Inflate your way to gold profits with Edward Karr
From his vantage in Geneva, Edward Karr, the founder of the investment firm RAMPartners SA, tells The Gold Report why European bankers are destined to inflate their way out of structural crisis and why that is good news for the price of gold. Karr believes gold has bottomed and should explode upward, and he profiles a handful of sleeping lions whose stock should roar back to life with rising precious metals prices.
The Gold Report: Let's talk about the Foreign Account Tax Compliance Act (FATCA) of 2010. What is the FATCA regulation?
Edward Karr: In March 2010, Congress passed the Hiring Incentives to Restore Employment Act. The HIRE Act was intended to stimulate domestic jobs in the U.S. FATCA was quietly slipped in as a very small part of the HIRE Act. In a nutshell, FATCA makes every overseas bank, financial company, hedge fund, mutual fund, broker, and dealer an enforcement agent of the U.S. Internal Revenue Service. Starting July 1, 2014, these financial institutions are required to turn over their data on U.S. clients' and U.S. persons' accounts.
Implementing FATCA is costly because many foreign financial institutions did not have the compliance systems and information technology in place to report on U.S. persons' holdings. Banks are being forced to spend tens of millions of dollars to upgrade their systems. And if they do not provide the information to the U.S., the penalties are extremely severe. The U.S. government can levy a 30% withholding penalty on any business that the institution does in the U.S., including trading U.S. dollars, equities, bonds and fixed income instruments. Noncompliance effectively locks a firm out of the U.S. markets.
TGR: FATCA was set up to stop people from cheating on their taxes; will it have some effect?
EK: FATCA goes after a mosquito with a sledgehammer—or in mining terms, uses a D11 bulldozer to move a small pebble. There are 7.6 million (7.6M) U.S. citizens living outside the U.S. who are caught up in this war on tax evasion. However, an organization called Republicans Overseas is launching a constitutional challenge to FATCA lawyered by Jim Bopp. He is the attorney who took down the McCain–Feingold campaign finance law in the Supreme Court. Bopp is confident that FATCA will be overturned.
TGR: Looking forward, then, what is the economic outlook in Europe for gold, commodities and stocks?
EK: The overall European economic outlook is the same muddle-through situation that has dominated the continent for the last couple of years: slow economic growth and possible deflation. After the financial crisis of 2008–2009, the U.S. proactively recapitalized the financial system in the U.S. The European banks still need to be recapitalized. The European Central Bank (ECB) has done a really good job in defending the euro, but the underlying problem of high debt levels on the banks' balance sheets has not been addressed.
Greece is not really a big problem, but keep a close eye on France. It has a very slow growth rate, high debt levels and is basically an economic train wreck in slow motion. In addition, we are seeing a resurgence of ultranationalism in the polls. Europe desperately needs inflation. Deflation, of course, is a central banker's worst nightmare. The bankers need inflation to avoid deflation. The ECB is going to have to start running the money printing presses around the clock. I just see no other way out of the dilemma. The banks can only inflate their way out of their crushing debt loads. And rising, higher inflation means higher interest rates, which is very positive for the gold markets.
TGR: How will higher interest rates impact the gold markets?
EK: As inflation and interest rates rise, so does the consumer demand for gold. People buy gold as a safe haven and a store of value. I have a positive outlook for gold and gold equities as Europe recapitalizes its banking systems and the prices of precious metals explode upward.
TGR: What about banking systems in other areas of the world?
EK: China escaped its last financial crisis with a massive government stimulus program. As a result, China is trapped inside one of the biggest credit bubbles in the history of the human race. Some people believe that when the bubble pops there will be a very hard landing. But with the stroke of a pen, the Chinese government can address economic issues much more effectively than a bunch of European bureaucrats sitting around a table.
TGR: Will inflation hit the U.S?
EK: Because the U.S. banking system is in great relative shape, there will be a resurgence of domestic manufacturing. The U.S. has a lot of land and has plenty of capital and technological savvy. It has abundant, cheap energy compared to the rest of the world. As the manufacturing economy takes off, inflation will gradually pick up there, too, which is positive for gold. Today's gold price of $1,319/ounce ($1,319/oz) is the new base price, in my opinion. Precious metal stocks are extremely cheap right now. This is a great time to buy.
TGR: Do you have any precious metals stock picks for us today?
EK: I like the metal royalty companies, such as Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) and Silver Wheaton Corp. (SLW:TSX; SLW:NYSE). These stocks should be core positions in any portfolio. They are going to continue to do exceedingly well regardless of where the underlying precious metals prices go.
TGR: What are some of the juniors that you like?
EK: My number one pick is Pershing Gold Corp. (PGLC:OTCBB). I have been a Pershing shareholder for a few years, and it has been exciting to watch the company develop. Pershing Gold is headed by CEO Steve Alfers. He is an experienced mining attorney with a great reputation in the U.S. He is a very seasoned deal guy and has put several mines into production. Alfers stepped down as COO of Franco-Nevada to become the CEO of Pershing Gold. That is a huge statement in and of its own—that he would leave a functioning major to run a junior. And Alfers has assembled a phenomenal team at Pershing Gold.
TGR: What are Pershing Gold's assets?
EK: Pershing Gold's major asset is the Relief Canyon project. Relief Canyon has three open-pit mines and a state-of-the-art, fully permitted and operational heap-leach facility. It is a shovel-ready project, fast-tracked to go into production by the end of this year.
And Pershing Gold has just announced a new discovery, which is two miles north of its three main pits. That property is very close to the border with Coeur Mining Inc.'s (CDM:TSX; CDE:NYSE) Rochester mine. Coeur Mining is already a shareholder in Pershing Gold and knows the situation on the ground very well. This discovery is a brand new, high-grade mineralization system that could very easily extend up into the Rochester mine/Coeur Mining properties. Pershing Gold has already announced some drill results at very good grades.
Pershing Gold has announced a recovery rate of 81.8%. Pershing is also forecasting about an 80,000 oz (80 Koz) per year production; Pershing's all-in costs should come in at $750/oz.
TGR: Are there other companies operating in the same area?
EK: Pershing Gold has a northern neighbor named Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.MKT). Midway Gold's Pan project is similar to Relief Canyon. The Pan project has a projected nine-year mine life with 81 Koz/year production. The fully loaded cost is $824/oz with a 75% recovery rate.
TGR: How do you compare the two companies?
EK: Midway had 180M shares outstanding, fully diluted, prior to its last bought deal. It recently did a financing of $25M at $0.83/share for an additional 30M shares. In addition, it had to issue 4M shares to Hale Capital Partners L.P. to approve that deal. If we add that to the $55M in project financing that Midway arranged at the end of May, there is an enterprise value on Midway Gold right now of $235M. This compares with Pershing Gold's debt-free current market cap of approximately $108M. I fully expect Pershing's market cap to trade up in line with Midway's in the future. I really like Midway and the Pan project, but I love Pershing Gold and Relief Canyon. Pershing Gold is one of the most undervalued and exciting Nevada gold exploration and near-term production stories on the market today.
TGR: Pershing has 25,000 acres around the Relief Canyon mine. What's the role of the Bureau of Land Management (BLM) in regard to its operation?
EK: Pershing is moving into fast-track permitting right now. It has the permits needed. The company is in constant contact with the BLM, and that process is moving forward at a very fast pace.
TGR: Do you expect to see a significant bump in Pershing Gold's share price in the short term?
EK: The discussions with the BLM to reopen the mine under either the current or the amended plan of operations could be a major catalyst. Seeing more results from the target two miles north of the main three pits could be a big catalyst. Cantor Fitzgerald issued a research report on Pershing Gold at the end of May. It put a $0.55 price target on the stock. When gold moves back up to $1,400–1,500/oz, investors will get tremendous leverage on the Pershing stock.
TGR: What about Mexico? Any juniors there that you like?
EK: Kootenay Silver Inc. (KTN:TSX.V) has a 100-million ounce (100 Moz) Measured and Indicated silver resource at its flagship project, Promontorio. The company has a great management team in mining-friendly Mexico. A while back, the stock sold off from the $0.80/share range to $0.30. Kootenay is small, with only 63M shares outstanding. If we value it at $1/oz for its proven 100 Moz deposit, we are looking at a potential $100M market cap plus its ongoing blue sky exploration opportunities. At $0.30/share with just 63M shares out, Kootenay is trading at a CA$19M market cap. As the silver market turns and heads higher, cheap companies like Kootenay will be acquired at substantial premiums.
TGR: Does Kootenay have the cash to keep operating in the interim?
EK: It has just announced a $2.5M financing at $0.30/share. That will provide enough cash to keep its exploration program well funded, while Kootenay continues to build out ounces and the market turns up.
TGR: What other gold juniors are sleeping lions?
EK: I am actively involved with InCoR Holdings Plc (ICR:GXG). It is a natural resource holding company with several exciting ventures, including the largest sawmill in the Republic of Georgia. InCoR Holdings is listed on the GXG global exchange, which is a new Danish stock market with operational headquarters in London. The firm has a division called InCoR Technologies that is developing a "starved acid leaching" technology (SALT). This new scientific method applies to the recovery of nickel and other metals from laterite ores, including saprolite ores that are below the current cutoff grade of the conventional smelting process.
Nickel production worldwide is generally divided between primary sulphidic ores and the more weathered laterite ores. The nickel sulphidic ores are being depleted, and the costs of building and operating nickel processing plants for nickel laterites are very high and, in most cases, economically marginal given where we are today with nickel prices. That fact has caused many global development projects to be postponed.
Generally, a nickel laterite ore with a grade in the range of 1.8% nickel or higher is needed to cover costs of production. SALT presents real competitive advantages over the existing technology because its capital costs are a magnitude of order less than the high-pressure acid leaching, which is the industry standard right now for the extraction of nickel from laterites. The founder and driving force of SALT is Dr. David Dreisinger. He is a professor at the University of British Columbia and one of the world's leading metallurgists. We feel that SALT is a major company maker.
But a word of caution. InCoR Holdings, as I mentioned, does trade on the GXG global exchange. We helped the company with its public listing. We are shareholders. But the stock is very illiquid at the moment, and it is a real micro-cap issue. This is not a stock to chase. It is a stock to put on your radar screen and watch.
TGR: Thanks for your time.
Edward Karr is the founder of RAMPartners S.A., an investment management and investment banking firm based in Geneva. Since 2005, RAMPartners has helped raise more than $200 million for small capitalization companies in fields such as natural resources, high technology, health care and clean energy. Prior to founding RAMPartners, Karr worked for a private Swiss asset management, investment banking and trading firm based in Geneva. Prior to moving to Europe, Karr worked for Prudential Securities in the United States and has been in the financial services industry for 20 years. Before his entry into the financial services arena, Karr was affiliated with the United States Antarctic Program and spent 13 consecutive months working in the Antarctic, receiving the Antarctic Service Medal for his contributions of courage, sacrifice and devotion. Karr studied at Embry-Riddle Aeronautical University and Lansdowne College in London, England, and received a Bachelor of Science in economics/finance with honors from Southern New Hampshire University.
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1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Pershing Gold Corp. Franco-Nevada Corp. is not associated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services.
3) Edward Karr: I own, or my family owns, shares of the following companies mentioned in this interview: Pershing Gold Corp., Coeur Mining Inc., Kootenay Silver Inc. and InCoR Holdings Plc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: InCoR Holdings Plc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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