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.
By Claus Vistesen, on June 16th, 2011
- The Squid goes long on copper and I must say that I agree with them. I think I would be able to build a strong case for a long copper position in the second half of 2011.
- Simon Ward gives us some bad news on China in so far as goes his view that inflation is likely to stay higher for longer (a whiff of India here?) and thus how it is not yet all engines go in the great East. I would have mapped in a relative acceleration in H02-2011, but I might have been too optimistic here
By The Gold Report, on May 23rd, 2011
 Blinded by the glare of gold’s rocketing rise over the last several years, investors may want to follow the leads of the Barricks, Thompson Creek Metals, Goldcorps and other major miners targeting the copper space, according to Kevin Puil, portfolio manager at Malcolm H. Gissen & Associates and senior analyst for its Encompass Fund. In this exclusive Gold Report interview, Kevin tells us that major gold miners increasingly want to diversify and are turning to the red metal on the opposite end of the economic spectrum.
The Gold Report: The biggest news to rock the copper world for quite some time hit late last month with Barrick Gold Corp. (TSX:ABX; NYSE:ABX) announcing a deal to buy Equinox Minerals Ltd. (TSX:EQN; ASX:EQN) for a cool $7.8B. What do you think about Barrick’s acquisition of Equinox, Kevin?
Kevin Puil: Although many view this acquisition as expensive and say that Barrick overpaid, I don’t think so. I think it’s a good move by Barrick. It was a friendly, all-cash bid of $8.15/share, which trumped Minmetals Resources’ hostile bid of $7/share. With this acquisition, I think Barrick management has clearly stated that its outlook for copper is bullish, and its outlook for the expansion potential at Equinox’s Lumwana deposit in Zambia is definitely bullish.
It’s a good way for Barrick to get back into African copper after having spun off African Barrick last year. The deal is definitely accretive. I saw the C-1 per-pound operating cost at about $1.90 with the average copper price Equinox sold this last quarter at about $4.30/lb. Those are good margins. The impact on net asset value (NAV)/share is negligible to Barrick, while it should increase per-share cash flow by almost 10% this year and close to 20% next year.
TGR: Given this acquisition, do you see more of the seniors that are heavily weighted toward gold following suit and adding more base metals to their portfolios?
KP: I definitely see more M&A in the copper sector, and I also can see more gold companies actively looking for projects that will give them exposure to both gold and copper.
TGR: Will that confuse investors who traditionally have a different reason for investing in copper than they do in gold?
KP: A lot of the senior gold producers have exposure to copper, whether investors know it or not. They typically produce a lot of copper as a byproduct. I don’t have the numbers in front of me, but I’d suspect that close to 10% of Barrick’s revenue comes from copper, especially with copper at $4/lb. At that level, it’s arguably more profitable than mining gold.
TGR: What are your feelings about copper? And where does Encompass Fund stand?
KP: I’m definitely bullish on copper over the medium and long term. The new world reality is increased consumption of raw materials by emerging classes in big countries with accelerated development. Demand is back on track, while supply isn’t. It’s taking longer to repair the damage to the supply side than to the demand side.
A few factors play into this. Companies are mining lower ore grades because new quality projects are scarce. In addition, political instability, as well as mining service and equipment supply problems are becoming major challenges for copper miners.
TGR: As you pointed out, with spot copper prices hovering around $4/lb., copper mining is still profitable for most of the seniors, and several seniors already have fairly significant copper credits or copper assets. Against that backdrop, will we see more juniors entering this space? And where would you expect to see more copper mining?
KP: Definitely. I do see more juniors getting involved in copper exploration and I think the majority of these projects will be found in Latin America, Canada and Australia. We’re seeing more activity—not just in the copper, but the gold/copper combination projects. We’ve already seen a number of acquisitions during the last year.
TGR: Aside from Barrick, what acquisitions come to mind?
KP: Thompson Creek Metals Company Inc. (TSX:TCM; NYSE:TC) acquired the Mount Milligan project in British Columbia from Royal Gold, Inc. (TSX:RGL; NASDAQ:RGLD). Goldcorp Inc. (TSX:G; NYSE:GG) acquired the remaining interest in El Morro, another Chilean copper project, from Xstrata PLC (LSE:XTA). And before Equinox, Barrick acquired the remaining interest in Cerro Casale in Northern Chile from Kinross Gold Corp. (TSX:K; NYSE:KGC).
TGR: Given the level of activity in the sector, could you tell us about any off-the-mainstream-radar companies that may have significant copper assets? Any compelling stories, particularly in mining-friendly jurisdictions?
KP: Yes, we’ve identified a few companies. Exeter Resource Corp. (TSX:XRC; NYSE.A:XRA; Fkft:EXB) has its Caspiche project. Again, it’s one of those copper/gold projects, with about 20 million ounces (Moz.) of gold and about 5 billion pounds (Blbs.) of copper. That comes with its own challenges, however, including lack of infrastructure and a large capital expenditure (capex) requirement.
Closer to home, Nevada Copper Corp. (TSX:NCU) has the Pumpkin Hollow deposit in the Walker Lane mineralized belt of Western Nevada. That deposit has about 9 Blbs. of copper with a couple million ounces of gold as well. Nevada Copper may be facing some permitting and financing hurdles, but it has good infrastructure in a stable political environment.
We also like Candente Copper Corp. (TSX:DNT). Its Cañariaco Norte deposit, with 7 or 8 Blbs. of copper has been significantly de-risked with the completion of a pre-feasibility study. Capex is probably going to be about $1.5B. Cañariaco Norte is in Peru, where the mining sector may see some instability in the post-election period, as both candidates have indicated an intention to increase taxes.
One of our favorites for potential acquisition is located in Arizona—Redhawk Resources (TSX.V:RDK; Fkft:QF7). Its Copper Creek project is located in a mining-friendly district in Arizona, which leads the U.S. as a copper-producing state, with 12 active mines. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) and Rio Tinto (NYSE:RIO; ASX:RIO) are also operating in the area. The project is within eyesight of Grupo México’s (BMV: GMEXICOB) ASARCO Ray mine and Hayden smelter and BHP Billiton Ltd.’s (NYSE:BHP; OTCPK:BHPLF) now-closed Kalamazoo Mine.
The 100%-owned project is 7 sq. mi. and has had more than 400 drill holes and 160,000m of drilling to date, with more than 75% of the property still unexplored. Redhawk’s deposit has already been adequately de-risked, with an NI 43-101 compliant resource and scoping study identifying approximately 3.5 Blbs. of copper and 50 Mlbs. of molybdenum, with plenty of exploration upside remaining. In addition, more than 400 high-grade breccias appear on the property, although only three have been fully drilled. This definitely has the potential to be a world-class deposit the size of the legendary Resolution or Safford mines.
TGR: When were the tests completed at Redhawk?
KP: They were released last year, and we’re expecting an updated resource estimate, probably in a month or two. It’s a well-positioned resource with a grade of close to 1% copper, a projected operating cost of $1/lb. and capex of less than $500M. I believe Redhawk’s a very attractive acquisition target, too, because it’s well down the permitting path and has great infrastructure. It could be ready for production within 18 months. Not only that, but Redhawk is trading at less than $0.03/lb. copper in the ground, not counting the molybdenum credit, and acquisitions have been more in the range of $0.07–$0.10/lb.
TGR: Is it fair to assume that some of the seniors located in the same district would be interested in an accretive asset such as Redhawk?
KP: Yes, the natural suitors would be ASARCO, Freeport McMoran or Rio Tinto, but I wouldn’t discount foreign nationals such as China and India. Both of those countries have long time horizons and are looking now to nail down supply streams for concentrate 10 to 15 years out. I wouldn’t count them out at all.
TGR: Tell us a little bit about Redhawk’s management, treasury, market cap and so on.
KP: It has a market cap of about $90M, which I think is undervalued by at least 50%. Just by doing easy calculations of copper in the ground, the base case tells me that the project is worth at least $1.25/share, whereas it’s trading at about $0.65 a share.
Redhawk has very strong management, probably more than 40 years of mining experience with one of its top executives coming from BHP. It’s well-capitalized with more than $20M in the bank right now, no debt and no need to go to the market. I think it’s extremely well positioned.
TGR: But no U.S. listing to date?
KP: Not yet, but soon. I believe that they’ll be listing on the OTCQX within a matter of weeks.
TGR: With so much emphasis on gold as it continues climbing to new heights, it might be easy for investors to overlook copper, but you’ve made it clear that the copper space is heating up and there are some exciting stories to tell.
KP: As I said early on, I’m bullish on copper and so are a lot of senior miners. They’re looking to diversify, and for gold miners, copper is an easy way to do it. As companies have to look toward increasingly more difficult geography and geologies to meet demand, it’s going to take more time and a lot more money to bring new copper supply online. We can probably expect more senior miners to get involved with copper as the supply/demand structure holds up for different reasons than the supply/demand structure for gold.
TGR: Thank you Kevin, you’ve given us a lot to think about.
A Chartered Financial Analyst (CFA) with more than 15 years’ experience in the investment management business, Kevin Puil currently serves as portfolio manager at Malcolm H. Gissen & Associates Inc. in San Francisco, and as senior analyst for its Encompass Fund. The Encompass Fund, which focuses on global resource companies exploring for and producing gold and silver, copper, uranium and rare earth elements, racked up a healthy 60% return in 2010, following a spectacular 139% in 2009. Before relocating to California, Kevin worked in Canada, where he also studied economics at the University of Victoria and the University of British Columbia.
By The Gold Report, on May 19th, 2011
 In last week’s EI letter we commented on the parabolic rise in the silver price and made the observation that, although the mining equities don’t always participate in the “up” move in metal prices they seem to always “enjoy” the down moves. This week proved the rule, as the commodity sector got a good shellacking. Although we have been quite cautious and have noted several times that we, and the market, were pricing a fair bit of success into an inherently high-risk investment sector, it still hurt. Little more needs to be said about this week’s two by four to the head that the charts below don’t illustrate.
(Figs. 1 and 2: 7 month charts for Silver and TSX-Venture index)
Of more significance is the longer-term underperformance of equities versus metals prices. As the chart below illustrates, the mid-tier and development-stage gold mining sector (as represented by the S&P/TSX Gold Index) has underperformed gold since at least 2006. Specifically, the gold price has gained 193% versus the Gold Equity Index’s 75% gain. This data point validates the complaint of many funds that, despite getting the macro picture right (gold) they missed out on the leveraged gains they expected from the mining equities.
(Fig. 3- Gold vs. the S&P/TSX Gold Index since 2006. 193% gain vs. 75%)
With regards to the index itself, it is comprised of a number of “troubled” companies. These troubles stem from permitting and geopolitical issues (Gabriel Resources Ltd. (TSX:GBU), Centerra Gold Inc. (TSX:CG), OceanaGold Corp. (TSX:OGC; ASX:OGC), Kinross Gold Corp. (TSX:K; NYSE:KGC), etc.), operational issues (Minefinders Corp. (TSX:MFL; NYSE:MFN), Gammon Gold Inc. (TSX:GAM; NYSE:GRS), Great Basin Gold Ltd. (TSX:GBG, NYSE.A:GBG), Jaguar Mining Inc. (TSX:JAG, NYSE:JAG), NovaGold Resources Inc. (TSX:NG; NYSE.A:NG), etc.) and just plain cost overruns and bad luck. These are inherent and inevitable in the mining industry—so much so that a sizeable portion of the money that might have gone into the sector in the good old days now ends up in Exchange Traded Funds (~67 million ounces of gold is held by ETFs).
Another major and often overlooked problem with the mining (and more specifically exploration) sector relates to the low cost of capital. There are two prime reasons for this availability of easy money. First, “investment” demand for a sexy exploration story far exceeds the number of legitimate and potentially successful exploration properties on Earth. Secondly, my experience is that maybe 80% of the people investing in junior exploration and mining companies have no real idea what the hell the geologist is talking about and therefore, what they are actually buying.
The result is that there are virtually no real barriers to entry in the exploration business. Nearly anyone with a bit of moose pasture, an anomaly, a story and a geologist can raise money. The fictional dream of an easy discovery and instant riches (sold to an overzealous audience) far outweighs the reality that the actual odds of discovery on any exploration property are about 1 in 1,000.
Aiding and abetting this demand for dreams and instant riches are 25 international and 80 Canadian brokerage firms based in Canada alone, all staffed with eager brokers looking to buy that new black Bentley. Last year on the TSX Venture exchange, $5.3 billion was raised by way of 2,110 financings, while the Venture’s big brother (TSX) raised another $12.5 billion for the mining sector. So far in the first quarter of this year, another $2.1 billion has been raised on the Venture Exchange by way of 617 financings and, another 32 new mining companies were born. Last year the two exchanges saw 208 new mining companies, all of them “on the verge of a discovery.”
That dear reader is a lot of money, or put another way, a lot of paper (stock) looking for a new home. It’s also $7.4 billion over 16 months that didn’t go into buying your favorite junior company.
Most of the “intelligent money,” the high net-worth investors who participated in these financings, know the odds of success (FYI- not good). That means that much of that new paper is destined to hit the market as soon as someone can pump the story to a commodity-crazed public. The current bludgeoning in the commodity space is overdue and quite honestly welcome. We have been living in la-la land with pure high-risk exploration plays priced at hundreds of millions of dollars and virtually worthless mineral resources attracting the attention of large hedge funds and media pundits. With luck, the junior market will retrace some of its gains, and over the summer we will come across a few good buys.
On a More Positive Note. . .
Although the paper available for Canadian equities is limited only by the number of trees between Victoria Island and Newfoundland, the number of economic mineral deposits and legitimate exploration properties is very limited. The net effect of this naturally limited supply of mineral deposits is playing out in real time. We have entered a period of history in which metal supply, as a function of time, can no longer keep up with demand, as a function of time. These two concepts are truly important ideas and will drive our long-term investment thesis in this risky sector here at Exploration Insights. As stated many times: Quality deposits will remain highly desirable and command a premium from the major mining companies. Bogus properties will ultimately revert to their intrinsic value—nada. Which do you want to own?
The photo below shows the Bingham Copper mine near Salt Lake City, Utah. This was the first open pit bulk mining operation in the world and has been actively mined since 1906. Total production is approximately 18 million tonnes (40 billion pounds of copper)—about one year of global demand! In effect, we need to find, drill, permit and mine one Bingham deposit every year just to stay even. The same holds true for gold: we are mining about 80 million ounces a year. That is equivalent to depleting Nevada’s entire Carlin Gold Trend every year.
(Fig. 4- Bingham Copper mine. Second largest open pit mine in the world: 1 a year!)
In summary, there is serious money to be made in the junior exploration sector if you can differentiate an ore deposit from moose pasture before the crowd. Given the two year bull run in this sector valuations are quite high and do not reflect the inherent exploration and mining risks. Companies have been financed by investors with no real chance of a discovery success by speculators with no real knowledge of what an ore deposit looks like or doesn’t. Caution is advised right now as reality sets in. There will be some very good companies with legitimate mineral properties coming to a market near you at a significant discount. Keep your powder dry, do your due diligence and good luck.
That’s the way I see it.
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