Now more than ever, investors simply can't afford to wish upon a star and hope the drill bits will deliver something; they need to focus on miners that have what it takes to get through the down times, says Thibaut Lepouttre, editor of Belgium-based Caesars Report mining newsletter. In this interview with The Gold Report, Lepouttre reveals the results of his search over five continents to find superior value in gold, iron ore and tungsten.
The Gold Report: German Finance Minister Wolfgang Schäuble said last month, "The eurozone is clearly on the mend both structurally and cyclically." How do we square this statement with the record high unemployment, economic contraction and soaring debt of the southern Europe eurozone members?
Thibaut Lepouttre: We must look at this statement in the light of the German elections in September. Schäuble belongs to the same political party as Angela Merkel, and he was giving us a pep talk to help his chancellor get re-elected. Based on what I see here in Europe, I don't have the impression that things are getting much better, and I think many more structural reforms will be necessary before that happens. The high yield on sovereign debt and the undercapitalized banks have been dealt with on an if-needed basis, without tackling the underlying, chronic problems.
TGR: In Spain, for example, there is 27% unemployment. What kind of political pressure does this put on the eurozone? Do you think that Spain, Greece and Italy can be kept in the eurozone?
TL: I don't think the eurozone will split up because for most of its countries the advantages of staying in the eurozone outweigh the negatives. If any country were to leave the eurozone and depreciate its new currency, it would be beneficial in the short term but harmful in the longer term because it would be tougher getting its debt financed on the international markets. And having depreciated once, most investors won't trust it again, fearing further deprecations. Now, because of the single currency, Greece can easily find an investor in, for instance, Germany or Belgium, while it would mainly be limited to domestic investors if it were to get out of the eurozone.
That said, I think the European Union is largely responsible for the crisis in southern Europe. Not only did it allow dubious countries to join, it also supported dubious spending. In a specific area in Spain, there are four parallel roads and two railroads in an area just three kilometers wide. Lots of Spaniards bought second houses or apartments, and thanks to the availability of cheap mortgages, people could actually pay them over 40, 50 or even 70 years. The last example would take three generations to pay off. It is painfully clear now that there was an urgent need for a banking regulator that could have scrutinized the lending of money to people who couldn't afford it.
TGR: Could natural resources help regenerate the European economy?
TL: No question. Italy has oil and gas. Greece has gold. Cyprus has gold, copper and even gas. Spain has gold, copper and silver, and Portugal has tungsten, gold and copper. In Spain, it would make sense to recentralize the mining permitting process because every decision now is made by a local government. This way, mining could be encouraged on a national level and several thousand or even tens of thousands of jobs could be created.
If this recentralization were to occur, it might then be possible for Spain to institute a 5% gross production royalty on gold mining so it would receive gold that's being mined in the country as bullion for its vault. This could strengthen the balance sheets of its national banks. By contributing increased labor and tax flows and increased gold holdings on the balance sheets of the national banks, mining could be a huge boost to Spain and to any other country in southern Europe that would take such measures. To clarify, this potential 5% royalty is my personal thought and not an official law.
TGR: Aren't large-scale environmental protests against mining in Europe a serious problem?
TL: There are always protesters. I agree that every modern mine should be as environmentally friendly as possible, but in the end governments need to balance potential environmental problems against job creation and increased tax revenues.
TGR: You predicted in May that gold would trade between $1,250-1,500/ounce [$1,250-1,500/oz]. You have been proven correct. Where does gold go from here?
TL: We've had very strong resistance at $1,410/oz, and when gold tried to break through just a few weeks ago, it dropped right back to the $1,300/oz level. I believe that gold will continue to trade sideways from here: between, let's say, $1,200-1,410/oz. I'm not sure what kind of major economic catalyst could result in a push strong enough to break through this resistance.
TGR: The Federal Reserve has backed off from tapering quantitative easing [QE]. Will this raise the price of gold over the long term?
TL: We've seen QE over the past three years, including the past two years when gold fell in price. The continuous printing of money by the U.S. will definitely be beneficial to the price of gold, but the problem is that this new money will cause inflation only when the velocity of money rises again. In a normal economic cycle, this happens between 24 and 36 months, but now the velocity of money is much lower than normal. I think we'll see inflation rising 48-60 months after the printing started, that is, within two years from now. And that will indeed benefit the price of gold.
TGR: Times are tough, and there's little margin of error for successful investors. What qualities must mining companies demonstrate for investors to favor them?
TL: I like to see a management team with a track record. The era of inexperienced managers is over. Further, a company must present to investors and potential investors a clear path and timeline toward production because now all anybody cares about is adding cash flow. In addition, the project must be financeable. I don't think any company would now be able to find financing for a $2-3 billion low-grade copper project in Chile. Finally, in this downturn, effective transparency is more important than ever because investors always want to know what the company is doing behind the curtain.
TGR: You have spoken in the past of the importance of jurisdiction in resource investment. In this regard, what do you like about Australia?
TL: Australia, like Canada, is a real mining country with many skilled and experienced people who are subject to very clear mining code. The jurisdictional risk is close to zero, as Australia realizes it needs its mining sector to support its entire economy. It's a great place to work. A few years ago, Australia instituted a new levy called the Minerals Resource Rent Tax [MRRT] to garner a larger share of mining profits. There was a huge protest against this tax, and last year, the first year it was implemented, it generated only $200 million [$200M], instead of the expected $3 billion. So I think Australia will abolish this tax within the next few years as the negatives outweigh the benefits.
TGR: What's your prediction for the price of iron ore?
TL: It's currently trading around $135-140/metric ton [$135-140/mt] of 62% iron content. This will drift down to maybe $110/mt because a lot of new projects are coming on-line and onstream, and even though the Chinese economy is still growing, it's growing at a slower rate. I think we should expect a long-term price of about $100/mt.
TGR: How much does iron ore depend on the Chinese economy?
TL: About 60-70% of Australia's iron ore is being shipped to China.
TGR: Where do you stand on the future of the Chinese economy?
TL: That's a difficult question because we just can't rely on any numbers the Chinese produce. There's not a lot of transparency. Without trying to sound like a conspiracy theorist, it is possible China is trying to hide things from the rest of the world. I do believe its economy is still growing, but I also believe the world will have to accept single-digit growth instead of the 10-12% we've become used to.
TGR: What's your assessment of the jurisdictional risk of West Africa in general?
TL: Ghana and Burkina Faso are the most reliable countries because they know their economies are based on gold mining, and they have been making tremendous progress attracting foreign investment in mining.
TGR: What's your assessment of Colombia's jurisdictional risk?
TL: Much better than five or six years ago. I think Colombia could very well be the next Peru, whereby mining will be encouraged as long as the companies color between the lines and don't do anything they aren't supposed to do.
TGR: Let's talk about Canada. Do you think that the mining industry in Canada is in decline? There are problems with both provincial and federal permitting, with relations with First Nations people, who are claiming oversight over developments, and with the TSX Venture Exchange. Recently, many British Columbia juniors seem to prefer working in Mexico, rather than in their home province. What do you think?
TL: I believe that Canada is a top mining destination and will continue to be so. Most projects will get permitted, but maybe not with best case scenarios. Mexico is very attractive because of its gold and silver history and its much lower labor costs. But since Mexico has announced plans to increase its mining tax, I do think a lot of companies will return to Canada because this makes Mexico less attractive than before.
TGR: What do you like about tungsten?
TL: Tungsten has some irreplaceable uses and thus scores very high on the list of governmental strategic minerals, about the third highest in the E.U. and U.S. I'm pretty sure that the Department of Defense has a tungsten stockpile. China dominates world production; it has also been the predominant world exporter for decades, but has now started to stockpile tungsten. China has become a net importer. So it has become essential to develop tungsten projects outside China in order to guarantee continued supply to the West.
TGR: Can we expect tungsten prices to increase?
TL: I think so. I'm perfectly comfortable with the current price: $400-410/mt. Most mining companies will make a lot of money at those prices. If China continues its new stance, I believe we will see a price increase.
TGR: Given all of the losses investors have suffered over the last couple of years, what are the factors that should keep them in the market?
TL: It all comes down to having a decent selection procedure. I can tell you that about 25-30% of the mining companies on the TSX Venture Exchange today won't survive this downturn. Investors need to take a look at companies with cash in the bank, real value in the ground and management that can deliver the goods. This is not the time to wish upon a star and hope that the drill bits will deliver something.
TGR: Thibaut, thank you for your time and your insights.
This interview was conducted by Kevin Michael Grace of The Gold Report.
Thibaut Lepouttre is the editor of the Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals. Lepouttre has a Bachelor of Law degree and two economics masters degrees that have forged his analytical approach to the mining sector. Considered a number cruncher, Lepouttre focuses on the valuations of companies and is consistently on the lookout for the next undervalued mining company.
1) Kevin Michael Grace conducted this interview for The Gold Report and provides services to The Gold Report as an employee.
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I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.