Rick Mills isn't looking for huge producers with so much overhead that they can't profitably mine an ounce of gold. Instead, Mills, the publisher, editor and president of Aheadoftheherd.com, seeks out the smaller mines with low capital costs. That's where the money will be made in the next two years, he tells The Gold Report.
The Gold Report: Rick, is this a good time to be buying gold?
Rick Mills: There are three key reasons to have exposure to gold bullion. The traditional reason is to protect against inflation. We're printing money. More quantitative easing has taken place, and inflation looks to be coming down the pike. I buy groceries. I pay for gas. I can see inflation. I firmly believe it's going to get higher over the coming months and years. Buying gold as a protection against inflation is realistic.
The second reason investors have traditionally bought gold is as a safe-haven investment. There's a lot going on in the world--from secession talk in the U.S. to turmoil in Israel, Iran, Syria, the South China Sea region and Turkey.
One of the things that most investors don't know about gold is that adding a gold allocation to your portfolio, especially over the last decade or so, has provided substantial enhancements to the portfolio's return.
Gold helps minimize the downside deviations in an overall portfolio. In 2002, the S&P 500 was down 23%. Emerging market equities were down 6%. International equities were down 16%. Yet gold was up 25%.
TGR: That was early in the bull run in gold.
RM: Even in 2008, the S&P 500 was down 37%, international equities were down 43% and emerging market equities were down 53%. However, gold was up 8%.
TGR: It felt like the end of the world in 2008. Gold has saved the portfolios of a lot of investors who were smart enough to start collecting it in 2001 and onward. However, there are investors who don't believe that gold has the multiples now.
RM: It's true. I believe gold producers have shot themselves in the foot because of their reporting methods. They use cash cost for reporting. In 2001 and 2002, miners were producing gold for below $180/ounce [oz]. By 2005, cash costs had risen 45% to $250/oz. Data from research consultancy Thompson Reuters GFMS shows that world gold production costs for the first half of 2009 averaged $457/oz. In 2011, they were $657/oz. GFMS' Gold Survey 2012 says it's now $727/oz.
But if investors have been looking at that, they've been misled, because that's not really the cost of producing gold. These average cash-cost figures include only the costs directly associated with the production of gold, such as wages, energy and raw materials. The problem is that gold cash costs are not the only costs associated with mines. Investment bank CIBC just produced a complete breakdown of costs. Yes, operating costs are $700/oz, but there is also sustaining capital, construction capital, discovery costs and overhead. CIBC pegs those at an average of $600/oz. Add in $200/oz for taxes on average, and you're looking at $1,500 to produce an ounce of gold.
TGR: In that environment, many of the gold mining producers would be out of business.
RM: The gold price is $1,700/oz. Companies are not making a lot of money here. The funny thing is that the sustainable costs for gold-the sustainable number gold miners need-according to CIBC, is $1,700/oz. You can see why investors are leery to jump into the space with numbers so tight.
TGR: But you're a gold bull. You believe that people should be investing in bullion. The bullion has to come from somewhere. What's an investor to do when he believes in the fundamental reasons for owning gold, but doesn't understand how the equities can perform?
RM: Historically, the precious metals equities have given investors the most leverage to a rise in gold and silver prices. We need to have a rise in gold and silver price. We need to get into that environment again, like it was from 2001 to 2006 when gold equities went up 900%.
Let's look at why companies aren't making a profit. One of the biggest reasons is capital expenditures [capex], which is the basic cost of building a mine and its supporting infrastructure. There are lower grades being mined-down 23% over the last five years and expected to drop another 4% this year-and more complex metallurgy. Companies are increasingly going into more remote areas that lack infrastructure. Environmental regulations are increasing. We are seeing more money-grabbing governments and resource nationalization. There's a serious shortage of skilled personnel and labor unrest is pretty much everywhere: strikes, protests and unions demanding higher wages. Everything you can imagine is working in a perfect storm to increase costs and risks on mining companies.
Costs are going through the roof, yet gold is stuck in a holding pattern at $1,700/oz. Then, when people want exposure to the sector, they buy an exchange-traded fund [ETF]. In the past, a lot of that money would have gone into mining equities.
There's a huge increase in exploration spending--more than $8 billion [$8B] in 2011--but a serious lack of new discovery. There have been very few large, high-grade deposits discovered during the past few years. Barrick Gold Corp. (ABX) said at the Precious Metals Conference 2012 that of the "super giant" discoveries, those that are more than 20 million ounces [Moz], 18 were discovered in the 1900s. Fast-forward to the 1980s when 14 were discovered. In the 1990s, 11 were discovered. In the 2000s, only five were uncovered.
The number of annual gold discoveries of more than 5 Moz since 2007 is six in 2007, one in 2008, one in 2009, three in 2010 and one in 2011. None is producing yet. A lot of people who think that they're going to produce are in for a disappointment because of resource nationalism, permitting problems, environmental problems, lack of water, labor unrest and protests.
TGR: Assuming gold demand will continue to escalate due to macroeconomic pressures, will the price of gold continue to increase?
RM: Gold demand is still rising. Five-year average quarterly demand is rising, so that's correct.
TGR: What do you forecast for the 2013 gold price?
RM: That's a mug's game, trying to predict gold prices, but it'll be higher.
TGR: You believe the price of gold can only go up.
RM: That's right. Inflation, world events, diversification-gold does offer leverage. So do equities, or at least they will again. I'm not looking at huge mines with billions and billions of dollars in capex. I'm much more comfortable with the smaller mines with lower capex and under-control operating expenditures. I like the lowest-cost producers. That's where the money is going to be made over the next two years.
TGR: Canada, the U.S. and some places in Latin America are the preferred jurisdictions for risk reduction, infrastructure, rule of law and reliability of government.
RM: Absolutely. Look at the Muslim Brotherhood in Egypt canceling a nearly 20-year-old license for a mining company. In Madagascar, a DJ gets elected president and the first thing he wants to do is cancel permits and do a review. That's not happening in Canada, the U.S. or politically stable places like Greenland. There is enough risk in this business as it is without intentionally inviting more.
TGR: Given that backdrop, what are some companies you find interesting right now?
RM: Let's stick with soon-to-be producers or companies that are going to be very low-cost producers. They're all in geopolitically acceptable countries with superior management teams.
According to a July 2012 research report by Natural Resource Holdings, there are only 164 undeveloped gold deposits globally, with more than 1 Moz of gold in all categories, that are owned by non-major mining companies. The average grade of all these deposits is 0.66 grams per ton [g/t]. Since we're mining +80 Moz a year, that makes these non-major-owned deposits quite valuable.
TGR: Do you foresee a problem with the rise of the green movement and First Nations issues?
RM: Most of the companies in British Columbia that have had problems with the First Nations created their own problems by not getting the First Nations involved in the projects early. They show disrespect to the traditional ways. A company that engages the First Nations, is willing to work with them and is willing to provide jobs and help them, isn't likely to be road-blocked by them. The First Nations are not against resource development. They want jobs. Engage them early in a project and you won't have a problem.
TGR: It sounds as if it won't be an issue.
RM: The next one we'll talk about is NioGold Mining Corp. (NOXGF.PK). I like this project. There has been some uncertainty surrounding it.
The first NI 43-101 didn't have phase two results and was very conservative. The phase one report has delineated 2.1 Moz, most of that in the Marban deposit. The goal of the phase one drilling on the Marban deposit was to bring as many surface ounces as possible into a pit shell. The stripping ratio looks pretty high, but the grade is good and that should compensate for the high strip. Now, NioGold is going to look at the open pit, the high grade and strip ratio.
TGR: When does NioGold expect to publish the updated NI 43-101, and how good was the grade in the first NI 43-101?
RM: Next March. Phase two included $5M of drilling, and that is being added to the NI 43-101 report now. The NI 43-101 shows 1.58 g/t and that compares with 1.07 g/t across the road at Osisko Mining Corp.'s Canadian Malartic mine. And the 43-101 report was quite conservative, using a punitive grade capping that discounts the contained metal by as much as 30%. The phase two report will be more detailed, using tighter intervals and high- and low-grade envelopes to more accurately detail the deposit, and this should capture more of the ounces.
TGR: What's up next?
RM: My next one for your readers is Northern Vertex Mining Corp. (NHVCF.OB). This is a company that is fast-tracking its Moss project in Arizona.
In the last six weeks, Northern Vertex has drilled 200 percussion holes and raised $9.1M. Ken Berry just stepped aside as CEO to bring on Dick Whittington, a mining engineer. Whittington took Farallon Mining Ltd.'s project in Mexico to production in four years. He's also put a voice behind mining interests in Mexico. He gathered together miners and explorers worth $50B in assets and they speak to the Mexican government as a single voice. Whittington is well respected and is very good at what he does. The mission is to fast-track Moss into production. When this happens, Northern Vertex is definitely going to be one of the lower-cost producers out there.
TGR: Tell me about the asset.
RM: Moss is a gold and silver project in northwestern Arizona with all the necessary infrastructure nearby. It has a gold-equivalent [eq] NI 43-101 resource of 950 Koz Measured and Indicated and 266 Koz Inferred gold eq, and it's growable. It's got a low strip ratio and is amenable to low-cost, heap-leach open pit mining. It's a major stockwork vein system that outcrops at the surface for 5,500 feet. It has a unique three-phase plan. The third phase will be paid for by production. It's a smart plan run by some very smart people. I have no doubt that this one is going to be successful.
TGR: The fact that it was able to raise $9.1M in this environment is pretty impressive. That's been within the last 30 days.
RM: Exactly. Its management team is extremely popular with investors and institutions for several good reasons. When they say they're going to do something, they go out and they do it. They're a no-nonsense team.
TGR: This has been an interesting list. Thanks, Rick.
Richard (Rick) Mills is the founder, owner and president of Northern Venture Group, which owns Aheadoftheherd.com, as well as publisher, editor and host of the website. Focusing on the junior resource sector, Mills has had articles appearing in more than 400 different publications, including the Wall Street Journal, Safe Haven, the Market Oracle, USA Today, National Post, Stockhouse, LewRockwell, Pinnacle Digest, Uranium Miner, Beforeitsnews, Seeking Alpha, Montreal Gazette, Casey Research, 24hgold, Vancouver Sun, CBS News, Silver Bear Cafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FN Arena, UraniumSeek, Financial Sense, GoldSeek, Dallas News, VantageWire, Indiatimes, ninemsn, IBTimes, jsmineset, the Association of Mining Analysts and Resource Clips.
1) Sally Lowder of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: None. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Rick Mills: I personally and/or my family own shares of the following companies mentioned in this interview: None. NioGold Mining Corp., and Northern Vertex Mining Corp. are paid sponsors of Mills' website, aheadoftheherd.com. I was not paid by Streetwise Reports for participating in this interview.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.