The Gold Report: Chris, Haywood Securities' estimated silver price for 2012 is $36/ounce (oz), but the "devil's metal" has averaged less so far in 2012, closing above $36/oz only once. Are you expecting a significantly stronger second half for silver?

Chris Thompson: Silver performed relatively well in Q1/12. We hope that the silver price will find support at current levels of ~$28/oz through Q2/12 and Q3/12, with potential for a strong Q4/12.

Looking at the silver price right now, I see that it's struggling to hold its head above $28/oz. If we do see a significant breakdown from $28/oz, it may somewhat compromise our forecast for this year averaging $36/oz.

TGR: Do you think investors shy away from the silver space given its overall size and susceptibility to manipulation?

CT: Silver is often referred to as the most volatile of all precious metals. In that sense, it's not for the faint-hearted investor. However, with volatility comes opportunity as long as timing is right. The benefit that silver provides is that it finds value as a store of wealth, as well as an ingredient used in industrial applications, so it offers investors a dual benefit where silver fundamentals benefit from economic growth as well as economic uncertainty.

TGR: In an April 23, 2012, research report, you told investors to "look for quality over quantity" when it comes to silver equities. What makes quality?

CT: A lot of investors look at the size of an in-situ metal resource hosted by a project when looking for a value opportunity presented by exploration and development-stage companies. They tend to ratio that against the enterprise value (EV) of that company to derive a valuation.

Silver is often mined with other metals as by-products. Just recognizing a straight EV dollar/ounces in the ground valuation can be a little misleading. Also, silver is inherently more challenging to recover metallurgically than other precious metals, which influences operating costs and recoveries.

When you layer these peculiarities into the picture, it becomes a complicated story and one that really cannot be valued based on a straight EV dollar/ounce in the ground valuation. We also look at size potential. We look at operating margins on the tonne, as well as jurisdiction. It's a sector where participants should be evaluated on a number of factors rather than just how much silver they have in the ground.

TGR: What sort of opportunities is the volatility creating?

CT: Silver has broken down from its highs in Q1/12. The sector has sold off, which has been exaggerated in some instances. If you're a believer in silver holding its head above the $28/oz mark, opportunities exist where equities have been beaten up more than they should have been based on weakness in the silver price. When the silver price exhibits volatility, volatility in equities is exaggerated, and that creates opportunity.

TGR: The performance of equities has lagged their underlying commodities in the precious metals space for almost 18 months. Why don't the equities respond the same way when the commodity goes up?

CT: We've definitely seen a dislocation between equity valuations and metal price since late 2010. The Toronto Stock Exchange Venture Index is currently at about the same level it was in in the middle of 2010 when the silver price was $17/oz and gold was $1,200/oz. Equities, whether they're exploration, development or even cash-flowing equities, haven't reflected strength in metal prices for some time now.

TGR: They are, but only to the downside.

CT: In the last six months, we have seen a lot of worry and concern about operating costs; capital costs; and jurisdictional, geopolitical and permitting risk. It's not just a story of metal prices anymore. Performance now relates to a whole host of other factors that determine how quickly and easily development-stage projects can advance to production or exploration-stage projects can advance to development.

TGR: Do you expect more mergers and acquisitions (M&A) in the silver space, perhaps based on this garage sale effect that's going on right now in the equities space? What market factors prompted that conclusion? Is that conclusion unique to the silver space among precious metals?

CT: We have to look at the industry from two points of view. First, we have to look at it from an acquirer's perspective. What companies are positioned to purchase assets? What companies are looking to grow their production profiles through making acquisitions? Second, you have to look for prospective acquisition targets. What companies have good-quality assets that are suffering in today's market because of lack of funding and weak investment sentiment for development- and exploration-focused stories?

What we find in the silver sector is that despite the current soft silver price, operating margins that a lot of silver producers are enjoying are some of the best in the sector. The average industry cash costs for silver producers are less than $10/oz, which implies a healthy operating margin at a silver price of ~$30/oz. A lot of silver producers are generating significant cash flow in this environment.

Realizing that investor sentiment in the mining sector is weak, a lot of companies that are trying to advance exploration projects or development-stage projects are battling to finance the advancement of their development and exploration plans. You coined it—it is pretty much a garage sale out there for exploration and development stories. The acquirers have healthy treasuries and the ability to generate additional cash flow to support larger treasuries and the targets are being starved of funds to develop their project—it's a buyer’s market.

TGR: Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE), recently paid AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE) $200 million (M) for AuRico's El Cubo gold mine and a couple of other smaller exploration projects in Mexico. Do you believe AuRico will use that cash for M&A?

CT: I can't talk about AuRico, but I can talk about Endeavour. Endeavour is an emerging midtier silver producer. It is currently working toward delivering upward of 5 million ounces (Moz) silver production annually over the next two years. Endeavour and other emerging midtier companies are growing their production base through acquisition. What seems to be a more common acquisition target in the sector right now are not development-stage or exploration-stage projects, but companies with operations. Endeavour's purchase of the AuRico assets fits very well into this focus and is not a surprise. First Majestic Silver Corp. (AG:NYSE; FR:TSX; FMV:FSE) used the same sort of strategy by acquiring Silvermex Resources Inc. (SLX:TSX; GGCRF:OTC). There is, especially in the emerging midtier subsector, a consolidation of players.

TGR: El Cubo's total resource is 1.14 Moz gold and 53.5 Moz silver. At $1,600/oz gold, that's $1.8 billion (B). At $30/oz silver, that's another $1.6B. That's a total of $3.4B in all categories. Even just the proven and probable reserves of 322,000 oz (322 Koz) gold and 18.5 Moz silver amounts to more than $1B. It seems like quite a bargain. Why did AuRico do that deal?

CT: I would argue that this is not a core asset for AuRico. AuRico has a relatively aggressive production growth plan. It is guiding toward more than 500 Koz gold production by 2014. Obviously, this comes with significant capital cost commitments. As far as silver valuation is concerned, Endeavour will pay about $250M for the asset and some exploration projects. Layering that into a reserve base of about 38 Moz silver equivalent (Ag eq), it is paying about $6.75/oz Ag eq. This is a little expensive, but understand that it's a producing asset. The same calculation using the resource base arrives at about $1.70/oz Ag eq, which is fair value for an asset portfolio that includes an operating mine. The value opportunity for Endeavour will be its ability to turn the operation around economically.

TGR: What about the exploration potential of the other two projects that were part of this deal—Quadalupe and Calvo?

CT: They present blue-sky opportunity for Endeavour. More important, Endeavour can generate value for the company by improving the operating efficiency of El Cubo, bringing down cash costs, adding ounces at the operation and developing the exploration assets.

TGR: Did you raise your target on Endeavour after that deal was announced?

CT: No. We still have a target of $10.50/share for Endeavour. We're waiting for the company to finalize the transaction, as well as provide more details about how it's going to be financing the $250M acquisition.

TGR: You were recently awarded the 2011 StarMine No. 1 Stock Picker award for the Canadian metals and mining sector. Congratulations. What are some of your favorite picks among the primary silver stories?

CT: I define a primary silver story as one that's more valuable for its silver metal value than other metals using Haywood's long-term metal price assumptions. We regard Bear Creek Mining Corp. (BCM:TSX.V) as a company that's of interest primarily because of the development potential offered by its flagship asset, the Corani deposit in Peru. In time, Corani could offer +10 Moz silver production annually supported by byproduct credits. There are not too many projects at the feasibility stage of development that can offer that sort of annual silver production potential. Bear Creek is our preferred large-project developer.

TGR: It's a world-class deposit, but Bear Creek is having permitting problems that are preventing its low-cost Santa Ana silver project from moving to production. It can't bring Corani to production without the cash flow from Santa Ana. What's the likelihood of Bear Creek finding a joint venture (JV) partner?

CT: There's concern relating to Bear Creek's ability to finance Corani. The company is in the throes of applying for permits for Corani. We do regard this asset as being financeable. Also, we do regard Peru as a world-class jurisdiction for exploration and project development in the mining space.

TGR: What are the estimated costs to bring Corani to production?

CT: We're looking at just under $575M.

TGR: And it could do that without a JV partner?

CT: Preferably it would like to sell the project for the right price, but the company isn't waiting to be acquired. It is aggressively developing the project to production. The company has just under $100M in cash. Santa Ana was the company's second-tier project. The advantage of Santa Ana was it is a relatively cheap mine to build and bring into production.

TGR: Bear Creek recently hired Renmark Financial to do some investor relations. Will that be enough to change the perception of the company in the marketplace?

CT: We need to see a rebuilding of investor confidence in Peru as a favorable jurisdiction for mine development. The company can't do much more than what it's currently doing to develop Corani. The company needs to continue to promote the benefits of Corani, as one of the world's largest undeveloped and economically viable silver projects, and work with the local communities.

TGR: How about some other primary silver producers? Would you put Kimber Resources Inc. (KBR:TSX; KBX:NYSE.A) in that category?

CT: Kimber, with its Monterde project in Mexico, is a very interesting company. Monterde is a development-stage gold-silver deposit. Based on the company's current stock price, and what the project can offer, it is cheap. We know the company is in the throes of putting together another resource update for Monterde. We see Monterde as being a very attractive potential acquisition target for a midtier silver or gold producer. There's a large gold silver resource with a high-grade core, which has been the focus of the company's current deep drilling program. It's a neat little project from an acquisition perspective.

TGR: Who are the would-be suitors?

CT: There is a small group of companies: Endeavour Silver, Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) or First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE), a company with operations in Mexico that knows the jurisdiction. It's an asset that would look good in the portfolio of a midtier producer—a company that is aiming to tag on 2 Moz silver production annually with a good gold credit. The challenge is that this group hasn't yet showed any interest in buying projects—just operating mines.

TGR: Kimber has had some good drilling results at depth at Monterde. Could those results change the picture for a potential suitor?

CT: They support the high-grade potential offered by Monterde at depth. Monterde has been mistakenly perceived by the marketplace as being a low-grade project. The drill results that the company has released over the last six to eight months suggest there is a high-grade core at depth. It's going to be very interesting to see what comes out when the company releases its revised resource estimate, which is anticipated in the next month or two.

TGR: We've seen some recent examples of nationalization, most notably in Argentina. The Argentinian government recently expropriated the assets of Yacimientos Petrolíferos Fiscales (YPF:NYSE), which is a Spanish oil company. Could there be ripple effects felt in the mining industry?

CT: It paints Argentina in a poor light as a prospective jurisdiction for mining and exploration. It's very unfortunate this has happened. It creates a lot of uncertainty, worry and fear over development of any resource-based asset in the country. We do like the exploration potential that the country offers. We follow a number of companies in Argentina, one of which has a very substantial land position in the Santa Cruz province.

TGR: Which one?

CT: Mirasol Resources Ltd. (MRZ:TSX.V). It's unfortunate. It's these issues that really are beginning to have an overriding influence on the sector and, in many senses, taking away some of perceived opportunity that higher metal prices offer.

TGR: Do you see that having a direct effect on the share price of companies like Mirasol?

CT: It creates uncertainty with regard to how easy it would be for Mirasol, or any company in a similar position, to advance the development of an asset in Argentina. I do see this development as being damaging to the share prices of companies active in Argentina based purely on the uncertainty that comes with this sort of geopolitical risk.

TGR: Tell us about Mirasol's flagship project and why the company merited coverage.

CT: When we look at an exploration-focused company, we have to be satisfied with the team and the property portfolio that the company offers. Mirasol has a very well qualified, experienced exploration-oriented team and a very attractive property portfolio.

In addition to that, the company has a JV with a major silver producer, Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE). Coeur d'Alene is earning a 61% interest in the Joaquin project, with Mirasol being the JV partner. The Joaquin project is arguably the most important development-stage asset that Coeur d'Alene Mines has, something that is needed to grow its production profile.

TGR: Do you believe that Mirasol is a potential acquisition target given the size and scope of Joaquin and Coeur d'Alene's majority interest?

CT: I think so. We've always looked at Mirasol as being a potential acquisition target. We know Coeur d'Alene's interest in Joaquin and see that as potentially being a trigger for an acquisition based on consolidation of ownership. We also recognize that the company has a very attractive land position, which ranks as one of the most prospective jurisdictions for precious metals exploration today.

TGR: There are a number of interesting silver explorers, even some developers, on Haywood Capital's Watch List. Which ones are you following most closely?

CT: Exploration company Soltoro Ltd. (SOL:TSX.V) could potentially deliver a significant resource base at its El Rayo project in Mexico.

International Northair Mines (INM:TSX.V) may deliver a maiden silver resource at its La Cigarra project in Mexico in mid-year.

Developers Kimber, Bear Creek, South American Silver Corp. (SAC:TSX; SOHAF:OTCBB), MAG Silver Corp. (MAG:TSX; MVG:NYSE), Extorre Gold Mines Ltd. (XG:TSX; XG:NYSE.A; E1R:FSE) and Tahoe Resources Inc. (THO:TSX; TAHO:NYSE) may offer development opportunities in the space, as well as producers Endeavour Silver, Fortuna Silver and Aurcana Corporation (AUN:TSX.V; AUNFF:OTCQX) may offer growing production growth profiles.

TGR: How far away is Aurcana from being an American silver producer?

CT: Aurcana is in production. It has two assets, the La Negra asset in Mexico and the development-stage Shafter project in Texas. Our understanding is that it's in the process of commissioning Shafter right now. We're also anticipating a revised resource estimate on La Negra. We're looking at a company that can deliver just over 4 Moz/year silver production at a little north of $8/oz cash costs.

TGR: Tahoe Resources is a very big resource at this stage.

CT: Tahoe is a very interesting company. It's a development-stage story at the moment, but it offers potential to be a near-term producer. The company recently announced a revised resource estimate that showed a 50% increase in Indicated silver resource to 367.5 Moz.

But it comes at a price. The market cap for Tahoe is ~$2.6B. That's what you pay right now for one asset that can deliver $20M silver/year and a potentially higher production rate with further development. Escobal also offers potential to achieve good operating margins.

It's a company we're watching very closely. We want to see the company get its permits. The permit is a very important milestone because it will remove a level of jurisdictional risk.

TGR: What approach to silver equities, especially those in the exploration and development phases, will best serve the average retail investor?

CT: Looking at silver equities is no different from looking at equities focused on developing, advancing and exploring for other metals. One of the most important attributes of any company is management. You need a good team that can deliver efficiencies in what is a relatively challenging time for mining based on a lot of cost creep and margin squeeze. It's all about the team. In silver we look for quality over quantity. Look at the ounces in the ground that will work from an operating perspective rather than just the size of the inventory.

TGR: High grade, too?

CT: Grade, good metallurgy, safe jurisdiction. As I've said before, people throw out silver projects in many senses as offering size potential, but there is no value in having hundreds of million ounces silver in situ in the ground if you can't mine them profitably. Also, be wary and recognize that silver is arguably the most volatile of all precious metals and equities, by extension, are also volatile.

TGR: Thanks for your time and insight.

Chris Thompson was trained in South Africa and has over 20 years of industry experience working as a geologist for major through to junior mining/exploration companies, in addition to a stint working as a mineral economist for the South African state. He has a bachelor's degree from the University of the Witwatersrand, a graduate degree in engineering, a master's in mineral economics and a PGeo designation. Thompson has been with Haywood Securities for over six years and specializes in junior exploration and the silver and PGM sectors. Thompson was recently awarded the 2011 StarMine No. 1 Stock Picker award for the Canadian metals and mining sector.

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) 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: Fortuna Silver Mines Inc., Silvermex Resources Inc., South American Silver Corp., MAG Silver Corp., Extorre Gold Mines Ltd., Aurcana Corp., Kimber Resources Inc., and Tahoe Resources Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Chris Thompson: 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 story.
4) Haywood Securities Inc. has reviewed lead projects of Endeavour Silver Corp. (EDR-T), Bear Creek Mining Corp. (BCM-V), Kimber Resources Inc. (KBR-T) and Mirasol Resources Ltd. (MRZ-V) and a portion of the expenses for this travel have been reimbursed by the issuer.
5) Haywood Securities, Inc. or one of its subsidiaries has received compensation for investment banking services from Endeavour Silver Corp. (EDR-T), Bear Creek Mining Corp (BCM-V), Kimber Resources Inc. (KBR-T) and Mirasol Resources Ltd. (MRZ-V) in the past 24 months.
6) As of the end of the month immediately preceding this publication either Haywood Securities Inc., one of its subsidiaries, its officers or directors beneficially owned 1% or more of Bear Creek Mining Corp. (BCM-V) and Mirasol Resources Ltd. (MRZ-V).
7) Haywood Securities Inc. or one of its subsidiaries has managed or co-managed or participated as selling group in a public offering of securities for Kimber Resources Inc. (KBR-T) and Mirasol Resources Ltd. (MRZ-V) in the past 12 months.
Haywood Securities Inc. pro group holdings exceed 10% of the issued and outstanding shares of Mirasol Resources Ltd. (MRZ-V).
9) An individual officer or director of Haywood Securities Inc. or one of its subsidiaries owns >10% of Mirasol Resources Ltd. (MRZ-V) outstanding shares.

The Gold Report: When we spoke last October, you were bullish on gold and gold equities. You blamed lagging gold‐mining stock performance on competition from exchange‐traded funds (ETF), lack of investor confidence and investor doubts on the sustainability of higher gold prices. Now that prices are hovering around $1,600 an ounce (oz), will that dynamic change?

John Hathaway: The dynamic will change based on higher gold prices. When one looks at Newmont Mining Corp. (NEM:NYSE), which is trading at about five times cash flow, one has to scratch one's head and say, in a world of $1,600/oz gold, what is that discounting? The market expects gold prices to go lower. Otherwise, at $1,600/oz gold, a Newmont could trade at least at an eight or nine times multiple of cash flow.

I'm using that as an example. Looking at the research material on Newmont—we included input from 29 sell‐side analysts—the consensus expectation for gold prices in five years is $1,270/oz.

That is just one example that not even $1,600/oz is considered to be a sustainable gold price.

But it is sustainable. Up to $2,000/oz is sustainable. It's something that we can get to. The monetary debasement that we're in the midst of is ongoing. Federal Reserve Chairman Ben Bernanke said on Feb. 29 that there won't be any more quantitative easing (QE). The Fed's minutes reiterated that about a month later. Both times gold took a hit, but it didn't go to new lows, which I thought was pretty interesting. Because for the average person, the narrative for the last two years has been all about QE.

TGR: So if there is no QE, what takes it to $2,000/oz?

JH: Gold was going up before QE was even a term in the English language. Gold went from somewhere around $300/oz to $800/oz before we had QE. The thing that drives gold is not dramatic—it's not like a new round of QE and it's not geopolitical; it's the fact that real interest rates are negative right now, close to 3%. So, if you have money that's saved up and you want to put it in a bank or want to put it in treasuries, you're losing about 3% a year. And you have to think about something else.

You could consider a lot of options. Gold is certainly on that list. Last summer, when gold got to $1,900/oz, the story was overcooked. The press was hyperventilating about the government shutdown over the debt ceiling and the downgrade of theU.S.debt rating.

We've gone from that situation, where it was basically boiling over, back to a simmer. The stove is still on. Real rates are still negative—with the promise of more of that. I can speculate as well as the next guy can on what's going to be the next thing, and it may be QE. QE could come about simply because the Fed has been buying 61% of all new treasury issuance for the last year. If it goes away, as Bernanke says it will at the end of June, what's going to happen to short‐term rates? What's the market going to demand if the Fed's not there buying treasuries?

China's buying a little bit, but it's way down from what it used to buy. In theory, we've got the two biggest supporters of the treasury market, and the principal reason for low interest rates, not being around in a big way after June 30.

TGR: China has been a hot topic: Whether it's growing. . .whether it's shrinking. . .just not growing as fast. What impact canChina,India,Russia andEurope have on the price of gold?

JH: Certainly, financial repression is not uniquely American. The Indians see it. The Chinese have it. So, yeah, there's definitely a non‐U.S. bid for gold. It's not based on what's happening on the Comex. It's based on the fact that liquid capital cannot get a decent return.

If interest rates went to 5%, which would be a decent return in a world with 3% inflation, that would add in the U.S. $800 billion (B) to the budget deficit. So whatever fiscal rectitude we might be able to gather would be a drop in the bucket compared to another $800B. That would take our annual deficit to well over $2 trillion every year. It's hard to imagine that. I don't have any answers—I just know that this simple arithmetic doesn't show any path out, other than some kind of money printing.

TGR: I know it's hard to predict dates, but Dec. 31 could be an important date, because tax cuts are going to expire and there will be cuts at the Pentagon and there will be debt ceiling issues. Do you see a lot of hand‐wringing leading up to Dec. 31, similar to last summer?

JH: Whoever gets elected in November is going to be on the hot seat. There will be fiscal drag in spades when the tax cuts expire.

TGR: We talked about companies being profitable at $1,600/oz gold. High energy prices have taken a toll on mining company performance. How many companies can be profitable at these current prices?

JH: At $1,600/oz gold, most existing mines are very profitable. Any company that has a producing mine that's out of the startup stage, where all the money has been spent, is gushing cash flow at $1,600/oz gold.

You'd have to go case by case for the new mines that they're building. But there are some new mines that are on the drawing board that require $1,600/oz gold or more to be profitable. The return on capital is likely to be less than anything that's in existence. The market sees that and that's a reason the gold stocks have been penalized, because in order to regenerate what they have, they may not be as profitable as they are right now.

TGR: So the lagging share price would be because they're forward looking?

JH: That's a possibility. When a Newmont says that it's going to add 40% to the current production base, you know that that's a big capital expenditure (capex). I talked to AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) the other day. Last year it generated $800 million (M) of cash flow, which is pretty good. I think the market cap is around $13B. This year it's spending $2.2B and it'll eke out some free cash, according to what it's saying right now. That's still pretty good. Here's a market cap of $13B and the equivalent of about 20% of that is cash flow. What's the presumed return? I know what AngloGold's projects are. They're by and large going to be good projects.

But that's the issue that the mining industry faces—and maybe a reason for the trepidation—is about the possible blowout in capex. So you have to go on a case‐by‐case basis and see which companies actually have projects where most of the costs are already dialed in. There are others that are further out in terms of permitting and ordering the long lead‐time items—pouring concrete and all that stuff—that might not be producing for five, six, seven years. There you have an issue.

One thing I've been saying to most of these companies is they don't need to grow. They just need to maintain what they have. The market won't mind that, as long as they pay it back in dividends.

TGR: Is paying a dividend a big plus in your stock‐picking scorecard?

JH: Absolutely.

TGR: Do you see more companies moving toward that?

JH: Yes. They should be paying out more and more. At the current gold price, the payout ratio among large producers is less than 20%. It's way too low. One reason it's too low is because mining companies think they have to build all these new projects. But they don't. Their stocks would probably double if they said, "We're just going to maintain steady‐state production and declare a dividend of X amount."

But these guys don't think that way because they want to build big mines with shiny new trucks and they want to send their exploration guys out to all corners of the earth. That's their modus operandi. So it's going to take time for the industry to change. The more enlightened management will start to look more and more at restricting capex.

It's not a growth industry. It's a capital‐intensive business that's fraught with risk. Why not just take a time‐out, generate cash for the next five years and pick spots? They have to build new mines to replace what they have, but they don't have to build so many new mines. If you take the 11 largest gold stocks, gold producers, which account for something like 40% of global production, and you go from 2008 to now, there's been no growth at all in production. They're producing the same ounces that they were producing then. These guys are crazy if they think they can grow. Consider the scale of these big mines and then the risks that the mining companies undertake with government intervention at the host‐country level, excess profits tax and you name it—obstacles come in many forms, many disguises. There's going to be a huge headwind.

TGR: Is acquisition the better way to go, instead of exploration?

JH: Yes. There have been takeovers every year. That's something companies could do. But they can't overpay. Newmont paid way too much forMiramar because it's the frozen north and that mine just isn't going to get built. Newmont has better opportunities. So, acquisitions are fine, but companies have to do a better job of it.

TGR: Some countries are a bit more difficult to do business in than others. What's your take on risk versus opportunity, and what countries do you favor or stay away from?

JH: We do not invest inChina orRussia. Rule of law is the first thing that we look at. But every country has issues, even theU.S. It's a very localized business. You have to ask which state inArgentina is the mine located, for example. Which part ofMexico is the mining company dealing with? You have to generalize about countries, and we do that, but once you've done that, you have to ask about specific locations.

But my general rule of thumb is that local governments will try to hold companies up because they see a gold price of $1,600/oz. Companies have bull's‐eyes on their backs. It's cold extortion. "Resource nationalism" is the polite term. It's a way of life; it's nothing new. And so the differences are in how these companies deal with it. It obviously affects margins and profitability.

The game is worth it if the company has a good asset; if the gold price is going to do as we expect it to in a world of monetary debasement; and if the country has good geology, a mining culture and some infrastructure. So, for me, the only countries that are off‐limits areRussiaandChina. Also, probablyBolivia,VenezuelaandPakistan. We also look for countries that have a bad temporary rap, asIndonesiadoes right now. It has just passed a mining law that basically takes some of the equity 10 years out. But then, if the stock discounts all of that, and the company gets enough of a reflection of the obvious problems and it still has a good asset and a decent team of people, then we'll look at something like that.

TGR: You hold about 10% in physical gold; 40% in the larger cap companies, with some royalty companies; 30% in near or small producers and the rest in the juniors. Are you adjusting your portfolio after some of the declines recently.

JH: We've taken a little money out of the ones that are very fully valued. When something like Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) gets beaten up, then we'll look at that as a buy.

We typically have a low turnover; we're not very active in trading. Our basic mix hasn't changed. And we wouldn't change it dramatically because the thing that's given us excess return over the years has been the fact that our average market cap is smaller than that of our peers, at 60% of our peer group, which tells you we're skewed to smaller cap size. Those companies are the ones that can grow. They're the ones where discoveries can make an impact on the valuation of the whole market cap. So, if you don't have those, then you might as well just own Market Vectors Gold Miners ETF (GDX:NYSE.A). You might as well just own the ETF of big‐cap stocks. And we try to do better than that.

But we always keep our eyes on companies, and if the story changes or if there's a valuation question, we'll look to see if we can deploy it in a better way.

TGR: A number of companies have mentioned you as a key piece of the junior mine‐building process. How do you decide which companies to participate in, and what are some examples of when you've really been able to make a difference in a company?

JH: Osisko Mining Corp. (OSK:TSX) is the best example; we were an early supporter of Sean Roosen. This goes back five years or so. He had an interesting thesis that most of the mines inQuebec were very deep because people were chasing grade to great depths. Roosen said they missed all the stuff on the surface. It is much lower grade, but as the gold price went up, what was considered to be not worth mining had become economic.

We backed Osisko early on. And then we backed it in several subsequent financing rounds. The miracle of that stock is that Roosen financed a huge capital expenditure through the meltdown in 2008. I would never want to do that again. The result is that here's a company with a new mine—it just started producing about a year ago. It has the usual startup issues, but they're not fatal. And we figure that at these gold prices, Osisko's going to generate a lot of cash flow, maybe $600M a year. This is a company that had a market cap five years ago of probably less than a $100M.

TGR: That is dramatic. And you supported him based on the fact that he had an interesting idea.

JH: And also because every step of the way he had a credible way to deal with whatever came up. And there was always something coming up. He had to move a town. He had big financing problems, as all these companies do when the markets dry up. But he met the challenges very believably.

We do hold investments in some companies that we think are good assets, but we're disappointed in the management. That's better than having bad management and no assets, but it's not ideal. And we make our displeasure known.

TGR: So you're active investors.

JH: We're very vocal backseat drivers. We see these guys all the time, in all these conferences that we go to and mining trips we take. We're in constant contact. They know who we are. They know where to come for the money, but they know it's not a free ride.

TGR: Any other examples you want to give of how you were an active backseat investor?

JH: International Tower Hill Mines Ltd. (ITH:TSX; THM:NYSE.A) has been very frustrating recently. But I've been through it before. The stock has been very disappointing lately, but when I see a good asset like that, it's worth sticking with. We'll get it right. Not on a timing that will make everybody happy, but we'll get it right. And we view it as a partnering. We're vocal shareholders, but we never want to seem abrasive or hostile. Basically, everybody's got an interest in making the thing work.

We've been a long‐time investor in International Tower Hill. The market is scared right now because there's a big capital expenditure program. But we've financed the company in several rounds. Before there wasn't more than just a couple million ounces there and today the company claims it could have as much as 20 million ounces in various categories. And it's inAlaska. So when you read all these terrible headlines aboutMaliandIndonesia,Alaskasounds pretty darn good.Alaska's got infrastructure. International Tower Hill is in a mining‐friendly jurisdiction, nearFairbanks. There's every reason in the world it would want to get this thing permitted and built. I think it will. We just have to figure out how to get from here to there.

TGR: What was the best investing advice you ever received—whether you took it or not—or the best investing advice you ever gave?

JH: I had a finance professor at theUniversity ofVirginia in business school, before it was called Darden, back in the 1960s. He was a very conservative guy: He wore both a belt and suspenders—he had backup systems. He said something that I've never forgotten: "To be successful in investing, there's only one thing you need to know. You have to know when to sell." Is that ever true. The most successful investors are the ones who know when to sell. And you only know when that is with 20–20 hindsight. I look back and say, "Should we have sold this stock or that stock, when gold was $1,900/oz and the pot was boiling?" But then I remember that I'm such a bull on gold. Even though this seems like a short‐term peak, I expect the precious metals stocks are going to trade much higher.

John Hathaway, senior managing director of Tocqueville Asset Management, manages all gold equity products and strategies at Tocqueville Asset Management. He holds a bachelor's degree from Harvard University, a Master of Business Administration from the University of Virginia and is a chartered financial analyst. He began his career in 1970 as an equity analyst with Spencer Trask & Co. In 1976, Hathaway joined investment advisory firm David J. Greene & Co., where he became a partner. In 1986, he founded Hudson Capital Advisors and in 1988 he became chief investment officer of Oak Hall Advisors.

Hathaway was one of 31 financial luminaries on hand at the recently concluded Casey Research Recovery Reality Check Summit, where 300+ attendees absorbed three days of expert economic analysis, little-known investment and asset-protection strategies, actionable investment advice—including specific stock picks—and more. While you may not have been able to attend, you can hear every recorded presentation with the Summit Audio Collection, which are available as downloadable MP3 files or CDs. Either way, you'll get over 20 hours worth of recordings that will provide you with valuable insights and timely investment recommendations that are off the radar of the Wall Street crowd. Learn more here.

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) 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: None. Streetwise Reports does not accept stock in exchange for services.
3) John Hathaway: I personally and/or my family own shares of the following companies mentioned in this interview: International Tower Hill Mines 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 story.

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

Last week we spoke about the upcoming election in France, where we saw a changing of the regime over the weekend. France's new socialist leader Francois Hollande is much more supportive of the European Central Bank intervening to boost the European economy by taxing the rich and industry. This is at odds with Angela Merkel of Germany, who faces a possible ousting herself as it is clear that austerity is not popular. At one point there was a strong partnership between France and Germany, but voters are choosing socialist means of taxing the rich rather than boosting industry like the Chinese and Russians. This may be destabilizing, causing investors to return to gold and silver as a hedge against a European currency on the brink of a possible crash.

This means we may see a new round of euro uncertainty this summer, which could lead to the next leg higher in precious metals. While the Europeans may be selling their gold to raise capital, the Chinese are important gold at a record pace and are becoming the largest consumer. China's imports of gold have skyrocketed more than sixfold in the first quarter. China is realizing the need to increase its reserves and is on the record that it is on the search for natural resources worldwide.

Operation Twist is set to expire in June. If we don't hear word of a QE3 or additional stimulus, then we can see a downward move in U.S equities. We saw this in the summer of 2011 as QE2 expired and in the summer of 2010 as QE1 expired. These stimulative moves boost stocks higher, then when the programs end we see liquidity traps. We need to be careful of a repeat of such a move in overbought equities and look for a rotation into the precious metals, which are continuing to make higher highs and in a long-term uptrend while the euro and dollar remain in downtrends. For instance, the dollar is still significantly lower than it was in the summer of 2010, before this Eurozone crisis intensified.

Support for gold is at $1,600/ounce (oz) and $27.50/oz for silver. We may see an initial correction in U.S. dollar terms, but gold and silver are near key support levels, oversold and possibly just about to takeoff. We are reaching extremely negative sentiment indicators indicating a bottom both in precious metals and the extremely undervalued miners. When indicators reach this level a bottom reversal may occur sooner rather than later.

Continue reading at The Gold Report for an interview with Jeb Handwerger from Gold Stock Trades

The Gold Report: When we talked last fall after the When Money Dies summit, Rick, you were looking forward to the volatility preceding the decline of paper currencies as an opportunity to take advantage of the liquidity crisis.

Rick Rule: The volatility I anticipated didn't happen because the amount of quantitative easing—I would call it counterfeiting—was extraordinary. That cash coming into the system acted as a soporific, so the volatility I had hoped for did not in fact come to pass. People whose portfolios declined probably felt they experienced volatility, but I think it was the weight of the chronically overvalued junior resources sector. Probably 80% of the sector is nonviable and in a state of permanent decline, with the market occasionally punctuated by up moves driven by performance among the best companies.

TGR: So, you were disappointed.

RR: I was very disappointed. I expected a Volatility S&P 500 (^VIX) in the range of 30. For somebody who makes a living basically as a pawnbroker, there are no better circumstances than extraordinary volatility. I didn't get to practice my trade.

TGR: Do you think it will change in the second half of 2012?

RR: I don't know, but the disconnect between the way we in the West live and the way we can afford to live will be problematic, particularly because the productive part of society—the so-called one percenters—is being vilified. The conflict between good and bad news will create incredible volatility at some point, but I'd be pressed to tell you when.

"Inevitable is not the same as imminent." – Rick Rule

TGR: That sounds like more social than economic volatility.

RR: Social volatility manifests itself in the economy. We'll see less productive investing if the politics of envy drive increasing taxes on capital. To raise workers' real wages, the workers must employ more capital, and you can't do that if the capital isn't finding its way into the economy.

TGR: Last fall, Marin, you said quantitative easing was deflating equity valuations. "He who has cash will be king," you said, "because he can afford to buy discounted stocks. If you do your homework and be sharp you'll make a fortune in the next three years." Is that still the case? Are we too late?

Marin Katusa: Not too late at all, and I still believe we're in deflating equity prices. I'd say it's going to get a lot worse, especially for the junior resource companies. Less money is flowing into the sector and it's now a buyer's market. This is the riskiest investment segment on the planet. Risk mitigation is the key to succeed, and any opportunity to reduce risk is the most important thing moving forward. By mitigating risk, being strategic, always taking Casey free rides—the portfolios for 2011 for both the Casey Energy Report and Casey Energy Confidential gained over 20%. And Q1/12 was over 20% for both newsletters also. So if you do your homework and buy good companies, you can do well.

TGR: Louis, you said "the secret is to figure out what real stuff people need because it will retain value. When prices on valuable stuff go down ridiculously it's a godsend because you can buy when it's cheap and sell when it's expensive." Is the stuff people need cheap now?

Louis James: Stuff is not really cheaper. There is deflation in some asset classes and some equities, but life for the average Joe is not cheaper and commodities in general are not cheaper. Gold is trading between $1,600 and $1,700/ounce (oz). Copper is at what looks like maybe reasonable long-term prices, but short term, they're ridiculously high. I can't believe the way copper has defied gravity in the face of all the economic turmoil the world is in. It says something about the supply destruction industry is seeing and the supply pinches coming.

It's actually fantastic if you have high, driving prices in the commodities, find good companies with good management, money in the bank and the wherewithal to weather the storms, buy them cheap and profit from some of the volatility Rick is looking for.

But I agree with what he said. I also think we'll see more volatility, and the chances of seeing much lower prices are pretty good. When a bear sentiment grabs the market, it takes everybody down, both the best and the worst players. If you have the courage to face it, that's very good news. There's a good chance we'll see much more of that over this summer and I'm looking forward to it.

"After the sector bounced back from 2008,
I wrote that we should be so lucky as to have another one." – Louis James

TGR: Participants came to this conference for a Reality Check. Rick, you said a reconnoitering is inevitable. But how do you tell the difference between a correction or retrenchment in a supercycle and the start of a bear cycle?

RR: I don't know how to know. Eric Sprott is a student of markets. I'm not. My response to a market is simply to try and figure out what I think a company's worth and buy or sell based on that. I think the resource equities markets are headed lower this year. I also think we're going to see increased merger and acquisition (M&A) activity simply as a consequence of the fact that the entry points are going lower. Although I think the overall market is going down, I'm writing more buy than sell tickets today. When the luster is off the sector, it's off all parts of the sector, so in bad markets the best companies are cheap. When the best come cheap, you have to play.

I'm keeping powder dry, too, because I think we're going to have the best private placement market in 2012 since 2002, when it was truly spectacular, when management thought they either had to raise money or forego their salaries. It made them reasonable about things like warrants.

MK: There are already more private placement opportunities on the buyers' terms, with full warrants, three years minimum. We'll also see management teams participating in the private placements. New terms will specify a certain amount that must go in the ground. A lot has unraveled and the mergers have started. Just on April 27, IAMGOLD Corp. (IMG:TSX; IAG:NYSE) bought Trelawney Mining and Exploration Inc. (TRR:TSX.V) with CA$585 million in cash.

A lot of the easy money has been blown up. Half the companies listed on the Venture Exchange have less than $5 million (M) in the till. They cannot do a serious exploration program. Drilling 4,000 meters in the Yukon costs a minimum of $2M. But the good companies will do very well, better than any bull market because there are more willing buyers for those few superb companies.

LJ: Because a rising tide lifts all ships, during part of a frothy bull cycle you have a reasonable chance of making money on the greater fool theory: buying something in the hopes somebody else will come along and pay more for it simply because the market goes up—not because any value has been added or the company has achieved any of its goals. But that's a pretty risky proposition; the greater fool theory is exceptionally dangerous. You never know if the market will go up, or whether a dip is a bottom or an increase is a top. Nobody in his right mind tries to time the market.

A much better procedure is to buy value. A rising tide will raise all ships but it should raise those with real value higher. The people who know the quality players certainly know what they're looking for, and they will buy the successful exploration companies.

TGR: Do you also anticipate increased M&A activity?

LJ: We've always had an eye out for the takeovers and kept them on the radar, but we started to focus on them more when the liquidity issue became very serious, because, frankly, as the number of subscribers grew we became market movers. We moved toward more liquid shares in the newsletter, and takeovers are among the best liquidity events.

As Rick says, M&As aren't an "if" but a "when" question for the larger mining companies, because if they don't buy the successful exploration efforts, they will no longer be larger companies. There's no way a mine can be anything but a depleting asset, so if these companies don't spend money replacing reserves through their own grassroots efforts, they have only one choice.

TGR: Rick, you say only a handful of management teams have created most of the value in the mining sector. Who are they?

RR: Two generations of relationships with the Lundin family reminds me of owning a row of slot machines. They've done something good for me every year for 35 years. I've also known Bob Quartermain for 35 years. I've done two companies with him, and he's been spectacularly successful. And the worst of the four companies that he wasn't involved in but recommended to me over a period of 20 years was a tenbagger. Same with Ross Beaty, who I've known since I was in university. A serially successful man.

In Calgary, there's Murray Edwards. Serially successful. If all you did for 20 years was hang out with Murray Edwards, you would have made truly spectacular amounts of money. Most junior resource investors won't spend time and don't have the education to make technical decisions with regard to the length and breadth of the market, but if they discipline themselves to stick with people who do that for them for the long term—management teams that may make mistakes and stumble but will deliver—they'll do well.

TGR: So even those with the Midas touch sometimes stumble?

RR: Oh, yes. I talk about how much money Ross Beaty has made my customers over the years. There hasn't been a Ross Beaty stock we've ever been in that hasn't fallen by 50% or more at one point in time when we owned it. In the first incarnation of Lumina Copper Corp. (LCC:TSX.V), I think the financing was $2/share. The stock ran to $6/share. Everybody loved it. It fell back to $2.80/share. If you lost your nerve and sold out then, you missed a 4½-year move to $44/share.

Marin runs a fund that I invest in, the KCR Fund. I told him, "Visit everybody you can in Canada between the ages of 30 and 40 and find me the next Ross Beaty. It ain't going to be easy but it's more important than anything else you can do for us."

TGR: Whom did you find, Marin?

MK: We created the NexTen, which is the next generation. Those in Rick's generation are Casey Explorers' League honorees, a kind of hall of fame in junior exploration. Amir Adnani, one of the first NexTen, actually built a uranium mine, and he's 33 years old. He sat behind me in organic chemistry class in university, so I've known him since then. And there's Nolan Watson, who was the youngest CFO of a NYSE-listed company with a market cap over $1 billion and probably knows more about royalty structures than anyone else in our business.

Morgan Poliquin, president and CEO at Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE.A), is also among the NexTen. His father is Duane Poliquin, Almaden's founder and chairman; he's a Casey Explorers' League honoree. When it comes to the geologists, you stick with the young ones who have it in their blood. They are true company builders. They aren't serving on the boards of 10 different companies, spending half their money on Canucks box tickets and the other half on their Ferraris.

LJ: We did a panel in Vancouver in January with maybe six Explorers. If you'd invested in their plays in this cycle in the last couple of years, you would have doubled or tripled your money. That's striking because it's not just the 80/20 rule. It's 80/20 and then 20% of that 20%, who make most of the discoveries. It's very much the cream of the crop, with those serially successful track records.

Rick mentioned how Ross Beaty's companies have had 50% haircuts on their way to multiple gains. We have to cull the herd in our newsletters, so we exited the second-generation Lumina when everything went into reverse in 2008. But we didn't say "sell" in our newsletters. We said we were closing our position for portfolio reasons, that we may not sell our own personal shares and we didn't think there was any hurry for readers to sell theirs—but we weren't going to be following the company anymore.

Interestingly enough, a good number of our subscribers didn't sell either. Now that political risk has increased in Argentina, where Lumina operates, we're getting more "should we sell?" questions—which tells me how many people held on to that stock. When we closed our position at about a 50% loss, it was at about $0.50/share. Last I noticed, it was in the $6–7/share range; if you'd held on, you'd have had a high multiple on your investment. Or if you bought at $0.50/share as a contrarian, you'd have done extremely well—more than a tenbagger.

Every time Ross pitched something to me and I didn't buy it, the stock went up a lot. The least was a little bit better than a double on Ventana Gold Corp. (VEN:TSX). I thought it was already expensive, but darned if it didn't more than double after I didn't buy it. It pays to bet on winners like this.

TGR: You're talking about company-builders providing a lot of value in the share price, and how stockholders will get the value out of some of these equities through M&A. Are the majors looking at management?

LJ: I doubt Newmont Mining Corp. (NMC:TSX; NEM:NYSE) cares whether quality operators like the Poliquins have advanced a project. They look at the numbers and decide, "Yes, this fits our needs, it dovetails with our existing production or whatever. It works for us and at X price, its value-accretive to us."

I don't think the majors look that much at management. Good management does the things the majors want to see. They derisk a project and advance it properly. When the majors review the data, they see this is a real resource.

"Anybody who thinks an NI 43-101 will protect them from a fraud
is smoking something."– Louis James

RR: Professional speculators, too, can focus on second-tier management teams and segregate properties. Most investors don't have the ability to separate the wheat from the chaff. If they're attracted to the performance this sector can produce, the most reliable way is to stick with the very best operators. With something like 250,000 geoscientists in the world and 3,000–4,000 operating mines, most geoscientists will never be part of a discovery. But others, like those in the Explorers' League, are responsible for 4–5 discoveries each.

MK: These aren't one-man shops, either. They build exceptional teams. Ross Beaty has David Strang as Lumina president and CEO, and Leo Hathaway as vice president of exploration. A close friend of mine, Jim O'Rourke, chairman of Copper Mountain Mining Corp. (CUM:TSX), has built five mines and teams around him. He's 72 years old and still drives up to the Copper

Mountain mine near Princeton, British Columbia, on Friday nights because that's what he loves.

TGR: Bud Conrad, Casey Research's chief economist, pointed out during the summit that gold stocks have never been lower compared to the gold price. When will this change?

LJ: My gut says that we don't have real capitulation yet—just price destruction and desperation that has Rick rubbing his hands together gleefully. Companies are hoping for the next round of drill results to raise their stock price so they can raise money at a better price and so forth. They aren't yet saying, "Forget it. Name your terms." When we start hearing that, it's a good sign of bottoming.

I'm quite happy for the bottom to pass and then say, "Clearly that was a bottom and now we have upward momentum," particularly in the context of a supercycle, which I don't believe is over. Looking at supply and demand and political factors, I have a high level of confidence that this major bull cycle for metals has a longer way to go. Until the fundamentals change, any retrenchments along the way, no matter how major, are buying opportunities. It's just a matter of when and how much to deploy.

RR: The gap between gold and gold equity prices came about for several reasons. In the first place, before 2010, gold stocks increased in price very rapidly, more rapidly than gold itself. As a result, gold stocks simply overshot and needed a rest. The second factor was partly a function of the first—the explosion of gold ETFs. People who hadn't traditionally been gold buyers but bought gold stocks for leverage to gold could buy bullion-like instruments in retirement accounts and hoard gold in some fashion more efficiently than buying it and burying it in the backyard.

The third factor was the gold industry's extraordinarily poor performance. Between 2000 and 2010, the price of gold advanced from $250/oz to $1,200+/oz. One would have expected a meteoric rise in the free cash generation of the gold companies, but the industry's cash-generating and earnings response was pathetic. Worse, while cash didn't explode, equity issuances did, so they diluted the cash they already had. That led to disgust with the gold companies, which carried over into their stock valuations.

A fifth factor, of course, is that the junior sector is perpetually overpriced. The sector itself is valueless and always will be. Added to that, these little companies incredibly inflated the number of shares they issued. The private sector is always more efficient than the public sector, even in counterfeiting, and the Canadian dealer network printed more phony share certificates than the Fed printed phony dollar bills. So although share prices didn't escalate, the market capitalization of the sector escalated dramatically.

If you step back and look at all those factors, you'll see the stage set for a rebound in the better gold companies. The performance of the senior and intermediate gold companies has been much better over the last 18 months. The cash is really starting to come out. Strip the tax gobbledygook from the accounting and look simply at cash at the beginning and end of period and capital expenditures, and you'll see how much cash these companies are generating.

That's good in a bunch of ways. It allows them to grow organically so they don't have to issue equity. It allows them to do takeovers, which adds capital and liquidity and hope to the sector. And increasingly the companies are sharing some of that capital with their shareholders either as dividends or equity buybacks. That's making the gold equities more attractive.

Ironically, the stage is set for a rebound just as gold share investors have conditioned themselves to expect the worst. Does that mean it's going to happen anytime soon? I'm long past confusing inevitable with imminent. And I would caution against reading too much bullishness into what I say with regard to juniors because you have to remember that most of them have no value.

That said, we're in a discovery cycle. Although the industry has all kinds of flimflam artists, every year we get a few better people and over the past 10 years we've empowered them with lots of capital. We now have some great people using great tools to make discoveries in many places that have never before been prospected by means more sophisticated than a pick and a mule.

So I expect an increasing cycle of discoveries that will really surprise people, and more money may be made farther down the value chain than at the very top. If I'm ever right about volatility—if the volatility index gets up to 25 or 30 again—one of the easiest ways in the world to make money is to buy very good companies and sell short-dated puts and calls against them. Being particularly volatile, gold stocks are especially appropriate for put and call ratings. So for the next year, I'd suggest buying a couple of majors if you're so inclined—they may not be cheap but they're reasonably priced—and sell puts and calls against them, particularly when the volatility goes nuts.

TGR: How about explorers versus producers?

RR: If you're willing to play the game, nothing makes money like successful exploration. Most speculators don't have the patience to speculate on a process, which is what anticipating exploration takes, but that's what's made me the money I have. Buying ATAC Resources Ltd. (ATC: TSX.V) at $0.10/share nine years ago, it was frustrating to watch it go to $0.22 to $0.13 to $0.27 to $0.11. But then it went to $7/share and you say, "Oh yeah, that's why I did that." So for people willing to take the risk and the time, the exploration sector is a nice place to be.

TGR: In conclusion, tell us about the best investing advice you have ever received or given.

RR: I think the best investing advice I've ever received I read in Ben Graham's Intelligent Investor—the chapter on Mr. Market. On the whole, he's your manic-depressive business partner. If you trade against his mania and depression, he's the best partner you could possibly have. By the same token, probably the best investing advice I've given was merely paraphrasing Ben Graham. I've told people for years that in an extremely cyclical business such as natural resources, you can either be a contrarian or a victim.

MK: My best advice came from two people. Doug Casey always said to focus on people, and Rick told me to focus on people of my generation to reap the rewards for the next 30 years. The main advice I'd give anyone is before buying anything, go to free shows, sign up for the Casey newsletters and figure out whether you even like this sector. You're not going to succeed if you don't enjoy learning about it and enjoy the people in it. If you follow your passion, whatever that may be, you will succeed.

LJ: Back to what Rick said—and he continues to be one of my mentors—is the critical concept of being either a contrarian or a victim. It's certainly proved true. Of course, Doug Casey is the quintessential contrarian. Maybe I'll go one further and add Bill Bonner's quip that a bull market is a random market movement that causes average investors to mistake themselves for financial geniuses. I've done a number of things wrong and there are things I might do differently, but I'm pretty sure I haven't made the mistake of assuming that the beneficial results of a bull market had anything to do with my particular genius. I've been cautious and the bull market has made me disciplined.

I think the advice I have given—and it's not mine but reiterating things that I've heard that have worked—is about discipline. You have to know yourself. As Marin said, you have to do something you care enough about to do the hard work, and learn what you need to learn. Rick said something about staying in the play until you get to the end game. That takes a lot of discipline. A good speculator is not just lucky. A good speculator is very disciplined.

TGR: That's a wonderful note to end on. Thank you all for your time.

Founder and chairman of Global Resource Investments and president of Sprott Asset Management USA, Rick Rule began his career in the securities business in 1974 and has been principally involved in natural resource security investments ever since. He is a leading American retail broker and asset manager specializing in mining, energy, water utilities, forest products and agriculture. Rule's company has built a sterling reputation for its specialist expertise in taking advantage of global opportunities in the resources industries. In 2011, Rule closed a landmark deal with Eric Sprott, founder of Sprott Inc., another famous powerhouse in the arena. Sprott Inc. offers resource-oriented investors opportunities in segregated managed accounts, mutual funds, hedge funds and private partnerships. The collective organization offers unparalleled expertise and access to investment opportunities in all resource sectors. Sprott Inc. manages a portfolio of small-cap resource investments worth more than $8 billion and boasts a workforce of more than 130 professionals in Canada and the U.S.

Louis James is chief metals and mining investment strategist at Casey Research, where he is also the senior editor of Casey International Speculator, Casey Investment Alert and Conversations with Casey. When not in meetings with mining company executives in Vancouver, British Columbia, James regularly travels the world evaluating highly prospective geological targets and visiting explorers and producers, getting to know their management teams. For more than 25 years, Casey Research, headed by investor and best-selling author Doug Casey, has been helping self-directed investors to earn returns through innovative investment research designed to take advantage of market dislocations.

Investment Analyst Marin Katusa is the senior editor of Casey Energy Report, Casey Energy Opportunities and Casey Energy Confidential. He left a successful teaching career to pursue what has proven an equally successful—and far more lucrative—career analyzing and investing in junior resource companies. With a stock pick record of 19 winners in a row—a 100% success rate last year—Katusa's insightful research has made his subscribers a great deal of money. Using his advanced mathematical skills, he created a diagnostic resource market tool that analyzes and compares hundreds of investment variables. Through his own investments and his work with the Casey team, Katusa has established a network of relationships with many of the key players in the junior resource sector in Vancouver. In addition, he is a member of the Vancouver Angel Forum, where he and his colleagues evaluate early seed investment opportunities. Katusa also manages a portfolio of international real estate projects.

Rule, Katusa and James were featured in daily Gold and Resource Stock Roundup sessions at the Casey Research Recovery Reality Check Summit, where they revealed their favorite resource companies and specific investment strategies. You can hear every word of these invaluable discussions, as well as over 20 hours of presentations by contrarian investor Doug Casey, former U.S. Office of Budget and Management Director David Stockman and 29 other financial experts in the Recovery Realty Check Summit Audio Collection.

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: Karen Roche and JT Long 

Disclosure:

1) Karen Roche and JT Long of The Gold Report facilitated this panel discussion. They personally and/or their families 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: None.
3) Rick Rule: I personally and/or my family own shares of the following companies I mentioned in this interview: ATAC Resources Ltd. I personally and/or my family am paid by the following companies I mentioned in this interview: None.
4) Louis James: I personally and/or my family own shares of the following companies I mentioned in this interview: None. I personally and/or my family am paid by the following companies I mentioned in this interview: None.
5) Marin Katusa: I personally and/or my family own shares of the following companies I mentioned in this interview: None. I personally and/or my family am paid by the following companies I mentioned in this interview: None.
None of these experts were paid by Streetwise Reports for their interviews.

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 Gold Report: What does your new partnership with Casey Research mean for investors going forward?

John Mauldin: We're creating a joint venture, Mauldin Economics, which will have its own brand and publications. We'll be starting out with a fixed-income letter. Casey Research and Mauldin Economics will be sister companies. It's not so much a partnership with Casey as it's a partnership with the team that runs Casey.

There will be a number of other letters, too. Editors and writers whom I like and have worked with will be writing rather than me. My personal letter will still always go out Friday. I'll still be doing Outside the Box and some other services.

David Galland and Olivier Garrett will become the publishing managers. Galland is one of the greatest marketers in the country. This gives me an opportunity to let him run everything while I spend more time on reading, writing and research, which are what I do best and enjoy the most.

TGR: You have spoken about the end of the developed-world debt supercycle and the end of the ability for governments to borrow cheap money. You said this development is bullish because that debt was invested in inefficient ways and now it will be invested in smart ways. How will countries like Germany, France, Spain and Ireland be affected differently from a country like China or Argentina by this endgame?

JM: Those are all radically different countries. The developed European countries—Ireland, Spain, Italy, even France—are going to see their governments forced to shrink. Germany will have to limit its growth in government.

China is different. It didn't get into a government debt bubble. It has its own particular crisis to deal with. It has a housing and banking debt bubble.

Argentina is just a bad case. President Cristina Kirchner is displaying signs of massive economic psychosis. The actions that she's been taking are the opposite of what you would do if you want to be able to stand up and say, "We're a civilized country that respects the rule of law." It is demonstrably bad for equity investors. People who loan money or do business in Argentina in such a way that the government can access their capital deserve what they get.

Ireland has rule of law. I think Ireland is a great place to put a foreign company. It has English-speaking people, hard workers, an educated labor force and low taxes. It set itself up to be the source for international business.

TGR: Ireland was booming for a short period of time.

JM: It boomed too well. It didn't continue because, just like Spain and the U.S., it believed its own housing bubble. Too much of its economy was invested in housing, which is what China is going to have a problem with. It just built too much stuff with too much money, and it's going to have to rationalize.

Australia has a housing bubble. There's a book that came out last week that talks about the Australian miracle and why it's different this time. I think, "Oh, could they ring a bell at the top any louder?"

TGR: The housing bubble is a private-sector bubble, though.

JM: But it affects everything. The government says, "We have to do something to help the poor housing people who are idiots to put the money in to begin with."

TGR: When you were talking about the end of the debt supercycle, you meant government debt as opposed to private-sector debt. You came up with two scenarios. One is somewhat controlled with austerity, reduced costs and increased taxes. One is, I assume, uncontrolled with bankruptcies and defaults.

JM: We won't have uncontrolled default. It will be intelligently initiated, or it will be crisis-induced with less thought and more pain.

TGR: Which is more likely?

JM: I'd put a 60% chance on the U.S. actually doing it right now and doing it best. Most politicians know that if we don't do something, we're, the technical term is, screwed. It will shock us in the extreme, but we have to do it.

Do you think what Greece and Spain are facing now is something they contemplated five years ago? Hell, no. They're in a crisis and they're being forced to do things that they should have done 15 years ago, but they keep putting it off. Bubbles are going to burst. The only way to deal with a real bubble is to prevent it from happening to begin with. Otherwise, you have to deal with the aftermath. The Federal Reserve thinks lower interest rates will help us deal with the aftermath of the next bubble and the crisis. No, they won't. They were one partial cause of it.

TGR: There is some economic dependency between Europe and the U.S. Is there a contagion that will force the U.S. to act more swiftly?

JM: The contagion is that the bond market will watch Europe go through a crisis country by country, then watch Japan go through its own crisis.

Japan is a bug in a search of a windshield. Its savings have gone from 16% down to 1%. And they are going lower and will turn negative because it's just dying. It's very sad. We've never seen anything like this in the history of the world. Japan will have to start printing money in a manner that will shock everyone.

Then the bond market will look at the U.S. and say, "Wait a minute. We've seen this movie twice now. We know how it ends, and it ends in tears. It's a horror show. If you don't mind, U.S. market, we'd like to leave at intermission."

Rather than having the three, four or five years that we should have from today, being completely profligate and running crazy deficits, we don't have that much time. The bond market will jerk our chain, which is actually fortunate, because the deeper in debt we go, the harder it is and the more pain we have to go through to get out. That's why Greece is down. Greece should have been trying to figure this out four years ago. The numbers are on the ball. It's arithmetic. It's not rocket science.

TGR: In January, you predicted that the wheels would fall off of Europe this year, but you also said that you think the European Union will stay together. What will be the precursors of a final collapse after years of handwringing?

JM: When the cost of staying together is more than the cost of breaking up.

TGR: How is that calculated?

JM: Europe is going to have to send €1 trillion to bail out Italy in addition to the trillions it has already spent. Then it's going to have to come up with some way to fund the Spanish banks; Spain can't do it. Spain is going to have to go through massive austerity. At some point, the population will get fed up and want out. The Germans are already fed up because they're getting handed the tab constantly.

There are three things Europe has to do if it wants to stay together. It has to solve its sovereign debt problem, the banking crisis and its trade imbalances.

The southern European nations have watched the cost of producing goods rise by an average of 30% against Germany and the cohort nations because their labor has been more productive. The only way to rationalize those trade imbalances is for either German labor prices to rise or for peripheral labor prices to fall. The latter is more likely, but it takes a very long time for wages to fall 30%.

It's not likely that everybody in Spain will agree to cut everything by 30% either. No. You think they were rioting in the streets before? Staying in the euro is a disaster for Spain. Getting out of the euro is just a different form of disaster. Either way, it's a disaster. Spain is in deep, deep chili. There's nothing it can do.

TGR: So, who decides if the cost of staying together is worth it?

JM: It's the pain experienced by the voters. What are we seeing in Greece today? Two factions have had a massive majority in Greece, the center left and the center right. They go back and forth. The same two families control them and have since the early 1970s. It looks like the two of them together may not get 40% in the elections coming up.

Forty percent is required to be able to form a government. The bar is set that low. It's not even 50% as it is in most countries because surely one party can get at least 40%, right? No. The rest of the country is so angry, it's split among 10 different, little itty-bitty parties: hard Communists, hard right nationalists and so on, all of whom hate austerity.

The Irish threw out a government that had been in charge for 80 years because it took on the new debt. The new government claimed it would deal with it. It hasn't, but it will deal with it before the next election. It is going to repudiate that bank debt. Either Sinn Fein will be elected, which means a crazy bunch of people will be put in charge, or the Irish people will vote for somebody who will tell the Central European Bank and the German, French and British banks to go piss off.

TGR: But doesn't that then start the ball rolling on a banking crisis?

JM: Ireland's debt is only €60 billion (B). In the grand scheme of things, it's starting to look like pretty small potatoes.

TGR: But it opens the door for every other sovereign country if Ireland goes back.

JM: Greece just did it. It defaulted on its debt.

TGR: I think it officially wrote it down to pennies under, so technically it did not default.

JM: There will be some euphemism for the Irish debt, too.

TGR: There are winners and losers in each of these crises. How can investors, seeing this collapse coming, either preserve assets and buying power or even profit from it?

JM: There is just no one-size-fits-all answer. I know that's not what investors want to hear. They want to hear, "Buy this, sell this, do this."

Typically, a crisis like this is not good to the equity market. There are certainly specific stocks and areas that will do well. Shorter term bonds with some high yields look pretty good. There are dividend plays from international stocks and maybe in their currencies. A very aggressive move is to go long the Japanese Nikkei and short the yen, because if Japan does print money as I expect it to do, the Nikkei will go up quite high in percentage terms. In dollar terms, it will look as if it's been flat. But if you short the yen, that's a way to play a crisis.

Should investors buy some gold? Yes. I buy coins. My fondest dream is that my gold, like my health and my life insurance, will never be used. I hope I give my gold to my great-great-grandkids and Papa John will say, "I don't know why I bought these silly yellow trinkets. Do you want to play with them? We can use them for checkers or something."

TGR: There never is a one-size-fits-all solution, is there?

JM: No. You need to hedge everything. You need to be aware that there is black-swan risk out there during this. This is not a typical market. We can't use models that we've used in the past and expect markets to behave as they have in the past. Don't throw the models away. They will be useful in four or five years. We can come back after we've hit the reset button. It's like the blue screen of death that some of us remember from the 1980s. You'd be typing along and you'd get the blue screen. It was a "feature" that Microsoft built into its software. You just had to hit the reset and start again. If you hadn't prepared for the blue screen of death, if you hadn't been saving every 30 seconds, you were out of luck.

TGR: That's a great analogy.

JM: We're in the process of hitting the reset button. Investors need to be prepared for when the blue screen of death comes along. They better make sure to hit the save button. When they restart the computer, their assets will come back up and they can start working on them again. It's key for investors to act because we have a limited period of time before we get another blue screen of death.

TGR: You're predicting this will happen within five years—not another decade.

JM: We don't have a decade, maybe three years. Spain doesn't even have three years. Europe has to deal with Spain now. It thought €1 trillion bought it a year; it bought it a month. It has to do something.

TGR: But "has to do something" and "doing something" don't always go together.

JM: For the Europeans they do. They'll have meetings. They'll call together the finance ministers. They'll talk frankly with each other. They'll come up with some type of joint statement and solidarity. They'll kick the can down the road. That's what the Europeans want to do. They have this massive desire to be European. They may be able to do it. I hope they do. I'm thinking a united Europe is better for the world than a bunch of countries, but that might not be my view if I were Italian or Spanish.

TGR: There is a lot of talk about savings. In an environment where there is potential to have more quantitative easing by Europe, China and the U.S., doesn't that in essence wound the saver?

JM: Savers are getting wounded now if they're buying Treasuries. They don't have to buy Treasuries. There are opportunities, especially for smaller savers, to find pockets of real yield. It's pretty tough if you're trying to run a $1B portfolio, but if you're trying to run a $100–500K portfolio, you could buy pockets of orphan bonds in the market that can pay a nice level of interest, well above inflation. They're shorter in duration. They're good credits. You can find solid foreign companies that pay very nice dividend yields of around 8%, too.

TGR: Why not dividend yields in U.S. companies?

JM: There are some companies in the U.S. that have dividend yields that are attractive, but not many. Most of them have dividend yields that are lower than what I can find in a more stable municipal bond that's shorter term and tax-free. Do I want a 2% dividend yield from a single-A company? It's a nice thing, but I'd rather have 5% tax-free money from a municipal. Investors ask where to find tax-free. You go find orphan bonds. You do your homework. There are no funds out there that do this stuff. You have to pay attention. If it were easy, everybody could do it. There are no hot stock tips. It's work.

TGR: You moderated a panel on inflation versus deflation at the Casey Conference at the end of April. Do you think that government will reverse the natural deflation tendencies and push us into hyperinflation, as some people here have said?

JM: No, that's total rubbish. Hyperinflation in the U.S.—really? What world are they living in? Could we have inflation? Could it get to 10%? Yes. The Fed would have to crank it down and it would be very embarrassed. We are not Argentina. That's just not a realistic scenario. That's black-helicopter-type talk.

TGR: Amid all this doom and gloom, I feel that you are quite optimistic about U.S. citizens. You talked about the dysfunctional U.S. gross domestic product, but you said you were bullish on the innovative power of the U.S. Can Americans turn the country's economics around by inventing things?

JM: Yes. Once we get to the other side of the blue screen of death, there will be more new technology, new business and innovation in the next 10 years than we saw in all of the last century. It's going to be a fantastic set of opportunities for investors and entrepreneurs. It will be the most exciting period in history. I just hope that someone can figure out how to make me young again—and they're working on it.

Source: Karen Roche and JT Long 

For more information on the strategic Investment Conference go to https://hedge-fund-conference.com/2012/invitation.aspx.

John Mauldin has been the author of New York Times best sellers four times. 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. He also writes the free weekly Thoughts from the Frontline e-letter and edits the free weekly Outside the Box. Mauldin 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 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.

Mauldin gave more details about the demise of the debt supercycle at the Casey Research Recovery Reality Check Summit. You can hear his entire presentation—entitled End Game Scenarios—as well as every other recorded summit session with the Summit Audio Collection. It features over 20 hours of sobering economic analysis, round-table discussions, updates of stocks from the natural resource sector, actionable investment advice and much more from 31 of the world's foremost financial experts (including famous contrarian investor Doug Casey and Porter Stansberry of End of America fame. More information is available here: http://www.caseyresearch.com/cm/cd-summit-spring2012?ppref=AUR449IN0512D.

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:
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 Gold Report: Eric, the gold bears recently outnumbered the gold bulls in Bloomberg's weekly Gold Bull/Gold Bear Sentiment Survey for the fourth time in a year. Are you a bull or a bear?

Eric Coffin: I think the gold price is going to end the year higher, so I guess that makes me bullish, but I think of myself as agnostic.

There needs to be a return of calm to Europe for the gold price to move much higher. The currency pair trade between the euro and the dollar is going to be a big determinant to the gold price. There's been more noise about the EU providing stimulus funds to offset all the government budget cuts in Europe. All of those countries have to deal with their debt loads. But it's not realistic to think that they can cut their deficit and 3% off their gross domestic product year after year and realistically get any net growth.

The other side of that equation is that the U.S. has slowed down. That'll help the gold price because a lot of goldbugs are riding on there being another round of quantitative easing. I'm not sure it's going to happen. But as long as Federal Reserve Chairman Ben Bernanke keeps saying it might happen, that's good enough.

TGR: Stagnant gold prices are translating to equities. Canaccord reports that "sector weakness in the gold equities over the last six years has typically ended with 'V'-shaped corrections to the upside." Do you believe that's what will happen this time?

EC: I sure hope so because I'm on the buy side, not the sell side. I'm going to feel pretty dumb if it doesn't happen. We're still in a bull market for gold. In a secular bull market, generally speaking, coming out of a dip tends to be an impressive move.

TGR: Many Yukon junior mining companies are starting their 2012 exploration programs after completing off-season financing on buyers' terms. What types of companies are getting financing?

EC: The only financings I've seen in the past five months are either relatively new deals where investors have a lot of respect for management—which is a roundabout way of saying that investors figure management will figure out a way to make money regardless—or companies that have something pretty definitive with a bunch of drill holes. Companies that didn't take the opportunity to raise money last year are going to have to pull a rabbit out of their hat. The Yukon is an expensive place. There's no getting around it.

Outside of companies with discoveries, like Kaminak Gold Corp. (KAM:TSX.V), ATAC Resources Ltd. (ATC:TSX.V) and Golden Predator Corp. (GPD:TSX), nobody's really done large financings and that's going to be tough. About 60% of the companies are going to have a hard time undertaking any significant programs this year. If the market gets better, which I think is going to happen, they still have a shot, but it's at buyers' terms.

I suspect a lot of companies are going to say, "Let's just wait and see if next year is better." You haven't seen many announcements. Quite a few of those companies that were talking last year about doing $4, $6, $8 million exploration programs—many of those programs aren't going to happen.

TGR: Desjardins Capital reports that 26 mergers and acquisitions worth a combined $30 billion (B) took place during 2010 and 2011. There are about 120 more companies operating in the Yukon. Are other junior explorers going to be forced to merge?

EC: I think there will be merger activity at the junior level. There are a lot of companies with decent but not spectacular projects where they haven't done enough work and are not in a position to raise money. A merger is one way out for them.

TGR: What did you think of the recently announced merger between Prosperity Goldfields Corp. (PPG:TSX.V) and Smash Minerals Corp. (SSH:TSX.V), which both have projects in the Yukon?

EC: It was our idea, so we liked it. It's a really good combination of management teams and a good-looking project. The first set of results from this year's drilling at the Kiyuk project should be out any time. I'm expecting good things from it.

TGR: Is it still fair to call the Yukon an area play when the shares of most of the juniors operating there have declined considerably, often by more than half? Even good results often don't tangibly move share prices.

EC: It still is an area play. This is a fairly common path even for a successful area play. The easy money has been made or, as is the case here, the market's just lousy and there is a lot of consolidation. The Yukon is getting to that point. The few companies that have done well will have the ability to pick up a lot of projects. In any area play, anywhere from a third to a half of the companies involved are piggybacking on the play to help raise money. Those companies tend to disappear quickly if they don't find something large right away or if the financing environment gets difficult. The bad market has exacerbated things but a large number of drop outs from an area play at this stage is not an unexpected development.

TGR: Let's talk about some of the contenders. What would be some of the biggest exploration programs in the Yukon this summer?

EC: Contenders will be the big spenders. ATAC is probably going to be the biggest up there at around $30M. Kaminak isn't very far behind. Both of those are funded new discoveries.

ATAC is particularly interesting because it looks like it could have a camp. It's Carlin, which is something new to the Yukon. There's not a lot of doubt that it will have a lot of ounces to work with, especially if they have some luck with new drill targets.

Kaminak's Coffee project is the same model as the original 1.5 million ounce (Moz) White Gold discovery, but it'll probably be larger. Kaminak is probably past that already, although it won't have a number out until early next year.

Both of those companies will probably get resources out at the end of the season.

Silver Range Resources Ltd. (SNG:TSX.V) has projects all around the old Faro mine. It has a very large land position and is drilling large bulk tonnage silver base metals zone. It also made a couple of high-grade silver vein discoveries late last year with similar mineralization to Keno Hill.

Ethos Gold Corp. (ECC:TSX.V; ETHOF:OTCQX) has about $7 million budgeted for its Betty project, which is adjacent to Kaminak's Coffee project. This will be the first drill test at Betty that has generated some good high-grade numbers from trenching and test pitting, so that will be closely watched. Ethos is fully funded for that program with quite a bit to spare.

TGR: Since we last talked, your brother David, your best friend and co-editor, passed away. He was a very fine geologist and a great human being. Our condolences for your loss.

EC: Thank you. We are going to hold a dinner and fundraiser for the University of British Columbia geology department in honor of Dave on June 4 after the Cambridge Conference in Vancouver. Everyone can get together, have a meal and a few drinks, and tell stories about Dave.

TGR: David often spent more than 200 days a year traveling to mining projects around the world. He helped start a new mining company before he passed away. Can you tell us about that?

EC: We were meeting with Strategic Metals Ltd. (SMD:TSX.V) about its projects. Doug Eaton, who runs Strategic, showed us a different project set that got our attention. Precipitate Gold Corp. (PRG:TSX.V–pending) was formed to explore 15 projects optioned from Strategic in the southeastern Yukon and northeastern British Columbia plus four other 100%-owned projects. After the initial public offering, which should be later this month, Strategic will become a significant shareholder and Precipitate gets 100% of the projects.

The lead project is the Reef project, north of Northern Tiger Resources Inc.'s (NTR:TSX.V) 3Ace project. A couple of large gold arsenic anomalies have been found at Reef, but they have not been drilled yet. There's some hard rock numbers there, but it will take drilling to figure out what it is. It's quite early stage.

Dave also picked and staked four other projects. We got a nice cluster of fairly high gold in silt numbers on the Gemini project in British Columbia. Part of the reason Dave liked this area was because it has very little exploration history, but that's actually what makes it interesting. It's not an area that's been written off. It just hasn't been looked at. And the logistics are pretty good by Yukon standards. The property is fairly flat, which makes it easier to work in the winter and it's a short hop from the Alaska Highway.

We went around and tapped on the shoulders of some really good people to work on this. Adrian Fleming, who was running Underworld Resources before it was taken over by Kinross Gold Corp. (K:TSX; KGC:NYSE), is the chairman. Quinton Hennigh, who was largely responsible for turning 600,000 ounces into 5 Moz at Gold Canyon Resources Inc. (GCU:TSX.V), is the geologist. Gary Freeman, who was president of Pediment Gold Corp. until it merged with Argonaut Gold Inc. (AR:TSX) and who is a really good market person, is on the board. Darryl Cardey, who was the chairman of Underworld Resources [acquired by Kinross], is on the board. Darcy Krohman, who has exploration and regulatory experience, has come in to be the CEO. Mike Moore has come on as vice president of exploration.

Like most early-stage stories, it's a management story. We might trip over something amazing on one of the properties right away, but we've got the right guys—that's the important thing. Strong management is the best Plan B you can have with an early stage company.

TGR: It's a compelling story with all those names involved, Eric. You follow companies all over the world, not just those in the Yukon. What are some of your favorite stories outside of the Yukon?

EC: I like Prosperity Goldfields, which is run by Adrian Fleming and Quinton Henning. The project is in really good hands and has a fair amount of room to grow. Results from the spring drill campaign should start arriving any time now.

Columbus Gold Corp. (CGT:TSX.V) picked up the Paul Isnard project, which was drilled about 20 years ago in French Guiana. It's got about 1.9 Moz on it. Columbus is fairly comfortable that it can double the ounces, and based on the drill results it's had so far, I'd say it probably can. As a company that has a 4 Moz deposit with a $60M market cap, it's fairly cheap.

Another one that we like is Riverstone Resources Inc. (RVS:TSX.V). It's got very good management and projects. The last resource was 3 Moz and it's still expanding. It's got a good bank account. It optioned the Yaramoko project to Roxgold Inc. (ROG:TSX.V) and sold the remaining 40% for $17M and 17M Roxgold shares.

TGR: What are your thoughts on Riverstone's Karma project?

EC: Karma probably has room to get to 4–5 Moz. It is still open and has gotten a lot bigger than we thought it would. The ounces are in several separate areas, but none of them are very far apart. It even has several trends that haven't been drilled much yet.

I'm very interested to see what happens with its Ligidi project. It is a really large target—one of the biggest I've ever seen in West Africa. What are the grades going to be when it starts putting holes in it? There are a lot of investors who have owned that stock for five years waiting to see Ligidi get drilled. It's one of the reasons Dave and I wrote it up. The company hasn't been able to work on it until now because of arguments with the vendor from whom Riverstone acquired the property. They've made peace now. It's just a matter of getting the exploration permits.

TGR: Majescor Resources Inc. (MJX:TSX.V) hit some interesting results recently on its Blondin project in Haiti. What do you know about that?

EC: We started following Majescor for its diamond mining a long time ago and kept it on the list. The project in Haiti looks pretty interesting. It has nice copper grades of a good width and a supergene zone. Supergene is the oxide just above the water table. Recirculating water creates blankets of high-grade material, be it copper, gold or whatever. In this case, it appears to be silver. Majescor doesn't have a lot of holes in that yet so it's hard to get our arms around it. However, the few holes it has drilled were getting 10–20 meters of 5–10 ounces silver. It's got potential.

Of course, Haiti is Haiti. The country is a mess; that's not a secret. However, it's a place that wants to get this industry going. Resources are probably one of the shortest routes to Haiti getting foreign currency reserves and direct investment. There are a few companies there now, including Eurasian Minerals Inc. (EMX:TSX.V) and Newmont Mining Corp. (NEM:NYSE).

TGR: Bear Creek Mining Corp. (BCM:TSX.V) in Peru has had some permitting issues. It seemed to be an up-and-coming company until the new government came into power and changed the landscape. What are your thoughts on what's happening in Peru and on companies like Bear Creek that are being affected?

EC: The political landscape has shifted a lot in Peru. It's made it very difficult for anybody outside of Peru—and maybe even inside Peru—to get a handle on what's a good spot and what isn't. There are a lot of South American countries where mining companies just shouldn't go because they're bound to face a political or indigenous population problem and they won't get permitting. Bear Creek has been there a long time and knew the good and bad areas and followed the laws. It stuck to areas where it didn't expect any problems and we didn't think it would encounter any either. Now no one seems to know what the good areas and the bad areas are. That's going to make it tough for everybody in Peru until this stuff gets clarified.

TGR: The problem is with a mining permit at Santa Ana, which isn't its primary project. The world-class Corani silver project is its main project, but it can't develop that without getting the cash flow from developing Santa Ana.

EC: Santa Ana was always going to be the lower capital expenditure (capex) project that would start spinning cash flow and increase the company's valuation in order to raise money for Corani. This has messed up its whole pipeline.

TGR: Is it too late to modify that game plan?

EC: The locals don't want the company there. Unless Bear Creek can go back into Santa Ana, it has to go back to square one and develop Corani first. That probably means bringing in a partner because it's a big capex project. There are Asian companies that are pretty active in Peru and Chile that may have enough political clout to be able to sit down with the government and say, "Look, we can come in and spend $1 billion to build this thing, but we've got to know now. No surprises."

TGR: The Chinese don't tend to be all that interested in silver though.

EC: They would be more interested in the base metals, which Corani has a lot of. There's a lot of zinc and lead. Lead is not a politically correct metal and it's got environmental issues, which doesn't make it an easy sell. However, it still gets used in a lot of areas, one of them being China.

If a company can deal with the base metals, Corani could be a very big silver producer by world standards for a long time.

TGR: Do you have some parting thoughts for us on the market and how it translates to the retail investor?

EC: I'm fairly comfortable that the U.S. is going to do OK over the next couple of years. It's going to have another political fight at the end of the year when tax cuts die. Europe has the capability to pull itself out of its problems. In a large measure, it's political decision-making. I certainly appreciate northern Europeans and Germans that don't really see why they should be footing the bill, but they can afford to foot the bill.

We're not particularly worried about China. It's trying to rebalance its economy. China's in a different boat from Europe or the U.S. in that it's got $3 trillion in reserves and can open the taps anytime it wants. China will increase the growth rate when it feels it's the right time to do it.

The world economy will do OK as well. I know it feels like the end of the world for investors that own a lot of resource stocks as I do. The secular bull market hasn't ended. Ironically, all the political problems in different producing regions are going to extend that secular bull market in metals because it's that much harder to grow production to a point that knocks metal prices down.

I'll just leave you with a contrarian thought: Everybody's so negative right now because this is what bottoms look like. Everybody thinks the world is coming to an end. Everybody thinks it's the worst market they've ever been in. Everybody thinks nothing is ever going to go up. That's what a bottom looks like. It's not fun to go through. There's so much negativity everywhere that it's telling me as a contrarian that there's probably not a lot more pain to go through before things start getting better.

If readers would like to download HRA's new company report on Precipitate Gold Corp., HRA has set up a special free report offer for a limited time. Simply click here and they will send you the report.

Eric Coffin is the editor of the HRA (Hard Rock Analyst) family of publications. Responsible for the "financial analysis" side of HRA, Coffin has a degree in corporate and investment finance. He has extensive experience in merger and acquisitions and small-company financing and promotion. For many years, he tracked the financial performance and funding of all exchange-listed Canadian mining companies and has helped with the formation of several successful exploration ventures. Coffin was one of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997. He also predicted the start of the current secular bull market in commodities based on the movement of the U.S. dollar in 2001 and the acceleration of growth in Asia and India. Coffin can be reached at hra@publishers-mgmt.com or the website www.hraadvisory.com.

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) 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: Ethos Capital Corp., Argonaut Gold Inc., Gold Canyon Resources Inc., Golden Predator Corp., Majescor Resources Inc., Prosperity Goldfields Corp. and Roxgold Inc. Streetwise Reports does not accept stock in exchange for services.
3) Eric Coffin: I personally and/or my family own shares of the following companies mentioned in this interview: Kaminak Gold Corp., ATAC Resources Ltd., Prosperity Goldfields Corp., Precipitate Gold Corp., Northern Tiger Resources Inc., Columbus Gold Corp., Majescor Resources Inc., Riverstone Resources Inc., Roxgold Inc., Argonaut Gold Inc. and Ethos Capital Corp. I personally and my family are not paid by any of the companies I follow in the HRA Advisories newsletters. I was not paid by Streetwise Reports for participating in this story.

The Gold Report: Jocelyn, you are following catalysts that affect resource stocks. Tell me about that.

Jocelyn August: We have started looking at catalysts in the natural resource sector. Originally, our CatalystTracker was designed to look at just medical devices and diagnostics as well as drugs and the catalysts involved in their development. But we did another impact study for the natural resource sector and identified some large-impact events in the minerals sector. Similar to drug and device development, you can follow a timeline for the development of a natural resource from the planning stages to exploration, and you can see similar catalysts in terms of the testing of the natural resources and results that might be announced. We think those types of events have large impacts for these companies.

TGR: And you publish on these events, right?

JA: We recently completed a Q212 Outlook Report for natural resources, and we discussed four upcoming gold catalysts for the second quarter.

TGR: Speaking generally for a moment to the differences between drug and resource development, I'm thinking that you have much shorter development times with mines than you do with drugs. Don't you?

JA: It depends. I think there definitely are companies that have been developing a mine for a long time and have run into a lot of regulatory and permitting hurdles.

TGR: Can we talk about some of the impending events and companies?

JA: One that we highlighted in our report for gold was the General Metals Corp. (GNMT:OTCBB; GMQ:FSE). This is a very small company with a $5.8 million (M) market cap. It is working on the Independence mine project in Nevada. We expect it is going to announce a preliminary economic assessment (PEA), which is an important step in moving the mine toward production. It's going to tell us if this mine is going to be economically viable in terms of development. So it's a necessary step for moving on in the feasibility stage. It will be an important event for the company considering that that market cap is so small.

TGR: How important will this PEA be as a catalyst for General Metals?

JA: The company has announced that it does not have the additional funds to proceed with the plan of operation. So if the PEA is negative, then it's going to be hard for it to come up with additional development funds. Because this is its only project in development right now, it might be forced to cut back or even cease operations if the PEA is negative. On the other hand, if it is a positive announcement, then this could be a major step for the company with pretty significant upside for that specific event. We think that that's going to be happening in Q212 as well.

TGR: What else have you written about in your Q2 Outlook Report?

JA: We are looking at several different gold companies that have some updated resource estimates. There is a project in the Marban block in Quebec for Aurizon Mines Ltd. (ARZ:TSX; AZK:NYSE.A). It has an option agreement with NioGold Mining Corp. (NOX:TSX.V; NOXGF:OTCPK) for this project. NioGold is currently the 100% operator of the project, but through its option agreement Aurizon can earn an additional 50% and then potentially up to 65% if it completes certain developmental milestones. So this updated mineral resource estimate for Marban would mean further fulfillment of the requirement for the option. It would mean that Aurizon would be at least a 50% operator here. That should work for both of them. That is also supposed to occur in Q212.

We also have an updated resource estimate projected for mid-2012 for Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE) for the Joaquin project, which is the gold and silver project in Argentina. It has already released some information on the estimate, and it is expecting to announce another update. That should give us a better indication of how much is actually present in that resource.

TGR: Coeur has a market cap of about $1.9 billion (B). How much can these catalysts mean?

JA: Coeur is a larger company with some other projects, but it should help give investors a better idea of where the company is going, how it's continuing to develop its resources and continuing to make money. Obviously, all mines have a certain lifespan, and all these mining companies have to continue to find new areas to develop so they can make up for other mines' production going down. It's like a pipeline in drug development.

TGR: Is there one more you might mention?

JA: The only other one we have is North American Palladium Ltd. (PDL:TSX; PAL:NYSE). It's a palladium company, obviously, but it is developing the Vezza mine, a gold mine in the Abitibi region of Quebec. The gold project is functioning as a diversification vehicle for the company, and we think that's appealing. It is expecting to announce the start of commercial production in Q212.

TGR: Thank you very much.

JA: Thank you.

Jocelyn August is currently the senior analyst and product manager for CatalystTracker, a proprietary research product focused on identifying and analyzing the future events that will materially impact publicly traded companies. In her five years at Sagient, she has developed expertise in the highly event-driven medical device and diagnostic sector. In addition, she spearheaded the development of a new Natural Resource Industry product within the CatalystTracker product line with the publication of theCatalyst Impact Study: Natural Resources Sector. Outside of Sagient, August was named the director of communications for the San Diego Professional Chapter of MBA Women International. August received a Master of Business Administration from the Rady School of Management at the University of California, San Diego and graduated cum laude from the University of California, San Diego with a Bachelor of Arts degree in sociology. 

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) George S. Mack 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: Aurizon Mines Ltd. Streetwise Reports does not accept stock in exchange for services.
3) Jocelyn August: 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 story.

The Gold Report: Gold consultancy GFMS, which is now owned by Thomson Reuters, recently published its 2012 Gold Survey. GFMS predicts that before the end of 2012, the yellow metal will likely reach above its all-time nominal high of $1,920/ounce (oz) in September 2011. The catalysts include inflation concerns and sovereign debt problems in Europe, especially Spain. What are your thoughts on these predictions and conclusions?

Nana Sangmuah: I agree with those predictions and the drivers. One thing that has been missing from the gold rally is inflation hedge demand. With the significant monetary easing that has occurred to drive a global recovery, inflation is definitely going to be an issue at some point. We haven't seen inflation trade come into gold throughout these 10+ years. That's the strong headwind that is going to move gold to another level.

TGR: The survey reported that mine production hit a record high in 2011, rising 2.8% year over year to reach 2,818 metric tons (mt). That marks the second straight year that gold production reached a new all-time high. Does that mean the theory of peak gold is dead?

NS: Not exactly. If you peel back the data over the past two years, the greater part of this growth has come from mines digging into their stockpiles and people revisiting old resources that previously were thought not to be economic but at these price levels look economic. There have been very few discoveries despite the fact that there's been quite a lot of money spent on the exploration front. That rate of increase is not sustainable going forward. And the bigger picture still looks grim because the last big discovery of 5+ million ounces (Moz) is the Aurelian discovery—the Fruta del Norte deposit in Ecuador, which now belongs to Kinross Gold Corp. (K:TSX; KGC:NYSE)—from early in the 2000s. It takes on average at least five years to move from discovery into production, so we're looking at a situation where the supply is not going to grow that much. If the investment demand is sustainable going forward, basically there won't be enough ounces to feed that demand.

TGR: The GFMS survey also reported that new gold-mining operations contributed 47 mt of new gold supply, while Africa was the region that witnessed the strongest growth, increasing production by 51 tons (t) despite a 5 t drop in output from South Africa. Do you believe Africa will continue to lead the way in worldwide gold production?

NS: Certainly. The ground is very favorable, and there are a lot of projects that have only scratched the surface. Even in the more prolific zones, which have seen a lot of dollars thrown at them, the concentration has just been on open-pit, near-surface mining. In some of these greenstone belts, you can trace mineralization down to more than 2.5 kilometers (km) at depth. As people get more comfortable with the region's politics, more dollars are going to move in, and certain grounds will be tested. The key is political stability. As commodity prices go up, countries move their fiscal regimes around.

But I think a lot of countries will smarten up and realize they can attract more investments, which will ultimately generate more revenues to the government if their current regimes are seen to be stable. The Asankrangwa Belt in Ghana is one example. This belt is as old as the Ashanti Belt, but we have just recently seen action on it. So far, within a period of less than three years, 10 Moz have been delineated. Some people would think that certain districts are mature and cannot be coming up with even more discoveries, but that is not true.

TGR: Mali's interim president said that he wouldn't hesitate to wage "total relentless war" against the Tuareg rebels who have seized much of northern Mali. Do his words make you less bullish on all West African gold producers?

NS: He's trying to send a strong signal that he's all for maintaining stability in the region. And the regional force, ECOWAS—Economic Community of West African States—acted quickly to prevent this from blowing up. A stabilizing force has made its dominance known in West Africa, which I think is going to foster more stability and get people to be more comfortable investing more dollars in the region. Access in general has not really been impaired. The borders are open. People can focus on the day-to-day running of businesses and mines. There's the potential for a few situations here and there as they try to push the Tuaregs away. But the Tuaregs' links with al-Qaeda are definitely going to unify the international community against any issues. That means that this is not going to drag on for long, and very soon we should see this issue behind us. We've seen similar events before and people have hit the panic button and sold off, but as the situations stabilize, valuations come back strongly. So, I see this as a buying opportunity, and I'll be focusing on assets. If these assets have not been impaired in any way fundamentally, they should be bought at these levels.

TGR: Ghana is second only to South Africa in African gold production. What are some of the companies operating in Ghana that are well positioned to grow their gold production and see it translate to their share price?

NS: In this current environment, we should be watching the balance sheets of companies to see whether they have enough capital to maintain their growth strategies. One company that I think has a very strong balance sheet is Perseus Mining Ltd. (PRU:TSX; PRU:ASX), which has finished up building a mine in Ghana and announced very strong Q112 results showing good cost containment. Commissioning has gone well and it's in a ramp-up phase. I think most of the risk is behind it. Perseus is on the cusp of generating a lot of cash flow. That is going to help it bring its second asset, which is not in Ghana, into production. Cast your eyes two years out and Perseus will be producing around 450,000 oz, generating a lot of cash flow that could be channeled into further growth opportunities or shareholder dividends. Currently the resource is 9 Moz and Perseus is spending quite a lot on exploration; about 200,000 meters (m) are being drilled in West Africa. The likelihood of growing 9 Moz into 12 Moz is high. And Perseus has had a very good success rate converting these ounces into reserves, so we should see the production profiles also tip up along the way. At these levels, with no finance hurdles ahead of it, being in a fully funded position and just on the cusp of generating strong cash flows, Perseus is one that investors should be watching.

TGR: Perseus boosted the resource at the Edikan by 1.03 Moz in December 2011. Is it reasonable to think that it could do that again by December 2012?

NS: It's doing about 200,000m of drilling this year; last year it drilled about 250,000m split between both assets. The rate of resource growth should be more significant because now it's switching focus from infill drilling to regional targeted. That's where you see a lot more growth in the resource. I'm quite optimistic that we should be seeing a lot of wider swings in the resource growth going forward. And the company's picking up new targets in and around the existing mine.

TGR: Ghana also has a number of smaller companies exploring for gold deposits, some of which have had early success. Could you introduce our readers to some of those companies?

NS: There are a lot of junior companies prospecting for gold in Ghana. One of the more successful ones in recent times has been PMI Gold Corp. (PMV:TSX.V; PVM:ASX; PN3N:FSE). It is advancing a brownfield operation previously operated by Resolute Mining Ltd. (RSG:ASX), which mined about a million ounces at 2.2 grams per ton (g/t). PMI came in and has been able to delineate about 5 Moz on the flagship asset. What is most exciting about the company is it has more ground toward the south on the Asankrangwa Belt, on the Asanko project and the Obotan project. This is the first time that ground has been developed by one single company. This points to the potential to grow the ounces profile well north of the current 5 Moz. PMI also has ground—the Kubi project—next to one of the world's most prolific mines, the Obuasi mine, which has produced and delineated about 60 Moz. And it actively drills Kubi, which is just 15km south of Obuasi. For the first half of the year, it's drilling about 100,000m on all these targets. And we just saw eight new anomalies discovered last week, signaling the potential to add to the current resource envelope.

TGR: The Obuasi gold mine is operated by AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE), which is a major gold producer. Would that make PMI a potential takeover target?

NS: Most of these junior companies that have solid resource growth potential are likely targets.

TGR: Any others in Ghana?

NS: There are quite a few, but we can talk about some other early-stage companies, like Abzu Gold Ltd. (ABS:TSX.V; ABZUF:OTCQX). It's about to come out with a maiden resource on the ground in northern Ghana in a district that is known for gold-bearing structures.

TGR: On Jan. 19, 2012, you wrote, "Abzu's vast tenement package with a plethora of targets diversifies exploration risk well for shareholders and its proven management team reduces execution risk." Tell us more about the management team there.

NS: Abzu's CEO Allan Serwa is a Canadian who's been in Ghana for quite some time and has built up a lot of relationships there. He brings to the table the ability to manage community relationships very well—better than seamless. You find a lot of companies with good projects but a lot of problems dealing with communities. So Serwa really gives Abzu a solid platform from which to take off. Paul Klipfel has been a geologist with some of the more senior mines, including Placer Dome Inc. [now Barrick Gold Corp. (ABX:TSX; ABX:NYSE)], and has had some decent experience in Ghana as well. Quite a few other accomplished geologists and company CEOs who will provide necessary direction are on Abzu's board of directors.

TGR: Abzu's sizeable land package stretches across four different gold belts in Ghana. What sort of exploration success has Abzu had to date?

NS: Abzu has delineated a mineralization trend of 1.5km in one. I have visited that structure and have seen that it extends well to the north and to the south. On the Asafo Belt right on the Kibi Belt in the south, Abzu has been coming up with some very decent grade intersections of 4+ g/t material. It's still early but indications point to, with additional drilling, sizeable results.

The concessions are in close proximity to prolific mines. Abzu has properties near Newmont Mining Corp.'s (NEM:NYSE) Ahafo and Akyem projects. It's got property that is close to Keegan Resources Inc.'s (KGN:TSX; KGN:NYSE.A) Esaase mine. So, these are spanning all the belts coming through to the south. And Abzu is on the Kibi Belt as well—that is also close to a past-producing mine. There is the adage that the best place to find gold is within the shadows of a headframe. I think that is the strategy that guided Abzu in staking all these concessions.

TGR: You also cover companies with gold projects or mines in Burkina Faso, Liberia and even the Democratic Republic of the Congo (DRC). Please tell us about some of those companies.

NS: In Burkina Faso one of my top picks is SEMAFO (SMF:TSX). It's seen quite a significant pullback in recent times. It has a very solid balance sheet, $170 million (M) in cash, no debt, and it's generating an operating cash flow of about $130M per year. This company is in a position to fund all its organic growth without coming back to the market. Any value from additional expansions flow to the shareholder. SEMAFO has been able to demonstrate the ability to bring that production on for the past three years. There are a few catalysts coming down the pipeline, including a resource update. And as management continues to show to the market that its large Mana project has resource growth potential with several exploration updates expected, not only in June but after, we should begin to see that attention back into the stock. We will probably see it recover earlier than most of its peers because there's nothing fundamentally wrong with the company.

TGR: You've got a $12 target price on that and a Buy rating. SEMAFO has a promising project in Niger called Samira Hill. What are your thoughts on that?

NS: It is a mine that sits on a mineralized trend that stretches for a good distance. Only about 15% has been tested and developed as pits. So there's a lot of potential along the strike. In the past, very little capital was reinvested in the mine because ownership was split between Etruscan Resources Inc. (EET:TSX) and SEMAFO, and Etruscan never had enough money to put into expansion activity. The mine has not been performing at its optimum level for some time. That's changing with SEMAFO now taking full control of the mine and investing a lot more into exploration and capital projects. It's smaller and we need to see a much, much larger expansion to get more stability in the operation. But I think it's still a worthy asset to have in the company.

TGR: Tell us about Liberia.

NS: Often people shy away from countries that have had issues. But Aureus Mining Inc. (AUE:TSX; AUE:LSE), which will likely be the first company to commence production in Liberia, is making good strides. Infrastructure-wise Aureus' New Liberty project is very close to the port, and most of the access to the ground is via a paved highway. That makes it relatively easy to access, compared to other projects in the country. The capital required to kick-start the mine is around $120M—that's not so huge that it will make this project's financing risk insurmountable. I see Aureus coming up with its first production sometime in 2014. At this level, it's one of the highest grade projects in the whole of West Africa near surface. And that's just the beginning. About 40km north is its main asset, New Liberty, which in itself has a lot of potential to grow in surrounding anomalies that have been delineated. Northwest of the structure is a new 13km anomaly that has been picked up. The grades that Aureus has been picking up from initial intersections on this system are quite encouraging. So, there's definitely a gold district there and the grades are quite compelling. That would definitely have a good impact on cost.

And we like the DRC. That country has had its issues in the past, but as with any other such situation, there's always a time when it stabilizes. The fact that the election was conducted is a good thing. There were a lot of irregularities, but post-election issues have not been too severe, and that's a good sign that the DRC is maturing and stabilizing. You see a huge discount in companies operating in the DRC, which in my opinion is not warranted, because it has one of the most prospective mineral belts in the world.

We just saw the first commercial gold production coming with Banro Corporation (BAA:TSX; BAA:NYSE)picking up the march. And we're going to be seeing Kibali from Randgold Resources Ltd. (GOLD:NASDAQ) come through. I just visited the Kibali project and was very impressed by the progress made for relocation, which is probably the most challenging part of construction. With a solid technical and mine-building team in place Randgold expects to bring Kibali into production by 2014 without a lot of challenges. As these two continue to do well, people will change their perception of gold mining in the country.

Another that I would highlight as very cheap at these levels is Kilo Goldmines Ltd. (KGL:TSX.V), which is on the Ngayu greenstone belt and will be commencing drilling very shortly. David Netherway and Alex van Hoeken have taken over, and they are seasoned mining personnel who focus on the exploration growth potential of their large land package. One similar ground to the Kilo ground is Geita, which in the 1990s started as a small resource from old mine workings and has grown to north of 10 Moz. It's a similar story for Kilo. It has an old mine at Adumbi, which is currently around 1.8 Moz, and there are a whole slew of prospects around it. This is one of the few times that a company has enough drill rigs to chase some of these targets. It's very early, but there's a lot of growth ahead of Kilo—including the fact that Kilo also has an iron ore exposure that the market is not paying anything for. So, you rarely get something for free, but Kilo could be an example of where that really works.

TGR: An iron-ore sweetener, as you've called it. In a March 30, 2012, report, you said you expected a rerating of the stock. When?

NS: Rigs are on-site and drilling has commenced. It has its own sample prep lot, so turnaround times are not going to be that long. As news starts to flow, which could be as early as midyear right through the end of the year, and people begin to appreciate the size potential of this asset land package and also the grade profiles, that's when everyone will start waking up to the opportunity and drive the re-rating.

TGR: Do you have some parting thoughts on African gold plays?

NS: People should continue to focus on the fundamentals. Take advantage of the situation, which will turn around and stabilize, to pick up on names that you missed out on and wait for the disconnect between the commodities and the equities to correct. I see very little downside risk at these levels.

TGR: Thanks for your insights today.

Nana Sangmuah is managing director of research at Toronto-based Clarus Securities. His previous industry experience includes the Prestea underground mine, AngloGold Ashanti's Obuasi and Iduapriem mines, and Gold Fields' Damang gold mine. He has over eight years of global mining equity research experience that covers more than 60 mining companies worldwide in the gold, base metals and diamond sectors and has in-depth knowledge of mining projects in West Africa. Sangmuah completed a Master of Business Administration in finance at the University of Toronto's Rotman School of Management in 2004 and obtained his Bachelor of Science in engineering from the University of Mines and Technology, Ghana, in 1999.

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) 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: Abzu Gold Ltd. and Banro Corporation. Streetwise Reports does not accept stock in exchange for services.
3) Nana Sangmuah: I personally and/or my family own shares of the following companies mentioned in this interview: Kilo Goldmines 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 story.

The Gold Report: When we last spoke in May 2010, small-cap mining plays were poised to go on a bull run that would last almost a year. However, the mining sector has underperformed expectations recently. Why do you remain optimistic?

Barry Allan: Market appetite for small-cap equities has eroded as investors clamor for less risky investments. A backdrop to that sentiment is the gold price, which has shown lackluster performance since hitting a peak in mid-2011. The gold price continues to be in a realm of uncertainty, particularly because we are in a seasonally weak period, the second quarter. The second quarter statistically is the weakest quarter for gold equities. There's no good reason for that, but it is a statistical fact. That has also eroded some of the appetite for small-cap gold stocks.

TGR: What is the best quarter for small-cap gold equities?

BA: The fourth quarter, bar none, is the best period for gold and gold-related equities, particularly small caps. On a percentage basis, there's less than a 5% probability that the fourth quarter will be a weak quarter in any fiscal year. There are generally good prices at year-end, which tend to carry through to February. Then March presents the highest risk for price decline. I make this joke about the Prospector & Developers Association of Canada (PDAC) conference, which is always in early March: The rule of thumb is wear a warm coat to the PDAC because we always get a cold snap, but also don't be holding any gold stocks.

TGR: You've said that you have no preference between gold and silver and remain bullish on both in the near and long term. What do you see that has you bullish in the near term given the recent slide in prices for both metals?

BA: Trajectories are never straight up. There are seasonally weak periods. Some evidence indicates that perhaps the U.S. economy is starting to set a base. However, I certainly don't see anything that reduces the attractiveness of either gold or silver looking out to the end of the year. There have been some bumps and grinds, but all the elements that made gold get here in the first place largely remain intact. I'm not prepared to say that I'm negative. I'm cautious about the second quarter, but I've been cautious about the second quarter pretty consistently over the last 10 years.

TGR: About 71% of the companies on your coverage list have Buy recommendations. Is it fair to say you see a lot of value in mining equities at the moment?

BA: Generally, the recommendation list follows my positive bias for the prospects of bullion. A lot of the equities that we have looked at are a pretty good value. Then the question becomes are they value traps? Are they going to continue to just look like a good value, but not show any performance over the next 12 months?

TGR: Where is value consistently presenting itself?

BA: The most compelling theme is those companies where the asset is clearly identified as having merit. The problem is usually getting the money to build the mine. There are a number of examples where there is a positive feasibility study or prefeasibility study. There are ounces and, in some cases, reserves in the ground. But how is the cash flow going to get unlocked? Capital costs could be $400–600 million (M) for a company that probably has a market cap of $120M. How will it get that into production? It will take capital to unlock it.

An example is AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE). It has the best growth profile of any junior-to-intermediate by far. Now it must execute. That is pretty compelling.

The other theme is companies that look like they have decent assets, but do they have mines? There's quite a long list of them: Sandspring Resources Ltd. (SSP:TSX.V), Oromin Explorations Ltd. (OLE:TSX; OLEPF:OTCBB), Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB) and Chesapeake Gold Corp. (CKG:TSX.V). There are at least a couple of levels of assessments that say they are economic, but the capital costs are really intimidating.

TGR: Let's talk about dividends for a moment and their impact on total return. TheStreet.com reports that the S&P 500 Total Return Index hit an all-time high of 2,449.1 on April 9. Dividend returns kept the index in the black. About 29% of the companies you follow are paying a dividend. What's your philosophy regarding dividend-paying companies?

BA: I don't want to sound sarcastic, but it's only in the last two years that gold companies could even spell dividend. This has been a sector that historically did not pay dividends.

With the evolution of exchange-traded funds (ETFs), gold companies have vocally come out and said, "Look, buy us because at least we will pay you something back where the ETF will not." They're attempting to recapture some of the valuation premiums that gold equities historically traded at.

Are dividend-paying gold companies enjoying a return to premiums? The answer is no. It's been a flawed strategy in the sense that the traditional methodology of tracking premiums was to show good fundamental underlying performance. The notion of dividend paying for gold companies is a little bit of an anomaly in this market. The broader market is yield starved and looking for dividends. As such, dividend paying companies have attracted more attention than not. But the highest yielding gold stock that we have is 2.5%. A number of yield stocks in the overall universe of coverage at Mackie Research have upward of 4% or 6% yields. We're not buying a 2.5% or 1.5% premium for the yield.

TGR: Newmont Mining Corp. (NEM:NYSE) offers the highest dividend at about 2.5% followed by Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) with 2.3%. Is that enough to lure investors or should these companies be using that money to improve their asset base or increase efficiency at their operations?

BA: It's nominal. A yielding stock isn't going to attract much attention at anything less than 2.5%. I don't know any investor who's saying, "Wow, I like Newmont because it's got a 2.5% yield!" They can buy another stock and get a 6.5% yield with much lower risk. I don't think it cuts it.

TGR: What are some promising stories you want to tell us about today?

BA: If I had to single out a company that is the most likely to enjoy a re-rating in the market irrespective of the gold price, I'd say AuRico. It's pregnant with many near-term milestones over the next nine months that suggest it will get a re-rating before executing its business plan. It has good growth and a group of people whom I trust to deliver the growth.

Another company that follows in the category of good growth, solid management and decent valuation would be Argonaut Gold Inc. (AR:TSX).

TGR: Argonaut is planning to expand production at El Castillo, one of its operations in Mexico. It also has a new resource at its development project, La Colorada.

BA: What we really like about Argonaut is that its core senior management group has done this before. The company has been quite cognizant that it needed to execute a strategy of growth, but at the same time be able to live within its means. El Castillo was exactly that. Argonaut took the asset, ramped it up and optimized it operations. In the case of La Colorada, it is just going to do that again. Argonaut knows its capabilities and can maximize those without overstretching. We expect steady progress with the existing operations and as it goes into its next phase of development with La Colorada. It's about solid, reliable execution.

TGR: La Mancha Resources Inc. (LMA:TSX) more than doubled its resource at the Hassaï project in Sudan. That's a world-class asset. You call La Mancha one of the most misunderstood junior mining stories in the market. Why is that?

BA: La Mancha has been broken out of AREVA SA (AREVA:EPA), a large integrated nuclear entity in France. AREVA had a group of gold-type assets in Sudan, Côte d'Ivoire and Australia. These assets were out of sight, out of mind because they were buried in AREVA. La Mancha really didn't have much of a market profile at all up until very recently. AREVA is selling the whole company and put La Mancha in market play. Even though the resources at the main mine have expanded, one of the driving elements on the valuation will be the sale process. Interested people have been spooling through La Mancha looking at its assets. This is about AREVA maximizing the valuation that it has in La Mancha. AREVA has had a very disastrous financial performance over the last 18 months. It's trying to monetize everything and, unfortunately, La Mancha is one part of that.

TGR: Avion Gold Corp. (AVR:TSX; AVGCF:OTCQX) has its main projects in Mali, which recently witnessed a coup attempt. Some order has since been restored and Avion's share price has begun to rebound. What strategy are you taking with that equity?

BA: We were aware that Mali might be going through some issues, but we still see some value in Avion. We adjusted our target down slightly as a result of production. It was starting to experience some stress at the Tabakoto mine about a week ago. I subsequently had a conversation with management and they are quite pleased that the borders have been opened now and goods and services are freely traveling. Operations are starting to return to normal even though the country itself is probably going to go through a few gymnastics before its issues are solved. We're not out of the woods, but it certainly is looking a little brighter than it was two weeks ago. The value hasn't gone away, but we're waiting to see some better outcome on the political front.

TGR: What did you make of the recent drill results of Southern Arc Minerals Inc. (SA:TSX.V; SOACF:OTCQX), particularly the 83 meters of 0.33 grams per ton gold and 0.80% copper at the West Lombok project in Indonesia?

BA: Southern Arc modified its exploration program for 2012 to focus on areas that are outside of forestry reserve. Historically in Indonesia, a company could operate within a forestry reserve even if it didn't have the official permits as long as it had applied for them. Southern Arc received counsel that that was probably not a good way to operate at this time.

Those drill results were designed to test a porphyry system in the south and west of Lombok Island. It shows there's a system bubbling around there. This area has the right geological conditions to yield porphyry systems. The grade was just not one that you would get all excited about, but good intercepts show anomalous mineralization of copper-gold over good regional widths. I look at it as encouraging. The property's right and the people are right. We'll see by the way it grows that.

TGR: Premier Gold Mines Ltd. (PG:TSX) recently announced that the Red Lake Haulage Drift crossed onto the Rahill-Bonanza joint venture in the Red Lake district. What does that mean for Premier's shareholders?

BA: It illustrates that the Rahill-Bonanza property is strategically located. That is significant in the mind of Premier Gold because that drift will provide access to deep exploration potential in the camp and in an area where the mineralization has shown to be quite deep. It's more of a symbolic statement than anything meaty and juicy. It just says that the company is dead center in that play and is seeing underground access to its project, which will allow it to more completely explore that area. However, you have to qualify the enthusiasm in the sense that Goldcorp Inc. (G:TSX; GG:NYSE) controls the exploration on that joint venture. So, it will be done in Goldcorp's time, not Premier Gold's time.

TGR: Premier also entered into an agreement to buy the Cove gold project in Nevada.

BA: I scratch my head a little bit on that acquisition. It's not clear to me what opportunity Premier sees there other than it was available. My memory goes back far enough to remember when Cove was an operating mine at Echo Bay. I know what the mine did for Echo Bay. I saw what Victoria Gold Corp. (VIT:TSX.V) tried to do with the asset. It's not clear to me what Premier thinks it can do that two previous operators couldn't deliver. There's a small resource there, but the ground was particularly problematic to operate in. It would have to be a particularly good grade to compensate for the poor ground.

TGR: How did Premier make it on your list then?

BA: We have been actively involved in the Red Lake camp going back to the initial days of Goldcorp and Rob McEwen. I have had very good experiences in the area. I feel I have a good handle on what it takes to be successful there. Two companies caught my eye as having the capability to make it: Rubicon Minerals Corp. (RBY:NYSE.A; RMX:TSX), which has been reasonably successful in its exploration, and Premier Gold. Now Premier Gold has moved way beyond the Red Lake camp and has developed a whole U.S. strategy, which involves Nevada. Its Saddle property in Nevada is adjacent to Newmont's assets. I kind of went to bed in Red Lake and woke up in Nevada. It's not where I really intended to be.

TGR: I don't think you're the first to do that.

BA: I'm sure. Premier is a very aggressive explorer. That's what I liked about it. But the move to Nevada is a little bit more of a departure.

TGR: Are there any other companies that really interest you?

BA: There is one company facing some issues, which we're trying to take advantage of for investors. Lake Shore Gold Corp.'s (LSG:TSX) stock certainly would not get you terribly excited, but we recognize there is certainly some very good resource potential. It has already released resources that are well over 7 million ounces. It has an operating mine, but it's not operating up to where it ought to be. This is another story about execution. We also know that if current management does not get it right, there are others in the Canadian mining industry that will. We're intrigued by the asset value, and we're getting it at a good value irrespective of what gold prices are doing.

TGR: Is the message to investors to wait until later in the year for performance and approach with caution?

BA: Yes, take a low-beta strategy through the year, increasing weightings in the August time period to enjoy a better return at the end of the year. Investors just looking for some good companies that will do well irrespective of the gold price should go back to the AuRicos and Lake Shores where there's value to be unlocked and all they need to do is wait for them to execute over the next 12 months.

It doesn't really matter what the gold price does. We're just looking at companies where the value is there and there's a real proposition that that value is getting unlocked within 12 months.

TGR: I enjoyed speaking with you, Barry.

Barry Allan joined Mackie Research's investment banking department in 1998 as a mining specialist and transferred to the research department as a mining analyst in 2001. He has worked in the mining sector for over 15 years, serving as a gold and precious metals mining analyst with Gordon Capital, BZW and Prudential Bache. He holds a Bachelor of Science degree in geology and a Master of Business Administration degree from Dalhousie University.

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) 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: Avion Gold Corp., La Mancha Resources Inc., Southern Arc Minerals Inc., Rubicon Minerals Corp., Premier Gold Mines Ltd., Argonaut Gold Inc. and Goldcorp Inc. Streetwise Reports does not accept stock in exchange for services.
3) 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.

John Kaiser: The merger between NEO Material and Molycorp combines NEO’s knowledge about producing and fabricating downstream products from rare earths (REEs) and other specialized metals with Molycorp’s emergence as a major U.S.-based REE supplier, especially light rare earths (LREEs). Within two years, Molycorp’s Mountain Pass project will deliver a substantial portion of global supply. The output from Mountain Pass and Lynas Corp.’s (LYC:ASX) Mt. Weld project will boost global output to 170,000 tons, knocking China off its perch as the 95% dominant supplier to a less overwhelming position of 65%. That will alleviate some of the anxiety underlying what the Brookings Institution calls “mutual strategic distrust” between China and the U.S.

The Brookings paper emphasizes the need for the government to become more accommodating about Chinese ownership of American assets, especially if it involves capital investment. Right now we have a one-way street where western capital invests itself in China, ships back cheap goods to Europe and the United States, and waits for access to the Chinese consumer to open up. Not only would Chinese investment in America put their strategic goals more in harmony, but it might prod American companies to invest some of the trillion dollars they are hoarding because of the uncertainty over how the seemingly opposed destinies of China and America will play out.

TCMR: Toyota has a pending REE deal with Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX) in Canada. German manufacturers are talking to Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK; T61:FSE) in Sweden. Will deals like this end China’s monopoly on REEs, lower their price and encourage more manufacturers to use these elements?

JK: Historically, REE prices have been very low due to China’s abundant resources and its ability to produce them very cheaply. China is aware that it could become the world’s biggest polluter when its economy eclipses that of the U.S. China is very concerned about making sure it has the raw materials on hand to assure its clean-energy future. The supply restrictions China introduced a couple of years ago were part of a campaign to clean up and consolidate its high-pollution industries. Those restrictions resulted in spectacularly high REE prices for export and substantially higher prices within China. Since July 2011, the drop in demand and China’s inability to control smuggling resulted in a pullback in REE prices. To some degree, I think China wants its monopoly to end. China’s ambitions go far beyond squeezing a few profits out of a market it controls.

All of this was a wakeup call. Companies all over the world realized that their new technologies can no longer rely on cheap REEs from China. Toyota’s deal with Matamec, which is essentially a 100% offtake agreement, is critical to Toyota’s plans to continue manufacturing hybrid and electric cars over the coming decades.

What distinguishes projects such as Tasman’s Norra Karr, Matamec’s Kipawa, Avalon’s Nechalacho and Quest Rare Minerals Ltd.’s (QRM:TSX; QRM:NYSE.A) Strange Lake is that these deposits offer the full spectrum of rare earths from lights to heavies. China’s natural rare earth abundance is skewed toward LREEs of the sort Molycorp and Lynas are bringing onstream. China’s bounty of HREEs are restricted to a group of rapidly depleting low grade clay deposits in southern China. While it is questionable that the world needs any more major light rare earth mines beyond Mountain Pass and Mt. Weld in the near term, bringing on stream heavy rare earth supply is in the interest of everybody, including China.

TCMR: What are China’s goals? Is the endgame to have companies move to China?

JK: China’s primary goals are to make sure the country does not run out of these critical materials. A secondary goal is to clean up the pollution. As China becomes more of a middle-class society, quality of life becomes a pressing issue. If the Chinese public rallies against pollution, it could become a destabilizing nightmare for the government.

Introducing supply quotas created a situation where end-users outside of China had to consider moving their production capacity there to get materials at a reasonable price. Technology companies have moved to China, creating a serious bone of contention related to the theft of intellectual property.

For the next two to four years, China will be in a position to force the transfer of technology production into China, where it can be co-opted by domestic companies and companies owned in part by the state. These companies would in turn compete with western companies. This is a convenient byproduct of China’s long-term strategy.

TCMR: If manufacturers will be able to source materials outside China, will they move out or stay in Asia, where the market is growing?

JK: Companies know that it is wise to have a foothold in Asia, the world’s biggest long-term growth market. Companies already there are likely to stay. In the case of NEO Material, I would be very surprised if Molycorp ends up shipping REEs to China to be processed at its facilities, as [Molycorp CEO] Mark Smith suggested in the post-merger conference call. Molycorp’s output will first flow to facilities Neo has outside of China, such as those in Thaliand and Germany. Neo currently holds export quotas that are still in the “provisional” category awaiting environmental clearance even though NEO claims to have been exemplary in complying with new regulations. I believe the true value of the NEO/Molycorp merger lies in the possibility that NEO will be able to transfer its know-how outside of China, possibly back into the United States itself. It is interesting that of the 472,000 manufacturing jobs created since 2010 in the United States, 120,600 have come in the sub-sector called “fabricated metal products.” I do believe that once the merger has closed, Molycorp will look at acquiring a major deposit outside of China that will give it control over a full spectrum of rare earths. Because NEO is also involved with the fabrication of zirconium metal products, I would expect Molycorp to be interested in Avalon, Quest or Tasman, whose heavy rare earth deposits will also include a zirconium credit.

Allowing Chinese capital to invest in the U.S. would also address the trillions of U.S. dollar reserve assets China holds. We could see a migration of capital into the U.S., tapping into American automation technology and rebuilding the domestic manufacturing base. This evolving trend could put the American economy back on an uptrend.

TCMR: Will the price of oil influence where manufacturing facilities are located?

JK: The cost of moving goods across the Pacific and Atlantic oceans is likely to stay high. However, we may see different pricing for oil in the immediate vicinity of North America. We already see a significant difference between Brent oil and West Texas Intermediate oil. One must also keep in mind the fixed cost of multiple port handling and cargo transfer charges, which become more important as the production cost of Chinese goods destined for export markets rises.

In competitive terms, making your goods in the U.S. in a highly automated manner and shipping it to distribution centers cuts both the cost and the risk of shipping them across the ocean. Chinese companies are already looking at importing automation technology to deal with their rising labor costs, which strikes me as a recipe for domestic trouble. It would make more sense to make this sort of investment in America where three decades of manufacturing job losses have choked off labor opposition to automation.

TCMR: You mentioned Matamec and Tasman. Are those two companies ahead of the pack when it comes to development? What hurdles do they still face?

JK: Molycorp and Lynas Corp. are the two companies in the lead with high-grade LREE projects. Molycorp is marching along very nicely. Lynas is hung up in Malaysia due to political opposition to how the company wants to deal with the radioactive thorium waste from processing REE concentrates. If these two companies come fully onstream, they will glut the market with LREEs, primarily lanthanum and cerium, as well as a fair amount of neodymium, the key REE used in magnets. This will bring free-on-board prices down and may even lower the current domestic spot price in China.

Next come companies with a mix of REEs, which I call full-spectrum deposits. In this group, Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) is the most advanced. It hopes to have a feasibility report on its Nechalacho project done by the end of 2012 with permits in place by the middle of 2013 to initiate construction.

The other companies with large projects are Quest Rare Minerals, Tasman and Matamec, which have all done preliminary economic assessments (PEAs). Quest has been working on a prefeasibility study for more than a year and expects to have it done in H2 of 2012; Tasman and Matamec are just starting prefeasibility work. However, if Matamec’s deal with Toyota goes to the next step, Toyota will define feasibility, which need not be as rigorous as an independent “bankable” feasibility study. If Toyota is satisfied the metallurgy works and the costs are in line with what it would want to pay for rare earth oxides in the market, it could make a production decision for Kipawa much sooner than would be the case for an independent company.

TCMR: Matamec’s PEA targets production for Q216. Do you think that is plausible?

JK: I think it is plausible, assuming Toyota is satisfied with the flow sheet. Toyota wants to mine the Kipawa deposit very aggressively. Matamec is confident that over time, it will find additional mineralization and will be able to stretch production beyond the current 11-year forecast.

Remember, Toyota wants a 100% offtake deal. That would make all the REES from Kipawa available to one major manufacturer. The rest of the world will have to look to to Avalon, Quest and Tasman.

TCMR: It looks like Avalon is scheduled to go into production in late 2015. What about Tasman and Quest?

JK: At best, I would expect them to break ground in mid-2016, followed by commercial production in 2017, assuming everything goes smoothly. Although Tasman is a year behind Quest, the location of Norra Karr in southern Sweden close to infrastructure will shorten the development timeline.

TCMR: You mentioned that a lot of REE companies may not survive the next five years. How many will be left when the dust settles?

JK: In 1992 in the junior mining sector, nobody was paying attention to diamonds. Then Lac de Gras was discovered. Within four years, there were 200 diamond exploration companies. Twenty years later, there are six junior companies still in the game. The REE junior space will be similar, but in a shorter timeframe.

The period from 2015 to 2020 is critical for REE production coming onstream, which means if a company’s project is not at an advanced stage right now and does not have a full spectrum of REEs—heavy and light—that company is not in the game anymore. It is too late for grassroots exploration for REEs. I regard half a dozen companies as serious contenders. End users must make decisions during the next 12-18 months about which projects they will back financially in order to secure their needs in 2015-2020. This does not mean exploration juniors should give up trying to make new rare earth discoveries. But they must accept that their discoveries will not be considered for production earlier than 2020. Meanwhile, they will have to endure market uncertainty about future rare earth demand. Some observers believe that the current shortages are causing permanent demand destruction that will result in a supply glut in 2015-2020 that renders the current crop of advanced projects future economic failures. Others believe the demand destruction is temporary. Demand will rebound and achieve new heights once it becomes clear that non-Chinese supply is coming on stream.

I belong in the second camp. Toyota’s new Prius C line is a hybrid priced below $20,000 whose sales pitch is not its “green status” but rather its fuel efficiency of 46-53 mpg. It is the hottest selling small car in decades. During the next decade, the streets will be ruled by conventional hybrids that use rare earth-based permanent magnets and the nickel-metal-hydride batteries that use the rare earth lanthanum.

So even if many of the rare earth projects do not make it into the 2015-2020 production round, the current REE boom is creating a future inventory for the world to draw on if these various clean technologies do take off and continue to require significant amounts of REEs.

TCMR: Graphite seems to be the newest “it” mineral. What are the most positive projects out there?

JK: China is the dominant producer, with about 65% of the graphite supply. But its best deposits are heading toward depletion. Because of the boom in the price of large-flake graphite prices, a lot of deposits, in Canada for example, are being revisited. Of these projects, you need a large enough flake with minimal impurities. Northern Graphite Corporation (NGC:TSX; NGPHF:OTCQX)has resurrected the Bissett Creek deposit in Ontario. Flinders Resources Ltd. (FDR:TSX.V) has resurrected a project in Sweden. Northern Graphite and Flinders are the most advanced public projects, though a number of advanced and operating private graphite projects are being readied to go public by IPO or reverse takeover.

The rest are grassroots projects or ones where graphite was intersected by past drilling campaigns seeking base metal discoveries. They were never delineated because they were failures. Early-stage graphite projects have better potential for attracting market attention than early-stage rare earth projects because they are simpler to develop and the big market demand is still down the road.

Unlike the REE sector, where each project requires a custom chemical plant, we will probably see a boom in mergers and acquisitions in the graphite space. Graphite projects do not command billion-dollar valuations; their small size and the comparatively low unit cost of graphite limit individual projects to net present value-based valuations below $200 million (M). The long-term supply will have to come from multiple operations, not a handful of world-class mines. Once companies drill their targets and demonstrate deposits of 20–30 million tons of 5–10% of the right sort of graphite, bigger companies will buy them up.

TCMR: When would Northern Graphite reach production?

JK: Northern Graphite hopes to publish a feasibility study in Q212. The permitting process is not complicated, so it could be in production by the end of 2013.

Flinders was in production at one point; this is really a case of refurbishing the mill and putting it back into production.

TCMR: What are the prospects for non-Chinese companies developing tungsten?

JK: A number of smaller operations are attracting attention. Sojitz Tungsten Resources Inc. (2768:JSX) bought out Primary Metals’ Panasqueira deposit in Portugal in 2007 and now uses it as a supply for tool-making.

Woulfe Mining (WOF:TSX.V) acquired Sangdong, the historic Korean tungsten deposit. Woulfe just did a deal with International Metalworking, which is controlled by Warren Buffett’s empire. International Metalworking invested directly in the mine and will develop a processing plant to upgrade the concentrates to ammonium paratungstate (APT), which is the primary form of tungsten used by manufacturers.

This is another example of end-users not waiting for the market to solve their problem. Instead, they are tracking down the juniors and putting up the capital directly.

North American Tungsten Corporation Ltd. (NTC:TSX) has the Cantung Project in Canada. Its production is on and off and really needs the current tungsten price to be profitable.

I am also watching EMC Metals Corp. (EMC:TSX). Its Springer deposit in Nevada is a mill that needs $30M more to come fully onstream. Ironically, Springer was created in the late 70s by General Electric when China jerked the tungsten price higher. Once the Chinese realized GE could produce its own tungsten, they let the price come down and GE mothballed the mine. Now, EMC would like to bring it back into production as an American tungsten source.

TCMR: Is that viable?

JK: It is if the tungsten price stays above $300/MTU. If the price sinks below $300/MTU, the mine would start to lose money.

For the past year, the price has been parked in the range of $400–450/million tons per unit (MTU) for ammonium paratungstate (APT) tungsten. Over the previous 15–20 years, the high had been $300/MTU, which is looking more like a base price these days. That is the level above which non-Chinese projects are economic to mine.

Incidentally, in 2011 total world tungsten production was valued at $3.7 billion (B), compared to $1B for graphite and roughly the same amount for lithium production.

TCMR: Is developing alternative sources to Chinese critical metal resources a better solution to the supply problem than the World Trade Organization’s (WTO) lawsuits? Or should both go forward on parallel tracks?

JK: When dealing with raw materials, it is always wise to have production coming from a variety of geographically distinct locations. Anytime you depend on a single-source supplier, you are setting yourself up for a malicious or accidental supply disruption. The latter could be a catastrophe that shuts down a key mine or a civil insurrection that makes the country incapable of producing anything.

If the WTO were massively successful—in other words, if China were to turn the taps back on—it would still be counterproductive, because China retains the ability to shut down its mines at any point. The WTO’s action is more a pressure tactic and is largely irrelevant to reducing supply dependency.

TCMR: If the U.S. economy continues to improve, how will that affect U.S./Chinese relations?

JK: It would help, because part of the tension is due to the trade imbalance. China knows it cannot rely on an export-based economy forever. It needs to develop a domestic economy.

After the crash, China bit the bullet and invested more than $600B in infrastructure development. It was counting on the U.S. to have emerged from the recession by now. Ongoing weakness in the U.S. economy increases the opposition to the import of low-priced Chinese goods.

None of this would be important if the American economy—in particular manufacturing—were growing again. Just as we need to rebalance global sources of raw materials, we need to rebalance manufacturing. Chinese capital investment in U.S. manufacturing capacity expansion would go a long way toward reducing the tension between the two countries.

TCMR: John thanks for talking with us.

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.

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) JT Long of The Critical Metals 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 Critical Metals Report: Matamec Explorations Inc., Tasman Metals Ltd., Quest Rare Minerals Ltd. and Northern Graphite Corporation.
3) John Kaiser: I personally and/or my family own shares of the following companies mentioned in this interview: Matamec Explorations Inc., Quest Rare Minerals Ltd., Tasman Metals Ltd., Flinders Resources Ltd., EMC Metals Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None.

The Gold Report: You told us about two ticking time bombs last September—the trillions of dollars owned outside the U.S. that could be dumped if the holders lose confidence and the trillions of dollars in the U.S. created to paper over the 2008 liquidity crisis. It's been six months since then. Have we averted the disaster or are we closer than ever?

Doug Casey: Things are worse now. The way I see it, what's going to happen is inevitable; it's just a question of when. We're rapidly approaching that moment. I suspect it will start in Europe, because so many European governments are bankrupt; Greece isn't an exception, it's the norm. So we have bankrupt governments trying to bail out the European banks, which are bankrupt because they've loaned money to the bankrupt governments. It's actually rather funny, in a perverse way. . .

If it were just the banks and the governments, I wouldn't care; they're just getting what they deserve. The problem is that many prudent middle class people are going to be wiped out. These folks have tried to produce more than they consume for their whole lives and save the difference. But their savings are almost all in government currencies, and those currencies are held in banks. However, the banks are unable to give back all the euros that these people have entrusted to them. It's a very serious thing. So European governments are trying to solve this by creating more euros. Eventually the euro is going to reach its intrinsic value—which is nothing. It's the same in the U.S. The banks are bankrupt, the government's bankrupt and creating more dollars so the banks don't go bust and depositors don't lose their money.

I'm of the opinion that if it doesn't blow up this year, the situation is certainly going to blow up next year. We're very close to the edge of the precipice.

TGR: Is the problem the debt, or all of the currency that has been pumped in?

DC: It's both. We have to really consider what debt is. It's the opposite of savings because savings means that you've produced more than you've consumed and put the difference aside. That's how you build capital. That's how you grow in wealth. On the other side of the balance sheet is debt, which means you've consumed more than you've produced. You've mortgaged the future or you're living out of past capital that somebody else produced. The existence of debt is a very bad thing.

In a classical banking system, loans are made only against 100% security and only on a short-term basis. And only from savings accounts that earn interest, not from money in checking accounts or demand deposits, where the depositor (at least theoretically) pays the banker for safe storage of his funds. These are very important distinctions, but they've been completely lost. The entire banking system today is totally corrupt. It's worse than that. Central banking has taken what was an occasional local problem, a bank failing from fraud or mismanagement, and elevated it to a national level by allowing fractional banking reserves and by creating currency for bailouts. Debt—at least consumer debt—is a bad thing; it's typically a sign that you're living above your means. But inflation of the currency is even worse in its consequences, because it can overturn the whole basis of society and destroy the middle class.

TGR: What happens when these time bombs go off?

DC: There are two possibilities. One is that the central banks and the governments stop creating enough currency units to bail out their banks. That could lead to a catastrophic deflation and banks going bankrupt wholesale. When consumer and business loans can't be repaid, the bank goes bust. The money created by those banks out of nothing, through fractional reserve banking, literally disappears. The dollars die and go to money heaven; the deposits that people put in there can't be redeemed.

The other possibility is an eventual hyperinflation. Here the central bank steps in and gives the banks new currency units to pay off depositors. It's just a question of which one happens. Or we can have both in sequence. If there's a catastrophic deflation, the government will get scared, and feel the need to "do something." And it will need money, because tax revenues will collapse at exactly the time its expenditures are skyrocketing—so it prints up more, which brings on a hyperinflation.

We could also see deflation in some areas of the economy and inflation in others. For example, the price of beans and rice may fall, relatively speaking, during a boom because everybody's eating steak and caviar. Then during a subsequent depression, people need more calories for fewer dollars, so prices for caviar and steak drop but beans and rice become more expensive because everybody is eating more of them.

Inflation creates all kinds of distortions in the economy and misallocations of capital. When there's a real demand for filet mignon, there's a lot of investment in the filet mignon industry and not enough in the beans and rice industry because nobody is eating them. And vice-versa. And it happens all over the economy, in every area.

TGR: But inflation rates don't seem to reflect the vast amounts of currency that central banks have injected into the U.S., European and other economies. The U.S. inflation rate was 2.93% in January and 2.87% in February. We haven't seen signs yet either of a hyperinflation or a serious deflation that we were warned would come with quantitative easing (QE). Does that mean QE is working after all?

DC: No. It's not just the immediate and direct consequences of what they do—everybody loves it when trillions of dollars are created. It feels good to have lots more purchasing media. The problem arises with the indirect and delayed consequences. All these dollars and euros—and Chinese yuan and Japanese yen—that have been created have basically gone into the banks, but the banks are not lending them out. The banks are afraid to lend and a lot of people don't want to borrow because they're afraid of taking on more debt. So the dollars that have been created, mostly invested in government paper, sit on the banks' balance sheets. They are not circulating in the economy at the moment. That's why prices aren't skyrocketing right now.

That's point number two, though. Point number one is that I wouldn't trust those inflation figures in the first place. The governments of Western Europe and the U.S. fudge inflation figures as certainly as the Argentine government fudges them, just less overtly and outrageously. They do that because they want to keep the perception of inflation down; they don't want people panicking, which is a pity, because the public should urgently do something to protect their capital. They also don't want to see Social Security payments and other payments that are tied to the consumer price index go up. They don't have the tax revenues to pay for them and will have to print even more money, which just exacerbates the problem. Official inflation numbers are unreliable; only somebody very naïve—like a TV anchorperson—could possibly believe them.

If you think of inflation as an increase in the money supply above the increase in real wealth—which is actually what the word means—the inflation rate is actually quite high at the moment. Real wealth is being created at lower rates than it historically has been, while the money supply is increasing tremendously. It's just a question of when that inflation rate manifests itself on a retail level. You've got to think like a real economist, not a political hack like Joseph Stiglitz or Paul Krugman. You have to see not just the immediate and direct consequences of something, but the indirect and delayed ones.

TGR: Given that this is an election year in the U.S., won't the government do everything possible to maintain a stable market and stop inflation?

DC: Sure, the government wants things stable. I have no doubt it is trying to keep the stock market up. It wants the stock market to stay high because pension funds and insurance companies and the public at large are invested in the stock market. It wants interest rates low, although artificially low interest rates are an economic disaster in that they encourage people to borrow more and save less. It would prefer to see precious metals, and all other commodities, at low levels. The argument is made that the governments of the world, especially the U.S. government, are manipulating the prices of gold and silver to keep them down, because when they increase, it's like financial alarm bells going off.

But they can't control the prices of the precious metals. In the real world, cause has effect. When you create trillions of currency units, eventually the price of those currency units relative to other things will go down. That's called inflation. Whether he's lying or he really believes it, Fed Chairman Ben Bernanke said he can control the levels of inflation. When it gets too high, he thinks he can rein it in somehow.

The current world monetary system is going to come undone. That's my prediction, and I'm betting on it massively, personally.

TGR: You've talked about the possibility of abandoning paper currency altogether and going to a digital system.

DC: The most important thing is to get the government out of money. There should be a high wall between the state and religion and an equally high wall between the state and the economy. I don't even like to talk about what governments "should" do as far as money is concerned because the governments shouldn't be involved in money—period. Money is a medium of exchange and a store of value. It shouldn't be a political football, nor should it be used as an indirect form of taxation, which is what inflation is. It should be a pure, 100% market phenomenon. Central banks should, therefore, be abolished. Paper currency should cease to exist—except as a receipt for money held on deposit. Historically, that's how it originated.

You could use any kind of commodity as money, but gold has proven since the dawn of civilization to be uniquely well suited for use as money. It's a market, which is to say a voluntary, phenomenon. Whether you represent that gold with bank notes printed by individual banks or by digital currency—which I'm sure the world is going to—makes no difference. But having the state in charge of currency is idiotic.

TGR: You've written about China moving away from the dollar. Do you see that happening gradually or all of a sudden? And would it be in favor of its own currency or more investment in gold? What impact would that have on gold prices?

DC: First of all, I think the nation-state as a form of organization is on its way out, and that a 100 years from now people will look back at countries like China and the U.S. the way we look back at medieval kingdoms today. In the meantime, the dollar is important because it's the numéraire for trade all over the world. At the same time, fewer and fewer people trust it, and they increasingly realize that it's the unbacked liability of a bankrupt government.

Eventually, it's going to be replaced by something else. India and Iran are trading between each other using gold and oil. Why use a piece of paper issued by a hostile and unreliable third party? The Russians and the Chinese can see how crazy it is to trade between each other using dollars, which all have to clear in New York. But people are still accustomed to using currencies issued by nation-states, and the U.S. dollar is everywhere and is therefore convenient. But it's a hot potato. People no longer trust it. I suspect the Chinese yuan will replace the dollar gradually—assuming the Chinese don't destroy the yuan as well. They're also creating trillions of the things to keep the economic bubble in China from imploding.

Before the Chinese yuan can replace the dollar, people must have confidence in it. The best way they can gain confidence in it is if the volume of yuan is limited and redeemable by the issuer in something real, something tangible. That's going to be gold. So I expect China will continue buying large amounts of gold to back its currency. China is already the world's largest gold producer. Considering that only about 6–7 billion ounces of gold have ever been mined in all the world's history, China alone could drive the price of gold much higher.

TGR: At your Recovery Reality Check summit in Florida April 27–29, you'll be talking about how business cycles have been turned on their heads. Is this the time for investors to sit tight, making only small adjustments to portfolios, or must they take more drastic action to protect their wealth or, better yet, profit from volatility?

DC: I think volatility is going to go way up in the future as the titanic forces of inflation and deflation fight with each other. This is a very poor time to make big bets in almost any conventional market because it's impossible to tell how things will finally settle, where the next major war will be and so forth. Stock markets around the world are not cheap now and bond markets are fantastically overpriced. Currencies are no more than floating abstractions. Commodities have been in a long bull market, so they're no longer a low-risk bet. Real estate—the most obvious thing for bankrupt governments to tax—is dangerous. In the developed world—especially in the U.S.—it floats on a sea of debt, which has driven it to artificially high levels. It's coming down as we speak, but it's nowhere near a bottom.

So there are very few places where people can still attempt to preserve capital. Everybody is going to be almost forced to be a speculator to try to stay in the same place. Speculating means capitalizing on politically caused distortions in the marketplace. That's the proper definition of the word.

TGR: What can people speculate on?

DC: Unfortunately, they have to second-guess where the money will go. I've always liked resource stocks, especially resource exploration stocks. It's a tiny market. If a fire gets lit under gold and silver, and I think it will, companies in this nanosector could explode 10, 20 or 50 times upward in price. It's happened many times in the past. Right now, these stocks are relatively cheap, so I like that as a speculative vehicle.

TGR: Rick Rule has cautioned against generalizing about the entire junior mining sector as a whole, because so many of these companies don't find anything. How do you decide which resource investments are worth looking into? Are there criteria? Is there some kind of a litmus test that you use?

DC: Rick is absolutely correct about that. Although the sector is capable of going upwards 10 or 20 times as a whole, most of the stocks in it are total garbage. The only gold, uranium, silver or whatever appears on their stock certificates, not in the ground they control. There are thousands of these little stocks, and yes, we have criteria we use to evaluate them. We use a tried-and-true due diligence process we call The Eight Ps of Resource Stock Evaluation to separate the wheat from the chaff among speculative investment opportunities.

TGR: Would you share that with us?

DC: Sure. This is a guide to help investors ask the right questions about every individual company they're considering. This list comprehends the essential, but you could write a book about each of these eight points.

• People: Who are the key players in the company and what are the track records of the companies they've managed? This is by far the most important criteria.

• Property: What resources are in hand, and what (if any) are the additional resources they expect to find? How well proven are they? Assessing this takes geological and engineering expertise.

• Phinancing: Does the company have enough cash to meet its next-phase objectives or have the ability to finance the cost of reaching those objectives? It's no longer a case of grubstaking a prospector and his mule.

• Paper: Capital is almost always raised from the issuance of new shares. Is there a lot of cheap paper out there that will keep the share price down? Will new or existing warrants or new shares dilute your own shares? Who owns most of the paper?

• Promotion: How and when is the company going to get itself (and its stock) noticed?

• Politics: Is the country or region mine friendly and stable? Are foreign investors welcome? Is there environmental resistance?

• Push: What's going to move this stock? Drill results, merger or acquisition, increase in the price of the underlying commodity, resolution of a legal issue?

• Price: What are the potential price moves of the underlying commodity that could have either a positive or negative impact on the value of the company?

TGR: How hard is it to find a company that passes muster on all eight counts?

DC: It's very hard. It's hard enough to look at the basic statistics of thousands of companies. Then you look at the people behind them. Generally, we try to find the people first. We stay away from those who have no history of success and have established that they have questionable characters. We look for people with long histories of success or appear to be about to embark on a lifetime of success. The most important piece is people. That's what we really look for most of all.

TGR: Based on all the calamities that could occur, how will you adjust your investing philosophy?

DC: Let me put it this way. We're going into something that I call The Greater Depression, much worse and much different than what happened in the 1930s. I think my friend Richard Russell said it best: "In a depression, everybody loses. The winner is the guy who loses the least." It's very tough to keep capital together today, much less make it grow in the years to come.

But I think it's possible. The thing to remember is that most of the world's real wealth will remain in existence regardless of what happens. The key is to position yourself so that more of it falls into your hands as opposed to falling out of your hands. That's what we're trying to do, to increase our relative share of the wealth in the world. We're not looking at boom times. What's coming will be the opposite of what we experienced during the artificial inflationary boom of the 1990s, where everything was going up—stocks, real estate and so forth. This is a time when, in real terms, most things will lose value. Most people will experience a real decline in their standard of living.

TGR: As we've discussed, at its root, paper currency is a substitute for something of value. Energy, similar to gold, has intrinsic value. It's always in demand. In the past, you've expressed optimism about uranium, natural gas and oil. As the dollar becomes suspect, do you foresee sources of energy becoming more valuable?

DC: Absolutely. I'm very bullish on oil. The world runs on fossil fuels today because they're ideal sources of highly concentrated energy. Unfortunately, all of the easily available, cheap fossil fuels have basically been found. The low-hanging fruit is gone. This is what the peak oil theory is about. Plenty of oil remains, but it's going to be more expensive to get it. To find oil now requires going to exotic places without infrastructure and with big political problems. It requires going much deeper into the ground, exploring under the ocean, using new technologies, and so forth.

Gas is secondary to oil when it comes to concentrated sources of energy. Of course, with the development of new technologies, primarily horizontal drilling and new fracking techniques, a huge amount of natural gas has become available all over the world. But it takes tremendous capital to retrieve it, and it also faces political problems.

But in summary, I'm bullish on energy of all types. There is plenty of fuel out there. It's just a question of the price level, so it becomes economic to retrieve it.

TGR: So how do you invest in finding the rest of what's out there?

DC: You look for companies that are exploring for it. One of the important things that makes me very bullish on oil is that most of the oil in the world today—something like 80%—is not owned and produced by BP Plc (BP:NYSE; BP:LSE), Exxon Mobil Corp. (XOM:NYSE), Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) and companies like that. It's mostly owned and produced by national oil companies such as those in Mexico, Iran, Saudi Arabia and Venezuela. These state oil companies are universally corrupt and inefficient. The profits from the oil are generally used as piggybanks by those governments, not to build capital and find more oil. Furthermore, where governments allow private exploration, such as Iraq, they take about 80–90% of the potential profits from oil, which of course discourages exploration and exploitation of the resource. The problems are almost entirely political, but they're big problems.

TGR: Speaking of the politics of energy, are you still bullish on uranium in light of the politics of what's gone on since the Fukushima meltdown?

DC: Yes. I've said it before and continue to say it. There's no question that nuclear power is by far the safest, cleanest and cheapest type of mass power generation available. Fukushima survived one of the most severe earthquakes in recorded history with no problem; it's just a pity they didn't adequately plan for a 45-foot tidal wave on top of it. In addition, those plants basically were 50-year-old technology. If it weren't for political obstructions, we'd be using vastly improved technology. But it's not just uranium. Thorium is actually a much better fuel from many points of view and probably would have been used as a fuel instead of uranium except that the governments of the world found uranium useful for nuclear weapons as well as nuclear power.

Nuclear power is definitely the answer, but as you point out, it's a question of political problems. Across the resource industry, in fact, it's all politics. When you find a gigantic resource of some type, you can count on lawsuits, not-in-my-backyard opposition and political theft. Those are among the reasons that I don't see the resource industry as a place to make investments. It's only a place where you can speculate.

TGR: So what should long-term investors do to protect themselves?

DC: Because the big problems in the world today all are political, the critical thing is to diversify politically and internationally. You can't have all your assets under the control of one government or in one country. Then, of course, you have to find the right place to put the money within that framework.

TGR: How do you do that?

DC: I can write a book on that.

TGR: Or stage a summit? You have quite a faculty lined up.

DC: It is an impressive group. Actually, this summit has dual overarching purposes. As we've discussed, the massive amounts of money the world's governments have unleashed in their economies have lit a small fire of recovery. We're going to talk a lot about whether the world is truly on a path to recovery or whether investors wouldn't be wise to develop and implement Plan B now, given that the extreme levels of debt that were such a major factor in creating the current crisis have not been reduced. To me, that strongly suggests that this so-called recovery is unsustainable and calls for moving into Plan B. Part of Plan B involves identifying optimal investment strategies for the markets ahead.

TGR: What sorts of takeaways are in store for people who attend?

DC: Let's have David Galland, who's been instrumental in preparing for this summit, respond to that. (A senior market strategist, Galland is managing director of Casey Research LLC, managing editor ofThe Casey Report, International Speculator and Casey Investment Alert and author of Casey's Daily Dispatch.) 

David Galland: We expect the takeaways will be good answers to many burning questions. As Doug has suggested, the government says the recovery is real and your broker will tell you it is, yet the underlying data suggests that it may be a paper tiger. So, what's the hard truth? Should you be moving aggressively into rebounding equities? Or is the recovery a mirage that will dissipate in a second crushing leg down for the economy and traditional investment markets? What are the road signs you need to pay close attention to? How can you position your portfolio to do well in either scenario and, most importantly, to hedge against the worst case? Should you worry about inflation or deflation? Neither? Or both? Will the gold and silver you've been holding turn to lead and pull your portfolio down? Or is loading up on corrections still the right thing to do?

TGR: These summits are always sold-out affairs. Is this one full already?

DG: Just a few spots remain as we speak.

Even if you can't make it to the Casey Research Recovery Reality Check Summit April 27-29, you can still listen to every piece of actionable investment advice attendees will hear with the Summit Audio Collection. This expansive audio set will feature every recorded Summit presentation, including those from David Stockman, director of the Office of Management and Budget under President Reagan. . .Harry Dent, author of The Great Crash Ahead. . .Casey Research Chairman Doug Casey. . .and 28 other financial luminaries. Pre-order before the Summit starts and get the entire collection for $100 off. 

Doug Casey, chairman of Casey Research LLC, is the international investor personified. He's spent substantial time in more than 175 different countries so far in his lifetime, residing in 12 of them. And Casey's the one who literally wrote the book on crisis investing. In fact, he's done it twice. After The International Man: The Complete Guidebook to the World's Last Frontiers in 1976, he came out withCrisis Investing: Opportunities and Profits in the Coming Great Depression in 1979. His sequel to this groundbreaking book, which anticipated the collapse of the savings-and-loan industry and rewarded readers who followed his recommendations with spectacular returns, came in 1993, with Crisis Investing for the Rest of the Nineties. In between, Casey's Strategic Investing: How to Profit from the Coming Inflationary Depression broke records for the largest advance ever paid for a financial book.

Casey has appeared on NBC News, CNN and National Public Radio. He's been a guest of David Letterman, Larry King, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin and Maury Povich. He's been featured in periodicals such as Time, Forbes, People, US, Barron's and the Washington Post—not to mention countless articles he's written for his own websites, publications and subscribers. Casey Research currently produces 11 publications on a variety of investment sectors and maintains two websites. 

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) 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 company mentioned in the interview is a sponsor of The Gold Report: Royal Dutch Shell Plc.
3) 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.

The Gold Report: Cambodia's gross domestic product (GDP) is roughly $13.2 billion (B) annually, or around $1,000 a person, according to the Association for Southeast Asian Nations. It's clearly an impoverished nation, but until the last few years, the country has done little to develop its mineral wealth. Why?

Richard Stanger: Mainly because there was almost no information available about the geology of the country. Most of it was destroyed during the civil war. The country is a bit of a secret. People don't know much about Cambodia, or, in some cases, even where it is located. The infrastructure was pretty poor until recently. Roads were very difficult to travel. Telecommunications were really undeveloped. There was almost no infrastructure available for exploration.

TGR: How did you find your way to Cambodia?

RS: I was looking for a country that had the right geological setting and a good government with a legal system that is workable. Cambodia fit that bill.

TGR: What is the country's current GDP growth rate?

RS: It's averaging about 6.5% at the moment. I believe that it will be significantly higher this year. It may be double-digits.

TGR: What metals and minerals is Cambodia prospective for?

RS: It's one of those countries where there are not many outcrops. It's not so easy to walk around in the rocks and find things, but they're there. There's a lot of sediment covering the country. However, the country is very prospective for gold, copper and base metals, iron ore and other industrial metals such as zirconium, graphite and titanium. It covers a wide range.

TGR: What would tempt junior mining companies to invest and explore for metals there?

RS: The key to the country is that it's open for business and has a stable, committed government that wants to develop the economy. There is an economic and legal framework for companies and foreign investors to come and work. The country has great financial controls. It's easy to move money in and out of Cambodia.

The people are really excellent—honest, welcoming and hard working. I can't say enough about them. It's a very safe country. The operating costs are low. There is rapidly developing infrastructure, as well as infrastructure specifically related to the mining exploration industry. There are a number of drilling companies and geological services here.

TGR: Are there any assay labs?

RS: Two recently opened.

TGR: Going back 5 to 10 years, Cambodia is similar to what country?

RS: Some people keep saying Colombia, however Mongolia is a really good comparison. I went to Mongolia fairly early. Nothing actually happened there for five years and then it just started booming.

TGR: After decades of civil war, Cambodia is slowly finding its feet and has established democratic elections under a constitutional monarchy. However, according to Transparency International, Cambodia is the fourth most corrupt nation in the world. What are your thoughts on that?

RS: As an investor, I don't understand that rating at all. I'm kind of perplexed about it, really. That rating is purely perceptual and it's non-empirical. I actually think they just flat out got it wrong. And I'm not the only person that would say that.

TGR: What are some risks associated with Cambodian investment?

RS: It's really difficult to find too many risks. Cambodia has internationally recognizable laws, a very stable government that won by a landslide in the last election, infrastructure development and an incredible number of companies pouring into the country to invest. The development is exponential. I know it sounds unrealistic, but there are very few reasons not to invest in this country. It's just been a secret for a long time.

TGR: Foreign direct investment in Cambodia has almost doubled to $5B within the last year. Where is that money going?

RS: That figure is likely to be a lot higher this year. A lot of that money is going into manufacturing. There are some significant manufacturing facilities being constructed here. It's also going into agriculture, banking and finance, construction, infrastructure and development, tourism and food processing. There really isn't a mining industry in Cambodia yet. It's really an exploration industry at this point and therefore exploration expenditure is not included in foreign direct investment.

TGR: When money starts pouring into a country that's never really seen that kind of prosperity before, things can go wrong. Is the government that's in place able to manage this newfound windfall and development?

RS: I really think so. There's been a lot of growth behind the scenes over the last few years. This government is very aware of its position, not only in Asia, but also globally. It's been careful to develop the economic framework for investment. The government has well-educated and clever people with international experience, particularly the prime minister, senior government leaders and advisers. There are a lot of younger people coming back to Cambodia after studying and working overseas to help develop their own country.

TGR: Does Cambodia have any form of capital markets?

RS: The stock exchange, which has been in development over the last three years, opened this month and has run an initial public offering of the Phnom Penh Water Authority. Cambodia has proper securities laws, a regulator and an exchange with one company trading so far.

TGR: Not surprisingly, the Chinese are already in Cambodia. Guangxi Nonferrous Metals Group invested $22 million (M) into construction of a steel processing plant there. Late last year, China's state-owned Xinhua news agency reported that Chinese companies planned to invest as much as $500M in Preah Vihear province. Do the Chinese plan to explore for gold in Cambodia?

RS: There are a couple of companies here looking for gold. However, Chinese companies are generally not interested in exploration. They're more interested in development.

TGR: What should investors know about Cambodia in your view?

RS: Cambodia is an investor friendly country with a stable democracy, excellent investment laws, some incentives and a legal and fiscal system constructed to encourage development. It has a world class banking system with more than 50 banks, a number of large commercial banks and none were impacted in the global financial crisis. There are a lot of places that investors can put their money in this country. There are so many opportunities here and it is still early days.

TGR: What are some of the mining companies currently operating in Cambodia?

RS: The publicly listed companies are Angkor Gold Corp. (ANK:TSX.V), Brighton Mining Group Ltd. (BTN:ASX), Southern Gold Ltd. (SAU:ASX), Indochine Mining Ltd. (IDC:ASX) and Renaissance Minerals Ltd. (RNS:ASX). There are also unlisted companies, such as Liberty Mining International Ltd.

TGR: What are the primary commodities being sought by those companies?

RS: Gold, copper and base metals are the prime commodities being sought. Gold is the highest priority at this stage because it's the easiest to develop in a country that hasn't had a mining industry previously.

TGR: Since it's really about exploration at this point, what companies have locked up a significant land package? Which have drills turning?

RS: The most active company at this stage is Angkor Gold. It has three drill rigs operating, more than 10,000 meters (m) planned this year and probably 150 people working in the field. It's working on multiple targets and has a large land holding. It's run by the visionary CEO Mike Weeks, who is also philanthropic in his outlook. He does a lot of social development work, as well as the mining exploration.

TGR: He's originally an oil and gas guy. Does exploring for gold in Cambodia seem like a bit of a stretch?

RS: He came from an oil and gas background, but I can tell you from spending time with him that he's 100% focused on developing Angkor Gold.

TGR: Does Angkor plan to option some of those properties to other companies?

RS: Not at this stage, I believe. However, it could be open to that further down the track when some of the projects get closer to the resource stage. I've spoken with management and they would be open to talking to other companies about coming in to explore some of the other targets because the company does have a large land package.

TGR: Has Angkor had any positive drilling results?

RS: Yes. The two main areas it's focusing on have quite different geological settings. One of them is a more structurally related, epithermal gold vein system with a potential of at least 0.5 million ounces in the first stage. The other area is a copper-gold-moly porphyry system, which is being actively drilled right now. Both of those areas—the second one in particular—have huge potential and are getting good results.

TGR: Has the copper-gold system been explored before?

RS: The area with the copper-gold-moly system has been explored since 2005. This year, Angkor is getting close to the source of a very large anomalous area.

TGR: Are there other companies on the ground trying to prove up some ounces with the drill bit?

RS: Renaissance Minerals has a drilled up Indicated resource. It has quite a land package and a growing resource of currently about 720,000 ounces at the Okvau gold deposit. I am aware that the company is planning a significant ongoing drilling program to commence almost immediately. It has probably drilled about 50,000m and has a number of other immediate targets in the area. Renaissance is a success here and will be one of the early starters as far as mining is concerned.

TGR: Are any other companies that far along?

RS: There are other active companies, such as Indochine Mining. It has a big land package and is actively exploring it. Indochine has carried out extensive field work and drilling programs along with Southern Gold and Brighton Mining Group. However, I believe those companies do not yet have anything like the advanced projects of Angkor Gold. I think it's safe to say Angkor will be the next company up and running with a resource inside of a year or so.

TGR: Are you getting more calls from your friends in Australia these days?

RS: Interestingly, I've had one company after another up here in the last six to eight months. It's remarkable how many companies are interested in getting involved in existing projects, joint venturing, picking up new areas or getting on the ground to learn about the country. I'm expecting a little bit of a land rush in the near future. A lot of people are trying to get involved in the business here now.

TGR: I guess Cambodia isn't a secret anymore?

RS: That's what we like to think. We had an international investment conference here last year; it was well attended. That was one of the things that was brought up at the conference: Cambodia is no longer a secret. It's quite staggering. A number of airlines fly directly into Cambodia now. The flights aren't just for tourists—they're filled with investors. Investment and venture capital funds are setting up here. I can't imagine what it will be like in five years.

TGR: Thanks for sharing your insights on Cambodia, Mr. Stanger.

Richard Stanger is the founding and present president of the CAMEC (Cambodian Association For Mining And Exploration Companies) and has been actively involved in the development of mining exploration in Cambodia since 2004. Stanger is an explorationist/businessman with more than 20 years of involvement in mining and exploration. Previous experience includes directorship of several Australian listed public companies as well as numerous unlisted entities, direct mining experience and a number of years in the management consulting industry primarily focused on the mining industry.

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) 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: Angkor Gold Corp. Streetwise Reports does not accept stock in exchange for services.
3) Richard Stanger: I personally and/or my family own shares of the following companies mentioned in this interview: Angkor Gold Corp., Liberty Mining International 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 story.

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 Gold Report: This is an election year and everybody is waiting to see what happens with the economy between now and November. The Federal Reserve just signaled that it may be less willing to provide more stimulus. What's your reading on that?

Chris Marchese: The Fed meeting minutes signaled that the members are willing to be very accommodating if gross domestic product (GDP) slows down, if it doesn't maintain a 2% inflation rate and/or unemployment starts to creep back up. Then they tried to play the metals down; they don't like high gold or silver prices because they delegitimize the dollar. I think they are doing that in preparation for the next round of quantitative easing, which in my opinion will just be an extension of Operation Twist that ends in June.

TGR: So you think that's all pretty much in place, regardless of how numbers look, unless there's some drastic change?

CM: Yes, real GDP is supposedly growing, but our deficits are running higher, and 21.5% of that is government spending, which doesn't include any Social Security or the like. If you take that $3 trillion (T) out, our economy is smaller or roughly the same size as it was back in 2006. So there hasn't been a recovery, even though they try to paint it that there is.

I can make the argument that things have gotten worse. There hasn't been any growth, and unemployment has been getting worse if you count discouraged workers, people no longer considered unemployed and people forced to take part-time jobs or jobs that they're overqualified for. John Williams of shadowstats.com calculates these numbers. Last month, it was almost at a record high of 22.5%. Even the U.S. Bureau of Labor Statistics has it at 15%, and it hasn't really budged.

TGR: What happens if the recovery stalls—or if it takes off faster than expected?

CM: I think that Fed Chairman Ben Bernanke and President Barack Obama might do stimulus, tax cuts or something like that to get a short-term hit. It's like heroin, you get a short-term high, then you come down hard again. We've been doing that since we got rid of the gold standard altogether. It's just the boom/bust cycle that eventually runs out when no one trusts our currency anymore. A growing population is already starting not to trust it. Politicians like to talk the talk—"oh, we're going to cut $2.6T over the next decade." Well, it's going to be out of control by that point. Everyone should read the GAO Report, written by the people who audit the government. The phrase "material weakness" is used 50 some-odd times. If that was the case when we filed our taxes, we'd be thrown in jail.

TGR: What do you think the chances are for inflation getting out of hand?

CM: I think it's already a problem. I use what's called True Money Supply, which is basically all currency that's readily available for use and exchange—currency, coins, notes, checkable deposits, savings deposits and the like. That's been growing between 10% and 15% over the last three years.

TGR: What's going to happen with precious metals if the economy stalls, or if inflation really picks up?

CM: I think it's a win-win either way. For one, as opposed to the 1970s, this is an entire-world problem. China has inflation. Argentina has inflation. Europe is going to have inflation. Everyone is running the money spigots non-stop. I think Bernanke is not going to let this economy stall. It's either going to take off through inflation and people will go to the metals, or he'll do another stimulus and if that doesn't get things going, he'll do another and another. At some point, it will be too much. Either way, I don't think the metals will do anything spectacular until the end of the summer. At that point, if the economy is not looking good enough, I think Bernanke will do everything in his power to make Obama look good to get re-elected.

TGR: Do you have any predictions for gold and silver prices?

CM: I think in Q412, we'll break $2,000/ounce (oz) in gold and $50/oz in silver. It could run up as far as $60–70/oz just because of the technical buying and no overhead resistance at $50/oz. Toward the end of 2012, it could be $55/oz silver and $2,100/oz gold. That might sound outrageous now, but last April silver ran from $32/oz to $49/oz in the blink of an eye.

TGR: When you spoke with us this past September along with Jason Burack, you talked about some 30 companies that were of interest at that time. A lot of those were in silver. Of the more-established producers, whom do you like at this point and what are their prospects now?

CM: I think Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) is a no-brainer for someone who wants something conservative. It's well diversified with the best operators in the world.

I also like what Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) has been doing. It acquired Minefinders Corp. (MFL:TSX; MFN:NYSE), which gives it a lot more exposure to Mexico, so it's not so concentrated in Peru and Argentina.

TGR: What are the implications of the Minefinders acquisition?

CM: Minefinders is a lot bigger than people think. Dolores mine is world-class and will produce 7–8 million ounces (Moz) silver and over 100,000 oz (100 Koz) gold, once the mill is optimized. That's going to add between 12–14 Moz silver equivalent to its growth profile. Its 20 Moz/year Navidad deposit in Argentina is expected to get fully permitted. Also, 12.5% has to be paid to Silver Wheaton because it bought a debenture from Aquiline Resources Inc. (AQI:TSX) from whom Pan American bought the property. Pan American produced about 22 Moz silver in 2011. With the Minefinders expansion and developing Navidad, it could be a 50–55 Moz producer and one of the world's largest primary producers after Fresnillo Plc (FRES:LSE). I think the Minefinders properties will give Pan American's stagnant share price a huge boost.

TGR: Any others you'd like to talk about that are more majors?

CM: Another one I like is First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE), which is acquiring Silvermex Resources Inc. (SLX:TSX; GGCRF:OTC). This just gives it more growth, especially for how much it is paying for it, $175 million (M). It can get this thing up between 3–5 Moz in a few years plus it already has lots of organic growth through 2015 or so with Del Toro. First Majestic is still looking really good, especially down around $16/share. I consider this one of the safer silver plays now that it has five operating mines and more to come on.

TGR: Let's talk about some of the more junior miners.

CM: One of my favorite junior gold plays right now is a Canadian company with operations in Panama and development projects in Spain and Portugal called Petaquilla Minerals Ltd. (PTQ:TSX, PTQMF:OTCBB, P7Z:FSE). Its main deposit is the Molejon gold mine in Panama, which reached commercial production in 2010 and has been ramping up production via several mill expansions ever since. It has been completely overlooked by the market even though it has one of the best production growth profiles out there, courtesy of its recent acquisition of Iberian Resources Corp. in August 2011.

In 2012, Petaquilla's production is projected to reach 100 Koz , 120 Koz in 2013 and nearly 250 Koz in 2015. This is excluding significant copper byproduct credits, which are forecast to reach 100 pounds per annum by 2015. Cash costs net of the company's silver and zinc credits were $557/oz in 2011 and are projected to remain between $500/oz and 600/oz going forward as silver credits will exceed 3 Moz. annually. The company also benefits from Panama's tax policy, giving Petaquilla a projected effective tax rate of 25%. Petaquilla is also a "special situation" at the moment, planning to spin out its wholly-owned infrastructure arm as an independent entity. Shareholders will receive one share for every four it holds prior to the spin-off date. I've modeled a net asset value on a fully diluted basis of over $3/share [using $1,600/oz Au, $2.50 Cu ~ discounted @ 15%], significantly higher than the current $0.42/share market price.

The composition of a company's largest shareholders often says a lot about the prospects of a company. In this case, management owns more than 12%, followed by significant stakes by Sprott Asset Management, U.S. Global Investors and Libra Advisors. I've always considered having at least 5% management ownership a huge positive due to an obvious alignment of objectives, notably increasing shareholder value.

TGR:Do you have any others?

CM: Up in the Yukon there's Alexco Resource Corp. (AXR:TSX; AXU:NYSE.A), which is one I've liked for a while. We talked about it last time. Since then, the company has identified some much larger targets that are much lower grade silver (on a relative basis), but, given the much wider intercepts, are candidates for significantly higher tonnage operations. That's at the Bermingham and Flame & Moth properties. These potential mines vastly increase the likelihood Alexco will surpass the 10 Moz/year hurdle within five years. Its Lucky Queen project is averaging over 1,200 grams per ton (g/t) coming on-line before the end of the year, along with Onek. So it has a really deep pipeline for continuous growth into the foreseeable future. With those types of mines, you can add a lot of reserves as opposed to most of the mines in the Keno Hill district, which are narrow-vein mines. One hopes that will catch the market's attention a little bit. It's been a good year for it and it's still cheap.

TGR: What about gold miners?

CM: Basically, gold stocks are trading cheaper than they were in 2008 relative to the underlying gold and silver price. There are only so many silver companies, but gold companies are a much bigger universe. One I like is Metanor Resources Inc. (MTO:TSX.V), located in Quebec. Its main property is the Bachelor Lake mine, which will be in commercial production this quarter. It will ramp up to feasibility levels by Q312 just because it's only running the mill at 65% capacity at this point. It has a $60M market cap but will be producing 60–75 Koz/year gold, although it does have a streaming agreement with Sandstorm Gold Ltd. (SSL:TSX.V) whereby it has to sell 20% at $500/oz. This shouldn't hurt it too much because it produces under $500/oz. Its average grade is about 7 g/t on that property. When it wants to access its Hewfran zone, it can increase production by about 25% or 70–80 Koz/year. That's a good smaller play.

It also has other properties. One is the Barry mine, which is also in Quebec and relatively close. It has a lot of the same features and structure as Canadian Malartic and Detour Lake. It's a high-tonnage, low-grade gold mine. Management will probably look for a joint venture partner on that one. This is another company that's gone under the radar.

TGR: Bachelor Lake used to be a separate company, or at least the mine was in a company called Bachelor Lake back in the 1980s and 1990s, as I recall.

CM: Yes, it's a past-producing shaft mine. I hate to harp on these really small caps, but they shouldn't be this small.

TGR: Any others that are interesting?

CM: There's an exploration company, Kimber Resources Inc. (KBR:TSX; KBX:NYSE.A). It has the Monterde project in Mexico, which could be on-line in two years if it had the money. It's not expensive to bring on-line for what's projected to be production of 60 Koz/year gold and 2 Moz silver for 15.5 years. The initial capital expenditure is just $100M. This looks like a likely buyout target unless it can sell a stream or something to that effect to Sandstorm Gold or someone else. In this market, these miners can't economically raise money through equity because of low prices and dilution.

This company, along with most others, were trading at two to three times what they are now. This one is also a $75M market-cap company. I think it will get bought out within the next 12–18 months.

TGR: What else is happening in Central America?

CM: Tahoe Resources Inc. (THO:TSX) has a huge project called Escobal in Guatemala and is fully financed. It is looking at expanding the mill capacity so that it can produce between 26–28 Moz silver with very low cash costs—around $3–4/oz net of all the byproducts.

TGR: Anything else you like?

CM: There's also Aurcana Corporation (AUN:TSX.V; AUNFF:OTCQX). It's a Mexican and soon-to-be American silver producer. It has the Shafter mine in Texas, which is two months ahead of schedule and should be coming on-line relatively soon. That will produce about 4 Moz/year, plus byproducts, and increase total U.S. silver production by 10%. It has the La Negra mine that produces about 1 Moz silver and 500 Koz silver equivalent, with zinc, lead, etc. It's going to have a huge growth spurt—a company that produces 1.5 Moz is going up to 5 Moz in a year and a half. People can buy it under $1/share and should be able to catch a double.

TGR: What would you like to leave as a final takeaway for our readers on how to best play this nervous market?

CM: Try to buy quality. Buy on dips. Always keep some cash in reserve because, as we know, things can go lower. You don't feel as bad when you have money left to deploy if a stock you like drops by 50%. Remember that negative sentiment in the market is a good thing. That's usually the sign of a bottom or a bottoming process. The average investor gets scared out of the market and sometimes liquidates his or her position at the very bottom. Understand the fundamentals of silver and gold. They are money and have been for thousands of years. Above all else, own the physical asset, then dabble in some mining companies.

TGR: Thanks for joining us today.

CM: Thanks a lot.

Chris Marchese  is an equity analyst and contributor at The Morgan Report. He has served as a research analyst at Morgan Stanley, founded and co-managed a private equity fund and was an adviser to Vishni Capital. Marchese has published over 150 articles on various financial sites such as Financial Sense, Goldseek, Kitco and Seeking Alpha and is co-author of the e-book Treasure Hunting for Precious Metal Stocks.

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: Minefinders Corp., Silvermex Resources Inc., Kimber Resources Inc., Tahoe Resources Inc. and Aurcana Corp. Streetwise Reports does not accept stock in exchange for services.
3) Chris Marchese: I personally and/or my family own shares of the following companies mentioned in this interview: Petaquilla Minerals Ltd., Alexco Resource Corp., First Majestic Silver Corp., Silver Wheaton Corp., Metanor Resources Inc., Sandstorm Gold Ltd., Pan American Silver Corp., Bear Creek Mining 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 story.

The Gold Report: Your grandfather was a mining engineer. Your father founded a coal company. You are a geologist, worked with Cliffs and ASARCO and are on the boards of several mining companies. How much of your success at Geologic Resource Partners do you attribute to your business acumen and how much to your relationships in the industry?

George Ireland: Having grown up in a mining-oriented family, the dinner table conversations from an early age steeped me in the lore and intrigue of business. Based on that early interest, I have built up quite a book of relationships and a broad knowledge over the years, but I attribute a lot of the opportunities that have come my way to hard work and perseverance in an industry that was, for quite a long time, out of favor.

TGR: What wisdom did you pick up at the dinner table that you use today?

GI: One of the first things I learned was to see for yourself what you are investing in and who you are investing with. The second—and I give this advice to companies that we invest in and to other fund managers—is to talk to your investors, to the people who are giving you their faith and money.

TGR: Does that mean you make regular site visits to projects?

GI: My team and I have visited about 80 countries over the last five years.

TGR: What are your "must-sees" on a site visit?

GI: Typically, we are looking at the lay of the land: how the project sits in the political jurisdiction, the social environment, the environmental issues. We look at management, from the senior level down into the junior ranks. We want to know if they are capable of performing the work they are being asked to do. We look at the assets themselves, reviewing public information found in various documents such as NI 43-101s. We look extensively at the drill cores, site and plan maps and other data to assess the quality of work being performed with regards to our own assessment of value of the company.

TGR: Do you expect your clients to meet a certain annual performance threshold?

GI: We do not have a specific threshold. Our orientation is toward compensation and performance over the long term.

TGR: Would it be fair to say that you look for at least double-digit growth?

GI: Very definitely. Given the expected risks in the mining industry, our investors look to us for rates of return comparable to other venture capital or private equity businesses. We believe it is important to note that the mineral exploration business, much like the pharmaceutical or tech business, can create substantial growth of value through exploration and discovery. Our general focus is to capture those areas of growth, rather than the commodity trends.

TGR: What is your time horizon?

GI: Our investment horizons typically stretch from two to five years. We focus on a firm's capabilities and ability to grow, not its latest drill or production results.

TGR: Are you concerned that equities have trailed the underlying commodity, especially in the precious metal side, for close to 18 months?

GI: The market trends are changing. We are now seeing the precious metal mining companies being valued using similar metrics to other mining companies, whereas historically they traded at a substantial premium. We believe this is both a natural evolution of the market and a direct result of the widespread acceptance of the metal exchange-traded funds (ETFs) like SPDR Gold Shares (GLD:NYSE.A). On a smaller scale, we see a lot of opportunity in exploration and development companies. Fortunately for us and unfortunately for them, these companies are having trouble getting financed, which means we can pick and choose among the assets that interest us.

TGR: Are you paying more attention now to things like infrastructure?

GI: Infrastructure has always been a critical component of mining investment. Our approach always includes taking into account all the necessary factors for a mining situation to be developed. The infrastructure demands of a mining project and how they will be financed are always crucial factors in deciding to invest in any remote mining situation.

TGR: Are most of your positions private placements or do you buy positions in the market?

GI: We do both.

TGR: In terms of your private placements, how important is a warrant?

GI: Not critical, although we like warrants. We particularly like financings that are elegantly structured, meaning the warrants are tied to the company's financing needs rather than an unrelated timeframe.

For example, if a company is raising money for a drill program it expects to complete in 15 months, we like to see that the warrants are tied to the completion of that program so they can be used to fund the next stage of exploration and development.

A big problem for many junior companies is the potential dilution caused by a large number of warrants outstanding with no implicit or explicit linkage to the cash requirements of the company.

TGR: Can you give us an example of a recent private placement you did versus the market price for the company involved, without naming a specific company?

GI: Typically, private placement terms are on the higher end of the historic band for discounts, namely 10–15% off a recent weighted-average price, as opposed to 5–10%.

TGR: Are you looking for companies offering a dividend?

GI: Absolutely. As a long-term investment fund, our focus is on total return to our investors. That comes through both capital appreciation and dividends.

TGR: Does that mean you are looking beyond companies in the exploration and development stage and into mid-tier and top-tier producers?

GI: Yes, we invest in companies in all phases of the mining sector. We utilize our judgment to decide which companies are the most appealing based on projected risk-weighted rate of return. In practice, that means you would not expect the same returns in lower risk senior producers compared to higher risk explorers once you remove the issue of the movement of the underlying commodity price. As for capital reinvestment and dividends, it is logical to expect that smaller, more rapidly growing companies would be less likely to pay a dividend than their more senior competitors.

TGR: Has your asset base moved from companies with market caps less than $200 million to larger companies, given that more of them are offering dividends than they used to?

GI: For us, dividends by themselves are not a driver; they are part of the total return on a particular investment. What causes us to change the portfolio in one direction or another is where we see the best prospect for total return relative to the level of risk inherent to an investment. It all depends on our view of the potential return on an individual company, not a particular segment of the business.

TGR: Would you be willing to name some of the dividend-issuing companies you hold?

GI: We hold names such as Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Goldcorp Inc. (G:TSX; GG:NYSE), to name two of the larger ones in the gold sector. Outside of the gold business, we hold Cliffs Natural Resources Inc. (CLF:NYSE) and Cameco Corp. (CCO:TSX; CCJ:NYSE), for example.

TGR: What are your strategies for playing ETFs?

GI: Our strategy for metal and metal stock ETFs is to look at relative return in the metal versus the equities.

For example, we hold platinum and palladium ETFs because we like the outlook for the metal, but we do not like the outlook for most of the companies, particularly those operating in Southern Africa and Russia.

TGR: Without naming companies, what have you seen on site visits that made you decide not to invest?

GI: Our site review process has uncovered everything from operational issues related to the geology or the quality of the drilling to engineering challenges associated with site layout or metallurgy. There may be infrastructure issues related to access to the project or, more importantly, shipping routes away from the project. Political and economic issues in the region or country can also come up. And finally, site visits allow us a better chance to see the quality of management in their "home" as opposed to being in a nice office or boardroom.

TGR: Brent Cook has suggested that there are too few people properly trained in preliminary economic assessments (PEA) and prefeasibility studies (PFS), leaving untrained people to plug numbers into models that cannot be relied on to predict whether a project can be mined. If you agree, what are some common errors retail investors should look for that might raise a red flag?

GI: We are deeply committed to doing onsite due diligence as we want to be able to make our own assessments of the numbers being used in the PEAs or PFSs being prepared. That said, it is important for retail (and institutional) investors to read and understand these documents for what they are: namely, preliminary estimates. If I had to characterize the most common area for error at this stage, it would be the assessment of the geology of the deposit and how it relates to the calculation of resourses and reserves.

Concurrently, the investor needs to understand how the economic numbers were calculated, particularly such things as metallurgical recoveries and costs such as the cost of electricity, fuel, labor and metals prices.

Investors need to understand the upside case, and more importantly, the downside case.

TGR: What are some of the common problems you see on site visits?

GI: One general theme is the lack of trained staff and labor, ranging from engineers and geologists to skilled operators and trades people. This continues to be a big problem worldwide.

The second would be the uncertainty associated with legal title and the project investment climate. This includes the tax rates or ownership structures being imposed by host countries.

The third is the temptation to use advanced technology where it is not completely understood or is being misapplied. Too often, this leads to failure or poor performance.

TGR: Once financed and in production a lot of mines fail to meet production targets. A management change soon follows. Is this a result of some of those factors?

GI: Very much so. It is the combination of, first, the expectations of the original group not being met and, second, not having the depth of experience to understand and correct for all the variables. It is no surprise to see issues come forward that were not anticipated in the feasibility studies. An axiom that one of my analyst partners loves to use is "there has never been a failed mine without a positive feasibility study."

TGR: I like that. Can you tell us about some of your recent site visits?

GI: My team and I have recently been to the Democratic Republic of the Congo (DRC) to visit Banro Corporation (BAA:TSX; BAA:NYSE) and Loncor Resources Inc. (LON:NYSE.A; LN:TSX.V). I recently visited Continental Gold Ltd. (CNL:TSX) and other companies in Colombia. I also visited a number of non-precious metal names, including Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX) in Argentina. In the rare earth space, I visited Great Western Minerals Group Ltd. (GWG:TSX.V; GWMGF:OTCQX) in South Africa, where I just joined the board.

TGR: In South Africa, calls to nationalize more of the mining industry are growing. Why?

GI: South Africa is not alone. It seems that 80–90% of the countries around the world want more of the patrimony to be shared with the government and the citizens.

The history and economic ramifications of apartheid influenced the move for local ownership in South Africa. There also are labor/management conflicts over wages and profit sharing. We believe the South African political outlook has declined substantially over the last five years.

However, South Africa is not alone. In 2010, the Australian government sought a very large tax increase on the mining sector. The U.S. Environmental Protection Agency has taken actions relative to the coal industry.

TGR: Let's go into more detail on your African visits. Banro recently chose a debt financing over equity financing. What are your thoughts on that?

GI: It was entirely appropriate, given the cash generation capability of its Twangiza project and the relatively accelerated development at Namoya, its number-two project. Banro looked at the cost of capital of equity, convertible debt and straight debt and decided the debt issue was the best alternative.

TGR: You have seen Namoya firsthand. What do you think?

GI: When I visited approximately 18 months ago, I was very impressed. Namoya has a relatively easy physical layout to build, a good operating environment in terms of climate and, relative to Africa, ease of access.

TGR: Banro has a position in Loncor, is that right?

GI: Yes. Many of Banro's early exploration team members were shifted to Loncor to develop exploration projects in North Kivu. As North and South Kivu became safer to explore, we noted their success with the Banro projects and wanted to invest with them.

TGR: Loncor has an agreement with Newmont Mining Corp. (NEM:NYSE) on its Makapela project, a high-grade gold deposit in North Kivu. Geologically speaking, can it be a mine?

GI: We believe so. The drilling is very early stage. There are two development options. One would be a larger, lower-grade, open-pit development. We are interested in the second option, a higher grade underground mine. It would have lower capital costs and be easier and faster to bring into production.

TGR: What are your thoughts on Peter Cowley and the management team?

GI: My teammates and I have known Peter for a number of years and have a lot of respect for the job he and his team have done. On our site visits, we have been pleased with the work being carried out under their direction. As a non-technical factor, we have been very pleased with the training programs that Loncor is offering its Congolese employees and the care being taken to build social relationships locally through their charitable foundation.

TGR: Many people consider the DRC to be the riskiest district in Africa. But the geology is irresistible. How do you balance those two considerations?

GI: High risk/high potential return is the mantra. While we believe that a number of assets in DRC that offer potentially returns to investors, the risk associated with each one must be closely scrutinized. For us, one of the key risks comes back to the question of whom we are investing with. In the case of Banro and Loncor, we believe the team, from the board down to the men with feet on the ground, has experience and relationships in the DRC to develop profitable mines with social and environmental sensitivity.

TGR: You visited Continental Gold's Buriticá Project in Colombia. What can you tell us about that?

GI: We began investing in Colombia a number of years ago, principally in the private company that evolved into Continental Gold. We initially saw Colombia as a regional play, just opening up for exploration and systematically underexplored by modern standards.

Developing Buriticá as the company's chief asset with the Berlin asset in second place struck us as a very good strategy. We like the high-grade ore reserves at Buriticá and the very high probability that it will be an underground mine using bulk tonnage mining methods. This approach should cause the project to have a relatively small footprint on the surface environment, which eases permitting and causes less social disruption.

TGR: Ari Sussman is Continental Gold's CEO, as well as CEO of Colossus Minerals Inc. (CSI:TSX; COLUF:OTCQX). Is this a management team you follow?

GI: We also invest in Colossus, and, yes, Ari has attracted strong people. We are particularly impressed with Sussman's ability to build up management teams with people as they are needed at each stage: exploration, development, construction, production.

In our evaluations, we ask how well management is prepared to transition itself in terms of its skill set as the company grows in value and as it develops its assets. That is one of the major risks in any kind of venture capital or private equity business.

TGR: What are your investment themes for non-precious metals equities?

GI: One of our major themes is in what we call "green metals," metals that will benefit from the environmental issues associated with global warming and climate change. An example is the lithium/graphite complex.

Lithium Americas is one of the most advanced brines project in South America, producing lithium using brine technology and solar evaporation—a very low-cost production method. We expect it to be among the first to market, in relatively due course.

And because lithium batteries utilize graphite in their anodes, we started to look at graphite producers. One of the most intriguing projects is Northern Graphite Corp.'s (NGC:TSX; NGPHF:OTCQX) Bissett Creek in Northern Ontario. The management team has the right combination of geologic, mining and marketing smarts. We became a cornerstone investor.

TGR: You have done well; since August Northern Graphite's share price probably rose about 300%.

GI: There is an old adage, "never mistake intelligence for a bull market."

TGR: So, is it a bit too frothy right now?

GI: It depends on your view for graphite. We fundamentally believe in the green metal theme and have decided that the lithium/graphite complex will be a winning technology.

If you believe market penetration for electric vehicles will be in the 3–4% range over the next 5–10 years, graphite prices will have a lot of upside. If you believe in market penetration rates of 10–15%, graphite prices will have to be that much higher in order to bring out the amount of material needed.

TGR: As an institutional investor, can you offer any wisdom to retail investors wondering if they should stay in the mining equity space?

GI: The generic advice to any investor in any business is to know what you are investing in. Know whom you are investing with. Do your homework.

Structure your investments appropriately relative to your risk profile. That is essential for institutional or individual investors in this high-risk, potentially high-return sector.

TGR: George, thank you for your time and your insights.

George Ireland founded Geologic Resource Partners LLC in 2004 and serves as its chief investment officer and managing member. He serves as portfolio manager of the associated Geologic Resource Funds and has been president of GRI Holdings LLC since June 2000. Ireland has 30 years of experience in all aspects of the resource sector, ranging from field geology to banking and venture capital.

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: 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: Goldcorp Inc., Banro Corp., Loncor Resources Inc., Continental Gold Ltd., Lithium Americas Corp., Northern Graphite Corp. and Colossus Minerals Inc. Streetwise Reports does not accept stock in exchange for services.
3) 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.