Corp. (TSX:RGC). That project in the Red Lake district in Ontario is starting to shape up into what is looking more and more like 5 Moz. of gold. The source of that geological opinion has requested anonymity, but, safe to say, it’s not me pulling a number out of the air. In my opinion, the current share price level will prove to be a steal when the market realizes what’s going on underground here.
TGR: Now what about copper? You’ve recently been quoted as being quite bullish on copper.
JW: To be clear, I think copper is in a long-term bubble formation in the classic sense. The price is rising despite weakening demand fundamentals out of China, and Brazil and India are absolutely not the sustainable demand powerhouses painted by the mainstream media. J.P. Morgan is taking delivery of physical copper into warehouses in support of its copper ETF, which is putting an insanely artificial demand pressure on the metal. That means when the copper bubble pops, so will this and other ETFs based on copper, which will exacerbate the downward momentum copper will face when China pops. And increasingly, there are signs that the China bubble may be starting to deflate a little.
That all being said, the China growth machine will still gobble up a lot of copper, so for the time being, world consumption, diminishing supply and growing demand for the physical metal for investment and hoarding purposes will continue to maintain the price near or beyond all-time highs, which makes copper exploration plays are of supreme interest to us.
In particular, I’m a huge fan of CuOro Resources (TSX.V:CUA) and its Santa Elena property near Medellin, Colombia, where two shallow holes were drilled to depths of 3.55m and 7.61m, respectively, at a down dipping angle of 20 degrees (widths represent down hole core lengths and the true width is unknown at this stage). At 1m intervals, 1.5 in.-dia. cores were assayed from these shallow holes. The highest individual result was from hole C4-4; it returned a 1m interval grading 9.51% copper, while the two holes averaged 5.63% copper over 7.61m and 4.53% copper over 3.55m. Those are some stellar grades. Now there’s at least one drill going on the project with two more on the way. The company will drill an initial 25 km. to be immediately followed by an additional 15 km. With over $20M on hand to cover exploration for the next two years, it’s as “de-risked” a copper exploration play as you can get, which is why you’re seeing the premium valuation.
TGR: I understand you’re in the Yukon right now. What are you doing up there?
JW: We’re here to make some videos with a professional TV crew in support of our new product, Midas Letter Site Visit Reports. We are visiting exploration projects in the Yukon that will be the subject of videos seeking to answer all of the questions that determine a mining project’s economic viability. We do that through interviews with technical talent on the ground, as well as interviews with regional stakeholders to make sure we are not just getting the sweetened version from the companies. Then we distribute the videos first to Midas Letter subscribers and unit-holders of the Midas Letter Opportunity Fund, and then to the general public.
TGR: So who are you going to see while you are there?
JW: Well, the primary one at this point is the Wellgreen Deposit held by Prophecy Platinum Corp. (TSX.V:NKL; OTCPink:PNIKD; Fkft:P94P), John Lee’s spin-out from Prophecy Coal Corp. (TSX.V: PCY) that just announced a 10 Moz. combined platinum group metals and gold inferred resource, with 0.4% nickel and 0.4% copper to go along with it. Some pretty good rare earth grades are in there that are not part of the equation yet. All of this is just from 2.3 km. of a 17 km. strike length. We are going to find out just how good the potential is for a major extension to the existing resource as drills are turning and a lot of analysts head up there to kick the tires.
A list of other companies we’d like to shoot is a little premature to discuss, but suffice to say we are looking at the cream of the Yukon crop.
Publisher of Midas Letter, James West has devoted 20 years to helping small companies in the resource sector—helping them raise money, further their projects, build their identities and get their stories in front of investors on the lookout for quality investments with excellent returns. The Midas Letter Opportunity Fund, is an institutional and high net-worth-only open-ended fund based in Luxembourg that specializes in early stage investments in Canadian-listed precious metals explorers.
By The Gold Report, on July 18th, 2011
Gold is once again hitting new highs, closing at $1,589/oz. on July 14. In this exclusive interview with The Gold Report, Dr. Michael Berry, principal of discoveryinvesting.com and editor of Morning Notes, predicts $1,700 gold by year-end and points to the juniors that could bask in the enhanced glow of all the metals, including copper and zinc.
The Gold Report: Dr. Berry, you are going to go before the Federal Reserve and meet with Congressional representatives on July 18. Could you give our readers a Coles Notes version of what you plan to say?
Michael Berry: I go before the Federal Reserve twice a year. In this presentation on Monday, I’ll talk about the geopolitics of growth in emerging countries and issues related to the dollar, gold, convergence of the rest of the world and the weak global recovery.
Monday afternoon, I’ll head over to the House and meet with the Chairman of the House Natural Resources Committee and Senator Lisa Murkowski’s (R-Alaska) natural resource staff to discuss extractive resource policy, natural resource exploration in the U.S., critical metals and what’s really happening in the rest of the world regarding resource nationalism.
I also believe I’ll be meeting with Senator Murkowski’s natural resource policy representative, McKie Campbell. I’m trying to educate the Congressmen and Senators and their staffs on how important natural resources are to the U.S. and what’s going on in the world with respect to critical metals, metals supply and demand and what policies we need to enact in this country.
TGR: Do you feel you’ve made progress toward legislation that’s a bit more pro-mineral development or metal development?
MB: Yes, I think we’ve made some progress. It’s a long education process and it’s difficult to do because you have to be consistently in front of them. Congress has three bills pending now—two in the House and one in the Senate—that relate to natural resource development in the U.S. for critical metals. Not just rare earth elements, but a number of others as well. They also relate to exploration and development policy. I think we’re making some inroads with Congress and others in Washington. It’s very important that we keep that pressure up.
TGR: On Thursday, the price of gold for delivery in August flirted with $1,600/oz., going as high as $1,594.90/oz. before closing at $1,589.30. What is causing this continued upward climb and what does it mean for juniors going forward?
MB: There is just a tremendous amount of uncertainty regarding the debt ceiling and the U.S. credit rating. That is pushing gold and silver prices higher, which is positive for gold miners and exploration stocks. Look for $1,700/oz. gold by the end of the year.
TGR: What happens if there is no third round of quantitative easing and our elected officials come to an agreement on the debt ceiling? Does the gold price climb lose its momentum?
MB: Nothing is standing in the way of gold and silver going higher. There will be some accommodation on the debt ceiling and something will be done to try to keep the economy moving just because no one wants to see higher interest rates. In the meantime, investors have come to the realization that precious metals play an important role in the portfolios of individuals, institutions and countries, which are now buying large quantities of gold. It will continue to hit new highs as the 250-day moving average is increasing beautifully.
TGR: In the second quarter, we witnessed a significant sell-off in speculative positions in both gold and silver. Do you believe a portion of that speculative money could find its way into copper?
MB: There’s tremendous pent-up demand for copper around the world because of emerging economies. It is also much more difficult to make world-class discoveries today. I think copper prices will be very strong. Metals like zinc are also really starting to look very attractive to the exploration industry. There’s a lot of potential for discovery investment flows into some of the base metals, including copper and zinc, and some of the special metals such as manganese, vanadium and graphite.
TGR: Any discussion about copper has to include China. Beijing recently raised interest rates to fight inflation, but the economic indicators in China continue to improve and that ultimately means greater demand for copper there. Will supply disruptions converging with greater demand push the copper price above $5/lb. this summer?
MB: That is certainly possible. I can remember when copper was $0.65/lb., so obviously there is real upward momentum. Copper is a “quality of life” metal. Infrastructure can’t be built-out without copper. I think that prices are going to be quite strong as we approach the fall season.
It is interesting to note that the Chinese started buying again as the price of copper fell in the last couple of months. Their demand is crucial. They are also bidding for copper companies around the world. I think we’re in the third inning of a very long commodity supercycle in the world. Copper rightly will take its place in that cycle. Copper miners in Indonesia and Chile are experiencing labor problems as well.
TGR: Recently, China’s Jinchuan Group trumped a $1B bid for the African-focused copper company Metorex Limited (JSE:MTX; LSE:MTX). Do you expect Chinese firms to take more runs at companies as a means to lower the cost of copper?
MB: I do, but I think the primary motivation of the Chinese is going to be infrastructure build out. It’s a huge country with a growing middle class. Somewhere around $4 copper is probably very cheap to the Chinese.
But it will be more than just the Chinese that come into this game. Companies like Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) are going to get involved because there just hasn’t been a lot of new high-grade discoveries that have been turned into reserves. It’s a very interesting game that’s being played. Africa is in play in terms of natural resources. No doubt.
TGR: Given the jurisdiction risk in Africa, could there be a bit of a premium on western copper plays?
MB: The Murkowski Bill, which passed in a unanimous, bi-partisan vote but hasn’t been signed by the president yet, should help ease exploration in U.S. Some of the discovery progress in Arizona and Nevada now is going to become increasingly sought after by companies like Freeport, Rio Tinto PLC (NYSE:RIO; Paris: RTZ.PA), even Barrick Gold Corp. (TSX:ABX; NYSE:ABX), and of course some of the smaller copper companies. I think there’s going to be a premium on what’s happening in the U.S., Canada and, to a lesser extent, Mexico.
TGR: Which companies do you think could benefit?
MB: One that I’ve followed for years and in which I own a big position is Quaterra Resources Inc. (TSX.V:QTA, NYSE.A:QMM). It just exercised its option to acquire the Yerington Mine, which was mined from about 1952 to 1978 by Anaconda. It’s the most significant land position in the Yerington District. Adjacent to it is Nevada Copper Corp. (TSX:NCU), which has a huge skarn find. Rio Tinto has a 13% position in Entree Gold Inc. (TSX:ETG), which acquired the Anne Mason Property in Nevada, also adjacent to the Yerington Mine.
Yerington is the newest and safest copper district in the U.S. It could realize 50 Blb. to 60 Blb. of copper. Anaconda mined 1.7 Blb. during its 25-year life. Quaterra went through the rigorous process of taking this mine and property out of bankruptcy. It now controls water rights and about 8 Blb. of copper. No one understands this story, so the QMM stock is very cheap. I estimate that Yerington, the Bear Deposit and its nearby open pit MacArthur mine are worth $3 to $4 per share of Quaterra.
Another company that I follow closely is Redhawk Resources (TSX.V:RDK; Fkft:QF7; OTCQX:RHWKF). Redhawk sits in the Copper Creek area of southern Arizona, actually Pinal County, where several big copper porphyries are located. It is drilling a huge defined copper and moly resource there. The stock is trading around $0.50, so companies like Freeport, BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) and Asarco Grupo Mexico, whose Hayden smelter is just a few miles away by road, are likely to take a big interest in Redhawk.
TGR: That property has been thoroughly explored before. Is it getting a second look because of where copper prices are right now?
MB: There has been a lack of new high-grade discoveries lately, so companies are coming back and readdressing some of the properties where maybe $0.65/lb. copper didn’t work, but $4/lb. copper works beautifully. These are places that already have a lot of infrastructure and safety isn’t a risk as in Africa or Indonesia.
TGR: Redhawk said in its scoping study that it’s going to need about $400M to build the mine and mill there. Is it going to have to do a joint venture or an off-take agreement?
MB: I would imagine that Redhawk will not raise that kind of money, but it may not have to build one. Several mills operate in the area, including Asarco’s Hayden mill, which would be a natural fit. There’s good transportation infrastructure and Pinal County is all about mining culture. My guess is that the company will strike a deal to use someone’s existing facilities or perhaps be acquired.
TGR: Quaterra and Redhawk are fairly mature. Do you have any earlier-stage prospects?
MB: Southern Silver Exploration Corp. (TSX.V.SSV; Fkft:SEG), southeast of Tucson, Ariz., is in the early stages of exploring for copper porphyries, specifically a Resolution-type target, jointly with Freeport-McMoRan. I think it has a good chance for a discovery at this stage on its Dragoon project. Freeport thinks enough of it to be drilling it at this stage.
It’s trading at about $0.17 a share, so it’s certainly what some of us would call a “penny dreadful.” But I like the management and I like their properties and they have several in addition to the Arizona copper target.
TGR: You recently went to Guyana with a group of Chinese investors. Guyana is starting to see some major gold projects come into development, such as Guyana Goldfields Inc.’s (TSX:GUY) Aurora Project and Sandspring Resources Ltd.’s (TSX.V:SSP) Toroparu Project. However, I see a few challenges facing companies looking to develop mines in Guyana. One is a severe lack of infrastructure and a pristine rain forest environment. Another is a shared border with Venezuela where several gold projects have been nationalized by the Hugo Chavez regime. Also, the Guyanese government is relatively unfamiliar with mining.
MB: You’re probably right about some of those concerns. There is a lack of infrastructure. For example, when we flew into the jungle to see GMV Minerals Inc. (TSX.V:GMV), we helicoptered in for about 70 miles. GMV has a huge land position. I think it has perhaps one of the better chances to make a significant discovery. I like the management team under Ian Klassen very much. They just have a good idea of what’s going on down there.
I don’t believe that Venezuela is a factor at all. I don’t foresee any problem with the Venezuelan government interfering in the internal affairs of Guyana.
There are some health risks. Malaria and yellow fever are a problem there. But I still think the glass is half full for Guyana. Especially, if foreign companies—primarily Canadian companies—bring their expertise, talent and jobs for the locals.
TGR: Is the government mining-friendly?
MB: We met with the Prime Minister and it’s fair to say that in every developing country there are going to be nationalist undertones. But the government is welcoming in exploration and development. Some of the big companies, like Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A, TCK.B) and Barrick, are now looking carefully at Guyana primarily because Venezuela is so inhospitable. The government seems to know what it’s doing with mining law. I don’t foresee that the taxes will be more significant there than anywhere else in the world.
TGR: One of GMV’s properties is right beside Guyana Goldfield’s Aurora Project. Is that property likely to become GMV’s flagship operation?
MB: GMV has done the geophysics and flown almost the entire country and analyzed the data carefully. No other company has this database. The company has a better idea of where the gold veins are located than anyone else there. The property it’s working on now has tremendous potential. We were there when it drilled its first hole. It’s going to be a while before we really know much about GMV, but I really like its potential because it has a lot of targets to drill. I believe the company will farm out some of the properties and drill the best ones.
TGR: Can you tell us about Ian Klassen, GMV’s head, and his team?
MB: He’s an experienced hand in Guyana. He’s really done a thorough job of working with prominent local mining families, soil sampling, ground geophysics and airborne geophysics. He’s kept costs to $50/m on the drilling, which are relatively cheap. He’s just announced a deal with Canamex Resources Corp. (TSX.V:CSQ; FSE:CX6) for several million shares, where Canamex will take a GMV property that is about 10% of its land position. He’s very good at monetizing some of the company’s holdings that couldn’t be utilized in the near term due to the large size of its land holdings. Ian’s had a lot of experience in Ottawa with the Canadian government and is moving forward with Grande Portage Resources, Ltd. (TSX.V:GPG) on the Herbert Glacier where they have reported visible gold intersections. He’s ready to create value for GMV shareholders.
TGR: You visited Sandspring’s Toroparu gold-copper deposit in Guyana on your previous trip. That junior recently released the results of its infill drill program. Did you see those results?
MB: I did. The company is getting one and two gram gold and has a copper credit. It just needs to step out and keep drilling and it will find a lot more gold. There’s a lot of opportunity for the companies already in Guyana with camps set up. Sandspring has about 10 Moz. in various resource classifications from measured and indicated to inferred. I expect that it will get higher grades as it keeps drilling. I’ve owned that stock for about two years.
TGR: Sandspring shares reached $3 late last year, but fell back below $2.50. What’s going to be the next catalyst to push Sandspring stock above $3?
MB: The next catalyst could be the discovery of a higher grade system. Most of the share prices of these gold juniors, even the ones with NI 43-101 resources, came off significantly in the past few months. It wouldn’t surprise me to see Sandspring go back above $3. If the company keeps drilling and keeps adding resources, it’s going to get a significant premium on a takeout from a major player at some point in time.
TGR: Are there any other Guyana-focused juniors that you’re following?
MB: Sacre Coeur Minerals (TSX.V:SCM) was part of a controversial takeout by OAO Severstal (LSE:SVST; RT:CHMF) that ultimately fell through. The stock is very cheap. Coming down from a high of $1.57, it was recently trading at around $0.40. The company’s property is very close to GMV and Sandspring’s properties in eastern Guyana.
TGR: Recently, the Peruvian government rescinded Bear Creek Mining Corp.’s (TSX.V:BCM) permit for the Santa Ana Silver Project in Peru. Since then, the company’s share price has plummeted to about one-third of its previous value. Did that move send some shockwaves through the mining investment community in South America?
MB: Peru and Guyana are on the same continent, but they’re almost totally different in every respect. The Peruvian decision has sent shockwaves through the mining community there. There’s a lot of gravitation to places like Colombia and Guyana and away from places like Venezuela and Peru. However, Peru, Ecuador and Chile have some of the great deposits and a lot of investors are willing to take that risk.
When something like this happens, there are shockwaves and shockwaves scare investors. The Peruvian government is smart enough to know that they need to attract money into the country. I’m sure that Bear Creek will handle it well and its stock price will come back over time.
TGR: Is there a risk of anything like that happening in Guyana?
MB: There is an election forthcoming in Guyana and things could change. I don’t think that they will change for the worse in Guyana. The country recognizes the need to have their country developed, to have capital coming in, to increase investment and infrastructure. I expect the election will be favorable for mining and offshore oil work.
TGR: Any parting thoughts for us, Dr. Berry?
MB: Canadian Nobel Prize winner Michael Spence has written a book on the coming convergence of the emerging world. I think we have between 20 and 30 years. He thinks we have 50 years of this convergence of emerging country quality of life. If that is true, we have the next three to five decades of converging lifestyles. That means that the commodity and natural resource sectors, in particular the mining sector, will be a wonderful place to be invested. And we’re going to be there with the discovery investing opportunity. We’re going to focus and push very hard toward that down the road.
TGR: Thanks, Dr. Berry.
Dr. Michael Berry has lived in the U.S. for 36 years, but was raised in Canada. A math major at the University of Waterloo in Ontario, he earned an MBA at the University of Connecticut and obtained a Ph.D. specializing in quantitative analysis and investment finance from Arizona State University. He has specialized in the study of behavioral strategies for investing and has been published in a number of academic and practitioner journals. His definitive work on earnings surprise, with David Dreman, was published in the Financial Analysts Journal. While he was a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia, Michael spent considerable time with some world-renowned geologists on the Carlin Trend. While a professor, he published a case book, Managing Investments: A Case Approach.
Dr. Berry also held the Wheat First Endowed Chair at James Madison University in Virginia, and managed small- and mid-cap value portfolios for Milwaukee-based Heartland Advisors and Chicago-based Kemper Scudder. His Morning Notes publication, distributed worldwide, provides analyses of emerging geopolitical, technological and economic trends, as well as identifying opportunities for the Discovery Investing strategy he developed. Dr. Berry has presented testimony to a subcommittee of the Natural Resource Committee and U.S. House of Representatives.
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