The Gold Report: The gold sector entered full-blown panic mode in July with the Bloomberg analysts forecasting a dip below $1,000 per ounce ($1,000/oz) this year, and Deutsche Bank forecasting $750/oz. Is this just fear feeding on fear, or is there something else going on?
Jeffrey Mosseri: It is fear feeding on fear, but there are two other things going on. The first is the strength of the dollar, and the second is the weakness in the price of oil. Combined, these two factors have greatly and negatively affected the prices of all metals in U.S. dollars. Over the past year, gold is up 2040% in many currencies.
TGR: In the last couple of years, the idea that the price of gold is being manipulated downward is no longer dismissed entirely as a conspiracy theory.
Douglass Loud: I wouldn't want to use the word "manipulation," but you could have an analyst predicting a gold price of $1,050/oz, followed by someone on the trading desk shorting it down to $1,050/oz, without any collusion.
TGR: How big a role does China have in setting the gold price?
JM: The biggest purchaser of gold in 2014 was the Russian central bank. China was second. This year, as gold has fallen below $1,100/oz, imports to China are headed for a record. I wouldn't call this manipulation necessarily, but the Chinese are definitely taking advantage of the lower price, as are the Russians, the Indians and the central banks of many other countries.
TGR: It is rumored that China intends to float a new reserve currency, backed fully or partially by gold bullion. What effect would this have on the supremacy of the U.S. dollar?
JM: The U.S. dollar remains, as I like to say, the cleanest dirty shirt in the laundry basket. There is an entirely clean shirt in the closet, however, and that's gold. At some point, investors will want to own that clean shirt, at which point the U.S. dollar will follow all the other currencies downward.
TGR: Jeff, you said in our last interview, "Demand for gold and silver bullion is quite high, but the paper market is about 50 times the size of the physical market, so games can be played in the paper market." Given the domination of the gold market by paper gold, is it still proper to call gold a safe haven?
JM: Absolutely. There's a lot of shorting going on in the commodity markets today, but supply and demand will win in the end, and the paper market will follow the bullion market. When this happens, we're going to see short covering, as we've had in the past, which will result in a gold rally of a couple hundred dollars or more.
DL: It's like going to the beach, watching the waves, and waiting for the tide to come in. One of these days there's going to be a big catch-up in gold when the tide finally comes in, regardless of what the waves are doing.
TGR: Can gold producers continue to make money at $1,100/oz?
JM: The current gold price is flirting with the cash cost per ounce for many mines. Should gold fall much below the current price, and stay there for a while, we'd soon see mine closures. If that occurred, the gold supply side would be greatly reduced, which would put upward pressure on the gold price.
DL: Gold supply is impacted by other factors as well. First Quantum Minerals Ltd. (FM:TSX; FQM:LSE) is being forced to shut down its Sentinel copper mine in Zambia because it can't get the electricity it needs. Gold mines there and in South Africa, as well, are being hit with lack of power. And that will affect the supply of gold.
TGR: The oil price collapse is now nearly a year old. Doesn't this suggest a fundamental weakening of the world economy expressed by a reduction in demand?
JM: Not necessarily. What we have is a huge amount of supply at the moment. So much of it is stored in tankers that we have a tanker shortage. But this oversupply will eventually work its way through the market. In the meantime, cheap diesel fuel has resulted in a dramatic reduction in mining costs, and this has lengthened the amount of time that gold will sell at a lower price.
TGR: When do you see a rebound in the price of gold?
JM: It's difficult to predict, in view of all the factors mentioned above, but we will probably see a bounce in the second half of this year, and more thereafter.
TGR: Why are you confident that gold equities will soon make a comeback?
JM: Gold equities are now selling at ridiculously low valuations. These valuations will be adjusted when it is believed that the price of gold will rise. A breakout in the equities will be the signal that the gold price has bottomed and will be moving significantly higher.
TGR: Which near-term junior gold producers are your favorites?
DL: I like Victoria Gold Corp. (VIT:TSX.V) and its 2.3 million ounce (2.3 Moz) Eagle gold project, which will produce gold at $600/oz. The Yukon is excited because this will be one of the biggest gold mines in the history of the territory and will create many jobs. Victoria now needs only its quartz mining and water permits. The company has only one project, so it isn't affected by the new environmental regulations like some other companies with multiple projects in a single district.
JM: And we like Pretium Resources Inc. (PVG:TSX; PVG:NYSE) and its 6.9 Moz Proven and Probable deposit in the Valley of the Kings section of the Brucejack project in northern British Columbia. This a beautiful deposit: about half an ounce per ton. The project is now fully permitted and by 2017 should be producing 500,000 ounces (500 Koz) per year for the first few years. All Pretium needs now is to put together the financing, which the company is working to secure, as we speak.
We also still love Exeter Resource Corp.'s (XRA:NYSE.MKT; XRC:TSX; EXB:FSE) Caspiche gold-copper project in Chile.
TGR: Brucejack's capital expenditure is $747 million ($747M), and Eagle's is $383M. How doable do they look in today's market?
DL: Dicey. But I look at Victoria as a project that will be derisked up to the point where it gets eaten by a larger company. And it is my belief that Victoria can get started on Eagle without spending the entire $383M and building one giant plant.
JM: As for Brucejack, anything under a billion dollars today is more doable than it was a year ago. Pretium has a great project with great grades and a great management team, so capital should be readily available for it.
TGR: How badly are the Yukon's new environmental regulations hurting mining?
DL: Alexco Resource Corp. (AXU:NYSE.MKT; AXR:TSX) has a whole silver district at Keno Hill, encompassing several different projects. But now the company is forced to re-file on every project whenever it wants to change the information on any one project. I think regulations will be improved in the course of time, but it makes doing business quite difficult now.
TGR: Do you still like Alexco?
DL: I do, especially if the zinc price starts to rise. Then it will go from being a silver company with a lot of zinc to a zinc company with a lot of silver.
Another company I like in that area is Seabridge Gold Inc. (SEA:TSX; SA:NYSE.MKT) and its KSM project in British Columbia. It is now fully permitted and has Proven and Probable reserves of 38.2 Moz gold and 9.9 billion pounds (9.9 Blb) copper. This company now has at least twice as much gold in the ground as it had when it was $50/share and the shares are under $6 now.
TGR: Are you worried that a well-connected spinoff group from the Sierra Club is determined to kill the 5.2 Blb KSM project?
JM: It can try, but that doesn't mean it will be successful. Any company with enough money to buy KSM would be a company with enough money to fight any environmentalists.
TGR: Which junior gold and silver producers do you like?
JM: Among the midsize producers, we like Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE). This company has excellent management. With its takeovers of Cayden, Osisko and Soltoro, it has been buying good projects cheaply and then integrating them really well.
TGR: This company's shares are down 40% over the last two months. Is there a buying opportunity here?
JM: Indeed. But in this market, any producer with good management, whose share price has been punished along with the rest of the market, is a buying opportunity.
DL: But investors have to be a little more patient. These companies aren't going to look good by the end of the week.
JM: Another midsized producer we like is HudBay Minerals Inc. (HBM:TSX; HBM:NYSE). The company has gold and copper. It's really interesting at its current price. It's more than doubled copper production in the last year and has succeeded in successfully integrating its Constancia mine in Peru, and solving the transportation problems that caused the company some headaches last quarter. Its Augusta in-situ copper project in Arizona is going to take a little more time, but I feel confident that HudBay will be successful in putting the mine into production.
TGR: Which smaller junior producers are you fond of?
JM: Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB) is one.
TGR: How well is that company succeeding in finding synergies between its Fire Creek and Midas projects in Nevada?
JM: On Aug. 4 Klondex announced the discovery of new veins at Fire Creek, including 9.1 grams per ton gold over 17 meters. It is doing exactly what it should be doing: developing both mines side by side.
TGR: How good is Klondex's cash flow?
JM: It's $41M. The company has 128M shares outstanding and earnings before interest, taxes, depreciation and amortization of $74M, so it is deploying its cash correctly. This is an especially unappreciated company at this price level.
TGR: Do you believe First Majestic Silver Corp.'s (FR:TSX; AG:NYSE; FMV:FSE) takeover of SilverCrest Mines to be a portent of things to come?
DL: With the new Mexican tax situation, with its tax and accounting changes, operating in Mexico will be a specialized field for a while, but we believe that it will pay off in the end. Companies operating in that country are incentivized to take out other Mexican miners.
TGR: You like the takeover?
DL: We liked SilverCrest, and we like First Majestic eating it.
TGR: Which other silver producers do you like?
JM: First Majestic is our favorite. And we also like Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ), but it is in the middle of a management change. So we'll have to wait and see how the new CEO will steer the ship.
TGR: How about junior near-term silver producers?
JM: We still like MAG Silver Corp. (MAG:TSX; MVG:NYSE), but that's further down the road. What we like most about the company is its partnership with Fresnillo Plc (FRES:LSE).
DL: The silver market is challenging now. First Majestic has more silver in the ground and is producing more silver than when its shares were at $20 or $25. Now its shares are around $4. The gold/silver ratio is also way out of whack; it's about 80:1, instead of 50:1, or 60:1.
JM: We think that when the gold turns, silver will turn harder.
TGR: It has been reported that silver producers are hoarding bullion.
DL: First Majestic has been known to keep some off the market.
TGR: Is this a sound practice?
JM: It makes sense, if the company believes the price of silver will rise.
TGR: Besides 153 Moz silver, 430 Koz gold and 361 million pounds (361 Mlb) lead, MAG's Juanicipio project has 584 Mlb zinc. Could a rise in the price of zinc reposition this project as you suggest Alexco's Eagle Hill could be repositioned?
DL: Sure, if the government decides to get serious about investing in our infrastructure again. Once it decides to start fixing the highways and the bridges and building the pipelines, iron ore will come back, along with zinc, nickel and molybdenum. Which gets us back to our friend PolyMet Mining Corp. (POM:TSX; PLM:NYSE.MKT).
TGR: How is its NorthMet project in Minnesota progressing?
JM: We're relatively optimistic now for the first time in several years that NorthMet will actually be in production within two years. That's quite exciting because annual production will be in large numbers: 72 Mlb copper, 15.4 Mlb nickel, 720 Klb cobalt and 106 Koz precious metals.
TGR: What's your view of the prospects for nickel?
DL: Same as zinc, only maybe a little better.
TGR: How is the export ban from Indonesia playing out?
DL: It makes PolyMet look a whole lot better. People used to joke that Freeport-McMoRan Copper Gold Inc. (FCX:NYSE) ran Indonesia. Now that country is saying it wants its nickel processed in-country. It has also passed a regulation mandating that expatriates working in the mining business in Indonesia must be able to prove their ability to speak Indonesian. All this makes working in Indonesia very difficult for foreign companies, and this puts producers outside that country ahead of the game.
JM: Looking down the road, a company like North American Nickel Inc. (NAN:TSX.V) with its Maniitsoq project in Greenland will probably give you the biggest capital gain because when it eventually goes into production, its leverage will come to the fore, assuming it can meet its energy requirements, capital needs and completion of permitting.
TGR: Can you tell us about a company with a unique process technology?
JM: Texas Rare Earth Resources Corp. (TRER:OTCQX). We know the company well, and like it very much, particularly since it has signed a joint venture with K-Technologies Inc. This will allow Texas Rare Earth Resources to use K-Technologies' continuous ion exchange process, rather than the conventional chemical separation method. This way, along with a simple heap-leach process, the continuous ion process, which has already been credentialed by being scaled up in other industries to levels exceeding that required at the Texas Rare Earth's project, should allow the company to produce, individually, the various heavy rare earths that make up 75% of the total deposit. And all this with substantially lower capital expenditures and much lower operating expenses.
In the rare earth space, we also like Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX), which recently announced excellent drilling results at its Ashram rare earth deposit in Northern Quebec.
TGR: Assuming that you are correct and that a comeback in gold equities will signal a new bull market in gold itself, what qualities should investors be looking for in gold stocks?
DL: First off, you've really got to take a serious look at country risk and infrastructure risk. The First Quantum Sentinel mine problem is really serious. This electricity shortage could envelop much of Africa, even including the Democratic Republic of the Congo.
We liked a bunch of exploration projects in Mali and Burkina Faso, and then that whole region got caught up in revolution. I would advise sticking to North America and Central and South America first, and then Australia.
JM: Investors should be looking for companies with good management, good projects and lots of cash on the balance sheet. For the time being, you want to avoid marginal producers and marginal explorers that need to keep on financing at lower and lower prices. Those will be the last companies to turn around, if they're not taken out or haven't gone bankrupt by then.
TGR: Jeff and Doug, thank you for your time and your insights.
Douglass N. Loud joined Greystone Asset Management LLC. at its founding in 2005 and has been senior managing director of Axiom Capital Management Inc. since 2009. Prior to that, he was with Murphy Durieu, where he served as executive director of the Private Clients Group. Loud has over 35 years of investment management and securities industry experience. He holds a degree from Yale University and a law degree from the University of California, Berkeley.
Jeffrey N. Mosseri established Greystone Asset Management LLC. in 2005 and became a director of Axiom Capital Management Inc. in 2009. He was a stockbroker and investment manager at Goldsmith Harris for 20 years. Mosseri also worked as a stockbroker and investment manager for Carnegie Capital, the investment advisory division of Prescott Ball Turben, where he ran the international arbitrage division and developed the gold mining research and investment department.
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1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. 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: Victoria Gold Corp., Pretium Resources Inc., Klondex Mines Ltd., MAG Silver Corp., North American Nickel Inc., and Commerce Resources Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Doug Loud: I own, or my family owns, shares of the following companies mentioned in this interview: Exeter Resource Corp., First Majestic Silver Corp., Klondex Mines Ltd., PolyMet Mining Corp., Pretium Resources Inc. and Victoria Gold Corp. In addition, my clients of Greystone Asset Management LLC. own shares in none of the companies mentioned in this interview. 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: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.
4) Jeff Mosseri: I own, or my family owns, shares of the following companies mentioned in this interview: Alexco Resource Corp., Exeter Resource Corp., First Majestic Silver Corp., HudBay Minerals Inc., Klondex Mines Ltd. and PolyMet Mining Corp. In addition, my clients of Greystone Asset Management LLC. own shares in Exeter Resource Corp., First Majestic Silver Corp., Hudbay Mining Inc., Pretium Resources Inc. and PolyMet Mining Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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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