The Gold Report's  Instablog

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.

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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.

Want to read more Metals 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 Metals Report homepage.

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.
2) The following companies mentioned in the interview are sponsors of The Metals Report: Foran Mining Corp. and Franco-Nevada Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
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.
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: JT Long of The Gold Report (5/20/13)

www.theaureport.com/pub/na/15281

"Half science, half art, half luck," is how Brent Cook describes a geologist's work in distinguishing an anomaly from a deposit. But in his interview with The Gold Report, the publisher of Exploration Insights suggests investors will have an easier time distinguishing good drill results from bad if they know how to dissect a company's press releases. And despite the current preference for cost cutting over discovery, Cook discusses several miners whose futures are bright.

The Gold Report: After the Prospectors and Developers Association of Canada Convention in March, you said that the next 12-18 months could define how investors, speculators and mining companies perceive and value both the junior and major mining sectors. That was before the volatility of mid-April. With higher production costs being the new normal, what percentage of miners can make money at the current gold price?

Brent Cook: That is a tough call because companies use different methods to report their gold prices and gold costs. Cash costs are just one factor. When you throw in exploration, general and administrative expenses, royalties and such, it goes up quite a bit.

Everything I have seen published by both the companies and the analysts suggests that the all-in average cost of production for larger mining companies is in the $1,300-1,500/ounce range. That is a tight margin at the current price. Companies are cutting back on exploration and capital expenses (capex). That may help in the short run, but it will not solve the problem.

I wrote an article called "Mining Meets the New Normal," in which I discuss the thesis that the mining companies are turning inward on their own little mines. Their expectation seems to be that by tweaking the way they operate, they can cut costs and turn their mines into slightly more profitable mines. They believe they can squeeze out the last bit of blood from the rock, if you will.

TGR: While that kind of cutting back can help in the short term, what are the long-term implications? If companies are not exploring, where will the new gold come from in 5 to 10 years?

BC: Precisely my point. Companies are concentrating on their current deposits, trying to add ounces at their operations. For me, that means they will have to go deeper or bring in more low-grade rock. Both of those mean higher costs-higher strip ratios for an open pit, and more development costs for an underground mine. They may add more ounces, but in at least 80% of the deposits the grades will probably decrease, unless they up the cutoff grade, which then puts them back in the same predicament. That actually means their costs will increase and/or production will decrease.

In the next year and beyond, the large mining companies will realize this strategy is not making them money. They will have to find, acquire and develop new, high-margin deposits. Very few of those are left, and they are hard to find. Once found, they take a long time to develop. The large mining companies will have to buy the high-margin deposits that are being discovered and proven up by others.

That is my focus: the new discoveries that will be the best-of-the best deposits in the world that someone will have to own. That is what Quinton Hennigh-an excellent geologist working with me at Exploration Insights-and I are good at, and there is less competition in that space right now.

TGR: Can geophysical surveys make it easier to find new sources or does it still take a drill bit and a smart geologist to interpret the results?

BC: Technology can, and does, help. Geophysics helps us see deeper into the earth. We are also using mobile metal elements for sampling, along with more detailed and precise geochemical methods. Technology helps, but it does not solve the issue of actually finding these new deposits. Geophysics measures the geophysical difference between one rock type and another; it does not tell you anything about grade.

It still comes down to drilling. And it takes a good geologist with an imagination to interpret data and decide where to go. This is a very inexact science. In fact, it is half science, half art and half luck.

TGR: How do you determine the difference between an anomaly and an economic deposit?

BC: That is the hard part. That takes tens of millions of dollars and is what a feasibility study is all about.

Explorers run around the world, finding and evaluating anomalies. The earth has been evolving and changing over its 4.6 billion year history. As it changes, those changes are reflected in geochemical and geophysical anomalies. A volcano blows up and washes away, hot springs come from a cooling magma and change a hard rock to clay; that process happens all the time and creates geochemical anomalies. Maybe one in one thousand of those geochemical anomalies might reflect an economic deposit.

Determining which is a deposit requires going through the feasibility study process, looking at metallurgy, infrastructure, rock mechanics, at everything that goes into building a mine. We really try to turn an anomaly into an ore deposit through detailed studies that cost a lot of money.

"It takes a good geologist with an imagination to interpret data and decide where to go. This is a very inexact science."

TGR: As holes are drilled and press releases highlight the drill results, share prices often drop, whether the results are good or bad. Why is that? What should people look for in the announcement of drill results to determine whether the price should go up or down?

BC: If you are going to invest in the explorer/speculative companies, it comes down to knowing what a company is looking for. Is it looking for porphyry copper, high sulphidation, whatever? You need to know what that looks like in terms of size and grade. Then you need to understand what the results tell you, relative to the expectations. Are the grades sufficient to warrant mining or are they too low? If the mineralogy of the deposit tells you that it is, for example, a high-sulfidation system with a lot of arsenic, antimony and mercury, you know it will be troublesome, if not impossible, to get the gold out of it economically.

You need to evaluate each drill hole keeping in mind what you expect the company to find.

To do that, you really almost have to be an expert. Otherwise, you are looking at a drill result and saying, "Wow, that is fantastic" or "Wow, that is no good." Twenty meters of 2 grams per tonne (2 g/t) could be a fantastic result or a really poor result if you do not put it into context.

TGR: Do share prices go down on good drill results because people are confused, or is something else going on?

BC: It varies. Right now, the market is so messed up that people are reacting without thinking. I have seen drill results that I think are good, and the stock will go down because people were expecting better or were just looking for an excuse to sell regardless of the results.

I have seen results that I think are really poor, and the stock goes up because people do not recognize that the company has drilled right down a structure and it is not nearly as thick, as wide or as good as it appears to be in the press release. People are not interpreting the results. They are being too reactive to market influences instead of analyzing what it really means.

TGR: What are some red flags in drill results press releases that make you look twice?

BC: One thing to look for is grade smearing. I have a tool that Corebox and I developed called the Drill Interval Calculator that lets investors calculate how much grade is being smeared across how much drill core. For example, a company will drill a 1-meter (1m) high-grade interval, call it 30 g/t, and mathematically smear that across 30m so it looks as though it has a 30m interval of 1 g/t. That is an extreme example, but it happens. The significance is that it changes what the deposit might be. Thirty meters is a lot wider and may be better because it implies a whole different set of economics and possible tonnes. Using the Drill Interval Calculator you can plug in the big interval and the little interval and see what the remaining rock really grades. Sometimes that can be quite interesting.

Investors also need to see if the press release gives them all the information they need to interpret the data. Investors should expect a drill hole map-including all the past drill holes-and a drill section that shows what it looks like in sections. If a company is not releasing those data, it says one of two things: It is either incompetent or is trying to hide something. In both instances, it is not a company you want to own.

There should be a real easy summary that anyone can read, but you should also be able to dig into the details and decipher what is going on.

The good companies- Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) and GoldQuest Mining Corp. (GQC:TSX.V) do this well. They provide drill maps, sections and the entire drill hole assay database. That is the kind of company you want to be involved with.

TGR: What are some recent examples of drill results that should be positive catalysts for stocks?

BC: Colorado Resources Ltd. (CXO:TSX.V) put out a fantastic hole, and the stock went from $0.19 to over $1/share.

TGR: What did you like about that one?

"It is a good time to get into the market, as long as you know what you are buying, why and what it is worth."

BC: It is 230m of more than 1 g/t gold equivalent, copper and gold, indicating that the company might be onto a high-grade porphyry copper deposit. We will have to wait and see, but it is a very good drill hole. Right now everyone who owns that stock should have in the back of their minds the tonnes and grade that will make this economic. They should also understand what the variability of these deposits is like, so as not to misinterpret the results.

TGR: What about other companies?

BC: Atico Mining Corp. (ATY:TSX.; ATCMF:OTCBB) issued a release not long ago on its volcanogenic massive sulfide (VMS) system in Colombia. The company had some very good results and is certainly economic. What remains to be seen is the potential size.

TGR: Are there any other companies you would like to talk about?

BC: Last week I bought Roxgold Inc. (ROG:TSX.V), after following it for a long time. The company will issue a preliminary economic assessment later this year. Its Burkina Faso deposit is not big, but it is tight and high grade. It will be easy to mine, inexpensive to build and very profitable for whoever ends up owning it.

TGR: Is your investment thesis changing given how hard it is for companies to find funding and how volatile the gold price has been? What are you doing differently? What are you looking for now compared to six months or a year ago?

BC: I remain focused on the economics and on grade. I am looking for what the larger mining companies are going to be buying. That is what I want to own and what I have bought.

TGR: Does that mean you are looking for companies that are acquisition targets?

BC: Exactly. I am looking for two things: real early-stage discoveries and companies that offer high margins. There are not many out there.

TGR: You recently published a list of mid-size and large companies that fit your investment criteria. How did you compile that list?

BC: Quinton Hennigh and I went through all the deposits we were familiar with and tried to get some sort of valuation on them before a feasibility study and such had been done on the deposits. We came up with a list of large and mid-sized deposits that are high margin-deposits we think major mining companies will want to buy.

TGR: One of the companies that fits those criteria was Lydian International Ltd. (LYD:TSX). What can you tell us about it?

BC: Anyone who follows me knows that Lydian has been on the list a long time. We bought that after I visited the project many years ago before the discovery was confirmed. I like it because it is a simple deposit. The mine will be simple to build and relatively low cost. Production costs are low. Its feasibility study shows it is worth something on the order of $1 billion and the mine can be built for $260 million today.

Mining companies will be looking for this kind of simple, low-capex project.

TGR: Any final words of wisdom for investors trying to preserve, if not grow, their wealth in this market?

BC: Gold is a good sector to be in, and the timing right now is good, in that the key to selling high is buying low. I think we would all agree that things are getting pretty damn low right now. I expect this to continue for some time and would be very conservative in what to buy. I see no urgency to buy anything, unless it is a true discovery.

TGR: Is it at the bottom?

BC: I do not think so, although we are very low in the trench. Two or three years from now, the deposits that are selling for pennies on the dollar today will be worth $1 on the dollar. That is what you want to buy.

I think it is a good time to get into the market, as long as you know what you are buying, why and what it is worth. As I said, however, I suspect things will stay rough for a while and for the most part there is no urgency.

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

Brent Cook brings more than 30 years of experience to his role as a geologist, consultant and investment adviser. His knowledge spans all areas of the mining business, from the conceptual stage through detailed technical and financial modeling related to mine development and production. Brent's weekly Exploration Insights newsletter focuses on early discovery, high-reward opportunities, primarily among junior mining and exploration companies.

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DISCLOSURE:
1) JT Long conducted this interview for The Gold Report and provides services to The Gold Report as an employee. She 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: Almaden Metals Ltd., Atico Mining Corp., Roxgold Inc. and Lydian International Ltd. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Brent Cook: I or my family own shares of the following companies mentioned in this interview: Almaden Metals Ltd., Roxgold Inc., Lydian International Ltd. and Colorado Resources Ltd. 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 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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