The Gold Report's  Instablog

Source: Brian Sylvester of The Gold Report (5/24/13)

http://www.theaureport.com/pub/na/15308

Do you follow your own advice? Ivan Lo, editor and founder of Equedia.com and The Equedia Weekly Letter, does. Lo doesn't just follow companies in the gold and silver space, he actually paused this interview with The Gold Report to receive a shipment of silver bars. Following the notion that "knowledge is power," Lo also explains the philosophies that guide his publications, the reasons why educated investors have nothing to fear from the dip in the gold price and why some companies remain good bets in the out-of-favor mining sector.

The Gold Report: Some recent headlines from The Equedia Weekly Letter include "A Scary Prediction," "Prepare for a Crisis," "A Nuclear Threat" and "A Shockwave Is Coming." Should investors be fearful, or does fear help sell your newsletter?

Ivan Lo: Fear helps sell the newsletter but not necessarily in the way you've worded it. Where there's fear and concern people go looking for answers, and we try to provide them. There's a lot of fear and concern right now-war with Syria in western Asia, nuclear threats from Korea, tensions between Japan and China, tension with China invading India's territory. These situations affect our safety and our financial well-being.

I think investors should be educated. If people are educated they are more prepared and don't feel the need to be fearful. Too many people in North America live inside of a small little box and have no idea what's going on around them, let alone in the world.

TGR: In a recent newsletter you wrote, "When you consider that we're in the middle of a currency crisis and a currency war, gold really is your only last form of liquid protectant." What would you say to the doubters who believe that money printing is already built into the gold price?

IL: A very fine line needs to be drawn between gold as a safe haven and gold as an investment. Stocks and real estate are investments. Gold is a currency that's held as value; it has had real value since the beginning of time. It doesn't suffer from inflation. There is a downside to gold, which may be what the doubters are talking about: It doesn't generate interest.

People get it wrong when they talk about gold as an inflation hedge and that they don't want it because the inflation numbers aren't there. The price of gold is less affected by the rate of inflation and more by the level of real interest rates. The real interest rates drive the appeal of holding gold relative to other currencies. In the end, I'm not telling my readers to go and buy gold to make money. I say you own gold so you won't lose money. Don't trade it. Own it.

TGR: But that doesn't mean gold equities will necessarily perform. Make the case for gold equities.

IL: Some incredible deals are out there if you know what to look for. People should start looking at gold plays as more of a real estate-style investment, where the idea is to get your hands on the rarest real estate project at the lowest possible price.

Natural Resource Holdings conducted a study last year and identified about 439 gold deposits in the world with over a million ounces. That's not a lot. Of that 439, about 189 are already producing mines. That leaves us with about 250 undeveloped deposits of over a million ounces. Consider that the majority of them are uneconomic, and you're left with 100 at the most. Right now, economic gold projects are not only ultra rare but cheap. Rare is good, but cheap is even better. That's my case for select gold equities.

TGR: What are some select gold equities at the production stage?

IL: Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT) is a favorite. The company continues to increase revenues, cut costs and expand its mine life with funds paid from production. It just had another record-breaking quarter. Its profit from operations grew 40%; earnings are up 155%; cash flow is up 50% or 51%, and it sold 30% to 35% more gold than it did last year. This is all at a cash cost per ounce on a byproduct basis of $703. That's an all-in cost. Even if prices fall to $1,000/ounce ($1,000/oz), Timmins is still making money. In the gold space that's rare.

TGR: Have investors missed the boat on that stock, or is it still undervalued?

IL: It's still undervalued compared to its peers, such as Argonaut Gold Inc. (AR:TSX). Timmins isn't even close to being fairly valued. Some of the analysts have price targets double where Timmins is currently trading.

TGR: Do you think Timmins will use its cash flow to purchase other assets, or will it stick to its knitting?

IL: That's a tough discussion to have. If Timmins announced it was going to acquire other properties, people will start hammering the market expecting something to happen. If it doesn't happen, they'll penalize Timmins for it. I don't see these gold equities moving anywhere in the near future, so Timmins has time on its side.

TGR: What's another producer?

"Investors should be educated. Too many people live inside a small little box and have no idea what's going on around them."

IL: I love the silver space. The Equedia Weekly Letterhas never introduced a silver company that didn't show our readers great returns. Aurcana Corporation (AUN:TSX.V; AUNFF:OTCQX) has great exploration upside at two of its mines―La Negra in Mexico, and Shafter in Texas. I believe the two projects are on the same belt line. Once Aurcana's new mine, Shafter, is operating at full capacity, it should become the largest pure silver mine in the U.S. and one of the largest primary silver mines in North America.

TGR: Shafter has had quite a few production issues. Why do you think Aurcana will get it on track?

IL: They're just operational issues. That happens when you try to put a mine back into production. Maybe one of the crushers isn't working and the company needs to get a new one. Everybody always penalizes companies for that, and that's why I don't like to set the expectations too far into the future. Now may actually be one of the better times to own the company because people are penalizing it.

TGR: Does Aurcana's strong institutional coverage provide you with an extra measure of confidence in talking about the stock?

IL: It does, but I don't necessarily count on the institution and the coverage it provides. A lot of that relies on "If you scratch my back, I'll scratch yours" funding. That's the space we're in, and that's how analysts cover certain companies.

TGR: What are some other equity stories in the exploration and development stage?

"Rare is good, but cheap is even better. That's my case for select gold equities."

IL: My favorite undeveloped project in the silver space is MAG Silver Corp.'s (MAG:TSX; MVG:NYSE)Juanicipio project. It has 146 million ounces (146 Moz) with an average grade of about 728 grams per ton (728 g/t) silver and 1.9 g/t gold and an Inferred resource of 85 Moz silver with an average grade of 373 g/t silver and 1.6 g/t gold. That's high grade. And it just drilled more holes at Juanicipio. It hasn't announced it, but it has an agreement with its partner, Fresnillo Plc (FRES:LSE), to do that.

MAG Silver owns 100% of Cinco de Mayo, which is a monster of a discovery. It's going through some property issues in Mexico right now, but I believe those will be resolved because Juanicipio went through the same thing. Then it will be off to the races.

TGR: Do you think that MAG Silver is being valued solely on Juanicipio and investors get Cinco de Mayo for free?

IL: Absolutely. Even without Cinco de Mayo, I think Juanicipio is undervalued right now. People are penalizing the company because it has to wait for Fresnillo to get this thing going. I believe it's going to break ground very soon, maybe even in the next month or two.

TGR: When would it enter production?

IL: A few years because it has the mine development phase. Brian, can you hang on for a second?

TGR: Sure.

IL: Sorry about that Brian. I just received silver bars that I ordered.

TGR: Really? Where did you buy them?

IL: I ordered them out of the U.S. I was supposed to pick them up, but they shipped them right to my door. It goes to show you that I actually act on what I say.

TGR: That's funny. What are some other development stage equities you're fond of?

IL: Balmoral Resources Ltd. (BAR:TSX.V; BAMLF:OTCQX) and Corvus Gold Inc. (KOR:TSX) are both excellent exploration plays. They're undeveloped projects. Corvus is closer to the production stage, so it's ahead of Balmoral, but Balmoral has the advantage of being next to Detour Lake, one of Canada's next biggest gold mines.

Balmoral is a high-grade story, while Corvus is a low-grade, near-term production story. However, Corvus might be on to a high-grade feeder zone that can dramatically change the outcome and economics of its near-term production project. It just raised more than $7 million ($7M) without warrants in this crummy market environment, so it must be doing something right. Balmoral, Corvus and MAG Silver all have tons of cash, so they can weather any storm in this market. That gives me comfort.

TGR: What's your impression of the Martiniere deposit? Balmoral has had some promising drill results there.

IL: I wouldn't call it a deposit yet, but it has massive potential. Balmoral has encountered good high-grade gold zones in practically every hole it has drilled. Detour Gold Corp. (DGC:TSX) is also on the same trend. Some of Balmoral's numbers are ridiculous.

TGR: Does that story get lost in a market that doesn't reward good drill results?

"There's always a positive if you know and prepare for the negative."

IL: It gets lost for the investors but not for the companies that might take over Balmoral. If Detour Gold looks at those drill results, it could see what's happening. You can bet those guys are looking at every news release that comes out.

TGR: Tocqueville Asset Management and AngloGold Ashanti (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) have invested in Corvus. The company is building the North Bullfrog gold project in Nevada. Is the plan to be in production in the third quarter of 2014 realistic?

IL: It's realistic if it keeps going at the same pace. I believe it has strong enough partners to raise the money to finance it, but timing can be affected by a number of different factors, such as market environment, drill progress, etc.

TGR: Would you be as bullish on this story if it didn't have such strong institutional ownership?

IL: Yes, because I look at management. Corvus CEO Jeff Pontius has a knack for finding gold where no one else wants to find it. Not just a little bit of gold, tons of gold. He has found five different multimillion-ounce deposits, leading the discoveries of nearly 40 Moz of gold. Most geologists live their whole lives without ever finding one. I believe in management's ability.

TGR: Could you share some of your readers' success stories from the The Equedia Weekly Letter?

IL: I would say that all companies I mentioned are success stories. On a trading note, when everybody was screaming doom and gloom last year, we predicted that the S&P 500 would go past 1,500 and the Dow would go past 14,000. We said to buy in late 2008, when everyone was telling people to sell. We told our readers that Japanese stocks would hit an all-time high while the yen would fall, and we told our readers how to benefit from that with exchange-traded funds. We're very fortunate to have had success when everybody else has failed.

TGR: The S&P 500 is past 1,600 now, and the Dow Jones is above 15,000. Should investors approach equities with caution given those levels?

IL: I am extremely cautious at these levels, but I do think the market has room to climb, especially given all the liquidity injections and the record amount of money sitting on the sidelines. Interest rates keep dropping, which leads to lower worldwide bond yields, which in turn should change how investors value equities relative to the fixed income market. Long-term bond yields can't keep up with inflation and are losing value. Fixed-income investors have to eventually rebalance their asset mix toward equities just to maintain their current allocation.

I tweeted last week-I just started using Twitter because a lot of my subscribers asked for it-that global yields on $20 trillion worth of government securities now yield even less than 1%. By incentivizing these fund flows into the equity market, stocks are going to rise. This isn't a fundamental market. It's one filled with euphoria. Just remember that the bigger they are, the harder they fall.

TGR: That's a good cliché right now. How does an investor focus on the positive when there's so much negative news?

IL: I'll keep this short. There's always a positive if you know and prepare for the negative.

Ivan Lo is the editor and founder of Equedia.com and The Equedia Weekly Letter, an online publication focused on investing in mining and resource stocks. With over 65,000 subscribers of high net worth investors, brokers, analysts and fund managers, The Equedia Weekly Letter has become one of Canada's most trusted investment newsletters, providing information on stocks that have earned returns of over 100%. As a result of his performance, Lo now works closely with brokers, money managers and industry reporters to bring them new ideas and insights on the market.

Want to read more 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 Streetwise Interviews page.

DISCLOSURE:
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Reportas an independent contractor. He 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: Timmins Gold Corp., Argonaut Gold Inc., MAG Silver Corp., Balmoral Resources Ltd. and Detour Gold Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Ivan Lo: I or my family own shares of the following companies mentioned in this interview: MAG Silver Corp., Balmoral Resources Ltd., Corvus Gold Inc. and Timmins Gold Corp. I personally am or my family is paid by the following companies mentioned in this interview: MAG Silver Corp., Balmoral Resources Ltd., Corvus Gold Inc. and Timmins Gold Corp. My company has a financial relationship with the following companies mentioned in this interview: MAG Silver Corp., Balmoral Resources Ltd., Corvus Gold Inc. and Timmins Gold Corp. 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.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews 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 © 2013 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.

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

Source: Brian Sylvester of The Gold Report (5/22/13).

http://www.theaureport.com/pub/na/15299

Sprott Silver Equities Class Co-Manager Maria Smirnova understands the power of leverage. She has seen the big impact even a slight increase in the silver price can have on silver producers. Every cent is multiplied and goes right to the investor's bottom line, giving the equities more upside than possible in a coin. That is why Eric Sprott increased holdings of silver equities in certain Sprott funds. Smirnova discusses five of these companies in this interview with The Gold Report.

The Gold Report: Maria, in April Eric Sprott sold more than $45 million ($45M) worth of units in the Sprott Silver Physical Trust. A spokesperson told Canada'sGlobe and Mail that the sale was needed to cover charitable obligations and to buy shares in silver mining companies because Mr. Sprott believes silver equities will outperform the metal in the next rally. Can you fill in the details on that thesis?

Maria Smirnova: We believe in the equities-for any commodity-for several reasons. Equities represent a leverage play on the underlying commodity. To use a simple example: Assume Company X can earn $5 when the silver price is $25/ounce ($25/oz). If the silver price increases 20% to $30, that extra $5 goes directly to the bottom line. This doubles the company's profits from $5 to $10. The silver price increases 20%; the profits rise nearly 100%-that is what I call leverage.

In addition, mining companies benefit from production growth through exploration or acquisition. We look for companies that can find millions of ounces of silver or gold.

TGR: Precious metals have certainly had their detractors of late. Why does Sprott Asset Management remain committed to precious metals?

MS: Governments are trying many maneuvers to fix the economic situation, printing money, for example. None of their actions are actually fixing the underlying economic issues. We remain committed to the precious metals because they are hard assets.

In addition, the financial market has become disconnected from the physical market. Especially since April's two-day selloff in silver and gold, purchases of the physical metals have surged.

For example, sales of the U.S. Mint's silver coins jumped 57% year-to-date compared to last year (as of April). Sales increased 169% in April alone. We have heard stories of people lining up to buy silver in Canada and Australia. Demand is up in China as well. Chinese jewelry sales grew 72% in April compared to 2012.

If you look at the exchange-traded funds (ETFs), silver ETFs have not had a large selloff.

The buyers are there, the physical demand is there, but the price is just not reflecting that. It is a bit frustrating, but from my perspective, it is comforting to see the numbers show that people want to own silver and are buying more of it.

TGR: Can you tell us about some of Sprott's top picks?

MS: Earlier this year Mr. Sprott made MAG Silver Corp. (MAG:TSX; MVG:NYSE) his top pick in the silver developer space and Sprott Asset Management took a position worth more than $26M. MAG Silver has a world-class deposit, the world's highest-grade silver development asset right now. MAG Silver owns 44% of the Juanicipio deposit in Mexico.

The grade is between 500 and 700 grams per ton (700 g/t), which is very high grade. The deposit has good thickness, so the economics have the potential for a very profitable mine. It is all about how economic the deposit is.

Fresnillo Plc (FRES:LSE) is MAG Silver's joint venture partner. Fresnillo operates Juanicipio and is pushing the project forward. Fresnillo should do a good job putting this into production and MAG Silver will benefit. MAG Silver is trading at about a 20% discount to net asset value, so this is not a bad time to buy.

TGR: Fresnillo also owns about 17% of MAG Silver. Some market watchers believe Fresnillo will ultimately buy MAG Silver given its ownership stake and the Juanicipio joint venture, but Fresnillo lacks the money to make an all-cash bid. Does that change the investment thesis for MAG?

MS: No, not at all. Fresnillo recently raised about $350M with a company called First Eagle Investment Management. That was done to maintain FTSE free float listing requirements. If Fresnillo does not have enough cash per se, it could do a cash-and-share acquisition.

Even if Fresnillo does not buy Juanicipio, when it goes into production, MAG Silver shareholders will benefit from the 44% stake.

I never invest in companies banking on a takeout. We always look at the basics: the deposits, the management teams, the fundamentals of the projects themselves.

TGR: MAG Silver also has the Cinco de Mayo project. Could MAG sell its 44% stake in Juanicipio to Fresnillo and then focus on Cinco de Mayo?

"No government actions are actually fixing the underlying economic issues. We remain committed to precious metals because they are hard assets."

MS: That could be an option.

TGR: In a recent radio interview, Mr. Sprott said, "The beauty of silver is that there is not much inventory in the world." What other small-cap silver equities are slowly but surely adding to the global silver inventory?

MS: I co-manage the Sprott Silver Equities Class with Eric Sprott and Charles Oliver and have been investing in the smaller silver producers.

We own names like Mandalay Resources Corp. (MND:TSX), SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT) and First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE). All of these companies are growing their silver production.

TGR: One of Mandalay's primary assets, Cerro Bayo, in southern Chile, had operational hiccups as the mine completed its ramp up to 1,200 tons of ore per day. What kind of production are you modeling from Cerro Bayo for the rest of 2013? And what cash-flow-per-share should Cerro Bayo generate?

MS: Cerro Bayo's production dipped a bit in Q1/13, but the reason was to accommodate the installation and commissioning of some new equipment designed to improve metallurgical recoveries, so I do not view the shortfall as negative at all. I expect the company to meet its 2013 overall production guidance despite whatever hiccups it had in Q1. In fact, Mandalay tends to exceed guidance. Management is guiding around 3 million ounces (3 Moz) of silver and 20,000 oz of gold production in 2013. This year, using $24/oz silver, I estimate about $0.16 cash flow per share, which implies that the stock is at about 5.5 times cash flow right now and has a 3.5% dividend yield.

TGR: How does that compare to its peers?

MS: Very favorably. The majors are trading at 13-15 times cash flow, using a current silver price, not a high silver price.

TGR: What silver price do you use in your models?

MS: I usually just use the spot price to evaluate all companies. For me, it is a relative-standing game. I do not project the silver price going forward. If today's price is $24/oz, I will use $24; that allows me to evaluate all companies on a fair ground.

TGR: You mentioned First Majestic. As of late March, it was the largest equity holding in the Sprott Canadian Equity Fund. Why does the fund have such a significant position in that name?

"It is very comforting to see retail buyers choosing in droves to own the physical metal. We hope that leads to higher market prices for gold and silver, and in turn to a rally in the stocks."

MS: Our initial investment in First Majestic was at less than $4/share. Today, the stock is $10 or $11/share. The position has grown because of price appreciation, as well as subsequent purchases.

First Majestic is one of the best silver plays out there. The management team has definitely delivered on its promises. The company built five mines and is adding two more. It is one of the purest silver producers out there; 90% of the production is silver.

Management has done well keeping costs under control. The total cash costs are virtually unchanged since 2008 at about $9/oz. Production is still growing. We think the silver equivalent production could double from 2012 to 2014. The stock is trading at about eight times next year's projected cash flow. This is a very reasonable multiple using the current silver price.

TGR: Is First Majestic an example of Sprott's approach to the equities? Even though overall things may not be that great in the sector, some very good performers exist.

MS: Absolutely. To me the key is to find the companies that can survive a tough market, exceed expectations, deliver on their promises and generate free cash flow. That describes First Majestic.

TGR: You mentioned SilverCrest. In Q1/13, SilverCrest sped up removal of waste rock at its Santa Elena mine so it could produce more silver and gold in the summer months when machinery tends to break down more frequently. Is that a typical mine management move?

MS: That decision was prudent. SilverCrest built the Santa Elena mine and has made money in the last couple of years. Now management is deciding to transition the mine from an open-pit to an underground operation. It is building a mill to grow production.

TGR: Where will SilverCrest's production growth come from?

MS: Last year SilverCrest produced about 2.4 Moz silver equivalent, and the target is to grow production to 4.5 Moz silver equivalent. That may not happen next year, but it will get there by 2015.

TGR: Are there any other small-cap names you would like to talk about?

MS: I want to mention International Northair Mines Ltd. (INM:TSX.V) in Mexico. It is small, but interesting, run by an experienced management team. The market cap is $10M, but the company has defined a deposit of more than 50 Moz silver in an open-pit resource. To date, the company has drilled 40% of a 6-kilometer (6km) mineral strike. The deposit is open on both ends and to depth. Two things here appeal to me: There is a lot of potential to find more ounces and the market cap is tiny.

TGR: How would you compare International Northair's La Cigarra deposit with other development-stage silver assets in Mexico?

MS: I like the deposit. The initial metallurgical tests are positive-no red flags. I think the resource could be increased by 50% to 100%. Just drilling the remaining 4km could more than double the resource. I do not see that kind of blue-sky potential in many companies right now.

TGR: Do you have a time frame for when the market might begin to favor precious metals again?

MS: That is hard to predict. A lot of what is taking place right now does not make sense. It is very difficult to predict when things will turn. We take a long-term view.

TGR: A number of the companies we have talked about have operations in Mexico. There has been some talk of increased royalties and some quiet forms of nationalization. Is that a concern at all?

MS: Nationalization is not a concern at all. Regarding royalties, the proposal appears to be for a net profits royalty tax of about 5%. That would equate to a 2% top-line net smelter royalty, lower than what people expected. This is not atypical and it is not a windfall tax. Therefore, in my mind, it will not have a huge impact on these companies.

The removal of the uncertainty about the tax is probably good for the mining industry in Mexico. We will move on and live our lives.

TGR: How do you view the silver space and what is your outlook for small-cap silver miners?

MS: I think you have to remain optimistic that the prices of the commodities, especially silver and gold, turn around. I do not even want to call them commodities, to be honest. I would call them currencies, especially gold. Silver is a hybrid because it also has industrial applications.

Once the turn happens, these stocks could explode in a good sense and completely revalue to the upside. Today, they are at depressed valuations.

TGR: Is there an across-the-board percentage recovery you would predict?

MS: Some stocks are down 50%-60%; they could double or triple. First Majestic used to be a $20/share stock; it will go back there and then some based on earnings alone.

TGR: To what do you attribute the two-day fall in mid-April? Was it manipulation?

MS: Yes, I would agree with that characterization. It is very difficult to believe that something could fall that much in just two days. A whopping 1.8 billion ounces of silver was traded on the COMEX on April 12 and 15-that's in a 1 billion ounce market!

TGR: And what are the reasons behind the more general mining equity slump?

MS: A lot of people believe we are fixing our economic problems and things are getting better. People are going to the U.S. dollar and to other assets and other sectors.

There have also been disappointments in the mining sector with companies not meeting their guidance and costs coming in higher. This too has put a damper on investor sentiment.

TGR: Can you leave us with a positive thought about the space in general?

MS: It is very comforting to see retail buyers choosing in droves to own the physical metal. We hope that leads to higher market prices for gold and silver, and in turn to a rally in the stocks.

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

Maria Smirnova joined Sprott Asset Management as a research associate in May 2005, and was appointed associate portfolio manager in February 2010. She currently co-manages the Sprott Silver Equities Class with Eric Sprott and Charles Oliver. She is also responsible for supporting the portfolio management team in the precious metals and mining space. Smirnova has over 12 years of experience in the financial services industry; she began her career at Excel Funds Management as operations manager, and subsequently worked in product development at Fidelity Investments. Smirnova graduated with distinction from the University of Toronto with a Bachelor of Commerce degree and obtained her CFA charter in 2002. She graduated as a Bregman Scholar from the University of Toronto's MBA program in 2005.

Want to read more 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 Streetwise Interviews page.

DISCLOSURE:
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Reportas an independent contractor. He 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: International Northair Mines Ltd., MAG Silver Corp., Mandalay Resources Corp. and SilverCrest Mines Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Maria Smirnova: I or my family own shares of the following companies mentioned in this interview: None. 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: Certain Sprott funds own shares of all five companies. 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.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews 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 © 2013 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.

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

Source: Brian Sylvester of The Metals Report (5/21/13)

http://www.theaureport.com/pub/na/15296

Everything you thought you knew about copper is wrong. Is it an economic barometer? Nope. Do copper warehouses decrease volatility? Hardly. Can investors play small-cap base metals producers for profit? You bet. These are the conclusions Analyst George Topping shared with us in his interview with The Metals Report. Find out why Doctor Copper just might be stripped of its credentials and whether you should trade in your gold for platinum group metals.

The Metals Report: George, what do Doctor Copper and other indicators tell you about global economic performance over the medium term?

George Topping: You can't take the value of any commodity as a true indicator of physical demand these days. For example, a fortnight ago, copper prices shot up 6% from $3 per pound ($3/lb) to $3.19/lb in a heartbeat. That resulted from financial players pushing the copper price around. It represents what the financial markets think of the world economy. The indicator has some value in that it reflects a collective body of knowledge, but the underlying physical market is not as bad as the financial players would have you think.

Copper consumption will start to pick up. I expect the price of copper will increase because the number of dollars in circulation has tripled in the past five to six years. There's been an incredible printing of currencies and currency debasement in the U.S., Japan, Europe and Great Britain. The U.S.-adjusted monetary base is now over $3 trillion, up from $800 billion ($800B).

"While it's easy to put copper into warehouses, it's not easy to get it out."

Another important angle on the physical copper market involves warehouses. Copper consumers are learning that we may look like we're well supplied from the London Metal Exchange, but while it's easy to put copper in, it's not easy to get it out. There are restrictions on the amount of copper that can come out of warehouses on a particular day. Warehouses are supposed to restrict volatility and make it less of a tradable commodity, but it can make it more volatile to the upside because when you want your copper, the companies that control the warehouses can take their time, causing premiums to rise.

TMR: Do you believe that volatility could provide investors with entry points?

GT: Absolutely. Pullbacks, like when the copper price came down closer to $3/lb this year, are an excellent entry point. When prices fall, it's a good time to stock up. It's human nature.

TMR: What is your thesis for small-cap base metal equities?

GT: Small-cap equities are out of favor, which makes them more attractive to larger companies that have the cash to move in and acquire them. There's a surplus of assets for sale right now. The major companies like BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) and Barrick Gold Corp. (ABX:TSX; ABX:NYSE) are selling off their noncore assets.

TMR: What do these companies look for in an asset?

"Pullbacks, like when the copper price came down closer to $3/lb this year, are an excellent entry point."

GT: They're looking for quick cash flow. The market has moved away from the "we'll build this, and in five years we'll see some cash flow" model. Until we work our way through this period of oversupply of producing assets, these juniors will trade at very cheap prices.

TMR: How long will it take to wash the surplus assets out of the system?

GT: It depends on metal prices. The push to sell lower-quality assets is on, but a lot of those assets will be taken off the table if base metal prices run higher. Juniors like Foran Mining Corporation (FOM:TSX.V)are trading at very low prices compared to the worth of their deposits. Smarter, more long-term-oriented companies can buy these smaller assets and tuck them away for later development.

TMR: What's your rating and target for Foran right now?

GT: We have a Buy rating on Foran. The target price is $1.50. A few months ago the stock was trading at $0.55. It's now down to $0.38. The management is a cut above the rest. President and CEO Patrick Soares, the chap who sold Hammond Reef to Osisko Mining Corp. (OSK:TSX), has a track record of selling assets at a premium. Chairman Darren Morcombe is connected and has done very well. He sold a gold refinery to Newmont Mining Corp. (NEM:NYSE) for a good profit. Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) Chairman Pierre Lassonde owns about 11% of the company. That's an endorsement, if you ask me.

TMR: What's next for Foran in terms of development?

GT: It's advancing engineering studies and met testing, so it can quickly put together an economic study.

TMR: What other development stage base metal projects are you following?

GT: Lumina Copper Corp. (LCC:TSX) in Argentina. Its Taca Taca project is trading at a deep discount due to Argentine risk, but we'll get a view on that in October when we see the legislature elections.

TMR: Where is Taca Taca along the development curve?

GT: Lumina has delineated the deposit and done the economics, but it's waiting for a bit. In any other country, it would've been taken out at three times the current share price. It's a waiting game.

TMR: What's your rating and target?

GT: I have a Buy rating on it. The target is $15. I also recommend Duluth Metals Ltd. (DM:TSX) in Minnesota.

TMR: It's on a big belt there.

GT: You got it. That belt continues up into Canada. It's a massive deposit. Polymet Mining Corp. (POM:TSX; PLM:NYSE.MKT) is also there.

TMR: But Polymet has all kinds of trouble. What makes the thesis better at Duluth?

GT: Duluth has a contract with Antofagasta Plc (ANTO:LSE), which owns 40% of the joint venture. Once the bankable feasibility study is completed, probably in two years, Antofagasta has the option to buy 25% of the Maturi project for a pro rata share of 1.0x net asset value (NAV), which will be determined by the bankable feasibility study. We've modeled it at a NAV 10% discount rate, $2.80 copper, and we get a value of over $2B for the deposit. That's $500 million ($500M) for the 25%, but Duluth is trading only at a couple of hundred million market cap. If I'm Antofagasta, I'm just going to buy Duluth, and then I get 60% for less than I can buy the 25% for. What I like most is that there's a catalyst that encourages Antofagasta buy Duluth much sooner. My target is $5.

TMR: Can you talk about a couple of the producers you cover?

GT: We're recommending First Quantum Minerals Ltd. (FM:TSX; FQM:LSE). It's the go-to name for copper exposure in North America since its competitor, Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE), bought into oil and gas.

TMR: Where is the growth coming from?

GT: It has a lot of growth projects, maybe too many at one time, actually. It's got expansion at its existing mine, Kansanshi, in Zambia. It's building a smelter, which will supply Kansanshi and also handle production from Sentinel, another huge project in Zambia. It's building the Enterprise nickel deposit in Zambia. The completion date for the next phase of expansion at Kansanshi is 2015. Sentinel should be commissioned in mid-2014.

TMR: Is it overleveraged in terms of development projects?

GT: There is a delivery risk, but it is better than most at delivering. That's the only concern. If you're not fazed by quarterly hits and misses and can look at it as a trend, you'll be fine.

TMR: Is there another copper producer in your book?

GT: Capstone Mining Corp. (CS:TSX), obviously. Its acquisition of BHP's Pinto Valley mine changes everything. Its copper production will be up more than 130%. Ironically, it may become more of a target because of that. It's always been seen as a small mine in the Yukon that was good quality, but didn't move the needle. But now it's got Pinto.

TMR: Did you see the Pinto acquisition coming?

GT: Yes, it was well signaled. The rumors in the market are that Capstone was not the highest bidder but was paying cash, whereas the others were saying, "Here, take our shares."

TMR: Let's shift to zinc. What's your price forecast for the remainder of the year?

GT: We're going to see metal taken off the visible inventories. For this year, $0.94/lb is the average. Next year, we expect it to spike up to $1.26/lb. We don't know when the cycle's going to turn, but when it does, it'll be rapid.

TMR: This is based on supply levels and a lack of a growing supply of zinc?

GT: At these price levels, companies are starting to shut down. The silver price has fallen significantly, and silver and zinc occur together. China is the major zinc supplier, but labor costs in China have been rising at 15% a year, meaning access to cheap labor to mine these deposits has dried up. On a currency basis, the Chinese yuan is fairly strong, so they're not getting a benefit from their currency.

TMR: Do escalating labor costs in China help raise the share price of a junior like Foran, given the amount of zinc at McIlvenna Bay?

"Very few zinc companies are left given the bear market we've had since 2007."

GT: Absolutely. Companies like Lundin Mining Corp. (LUN:TSX), HudBay Minerals Inc. (HBM:TSX; HBM:NYSE) and Foran should benefit tremendously, Foran especially, given its 25 million ton McIlvenna resource [Indicated and Inferred] and proximity to Hudbay's Flin Flon zinc smelter. Very few zinc companies are left given the bear market we've had since 2007. Six years later, there's hardly anything available to invest in. These polymetallic companies are the only survivors. HudBay and Lundin produce about 40% of their revenue from zinc.

TMR: What's your forecast for platinum and palladium in the near and medium term?

GT: For platinum, we're at $1,758 per ounce ($1,758/oz) for this year and $1,775/oz for next. For palladium, my forecast is $754/oz this year and $863/oz the next.

TMR: That's a healthy increase. Should investors sell their gold and buy palladium?

GT: I do like platinum and palladium. The problem is finding companies to invest in. One reason behind the forecast is that South Africa is in dire straits. If you can buy the physical platinum and palladium exchange-traded funds, I would.

However, Platinum Group Metals Ltd. (PTM:TSX; PLG:NYSE.MKT) is in South Africa, but it's a shallow deposit so its energy requirements are much lower. It has this remarkable discovery called Waterberg, which is a massive deposit of platinum and palladium. It's lower grade, but it's thick and extensive. You should have a look at that one.

TMR: Is that company being unfairly punished because it's in South Africa?

GT: I think all companies in South Africa carry a discount. Platinum Group Metals has some advantages. It already has a JV with the Chinese company, Jinchuan Group Ltd. Of course, the rand is devalued as well, which is good for the company because by building a mine on a weaker rand, you're probably saving about 20% on your U.S. dollar capital expenditures (capex).

TMR: Is production in late 2014, like it's predicting, realistic?

GT: Initial production will start then, but it will be more of a 2015 story. My target there is $1.75.

TMR: Any last words of Topping wisdom for retail investors?

GT: The amount of currency debasement and stimulus we're seeing means that there has to be a role for hard assets, be it gold, copper, platinum or palladium. I would seek protection against fiat currencies. I think inflation is unavoidable once the economy starts to pick up in a serious way, and all commodities do well in inflation.

George Topping joined the Stifel Nicolaus Research Team in connection with its acquisition of Thomas Weisel Partners LLC in July 2010. Topping joined Thomas Weisel Partners in December 2009 as a senior mining analyst covering base metals. Topping brings 10 years of experience in the mining industry and 14 years as a sell-side analyst. He began his mining career in 1985 with a senior South African mining company and worked both in operations and mining strategy roles for the gold and coal sectors. In 1995, Topping became a sell-side analyst covering platinum, coal and base metals with Irish & Menell Rosenberg, a South Africa-based financial services firm. Topping moved to Canada in 1997, where he has continued as an analyst covering base metals. From 1999 to 2005, he was at Sprott Securities and since 2007 at Blackmont Capital. Topping earned his undergraduate degree in mining engineering from the University of Strathclyde in Glasgow, Scotland.

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DISCLOSURE:
1) Brian Sylvester conducted this interview for The Metals Report and provides services to The Metals Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
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3) George Topping: I or my family own shares of the following companies mentioned in this interview: None. 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: Polymet Mining Corp. View Stifel Nicolaus Public Appearances. 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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