By Bron Suchecki, on February 10th, 2012
Below are some relevant extracts from Martin Armstrong’s The Analytical Shill. The article is generally about how research and analysts are conflicted and how analysts and investors and gurus can be blinded by their biases. The paragraphs below are straight from the article and will jump around a bit because I’ve just pasted them in order they appeared without all the extraneous stuff.
Martin Armstrong:
The metals were one favorite sector where they were constantly bullish – never bearish for 19 years. But hey, the market manipulators always needed cheer-leaders to get people to buy every high so they could sell.
On the Buffett Silver Manipulation, it was PhiBro who had a shill call the Wall Street Journal and tell them I was trying to manipulate silver down because I was short. When the WSJ & I argued and they refused to print the name Buffett they demanded I give them, that forced the CFTC to act calling me to ask where was it taking place. I told them London and they called the Bank of England. When they in turn ordered all silver brokers to show up the next morning, Buffett was forced to come out and admit he bought $1 billion worth of silver but denied he was manipulating the price.
You can ask the guys at GATA. They were well aware of the first 1993 Manipulation by PhiBro (Philips Brothers). They got in bed with Buffett when he stepped in to run Salomon Brothers after they got caught MANIPULATING the US Government bond auctions. They began buying silver and the CFTC stepped in demanding to know who their client was. Now if it had been anyone else, PhiBro’s reply was they refused to tell the name of the client. Forget the law. That does not apply to New York firms. The CFTC responded saying if they could not know who their client was, then PhilBro had to exist the trade. They did and of course made a fortune for the hawkers had all the little guys buy silver just in time for PhilBro to sell it to them.
This is WHY the manipulations began to move to London. Not only did PhiBro try to get me on board, their broker walked across the floor and SHOWED my broker Buffett’s orders at the low!
To create the fundamental, they moved inventory from New York to London. They were manipulating silver as always. Playing games with the inventories. They were moving silver from New York to London where the Buffett orders were being executed. This made the US warehouse inventories drop sharply. Go look at the analysts who talked silver up on that very fundamental. If they said there was a shortage of silver and you better buy it is going to $100, then you may be dealing with a shill or a biased analyst.
Many of the metals analysts with an agenda back then hated my guts. How dare I say there was a manipulation when it was at last silver was going up instead of down. Now I was part of some covert conspiracy hell bent on suppressing the metals because I dared to say “they are back” (manipulators) and the target was $7 by January 1998. To this crowd, a manipulation is always to the downside and never up.
Go check the recommendations of analysts back then. See where they stood. The best one I heard was silver was in demand in London because it was .9999 there instead of .999 in New York.
GATA began to see the same nonsense that I did during the early 1990s. It was just that I saw the manipulations as being UNBIASED. In other words, they did not care what they manipulated as long as there was a guaranteed profit. They manipulated even base metals such as rhodium. They manipulated platinum in league with Russian politicians who strangely recalled all platinum to take an inventory. Hell, Ford Motor Company filed suit over that manipulation.
How do you distinguish a REAL bull market from a bullshit manipulation?
Most manipulations can be seen easily when you look at a market in terms of a Basket of Currencies. Why? Because a REAL bull market must take place ONLY when it rises in terms of ALL currencies. Unless that takes place, investors in some countries will be sellers while others are buyers. Here is a classic example as to why we were bearish on gold for 19 years despite the hate mail and the best attacks of the shills. The manipulators ALWAYS need to get the metals guys worked up into a fever to sell to them to make their profits and big bonuses.
So when analysts only espouse one side, be very careful. For no matter what the market, there is always a time to rally and a time to pause. Nothing is ever straight up or straight down. Anyone who portrays that is either ignorant of the market behavior, or a shill – paid cheer-leader. Putting out bogus research has been the name of the game. Unfortunately, there are just some people who are hardcore.
Markets are the same mix as politics. There are people who simply believe in a given position and no matter what you say or what evidence you present to the contrary, they will never believe it. Thus, I have NEVER been interested in preaching to the choir. I have always preferred the independent thinker – the investor who wants to really learn about market behavior and not read someone who simply supports their never changing view of the world. Nor am I interested in exchange words with those who may not be shills, but are just part of a particular hardcore group. I am cheered only when I agree, and if I disagree, I am despised. But that is expected in the retail world – NEVER in the professional institutional world.
There cannot be a perpetual bull market in anything anymore than you can stand there with your arm straight up in the air. Oh shore, you can do it briefly. But then your arm will feel so heavy you can no longer keep it up. Everything takes a pause for the same reason you sleep at night. Nothing can maintain the same energy output all the time. People come up with all sorts of excuses why they are right yet the market declines. Usually it is some conspiracy of a mythical group so powerful that they just win.
Markets collapse because EVERYONE who ever thought of buying has bought. They are now counting their profits for the next eternity. Something happens and scares the herd. Suddenly, the long try to sell but there is no bid. The market collapses in the blink of an eye. Why, because the majority has already bought and there are no new buyers to keep the momentum going. It is never some mythical short player preventing the upward advance. It is just not time yet.
Philip Tetlock, a professor of organizational behavior at the Haas Business School at the University of California-Berkeley, has been following the so called experts for some 25 years studying primarily the institutional forecasting skill of political experts. He had signed up nearly 300 academics, economists, policymakers and journalists keeping track of more than 82,000 forecasts plotting them against real-world results. He analyzed not just what the experts said but how they reasoned and how quickly they changed their mind in the face of contrary evidence. He also tracked how they reacted when they were wrong, which was of course the majority of the time. Most could not even beat a random forecast generator.
Tetlock’s research did discover that there was one kind of expert turns out consistently more accurate forecasts than others. The most important factor he discovered was not how much education or experience the experts had but how they actually thought. The best forecasters were those who were self-critical, eclectic thinkers who were constantly updating their beliefs when faced with contrary evidence instead of clinging to dogma. He found the best were suspicious of grand schemes and conspiracies and were more practical about their predictive ability. The less successful forecasters clung to the same ideas never wavering pushing the same idea to the breaking point of absurdity. These types of people were more often embraced by the media because they loved to articulate and persuade as to why their idea explained absolutely everything.
Tetlock uncovered widespread forecasting failures. Of course, there is the herd of followers who for some reason want a GURU and unrealistically expect infallibility. This may reinforce the pundits that like to put on a show and claim why they are personally better than everyone else and only their ideas are correct and when wrong, it is the result of some giant conspiracy, not their lack of ability to forecast.
The key to the future lies in the UNBIASED view of whatever it is. You cannot be married to a single position EVER! Tetlock points out that a successful analyst always qualifies their arguments with “however” and “perhaps,” while the dangerous analysts build up momentum with “moreover” and “all the more so” as they try to be more entertaining. The dangerous analyst wants to keep the clients happy and to a large extent preaches to the choir telling them what they want to hear.
The one thing about markets is that the MAJORITY just have to be wrong! Why? They are the fuel that drives the market up and down. Trap the majority either long or short and you create the fuel for the next move in the opposite direction.
So for now, it is far better to let the markets speak. As I stated at just about every conference I have ever given, there is ONLY one analyst that is never wrong – that is the market itself. The key to successful trading & forecasting is to learn how to let the market speak to you and go with the flow. It does so in both TIME as well as PRICE. Turning points are NEVER specific events, but inflection points where highs and lows take place. It would have been nice to have a low first and a more orderly advance afterwards. But markets like to create the worst of all worlds.
So for anyone who thinks he can beat the game as an analyst or trader, must remember one thing. The market is always right. To survive, we have to align ourselves with the market and listen when it speaks. This is not a game for arrogance and prognostications fixed in stone steeped in bias and dogma. History repeats – but also with a slight twist. So how high will gold go? It is a question of CONFIDENCE.
You will ALWAYS be your greatest adversary, for to succeed you must conquer your own biases, fears, and doubts. You cannot do that as Philip Tetlock has keenly demonstrated with fixed ideas. If you are married to a philosophy and will not yield and blame everyone else for conspiring against you and that is the reason something has not yet unfolded, you better see a shrink.
By The Gold Report, on February 9th, 2012
  Preserving wealth in a volatile political and financial world is a job for gold. Greg Weldon, publisher of Weldon’s Money Monitor newsletter and Grant Williams, a portfolio advisor at Vulpes Investment Management in Singapore, will share their insights at the Cambridge House California Investment Conference Feb. 11–12. In this exclusive interview with The Gold Report, they answer the question: How low and high can gold go?
The Gold Report: Recent headlines continue to focus on the debt crisis in Europe as more countries are having their debt downgraded. Greg, you have diagnosed the problem as credit addiction and said that the European Union won’t be able to recover until leaders take painful measures necessary to kick their addiction. What does this mean for commodities and commodity equities?
Greg Weldon: It’s critical for asset prices across the globe. It is a debt addiction, debt refinancing and deficit financing problem, not only in Europe, but also in the U.S. and Japan. Austerity is the real answer to the fact that there is too much debt, and austerity measures in an economic sense are not positive.
My fear is that it’s going to be very difficult to see how economies in Europe, the U.S. and Japan can stand on their own two feet without the assistance of central banks debasing currency through debt monetization. I liken it to filling the sink halfway up with water and pulling the plug out of the drain. Of course, the water level will recede unless you turn the faucet on and start more water pouring into the sink. The level of water represents asset prices, the water flowing out of the faucet represents liquidity provided by global central banks and the drain represents the real macro economy, which has not been fixed.
At the end of the second round of qualitative easing, when the Fed shut off the faucet, the water level (asset prices) started to go down. But now the water is running again—particularly with some of the measures instituted by the European Central Bank, with its three-year loan program, the federal liquidity swaps and the back-ended way that it’s managed to involve the International Monetary Fund.
The problem with all of this is it does nothing to fix the underlying problem, which is too much debt. This is not sustainable. Central banks turning on the water faucet is good for asset prices. The real solutions of fiscal austerity, which are probably not palatable to most politicians in Europe, are the real struggle as we go forward. This problem is not going to go away.
TGR: Grant, in your Things That Make You Go Hmmm…. newsletter, you painted a picture of the final implosion of the euro and U.S. municipal bond meltdown. What would this mean for resource stocks?
Grant Williams: That was part of a prediction piece that I wrote at the end of 2011. It was semi-tongue-in-cheek. My contention was that as volatile as 2011 played out, we didn’t actually get any resolution. And it feels like 2012 will be the year those resolutions start to take place. One of the primary ones is the European situation. A Greek deal to solve the crisis seems to constantly be on the horizon, but they can’t seem to come up with an absolute solution to the public sector involvement haircut issue. When they do, I think it’s going to be the start of a whole slew of legal action to try and either trigger credit default swaps or negate any haircut from those who don’t want to sign up. Greece has a big refinancing coming up in March. It has to raise a little over €14 billion (B), and between now and then it somehow has to get a $130B loan package approved from the Troika. It is very hard to see how Europe can just keep pumping money into Greece. It’s very likely we’ll see Greece exit the Eurozone then, and that’s going to focus everyone’s attention on Portugal. I think Italy will be OK. Spain worries me more than Italy because the economy there structurally is in far worse shape. But if a bunch of countries pull out, that leaves the question of how people unwind any obligations they have in the current euro construct.
What this means for commodities is that the money-printing presses are going to be turned up to the max again. Despite adamant claims from politicians to the contrary, money printing—even if by another name—will have to be implemented at a magnitude much, much higher than ever before to meet current demands. Cash is being given to banks basically for free through the long-term refinancing operation on the quid pro quo that the money finds its way back into the government bond market. The problem is that a lot of this money is going to leak out somewhere other than where it is intended and I suspect it’s going to leak into commodities and equities. We are going to see stock markets float higher, not necessarily on particularly good numbers from corporates, but from the simple dynamic of a lot of freshly printed money looking for a home. We have already seen it in gold and silver this year. They both had big corrections in December, but they are two of the best performing assets of the year so far and I suspect the more money they print this year, the faster these things are going to go up.
People are starting to understand that deflation is not an option for the central banks. Once people realize that if we get a brief period of deflation, it will be fought aggressively with inflation, they will start to look past any deflationary period and position themselves for inflation. That is going to mean higher prices in commodities.
TGR: How high could gold and silver go in 2012?
GWilliams: I think gold trades at $2,200 an ounce (oz) this year. I think silver trades at possibly $60/oz this year, but they’re really just stepping stones on the way to higher ground. This 11-year ascent in both precious metals is only going to change when central bank policy surrounding it changes. I just don’t see that happening in the foreseeable future until they get this debt problem under control.
We are going to see periods with crazy spikes. We are going to see corrections. Some will view this as a collapse but the difference between a correction and a collapse is your entry price. If you bought gold at $700/oz a few years ago and you watched it go from $1,900/oz to $1,500/oz in December, that’s a correction. If you bought it at $1,900/oz, it’s a collapse. I think it’s important to try and take a longer view. The rationale for owning gold and silver is still in place. In a world of printing presses and fiat currencies, no one can manufacture gold and silver out of thin air. I think they are both going to go a lot higher.
TGR: Greg, what are your predictions for 2012?
GWeldon: There is a disconnect in the markets. Currencies really aren’t moving much either. The dollar hasn’t appreciated much. This is why gold is stuck in this range, capped just above $1,700/oz, with potential downside toward $1,300/oz. People are liquidating commodities. My sense is that there is more weakness to come in H112. Commodity prices in Q411 have already come down significantly, pumping some relief into margins. There is a little window of opportunity here where equities and some of the commodities markets could have some upside.
Debt could become an issue again in H212 depending on how central banks deal with that and whether we have a big downturn again in the stock and commodity markets. My longer term view is that when push comes to shove and central banks are staring into the abyss of a potential debt deflation, they will choose to reflate at whatever cost. That is bullish for gold long term. If banks can find the political will to do it, there will be significantly higher prices for commodities across the board in the long term.
China, in particular, has a bullish dynamic. Certain commodities, such as copper, have their own supply-demand dynamics that are detached from the dollar and monetary policies. The Chinese imported copper at a record high in December. Copper stocks on the London Metal Exchange have fallen by close to 30% since October. Copper is one of these commodities that has upside potential regardless of what the dollar is doing.
TGR: Grant, you are based in Singapore. There was a lot of talk at the last Cambridge House Conference in Vancouver about whether China is growing, shrinking, landing hard or soft. What impact will China have on commodities and equities around the world?
GWilliams: China faces a lot of problems. A lot of people think it is in for a hard landing. It is always difficult to believe official Chinese statistics, but the message that the Chinese government is sending through those numbers can be useful. For example, the Chinese growth numbers last week showed an 8.9% increase in gross domestic product. In a world of basically zero growth, that’s a pretty good number, but it’s not the double-digit number we’ve been conditioned to expect from China. Whether it was true or not, it shows that the government is saying: things are OK. We are on top of this, we’re in control. We are not going to slow to zero; we’re just going to grow a little bit slower. The big problem China has is inflation. Roaring food inflation in a society in which half the population lives in relative poverty in rural areas would be a big issue. A lot of people talk about property bubbles—and there are definitely bubbles in Chinese property—but as long as the government can keep people fed, it is going to find a way to get through this—at least for now.
China also has vast currency reserves. The Chinese absolutely understand that paper currency is being devalued incredibly quickly. So, until someone puts a sell-by date on copper and iron ore, it will keep stockpiling the stuff because it will need these commodities to continue growing. China will continue to swap paper money for commodities. The Chinese are bringing gold into the country as fast as they possibly can. Gold is in the DNA here in Asia. It doesn’t take an awful lot to persuade the public to own gold.
TGR: Greg, in your book, Gold Trading Boot Camp, you said gold is at the top of the macro-monetary pyramid. Why does it hold such an important position?
GWeldon: It is a rare and unique mineral that has provided a store of value for centuries that is not backed by any government. It is not subject to anyone’s IOU. Gold stands alone in the level of security it creates in people’s minds as a way to store wealth and protect it from governments that are continually debasing the value of paper money.
TGR: You put the dollar second on the pyramid, but said that could change soon. What will be the catalyst for change and what will be the result for investors?
GWeldon: I don’t know what the catalyst for change could potentially be. For me, the dollar stays as No. 2. There’s been an interesting little sequence recently where the dollar has rallied and gold has declined. But gold has not declined to the same degree that the dollar has rallied. Gold is appreciating in a lot of currencies outside of the dollar where it’s actually outperforming dollar-based gold.
Investors have a greater degree of confidence that the Fed will do what it has to do to circumvent a bigger issue. Next to gold, the dollar still is the second place that people feel comfortable.
TGR: Mining equities haven’t been able to keep pace with the price of gold. Do you see that changing?
GWilliams: It continues to surprise me, frankly, that these stocks are on such crazy valuations against the metal. I think once we start to get wider acceptance that inflation is going to be the outcome rather than deflation, people will start to look at these companies in a different way. Mining companies will instantly become some of the most attractive companies in the world.
I think there’s going to be a tremendous wave of consolidation in the mining sector. When it comes is a tough one to call, though. We’re going to see a lot of junior miners get taken out because it’s going to become a battle for ounces in the ground. If you have proven reserves, the majors are going to come looking for you—particularly if you are in a safe political jurisdiction—and they can afford to pay very, very good multiples of where the stocks are trading now.
In the last 10 years, we have seen some tremendous finds. We’ve seen some tremendous small companies that are very, very well run with incredibly experienced geologists. It requires a lot of due diligence to go through the sheer number of gold mining companies and find the very valuable ones, but I think having ounces in the ground and a good, proven management team are the two fundamental criteria that you have to look for in these stocks. Once the consolidation starts to take place and once the scramble for ounces of gold in the ground begins, I think the resulting valuations will be quite spectacular.
TGR: You are both speaking at the Cambridge House California Investment Conference Feb. 11–12. Based on all of these trends that you’ve laid out, how can investors preserve wealth or even profit during volatile times like these?
GWeldon: Investors who are focused on preserving wealth are best served by buying gold on the dip that is currently taking place. The gold price has a chance to reach $1,450/oz—that’s a sizable move downward.
There’s a chance that monetary authorities would take gold coming off that hard as a sign that they need to be more aggressive. It will be interesting to see how that plays out. However, being long gold and silver is clearly the best play in my mind to preserve wealth.
For investors who are looking to appreciate wealth, the commodities markets offer tremendous upcoming opportunities. That is because there is one thing that I can be certain about: Volatility will remain high. We are not going back to a low-volatility environment. It’s treacherous for individual investors trying to do it themselves. We run a long-short commodity program that’s non-leveraged. But there is a lot of talent in the commodities space for individual investors looking to profit from this market environment.
GWilliams: Preserving your wealth is absolutely the right way to look at it at the moment. Trying to make a profit in markets when there is so much uncertainty is a very dangerous thing to do because things change midgame. So I think for the next several years, using gold, silver and the platinum-palladium group metals as a store of wealth fundamentally makes a lot of sense. I suspect you are going to see outsized gains as a byproduct of using that strategy because I think the prices will go materially higher despite low headline inflation numbers. Using gold and precious metals to hedge yourself as a safety trade is the smart thing to do. By doing that, you will not only protect your existing wealth but you can also generate increased wealth through price appreciation in excess of inflation.
TGR: When you say gold and precious metals, how would an individual investor protect wealth using gold? Are you talking about holding the bullion, buying gold exchange-traded funds (ETF) or buying equities?
GWilliams: It depends. I think protecting wealth using highly geared gold mining companies is a dangerous thing to do. Yes, if gold goes crazy, you are going to make some outsize returns, assuming the asset in the ground is good, assuming the management is good and assuming you don’t get any collapsed mines or any other geological anomalies that sometimes are part and parcel of owning gold mining stocks. Holding the bullion itself is absolutely the safest way to do it. You have an asset free and clear with no claims on it. It’s yours. But that’s not necessarily an easy thing to do from a logistical perspective. A lot of people look at the ETFs as a good vehicle, and they are a perfectly good gold proxy. You have a claim on some physical metal there. But for pure safety’s sake, owning the bullion itself or as close to pure bullion as you possibly can is the smartest way to go.
If you’re looking for any kind of leverage or any kind of gearing, then you need to start looking into the mining companies. But outside the major miners, it’s a very dangerous place to be unless you have someone very smart holding your hand, and you need to do an awful lot of work on researching the particular stocks you buy. While the returns can be extremely good, particularly at these low valuations, gold is a very, very tricky thing to dig for and mines are very tricky things to operate and to run. So you have to be aware of that.
Most important, try to steer clear of government bonds. In a world of increasing inflation, and a world where central banks have promised to try and generate MORE inflation, to lend money to irresponsible governments at 0.23% for two years in the case of the U.S is just crazy to me. Over the long term, you are absolutely guaranteed to lose money in real terms by doing that.
TGR: Thank you for your advice.
Greg Weldon started his Wall Street career working in the Comex Gold and Silver Pits after graduating Colgate University. He progressed as an institutional sales broker at Lehman and Prudential before joining Moore Capital as a proprietary trader. At Moore, Weldon honed his systematic trading methodology and risk management discipline before joining Commodity Corporation where he became one of its top risk-adjusted money managers. Today, he publishes Weldon’s Money Monitor, The Metal Monitor and The ETF Playbook in addition to operating his Managed Futures Account Program as a CTA. He has a unique ability to define and forecast the market’s direction through his proprietary dissection of fundamental and technical market data. Weldon Financial is now a highly regarded and profitable publishing company, having garnered some of the world’s most respected fund managers as loyal and daily readers.
Weldon published Gold Trading Boot Camp: How to Master the Basics and Become a Successful Commodities Investor, in late 2006 in which he predicted the current global credit crisis and discussed the impact on golf from intensified central bank debt monetization. You are invited to participate in a “one-time” free trial of Weldon’s research @ www.weldononline.com.
Grant Williams is a portfolio and strategy advisor to Vulpes Investment Management in Singapore—a hedge fund running $200 million of largely partners’ capital across multiple strategies. Williams has 26 years of experience in finance on the Asian, Australian, European and U.S. markets and has held senior positions at several international investment houses. Williams also writes the popular investment letter Things That Make You Go Hmmm….., which is available to subscribers.
By The Gold Report, on February 7th, 2012
 The market isn’t rewarding fundamentals just yet for precious metal miners, according to Byron King, editor of Daily Resource Hunter, Outstanding Investments and Energy & Scarcity Investor. But in this exclusive interview with The Gold Report, King maps out when rising gold prices will actually lead to rising stock prices for companies with quality projects and solid treasuries.
The Gold Report: Byron, anyone who reads your reports knows two things: you like to tell stories and you like precious metals. The gold price has spent the last 11 years trending higher. Do you see it continuing upward?
Byron King: I anticipate that gold, silver and platinum will all continue to rise in price. There are currency-driven reasons why metal prices are going to keep rising, as well as other issues with overall supply and falling production.
In terms of production, the gold and the platinum production spaces are very precarious. A few very bad things could happen at random and knock global production for a loop and seriously impact supply. Think in terms of a major mine accident in, say, South Africa. Supply could fall off a cliff overnight.
In terms of politics and monetary issues, precious metals create an outside limit on people’s political power. Thus I expect massive amounts of manipulation as we roll along, too. The dollar value of gold, silver or platinum will tend to rise over time, but we could see price spikes up and down due to that manipulation.
TGR: The junior precious metals sector fell hard in 2011. You tend to stick toward the midtier and major precious metals producers with strong cash flow. Those names often have lower risk, but risk can rear its head in that space, too. Major gold producer Kinross Gold Corp. (K:TSX; KGC:NYSE) watched about $3.1 billion (B) of its market cap get buzz sawed off in mid-January after it announced that it would take a $4.6B write-down on its Tasiast gold mine in Mauritania. Kinross spent $7.1B acquiring Tasiast and other assets in the September 2010 takeover of Red Back Mining. Does this serve as a warning to the other majors?
BK: It might be 15 years past the Bre-X scandal, but when it comes to buying and selling gold mines, no amount of due diligence is too much. It gets back to Mark Twain’s comment about how to define the term gold mine. It’s a hole in the ground with a liar standing at the opening of the shaft.
The Kinross writeoff is scary. They’re supposed to be better than that. So when you own physical gold, you can go to bed and close both your eyes. With gold mining shares, you still need to keep one eye open.
TGR: Were you recommending Kinross?
BK: Kinross has been in the Outstanding Investments portfolio for over four years. I’m hanging on to it in the hopes that it will go higher, but it’s been disappointing. It’s not been able to get the share price up and keep it up despite a gold price that has quadrupled.
TGR: Its strategy was to grow through acquiring assets. Apart from buying Red Back Mining, Kinross bought Underworld Resources in the Yukon and Aurelian Resources in Ecuador. Do you believe that was the wrong strategy?
BK: Much of the gold mining investing business is about takeovers. The large companies with, say, 10 million ounces (Moz) a year of output couldn’t discover that much just by sending out their own geologists with rock picks. Gold mining requires an entire process of prospect developers, generators and joint ventures. The better assets get picked up by the larger companies. In fact, Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) just announced a takeover of Minefinders Corp. (MFL:TSX; MFN:NYSE). Minefinders is a one-trick pony, but it’s one heck of a pony. It’s the Dolores play in Mexico.
TGR: Sure, acquisitions are key, but many analysts believe that Kinross paid too much for Red Back and it’s now writing down three-quarters of what it paid. Will companies be more loath to spend big dollars in takeovers now?
BK: The acquiring companies have to be smarter and cheaper about takeovers. They have to pay less. Then again, you’re lucky if you get what you pay for, and you never get what you don’t pay for.
The news from Kinross could serve as a wet blanket for the rest of the intermediate and junior mining space. Future takeout plays might see more lowball offers.
It gets back to the idea that an allegedly savvy company like Kinross could make as bad a mistake as it did—at least in retrospect. It’s a wakeup call to the industry. I suppose in the boardrooms of the big mining companies they’re sitting around saying, “We’re much smarter than those guys at Kinross.” All I can say is to be careful of admiring yourself too much in the mirror because I’m sure Kinross thought it was doing the right thing, too.
TGR: In an ironic twist, some analysts are now speculating that Kinross could become a takeover target. Keith Wirtz, chief investment officer at Fifth Third Asset Management, said, “Every dollar lower pushes the stock higher up the list of potential takeovers. That will attract the sharks in the water.” Do you think Kinross will be taken out in 2012?
BK: Kinross has made a big mistake. Now the company has a big bull’s eye pinned on its back. Kinross has some very strong assets. I’m sure other companies are looking at these assets and thinking they could do a much better job at managing them than the guys running the show right now.
TGR: Something else of note in the large-cap gold space is the increase in dividends as gold companies jockey for investor attention with other instruments like real estate investment trusts, exchange-traded funds and even master limited partnerships. One company in particular, Goldcorp Inc. (G:TSX; GG:NYSE), recently raised its dividend again. Do you prefer gold companies with a significant dividend or are other factors more important?
BK: All things considered, I like companies that pay dividends. I like the idea that they bring the shareholders into the equation by sharing some of the wealth. There’s a certain capital discipline in running a company that comes with the knowledge that it has to write a check to the shareholders as well.
TGR: What are some of the major gold producers that are running a dividend that you like?
BK: Newmont Mining Corp. (NEM:NYSE), Barrick Gold Corp. (ABX:TSX; ABX:NYSE), IAMGOLD Corp. (IMG:TSX; IAG:NYSE) and Goldcorp are nice dividend players.
TGR: Which one has the strongest growth profile?
BK: Goldcorp. Five years from now, it could be the best overall return.
TGR: Are you following any midtiers?
BK: I’ve been following Minefinders, but it just got bought. I’m waiting for the development at Donlin Creek, Alaska, to come through for NovaGold Resources Inc. (NG:TSX; NG:NYSE.A). Investors are going to have to be patient with this one. It’s over 30 Moz of gold. It’s partnered up with Barrick, but the development has been slower, longer and more painful than I expected. However, over enough time, NovaGold could be quite rewarding to a patient resource investor.
TGR: What undervalued junior or midtier producers could rebound in 2012?
BK: Carlisle Goldfields Ltd. (CGJ:CNSX) at Lynn Lake, Manitoba. It’s an old copper-nickel producing area, but it has had a very aggressive drilling program. I am waiting for an updated NI 43-101 to come out, which could show an expanded resource base.
Reservoir Minerals Inc. (RMC:TSX.V), a spinout of Reservoir Capital Corp. (REO:TSX.V), is a play on mineralization in Serbia. Reservoir Capital was a hydropower and geothermal company with some mining assets as well. Last fall, it spun out the mining assets into Reservoir Minerals.
It’s now a copper project that is joint ventured with Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE). It has had extremely good drilling results in a historic gold producing area in Serbia that was one of the richest gold mines in Europe in its day. It was sealed up just before World War II and not unsealed until about two years ago.
Reservoir also controls numerous other mineralized areas in Serbia, which is a very well-run, mining-friendly jurisdiction. That is, we’re not dealing with the Serbia of the 1990s. This isn’t the Serbia that NATO bombed in 1999. This is a modern, European country that is looking desperately for investment. Reservoir Minerals is a key part of the future of Serbia.
TGR: Carlisle has the historic MacLellan mine. What stood out when you visited that project?
BK: It’s in Precambrian greenstone in a shear zone, in a known mineralized district. The greenstone and the shearing outcrop at the surface. Carlisle has great land position in terms of following the strike. It has a very aggressive drilling program, and while results aren’t out officially, from what I can gather from my own examination of the cores, there is a very nice consistency of mineralization all along the strike. I think that when Carlisle gets done with its analysis we’re going to see a very nice resource number at very respectable, mineable grades.
TGR: What investment themes do you expect will be prevalent in the gold space this year?
BK: The gold price should continue the 11-year trend of increasing nearly every year with the possibility of a big jump if a one-off type of event, such as a mine accident, chokes off a large amount of the world’s gold supply. I know accidents aren’t ever supposed to happen—nuclear plants in Japan and cruise ships in Italy are failsafe, right? We have to watch that.
TGR: What about increasing tension in the Middle East?
BK: Tension in the Middle East always seems to drive up the price of oil and the price of gold. People move their resources from one jurisdiction to another, from one form of investment to another. I went to one of the gold souks at the grand bazaar in Istanbul about two years ago. I was astonished that people were mobbing the gold souks, throwing money down and grabbing all the gold coins that they could get their hands on. I saw Russians and people from across Europe just peeling out these €500 notes and buying as much gold as they could take. It was fascinating.
TGR: Surreal.
BK: It was surreal to literally watch people scoop up gold, put it in their pockets and walk out of the stores. People were trying to get rid of cash and buy gold. There’s an entire gold-buying culture that a lot of people in the West are not used to seeing.
TGR: What about the protests, violence and economic sanctions being brought to bear on certain Middle Eastern countries? It seems like the tensions there are certainly hotter than they have been since the early ’80s.
BK: War is bad for business, but the rumors of war are sometimes good for business. I think if the Strait of Hormuz closed or if there was a shooting war in the Middle East, it would drive the price of gold upward. As the price of gold goes up, it’s going to lift the share price for the miners that have good fundamentals.
Right now the stock market is barely paying for fundamentals. It really doesn’t respect stories, let alone blue sky. But if the price of gold keeps going up, the companies with decent fundamentals will also rise.
TGR: Thanks for your insight, Byron.
Byron King is the resident energy and natural resource expert at Agora Financial, LLC. A geologist by training, he worked for the former Gulf Oil Co. and has followed oil industry developments for over 30 years. King’s career path also took him into the U.S. Navy, both in active duty and reserve. In the 1990s and 2000s, King engaged in a vigorous private law practice. For the past five years, King has been writing about energy and natural resource issues for an international audience. Currently, King writes and edits Daily Resource Hunter, Outstanding Investments and Energy & Scarcity Investor. He holds degrees from Harvard, the U.S. Naval War College and the University of Pittsburgh.
By The Gold Report, on February 6th, 2012
 Economics and politics. Accretion and repletion. Mergers and acquisitions. Joe Mazumdar, senior mining analyst with Haywood Securities, sees all of these as catalysts for a rebound in the junior gold space in 2012. In this exclusive Gold Report interview, he reveals the names of companies he expects to take off.
The Gold Report: What is the consensus among Haywood analysts on what 2012 will bring for mine commodities, particularly precious metals?
Joe Mazumdar: Last year, risk aversion was a common market theme. In 2012, some of the same global economic concerns, such as the ongoing Eurozone crisis and the future of the euro, will continue to draw attention. But we also believe there is potential for positive economic indicators, primarily from the U.S., where there have been upticks in manufacturing and GDP growth. Also, unemployment in the U.S. is down to 8.5%, generating some consumer confidence. Recently, GDP growth for Q411 came in at 2.8%, which was slower than consensus forecasts—3%—but still the strongest in over a year.
Political factors will play a role in 2012. There could be a change in leadership among four of the five permanent members of the U.N. Security Council. The presidential election will be a key focus of the U.S. and global market. There are also presidential elections in Russia, France and Mexico. There also may be a changing of the guard in China in the latter part of 2012. The potential for changes in leadership in these key nations will generate a bid to market volatility in 2012.
Beyond gold and silver, our preferred commodity sectors include copper, iron ore and coal. Gold continues to be adversely affected by its own volatility, which continues to tarnish its reputation as a safe-haven asset. We note that during 2011, U.S. Treasury securities, the most liquid safe-haven asset, was a preferred recipient of capital investment, providing a ~10% return, its highest annual return since 2008 when it was 14%.
TGR: Will the strengthening American economy have an adverse effect on the gold price?
JM: Yes, the gold price quoted in U.S. dollars will be hindered by any U.S. dollar strength based on economic growth and increasing consumer confidence. In the current environment, gold, quoted in U.S. dollars, is still holding up well at price levels over $1,700/ounce (oz).
We note that the Federal Reserve said recently that it remains concerned about the “vigor” of U.S. economic growth and pledged to maintain low interest rates until at least 2014. The latter is a positive for gold prices.
In the medium to long term, increasing confidence levels in U.S. economic growth we believe will drive higher capital investments domestically and potentially raise inflation expectations, which would be a positive for gold.
TGR: What about silver and copper?
JM: We see copper on the brink of a rebound in 2012. The London Metals Exchange inventories are at low levels and Chinese imports of refined copper accelerated in the latter part of 2011. Copper is covered by Stefan Ioannou/Kerry Smith of Haywood Securities and they highlight a structural tightness in the copper market as supply growth remains constrained while a portion of future production growth resides in higher geopolitical risk jurisdictions. They note that the GFMS has estimated a deficit of 372 Kt copper in 2011 and forecast yet another deficit for 2012, 101 Kt.
Chris Thompson covers the silver sector for Haywood Securities and has commented that despite the growth in investment demand over the past five years, silver is still very much an industrial metal. Volatility, he believes, will be underpinned by potential contradictory moves by those who see silver as an industrial metal and others who seek it as an investment asset.
TGR: Did the junior mining sector hit bottom in 2011?
JM: Within the current cycle, I think it has hit bottom. For me, the question remains: What are the catalysts that will move individual stocks up within the sector?
For a number of the majors, growth has been increasingly difficult to achieve given the higher amounts of reserves they must replete on an annual basis. Companies such as Newmont Mining Corp. (NEM:NYSE) have been offering higher and more levered dividend payout structures to attract investors.
In 2012, we see the potential for more merger and acquisition (M&A) activity, specifically in the junior to intermediate sector, given the plethora of small-cap stories in the gold sector. Producers have performed better with respect to their paper in 2011, compared to development stocks, and boast healthier balance sheets. M&A activity will be driven not only by a desire for growth but also motivated by financing risk to capture any synergistic opportunities such as sharing infrastructure and the potential to merge critical skill sets. There is a paucity of people who can bring projects into production and operate them. Merging structures and management is very important right now in the junior and intermediate sector. Without it, a lot of these companies with development assets may continue to struggle.
TGR: Do you expect the Kinross Gold Corp. (K:TSX; KGC:NYSE, Not Rated) write-down to have an adverse effect on M&A?
JM: Large projects that are required to move the needle in the growth strategy of a large gold producer have a scale and scope that naturally expose them to significant execution risk. So, in a nutshell, escalating capital costs for projects of this magnitude are nothing new.
The M&A opportunities I refer to are at a scale that would be accretive to a junior to intermediate company from a growth perspective and offer opportunities to capture synergistic value. From a valuation perspective, many companies with development stage assets are trading well below their underlying asset valuations. M&A activity allows also for some consolidation in the junior sector given the plethora of small-cap gold plays.
TGR: Did you make any adjustments to your investment thesis following the dip in precious metals equities late in 2011?
JM: In our top picks, which we put out on Jan. 9, we focused on producers generating cash flow and developers with permitted or on a clear path-to-permitted projects in low geopolitical risk jurisdictions.
One pick was Midas Gold Corp. (MAX:TSX, Not Rated), whose flagship asset, the Golden Meadows project, hosts a global resource of 5.8 million ounce (Moz) in the Yellow Pine Stibnite area on a large land package (11,600 hectares) in west-central Idaho, a re-emerging gold district. The company is working toward an updated gold resource estimate before the end of Q112, leading to a preliminary economic assessment (PEA) by Q312.
TGR: Can you give us another name on your list?
JM: Yes, Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.A, Sector Outperform, CA$3.25 Target Price). It has the Spring Valley gold project, an intrusive-hosted gold deposit with a global resource, we estimate at over 5 Moz, in a district close to Lovelock, Nevada, where Barrick Gold Corp. (ABX:TSX; ABX:NYSE, Sector Outperform, CA$61 Target Price), is earning in up to 70% by 2013 by cumulatively spending US$38M.
From a metallurgic perspective, the gold is free, not occluded in pyrite and potentially amenable to be economically extracted via a heap-leach process. Barrick, the joint-venture operator, is currently drilling the edges of the deposit to find out how big it could be. This means the near-term news flow will be linked to drilling results and less about a resource update in 2012.
Midway has a portfolio of projects that it is capable of bringing on-line. Its Pan project, a low strip open-pit, heap-leach gold project in Nevada, has submitted a completed bankable feasibility study and a plan of operations. Its Gold Rock project, only 8 kilometers from Pan, is in an earlier stage where we anticipate a resource by Q112 with additional drilling in Q2–Q312, leading to another resource update by Q412 and a PEA by 2013. Additionally, Midway is working a low-sulphidation, high-grade gold project in the Tonopah District.
Midway has a portfolio of projects and is assembling a team to build and operate them. Its COO, Ken Brunk, formerly with Newmont and Romarco, is very familiar with the permitting process and developing/operating projects in Nevada. I believe the company can manage this project pipeline of financeable projects in the low geopolitical risk jurisdiction of Nevada.
TGR: Your target price for Midway is $3.25, up $0.25 from your last report. With that many projects in the development stage, it seems that Midway would be a prime takeover target, especially given its joint venture with Barrick.
JM: Barrick is looking at a number of projects in Nevada, some of which are billion-dollar-plus projects that would add significant ounces to its production profile including Spring Valley, Goldstrike and an expansion at Turquoise Ridge. I believe that Spring Valley may be a target for Barrick going forward as it has potential to contain a +5 Moz global resource and lies in Nevada where Barrick has a significant infrastructure and asset base.
However, the other components of the company’s portfolio, which include smaller open-pit, heap-leach projects, such as Pan and Gold Rock, that could potentially produce between 70–90 thousand ounces (Koz)/year, would not move the needle for most majors. These smaller projects do generate cash flow and are more readily financeable by a company the size of Midway. They could also be attractive to an intermediate operating group looking at accretive transactions with junior developers.
TGR: You cover Orvana Minerals Corp. (ORV:TSX, Sector Outperform, CA$2.25 Target Price), which is in production at its Don Mario mine in Bolivia and its El Valle-Boinás/Carlés (EVBC) mine in Spain. From June to October 2011, gold grades there increased incrementally from 1.4 to 2.17 grams per tonne (g/t). Nevertheless, Orvana’s throughput at EVBC is below your forecast. Results at Don Mario in Bolivia also were below estimates. Is this a make-or-break year for Orvana?
JM: It is a critical year for the company. Bill Williams, formerly Orvana’s vice president of corporate development, is now the CEO. He is an ex-Phelps Dodge vice president and has been instrumental in generating the revised technical reports on both operations, EVBC and Don Mario Upper Mineralized Zone (UMZ), while advancing the Copperwood project. We believe his appointment reflects the company’s focus on getting the operations back on track.
Orvana is currently in the process of re-benchmarking both EVBC and Don Mario UMZ. For Don Mario—an open-pit mine with an upper mineralized zone containing a lot of copper, as well as gold and silver—Orvana has delivered a new life-of-mine forecast that addresses the difficulty of getting copper out using a leach precipitation flotation circuit on a much bigger scale than has been used before. The Don Mario operation also has been troubled by high costs of reagents for the circuit, which has raised the processing costs.
We had originally forecast an annual production profile of 10–15 Koz per year of gold and 10–15 million pounds (Mlb) of copper. We are now looking at a production profile of 9–10 Mlb copper and 8–9 Koz of gold, whereas Orvana is still signaling 13 Mlb of copper and 12 Koz of gold. In Q411, the Don Mario UMZ operation produced 2.5 Mlb of copper and 2.3 Koz of gold, which is a positive. Now, it has to consistently achieve its new benchmarks over the next few quarters so the market can gain confidence in its operational abilities.
At Orvana’s flagship, the EVBC gold-copper project in northwest Spain, the operational issues have been related to head grades. Underground bottlenecks have hindered the company’s ability to blend higher grade feed to the processing plant. We anticipate that a shaft will be in place by April/May 2012, which should alleviate some of the bottlenecks. We had originally forecast that the feed grade, at steady state levels, would be in the area of 5 g/t. However, revised guidance indicated that it would be lower, 3–3.5 g/t gold, which also conspired to lower our target. We anticipate a revised technical report for EVBC prior to March 2012 with updated life-of-mine forecasts.
Orvana’s Copperwood project in upper Michigan is a 50 Mlb/year copper project, now in bankable feasibility study, and Orvana is seeking to permit this year. Even with up to 800 Mlb of copper reserves, we believe that the Copperwood asset is not being valued at its current price levels as Orvana has been heavily discounted in the market due to poor operational performance.
TGR: Given the lower recoveries and production estimates at Don Mario UMZ released in late January, you lowered your target price by $0.15 to $2.25. Yet you still give it a sector outperform rating. Why?
JM: Due to the heavy market discounting related to disappointing results from both operations over the past few quarters, Orvana still provides about a 100% return to our target from where it is trading right now. I continue to believe that management can redeem themselves by achieving the revised benchmarks consistently over the next few quarters. As Orvana meets its goals, I believe the market will appreciate the cash flow being generated, worry less about its working capital position and give the company credit for its advancement of the Copperwood project.
TGR: Prodigy Gold Inc. (PDG:TSX.V, Sector Outperform, CA$1.20 Target Price) recently published an updated PEA on its flagship Magino gold project in northern Ontario. Your model for Prodigy, using the updated PEA, projects a 20,000-ton/day operation, producing 222 Koz of gold per year over 13 years at total cash cost of roughly $775/oz. That would generate annual earnings before interest, taxes, depreciation and amortization margin of more than 50%. Yet, your target price of $1.20 is only about 40% above where Prodigy is trading. Why so conservative?
JM: Given that gold indices provided a negative return in 2011 ranging from 13% to 20%, I think that a positive 40% return to target is probably not conservative in the current market environment. With respect to the valuation, I have adjusted for the technical and execution risk of the study level (PEA) and the fact that I have modeled a larger mineable resource base than that used in the December 2011 PEA. As a company derisks the project from PEA to a feasibility study, I revise the multiples applied to the asset valuation.
Prodigy is planning a significant drill program of 60,000m in 2012 to infill/upgrade and expand the resource base while condemning areas for locating site facilities. We also anticipate an updated resource by Q312 leading to a feasibility study by Q412.
TGR: Do you expect a takeover offer for Prodigy?
JM: I try not to work off the takeover model because it is highly uncertain but focus on the underlying valuation. While I do believe that the Magino asset would be a good takeover candidate for an intermediate, I think that there are opportunities for consolidation and capturing some synergies with Richmont Mines Inc. (RIC:TSX; RIC:NYSE.A), which has an underground operation that abuts Prodigy’s land package. Consolidation would probably be a good idea, given that Prodigy could have underground targets within the same host rocks as Richmont, which has a fully permitted and functional process plant.
TGR: In your last interview with The Gold Report, you talked about Revolution Resources Corp. (RV:TSX; RVRCF:OTCQX, Not Rated). You said it was looking for analogs of Romarco Minerals Inc.’s (R:TSX, Not Rated) Haile Deposit in the Carolina Slate Belt. What’s happening with Revolution now?
JM: Revolution still occupies a significant land package of 7,500 acres along a 25-kilometer corridor within the Carolina Slate Belt at its Champion Hills Gold project in North Carolina. It drilled 19,150m in 2011 and is working on a resource estimate in 2012. Currently, gold equity plays exploring in the Carolina Slate Belt are strongly tied to news flow from Romarco’s multimillion-ounce Haile gold development project in South Carolina and its ability to permit it. In an effort to diversify its portfolio, Revolution acquired a significant land package (~400,000 hectares) in two prospective regions in Mexico from Lake Shore Gold (LSG:TSX, Sector Outperform, CA$3.50 Target Price) in 2011. These assets host high-level low-sulphidation epithermal, gold and silver mineralization and we anticipate news flow from drilling results by Q1–Q212. The company wanted to present the market with multiple catalysts from a diversified asset base and this project has allowed it to achieve that goal.
TGR: In late December 2011, Eldorado Gold Corp. (ELD:TSX; EGO:NYSE, Sector Outperform, CA$19.00 Target Price), made a takeover bid for European Goldfields Ltd. (EGU:TSX; EGU:AIM), which has gold exploration and development properties in Greece, Turkey and Romania. Last year, you discussed Carpathian Gold Inc. (CPN:TSX, Sector Outperform, CA$0.90 Target Price) and its Rovina Valley copper-gold-porphyry project, which contains about 10.7 Moz gold equivalent in Romania’s Golden Quadrilateral. Does the proposed European Goldfields takeover make Carpathian Gold more attractive to larger suitors?
JM: Barrick’s private placement in August 2011 into Carpathian to fund additional drilling at Rovina Valley already speaks to the attractiveness of these gold rich porphyry systems to larger suitors. Mining activity in Romania is heavily linked to news flow on the permitting activities at Rosia Montana operated by Gabriel Resources Ltd. (GBU:TSX, Not Rated).
Eldorado Gold’s proposed takeover bid for European Goldfields does put in a bid for assets in Europe, however, the majority of European Goldfields’ assets are located in Greece (Olympias/Skouries) and less so in Romania (Certej). For me, the takeover trigger was related to the receipt of permits to develop its Greek projects in July 2011. Permitting of those projects took an extended period of time. A positive permitting environment in Europe bodes well for Carpathian at Rovina Valley and it will benefit from any positive news flow from Gabriel. The risks include royalty increases and potential free carried interest that the government wants to negotiate.
TGR: Royalties are going from 4% to 8%. That certainly is not positive, but to get those revenues the government has to permit the mines.
JM: Herein lies the rub. On Jan. 3, we lowered our target by $0.10 on Carpathian to $0.90 to accommodate an increase in the gold and copper royalties to 8% at Rovina Valley. However, on the positive side, by defining the mining royalty rates and the tax structure and negotiating a free carried interest, the Romanian government has shown its desire to have these companies invest in these projects and generate the revenue streams within a restructured rent-sharing framework. We note that the local government is also looking to privatize some state-owned mining assets to raise revenue.
TGR: What do analysts, investors and companies need to look out for in terms of geopolitical risk?
JM: I would highlight countries—emerging or developed—that are in economic dire straits with prospective geology whose mining sector is underdeveloped and has untested mining laws and poor infrastructure. Geopolitical risk carries a few facets including outright expropriation to creeping nationalism, which is linked inextricably to a company’s ability to develop/permit the project. These countries will continue to seek foreign direct investment to explore/develop these assets. Outright expropriation is difficult in countries where there is no mining history and a paucity of critical skill sets locally, unless of course it is looking to sell the asset to another bidder. Alternatively, the country may alter its mining laws to increase its share of resource rents derived from the exploitation of these assets. We have observed higher rent sharing globally via increased royalty payments, higher taxes and/or the introduction of windfall tax structures in countries such as Peru, Argentina and Romania, to name a few.
Assets in higher geopolitical risk jurisdictions must provide the investor a high return and quick payback commensurate with the elevated risk profile. Note that assets within higher geopolitical risk jurisdictions may be more difficult to finance and there may be a limit on potential takeover suitors, depending on their risk appetite. To properly risk adjust and quantify these uncertainties remains a challenge.
TGR: Is that because it is not going away?
JM: Let’s not forget that mining is a great way to get an injection of direct investment into an economy and generate employment. For example, high rates of unemployment in developed countries such as the U.S. and European countries are driving mining activity in places where permits have historically been difficult to attain.
TGR: Joe, thank you for your time and your insights.
Joe Mazumdar is a senior mining analyst with Haywood Securities in Vancouver. Previously, he served as director of strategic planning at Newmont Mining and was the senior market analyst for Phelps Dodge. He has held a variety of geologist positions with other mining companies including RTZ, MIM, North and IAMGold working in South America, Australia and Canada, rounding out ~20 years industry experience. He holds a Bachelor of Science in geology from the University of Alberta, Canada, a Master of Science in exploration and mining from James Cook University, Australia, and a Master of Science in mineral economics from the Colorado School of Mines, U.S.
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By Thomas Knapp, on February 3rd, 2012
More of a silver bug, actually. But a metal bug. I like having the real stuff, and I particularly like having it already broken down into known increments that are reasonably spendable (or will be, as more and more people decide that precious metals make more sense than paper backed only by “the full faith and credit of” a bunch of politicians).
If you’ve seen gold and silver prices lately, you know that a one-ounce silver or even a 1/10th-ounce gold coin is a little much for normal exchange. So, I’m a big fan of Ron Helwig’s Shire Silver — laminated cards with small quantities of metal in them (0.5. 1 or 5 grams of silver; 0.05, 0.1 or 0.5 grams of gold):
Perfect even now for buying and selling stuff at freedom movement events. As fiat currency continues its unstable, decaying orbit around the black hole of politics, I expect it to come into use for more routine transactions.
You should probably get some yourself. If you’re interested in doing business with it on a regular basis, you might consider becoming a Shire Silver merchant (Disclosure: I’ve been one — through Rational Review News Digest — for more than a year).
By The Gold Report, on February 2nd, 2012
 GoldMoney Founder and Chairman James Turk knows how to find great deals on gold and silver. He claims that the 2012 bottom for gold came during the first week in January. If the year’s low is already history and if his projection that gold will hit the $2,000/oz mark within three months is on target, you do the math. “Gold is way too cheap,” he tells The Gold Report in this exclusive interview.
The Gold Report: Given the volatile 2011 market and the fact that gold trades at seasonally lower prices in the summer, James, what led you to say you believe we’ve already hit the low for the gold price in 2012?
James Turk: We started this year in an unusual position. Normally, we see seasonal strength in the last quarter. We didn’t get it. We’d been in a correction since the high in silver back in April 2011. The high in gold came during the summer, which was very unusual, but basically both metals have been moving sideways. Starting from the end of a correction, value is more important than seasonality. Clearly, gold and silver both represent good, undervalued assets at the moment.
The other factor is continuing problems in the financial system. The European banks are still on the brink and many American banks are in a similar situation. Questions about the currency—whether the euro will survive—and the ongoing sovereign debt issue will cause people to look at the precious metals. I’ve said we saw the low in the gold price the first week of January, and the further into the year we get without going lower, the greater the probability that it was, in fact, the low for the year.
TGR: Considering all the issues you mentioned that existed last summer as well, why didn’t that seasonal strength return late in 2011?
JT: An interesting thing about markets is that nothing works all of the time. You just have to respond accordingly in looking at how things are going to unfold. That’s why I think the low has been made already.
TGR: You also mentioned in a recent interview that you thought gold could get above $2,000/ounce (oz) in the next three months. With all the monetary issues on the table, not to mention a few new wrinkles, what will make the gold price pop up so much in such a short period of time? What’s the catalyst?
JT: I can’t tell you what the event will be, but I look at charts and things of that nature to give me an indication as to when something’s ready to move. The fact that we’ve been in a correction for several months is one indication that something will happen. Whether it’s a bank failure or a problem with the euro or some European bank, you can’t really tell. But whatever is coming, the markets reflect it. It’s like following footprints in the sand on the beach, leading a certain way. The charts and the circumstances are telling me to expect a big pop in the gold price this year.
TGR: And would it correct immediately afterward?
JT: Not necessarily, because at some point, the currencies will collapse. When they do, gold won’t correct. It will just keep going up.
TGR: So are you projecting currency collapses within the next few months?
JT: No, I’m not, but they will at some point. It could happen in the next several months; it could happen in the next several years. We are in a bubble, not a gold bubble but a fiat currency bubble. The belief that fiat currencies have value will be tested. I think fiat currencies, which are backed by nothing but government promises, will collapse, and gold will return to center stage in global commerce. When it does, expect a straight shot up. It may be three months or three years. Take it month by month and see how it goes. Don’t try to trade the gold market. Continue to build your gold and/or silver holdings, and when all is said and done, you’ll be very, very happy.
TGR: You’ve also indicated that you expect the U.S. to get into hyperinflation, citing examples of currencies in the Weimar Republic, Argentina and Zimbabwe. None of those currencies was world reserve currencies as the U.S. dollar is. Would the world allow the U.S. dollar to go into hyperinflation?
JT: The world can’t do anything to stop it. President Nixon’s Treasury secretary, John Connally, captured it perfectly when he told one of his European counterparts, “The dollar is our currency but your problem.” That’s still true 40 years later.
The dollar continues to be the world’s problem, and the U.S. government isn’t doing anything to make the dollar worthy of the esteemed position of being the world’s reserve currency. There is no pressure that can be brought to bear on the dollar that would cause the U.S. government to reverse course and go in the right direction.
We are seeing countries around the world accumulating more gold in case the dollar collapses, which is what individuals should be doing as well. Countries around the world are also taking other steps to protect themselves. For instance, they’re entering bilateral trade agreements that don’t involve U.S. dollars. China has been doing a lot of bilateral trade agreements that completely exclude the dollar. India and Iran, of all places, just recently announced an agreement whereby they’re going to use gold for transacting.
TGR: In King World News in October you wowed the world with the Gold Money Index discussion and how it shows that the fair price of gold is really $11,000/oz. You based your calculation on the combined total of central banks’ foreign exchange reserves divided by their gold holdings. Why do you use only foreign-exchange reserves in that calculation and not total reserves?
JT: Because gold is international money, and I’m trying to focus solely on the monetary component. Instead of moving gold around as they did under the classical gold standard, the central banks have been using foreign currencies as a money substitute. If you’re using a money substitute, the money itself should be equivalent to gold. The real factor underlying all of this is that gold is way too cheap, and accepting paper currencies instead of gold is the wrong thing to do, which is what the Gold Money Index shows.
So it’s basically reestablishing gold’s role in the international monetary system and what its value would be based on historical evidence, particularly from the 1960s and 1970s, when the index was working much more clearly. Over the last 20 years, the gap between the fair value of gold and its actual price has become huge.
TGR: Have you gone back to 1900 with that calculation?
JT: It’s hard to get all the data, but the logic is basically there. I’ve gone back prior to 1900, not with the Gold Money Index, but with my Fear Index, looking at domestic money supplies. The Fear Index is at about 3% now, so gold today backs about 3% of the domestic money supply. When Sir Isaac Newton devised the classical gold standard, an average of 40% of the monetary system’s value was based on gold and 60% on paper. That we’re so far below the guideline he established is an indication to how undervalued gold is relative to all the paper money systems out there.
TGR: You mentioned using foreign-exchange reserves because they mimic the way gold was transferred under the gold standard. But wasn’t it part of being on the gold standard that each currency unit reflected a gold component?
JT: Yes. But, the Fear Index and the Gold Money Index distinguish between domestic and international money supplies. That’s why I was saying this 40% on the Fear Index is the historical norm.
TGR: Your Gold Money Index is interesting, and the $11,000/oz number grabs a lot of attention, but maybe the real underlying question is whether this ratio is really relevant.
JT: What makes the ratio relevant is that it had relevance up until the last 20 years. The fair price and the actual price have separated so far due to government intervention—attempts to cap the price of gold. Governments intervene in the gold market for the same reason they intervene in any market. When they don’t like the outcome, they try to change things around. This index gives people an opportunity to understand how undervalued gold is.
The index is relevant, too, in that it makes it very clear that we’re living in a bubble. How can something work for so many years and then all of a sudden not work? It’s because we’re in a bubble.
TGR: Didn’t it work for so many years because we were on a gold standard?
JT: Exactly, but we went off the gold standard in 1971, and even in the 1970s, that ratio worked. It continued to work in the early 1980s. Then it stopped working.
TGR: So it wasn’t until they started printing money, and expanding the M1—increasing the money supply—that the imbalance grew.
JT: Yes. The attributes that gave gold value and made it money in the first place did not disappear, but they were ignored or forgotten. Gold was marginalized. Then in recent years, people started to rediscover those attributes and realized that gold is very, very useful.
At some point the price of gold will just keep rising and not stop. That’s when the currency collapses. And while we can’t predict when it will happen, people have to reach one of two conclusions. Either 1) monetary history is not relevant and the fiat currency system will survive, or 2) monetary history is relevant, this is a bubble, the fiat currency system will collapse and gold is much undervalued.
TGR: There’s no doubt about which conclusion you’ve reached. You’ve also made it clear that while you can’t predict when the fiat currency will collapse or when hyperinflation will kick in, you recognize where the path we’re going down leads. Still, as an astute historian of the currencies, could you tell us how long it took from the tipping point to all-out hyperinflation in the countries that experienced it?
JT: Once you hit the tipping point, it’s usually six months before the currency is finished. To give you an example, I went to Argentina in 1991 to study what was happening there. Hyperinflation appeared to be brewing. The currency, the austral, was linked to the U.S. dollar at 14:1 in January, and the link was broken. During the first week of May, when I arrived, the austral had already devalued to 64:1 against the dollar. When I left at the end of the week, it was 96:1 and by December, it was 10,000:1. So I was right there at the tipping point.
But here’s the interesting thing. Hyperinflation is first recognized outside the country before it’s recognized within, because foreigners own another country’s currency by choice. If they don’t like what’s going on, they sell that currency and move into something else. Where we are with the U.S. dollar, so many indications suggest that internationally we’ve hit the tipping point, but not yet within the U.S., where people are still getting paid in dollars and still spending dollars. Once the domestic tipping point is reached, it’s six months before the currency collapses.
TGR: Considering that you’re based in London now and presumably have greater insight into what’s happening with the euro and in the European Union than most of us, how do you see the situation in Europe vis-à-vis the U.S.?
JT: Last year, the euro was in the doghouse and the dollar was relatively strong. A couple of years ago, the dollar was in the doghouse and the euro was relatively strong. As a famous hedge fund manager in New York said, trying to pick between the currencies today is like trying to choose the best-looking horse in the glue factory. You really can’t say that the dollar is a good choice just because the euro is weak this year. It’s not. All fiat currencies have serious problems.
The problems differ to a certain extent, and at any moment in time—depending upon what different central banks are doing or how investor sentiment is moving—you could have relative strength in one or the other. But they’re all sinking relative to gold, so when deciding how to hold your liquidity, you have to consider gold bullion as one of the best choices simply because it’s done so well against all of the world’s major currencies for the past decade.
TGR: You’ve said many times that anyone who gets into precious metals needs to know why. You’ve suggested it’s either exposure to the silver and gold prices—in which case people can opt for instruments such as exchange-traded funds—or elimination of counterparty risk, which means they need tangible assets. Most of the rationale for people getting into precious metals these days is the insurance factor. Does protection against currency devaluation fall into either of those two categories?
JT: It falls into the tangible asset category. If you’re holding gold or silver for insurance, you’re holding bedrock assets with thousands of years of history. Come what may, they’re going to have value in the future.
TGR: The typical advice for people holding gold as insurance is to have 10% of your assets in gold. Maybe now that things are so volatile, 20% would be a better idea. But you’re even more aggressive on that.
JT: I am, but everybody has unique circumstances, so it’s hard to make sweeping generalizations. My basic view, though, is the older you are the more conservative you should be and, therefore, the more gold you should own. As a rule of thumb, use your age as a guide. If you’re 20, you may want 20% of your portfolio in gold and the rest in higher risk assets because you still have time to generate wealth as you get older. But once you’re older, you want to be conservative, and the way to be conservative in this environment is to own physical bullion. If you’re 60, you should have 60% of your portfolio in gold.
TGR: People look at gold now and see the wonderful returns—17% annually on average, in the U.S. alone. What about an investor who says, “Hey, I’m just going to invest in gold because it will give me a better return than equities”? Is that a bad way to look at it?
JT: No, but understand that gold doesn’t create wealth. It doesn’t have cash flow, it doesn’t have a management team and it doesn’t have a price/earnings ratio. It’s just a sterile, tangible asset. Gold doesn’t even really generate a return. When you talk about returns in gold, you’re actually talking about the lost purchasing power of the dollar. An ounce of gold today buys the same amount of crude oil it did 60 years ago. It didn’t increase your wealth. It basically just preserved your purchasing power over that period of time.
Even when the gold price rises, even at 17.7%/year on average over the last 11 years against the U.S. dollar, it’s not creating wealth. It’s taking wealth that already exists and is being held by people who own fiat currencies. That wealth is being moved from them to people who own gold. But gold is not a wealth-generating asset. It doesn’t grow anything.
TGR: A lot of vehicles that people put in their portfolios mimic stock indices, which also don’t create wealth, but they do create returns.
JT: If they mimic stock indices, they create wealth. Ultimately, if the shares themselves go up, what mimics those shares goes up. If the stock in these indices goes up, the wealth in the world expands because it generates cash flow. A company generates some goods or services that benefit people, and people are willing to use their hard-earned cash to buy those goods or services. Ultimately, the firm grows and, as a consequence, creates wealth.
TGR: Now that we’re talking about stocks, what’s the role of gold equities? You said that people should use their age when they think about what percentage of their portfolio should be in gold. Let’s say someone is 50. Would that 50% be in physical gold, or could it also include gold equities?
JT: Gold equities are different than gold. Gold equities are investments. Gold bullion is money. A portfolio has two components. The investment component focuses on risk versus return. The monetary component provides liquidity. When you sell an investment, you have liquidity, whether gold, a national currency or some mix. You hold that liquidity until you’re ready to use some of it to make your next investment or to buy goods or services.
But, mining stocks are fundamentally different than gold. A company you invest in has a balance sheet. It has a management team. Acts of God can destroy a mine. There are political risks and other considerations involved in owning mining stocks. Of course, that’s also how you actually create wealth—if you choose the right stock, you get a return. It’s also true that these stocks have exposure to the gold price in the sense that if the gold price goes up, the mining stocks probably will go up also. But even then, there’s no guarantee that the mining stocks will go up.
And remember, gold mining stocks are investments. Gold is money. Do you want liquidity or do you want an investment?
TGR: For those who want an investment, how do you feel about the gold equities? They do carry the additional risks you outlined but not so much the counterparty risk.
JT: I happen to be bullish on mining stocks because I think their bear market ended a few years ago. We’re just now retesting lows that had been made previously, and with the rise in gold and silver I expect this year, I think we’ll see the mining stocks go up as well.
In fact, if you choose the right mining stock and the gold price increases, the mining stock should rise by a higher percentage than gold itself. This has to do with the fact that a rising gold price improves the bottom line, increases the profit margin and ultimately results in a higher price/earnings ratio because the market senses that this is a major bull market, and the earnings and cash flow generated will lead the company to possibly increase dividends or something like that down the road.
As I indicated at the start of our conversation, though, an interesting thing about markets is that nothing works all the time. So while generally speaking, mining stocks rise by a higher percentage in a rising gold price environment, it doesn’t always work that way. For the last 10 years, gold has done very well, but the mining stocks have basically gone nowhere.
TGR: One of the themes of the Vancouver Resource Investment Conference seemed to be that gold stocks are a really good deal for that very reason, and that they’re on sale at bargain prices right now.
JT: I agree completely.
TGR: You’re also bullish on silver and apparently expect the silver/gold ratio to return to historic levels.
JT: I am very bullish on silver, but not because of that ratio. The ratio is basically just the outward measure used to show how silver is undervalued relative to gold. The underlying fundamentals suggest to me that the silver price is very cheap relative to how I sense the supply and demand characteristics.
TGR: We have minimal economic growth in Europe and the U.S., if any, and everyone seems to agree that China’s growth is slowing. With the world economy in slow motion, and silver being an industrial metal, what makes you so bullish on this commodity? What underlying fundamentals will drive the silver price up?
JT: It’s a good substitute for gold. Fifty-one ounces of silver do the same thing as one ounce of gold. Silver is a monetary asset that preserves and protects purchasing power. It’s the combination of the monetary and industrial demands that creates so much volatility in silver relative to gold. With gold, you have only the monetary demand. Economists call that demand inelastic, because people want to own gold regardless of the price. With silver, the demand is very elastic, meaning it’s very sensitive to changes in price.
TGR: If people want both metals in their portfolio, what kind of balance do you recommend?
JT: Two-thirds gold and one-third silver.
TGR: You’ve suggested that silver prices are going to rise faster than gold. Should that carry over to silver equities? Do you expect them to outperform gold equities?
JT: Yes, I do. Again, it’s difficult to make a sweeping generalization, but the odds are that silver stocks will do better than gold stocks in the foreseeable future.
TGR: You’ve covered some of the same points here that you made in your presentation at the Vancouver Resource Investment Conference. What would you consider the key takeaways from that presentation?
JT: First of all, I hope people understand more clearly that gold is money, and that they view it from that perspective in order to properly assess whether it makes sense in their portfolios. Secondly, I hope people realize that despite the fact that the gold price has risen, it’s important to distinguish between price and value—they’re different things. The gold price has risen because the dollar is being debased, but gold remains very undervalued and it’s well worth it for you to continue to accumulate it. Work it into your family budget, and every month or two, buy more gold—and silver, if you’re so inclined. That leads to the third point. Don’t try to trade gold; save it. When you’re doing that, you’re saving sound money, and that’s a good thing.
TGR: When you started GoldMoney, you talked about a vision that at some point people would use GoldMoney units as currency to trade for services—a bit like using PayPal or an online bank but using your digital gold currency (DGC) instead. Do you still see that coming?
JT: Yes, it seems inevitable to me. In fact we’ve used the DGC payment feature, but recently stopped for a variety of reasons. It had not been used very actively anyway because of Gresham’s law—that bad money drives out good. In today’s world, people would rather spend fiat currency as a form of payment and save their gold and silver. That’s a good thing, for now, but that will change as fiat currency itself becomes less trusted and ultimately collapses.
James Turk, a renowned authority on gold and the precious metals markets, is founder and chairman of GoldMoney®, patented gold-based electronic money—digital gold currency (DGC)—that’s transferred over the Internet. In vaults in London, Zurich and Hong Kong, GoldMoney.com stores more than $2 billion worth of precious metals bullion, including platinum and palladium as well as gold and silver, for customers located in more than 100 countries. In August 2009, Turk’s Freemarket Gold & Money Report, which began in 1987 as a subscription-based investment newsletter, completed a transformation to become a free, web-based commentary. Accordingly, its name changed to the Free Gold Money Report (FGMR).
Turk is also a director of the GoldMoney Foundation, a nonprofit educational organization dedicated to providing information on the role of gold and silver as money and currency and their importance to society. Co-author of The Collapse of the Dollar, Turk has specialized in international banking, finance and investments since his 1969 graduation from George Washington University with a Bachelor of Arts degree in international economics. He began his business career with The Chase Manhattan Bank (now JPMorgan Chase), which included assignments in Thailand, the Philippines and Hong Kong, followed by several years with a prominent precious metals trader’s private investment and trading company, and, based in the United Arab Emirates, several more years managing the Abu Dhabi Investment Authority’s Commodity Department.
By The Gold Report, on January 31st, 2012
 After a tough year in 2011, there is definitely a good selection of underpriced junior resource stocks available for astute investors to focus on before the rest of the herd finally wakes up and smells the gold. In this exclusive interview with The Gold Report, Matthew Zylstra, mining analyst at Northern Securities, reviews the gold, silver and PGM markets and tells us why he believes that better times are ahead for junior miners in 2012 and which ones he particularly likes at current price levels.
The Gold Report: When you last spoke with The Gold Report in early March of last year, gold was trading around $1,420/ounce (oz) and silver was around $36/oz. Silver peaked about $49/oz in late April and then gold hit around $1,900/oz in September. Now we’re back up above $1,700/oz on gold and about $33/oz on silver. Where do you see these prices going this year, after it appears that they have likely bottomed out?
Matthew Zylstra: We’re long-term bulls on both metals. Gold has been correcting since September and it looks like it bottomed out around $1,500/oz. We believe the recent decline is a normal pullback in a longer-term uptrend where nothing has really changed to the outlook. We see a perfect environment for the metal—concerns over our currency debasement, negative real interest rates, geopolitical friction, etc. I expect gold will reclaim the 2011 highs and could reach $2,000/oz.
For silver, the picture is less clear. Silver is, in part, an industrial metal accounting for around 50% of demand and less of a currency. Silver peaked at almost $50/oz in April 2011 and the price has been very volatile. We think the move is a correction, again, in a longer uptrend going back to 2003. I expect silver will trade around the mid-$30/oz range this year.
We actually feel platinum has a lot of potential. South Africa, Zimbabwe and Russia account for about 90% of platinum production and there’s a scarcity of good platinum metals group (PMG) projects outside those countries. We expect increased investment demand and believe that supply disruptions, as well as resource nationalization concerns, will drive the price higher. We note that Sprott Asset Management has formed a physical platinum and palladium trust, which could boost investment demand.
TGR: So, what really happened to the platinum market? Historically, platinum traded at a 30–40% premium over gold. Does it have to do with industrial demand or what happened to cause it to trade below gold?
MZ: The main industrial use for platinum/palladium is automotive catalysts. With fears of a global slowdown, their prices came off. But our view is that supply is not going to be able to meet the demand going forward. And, as you mentioned, platinum has historically traded at a significant premium to gold but the value is now only about 95% of the price of gold.
TGR: Getting to the actual equities, the gold and silver stocks certainly didn’t track the metals prices very well the last year. What’s been the problem?
MZ: Gold stocks have performed poorly compared to the metals. We believe this has to do with investors being leery about another period similar to what occurred in 2008 when credit markets froze. Exploration and development companies, in particular, are sensitive to what’s going on in the capital markets since they require capital to continue exploration. Take, for example, Trade Winds Ventures Inc., which was acquired last year by Detour Gold Corp. (DGC:TSX). Shares of Trade Winds traded down to $0.03 in the 2008 crisis. Trade Wind shares were later bought for cash and stock, which at the time amounted to about $0.45 a share. My point is that people are nervous but that creates opportunity especially with what I believe will be a catch-up in equity prices.
TGR: I hope with metals prices staying up, the credit markets will be a little more optimistic and will loosen up a bit.
MZ: We certainly don’t expect another period like 2008. I think that was an aberration.
TGR: So, I hope the stocks start picking up here and not continue acting like gold is $800/oz and silver is $15/oz.
MZ: That is what we expect and the precious metals stocks could really get a boost on QE3 or other stimulus programs.
TGR: So, what do you think is going to be some sort of catalyst to get people more excited faster? Or is this just going to have to be a gradual progression and we are going to have to wait for $2,000/oz gold and $50/oz silver for people to really get into this market?
MZ: The disconnect between gold/silver prices and mining company equities has grown considerably. The sector is cheap by historical standards when you consider the price of gold miners’ shares relative to the price of gold. The Philadelphia Gold and Silver Index (XAU), which is an index of 16 precious metals and mining companies, is close to the lowest level it has been since the 2008 crisis relative to gold. We expect this ratio to gradually work its way back to the average. If we see gold mining stocks move up to even the low end of their historical range versus gold, it will mean a significant gain for many of these companies.
Increased merger and acquisition (M&A) activity in the sector will get people interested in a lot of these companies. As the price of gold and silver continues to rise, the economics become very compelling, especially for large- and mid-cap companies to acquire smaller players.
More interest in precious metals will help too. With what I see as a developing currency war—a race to devalue—I think more investors are going to turn to precious metals and related equities.
TGR: It certainly seems like there are a lot of smaller companies out there with some interesting looking projects that may be sitting ducks for being taken over. If they have to keep going back to the market to raise more money and create more dilution, that could be a problem. What’s your thinking on that?
MZ: Small exploration companies are going to continue to need funds to advance their projects, and costs have been increasing. That’s a major problem. The need to raise capital isn’t going to change but we are seeing alternative ways of financing such as gold and silver streams, alternative debt arrangements and joint ventures, which mean less dilution.
TGR: A lot of companies that were able to load up with plenty of cash at reasonable prices are obviously happy in this market. Do you think they’re going to get pushed to go out and do acquisitions?
MZ: I think what we’re seeing now are mining companies with the ability to acquire languishing juniors taking advantage of the environment. The seniors and intermediates, which have filled up their treasuries with robust gold and silver prices, certainly have the ability to do the same. At the end of the year we saw companies like Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) acquiring Grayd Resource Corp, AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE) acquiring Northgate Minerals, and New Gold Inc. (NGD:TSX; NGD:NYSE.A) acquiring Richfield Ventures Corp. and Silver Quest Resources Ltd. We see this trend intensifying, especially if mining company valuations don’t keep pace with rising metals prices.
TGR: That brings us to a little follow-up on some of the companies that you talked about last time. A couple of the junior producers you talked about were Barkerville Gold Mines Ltd. (BGM:TSX.V) and Orvana Minerals Corp. (ORV:TSX). Can you tell us what’s going on with them?
MZ: The market has been disappointed with production from both companies. Barkerville recently got a boost after receiving a permit for its Bonanza Ledge property, which is a high-grade open-pittable gold resource. The delay in getting that permit meant that production was not what we had originally expected. Updated resource calculations for the company’s Bonanza Ledge, Cariboo Quartz and B.C. vein zone in the first half of 2012 could be a positive there.
Orvana has two properties that were both put into production in 2011. In Spain, the company’s El Valle-Boinás/Carlés is an operating gold mine, which is not seeing the head grade we had expected. Grades are slowly increasing from around 2 grams per tonne (g/t) to an expected 3.5 g/t. Its other project in Bolivia, the Don Mario mine, has a different problem. It’s an open-pit, copper-gold mine where recoveries have been less than expected—around 50% versus 70–80% for copper. We look for recoveries to improve and think a lot of the bad news has been priced into the shares. We’re also encouraged by the fact that Bill Williams has now taken the helm of the company. Bill has exceptional operational technical expertise.
TGR: So you feel both of those are reasonable values at this point?
MZ: On Barkerville we’re taking a wait-and-see approach and have the stock rated as a hold. On Orvana we believe the negative news has been priced into the shares and valuation looks compelling.
TGR: So, how about some of the near-term producers that you follow, such as Canadian Zinc Corporation (CZN:TSX; CZICF:OTCBB)?
MZ: Canadian Zinc is a situation where the valuation has not kept up with the project. The company recently passed the major hurdle for environmental approval of its Prairie Creek mine. It’s a really interesting story—an old Hunt Brothers mine that could be in production in 2014 or maybe even as early as 2013. For readers who don’t know the history of the Prairie Creek mine, it is in the Northwest Territories and was just a few months away from going into production when silver prices collapsed in the early 1980s and the Hunt Brothers went bankrupt. It’s a high-grade silver-lead-zinc mine with much of the infrastructure in place that we think has a lot of potential. We actually believe this is an ideal time to own shares of the company since fundamentals have improved and the share price has drifted lower with the sector.
TGR: So that’s another one to watch closely and this may be a good time to be picking some up. What about some of the other junior explorers that you like and have talked about in the past?
MZ: For very near-term production I have followed but do not cover Armistice Resources Corp. (AZ:TSX). The company expects to produce 25,000 oz gold in 2012. At around $0.22/share, which is about 50% less than last year, valuation looks interesting. Two that I cover, which are exploration stories, are NioGold Mining Corp. (NOX:TSX.V; NOXGF:OTCPK) and Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:FSE). NioGold continues to drill at its Marban project in Val-d’Or, Québec. This is a joint venture with Aurizon Mines Ltd. (ARZ:TSX; AZK:NYSE.A) where Aurizon is funding $20 million for exploration. We think the resource could grow fairly significantly from the current 960,000 oz to 1.4–1.5 million ounces (Moz). We actually think Marban could give Aurizon’s other project, Joanna, some competition. I think the valuation looks fairly attractive here, trading at about 60% lower than our calculated net asset value.
We’re also excited about the potential of Prophecy Platinum. Prophecy has the Wellgreen deposit in the Yukon, which contains 12 Moz of combined PGMs and gold plus 2.4 billion pounds (Blb) of nickel and 2.2 Blb of copper. The in-situ value is around $50 billion and we think a preliminary economic assessment due out in Q112 will show some strong economics for an optimized open-pit. The company is carrying out other work to derisk the project, including metallurgical studies and additional infill drilling for which we’ll start seeing results early this year.
TGR: So, that one is well priced at this point and a buy as far as you’re concerned.
MZ: Absolutely. The price drifted down after the excitement over the updated resource estimate, but it’s come down to a level where we think it offers very good value. We have a $6.40 target price.
TGR: So then, let’s look at some silver juniors. One that you follow is Cream Minerals Ltd. (CMA:TSX.V; CRMXF:OTCBB; DFL:FSE). What’s going on with that one?
MZ: Cream is a company I cover and which I visited late last year. It’s an exploration company with a 41 Moz silver deposit called Nuevo Milenio. It also has about 300,000 oz gold. We believe the company has the potential to really expand the current resource. Cream completed about 20,000 meters (m) of drilling in 2011 and we expect an updated resource out late Q112. This should actually upgrade a fair amount of the Inferred resource to Indicated and could add about 30% to that resource. We also see it doing another round of drilling of 20,000–30,000m in 2012, which we think has the potential to more than double the current resource.
TGR: That sounds promising.
MZ: Another one I don’t cover but I think is very interesting is Oremex Silver Inc. (OAG:TSX.V; OARGF:OTCBB; OSI:FSE). This is a small-cap silver exploration company with assets in Mexico. The company recently moved up on good initial results on its Chalchihuites project. The project is in the same area as First Majestic Silver Corp.’s (FR:TSX; AG:NYSE; FMV:FSE) Del Toro project, and we understand First Majestic is aggressively acquiring property in the area. The company’s flagship property, Tejamen, has a defined 51 Moz silver deposit. We think the president and CEO is also a real asset for a company with a market cap of around $20M. He’s been manager of exploration and development for Barrick Gold Corp. (ABX:TSX; ABX:NYSE) in South America.
TGR: So, are you expecting that 2012 is going to be the year that mining stock investors finally wake up and smell the gold and realize it’s time to get into this market?
MZ: I think this is the year! Investors have been cautious and focusing just on the downside, holding their money in cash. I think investors should be opportunistic and look for well-run companies with strong management and great assets.
TGR: Well, we’re certainly hoping for that also. We appreciate your joining us today and look forward to talking with you again.
MZ: Thank you and I appreciate the opportunity.
Analyst Matthew Zylstra joined Northern Securities in 2010 after having worked at Sprott Resource Corp. and investment counsel firm Foyston, Gordon and Payne Inc., a unit of Affiliated Managers Group Inc. He is focused primarily on junior precious metals producers and also follows some base metals miners. Zylstra has worked in the finance sector since 1999.
By The Gold Report, on January 30th, 2012
 Kwong-Mun Achong Low, an analyst with Northern Securities in Canada, thinks that copper and gold juniors are in for a better run this year. He’s ferreted out the juniors with the most promising management and assets that are on a path to production—not to mention rising stock prices. In this exclusive interview with The Gold Report, Achong Low discusses why copper may have a slight edge on gold in 2012 and what companies are the crown jewels of his coverage list.
The Gold Report: Kwong, what are some themes or common ground within your Buy recommendations in the junior mining space?
Kwong-Mun Achong Low: When I look to initiate coverage of a company, I go through a checklist of must-haves with emphasis on the management team and the assets. Excelsior Mining Corp. (MIN:TSX.V), Golden Predator Corp. (GPD:TSX), Probe Mines Ltd. (PRB:TSX.V) and Sunridge Gold Corp. (SGC:TSX.V) have solid management teams with proven track records and they’ve either built and sold companies before or they have tremendous experience in the countries that they operate in. All of those companies’ flagship assets are close to infrastructure, and they have a clear path to production. They’re not just speculative stories. They also have good streams of news to keep investors interested and are supported by the commodities that they are focused on, which are gold or copper.
TGR: Even very good news wasn’t really moving share prices a lot in the last half of 2011. Do you expect that to change in 2012? Will good drill results move share prices this year?
KAL: I think so, but a lot of the speculation has come out of the space. Really and truly, things were looking dire at the end of 2011, in part because of redemptions of funds and tax-loss selling. This year, investors will look at the quality projects and, when good drill results come out, they’ll say, “Okay, we’ll reward this company because it continues with good news.” I think share prices will respond to suit.
TGR: Are you more bullish on copper or gold in 2012?
KAL: The underlying fundamentals of both are still pretty good. Gold’s use as a store of value should be of real interest to investors because of the ongoing quantitative easing and the loose monetary policies by central banks that are devaluing major currencies. Historically, gold has responded well to that.
For copper, our bullish case comes from supply-demand fundamentals. Many commodity houses are forecasting a supply deficit for 2012. For instance, stockpiles in Asia as tracked by the London Metal Exchange (LME) are at a two-year low and heading lower, which is likely because China is buying and stockpiling copper again. The broader LME stocks are at a one-year low and also heading lower. That’s really good for copper and gives it an edge over gold this year.
TGR: But copper was down about 3.5% last year.
KAL: It just got caught up in all of the economic worries. When you go back to basics, which are supply-demand fundamentals, copper is still a really good story.
TGR: Northern Securities’ 2012 Top Picks List includes Golden Predator and Probe Mines, but not Sunridge or Excelsior. What factors put Golden Predator and Probe above the others?
KAL: At the time we chose those two names to highlight, the stock market was more volatile and investors were in a real risk-adverse mood.
Golden Predator stood out because it’s in the Yukon, which is a good mining jurisdiction. It has near-term production potential and current cash flow from its royalty portfolio. In a real cash crunch, it would come out OK.
Probe Mines, in Ontario, came on the scene with a really good resource update. It has a good opportunity for more resource growth, which puts it on a short list of takeover candidates.
TGR: Would it surprise you if the companies not on the top picks list outperformed those that are?
KAL: No, not at all. Both Sunridge and Excelsior are solid companies with robust assets. Sunridge has four polymetallic deposits in close proximity to one another. The biggest deposit, Emba Derho, is of world-class size by itself. It’s a 62 million tonne (Mt) volcanic massive sulphide (VMS) deposit with almost 0.6 million ounces (Moz) gold, nearly 1 billion pounds (Blb) copper and 2 Blb zinc. Something that size could attract takeover potential as well.
Excelsior’s preliminary economic assessment (PEA) on the Gunnison copper project in Arizona in December really impressed me. It could advance its project quickly to production and I would put it on a short list for potential acquirers given the project economics.
TGR: What in that PEA did you find particularly interesting?
KAL: It’s expecting annual production of 85 million pounds (Mlb) copper for a capital expenditure of $240 million (M). Not many companies could do that. If it builds a sulfuric acid plant for $85M, it could get its cash costs down from a projected $0.94/pound (lb) to about $0.68/lb. That could make it one of the lowest cash-cost producers in the copper space.
TGR: It plans to use in situ recovery, which involves drilling holes into a land mass, injecting liquid into those holes and then pumping it out and recovering the metals in those liquids. Given the recent concerns regarding fracking in the oil and gas space, do you expect getting environmental permits could pose a problem?
KAL: I’m not concerned with Excelsior getting its permits because the same process has been successfully permitted and used in the past in Arizona during the 1980s and 1990s. In situ recovery is often misunderstood because it’s not commonly used in the copper industry though it is quite common in the U.S. uranium industry. When at full operation, more of the dissolving liquid is removed than is pumped into the ground. That creates a cone of depression where the basic physics of high and low pressure prevents any fluid from traveling where it’s not supposed to go.
TGR: What catalysts are going to push Excelsior, which currently trades around $0.57/share, to your 12-month target of $2/share?
KAL: It intends to do a prefeasibility study by the end of this year. To do that, it will have to continue with its hydrology and metallurgical studies. Even though the initial tests came back positive and show a good case for in situ recovery, investors would be happy to see more detailed tests confirming those results. That should push this toward the target.
TGR: Golden Predator, which is the largest holder of active exploration properties in the Yukon, receives royalty payments from a property portfolio in Nevada. What sort of cash flows are those royalties creating and how is Golden Predator using that cash?
KAL: The land package and the royalty portfolio are two of the best things about Golden Predator. It already has cash flow coming in, which could be used for general and administrative expenses or to offset large financings. We expect about $1M in royalty payments this year, gradually increasing to about $8M by 2015. Also, as the company has done before, non-core segments in the royalty portfolio and land package could be monetized for additional gains.
TGR: Golden Predator released some results from the Sleeman zone on the Brewery Creek project in the Yukon recently. One hole returned 35.1 meters (m) of 1.63 grams per tonne (g/t) gold and 136.72 g/t silver. Within that intercept, there were 20m of an even higher grade intercept. What were your impressions of those results?
KAL: They were quite good. It’s not often that we see a sizable silver intercept at Brewery Creek, but that adds another dimension to go along with the gold. One of the holes on the westernmost part of Sleeman returned some decent results as well, showing that the zone is still open in all directions. That step out hole would not be included in the resource update at the end of January. Because of this, and the over 100 holes to be assayed, the company is planning another resource update for the middle of the year.
TGR: Golden Predator has a number of properties. Do you think as these sorts of results come back that it will begin to focus more on Brewery Creek than the others?
KAL: It already is focusing mostly on Brewery Creek given its near-term production potential possible because of its past-producer status. So Brewery Creek is both an exploration story with the good drill results it keeps returning and also a development story that could see itself in production by the end of the year. The other properties will also see some drilling this year and could add production growth a few years down the line, but they are not the focus now.
TGR: What other catalysts are you expecting to take Golden Predator to your 12-month target of $1.60/share?
KAL: It still needs to come out with some engineering tests on the existing heap-leach pad to see if a quick production start-up is possible. Those are due in the next few months and if they continue to show that it can start production sooner than most people think, that should really push the stock up.
TGR: Golden Predator has made some management changes. Do you think those are positive?
KAL: Definitely. It hired a chief operating officer and a chief mining engineer, which shows that it really is gearing up for production.
TGR: Probe Mines has gone from being primarily a chromite play to a gold play. The junior now sits with a resource of almost 5 Moz at the Borden Lake project in Northern Ontario. In 2009, Osisko Mining Corp. (OSK:TSX) bought out Brett Resources Inc. (BBR:TSX.V), which had a resource of similar size in Northern Ontario. It’s a distance away, but there are some similarities. Do you believe Probe is a takeover target?
KAL: I think so. Probe really has reinvented itself and capitalized on its grassroots Borden Lake gold discovery. It is expecting another resource update later on in this quarter, which should get it past the critical 5 Moz mark and put it on the radar for intermediate and senior producers. The orientation and structure of the ore body are close to ideal for mining a low-grade, bulk-tonnage deposit. A lot of that resource will end up mineable, and that’s what companies are looking for.
TGR: Have you visited that project?
KAL: I have. Dave Palmer, the chief executive officer, really keeps a close eye on what’s going on there and he regularly takes analysts and investors up to the property. What I really like about the project is that it’s about a 15-minute drive from the airstrip and the town of Chapleau, and you can walk straight from the road to the drill rig.
TGR: What are some catalysts we can expect in 2012 for Probe?
KAL: Apart from the updated resource, it also has some further metallurgical studies and drill results coming due. What I like about Borden Lake is that there are some really good geophysics in the northern part of the property that show that it could have another main Borden Lake deposit there. It’s drilling that now and if successful, that could easily double the resource.
TGR: Are you saying it could hit 10 Moz?
KAL: It could, but it may not this year. If it hits some good results up to the north, it could get really big.
TGR: If that’s the case, then it must be a takeover target.
KAL: For sure.
TGR: In a report, you suggest that Sunridge Gold is one of the more misunderstood stories in the junior gold sector. What misconceptions about Sunridge would you like to correct?
KAL: The biggest misconception is that Eritrea is a bad place to do business. I visited the property in November and saw firsthand that it is a very determined country working to put additional business-friendly policies in place. The people are very friendly and hard working. The United Nations Security Council clouded that view when it put further sanctions on the country in December after some neighboring countries accused it of supporting militant groups, but I think the accusations are politically motivated. Russia and China both abstained from the vote. Also, Russia went on record saying that the evidence of Eritrea’s link to the planned attacks in Addis Ababa was not conclusive.
TGR: But there is unrest in the region. Are you factoring that into a discount rate?
KAL: Definitely. Whether it’s true or not, the market does perceive additional risk in Eritrea. We only use a multiple of 0.4x our net asset value whereas other companies in our space could get from 0.5–1.0x.
TGR: What were your thoughts about the Asmara project when you visited?
KAL: It is very close to infrastructure. You can drive to the site in a matter of minutes. The topography is very supportive of open-pit mining as it is very flat with lots of room to put the mill facilities and tailings pond. It’s also very close to a willing workforce.
TGR: Are there any majors operating in Eritrea right now?
KAL: None that I know are active in the area. There are a number of Chinese companies with interest including the Shanghai Construction Group that recently bid for Chalice Gold Mines Ltd. (CXN:TSX; CHN:ASX), though the others have nothing as advanced as Sunridge or Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.A).
TGR: Does Nevsun have the cash flow to pull off a takeover?
KAL: For sure. It is producing a lot of gold at one of the lowest cash operating costs in the industry. Last year it produced about 380 thousand ounces of gold and the cash costs for the first three quarters were about $285/ounce (oz). However, I’m not sure that, if it were to expand, it would want to get another asset in Eritrea.
TGR: On the one hand, you’re saying there’s not as much risk as people think, but in this example, you are intimating that there is still a significant amount of risk there?
KAL: There is perceived risk. If a company like Nevsun has a main asset there and it’s not getting the full value that it should for it, then there’s no need to wait around for the market to clue in. It can just take its cash and go after something that the market will recognize.
TGR: What should move Sunridge stock to your 12-month target price of $1/share?
KAL: Of its four main deposits, it has combined three of them into one prefeasibility study due out in about four months. The fourth deposit, the Debarwa deposit to the south of Asmara, has a feasibility study due in the next couple of months. As the market sees that there is real economic benefit to these projects and there is a clear line to their production, Sunridge should get rewarded for that.
TGR: Debarwa is really the crown jewel here, right?
KAL: It’s the highest grade and it may be the closest to production, though I think the crown jewel is Emba Derho, with 62 Mt of VMS.
TGR: What’s the resource there?
KAL: It’s almost 600,000 oz gold, 1 Blb copper and 2 Blb zinc at Emba Derho.
TGR: What’s the estimated production timeline there?
KAL: It could be as early as 2015. After the feasibility is completed, it could start applying for its permits. Sunridge has already started talking with government officials, so I don’t think that will take as long as it has for other companies, like Nevsun.
TGR: Are there any other companies that you would like to discuss today?
KAL: It’s not one that I cover, but it is in a very stable country: Seafield Resources Ltd. (SFF:TSX.V:). It is advancing its Quinchia gold project in Colombia. It is expecting a resource update at its Miraflores deposit by the end of this month and a PEA in a few months. Quinchia currently has 2.5 Moz in global resource and with the new management appearing settled, the relative valuation and news flow makes this stock one to watch.
TGR: Do you have some parting thoughts for our readers?
KAL: Investors need to take the speculation out and do additional due diligence because it’s a stock-picking market. Investors need to look for companies that have good news flow, really good management and an asset that is good enough to put into production when they invest in it.
TGR: Thanks.
Kwong-Mun Achong Low is a mining analyst with Northern Securities with a focus on both precious and base metal equities. He previously worked at a Canadian bank owned dealer and at a U.S.-based brokerage. Achong Low obtained both his Master of Business Administration and Bachelor of Science degree in mechanical engineering from the University of Toronto.
By Bron Suchecki, on January 27th, 2012
Worth reading this response by Victor the Cleaner in FOFOA comments to this question: “At the moment, in order to influence the Gold price downwards, all that needs to be done by the authorities in LBMA and COMEX, is to raise the margin requirements.” This is complete and utter nonsense.
LBMA is a trade association and not an exchange and as such does not set any ‘margin requirement’. The LBMA member firms are typically those banks and other financial institutions that trade gold and silver OTC in London, but non-members around the world also trade OTC with these institutions.
When Newmont has some trucks on the road on the way to the refiner, they might want to sell that gold immediately to eliminate any further price volatility from their accounts, and so they might phone JPM and sell that stuff forward. None of the two counterparties is a speculator here. Newmont does have the real stuff, and JPM does have the cash. So even if they would require collateral, this would not influence the price.
Yes, there are probably some raw recruits who follow websites such as TF and who trade COMEX futures in under-capitalized accounts. Yes, CME occasionally raises the margin. Yes, they may just be checking who is the under-capitalized novice and who really has the cash in order to purchase the gold for the contracts they hold. Yes, they may just rip off the clueless novice for fun (and money). But to think this would set the spot price of gold is quite a hubris.
The OTC market is ten times bigger than COMEX, and so it pushes COMEX around in a way that most COMEX-fixated goldbugs don’t understand.
If you want to keep gold cheap in the long run, you need to create a huge volume of gold loans, expand the ‘money supply’. If you want to manage the price of gold intra-day (and yes, there is indeed statistical evidence for this), you need to sell a lot of gold at spot in a short period of time. But you can do this only if you are a credible financial institution and only as long as you can hand over the allocated whenever your counterparties request it. So you need to understand extremely well what you are doing and how much physical per paper you need to be able to show. Hiking the COMEX margin is a side show.
What I find rather disappointing is the extremely poor quality of the discussion that is presented on the typical precious metal websites. This is financial product pushing of the same quality as pre-1999 when they IPO’d the companies that sell dog-food online.
Here are FOFOA, people discuss a very good reason for owning gold. For some reason, the mainstream goldbug websites totally ignore the good reason and push gold with inconsistent nonsense instead.
Why is that? Want to scalp PSLV? Want to create a mania, sell them financial products (including GoldMoney which is no longer ‘money’ by the way) and then when the big blackout comes, grab the gold for cheap from those who sell in panic because they never understood why they owned it in the first place? Very sad. And when the Financial Times calls the goldbugs confused idiots, sadly, there is even some truth in this statement.
If Victor keeps this up I’ll be out of a blogging job.
By The Gold Report, on January 26th, 2012
 Fayyaz Alimohamed, CEO of Altair Ventures Inc. and publisher of the Acamar Journal, offers historical perspective and predictions on the global economic crisis. In this exclusive Gold Report interview, he foresees a “mania” in junior mining stocks and recommends holding physical gold outside the banking system as a safety net.
The Gold Report: Fayyaz, in June 2008, using readily available economic data, you wrote that the global economy was on the verge of financial collapse. What do those sources tell you about where the global economy is headed today?
Fayyaz Alimohamed: In November 2006, I predicted that the U.S. was headed into a recession. Seven months later, the Bear Stearns funds cracked, beginning the crisis. By June 2008 it was obvious to me that the crisis would escalate into a crash.
Today, the U.S. cannot meet its gargantuan future unfunded liabilities. Europe and Japan face debt levels that ensure eventual sovereign debt defaults and declining standards of living. There is potential for all of this unwinding to seriously affect an entire generation.
These economies cannot grow their way out of their problems and the cuts needed to balance budgets would create massive social turmoil because the cuts themselves would lead to sharp drops in gross domestic product, creating vicious negative spirals. The current solution being utilized is more debt and quantitative easing. That can only keep things afloat until it can’t anymore. I would say that we will have the next major crisis within the next two years.
TGR: I would like to flesh that out a bit. What do you believe will trigger the next crisis?
FA: Genuine reform has not been implemented. This crisis was caused by unprecedented levels of consumer and corporate debt and Wall Street greed. When the crisis happened, government rescued distressed debt by massively increasing its own debt. For example, the Federal Reserve and the European Central Bank are using their balance sheets at about a 30:1 leverage. This is the same sort of leverage that Wall Street banks had recklessly indulged in. When government debt was substituted for corporate and consumer debt, the whole system rolled over into a much more dangerous phase.
TGR: Do you think the European debt crisis will remain the dominant theme in 2012 or will other themes take center stage?
FA: The European crisis is simply a proxy for a global debt crisis. It happens to be focused on Europe because Germany has not been as eager as the Federal Reserve to print money. Germany remembers the hyperinflation of 1924, when unbridled money creation led to prices doubling every two days.
Today, governments have a preponderant influence on the economy, while large corporations, through lobbying, have inordinate influence over the government, to the detriment of other stakeholders. As the danger of a deflationary depression increases, governments are attempting to reinflate the economy; they may well overreach and create hyperinflation.
Thus, the broadest theme by far is debt and the reaction to debt. We just saw France’s debt downgraded and a negative watch put on the European Financial Stability Facility. This negative spiral will continue. Even though the U.S. has tepid signs of economic growth, it is at the cost of enormous amounts of stimulus being put into the economy.
Given that the U.S. and Europe are its two largest export markets, China also is headed for a hard landing unless it can increase internal consumption substantially.
TGR: Much of the discussion of the European crisis has centered on Greece. But a recent auction of six-month Italian bonds was priced at an interest rate of 6.5%—the highest rate of a bond auction since Italy joined the Eurozone 13 years ago. What do you make of that?
FA: In literature, readers are invited to enter into a “suspension of disbelief” to go along with the story, even if implausible. Before the 2008 crisis, that was the mindset of investors. Now they want to believe that governments can solve these problems.
Greece was not the primary cause of the European crisis. It was caused by German, French and U.S. banks. These banks are all insolvent if they were to mark their assets to market and not to theoretical models. But, we are suspending disbelief because we all have skin in the game and need things to work out.
The drive for austerity ensures that Portugal, Ireland, Italy, Greece and Spain (PIIGS) will continue to see their economies shrink, leading to lower tax revenues and the continued inability to meet budget targets, which will require larger debt relief. It is a vicious downward spiral that will lead to declining standards of living.
Greece, Portugal and Ireland would be much better off leaving the EU, defaulting on their debts and devaluing their currencies. That is a time-honored tradition. After some pain things will work out, as they did in Argentina and Russia in the 1990s.
Investors want to believe that heavily indebted countries can solve the problems of other heavily indebted countries; that an insolvent banking system can be rescued by governments through more debt issuance and debt monetization.
TGR: The European Central Bank has floated the idea of euro bonds, backed by all 17 members of the Eurozone, as a solution to this problem. But Germany does not want to go down that path unless the indebted countries adopt more severe austerity measures. Do you think we’ll ever see euro bonds?
FA: We are really into the realm of absurdity. For example, the European Financial Stability Facility is a private company authorized to borrow €450 billion (B) from the private sector backed by a guarantee from all the EU members who are already heavily in debt and being downgraded periodically. One proposal I saw was that it would use the €440B of debt as collateral to borrow another €1–2 trillion of debt to lend to the PIIGS!
Can this type of thinking ever end well?
As Europe enters a recession, the problems will only get worse. Euro bonds issued by indebted countries just mean France and Germany are putting their own balance sheets at risk. It may provide time, but it does not solve the problem. The question is, should they bailout the PIIGS or take the same money and bailout their own banks? There are no good solutions.
A final thought on yields: when I studied economics we were taught that U.S. Treasuries were the risk-free asset to be used as an absolute benchmark. Given the recent downgrade and outlook, perhaps the economics profession should start looking for another risk-free benchmark, just as the U.S. dollar replaced the pound sterling.
TGR: Given all of this, how are you protecting yourself?
FA: One of the primary measures of protection is a healthy cash balance. You have to be in a position where you are able to ride out any crisis and also to take advantage of valuations in case of a crisis. If the crisis is as bad as I think it will be, you will be able to find and acquire assets at generationally low prices.
The other way to protect yourself is to invest in precious metals. I believe precious metals will do well whether we continue to stagnate or actually see another crisis. I think silver and gold equities will do very well in the long run.
TGR: Investors have been seeking greater security for at least seven months. How long do you think that risk-off sentiment will last?
FA: Brian, U.S. domestic stock funds have seen net redemptions for five straight years. Due to negative real interest rates, equities are undervalued in historical terms. This is tempered by the dangerous, rising systematic risk. Fund managers are paid to perform or else they face redemptions. So, the bias is for stocks to rally as we are seeing now, unless the second phase of the crisis clearly emerges, which in my opinion is inevitable.
Ironically, in another crisis, governments will likely turn to quantitative easing with a vengeance, which means that, despite a crisis in sovereign debt, we will see a substantial rally in commodities, particularly gold and equities, as substantial sums of newly created money finds its way into the system and money leaves the bond markets. You may find prices rising while the economy is being undermined.
TGR: Fayyaz, your background is in insurance and finance, how did you find your way into the gold and silver space?
FA: From 2001 onward, I realized that the U.S. seemed to lack the political will to deal with its increasing levels of budget and trade deficits. In fact, the Fed was creating asset bubbles that were bound to end badly. At the same time, I knew from history that fiat money generally ends badly, starting with Kublai Khan. I came to anticipate the decline of the U.S. dollar and the rise of gold. I believe that the price of gold will be much higher in the coming years and that gold will become part of the monetary system in some capacity.
Gold is interesting in another way. Throughout history booms have been localized geographically. As an example, the average Canadian investor is unlikely to invest in, say, Argentinian real estate or in its stock market even if they are booming. The Internet bubble was the first time that a global audience became aware of an asset category that was rising dramatically, ironically thanks to the Internet itself. But you could not participate unless you had a U.S. brokerage account. Gold is the first truly global asset boom that investors at all levels can participate in. Today investors are more savvy and more heavily invested across markets and categories but gold is fundamentally money and all investors and savers can buy it. Local yet global.
TGR: Investors also have different tools.
FA: That’s right. They can do a lot of research. They have a lot more liquidity. The potential impact on the market for gold as an asset class is phenomenal. It appeals to all levels of investors. Someone buying a few grams of gold in China creates demand that directly helps the value of your gold holdings. I mean, how many people sleep with a barrel of oil tucked under their mattress?
TGR: Not if you could help it.
FA: Historically, gold and silver equities leveraged the returns on gold. In 2011, mining companies were producing gold at an average cash cost just under $600/ounce (oz) and were getting about $1,600/oz in revenue. Cash flows are very impressive and price earnings are healthy. Mining companies continue to buy juniors with good assets, especially at these low share-price values. I moved into the sector to take advantage of this bull market in gold. And, I believe we will see a mania in junior mining stocks before this is over.
TGR: And, when will that be?
FA: I think we will see this happen within the next two years as people begin to realize that solutions to the global economic situation are not forthcoming. There will be more and more nervousness and gold will find a larger and larger audience.
We now have a situation where central banks, which were net sellers of gold for 20 years, became net buyers in 2009 and are accelerating their buying programs. We are seeing tremendous support for gold from central banks, institutional and retail investors across the world.
TGR: Do you have positions in any gold and silver juniors?
FA: Yes, one is Colombia Crest Gold Corp. (CLB:TSX.V; EAT:FSE). This company has a huge land package in a prolific gold belt, surrounded by several large deposits including Sunward Resources Ltd.’s (SWD:TSX.V) 8 Moz Titiribi project. IAMGOLD Corp (IMG:TSX: IAG:NYSE) took a 19.9% stake in October 2011, which validates Colombia Crest’s exploration program. With many large, prolific gold targets, the company will commence a 5,000m drill program next month. It also has a high-grade gold resource in Bolivia, a $25 million (M) market cap and $6M in cash. There is good upside potential as the company gets decent drill results.
TGR: Is there one project that will attract notice to Colombia Crest Gold?
FA: It has two projects in Colombia called Venecia and Fredonia.
TGR: And are they underground mine systems or bulk tonnage targets?
FA: I think Colombia Crest has a number of prolific targets. Some will be potential heap leachable targets and others are underground and, therefore, higher grade. So, the company has a dual approach in the Antioquia Province.
TGR: As far as management goes, are there people onboard that you are confident in?
FA: I mostly talk to Hans Rasmussen, the president and CEO. He strikes me as being very focused. He is a geologist and geophysicist and has worked with a number of senior companies. He was brought in by a group of investors to sort out various issues and he created the opportunity in Colombia. Rasmussen is the kind of person that you can have confidence in.
TGR: Do you have another junior name?
FA: I would also mention Coral Gold Resources Ltd. (CLH:TSX.V) with a 3.4 million ounce (Moz) Inferred resource. Its Robertson property in Nevada sits adjacent to Barrick Gold Corp.’s (ABX:TSX; ABX:NYSE) 14 Moz Cortez Pipeline mine, which produces gold at a cash cost of $312/oz. The preliminary economic assessment just came out, showing a net present value at a 5% discount at $1,500/oz gold of $147M for just three of its multiple zones. Its market cap is about $15M. Coral is a natural takeover target. I believe there is good value here for a patient investor.
TGR: Coral has not put out any news since February 2011. The lack of news for almost a year has done nothing but erode shareholder confidence. What is the problem?
FA: From what I understand, unlike nearby exploration companies, Coral has had its mine for a couple of decades and is a past producer. The company was given some very rigorous regulatory environmental conditions to meet regarding migratory patterns of birds and insects and such. Coral had to study these for a given period of time, which delayed its drilling permit. I think that situation is now on the verge of being resolved.
If that happens, Coral has the cash and is ready to drill. You should see movement in terms of activity and, potentially, share price appreciation.
TGR: Let’s move to silver. Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.A) is led by Bob Archer, a real veteran. The company is producing from its Guanajuato mine in Mexico. In 2012, the company plans to produce 1.72 Moz silver, up from 1.5 Moz last year. It also expects to produce 10–11 thousand ounces (Koz) gold, up from 7.8 Koz in 2011. That news, although good, was not met with much enthusiasm from the market. What are your thoughts?
FA: I think a 20% year-over-year increase is very healthy for any producer. The company’s profit margins are excellent. It has a 30% net margin for the year to date. So, it should generate very decent cash flows going forward. Great Panther has $40M in the bank. It is growing the resource at the San Ignacio project, is looking for acquisitions and it is mining a recently discovered high-grade zone in Cata.
Overall, the junior sector has stagnated over the last few months and I think Great Panther has just been part of that process.
TGR: What are your thoughts on what Bob Archer has done there?
FA: I think Bob has delivered tremendous value for shareholders. He is very competent and is a man of integrity. I think his share price is closely linked to the price of silver, which is generally true for most silver producers. Guanajuato has a rich history. It was mined by the Spaniards and has been in production for 400 years. It was once considered the richest silver mine in the world. Bob has taken it from when silver was down to $4/oz, resurrected it, capitalized it, built out infrastructure and delivered tremendous value.
TGR: In your time in this space, what have you learned that the average retail investor ought to know?
FA: This is a very volatile sector, subject to investors jumping in when there is a bullish trend and a lot of enthusiasm, and those same investors not wanting any part of equities when there’s a pullback in prices.
Given the overall increase in volatility in the markets, investors really should take a look at gold and silver. If they are bullish, any pullbacks in the commodity prices or in the associated equities should be seen as buying opportunities. When there is a lot of enthusiasm, it should be seen as creating selling opportunities.
You also have to have physical gold and silver in your possession. We learned a lesson with MF Global. We saw $1B of segregated funds in clients’ accounts vanish. My understanding is that some of those funds were comingled and used to settle MF Global’s liabilities to other financial institutions. There is this whole issue of counter-party risk, which gold does not have. That should be a cautionary reminder to people. You need to have physical cash balances. You need to have physical gold and silver outside of the banking system as a safety net because, as Warren Buffet said, we are in uncharted waters now.
TGR: You grew up in Pakistan, where gold is part of the culture, given as gifts at weddings and such. Do you think you would have that same opinion about physical gold as a personal asset if you had grown up somewhere else?
FA: Not in my case. I had no involvement or affinity with gold. I was a finance professional. My involvement with the gold sector is purely intellectually driven, from looking at trends within the macro economy and realizing that gold and silver really are hedges against turmoil and currency debasement.
But that is a very good question and it points up the importance of watching out for biases in the commentaries that you read. People have vested interests and they do tend to have agendas, both in the mainstream media and elsewhere. For your own protection, you need to be sensitive to those influences and to study track records at key inflection points before relying on other people’s judgment.
TGR: Fayyaz, thank you for your time and your insights.
Fayyaz Alimohamed is president, CEO and director of Altair Ventures Inc. and publisher of the Acamar Journal. He has over 20 years of experience in investment management, finance and consultancy. He previously worked at the Aga Khan University Hospital, Financial and Management Services Ltd. (a management consultancy set up by Morgan Grenfell & Co. Ltd. and Booz Allen Hamilton Inc.) and as the chief financial officer of the Key Capital Group before becoming director of investments for the Cupola Group, a large operating and investment conglomerate based in Dubai. He holds a Bachelor of Science (Honors) degree in economics from the London School of Economics, University of London, and is a Certified General Accountant (CGA).
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