Why? First, the 20-year Highly Enriched Uranium (HEU) Program agreement between the U.S. and Russia, aka "Megatons to Megawatts," expires this year.

Second, the end of that program will allow Russia to sell its coveted uranium, which currently powers one of every 10 homes in the U.S., to the highest bidder. With 200 nuclear power plants under construction or on the drawing boards, China is likely to be first in line, with India and even oil-rich Saudi Arabia on its heels.

Third, the increase in nuclear plants being built around the world will stimulate huge demand while supply inevitably dwindles. Because it can take a decade to bring a uranium mine on-line, new mining production can't grow fast enough to meet the demand.

Fourth, like it or not, nuclear energy is clean—while the average coal-fired power plant in the U.S. emits nearly 4 million metric tons of CO2 each year, nuclear power plants emit no carbon dioxide, sulfur dioxide, nitrogen oxides, mercury or other toxic gases.

Finally, last Thursday, an Al-Qaeda splinter group attacked the Somair uranium mine in Niger—owned by French uranium giant Areva. This will further disrupt global uranium supplies and emphasizes what the energy experts have been saying: Uranium is prime for price increases.

Casey Research agreed to share Katusa's segment with Sprott U.S. Holdings Chairman Rick Rule withThe Energy Report readers and invites you to listen to the rest.

Marin Katusa: We first met 10 years ago, when you were begging people to buy uranium companies, and the market boomed. Those of us who followed your advice made a lot of money. Are you expecting a replay in that market?

Rick Rule: I think so. The similarities are interesting. At that time, the price of uranium on the market was less than what it cost to produce it, which meant that one of two things would happen: Either the uranium price would go up, or the lights would go out. Those were the only two choices. We're in a situation now where the uranium price on world markets is lower than what's required to bring online the supplies needed to keep the lights on around the world. So once again, either the uranium price goes up, or the lights go out. I think the price will go up.

MK: What can you tell investors who are nervous about uranium? Nuclear power is unpopular. Why should investors expect its feedstock to have this massive bull market?

RR: You make money in financial markets by buying low and selling high, and you can't buy low when something is universally loved and every investor is competing with you. You have to buy things when they are unloved. In natural resources, you can be a contrarian or a victim. You had the good sense of getting into the market when uranium was cheap, and you also had the good sense to get out when everybody else was flocking in. You did what you were supposed to—buy it when it was out of favor and sell it when it came into favor. It's out of favor again. You will make money buying it now and selling again when it returns to favor, because it will.

MK: Are you currently investing in companies that are exploring for and producing uranium in the junior resource sector?

RR: We are. We are investing in the broader junior resource sector because it is universally unloved, and we are specifically investing in the uranium sector. We invest in any commodity where the selling price on global markets is less than the cost of production and where we see ongoing demand. The price has to rise to meet demand.

MK: Considering that China is on its way to building twice as many nuclear reactors as America, India is building theirs and Saudi Arabia—which is so rich in oil and gas—is planning on building 16 nuclear reactors, does that make the argument for uranium better today than it was 10 years ago?

RR: I wouldn't argue that it's better, because the situation 10 years ago was superb. But it doesn't have to be better. A lot of people added a zero to their net worth as a consequence of that market. If they increase their net worth only five times, would that be sufficient?

MK: I think it would. Like uranium, the junior resource sector is not popular. How would you advise people to invest in that sector today?

RR: They have to invest in themselves before they invest in the sector. They have to get educated about natural resources and you don't get educated about natural resources in The Wall Street Journal. These businesses differ from other businesses. You need the courage and the common sense to invest in contrarian fashion. You need to buy out-of-favor sectors and once your thesis has been vindicated and you're feeling smart, you need to sell those sectors. It's very important that you both buy low and sell high. Industry cycles in natural resources are very predictable, and after you discipline yourself, find information sources you can trust and figure out how to use those information sources, you will find the sector extremely generous.

MK: What is the most important factor when you look at a company? When Rick Rule and Sprott write a check with their own money into a company, what's the most important element of that investment decision?

RR: If it's a speculative, junior company, the three most important factors are people, people and people. In the uranium sector for example, when the resource became popular in the middle part of the last decade, there were 500 junior uranium companies but only 20 competent teams.

MK: And of those 500 companies, about 480 disappeared.

RR: Another thing that argues in your favor today is that you're now able to come in and buy companies with $50M market caps that spent $250–300M they raised cheaply during the boom. Those are very attractive propositions.

MK: Can anything derail this nuclear renaissance?

RR: If there's a black swan on the nuclear side, it would be another event like Fukushima, Chernobyl or Three Mile Island. On the financial side, it would be another 2008-style psychotic break. But if that happened, your uranium portfolio would be probably the least of your concerns.

MK: As always, Rick, it was a pleasure. Thank you.

Uranium prices have nowhere to go but up. Rick confirmed that, as do the other experts in the videocast.Listen for the insights from:

• Spencer Abraham, who served as the 10th U.S. Secretary of Energy (2001-2005) during the George W. Bush Administration.
• Lady Barbara Thomas Judge, chairman emeritus of the U.K. Atomic Energy Authority, chairman of the Pension Protection Fund, and U.K. business ambassador on behalf of U.K. Trade and Investment, and is an appointed member of the TEPCO Nuclear Reform Monitoring Committee.
• Herb Dhaliwal, former Canadian minister of natural resources and senior regional minister for British Columbia.
• Amir Adnani, co-founder and CEO of Uranium Energy Corp. (UEC:NYSE.MKT), which operates North America's newest uranium mine; located in South Texas, it's the first new uranium production in the U.S. in seven years.

Image of building to be used for uranium extraction

Casey Research has identified the top three undervalued uranium stocks that you should invest in right now to be well positioned for the coming uranium bull market. Compiled into a special report, Three Must-Own Uranium Stocks, Casey is making this time-sensitive special report available exclusively for viewers of this webinar.

Marin Katusa, an accomplished investment analyst, is the chief energy investment strategist for Casey Research and the senior editor of the Casey Energy Report. He's considered one of the world's foremost energy experts, and regularly offers commentary on energy issues on BNN and other major media outlets.

Rick Rule, chairman of Sprott U.S. Holdings, is part of the team responsible for managing more than $8 billion in resource and commodity assets around the world. Active in natural resource investing for 35 years, he's a recognized expert in mining, energy, water, forest products, infrastructure and agriculture. The Global Resource Investments group of companies he founded became part of the Sprott Group last year.

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The post Why a uranium renaissance looks inevitable appeared first on MINING.com.

The Gold Report: On April 15, gold dropped to a two-year low as panic selling set in across many mine commodities. Was this the larger players showing the retail market who is in control or was it inevitable?

Michael Gray: Several firms have been predicting a mid-cycle correction for gold; it just happened faster and with more volatility than expected. It also seems to be a very well-timed short-selling trade, especially on the back of the positive gold price correlation with quantitative easing (QE) breaking down and reversing post-QE3. In addition, there was no response in the gold price to the debt crisis in Cyprus or political concerns with North Korea. This was an opportunistic time for the shorts to come in, and they did, forcefully.

TGR: Does this indicate that investors prefer equities to gold?

MG: Not necessarily. The gold equities have moved sharply down and most are now pricing gold at an implied gold price of $1,000–1,200/ounce ($1,000–1,200/oz) or less. There is some fear that the gold bull run is over, which explains why many institutional investors have been abandoning their gold equity positions.

TGR: Gold equities fell in lockstep with the fall in the gold price. Why?

MG: Gold equities have had an inverse correlation of share price: net asset value (P/NAV) versus the gold price since late 2009. Historically the senior gold equities have traded +1.2x P/NAV. Now we are looking at an average of 0.65x P/NAV among our senior gold producers. Essentially, investors are pricing in a much lower gold price on the forward curve.

As the gold price goes down, we believe investors will expect that the future gold price will drop as well. That is why the equities are trading in lockstep with the decline and have a much weaker response on the upside.

TGR: Has the drop in precious metals prices fundamentally changed the market?

MG: We have not seen this magnitude of volatility in this bull market up until now. It sets the stage for other big moves and for a more volatile market, perhaps including price upswings of similar magnitude. We think this volatility is ultimately good for the bull market.

TGR: Will it result in less gold being produced?

MG: The deferral of major capital projects and the number of projects that will be shelved because they cannot stand up to the stress test of a $1,200/oz gold price will limit growth among the senior companies. As that happens, we expect significantly less growth in the gold sector over the next five years if prices continue to lag or go sideways.

TGR: A JPMorgan Chase report dated April 16 said 10 years remain in the commodity supercycle and that the April 15 price drop was only a pause in the overall cycle. Do you agree, and what positives do you see as a result of the price drop?

MG: In general, we concur that this is a pause in the supercycle for metals in general, including base and bulk metals. China's growth being lower than expected shocked the market, at least in the short term.

The positives are that management teams are now less focused on growth and more focused on earnings and returns to shareholders—this could instill more investor confidence. It will take a few years, but having CEOs whose interests are more aligned with shareholders will impose more discipline among the producers.

TGR: In early April, Barrick Gold Corp. (ABX:TSX; ABX:NYSE) once again delayed development of its Pascua Lama gold project in Chile. What are the likely ripple effects for Barrick and the sector?

MG: This is one of those situations where a company believed it had earned its social license after a long dialogue with the government and various nongovernmental organizations (NGOs). Barrick likely felt it was crossing the finish line. Barrick is not alone in this situation.

For the gold sector it means management teams will have to look at large capital expense (capex) projects through a lens that captures extreme capex creep risk, in the case of Pascua Lama from less than $3 billion ($3B) to north of $8B. Going forward, project scale and social license risk will be key issues—only the best projects will be built.

TGR: Is Chile still on your list of preferred mining jurisdictions?

MG: It was until recently. Canada, Mexico and the U.S. are at the top. Recent developments in Chile and elsewhere in South America with community relations and NGO protests are cause for concern.

TGR: If Mexico, Canada and the U.S. are your top jurisdictions, what is the next tier?

MG: The next tier would include Chile, Peru and Turkey. In particular, Turkey is embracing foreign investment, has attracted a significant amount of capital and has a successful track record of mines being permitted and put into production.

In South America, Brazil can be also be an attractive jurisdiction, depending on the state. In Central America, we like Nicaragua, where we cover B2Gold Corp. (BTO:TSX; BGLPF:OTCQX). Nicaragua has been very politically stable in the past decade and is one of the few countries in Central America that has a stable mining policy and royalty regime. In Africa, Namibia, Tanzania and Botswana would lead our list.

TGR: Let's look at management teams. Cash is king for junior mining equities right now, yet some junior mining executives are collecting big cash salaries. Some shareholders think the C-suite is overcompensated. What do you consider a reasonable salary for a junior mining CEO?

MG: Management compensation has been a blind spot for investors in the exploration sector during this bull market, given that many management teams have created tremendous value for shareholders. The compensation matrices among peer groups have been driven by market capitalization: The more you could grow your company, the more you could convince your compensation committee to pay you.

The problem is that juniors with undeveloped resources trading at $1B market caps in 2011 paid dearly to attract talent or retain talent. Their base salaries in some cases exceeded $400,000 ($400K) plus similar size annual cash bonuses. Now those same companies have market caps of $200–300 million ($200–300M), yet the compensation levels have not changed. The G&A burn rate related to these salaries is significant.

To evaluate compensation, we look at where the company is in the exploration cycle and how much skin management has in the game. The $80–150K/year salary range has the right ring for a very early-stage explorer with no assets of retained value. Companies that have more advanced assets probably need to pay in the $200–250K range, plus bonus.

TGR: How do people find out that information?

MG: It is all disclosed in the annual financial statements and in the Management Information Circular onwww.SEDAR.com (System for Electronic Document Analysis and Retrieval).

TGR: A story in Canada's National Post reported that CEOs and company presidents are more often fired in good times than in tough times because expectations are higher. Does that apply in mining?

MG: That comes back to investors focusing on returns and punishing the senior mining companies for poor leadership, including overpaying to acquire assets and the inability to control operating and capital costs. In the gold space, three CEOs have been fired in relatively good times for focusing too much on growth. The trend is now toward CEOs trying to focus on earnings, provide realistic guidance and, if possible, pay a dividend. Those are the leaders who will keep their jobs.

TGR: A recent Macquarie research report said, "The producers will rapidly pursue M&A of new 'grade A discoveries' if they emerge but are unlikely to pursue the large, capex-intensive B- and C-quality discoveries. In the meantime, the price will get lower and favor the producers that are patient and seeking smaller, strategic tuck-in acquisitions." What is a tuck-in acquisition?

MG: I would like to start by making it clear that "rapidly pursuing 'grade A discoveries'" means that if a junior has found another Kupol or Eleonore deposit, the type of precious metal high grade/high margin deposits coveted by the seniors, it will garner a tremendous amount of attention and probably attract a takeover bid before a resource is defined. This is what happened with Virginia Gold Mines' Eleonore discovery, which is being developed by Goldcorp Inc. (G:TSX; GG:NYSE) in Québec and for which Virginia Mines Inc. (VGQ:TSX) holds a royalty.

That is what I mean by a rapid move on what are clearly high-grade/high-margin assets because they are so rare right now.

TGR: And now, what is a tuck-in acquisition?

MG: A tuck-in acquisition is one that the market views as a relatively small deal, say, under $500M. It either fills a gap in the producer's pipeline down the line, or is strategic in consolidating a district in which the producer is already active.

TGR: If Kupol and Eleonore were grade-A discoveries, what are examples of tuck-in acquisitions? Would it be something like Grayd Resource Corp. (GYD:TSX.V) and Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE)?

MG: Yes, Grayd with Agnico in Mexico would qualify as a tuck-in acquisition. We would consider Goldcorp's purchase of Gold Eagle Mines Ltd. in the Red Lake Camp a tuck-in or bolt-on, albeit with a larger market cap. Extorre Gold Mines Ltd.'s acquisition by Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) was a relatively small acquisition but meaningful to Yamana's growth pipeline.

TGR: Are other juniors developing candidates for tuck-in acquisitions?

MG: In our coverage list, we have published our views on MAG Silver Corp. (MAG:TSX; MVG:NYSE) as a prime example for potential of consolidation of the 44% joint venture interest it has with Fresnillo Plc (FRES:LSE) in the world-class Fresnillo Silver Trend. It is a high-grade, high-margin asset that we think Fresnillo would like to control. It would also help meet Fresnillo's goal for production of at least 65 million ounces (65 Moz) by 2018.

TGR: How close is MAG Silver's Juanicipio to Fresnillo's operations?

MG: It is within 1 kilometer of the mill and infrastructure, right in the heart of the Fresnillo district. In our view, as published in our research, it has great synergies with Fresnillo's existing operations..

TGR: Would Fresnillo buy just Juanicipio or buy MAG Silver outright?

MG: Fresnillo owns a 17% interest in MAG Silver. Given the fairly significant discovery MAG Silver has made on an asset called Cinco de Mayo, we would expect that Fresnillo would want that as well.

TGR: Regardless of a takeover bid, is MAG Silver poised to perform in 2013 even with lower silver prices?

MG: The company will break ground in the next month or two for the decline at Juanicipio. But the real sizzle for MAG Silver is getting back to exploration drilling at Cinco de Mayo, probably in H2/13.

Cinco de Mayo is a huge carbonate replacement deposit (CRD), a silver-zinc-lead deposit with an early resource estimate just over 50 Moz silver. It has a large footprint and an outstanding intersection at depth outside of the resource of 61.6 meters at 89 grams/tonne (89 g/t) silver, 7.4% zinc, 2.1% lead and 0.78 g/t gold. This is one of the best discoveries in Mexico in the cycle. Although early stage and the exploration to depth needs a lot of infill drilling, the anatomy of the system discovered so far suggests it could be very large.

TGR: Does MAG Silver have the disciplined management team you like to see?

MG: Yes, the team performs its discovery role exceptionally well. To make two major discoveries over the past decade is impressive in itself, but it is also very disciplined. It maintained a very efficient capital structure, with fewer than 60M shares issued and outstanding. It has discovered best-of-breed assets with what we would consider best-of-breed talent.

TGR: Which other juniors are developing possible tuck-in acquisitions?

MG: In that category, we like Midas Gold Corp. (MAX:TSX). The company's Golden Meadows project in Idaho has more than 7 Moz gold in resources and a significant antimony credit. The company has issued a preliminary economic assessment (PEA) on the project. It is only trading with a market capitalization of $100M or so.

This would be an excellent tuck-in acquisition for producers looking for a +400,000 oz/year production profile, starting in 2018 or 2019.

We see Midas' Golden Meadows project as a Donlin Creek-type of setting, and published our belief that the potential endowment could ultimately exceed 20 Moz gold. Thus, in our view it is potentially a Tier 1 asset that already has 7 Moz documented, in a historic mining district, making it a brownfield site. The company is heavily discounted in value right now.

TGR: What progress has Midas made since you started covering it 18 months ago?

MG: The company has executed well the mandate to infill and expand the near-pit resources and establish resources that could be put into a PEA and eventually into a preliminary feasibility study. It has also conducted a lot of pragmatic consulting with the community and the NGOs.

Stephen Quin, Midas' CEO, has the perfect skill set for permitting and advancing the economics of this project given his past experience with similar projects.

The overhang is the perception that it will be tough to permit in Idaho and that production is a long way out in 2018. As a result, the stock has lagged over the last 12 months.

TGR: How much does the antimony credit play in the project economics?

MG: At the front end, the antimony credit is fairly important. I believe about 80% of the antimony currently documented will be produced in the first four years. This allows Midas to achieve gold equivalent grades that exceed 2.4 g/t, whereas the average grade in the first pit to be mined is closer to 2.0 g/t for the gold only. Therefore, the antimony credit is fairly important.

During World War II, Golden Meadows was mined for antimony needed to harden shell casings. Now antimony is used mainly as a fire retardant. About a year ago, antimony led the British Geological Survey list as the #1 commodity at risk. That is a compelling twist to the Midas story.

TGR: Where does permitting stand?

MG: The formal permitting process is called the Joint Review Process (JRP), which harmonizes the review activities of the state and federal governments. This process has not started yet; however, because Midas has completed a PEA study, it is able to start the informal process right now and consult with various stakeholders. We expect Midas may be in a position toward the end of 2013 to formally enter the JRP.

On a separate front, it is unfortunate that the U.S. Forest Service pulled back some of its drill permits on non-patented lands. Having to re-apply for those will delay exploration on the outer reaches of the property. There is no question that permitting in Idaho can take time, but in our view it is a question of when, not if, providing responsible plans are put forward and the process is closely adhered to.

We believe management has the right skill set to persist and earn the social license to permit Golden Meadows. This is a state with high unemployment and mining the brownfield site would actually clean it up. It is a good news story.

TGR: To value companies, you use a sum-of-parts NAV valuation system based on a 5% discounted cash-flow model. Using this system, what companies are among your top picks?

MG: We also use the forward curve and long-term commodity prices to value the companies where we are able to establish a discounted cash-flow model. When we see this much market volatility in the commodity prices, we tend to make more frequent adjustments to the forward curve we are using and to reset target prices accordingly.

MAG Silver, Mirasol Resources Ltd. (MRZ:TSX.V), B2Gold and Tahoe Resources Inc. (THO:TSX; TAHO:NYSE) are our top picks among the companies we cover.

Mirasol Resources is a cash-rich junior that has emerged in a very strong position through discovery and monetizing its assets. We estimate it has approximately $50M in cash and investments.

We like Mirasol because it has shifted its exploration focus to Chile and has identified what appears to be a large, high-sulphidation system. If Mirasol succeeds, this potentially large gold system will attract the seniors' interest. The project is very early and only trenched so far—we expect drilling in May and June—but the markers suggest that Mirasol could be onto a fairly significant new belt in Chile.

The company also has significant assets in Argentina, although they do not yet have resources.

TGR: Is there less pressure in Chile on smaller companies?

MG: As long as their programs are not huge, smaller companies are likely better able to fly under the radar. In the early stages, they do not have to negotiate for water rights or consult with the communities on a formal basis. That makes it easier.

At the same time, they have to pave the way for the ultimate developers to earn their social licenses. It is important that they execute on the ground at an extremely early stage by developing good relationships and respecting the community.

TGR: Access to water is one of the biggest issues in Chile. Does Mirasol have a clear path to water?

MG: The company has been somewhat cryptic as to the exact project location and has yet to conduct an analyst site visit. Our understanding is that Mirasol is still acquiring strategic land positions within this new belt.

TGR: When will that information be available?

MG: We are confident in the management team's ability to conduct generative research using satellite and Advanced Spaceborne Thermal Emission and Reflection Radiometer (ASTER) imagery to identify large alteration signatures. The company has homed in on a specific area with nine targets. As it goes forward to drill the initial targets in the next few months, I expect more visibility on the actual location and setting.

TGR: What other companies are on your top pick list?

MG: B2Gold is one. For an intermediate producer, B2Gold has a top management team. The company is a hybrid producer-explorer, and it does both well. It operates gold mines in Nicaragua, a new acquisition in the Philippines called the Masbate mine and a development project in Namibia. The company has a tremendous growth profile: from 150,000 oz (150 Koz) last year to what we estimate could exceed 500 Koz by 2015. It all comes at a fairly low capital expense.

B2Gold also comes with tremendous exploration upside. In Nicaragua, it is executing a feed-the-mill strategy to extend mine life. By exploring the La Libertad gold belt and finding satellite deposits at twice the grade, it is able to feed its mill and grow organically. For example, we estimate that the Jabali satellite deposit will generate a 95% internal rate of return.

B2Gold acquired Auryx Gold Corp. in December 2011. It did not overpay for an asset that will deliver 140 Koz/year by 2015, along with a tremendous exploration belt. This is the former Bema Gold team that discovered Refugio, Cerro Casale and created tremendous value at Kupol; Kinross Gold Corp. (K:TSX; KGC;NYSE) subsequently bought Bema for $3.6B.

TGR: One of the more interesting projects in B2Gold's portfolio is the Gramalote joint venture in Colombia. What can you tell us about that project?

MG: Gramalote is a strategic gold porphyry development project in Colombia and is operated by AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE). It is a 51/49 joint venture, 51 for AngloGold Ashanti.

Gramalote is somewhat low grade—0.65 g/t average grade—and would be a milling operation. It has good infrastructure and very good recoveries. The project is in the midst of a preliminary feasibility study, and we expect better visibility on the economics in the next few months. In our view, it is probably of less strategic interest to B2Gold, given the location and the probable high cost to build the project.

However, in our view, Gramalote is very strategic to AngloGold Ashanti as development of this asset to production could pave the way for a separate 100%-owned project called La Colosa in a different part of Colombia that is reportedly in the 25+ Moz gold resource size. La Colosa is the ultimate prize in Colombia for AngloGold Ashanti.

TGR: Can B2Gold achieve significant production increases at La Libertad and Masbate?

MG: Yes. Masbate brings in the range of 180–200 Koz to B2Gold. It has not decided on an expansion, but we model a +50 Koz/year expansion in 2015. This becomes the flagship asset for B2Gold with its contribution to production and growth.

At La Libertad, we see incremental production growth through 2013–2014, topping out near 150 Koz.

TGR: Do you have another top pick that you would like to talk about?

MG: Tahoe Resources has a best-of-breed silver asset in Guatemala and is run by Kevin McArthur, former CEO of Goldcorp and Glamis Gold Ltd., along with his very strong team. Tahoe has built an underground mine for less than $400M, on time and on budget. It should be completed by July 2013.

What stands out about Tahoe's Escobal mine development project is its high grade and large size. It has more than 400 Moz in silver resources and will mine average grades of 400 g/t, with some gold, zinc and lead credits. Another key is that the veins are very thick, averaging 10–15m in one zone, and over 15m in another. The company can, therefore, mine very efficiently and run the plant initially at 3,500 tons per day (3,500 tpd), moving up to 5,000 tpd and potentially to 7,000 tpd. You are looking at 20 Moz/year silver for at least the first eight years.

TGR: That is an interesting point about scalability in projects, something offered by very few projects.

MG: This is an asset built by a veteran team that contemplates that upside. The incremental expansion is more or less designed and factored in to get to 5,000 tpd.

TGR: Kevin McArthur was on Canada's BNN, and he was grilled about some problems with the locals near its project after an incident. Is that a problem?

MG: It is an ongoing issue that must be dealt with. The company received its permit—a real endorsement from the government—and a government presence on-site helps with security.

This is a change to the local economy. It is an industrial site near the town of San Rafael, a community that we estimate will benefit from the new royalty regime to the tune of about $10M/year. Communities farther away also will feel the impact.

Guatemala does not have a mining culture with a long history. There will be community relations and security issues to manage in the near and medium term.

TGR: According to your models, what sort of cash flow will Tahoe generate by Q4/13?

MG: We show Tahoe being cash flow positive in Q4/13 and overall guidance of 5 Moz silver being produced into 2013. Looking out to 2014, and using a forward curve from Feb. 6, 2013, and a higher silver price ($32/oz silver), we are looking at $353M cash flow from operations in 2014 for $2.33/share.

Another attraction with Tahoe is that management suggested last summer that it would pay a significant dividend.

TGR: If you were a grief counselor for retail investors with positions in gold, how would you assuage them after the recent dramatic market events?

MG: Being one of those investors who feel the pain, I can empathize. It comes back to volatility. If you are convinced that the best companies will come out of this, when they are deeply discounted and you can buy them at what seem to be fire sale prices, you will be rewarded down the line. It also comes back to the potential swings in volatility we could see to the upside. That is why you want exposure to the gold sector, especially in equities, despite its downtrodden reputation.

TGR: Thank you for your insights.

Michael Gray is a mining equity analyst with Macquarie Capital Markets and covers a range of precious metal explorers and producers with an emphasis on North and South America. He is an exploration geologist and holds a Bachelor of Science in geology from University of British Columbia and Master of Science in economic geology from Laurentian University. His career of over 25 years in the mineral exploration business started with senior mining companies including Falconbridge, Lac Minerals, Cominco and Minnova where he worked throughout Canada and the USA. He co-founded Rubicon Minerals in 1996 and helped navigate the company through a series of joint ventures and an asset portfolio build that was eventually centered on the Red Lake gold district in Canada. During this period, Gray was president of the 5,000 member British Columbia and Yukon Chamber of Mines for one year and on the executive committee for six years. Gray then joined the mining analyst world in 2005 where he brought to bear his technical skills to identify new precious metal opportunities at an early stage with outstanding exploration potential; he has covered a number of these opportunities that were subsequently taken over by gold producers.

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DISCLOSURE:

1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Gold Report: B2Gold Corp., Goldcorp Inc., MAG Silver Corp. and Tahoe Resources Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Michael Gray: I or my family own shares of the following companies mentioned in this interview: Goldcorp Inc. and Barrick Gold Corp. I personally or my family am paid by the following companies mentioned in this interview: None. Macquarie Capital Markets disclosures are available here. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

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Source: Brian Sylvester

The post Gold's plunge ultimately healthy for the sector appeared first on MINING.com.

In this interview with The Gold Report, Rico explains how analysts value miners and reveals how she will be looking at junior mining companies in 2013—with a skeptical eye, preferring those funded to complete exploration plans for the year and a management track record to deliver results. She shares names of some companies whose projects stand out.

The Gold Report: As of Sept. 30, 2012, Toronto-based M Partners had Buy recommendations on 84% of the 58 companies it covered at that time. There are many brokerages with similar percentages. Have analysts lost some credibility in the mining space over the last few years when companies have vastly underperformed the broad market despite analysts' Buy ratings and high target prices?

Ingrid Rico: The simple way to answer that question is by explaining how we as analysts do our job. We try to do our best to demonstrate that a project makes economic sense. We look at the deposit and review mine plans. We try to get a handle on the operating challenges and the capital requirements for the project. Based on that, we build a model that needs some level of execution by the management in order to be achieved.

Over the last few years, we have seen some hiccups in the execution and delivery in the space, which has made investors grow increasingly cautious on the sector. What we're seeing now is investors needing to get that confidence back. It's not to say that the companies are not a Buy and that the target is not valid because the projects make sense economically. We have also experienced a migration of funds away from the juniors and recent producers as investors looked to mitigate risk during a period of economic uncertainty. That funds flow as much as anything has hurt the share prices of companies in the sector.

TGR: Are you adjusting your models and lowering target prices to reclaim investor confidence?

IR: We continue to look at the inputs and make our assumptions fit the challenges. We're trying to get better at understanding the challenges—the operating challenges, the capital challenges—improving our models every time.

TGR: With ounces-in-the-ground valuations, have you had to reassess those, too, given how the market is valuing these junior mining companies?

IR: Yes, we have a couple of companies under coverage that are purely valued as ounces in the ground. Just a couple of years ago, our valuation metrics were essentially double what they are now.

TGR: What are the essentials of your investment thesis when it comes to junior mining companies?

IR: We look at the jurisdictions, the infrastructure and the prospective nature of the property. Also, grade is key to the project. Desirable high grades make a project withstand the market when it is as challenging as it has been lately. Let's not forget management either. We need to have a highly skilled and experienced group who understand the market and have proven that they can do the job.

TGR: How are you factoring financing risk into your models? What adjustments have you made there?

IR: It depends on the project. We see a number of projects that have economic merit, but the project financing window is fairly narrow right now. We look at the possible financing alternatives that the project has, whether that be a royalty streaming, an offtake or the conventional debt and equity ratio.

TGR: How would you describe the financing market right now for junior mining companies?

IR: It is quite difficult for some companies currently. It's part of the cycle. In the junior space, a lot of money came in at the high of the cycle. But some junior companies fell well short on delivering results. So now the market is saying that we need to see more consolidation.

Quite frankly, some of the juniors that didn't deliver are going to disappear. That is what the market is saying. Again, it's all part of the cycle.

TGR: How does that affect your job?

IR: It makes it interesting and makes me realize that there are projects out there that do stand out. There are many projects unfairly undervalued at this point because the entire sector is suffering from a cautious investor sentiment. It's interesting to get on those companies before people start jumping in, when sentiment begins to change.

TGR: What are some ways investors can determine whether or not a junior mining company is underfunded and possibly going to fold?

IR: For exploration companies, the key metric you can look at is burn rate. You need to have a sense of its exploration budgets, its current cash position and whether it will be able to fund the program for the year or not.

For developers, the technical report gives us guidance as to what a company needs for project funding. With the sector seeing quite a few cost overruns lately, we typically build in a contingency of 15–20%.

TGR: The old rule of thumb was that all good projects will get financed. Is that still the case?

IR: Yes. The good projects that stand out will get financed. It's a matter of timing, though.

TGR: How far into the future do you see a time when the markets are going to open up and start funding companies with fresh equity issues à la 2010?

IR: It depends on the commodity. Supplies are pretty tight right now in the copper sector, and projects are going to have to get funded soon.

TGR: One of the companies you cover, Trevali Mining Corp. (TV:TSX; TREVF:OTCQX), recently entered into a bridge loan with Sprott. The loan is due Aug. 31, 2013, and will cost Trevali 11% interest/year plus almost 330,000 shares and a $100,000 handling fee. Do you prefer to see a junior mining company work out this type of financing or conduct a straight equity offer?

IR: Trevali has been an interesting story. It is building two mines, one in Peru and one in New Brunswick. It is at the stage where shareholders would rather see less of an equity dilution.

The company has been working on finalizing a senior debt facility so the bridge loan is, as the name suggests, just a bridge to get it to that senior financing and get things moving. We generally think that bridge financing, as opposed to equity, is an attractive option for a near-term/imminent producer, and this works well for Trevali at this time.

TGR: Trevali is working on bringing several past-producing, base metals mines in New Brunswick back into production. How soon could we start seeing cash flow?

IR: Its Santander project in Peru is the operation that should come into production in Q1/13. The mines in New Brunswick are targeted for H2/13, probably Q4/13. Trevali will see operating cash flow from Santander pretty early in the year.

TGR: Has Trevali issued production guidance for Santander for 2013?

IR: It hasn't put out numbers. It is still working as a development company, so it doesn't really give guidance on production.

TGR: You have a target price of $2.85 on Trevali. What is going to get it there?

IR: Trevali is a zinc play. We believe by 2015, it is going to have significant zinc production of over 250 million pounds (250 Mlb) zinc. The company is developing into a zinc play that majors are going to like. What is it going to take to get it to $2.85/share? It is going to be Trevali having Santander and the New Brunswick complex ramped up.

TGR: Are you saying that the ultimate goal of Trevali is to become another Breakwater Resources Ltd. and get taken out?

IR: That's a real possibility. Already Glencore International Plc (GLEN:LSE) holds a position in Trevali and other companies have also made mention of Trevali.

TGR: What are some other companies you have under coverage with lots of cash that continue to derisk their projects?

IR: Balmoral Resources Ltd. (BAR:TSX.V; BAMLF:OTCQX) is a good example. It has the cash to complete its 2013 work program and toward the end of the year deliver a resource estimate for its Martiniere project.

Balmoral had an excellent exploration program in 2012. It delineated new targets and discovered three new zones. It has highlighted the prospective nature of the region and the Martiniere gold system. We believe that 2013 will be another interesting year for Balmoral. Its winter program is already underway. We expect to see results from new targets, resource definition and expansion drilling of the zones that were outlined last year.

TGR: One of the zones at Martiniere is the Bug Lake zone. To date it has delineated narrow, high-grade mineralization. It's been traced basically 375 meters (375m) at surface and goes as deep as 235m, and the mineralization remains open at depth. It's very early stage, but does that look like a starter pit to you?

IR: It's very early stage, but it is shaping up to where it could do a small pit, either at Bug Lake or at Martiniere West. It has been drilling fairly shallow holes, so all this high grade is actually close to surface.

TGR: What's your target price on Balmoral?

IR: It's $1.25.

TGR: Balmoral is expecting a maiden resource by the end of the year. I know you've already done the math and you're looking at what this could be. What are your early projections?

IR: Very conservatively, we're looking at 1 million ounces (1 Moz).

TGR: Do you think that's enough to move the needle?

IR: It should, but the key will be delivering results. This was a greenfield exploration program that developed into what it is now. It's now a matter of resource definition drilling and coming up with that initial resource.

The market sometimes takes the initial resource to be the total resource, but we know that Balmoral has way more to explore within Martiniere.

TGR: Tell us about some other names you're following.

IR: Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT) has been one of our best performing companies. The company had an excellent operational year in 2012. It is at the point where it has proven to the market that it can deliver operational performance. This year, Timmins is going to concentrate on drilling, getting that visibility of a bigger resource and further production expansion.

TGR: With its cash flow, is Timmins a hunter of other assets or is it being hunted?

IR: Because Timmins is generating cash, it does become pretty attractive. We have seen that before, such as when B2Gold Corp. (BTO:TSX; BGLPF:OTCQX) went after CGA Mining Ltd. (CGA:TSX; CGX:ASX).

But Timmins would like to keep growing on its own. I assume it is already actively looking at different properties and seeing what's out there so it can evolve into a more-than-one-asset operating mining company.

TGR: What is your target for Timmins?

IR: It's $4.10

TGR: Can you tell us about more of your favorite companies?

IR: Another company in our coverage with cash and completing its current work program is Panoro Minerals Ltd. (PML:TSX.V: PZN:FSE; PML:BVL). The company is completing a 30,000m drill project at its Cotabambas copper project in Peru.

Cotabambas is actually pretty interesting. It's located in the region where HudBay Minerals Inc. (HBM:TSX; HBM:NYSE) is developing its Constancia project and Xstrata Plc (XTA:LSE) has started building Las Bambas. Cotabambas has proven to have great exploration upside potential. Last year, its updated resource exceeded expectations by more than doubling the resource. This year, with a 30,000m drill program, we expect another very interesting resource.

TGR: What's your target on Panoro?

IR: $2.20.

TGR: Panoro is a name that often flies under the radar. Not a lot of people are talking about it. Why do you think that is?

IR: A lot of people got really hyped up at the time when many of the copper mergers and acquisitions (M&A) were happening. But copper M&A was pretty quiet last year and that's why Panoro flew under the radar.

We do believe that once that next round of M&A starts happening, this would be one of those names that people should be looking at carefully, especially given its proximity to some other bigger players.

TGR: What is happening in Africa?

IR: I follow Volta Resources Inc. (VTR:TSX), which has the Kiaka deposit in Burkina Faso. The financing should be done in the upcoming months. The company has been derisking the project to a point that either it is going to mine it or someone else will. It's an attractive project. The deposit has proven to be pretty consistent. It has been able to optimize the deposit and taken other steps, making the project that much better.

TGR: Are you more concerned about smaller mining plays in Africa than you were a few months ago, given what's happening in Mali?

IR: It brings the valuations lower just having that socio-political risk there. But Burkina Faso has been one of the most stable jurisdictions in Africa, so I'm not overly worried about Volta.

TGR: There are some companies that you have on your Watch List. These are companies that are not under coverage, but you're following them and you're tracking their news releases. These are companies that might one day graduate to coverage. What are some companies that are piquing your curiosity there?

IR: Bellhaven Copper & Gold Inc. (BHV:TSX.V) in Colombia and Temex Resources Corp. (TME:TSX.V; TQ1:FSE) in Northern Ontario are two quite distinct companies with projects that offer the significant exploration upside that we look for.

Bellhaven recently announced its work program for the first six months of the year. The company will be drilling two new targets at its La Mina project, which may lead to some exciting news. One target is La Garrucha. It's has a magnetic anomaly that is roughly three times the size of La Cantera, which already holds 1.6 Moz gold equivalent.

Additionally, not many pay attention to Bellhaven's Panama asset. Bellhaven hasn't been doing work on it; it's waiting for some applications or concessions to be granted. Once it gets that green light, there should be some news coming from there.

TGR: How about Temex and its projects in Northern Ontario?

IR: Temex is advancing exploration at its two projects in Northern Ontario. The company has consistently delivered on its resource growth targets. This year, it is going for a global resource of nearly 5 Moz; right now, the company has on its books 2.5 Moz.

Temex is in the right location, with one of the projects in the Timmins Camp and the other one close to where the recent M&A happened with IAMGOLD Corp. (IMG:TSX; IAG:NYSE) and Trelawney Resources Inc. The management is sharp, with a good team of exploration geologists who have a handle on the properties.

TGR: Would you say the Timmins project is Temex's flagship project?

IR: You have to look at both projects because Temex is advancing them side by side. At Timmins you could see near-term production because there is so much infrastructure in place. The other project is more of an exploration play to grow the resource to a size large enough to grab the attention of companies in the area.

TGR: Temex has some significant neighbors in the area, not the least of which is Goldcorp Inc. (G:TSX; GG:NYSE). It also has Lake Shore Gold Corp. (LSG:TSX) as a neighbor. Would you say there's a greater likelihood of a takeover here than there is with similar plays of this size?

IR: Temex is in a great location with a few "hungry" mills in the area that would be quite interested in that property. The initial resource came out last year, and people are starting to get a handle on the property and what that resource implies, whether it is an open pit or a really high-grade underground mine.

TGR: What sort of year should mining investors expect?

IR: It seems to be shaping up as another challenging year ahead. We expect more consolidation as cash-constrained companies join well-funded partners either by choice or, in many cases, out of necessity.

Again, in the copper space, things are much tighter than people realize. First Quantum Minerals Ltd. (FM:TSX) is bidding for Inmet Mining Corp. (IMN:TSX); this could be the beginning of the next round of M&A in the copper space.

TGR: Is that an angle investors should be looking to play if they want to get into this space?

IR: Yes, we think so. In the junior space, it's looking at the ones that actually stand out, the ones with cash, that will be delivering, whether that be on exploration resources or on a new resource estimate. That's what mining investors should be looking at right now.

TGR: Thanks for your time, Ingrid.

Ingrid Rico is a mining analyst at Toronto-based investment bank M Partners, covering junior producers and exploration/development-stage companies. She is a graduate of the Lassonde Mineral Engineering program at the University of Toronto.

Source: Brian Sylvester of The Gold Report (2/11/13)

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The post Why you can trust your analyst again appeared first on MINING.com.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TGR: What's happening with Lion One?

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

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

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

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

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

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

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

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

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

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

TGR: Thanks, Brien, for your insights.

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

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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Almaden Minerals Ltd., Goldcorp Inc., Brigus Gold Corp., Precipitate Gold Corp., International Tower Hill Mines Ltd., Gold Standard Ventures Corp. and Lion One Metals Ltd. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Brien Lundin: I personally and/or my family own shares of the following companies mentioned in this interview: Comstock Metals Ltd., Keegan Resources Inc., Precipitate Gold Corp., Cayden Resources Inc., Kaminak Gold Corp. and Lion One Metals Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

Streetwise – The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

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The post Brien Lundin: Pick up junior gold mining bargains now appeared first on MINING.com.

The Critical Metals Report: Matt, in a recent research report, you noted that the rare earth element (REE) space is being driven by market sentiment. Do you expect sentiment to change in the near term?

Matt Gibson: Recent support for REE prices has lifted some of the stocks off the bottom. I think we will need a more prolonged period of price stability to really return a lot of positive sentiment.

TCMR: When might that happen?

MG: That is tough to say. We need a lot more clarity regarding Japanese demand and Chinese supply. We should have that clarity over the next six to eight months.

TCMR: Is getting REE data from inside China easier now than it used to be?

MG: There are a number of systems that track pricing data and make it available on Bloomberg terminals now. A number of websites are also dedicated to tracking prices.

TCMR: Will that improved transparency provide investors more security?

MG: I think it helps. The tough part is knowing how much volume is being traded at a given price. Without volume data, it is hard to evaluate the conviction behind a specific price. The current systems do not always provide volume data.

TCMR: You also noted in your report that REE equities have betas up to three times the market. As a benchmark, what is the average beta for an exploration-stage base metal company?

MG: I would say that your typical producer would have an average beta of about 1.5 times the market and a junior would be closer to twice the market. It is fair to say that high risk, high reward is a characteristic of this space.

TCMR: What are the highest-beta names in the REE space?

MG: Names like Molycorp Inc. (MCP:NYSE), Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) and Rare Element Resources Ltd. (RES:TSX; REE:NYSE.MKT) have the highest beta to REE prices and general sentiment in the space.

TCMR: In a June 2012 report you wrote that REE companies were trading at an average of 0.3 times net asset value (NAV). What are they trading at now, on average?

MG: The juniors are still trading at that level. Molycorp, being closer to the production stage, is trading at about 0.4 times its NAV. By comparison, the juniors recently touched down at 0.2 times NAV. They have traded as high as one times NAV.

TCMR: What are the essentials of your REE equities thesis?

MG: Right now it goes back to what I mentioned earlier: prolonged price stability in the overall REE market, clarity about Japanese demand, inventory levels and Chinese supply.

A better sense of where global growth in general is going would help, too.

TCMR: Looking at your coverage universe from A to Z, Avalon recently amended its process flow sheet to exclude the cost-of-cracking stage. That will shave $200 million ($200M) off its capex and about $70 per ton (t) in operating costs. However, its capex remains close to $1.2 billion ($1.2B). Are these changes enough to make Avalon's Nechalacho REE project economic?

MG: While shaving off part of the capex and operating costs is important for the economics, I think the real savings lie in derisking the project from an operational and technical standpoint. The company is taking a very complex piece of technology out of the flow sheet. That should help Avalon find a partner for the project and derisk putting Nechalacho into production.

TCMR: Why has Avalon not yet made an agreement with an offtake partner?

MG: Avalon is dealing with mineralogy that has never been processed before, so it is developing a novel flow sheet. Before pulling the trigger, any potential offtaker or joint venture partner will want to make sure that Avalon has completed the pilot plant testing and product testing phases with a larger volume of material. Avalon is completing its pilot plant testing right now. Once that is done and the definitive feasibility study is finished, potential joint venture partners will be looking at a project with much less risk.

TCMR: Is the processing plant in the southern U.S. still part of Avalon's plan?

MG: Yes, that is where the cracking and separation facility is likely to be located.

TCMR: In an August 8, 2012 research report on Avalon, you wrote, "Trade disruptions between China and the rest of the world will maintain tightness in the market and increase the possibility of a takeover offer for AVL." Who would be the potential suitors in a situation like that?

MG: I was thinking that emerging producers like Lynas Corp. (LYC:ASX) or Molycorp, having a robust production profile for light rare earths, would perhaps be attracted by Avalon's heavy rare earths. However, both of those companies are going through their own growing pains and are experiencing issues with ramping up production. As a result, the timing for potential transactions may have been pushed out into the future.

TCMR: What is more likely for Avalon, an offtake agreement, a takeover offer or both?

MG: In the near term, an offtake agreement is more likely.

TCMR: You also follow Frontier Rare Earths Ltd. (FRO:TSX). In June, it was trading below cash. Recently, Frontier's joint venture partner, KORES, delayed a ~$24M payment by two weeks. Should investors be nervous?

MG: I do not see any cause for concern over a delayed payment. Frontier ended the quarter with $30M on its balance sheet; the company is not hurting for cash. [Editor's note: KORES completed its transaction Friday, Dec. 14, and Frontier currently has a cash balance of $52M]

TCMR: What makes Frontier attractive compared to other REE equities?

MG: Three things make Frontier attractive. Compared to a lot of the other juniors, it has a much higher-grade deposit. Its mineralogy has a known processing method, so the company does not have to develop a flow sheet from scratch. Finally, it has a strong financial partner in KORES.

TCMR: What is its timeline to production?

MG: Ultimately that will depend on permitting and a lot of derisking activities. Right now, I see the project coming into production in the 2016 timeframe.

TCMR: Does having a strategic partner like KORES scare off potential takeovers?

MG: It could be a deterrent; it also could attract interest. The REE space is very much like a specialized chemical business. Knowing where you will be selling the material at the end of the day and that it will meet an actual customer's needs is attractive in the REE space.

TCMR: You also cover Molycorp, the largest of all REE plays in terms of market cap. You have a Sector Outperform rating on Molycorp with a 12–18 month $20 target price. Molycorp was trading at $35 in April. Does Molycorp deserve the beating its share price has taken since then?

MG: Whether the price drop is warranted is outside my scope. I will say that several things have contributed to the price decline. One is an increase in capex that affected the valuation. The continued decline in REE prices also contributed. There has been dilution associated with Molycorp's equity financing. And I think the investment community is disappointed with how forthright management has been in discussing the capex increases.

TCMR: Not long ago, Molycorp was flush with cash. Now, it will need more capital to complete the ramp-up of Mountain Pass. Has the company mismanaged its resources?

MG: I do not know if this is a matter of mismanagement. These things tend to happen in projects where you are putting so many components in place. Typically, the labor component ends up costing more than expected. This is mostly a function of how much time it takes to get these projects built and up and running.

TCMR: Molycorp should end 2012 producing about 19,000 tons per year of rare earth oxides and finish 2013 at 40,000 tons per year. Will that be enough to put Molycorp in the black?

MG: It should be enough. I am forecasting a further decline in its REE basket price to $18 per kilogram. However, ramping up production will spread its operating costs over more production. Ultimately that will drive Molycorp into profitability.

TCMR: Do you have any parting thoughts for retail investors looking to add REE exposure to their portfolios?

MG: The REE space is for investors with a higher-than-average risk tolerance. It is for people who are bullish on global growth and in the sectors that drive REE demand. It will take some time for price stability and sentiment to return to the market. That is the tradeoff every investor has to consider.

TCMR: Matt, thank you for your time and your insights.

Matt Gibson joined CIBC's Equity Research Department in February 2009. He covers the junior base metals, rare earth, uranium and iron ore spaces. His more macro focus and financial acumen have helped to support commodity-related calls and augment the wealth of technical expertise on the mining research team. Gibson holds a Master of Business Administration from McMaster University, where he focused on financial markets and business valuation, and a bachelor's degree (Honors) in economics from McMaster University.

Read about Matt Gibson's ideas for investing in iron ore here.

Want to read more exclusive Critical Metals Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators and learn more about critical metals companies, visit our Critical Metals Report page.

DISCLOSURE:
1) Brian Sylvester of The Critical Metals Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report:Rare Element Resources Ltd. and Frontier Rare Earths Ltd. Interviews are edited for clarity.
3) Matthew GIbson: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

Image of three spoonbills from Flickr Commons

The post The rare earth sector needs these three things to prosper appeared first on MINING.com.

The Gold Report: When you last spoke with The Gold Report in late May, gold was hitting its first bottom of 2012, just over $1,570/ounce (oz), after apparently breaking a multiyear uptrend around the end of March. Silver bottomed about a month later just under $26/oz. While both prices are higher as we speak, 2012 has been pretty much a sideways year. What are you predicting for 2013, in light of world economic and political developments over the past six months?

Alka Singh: Gold is trading over $1,700/oz again and silver is over $32/oz. I believe this trend will continue in the short-to-medium term with higher prices for both metals in 2013 as the global economic crisis will take at least a couple of years to be resolved. Gold has a unique characteristic, and the price of gold tends to increase both during an inflationary period as well as when there is deflation. I don't see gold or silver prices coming off from where they are right now.

TGR: Do you have any target figures in mind, or any specific catalysts that you think could cause a big breakout?

AS: Almost every country in Europe, as well as the U.S., is heavily debt-laden, and the countries are all trying to manage the debt crisis by printing more money. When that happens, gold prices will continue to increase. With Obama winning the election, the quantitative easing will continue, which will be very positive for gold in 2013. In terms of target prices, I think gold will move closer to $1,900/oz, if not $2,000/oz next year, and silver will be north of $35/oz.

TGR: Shouldn't silver have better leverage than gold? It has in the past.

AS: Basically, silver is poor man's gold, and silver prices have historically followed gold prices. However, silver has more leverage, as you mentioned, than gold. Historically the gold-silver price ratio has been about 25-27:1. In recent times, we have seen the gold-silver ratio around 50:1, so it's almost doubled. We don't expect gold prices to fall, so the only way to bring that ratio back to the historical average ratio is to have silver prices go competitively higher than gold prices.

TGR: The disconnect between metals prices and mining shares continues to frustrate investors looking for a turnaround. What do you think it will take to close this performance gap?

AS: If I had to pick a timeline, I would say in early 2013 we should start seeing the gap close. Gold equities have not kept up with the gold prices due to the volatility in the stock market. Investors are still very afraid of the stock market and the economy and don't know what to do. This fear is the reason why the equities have not performed as well as the metals.

The other big problem facing mining companies is that costs have been going up at a higher rate than metals prices, so profit margins have been squeezed. We saw operating costs increase for many of the large gold producers including Barrick Gold Corp. (ABX:TSX; ABX:NYSE), Kinross (K:TSX: KGC:NYSE), IAMGOLD Corp. (IMG:TSX; IAG:NYSE) and Newmont Mining Corp. (NEM:NYSE). We have also seen capital costs go up by 50–100% for the projects. That, together with the volatility in the stock market, has caused the equities to not keep up with metals prices.

For the gap to actually narrow, the companies have to make sure that the capital expenditure guidance they are giving to the market can actually be achieved. Until they are able to lower their costs and increase their profit margins, it will be very difficult for the gap to narrow, because it's easier for investors to buy gold bullion and exchange-traded funds and get the entire price appreciation, rather than buying the equities and facing all the operational and technical risks. I think that in 2013 that gap should start coming down, although I can't say with certainty that it will close. That's because the operational issues have been going on for over a year now.

TGR: It seems as if there has been negative leverage for the mining shares versus the positive leverage that people used to expect.

AS: That is absolutely correct. Until the companies and the managements of the companies start controlling their costs and start giving better guidance to the market, equities will underperform the commodities. Also, investors are now focusing more on dividends and cash flows than on growth, so management of the mining companies need to realize this and change their strategies accordingly.

TGR: Unlike in the past, when rising metals prices floated all stocks, it now seems that resource companies are increasingly being divided into what I would call the "haves," the "have-nots" and the "wannabes." Most investors are focusing on the haves, which are successful producers, and to a lesser extent on the wannabes that are smaller, but hoping to survive and grow. The vast majority, however, fall into the have-not category, that might hit on something or not survive. How is this influencing your investment choices at this point?

AS: The reason why investors are focusing on the companies that are haves is because they are usually large-cap companies that are already producers, which means that they are highly liquid and cash flow-positive. In a volatile market like this, investors do look for liquidity. When they get into a stock, they want to know that they are able to get out of it when they want to get out.

The have not category is one that performs very well when gold prices are increasing substantially and are expected to continue doing so, because the option value of their assets increases. During the times when gold prices are flat or the market volatility is high, we don't see these kinds of companies doing well, which is why you don't see investors buying companies in the have not category at this time.

The companies and equities that have been hit a lot are the ones that are in the wannabe category. These companies have good assets and good management teams, however, they are about three to five years away from being cash-flow positive. That means that they have assets that are either in the prefeasibility or the feasibility stage and it will take them at least two years to build a mine and be cash flow positive. They are suffering right now because when investors are afraid, they choose to invest in companies with positive cash flows, rather than companies that will be in production in two to three years. Wannabe companies are where investors should have the highest potential returns because they are now trading below their net asset values. As they are only about 12–36 months away from production, their stock prices should increase faster. Companies in this sector really have the most upside potential, if metals prices continue to increase and investors' risk appetite improves.

TGR: Maybe we can talk a little bit about specific companies that you're currently focusing on and what's going on with their exploration and development activities. Certainly, a lot of action is taking place in Mexico and Latin America. What's your view on what's going on there?

AS: A lot of companies are actually focusing on exploration in Mexico and Latin America because these countries are supposedly politically safe areas. With what we have seen happen in some countries in West Africa, investors are afraid of investing in much of Africa now other than, say, Ghana or perhaps Burkina Faso. We have seen a coup in Mali and some issues in Egypt and in West Africa as well as East Africa. Companies are actually focusing more on Latin and North America. Investors are ready to pay a good premium for companies with assets in Canada, U.S., Mexico, Chile, Brazil or Guyana because of the lower political risks.

I want to talk about a few companies that we think are really solid. One of them is Atacama Pacific Gold Corp. (ATM:TSX.V). The Cerro Maricunga project in Chile has approximately 4.5 million ounces (Moz) . Currently, it is going through a preliminary economic assessment (PEA), the results of which are expected to be announced before the end of this year. I like the Cerro Maricunga gold project as it is all oxide associated ore, and the metallurgy for oxide is much easier and cheaper than for sulphide ore. I like the management team as well, and the insiders own 40% of the stock. That's my favorite name right now.

TGR: Would this be a low-grade, open-pit operation?

AS: Cerro Maricunga will be a low-grade, open-pit operation. The mineralization starts at surface and continues to over 500 meters in depth. Atacama will have a big open-pit operation at Cerro Maricunga.

I also like Volta Resources Inc. (VTR:TSX). The company has the Kiaka project in Burkina Faso. It has over 5 Moz of NI-43-101-compliant total gold resources. The company just put out its prefeasibility study and is now in the feasibility stage with those results to be announced in Q2/13. We like Kiaka because it's a big, low-grade, bulk-tonnage deposit. There are very few deposits in the world that have over 5 Moz, and this falls in that category. We like the management of Volta and think that Kiaka will become a mine over the next three to four years.

TGR: Most people have never heard of Burkina Faso. How politically stable is it?

AS: Burkina Faso is a democracy, very similar to Ghana. It did have some labor issues earlier this year, but those have all been resolved. IAMGOLD, SEMAFO Inc. (SMF:TSX; SMF:OMX), High River Gold Mines Ltd. (HRG:TSX) and Avocet Mining Plc (AVM:LSE) have operating gold mines in Burkina Faso. There are six producing gold mines in Burkina Faso right now. I think it's actually a politically safer jurisdiction than many of the other African countries.

TGR: What else do you like?

AS: In the silver space, I would like to mention Levon Resources Ltd. (LVN:TSX.V; L09:FSE; LVNVF:OTC). The stock has been beaten up a lot, just like every junior. Levon has over 455 Moz silver in politically safe Mexico and over $55 million in the bank. It has a deposit called Cordero, which is a Peñasquito look-alike deposit. With all the market volatility going on, the company has stopped drilling recently, but this is going to be another huge operation. Newmont owns about 11% of Levon. I really like Levon because of the silver exposure and the fact that it is one of the largest undeveloped silver projects in the world. There are not that many companies with good, undeveloped silver deposits in the world, and Levon is one of them.

TGR: Levon has been around for many, many years.

AS: That is correct.

TGR: Are there any other ones in Mexico or other places in South America that you'd like to talk about?

AS: I like Brazil Resources Inc. (BRI:TSX.V; BRIZF:OTCQX), which is obviously in Brazil. It just closed a deal about a month and a half ago with Luna Gold Corp. (LGC:TSX.V), where it bought Luna Gold's Cachoeira project. The project has about 667,000 oz (667 Koz) of gold and is expected to announce that it is getting into a PEA at Cachoeira. I think the company will be looking at other acquisitions as well. It's a good company with a management team that has a lot of experience in Latin America. The stock hasn't performed very well, just like the other juniors, but I think that it's a good company to hold.

TGR: Where is that trading these days?

AS: Brazil Resources is trading at $1.06/share and I have a 12-month target price of $1.45.

I would also like to mention Timmins Gold Corp. (TMM:TSX.V; TGD:NYSE.MKT). Timmins Gold has been ramping up production in Mexico. I don't cover it officially, but I really like the management team and the San Francisco gold mine in the Sonora State of Mexico that they operate. It's a nice, small operation, producing over 100 Koz gold at a low cost. I think that it has a lot of exploration upside as well and I like it a lot.

TGR: In general, what's your overall assessment of the metals situation these days? What do you think that investors ought to be doing to hopefully make some reasonable money in the coming year or at least protect their downside?

AS: If investors are risk-averse, I think that they should just stick with large-cap liquid names, like the large producers, which will probably pay dividends and have an upside when gold prices go up. Investors who have some risk appetite should choose among some of these smaller companies with good management teams and good assets in not very politically risky jurisdictions where projects could be in production over the next two to three years. Those will have the most upside over the next year.

TGR: That sounds both reasonably conservative and, hopefully, optimistic thinking. We'll have to see what happens with the metals markets and if they can drag these stocks along with them. Thanks for speaking with us today, Alka.

AS: I hope for the same. Thanks for having me.

Alka Singh started her career as a mining research associate with Wellington West Capital Markets in Toronto. Since then she has worked for Orion Securities and Merrill Lynch in Canada. She then moved to New York City to build the mining franchise for Rodman and Renshaw, where she covered 24 precious metals, base metals and uranium names. Singh has since started her own independent research firm, Mine2Capital, to provide unbiased research for clients. She holds a Bachelor of Science in geology and a Master of Business Administration in finance. She is a CFA charter holder.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

Source: Zig Lambo 

DISCLOSURE:
1) Zig Lambo of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins Gold Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Alka Singh: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

Streetwise – The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

The post Alka Singh: distinguish the precious metal 'haves' from the 'have-nots' and the 'wannabes' appeared first on MINING.com.

The Gold Report: Chris, the lifeblood of your business is financing. What's your read on the appetite for junior financings compared to earlier this year?

Christopher Welch: The appetite for high-quality projects in the mining space is basically the same as it was in early 2012. However, in the current environment, where share prices are a bit depressed, it's getting harder to match investors with companies at share prices that are acceptable to both parties.

Aureus Mining Inc. (AUE:TSX; AUE:LSE) is conducting a big fundraising for its New Liberty mine in Liberia, which is positive news demonstrating there are green shoots in the equity space for West African gold, which is encouraging. We're optimistic that there will be more deals done in the near term.

TGR: There's been some instability in Mali, which stemmed from instability in Libya in part, and now there's growing religious tension in Nigeria. Does West Africa remain as stable as you once believed it was?

CW: We need to separate political instability from operational risk. Let's use Mali as a bit of a case study. Randgold Resources Ltd.'s (GOLD:NASDAQ; RRS:LSE) operations were affected, but in a very minor sense. It's important to draw that clear line. Yes, political instability will affect investment appetite for projects in the region, but it's still an area that has fantastic geological potential. It's certainly is a place where business can get done, but investors have to bear in mind political instability.

TGR: Perhaps we could create a scorecard for how you see things for a number of countries in West Africa. Canada is just about as stable as it gets in the world. If Canada scores a 9 out of 10 as a stable jurisdiction, how would you score countries like Burkina Faso, Ghana, Mali, Liberia, Cote d'Ivoire, Sierra Leone, Ethiopia and Eritrea? Let's start with Burkina Faso.

CW: Burkina Faso had similar strife to Mali's, but the Malian issue sprawled and became a much bigger issue. Burkina Faso has an interesting political future, but it's also got a great mining future. Mining is going to be the backbone of economic development for West Africa. Each country has to secure its investment from outside of Africa. If Canada is a nine, I say Burkina Faso is a four. There's perhaps a little bit of instability and political insecurity on the horizon, but that should be sorted out.

Ghana, given its long gold mining history and its stability, has got to be a five. Some recent tax regime changes might have dusted it up a little bit, but it's a very solid country where companies can get the services that support mining. That is very important for operational risk.

Mali has a problem that it has to sort out. Randgold's share prices initially after the coup showed the effect of instability in the country. Yet Randgold's share price has recovered on its continued success in the area. Papillon Resources Inc. (PIR:ASX) has definitely shown that if a company provides great exploration success and resource growth, then the currently political uncertainty doesn't really matter, the company will get an uplift in share price.

I really like Liberia. It's one of the more exciting countries in West Africa. President Ellen Johnson Sirleaf has done a good job getting rid of corruption—she fired half of the executive group because of fears of corruption. Liberia is exciting because it has great geological potential with a pretty stable political outlook in the near term. It's a 5 out of 10.

TGR: Looking at Cote d'Ivoire?

CW: It's had a checkered history. Companies like Amara Mining Plc (formerly Cluff Gold Plc) (AMZ:TSX; AMA:LSE) have some very interesting projects in Cote d'Ivoire. It's got great exposure to the country and understands it very well. Amara has reduced some of my fears about the country, but it's got to put its past behind it and the wounds will take time to heal. It's probably a 3.5 of 10.

TGR: Sierra Leone is next.

CW: There's been a bit of saber-rattling from the two political parties in Sierra Leone. The incumbent has done a bit of what we call "Clintonian triangulation" where it's said, "Oh, my opponent got some support by saying we need to toughen our tax regime on mining projects and mining profits." That's genuine just saber-rattling. The incumbent is probably going to get in again and he's probably going to maintain a good outlook for mining in Sierra Leone.

We've got some good iron ore projects that have been developed recently in Sierra Leone. There may be some uncertainty regarding mining taxes in the country, but companies can develop big projects with large infrastructure requirements. It is stable, but we've got to get a near-term election out of the way to show that it's going to remain stable. I'd give it a 3.5 out of 10.

TGR: The last two are Ethiopia and Eritrea.

CW: We have covered Nyota Minerals Ltd. (NYO:LSE; NYO:ASX) for a good while now. The company has got the Tulu Kapi gold project in western Ethiopia. It's the first public company applying for a mining license in Ethiopia. It's not holding the hand of the government, but has helped where possible while the government gets itself up the information curve on the mining industry and mining law.

We're at a turning point for Ethiopia. It's going to have stable mining law for the first time. When it comes out, depending on tax and royalty rates, we're going to get a new mining jurisdiction on the block. But until that happens, I'd give it a 3 out of 10. Once that happens, which is imminent, that score will go up.

TGR: Who is Ethiopia working with to develop its mining law?

CW: Ethiopia is a very independent country. I've spent a bit of time out there and the Ethiopians are a great people. The country has never been colonized. It is starting from scratch but has looked at other mining laws. The basis of its law is a Western-type of mining law. It's not specifically Australian, but it's been influenced by Australia. It's trying to take in the recent evolutions of mining law, but Ethiopia is basically starting with a blank piece of paper.

TGR: On to Eritrea.

CW: The Eritrean government is pro-mining investment. It has great mineral potential. Bring the two together and it's definitely an interesting mining investment jurisdiction. However, because of the political football nature of Eritrea regarding the UN sanctions, etc., it's a 3.5 out of 10. Most people would probably give it a two, but that's unfair to Eritrea.

TGR: Of the companies operating in these countries, are there examples of management teams that have mitigated risk?

CW: There are good examples of companies that have reduced operational risks. SEMAFO Inc. (SMF:TSX; SMF:OMX) in Burkina Faso has done a great job. It's made sure its agricultural developments have gone hand in hand with its mining developments. It's practical, sustainable development, where it uses very small amounts of operating profits to develop sustainable businesses, like paprika and sesame seed growing alongside the mining projects. It's been able to secure non-unionized mining teams, which is very rare in Burkina Faso.

Another company that has spread its wings in the region is Amara. It's done quite well and has picked a few good projects in certain countries. It's shown that having a broad spread and management based in the region gives it unparalleled information to reduce the operational risk.

TGR: Amara was once Cluff Gold Plc. Why did it change the name?

CW: It had a big change in the management team. Algy Cluff stepped aside to let more development- and operation-focused management come in. Chairman John McGloin joined the team and he's definitely had a positive effect already.

TGR: Is it fair to say that those are very positive changes?

CW: They're very positive changes. John McGloin was an analyst before, so I know him reasonably well.

He was a very well-respected mining analyst, who won the Association of Mining Analyst's analyst of the year award in London last year. He made a pretty quick hop over to Amara. He's got a strong technical background and he's been able to shepherd the resource calculation for its Baomahun project in Sierra Leone very well.

TGR: What are some other tangible things that great management teams do that earn points in your book?

CW: Companies need something that differentiates them—be that grade, scale or some technical aspect. It should pick the thing that makes it special and stick to it and not spread itself too thin. What's going to sell the company is that tag line, "the highest grade mining company" or "the biggest mining company in the region."

TGR: Companies are akin to professional sports teams in that one manager can get more out of the same people or resources than another manager can. What are some West African juniors that have management teams that you would consider a cut above?

CW: I'm going to go with Amara Mining again. It's really a good company. Chief Executive Officer Peter Spivey is based in the region and has unparalleled information about what's going on in every country where it operates. The new management in London is very strong and is quite happy to jump on a plane and spend a long time on the projects. It has the depth and the dynamism to carry out its long-term objectives.

TGR: Amara has the Baomahun gold project in Sierra Leone, which is expected to reach production in 2014 at 135,000 ounces (oz) annually. Financing was supposed to be in place by now and construction started. Is that the case?

CW: John McGloin has taken a very prudent step and said, "Let's not rush the feasibility. Let's get it right." It's quite a bold call because a lot of investors will be looking for delivery sooner rather than later. It's a brave call, but the right call to ensure that the project's going to be economic and profitable.

It's had good exploration success in some of the projects that were written off by many investors. At its Yaoure project in Cote d'Ivoire, it's gone into some of the deeper mineralization. It might be sub-economic if it had to run it on diesel oil, but with a nearby power source, it could be quite profitable. We're waiting on a resource update, which should come out soon based on the recent drilling results.

TGR: It also recently announced a deal with Samsung Electronics Co. Ltd. Is that meaningful to shareholders?

CW: It's very meaningful for shareholders. It's one of two strings to the bow that haven't gotten due recognition. Samsung coming on board shows that it's a company that can get approval by one of the biggest players in the world. It's doing a small loan to help Amara bring on-line the nearby Sega project, which is next to the Kalsaka mine that is already in production. Having a big brother in Samsung means that it can keep its other near-term development projects, like Yaoure, in its portfolio rather than be forced to spin them out to pay for development of Baomahun.

The other aspect of Amara that has not had due recognition is its revenue. If you're looking at a group of, say, six players that are going to bring bigger mines on-line in the near term, Amara differentiates itself because the Kalsaka mine generates good revenue that can help fund near-term development and exploration, which importantly reduces dilution.

TGR: That's one exceptional management team. How about another one?

CW: Volta Resources Inc. (VTR:TSX) has an A-Team with good company experience. Kevin Bullock and Vic King are doing a great job bringing on-line a huge project in Burkina Faso, Kiaka, which has 5 million ounces (Moz). It is not getting due credit for the scale of its projects. Some people are saying they don't think a small company can deliver such a big project. That's unfair. I believe Volta is going to do it given its skills; Volta is one company where the skills of the management differentiate it.

TGR: Volta recently released 111 drill holes from the Phase 4 drilling program in the Kiaka Central area. What should investors make of those results?

CW: The big takeaway is that the company successfully turned blocks of material that were classed as waste into ore that can be mined. It's also shown that there are definitely areas of high-grade mineralization to Kiaka, which are going to improve the economics of the projects.

TGR: What upgrade do you expect to the 1 Moz Inferred resource?

CW: We're probably going to get 60–70% of that kicked into indicated and hopefully lifted into a probable reserve.

TGR: Are there some juniors in Africa that are developing projects proximal to existing mines that could generate takeover interest?

CW: Definitely, in areas like Ghana where there's the infrastructure advantage and the proximal mineralization. Castle Peak Mining Ltd. (CAP:TSX.V) has some interesting early-stage ground that would be attractive to other nearby producers, especially that are known to be increasing their footprint in the region.

TGR: Castle Peak is currently undergoing a drill program on its property in Ghana. What have you made of the results so far?

CW: They're broadly positive, but perhaps it's too early to take them too far.

TGR: What are some projects that you've visited recently that our readers might want to take a closer look at?

CW: One company that's very attractive is Mawson Resources Ltd. (MAW:TSX; MWSNF:OTCPK; MRY:FSE), which has the Rompas project in central Finland. Its exploration results so far are eye-popping. Grab samples include several kilos of gold per tonne in grade with uranium, which I know is a bit of a love-it-or-hate-it commodity, but the potential ore in the region would be classed as a concentrate already. It's something that has to be on your watch list, if not in your portfolio already.

TGR: I visited the Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) Kittila mine in Lapland, Finland. That mine has reserves of more than 5 Moz and the grades are around 4.7 grams per tonne (g/t). Could Rompas be even larger?

CW: Its beat it on grade already. Rompas produced the best drill intersection ever seen in Finland of 6 meters (m) at over 600 g/t gold at a depth of 7m. We're looking at a very high-grade project if it can delineate a resource at depth. We're expecting some more drill results in early 2013.

TGR: In your research, you suggested that Mawson's land package could host a new gold mining camp in central Finland. That's high praise indeed. Is that putting the cart before the horse?

CW: We've got to take an optimistic view on this. It's got a large mineralization footprint in the range of 10 square kilometers. It's got Rompas. It's definitely the most advanced project with drilling on it so far. I'm quite confident that the near-term drilling results are going to demonstrate that we're right on our early analysis of the project and the company.

TGR: What are some other companies under coverage that you find interesting?

CW: Condor Gold Plc's (CNR:LSE) La India project in Nicaragua is very interesting. Mark Child, who is at the helm of Condor, has definitely delivered on a great resource increase of more than 2 Moz. He's also delineated a potentially open-pit project. The company is just scratching the surface of that. It has a large land package, which is essentially riddled with gold with lots of epithermal veining across the whole area. It could host a mining district for sure.

TGR: Condor recently acquired the La Mojarra concession in Nicaragua. How is that material to shareholders?

CW: It's very early stage for La Mojarra. The company has done some grab samples. It will run a geophysical survey over its land package, which should add a lot of value. It could show a lot of larger targets. In order to have an area that's got such disseminated gold mineralization over the whole land package, there's got to be a deeper source there. Hopefully, geophysics will give us more information about where a potential source of larger scale could lie.

TGR: What's the earliest we could expect some drill results on La Mojarra?

CW: Condor just did a financing to carry out more drilling, but it is early stage at the moment. It could be the middle of next year.

TGR: What else is on your plate?

CW: Rambler Metals & Mining Plc (RAB:TSX; RMM:LSE) has done very well and just completed a commercial commissioning of its Ming mine in Newfoundland.

Again, you've got to look at the management team. George Ogilvie has delivered. He's done what he said he's going to do and the high grade of the Ming mine is its differentiator. It also has near-term potential to develop a larger zone of mineralization at Ming, which would transform Rambler into a much larger player. Newfoundland offers a lot of exploration potential for some of the last low-hanging fruit in the volcanogenic massive sulfide high-grade space.

TGR: The Ming mine was supposed to start commercial production Nov. 1. Is everything going as planned?

CW: Nov. 1 is the official date of commercial commissioning. It's been operating. It's got its first shipment of concentrate coming up. It's informed its offtake partner, Transamine Trading, that it's got enough concentrate in the Goodyear's Cove port facility to transport.

TGR: During the pilot plant, gold recovery rates averaged 65%. Is there a plan to boost those numbers?

CW: It has a great option to use a hydrometallurgical process on the tailings of the main copper concentrate circuit, which could boost gold recoveries to over 80% or higher based on laboratory testing so far. It's a cheap option and we know it has high-grade gold, so it's a very good thing for the company to do.

TGR: As an investor, would you follow this management team to another company?

CW: I hope the team doesn't leave this one, to be honest. Once you have built a team, and George built his team to bring Ming into production, you can apply the skill set onto other areas. It could grow within Newfoundland or it could go to another part of the world and do exactly the same thing.

TGR: It's fun to talk about these companies. Is there another company that interests you?

CW: Nyota Minerals, which is at a critical stage. Its area has got great exploration potential. Nyota's flagship deposit, the Tulu Kapi mine, is basically the first step. Once it's got Tulu Kapi into production, it'll be able to demonstrate that the initial mine life for the plant at 10 years is just a start.

TGR: There was a delay in Nyota receiving its mining license for Tulu Kapi. Do you think the Ethiopian government is looking for a larger piece?

CW: Investors shouldn't be too concerned. It was a combination of factors that led to the delay, including the death of the prime minister and the departure of two key members of the Ministry of Mines. One of them actually joined a mining company. The Ethiopian government is also on a near vertical learning curve to understand mining and mining investment. There's a bottleneck at the Ministry of Mines in processing all the technical data.

As we saw at Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) when it went into Eritrea, there are going to be problems along the way. Once Nyota has delivered, it'll get due credit. It has good support and good shareholders. Some of them are strategic players in the region. These are investors who have done due diligence and know when a deposit is good.

TGR: What are the odds of the company making another significant discovery beyond Tulu Kapi?

CW: The chance of success in exploration is great. Nyota carried out some wildcat drilling earlier this year on its Northern Block tenements. The results were interesting, but Nyota didn't quite hit the mineralization that was expected. However, what it has learned from the drilling is going to be tremendously important. It can apply that to the wider area. It's doing more grassroots-stage exploration across the area, which could yield some very good results. I'm very optimistic that it's going to find something of decent scale on the Northern Block.

TGR: Where do you believe the sweet spot is for investors looking to put money in gold equities?

CW: We're at a very interesting stage at the moment. Producers are getting the recognition back for having revenue. That value recognition is going to trickle down to the midtiers, juniors and the very junior juniors. Investors have to do their homework to find the right companies that will soon get recognition for success in either exploration or development. Papillon is a great example of backing the project geology and the team that bucks the trend. For me, at the moment, the sweet spot is producers, but I've got to go for the juniors that have that exploration experience and strong management, too.

TGR: Thanks, Chris.

Christopher Welch is a mining analyst with Ocean Equities in London. Before joining Ocean Equities, Welch spent four years with Bloomsbury Minerals Economics as a copper analyst, prior to which he worked as a geologist in Lesotho. He holds a master's degree in international business management and a Bachelor of Science (Honors) in geology from University College London and an Advanced Certificate in Economics from Birkbeck University.

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Source: Brian Sylvester 

DISCLOSURE: 

1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Castle Peak Mining Ltd. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Chris Welch: I personally and/or my family own shares of the following companies mentioned in this interview: Condor Gold Plc, Amara Mining Plc, Aureus Mining Inc., and Nyota Minerals Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

Streetwise – The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

The post Christopher Welch: searching for a perfect 10 appeared first on MINING.com.

The Gold Report: This is the first time you are speaking with The Gold Report, Florian, so maybe you could give us a brief overview of Precious Capital AG and its investment focus.

Florian Siegfried: Precious Capital is an independent, privately held fund-management company in Zurich, Switzerland, with a team of financial and mining professionals. Our investment strategy is to identify undervalued future winners in the precious metals mining space. Often these are companies that are not yet the focus of the bigger institutional brokers, have good future expansion potential, have reasonable market capitalization and are driven by good management teams. We took over the company in December 2008, and since then the business has grown quite consistently and this year is performing very well for us.

TGR: Can you give us your European perspective on the current global economic and financial situation and where things might be headed?

FS: We are long-term bulls on gold because we think that the debt crisis in Europe has been downplayed for too long and there is no solution to the problem. Eventually, we expect to see a credit deflation where most of these bankrupt governments in Europe are no longer able to repay their debt, which will translate into more stress in the banking sector. In our view, this will lead to a deflationary downward spiral, which cannot be manipulated any longer by printing money because eventually the insolvent banks will fail to lend, and then there is no possibility to lift asset prices anymore. When that happens, the investor community will have a huge preference for liquidity and unleveraged assets.

We think gold is the most favorable asset class in a time of credit deleveraging. An investor in gold will make money in real terms as the credit bubble deflates. Investors who are long in euros or commodity-based currencies will actually lose in purchasing power as credit deflation hits. This is our long-term view and we think that there is no further room to manipulate asset markets, as they have been in the past. I think that we are at the triggering event here.

TGR: How much air do you think can come out of this whole system? And how much can prices deflate overall?

FS: That's a difficult question. One has to look at various asset classes. We would be rather bearish on base metals, such as iron ore, which has already declined quite dramatically since the beginning of the year. China has to rebalance its economy, which largely depends on capital investments and exports and this could become a real problem now. I wouldn't be surprised if in two or three years we would see prices off by 30% or so. Oil prices are still getting some support because of the geopolitical situation, but as China slows down, consumption is probably going to decline and we could see oil off 20% over the next few quarters.

In the equity markets, I think earnings disappointment is going to be a major topic next year. Sooner or later, the market has to realize that if Europe is in a recession, China is slowing down and the U.S. is not getting ahead of the curve, where would earnings growth come from? So, I would expect equity prices, overall, in a year's time could be lower, probably by 10–20%.

TGR: In reading through your Precious Capital fund materials, it was interesting to note the major credit crises over the last 300 years, starting with the South Sea Bubble in 1725 and then the British Credit Crisis of 1772 and then the panics of 1825 and 1873, followed by the market crash in 1929 that started the Depression. Then we had the bad recession in 1973. Now we have this global financial crisis that started in 2008. If the previous 300-year pattern holds, it would indicate another severe event around 2025–2030. Do you think the Federal Reserve and foreign central banks can keep things together and prevent a major collapse in 2025–2030?

FS: These kinds of cycles have a common characteristic. In each, you have good times, with real or so-called "prosperity," mostly driven by excessive use of leverage and debt. 2008 was the same, with too much credit and debt. Bear Stearns and Lehman Brothers failed to serve the debt because they were too highly leveraged. Then the whole system broke down because if one bank failed, many others would fail.

I think we are still relatively early in this kind of cycle. The Federal Reserve and the European Central Bank have really acted ambitiously to solve the crisis and prevent the system from collapsing by just printing money to loan at 0% to the banking system. But, eventually, what is it going to change? In the long run nothing, because it's not just a liquidity crisis. It's also a solvency crisis. The only solution to too much leverage is less leverage. Only the market can bring that leverage to a level where it is actually sustainable. I believe the stimulus, TARPs and LTRO programs from all the central banks have only pushed the inevitable credit deflation cycle down the road.

TGR: So how does all this influence your investment strategy?

FS: We try to identify industries that actually make money in a deflationary environment. Lower commodity prices create margin pressure for most industries and they don't do as well as during times of inflation. The precious metals industry does well in a deflationary environment because the gold price goes up against the whole commodity complex while input costs such as crude oil or steel are probably stabilizing or will become less expensive than they were in years of higher inflation. Eventually, I think it is the market's desire for liquidity, which will cause gold prices to continue rising.

So, the long-term view is very bullish, but it's a very volatile market, and last year gold stocks really underperformed. This is mainly explained by a lack of liquidity and investor confidence. The whole precious metal sector has overpromised and under delivered and many M&A transactions did actually destroy shareholder value. I guess investors have reset their expectations dramatically after all this frustration. However, this can provide opportunities and we try to use some of our technical indicators to trade these stocks while they are getting into an overbought or oversold condition. This past April and May, when the market was really capitulating, we were buyers in most of the stocks we like.

Right now we think the market is a bit overpriced and we've had a very good run in most of these gold mining shares. Now they could go into a little correction mode and probably lose another 10% or 15%. So, we sold some of our positions at the end of September and are waiting for more favorable buying opportunities in the next few weeks. It's not a buy-and-hold strategy that we want to apply here. One can really trade swings if you can get the timing right. We are always invested in the sector, but sometimes we have 30% or 40% cash.

TGR: How has your strategy paid off over the last couple of years?

FS: Since we took over the fund in December 2008, we are up about 140% in U.S. dollars and this year as of end of September we are up about 26%. We have some winners in the fund that performed well based on the discoveries and the operational improvements they made. We were regularly buying when the markets dried up, which forced stock prices to go lower. There were actually no signals that would suggest a long-term fundamental downturn. We see these corrections as tradable opportunities. I was calling brokers in May and it was unusual to see how defensive they were, saying to stay away from gold stocks until gold hits $2,000/ounce (oz). We got the feeling that was probably the bottom of the market. Timing is of the essence. Pick your stocks carefully, especially in the junior space, because most of these companies will never make money for their shareholders.

That brings me to our selection strategy. The first thing we look at is management. The mining business is very challenging, with a lot of risks. The people with the right experience who have done it before will attract the money from the Street to bring a story to reality and attract institutional money in the future. The next thing we look for is geology. Can a good deposit become bigger and can this ever become a mine and what and how long will it take? In addition, a solid balance sheet with little leverage and good networking capital in the bank is key, so they don't have to tap the equity markets in these volatile times.

We are largely positioned in the midtier mining space because the industry as a whole has started to change. Many of the large gold mining companies have grown too big and aren't flexible anymore. Their strategy was for growth in size, rather than profitability. As a result, many have failed to make money for shareholders. Now, the whole industry has started to focus on smaller projects with lower capital requirements. As a result, we think the market has shown a preference for companies that run easy mines, which can be expanded operationally and can be financed by the market without the risk of significant equity dilution.

Many companies have good assets but don't have the critical mass to attract institutional money. We expect to see more mergers taking place between junior companies or midtier producers. It doesn't make sense to have two companies producing, let's say, 150,000 oz (150 Koz) per year trading at a market cap of $500 million (M). It would be an enormous task for them to get into a league where they could attract institutional money. Growing to a $1 billion (B) market cap internally is probably going to be a tough task. With smart merger and acquisitions (M&A), becoming a 200–300 Koz producer by combining two businesses can get it into the $1B market-cap range more easily. We think that M&A among junior producers is going to be a major topic in the next few quarters.

TGR: So, let's talk about some specifics on companies you're currently invested in that you think look interesting.

FS: One company we own that we think was undervalued at the beginning of the year is OceanaGold Corp. (OGC:TSX; OGC:ASX), which is a 250 Koz producer in New Zealand. It has transitioned from a company that only operated there, to a more internationally based one. Its Didipio project in the Philippines is well advanced and should get into commercial production next year. We think OceanaGold is going to make a lot of money as cash costs drop and production increases. It had some cost issues over the last 12 months or so mainly due to the strong New Zealand dollar versus the U.S. dollar. The Philippines operation has a lot of credit from copper, which will lead to ongoing cost improvements.

The company has good management and its growth is pretty well financed right now with no need to tap the equity markets in the near future. The stock has had a good run, up about 68% this year. I would rather wait for a correction before buying it here. If management continues to execute its strategy it has the potential to grow to 400–500 Koz/year of production over the next three to four years.

TGR: How about some other ones that you like?

FS: We have also been acquiring Endeavour Mining Corp. (EDV:TSX; EVR:ASX), which is proposing a smart acquisition of Avion Gold Corp. Unlike many M&A deals that have hardly created long-term shareholder value because of management issues and lack of synergies among operations, both Endeavour and Avion are West African gold producers. Avion was running out of money in the second quarter and Endeavour took the challenge to pick up the whole company in a share deal. The combined entity would be a gold-focused producer with four mines and combined annual production of about 300 Koz. Its reserve base would be close to 3 million ounces (Moz), with a resource base of about 10 Moz and a market cap of close to $1B. Compared to companies with similar production profiles and resource bases, we think Endeavour looks rather cheap. The political situation in Mali in West Africa is certainly holding the stock down to a certain degree. I think the management team will make this deal happen and create shareholder value in the long term.

TGR: How about some other ones?

FS: Another company we were just adding to our portfolio is Keegan Resources Inc. (KGN:TSX; KGN:NYSE.MKT), which is in a relatively safe jurisdiction in Ghana, West Africa. It had a sharp price decline from trading at a little over $9/share, down to around $2.38/share by the middle of May. Its Esaase project had the classic capital expenditure (capex) overruns. They underestimated the cost of the project. When financing requirements changed, the markets became very skeptical and the shares dropped. We feel the project economics are still favorable and that it can operate on a smaller scale than the planned 300 Koz/year with a $500M capex budget. Management is in the process of recalculating a smaller plant with a much lower capex, about $150–200M, rather than $500M.

After the recent rally, Keegan's market cap is now about $270M, with about $170M in the bank and 6 Moz resource in the ground. The company is almost trading at cash, which provides good market support. When the new project economics are published, it will probably show a 100–160 Moz/year operation with a lower strip ratio and lower operating costs. The recoveries will be the same, say 92–93%. Many of the long-term shareholders and institutions went in at $7–9/share. With the stock trading around $3.97/share, we think it has some real catch-up potential from here. PMI Gold's Obotan mine is about 10 kilometers southwest of Keegan's Esaase project and PMI just raised $100M to start construction of the mine. We originally invested in PMI Gold at $0.10/share back in October 2009.

TGR: How about companies that are a little closer to home? Certainly the Yukon has had quite a bit of activity lately. What do you like there?

FS: We think the Yukon is a great jurisdiction for mining. With devolution of resource management responsibilities in April 2003, the Yukon has its own policy for mining, which we regard as a major benefit for mining companies. The top part of the Yukon has great and underestimated potential from a geological standpoint. The main challenge is the remote locations where you have to bring in all your equipment by helicopter and the short drilling season, which goes from about April/May until the snow comes in October.

In the silver space there we like Alexco Resource Corp. (AXR:TSX; AXU:NYSE.MKT), which is producing silver from its Bellekeno mine in the historical Keno District. It is fully financed by Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) with a very tight share structure of about 65M shares outstanding. We think it has the potential to grow resources and production through internal cash flow and no debt. Nevertheless, the company suffered a 27% increase in cash costs in the first half of the year versus 2011 due to lower base metal credits and mining of lower-grade material. These factors brought the price down quite significantly this year by -45%, to about $3.80/share.

What we like about Alexco is that the company is producing now and has many exploration and development projects in the same district. Most of the exploration and development money it's spending will add to future production. It will probably produce around 2 Moz silver this year. As new projects are added, it will become a two- or three-mine operator in the next two to three years, all funded by internal cash flow. The Keno District has very rich silver grades, historically averaging 50 ounces/ton or so. It's all underground, which is a big plus because the mine can operate year-round with the concentrate being shipped out by road throughout the year. The management team has a good reputation and when we visited the mine in May of last year our impression was that the exploration and development team are all solid and experienced mining people.

TGR: Any others you'd like to mention up there?

FS: Some of these Yukon stocks really fell out of favor over the last few months. One company we like, especially because the shares are also still trading at very depressed levels despite good news, is ATAC Resources Ltd. (ATC:TSX.V). This is a pure exploration company with a large land package. All the gold discoveries it released this year point to a potentially huge system that could be described as a Carlin-type gold discovery.

We visited the project last year. The company has identified multiple targets on its so-called Rackla Gold Belt, which is about 185 kilometers long. Every time the company releases results, we see that this system is potentially growing into something much bigger. The grades are phenomenal, like 10.24 grams/ton (g/t) over 46 meters, and not very deep. The stock is down to around $2.36/share, from $10/share in July 2011. The company is well financed and has a good management team. If one looks for value in exploration, I think ATAC is a good name to have at these low levels.

TGR: What about companies in other parts of Canada?

FS: We have St Andrew Goldfields Ltd. (SAS:TSX), which has had a choppy ride in the last few quarters and is now attractive from a valuation standpoint. Based on the progress the company has made since the beginning of the year, we see a turnaround with bottom line net profits and operating cash flows. Production is growing steadily toward 100 Koz this year and costs are coming down. However, a few weeks ago it announced an overstatement of its Inferred resources on its o

We like the experienced team headed by Jacques Perron and the location in Ontario, which is one of the best places to be for mining. The projects are rather high-grade underground operations, which is a positive factor because it makes for more stable operating margins when you have volatile gold prices. The company seems to be on track to achieve its production goal in 2012, but given the operational problems in 2011, the stock is still on a depressed level. The company is fully financed and both production and resources should grow in the next three to four years. Operationally and financially the story looks now much better than last year. The company also has a large land package for exploration and a tax pool of $190M on its balance sheet, which is more or less the market cap right now. The share price doesn't reflect underlying resources and the reserves in the ground.

One shareholder who probably has a high degree of control in the company may contribute to the market underperformance. But, in a good gold market, a stock like St Andrew should probably trade at $0.80–1.00/share, to reflect the operational business.

TGR: Let's turn to some projects and companies that have operations in the U.S. What do you like there?

FS: We have a development stage company in the fund called Romarco Minerals Inc. (R:TSX), which has the Haile project in South Carolina. This project has been delayed due to the completion of a full Environmental Impact Statement (EIS). The stock is therefore in a penalty box, but the project economics are very favorable. It will have low costs and gold grades of about 1.8 g/t open pit, which is rather high. The stock is trading at about $1/share. I would say that Romarco could be a takeover target for a midtier producer or even a senior, based on the quality of the asset and the location. Once the EIS issue has been resolved, probably next year, then we think it will be a very attractive stock to own. The main risk is permitting and finance, should the company require to raise more equity, which would be dilutive with the current low share price.

TGR: Maybe you can summarize what our readers ought to be doing in the coming months to take advantage of what you think lies ahead.

FS: The key is to see the fundamentally positive development of the industry. Gold mining shares are trading at historically low valuations, e.g., on a price-to-earnings ratio basis or compared to the price of bullion. I would stress, however, that these shares can be very volatile and people can get frustrated if they don't perform. They sell in a down market and then miss the opportunity to buy when the market rebounds. One has to be really disciplined. Never get married to a company, no matter how good it looks. When things move up and get overbought, always take profits and have cash on the sideline to buy into the dips.

But, as long as we have these fundamental problems in the world with money printing and low economic growth, recessions and depressions, it will be very bullish for gold mining companies. In order to outperform the gold price, you can't just be long all the time and not trade these stocks. One really has to be more active and when the market is capitulating, you have to pick up your most attractive shares. Always do your own due diligence on these companies. Check out the management and how it does operationally, and look at past track records. Once you have identified the right companies that fit your portfolio, then just try to play the sector in a little bit more of a contrarian way. That's my advice.

TGR: Thanks for talking with us today, Florian.

FS: Thanks for having me.

 Source: Zig Lambo 

Florian Siegfried is the chief executive officer of Precious Capital AG, a Zurich-based fund specializing in global mining investments. Siegfried was previously the CEO of ShaPE Capital Ltd., a SIX Swiss Exchange-listed private equity company, where he was instrumental in raising more than CHF 50 million in equity capital. Siegfried is also a board member of GoldQuest Mining Corp. He holds a master's degree in finance and economics from the University of Zurich.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE: 

1) Zig Lambo of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Avion Gold Corp. and St Andrews Goldfields Ltd. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Florian Siegfried: I personally and/or my family own shares of the following companies mentioned in this interview: OceanaGold Corp. and Alexco Resource Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

Streetwise – The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

The post Mining stocks now provide bargain trade opportunities: Florian Siegfried appeared first on MINING.com.

In this exclusive interview with The Gold Report, he tells us why he's now turning his attention to silver, which he expects will provide some exciting returns for producers and investors. He talks about some of his favorite names and how companies with cash and cash flow will be able to scoop up some great property deals from less-fortunate juniors.

The Gold Report: A lot has happened on the global economic and geopolitical fronts since we spoke last Spring. What's your appraisal of the affects of these developments on the precious metals markets?

Jordan Roy-Byrne: I believe the geopolitics is overplayed. Certain geopolitical events can have a short-term impact but by and large aren't a long-term driving force for precious metals. As far as the economy itself, up until this spring, the markets were essentially pricing in a mild recession globally. Europe was in recession and the emerging world was slowing down considerably. The U.S. situation is similar to Japan after its bust. We're in a flat-lining mode, which I believe will continue for another five to seven years.

I don't see any substantial economic growth, and at the same time I don't see any severe recessions on the horizon. To have a severe recession you need to have an expansion lasting for many years. The Great Recession of 2007/2008 cleansed the system. Granted, we're still not at the point where we can get back to consistent strong economic growth. It's going to take several more years to get to that point.

At the beginning of the crisis, governments financed deficits with huge amounts of short-term debt rather than with long-term instruments. A significant amount of that debt is coming due in the next several years. That's why we're having open-ended quantitative easing (QE) and why we will have permanent QE, given that the debt burden over the next couple of years is going to be substantially greater than it was in the last couple of years. The other point is that even though we have had a recovery, it has not been strong enough to bring down the debt burden, which has gotten worse and worse.

That's why I believe we're in a new cyclical bull market for precious metals that started in May. I'm looking for a little correction/pullback in October. After that, the market could be in position to retest its highs sometime this winter.

TGR: Historically, October can be a scary month in the markets and it is just ahead of the U.S. election. Care to make any short-term predictions for what will happen between now and the end of the year?

JR-B: I think the markets will do what they're going to do. They don't really respond to political events. Markets are forward-looking and lead everything. I don't see something coming out of nowhere and most markets are performing fairly well. October is probably just going to be a pullback, and it's possible the S&P 500 can have a significant pullback. I'm more focused on precious metals, which have been following the seasonality to a T in the last couple of months. Typically, this seasonality calls for weakness in October. The market is ready for a correction anyway, and the typical October seasonality adds more credence to that argument.

TGR: You just got back from the big Toronto investment conference. What was the general sentiment there?

JR-B: There was a good turnout at the show and I think people are more optimistic. The general sentiment has improved regarding the markets and precious metals specifically. Just speaking anecdotally, the average retail investor I spoke with was definitely interested in the precious metals story but still not ready to be fully onboard. I think that's a good thing from a contrarian point of view.

TGR: You approach the markets from a technical standpoint, probably more so than most of the people we talk to at The Gold Report. What do you see from a technical standpoint on the precious metals at this point?

JR-B: I look at the charts, sentiment indicators and money flows. So, it's a much broader study then people think. Then you have to align that with the fundamental picture. However, the technicals always lead fundamentals. We saw that in the last couple of months when the markets completed a bottom and then started to move up a little bit in anticipation of the actual QE announcement. I like to look at everything, but technical analysis is definitely my bread and butter.

Now, looking at gold, I had a short-term target of $1,800/ounce (oz), which was predictable because there were previous peaks there. It's consolidating below $1,800/oz with probably another three or four weeks of weakness before it can make an attempt at breaking through again. Over the next two to three months, I have an upside target of $1,900/oz, retesting the old high. After that, I have a potential six-to-nine month target of $2,250–2,300/oz. Once this market breaks $1,800/oz, it only has a little resistance at $1,900/oz to deal with.

I'm a little less keen on silver right now. I had a short-term target of $35–37/oz. Similar to how gold is pulling back at $1,800/oz, we see silver pulling back and consolidating around $35/oz. A good target for the next three months would probably be $40–42/oz. Assuming gold breaks $1,900/oz and $2,000/oz, that would indicate to me that silver is probably going to test $50/oz. So, those are the targets I'm looking at.

In regard to the equities, Market Vectors Gold Miners ETF (GDX:NYSEArca), the large-cap unhedged gold stock producers, peaked just below $56. I had a target of $58, so it didn't quite go as high as I expected. Again, it's consolidating here and I expect that to continue for probably another three weeks or so. Looking at upside targets over the next three or four months, there's strong resistance at $64. Assuming gold breaks above $1,900/oz, the NYSE Arca Gold BUGS Index (HUI:NYSEArca) and the Market Vectors Gold Miners ETF should break to new all-time highs, probably by the end of February.

TGR: Do you think that when gold breaks through $2,000/oz, everybody is going to finally decide it's going higher and pile into it?

JR-B: I think that's fair to say and that in the next leg higher, people will start to get a lot more excited. I also should point out that the junior equities always start to catch fire when gold breaks to a new high. One reason I expect this is that the rebound we've had in the last several months, both in the shares and in the metals, has come with very strong momentum.

When a market is bottoming and then starts to build momentum, that indicates that the internals are very strong and that the rebound is going to be sustainable in the near term. In the last couple of months, the momentum these shares and the metals have achieved has been very strong, which bodes very well for continued movement higher, likely after October.

TGR: Maybe we can talk a bit about the model portfolio you're running in your Daily Gold Premium newsletter. How's that performed since the beginning of the year?

JR-B: At this point, it is up 24% year-to-date. I use Market Vectors Junior Gold Miners ETF (GDXJ:NYSEArca) as my benchmark, which is essentially flat. So, we've been fortunate to have done quite well so far this year.

TGR: That's pretty good, considering the performance of a lot of stocks in the space. What are some of the specific gold names you particularly like at this point?

JR-B: We've avoided juniors for the most part and were cautious on silver for a while, which has helped our performance relative to the rest of the sector. We've also overweighted some of our favorite names, such as Argonaut Gold Inc. (AR:TSX), which is one we have really liked for some time. That stock has performed very, very well. It has exactly what I want to see in what I like to call a growth-oriented producer. It reminds me of First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) a couple of years ago, when I knew that it really had the capability and potential to grow itself into a major producer.

So, I think Argonaut looks very similar to First Majestic (which I continue to be bullish on and continues to have a stellar pipeline of projects), and I expect it to have a similarly huge move, occurring more slowly over the next several years. It has two growing mines, probably the best management in the industry and is currently permitting a third project. If there are any delays in the permitting, that could cause the stock to fall a little bit and would provide a fantastic opportunity for people to add to their positions and for newer investors to get onboard. But, I definitely remain very optimistic on Argonaut over the next several years. Even though the stock has already advanced substantially, I think it still has significant room to move over the next 12–18 months.

Next, I would mention Corvus Gold Inc. (KOR:TSX), which is an exploration company that has performed fantastically. Corvus has joint-ventured its projects in Alaska and focused most of its resources on its North Bullfrog project in Nevada. Not only does North Bullfrog have substantial exploration potential, but also Corvus has already outlined a deposit there and put out a preliminary economic assessment (PEA). The PEA showed that the project would be extremely economic, even at lower gold prices, with payback at about two years, even on a $1,250/oz gold price.

It also has fantastic exploration potential. Part of the deposit is on privately owned land, which means it can be permitted much faster and get into production much more quickly. Potential production is targeted for 2014. Corvus has tremendous management, which has done everything right to this point. Even though the stock is already up over 100% since we first recommended it, I still believe it has substantial potential from here. Any exploration success in the future, which is a possibility, would be a major catalyst for Corvus' shares. People should definitely keep an eye on these two companies.

TGR: Back in the 1980s and 1990s, it seems that everybody and their uncle were in Nevada. Then companies decided to go south and everywhere else. Now it seems that I see more companies working on properties in Nevada again. Is that a trend you see?

JR-B: Definitely. I think it's a trend for several reasons. First of all, the higher prices are obviously making many formerly uneconomic deposits economic now. Also, Nevada is a safe and very easy place to do business.

TGR: That's an area we're going to be seeing a lot more companies returning to and turning some of these low-grade deals into profitable mines.

JR-B: You said it there. There are a lot of low-grade deposits in Nevada that may be only marginally economic at $1,500/oz or $1,600/oz gold, which are becoming very economic at $2,000/oz. That's where the extreme upside is now. So, that's an example of why I think Nevada is benefiting and why you'll see more people going there.

TGR: What else do you like in the gold area?

JR-B: I love the royalty companies, like Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) and Sandstorm Gold Ltd. (SSL:TSX.V). I would definitely look at both of those if we get the pullback in October.

I think Primero Mining Corp. (PPP:NYSE; P:TSX) is another one to take a look at. It's a very interesting story because it has a world-class asset in Mexico. It's in the middle of a tax arbitration because it has a streaming deal with Silver Wheaton Corp. (SLW:TSX; SLW:NYSE). Primero has to pay taxes as if it were selling the silver for $30/oz, even though it only gets $4/oz from Silver Wheaton. It has applied to the Mexican authorities for tax relief, and expects there's something like a 70% chance that it can get this overturned.

When I first recommended Primero, the stock was well under $3/share. I felt that it was a no-lose situation, and based on what I was looking at, I had a target of about $3.80/share considering a loss in the tax case. Now, assuming a victory in this tax case, the stock should be worth a minimum of $8/share. The fact that it has gone over $5/share tells me that the market is pricing in a victory. If it loses the tax case, the stock could fall a dollar or so. If it wins, it could shoot up a couple more bucks.

Regardless of that, it has this world-class asset, a great management team and over $100 million (M) in cash, which should allow it to make an acquisition of a producing project. So, Primero really has all the things you want to see in a company that can be a successful growth-oriented producer and would be my top candidate to be the next Argonaut.

TGR: Any others you want to mention or talk about in the gold arena?

JR-B: I recently visited a company called Northern Vertex Mining Corp. (NEE:TSX.V; NHVCF:OTCQX) that has a project in Arizona called the Moss project. This is run by the same people who founded Kootenay Silver Inc. (KTN:TSX.V), which they have run extremely well in a tough market environment. Northern Vertex is focused on becoming a growth producer in the U.S. through this Moss project, where it is earning-in to achieve 70% ownership. I think the potential there is substantial because it already has a Measured and Indicated resource of nearly 1 million ounces (Moz) at an average grade that is close to 1 gram/ton gold equivalent, with a little silver.

If this can be run successfully as a heap-leach operation, with that type of grade it is going to be substantially profitable. There also is the option to run the ore through a nearby mill. That would obviously reduce the capital expenditure considerably. The company also has a pretty large deposit in Idaho. I'm less keen on that at the moment. I would say Northern Vertex is definitely a company to keep an eye on as a potential growth-oriented producer. I believe this Moss project could really springboard it into a nice future.

TGR: You said you weren't that hot on silver stocks, but there must be some you still like there.

JR-B: Up until recently I wasn't that hot on silver stocks. But, looking at where silver is now, we know that whenever gold goes up, silver goes up even more. So, actually I'm looking for more silver plays like Huldra Silver Inc. (HDA:TSX.V), which recently commissioned its Treasure Mountain mill in British Columbia. It's going to start spitting out ounces this month and should be in commercial operation by January. It's a very high-grade producer and should be the second highest grade mine in the world. There are several things I like about Huldra. Number one, although the company has had to raise some money this year, the stock has held up very well, whereas a lot of silver stocks have completely fallen apart technically.

The company has been able to successfully raise money and should produce about 2 Moz silver equivalent per year, which will result in a substantial amount of cash flow. It has about 17M options and warrants that would likely be exercised if the stock exceeds $2/share. The stock is now around $1.40/share. Assuming it goes over $2/share, these options and warrants will get exercised, generating something like $20M. In terms of mining, because its costs are very low and the grade is high, its profits are going to be substantial. Twelve months from now Huldra could have a minimum of $40–50M to work with.

The Treasure Mountain historical resource estimate is 10 Moz silver, but its NI 43-101 estimate is much smaller than that. Huldra really needs to drill out this project and define a more substantial resource, which would give it a higher valuation. Then it could trade at 4–5 times cash flow, versus the current 1–2 times. Also of note is that prior to the most recent financing, Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE) owned 12% of the stock and Sprott also owns a big position. That shows that some institutions think there's huge potential for the resource. Up until earlier this year, only $5M had been spent on this property.

Assuming silver goes above $40/oz and gets to $50/oz again, Huldra is one that I think is going to receive a large amount of interest and is going to be very profitable. I'm very optimistic on it long term.

TGR: On the other side of the coin, it's been a real struggle for a lot of junior companies that have had trouble financing in this market. Is there hope for them or are there going to be a lot of casualties or forced property abandonments due to lack to funding, regardless of gold and silver prices.

JR-B: I think the smart companies that are looking for acquisitions are going to do something similar to what Argonaut just did. It struck a deal with Bravada Gold Corp. (BVA:TSX.V), which has a deposit—Wind Mountain—in northern Nevada with a PEA that looks very economic at current prices. Wind Mountain already has a Measured and Indicated resource of 570,000 oz gold and 14.7 Moz silver. Argonaut is putting a little bit of money into drilling some targets there. If it likes what it sees, it has the option to spend a little more money over the next couple of years doing more exploration. After that, it has the option to buy the project directly for $30/oz in the ground. Essentially, if Argonaut really likes what it sees it could end up acquiring another mine for roughly $40M. Right now it is only committed to spending $250,000 and then $7M over three years.

A lot of these companies, with their stock prices below $0.10/share and not much cash, can't do anything and would be helped by a bigger company coming in. I would really be looking for the companies that are going to acquire these projects because they're going to be able to do so on the cheap and be able to add to their growth substantially and at a low cost. Argonaut has already made several great acquisitions, and looks as if it may be on the cusp of another one. By the way, Primero is also looking aggressively for acquisitions and Northern Vertex told me it is looking at similar types of deals (as Argonaut just did).

For many of these smaller juniors, there's really not that much hope left. You have to play those situations through larger growth-producer companies, like Argonaut. But, at the same time, a lot of the exploration companies and juniors typically catch fire when gold breaks out to a new high. What you want to see there is companies that are either totally cashed up, like Corvus, or companies that have the ability to raise some cash without destroying its share structure. It's a difficult situation for a lot of juniors and you really have to pick and choose very carefully.

TGR: That sounds like a good summary of what people ought to be looking at now. Any other further thoughts on strategy at this point for investors in the metals markets?

JR-B: As I discussed in my presentation in Toronto, when investing in this sector you have to separate things into where you're going to get your growth and where you're basically speculating. You get consistent performance from the growth-oriented producers and royalty companies. We have to realize that on the speculation side, a lot of these development plays and juniors are not real businesses. They're 18–24 month timeframe speculations where you're hoping they'll really do well. And, if something does and you make a nice amount of money, you have to get rid of it because you rarely see juniors, even in a fantastic market, trading over $5/share. You have to liquidate those and go back to the drawing board because they don't consistently make new highs over time. I heard an analyst on BNN say that 90% of these stocks will go right back down. He is exactly right.

You could make a fantastic amount of money on these companies, but I like to focus first on the smaller growth-oriented producers, which have the ability to grow for several years. After that, you go down the food chain and look at the juniors and developers that have potential, not just to double but to make three, four, five times your money. If you're looking at a junior and it doesn't have that potential, then why bother? You could just buy a royalty company or a mutual fund that has less risk but decent potential.

TGR: That makes sense and I think is something all investors ought to consider. Thanks for talking with us today.

JR-B: I appreciate the opportunity.

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.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:

1) Zig Lambo of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Gold Report: Argonaut Gold Inc., Franco-Nevada Corp. and Primero Mining Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.

3) Jordan Roy-Byrne: I personally and/or my family own shares of the following companies mentioned in this interview: Argonaut Gold Inc. shares and warrants, Corvus Gold Inc. and Franco-Nevada Corp. warrants. Argonaut Gold, Corvus Gold Inc., Huldra Silver Inc. and First Majestic Silver Corp. are sponsors of The Daily Gold website. I was not paid by Streetwise Reports for participating in this interview.

Streetwise – The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

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The post Gold and silver will soon line investors' pockets: Jordan Roy-Byrne appeared first on MINING.com.

The Gold Report: John, 2012 has been a volatile year for junior equities. What is your thesis for diversifying your portfolio to both protect and possibly grow wealth in this market?

John Kaiser: It's interesting that American households currently have bank deposits totaling $8.7 trillion, which is an all-time record, and yet these deposits are earning less than 1%. This illustrates the anxiety about where the general economy and equity markets are going. Given the risk that we could end up in a global recession next year that could possibly deteriorate into a depression down the road, it is understandable that the public wants to keep its capital secure.

This could have very negative implications for the general equity markets, which are vulnerable to all sorts of disruptions. That is why I am recommending that cautious investors leave 90–95% of their portfolio in low-yielding cash deposits and then shift the other 5–10% into a diversified portfolio of extremely high-risk securities that could yield some big winners. The area that I think is going to be very prospective in the next few years is discovery exploration in the resource sector, where stocks can go up 10, 20 or 30 times in response to a discovery.

TGR: A lot of the resource sector used to be focused on South Africa. That's becoming riskier due to worker unrest. South America has had violence and nationalization threats. Are there still opportunities in relatively safe domestic markets like the U.S.?

JK: I think we are ripe for a return of interest to the U.S. mining exploration and development sector. It has been shunned to some degree because of long permitting cycles, even for exploration programs. The timeline can be even worse when it comes to putting a mine into production.

Fueling this return will be a growing interest in raw material self-sufficiency, of which the boom in shale oil and gas is an early example. In other parts of the world such as South Africa, erupting social tensions threaten the operations of major mines. In some countries, higher gold and copper prices are leading to resource nationalism, increased demands for royalties from governments that don't care if increased operating costs are whittling away profits. These countries are losing their attractiveness as a place for operating and developing mines, let alone exploring for new deposits. Others such as China impose export quotas that create two-tier pricing systems that favor China-based businesses.

TGR: You recently toured the historic mining state of Nevada. What are the geological factors that make that basin attractive as gold and silver targets? What are the major trends there? How did they form?

JK: Nevada is the second-largest gold-producing region in the world. Much of this comes from the north-central part of Nevada where we have famous names like the Carlin Trend and the Battle Mountain-Eureka Trend. This region has very unusual geology where old sedimentary rocks have thrust over each other, with an upper plate horizon consisting of fairly impermeable siltstones over a more permeable limestone lower-plate sequence of rocks. This happened several hundred million years ago.

Several subsequent waves of magmatism and folding occurred due to pressure from the west as island arcs crashed into Nevada and caused buckling of the entire land mass. The subduction slab underneath caused magmatic upwellings, which created igneous intrusions and doming. The result is a very complex geology that looks like a messed up sheet of bubble wrap.

Then, about 40 million (M) years ago, the Pacific plate stopped crashing into the North American continent and the Farallon subduction slab started to founder. As this slab failed like a retreating Niagara Falls, it caused magmatic upwellings. According to a new theory proposed by University of Reno's John Muntean, this spawned gold-rich vapors, also laden arsenic, antimony, thallium and mercury that penetrated crustal cracks, mixed with water and resulted in Carlin-style gold deposits where upper-plate capped lower-plate rocks served as structural traps that soaked up the gold and its marker elements like a sponge.

These deposits can be very large, deep and offer high gold grade. Only about half of Nevada's estimated gold bounty of more than 150 million ounces (Moz) has been found to date thanks to another subsequent event. The other half is hidden because about 15M years ago, the pressure on the continent ceased and Nevada stretched apart, causing long blocks of rock to rise or fall, which created our basin and range topography. Because the gold deposits already existed before this happened, some ended high, some ended deeper. With erosion, these basins filled, and now they are largely gravel covered. A new wave of exploration could be coming based on the bounty that remains to be found.

TGR: What are some examples of explorers that are in a good position to find that bounty and how are they doing it?

JK: The most obvious strategy is to look within the apparent trends of known deposits. This includes the Carlin Trend, the northern part of which is dominated by Newmont Mining Corp. (NEM:NYSE) and Barrick Gold Corp. (ABX:TSX; ABX:NYSE), which own all the key land. At the southern end, Gold Standard Ventures Corp. (GSV:TSX.V; GDVXF:OTCQX) has the Railroad Gold project where it is using a clever reconstruction of the geology to home in on what it believes to be a significant Carlin-style deposit.

Within the Battle Mountain-Eureka Trend is the more recently famous Cortez Trend, which started in the 1990s with the Pipeline discovery, which is now being mined by Barrick. Then, at the start of this century, Cortez Hills was discovered within a few miles of Pipeline. Now we're seeing that the Cortez Hills Trend is extending to the Gold Rush and Red Hill deposits. More than 7 Moz has been added to the 20 Moz at Cortez in addition to the 25–30 Moz at Pipeline. The juniors control most of the southern part of this trend. McEwen Mining Inc. (MUX:NYSE; MUX:TSX) assembled a very large land package during the last decade and spent nearly $60M exploring without coming up with any significant, lower plate-hosted, Carlin-style deposits, which just shows you how difficult it can be.

Now another round of companies is coming in to turn over the rocks in this historic area. NuLegacy Gold Corp. (NUG:TSX.V) assembled several properties a couple years ago when everybody was in a funk about gold exploration and the company is now in the process of drilling what it calls the Red Hill property. This is a lower-plate window, which is exposed. It has been drilled with shallow holes in the past that have intersected gold mineralization that is not rich enough to make a mine, but NuLegacy figures that if it follows that statigraphy deeper, it will find the richer and longer intersections needed to put together a deposit.

Another company that is in the area is Carlin Gold Corp. (CGD.TSX.V), which has just finished drilling a half-dozen holes on its Cortez Summit, which is just to the east of the Gold Rush deposit. Again, a lot of this is blind drilling. It's expensive. In new target areas you don't really know what's happening in the third dimension, so your first round of drilling is all about just getting the geology to see where you are and then the geologists can start to think where the deposit would be.

Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) is another company that managed to pick up the Garden Gate Pass project when a company let it lapse, and it also optioned into the Patty project, which was part of the McEwen Mining project. It has a major drill program on the Garden Gate, where it is going to drill several deep core holes. It hopes that it hits the target mineralization, but the real goal is to understand how the geology behaves on trend with the main deposits. The same is true on the Patty project, where it has some gold mineralization from past drilling, but it is trying to sort out where the system is going.

One of the new developments that just emerged this week is Nevada Exploration Inc.'s (NGE:TSX.V) Grass Valley, Nevada, project, which was generated by an innovative technique called hydrogeochemistry that focuses on the gravel covered basins of Nevada. Groundwater is collected and tested for gold and all the various poisons, such as arsenic, antimony, thallium and mercury, which are normally associated with Carlin-style deposits. Where tests show a gold-in-groundwater anomaly, geologists can take a closer look at the bedrock underneath.

The interesting thing about the Grass Valley anomaly is that instead of striking northwest-southeast as is the norm within the Cortez Trend, the Grass Valley anomaly strikes southwest-northeast. This play is stunning because although it is within eyesight of the Cortez Hills deposit, it's in a geological setting where no one would think of wasting any money to explore. Yet, this new technique pointed to an anomaly that shows a 10- to 15-mile strike, a linear anomaly, likely associated with a hidden fault that appears to host an oxidizing gold deposit that is the source of the full set of Carlin-style elements.

McEwen Mining has elected to earn 70% by carrying the prospect generator 30% to a production decision. This is a high-stakes play, which could make a big difference for McEwen Mining itself, which is also developing a number of smaller deposits in Mexico and at the southern end of the Cortez Trend.

TGR: Unlike the Grass Valley project, the Gold Standard, NuLegacy, Carlin and Rye Patch projects are based on trends that are already known to exist because they are home to working mines. Is that correct?

JK: Yes. They are looking for these lower-plate windows within the primary trends where the mineralization is close enough to surface to be found and commercially exploited.

TGR: Are we talking about open-pit mines or are these deeper than that?

JK: If they are near surface, they can be open-pit mined. Cortez Hills is part open-pit and part underground mine. Finding a new near-surface deposit in the outcropping part of Nevada is going to be difficult. You need to look in an area where there's a very thin veneer of upper-plate rocks and somebody correctly guesses that mineralized lower-plate rocks are just beneath 50–100 meters (m) of waste rock that can be stripped off to allow an open-pit mine.

In the basins, where you're typically looking at 100m or more of gravel, it may be more difficult to create an open-pit mine, so the targets need a richer high grade and size where you have 0.3 ounce or better gold mineralization to make underground mining profitable. Another issue is that the deeper you go, the more likely the mineralization will be refractory, which has a higher processing cost.

TGR: A lot of these areas have been looked at before, maybe in the 1980s when the price of gold was less. Where are we in the current discovery cycle? How long do investors have to wait before some of these pay off?

JK: The easy gold has already been found in Nevada. Now we have had a decade or so of fairly sophisticated exploration looking for lower-plate windows. The next wave will require a very, sophisticated search similar to what is happening at Rye Patch and NuLegacy, or a very innovative exploration strategy like hydrogeochemical sampling. The beauty of the latter is that it results in new discoveries such as Grass Valley where no one would have a prior geological reason to explore in the first place.

An example of this is another project called Fletcher Junction that Nevada Exploration has optioned to a tiny junior called Spruce Ridge Resources Ltd. (SHL:TSX.V) in the Walker Lane Trend in the western part of Nevada. It is in the Aurora district, which has produced about 4 or 5 Moz during its lifetime from gold and silver epithermal veins.

In this case, we are looking at an area covered by a very young volcano. The lavas are not very thick, but they have covered a fairly large area. Nevada Exploration Inc. collected hydrogeochemical samples on the edges of this lava flow and found gold in the groundwater emanating from underneath this lava cap. It drilled some shallow, reverse-circulation holes to confirm the depth of the bedrock several years ago. Now the farm-in junior is bringing more expensive, angled core drilling designed to demonstrate what could be another Comstock Lode-type system. Comstock, which produced 8 Moz gold and 200 Moz silver, was found because its veins were exposed in outcrop. The early prospectors could not see what was under the Aurora lava flow, and modern explorers had no reason to drill through the lava.

Companies are moving back into old districts within the Walker Lane that were last explored in the 1980s, applying what they learned from the Ken Snyder mine in Northern Nevada that turned out to be a very high-grade, bonanza-type vein system and figuring out where to drill new holes. The Comstock, itself, was mined out during the 19th century, and now the lower-grade material left behind is being put back into production as a heap-leach gold mine. I see the Walker Lane undergoing a revival of exploration interest from the juniors.

TGR: On the Cortez Trend, what are the juniors learning from what Newmont and Barrick are finding in their mining operations that will make finding the next one easier?

JK: They have learned the structural and stratigraphic controls for this mineralization. Barrick will give a couple of important papers in the next 12 months about what makes the Cortez Hills system tick. Everyone is eager to learn the secrets because this helps them guide their own drilling. It's very rare that miners come up with a target using remote-sensing methods such as geophysical surveys or geochemical surveys and then spear the primary deposit with the first few drill holes.

With Pipeline, numerous holes were drilled before the primary deposit was found, and even then, it was found because NuLegacy's Roger Steininger drilled a condemnation hole twice as deep as he was supposed to for a heap-leach pad for the smaller Gold Acres deposit. An understanding of the geology and the mineral controls can guide the exploration process, which literally is a feedback-driven process of underground groping. That is why these are high-risk endeavors and junior valuations are relatively low. That is also why you can get 10, 20 and 30-fold price increases when an exploration discovery is made and the market recognizes it as the real thing.

One way juniors can protect themselves is by always having a plan B ready to tackle if plan A starts to look as if it is not going to deliver the goods.

TGR: It sounds as if that is what McEwen, NuLegacy and Rye Patch have. They all talk about a number of other targets on the map.

JK: That's right. Rye Patch's big story right now is the Rochester litigation. Last year Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE) let all of its Bureau of Land Management claims lapse. Rye Patch noticed that these claims were open and staked them, covering a good part of the existing resource that Coeur d'Alene had developed. If a judge agrees that even though Coeur d'Alene didn't pay its fees, it doesn't matter because it has an established mine, it gets to keep it.

If Coeur d'Alene loses that case, it will have to do a deal with Rye Patch to acquire the claims. One way that this could end up being a win-win for everybody is if Coeur d'Alene buys Rye Patch's properties in the Oreana Trend, including the disputed claims, it would end up with a strategic land position that includes Lincoln Hill adjacent to Rochester. Either way, right now Rye Patch has a higher valuation than the typical junior undertaking grassroots exploration because it has this dual strategy of Oreana Trend/Rochester while it is drilling deep holes in the Cortez Trend, hoping to find something that makes the company worth $1 or $2 billion.

TGR: That takes us back to your thesis in the very beginning. If 10% of our portfolio is in the high-risk exploration resource sector, how much could it return?

JK: The way the junior exploration market works is we have these deep, cyclical troughs and high peaks. Right now, we are in a cyclical trough. There has been little appetite for discovery exploration in the past decade. The glass is half empty. No one expects any junior to get lucky, which is why we have very low valuations. If one of them makes a major discovery, say NuLegacy goes from $0.16 to $3 or $4/share, that's a 20 or 30-fold increase.

So if you have a $10,000 diversified portfolio of 10 juniors while $90,000 sits in savings deposits, and one of the juniors on which you risked $1,000 goes up 20 fold because of a discovery, then your portfolio consists of $90,000 cash and $30,000 in high-risk high-reward juniors, in effect a 20% return on the entire $100,000 portfolio.

If the discovery has been recognized as a substantial new development, then the market starts to look at these other juniors and says, wow, the glass is actually half full, and we get a market upswing where the tide lifts all the other boats as valuations of all companies in the area become more optimistic. Right now, valuations reflect deep pessimism, not just about the juniors themselves, but also about the overall global economic outlook.

I know there are market cycles, such as in 2008 when we had a catastrophic decline that took down everything and severely hurt that 10% of my portfolio that's in extremely high-risk stocks. However, that also produced very, very low valuations. So I simply rethought everything. I carved a bit of that 90% parked in cash earning nothing, which had become 98%, reallocated it so that 10% was exposed to resource juniors bottom fished at extremely low bargain prices.

Since Q1/11 we have had a similar decline, which is why I published a new bottom-fish edition in July consisting of 100 of these high risk, high reward juniors. The trick is to make sure when your high-risk portfolio blossoms in value that you restore capital back to the 90% of the cash portion of your portfolio. Thus if we get another meltdown that so many fear is imminent, my downside is restricted to 10%.

Because I avoid revenue producing companies I don't have to worry about things such as how many iPhones Apple is going to sell and what the latest patent lawsuit is going to do. I don't worry about anything but these little juniors and what their projects are. You do have to put some effort into understanding how the exploration sector works. Otherwise, you're just making random guesses. But it is possible to do this because we have all these resources now available on the Internet.

TGR: Any final advice for investing in the western basin based on the trends you're seeing?

JK: The key thing is to understand what the company thinks it's going to accomplish. If it simply tells you that it is going to find something big, give it a pass. If it shows you detailed diagrams of its various data sets and extrapolations of what it thinks is represented by the target, then you know that when it spends your money drilling that target, there is a chance that it will deliver something. Avoid the companies that do not have well-developed and data-supported targets. And finally, it's very entertaining to track these juniors in my portfolio.

TGR: Thank you for your time, John.

JK: Thank you.

John Kaiser, a mining analyst with 25-plus years of experience, produces Kaiser Research Online. After graduating from the University of British Columbia in 1982, he joined Continental Carlisle Douglas as a research assistant. Six years later, he moved to Pacific International Securities as research director and also became a registered investment adviser. He moved to the U.S. with his family in 1994.

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DISCLOSURE:

1) JT Long of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Rye Patch Gold Corp. and Gold Standard Ventures Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) John Kaiser: I personally and/or my family own shares of the following companies mentioned in this interview: Rye Patch Gold Corp., Nevada Exploration Inc. and Spruce Ridge Resources Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

Streetwise – The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Source: JT Long

The post The original bottom fisher finds high risk and reward in Nevada appeared first on MINING.com.

The Gold Report: Leily, you are with Scotiabank in Toronto, but you're not originally from that area. Tell us about yourself.

Leily Omoumi: I've been living in Toronto for many years. I earned a degree in mechanical engineering from the University of Toronto and worked as an engineer for Hatch Ltd. for about four years. Following that, I earned a master's degree in business administration at Rotman School of Management. I started working at Scotia immediately after. I have been covering gold stocks for a few years now.

I cover gold stocks and one palladium name: North American Palladium Ltd. (PDL:TSX; PAL:NYSE).

TGR: There has been resurgence in the price of gold, which is now at more than $1,700/ounce (oz). While the price of gold has held up during the past several months, gold equities have languished through the summer. But equity prices have been rebounding in the last several weeks. What are your thoughts on that climb?

LO: You are quite right: Even though the price of gold has held up, a lot of equities suffered earlier in the year. Capital blowup, cost escalation and inflation have hit several stocks. Many companies suffered as investors lost confidence in where costs were trending and development projects progressing.

There has been a nice push to the gold price in the past couple of weeks. Some of the losses have been made up and the market is getting to levels similar to last year's, before stocks really went down.

TGR: We are at the Denver Gold Forum, a great venue for a gathering of institutions, analysts and public companies. It feels like there is a little bit of optimism in the crowd. What do you think?

LO: I agree. Investors have been sitting on the sidelines for quite a while and they're starting to step back in. In April, at the European Gold Forum in Zurich, the mood was very different—more negative. People were watching from the sidelines and waiting to make a move. Investors have more optimism now. They are ready to step into names, primarily those that have free cash flow and are in production or are close to production.

But many pre-producers continue to be punished because of financing risk. Although the markets are doing better, confidence is not fully back. Even companies that have released decent feasibility or prefeasibility studies have not seen moves in their stock prices because of the financing risk. Companies frequently have initial capital requirements that are larger than the market cap of the company. It can take a long time for a company to finance a project in a scenario like that. Unfortunately in some cases, dilution becomes a significant factor.

Pre-producers have to wait for the right opportunity to raise money. They must do it in tranches, which can be a long process. They have a long road ahead.

TGR: Unfortunately, a lot of those companies already have somewhat blown-out stock structures, which further discourage them from doing equity financings because they don't want to dilute shareholders any further. They have to look at royalties and large debt financings. We are seeing a lot of creative financings, but we are also seeing some preproduction and development stories that are spectacular values for large caps. Do you agree?

LO: Yes. Large-cap companies are moving ahead very cautiously, however. They are being scrutinized by investors, too, so they are very careful about the investments they make. I agree that there is great value. The market just needs confidence. A couple of good merger-and-acquisition deals could potentially bring confidence back and encourage others to step in. There are a lot of good names out there.

Two development stories that I like are Lydian International Ltd. (LYD:TSX) and Rainy River Resources Ltd. (RR:TSX.V). I like Lydian because of the low initial capital intensity of its Amulsar project. It's a simple heap-leach project with an initial capital cost of below $300 million (M). Operating costs are below $500/oz. It's a project that can be financed.

TGR: Lydian isn't on a lot of people's radars because of its jurisdiction—Armenia. It certainly is not Nevada or Ontario. Tell us about your comfort level with this company in terms of its location.

LO: I have been to Armenia. Armenia, as you said, is not Nevada. A lot of people are unfamiliar with it, but it appears to be a pretty decent place for mining companies. For example, Dundee Precious Metals Inc. (DPM:TSX) has an operating mine there and other European and private mines operate there currently as well. The country has a modern mining concession law and is open for business. Lydian has not had too much difficulty advancing its permits; it's in the advanced permitting stage now. The president of the country is supportive of the project and has expressed his views about the project publicly, which has gone a long way in moving the permitting process forward.

TGR: Lydian has drilled, and has an NI-43-101-compliant resource. What are the next steps?

LO: Lydian released a full feasibility study the first week of September. Some of the numbers I mentioned are based on that prefeasibility study. The initial capital came in at around $270M and life-of-mine cash costs are about $470/oz. The project is expected to go into production in early to mid-2015.

Aside from final permitting, the next big step for the Lydian team is financing. The company has to start placing orders for long lead-time equipment early next year.

TGR: Tell us about Rainy River in Ontario.

LO: Rainy River is in a mining-friendly jurisdiction that is familiar to investors. What I like about the Rainy River deposit is that it contains approximately 8 million ounces (Moz) of Measured, Indicated and Inferred resources. It has a lot of optionality; the company proved that with its updated PEA, which came out in late August. It initially expected to have a much larger operation, with about 32,000 tons per day (Kt/day). Rainy River has since reduced the scale of the operation because of capital constraints. It is starting with a smaller operation, at 20 Kt/day.

The company has been able to push a lot of the higher-grade ore ahead for the earlier years of production. That helps with the internal rate of return on the project. It now expects to process an average grade of 1.38 grams/ton (g/t) in the first five years, compared to previous numbers of about 1 g/t. Over the first 10 years of operation grades are expected to average 1.45 g/t—this includes underground.

TGR: Does Rainy River have a lot of exploration potential? Is there still a lot of blue sky?

LO: Absolutely. It has district potential and there are a lot of targets that the company is still looking at. The underground potential is underexplored in my opinion, and the company is still drilling. Although there is an underground portion in the updated PEA, there is a lot more work to be done.

Aside from that, the company is looking at regional targets. There is potential for other metals as well. For example, it is looking at some nickel bearing targets to the south of the current deposit. However, that's down the road and is not something the company is counting on right now. But blue sky is certainly there.

TGR: This seems like a potential acquisition candidate based on its jurisdiction and improved grade.

LO: Given its jurisdiction, the scale of the project, with life-of-mine production at more than 200 Koz, it could definitely move the needle for midsize to larger companies. If a major were to look at Rainy River, it would probably build the project differently. It might start with a larger scale right off the bat and increase production levels. A midtier company would potentially look at the project as outlined in the updated PEA, which is a smaller scale.

Nonetheless, it's the type of project that can move the needle. It is in Ontario. It's not expected to have permitting issues. There is exploration potential. It's a good project all around.

Additionally, I believe Lydian, which we spoke about earlier, could be a potential takeover target. Amulsar is a simple and manageable project and could fit nicely with midtier producers that have familiarity with the region.

TGR: Let's move on to a producer that may not be on the radar of some investors, Dundee Precious Metals. Tell us about Dundee and why you like the story.

LO: I like Dundee Precious Metals because it has production growth, it's a low-cost producer and it has a pipeline of projects. Its largest operation is the Chelopech underground mine in Bulgaria. The company is currently expanding underground operations and we should see a step change in production next year. I expect production—company-wide—to increase by about 20% in 2013 to over 170 Koz. I expect cash costs to be below $450/oz this year and next. What makes this story a little different is that the company also owns a smelter in Namibia, where the gold-copper concentrate from Chelopech is processed.

TGR: How does Dundee get the material from Bulgaria to Namibia?

LO: The concentrate is transported to Bourgas, Bulgaria's largest port on the Black Sea, for sea shipment to Namibia. It is then transported by rail to the smelter from the Atlantic port of Walvis Bay. Tsumeb is one of only a few smelters in the world capable of treating arsenic bearing concentrates such as the one produced at Chelopech. It is a long way to go but when it comes down to it, Dundee is a company that is making money.

Its development project in Bulgaria, Krumovgrad, is going through the permitting stages right now. We expect that to be in production in 2016.

TGR: We have talked about the cautious optimism among institutions that might jump into mining equities or add them to their portfolios. Do you have any thoughts about what you see happening as we go into the fourth quarter of 2012?

LO: I think optimism is starting to come back, but it is going to take a while. Third-quarter (Q3/12) financial results should be decent. However, I cover some West African names, and Q3/12 could be relatively weak for some of those companies because of heavy rains that the region has been experiencing.

Going forward, a lot of the midtier and large-cap producers are expected to have a good Q4/12. Many have had heavy backend-loaded years. The combination of optimism in the market, the stronger gold price and better results toward the end of the year is going to have an overall positive impact on the market and the inflow of funds to the sector.

TGR: Some North American investors don't understand the potential in West Africa. Do you feel like West Africa—Côte d'Ivoire, Burkina Faso, Ghana—represents an opportunity in terms of mineral wealth and share price appreciation for juniors that are developing projects or producing there? Is it a misunderstood jurisdiction?

LO: There is significant mineral potential in that part of the world. However, in certain countries, there are higher-than-average cash costs due to limitations with infrastructure and power costs. Political risk in some regions is the other issue to consider. There have been a number of blowups in West Africa politically, including in Mali and Côte d'Ivoire. That has drained some confidence and I don't see that changing quickly going forward. Companies with a lower risk profile in North America and parts of South America, and companies with access to good infrastructure and lower power costs, will trade at a higher premium, in my opinion.

TGR: Are the political risks in West Africa higher than the risks in, for instance, regions surrounding Armenia or Bulgaria?

LO: It is hard to generalize, because you have to look country by country. I think the perceived risk in West Africa is a little overblown. Companies even in Bulgaria have had permitting issues in the past. However, Bulgaria is pretty stable politically and has excellent infrastructure. I wouldn't necessarily compare Bulgaria to countries in West Africa. Ghana is an exception. It is a very stable country with a very established mining industry.

TGR: Do you think West African countries get too much of a discount sometimes?

LO: I don't necessarily disagree with that statement. Some investors are not familiar with countries in West Africa. They tend to put all of them in one basket. If something happens in Mali, shares of a company with an asset in Burkina Faso also fall—when there is really no relation or connection. In general, European investors are probably a little bit more in tune with what is going on in Africa.

TGR: Thank you, Leily.

LO: Thank you.

Leily Omoumi, a gold analyst with Scotiabank in Toronto, holds a degree in mechanical engineering from University of Toronto and a Master of Business Administration degree from the Rotman School of Management.

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DISCLOSURE:
1) Sally Lowder of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Lydian International Ltd. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Leily Omoumi: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

Streetwise – The Gold Report  is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

101 Second St., Suite 110

Petaluma, CA 94952

Tel.: (707) 981-8999

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Email: jluther@streetwisereports.com

The post A lost world of junior mining opportunities appeared first on MINING.com.

The Gold Report: Duane and Morgan, talking with you is a wonderful opportunity to introduce our readers to the prospect generator business model, which Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) pioneered. Can you tell us how that came about?

Duane Poliquin: Early in my career as a geological engineer, I worked around the world for companies like Placer Development and Kaiser Steel. Along the way, I became a goldbug. In 1972, I quit my job and announced to my wife that I was going to start my own gold company. We found a nice prospect in Nevada, and two years later did an initial public offering (IPO) for what was called Westley Mines Ltd.

The markets were terrible then, so the first people I hit up for the IPO were family and friends. They bought up 40% of it and I was having a hard time selling the balance. Necessity being the mother of invention, I went to a major company that wanted to option the property. Instead of a down payment on the option, the company took part of the IPO financing. At that point, the brokers jumped in and cleaned up the rest of it.

After some drilling we got the property back, we drilled more holes on our own and optioned it out yet again. With more drilling, it became obvious that it would be a mine. The stock had moved from $0.40/share to as high as $7/share and shortly thereafter we were bought out. The company that acquired Westley, in turn, flipped it to Homestake Mining Co., which actually mined it. It was a win-win-win, and it became our model.

In those days, brokers were not interested in a company being run by a geologic engineer. They wanted to deal with a promoter. Well, I was my own promoter. I had generated prospects for my previous employers, so I figured I could generate new properties, get some payments from outsiders and keep some percentage to keep the doors open. That was the beginning of the prospector model. I did a deal on the prospect, kept an interest and the other company worked on the project.

TGR: It sounds similar to the model used by the oil and gas industry.

DP: Rick Rule deserves credit for calling it the prospect generator model, and he did get the name from the oil and gas industry.

TGR: When did Almaden start up?

DP: We went public with Almaden in 1986.

TGR: A lot of your focus in is Mexico. Do you have properties in other countries as well?

DP: Our beat, if you will, is the North American Free Trade Agreement area.

Mexico basically missed the 20th century in terms of exploration. Until 1992, foreigners could own only 49% of a project. When Mexico finally opened up to foreign investment, a lot of companies went there.

We found a little mine called Trinidad that we sold to Eldorado Gold Corp. (ELD:TSX; EGO:NYSE), which put it in production. That is just one example of how we have used our prospecting model in Mexico.

TGR: With how many companies do you have joint ventures?

Morgan Poliquin: We have about six joint venture option agreements. Recently, the number of option agreements has decreased because the markets have been challenging for option partners. But that is part of the business plan. We can generate more properties than we can drill ourselves. We still believe the more irons in the fire, the better.

TGR: On how many properties does Almaden currently own a royalty?

DP: We have quite a few royalties, 15.

TGR: All with producing companies?

MP: All are exploration projects at this point. None of them is in production.

DP: Two of them are near term, however.

TGR: Tell us more about your efforts in Mexico.

MP: We have a specific geologic focus on eastern Mexico. The western mountain ranges in North America have huge, historic deposits. In Nevada, for example, you have the Comstock Lode and the Mother Lode, but there are far bigger deposits to the east.

The same is true of Mexico in that it has a western belt of high-grade, silver-gold mines. But the exploration work that found the Carlin Trend and the Bingham Canyon in the Eastern Great Basin was not done in Eastern Mexico. We thought there was great potential and great geologic opportunity there.

DP: And no competition.

TGR: In terms of the geology, do you see eastern Mexico twinning the Carlin Trend or what we see in the Bingham Canyon?

MP: Bingham Canyon, certainly. We have a Bingham Canyon-like prospect in northern Mexico that is exactly the same age as Bingham Canyon. Geology does not stop at borders.

I took our eastern Mexico concept to BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), which funded me to sit in a helicopter for a few years. Overall, we have been pursuing this concept for more than a decade. The geology was not understood. We have done an enormous amount of geological work to define belts of volcanos that are promissive areas for mineral deposits. We know which belts are likely to have mineral deposits and where they go. This presents a whole new geologic framework for exploration.

TGR: Is this a proprietary database that you own?

MP: It is, yes. The first discovery out of that work that will become a mine is Caballo Blanco, which has developed a resource.

It is owned by Goldgroup Mining Inc. (GGA:TSX), which is a fourth partner in the project. We acquired the property in the early 1990s as a raw prospect: no historic mining, no exploration, no drilling. We optioned it to different juniors and a couple of majors. Now, Goldgroup Mining is putting it into production.

TGR: And what about your Ixtaca project?

MP: The Ixtaca discovery further proves the thesis that eastern Mexico has merit. Ixtaca had no historic mining, no exploration. When we staked the claims, it was a first.

TGR: Where is Ixtaca in relation to Caballo Blanco?

DP: It is almost due west of Caballo Blanco, about a 2.5-hour drive east of Mexico City by paved road. In addition to outstanding geologic potential, this is an area of relatively good infrastructure. Caballo Blanco has a power plant on the property. Ixtaca is a 1.5-hour drive from the largest Volkswagen plant in the Americas, a paved road right to site.

TGR: I assume eastern Mexico does not have the political strife you see on the borders.

DP: Absolutely, knock on wood. Obviously, things can change, but we have no security risks to work at Ixtaca.

TGR: Are you directly involved in developing Ixtaca?

MP: We did a conceptual drill test program at Ixtaca for about $50,000. We were able to increase our market cap five times on that discovery. We like to combine our portfolio of exploration properties with quick, cheap and very effective drilling. We believe the odds are long that any one prospect will be a mine, so you need to increase the volume.

Sometimes when we option a property to a smaller company and its drilling does not come to fruition, the company loses its source of funding. To avoid that situation, companies sometimes push drilling into the future. But drilling is the way to create value in this business. We believe we have found a way to reduce the risk by doing more drilling earlier. That is what we did at Ixtaca.

TGR: Does that mean you own your own drills?

DP: Yes, we bought our first drill prior to 2008 because we wanted to reduce the cost of drilling and our partners in Mexico were having a hard time getting a drill when they needed one.

We now own five drills and have trained a crew of Mexicans to be outstanding drillers. We can drill for one-third of market rates. We have one large drill and four portable drills and we have gone as deep as 600 meters with the portable drills. The best thing about these drills is their portability. You do not have to build roads to transport them, which allows you to drill early and cheaply.

TGR: How do you move the drills around without roads?

MP: You can move them around on trails. You can move them in a pickup truck. They can be hand carried; you get two men at each corner of each piece, and you can lug it anywhere.

DP: They are designed on a tiny, turbo-charged Japanese diesel engine. They retain power at any altitude. Each has 35 horsepower. You put three of them in together and, bingo, you have a 105-horsepower diamond drill.

The original prospectors had a gold pan and a hammer. Today, the drill is a prospecting tool for hidden deposits.

TGR: Are you drilling only on Ixtaca?

MP: Our four portable drills are at Ixtaca. The fifth drill can go deeper and is a little less portable as a result. We plan to move that drill to another project adjoining Caballo Blanco, a portion of the property that we kept when we sold Caballo Blanco to Goldgroup. We think it is a high-percentile shot and will start drilling there.

TGR: Where does Ixtaca stand now?

MP: Since the discovery hole in August 2010, we have now 200 holes and counting. We expect to have our first resource—a snapshot, if you will—before the end of 2012.

We believe the resource will very likely grow beyond the boundaries of that snapshot, but it is a way to quantify work to date for our shareholders' sake. We think it is a real potential catalyst for value creation.

TGR: Are there other companies using your prospect generation model?

DP: Rick Rule has counted 20 others. Eurasian Minerals Inc. (EMX:TSX.V) and John-Mark Staude's Riverside Resources Inc. (RRI:TSX) are two good examples. But I think we are the only ones who have taken it to the level of having our own drills.

TGR: In a perfect world, what would happen with Ixtaca after you announce the resource later this year?

MP: We will always look to diversify through agreements in our portfolio of properties, principally because we can come up with new ideas faster than they can be drilled.

That being said, I believe there is more shareholder value in making a discovery. If a property does not make it through that first round of drilling, our preference is to move on to another property.

DP: At Ixtaca, we are working on a resource and metallurgy, but a dozen or more producing-type companies have already visited the property and signed confidentiality agreements. We have defined our skill set, and mining is not part of it.

Ultimately, we see a producing-type outfit coming forward at Ixtaca. Then we do what we do best, which is turning over properties and finding new projects. Even while we have been developing Ixtaca, Morgan has had crews out doing geochemistry and advancing other properties to the drill-ready stage.

In 2008–2009, we had to take some properties back from our partners for various reasons. Morgan and I sat down and chose eight projects to drill ourselves. Ixtaca was No. 3.

TGR: It sounds as if it was more than luck.

DP: We will never say that luck is not a factor.

MP: Yes, luck is a huge part of being a prospector.

TGR: Yes, but you saw something that others didn't. There is art as well as science in mining.

MP: Knowing that these projects are long-shots makes it challenging to make decisions to drill, which is the big problem in the exploration industry. You do a lot of geophysical work. You try to create more certainty with surface work, which can be very expensive. But there is only one way to figure out whether there is something there: drill. If you can drill earlier and cheaper, you shorten the odds. You play the odds and roll the dice a lot.

TGR: Morgan and Duane, thank you for your time and your insights.

Duane Poliquin, founder and chairman of Almaden Minerals Ltd., received his degree in geological engineering in 1962 and has been active in mining exploration around the world ever since. In 1972, Poliquin identified the Santa Fe gold property in Nevada and formed Westley Mines Ltd. to explore the project. Westley was taken over and placed in production as a heap-leach operation by a division of Homestake. Before founding Almaden, Poliquin also initiated several other projects that became producing mines. After founding Almaden and doing an IPO in 1986, Poliquin indentified the Trinidad gold deposit in Mexico, which was subsequently sold with a royalty retained to Eldorado Gold Corp. and became that company's second mine. Having been in the exploration industry for many years, Poliquin has been through several metal and mining market cycles and remains confident that the next up cycle will be very rewarding.

Morgan Poliquin, CEO and president of Almaden Minerals Ltd., graduated from the University of British Columbia's Geological Engineering program in 1994. He earned his Master of Science degree in geology at the University of Auckland, studying geothermal systems and epithermal gold deposits and his Ph.D. in geology from the University of Exeter (Camborne School of Mines) studying the geology and mineral deposits of eastern Mexico. His Ph.D. research was combined with the prospecting program he led in eastern Mexico for the company. This exploration directly led to Almaden's involvement in the Caballo Blanco and Ixtaca projects and the subsequent discoveries made on these projects. Poliquin first came to work with his father at Almaden after finishing his master's degree in 1996 and directs Almaden's prospecting and property exploration programs.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:
1) Sally Lowder of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Almaden Minerals Ltd. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Duane Poliquin: I personally and/or my family own shares of the following companies mentioned in this interview: Almaden Minerals Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: Almaden Minerals Ltd. I was not paid by Streetwise Reports for participating in this interview.
4) Morgan Poliquin: I personally and/or my family own shares of the following companies mentioned in this interview: Almaden Minerals Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: Almaden Minerals Ltd. I was not paid by Streetwise Reports for participating in this interview.

Streetwise – The Gold Report  is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

101 Second St., Suite 110

Petaluma, CA 94952

Tel.: (707) 981-8999

Fax: (707) 981-8998
Email: jluther@streetwisereports.com

The post Drill baby drill, the secret to prospect generation appeared first on MINING.com.

The Gold Report: Back in January you said the European Union (EU) would have to make serious political decisions with "major economic consequences" in 2012. Is the EU making those decisions and what is your prognosis?

John Mauldin: It is doing its best to avoid making decisions, but is being forced to make them, ad hoc. The EU allowed the European Central Bank (ECB) to print money to monetize debt. The ECB is buying time for governments to achieve structural reform.

Structural reform, not the debt, is the problem. The debt is a symptom of bad policies, of a system set up for failure. The EU translated a theory into fact, and the theory did not work.

TGR: Is that theory the EU itself?

JM: The theory is the monetary union. If the EU had just left the trade union alone without trying to layer the monetary union on, it would have been just fine. But the EU wanted a single currency. It was part of the Europhiles' dream. The EU thinks the monetary union is the sine qua non and it is not.

Today, computers do not care about lira, pesos, drachmas, pounds, marks or francs. Computers just say, this is what this unit is worth, click, click, done. Exchange rates become pointless in an age when we are moving to an electronic currency.

TGR: What is the structural problem as you see it?

JM: The structural problem is a fundamental difference in the labor markets of northern Europe and southern Europe. There is a 30% differential over the last 10 years in the productivity costs in Germany and the countries in the south of the EU. That creates trade deficits in the southern countries.

If you want to balance fiscal government deficits, you have to have a trade surplus. That is the economic rule. Greece cannot balance its government budget until it balances its trade deficit. The Greek trade deficit is running at 10% because it does not produce enough goods to sell to the rest of Europe at reasonable prices. Before the monetary union, Greece could fix that by changing the value of its currency. That avenue is now closed, so it will have to reduce the relative cost of its labor.

Indeed, when you look at the data, the Greeks work longer hours and harder than Germans; they just do not produce as much at the price the Germans do. There are some reasons for that. Germany restructured its labor force early in the last decade to allow for "mini-jobs." Companies can hire workers without having to keep them on the books. You can hire him at €400/week without paying any benefits. When you no longer need them, you can fire them. Mini-jobs released excess labor; it gave German industry an outlet, and it is part of the German productivity miracle.

Mini-jobs would be politically unfeasible in Spain, Italy or Greece. Those governments believe people should get full wages for their work. Fine, but nobody is going to buy what you are making. There are consequences to solidarity with the workers.

TGR: What strong governmental decisions need to be made?

JM: The southern European countries must restructure their economies. Simply buying their debt and allowing these governments to borrow more money only means more debt owed to European taxpayers, debt that will be defaulted on.

Now, the EU countries are talking about a European banking authority that looks like the Federal Deposit Insurance Corp. The Germans hate the idea of the ECB telling them how to run their landesbanks, their regional banks, because those regional banks are really under water.

TGR: Structurally changing the labor force could take years, no?

JM: It could take years or it could change overnight.

Change can happen overnight when you have a currency. If we went back to the peso or the lira, Spain and Italy could restructure their relative labor costs immediately by dropping their currency 10–20%.

The countries remain productive, trade does not stop. Italians could then buy less because their currency would be worth less and the Germans could buy more Italian goods because their currency is worth more.

TGR: Why is that option not being discussed?

JM: Breaking up the monetary union is horrendously expensive. It's a major—insert your favorite expletives here—disaster for everyone involved.

TGR: But the Eurozone countries lose even if they continue down the path they are on.

JM: That is the second disaster. You just have to choose which disaster you want.

The choices now are between very bad and disastrous. The northern countries want a true, full-on political union, but only if the rules clearly state that the European central authorities can take over the budgetary rules for what are now sovereign states if the states cannot get their budgets together.

The northern countries want to give Brussels the power to tell Spain, for example, how many government workers to lay off, how much to raise taxes and reduce spending to achieve a balanced budget. And the Spanish would have to sit there and take it because it agreed to those rules.

TGR: Turning to the U.S., in your speech today (Sept. 10) you inferred that politicians' knowledge that the U.S. will hit the wall unless they do the right thing has become the catalyst to do the right thing. You also said you did not like all the solutions the politicians are proposing. What solutions would you propose?

JM: We all have our own economic fantasy. Mine is more academic than philosophical. When you study the literature, consumption taxes are less damaging to the economy than income taxes. I would like to see a value-added tax created, and I would like to reduce the income tax. This can increase the total amount of taxes collected and reduce the top rates.

I would eliminate most deductions: mortgage interest, charity, subsidies. If you make $100,000 and the top tax rate is 20–24%, you will pay that rate. I would drop the bottom rate to 7–8%, and I would make the threshold for paying that rate pretty low.

I would like to see the corporate tax rate taken to 15% or 12%, and get rid of every flipping deduction.

TGR: The deductions for mortgage interest, charitable deductions and some subsidies are pretty emotional. What is the probability they will be eliminated?

JM: I think it is pretty high because it is the only way to reach a compromise. The Simpson-Bowles compromise is one of the worst proposals I have read but I would vote for it in a heartbeat because it solves the problem.

That compromise eliminated a lot of deductions and dropped the total top tax rates. Dropping the top marginal rate is actually very bullish for the economy because it allows businesses and entrepreneurs to keep more of what they make.

TGR: Will politicians who vote to eliminate those emotionally charged deductions pay for those votes when they are up for re-election?

JM: A lot of things are emotional. That is why both parties have to hold hands and walk off the cliff together.

TGR: And you are optimistic they will do that.

JM: I think they will be looking into such an abyss that it will be impossible for one party to force the other party to make all the decisions and do all the heavy lifting.

TGR: Would you also change the capital gains tax?

JM: Academically, it is preferable to get rid of the capital gains tax, but I do not think that is politically feasible, so I would leave it where it is.

TGR: Meaning no taxes on capital gains?

JM: I would get rid of capital gains period, if you go out and create something, invest in something and do something.

However, a capital gains tax of 15% will not change anybody's economic motive for investing. Same thing for a 20% top income tax rate. People will not try to avoid taxes; they will just pay them.

I would have a 12% to 15% rate for corporations, with no deductions. General Electric made $6–8 billion and paid no taxes. I read a list of 20 corporations whose CEOs earned more in compensation than the corporations paid in taxes. This is just wrong.

I would tax foreign earnings at the same rate. Bring the money back, invest it here or do whatever makes sense for the company. This will have the added advantage of making our corporations far more competitive. It will allow us to become an export machine and it will create jobs.

TGR: How do lower corporate tax rates make the U.S. an economic export engine?

JM: By dropping to lower rates we will collect more in taxes from corporations because there would be fewer, or no, deductions. Instead of giving corporations tax deductions for certain investments or for using green technology, let the market sort it out.

By and large, the government has shown itself to be incredibly bad at trying to pick technology winners and losers. The Defense Advanced Research Projects Agency (DARPA) and a few others are the exception, where funding pure research and cutting-edge development makes sense.

TGR: Your remarks today included a warning that your optimism would change to pessimism if a solution were not developed in the first half of 2013.

JM: Very pessimistic; Spain and Greece-type ugly.

TGR: How does your optimistic side look at investment?

JM: On the optimistic side, I think the technological changes Alex Daley talked about in his remarks are real. Gross domestic product is growing at 2–3% and there are companies out there compounding it at 25–30%, in the biotech space for example.

Over the next four to five years, I like dividend plays and income plays, income-producing real estate, farmland if you can get it—including outside the U.S. There is a whole world of potential investments in companies doing cool stuff: traders, hedge funds, alternative funds. Do not limit yourself to buying a few, large-cap index funds and hoping for the best.

It will be a slower-growth economy for a while. Once we get to the other side of this, we will see a fabulous bull market start in the latter part of the decade. It could be a 15- or 20-year run. The last secular bear market is getting long in the tooth. It could be over in four to five years, maybe earlier.

TGR: What does your pessimistic side say?

JM: Investors must become more defensive; more fixed income, putting more money outside the U.S. and in gold. Look for investments that produce an income and a yield no matter what happens.

Investors should still look at technologies, but should be more conservative. You almost have to see how it will unfold.

In a disaster scenario, you have to start looking at what you will do when rates go up and the U.S. has its "bang" moment. No U.S. investor has experienced that so far. We do not know what this road looks like because it is around the curve.

My pessimist side sees more disruptions in the market, more Lehman-type events, bond markets deciding one morning that they want higher interest rates.

TGR: Your pessimistic scenario included buying gold as insurance not as a moneymaking asset. Can gold protect against these disruptions?

JM: Sure. Gold will have buying power in a disruptive society. If we cannot get our collective deficit act together, I will start increasing my gold allocation.

TGR: In  diversified portfolio, what is a healthy percentage of gold in both an optimistic and a pessimistic scenario?

JM: Optimistic scenario, I would say 5% or maybe a little bit more in physical gold. In a pessimistic scenario, I would double that.

TGR: You used a technical term, saying that "yield is a bitch," and noted that 5–6% is a good number. In which industries or sectors do you find those percentages?

JM: There are companies that will pay 8–10% yields all over the board, all over the world. If you narrow your focus to U.S. companies, you will not find all of them.

Their stock price might have collapsed, even though they are in solid industries such as beer or liquor; very few countries are going to outlaw alcohol and beer. A company will not pay a 10% dividend for very long, because people catch on and buy the stock. Soon, the dividend returns to rates that are more normal. You have to be opportunistic.

TGR: In your pessimistic scenario, is that 5% or 6% yield erased?

JM: Some of it is. You will have to look for more defensive or more bond-type plays.

People reading this who are investing $100K, $500K, $1M, $2M can look at small, viable targets. If you are looking only at where the big boys are investing, you are limiting your world.

TGR: You are already widely published, why did you decide to start a subscription newsletter?

JM: People have been asking me to do it for 10 years, and I finally found the right people to do it with.

I realized that I could not write a newsletter, do the research that I am doing and run a publishing company. I needed a partner who gets the investment process the way I do. David Galland and Olivier Garret are the right people and I am enjoying our relationship.

TGR: How did you choose Yield Shark as your first newsletter?

JM: That is where the demand is, and I have been overwhelmed by the response.

We will launch Bull's Eye Investor with Grant Williams in a month. Within the next 18 to 24 months, we will have eight or nine different publications.

TGR: I like that kind of optimism.

JM: The newsletters will give me a certain amount of freedom in the way I write and research and structure my life. This will simplify my life a great deal. I am only doing stuff that I want to do.

My Thoughts from the Frontline will always be free. It will always be written on the weekend, with one major change. I will write it on Sunday night so I can have a real weekend.

That may mean the newsletter will show up in readers' boxes Monday morning instead of Saturday afternoon.

TGR: Getting your weekends back is a good plan, John. Thanks for your time and insights.

Hear the recommendations of all 28 experts at the Casey Research "Navigating the Politicized Economy" Summit with the audio collection.

John Mauldin is chairman of Mauldin Economics, an investment newsletter publisher, and is the author of four New York Times Bestseller books. They include Bull's Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market, Just One Thing: Twelve of the World's Best Investors Reveal the One Strategy You Can't Overlook, and Endgame: The End of the Debt Supercycle and How it Changes Everything. Mauldin's free e-letter, Thoughts From the Frontline, is sent to over 1 million people every week. He also offers The Mauldin Circle, a free service that connects accredited investors to an exclusive network of money managers and alternative investment opportunities. He is a frequent contributor to publications including The Financial Times and The Daily Reckoning, as well as a regular guest on CNBC, Yahoo Tech Ticker and Bloomberg TV. Mauldin is the president of Millennium Wave Advisors, an investment advisory firm registered with multiple states. He is also a registered representative of Millennium Wave Securities, a FINRA-registered broker-dealer.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

Source: JT Long 

DISCLOSURE: 

From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise – The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

The post John Mauldin's prescription for avoiding economic catastrophe appeared first on MINING.com.

The Gold Report: This year could be described as a hangover from the high gold prices of last fall. The price of gold hit a high of around $1,900/ounce (oz); it is now about $1,760/oz. Yet, we do see some bubbling and some positive news in the space. I'm sensing a cautious optimism among institutional investors.

David Christensen: In recent weeks, there has been a general uptick in enthusiasm for gold mining shares. As you pointed out, it's been a very tumultuous year for mining shares and the gold price. While the gold price has stabilized, it hasn't set a new high in more than 12 months. That has led to some investors withdrawing money from the mining sector.

At the same time, the shares of many gold miners failed to perform. Cash flow was generally less than investors expected given the relatively high prices. Mining companies weren't generating the growth investors desired and internal rates of return have been much lower than investors had been seeking.

As a consequence, there was a selloff in the gold mining shares. Part of the selling pressure was newer money that came into the sector over the last few years, such as hedge funds, looking to make an early exit from the sector. Gold funds typically remain fairly static in terms of their overall portfolios, while hedge funds come in and out of the sector. As the sector lost momentum and the general equity markets began to improve, hedge funds found alternative places to put their money. The consequence was that there were no buyers and a lot of selling pressure. Many of these shares are down more than one-third from where they were a year ago.

TGR: Still, there are so many gold producers, many of which are in your portfolio, that are still operating at very impressive cash flows with impressive balance sheets. How are they attracting new money—the hedge funds and the generalists—back into their shares?

DC: It's really pretty simple. They have come out of a very rapid period of growth and are beginning to generate very strong cash flows and earnings. Moreover, gold producers are increasing their dividends. Dividend distributions are up by about 30% year-on-year from most of the major mining companies. We have companies today that are distributing three times what you could get from a safe T-bond investment here in the U.S., while providing added portfolio diversification from investing in a gold mining share.

TGR: That's pretty compelling to a lot of investors who are looking for income right now.

DC: We see some good value in the sector at the present time due to the increasing volume of distributable cash flow. The simple cash flow multiples or multiples to net asset value (NAV) for the industry are at the lowest valuations we've seen in several decades—perhaps during my career. Many of the mining companies on the senior side are trading at 0.7–0.8 times NAV. Mid-caps to juniors are at about half of their intrinsic value. Now is a good time to consider many of the gold mining shares.

TGR: ASA has around a half-billion dollars in assets. How many stocks do you own in the fund?

DC: It fluctuates between 30–34 positions. Right now, we're probably at about 32 positions in the portfolio. We're very heavily weighted toward some of the quality benchmark companies that most people would be familiar with, such as Barrick Gold Corp. (ABX:TSX; ABX:NYSE), Newcrest Mining Ltd. (NCM:ASX), Goldcorp Inc. (G:TSX; GG:NYSE) and, of course, one of the all-time stellar performers, Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE). Randgold has been the largest or second largest position in our portfolio for a good part of the last five years.

Beyond that, there are a number of small companies that make up much of the growth component of the portfolio. They are names that aren't on everybody's radar screens, such as Silver Lake Resources Ltd. (SLR:ASX), Osisko Mining Corp. (OSK:TSX), Detour Gold Corp. (DGC:TSX), Lake Shore Gold Corp. (LSG:TSX) and Stornoway Diamonds Corp. (SWY:TSX). These will change over time depending on how we feel those companies are doing, but they do provide a lot of the growth for the portfolio.

TGR: I noticed a couple of platinum names and a silver name in the portfolio. It's not a gold-only fund, but certainly is very heavily weighted toward gold.

DC: It is a precious metals fund, which typically will mean that we may underperform some of the purer gold shares in a rising gold price environment. However, we tend to look at these investments over a longer cycle. For example, we invested in platinum mining shares for the long-term positive attributes of the platinum industry several decades ago and during that time, they have been some of the best performing investments in the portfolio. We have found that a more diversified precious metals portfolio has outperformed the gold portfolio over longer periods. But a gold fund, at times, will provide more leverage to a change in the gold price.

TGR: A subsector within the space is the royalty sector. You own Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) and Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX).

DC: The royalty sector is one of the stronger business models in the precious metals space, and Royal Gold and Franco-Nevada are the two big players. They have historically been phenomenal companies in the portfolio. We are very long-term shareholders in those names.

TGR: What about Silver Wheaton Corp. (SLW:TSX; SLW:NYSE)?

DC: ASA does not own Silver Wheaton. There are a number of reasons for it. At the moment, we prefer to get most of our silver exposure through a little company called Tahoe Resources Inc. (THO:TSX; TAHO:NYSE), which has been a strong performer in the portfolio during the last year. Tahoe is developing a high-grade silver asset in Guatemala, which we think is very attractive.

TGR: What progress has Tahoe made on that asset?

DC: Tahoe has commenced construction of its project. It is starting the second decline into its operations, and things seem to be going very well. It doesn't have its operating permits yet, but it wasn't expecting to have them by this time. Tahoe doesn't need them for another nine months or so before it commences operations. At this point, the development of the asset seems to be on time and on budget, and the stock has continued to perform very well. We believe it has one of the better management and operating teams in this industry.

By the way, there have been no issues with its location in Guatemala either.

TGR: Guatemala doesn't seem to be having the political or jurisdictional problems that have been impacting other Latin American countries.

Do you have a favorite jurisdiction? Your assets are really all over the planet.

DC: Gold deposits are put where Mother Nature put them. I don't have the option to move an asset. As a result, we don't have the benefit of picking countries first. What we do is choose a quality project. If the quality of the project is sufficient to offset the risk of operating in a given jurisdiction, then we'll consider it. Nobody in their right mind would take a low-quality project in a high-risk jurisdiction.

At the same time, we might take a lower-return project in a safer jurisdiction as part of our portfolio makeup. That risk adjustment is a constant ongoing process within the portfolio. You know, there was a time when a gold fund, such as ASA, would have been largely a South African portfolio. Up until the 1970s, there were only a handful of gold mining operations outside of South Africa.

TGR: The Carlin Trend hadn't been discovered at that point.

DC: Newmont Mining Corp. (NEM:NYSE) existed, but it was also a significant copper producer. There was Homestake Mining, which is no longer in business, and Hecla Mining Co. (HL:NYSE). That was largely the North American gold mining industry. At that time, ASA was largely a South African portfolio of gold mining shares. As the world has developed and exploration techniques have improved, we've become more diversified.

TGR: It was interesting to hear in presentations today about some of these large capital-expenditure projects that are taking place in far-flung locations all over the planet that one would never have thought of in the 1950s.

DC: I'll be honest—I have favorite countries that I like to travel to and visit operations. They aren't necessarily where I prefer to invest.

TGR: Your fund has obviously struggled in the last several quarters because of languishing equity prices in the gold and silver space, even with the strength of the commodity price. Have you adjusted the portfolio at all based on the relative weakness of equity prices? I know you're a long-term bull in the space.

DC: ASA does tend to be a very long-term investor. There are securities in our Top 10 holdings that we've owned for decades. They didn't become Top 10 holdings because we bought 10% of the fund in the stock. They became Top 10 because we bought 1% that grew 10 times. They've just gotten there through success.

In the course of the last year, as the crisis in the industry broke and mining finance wasn't available to develop projects, those companies that were going to be in need of financing in the next year were some of the ones that we quickly ejected from the portfolio. We knew that they were going to be under significant pressure and that we were going to be able to buy those back as the market environment improved. There was a lot of turnover in the portfolio that wasn't typical for us.

TGR: I'm assuming that those were some of the smaller- and mid-cap companies.

DC: Absolutely. There were some adjustments from a risk standpoint in the larger caps, as well. The market began to deteriorate in the gold sector. Some valuation gaps broke out where companies that we considered to be very high-risk assets that weren't being discounted by the market became overweight positions and some that were lower risk had taken the brunt of the selling. Some adjustments were made to lower the overall risk of the portfolio and hopefully improve its returns going forward.

TGR: Do you have a mandate? Will you look at a company of any size?

DC: We look for asset quality and good management teams first and foremost. When it comes to market cap, we don't have a hard and fast rule. We generally like a portfolio position to be at least 100 basis points of the portfolio or 1% of assets under management. If we're a $500 million (M) portfolio, I have to be able to move $5M of stock in and out of that position at any one time. If the liquidity isn't there to do that, then the company is simply too small. It's a simple math problem for us.

TGR: You have to have the liquidity. The only company that I don't really know in your holdings is Silver Lake. Tell me a little bit about that one. Is that still in the portfolio?

DC: We actually met with Silver Lake management about 30 minutes ago. One of the benefits of being in Denver is all the major companies in the industry are here at one time.

Silver Lake is developing several assets in Australia, which we think are very strong. Most of the management comes from Western Mining Co., previously one of the largest mining companies in Australia, predominately in nickel. The strength of the management team and its approach to the industry is a combination that could make it an outperformer going forward. We're looking at this asset very carefully.

TGR: The company is not listed on a North American exchange at this point.

DC: It is only listed in Australia.

TGR: The Australian stock exchange is looked on with a little bit of a jaundiced eye. When you buy an Aussie stock, do you take a closer look at their balance sheet? Do you do more due diligence on a stock like that than you would on a North American-listed issue?

DC: I hate to be flip, but honestly, no. There are certain financials that we look at in any asset. The level of modeling and the diligence is the same regardless of where they're listed. The exchange they're listed on is a tertiary consideration.

Newcrest Mining is one of the largest Aussie mining companies in the world.

TGR: And it's in your top five holdings.

DC: Yes, it's our number three position.

TGR: We haven't seen too much discovery. There was GoldQuest Mining Corp.'s (GQC:TSX.V) big discovery in the Dominican Republic. Is CGA Mining Ltd. (CGA:TSX; CGX:ASX) still in your portfolio?

DC: Oh, yes, very much so.

TGR: That's in the Philippines. We've seen some interesting things out of the Philippines.

DC: Historically, we haven't done well in the Philippines as investors. CGA, for us, is a bit of, for lack of a better term, a concept stock that we believe will be a good performer for the portfolio going forward. It has a good project and strong management team. It provides a little bit of exposure to that jurisdiction.

TGR: You're on the board of the Denver Gold Forum. What are your responsibilities?

DC: The Denver Gold Group is a not-for-profit organization that puts on conferences to assist the gold mining industry reach out to investors, like myself, for potential investment consideration. We host these conferences every year. The board tries to take the concerns of our members, the companies that are here, and reflect them in the conference to do the best job we can for the industry.

TGR: The general attitude here is one of measured optimism. It feels as if we're all moving forward cautiously in this space. There's a little more excitement today than there was even a month ago.

DC: Look at what's going on in the world today: concerns about political and economic situations in the United States, Europe and the Middle East, what's going on with the euro and the U.S. dollar. People can't help but consider gold as an alternative investment. Gold prices will continue to do well for the next 12–24 months. Many countries, in fact, are looking to diversify their holdings—as are investors—into gold bullion, as well as dollars and euros. It's only a natural process. It's smart for investors to keep anywhere from 2% to 5% of their portfolios in precious metals. It provides a good diversification for an overall portfolio.

TGR: Thank you, David. I appreciate your time.

David Christensen is CEO, president and chief investment officer of ASA Gold and Precious Metals Limited. He joined the company in 2007 as vice president of investments and assumed his current positions in 2009. Prior to joining ASA, he worked with Gabriel Resources, a junior gold company, from 2004 to 2007, where he worked on the feasibility study and financing plans for the Rosia Montana project. He has earned a StarMine ranking for some of the most accurate earnings estimates, and has been consistently ranked by The Wall Street Journal and Reuters as one of the precious metals industry's best analysts. Christensen earned his Bachelor of Science degree in business administration at California State University, Chico. He earned his Master of International Management from the American Graduate School of International Management.

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DISCLOSURE: 

1) Sally Lowder of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Goldcorp Inc., Detour Gold Corp., Franco-Nevada Corp., Royal Gold Inc. and Tahoe Resources Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) David Christensen: I personally and/or my family own shares of the following companies mentioned in this interview: ASA Gold and Precious Metals Limited. I personally and/or my family am paid by the following companies mentioned in this interview: ASA Gold and Precious Metals Limited. I was not paid by Streetwise Reports for participating in this story.

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Source: Sally Lowder 

The post Can dividends cure gold equity hangovers?: David Christensen appeared first on MINING.com.

The Gold Report: Brock, your research suggests that the production margins of gold companies are near all-time highs. Why has that not translated to share price appreciation?

Brock Salier: The weak equity markets play a role in the disconnect between gold prices and gold equities, but a lot has to do with maturing gold assets.

A lot of gold mines were funded between 2007 and 2009 and commissioned between 2008 and 2010. Most companies typically mine above their reserve grade for the first one to three years to speed capital and debt repayments. But, if they have not found an expansion and completed a feasibility study, or if they lack a new mine to develop, that grade has to fall. As production falls, cost rises and share prices legitimately fall along with profits.

TGR: Can you go into a bit more detail about that concept, which is known as "high grading?"

BS: If a company plans to mine for 10 years at 2 grams per ton gold (g/t), in the first two years it will often mine at perhaps 2.4 g/t. This lowers costs and increases production, which brings the company's cash flows forward. In addition, tax breaks in the early years often motivate companies to get as much cash as soon as they can.

By the third year, the mine's residual reserve is 1.8 g/t. The same amount of material goes through the plant, but production drops while operating costs stay the same. The company is spending the same to produce less gold; there is less profit.

At this stage, many companies will have an expansion or a new mine in place. For example, Banro Corporation (BAA:TSX; BAA:NYSE) is mining above reserve at the Twangiza mine in the Democratic Republic of the Congo (DRC). When that grade falls, its second mine, Namoya, should come into production. And while Teranga Gold Corp. (TGZ:TSX; TGZ:ASX) does not have a second mine, it has an expansion, which should allow the company to maintain its production level.

TGR: What is the quickest way for an investor to learn whether a company is in fact high grading at the start of its production cycle?

BS: Investors should always check the last quarterly report to see what the head grade is going into the mine. Quarterly, every company will tell you what grade it is mining and what its reserves are. If the reserve grade is substantially lower than what is being mined, you know that eventually production will fall. The reverse is also true.

Some companies, such as Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE), are mining well under their reserve grade. That is a great position to be in because it means production will rise and cash cost will fall as the mine goes on.

The companies with the very high-grade deposits are lucky enough to be able to mine under reserve grade. In Randgold's case, many of its mines have reserves at 5 g/t and are being mined at 3.5 g/t.

TGR: In addition, when a mine comes into commercial production with 100,000 ounces/year (100 Koz) gold, it does not necessarily mean it will produce 100 Koz/year gold for the life of the mine.

BS: Ideally, the mine will produce 100 Koz/year and after a few years when the grade declines, the company will do an expansion and continue to produce 100 Koz/year. Without an expansion in the plant, production and profits will drop after about three years.

TGR: Is it best for an investor to get in just before commercial production begins and not stay invested too long?

BS: It makes sense to get in before commercial production begins and then take a view on the next project or the expansion. If you think the company's expansion or the second project is legitimate, has been funded, has a feasibility study and perhaps is under construction, it is definitely worthwhile to stay in the company.

If you go in before commercial production and later the company's expansion and feasibility studies are not being completed on time or a second mine is not in the pipeline, you do not want to be stuck holding that company as its production goes through the shrinking phase.

TGR: Given all of that, what happens next in this space?

BS: There are three scenarios for mid-cap producers. First, companies like Teranga that have expansion nearing completion or companies like Banro that have a second project fully funded and under-built can simply extend their production. They are in the best position.

The second scenario is companies that may not have that production growth, yet are generating cash. This is where the merger and acquisition (M&A) story comes alive. We are seeing a significant increase in nil premium, or paper mergers, and consolidation. Mid-cap producers without growth projects can nonetheless start consolidating to create larger companies and value that will snowball up their production.

The third scenario, unfortunately, is companies without expansion or new projects that are not undertaking some kind of M&A activity. They will get left by the wayside.

TGR: Recent deals have included early-stage or midtier producers buying production, and, in some cases, exploration assets from small-cap players. There seems to be a merger of needs scenario right now.

BS: You are right about the merger of needs. In 2011, we saw relatively easy access to debt and equity among the juniors and very high equity valuations. The juniors had a degree of comfort, such that when they were approached by mid-cap producers with maturing assets, the valuations were too high or, alternatively, the juniors did not need to be acquired. They could self develop.

In 2012, the juniors' valuations are significantly lower, due mainly to capital constraints. They can no longer self develop, and M&A makes a lot more sense.

TGR: Which smallish producers could see some M&A interest?

BS: Cluff Gold Plc (CFG:TSX; CFG:LSE) is a good example of a small producer that could see some attention. It has a small producing asset in Burkina Faso and a substantial, undeveloped project in Sierra Leone. Cluff's producing mine offers immediate, added production and cash flow to a bidder. Its undeveloped project, which is receiving little valuation in the equity market right now, offers upside.

TGR: Would investors or potential acquirers be willing to venture into Sierra Leone?

BS: Sierra Leone and Liberia are two of the newer gold countries. With the rest of West Africa, they are peaceful and stable, with lots of development going on. Historically, political difficulties in Africa result from the removal of long-term incumbents. That has already happened in Sierra Leone and Liberia. Both now have democratically elected leaders who do not have the same stranglehold on the country as their former dictators. The election season in West Africa—a traditional tipping point for potential civil unrest—is mostly over. Sierra Leone's election will be in Q4/12.

We are very positive and upbeat on the political stability of virtually all of the Central African gold-producing countries.

TGR: Another boon for companies operating in Africa is that the threat of nationalization is remote.

BS: Talk of nationalization or civil unrest in Africa is very common, yet it essentially never happens. When I take into account both nationalization and the environmental permitting process, which is a greater constraint in mature arenas like Europe, Africa ranks extremely high.

I judge geographies by the number of precedents. How many precedents have there been of assets being nationalized or mines that have been unable to obtain licenses? There are essentially no precedents in all the African countries I cover.

TGR: Barrick Gold Corp. (ABX:TSX; ABX:NYSE) is trying to sell its African Barrick Gold Plc (ABG:LSE) stake. One of the interested buyers is the state-owned China National Gold Group Corp. Why is China more interested in African plays than elsewhere?

BS: I would not agree that China's interest lies in African gold per se. In my African coverage universe, there has been little to no precedent of Chinese companies buying gold assets. There is some precedent in South Africa, but those are larger, lower-grade, larger-cost operations.

China's interest in Africa is more in the base metals, such as copper and iron ore, as a supply chain for its industrial economy. I would not expect Chinese investors to add to the M&A fever in Africa in gold in the same way that they have in iron ore and copper.

Regarding Barrick Gold, I believe that Barrick is using that approach to start an option process with the expectation that the Chinese parties will end up owning those assets.

TGR: In a recent GMP resource report you wrote, "with equities trading at record lows and capital expense requirements, in most cases, larger than group enterprise value, dilution is critical in assessing the value of pre-producers." How do you determine equity dilution before it happens?

BS: That is a valid question. One must assume that a degree of dilution will happen if these companies self fund. This is much of the rationale behind M&A.

If these gold pre-producers were to press the button on development now, they face a degree of equity dilution. The value of an undeveloped mine in the hands of a pre-producer may be at risk of dilution. That risk would not exist if a bidder that had the cash to develop the asset were to acquire the pre-producer. There is a rationale in M&A that mid-cap producers with cash generation from existing operations will actually see more value in undeveloped ounces than the juniors.

The reverse of this is also true—if the market does recover, then deeply discounted valuations of the juniors would reverse simply because they would have more access to equity. Their share prices would rise. Any potential dilution, as you point out, would be reduced. And, there would be an opportunity for a significant rerating. But that is completely dependent on a wider global market recovery.

TGR: Looking back over the last 10 years, do you have a feel for the average percentage of dilution that happens with each successful financing?

BS: Qualitatively, I would expect a pre-producer to target a maximum of 50% dilution, perhaps a $300 million (M) market cap raising $200M in equity dilution or a $200M market cap raising a mix of debt and equity.

The problem facing many juniors is capital expenditure (capex) bills on the order of $200M to $300M, with market caps below that. They are using the market slowdown to revise their projects with a focus on higher-grade areas and lower capex.

Over that 10-year window, most projects fund on the cyclical upturn. So, yes, dilution would be a high risk for investors now. But in reality, these juniors will not fund until the cycle has turned, so that dilution probably will not happen. The risk here is having to wait a long time if the market does not turn.

TGR: You also wrote that you quantify the value of pre-producers to bidders by "calculating 'undiscounted' return, which is the percentage of reserve value [mineable gold less cash costs, royalties, taxes and minority stakes] over total cost to gold market cap at 25% premium plus capex from a selection of juniors in Africa. This shows even without exploration upside, all juniors offer upside to bidders." Are these pre-producers that are deeply undervalued or does this speak to gold mining and exploration in Africa in general?

BS: The M&A metric that you refer to is what we call total cash return. Say it costs $400M to acquire a junior and build the mine. Because the cash cost for a larger producer to buy a pre-producer is at a cyclical low, the undiscounted cash return will be positive in all cases.

But, the percentage upside is key here. When you're looking at acquiring a pre-producer, this is an undiscounted return. What that means is that's the life of mine. You have to build the gold plant. You have to mine that gold over 10 years. So, it's a lengthy investment horizon. If the cash return is something like 25% or 50%, yes, that is a positive return but it's probably not enough of a return for that gold producer to go ahead and buy the pre-producer because the gold producer would still have to build a mine and operate it for 10 years. But, in some cases, the percentage return on a cash basis is substantially higher than that. In our report we note that someone like Cluff Gold, which I mentioned earlier, could provide healthy cash returns.

TGR: But Cluff Gold is not a pre-producer.

BS: True, Cluff Gold does have existing production. However the company has a substantial undeveloped asset at Baomahun, which is what would offer potential upside as it goes into production.

TGR: Can you give us an example of a pre-producer?

BS: Take Aureus Mining Inc. (AUE:TSX; AUE:LSE), a small, higher-grade company. We estimate there is 124% return on the cash that a potential bidder would invest to acquire the company and build the mine. That is a good return although it does come with a risk of the time value of money and execution.

TGR: Are there other pre-producers or producers with similar numbers?

BS: Papillon Resources Inc. (PIR:ASX) has made probably the highest quality, undeveloped gold discovery in Africa held by a junior. Its maiden resource in Mali is more than 3 million ounces (Moz) and over 2 g/t. Papillon ticks off a lot of boxes for investors: it is big, can be open-pit mined, is metallurgically simple and high grade.

TGR: What about companies that will be growing over the next two to three years and could see some takeover interest?

BS: Banro fits that description. It recently completed a $175M bond issue while also finishing the commissioning on its Twangiza Mine. Its Namoya mine is expected to be at nameplate production at the end of 2013. The engineering and feasibility studies are finished, construction is underway and the company has the cash to build.

TGR: You project Banro's production between now and 2015 will be up 450%. Is that too good an opportunity for a potential acquirer to pass up?

BS: The 450% is based on Twangiza's very low production base earlier this year and is a bit exaggerated.

The production growth curve is critical. We see 100% production growth between today's 100–120 Koz/year and the tail end of next year when Namoya is commissioned.

TGR: Does Banro have the management team to succeed?

BS: Banro's very strong technical team built up a lot of experience in its first mine build. The general manager, Thinus Vorster, has now moved from Twangiza to Namoya. Banro's principal founder, Arnold Kondrat, has been operating in the DRC for a long time and understands how the country works. Banro has a great combination of political and commercial know-how and technical management on the ground.

TGR: Are there any other companies poised for growth that may not be as well financed?

BS: La Mancha Resources Inc. (LMA:TSX) is the subject of a takeover offer. Its Australian asset generates a lot of cash; its West African asset less so. Its Sudanese copper-gold projects, however, have tremendous growth potential.

TGR: What are some pre-producers with good assets but not enough money to properly develop them?

BS: Volta Resources Inc. (VTR:TSX) and Orezone Gold Corporation (ORE:TSX) both have interesting assets in Burkina Faso, which is a center for the discovery of substantial, albeit low-grade, gold resources.

Volta has 5 Moz at 1.1 g/t. Orezone's resource is similar. To overcome the short-term funding gap, these pre-producers are realigning themselves to decrease capex by building staged development earlier on in the mine life, for example by building lower-cost, heap-leach mines.

Volta has a small, very high-grade discovery close to its existing low-grade resource. Recent drilling has seen hits as high as 10 meters at 13 g/t. Volta can build a smaller, very high-grade starter pit and use the cash to self-fund production from the larger, lower-grade resource.

Orezone can use an early heap leach at a much lower capex than a traditional mine and use the cash generated to develop in stages as production grows.

Riverstone Resources Inc. (RVS:TSX.V) is on a similar growth curve, although not as far developed. It, too, has a low-grade, but very large resource in Burkina Faso.

TGR: Orezone's market cap is $177M and it needs $350M to build a mine. Volta's market cap is $122M, with $610M in capex needed to build. In both cases, if you double the number of shares at the current value, you still are not close.

BS: No doubt whatsoever that it will be hard to fund those projects in their current form at this stage in the cycle. That is why these companies have to come up with alternative options. They have to reduce their capex, look at smaller, staged development and for higher-grade resources. In a capital-constrained market, the capex/market cap ratio is much higher and is a significant challenge.

At the opposite end of the spectrum are the very high-grade exploration stories. An example of that would be Loncor Resources Inc. (LN:TSX.V; LON:NYSE.MKT). It is in the DRC and recently announced 1 Moz at 7.6 g/t. Roxgold Inc. (ROG:TSX.V), in Burkina Faso, came out with a resource of 660 Koz at 11 g/t. That is almost unheard of in Africa.

These projects' lower cash cost and their attraction from an M&A standpoint make these high-grade projects attractive.

TGR: Are these high-margin deposits simply the "flavor of the month" or are they here to stay?

BS: For the African space, that is yet to be determined. Africa lacks depth of expertise in underground mining. While the high-grade underground projects certainly offer good investment returns at face value, human resourcing these projects is not necessarily easy.

In the long run I think all gold producers would prefer to have an open pit. But we will be seeing more high-grade underground mines because the near-surface resources are already being exploited.

TGR: Is it true that Africa is underexplored?

BS: You have to look at it country by country. Ghana and Mali are much more well explored than the rest of West Africa. Sierra Leone, Liberia and Ivory Coast are far less explored.

TGR: What three things do you look for before buying into a gold exploration company operating in Africa?

BS: I look first for grade: a high-grade asset, meaning over 2 g/t, open pittable and free milling. By that, I mean no metallurgical issues and ready for treatment in an off-the-shelf plant.

Second, I look at the fiscal regime of the country where the company operates. Fiscal regimes also vary. When you tally up all the taxes, royalties and carried interest in Ghana, it equates to a 48% tax equivalent. Senegal, which has a 7-year tax holiday, is at a 23% tax equivalent.

Finally I would look for cash in the bank or a supportive strategic shareholder.

TGR: Brock, thank you for your time and insights.

Brock Salier joined GMP Securities Europe LLP in 2011 after three years at Ambrian Capital where he was head of the small-cap mining desk, which achieved a #1 Extel ranking, and he was individually ranked at #3 among small/mid-cap mining analysts in the UK for two years running. Prior to this, Salier was a management consultant in London for three years, part of which was spent in the natural resources practice of Accenture. Salier worked as a mining geologist with Great Central Mines in Australia and held exploration geology positions with Placer Dome and Rio Tinto. He holds a PhD (Distinction) and Bachelor of Science (Hons), both in economic geology specializing in gold, from the University of Western Australia.

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DISCLOSURE:

1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Banro Corporation, La Mancha Resources Inc., Orezone Gold Corporation, Loncor Resources Inc. and Roxgold Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Brock Salier: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I have seen material operations of the following issuers: African Barrick Gold Plc, Aureus Mining Inc., Banro Corporation, Barrick Gold Corp., Cluff Gold Plc, Orezone Gold Corporation, Loncor Resources Inc. and Volta Resources Inc. I was not paid by Streetwise Reports for participating in this interview.
4) GMP Securities Europe LLP and/or any of its group affiliated companies has, within the previous 12 months, provided paid investment banking services or acted as underwriter to the following issuers: Banro Corporation, Cluff Gold Plc, Aureus Mining Inc. and Orezone Gold Corporation.

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Source: Brian Sylvester 

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