Mining companies have lost the trust of investors, says David Baker, managing partner at Baker Steel. Baker sees the gold market as at a watershed point and the miners must change to stay afloat. In this interview with The Gold Report, Baker sets out his prescription for nursing the industry back to health. Will the restrictions his company and other investors are putting on gold companies increase reporting clarity, investor trust and money earned?

The Gold Report: The major gold producers have ceded market share to gold exchange-traded funds and royalty companies and are vastly underperforming those investment vehicles. If you were running a major gold producer, how would you go about restoring the appeal of your company’s shares?

David Baker: Mining companies need to restore trust and give more clarity. They are confusing investors because on the one hand they tell us they have so many ounces of gold in reserves and are producing so many ounces of gold, and then they confuse us by benchmarking all this to dollars—a depreciating asset. We believe the mining companies should be consistent and report in gold; this would then give investors a clearer picture on how much gold it is costing to mine the resource and how many ounces of gold are added to the shareholder vault.

“Holding gold instead of dollars will also preserve the purchasing power of the company.”

There are a number of challenges out there; first is the issue of the dollar cost inflation. When measured in dollars, the capital and operating costs of a mine have gone up, but when measured in gold, costs are fairly stable. Back in 2008 when gold was $800/ounce ($800/oz), a 100,000/oz per annum gold mine would typically cost $80 million ($80M) or 100,000 oz, today that same mine will cost around $170M, again around 100,000 oz. In dollars, costs are up by over 100% but in gold ounces they are steady.

We are using the wrong measure of costs; we are using a depreciating asset—dollars—to measure costs instead of a real asset, gold. So by mixing dollars and gold we are confusing investors. Now if costs in ounces had risen, we would have a serious problem! To compound the issue, analysts are forecasting higher dollar costs and lower future gold prices. Put these together and this spells a potential margin squeeze. Under this scenario, a new gold project has little value, and the shares get de-rated.

Second, the gold exchange-traded fund (EFT) has outperformed the gold equities; how do we reverse this trend and convince investors to sell some of their EFTs to buy a gold share? As it stands today, if you sell your gold ETF to buy a gold share, what you get is a company who digs gold out of the ground, brings it to surface and then converts it back to dollars, which when you think about it, is not what the EFT holder wants. We believe gold miners need to give investors gold, not dollars, and they could start doing this by reporting in gold, holding gold on their balance sheet instead of dollars and paying a gold royalty or gold dividend.

TGR: Even if companies do put their gold production on the books, they’re still going to need to liquidate some of that gold in order to meet day-to-day expenses.

DB: That is exactly right, but the balance should be held in gold. When we analyze a typical gold mine, it takes about 10% of the deposit to build the mine, 40–45% of the deposit to mine it, about 15% to pay government taxes and maybe 5% for sustaining capital. The balance, 20–25%, is the return and instead of selling this for dollars, the mining company should hold these gold ounces on its balance sheet.

“Gold is a currency that can’t be printed.”

Why is this a good idea? First, it makes no sense to sell an appreciating asset for a depreciating one; second, holding gold instead of dollars will also preserve the purchasing power of the company. A mining company with gold in its vault and lucky enough to discover a new gold project will no longer face a problem of capital cost inflation. As explained, capital costs are fairly stable in ounces and account for around 10% of reserves. Holding gold on the balance sheet will also act as a new source of demand, keeping more gold off the market. Gold producers should then start to emulate the ETF.

Companies should review their mission statements; they should change it ”to build and grow shareholder value expressed in ounces of gold.” This will give management more focus and investors greater clarity.

TGR: When you bring up this idea to boards of gold companies, what’s their response?

DB: I would say that overall we are getting a very positive response; they like the logic and it is certainly stimulating debate.

There is clearly an appetite for gold projects: Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) recently raised $1.9 billion to buy a gold stream off Vale S.A. (VALE:NYSE); it risked that amount for a gold stream at a fixed cost. So we can conclude there is a market for this model. Unfortunately, when gold companies sell a royalty to the royalty companies, they have been giving real margin to the royalty companies, and shareholders have ended up with less. Just look at the difference in share price performance of the royalty companies and the gold miners—it says it all. The gold companies don’t give away much and they hope shareholders hardly miss the 1.75–2% of the gold they sell, but the royalty companies have made a great business out of this.

“We’re looking for well-managed companies and companies that are diversified and well capitalized.”

There is an understanding that something has to change, that the business model isn’t exactly working for gold equity investors—we are giving our margin to others. We argue that royalties should also be paid to current shareholders of the mines. It doesn’t have to be much, say 2–2.5% of the gold mined, but this will link the gold in the ground to what the shareholders get; there is then a tangible way to define what an increase in reserves means to the value of the company. After all, I tell the mining companies, “When you’re going down to your pit and you do 20 shovels to put to the mill, all you have to do is one-half to one shovel to shareholders. It’s not too much to ask.”

TGR: How far off is that?

DB: We’re starting small. Korab Resources Ltd. (KOR:ASX), an Australia-listed company, has just announced a gold reporting, gold strategy and gold dividend policy. We have others in mind. We have confirmations that the strategy will be discussed at board level for a number of companies with the view that they will adopt these policies, so we are getting traction. They are listening, but it is hard being the first mover. Our aim is to allocate funds to those companies who adopt our strategies.

In a nutshell we need to restore the trust between the mining companies and investors and we believe our strategies are one way to do just that. The miners have to be held to account.

TGR: There’s precedence for this. After gold reached its all-time high in early 1981, a number of companies started forward-selling their gold so they could better control their costs. Shareholders ultimately were the benefactors of that. They’ve done it once before, so it can be done again.

DB: In the 1980s and 1990s, the gold price was falling and the dollar was rising. It made every sense that once you dug your gold out of the ground, you converted it straight into dollars. It was such a convincing trade that people were selling gold they had yet to mine to convert into dollars, and that was the advent of forward selling. It took about 10 years to get it entrenched that the gold price was falling, and the dollar was rising. We then took 10 years, from 1990 to 2000, for everyone to get on the trade and forward sell. At the bottom of the market, there were well over 3,300 tons gold forward sold.

TGR: Practically all production.

DB: It was over one year’s annual production. Now the situation has reversed; the gold price is rising and the dollar is depreciating, and this should continue as long as the central banks carry on printing more and more money. Over the last 10 years, gold has been rising at around 15% per annum, so we are now just getting the hang of this trend. We have to become gold centric; the miners need to be forward buying gold (holding gold on the balance sheet) instead of forward selling gold. The dollar period was the 1980s to the 2000s; now we’re in a gold period.

TGR: Some countries are doing that. China has dramatically increased its gold imports from Hong Kong, putting it ahead of India as the world’s largest gold consumer.

DB: Many central banks are printing money. They’re trying to get their currencies cheaper than others so they can capture market share and generate growth, the so-called currency wars, but they all know that if everyone is printing money, they cannot all devalue against each other. They have to devalue against something, and gold is a currency that can’t be printed. So these central banks are starting to see the writing on the wall, and they’re buying physical gold, converting dollars and buying gold. That’s a positive. That’s going to carry on. But nothing goes up in a straight line. At the moment, we’re going through this consolidation, which has felt as if it’s lasted forever. It’s probably been about two years. Hopefully, we’re coming to an end of it.

TGR: In early February, a story in Canada’s Globe and Mail suggested that IAMGOLD Corp. (IMG:TSX; IAG:NYSE) could soon be the subject of a takeover bid. Do you believe there’s any substance to that idea?

DB: I’m not convinced. IAMGOLD has purchased a project in Canada that is very low grade with low returns. Maybe that’s the opportunity, but not in our book. Baker Steel separates the wheat from the chaff by looking at the quality of the projects. We analyze returns and how the company is going to finance the development—will it use debt or equity? In a high inflation environment, debt would be the logical choice, but we’re very reluctant to go down the bank route as this normally entails forward selling part of future production. Recently an Australian company raised $50M of debt and had to forward sell over $300M worth of gold to do that. That didn’t seem logical to us.

In the last 10–12 years, we’ve seen cost inflation of 12–15% and the gold price running up at a similar rate. If you forward sell $300M of gold, and gold continues to rise at the same pace it has over the past 10 years, then in a couple of years, the cost of this debt is going to be greater than 100%, simply in the lost opportunity cost of not being able to sell gold at market. A disproportionate share of our projected returns will either end up in money heaven through the lost opportunity of forward selling or to the bank through fees—again shareholders are short changed. Investors have cottoned on to this and are deserting the developers in droves.

TGR: Baker Steel funds have underperformed in lockstep with gold equities. What approaches are you employing to offset the recent dismal performance in gold equities?

DB: The market is very cheap. A lot of resource companies are trading on single-digit multiples, whereas the market as a whole is trading at 15–20 times multiples. Gold equities used to trade at a premium to the general market but are now trading at a significant discount. That’s the opportunity. We’re looking for well-managed companies and companies that are diversified and well capitalized.

Our focus is the mid-cap, 400,000–600,000 oz (400–600 Koz) gold producers that have two or three operations, with potentially a growth asset as well. We’ve built up a nice portfolio of these. Unfortunately they still haven’t caught traction in the market; you can buy these companies for around 6–8 times price-earnings ratio. They’re very cheap.

TGR: Do you visit the companies?

DB: Yes, last year I went to Chile, Sudan and the Democratic Republic of the Congo (DRC) and others in our investment team travelled to Papua New Guinea, Africa, Indonesia and other sites. We do a lot of due diligence.

TGR: You have investments in what would be classified as safer jurisdictions, like Canada, Mexico and Australia, but you also have investments in places with greater risk, like South Africa, Eritrea and Zimbabwe. Would it be fair to say that when Baker Steel is evaluating a potential asset, it doesn’t put as much emphasis on jurisdiction risk as it does on potential return?

DB: We risk adjust all of our investments; we are interested in risk-adjusted returns. For example, we would place a higher discount rate on a mine in Zimbabwe. Zimbabwe producers have been completely de-rated by the market, to the point it probably couldn’t really get much worse. In an effort to survive, many of the Zimbabwean companies have had to modify the way they do business in an effort to make their model work. They’re starting to produce gold at relatively good costs. There are still some political issues, but you can buy these assets for 10 cents on the dollar. We’re putting in just enough money that if we get it right, investors will be glad. And if it doesn’t go right, it’s not going to be so big a deal for us.

South Africa has been a challenge, but Harmony Gold Mining Co. (HMY:NYSE; HAR:JSE), which has been totally de-rated, came out with a result this week that shows that the company is actually performing quite well. We see great value in a number of South African companies.

AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) produces about 42% of its gold in South Africa yet has been sold down as if all its ounces were in that country. And even those South Africa ounces are generating very good cash flow. Those are the opportunities that we’re looking at. AngloGold is trading at a projected seven times earnings; its yield could be higher but it is currently in a capital intensive phase.

Endeavour Mining Corp. (EDV:TSX; EVR:ASX) is one of our bigger holdings; the company is a diversified producer that recently acquired Avion Gold Corp. It’s a low-cost producer that has a reasonable balance sheet and looks interesting.

TGR: Most of Avion’s producing assets are in Mali.

DB: There is obviously a risk, but we believe this is somewhat discounted by the market. Take Resolute Mining Ltd. (RSG:ASX), for example; the company operates the Syama gold mine in Mali and gold mines in Australia and has a market capitalization of $840M. It has $100M worth of gold/cash and investments on its balance sheet and is generating probably $60–70M/quarter—now that is cheap. There’s been no production lost at Syama but the market has sold it down as if the mine faces major disruption. Now, admittedly, the costs have had to increase because Resolute has had to add to security, but the stock does look very cheap.

Also, we manage a diversified portfolio. It’s not as if we’re putting everything into these names. We have around 4% in both Endeavour and Resolute. We can live with the individual company-specific risk, particularly for the price. And while we are waiting for the market to recognize the opportunity, Resolute is paying us a good dividend yield as well, and it is holding some of its profits in gold, which, as we have discussed, matches our strategic objectives.

We have a position in Ivanplats Ltd. (IVP:TSX) across some of our funds. Founder Robert Friedland used to be in Ivanhoe Mines Ltd. Ivanplats has three world-class assets; it just increased its resources at its Platreef project, an ore-body that is around 14 meters in width, compared to 40–150 centimeters for the typical Merensky reef mine, both with similar grades. Ivanplats is going to be a game changer in this industry.

TGR: Are you bullish on platinum?

DB: You have to be positive on platinum, given the problems in South Africa and the challenges that the platinum producers have there. Anglo American Platinum Ltd. (AMS:JSE) has recently cut production. I don’t think there can be a lot of downside in the platinum price. If there’s not a lot of downside, presumably there’s some good upside.

TGR: Do you have any holdings in the DRC?

DB: We have a very small holding in Banro Corporation (BAA:TSX; BAA:NYSE).

TGR: Is its Namoya project on track to begin production later this year?

DB: That is correct but we understand that the company will need $35–45M to complete this. With Banro’s Twangiza project, we’re getting there, but we’re not there yet.

TGR: It produced about 20 Koz gold in Q4/12.

DB: Twangiza needs to be doing much more that, at least 35–40 Koz/quarter and we need to see some consistency of production. Having said this, we did note that the increase in the resources and the oxide is a positive for that company.

TGR: Let’s move to the South Pacific and New Zealand.

DB: Evolution Mining Ltd. (EVN:ASX), OceanaGold Corp. (OGC:TSX; OGC:ASX), Kingsgate Consolidated Ltd. (KCN:ASX), Silver Lake Resources Ltd. (SLR:ASX), Archipelago Resources Plc (AR:LSE) and St. Barbara Ltd. (SBM:ASX) are our key holdings in this region. They all have decent balance sheets and are generating cash. You can buy Evolution under single-digit multiples. It seems incredible.

TGR: What sort of growth should investors expect from Archipelago in 2013?

DB: Archipelago is producing around 120–140 Koz with potential going up to 165 Koz and even maybe 200 Koz per annum, all self funded. It is getting some good results from recent drilling and this will allow the company to upgrade its plant and increase production and profits. Archipelago is generating good cash at the moment, although I would like to see that reported and held in ounces. The challenge for Archipelago is whether the major shareholder allows it to grow through acquisition.

TGR: What’s on your list in North America?

DB: Lake Shore Gold Corp. (LSG:TSX) and AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE), which owns the Young-Davidson mine. Lake Shore reduced its 2013 capital expenditure budget by about $18M, but we need to start seeing some returns. When we see Lake Shore this month at the BMO Conference in Miami, this is what we’re going to be discussing. It sold a royalty to Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), so maybe the company should consider a royalty to shareholders in return for all our patience. AuRico sold off some assets to focus on Young-Davidson, so now it has a better balance sheet. It is looking at potentially paying a high yield. We’d like to see that as a gold royalty as opposed to a cash yield, but that’s a discussion we have to have with the company.

TGR: What about your silver holdings in North America? You have a position in First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE).

DB: We used to, we made a good return on that and moved on. Our main silver holding is Polar Silver (privately held), this company owns a share of a very high-grade silver project in Russia, which we’re valuing at about $0.25/oz silver. We think we can bring that to market for at least $1/oz, if not more.

TGR: Thank you for your insights.

David Baker is a managing partner at Baker Steel and heads the company’s Sydney, Australia, office. Prior to founding Baker Steel in 2001, Baker was part of the award-winning Merrill Lynch Investment Management natural resources team, successfully managing the Mercury Gold Metal Open Fund, the largest precious metals fund in Japan, from its launch in 1995 until his departure in 2001. Prior to joining MLIM in 1992, Baker was a gold and mining analyst for James Capel Stockbrokers in London from 1988 and held a similar role at Capel Court Powell in Sydney from 1986 to 1988. Baker started his career in 1981 as a metallurgist at CRA Broken Hill, Australia. He holds a degree in mineral processing and a master’s in mineral production management from Imperial College, London.

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It is difficult for retail investors to sift the wheat from the chaff in the junior miner sector. In this interview with The Gold Report, Rick Winters reveals how RMB Resources, a resource merchant bank, figures out what projects to invest in and those to pass over and talks about some of the companies that made the cut.

The Gold Report: Rick, RMB Resources invests in resource companies throughout the world. Why is RMB flocking to resource companies when most investors seem to be running in the opposite direction?

Rick Winters: RMB Resources is the resource merchant banking division of the FirstRand Group, one of South Africa’s major financial institutions. We’ve been in the business of providing finance to the junior resource sector for 18 years. We look at junior resource opportunities everywhere in the world outside South Africa.

As resource investors, we’re always in the game, even when the market doesn’t seem to care. Our product mix may change with market conditions, but we stay in the market and are always active.

TGR: With the risk-off sentiment that’s prevalent in the market right now, are you making changes to your overall strategy?

RW: As a merchant banking operation, we look at junior resource finance and focus on relatively higher-risk, higher-return opportunities. In times like this, when junior resource equities and mining equities aren’t in favor, we look more toward quasi-equity and quasi-debt investments as a way of providing finance to companies. We do this when we have confidence in their projects, using their projects as security for a debt structure. This saves companies from dilution in a time of very low share prices.

TGR: Can you talk more about quasi-debt and quasi-equity investments?

RW: We invest all along the spectrum, from pre-initial public offering seed capital through to corporate debt and project finance. When we talk about quasi-equity and quasi-debt, it’s a reflection of the stage that a project or a company is at. Quasi-equity tends to be higher risk.

“We focus first on people and identifying good management that we’ve done business with in the past and that currently has good opportunities.”

One example of such a transaction is Bullfrog Gold Corp. (BFGC:OTCBB). We have funded Bullfrog Gold as a quasi-equity opportunity because it has a very attractive project that’s had a significant amount of work done on it in the past—a feasibility study, initial permitting and the like. But now, it needs funding to confirm what was done in the past and to expand the project. The transaction uses the project as security for the facility. We have a significant warrant package associated with that facility that represents the return we need for the risk profile.

An example of a quasi-debt transaction would be Solitario Exploration & Royalty Corp. (SLR:TSX). It has a project in Nevada, a gold heap-leap project, Mt. Hamilton. That project completed a final feasibility study in 2012, so the project is well defined. Solitario continues to optimize that feasibility study. Once again, the project is used as security for a debt facility but because the project is well defined it has a lower risk profile and our required warrant exposure is consequentially lower than a quasi-equity opportunity. That facility is to provide working capital to complete the permitting process so that the company can go forward with obtaining project financing and put the project into production.

TGR: What is the total amount of your investments in resource companies, both in 2011 and in 2012?

RW: We have a lot of movement in and out of our portfolio but, generally speaking, we have a portfolio of about $100 million (M)in equity and around $200M in debt.

TGR: Do you expect those levels to increase in 2013?

RW: Not necessarily. But we’ll probably see our debt portfolio grow in 2013 because of the nature of the market.

TGR: With all the companies knocking on your door, how do you decide which ones you’re going to invest in and which ones you’re not?

RW: We really stay with the fundamentals. In a buoyant equity time, the spectrum of the projects that we look at is much broader and we do look at exploration and very early-stage projects and seed capital. But we’re doing much less of that these days.

We’re focused now on projects where we can assess the project and the opportunity technically. We assess the tradeoff between what we believe will be the fundamental value and the opportunity for the project to actually become a cash-flow generator. In other words, we’re looking at the feasibility stage and above.

TGR: What are some investment themes that you expect will govern most of your investment decisions in 2013?

RW: The last year and a half has been an unprecedented period for the industry. We expect 2013 to be the same. We seek to patiently invest. We continue to have a minimum three-to-five year investment horizon.

“Retail investors need to look behind the retail promotion and see where serious money is getting invested.”

We focus first on people and identifying good management that we’ve done business with in the past and that currently has good opportunities. We focus on projects and make sure there’s sufficient asset value to justify the risk-return profile. We also focus on our companies’ abilities to promote and raise capital because the mining business is very capital intensive.

TGR: Are your investments geared toward rising commodity prices or are you looking for specific situations that merit your expertise and your cash?

RW: We’re happy to participate in the equity upside that comes along with rising metal prices, but we have more of a banking mindset than an equity investor mindset. We’re always looking for the recognition of fundamental value at rational metal prices, which are often lower than the current price. In other words, we focus on project fundamentals.

TGR: Where do you see metals prices, particularly precious metals prices, in 2013?

RW: Prices will be relatively stable. There will be volatility within the metal prices, precious metals in particular. We’re in an environment where fiat currencies and the major economies in the world are in trouble. The debt situation has to be dealt with, and is not going to go away for at least a few years. That’s why I don’t see a precious metal environment that’s much different than what we’ve seen over the last couple of years.

TGR: RMB Resources is an investor in Sutter Gold Mining Inc. (SGM:TSX.V; OTCQX:SGMNF) and you are a director of that firm. Is it common for RMB to have a position on the board of a company that you’re investing in?

RW: No, it’s not typical for us. One of our most treasured mantras is not to become involved at the board or management level. We believe that if we can’t have confidence in the boards and managements of the companies we invest in, we probably shouldn’t invest in the first place.

“When this market turns, it will come back with a vengeance.”

We became involved in Sutter when the former largest shareholder decided it didn’t want to be in the gold business anymore. We purchased half the company from that shareholder and then sought to move the company and the project in California forward. When we started, we had 49% of a junior public company and had to build a management team and a new board from the ground up.

TGR: Sutter just poured gold, its first doré, at the Lincoln project in northeastern California. Will this news move the share price?

RW: Sutter’s price graph shows that it’s one of the better-performing junior stocks and has been over the last year. With the mine being built and coming into production, the value of the company has more than doubled over the last 12 months.

TGR: But the share price has been roughly the same since March.

RW: Now that the company poured the first gold in the Mother Lode in 54 years, the market is waiting to see the mine start to generate cash flow. The first six months of 2013 will be the ramp-up phase and the mine should be in full production by midyear. Then we’ll see what value the market assesses for the Lincoln-Comet project.

That initial project is based on a five-year resource of about 180,000 ounces (180 Koz). What the market will come to appreciate is the immediate upside for Sutter. There is a second project, the Keystone project, which lies immediately north of the current mining resource. That’s about a 400 Koz resource. The mill has been designed and built so its capacity can be doubled at a cost of about $700,000–750,000.

TGR: Has Sutter provided any production guidance for the first year?

RW: Not yet. It will going forward, but that will be a function of how the ramp-up goes. Once the Lincoln-Comet project is in full production, about 23 Koz/year is anticipated. There will be less than that in 2013 given the ramp-up for half the year.

TGR: Has any of that gold been forward sold?

RW: It has—RMB Resources provided a prepaid gold facility. To fund the project and get the mill built, we sold forward half the production of the current mine plan at a price of $942/oz. Sutter got—this was at a time when gold was around $1,540/oz—$20M in finance to sell 54 Koz forward for which it will receive $942/oz. In effect, it got a price of about $1,320/oz, selling forward in July 2011.

TGR: Do you know its cost per ounce?

RW: It should be around $700–725/ounce.

TGR: What are some other junior mining companies that RMB helped finance?

RW: Another recent one was Bullfrog Gold. It’s a relatively new company and has a current market cap of about $11M. It has an advanced exploration project in Arizona called the Newsboy project.

In the 1990s, an Australian company did quite a bit of work and actually defined a resource of about 5 million tons (Mt) at about 1.5 grams/ton (g/t) gold. It completed a feasibility study and started all its permitting work in Arizona, so the state regulators are aware of the project. It then fell by the wayside in the mid-1990s. A Canadian company had it for a period of time, did a bit of work and then dropped the project in the late 1990s. In the early 2000s, a private group restaked it, and Bullfrog optioned the property from that private group.

Bullfrog is now working hard on it and is doing a lot of drilling to confirm the historic resources. It’s gone a long way in doing that. It started to expand the deposit beyond the limits that were known in the 1990s. We think there is likely a deposit there that will be around 7 Mt at 1.5 g/t. Our facility, which is $4.2M, is to fund work at the project for the next 18 months. The work is intended to do the additional drilling and resource evaluation to complete the initial resource re-estimations and to begin, if not complete, feasibility and get the final permitting under way. It’s a new opportunity that the market hasn’t known about because it was in private hands, but we think it will become a mine.

TGR: Do you think that the management at Bullfrog has what it takes to go beyond what previous operators could do?

RW: Yes. The management is led by a gentleman named Dave Beling, who is a very experienced mining engineer. He’s been involved with several different junior companies and has done lots of consulting work. We see eye to eye with Mr. Beling on what work needs to be done to bring a project to a development decision. Right now, it’s a very lean and mean management team, but that’s by design. At this point, the focus needs to be on the geology of the project area in the drilling and the resource estimation. But Mr. Beling also has all the experience to bring a development team together when the time comes.

TGR: Sounds like a lot of what your job is in this business is not to see what a project is but what it could become. What could the Newsboy gold-silver project in Arizona become?

RW: If it develops as we think it should, it will be a project that should be producing around 35–40 Koz/year and probably generating annual earnings before interest, taxes, depreciation and amortization of about $25M. On paper at $1,700/oz gold, it preliminarily has a net present value (NPV) at a 5% discount of around $90M in comparison to a market cap of around $11M.

It’s a good example of how we try to assess fundamental value. It’s also what allows us to have patience in our investing because with most of the companies that we’re involved in we’re looking at the opportunity for a four or five time increase in value.

TGR: What are some other companies you’re invested in?

RW: Along the same theme is Solitario, which I mentioned earlier. It has a current market cap of about $50M, but its Mt. Hamilton project at $1,700/oz gold has an NPV of $260M. That’s another deep value discount situation.

We recently became involved with Mercator Minerals Ltd. (ML:TSX) out of Vancouver. It has an interest in an operating copper-molybdenum mine in Arizona, the Mineral Park mine, as well as advanced development-stage assets in Mexico. We were a part of an overall balance sheet restructuring of the company. It had to restructure the debt associated with Mineral Park. Mercator just completed a major expansion at that mine to 50,000 tons per day. It’s a large-tonnage, low-grade mine that produces around 40 million pounds (Mlb)/year copper and about 10 Mlb/year molybdenum.

Mercator is currently trading at about $0.58/share, down from over $4/share two years ago. It’s a situation where the market has lost confidence in that company’s ability to service its debt, so it needed to restructure its debt more in line with the long-life nature of the Mineral Park asset.

We refinanced a $30M facility that it had with a group of Canadian investors for its El Pilar project in Mexico, which is a large, low-grade, heap-leach opportunity in northern Sonora, just across the U.S. border. That project, which is where our security lies, has a final feasibility study completed. It’s fully permitted to go into production. It only needs to obtain project finance to move the project forward.

The El Pilar asset really is one of significant value. That project has an after-tax, all-equity NPV8 of $460M at an average copper price of $2.82 per pound over the life of the project in comparison to a current spot price of $3.67 per pound. It’s in a very good location with very good infrastructure, so it has a relatively low $280M capital expenditure requirement to put it into production. But with that sort of NPV after tax and with the current market cap of the company at about $180M, the value of El Pilar is over 2.5 times the current market cap without giving any credit to cash flow from its mine in Arizona or its other projects. That’s another example of the type of things we look at.

TGR: Is El Pilar close to any larger producing companies in Mexico?

RW: Yes, it’s about 45 kilometers northwest of the Cananea mine, the largest copper mine in Mexico. It’s also about 50 miles southeast of some of the large Arizona copper mines, such as Sierrita/Twin Buttes. It’s a unique deposit, but it’s in a very good address for copper mining.

TGR: Another investment you made?

RW: Another one that we put some real equity into is a unique story, Highland Copper Company Inc. (HI:TSX.V). It’s a Vancouver junior that has an interest in copper in the Upper Peninsula of Michigan. Most people don’t remember that the Upper Peninsula was one of the greatest copper belts in the U.S. for some time. It produced over 5 Mt of copper.

Highland Copper did a joint venture with a Houston group, BRP LLC, which holds interest to about 13 million acres of mineral claims in the U.S. It purchased the mineral claims in the Upper Peninsula in a bankruptcy in the late 1990s and really didn’t know what to do with them. To Highland’s credit, it did a joint venture with BRP to earn a 65% interest in the Upper Peninsula mineral holdings by spending $11.5M and producing a feasibility study.

The problem came with the markets over the last 18 months and the company’s inability to finance itself and move forward on the earn-in conditions of the joint venture. We became aware of it when a notable mining entrepreneur, David Fennell, learned of this opportunity and discussed it with us.

It was a restructuring exercise to take this Canadian company, which last May had a market cap of about CA$2M. At that time, Fennell brought in new investors including RMB Resources, new money ($16.5M), new management and renegotiated the earn-in option appropriately to allow it to go forward. We now own about 10% of the company.

The company has, since July, drilled 160 holes and over 24,000 meters. It is focusing on the chalcocite part of the belt. Unlike the native copper, chalcocite as a mineral is much more friendly from a metallurgical standpoint and produces a very high-quality, clean copper concentrate. No one had really focused on the chalcocite part of the belt in the old days.

We would expect that sometime in Q1/13, Highland Copper will come out with its initial resource estimate, and it will probably be on the order of 6–7 Mt initially of 2.2–2.5% copper, most of it open pitable, which is quite significant these days where the average grade of a copper deposit is more like 0.5%.

There was a joint venture by Inco and Homestake Mining Co. in the later 1970s and early 1980s, and they defined three deposits, conducted preliminary evaluations and produced resource and reserve estimates. Highland got an inventory of around 2 billion pounds of historic chalcocite and native copper resource, which needs to be prioritized and confirmed.

Bottom line, Highland has a high-grade deposit near the surface in an area that has a copper mining tradition. It is fully funded to meet its obligations under the joint venture earn-in. It has also been producing fantastic results, but people haven’t really noticed. That said, it currently has a market cap of about $24M, up from $2M, with about $14M in cash and a lot of work going on to get an initial mine going and really explore and evaluate the 13,000 acres of holdings that it has in the Keweenaw project in the Upper Peninsula of Michigan.

TGR: What about permitting in a place like Michigan, which hasn’t seen a lot of mining over the last 30 years or so?

RW: Michigan seems to have quite favorable attitudes toward mining and mining regulations. Most of the project is on private land, so the federal part of the permitting equation is less of an issue. The Keweenaw part of the Upper Peninsula is economically depressed. There is still a history and heritage of mining there, so in general people are very supportive. But time will tell. The permitting anywhere in the world these days is every bit as important as any other part of the job. That work is currently being initiated by Highland Copper.

TGR: Are there any other companies you want to comment on?

RW: Trevali Mining Corp. (TV:TSX; TREVF:OTCQX) is one of the better stories in the marketplace and we are working on it right now. We’ve been mandated to arrange $60M of finance for its mines and its development opportunities in New Brunswick as well as in Peru.

It’s a complicated task because Trevali has a lot going on simultaneously, including three mines and two mills. For investors who like zinc, it’s definitely one to pay attention to. It also has quite an ability to raise capital. But it is at that cusp where quite a bit of money is needed, and we’re one of the groups working on that. We have confidence it will go forward.

TGR: Its biggest project is the Santander base metals project in Peru. That has bounced around from company to company for years. Why does that project make economic sense now?

RW: It makes economic sense for two fundamental reasons. One is that there is already a tremendous amount of capital invested there. There is already a mill at Santander. There is housing at Santander and a complete mining camp. The other factor is that it has good zinc and silver grades in a well-established mining resource.

But it’s a big project. The challenge is getting all the final mine plans in order and properly developing the underground deposit. Santander should start producing metal in 2013. What makes these types of projects successful is that some management groups bring a focus and a commitment to it. That’s what’s happened at Santander. Glencore International Plc (GLEN:LSE; 0805:SEHK) has a major interest there along with Trevali. But it’s Trevali, and the confidence that Glencore has in Trevali to put the mine into production, that will bring it to fruition.

TGR: The junior mining space used to be predominantly the domain of retail investors. Is there still room for retail investors in the sector? Would they be well served to follow the investments made by large companies, such as those made by RMB?

RW: There is always room for retail investors. One of my attractions of getting into the junior sector when I became an analyst many years ago at Robertson Stephens & Co. was the realization of the mining industry in general, but the junior sector in particular, that it’s really a very small sector. There are lots and lots of companies; in Canada, there are around 1,500 listed junior companies.

But if you take the total value of those companies, or even the entire mining sector, it’s not very significant. Apple is probably bigger than the entire global mining sector. So when investor interest flows into the sector, it doesn’t take much for all the boats to rise, and do so rapidly. But when the interest leaves the sector, the inverse is true. The tide goes out, and all the boats fall quickly.

For people who think about fundamental investing, and not trading, there is a lot of opportunity in the junior sector because of this complete disconnect between the current valuations for companies and value of the metal in the ground and even cash flow given the current and expected prices for the commodities that these companies are producing.

I think for a lot of retail investors, it’s very difficult to know who’s who in the zoo. Just because a company is a very good promoter doesn’t mean that it has very good assets. People with a view like ours, which is a bit longer-term, fundamental resource-oriented view, would be well served by looking at what some of the other successful major resource investors do in trying to cull the number of opportunities and focus on those things that provide the best risk-reward. Institutional investors, as a group, typically do not seek market returns. We are looking at higher-risk, higher-reward opportunities. Retail investors need to look behind the retail promotion and see where serious money is getting invested.

When this market turns, it will come back with a vengeance. Everybody will be very happy. The people who will be most happy will be the people who were already invested.

TGR: That sounds like sage advice.

Rick Winters has been president of RMB Resources, the resource merchant banking division of the FirstRand Group, since August 2005. During the previous five years, he served as vice-president of RMB Resources. Prior to his time at RMB, Winters also had stints at Golden Star Resources Ltd., Robertson Stephens & Co., Phelps Dodge and the Colorado School of Mines, where he holds a master’s degree in mineral economics.

The past year was a very tough one for the junior gold mining sector. In this interview with The Gold Report, Brien Lundin, CEO of Jefferson Financial, says that the past year has, in fact, put many gold mining companies on the bargain basement shelf. He shares some advice on end-of-year portfolio repositions and talks about some of his favorite stocks that he believes are poised for a rebound in 2013.

The Gold Report: Brien, in late October you and your company Jefferson Financial hosted the New Orleans Investment Conference. What were some of the commodity-related themes consistently making the rounds there?

Brien Lundin: The buzz was that the underlying fundamentals for precious metals would remain bullish regardless of who won the election. But if President Obama were re-elected, then all of the factors favoring gold and silver would become dramatically more bullish.

TGR: You wrote about that in the November edition of Gold Newsletter. Here’s a quote from that edition of your newsletter: “The bottom line is that President Obama’s re-election means that you need to buy gold and silver, and things that will retain their value as the dollar loses its value.” Why were things different on Nov. 7 than they were the day before?

BL: Even before the election, the economic and fiscal situation for the United States was pretty dire. In my view the only hope of recovery and reform, without a major ongoing crisis and very significant inflation, would be if the Paul Ryan plan were to be put into effect immediately.

“When the perceived risk is one of long-term currency debasement, gold is the preferred safe haven. “

Instead, we now have the same administration that took the emergency one-year spending levels enacted to keep the economy from crashing during the 2008 credit crisis, and has now made those massive spending levels the new baseline going forward. The difference is that the Obama administration is now unrestrained by the prospect of another election, so the trajectory of government spending is actually being steepened.

TGR: In another passage of the same edition of Gold Newsletter you wrote: “The coming inflation will be similar to what we’ve experienced in recent years. Huge pools of loose money will continue to flow into commodities and financial assets.” What makes you certain that we won’t see another round of risk-off sentiment if things go as badly as you suggest they will?

BL: The risk-off episodes that seized the investment markets over the past few years are in reaction to potential fiscal crises in the U.S. and Europe. This headline risk sent investors running to the safety of cash, specifically to the U.S. dollar. This seems counterintuitive, but investors are looking for short-term safety.

When the perceived risk is one of long-term currency debasement, then gold is the preferred safe haven. My whole bull market thesis for gold is based on a developing consensus that neither Europe nor the U.S. is going to face collapse anytime soon. Rather each will be kept afloat on a sea of new money printing by both the Federal Reserve and the European Central Bank. In such an environment, gold and silver are going to absolutely take off.

TGR: Do you think that lack of practicality of gold hampers its status as a safe haven?

BL: Not today. Gold is very liquid. A lot of speculators use the exchange-traded funds (ETFs), which I recommend for trading the metals. But I don’t recommend ETFs for core holdings.

In fact, one of the things that is keeping the market buoyed currently is the tremendous retail investor demand for the metals. That comes in the form of skyrocketing physical sales of coins and bullion, and in the ETFs. Metals holdings of the ETFs are at record levels. Coin demand is at near record levels. Yet we see the price moribund due to the whims of speculative demand.

TGR: It’s interesting that you’re pro ETFs, because most gold bulls aren’t. Is this a new tack for you?

BL: Not really. You know a lot of the hard-core goldbugs are somewhat doubtful of whether the EFT gold is actually there. I recognize those concerns, so I don’t recommend ETFs for core physical metals holdings, just for trading.

TGR: When should equities enter the mix for a retail investor?

BL: Simply put, right now. The junior resource stocks have been absolutely decimated over the past year. There are bargains galore right now if you have cash to buy them.

TGR: Are these bargains mostly market related or is this part of tax-loss selling season?

BL: I don’t really distinguish between the two. We’ve had a lousy year for the equities. When we have had risk-on environments, they have not lasted long enough to where it filtered down to the highly speculative junior resource equities.

We also have an unusual situation this year where we have not only tax-loss selling but also tax-gain selling as investors take profits to avoid higher capital gains taxes next year. When you combine that with the junior stock market that has been depressed all year, some incredible bargains emerge. I’m pinpointing a number of them in Gold Newsletter right now.

TGR: Let’s talk about some of the equities that you follow. You said in a recent edition of your newsletter that Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) has “opted to forego” the prospect-generator model in an effort to develop the promising Ixtaca gold-silver deposit in Mexico that’s part of the Tuligtic project. Is that your opinion?

BL: Yes. I have never been a big believer in the prospect-generator business model as an absolute. It should be a business model, not a religion. So when a junior explorer comes across a prospect that is particularly exciting and can provide rapid value advancement with relatively little risk, then I think the company should explore that project fully.

Almaden was the poster child for the prospector-generator model for years. But Morgan and Dwayne Poliquin had the vision and the foresight to see that Ixtaca could be different. Their decision has paid off in spades. Almaden right now is one of my top recommendations and I think that deposit is going to get much bigger than the company’s current market cap is indicating.

TGR: Almaden has about $36 million (M) to continue to develop Ixtaca. Do you think that it will sell that project, dividend the money out to shareholders, and then continue on its way? Or do you think it will sell the whole company? Or would it do something similar to what Virginia Mines Inc. (VGQ:TSX) did when it took all the other projects out of that company, put them in a new company, and sold that company to Goldcorp Inc. (G:TSX; GG:NYSE)?

BL: Typically in a case where a company has a number of earlier-stage projects, and it has one major project for which it is primarily being valued, then management will sell the company. Usually you’ll see a spin off of those other projects into a new vehicle so that shareholders can keep the benefit of that other property portfolio that really isn’t adding value to the transaction. That’s a process to fund that new company as well.

TGR: You’ve also written that Brigus Gold Corp. (BRD:NYSE.MKT; BRD:TSX) looked “undervalued” in early November after Brigus bought back much of its gold royalty stream from Sandstorm Gold Ltd. (SSL:TSX.V). Tell us about that deal and the market’s reaction to it.

BL: There are a few keys to Brigus Gold and the opportunity it presents. First, the company ran into operational problems when it was trying to ramp up production at its Black Fox Mine, prompting a decline in the share price.

“The junior resource stocks have been absolutely decimated over the past year. There are bargains galore right now if you have cash to buy them.”

Those production hiccups have been solved and production is now growing. Yet the company’s shares are on sale. In addition, there is the exploration drilling the company is doing on its Grey Fox property near the Black Fox Mine. In particular it is getting tremendous results from a high-grade zone called the 147 Zone. Those results are normally enough to absolutely catapult the value of a junior explorer. But the results are getting lost in the shuffle because Brigus is a production story. In fact, this Grey Fox property will become the company’s next mine.

TGR: Another company you follow is Comstock Metals Ltd. (CSL:TSX.V). You see more promise in the recent drill results from the company’s QV project in the Yukon than the market does. Give us your thoughts on that.

BL: Comstock is a case where expectations were really high before the first drill results came in. The results were actually quite good, but not quite up to the elevated expectations. So the share price sold off, which was unwarranted.

The first results showed the potential for a nice sized deposit at the VG Zone. Importantly, the company also outlined a number of other drill targets from soil sampling and trenching. The real key for Comstock will come with next year’s exploration program. The company’s geologists plan to mount a comprehensive attack on all those highly prospective targets.

“Once we get through these end of year trading games and that fiscal cliff fiasco, the markets should settle down into an environment where everyone recognizes that massive money printing will continue for years to come.”

I think Comstock is a longer-term story. It’s not going to be built on a few drill holes or even a couple of rounds of drilling. It’s a project that has a number of very exciting targets. It’s a cross between the Underworld Resources story, which had the Golden Saddle deposit just about 10 or 11 kilometers to the south, and the Kaminak Gold Corp. (KAM:TSX.V) story not far away. Kaminak had a number of anomalies that it had to drill off and is only now starting to connect those anomalies with mineralization.

There’s a lot of potential in Comstock. I see some very exciting analogs in the area and the mineralization that it has seen so far is very, very similar to that at the Golden Saddle discovery by Underworld. That discovery was a big winner for Gold Newsletter readers, when Kinross Gold Corp. (K:TSX; KGC:NYSE) took over Underworld at a big premium.

TGR: One hole cut 89.9 meters of 2.34 grams per tonne gold. Could this be a bulk tonnage starter?

BL: That wasn’t a very deep intersection, so it could be bulk tonnage. People tend to feel that the grades in the Yukon have to be very high even for a bulk-tonnage or an open-pit deposit for the economics to work. But this whole area is becoming ripe with new discoveries and infrastructure will follow, and, at some point, it’s also going to be ripe for consolidation. So I think that the current grades are very close to what a company would need to make a deposit work in the Yukon.

TGR: What did you make of the recent friendly merger between Keegan Resources Inc. (KGN:TSX; KGN:NYSE.MKT) and PMI Gold Corp. (PMV:TSX.V; PVM:ASX; PN3N:FSE)?

BL: It was a great deal for both companies. Everyone’s been waiting for one of the majors to come in and scoop up one or both of these juniors and consolidate the projects in this area of Ghana. But those takeovers never happened. So these two management teams essentially decided to do it on their own.

In the near term, this isn’t a big share-price catalyst. But considering that the combined companies can now fully find the development of the more advanced Obotan project of PMI and get into production, the financing risk is removed essentially for both projects.

Obotan should get into full production by 2015 at around 200,000 ounces (oz)/year. By 2017, Keegan’s Esaase project will get added to the mix and bring production up to around 385,000 ounces annually. The bottom line is that we now have either a must-have acquisition by a major or the emergence of a new midlevel producer with the potential to continue consolidating the region.

TGR: Do you see this as an investible theme? Companies with nearby development-stage projects that are suffering from markets that aren’t all that flush with cash getting together?

BL: In this case, both of these companies are fairly well funded. I see them as being potential aggressors in a new round of merger and acquisition activity. These companies also have additional exploration potential. Keegan just made a new, very important property acquisition. It was a property swap with the Ghana government that it’s been working on for years and where the company sees the potential for some sizable extensions to the Esaase mineralization. So the story could get bigger on every front.

TGR: You recently added some companies to the rather lengthy list of ones that you cover. One of them is Precipitate Gold Corp. (PRG:TSX.V), which is seeking gold in the Dominican Republic. Does it concern you that it has only $1.8M in exploration capital?

BL: Not really. That amount is actually a decent treasury compared to the peer group. There are hundreds of companies in the junior resource sector now that only have a few $100,000 in the treasury. The company, though, will have to raise more money to advance its projects in the Dominican Republic.

There is potential for further dilution, but the share structure is fairly tight. There’s only about 24–25M shares outstanding, no warrants overhanging the stock, and the company is well-held by a strong group of financiers. Bottom line is I don’t think they’ll have any problems raising additional funds if needed.

TGR: Another company that’s exploring the Dominican Republic is GoldQuest Mining Corp. (GQC:TSX.V). It recently had some less than ideal drill results and the market reacted negatively to those. Was Precipitate affected adversely by association?

BL: Absolutely. GoldQuest was another case where the expectations were raised really high. The first few drill holes from GoldQuest were just phenomenal and it would have been very difficult to continue that. GoldQuest really hit the honey holes right at the beginning.

But now the hype has definitely died down from the whole Dominican Republic play and Precipitate did suffer from that. The hype over the Dominican Republic helped obscure Precipitate’s outstanding property portfolio in the Yukon and British Columbia, where it has about 19 highly prospective properties that were acquired for really valid geological reasons. That’s the side of the company where I expect the next really important exploration news will come from.

TGR: What are some other companies that you follow that could see a rebound in 2013?

BL: The list is starting to grow a bit long. But there are really some remarkable bargains right now as the year draws to a close. Investors should concentrate on companies with either proven resources and/or the likelihood of big news on the near-term horizon.

Some of the prime examples that I would throw into this category are Cayden Resources Inc. (CYD:TSX.V), International Tower Hill Mines Ltd. (ITH:TSX; THM:NYSE.MKT), Gold Standard Ventures Corp. (GSV:TSX.V; GDVXF:OTCQX), Kaminak Gold, and Lion One Metals Ltd. (LIO:TSX.V; LOMLF:OTCQX; LY1:FSE).

TGR: Let’s start with Cayden. That’s a story that’s largely unfamiliar to our readers, with the La Magnetita target in Mexico.

BL: What’s important about Cayden is that there are a few aspects to the story. There’s the property position that it has at the Morelos Sur gold project. It actually partially surrounds and transects the largest producing gold mine in Mexico, Los Filos, which is owned by Goldcorp.

That mine has to expand, and in fact, it’s already encroaching on the surface onto Cayden’s property position. That means there’s going to have to be some kind of a financial accommodation done there and it could be significant for the company.

In addition, Cayden has the land between the two producing pits on Goldcorp’s mine and Cayden has drilled that. It has shown that there is mineralization trending from between those two pits at depth on its property. So Cayden has proven mineralization and an obvious natural buyer for whatever it can prove up.

Then you have the La Magnetita target. The key to that is that every mine and discovery in the Guerrero Gold Belt has been identified through geophysical means. Importantly, La Magnetita is the largest geophysical anomaly in the belt. To date Cayden has gotten some outstanding sampling and trenching results, and is now drilling, so I’m very excited about that potential.

TGR: International Tower Hill is a story that took off a few years ago and seems to have stumbled more recently. What’s happening with the company now?

BL: Its Livengood gold project is a case of a really large project with lower grades. The project is still economical, but you have to get the majors out there ready to buy up such a project. That will likely happen, but only when we have a sense of normalcy in the market that we haven’t had in the last 18 to 24 months.

TGR: How about Kaminak? We talked a little bit about the Yukon with Comstock and Kaminak’s right there too in the White Gold District.

BL: Yes, it is connecting all of these various anomalies on its property and building up a resource that, in its recently released maiden resource estimate, is already totaling over 3.2 million ounces of inferred resource.

Kaminak has come off a good bit and could be a prime takeover candidate. It’s being derisked with every drill hole. The company has had incredible success so far and it has just completed one of the most aggressive drill programs to be seen in the junior resource world in many years.

At the current price levels, it’s hard to get hurt in Kaminak.

TGR: Gold Standard Ventures, which owns the Railroad gold project in north central Nevada, is a made-in-America story. What’s the next catalyst for Gold Standard?

BL: This was a slow motion discovery. When the company first came public, I didn’t recommend it in my newsletter because I thought it was too expensive.

The company’s first results weren’t spectacular by any means, but they were technical successes—not market successes. However, once you understood the story and talked to the geologists, you understood that the company was vectoring in on something that could be big. We were able to get our readers in on the stock before the big run up, which was just wonderful timing, after it had declined a bit after it first came public.

The geologists kept vectoring in on the mineralization while proving up the geological concept, until they eventually found the higher-grade mineralization. At this point, it is still trying to fully understand the mineralization and get a much better handle on it. I think what you’ll see is that Gold Standard will be able to advance the resource to a much greater degree over the coming months. This is another example of those very hot stories that have come back a good bit, yet have a proven discovery, and the company will just keep drilling to prove up a resource.

TGR: What’s happening with Lion One?

BL: Lion One is progressing with permitting and development of its Tuvatu gold project in Fiji, a project with upside potential that I don’t believe is being valued by the market at all. Over $30M was spent on this project by Emperor Mines Ltd. in the late 1990s, including over 85,000m of drilling and 1,600m of underground infrastructure.

All Lion One has to do is dust off and update an existing feasibility study, and get the necessary permits to get into production. It is doing that right now, and will use proceeds from Tuvatu to fund exploration of the multimillion-ounce potential of the project.

Management, including legendary financier Walter Berukoff, owns about 40% of the company, so it has solid support going forward. It’s a great buy at these levels.

TGR: It’s the end of the year and some retail investors are wondering what to do with their portfolios and if they should make some changes. Is there a process that you go through at the end of the year?

BL: The end of the calendar year is a natural time to clean up a portfolio and rationalize things. But it is also the time of the year that you typically have tax-loss selling that creates a dampening effect on the markets and sometimes creates some pretty attractive bargains. This year, as I said, we’ve had some screaming bargains created.

I think what investors need to do, and we’re doing it with our Gold Newsletter portfolio as well, is to look at the number of companies that you can adequately follow. If you’re able to find some really attractive opportunities in this kind of an environment, you need to start switching into these faster horses in exchange for some of the slower horses in your stable. Just turn over the portfolio a bit, rearrange it and get prepared for the future.

It’s especially important if you can find companies that are better positioned going forward than the ones you have in your portfolio and you can realize some tax losses going forward. There’s no reason to play the psychological games of holding on to a loser just so you can get back what you paid for the stock. Be ready to break emotional ties, sell a company and put the money on a better bet going forward.

TGR: We’d be remiss if we didn’t ask a gold bull like yourself to tell us what you think the coming year has in store for gold. Please give us your thoughts on that.

BL: It’s going to be a very good year for precious metals and mining stock investors. Once we get through these end of year trading games and that fiscal cliff fiasco, the markets should settle down into an environment where everyone recognizes that massive money printing will continue for years to come. This is the fundamental story that’s going to drive metals prices higher and in this environment the equities will begin to benefit once again.

There’s also a very powerful technical picture developing. Both gold and silver are tracing out a cup-and-handle formation similar to the ones they formed during the 2008 credit crisis and the subsequent recovery from that crisis. After that, the metals rocketed higher out of those cup-and-handle bottoming formations. I fully expect a similar performance this time around, which would be a pretty exceptionally profitable situation for gold bulls.

TGR: Thanks, Brien, for your insights.

With a career spanning three decades, Brien Lundin serves as president and CEO of Jefferson Financial, a highly regarded publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Lundin edits and publishes Gold Newsletter, a cornerstone of precious metals advisories since 1971. He also hosts the New Orleans Investment Conference, the oldest and most respected investment event of its kind.