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 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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By The Gold Report, on April 9th, 2012
 What do the gold market and the weather have in common? You can forecast both, but predict neither, according to Brien Lundin, chief executive of Jefferson Financial and publisher of Gold Newsletter. Lundin, who also organizes the New Orleans Investment Conference, isn’t focusing on if there will be rain or sun in the market, he told The Gold Report in this exclusive interview. He’s slowly accumulating juniors on the cheap that have big news in the forecast.
The Gold Report: You’ve compared the gold market to the weather because it’s about that predictable. What does your experience tell you about navigating a market like this?
Brien Lundin: You have to be nimble and keep your eye on the big picture. Every asset class is searching for a trend. The U.S. economy is in transition. The equity markets are in transition. Everything is in limbo searching for the next trend line. There’s just no telling whether that next direction is upward or downward.
In times like this, investors need to look beyond the day-to-day headlines. They need to keep the bigger picture in mind, focus on buying value on the dips and not getting too aggressive in any case.
TGR: You were recently at the Prospectors and Developers Association Conference in Toronto. What’s the common refrain you’re hearing from investors and what’s your response?
BL: They’re wondering when things are going to turn around. I wish I could provide them with the answer because I’m searching for that answer myself. We needed calmer markets, which we have now. We don’t have the dancing-along-the-precipice type of markets that we had earlier this year when it seemed Europe could crater at any moment. Now we need to have some recognition that there is going to continue to be an easy-money environment as a backdrop and that there will continue to be monetary inflation to support the commodity markets and, most important, gold. Until we have fairly steady, non-crisis-driven markets with a consensus toward monetary easing, we won’t see investors turn to the more speculative assets, such as mining shares.
TGR: Many gold investors believe that continued growth in the U.S. economy will eliminate the need for further quantitative easing (QE) by the U.S. Federal Reserve, which could suppress the gold price. You argue that there is already $1.5 trillion in the system that hasn’t been deployed by the Federal Reserve. In February, you wrote, “This money officially doesn’t exist. Until the nation’s banks start withdrawing it to make loans and insert the funds into the economy, sustained U.S. economic growth, in other words, won’t be the end of liquidity injections. Instead, it will mark the beginning of a new phase, as the velocity of today’s huge overhanging money supply accelerates and inflation truly kicks in.” That sounds promising for precious metals prices, but are banks ready to start lending their hoards of cash?
BL: Simply put, they aren’t yet. What I was talking about was a scenario of economic growth, one in which the banks would not only be able to start lending again but would also be eager to start lending to capture that greater margin by creating loans. Under that scenario of economic growth, bank lending would increase and there would be a shot of adrenaline hitting the market as reserves become currency.
The key is that so much debt and currency have already been created that gold wins in virtually any economic scenario, whether it’s economic growth or a continued easy-money environment in a more sluggish economy. Under either scenario over the long term, gold is a winner precisely because there’s already so much debt and currency.
TGR: Do you have any timeline for that scenario to take place?
BL: One of the important timelines is presented by the presidential election in the U.S. That is going to be a key inflection point for the markets. If the current administration is retained, there would be more easy-money policies. Those policies won’t suddenly end if we see a Republican elected, however, because there’s been so much debt created in the U.S. and Europe. There’s no way to escape that burden through economic growth, austerity plans or tax hikes. We cannot manage that mountain of debt that’s already been accumulated. The only way to address it is through monetary inflation, by making the debt less valuable by increasing the quantity of dollars and euros.
TGR: You can’t do that with gold.
BL: That’s why gold is gold. As J.P. Morgan is rumored to have said, “Gold is money. That’s it.”
TGR: Newmont Mining Corp.’s (NEM:NYSE) CEO, Richard O’Brien, said on March 27 that $2,000/ounce (oz) gold was “reachable” in 2012. A $350/oz-plus move in the gold price inside nine months seems a little optimistic.
BL: It looks a bit fanciful. However, we could end up looking back at a $300/oz rise in the gold price and think, “Well, that was easy!” We’ve seen that before in this market. It could happen with just the imposition of a third round of QE, which is what created the last $300 move.
TGR: Gold and silver equities have lagged the prices of their respective commodities since December 2010. What tangible move in the gold price is necessary to lift share prices to float the boat of all these junior companies? They’re not even moving on good drill results right now.
BL: It’s as much a matter of time as price. It’s not just a matter of getting a $100/oz, $200/oz or a $300/oz rise in the gold price, which, of course, would move the juniors if it occurred in a steady fashion against the backdrop of normalcy in the markets and economy. That rise would need to occur over a period of time long enough so that investors would be comfortable in taking on risk. Juniors cannot thrive in an environment where investors are searching for safety.
TGR: As an approach to the moribund gold equities market, you recommend a stick-to-your-knitting strategy of continuing the “slow but steady accumulation of undervalued companies with news on the way.” What are some companies that you’re expecting some positive news from in the near future?
BL: There are a number of companies in that sweet spot. There are a lot of bargains out there that aren’t just grassroots exploration companies with an idea and not much more. These are companies that either have resources or are very likely to turn out very positive news in the near term.
I’m very excited about Elissa Resources Ltd. (ELI:TSX.V; E30:FSE) and South American Silver Corp. (SAC:TSX; SOHAF:OTCBB). Elissa is a rare earth play in Nevada 16 miles away from Molycorp Inc.’s (MCP:NYSE) Mountain Pass project. I’ve visited the property. Right now, Elissa is drilling a very high-grade surface anomaly and has indications that it could spread elsewhere on the property. It should have news out by early May on its first drill program.
TGR: It’s a heavy rare earths play a stone’s throw from Molycorp’s processing facility at Mountain Pass, yet Molycorp let it slip through its fingers. How does that happen?
BL: It’s an early-stage play. That’s the kind of thing that these aggressive junior exploration outfits are best at, finding possibilities that other people overlooked.
TGR: Its proximity to Mountain Pass indicates that even a small discovery there would make it economic.
BL: Yes. It would provide precisely what Molycorp needs to complement its project. Molycorp would be the natural buyer and would backstop the value if there were a discovery there. The challenge for Elissa will be trying to find another potential bidder for the property. But given the infrastructure in the area, that really shouldn’t be too hard because any concentrates can be easily shipped.
TGR: What about South American Silver?
BL: South American Silver has tremendous value. It’s been held back by the perceived country risk in Bolivia, but its Malku Khota silver property is enormous, growing and worth many times the current market cap of the company on a net present value (NPV) basis. The company is going to have a revised economic update in Q212 and that could be a real catalyst.
South American Silver also has a second project, Escalones, in Chile, that is a potential company maker by itself. It will have its initial preliminary economic assessment (PEA) done sometime this year.
TGR: That’s a copper-gold-silver discovery with about 4 billion pounds copper in the biggest copper-producing country in the world. It put the resource estimate on Escalones out in December, but it didn’t move the stock a lot. Why doesn’t the market give more credence to that discovery?
BL: The market isn’t giving credence to a lot of things right now, but December isn’t the best month to put out big news. That said, Malku Khota has been such a marquee project for South American Silver for so long, very few investors really appreciated Escalones. Quietly in the background, South American Silver’s management was doing the necessary confirmatory drilling on Escalones to prove up a resource. Really, it was stunning when it came out. It is fighting a battle to show the market that it has two company-maker projects. If you like silver, there is Malku Khota. If you like copper-gold, there is Escalones. There are two ways to win. The company’s value is not only backstopped, but also leveraged to the metals as few other juniors are.
TGR: Could the company spin out Escalones?
BL: It’s something I know that management has considered, but I don’t think that it’s going to do that in the near term.
TGR: When share prices aren’t moving a lot, do you focus more on jurisdictions so that if there’s one discovery in a given area, then that might raise the prices of a number of juniors operating near by?
BL: Yes, I do. A hot area is one of the things that can overcome other market trends, positive or negative. I think the Yukon, for example, is going to heat up again. There was a big rush into the Yukon last year and it was just a zoo. A lot of the companies anticipated that they would be able to do the necessary groundwork and soil sampling, and then still have time to drill some of their juicier targets before the end of the exploration season. What they didn’t count on was the fact that the assay labs were just completely overloaded. Expected three-week turnarounds turned into three-month turnarounds and longer. There was very little drilling done on a lot of these projects, but now they’re ready to go. There are some companies up there that have really exciting targets and discoveries. They’re ready to drill—and some are drilling right now.
In particular, Golden Predator Corp. (GPD:TSX) has a bona fide discovery at its Brewery Creek project and has virtually year-round access to drill the project, so it has been producing results. This project is undoubtedly going to go into production. It’s just a matter of when it has defined enough resource. It’s been a past producer, so it has some of the permitting obstacles already cleared.
TGR: It recently did a deal with Alexco Resource Corp. (AXR:TSX; AXU:NYSE.A) that gives Golden Predator full ownership of Brewery Creek in exchange for a 2% net smelter return royalty. What does that mean for Golden Predator?
BL: Bill Sheriff, Golden Predator’s chief executive, is an awfully smart guy. He’s taken a ground floor, junior company to the New York Stock Exchange before, and he’s pursuing a similar game plan here. It’s a good deal. It fits Bill’s mold. He has a better idea than anyone of what the upside potential of the project is. I think that’s a sign that he thinks it’s pretty significant.
TGR: Golden Predator says that commercial production and positive cash flow are possible inside of 14 months. Is that realistic?
BL: Absolutely. It’s a past-producing project. The question remains how to do it efficiently. It does have to get some numbers in place, but capital is not going to be a problem. It is rapidly drilling and making new discoveries as it goes along.
TGR: Are there any other companies in that jurisdiction that you have positions in?
BL: I like Ethos Gold Corp. (ECC:TSX.V; ETHOF:OTCQX) and Ansell Capital Corp. (ACP:TSX.V). They have good anomalies, but they don’t have true discoveries yet. Ethos, for example, has outlined a 17.5-square-kilometer soil anomaly called the Mascot Creek target on its Betty property. It includes a trench running 7.3 grams/ton gold over 50 meters—which is one of the best trench results I’ve ever seen in the Yukon. Ethos is a widely followed stock, but still a bargain considering that I feel its chances of a major discovery are very high.
In contrast, not many people follow Ansell. It’s a very small, micro market cap company. But it’s well funded, and has one of the more exciting argots that I’ve seen in the Yukon. It had some significant drill results in December that were completely ignored by the market. The company is still trading at about the same level that it was in late December.
TGR: Are there other areas that are exciting right now?
BL: Colombia. Seafield Resources Ltd. (SFF:TSX.V) is one of the more undiscovered plays in that area. Not very many people realize that it has about 3 million ounces (Moz) in total resource identified on two targets. It is working toward a PEA on the Miraflores project, which has about 2 Moz in a setting that should be straightforward to mine and with a grade that should allow for a very profitable operation. I see it advancing that project toward either production or a takeout at some point. It will continue to grow the resource, but it is already considerable.
TGR: Its stock is trading at about $0.17, which puts it at about $10/oz. That is kind of a silly price.
BL: Yes, it is. Its goal is to expand the resource as much as possible, but also advance the resource at Miraflores and remove some of that risk so it rises up the value chain. It’s just too large of a resource to be ignored.
TGR: At one point, Seafield was one of the most talked about juniors. Then there were some issues and the management team was replaced. What do you think of the new team?
BL: I like them. I’m familiar with other work that they’ve done. They are serious people experienced in Latin America and have great local relations. The team that was running the company previously was kind of a caretaker team. They were very happy that they found this new group.
TGR: You follow some made-in-America stories, too.
BL: Calico Resources Corp. (CKB:TSX.V; CVXHF:OTCQX) has the Grassy Mountain play in Oregon. It is undervalued because investors feel there’s some risk that the project can’t get permitted in Oregon. In fact, it will likely end up as an underground project, at least initially, with relatively little surface disturbance. It has the local authorities and community behind it. It has a great leadership team headed by Chairman Buck Morrow, who’s done this before and done it correctly.
I believe it will get permitted and eventually go into production. That value will get realized. It has about 1 Moz in total resources. As it focuses on high-grade, underground resources, that’s probably going to end up in the 600,000–700,000 ounce range. It has a lot of upside potential.
TGR: Is it open at depth?
BL: Yes. It also has anomalies and geophysical targets outside of the current resource that it will be drilling soon. It has good upside potential.
TGR: It has added silver to the resource, too.
BL: It actually calculated the silver resource for the first time, which will help the economics. It’s going to be a long-term value play. The good thing about this project is that the risks are known, and that is primarily the permitting risk. The market is over-concerned about that risk. It’s a very valuable, identified resource that’s growing.
TGR: What are some other made-in-America stories you like?
BL: Revolution Resources Corp. (RV:TSX; RVRCF:OTCQX) is one of the leading landholders among the juniors in the Carolina Slate Belt play, the location of the first gold rush in North America. It’s building up a nice resource at its Champion Hills project in North Carolina. That area is famed for Romarco Minerals Inc.’s (R:TSX) Haile project, which will have a 4–5 Moz resource, but has been delayed by permitting woes. Revolution is drilling its project. It doesn’t have the same issues as Romarco, but it is being held back a bit by Romarco’s permitting problems. It could delay everything by up to a year.
In the meantime, Revolution made an absolutely extraordinary purchase of the Universo and La Bufa projects in Mexico, which are tremendous land positions with highly prospective targets ready to be drilled. It just raised $5M and will be well funded to advance those properties. I expect it to get some early news out on those projects and then focus back on the Carolina Slate Belt as permitting problems for Romarco get put to bed.
TGR: Some skeptics might say that it got the Mexican projects because it’s not sure that its primary project is going to move forward.
BL: I don’t think that’s true. The problems for Romarco revolve around some wetlands around its landholdings. Revolution doesn’t have that problem, but it’s tarred by the same brush. It isn’t getting any traction in the market despite its exciting Mexican projects. As Romarco’s project moves forward, it will open up the Carolina play again and Revolution will be in a position to take advantage of that.
TGR: Any more interesting American stories?
BL: Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) has been building a lower grade but significant resource in Nevada with the idea of using area mills to centrally process the ore from a number of projects in the Oreana trend in a hub-and-spoke strategy. The Oreana trend is a relatively new and still unappreciated gold trend in Nevada. Importantly, the company recently noticed that Coeur d’Alene Mines Corp. (CDM:TSX; CDE:NYSE), which was operating the Rochester silver mine in the region, failed to renew its mining claims with the federal government. Rye Patch went in and staked a claim that is, in effect, an active mining and exploration project by a mid-major mining company.
TGR: There’s a lawsuit over Rochester between Rye Patch and Coeur d’Alene. That doesn’t seem promising, but Rye Patch certainly seems to have a solid legal position.
BL: Some would call its position unassailable. It’s tough to bet on legal outcomes, but this one does look pretty strong. For the court system to invalidate Rye Patch’s claims, it would have to overturn over a century of established mining law and precedent, with collateral damage that would put many American mining operations up for grabs. There almost assuredly will be some accommodation made one way or the other to resolve this situation. Whatever that accommodation is, the value of it seems almost certain to be far above what Rye Patch’s current market value is.
TGR: The rare earth elements sector took a big hit in 2011, but you still see value in a few plays. Tell us why those still remain on your radar and which ones you like.
BL: The economic fundamentals have not changed. These plays go in and out of fashion in the markets and there are bursts of buying here and there. We saw that recently when Molycorp’s competitor in China reported that its earnings had quadrupled, and it boosted buying in Molycorp and in other rare earth plays. Yet, a number of these plays are still much undervalued.
Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A) has been the lead play in the junior sector for some time, and I’m proud to say that Gold Newsletter was the first to recommend it years ago. The company recently came out with a prefeasibility study on the Bear Lodge project in Wyoming that showed tremendous value of $1.7–4 billion (B) NPV. It is one of the most advanced and valuable rare earth deposits in the world today, certainly among publicly traded companies. It’s a tremendous value right now.
Another play that I like is Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK; T61:FSE). It recently released an impressive PEA on its Norra Karr project in Sweden. The key to this project has always been its location as a source of critical metals and rare earth metals supply to Europe, breaking that market’s lifeline to China. Then it released this PEA that showed a $1.46B NPV at a 10% discount rate. These numbers are stunning because most investors in the market regarded this project as being middle of the road. It’s a really remarkable project and one of the most undervalued plays out there—much to my dismay because I am a long-time shareholder. But the company has much brighter days ahead of it.
TGR: Neither Tasman nor Rare Element has offtake agreements with third parties. Is that something that they’re going to be looking at?
BL: It would be very important to Tasman because it makes it easier to finance a project. It actually makes it almost inevitable that a project will be financed and constructed. I would not be surprised to see Tasman announce something of that sort. It’s not as important for Rare Element, however. I don’t think that company is as aggressively searching for that type of an offtake agreement.
TGR: It’s been a pleasure speaking with you.
With a career spanning three decades in the investment markets, 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 publishes and edits 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.
By The Gold Report, on April 6th, 2012
Richard Karn, managing editor of The Emerging Trends Report, has been in Australia investigating precious and specialty metal projects for over two years. He likes what he sees. In this exclusive Gold Report interview, he reveals that in an environment where the U.S. dollar continues to lose its purchasing power, Australia and its gold offer good protection against what he sees as a “global pandemic of corruption.”
The Gold Report: Richard, at the Gold Symposium in Sydney, Australia, last November, one of your charts tracked the erosion of U.S. dollar purchasing power. Can you give us a summary?
Richard Karn: It’s interesting that if you go back to the late 18th century, the dollar has been on the gold standard roughly the same amount of time it has been on the Federal Reserve System, which presents us with a wonderful opportunity to compare the dollar’s purchasing power over time.
Throughout the 19th century with all of the booms and busts, the wars, and the incredible territorial and industrial expansions, the dollar maintained its purchasing power very well on the gold standard. Since 1914, when the U.S. went to the Federal Reserve System and especially since it has become a purely fiat currency system since closing the gold window in 1971, the dollar’s purchasing power has collapsed. Under the Fed’s administration, the dollar has lost well over 95% of its purchasing power.
We show this chart in our presentations, pointing out that the purchasing power of the dollar on the left scale is in log format while the GDP, M2/M3 and Public Debt figures are in linear format on the right scale. Our intention here is simply to highlight the explosion of nominal GDP, M2/M3 and Public Debt corresponds with the collapse of the real purchasing power of the dollar that attended the end of any pretense to adhering to a gold standard in 1971.
However, in order to dispel any accusations of bias, here is the same data in log format on both scales: the take-away is still that the explosion of nominal GDP, M2/M3 and Public Debt corresponds with the collapse of the real purchasing power of the dollar that attended the end of any pretense to adhering to a gold standard. If anything, to mathematicians the chart is even more damning.
While public awareness of this problem has grown steadily for 40 years, grassroots objection is just now reaching a critical mass, especially among the younger followers of presidential candidate Ron Paul. That is why Federal Reserve Chairman Ben Bernanke, in reaching out to the next generation of leaders with his series of university lectures, is disingenuously making a point of damning the gold standard for its “volatility” while utterly dismissing the simple truth that at least on the gold standard the dollar retained its purchasing power over time, something the U.S. dollar under the Federal Reserve Bank’s stewardship unequivocally has failed to do.
In 1914, the U.S. moved away from the gold standard and into a financial system based on debt and ever-increasing monetary inflation; the transition was completed in August 1971 when Nixon ended dollar convertibility into gold, and John Connelly famously told concerned European bankers, “it’s our currency, but it’s your problem.”
What has emerged is a system under which people earn more nominal dollars of less real value, which disguises the loss of real purchasing power. For four decades, real wages have not kept up with the rate of inflation. Savings have been drawn down and the standard of living in the U.S. has declined. As a consequence, debt levels have soared.
The Fed is targeting inflation rates of 2% to 3% per year, which roughly equates to the inflation rate Americans experienced under the gold standard over the entirety of the ninteenth century. We have long suspected that this figure was chosen because the Fed believes that is the threshold people will tolerate being stolen from their paychecks without complaint. But 2% to 3% inflation compounded annually over the course of a 35- or 40-year working career amounts to a massive loss of purchasing power as well as fostering a false sense of security regarding one’s financial situation.
This is a very sophisticated swindle, and all of the powers of government are being brought to bear in order to hide what they have done or to deflect blame, but they are increasingly being cornered by demographics. For most of their working careers, people are too busy earning a living and raising a family to take the time to monitor what monetary policy was doing to their life savings and the retirement they envisioned that they can no longer afford.
TGR: And now the largest wave of retirees in American history is about to have a nasty suprise?
RK: Exactly. Retiring Baby Boomers are discovering they have been duped and that their golden years have been confiscated by a government they believed was serving their interests—and this largest cohort of the population, as well as an increasing number of young people facing a very bleak future determined for them before they were born by deficit spending politicians and their social welfare programs that have simply run amok—are saying “We’re mad as hell, and we’re not going to take it anymore.”
I believe that when you see the radical left in America as manifested by the Occupy Wall Street movement marching right by the radical right in America as manifested by the Tea Party movement effectively mouthing the same slogans, and seeing their ranks swell with retiring Baby Boomers, change is at hand.
The United States has a history of reform, of “throwing the bums out,” and we think it likely that time is at hand once again.
To be clear: we think this is a good thing, a cleansing thing, that will lead to better lives for the mass of Americans.
TGR: You dubbed the destructive course of fiat currencies and sovereign debt levels the “global pandemic of corruption” and suggested that if people want to grow wealth in a negative real-interest-rate environment they must speculate. But where?
RK: In a negative real-interest-rate environment, if you do nothing, you lose money because the purchasing power of your money is in perpetual decline. But where should you invest? At The Emerging Trends Report, we are students of history, and what is transpiring today is not new—in fact, it has happened hundreds of times before, just not on a global scale. History tells us there has never been a successful fiat currency—every single one has failed for exactly the reasons we are experiencing firsthand today. Over time, a fiat currency’s purchasing power is utterly destroyed by politicians. So obviously, we like gold and silver, which we will come back to in a moment.
Under a fiat currency regime, the rubber always meets the road at real assets, particularly resources, which simply cannot be conjured with the stroke of a few computer keys.
First, we like oil and gas. If there are two aspects of the U.S. economy that still represent American innovation and entrepreneurial spirit, it is technology and the oil and gas industry, the latter of which is frequently overlooked as a technology play. America does oil and gas better than anybody else. Having natural gas at $2.50 per million BTUs may be the most important competitive advantage America has been legitimately afforded since World War II. It would be foolish not to take advantage of it, and we think the market will overcome the array of bureaucracies aligned against it.
Second, we like large, job-generating, economy-enhancing infrastructure projects, in particular oil and gas pipelines, the rebuilding of the North American electrical grid, and water and wastewater treatment plants—as well as the engineering and construction firms that will make it happen.
American politicians of all political stripes have neglected the maintenance, replacement and expansion of U.S. infrastructure for the better part of 30 years, preferring to kick the infrastructure can down the road while promoting pet vote-buying projects, but we have reached a point where that is no longer possible—we’ve run out of road. We have gas lines exploding, massive sink holes or subsidence from water main leakage, and a rapidly increasing incidence of brown- and black-outs.
This infrastructure program will drive the third and most speculative theme: specialty metals, all of which are leveraged either to technological advance, or the base metals upon which a domestic infrastructure rebuild program will rely.
When the U.S. goes into the market for the materials to undertake this rebuild cycle, prices will take off because there is far less of these specialty metals available today than people realize, and they are harder and more expensive to extract, process and bring to market. The upside on these metals is truly stunning.
And of course, we like gold and silver—the ultimate anti-fiat currency.
TGR: You’ve spent a lot of time in Australia looking at precious and specialty metal projects. Tell us: the success of the Australian mining industry has helped raise the Australian dollar against the U.S. dollar. What effect is that having on the mining sector?
RK: First and foremost, it is undercutting the mining industry’s profitability. Because gold and silver are priced in U.S. dollars, the Australian dollar, in which they incur operating expenses, is going up against the U.S. dollar, despite various
hedging strategies, profitability has not matched the increase in the price of gold or silver.
People in North America do not realize how difficult it is for small Australian companies to get financing. As a result, companies fund themselves by issuing shares. North American investors see an Australian company with half a billion shares out there, selling at $0.09, and they assume this is bad management, when in reality equity dilution is often a matter of not having another course available to them.
In response to the prolonged dearth of financing, which actually predates the global financial crisis, we are starting to see more medium and large companies buying smaller companies with good deposits with equity, or company scrip—the corporate equivalent of fiat currency. I believe we will see an acceleration in this trend over the next 18 months with premiums ranging from 30% to 70%.
The problem for the acquiring medium and large companies will be how much equity dilution their shareholders will tolerate before there is a backlash.
TGR: Do you particularly like gold companies in this regard?
RK: Absolutely. This trend is especially prevalent in the Australian gold sector.
TGR: Have there been any recent discoveries in Australia that have investors and the mining sector excited?
RK: I’d say over the course of the last year Northern Star Resources Ltd. (NST:AUX) and Gold Road Resources Ltd. (GOR:ASX) have probably caused the most excitement. We plan to visit both soon. Gold Road has what may prove to be a whole new gold region called the Yamarna Belt, north of the Tropicana project in Western Australia. We also want to take a look at Silver Lake Resources Ltd. (SLR:TSX), Ramelius Resources Ltd. (RMS:ASX), which is the highest grade gold mine in Australia, Alacer Gold Corp. (ASR:TSX), and dozens of others.
In fact, we’ll be spending the majority of the next 18 months in Western Australia to do exactly that.
TGR: Your newsletter has a bias for historic gold producers. Can you give us some names?
RK: I’ll give you two with interesting stories. The first is Morning Star Gold NL (MCO:ASX), a narrow vein gold mine at Woods Point in Victoria. Western Mining ran it for 25 years, and took out 25,000 to 28,000 tons of ore each year, grading 27 grams of gold per ton (g/t). Then it stopped production, not because the grade was declining or they were running out of ore but because the fixed price of gold was undermining profitability, and management decided to go chase nickel during the Poseidon Boom in the 1960s—they simply closed all six of their eastern gold mines.
After overcoming a host of obstacles, management has been very good at communicating with shareholders on its website. Morning Star has finally concluded the majority of its capital spend and has brought the mine back into production—albeit more slowly than anticipated. It has a 900,000-ounce (oz) resource with considerable exploration upside.
It’s been a “hard slog” for the Morningstar crew, but things are finally coming together. It is building toward production on multiple fronts and drilling on a couple of new reefs. One interesting anomaly Morningstar is experiencing as it resumes production is that it is finding that the final ore grade reconciliations differ from the on-site estimations, often coming in 2–4 times higher, which is consistent with historic production and should be reassuring for shareholders.
While the Morning Star mine itself will be profitable, I think the upside for shareholders will be found in the myriad historic sites spread over its 200 square kilometers of tenements in the Woods Points region. Historically, mining operations throughout the Jamieson-Walhalla Synclinorium lacked the capital to operate below the weathered zone of the countless dykes in the region. Of the hundreds of mines that were sunk in the region, only three raised sufficient capital to go below the water table with mechanization. So Morningstar has all of these targets where gold was found and extracted, but only very superficially, which we think presents a remarkable opportunity.
TGR: What are the cash cost projections?
RK: I think the company is using $750/oz all-in cash costs.
TGR: Do you think that is on the high side?
RK: No. There is a lot of fancy footwork being employed in annual reports in the gold sector. When I say all-in costs, I mean everything, including administration and exploration. I wouldn’t be surprised if the all-in cost of gold production industry-wide right now is really in the vicinity of $1,000/oz.
TGR: And the second name?
RK: Cortona Resources Ltd. (CRC:ASX), which is developing Dargues Reef, located about 60 kilometers (km) east of Canberra, the Australian capital. The large tenement package Cortona controls encompasses the majority of the sites of the biggest gold rush in New South Wales history, during which miners recovered 1.2 million ounces (Moz) of alluvial gold.
Dargues Reef may be the source, or one of the sources, of all that alluvial gold, the literal motherlode, but because of the remoteness at the time and the processing technology of the day, old-timers were unable to mine Dargues Reef economically.
Cortona has come up with a very good, and very unusual resource, in that it has an unusual uniformity grade of 7.4 g/t. To date, Cortona has also found two other geological formations exactly like Dargues Reef, which may create tremendous upside.
This is the first new gold mine to be permited in New South Wales in more than seven years and represents no mean feat. Cortona’s management has been actively engaged with the community and environmental groups for a number of years, and I think they really should be applauded for their efforts. If Cortona finds the source of that 1.2 Moz of alluvial gold, it will be opening up a new gold field in New South Wales of all places, one of the more populated areas in Australia.
TGR: Do you expect issues with permitting a bigger operation?
RK: One of the “nice” things, from an environmental point of view, about an underground narrow vein operation is that it has a very small environmental footprint. In the case of Dargues Reef, about half of the gold will be recovered by simple, unthreatening gravity separation, and the remaining concentrate will be trucked to a carbon in leach (CIL) plant 400km away.
TGR: Do you have any parting thoughts on precious metals in Australia?
RK: Australia is a safe country. It has very good miners and very good geology. We see an absolute wall of money headed Australia’s way at some point because the worse the sovereign debt and sovereign risk issues get, the more people will pay a premium for safe countries in which to operate. That pretty much sums it up.
TGR: Richard, thank you for your time.
RK: It’s been a pleasure.
Richard Karn, managing editor of The Emerging Trends Report, has a broad, multi-disciplinary background, industry contacts, and a working knowledge of these metals as well as considerable research, analytical and writing experience pertaining to them. His firm has published nine Emerging Trends Reports, which were updated in the aftermath of the global financial crisis and published in the form of an eBook, Credit & Credibility. For more than two years The Emerging Trends Report has been conducting a boots-on-the-ground survey of Australian precious and specialty metal projects. If you would be interested in participating in the exciting venture, please contact Karn at rkarn@emergingtrendsreport.com.
By The Gold Report, on April 5th, 2012
 The turnaround in precious metals prices and mining shares has been slower in coming than most analysts and investors have expected. This has certainly not deterred Jordan Roy-Byrne, publisher of The Daily Gold Premium, from searching for and uncovering some of the situations he expects to provide winning returns. In this exclusive interview with The Gold Report, Roy-Byrne discusses a couple of new gold and silver names with near-term production in the works.
The Gold Report: When we last spoke four months ago, gold and silver stocks generally, and the juniors in particular, were in their year-end, tax-loss-selling doldrums. What is your view on where these things are now?
Jordan Roy-Byrne: I think the sector is basically in a bottoming process. It has been in a state of negative sentiment for weeks but has been unable to rally. We thought the market had bottomed last week but it now appears a final washout is beginning, which could be ugly. There has been a lot of technical damage inflicted on the sector. Over the next several months or so, I think we’ll see a rebound but a breakout to new highs is now unlikely to happen this year. If you have ample cash then you will be able to take advantage of the coming major bottom.
TGR: Last November you were expecting a breakout in the gold stocks that would start sooner than it has. Metal prices haven’t cooperated very well. Do you think it’s going to take $1,800/oz gold to get people’s attention again for things to move, or something other than that?
JR-B: Well, first of all, the stocks have to lead the metals and that is what will happen eventually. As far as what it’s going to take, that’s a great question. In the larger view, we see that a lot of money has gone into bonds and also into conventional stocks. Stocks have been doing well, and there’s been at least the perception that corporate profits have been growing and there’s a statistical economic recovery. That provides competition to the precious metals sector and so money has moved away from precious metals and, secondarily, the resource sector.
Bonds appear to have put in a potentially major peak and now look like they’re going to decline in price, which means rates will rise. I think the stock market has more upside, but fairly soon it’s going to start to run into some major resistance. At that point I expect a neutral market or mild bear market. So I think the combination of bonds and stocks struggling simultaneously, probably at some point later in the year, is going to be a significant but stealth catalyst for precious metals because that’s what’s going to make people look at other things, such as precious metals.
TGR: You’re a technician and you study charts in great detail. What’s your technical work telling you at this point as far as where the metals are headed and when the turnaround is near?
JR-B: It appears that we are near the end of the bottoming process. Sentiment is obviously very negative and that is one of the conditions you need to see for a bottom. The other condition you need is positive price action with bottom building followed by higher highs and higher lows. We have not seen that, but with the market starting a capitulation phase, we are likely to see a V bottom develop. This coming bottom will be the fourth major bottom in the sector following 2000, 2005, and 2008. Again, if you have ample cash you will be able to pick up some major bargains. Most investors are probably despondent now but the professionals will be the ones that are looking for bargains at the bottom, which could rebound 30, 40 or 50% right away.
TGR: Can you see any particular catalysts outside of a higher gold price where people are going to jump on these things and cause them to lead the metals prices, as they would normally do?
JR-B: I do not see any immediate catalysts other than a potential V bottom. Fundamentally, here is what will sustain that bottom and lead to a new bull run. We have had a recovery, but it is a weak recovery that has not improved the financial condition of the government sector in the U.S., Japan and Europe. More monetization of existing and new debt will be required and is imperative to keeping the global economy functioning. Rising interest rates increase the burden of interest payments on the debt. Meanwhile, a stagnant or slowing economy puts pressure on budget deficits. These factors, while not important today, will become very important within the next year and, again, will require new rounds of monetization and quantitative easing.
To conclude, any negative economic news or softening in the U.S. or global economy is a potential catalyst for this sector.
TGR: What are you looking for these days in potential winners, and what kind of characteristics would they have?
JR-B: I’m looking for a strong combination of present value, growth potential, a chart that shows that there’s actually some accumulation taking place and potential for near- and long-term gains. I’m looking for growth of a resource that’s likely to become a mine. In the case of producers, you want to see production growth. The big winners tend to have projects in the pipeline that are close to production and, therefore, can continue to grow. Our two biggest winners in recent years—First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) and Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE)—have had mines operating but projects in the pipeline to increase production. The market wants growth. Investors should be looking for companies with multiple mines and/or projects close to production.
Sandstorm Gold Ltd. (SSL:TSX.V) has performed very well for us. It’s a royalty company and has continued to make new deals and acquire new streams as they are called. That equates to growth and the company’s share price has responded favorably and consistently.
More recently, we and our subscribers have profited handsomely with Argonaut Gold Inc. (AR:TSX), which has begun to produce gold from its second project that was acquired along with the San Antonio in its brilliant acquisition of Pediment Gold Corp. San Antonio would be the third mine for the company and could be in production by the end of 2013. Analysts are projecting 250,000 ounces (250 Koz) for Argonaut in 2014, up from about 75 Koz last year. Thanks to the exercise of some warrants, the company could have about $170 million (M) in cash by the end of the year. Given that huge cash position and two recent acquisitions, it’s fairly obvious that it’s going to make another acquisition. With management’s track record, we could see more than 300 Koz production in the next two to three years. Based on our criteria of operational performance, management competence, cash-flow growth, growth potential and also downside protection, we believe Argonaut is the finest gold or silver mining company in the world today.
The way the stock has performed may cause some investors to think they’re too late, but I think that Argonaut’s best days are still ahead in the next several years. I would definitely be accumulating that stock on any pullbacks. Argonaut is our baseline and we’re searching for another Argonaut. Obviously, a company like that only comes along once every few years. If there is any other company in the Americas that looks like it could become another Argonaut, I think Argonaut itself might acquire that company. So that’s something to keep in mind.
One company we thought could be another Argonaut was Richmont Mines Inc. (RIC:TSX; RIC:NYSE.A). It performed very well in 2011 and is a very well-structured and well-run company with a very large cash position. It only has about 33M shares and a multimillion ounce resource from several different properties. Last year, it produced close to 80 Koz. This year, it’s looking to ramp that up to about 100 Koz. It also has a property called the Wasamac property, in Quebec. If that goes into production in the next two or three years, it could take its production to close to about 200 Koz/year. However, Richmont’s CEO resigned and the company’s preliminary economic assessment (PEA) on Wasamac was quite disappointing.
TGR: It certainly is a fairly tight share structure. You don’t find too many decent-size companies these days with 33M shares out.
JR-B: That’s right. With 33M shares out and having the amount of production it has, as well as a multimillion ounce resource and significant earnings last year, is very impressive. But the company is experiencing some headwinds presently.
TGR: Maybe you can talk a little about your model portfolio and how that’s performed since we last spoke.
JR-B: Last year our portfolio was down about 6%. To compare to the overall market, Market Vectors Junior Gold Miners ETF (GDXJ), the junior exchange-traded fund, was down 37%. We have to remember that there was a bottom at the very end of the year that makes 2011 performance look very negative. So far this year, our portfolio is up 7.6% while Market Vectors Junior Gold Miners is down 8.0%. We’ve been fortunate because, based on what we said in our last interview, we really had expected the gold stocks as a group to perform a lot better. We’ve been wrong about that, but we haven’t been wrong about our favorite companies, which have performed fantastically and really helped overall performance. We also put a hedge on in the last month because we felt the market would be moving down, and that’s helped our performance.
TGR: Looking at past market cycles, most of these Canadian juniors would tend to congregate in certain hot areas. For a while there, they were crawling all over Nevada and British Columbia (B.C.). Now, a lot of the action has turned to Mexico, South America and Africa. What’s going on in Nevada and B.C. these days? There are obviously companies that are still exploring those areas because there’s still lots of potential there.
JR-B: Yes, there is. We actually like four companies operating in those areas. We can start off with Nevada. There are two companies I really like in Nevada. One is Meadow Bay Gold Corp. (MAY:TSX.V; MAYGF:OTCQX), which acquired the old Atlanta mine, a producing mine back in the 1980s. When Meadow Bay started, management just figured it was going to increase and develop that resource to over 1 million ounces (Moz), perhaps 2 Moz. There’s a historical resource estimate of about 500 Koz. Meadow Bay was pretty confident it would be able to increase that right away to 1 Moz. Its initial drilling program discovered a gold porphyry that is separate from the Atlanta mine fault zone. Now it appears that the new porphyry itself could be bigger than the old Atlanta mine fault zone.
Meadow Bay Gold is going to have a resource estimate out in the next few months and management is openly talking about 2 Moz Au. I’m expecting slightly more than 2 Moz. With only about 40–42M shares out, at the current stock price, the market cap is not much more than $50M. So there is a lot of significant upside potential in Meadow Bay based on the numbers.
After making a pretty good run, it came back with the market and seems to be putting in another short-term bottom here, making an excellent risk-reward opportunity at around $1.00/share. Also, it received its first analyst coverage, coming from Dahlmann Rose & Co. in an initial report, which came out with a price target for Meadow Bay of $4.27. And keep in mind, Meadow Bay is in a great jurisdiction and is working around a past producing mine. Those two things are very encouraging in addition to the present value.
The next company I like in Nevada is Corvus Gold Inc. (KOR:TSX). That’s one we’ve had in our portfolio since last summer/early fall and it has performed fantastically. Corvus Gold has joint ventured its properties in Alaska and is focusing most of its resources on its North Bullfrog project in Nevada. The North Bullfrog PEA issued a few weeks ago showed that at about $1,300/oz gold, this low-grade, heap-leach operation would have a 2.5-year payback. The company is working very hard on drilling to move it toward production. The PEA took into account less than 1 Moz. The initial resource estimate was about 1.6 Moz, and there is still significant expansion potential as demonstrated by some recent high-grade results from a section of North Bullfrog that was not included in the PEA. So if Corvus can continue to increase this resource and get it over 2 Moz, I think it will attract a lot of suitors.
At the same time, it has some really prospective properties in Alaska. It has one called the Terra project that it joint ventured out, which could actually begin small-scale production this summer. It is a small but high-grade resource. We believe Corvus has significant upside potential, even from present levels.
TGR: How about in British Columbia?
JR-B: There’s one company that we’ve just begun covering that we really like. We met with management at the Prospectors and Developers Association of Canada (PDAC) conference. It’s Huldra Silver Inc. (HDA:TSX.V) and is going to be a new high-grade silver producer. It is expecting its final permit in April before it can go into production at its Treasure Mountain property. It’s very well structured and also tightly held and currently has less than a $45M market cap. Once it gets going, management expects to produce 2 Moz/year. That would be very significant for this new tiny company relative to its market cap. We think there’s some good near-term upside with very high leverage to rising silver prices. A move in silver above $40/oz could be a second major catalyst for Huldra Silver. Finally, the cash flow from production will enable the company to invest in developing and expanding the resource at Treasure Mountain while maintaining the share structure.
Finally, there’s a brand-new company in British Columbia that we just began covering. It’s called Banks Island Gold Ltd. (BOZ:TSX.V) and is run by a pair of mining engineers with real expertise in underground mining. Banks Island has one property, Yellow Giant, that currently only has a two-year mine life, but it believes it’s going to be able to put that in production in Q113. Once it puts that into production, the hope is to expand the resource and, therefore, the mine life.
Banks Island is also in the process of acquiring a property from Seabridge Gold Inc. (SEA:TSX; SA:NYSE.A), which is going to take probably two to three years to put into production. This is called the Red Mountain property, with a resource estimate of close to 700 Koz gold. The grade there is actually very good. This will also be an underground mine with significant further potential as the deeper it goes, the more ounces can be found. If the company is able to successfully put Yellow Giant into production as expected, that’s going to provide a significant amount of cash flow that will help develop Red Mountain. Again, this is basically a brand-new company with very exciting potential.
TGR: What’s the market cap on that one?
JR-B: Right now, the market cap is about $11M. There are only about 17M shares out, but it will have to do a couple of financings. It will take about $10M to put the first property in production. Considering the numbers, Yellow Giant should be able to go into production with 40M shares or less. The significant amount of cash flow from that will help it develop the second property. It still owes some payments to Seabridge Gold for the second property. Again, this is a potentially very exciting situation over the next few years.
TGR: Is there anything else you’d like to mention?
JR-B: We had a very significant recovery in the sector between the end of 2008 and 2011. It’s going to take the market some time to consolidate those gains before the next move higher. At the same time, valuations have come down, which is really a symptom of the “wall-of-worry” phase in a bull market.
After the first big correction in a bull market, it takes the market between four to five years to make its next big breakout and pull away from the first major high. In that extended period, sentiment obviously tends to be neutral to negative. Investors are worried that the bull market’s over and not going to make new highs, yet companies continue to add value. That’s why you tend to see improved valuations, which in itself is a major catalyst for the sector. Right now the market is likely entering a final washout phase. Looking at the long-term charts, there is nothing that says the bull market is over. The market is soon to make a major bottom and should be in position for a great rebound. I’m actually seeing several similarities between this year and 2005.
There are several things readers should look at. One, they can look at companies that have performed very well yet still have value to offer. You really want to buy them when they’re trading 20–30% off their highs, which will happen at least twice a year. Now is obviously one of those times. If you see an Argonaut come 20% off a high, that’s something you really want to take a serious look at. Established growth-oriented companies like Fortuna Silver (though it’s struggling), First Majestic and Silver Wheaton are trading well off their highs. At the same time, I’m not against bottom fishing per se, but you have to be careful with those companies. There are fundamental reasons why companies fall 50, 60 or 70%. But if you find the right one, you could certainly double or triple your money very quickly. I’d just be extremely selective there. It will be a few years before those companies come back into favor, universally.
TGR: Thanks for joining us today.
Jordan Roy-Byrne, CMT, is a Chartered Market Technician, a member of the Market Technicians Association and a former official contributor to the CME Group, the largest futures exchange in the world. He is the editor of TheDailyGold Premium. His work has been featured in CNBC, Barrons, Financial Times, Alphaville, Yahoo Finance, BusinessInsider, 321gold, Gold-Eagle, FinancialSense, GoldSeek and Kitco.
By The Gold Report, on April 3rd, 2012
 Mining companies face risks in Latin America, from nationalization to skilled labor shortages. The Gold Report sat down with several mining executives whose companies stand out among south-of-the-border silver producers. Sharing their thoughts in our “virtual roundtable” are Ross Beaty, chairman of Pan American Silver Corp.; Mike Callahan, president of Silvermex Resources Ltd.; Jorge Alberto Ganoza Durant, president and CEO of Fortuna Silver Mines Inc.; and Lenic Rodriguez, president and CEO of Aurcana Corporation.
“I’m not concerned about nationalization in Mexico,” Mike Callahan says, “but nationalization and increasing royalties are certainly concerns in other countries. There’s continued talk of putting royalties in Chile and nationalization in other places. And, that’s 3–4% right off the top.
 In Jorge Ganoza’s opinion, “Argentina is not a mining country; it’s not a mining jurisdiction. At federal, state and local levels and municipalities, the governments have little understanding of the industry, so there are bigger risks. If you take bigger risks, you need bigger rewards.” Noting that “the cost structure in Argentina is much higher than in Peru,” Ganoza says that Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) would “really need a compelling reason to go to Argentina.”
Argentina, which has hamstrung Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) in its efforts to capitalize on the Navidad property it acquired from Aquiline Resources in 2010, isn’t alone among Latin American countries exposing miners to jurisdictional risk. How about Peru?
Last June, the Peruvian government pulled the rug out from under Bear Creek Mining Corp. (BCM:TSX.V), canceling the concession it had been granted for its Santa Ana operation. The Santa Ana mine was slated to produce about 47 million ounces (Moz) silver over an 11-year mine life starting this year. Bear Creek has two other projects in Peru. Corani, a silver-lead-zinc deposit that’s nine times larger than Santa Ana but located in a jurisdiction where mining is less contentious, is expected to produce more than 13 Moz silver annually starting in 2014 for the first five years of a 20-year mine life. Bear Creek’s flagship project, Corani, represents 80% of the company’s value on a pure silver basis. Corani is proceeding toward permitting and construction.
According to Ganoza, a fourth-generation miner from a Peruvian family that has owned and operated several underground gold, silver, and base metal mines, “Peru has been, is and will continue to be a mining jurisdiction. But that is a generalization,” he admits. “Parts of Peru are very friendly and amenable to new mine developments. Others aren’t, and Santa Ana is in one such location. Bear Creek knew early on that it would face challenges and took a measured risk. We know what happened. I think the government is committed to a resolution of that problem—that is what it has been communicating consistently—but it will take time.”
Fortuna has been operating its Caylloma mine profitably in Peru since 2007, Ganoza says, having purchased it and related concessions in 2005. After a significant upgrading and modernization of the ore processing plant, the company returned the mine to production and the facilities are operating at a rate of more than 1,000 tons per day (tpd).
Commercial operations at Fortuna’s larger San Jose mine, located in Oaxaca, Mexico, achieved commercial production in September 2011 at a rate of 1,000 tpd. The mine produced 491,000 ounces (491 Koz) silver and 4.6 Koz gold in 2011; for 2012, those figures are expected grow to 1.7 Moz silver and 15 Koz gold. When planned mine expansion and processing plant capacity to 1,500 tpd are complete, annual production is estimated at approximately 3.2 Moz silver and 25 Koz gold. By 2014, Fortuna expects consolidated production to reach 6 Moz silver equivalent per year plus base metal credits.
Did jurisdictional risk in Peru or a desire for asset diversification lead Fortuna to the San Jose operation? “Going to Mexico was not driven by asset diversification or jurisdictional risk at all,” Ganoza says. “Mexico and Peru are established, good bases of operation for us. We went to Mexico not to diversify our Peruvian risk but rather because we thought there were good opportunities in Mexico and we had to be there if we wanted to be a world leader in silver production. So we have two anchor assets in these two great mining jurisdictions as a platform for growth moving forward.
“We’re not here to become the leading silver miner in Latin America,” Ganoza stresses, but “a force in world silver production. It is strategic in this stage of our evolution to focus on Latin America. Early on, we said, ‘If we want to be a world force in silver, where are the largest silver-producing countries in the world? Peru and Mexico. So we’ll try to establish ourselves as producers in those countries.’ We’ve been successful at that. So we’re executing a plan we laid out seven years ago. We differentiate ourselves from the pack based on the fact that we have quality assets that operate at low costs.”
Do any of the other executives see jurisdictional risks in Mexico?
 Lenic Rodriguez, who became a Canadian citizen but remains a Mexican citizen as well, says, “I can tell you that Mexico’s political stability is wonderful. I don’t see any resource grab coming from the government. Foreign mining companies operating in Mexico in general are very conscious of their social responsibilities.” He talks about Aurcana Corporation’s (AUN:TSX.V) La Negra mine, purchased from Industriales Peñoles, the largest silver producer in the world. “Industriales Peñoles thought there were no more resources there and was not interested in copper, just silver,” Rodriguez says. “But copper comes associated with silver and we’re having wonderful results at La Negra. It still has a very long mine life, and on March 31 we’ll begin the second consecutive year of expansion of La Negra.
“As we inaugurate that expansion,” he continues, “we’ll be donating space for a clinic for the town of Macon, and we’ll be showing people how to build their own permanent housing. We have proprietary technology using concrete blocks whereby they can build houses very inexpensively, maybe $2,000 each.”
Considering the foreign investment mining brings to the country, the jobs it creates and the community support it demonstrates, Rodriguez says, “a politician would have to be quite crazy to do something against the mining industry.”
The highly publicized incidents of violence related to drug cartels and trafficking have presented no problems whatsoever to Aurcana or its people. “We have not had one incident,” Rodriguez says. “I go very often to Mexico, maybe six times a year, and I’ve never experienced any problems. Not me, nor any of our people, visitors, guests, analysts, people who have gone there. Quite the contrary. They find the people of Mexico very friendly and welcoming.”
 Ross Beaty agrees heartily. “Mexico is an absolutely wonderful mining country. The drug-related violence is real but has nothing whatsoever to do with Mexico’s strength as a mining jurisdiction. It’s a wonderful country period. I love Mexico.”
But jurisdictional risk isn’t the only peril that these executives and their peers face.
What if financing dries up? “It’s a bit of a struggle to continue raising money to try to move something forward,” Callahan supposes. “If you have a project worthy of the financing, I think you can get it. People are betting on your management team and on the fact that you have a decent asset. If you have those I think financing is available.”
He considers it “a blessing that Silvermex Resources Inc. (SLX:TSX; GGCRF:OTC) probably has more financing available than it needs, and money in the bank.” Furthermore, he indicates that its $25 million (M) in gross revenue is enough to fund Silvermex’s development and exploration plans. We’re generating cash flow so we don’t need an infusion of capital investment now.
“We may or may not have to go back to the market,” he continues, “if we find an asset or a deposit that we want to put into production, but it depends on its scale and size, how far they are from the mine, and so forth. If they use the existing mill and/or tailings facility, we’d have to expand those.”
If Silvermex does find itself wanting to seek outside financing, he isn’t worried. “We have a tremendous amount of support in the equity markets,” Callahan says. “We have people looking to try and invest in Silvermex. We’ve been putting them at bay, saying we’ve got $60M in the bank. The markets are certainly available and open to us. We would just need that leap to the next production level to justify going to the markets.”
Ganoza considers the question of capital availability “a bigger risk for the explorers that don’t have established projects and are just pursuing ideas here and there and looking for seed capital to fund ideas. I think that’s where the main risk resides.” He’s not concerned about Fortuna’s dependence on the capital markets because “we have a low-cost operation and healthy cash flow. If we find an acquisition of sufficient merit, we will be able to fund that acquisition. We are not at a stage where we’re funding high-risk ideas.”
What if oil hits $150 a barrel? According to Callahan, that would be a particular concern in Mexico, “where most things are driven by diesel. That could drive costs up 30–40% for some producers. Thank God, we have electric power at our operations so that isn’t as big as a concern for us.”
What if you can’t find top talent? This is a biggie in Ganoza’s view, particularly as a company grows. “All of a sudden you find out how difficult it is to operate 20 mines, especially when they are small. It’s as if you’re a pilot who flies one of the larger planes and someone asks you to fly a small Cessna on a regional route. That’s not a career upgrade for either a young professional or a seasoned veteran with gray hair. It’s a career downgrade. It’s the same with mines. I hunt all the time for talented professionals, and it’s difficult to attract them to a small asset.”
The top talent “all want a technical challenge, size,” Ganoza states. “Bigger mines mean better mine conditions, more resources to run business and more intellectual capital. At the smaller mines, everything is more humble, more limited, fewer resources. You cannot run a business atomizing your property portfolio in this environment especially, because there are no people.”
Ganoza calls the people issue “a challenge we are clearly facing every day. Human resources (HR) management and organizational development are very crude in the mining industry. Other industries are much more sophisticated. At least among the midsize emerging producers, HR management doesn’t exist.”
To address the challenge, Fortuna hired a vice president of HR and organizational development. Ganoza made it clear to the headhunter that he wasn’t interested in a recruit from the mining industry to handle payroll. He wanted “truly to establish processes that come from industries such as services, banking, insurance, where HR is an established system that adds value to the business. We want to be able to attract good people.”
Ganoza considers the people issue a far bigger concern for the industry than jurisdictional risk. “You manage jurisdiction risk with people and money. There is no shortage of money these days, but there is a shortage of people.
“All of our team is seasoned, not only in mining but also mining in Latin America,” he continues. “They have been doing extensive work. I just hired as a chief project manager for a new project, a guy who has been working in Latin America for 15 years for Gold Fields Ltd. (GFI:NYSE) of South Africa. He’s one of the leading explorers in my experience, a truly tremendous guy, a true discover, excellent with geology, good technical skills, discovery driven.
“We are trying to get the talent that is residing in the bigger companies,” Ganoza says. “And we’re telling them, ‘With us you’ll be able to move quicker with not so much bureaucracy. We’ll give you the funding because we have money and we’ll let you run with your ideas. We will back you. Let’s go pursue those opportunities that you have in your head and couldn’t do.’”
Despite the perils, the opportunities appear boundless. As Beaty notes, “Silver’s gone from $5 to $40 per ounce in the last number of years. I don’t think we have to invent too many things to explain why that’s happening and express the likelihood that it’s likely to continue.”
The Gold Report Publisher Sally Lowder, in some cases joined by Brian Sylvester, conducted the interviews on which this article is based during the 2012 PDAC International Convention, Trade Show & Investors Exchange, held March 4–7 at the Metro Toronto Convention Center. The annual event, sponsored by the Prospectors and Developers Association of Canada, drew nearly 28,000 attendees from 120 countries last year.
Geologist and Entrepreneur Ross J. Beaty, loved by investors for whom he’s created more $4 billion in shareholder value over the years, currently serves as executive chairman of Alterra Power Corp. and chairman of Pan American Silver Corp.—but he’s founded, developed and divested a number of other public mineral resource companies over the course of 38 years in the international minerals industry. Born in Vancouver, Beaty has a degree from the Royal School of Mines, a Master of Science with Distinction in mineral exploration from the University of London, and bachelor’s degree in geology and a law degree from the University of British Columbia. Working in 50-plus different countries over the years, he speaks English, French and Spanish, as well as some Russian, German and Italian. Beaty is a past president of the Silver Institute in Washington, D.C., a fellow of the Geological Association of Canada and the Canadian Institute of Mining, a recipient of the Institute’s Past President’s Memorial Medal and a founder of the Pacific Mineral Museum in British Columbia.
Michael H. (Mike) Callahan has been the president of Silvermex Resources Inc. since November 2010, and began serving as a director a year earlier. Prior to Silvermex, Callahan spent 20 years with Hecla Mining Co. He joined the company in 1989; served as a senior financial analyst, financial manager of its Silver Valley operations in northern Idaho and director of accounting and information services. While serving as president of Minera Hecla Venezolana and leading Hecla’s Venezuelan operations, he also assumed duties as Hecla’s vice president of corporate development, after which he returned to Idaho as vice president of Silver Valley operations.
Jorge A. Ganoza Durant, whose work has earned him a spot among “Casey’s NexTen”—an exclusive collection of the “top 10 rising stars in the natural resource sector,” is president and CEO of Fortuna Silver Mines Inc. since January 2006, and a director of the company since December 2004. Ganoza holds of Bachelor of Science in engineering from the New Mexico Institute of Mining. A fourth-generation miner from a Peruvian family that has owned and operated several underground gold, silver, and base metal mines, he’s a geological engineer who has amassed more than 16 years of experience in exploration, mining and business development throughout Latin America, working for a number of private and public Canadian junior mining companies in Panama, Guatemala, Nicaragua, Honduras, Mexico, Dominican Republic, Haiti, Peru and Colombia.
Lenic M. Rodriguez, a Mexican businessman residing in Vancouver, has been the CEO and president of Aurcana Corporation since May 2009 and has been a director of Aurcana since 2006. He has over 15 years of experience in top management with one of Mexico’s 10 largest corporations. He has also served as a director of Alberta Star Development Corp. Rodriquez is a magna cum laude honors business graduate from one of Mexico’s top Universities, Universidad IberoAmericana. He holds a Master of Science and a Bachelor of Arts in business administration.
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