By The Gold Report, on April 27th, 2012
 Last year, Africa was the region that witnessed the strongest growth in gold-mining operations. In an exclusive interview with The Gold Report, Nana Sangmuah, managing director of research with Toronto-based Clarus Securities, expects that trend to continue and suggests some immediate smart investments in Ghana, Mali, Liberia and the Democratic Republic of the Congo.
The Gold Report: Gold consultancy GFMS, which is now owned by Thomson Reuters, recently published its 2012 Gold Survey. GFMS predicts that before the end of 2012, the yellow metal will likely reach above its all-time nominal high of $1,920/ounce (oz) in September 2011. The catalysts include inflation concerns and sovereign debt problems in Europe, especially Spain. What are your thoughts on these predictions and conclusions?
Nana Sangmuah: I agree with those predictions and the drivers. One thing that has been missing from the gold rally is inflation hedge demand. With the significant monetary easing that has occurred to drive a global recovery, inflation is definitely going to be an issue at some point. We haven’t seen inflation trade come into gold throughout these 10+ years. That’s the strong headwind that is going to move gold to another level.
TGR: The survey reported that mine production hit a record high in 2011, rising 2.8% year over year to reach 2,818 metric tons (mt). That marks the second straight year that gold production reached a new all-time high. Does that mean the theory of peak gold is dead?
NS: Not exactly. If you peel back the data over the past two years, the greater part of this growth has come from mines digging into their stockpiles and people revisiting old resources that previously were thought not to be economic but at these price levels look economic. There have been very few discoveries despite the fact that there’s been quite a lot of money spent on the exploration front. That rate of increase is not sustainable going forward. And the bigger picture still looks grim because the last big discovery of 5+ million ounces (Moz) is the Aurelian discovery—the Fruta del Norte deposit in Ecuador, which now belongs to Kinross Gold Corp. (K:TSX; KGC:NYSE)—from early in the 2000s. It takes on average at least five years to move from discovery into production, so we’re looking at a situation where the supply is not going to grow that much. If the investment demand is sustainable going forward, basically there won’t be enough ounces to feed that demand.
TGR: The GFMS survey also reported that new gold-mining operations contributed 47 mt of new gold supply, while Africa was the region that witnessed the strongest growth, increasing production by 51 tons (t) despite a 5 t drop in output from South Africa. Do you believe Africa will continue to lead the way in worldwide gold production?
NS: Certainly. The ground is very favorable, and there are a lot of projects that have only scratched the surface. Even in the more prolific zones, which have seen a lot of dollars thrown at them, the concentration has just been on open-pit, near-surface mining. In some of these greenstone belts, you can trace mineralization down to more than 2.5 kilometers (km) at depth. As people get more comfortable with the region’s politics, more dollars are going to move in, and certain grounds will be tested. The key is political stability. As commodity prices go up, countries move their fiscal regimes around.
But I think a lot of countries will smarten up and realize they can attract more investments, which will ultimately generate more revenues to the government if their current regimes are seen to be stable. The Asankrangwa Belt in Ghana is one example. This belt is as old as the Ashanti Belt, but we have just recently seen action on it. So far, within a period of less than three years, 10 Moz have been delineated. Some people would think that certain districts are mature and cannot be coming up with even more discoveries, but that is not true.
TGR: Mali’s interim president said that he wouldn’t hesitate to wage “total relentless war” against the Tuareg rebels who have seized much of northern Mali. Do his words make you less bullish on all West African gold producers?
NS: He’s trying to send a strong signal that he’s all for maintaining stability in the region. And the regional force, ECOWAS—Economic Community of West African States—acted quickly to prevent this from blowing up. A stabilizing force has made its dominance known in West Africa, which I think is going to foster more stability and get people to be more comfortable investing more dollars in the region. Access in general has not really been impaired. The borders are open. People can focus on the day-to-day running of businesses and mines. There’s the potential for a few situations here and there as they try to push the Tuaregs away. But the Tuaregs’ links with al-Qaeda are definitely going to unify the international community against any issues. That means that this is not going to drag on for long, and very soon we should see this issue behind us. We’ve seen similar events before and people have hit the panic button and sold off, but as the situations stabilize, valuations come back strongly. So, I see this as a buying opportunity, and I’ll be focusing on assets. If these assets have not been impaired in any way fundamentally, they should be bought at these levels.
TGR: Ghana is second only to South Africa in African gold production. What are some of the companies operating in Ghana that are well positioned to grow their gold production and see it translate to their share price?
NS: In this current environment, we should be watching the balance sheets of companies to see whether they have enough capital to maintain their growth strategies. One company that I think has a very strong balance sheet is Perseus Mining Ltd. (PRU:TSX; PRU:ASX), which has finished up building a mine in Ghana and announced very strong Q112 results showing good cost containment. Commissioning has gone well and it’s in a ramp-up phase. I think most of the risk is behind it. Perseus is on the cusp of generating a lot of cash flow. That is going to help it bring its second asset, which is not in Ghana, into production. Cast your eyes two years out and Perseus will be producing around 450,000 oz, generating a lot of cash flow that could be channeled into further growth opportunities or shareholder dividends. Currently the resource is 9 Moz and Perseus is spending quite a lot on exploration; about 200,000 meters (m) are being drilled in West Africa. The likelihood of growing 9 Moz into 12 Moz is high. And Perseus has had a very good success rate converting these ounces into reserves, so we should see the production profiles also tip up along the way. At these levels, with no finance hurdles ahead of it, being in a fully funded position and just on the cusp of generating strong cash flows, Perseus is one that investors should be watching.
TGR: Perseus boosted the resource at the Edikan by 1.03 Moz in December 2011. Is it reasonable to think that it could do that again by December 2012?
NS: It’s doing about 200,000m of drilling this year; last year it drilled about 250,000m split between both assets. The rate of resource growth should be more significant because now it’s switching focus from infill drilling to regional targeted. That’s where you see a lot more growth in the resource. I’m quite optimistic that we should be seeing a lot of wider swings in the resource growth going forward. And the company’s picking up new targets in and around the existing mine.
TGR: Ghana also has a number of smaller companies exploring for gold deposits, some of which have had early success. Could you introduce our readers to some of those companies?
NS: There are a lot of junior companies prospecting for gold in Ghana. One of the more successful ones in recent times has been PMI Gold Corp. (PMV:TSX.V; PVM:ASX; PN3N:FSE). It is advancing a brownfield operation previously operated by Resolute Mining Ltd. (RSG:ASX), which mined about a million ounces at 2.2 grams per ton (g/t). PMI came in and has been able to delineate about 5 Moz on the flagship asset. What is most exciting about the company is it has more ground toward the south on the Asankrangwa Belt, on the Asanko project and the Obotan project. This is the first time that ground has been developed by one single company. This points to the potential to grow the ounces profile well north of the current 5 Moz. PMI also has ground—the Kubi project—next to one of the world’s most prolific mines, the Obuasi mine, which has produced and delineated about 60 Moz. And it actively drills Kubi, which is just 15km south of Obuasi. For the first half of the year, it’s drilling about 100,000m on all these targets. And we just saw eight new anomalies discovered last week, signaling the potential to add to the current resource envelope.
TGR: The Obuasi gold mine is operated by AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE), which is a major gold producer. Would that make PMI a potential takeover target?
NS: Most of these junior companies that have solid resource growth potential are likely targets.
TGR: Any others in Ghana?
NS: There are quite a few, but we can talk about some other early-stage companies, like Abzu Gold Ltd. (ABS:TSX.V; ABZUF:OTCQX). It’s about to come out with a maiden resource on the ground in northern Ghana in a district that is known for gold-bearing structures.
TGR: On Jan. 19, 2012, you wrote, “Abzu’s vast tenement package with a plethora of targets diversifies exploration risk well for shareholders and its proven management team reduces execution risk.” Tell us more about the management team there.
NS: Abzu’s CEO Allan Serwa is a Canadian who’s been in Ghana for quite some time and has built up a lot of relationships there. He brings to the table the ability to manage community relationships very well—better than seamless. You find a lot of companies with good projects but a lot of problems dealing with communities. So Serwa really gives Abzu a solid platform from which to take off. Paul Klipfel has been a geologist with some of the more senior mines, including Placer Dome Inc. [now Barrick Gold Corp. (ABX:TSX; ABX:NYSE)], and has had some decent experience in Ghana as well. Quite a few other accomplished geologists and company CEOs who will provide necessary direction are on Abzu’s board of directors.
TGR: Abzu’s sizeable land package stretches across four different gold belts in Ghana. What sort of exploration success has Abzu had to date?
NS: Abzu has delineated a mineralization trend of 1.5km in one. I have visited that structure and have seen that it extends well to the north and to the south. On the Asafo Belt right on the Kibi Belt in the south, Abzu has been coming up with some very decent grade intersections of 4+ g/t material. It’s still early but indications point to, with additional drilling, sizeable results.
The concessions are in close proximity to prolific mines. Abzu has properties near Newmont Mining Corp.’s (NEM:NYSE) Ahafo and Akyem projects. It’s got property that is close to Keegan Resources Inc.’s (KGN:TSX; KGN:NYSE.A) Esaase mine. So, these are spanning all the belts coming through to the south. And Abzu is on the Kibi Belt as well—that is also close to a past-producing mine. There is the adage that the best place to find gold is within the shadows of a headframe. I think that is the strategy that guided Abzu in staking all these concessions.
TGR: You also cover companies with gold projects or mines in Burkina Faso, Liberia and even the Democratic Republic of the Congo (DRC). Please tell us about some of those companies.
NS: In Burkina Faso one of my top picks is SEMAFO (SMF:TSX). It’s seen quite a significant pullback in recent times. It has a very solid balance sheet, $170 million (M) in cash, no debt, and it’s generating an operating cash flow of about $130M per year. This company is in a position to fund all its organic growth without coming back to the market. Any value from additional expansions flow to the shareholder. SEMAFO has been able to demonstrate the ability to bring that production on for the past three years. There are a few catalysts coming down the pipeline, including a resource update. And as management continues to show to the market that its large Mana project has resource growth potential with several exploration updates expected, not only in June but after, we should begin to see that attention back into the stock. We will probably see it recover earlier than most of its peers because there’s nothing fundamentally wrong with the company.
TGR: You’ve got a $12 target price on that and a Buy rating. SEMAFO has a promising project in Niger called Samira Hill. What are your thoughts on that?
NS: It is a mine that sits on a mineralized trend that stretches for a good distance. Only about 15% has been tested and developed as pits. So there’s a lot of potential along the strike. In the past, very little capital was reinvested in the mine because ownership was split between Etruscan Resources Inc. (EET:TSX) and SEMAFO, and Etruscan never had enough money to put into expansion activity. The mine has not been performing at its optimum level for some time. That’s changing with SEMAFO now taking full control of the mine and investing a lot more into exploration and capital projects. It’s smaller and we need to see a much, much larger expansion to get more stability in the operation. But I think it’s still a worthy asset to have in the company.
TGR: Tell us about Liberia.
NS: Often people shy away from countries that have had issues. But Aureus Mining Inc. (AUE:TSX; AUE:LSE), which will likely be the first company to commence production in Liberia, is making good strides. Infrastructure-wise Aureus’ New Liberty project is very close to the port, and most of the access to the ground is via a paved highway. That makes it relatively easy to access, compared to other projects in the country. The capital required to kick-start the mine is around $120M—that’s not so huge that it will make this project’s financing risk insurmountable. I see Aureus coming up with its first production sometime in 2014. At this level, it’s one of the highest grade projects in the whole of West Africa near surface. And that’s just the beginning. About 40km north is its main asset, New Liberty, which in itself has a lot of potential to grow in surrounding anomalies that have been delineated. Northwest of the structure is a new 13km anomaly that has been picked up. The grades that Aureus has been picking up from initial intersections on this system are quite encouraging. So, there’s definitely a gold district there and the grades are quite compelling. That would definitely have a good impact on cost.
And we like the DRC. That country has had its issues in the past, but as with any other such situation, there’s always a time when it stabilizes. The fact that the election was conducted is a good thing. There were a lot of irregularities, but post-election issues have not been too severe, and that’s a good sign that the DRC is maturing and stabilizing. You see a huge discount in companies operating in the DRC, which in my opinion is not warranted, because it has one of the most prospective mineral belts in the world.
We just saw the first commercial gold production coming with Banro Corporation (BAA:TSX; BAA:NYSE) picking up the march. And we’re going to be seeing Kibali from Randgold Resources Ltd. (GOLD:NASDAQ) come through. I just visited the Kibali project and was very impressed by the progress made for relocation, which is probably the most challenging part of construction. With a solid technical and mine-building team in place Randgold expects to bring Kibali into production by 2014 without a lot of challenges. As these two continue to do well, people will change their perception of gold mining in the country.
Another that I would highlight as very cheap at these levels is Kilo Goldmines Ltd. (KGL:TSX.V), which is on the Ngayu greenstone belt and will be commencing drilling very shortly. David Netherway and Alex van Hoeken have taken over, and they are seasoned mining personnel who focus on the exploration growth potential of their large land package. One similar ground to the Kilo ground is Geita, which in the 1990s started as a small resource from old mine workings and has grown to north of 10 Moz. It’s a similar story for Kilo. It has an old mine at Adumbi, which is currently around 1.8 Moz, and there are a whole slew of prospects around it. This is one of the few times that a company has enough drill rigs to chase some of these targets. It’s very early, but there’s a lot of growth ahead of Kilo—including the fact that Kilo also has an iron ore exposure that the market is not paying anything for. So, you rarely get something for free, but Kilo could be an example of where that really works.
TGR: An iron-ore sweetener, as you’ve called it. In a March 30, 2012, report, you said you expected a rerating of the stock. When?
NS: Rigs are on-site and drilling has commenced. It has its own sample prep lot, so turnaround times are not going to be that long. As news starts to flow, which could be as early as midyear right through the end of the year, and people begin to appreciate the size potential of this asset land package and also the grade profiles, that’s when everyone will start waking up to the opportunity and drive the re-rating.
TGR: Do you have some parting thoughts on African gold plays?
NS: People should continue to focus on the fundamentals. Take advantage of the situation, which will turn around and stabilize, to pick up on names that you missed out on and wait for the disconnect between the commodities and the equities to correct. I see very little downside risk at these levels.
TGR: Thanks for your insights today.
Nana Sangmuah is managing director of research at Toronto-based Clarus Securities. His previous industry experience includes the Prestea underground mine, AngloGold Ashanti’s Obuasi and Iduapriem mines, and Gold Fields’ Damang gold mine. He has over eight years of global mining equity research experience that covers more than 60 mining companies worldwide in the gold, base metals and diamond sectors and has in-depth knowledge of mining projects in West Africa. Sangmuah completed a Master of Business Administration in finance at the University of Toronto’s Rotman School of Management in 2004 and obtained his Bachelor of Science in engineering from the University of Mines and Technology, Ghana, in 1999.
By The Gold Report, on April 26th, 2012
 Ongoing inflation pressures and China’s investments in the African gold supply chain point to a higher gold price, according to Matt Badiali of Stansberry & Associates. Bullion in all its forms belongs in every portfolio and when it comes to equities, investors have their choice of business models—dividend payers, prospect generators and royalty companies. In this exclusive Gold Report interview, Badiali outlines companies whose equities should catch up to the higher gold price.
The Gold Report: Matt, in the February 2012 edition of Stansberry’s Investment Advisory, Porter Stansberry predicted gold would hit $9,600 an ounce (oz) someday. How should investors protect themselves from this coming crisis?
Matt Badiali: In general, I agree with Porter’s thesis. Bullion—gold, silver coins or bars—should be part of everyone’s portfolio. It is one of the best anchors against inflation. Gold and gold stocks also are important holdings because as the value of paper money falls, the value of gold rises.
TGR: Stock prices have not gone up as much as the gold price. Will that trend continue?
MB: We have been in an odd scenario. If gold miners were T-shirt makers and the price of T-shirts went up, the market would buy the company to match the earnings. That has not happened for gold stocks.
Last year, the Market Vectors Gold Miners ETF (GDX:NYSE.A) was down 25% while the price of gold was up 15%. Looking at just the last three years, stocks were up 40% while the gold price rose 90%. So, in the short term, the Gold Miners ETF has underperformed gold.
Gold miners’ earnings have climbed dramatically, but their share prices have not followed suit. I believe gold miners will outperform the metal just because they have to rebalance.
TGR: What does the volatility in gold tell us?
MB: Generally speaking, the market wants a stable U.S. dollar. It rallies to dollars for all sorts of reasons. I think that is false faith.
So many new dollars have been printed that the value of all tangible things has to increase in response. For example, we all think $110/barrel oil is crazy expensive. But, relative to gold, oil has been less expensive over the last couple of years. The price of oil is falling in terms of real money, but going up in terms of dollars. That is a good indicator of how much new paper money has been printed.
TGR: What effect would higher interest rates have on junior miners? Can the increase in the gold price offset the greater cost of raising capital?
MB: Raising interest rates immediately strengthen the dollar, and a strong dollar is hard on all real assets. They rein in inflation, and inflation is why the price of real things like gold and oil go up. Therefore, if rates increase, the price of gold will probably fall.
Many companies have already adapted their plans to a higher gold price. Recently, I have seen development plans based on $1,000/oz and $1,200/oz gold. If the dollar were to strengthen and the gold price fall, it would negatively affect the gold mining industry.
TGR: How does the price of oil affect the operating expenses of gold mining companies?
MB: A gold mine is essentially a commodity swap. A company uses fuel, diesel, gasoline, electricity, concrete and steel to build out a mine and recover gold. As long as the commodities you put in cost less than the commodity you take out, the mine is in business.
Over the last 10 years, the commodity cost to build mines has increased. In any business, when your costs rise as quickly as your revenue, your earnings stay pretty much the same.
TGR: On the earnings side, some large precious metals producers are offering dividends. Is that working?
MB: Newmont Mining Corp. (NEM:NYSE) pays a 2.9% dividend, tied to the price of gold. That is a spectacular idea if your operating costs are well enough in hand to support it.
The thesis is that the Federal Reserve will continue to stimulate the economy by adding money to the system, thereby driving up the gold price. If you trust that thesis, buying a dividend-issuing gold company now when they are relatively inexpensive will lock in your yield at a lower price.
Newmont’s profit went from $4.7 billion (B) in 2009 to almost $6.5B in 2011. The rising price of gold contributes heavily to its bottom line. Investors who get in now stand to see a 5–7% yield in a couple of years.
TGR: Can that same business model work for smaller companies?
MB: It depends. There are some opportunities out there, but there have also been some spectacular failures. For example, I thought the silver miner Hecla Mining Co. (HL:NYSE) would be a great company over the long term, but it had a problem with its Lucky Friday mine and the company tanked.
TGR: But that was a resource problem, not the business model.
MB: Sure, but the point is the dividend model works for the big miners like Newmont, Barrick Gold Corp. (ABX:TSX; ABX:NYSE) or Goldcorp Inc. (G:TSX; GG:NYSE). Companies that can diversify their revenue stream over many mines on many continents mitigate risk. They can absorb more hits and continue to pay dividends. If a company generates most of its revenue and income from one mine and that mine takes a hit, that company is done.
Our first rule is never take a big loss. I typically use a 30% trailing stop on mining companies, which means that if it falls 30% from the highest point reached during my investment period, I sell.
If a mining company falls 30%, there is a fundamental flaw. Either the market has changed or the company has a problem. We limit ourselves to 30% losses because we can recover that. A loss of 50% or 80% is hard to recover.
TGR: What about dividends for royalty equity companies?
MB: I love them. Royalty companies are my favorite. The really big, safe ones are the best: Silver Wheaton Corp. (SLW:TSX; SLW:NYSE), Franco-Nevada Corp. (FNV:TSX) and Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX). These companies have 50 to 80 royalty streams. If their royalty stream on one mine ends, it is just a dimple in their revenue stream. Most of these royalty companies could survive 10 losses with only a modest hit to their revenue.
The other great thing about these royalty companies is they have none of the carrying costs of mines. Because they take such a small piece of a lot of mines—typically 2–5% of production—they have very diluted political and mine-specific risk.
TGR: Does the dividend model work there?
MB: Typically, they pay a very modest or no dividend because they reinvest their capital.
Right now, mining companies are coming to these royalty companies for cash to develop their mines. In return for $5 million (M) of its cash, the royalty company gets 2% of the gold produced over a mine’s 15- or 20-year lifespan. I would rather see the company reinvest because mining is so cyclical and there are so many opportunities now.
TGR: In February, you produced a report, “How to be an Investor in China’s Fort Knox.” What is its investment thesis?
MB: We have been watching China’s investments in Africa for a while now. China is spending billions of dollars in Africa in very specific ways: financing power plants, building railroads and developing other infrastructure plays.
Why? If you want to build a mine, you need electric power. You need to be able to get ore from the mine to a port. China is laying the groundwork for mine development all over Africa.
Look also at what China is buying: one of the world’s largest undeveloped uranium deposits, bullion and shares in African gold miners, from major mining companies to partnerships with juniors and exploration projects.
At the Mines and Money Conference in Hong Kong, I asked representatives of major Chinese investment banks and funds if gold is a major target for Chinese investment in Africa. Across the board, they all said yes.
TGR: How can people outside of China get involved in that?
MB: That was my next question. The best approach is to find companies where the Chinese government or government entities have already invested. I think serious investors who want to participate in mining—especially in Australia, Africa and China—need to understand the Chinese philosophy of resource investing.
When a company gets money from a Chinese bank, it gets far more than funds. It gets exposure to the entire Chinese system. The banker will help the company find a market for its goods or find a Chinese engineering firm to provide technical expertise.
Chinese banks protect their investments. Once a Chinese bank is involved in a mining program, the company typically can get more cash without problems.
TGR: You often emphasize the importance of diversity within the mining company and within portfolios. Where do precious metals fit into a good portfolio mix?
MB: There is a spectrum of risk in precious metals. Bullion is fairly low risk; it is limited to the commodity risk.
With major mining companies, your risk of a 50% loss is pretty low. For investors with low tolerance for risk, a senior mining company is the best place to be.
Mid-cap growth gold miners all have risk. For older investors looking toward retirement, I do not recommend putting a large portion of your portfolio at risk. If 5% of your portfolio is higher risk, some percentage of that can be in mining.
Junior miners are just little bundles of risk. They are not safe; 90% of them bomb. When I write about junior mining companies, I advise investing only if you can afford to lose 50%.
TGR: What do you look for to downplay risk?
MB: The first thing I look for is management. Imagine two junior mining companies, both listed on the Canadian TSX Venture Exchange. Company A is run by a lawyer and a serial stock promoter. Company B is run by a mine executive who worked 25 years for one of the majors. To reduce risk, I would choose B.
Company A is most likely what I call a “lifestyle company.” Its high-rise offices have a spectacular view; management wines and dines you, all on the company’s dime.
Company B, my ideal investment, has offices in a building where the elevator barely works. There are rocks stacked in the lobby and geologic maps on the walls. These guys are working; this company offers opportunity.
TGR: What are some examples of Company B?
MB: ATAC Resources Ltd. (ATC:TSX.V) is a great example. I know the CEO and the principals. I knew the area and spent a lot of time there. In 2008, after the company put out a press release on a discovery, we wrote it up and made 597% on the trade.
Another is Riverside Resources Inc. (RRI:TSX), led by Dr. John-Mark Staude, who has years of experience as an exploration geologist. This company uses the prospect generation business model, which means it uses other people’s money to find projects. Cliffs Natural Resources Inc. (CLF:NYSE) funds Riverside’s exploration and gets a first look at whether its projects are worth anything. Choice Gold Corp. (CHF:CNSX) is Riverside’s partner on the Sugarloaf Peak project, a low-grade gold resource.
Typically, only 1 in 3,000 exploration projects becomes a mine down the road. John-Mark and his crew have generated more than 11 projects, most of them with partners.
TGR: Riverside seems to have lots of technical knowledge, a great database and great partners, including Antofagasta Plc (ANTO:LSE). But its stock is at $0.86. What catalyst could take it higher?
MB: With a prospect generator like Riverside, you have multiple shots on goal. Even though Riverside does not own 100% of Sugarloaf, 30% of a major gold discovery will take an $0.86 stock to the moon.
TGR: We talked about investing in Africa earlier. What are some exploration and development companies there that interest you?
MB: My favorite African play right now, which is ridiculously cheap, is Keegan Resources Inc. (KGN:TSX; KGN:NYSE.A) in West Africa. Its Esaase project will be a mine, the other, Asumura, is just starting to find gold in its drill results.
Keegan is in a bad place in terms of the mining cycle. It is spending money on permitting and environmental reports. The only news that could come out would be bad news, like a permit delay. Add to that its location in Africa, a jurisdiction that scares people. Everybody expects it to be bought by a major mining company. While that drags out and the company continues to spend money, the share price continues to erode.
I think Keegan will be taken out. My concern is that its share price has sunk so low, it may get taken out at a modest premium and wind up not being anywhere near the value I anticipated.
TGR: If it is not taken over, could Keegan be a successful mine developer?
MB: If it gets the right partner, it can be very successful. Many small mining companies have come in as junior partners and have done quite well. MAG Silver Corp. (MAG:TSX; MVG:NYSE), through its partnership with giant silver miner Fresnillo Plc (FRES:LSE), for one.
TGR: How about safer jurisdictions like Canada?
MB: Canada has its own risks. There are a lot of taxes and some of the projects, even in British Columbia, are remote.
Seabridge Gold Inc. (SEA:TSX; SA:NYSE.A) owns the Kerr-Sulphurets-Mitchell (KSM) project. I love this company and KSM, which is a big, low-grade project. The most recent development estimate was somewhere north of $4B. Seabridge is a great company to play arbitrage on the gold price. When the market does not like gold, Seabridge shares fall to nothing; when the market likes gold, Seabridge trades much higher.
However, there’s another deposit up near KSM that’s exciting. Brucejack, owned by Pretium Resources Inc. (PVG:TSX; PVG:NYSE), is a high-grade gold and silver deposit. It’s just a few miles from KSM and is likely related. In Brucejack, the gold and silver are concentrated. Brucejack’s resource is 4.9 million ounces (Moz) of Indicated gold ounces at 17.3 grams per ton (g/t). That’s over half an ounce of gold per ton of rock. There is another 10.4 Moz of Inferred resources at 25.5 g/t. Those are spectacular grades. In November 2011, one of its drill holes ran 17.75 kilograms (kg) gold per ton. It was beautiful, striped with gold in places. Pretium’s shares went from $8.50 to $12.30. The stock is at $15/share now. Unless Pretium brings in a development partner, it will probably get bought for this project.
TGR: Will more strikes be announced?
MB: There is more exploration drilling to come. I don’t have it as a Buy, but this might be a good time to add a position. With such a great deposit at high grades, Pretium will have a lot of leverage to the gold price if it starts to climb. At $2,000/oz, this project is a cash machine.
I see this whole Valley of the Kings area as a catalyst for the entire region. Over the next 25–30 years, this part of British Columbia. could become a major, major gold and copper mining center.
TGR: Let’s go south to Mexico. Do you have a name or two there?
MB: Silvermex Resources Inc. (SLX:TSX; GGCRF:OTC) was recently acquired.
I like Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) and have for a long time. Again, it’s a great example of a company run by industry experts with 30 years in the business. It has two operating mines, Guanacevi in Durango State and Guanajuato in Guanajuato State in Mexico. Its Q112 results were spectacular: 20% increase on silver production and 26% increase on gold production. We’re looking at a very healthy silver producer. That should increase further, as the company expands both mines in 2012.
If the Fed does more quantitative easing, silver prices are likely to touch $50/oz in the near future. Endeavour is a good company now; when silver gets to $50/oz, it will be a spectacular company. It offers fairly low downside risk with the potential of a big gain.
TGR: Any parting advice?
MB: One of the best pieces of advice I was given is: The best time to make an investment is probably when you are most terrified about making it. When an investment is easy, it is probably near the top. I love to hear people say they will never invest in gold or silver again because they got burned before. If people like that flee the sector, I have less competition.
For folks who despair over the gold and silver market, I say, hold your nose, figure out how much money you can afford to invest and do it. The risk is fairly low and the potential rewards are pretty high.
TGR: Matt, thank you for taking the time to talk to us.
Matt Badiali is the editor of the S&A Resource Report, a monthly investment advisory that focuses on natural resources—from small exploration outfits to equipment companies, to the biggest commodity companies in the world. He also writes S&A Junior Resource Trader, which focuses on the “bloodhounds” of the mining and energy industries—small gold, copper, oil, diamond and uranium miners—and how to earn thousands of percent in the coming years. Badiali has real-world experience as a field geologist, lecturer, researcher and a consultant. He holds a master’s degree in geology from Florida Atlantic University.
By The Gold Report, on April 25th, 2012
 Barry Allan, vice chairman of Mackie Research Capital Corp.’s mining group, is guarded about gold equities from March to May, statistically the weakest period. However, Allan remains bullish on gold stocks through the end of the year and has Buy recommendations on more than 70% of his coverage universe. In this exclusive interview with The Gold Report, Allan points to where he’s finding value during this period of seasonal weakness.
The Gold Report: When we last spoke in May 2010, small-cap mining plays were poised to go on a bull run that would last almost a year. However, the mining sector has underperformed expectations recently. Why do you remain optimistic?
Barry Allan: Market appetite for small-cap equities has eroded as investors clamor for less risky investments. A backdrop to that sentiment is the gold price, which has shown lackluster performance since hitting a peak in mid-2011. The gold price continues to be in a realm of uncertainty, particularly because we are in a seasonally weak period, the second quarter. The second quarter statistically is the weakest quarter for gold equities. There’s no good reason for that, but it is a statistical fact. That has also eroded some of the appetite for small-cap gold stocks.
TGR: What is the best quarter for small-cap gold equities?
BA: The fourth quarter, bar none, is the best period for gold and gold-related equities, particularly small caps. On a percentage basis, there’s less than a 5% probability that the fourth quarter will be a weak quarter in any fiscal year. There are generally good prices at year-end, which tend to carry through to February. Then March presents the highest risk for price decline. I make this joke about the Prospector & Developers Association of Canada (PDAC) conference, which is always in early March: The rule of thumb is wear a warm coat to the PDAC because we always get a cold snap, but also don’t be holding any gold stocks.
TGR: You’ve said that you have no preference between gold and silver and remain bullish on both in the near and long term. What do you see that has you bullish in the near term given the recent slide in prices for both metals?
BA: Trajectories are never straight up. There are seasonally weak periods. Some evidence indicates that perhaps the U.S. economy is starting to set a base. However, I certainly don’t see anything that reduces the attractiveness of either gold or silver looking out to the end of the year. There have been some bumps and grinds, but all the elements that made gold get here in the first place largely remain intact. I’m not prepared to say that I’m negative. I’m cautious about the second quarter, but I’ve been cautious about the second quarter pretty consistently over the last 10 years.
TGR: About 71% of the companies on your coverage list have Buy recommendations. Is it fair to say you see a lot of value in mining equities at the moment?
BA: Generally, the recommendation list follows my positive bias for the prospects of bullion. A lot of the equities that we have looked at are a pretty good value. Then the question becomes are they value traps? Are they going to continue to just look like a good value, but not show any performance over the next 12 months?
TGR: Where is value consistently presenting itself?
BA: The most compelling theme is those companies where the asset is clearly identified as having merit. The problem is usually getting the money to build the mine. There are a number of examples where there is a positive feasibility study or prefeasibility study. There are ounces and, in some cases, reserves in the ground. But how is the cash flow going to get unlocked? Capital costs could be $400–600 million (M) for a company that probably has a market cap of $120M. How will it get that into production? It will take capital to unlock it.
An example is AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE). It has the best growth profile of any junior-to-intermediate by far. Now it must execute. That is pretty compelling.
The other theme is companies that look like they have decent assets, but do they have mines? There’s quite a long list of them: Sandspring Resources Ltd. (SSP:TSX.V), Oromin Explorations Ltd. (OLE:TSX; OLEPF:OTCBB), Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB) and Chesapeake Gold Corp. (CKG:TSX.V). There are at least a couple of levels of assessments that say they are economic, but the capital costs are really intimidating.
TGR: Let’s talk about dividends for a moment and their impact on total return. TheStreet.com reports that the S&P 500 Total Return Index hit an all-time high of 2,449.1 on April 9. Dividend returns kept the index in the black. About 29% of the companies you follow are paying a dividend. What’s your philosophy regarding dividend-paying companies?
BA: I don’t want to sound sarcastic, but it’s only in the last two years that gold companies could even spell dividend. This has been a sector that historically did not pay dividends.
With the evolution of exchange-traded funds (ETFs), gold companies have vocally come out and said, “Look, buy us because at least we will pay you something back where the ETF will not.” They’re attempting to recapture some of the valuation premiums that gold equities historically traded at.
Are dividend-paying gold companies enjoying a return to premiums? The answer is no. It’s been a flawed strategy in the sense that the traditional methodology of tracking premiums was to show good fundamental underlying performance. The notion of dividend paying for gold companies is a little bit of an anomaly in this market. The broader market is yield starved and looking for dividends. As such, dividend paying companies have attracted more attention than not. But the highest yielding gold stock that we have is 2.5%. A number of yield stocks in the overall universe of coverage at Mackie Research have upward of 4% or 6% yields. We’re not buying a 2.5% or 1.5% premium for the yield.
TGR: Newmont Mining Corp. (NEM:NYSE) offers the highest dividend at about 2.5% followed by Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) with 2.3%. Is that enough to lure investors or should these companies be using that money to improve their asset base or increase efficiency at their operations?
BA: It’s nominal. A yielding stock isn’t going to attract much attention at anything less than 2.5%. I don’t know any investor who’s saying, “Wow, I like Newmont because it’s got a 2.5% yield!” They can buy another stock and get a 6.5% yield with much lower risk. I don’t think it cuts it.
TGR: What are some promising stories you want to tell us about today?
BA: If I had to single out a company that is the most likely to enjoy a re-rating in the market irrespective of the gold price, I’d say AuRico. It’s pregnant with many near-term milestones over the next nine months that suggest it will get a re-rating before executing its business plan. It has good growth and a group of people whom I trust to deliver the growth.
Another company that follows in the category of good growth, solid management and decent valuation would be Argonaut Gold Inc. (AR:TSX).
TGR: Argonaut is planning to expand production at El Castillo, one of its operations in Mexico. It also has a new resource at its development project, La Colorada.
BA: What we really like about Argonaut is that its core senior management group has done this before. The company has been quite cognizant that it needed to execute a strategy of growth, but at the same time be able to live within its means. El Castillo was exactly that. Argonaut took the asset, ramped it up and optimized it operations. In the case of La Colorada, it is just going to do that again. Argonaut knows its capabilities and can maximize those without overstretching. We expect steady progress with the existing operations and as it goes into its next phase of development with La Colorada. It’s about solid, reliable execution.
TGR: La Mancha Resources Inc. (LMA:TSX) more than doubled its resource at the Hassaï project in Sudan. That’s a world-class asset. You call La Mancha one of the most misunderstood junior mining stories in the market. Why is that?
BA: La Mancha has been broken out of AREVA SA (AREVA:EPA), a large integrated nuclear entity in France. AREVA had a group of gold-type assets in Sudan, Côte d’Ivoire and Australia. These assets were out of sight, out of mind because they were buried in AREVA. La Mancha really didn’t have much of a market profile at all up until very recently. AREVA is selling the whole company and put La Mancha in market play. Even though the resources at the main mine have expanded, one of the driving elements on the valuation will be the sale process. Interested people have been spooling through La Mancha looking at its assets. This is about AREVA maximizing the valuation that it has in La Mancha. AREVA has had a very disastrous financial performance over the last 18 months. It’s trying to monetize everything and, unfortunately, La Mancha is one part of that.
TGR: Avion Gold Corp. (AVR:TSX; AVGCF:OTCQX) has its main projects in Mali, which recently witnessed a coup attempt. Some order has since been restored and Avion’s share price has begun to rebound. What strategy are you taking with that equity?
BA: We were aware that Mali might be going through some issues, but we still see some value in Avion. We adjusted our target down slightly as a result of production. It was starting to experience some stress at the Tabakoto mine about a week ago. I subsequently had a conversation with management and they are quite pleased that the borders have been opened now and goods and services are freely traveling. Operations are starting to return to normal even though the country itself is probably going to go through a few gymnastics before its issues are solved. We’re not out of the woods, but it certainly is looking a little brighter than it was two weeks ago. The value hasn’t gone away, but we’re waiting to see some better outcome on the political front.
TGR: What did you make of the recent drill results of Southern Arc Minerals Inc. (SA:TSX.V; SOACF:OTCQX), particularly the 83 meters of 0.33 grams per ton gold and 0.080% copper at the West Lombok project in Indonesia?
BA: Southern Arc modified its exploration program for 2012 to focus on areas that are outside of forestry reserve. Historically in Indonesia, a company could operate within a forestry reserve even if it didn’t have the official permits as long as it had applied for them. Southern Arc received counsel that that was probably not a good way to operate at this time.
Those drill results were designed to test a porphyry system in the south and west of Lombok Island. It shows there’s a system bubbling around there. This area has the right geological conditions to yield porphyry systems. The grade was just not one that you would get all excited about, but good intercepts show anomalous mineralization of copper-gold over good regional widths. I look at it as encouraging. The property’s right and the people are right. We’ll see by the way it grows that.
TGR: Premier Gold Mines Ltd. (PG:TSX) recently announced that the Red Lake Haulage Drift crossed onto the Rahill-Bonanza joint venture in the Red Lake district. What does that mean for Premier’s shareholders?
BA: It illustrates that the Rahill-Bonanza property is strategically located. That is significant in the mind of Premier Gold because that drift will provide access to deep exploration potential in the camp and in an area where the mineralization has shown to be quite deep. It’s more of a symbolic statement than anything meaty and juicy. It just says that the company is dead center in that play and is seeing underground access to its project, which will allow it to more completely explore that area. However, you have to qualify the enthusiasm in the sense that Goldcorp Inc. (G:TSX; GG:NYSE) controls the exploration on that joint venture. So, it will be done in Goldcorp’s time, not Premier Gold’s time.
TGR: Premier also entered into an agreement to buy the Cove gold project in Nevada.
BA: I scratch my head a little bit on that acquisition. It’s not clear to me what opportunity Premier sees there other than it was available. My memory goes back far enough to remember when Cove was an operating mine at Echo Bay. I know what the mine did for Echo Bay. I saw what Victoria Gold Corp. (VIT:TSX.V) tried to do with the asset. It’s not clear to me what Premier thinks it can do that two previous operators couldn’t deliver. There’s a small resource there, but the ground was particularly problematic to operate in. It would have to be a particularly good grade to compensate for the poor ground.
TGR: How did Premier make it on your list then?
BA: We have been actively involved in the Red Lake camp going back to the initial days of Goldcorp and Rob McEwen. I have had very good experiences in the area. I feel I have a good handle on what it takes to be successful there. Two companies caught my eye as having the capability to make it: Rubicon Minerals Corp. (RBY:NYSE.A; RMX:TSX), which has been reasonably successful in its exploration, and Premier Gold. Now Premier Gold has moved way beyond the Red Lake camp and has developed a whole U.S. strategy, which involves Nevada. Its Saddle property in Nevada is adjacent to Newmont’s assets. I kind of went to bed in Red Lake and woke up in Nevada. It’s not where I really intended to be.
TGR: I don’t think you’re the first to do that.
BA: I’m sure. Premier is a very aggressive explorer. That’s what I liked about it. But the move to Nevada is a little bit more of a departure.
TGR: Are there any other companies that really interest you?
BA: There is one company facing some issues, which we’re trying to take advantage of for investors. Lake Shore Gold Corp.’s (LSG:TSX) stock certainly would not get you terribly excited, but we recognize there is certainly some very good resource potential. It has already released resources that are well over 7 million ounces. It has an operating mine, but it’s not operating up to where it ought to be. This is another story about execution. We also know that if current management does not get it right, there are others in the Canadian mining industry that will. We’re intrigued by the asset value, and we’re getting it at a good value irrespective of what gold prices are doing.
TGR: Is the message to investors to wait until later in the year for performance and approach with caution?
BA: Yes, take a low-beta strategy through the year, increasing weightings in the August time period to enjoy a better return at the end of the year. Investors just looking for some good companies that will do well irrespective of the gold price should go back to the AuRicos and Lake Shores where there’s value to be unlocked and all they need to do is wait for them to execute over the next 12 months.
It doesn’t really matter what the gold price does. We’re just looking at companies where the value is there and there’s a real proposition that that value is getting unlocked within 12 months.
TGR: I enjoyed speaking with you, Barry.
Barry Allan joined Mackie Research’s investment banking department in 1998 as a mining specialist and transferred to the research department as a mining analyst in 2001. He has worked in the mining sector for over 15 years, serving as a gold and precious metals mining analyst with Gordon Capital, BZW and Prudential Bache. He holds a Bachelor of Science degree in geology and a Master of Business Administration degree from Dalhousie University.
By The Gold Report, on April 24th, 2012
 Many forces influence the gold markets today, sometimes producing confusing indicators of what may lie ahead. In this exclusive interview with The Gold Report, John LaForge, commodity strategist at Ned Davis Research Inc., talks about the numerous and sometimes not-so-obvious factors that he considers in his research and how they influence the gold markets and, ultimately, mining shares. As long as there is no significant improvement in the world monetary situation and real interest rates don’t rise dramatically, he believes the gold price trend remains positive and gold stocks should shine brighter.
The Gold Report: The recent price performance of gold has probably left many investors puzzled about what’s going on amid all the conflicting background news. What’s your broad-picture view?
John LaForge: Gold is telling many stories at the same time. Recently, though, one of the main issues has been seasonality. Gold tends to do best toward the end of the fall, right around the Diwali wedding season in India, up until about now. Springtime through fall is a good time for accumulating, but not to expect big price rises.
The second factor impacting the price recently has been the new Indian taxation issue. India has a trade deficit, and one of the ways it is dealing with that is by trying to tax gold coming into the country. India has been the largest gold buyer for a long time, although China finally did surpass it last year. The two account for about 43–44% of all world gold demand. The Indian tax proposal was met with resistance and strikes. So there has been weaker demand for physical gold in the last few weeks from India.
The third piece is much more macro-oriented. Real interest rates affect the carrying cost of gold. Low real interest rates are very good. When they get up to around 3.5% on a real-rate basis, that’s not good for gold because that’s the carrying cost. Right now, we’re between 0 and 50 basis points, which is very good for gold. But the rate of change in the real rate has slowed and has stopped becoming more negative.
TGR: How big a tax is India proposing?
JL: It’s 2%, which doesn’t sound like much, but it did cause dealers to strike for the whole week and shut up shop, which is a big deal. In the U.S., it would be something like Starbucks shutting up shop because coffee prices had risen too high. In the longer term the tax should have very little impact on the price of gold because gold is an integral part of the culture in India. Any type of tax eventually just gets worked into the price and the consumer just ends up buying a little bit less, but still buying.
TGR: Many gold bugs are predicting gold prices ranging up into the $5,000–10,000/ounce (oz) range in the coming years. How realistic do you feel those numbers are and what combination of circumstances would it take for gold to hit those prices?
JL: Both are truly out-of-the-air type numbers, but, in fact, we once published something on $5,000/oz that was based on time, since the 1970s. When Nixon went off the gold standard in 1971, gold rose from $35/oz to over $800 in 1980. If you apply the current cycle to the 1970s cycle, with gold starting this cycle at $250/oz, the same type of performance would equate to 5,000/oz. today. That’s where the $5,000/oz comes from, but we’ve never actually predicted $5,000/oz.
The $10,000/oz scenario I’ve seen was equated to money supply. To back all the money out there today with some form of gold, even at just, say, 10% (or whatever percentage used), a $10,000/oz value was reached. If consumers and investors do not trust their governments to stop printing money and governments continue to do so, gold does have a shot at much higher levels than $1,700/oz or $1,900/oz, but I don’t know about $5,000/oz and $10,000/oz.
The West is dealing with debt issues and the East is dealing with growth issues and trying to compete with countries that are devaluing their currencies. China doesn’t want to increase the yuan too quickly because it makes exports less competitive.
From what we know about commodity cycles going back into the 1700s, the average bull cycle lasts about 17 years. This commodity cycle has now gone 11 years. Typically the first 10 years of those cycles is when a lot of that easy money is made. That’s when things like gold go up seven times from $250/oz to $1,700/oz. If gold increased seven times from $1,600–1,700/oz, that would equate to $10,000/oz. To get another seven-fold increase from here would be tough.
TGR: Wouldn’t it take some dramatically bad economic circumstances, panics or some combination for people to run it up to those prices in any shorter period of time?
JL: Yes. What you’re describing is a fear-based environment with people coming to the realization that all of this paper money floating around is not worthy. History is littered with paper money that has gone bad, whether it’s Germany’s famous Weimar Republic in the 1920s, or more recently the Hungarian pengo, the Zimbabwean dollar and Argentina’s peso. Most Westerners, particularly Americans, don’t think much about the value of the currency in their pockets.
As more and more of this money is printed everywhere, not just in the U.S. but also in the Eurozone, Japan, China and elsewhere, there’s going to be a realization sometime in the next three to five years that maybe the $20 sitting in a pocket isn’t worth what it used to be. How do I protect myself? People are going to start looking more toward hard assets. Gold is one of those. Land could be another one. But gold is clearly something you can pick up and move. It’s definitely a place to hold some value and protect wealth. It’s not going to be the next Apple. You’re not looking at a $15 stock that goes to $600. That’s not what gold is for. It’s there to protect wealth from this erosion of all of the paper money that’s sitting out there.
TGR: From a trading standpoint, what do you see as a downside for gold in the near term?
JL: The major one would be if confidence comes back that governments are going to stop printing money and be held accountable. That will happen one day, which could be tomorrow or 10 years from now. One thing we do know is that secular cycles do end. Stocks will go through a 20-year bull market, and then they have a bear market. Commodities do the same thing. Gold will do the same thing. The gold cycle of people being fearful of all of this money being printed will end. That might be at $3,500/oz, and then it just fades for 10 years and settles around $2,500/oz. You still would have made money if you bought it today.
Confidence is the big factor. One way to track confidence is to look at gold in multiple currency terms: the euro, the yen, the rand—not just the dollar. Gold is rising against all currencies in the world. What would worry me is when that stops. As long as the current uptrend continues, I’m a happy camper.
TGR: It appears we’re in the midst of a near-term correction or maybe on the upside of one that just occurred. Is there some more potential downside?
JL: Yes, there is. From our technical work, if gold can’t hang in the $1,660–1,670/oz range, the next support level is $1,565/oz. Then there is another support level around $1,480/oz, and finally a big one around $1,300/oz. We don’t think $1,300/oz is in the cards because we would need to see some pretty dramatic confidence come back in governments worldwide. But $1,565/oz is definitely a possibility. Gold currently sits below both its 200-day and 50-day moving averages, which is technically bad news. It’s basically showing that the trend has slowed and gold is consolidating. That goes with one of the first points we talked about: seasonality. From a yearly perspective, this is one of those times where gold usually takes a breather every year.
TGR: The Chinese seem to be pretty excited about gold. One of the charts in your research shows that Chinese imports of gold really took off dramatically last June and have continued doing so. Do you expect this to continue and what are the implications for the market if it does?
JL: It probably will. Everyone assumes that China is a big buyer of all commodities. China is also the largest producer of gold in the world and hasn’t really tried to buy much gold outside of the country. Most has been produced and consumed internally, although it’s hard to get data on what it owns. The chart you’re referencing reflects Hong Kong import numbers I’ve been looking through and shows that the Chinese are now starting to buy gold in droves through Hong Kong. This tells me that it is basically consuming everything it can internally and now it’s looking outside. That is a game changer.
A year ago China imported about 5 tons (t) gold a month through Hong Kong. That’s been fairly consistent over time. We can track 5–15 t/month through Hong Kong. But around last June, it suddenly jumped to 25 t for the month. Then it went to 40 t. Then it went to 55 t. In November, it peaked at 100 t. If it kept up that pace, which it probably won’t, that would be 1,200 t/year. That’s about 45% of yearly mine supply in the world. So China is one of these wild cards because it hadn’t really been out there in the market like this.
If China does with gold what it’s been doing with other commodities, it could keep that 11-year positive cycle going by looking for gold outside its borders. We’re going to get a better picture of how much it truly wants to buy. The numbers could be pretty staggering and could be multiples of what we saw last year and the year before.
TGR: Is there any way of knowing how much of that would be official government buying versus retail buying?
JL: Unfortunately, the numbers aren’t broken out into how much is the People’s Bank of China (PBOC) and how much is consumer. I think it’s pretty safe to say, though, that to have such a big jump, from 5 t to 100 t/month, the PBOC is somehow buying some of that. It’s hard to believe it’s all consumer driven.
TGR: Most of our readers are mainly interested in the mining stocks that have really lagged metals price performance. It’s a frustrating scenario that has been going on for some time now. What do you think are the main causes for this disconnect?
JL: One is production where a lot of the larger and mid-cap miners just don’t have the production growth. If you’re an investment manager running $1 billion and you see the price of gold going up, you have a couple of options. One is just to get long the price of gold through the SPDR Gold Trust Fund (GLD) or physical exchange-traded funds (ETFs) or just buying physical metal.
Gold miners have to worry about production and energy costs. They’re not producing at the levels that they’d want because a lot of the ore grades are now much lower than they were 30 to 40 years ago. That’s a classic example of a “peak” commodity. Peak oil or peak gold doesn’t mean we’ve run out. It just means we’ve reached that point where the easy stuff has been found and now it’s just going to be harder to find the rest, either in countries you don’t want to be in or because the ore grades are down.
We’ve found that professional investors are more interested in just getting access to the price of the metal itself. When investors buy miners, unfortunately, they are dealing with the lack of production growth and, at the same time, rising energy costs. From about 1996 to 2008, the price of oil rose at a faster rate than the price of gold, which is very surprising to most people. They think that because gold’s been up 11 years in a row, it’s somehow beating every other commodity. That’s just not the case. Gold mining is typically one big dirt-moving operation that’s heavily tied to energy. Additionally, labor costs have also been killing them.
There is a positive side for anyone who owns miners. They are now about as cheap as they’ve been versus gold since the mid-1980s and may get cheaper still due to ETFs like the GLD. We’re still telling people to stay allocated to the price through the GLDs, but it’s getting to a point where some of these miners are very, very appealing from a bargain perspective.
TGR: Do you see any particular catalyst that could actually get people really interested in buying shares anytime soon?
JL: Unfortunately, no, unless we start seeing big production numbers out of these guys. If you can aggregate the group and get some decent production numbers, I think you’ll start seeing people go back and be very interested. The other thing that could happen, which we haven’t seen yet, is merger and acquisition (M&A) deals. If you start getting some bigger M&A deals, that could be a catalyst for people to realize how undervalued these names are compared to the price of gold. But because we haven’t seen that, there is no premium in any of them for those types of buyouts.
TGR: Is it just going to take the price/earnings (P/E) ratios getting to such low levels that average investors are going to start buying them on the basis of P/Es rather than the business they’re in?
JL: You also need a decent stock market. The last six months have been a little strange because the stock market has gone up, but gold miners have trailed gold, which is usually not the way it works. Historically speaking, there have been two drivers of gold stocks: gold and the stock market. Gold stocks don’t seem to be winning under either scenario right now, unfortunately.
TGR: In reviewing all of your different research reports, you come up with some pretty interesting correlations between gold and various other prices and economic factors. Are there one or two that you’d like to particularly emphasize that you think might be the best indicators of what might lie ahead in the gold market?
JL: The No. 1 indicator for gold prices is real interest rates—the nominal interest rate minus the inflation rate. Below 3.5%, gold is usually good to go. Above 3.5%, it becomes a real issue. The other piece to that is the rate of change. In essence, the 10-year real interest rate is zero right now. If it starts moving from here toward that 3.5%, that’s typically a headwind for gold.
The second one, which really has to be watched closely, is gold in all of these different currencies. Right now, the charts all look very similar. If gold continues to rise versus all these different currencies and there’s still that fear factor over money printing, gold is still good to go. If it starts to fade, that’s the signal I’d watch out for that maybe this 11-year run is due for a breather. We hope we’ll have some time to give our clients some warning that it’s rolling over and that the gold story is done for a little while. But we’re not there yet, and it’s all still positive.
TGR: Would you like to take a shot at predicting where gold might be going in the next year or so?
JL: I don’t put out a formal prediction. My thoughts at the beginning of this year were that gold was going to be dead money in 2012 and just sit there after a good run. I didn’t have anything to back that up other than time and the fact that gold was up each year for the past 11 years. Looking at the Dow Jones Industrial Average back into the late 1800s, its longest run up on a consecutive basis was nine years, and that was in the 1990s. Before then, the most the Dow had ever strung together was five consecutive positive years. Assets usually don’t run up in straight lines as gold has done.
My prediction for the year was for sideways trading in that $1,600–1,700/oz range. I was looking a bit like a fool in February when we were approaching $1,800/oz again, but I still think that’s the case. Europe is the big question and if Spain becomes a problem like Greece was last year, $1,700/oz is probably light and it will probably be closer to $1,800/oz or $1,900/oz. We’ll probably look back on 2012 and say it was a good year to accumulate gold, but not one in which you made big money in gold.
TGR: Thanks for talking with us. We’ll have to see whether you’ve been overly optimistic or overly pessimistic.
JL: That sounds good. Thanks.
John E. LaForge leads Ned Davis Research’s Commodity Team, which provides research across the commodity spectrum, including equities. The team covers the most widely followed energy, metal, agricultural and soft commodities and equities, providing both commentary and strategy. Commodities and commodity equities are global in nature and sensitive to economic realities, so LaForge works closely with all of NDR’s other strategy teams. LaForge has over 17 years of investment experience, primarily in asset management. Almost eight of those years were spent managing $1.2 billion across seven mutual/hedge funds under multiple client platforms for Phoenix Investment Partners before he became chief investment officer of SRQ Capital Management in 2005. Over the course of his career, LaForge has been a frequent contributor to the media, including CNBC, Bloomberg and many print media publications. LaForge holds a Bachelor of Science in finance and Master of Business Administration from the University of Tampa.
By The Gold Report, on April 23rd, 2012
 So far, 2012 has been a banner year for the stock market, which recently closed the books on its best first quarter in 14 years. But Casey Research Chairman Doug Casey insists that time is running out on the ticking time bombs. Next week when Casey Research’s spring summit gets underway, Casey will open the first general session addressing the question of whether the inevitable is now imminent. In another exclusive interview with The Gold Report, Casey tells us that he foresees extreme volatility “as the titanic forces of inflation and deflation fight with each other” and a forced shift to speculation to either protect or build wealth.
The Gold Report: You told us about two ticking time bombs last September—the trillions of dollars owned outside the U.S. that could be dumped if the holders lose confidence and the trillions of dollars in the U.S. created to paper over the 2008 liquidity crisis. It’s been six months since then. Have we averted the disaster or are we closer than ever?
Doug Casey: Things are worse now. The way I see it, what’s going to happen is inevitable; it’s just a question of when. We’re rapidly approaching that moment. I suspect it will start in Europe, because so many European governments are bankrupt; Greece isn’t an exception, it’s the norm. So we have bankrupt governments trying to bail out the European banks, which are bankrupt because they’ve loaned money to the bankrupt governments. It’s actually rather funny, in a perverse way. . .
If it were just the banks and the governments, I wouldn’t care; they’re just getting what they deserve. The problem is that many prudent middle class people are going to be wiped out. These folks have tried to produce more than they consume for their whole lives and save the difference. But their savings are almost all in government currencies, and those currencies are held in banks. However, the banks are unable to give back all the euros that these people have entrusted to them. It’s a very serious thing. So European governments are trying to solve this by creating more euros. Eventually the euro is going to reach its intrinsic value—which is nothing. It’s the same in the U.S. The banks are bankrupt, the government’s bankrupt and creating more dollars so the banks don’t go bust and depositors don’t lose their money.
I’m of the opinion that if it doesn’t blow up this year, the situation is certainly going to blow up next year. We’re very close to the edge of the precipice.
TGR: Is the problem the debt, or all of the currency that has been pumped in?
DC: It’s both. We have to really consider what debt is. It’s the opposite of savings because savings means that you’ve produced more than you’ve consumed and put the difference aside. That’s how you build capital. That’s how you grow in wealth. On the other side of the balance sheet is debt, which means you’ve consumed more than you’ve produced. You’ve mortgaged the future or you’re living out of past capital that somebody else produced. The existence of debt is a very bad thing.
In a classical banking system, loans are made only against 100% security and only on a short-term basis. And only from savings accounts that earn interest, not from money in checking accounts or demand deposits, where the depositor (at least theoretically) pays the banker for safe storage of his funds. These are very important distinctions, but they’ve been completely lost. The entire banking system today is totally corrupt. It’s worse than that. Central banking has taken what was an occasional local problem, a bank failing from fraud or mismanagement, and elevated it to a national level by allowing fractional banking reserves and by creating currency for bailouts. Debt—at least consumer debt—is a bad thing; it’s typically a sign that you’re living above your means. But inflation of the currency is even worse in its consequences, because it can overturn the whole basis of society and destroy the middle class.
TGR: What happens when these time bombs go off?
DC: There are two possibilities. One is that the central banks and the governments stop creating enough currency units to bail out their banks. That could lead to a catastrophic deflation and banks going bankrupt wholesale. When consumer and business loans can’t be repaid, the bank goes bust. The money created by those banks out of nothing, through fractional reserve banking, literally disappears. The dollars die and go to money heaven; the deposits that people put in there can’t be redeemed.
The other possibility is an eventual hyperinflation. Here the central bank steps in and gives the banks new currency units to pay off depositors. It’s just a question of which one happens. Or we can have both in sequence. If there’s a catastrophic deflation, the government will get scared, and feel the need to “do something.” And it will need money, because tax revenues will collapse at exactly the time its expenditures are skyrocketing—so it prints up more, which brings on a hyperinflation.
We could also see deflation in some areas of the economy and inflation in others. For example, the price of beans and rice may fall, relatively speaking, during a boom because everybody’s eating steak and caviar. Then during a subsequent depression, people need more calories for fewer dollars, so prices for caviar and steak drop but beans and rice become more expensive because everybody is eating more of them.
Inflation creates all kinds of distortions in the economy and misallocations of capital. When there’s a real demand for filet mignon, there’s a lot of investment in the filet mignon industry and not enough in the beans and rice industry because nobody is eating them. And vice-versa. And it happens all over the economy, in every area.
TGR: But inflation rates don’t seem to reflect the vast amounts of currency that central banks have injected into the U.S., European and other economies. The U.S. inflation rate was 2.93% in January and 2.87% in February. We haven’t seen signs yet either of a hyperinflation or a serious deflation that we were warned would come with quantitative easing (QE). Does that mean QE is working after all?
DC: No. It’s not just the immediate and direct consequences of what they do—everybody loves it when trillions of dollars are created. It feels good to have lots more purchasing media. The problem arises with the indirect and delayed consequences. All these dollars and euros—and Chinese yuan and Japanese yen—that have been created have basically gone into the banks, but the banks are not lending them out. The banks are afraid to lend and a lot of people don’t want to borrow because they’re afraid of taking on more debt. So the dollars that have been created, mostly invested in government paper, sit on the banks’ balance sheets. They are not circulating in the economy at the moment. That’s why prices aren’t skyrocketing right now.
That’s point number two, though. Point number one is that I wouldn’t trust those inflation figures in the first place. The governments of Western Europe and the U.S. fudge inflation figures as certainly as the Argentine government fudges them, just less overtly and outrageously. They do that because they want to keep the perception of inflation down; they don’t want people panicking, which is a pity, because the public should urgently do something to protect their capital. They also don’t want to see Social Security payments and other payments that are tied to the consumer price index go up. They don’t have the tax revenues to pay for them and will have to print even more money, which just exacerbates the problem. Official inflation numbers are unreliable; only somebody very naïve—like a TV anchorperson—could possibly believe them.
If you think of inflation as an increase in the money supply above the increase in real wealth—which is actually what the word means—the inflation rate is actually quite high at the moment. Real wealth is being created at lower rates than it historically has been, while the money supply is increasing tremendously. It’s just a question of when that inflation rate manifests itself on a retail level. You’ve got to think like a real economist, not a political hack like Joseph Stiglitz or Paul Krugman. You have to see not just the immediate and direct consequences of something, but the indirect and delayed ones.
TGR: Given that this is an election year in the U.S., won’t the government do everything possible to maintain a stable market and stop inflation?
DC: Sure, the government wants things stable. I have no doubt it is trying to keep the stock market up. It wants the stock market to stay high because pension funds and insurance companies and the public at large are invested in the stock market. It wants interest rates low, although artificially low interest rates are an economic disaster in that they encourage people to borrow more and save less. It would prefer to see precious metals, and all other commodities, at low levels. The argument is made that the governments of the world, especially the U.S. government, are manipulating the prices of gold and silver to keep them down, because when they increase, it’s like financial alarm bells going off.
But they can’t control the prices of the precious metals. In the real world, cause has effect. When you create trillions of currency units, eventually the price of those currency units relative to other things will go down. That’s called inflation. Whether he’s lying or he really believes it, Fed Chairman Ben Bernanke said he can control the levels of inflation. When it gets too high, he thinks he can rein it in somehow.
The current world monetary system is going to come undone. That’s my prediction, and I’m betting on it massively, personally.
TGR: You’ve talked about the possibility of abandoning paper currency altogether and going to a digital system.
DC: The most important thing is to get the government out of money. There should be a high wall between the state and religion and an equally high wall between the state and the economy. I don’t even like to talk about what governments “should” do as far as money is concerned because the governments shouldn’t be involved in money—period. Money is a medium of exchange and a store of value. It shouldn’t be a political football, nor should it be used as an indirect form of taxation, which is what inflation is. It should be a pure, 100% market phenomenon. Central banks should, therefore, be abolished. Paper currency should cease to exist—except as a receipt for money held on deposit. Historically, that’s how it originated.
You could use any kind of commodity as money, but gold has proven since the dawn of civilization to be uniquely well suited for use as money. It’s a market, which is to say a voluntary, phenomenon. Whether you represent that gold with bank notes printed by individual banks or by digital currency—which I’m sure the world is going to—makes no difference. But having the state in charge of currency is idiotic.
TGR: You’ve written about China moving away from the dollar. Do you see that happening gradually or all of a sudden? And would it be in favor of its own currency or more investment in gold? What impact would that have on gold prices?
DC: First of all, I think the nation-state as a form of organization is on its way out, and that a 100 years from now people will look back at countries like China and the U.S. the way we look back at medieval kingdoms today. In the meantime, the dollar is important because it’s the numéraire for trade all over the world. At the same time, fewer and fewer people trust it, and they increasingly realize that it’s the unbacked liability of a bankrupt government.
Eventually, it’s going to be replaced by something else. India and Iran are trading between each other using gold and oil. Why use a piece of paper issued by a hostile and unreliable third party? The Russians and the Chinese can see how crazy it is to trade between each other using dollars, which all have to clear in New York. But people are still accustomed to using currencies issued by nation-states, and the U.S. dollar is everywhere and is therefore convenient. But it’s a hot potato. People no longer trust it. I suspect the Chinese yuan will replace the dollar gradually—assuming the Chinese don’t destroy the yuan as well. They’re also creating trillions of the things to keep the economic bubble in China from imploding.
Before the Chinese yuan can replace the dollar, people must have confidence in it. The best way they can gain confidence in it is if the volume of yuan is limited and redeemable by the issuer in something real, something tangible. That’s going to be gold. So I expect China will continue buying large amounts of gold to back its currency. China is already the world’s largest gold producer. Considering that only about 6–7 billion ounces of gold have ever been mined in all the world’s history, China alone could drive the price of gold much higher.
TGR: At your Recovery Reality Check summit in Florida April 27–29, you’ll be talking about how business cycles have been turned on their heads. Is this the time for investors to sit tight, making only small adjustments to portfolios, or must they take more drastic action to protect their wealth or, better yet, profit from volatility?
DC: I think volatility is going to go way up in the future as the titanic forces of inflation and deflation fight with each other. This is a very poor time to make big bets in almost any conventional market because it’s impossible to tell how things will finally settle, where the next major war will be and so forth. Stock markets around the world are not cheap now and bond markets are fantastically overpriced. Currencies are no more than floating abstractions. Commodities have been in a long bull market, so they’re no longer a low-risk bet. Real estate—the most obvious thing for bankrupt governments to tax—is dangerous. In the developed world—especially in the U.S.—it floats on a sea of debt, which has driven it to artificially high levels. It’s coming down as we speak, but it’s nowhere near a bottom.
So there are very few places where people can still attempt to preserve capital. Everybody is going to be almost forced to be a speculator to try to stay in the same place. Speculating means capitalizing on politically caused distortions in the marketplace. That’s the proper definition of the word.
TGR: What can people speculate on?
DC: Unfortunately, they have to second-guess where the money will go. I’ve always liked resource stocks, especially resource exploration stocks. It’s a tiny market. If a fire gets lit under gold and silver, and I think it will, companies in this nanosector could explode 10, 20 or 50 times upward in price. It’s happened many times in the past. Right now, these stocks are relatively cheap, so I like that as a speculative vehicle.
TGR: Rick Rule has cautioned against generalizing about the entire junior mining sector as a whole, because so many of these companies don’t find anything. How do you decide which resource investments are worth looking into? Are there criteria? Is there some kind of a litmus test that you use?
DC: Rick is absolutely correct about that. Although the sector is capable of going upwards 10 or 20 times as a whole, most of the stocks in it are total garbage. The only gold, uranium, silver or whatever appears on their stock certificates, not in the ground they control. There are thousands of these little stocks, and yes, we have criteria we use to evaluate them. We use a tried-and-true due diligence process we call The Eight Ps of Resource Stock Evaluation to separate the wheat from the chaff among speculative investment opportunities.
TGR: Would you share that with us?
DC: Sure. This is a guide to help investors ask the right questions about every individual company they’re considering. This list comprehends the essential, but you could write a book about each of these eight points.
- People: Who are the key players in the company and what are the track records of the companies they’ve managed? This is by far the most important criteria.
- Property: What resources are in hand, and what (if any) are the additional resources they expect to find? How well proven are they? Assessing this takes geological and engineering expertise.
- Phinancing: Does the company have enough cash to meet its next-phase objectives or have the ability to finance the cost of reaching those objectives? It’s no longer a case of grubstaking a prospector and his mule.
- Paper: Capital is almost always raised from the issuance of new shares. Is there a lot of cheap paper out there that will keep the share price down? Will new or existing warrants or new shares dilute your own shares? Who owns most of the paper?
- Promotion: How and when is the company going to get itself (and its stock) noticed?
- Politics: Is the country or region mine friendly and stable? Are foreign investors welcome? Is there environmental resistance?
- Push: What’s going to move this stock? Drill results, merger or acquisition, increase in the price of the underlying commodity, resolution of a legal issue?
- Price: What are the potential price moves of the underlying commodity that could have either a positive or negative impact on the value of the company?
TGR: How hard is it to find a company that passes muster on all eight counts?
DC: It’s very hard. It’s hard enough to look at the basic statistics of thousands of companies. Then you look at the people behind them. Generally, we try to find the people first. We stay away from those who have no history of success and have established that they have questionable characters. We look for people with long histories of success or appear to be about to embark on a lifetime of success. The most important piece is people. That’s what we really look for most of all.
TGR: Based on all the calamities that could occur, how will you adjust your investing philosophy?
DC: Let me put it this way. We’re going into something that I call The Greater Depression, much worse and much different than what happened in the 1930s. I think my friend Richard Russell said it best: “In a depression, everybody loses. The winner is the guy who loses the least.” It’s very tough to keep capital together today, much less make it grow in the years to come.
But I think it’s possible. The thing to remember is that most of the world’s real wealth will remain in existence regardless of what happens. The key is to position yourself so that more of it falls into your hands as opposed to falling out of your hands. That’s what we’re trying to do, to increase our relative share of the wealth in the world. We’re not looking at boom times. What’s coming will be the opposite of what we experienced during the artificial inflationary boom of the 1990s, where everything was going up—stocks, real estate and so forth. This is a time when, in real terms, most things will lose value. Most people will experience a real decline in their standard of living.
TGR: As we’ve discussed, at its root, paper currency is a substitute for something of value. Energy, similar to gold, has intrinsic value. It’s always in demand. In the past, you’ve expressed optimism about uranium, natural gas and oil. As the dollar becomes suspect, do you foresee sources of energy becoming more valuable?
DC: Absolutely. I’m very bullish on oil. The world runs on fossil fuels today because they’re ideal sources of highly concentrated energy. Unfortunately, all of the easily available, cheap fossil fuels have basically been found. The low-hanging fruit is gone. This is what the peak oil theory is about. Plenty of oil remains, but it’s going to be more expensive to get it. To find oil now requires going to exotic places without infrastructure and with big political problems. It requires going much deeper into the ground, exploring under the ocean, using new technologies, and so forth.
Gas is secondary to oil when it comes to concentrated sources of energy. Of course, with the development of new technologies, primarily horizontal drilling and new fracking techniques, a huge amount of natural gas has become available all over the world. But it takes tremendous capital to retrieve it, and it also faces political problems.
But in summary, I’m bullish on energy of all types. There is plenty of fuel out there. It’s just a question of the price level, so it becomes economic to retrieve it.
TGR: So how do you invest in finding the rest of what’s out there?
DC: You look for companies that are exploring for it. One of the important things that makes me very bullish on oil is that most of the oil in the world today—something like 80%—is not owned and produced by BP Plc (BP:NYSE; BP:LSE), Exxon Mobil Corp. (XOM:NYSE), Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) and companies like that. It’s mostly owned and produced by national oil companies such as those in Mexico, Iran, Saudi Arabia and Venezuela. These state oil companies are universally corrupt and inefficient. The profits from the oil are generally used as piggybanks by those governments, not to build capital and find more oil. Furthermore, where governments allow private exploration, such as Iraq, they take about 80–90% of the potential profits from oil, which of course discourages exploration and exploitation of the resource. The problems are almost entirely political, but they’re big problems.
TGR: Speaking of the politics of energy, are you still bullish on uranium in light of the politics of what’s gone on since the Fukushima meltdown?
DC: Yes. I’ve said it before and continue to say it. There’s no question that nuclear power is by far the safest, cleanest and cheapest type of mass power generation available. Fukushima survived one of the most severe earthquakes in recorded history with no problem; it’s just a pity they didn’t adequately plan for a 45-foot tidal wave on top of it. In addition, those plants basically were 50-year-old technology. If it weren’t for political obstructions, we’d be using vastly improved technology. But it’s not just uranium. Thorium is actually a much better fuel from many points of view and probably would have been used as a fuel instead of uranium except that the governments of the world found uranium useful for nuclear weapons as well as nuclear power.
Nuclear power is definitely the answer, but as you point out, it’s a question of political problems. Across the resource industry, in fact, it’s all politics. When you find a gigantic resource of some type, you can count on lawsuits, not-in-my-backyard opposition and political theft. Those are among the reasons that I don’t see the resource industry as a place to make investments. It’s only a place where you can speculate.
TGR: So what should long-term investors do to protect themselves?
DC: Because the big problems in the world today all are political, the critical thing is to diversify politically and internationally. You can’t have all your assets under the control of one government or in one country. Then, of course, you have to find the right place to put the money within that framework.
TGR: How do you do that?
DC: I can write a book on that.
TGR: Or stage a summit? You have quite a faculty lined up.
DC: It is an impressive group. Actually, this summit has dual overarching purposes. As we’ve discussed, the massive amounts of money the world’s governments have unleashed in their economies have lit a small fire of recovery. We’re going to talk a lot about whether the world is truly on a path to recovery or whether investors wouldn’t be wise to develop and implement Plan B now, given that the extreme levels of debt that were such a major factor in creating the current crisis have not been reduced. To me, that strongly suggests that this so-called recovery is unsustainable and calls for moving into Plan B. Part of Plan B involves identifying optimal investment strategies for the markets ahead.
TGR: What sorts of takeaways are in store for people who attend?
DC: Let’s have David Galland, who’s been instrumental in preparing for this summit, respond to that. (A senior market strategist, Galland is managing director of Casey Research LLC, managing editor of The Casey Report, International Speculator and Casey Investment Alert and author of Casey’s Daily Dispatch.)
David Galland: We expect the takeaways will be good answers to many burning questions. As Doug has suggested, the government says the recovery is real and your broker will tell you it is, yet the underlying data suggests that it may be a paper tiger. So, what’s the hard truth? Should you be moving aggressively into rebounding equities? Or is the recovery a mirage that will dissipate in a second crushing leg down for the economy and traditional investment markets? What are the road signs you need to pay close attention to? How can you position your portfolio to do well in either scenario and, most importantly, to hedge against the worst case? Should you worry about inflation or deflation? Neither? Or both? Will the gold and silver you’ve been holding turn to lead and pull your portfolio down? Or is loading up on corrections still the right thing to do?
TGR: These summits are always sold-out affairs. Is this one full already?
DG: Just a few spots remain as we speak.
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Doug Casey, chairman of Casey Research LLC, is the international investor personified. He’s spent substantial time in more than 175 different countries so far in his lifetime, residing in 12 of them. And Casey’s the one who literally wrote the book on crisis investing. In fact, he’s done it twice. After The International Man: The Complete Guidebook to the World’s Last Frontiers in 1976, he came out with Crisis Investing: Opportunities and Profits in the Coming Great Depression in 1979. His sequel to this groundbreaking book, which anticipated the collapse of the savings-and-loan industry and rewarded readers who followed his recommendations with spectacular returns, came in 1993, with Crisis Investing for the Rest of the Nineties. In between, Casey’s Strategic Investing: How to Profit from the Coming Inflationary Depression broke records for the largest advance ever paid for a financial book.
Casey has appeared on NBC News, CNN and National Public Radio. He’s been a guest of David Letterman, Larry King, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin and Maury Povich. He’s been featured in periodicals such as Time, Forbes, People, US, Barron’s and the Washington Post—not to mention countless articles he’s written for his own websites, publications and subscribers. Casey Research currently produces 11 publications on a variety of investment sectors and maintains two websites.
By The Gold Report, on April 19th, 2012
 Resource investors are always looking for the next untapped region and Richard Stanger thinks he has found it. President and founder of the Cambodian Association of Mining and Exploration Companies, Stanger has been working to get the word out about Cambodia, a growing, stable country with the right geology for some big discoveries. In this exclusive interview with The Gold Report, Stanger gives an insider’s view of the secrets to investing in Cambodia and explains why he’s expecting a land rush.
The Gold Report: Cambodia’s gross domestic product (GDP) is roughly $13.2 billion (B) annually, or around $1,000 a person, according to the Association for Southeast Asian Nations. It’s clearly an impoverished nation, but until the last few years, the country has done little to develop its mineral wealth. Why?
Richard Stanger: Mainly because there was almost no information available about the geology of the country. Most of it was destroyed during the civil war. The country is a bit of a secret. People don’t know much about Cambodia, or, in some cases, even where it is located. The infrastructure was pretty poor until recently. Roads were very difficult to travel. Telecommunications were really undeveloped. There was almost no infrastructure available for exploration.
TGR: How did you find your way to Cambodia?
RS: I was looking for a country that had the right geological setting and a good government with a legal system that is workable. Cambodia fit that bill.
TGR: What is the country’s current GDP growth rate?
RS: It’s averaging about 6.5% at the moment. I believe that it will be significantly higher this year. It may be double-digits.
TGR: What metals and minerals is Cambodia prospective for?
RS: It’s one of those countries where there are not many outcrops. It’s not so easy to walk around in the rocks and find things, but they’re there. There’s a lot of sediment covering the country. However, the country is very prospective for gold, copper and base metals, iron ore and other industrial metals such as zirconium, graphite and titanium. It covers a wide range.
TGR: What would tempt junior mining companies to invest and explore for metals there?
RS: The key to the country is that it’s open for business and has a stable, committed government that wants to develop the economy. There is an economic and legal framework for companies and foreign investors to come and work. The country has great financial controls. It’s easy to move money in and out of Cambodia.
The people are really excellent—honest, welcoming and hard working. I can’t say enough about them. It’s a very safe country. The operating costs are low. There is rapidly developing infrastructure, as well as infrastructure specifically related to the mining exploration industry. There are a number of drilling companies and geological services here.
TGR: Are there any assay labs?
RS: Two recently opened.
TGR: Going back 5 to 10 years, Cambodia is similar to what country?
RS: Some people keep saying Colombia, however Mongolia is a really good comparison. I went to Mongolia fairly early. Nothing actually happened there for five years and then it just started booming.
TGR: After decades of civil war, Cambodia is slowly finding its feet and has established democratic elections under a constitutional monarchy. However, according to Transparency International, Cambodia is the fourth most corrupt nation in the world. What are your thoughts on that?
RS: As an investor, I don’t understand that rating at all. I’m kind of perplexed about it, really. That rating is purely perceptual and it’s non-empirical. I actually think they just flat out got it wrong. And I’m not the only person that would say that.
TGR: What are some risks associated with Cambodian investment?
RS: It’s really difficult to find too many risks. Cambodia has internationally recognizable laws, a very stable government that won by a landslide in the last election, infrastructure development and an incredible number of companies pouring into the country to invest. The development is exponential. I know it sounds unrealistic, but there are very few reasons not to invest in this country. It’s just been a secret for a long time.
TGR: Foreign direct investment in Cambodia has almost doubled to $5B within the last year. Where is that money going?
RS: That figure is likely to be a lot higher this year. A lot of that money is going into manufacturing. There are some significant manufacturing facilities being constructed here. It’s also going into agriculture, banking and finance, construction, infrastructure and development, tourism and food processing. There really isn’t a mining industry in Cambodia yet. It’s really an exploration industry at this point and therefore exploration expenditure is not included in foreign direct investment.
TGR: When money starts pouring into a country that’s never really seen that kind of prosperity before, things can go wrong. Is the government that’s in place able to manage this newfound windfall and development?
RS: I really think so. There’s been a lot of growth behind the scenes over the last few years. This government is very aware of its position, not only in Asia, but also globally. It’s been careful to develop the economic framework for investment. The government has well-educated and clever people with international experience, particularly the prime minister, senior government leaders and advisers. There are a lot of younger people coming back to Cambodia after studying and working overseas to help develop their own country.
TGR: Does Cambodia have any form of capital markets?
RS: The stock exchange, which has been in development over the last three years, opened this month and has run an initial public offering of the Phnom Penh Water Authority. Cambodia has proper securities laws, a regulator and an exchange with one company trading so far.
TGR: Not surprisingly, the Chinese are already in Cambodia. Guangxi Nonferrous Metals Group invested $22 million (M) into construction of a steel processing plant there. Late last year, China’s state-owned Xinhua news agency reported that Chinese companies planned to invest as much as $500M in Preah Vihear province. Do the Chinese plan to explore for gold in Cambodia?
RS: There are a couple of companies here looking for gold. However, Chinese companies are generally not interested in exploration. They’re more interested in development.
TGR: What should investors know about Cambodia in your view?
RS: Cambodia is an investor friendly country with a stable democracy, excellent investment laws, some incentives and a legal and fiscal system constructed to encourage development. It has a world class banking system with more than 50 banks, a number of large commercial banks and none were impacted in the global financial crisis. There are a lot of places that investors can put their money in this country. There are so many opportunities here and it is still early days.
TGR: What are some of the mining companies currently operating in Cambodia?
RS: The publicly listed companies are Angkor Gold Corp. (ANK:TSX.V), Brighton Mining Group Ltd. (BTN:ASX), Southern Gold Ltd. (SAU:ASX), Indochine Mining Ltd. (IDC:ASX) and Renaissance Minerals Ltd. (RNS:ASX). There are also unlisted companies, such as Liberty Mining International Ltd.
TGR: What are the primary commodities being sought by those companies?
RS: Gold, copper and base metals are the prime commodities being sought. Gold is the highest priority at this stage because it’s the easiest to develop in a country that hasn’t had a mining industry previously.
TGR: Since it’s really about exploration at this point, what companies have locked up a significant land package? Which have drills turning?
RS: The most active company at this stage is Angkor Gold. It has three drill rigs operating, more than 10,000 meters (m) planned this year and probably 150 people working in the field. It’s working on multiple targets and has a large land holding. It’s run by the visionary CEO Mike Weeks, who is also philanthropic in his outlook. He does a lot of social development work, as well as the mining exploration.
TGR: He’s originally an oil and gas guy. Does exploring for gold in Cambodia seem like a bit of a stretch?
RS: He came from an oil and gas background, but I can tell you from spending time with him that he’s 100% focused on developing Angkor Gold.
TGR: Does Angkor plan to option some of those properties to other companies?
RS: Not at this stage, I believe. However, it could be open to that further down the track when some of the projects get closer to the resource stage. I’ve spoken with management and they would be open to talking to other companies about coming in to explore some of the other targets because the company does have a large land package.
TGR: Has Angkor had any positive drilling results?
RS: Yes. The two main areas it’s focusing on have quite different geological settings. One of them is a more structurally related, epithermal gold vein system with a potential of at least 0.5 million ounces in the first stage. The other area is a copper-gold-moly porphyry system, which is being actively drilled right now. Both of those areas—the second one in particular—have huge potential and are getting good results.
TGR: Has the copper-gold system been explored before?
RS: The area with the copper-gold-moly system has been explored since 2005. This year, Angkor is getting close to the source of a very large anomalous area.
TGR: Are there other companies on the ground trying to prove up some ounces with the drill bit?
RS: Renaissance Minerals has a drilled up Indicated resource. It has quite a land package and a growing resource of currently about 720,000 ounces at the Okvau gold deposit. I am aware that the company is planning a significant ongoing drilling program to commence almost immediately. It has probably drilled about 50,000m and has a number of other immediate targets in the area. Renaissance is a success here and will be one of the early starters as far as mining is concerned.
TGR: Are any other companies that far along?
RS: There are other active companies, such as Indochine Mining. It has a big land package and is actively exploring it. Indochine has carried out extensive field work and drilling programs along with Southern Gold and Brighton Mining Group. However, I believe those companies do not yet have anything like the advanced projects of Angkor Gold. I think it’s safe to say Angkor will be the next company up and running with a resource inside of a year or so.
TGR: Are you getting more calls from your friends in Australia these days?
RS: Interestingly, I’ve had one company after another up here in the last six to eight months. It’s remarkable how many companies are interested in getting involved in existing projects, joint venturing, picking up new areas or getting on the ground to learn about the country. I’m expecting a little bit of a land rush in the near future. A lot of people are trying to get involved in the business here now.
TGR: I guess Cambodia isn’t a secret anymore?
RS: That’s what we like to think. We had an international investment conference here last year; it was well attended. That was one of the things that was brought up at the conference: Cambodia is no longer a secret. It’s quite staggering. A number of airlines fly directly into Cambodia now. The flights aren’t just for tourists—they’re filled with investors. Investment and venture capital funds are setting up here. I can’t imagine what it will be like in five years.
TGR: Thanks for sharing your insights on Cambodia, Mr. Stanger.
Richard Stanger is the founding and present president of the CAMEC (Cambodian Association For Mining And Exploration Companies) and has been actively involved in the development of mining exploration in Cambodia since 2004. Stanger is an explorationist/businessman with more than 20 years of involvement in mining and exploration. Previous experience includes directorship of several Australian listed public companies as well as numerous unlisted entities, direct mining experience and a number of years in the management consulting industry primarily focused on the mining industry.
By The Gold Report, on April 17th, 2012
 Precious and base metal companies both have to obey the basic laws of physics and economics to be profitable. In this exclusive interview with The Gold Report, geologist turned analyst Vishal Gupta of Fraser Mackenzie shares names of small-cap companies that could successfully take advantage of unique mineralogy to produce profitable mines.
The Gold Report: You are an analyst and a geologist. Can you explain the fundamentals behind investing in base metals compared to precious metals?
Vishal Gupta: The fundamental difference is that base metals can be fairly straightforward in quantification when it comes to supply-demand balances. The world needs a certain amount of base metals to keep up its growth rate. Growing economies like India and China require base metals for their industrialization initiatives. For instance, copper would be required in electrical wiring and zinc would be required in steel galvanization. There is a specific purpose for base metals in industry.
Gold is valued more from a currency standpoint. There are actually very few uses for gold. That is why it is difficult to quantify the supply-demand balances for gold. This leads to the turmoil we see in the gold market. Any material piece of macroeconomic information that hits newswires will have some sort of an effect on the gold price because it is traded as a currency.
TGR: You have talked about how even when there is a downturn in global economies, jewelry demand remains. Why is that?
VG: I am originally from India and I lived in that country for about 16 years before moving to Canada. India is by far the biggest retail market for gold. The Indian wedding season, which runs from September to December, is typically the high time for gold markets. The reason for this traditional demand for gold in India goes back to what I said about gold being used as a currency. People in India treat gold as a commodity that holds its value better than paper currency. So when they give gifts of gold jewelry, it is because they want to invest in something that is going to hold its value. The result is that in lean times, when the markets are down and unemployment is high, people have that reserve in gold that they can take to the market and sell.
TGR: When North Americans think of investing in gold, we think of investing in maple leaves, gold bars, coins or other physical forms of gold. But in India, they think of purchasing a necklace, bracelet or gold earrings. Is it the same investment dynamic in a different package?
VG: That’s absolutely right. Gold has held its value better than paper currency in the past, especially relative to Indian currency. The Indian rupee has devalued significantly over the last few decades, so people put their faith in a physical commodity, such as gold, rather than the paper currency.
TGR: We’ve seen a lot of volatility in the U.S. stock market. We haven’t seen a whole lot of industrial growth, but the price of copper seems to be holding up right around where it is today at $3.74. Turning to the base metals, what is your outlook on the supply and demand fundamentals for copper going into Q212 and through next year?
VG: I always view copper as the leader of the pack when it comes to base metals. You’ll see in the past, whenever the base metals markets have turned around, copper is the one that has led the charge. We are going into a lean time for commodities right now. However, when the commodity markets do turn around in the next five to six months, driven by the traditional surge in demand for commodities during September/October, I would expect copper to again lead the charge for base metals. Copper is the London Metal Exchange’s flagship metal. Whenever we talk about base metals, we first talk about copper and then we talk about everything else.
TGR: What are the copper equities that most interest you?
VG: One is a base metals company, Foran Mining Corp. (FOM:TSX.V). Its flagship McIlvenna Bay project hosts a volcanogenic massive sulphide (VMS) deposit in the prolific Flin Flon belt of Manitoba-Saskatchewan, on the Saskatchewan side of the border. That region is traditionally known as HudBay Minerals Inc.’s (HBM:TSX; HBM:NYSE) backyard because the major miner has been mining zinc and copper there for over 100 years. Most junior explorers in the area typically form partnerships with HudBay simply because of the major’s regional processing power. Because most of the deposits that the juniors are finding contain 3–5 million tonnes (Mt) of very high-grade ore, these deposits are too small to make building their own plant possible. Foran Mining is currently sitting on a 22 Mt, high-grade zinc and copper deposit at McIlvenna Bay. Going forward, I expect the tonnage to increase to 30 Mt, which would make McIlvenna Bay several times bigger than your average VMS deposit in the Flin Flon belt. Therefore, I believe Foran’s deposit is substantial enough to warrant a stand-alone mining and processing operation, and it should not require HudBay’s partnership to go into production.
I also follow Arian Silver Corp (AGQ:TSX.V; AGQ:AIM), a company active in Zacatecas, Mexico. It trades more than 1 million (M) shares/day on the London’s AIM Exchange. Arian Silver has a 120 million ounce (Moz) silver resource in Zacatecas. In the next year or so, I expect the resource to increase to about 140 Moz.
TGR: What’s the market cap of Arian?
VG: Arian’s market cap is about $95M currently.
TGR: So you really do focus on the small caps.
VG: Yes. My educational background and my work experience are in geology. As a geologist, I believe my maximum value add is analyzing companies at a very early stage where I can use my knowledge to estimate which of the junior companies’ assets have the best odds of becoming producing mines and generating cash flow in the future.
TGR: So you think both Foran and Arian have the mineralogy to be successful mines?
VG: Yes. That is why I cover these two names.
I have been to Arian’s property myself. I see a lot of potential. The resource could conceivably go from the current 120 Moz all the way to the 200–250 Moz range. The next catalyst in Arian’s development is going to be a scoping study on a sovereign mill. It is considering mill options ranging from 750 tonnes per day (tpd) up to 2,000 tonnes per day (2 Ktpd). That decision is going to be made in the next two to three months. Once that decision is made, I would estimate about 18–24 months for this large-scale production scenario to be put into operation.
TGR: Are there other juniors in that area that could be potential acquirers that would use Arian’s ore and put it through their own mill?
VG: Mexico is prime silver country. The best possible scenario for Arian to build shareholder value would be to actually put its own mill into production. That saves it all sorts of operating costs. Obviously, the up-front capital expenditure (capex) is going to be significant. For 750 tpd, you’re looking at about $15–20M in capex; for a 2 Ktpd mill, you’re looking at about $50–55M in capex. But once that investment is in place, I think the benefit to Arian shareholders is going to be tremendous. At a 2 Ktpd production scenario, it is looking at producing about 4.0-4.5 Moz silver/year. That is very significant cash flow.
TGR: How is Arian planning to finance that mill?
VG: If Arian settles on the 750 tpd scenario, a $15–20M capex could potentially all be done through equity financing. But if Arian goes for that $50–55M capex associated with a 2 Ktpd mill, then it will probably pay for it through a combination of debt and equity.
TGR: We didn’t really discuss the investing scenario behind silver. Are you equally bullish on the copper, silver and gold commodity spaces?
VG: I think silver is a very undervalued commodity right now. The market seems to follow what the gold price is doing but silver has so many industrial uses that you can view it as a precious metal or a base metal. Many of the silver names, including First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE), are just starting to come into prominence. Very few silver-only production companies exist today. What is out there is starting to get the value that traditionally has been reserved for gold and base metals.
TGR: What other names do you like either because they are potential acquisition candidates or possess particularly good deposits.
VG: There are a couple of companies that I visited down in Arizona about a month or so ago. One is Redhawk Resources (RDK:TSX; QF7:FSE; RHWKF:OTCQX). It has about 3.5 billion pounds (Blb) of copper in the ground currently at its flagship Copper Creek deposit at a grade of about 1% copper. Management is expected to release a new resource estimate in the next couple of weeks that could push the total resource to about 5 Blb copper. That would put Redhawk on the radar screens of all the consolidators operating in the region.
Arizona is prime copper country. Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE) has five operations there. In the adjoining state of New Mexico, it has another couple of operations. ASARCO LLC (AR:NYSE) has two to three operations in that area as well. BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), Rio Tinto (RIO:NYSE; RIO:ASX) and Quadra FNX Mining Ltd. (QUX:TSX), now KGHM International Ltd.—all of these players are in the area. They are all looking for sizable copper deposits and, at 5 Blb in-situ copper, Redhawk meets this criteria. I think the mineability of it has to be determined by a major and not by Redhawk itself. I don’t think a junior like Redhawk will be the one to actually put Copper Creek into production because the capex requirements for something like this would be well in excess of $1B.
TGR: But couldn’t one of the existing players in the area just truck the ore to its smelter because some operate already in the area.
VG: That’s absolutely right. That would save a lot of capex requirements and one of the reasons Redhawk is a prime acquisition target for a consolidator in the area that can take advantage of operational synergies.
TGR: Do you think permitting will be a problem? Augusta Resource Group (AZC:TSX; AZC:NYSE.A; A5R:FSE) has had trouble getting its Rosemont mine in Arizona permitted. Does Redhawk have aquifer permits in place, for instance?
VG: Yes, Redhawk does have this permit. And, Augusta has had permitting issues in the past, but recently received a key environmental permit—the Aquifer Protection Permit—for its Rosemont development project. Permitting could be an issue in any jurisdiction. You have to take things on a case-by-case basis.
As a jurisdiction, Arizona is full of open-pit copper mines. That says to me that it is a favorable jurisdiction for copper mining. There could be an odd blip here or there, but the overall scenario in Arizona is very mining friendly.
TGR: You’re an unusual analyst in that you’re bullish on gold and silver and copper. Do you have any other names in the junior space that are interesting to you?
VG: I was going to tell you about the second story that I saw in Arizona. The company’s name is Toro Resources Corp. (TRK:TSX.V). It’s a very small company; it’s trading at about a $4M market cap right now. I usually don’t visit a junior explorer that small, but this has what I call an enriched copper deposit; it’s a supergene blanket, which means it has a higher percentage of copper than most sulphides. This is leachable copper, not millable copper. The capex requirements for leachable copper are much lower than for millable copper.
Toro Resources has the Morgan Peak deposit in Arizona. Within a 5-kilometer (km) radius from it is BHP’s Pinto Valley, Rio Tinto’s Resolution copper mine, Freeport-McMoRan’s Miami mine, Quadra FNX’s (now KGHM International Ltd.) Carlota mine. The best part is that it is on a ridge about 800 meters in elevation higher than all of these other major consolidators in the valleys. All it needs is 100 Mt at 0.4% copper and it could put two valley fill leach pads right on top of the ridge, take the pregnant solution from the leach pad, put it into a pipeline and either go to Carlota’s SX-EW plant or Miami’s SX-EW plant just 5km down the hill. That scenario would save Toro on the overall capex requirements tremendously and would improve the economics of a potential future operation on the deposit. The mineability is very compelling for such a small-cap junior exploration company.
TGR: Interesting. That is certainly a new approach. Just do the leaching and then run it down the hill.
Any final words of wisdom about investing in today’s volatile markets?
VG: I know that the commodity markets have been in great turmoil. People say, oh, gold has fallen from $1,750/ounce (oz) down to about $1,670/oz and the commodities have started coming off now. That is not the case. If you compare where the commodity markets were in 2008–2009 and where the commodity markets are now, we’ve gone through a huge growth spurt. We have found a level where things have stabilized. $1,500/oz gold is ideal for a lot of companies and could lead to a lot more production coming online. Anything over $1,500/oz gold to me is beautiful. When you’re looking to invest in the commodity markets, it helps to have a longer term view. If you have a solid, longer term view on gold, copper or silver, you should make a lot of money.
TGR: Thank you so much, Vishal.
Vishal Gupta is an equity research analyst for Fraser Mackenzie, covering resource exploration companies in the base metals and precious metals space. He holds a Master of Science degree in geology from the University of Toronto. Prior to joining Fraser Mackenzie, he worked in the resource exploration industry as a consulting geologist with Noront Resources, Northern Gold Mining and Nuinsco Resources. Gupta entered the financial community in 2009 with Desjardins Securities as a base metals equity research associate, followed by a brief stay in mining corporate finance at Cormark Securities. Most recently, he held the position of equity research analyst at Dundee Capital Markets covering junior mining companies in the precious metals, base metals and uranium space.
By The Gold Report, on April 16th, 2012
 The health of the U.S. economy may not be quite as robust as some government statistics indicate and more stimulus could be on the way, despite what the Fed may be saying. Regardless of which way the economy goes, Chris Marchese, contributor to The Morgan Report, tells us in this exclusive interview with The Gold Report that precious metals will go higher as investors seek protection from the effects of monetary policies that don’t work. In the process, he expects that greatly undervalued mining shares of silver producers will again shine in the eyes of investors and highlights several of his favorites at current bargain prices.
The Gold Report: This is an election year and everybody is waiting to see what happens with the economy between now and November. The Federal Reserve just signaled that it may be less willing to provide more stimulus. What’s your reading on that?
Chris Marchese: The Fed meeting minutes signaled that the members are willing to be very accommodating if gross domestic product (GDP) slows down, if it doesn’t maintain a 2% inflation rate and/or unemployment starts to creep back up. Then they tried to play the metals down; they don’t like high gold or silver prices because they delegitimize the dollar. I think they are doing that in preparation for the next round of quantitative easing, which in my opinion will just be an extension of Operation Twist that ends in June.
TGR: So you think that’s all pretty much in place, regardless of how numbers look, unless there’s some drastic change?
CM: Yes, real GDP is supposedly growing, but our deficits are running higher, and 21.5% of that is government spending, which doesn’t include any Social Security or the like. If you take that $3 trillion (T) out, our economy is smaller or roughly the same size as it was back in 2006. So there hasn’t been a recovery, even though they try to paint it that there is.
I can make the argument that things have gotten worse. There hasn’t been any growth, and unemployment has been getting worse if you count discouraged workers, people no longer considered unemployed and people forced to take part-time jobs or jobs that they’re overqualified for. John Williams of shadowstats.com calculates these numbers. Last month, it was almost at a record high of 22.5%. Even the U.S. Bureau of Labor Statistics has it at 15%, and it hasn’t really budged.
TGR: What happens if the recovery stalls—or if it takes off faster than expected?
CM: I think that Fed Chairman Ben Bernanke and President Barack Obama might do stimulus, tax cuts or something like that to get a short-term hit. It’s like heroin, you get a short-term high, then you come down hard again. We’ve been doing that since we got rid of the gold standard altogether. It’s just the boom/bust cycle that eventually runs out when no one trusts our currency anymore. A growing population is already starting not to trust it. Politicians like to talk the talk—”oh, we’re going to cut $2.6T over the next decade.” Well, it’s going to be out of control by that point. Everyone should read the GAO Report, written by the people who audit the government. The phrase “material weakness” is used 50 some-odd times. If that was the case when we filed our taxes, we’d be thrown in jail.
TGR: What do you think the chances are for inflation getting out of hand?
CM: I think it’s already a problem. I use what’s called True Money Supply, which is basically all currency that’s readily available for use and exchange—currency, coins, notes, checkable deposits, savings deposits and the like. That’s been growing between 10% and 15% over the last three years.
TGR: What’s going to happen with precious metals if the economy stalls, or if inflation really picks up?
CM: I think it’s a win-win either way. For one, as opposed to the 1970s, this is an entire-world problem. China has inflation. Argentina has inflation. Europe is going to have inflation. Everyone is running the money spigots non-stop. I think Bernanke is not going to let this economy stall. It’s either going to take off through inflation and people will go to the metals, or he’ll do another stimulus and if that doesn’t get things going, he’ll do another and another. At some point, it will be too much. Either way, I don’t think the metals will do anything spectacular until the end of the summer. At that point, if the economy is not looking good enough, I think Bernanke will do everything in his power to make Obama look good to get re-elected.
TGR: Do you have any predictions for gold and silver prices?
CM: I think in Q412, we’ll break $2,000/ounce (oz) in gold and $50/oz in silver. It could run up as far as $60–70/oz just because of the technical buying and no overhead resistance at $50/oz. Toward the end of 2012, it could be $55/oz silver and $2,100/oz gold. That might sound outrageous now, but last April silver ran from $32/oz to $49/oz in the blink of an eye.
TGR: When you spoke with us this past September along with Jason Burack, you talked about some 30 companies that were of interest at that time. A lot of those were in silver. Of the more-established producers, whom do you like at this point and what are their prospects now?
CM: I think Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) is a no-brainer for someone who wants something conservative. It’s well diversified with the best operators in the world.
I also like what Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) has been doing. It acquired Minefinders Corp. (MFL:TSX; MFN:NYSE), which gives it a lot more exposure to Mexico, so it’s not so concentrated in Peru and Argentina.
TGR: What are the implications of the Minefinders acquisition?
CM: Minefinders is a lot bigger than people think. Dolores mine is world-class and will produce 7–8 million ounces (Moz) silver and over 100,000 oz (100 Koz) gold, once the mill is optimized. That’s going to add between 12–14 Moz silver equivalent to its growth profile. Its 20 Moz/year Navidad deposit in Argentina is expected to get fully permitted. Also, 12.5% has to be paid to Silver Wheaton because it bought a debenture from Aquiline Resources Inc. (AQI:TSX) from whom Pan American bought the property. Pan American produced about 22 Moz silver in 2011. With the Minefinders expansion and developing Navidad, it could be a 50–55 Moz producer and one of the world’s largest primary producers after Fresnillo Plc (FRES:LSE). I think the Minefinders properties will give Pan American’s stagnant share price a huge boost.
TGR: Any others you’d like to talk about that are more majors?
CM: Another one I like is First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE), which is acquiring Silvermex Resources Inc. (SLX:TSX; GGCRF:OTC). This just gives it more growth, especially for how much it is paying for it, $175 million (M). It can get this thing up between 3–5 Moz in a few years plus it already has lots of organic growth through 2015 or so with Del Toro. First Majestic is still looking really good, especially down around $16/share. I consider this one of the safer silver plays now that it has five operating mines and more to come on.
TGR: Let’s talk about some of the more junior miners.
CM: One of my favorite junior gold plays right now is a Canadian company with operations in Panama and development projects in Spain and Portugal called Petaquilla Minerals Ltd. (PTQ:TSX, PTQMF:OTCBB, P7Z:FSE). Its main deposit is the Molejon gold mine in Panama, which reached commercial production in 2010 and has been ramping up production via several mill expansions ever since. It has been completely overlooked by the market even though it has one of the best production growth profiles out there, courtesy of its recent acquisition of Iberian Resources Corp. in August 2011.
In 2012, Petaquilla’s production is projected to reach 100 Koz , 120 Koz in 2013 and nearly 250 Koz in 2015. This is excluding significant copper byproduct credits, which are forecast to reach 100 pounds per annum by 2015. Cash costs net of the company’s silver and zinc credits were $557/oz in 2011 and are projected to remain between $500/oz and 600/oz going forward as silver credits will exceed 3 Moz. annually. The company also benefits from Panama’s tax policy, giving Petaquilla a projected effective tax rate of 25%. Petaquilla is also a “special situation” at the moment, planning to spin out its wholly-owned infrastructure arm as an independent entity. Shareholders will receive one share for every four it holds prior to the spin-off date. I’ve modeled a net asset value on a fully diluted basis of over $3/share [using $1,600/oz Au, $2.50 Cu ~ discounted @ 15%], significantly higher than the current $0.42/share market price.
The composition of a company’s largest shareholders often says a lot about the prospects of a company. In this case, management owns more than 12%, followed by significant stakes by Sprott Asset Management, U.S. Global Investors and Libra Advisors. I’ve always considered having at least 5% management ownership a huge positive due to an obvious alignment of objectives, notably increasing shareholder value.
TGR:Do you have any others?
CM: Up in the Yukon there’s Alexco Resource Corp. (AXR:TSX; AXU:NYSE.A), which is one I’ve liked for a while. We talked about it last time. Since then, the company has identified some much larger targets that are much lower grade silver (on a relative basis), but, given the much wider intercepts, are candidates for significantly higher tonnage operations. That’s at the Bermingham and Flame & Moth properties. These potential mines vastly increase the likelihood Alexco will surpass the 10 Moz/year hurdle within five years. Its Lucky Queen project is averaging over 1,200 grams per ton (g/t) coming on-line before the end of the year, along with Onek. So it has a really deep pipeline for continuous growth into the foreseeable future. With those types of mines, you can add a lot of reserves as opposed to most of the mines in the Keno Hill district, which are narrow-vein mines. One hopes that will catch the market’s attention a little bit. It’s been a good year for it and it’s still cheap.
TGR: What about gold miners?
CM: Basically, gold stocks are trading cheaper than they were in 2008 relative to the underlying gold and silver price. There are only so many silver companies, but gold companies are a much bigger universe. One I like is Metanor Resources Inc. (MTO:TSX.V), located in Quebec. Its main property is the Bachelor Lake mine, which will be in commercial production this quarter. It will ramp up to feasibility levels by Q312 just because it’s only running the mill at 65% capacity at this point. It has a $60M market cap but will be producing 60–75 Koz/year gold, although it does have a streaming agreement with Sandstorm Gold Ltd. (SSL:TSX.V) whereby it has to sell 20% at $500/oz. This shouldn’t hurt it too much because it produces under $500/oz. Its average grade is about 7 g/t on that property. When it wants to access its Hewfran zone, it can increase production by about 25% or 70–80 Koz/year. That’s a good smaller play.
It also has other properties. One is the Barry mine, which is also in Quebec and relatively close. It has a lot of the same features and structure as Canadian Malartic and Detour Lake. It’s a high-tonnage, low-grade gold mine. Management will probably look for a joint venture partner on that one. This is another company that’s gone under the radar.
TGR: Bachelor Lake used to be a separate company, or at least the mine was in a company called Bachelor Lake back in the 1980s and 1990s, as I recall.
CM: Yes, it’s a past-producing shaft mine. I hate to harp on these really small caps, but they shouldn’t be this small.
TGR: Any others that are interesting?
CM: There’s an exploration company, Kimber Resources Inc. (KBR:TSX; KBX:NYSE.A). It has the Monterde project in Mexico, which could be on-line in two years if it had the money. It’s not expensive to bring on-line for what’s projected to be production of 60 Koz/year gold and 2 Moz silver for 15.5 years. The initial capital expenditure is just $100M. This looks like a likely buyout target unless it can sell a stream or something to that effect to Sandstorm Gold or someone else. In this market, these miners can’t economically raise money through equity because of low prices and dilution.
This company, along with most others, were trading at two to three times what they are now. This one is also a $75M market-cap company. I think it will get bought out within the next 12–18 months.
TGR: What else is happening in Central America?
CM: Tahoe Resources Inc. (THO:TSX) has a huge project called Escobal in Guatemala and is fully financed. It is looking at expanding the mill capacity so that it can produce between 26–28 Moz silver with very low cash costs—around $3–4/oz net of all the byproducts.
TGR: Anything else you like?
CM: There’s also Aurcana Corporation (AUN:TSX.V; AUNFF:OTCQX). It’s a Mexican and soon-to-be American silver producer. It has the Shafter mine in Texas, which is two months ahead of schedule and should be coming on-line relatively soon. That will produce about 4 Moz/year, plus byproducts, and increase total U.S. silver production by 10%. It has the La Negra mine that produces about 1 Moz silver and 500 Koz silver equivalent, with zinc, lead, etc. It’s going to have a huge growth spurt—a company that produces 1.5 Moz is going up to 5 Moz in a year and a half. People can buy it under $1/share and should be able to catch a double.
TGR: What would you like to leave as a final takeaway for our readers on how to best play this nervous market?
CM: Try to buy quality. Buy on dips. Always keep some cash in reserve because, as we know, things can go lower. You don’t feel as bad when you have money left to deploy if a stock you like drops by 50%. Remember that negative sentiment in the market is a good thing. That’s usually the sign of a bottom or a bottoming process. The average investor gets scared out of the market and sometimes liquidates his or her position at the very bottom. Understand the fundamentals of silver and gold. They are money and have been for thousands of years. Above all else, own the physical asset, then dabble in some mining companies.
TGR: Thanks for joining us today.
CM: Thanks a lot.
Chris Marchese is an equity analyst and contributor at The Morgan Report. He has served as a research analyst at Morgan Stanley, founded and co-managed a private equity fund and was an adviser to Vishni Capital. Marchese has published over 150 articles on various financial sites such as Financial Sense, Goldseek, Kitco and Seeking Alpha and is co-author of the e-book Treasure Hunting for Precious Metal Stocks.
By The Gold Report, on April 12th, 2012
 While gold equities continue to trail the gold price, junior stocks are gaining traction according to Doug Groh, co-portfolio manager and senior analyst with Tocqueville Asset Management. He believes investors should not let the market’s risk aversion keep them out of a stock picker’s market. The trick, Groh reveals in this exclusive Gold Report interview, is to pick managements, not jurisdictions.
The Gold Report: Doug, macro factors like the European sovereign debt situation, U.S. monetary policy and an economic slowdown in China drove the markets in 2011, with company fundamentals and stock valuations playing second fiddle. How is the Tocqueville Gold Fund mitigating these factors in 2012?
Doug Groh: We remain very positive on the dynamics of the gold market and are even more excited about the prospects for gold mining companies. We really are not taking a different path, other than sticking by our positions and seeking out good opportunities.
The market has been missing the tremendous margins gold mining companies have right now, despite rising production costs. The average gold price is up more than the cost increase over the past year, which has allowed for margin expansion throughout the industry.
TGR: The Tocqueville Gold Fund received the 2012 Lipper Fund Award for the best fund in the precious metal category for the three-year period ending Dec. 31, 2011. Congratulations. What is the fund’s current value and how did it perform in 2011 compared with the Philadelphia Gold and Silver Index?
DG: As of March 28, the Gold Fund was at $2.24 billion and the net asset value per share was $69.88.
As far as performance goes, as of Dec. 31, 2011, we were down 15.85%, while the Philadelphia Gold Index was down 19.16%. So, we did a little better.
TGR: What do you at Tocqueville expect of the gold market in 2012?
DG: We are very optimistic. From our perspective, gold bullion is still very much under-owned and gold mining equities are very much under-appreciated and misunderstood.
There is a lot of risk aversion going on. Equity investors worry about operating costs and about the volatility in gold equities. They are concerned that the gold price has peaked.
These concerns ignore the margin expansion in the gold mining sector. They ignore that gold bullion is under-owned. They ignore that central banks have been significant buyers of gold for two years and will most likely continue to buy gold to diversify their reserves away from the U.S. dollar.
While gold is susceptible to movements in interest rates and in the U.S. dollar, the potential for a structural shift in people’s interest in gold is very strong. In particular, demand in India and China has a long way to grow. Gold is a very important currency in the Asian market.
It is hard to say what the gold price will be at any given point in time. I still think it is headed to the $2,000/ounce mark in the next 12 months. But that is not the endgame for gold. It still has a long way to go.
TGR: When we talked in June 2011, gold had been outperforming equities for five months. It’s 10 months later; did you imagine then that equities would still be lagging the performance of gold? How are you and your fund managers adjusting to that?
DG: I did not think gold equities would underperform as much as they have. I attribute it to risk aversion in the equity markets. Gold stocks are equities first and foremost. In addition, investors have very high expectations for gold mining equities and the companies have disappointed the market’s expectations.
We are holding to our positions. This is more of a stock picker’s market than for general exposure to gold mining equities. While the gold mining exchange-traded funds may serve a purpose, one can add value by actively managing a gold equity portfolio. That requires more due diligence and an understanding of what the companies are trying to do and what they have accomplished.
We focus on companies that are well financed and well managed, companies with track records for building shareholder value and that, importantly, have a very good asset base. We want to know: What resource is the company working from? What is it developing?
TGR: Does stock picking become harder when macro drivers move share prices more than the companies’ fundamentals?
DG: In some regards it requires more patience. Stock picking is difficult. You have to look at the higher quality companies. Understand their strategies. Understand management’s vision. It demands that you appreciate the assets they are working with. That requires talking with the companies, visiting their assets, observing what they are doing with those assets and staying in touch with their progress.
TGR: Last June, the Tocqueville Gold Fund was 35% vested in small-cap explorers and developers. Is that still the case or are you leaning more heavily toward companies generating cash flow and perhaps offering a dividend?
DG: We are shifting out of the junior explorers to some extent. We are not necessarily trading out of our positions, but our positions are now that much more advanced in terms of the companies’ lifecycles. Thus, a greater percentage of our portfolio now is in developing or producing companies as opposed to explorers and discoverers. It is a natural evolution.
And, some of the larger companies have done a bit better than some of the smaller names. So, we have a percentage shift to the larger caps.
TGR: Are you more selective now, given that the price environment among gold equities has created so many bargains?
DG: It is interesting that, even though these companies produce the same product, their valuations are all over the place. Companies are valued differently for different reasons; they are getting different discounts for different reasons.
This means investors have a lot to consider. They have to understand each company and its situation: its capital needs, cash flow, capital structure, strategy and where it operates.
TGR: What advice would you give retail investors in today’s environment?
DG: Investors have lots of choices for exposure to the gold mining sector. If they have the network and ability to gather and assess a lot of information, they can invest on their own. More power to them, they should.
An index fund is another approach. A third way is to invest in a diversified portfolio of well-known names that is covered by various investment banks. Both of these approaches can keep surprises to a minimum.
TGR: Are institutional investors like Tocqueville Asset Management more likely to set the terms of private placements these days?
DG: Compared with a couple of years ago, yes. Investors can have a greater input into how a financing is structured these days. Companies need capital and the markets are not quite as friendly to general equity issuance. That means management has to be more creative with financing projects. There is more of an open discussion between investors and management.
TGR: Where do you see pockets of investment opportunity in the gold space? You seem to be leaning heavily on royalty plays.
DG: The royalty companies have a very interesting model. They are diversified and have less asset exposure and capital commitment than some of the mining companies. I think this is a very profitable model in this environment.
TGR: What are some other opportunities for investors?
DG: Detour Gold Corp. (DGC:TSX) and Bear Creek Mining Corp. (BCM:TSX.V) might be considered. In the Yukon, there is ATAC Resources Ltd. (ATC:TSX.V).
Gold Resource Corp. (GORO:NYSE.A; GORO:OTCBB; GIH:FSE) is interesting in that it is issuing a gold dividend, which shows that companies are responding to investors’ desire for return on shareholder value. Companies are trying to differentiate themselves from gold exchange-traded funds.
I think good opportunities remain for companies developing assets in the right part of the world. That may be West Africa, Mexico, eastern or western Canada, even Alaska.
TGR: Are you concerned about creeping nationalism today, given events in South America, and even more recently in Mali?
DG: Yes, nationalism is a bigger concern today. Nationalism can be expressed in many ways including higher taxes on companies, royalties or participating interests.
Nationalism is not surprising. The industry is very profitable. Jurisdictions recognize that and are trying to capture more of that value for their national needs. But some of those policies are so restrictive that they drive capital and foreign investment away. That is a concern for investors.
TGR: Does that mean you have steered away from certain jurisdictions?
DG: Yes, Venezuela and Bolivia come to mind. Russia presents tremendous opportunity, but we are concerned about governance and about how business is conducted there.
The Middle East and North Africa have interesting potential, but again, there are concerns.
TGR: Let us look at some of the positions in your gold fund. Randgold Resources Ltd. (GOLD:NASDAQ) has significant exposure to Mali, where a recent coup is creating instability. What is your current approach to Randgold?
DG: We are taking a wait-and-see approach; we have not sold. Actually, I see this as a buy opportunity. Randgold believes the situation is more politically and socially complex than the media may be portraying.
We believe that in a relatively short period of time the political instability in Mali will resolve itself. Randgold continues to operate its mines as it did during other political conflicts in the region. For example, during a civil war in Côte d’Ivoire, Randgold held on to its property and built a mine during the government transition.
TGR: You also have exposure to West Africa through Abzu Gold Ltd. (ABS:TSX.V), which owns the Nangodi gold play in Ghana. Initial results from the company’s current drill program seem to indicate the potential for open-pit gold mining.
DG: Abzu has done initial exploration and drilling. It seems to be on to a deposit that deserves more attention. My sense is that the company has limited capital and will need to reassess its position in terms of making the most of its land position and resource base in Ghana.
TGR: You continue to hold a fairly large position in Osisko Mining Corp. (OSK:TSX). Now you have a position in Detour Gold, a similar story in the same part of the world. What can you tell us about Detour Gold?
DG: It is very similar to Osisko, in that as both companies build and derisk their projects, their market valuations should rise as the market appreciates their efforts. Both are meeting their goals and realizing success.
TGR: Osisko has been in production a little less than a year. Are you satisfied with its results?
DG: Basically, yes. We understand the design and engineering challenges a company can run into when it starts up a mine. Our understanding is that the deposit is performing better than perhaps was expected. The grades and recoveries are good. Osisko is producing gold, perhaps not quite at the level originally expected, but we can work with that. In the end, we think Osisko will have a very successful operation. Given the gold price and its production costs, the company should have this mine paid off relatively quickly.
We might be a little disappointed that the market is not giving Osisko the valuation we feel it deserves. I am not sure why. It is in a favorable jurisdiction. Its costs are not out of line. It is slowly meeting its targets. Maybe what concerns investors is that the ramp-up is not happening soon enough. But in time, Osisko should deliver the project as it intended.
TGR: Do you expect Detour Gold to have similar success?
DG: We anticipate that. Detour Gold will probably run up against similar issues. The project may not get the expected throughput initially, or recoveries might be a bit off. But management will make the necessary adjustments. In time, I anticipate management will deliver on its plan, with the typical hiccups along the way.
TGR: You have exposure to silver production in Mexico. Are silver and gold producers takeover targets?
DG: I suppose every company could be considered a target.
We see relatively small deposits with great potential in Mexico. Large producers are looking for deposits that can be scaled up. Witness Goldcorp Inc.’s (G:TSX; GG:NYSE) acquisition at Peñasquito some years ago. Or the numerous property/company transactions that have taken place since.
Scorpio Gold Corp. (SGN:TSX.V), Levon Resources Ltd. and Gold Resource are operating now. Some are generating cash flow. Yet, they have not fully explored their properties. There is significant potential to identify value where it is yet unrealized or unrecognized.
TGR: Overall, you seem pretty optimistic.
DG: You know a lot of these stocks performed quite well years ago when the gold and silver prices were much lower. Companies were raising capital to build out their mines or expand operations. In one regard, company valuations were higher than they are now. That makes me ask, what is wrong with a market that does not recognize companies like Osisko and Detour that we believe will deliver?
I think the outlook is very good for precious metals and, in particular, for gold mining equities. Maybe it is time to turn the corner into Q212 and think about a new story, to let gold mining equities come into their own as the year progresses.
TGR: Doug, thank you for your time and your insights.
Doug Groh has 25 years of investment experience. Before joining Tocqueville in 2003, he was director of investment research at Grove Capital from 2001–2003. Between 1992 and 2001, as a senior sell-side analyst for JP Morgan and Merrill Lynch, he was recognized as a ranked analyst by Institutional Investor Magazine and The Wall Street Journal for his coverage of basic material stocks in the non-ferrous metals, chemicals and paper and packaging industries. He began his career as a mining analyst and worked as a precious metals portfolio manager at U.S. Global Investors and American Express Financial Advisors in the 1980s and early 1990s. He holds a masters in energy and mineral resources from the University of Texas at Austin and a Bachelor of Science degree in geology/geophysics from the University of Wisconsin–Madison.
By The Gold Report, on April 10th, 2012
 George Ireland, portfolio manager with Boston-based Geologic Resource Partners, believes in seeing what he invests in and his passport bears witness: 80 countries visited in five years. From Africa to Argentina, from gold to lithium and graphite, he and his team seek out companies with experienced management, promising geology, good infrastructure and strong cash flow. Ireland shares his views on issues facing the mining industry in all corners of the world in this exclusive Gold Report interview.
The Gold Report: Your grandfather was a mining engineer. Your father founded a coal company. You are a geologist, worked with Cliffs and ASARCO and are on the boards of several mining companies. How much of your success at Geologic Resource Partners do you attribute to your business acumen and how much to your relationships in the industry?
George Ireland: Having grown up in a mining-oriented family, the dinner table conversations from an early age steeped me in the lore and intrigue of business. Based on that early interest, I have built up quite a book of relationships and a broad knowledge over the years, but I attribute a lot of the opportunities that have come my way to hard work and perseverance in an industry that was, for quite a long time, out of favor.
TGR: What wisdom did you pick up at the dinner table that you use today?
GI: One of the first things I learned was to see for yourself what you are investing in and who you are investing with. The second—and I give this advice to companies that we invest in and to other fund managers—is to talk to your investors, to the people who are giving you their faith and money.
TGR: Does that mean you make regular site visits to projects?
GI: My team and I have visited about 80 countries over the last five years.
TGR: What are your “must-sees” on a site visit?
GI: Typically, we are looking at the lay of the land: how the project sits in the political jurisdiction, the social environment, the environmental issues. We look at management, from the senior level down into the junior ranks. We want to know if they are capable of performing the work they are being asked to do. We look at the assets themselves, reviewing public information found in various documents such as NI 43-101s. We look extensively at the drill cores, site and plan maps and other data to assess the quality of work being performed with regards to our own assessment of value of the company.
TGR: Do you expect your clients to meet a certain annual performance threshold?
GI: We do not have a specific threshold. Our orientation is toward compensation and performance over the long term.
TGR: Would it be fair to say that you look for at least double-digit growth?
GI: Very definitely. Given the expected risks in the mining industry, our investors look to us for rates of return comparable to other venture capital or private equity businesses. We believe it is important to note that the mineral exploration business, much like the pharmaceutical or tech business, can create substantial growth of value through exploration and discovery. Our general focus is to capture those areas of growth, rather than the commodity trends.
TGR: What is your time horizon?
GI: Our investment horizons typically stretch from two to five years. We focus on a firm’s capabilities and ability to grow, not its latest drill or production results.
TGR: Are you concerned that equities have trailed the underlying commodity, especially in the precious metal side, for close to 18 months?
GI: The market trends are changing. We are now seeing the precious metal mining companies being valued using similar metrics to other mining companies, whereas historically they traded at a substantial premium. We believe this is both a natural evolution of the market and a direct result of the widespread acceptance of the metal exchange-traded funds (ETFs) like SPDR Gold Shares (GLD:NYSE.A). On a smaller scale, we see a lot of opportunity in exploration and development companies. Fortunately for us and unfortunately for them, these companies are having trouble getting financed, which means we can pick and choose among the assets that interest us.
TGR: Are you paying more attention now to things like infrastructure?
GI: Infrastructure has always been a critical component of mining investment. Our approach always includes taking into account all the necessary factors for a mining situation to be developed. The infrastructure demands of a mining project and how they will be financed are always crucial factors in deciding to invest in any remote mining situation.
TGR: Are most of your positions private placements or do you buy positions in the market?
GI: We do both.
TGR: In terms of your private placements, how important is a warrant?
GI: Not critical, although we like warrants. We particularly like financings that are elegantly structured, meaning the warrants are tied to the company’s financing needs rather than an unrelated timeframe.
For example, if a company is raising money for a drill program it expects to complete in 15 months, we like to see that the warrants are tied to the completion of that program so they can be used to fund the next stage of exploration and development.
A big problem for many junior companies is the potential dilution caused by a large number of warrants outstanding with no implicit or explicit linkage to the cash requirements of the company.
TGR: Can you give us an example of a recent private placement you did versus the market price for the company involved, without naming a specific company?
GI: Typically, private placement terms are on the higher end of the historic band for discounts, namely 10–15% off a recent weighted-average price, as opposed to 5–10%.
TGR: Are you looking for companies offering a dividend?
GI: Absolutely. As a long-term investment fund, our focus is on total return to our investors. That comes through both capital appreciation and dividends.
TGR: Does that mean you are looking beyond companies in the exploration and development stage and into mid-tier and top-tier producers?
GI: Yes, we invest in companies in all phases of the mining sector. We utilize our judgment to decide which companies are the most appealing based on projected risk-weighted rate of return. In practice, that means you would not expect the same returns in lower risk senior producers compared to higher risk explorers once you remove the issue of the movement of the underlying commodity price. As for capital reinvestment and dividends, it is logical to expect that smaller, more rapidly growing companies would be less likely to pay a dividend than their more senior competitors.
TGR: Has your asset base moved from companies with market caps less than $200 million to larger companies, given that more of them are offering dividends than they used to?
GI: For us, dividends by themselves are not a driver; they are part of the total return on a particular investment. What causes us to change the portfolio in one direction or another is where we see the best prospect for total return relative to the level of risk inherent to an investment. It all depends on our view of the potential return on an individual company, not a particular segment of the business.
TGR: Would you be willing to name some of the dividend-issuing companies you hold?
GI: We hold names such as Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Goldcorp Inc. (G:TSX; GG:NYSE), to name two of the larger ones in the gold sector. Outside of the gold business, we hold Cliffs Natural Resources Inc. (CLF:NYSE) and Cameco Corp. (CCO:TSX; CCJ:NYSE), for example.
TGR: What are your strategies for playing ETFs?
GI: Our strategy for metal and metal stock ETFs is to look at relative return in the metal versus the equities.
For example, we hold platinum and palladium ETFs because we like the outlook for the metal, but we do not like the outlook for most of the companies, particularly those operating in Southern Africa and Russia.
TGR: Without naming companies, what have you seen on site visits that made you decide not to invest?
GI: Our site review process has uncovered everything from operational issues related to the geology or the quality of the drilling to engineering challenges associated with site layout or metallurgy. There may be infrastructure issues related to access to the project or, more importantly, shipping routes away from the project. Political and economic issues in the region or country can also come up. And finally, site visits allow us a better chance to see the quality of management in their “home” as opposed to being in a nice office or boardroom.
TGR: Brent Cook has suggested that there are too few people properly trained in preliminary economic assessments (PEA) and prefeasibility studies (PFS), leaving untrained people to plug numbers into models that cannot be relied on to predict whether a project can be mined. If you agree, what are some common errors retail investors should look for that might raise a red flag?
GI: We are deeply committed to doing onsite due diligence as we want to be able to make our own assessments of the numbers being used in the PEAs or PFSs being prepared. That said, it is important for retail (and institutional) investors to read and understand these documents for what they are: namely, preliminary estimates. If I had to characterize the most common area for error at this stage, it would be the assessment of the geology of the deposit and how it relates to the calculation of resourses and reserves.
Concurrently, the investor needs to understand how the economic numbers were calculated, particularly such things as metallurgical recoveries and costs such as the cost of electricity, fuel, labor and metals prices.
Investors need to understand the upside case, and more importantly, the downside case.
TGR: What are some of the common problems you see on site visits?
GI: One general theme is the lack of trained staff and labor, ranging from engineers and geologists to skilled operators and trades people. This continues to be a big problem worldwide.
The second would be the uncertainty associated with legal title and the project investment climate. This includes the tax rates or ownership structures being imposed by host countries.
The third is the temptation to use advanced technology where it is not completely understood or is being misapplied. Too often, this leads to failure or poor performance.
TGR: Once financed and in production a lot of mines fail to meet production targets. A management change soon follows. Is this a result of some of those factors?
GI: Very much so. It is the combination of, first, the expectations of the original group not being met and, second, not having the depth of experience to understand and correct for all the variables. It is no surprise to see issues come forward that were not anticipated in the feasibility studies. An axiom that one of my analyst partners loves to use is “there has never been a failed mine without a positive feasibility study.”
TGR: I like that. Can you tell us about some of your recent site visits?
GI: My team and I have recently been to the Democratic Republic of the Congo (DRC) to visit Banro Corporation (BAA:TSX; BAA:NYSE) and Loncor Resources Inc. (LON:NYSE.A; LN:TSX.V). I recently visited Continental Gold Ltd. (CNL:TSX) and other companies in Colombia. I also visited a number of non-precious metal names, including Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX) in Argentina. In the rare earth space, I visited Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) in South Africa, where I just joined the board.
TGR: In South Africa, calls to nationalize more of the mining industry are growing. Why?
GI: South Africa is not alone. It seems that 80–90% of the countries around the world want more of the patrimony to be shared with the government and the citizens.
The history and economic ramifications of apartheid influenced the move for local ownership in South Africa. There also are labor/management conflicts over wages and profit sharing. We believe the South African political outlook has declined substantially over the last five years.
However, South Africa is not alone. In 2010, the Australian government sought a very large tax increase on the mining sector. The U.S. Environmental Protection Agency has taken actions relative to the coal industry.
TGR: Let’s go into more detail on your African visits. Banro recently chose a debt financing over equity financing. What are your thoughts on that?
GI: It was entirely appropriate, given the cash generation capability of its Twangiza project and the relatively accelerated development at Namoya, its number-two project. Banro looked at the cost of capital of equity, convertible debt and straight debt and decided the debt issue was the best alternative.
TGR: You have seen Namoya firsthand. What do you think?
GI: When I visited approximately 18 months ago, I was very impressed. Namoya has a relatively easy physical layout to build, a good operating environment in terms of climate and, relative to Africa, ease of access.
TGR: Banro has a position in Loncor, is that right?
GI: Yes. Many of Banro’s early exploration team members were shifted to Loncor to develop exploration projects in North Kivu. As North and South Kivu became safer to explore, we noted their success with the Banro projects and wanted to invest with them.
TGR: Loncor has an agreement with Newmont Mining Corp. (NEM:NYSE) on its Makapela project, a high-grade gold deposit in North Kivu. Geologically speaking, can it be a mine?
GI: We believe so. The drilling is very early stage. There are two development options. One would be a larger, lower-grade, open-pit development. We are interested in the second option, a higher grade underground mine. It would have lower capital costs and be easier and faster to bring into production.
TGR: What are your thoughts on Peter Cowley and the management team?
GI: My teammates and I have known Peter for a number of years and have a lot of respect for the job he and his team have done. On our site visits, we have been pleased with the work being carried out under their direction. As a non-technical factor, we have been very pleased with the training programs that Loncor is offering its Congolese employees and the care being taken to build social relationships locally through their charitable foundation.
TGR: Many people consider the DRC to be the riskiest district in Africa. But the geology is irresistible. How do you balance those two considerations?
GI: High risk/high potential return is the mantra. While we believe that a number of assets in DRC that offer potentially returns to investors, the risk associated with each one must be closely scrutinized. For us, one of the key risks comes back to the question of whom we are investing with. In the case of Banro and Loncor, we believe the team, from the board down to the men with feet on the ground, has experience and relationships in the DRC to develop profitable mines with social and environmental sensitivity.
TGR: You visited Continental Gold’s Buriticá Project in Colombia. What can you tell us about that?
GI: We began investing in Colombia a number of years ago, principally in the private company that evolved into Continental Gold. We initially saw Colombia as a regional play, just opening up for exploration and systematically underexplored by modern standards.
Developing Buriticá as the company’s chief asset with the Berlin asset in second place struck us as a very good strategy. We like the high-grade ore reserves at Buriticá and the very high probability that it will be an underground mine using bulk tonnage mining methods. This approach should cause the project to have a relatively small footprint on the surface environment, which eases permitting and causes less social disruption.
TGR: Ari Sussman is Continental Gold’s CEO, as well as CEO of Colossus Minerals Inc. (CSI:TSX; COLUF:OTCQX). Is this a management team you follow?
GI: We also invest in Colossus, and, yes, Ari has attracted strong people. We are particularly impressed with Sussman’s ability to build up management teams with people as they are needed at each stage: exploration, development, construction, production.
In our evaluations, we ask how well management is prepared to transition itself in terms of its skill set as the company grows in value and as it develops its assets. That is one of the major risks in any kind of venture capital or private equity business.
TGR: What are your investment themes for non-precious metals equities?
GI: One of our major themes is in what we call “green metals,” metals that will benefit from the environmental issues associated with global warming and climate change. An example is the lithium/graphite complex.
Lithium Americas is one of the most advanced brines project in South America, producing lithium using brine technology and solar evaporation—a very low-cost production method. We expect it to be among the first to market, in relatively due course.
And because lithium batteries utilize graphite in their anodes, we started to look at graphite producers. One of the most intriguing projects is Northern Graphite Corp.’s (NGC:TSX; NGPHF:OTCQX) Bissett Creek in Northern Ontario. The management team has the right combination of geologic, mining and marketing smarts. We became a cornerstone investor.
TGR: You have done well; since August Northern Graphite’s share price probably rose about 300%.
GI: There is an old adage, “never mistake intelligence for a bull market.”
TGR: So, is it a bit too frothy right now?
GI: It depends on your view for graphite. We fundamentally believe in the green metal theme and have decided that the lithium/graphite complex will be a winning technology.
If you believe market penetration for electric vehicles will be in the 3–4% range over the next 5–10 years, graphite prices will have a lot of upside. If you believe in market penetration rates of 10–15%, graphite prices will have to be that much higher in order to bring out the amount of material needed.
TGR: As an institutional investor, can you offer any wisdom to retail investors wondering if they should stay in the mining equity space?
GI: The generic advice to any investor in any business is to know what you are investing in. Know whom you are investing with. Do your homework.
Structure your investments appropriately relative to your risk profile. That is essential for institutional or individual investors in this high-risk, potentially high-return sector.
TGR: George, thank you for your time and your insights.
George Ireland founded Geologic Resource Partners LLC in 2004 and serves as its chief investment officer and managing member. He serves as portfolio manager of the associated Geologic Resource Funds and has been president of GRI Holdings LLC since June 2000. Ireland has 30 years of experience in all aspects of the resource sector, ranging from field geology to banking and venture capital.
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