The Gold Report's  Instablog

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.

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) 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.
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 (5/17/13)

www.theaureport.com/pub/na/15279

Jurisdiction risk continues to grow as a result of countries attempting to capitalize on higher commodity prices. In this interview for The Gold Report,Thibaut Lepouttre, editor of Caesars Report, a newsletter and mining portal in Belgium, discusses which jurisdictions offer better value to investors and which countries to avoid. He also offers suggestions on where to look outside of North America for compelling values in junior mining.

The Gold Report: Thibaut, at your presentation at the Prospectors and Developers Association of Canada in March, you said that country risk was the second most important factor investors should look at when analyzing mining companies. Obviously, management is the most important factor, but how has country risk changed over the previous five years or so?

Thibaut Lepouttre: I think you will agree that there is a direct correlation between the rise in commodity prices and how greedy a country gets. Country risks have increased dramatically over the past five years with the global financial crisis as commodities are a way a government can make money. This trend will definitely continue.

TGR: Will resource nationalism be the single greatest threat to the mining industry over the next decade or so?

TL: Several countries actually have written into their laws language that gives them the authority to nationalize or partially nationalize mining projects. For example, Russia's mining code states it can nationalize every mine of strategic importance. However, it did not really define what strategic importance was.

TGR: What are some countries where investment risk is actually lower than it was and why?

TL: In Europe, I would say Serbia and Bulgaria. The war ended in Serbia about 15 years ago and since then the country has dramatically changed. It is completely open for foreign investment now, has a favorable tax rate and has great potential for new discoveries. As a country that is a candidate to join the European Union, the political risk has decreased tremendously. There have been several finds there recently such as Reservoir Minerals Inc. (RMC:TSX.V), which discovered an exciting drill hole. EurOmax Resources Ltd. (EOX:TSX.V) and Columbus Copper Corp. (CCU:TSX.V) also have properties that look promising. Reservoir and Columbus are in Serbia and EurOmax is in Serbia and Bulgaria, so maybe EurOmax is the better example for both countries.

TGR: Which one of those is furthest along the development chart?

TL: I would say EurOmax. Its main project is in Macedonia, but it has a gold project in Bulgaria with about 2 million ounces (2 Moz) gold. It will define an NI 43-101 resource this year on its Serbian copper-gold project.

TGR: What are some other European countries that are worthy of a look?

TL: The most surprising country is France. It has an overseas department, French Guiana, which borders Brazil and Suriname. Because it is part of France, the political risk is almost zero. A company there called Columbus Gold Corp. (CGT:TSX.V) recently outlined a resource estimate of 5.4 Moz gold. It is open pittable and the average grade is 1.4 grams/ton (1.4 g/t). The company plans to drill more holes this year. I am certain it will come up with a resource that contains in excess of 7 Moz.

TGR: Is Columbus Gold any relation to Columbus Copper Corp.?

TL: They are both part of the Columbus group. There are three Columbus companies: Columbus Gold that focuses on gold in Nevada and French Guiana. Columbus Copper focuses on copper mainly in Turkey where it has a joint venture with First Quantum Minerals Ltd. (FM:TSX). Then there is Columbus Exploration Corp. (CLX:TSX.V), whose properties are less exciting than the properties of the other two Columbus companies.

TGR: What are some examples of countries where the risk is perceived to be much higher than it actually is?

TL: Argentina because President Cristina Kirchner actually nationalized the company Yacimientos Petrolíferos Fiscales (YPF) from Repsol SA. A lot of people got scared and thought that the mining business might be next. That was 15 months ago and nothing has happened. The risk of nationalization or government involvement in mining projects is limited, especially because mining licenses are distributed by the state. The federal government is not making the decision on the mining project. As an example of a company there, Golden Arrow Resources Corp. (GRG:TSX.V; GAC:FSE; GARWF:OTCPK) has an exciting high-grade silver discovery in the Jujuy province in the northern part of Argentina next to Bolivia. The metallurgical tests were out recently and averaging in the 90s. The company has just released an NI-43-101-compliant resource estimate with 105 Moz silver equivalent, which is much better than what I was expecting.

TGR: Golden Arrow is also part of The Grosso Group, a group of mining companies based out of Vancouver. How important is that in a climate where financing is increasingly difficult?

TL: It is a good thing because it can share several resources, such as office and investor relations personnel. Being part of an umbrella group could actually reduce the overhead costs.

TGR: What are some other countries where risk is perceived to be higher than it is?

TL: Peru. After Ollanta Humala won the elections approximately two years ago, people were worried because he represents a left-wing party-and we all know how left-wing presidents treated the mining industry in Ecuador and Bolivia. But he has proven to be very moderate when it comes to his involvement in the mining sector.

TGR: What junior mining companies are you currently following in Peru?

"There is a direct correlation between the rise in commodity prices and how greedy a country gets."

TL: Inca One Resources Corp. (IO:TSX.V) has a few projects, one of which is actually a near-term production asset. The company is in the process of taking a 20 ton bulk sample out for processing at its Corizona project in Peru. This permitted project is allowed to extract up to 350 tons of ore out of the mine per day, which it will truck to a nearby mill to process and get the cash flow going. Production will be reached within six months. Corizona will be small, but it will provide the company with enough cash flow to continue development and exploration of its other projects. Besides Corizona, Inca One has in the north of Peru the Las Huaquillas asset, which has 440,000 ounces (440,000 oz) gold and an average grade in excess of 2 g/t.

TGR: Where is that project along the development path?

TL: Inca One submitted its application for the drill permits about three months ago, so I expect it will get the drill permits quite soon. It also submitted an environmental impact study to the government so we should see some news on Las Huaquillas within the next few months.

TGR: Obviously, Corizona is the near-term cash generator, but is Las Huaquillas the long-term company builder asset?

TL: Las Huaquillas has the potential to have at least 1 Moz gold in NI 43-101 resources. Corizona is an excellent asset because it will get cash flow going and allow the company to build up a treasury and start building up Las Huaquillas without actually diluting the current shareholders any further. It is actually a two-step process. The first is to get Corizona into production to get the cash flow, and the second step is to explore Las Huaquillas further.

TGR: Are there any other companies in Peru that you are following?

TL: Lupaka Gold Corp. (LPK:TSX) has two excellent targets and it merged with Andean American Gold Corp. last year. Lupaka has the Crucero project, which is at an elevation of approximately 4,400 meters (4,400m). And it has a resource estimate of 2.2 Moz gold with an average grade of 1 g/t. The company currently has $8 million ($8M) in cash and will actually continue to drill and expand the resource at Crucero.

TGR: Which of Lupaka's three assets in Peru-AntaKori, Invicta and Crucero-shows the most promise?

TL: I would say Crucero because it can easily increase the resource estimate over the current 2.2 Moz. The AntaKori asset, which is held by its 17% subsidiary, Southern Legacy Minerals Inc. (LCY:TSX.V), has a very strategic location in the middle of the belt of Peru. Legacy Minerals is actually one of the takeout candidates for this year, which would obviously benefit Lupaka Gold as well.

TGR: Can a mining or exploration project with high grades and an experienced management team trump significant jurisdiction risk?

TL: Yes and no. There are countries where you can pull it off, and there are countries where you definitely cannot. An example of where you can is Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) in Eritrea. There the government gets a 10% statutory ownership in a mining project and can acquire 30% more based on the net present value (NPV). Compare that to Mongolia home to the Oyu Tolgoi deposit, one of the richest copper-gold deposits in the world. Turquoise Hill Resources Ltd. (TRQ:TSX; TRQ:NYSE) (formerly Ivanhoe Mines Ltd.) and Rio Tinto Plc (RIO:NYSE; RIO:ASX) are not freshmen in the business, but they still had severe difficulties with the Mongolian government.

TGR: Would you invest in Eritrea before Mongolia?

TL: I have been a shareholder of Nevsun for three years and have never encountered any problems. The government of Eritrea is holding up its part of the deal.

TGR: Do you attribute that almost entirely to the big stake that the government has in the Bisha project there?

TL: I would attribute it more to the intelligence of the government. In the Democratic Republic of the Congo, the government takes a 40% ownership, but it does not realize that if you nationalize part of it, you actually diminish and reduce your image in the world in the longer term. A lot of people have started to trust Eritrea because it thinks longer term.

TGR: What other countries would you add to the list where investment risk has dramatically increased since 2008?

TL: I would say South Africa. We have seen many strikes and wage hikes. On top of that, a regulation stipulates that 24% of every project should be given to the Black Economic Empowerment (BEE) movement. My main fear is that it is not just 24%, but that the percentage will actually increase over time and reach 49% or even 51%, just as in Zimbabwe.

TGR: But that black empowerment ownership structure started long before 2008.

TL: Yes, but it goes back to your first question that the higher the commodity prices, the greedier the government and these movements are. I think we will see some changes soon, whereby the BEE group will take a larger chunk of projects.

TGR: What other stories would you like to share?

"The financing capability of the management team is the most important thing to look at when a company is running low on cash."

TL: In North America, there are some interesting silver projects. I like Brixton Metals Corp. (BBB:TSX.V), which is in British Columbia and has extremely high-grade silver. Hecla Mining Co. (HL:NYSE) owns about 20% of the company.

Another silver name is Revett Minerals Inc. (RVM:TSX; RMV:NYSE.MKT), whose Troy mine is reopening later this year. The company should produce about 1 Moz silver at the cash cost of $11-12/oz at a full production rate.

TGR: Revett also has another asset in development after it won its court case. How soon could that be in production?

TL: We will not see production before 2020 or 2021 because Revett is taking a very cautious approach. It wants to ensure that everyone involved directly with the project is satisfied with the steps the company is making.

TGR: What are some other companies?

TL: Temex Resources Corp. (TME:TSX.V; TQ1:FSE) in Ontario. The company just released its resource update. It has 2.3 Moz gold at 1 g/t. It is open pittable and the project has the capability of reaching at least 5 Moz.

I also like High Desert Gold Corp. (HDG:TSX.V), which has a gold-silver oxide project on the border of Nevada and Utah. The company has drilled about 100 holes this year. We should see a 1 Moz gold equivalent resource estimate by the end of this year.

In South America there is Cliffmont Resources Ltd. (CMO:TSX.V). The company has the San Luis project in Colombia, and it is looking to reserve the high grades at the San Jorge underground mine. It has put in an application to erect a 100 ton per day mill.

TGR: You talked a little about Argentina and Peru. What is the risk profile of Colombia, especially after what happened with the Angostura project and Greystar Resources Ltd., which is now Eco Oro Minerals Corp. (EOM:TSX.V)?

TL: When we are talking about nature preservation and mining companies, Colombia is not alone. I do not think Peru or most other countries are different. Colombia's image has not worsened because Eco Oro is just one blip on the radar. Many other companies have projects that have run into the same problems elsewhere. Colombia is tremendously underexplored and if you look at the maps in the gold museum in Bogota, there is much more to be found there. Mining companies have to make sure they are in compliance with the environmental laws.

TGR: But in the case of Greystar, Colombia changed the law.

TL: It did change the law for the altitude. Quite a large part of the resources in the lease are accessible again right now. I think Colombia realizes it can't change the mining law too often or it will indeed scare companies away.

TGR: Do you wish to talk about any other companies?

TL: I would also like to give you some more names of companies operating in Europe and making my favorite list. One of them is Edgewater Exploration Ltd. (EDW:TSX.V), which has a project in the Galicia area of Spain with 1.4 Moz in a resource estimate. It is expecting an upgrade of that resource later this quarter followed by a feasibility study by the end of this year. Edgewater has all the necessary permits and the environmental assessment was approved in December. I think it will be in production within two years from now.

TGR: What is its cash position?

TL: Around $2M right now, so Edgewater will definitely need to go back to the market later this year to continue the feasibility study. The company sold a 1% net smelter royalty last year for $4M. It is a good sign that some royalty companies believe the project is worth at least $400M.

Another company is Dalradian Resources Inc. (DNA:TSX) in Northern Ireland. The company has a market cap of $60M right now with $20M in cash. It has 2.7 Moz high-grade gold and the 8% NPV based on a $1,160/oz gold price-a 25% cut from the recent average gold price-totaling $330M. Dalradian completed a preliminary economic assessment last summer, so I am expecting to see the feasibility study by the end of this year. It could be in production by 2017.

TGR: Any parting thoughts on commodity price risk or the market in general?

TL: I have always been quite conservative when I do my calculations, so I always use a lower gold price. I think from this year on, the financing capability of the management team is the most important thing to look at when a company is running low on cash.

TGR: How so?

TL: Some management teams can raise money easier than others. Look at EurOmax. Many on the board formerly served on the board of European Goldfields Ltd., which was sold to Eldorado Gold Corp. (ELD:TSX; EGO:NYSE) last year for $2.5 billion. The members of this board can raise $10M in seconds. They just call their old friends, old brokers, and get it together. A new company with an unproven management team will have a difficult time raising a quarter of a million dollars in this market.

TGR: On the gold price, do you see gold leveling off and remaining within $100 of its current range throughout the rest of the year?

TL: Gold will trade between $1,250/oz and $1,500/oz. The Cyprus-case has proven that even a big catalyst like confiscation of savings money did not help the gold price. The question in the market right now is whether confiscation and nationalization of savings accounts is a good thing for gold, and what will the catalyst be for gold to move up. I think gold will continue to move sideways.

TGR: Thank you for your insights.

Thibaut Lepouttre is the editor of the Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals. Lepouttre has a Bachelor of Law degree and two economics masters degrees that have forged his analytical approach to the mining sector. Considered a number cruncher, Lepouttre focuses on the valuations of companies and is consistently on the lookout for the next undervalued mining company.

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DISCLOSURE:
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold 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 Gold Report: Golden Arrow Resources Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Thibaut Lepouttre: I or my family own directly or indirectly shares of the following companies mentioned in this interview: EurOmax Resources Ltd., Columbus Copper Corp., Columbus Gold Corp., Inca One Resources Corp., Golden Arrow Resources Corp., Revett Minerals Inc., Edgewater Exploration Ltd., Nevsun Resources Ltd., Brixton Metals Corp., Temex Resources Corp., High Desert Gold Corp., Cliffmont Resources Ltd. and Dalradian Resources Inc. 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: Cliffmont Resources Ltd., Golden Arrow Resources Corp., Revett Minerals Inc., Inca One Resources Corp., High Desert Gold Corp. and Lupaka 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.
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