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  • Salman Partners' Raymond Goldie: Copper Is Pathological And Suffers From SAD, But It Has Value

    Dr. Copper may be in a supercycle, but there are serious problems. In this interview with The Gold Report, Salman Partners' Vice President of Commodity Economics Raymond Goldie explains why even though the base metal acts pathologically and has a bad case of seasonal affective disorder, these three equities are priced below their intrinsic value.

    The Gold Report: You are giving a presentation at the Society for Mining, Metallurgy & Exploration Current Trends in Mining Finance Conference called Diagnosing the Doctor, which refers to assessing the supply and demand problems for Dr. Copper as a way to understand what is ailing all the mining products today. Are we in a supercycle? What is the meaning of a sustainable supercycle?

    Raymond Goldie: I suppose it's best to answer your second question first-What is the meaning of a sustainable supercycle?-because a lot of people use the word supercycle to describe the wonderful state that we had beginning in the early part of this century, when metal prices kept going up, commodity prices kept going up, seemingly forever. I'm a little less restrictive on what I define as a supercycle. I think a supercycle is any period in which we have commodity prices higher than their long-term average values. On that basis, even allowing for overall inflation, we've been in a supercycle since 2004. We're still in it, although for a few months regrettably at the end of 2008 we popped out of it. But right now we are in a supercycle.

    TGR: What are the fundamentals keeping us in your definition of a supercycle?

    RG: The usual reason is China. It's the biggest consumer of most of the commodities in the world and has the biggest growth in consumption of most of the commodities in the world. But what that analysis tends to overlook is that production of most commodities in China has been increasing at roughly the same rate as consumption in China. So, on balance, China may not be as big a contributor to the supercycle as we've imagined.

    TGR: Does that mean that the Western world is playing a larger role in supporting the supercycle than we give it credit for?

    RG: When it comes to assessing supply and demand from Asia, it is important to consider Chinese economic data, which a recent Bloomberg article equates to some of the meat served in low-cost restaurants. We don't know where it comes from and don't really know what it means. It's not easy to put a lot of credence on Chinese economic numbers, so it's hard to tell the extent to which China does affect supply and demand.

    But one thing that we can count on is the diligence of people who sit at borders with clipboards looking at stuff crossing borders. They are paid to make sure that the right duties get paid and the ships are carrying what they're supposed to be carrying. If we look at China's trade with the rest of the world, those numbers are fairly reliable, even if the numbers for what's going on inside China are not reliable. Since 2008, the dark days when the world seemed to have ended, China's imports of copper from the rest of the world have grown 41% per annum.

    TGR: And what about the supply side?

    RG: I think the single most important reason that we're in a sustainable supercycle is that we haven't invested enough in finding more resources. The supply-side constraints are probably why prices are higher than the long-term trend in prices.

    TGR: Why has it been so difficult to predict how much copper will be produced in a given year if it takes so long to bring a mine to production?

    RG: Since about 2003 analysts have consistently overestimated the production of copper. My theory for the consistent shortfall is that before 2003, when strikes, landslides, earthquakes, storms, civil unrest, late trains and the like slowed down production, someone in the head office would send a cable calling for the mining of high-grade ore to make up the difference. But since 2003, there hasn't been any high-grade ore to mine because of a lack of investment in new resources. And this happens year after year. About 7% less copper is produced each year than the mines predicted at the start of the year.

    TGR: So why isn't that inconsistency causing the price to go up?

    RG: Maybe it is. There has certainly been what I've called a pathological situation in the copper markets because typically the relationship between copper inventories-the stuff that's sitting around in warehouses-and prices is that the lower the inventories, the higher the price. But since 2005, in the Western world-we don't know what's going on in China-inventories have gone up 185%. Typically, that would mean prices go down, right? But, no, prices have gone up 95%. That may be one of the reasons that we're consistently producing less of the stuff than we thought we could.

    TGR: You have said that the pitch-point™ curve* for supply and demand compared to prices is pathological. Is that because of the role of recycling in meeting some of the demand?

    RG: I think it could be because it used to be that every pound that was in inventory was backed by all the copper that the mines would produce and all the copper that scrap yards would produce. The amount that the scrap yards produce has been declining, in large part because Asians have been very diligent about taking scrap from North America and refining it into good usable copper again. But, again, it's hard to get good figures for how much copper there is in scrap yards so that answer is probably yes, the declining use of copper in recycling is probably one of the reasons why we've seen prices go up even though inventories have also gone up. But it's hard to be more precise than that.

    TGR: You have also said that copper has seasonal affective disorder [SAD]. What causes that?

    RG: That's right, it does. I can tell you what SAD is, but I can't tell you exactly what causes it. In the good old days of the London Metal Exchange [LME], the saying was "sell in May and go away." And that was always a wonderful excuse to take an English summer holiday and not bother coming back to trade copper until September or October. Now, the peak seems to be around the end of February and the end of June tends to be the bottom in copper prices. It's pretty consistent. Year after year we see that effect, but what causes it, I don't know.

    TGR: Because copper is so important for growth, is it feasible that it could be used as the world reserve currency instead of gold or the dollar? What would that look like?

    RG: Copper is being used as a reserve currency in China right now. Some of the importers will use the copper that they hold as collateral for loans that they make from various banks in China. One of the advantages of copper as collateral is that unlike wheat, silver or potash, you can store it outside. Even in the rain, copper will keep its value, and there's always a use for the stuff.

    But to talk about copper as a reserve currency for the whole world is not practical. If a country is holding reserves of $1 trillion, it would have to have 150 million tons on reserve. That is about eight and a half years of copper consumption just sitting there. But certainly copper is being used as a currency on a small scale, as it's being used now in China.

    TGR: What prices are you using for copper going forward in the rest of 2014?

    RG: Since 2003 when the fundamentals of the copper business changed so significantly, the forward prices on the LME have been a much better forecaster of copper prices than we analysts. This afternoon, the LME is telling me that if I buy copper now for delivery in 10 years, I would have to pay $3.02/pound [$3.02/lb]. That's as good as any forecast I have for the long-term price of copper. If you were to buy a pound of copper for delivery tomorrow, it's pretty much the same as where the price of copper is today.

    TGR: If copper prices look to be fairly flat going forward, why do copper equities tend to outperform the metal?

    RG: This gets back to the unwieldy nature of copper as a store of value. Let's say you were thinking of retiring and decided to make off with all of your fortune, say $3 million [$3M], and drive away into the sunset. Now, if you put that in the form of gold, $3M would weigh less than 200 lb; it would fit in the trunk of your car. But $3M worth of copper would weigh 450 tons. That is why when people get enthusiastic about buying gold, they often buy gold bullion. But when they're thinking of buying copper, the unwieldy nature of buying copper metal means they are better off with the equities. That's why the equities have done about the same or even a little better than the price of copper itself. That certainly has not been the case with gold.

    TGR: Are the copper companies less risky than some of the gold companies?

    RG: Riskiness is a feature of the things that Mother Nature can fling at us or the surprises that come with the election of a government that no one expected and that government nationalizes some of its assets. Most of the companies that I follow are managed by a lot of gray hairs; they've seen all the unpleasant things that can happen. Most of the ones that I tend to look at are well managed, and they include the big producers, like Freeport-McMoRan Copper & Gold Inc. (FCX), whose biggest growth comes from the Democratic Republic of Congo, where there are political risks, but Freeport is skilled enough and experienced enough in operating in parts of the world where there is high political risk that it has so far been able to stave off most political concerns.

    Another company that has also done well in that part of the world is First Quantum Minerals Ltd. (OTCPK:FQVLF)[FM:TSX; FQM:LSE], a Canadian company that just bought Inmet Mining Corp. and, through its acquisition of Inmet, is building a new copper mine in Panama. Of the companies I cover, First Quantum stands out for being relatively low risk and high return.

    TGR: Does First Quantum's acquisition make it stronger because it is diversified?

    RG: Certainly, it's diversifying geographically. Before the acquisition most of its assets were in Zambia, which has been a good address for a mine, but that may not always be the case. Having assets in Panama, Finland and Turkey is not a bad idea.

    TGR: Do you evaluate a company in the tailing business very differently than a company like First Quantum?

    RG: I don't actually. I generally use the standard textbook discounted cash flow valuation method. For a mine in production, I use a low discount rate. For potential expansion, I use a higher discount rate because this is an unproven technology there. For First Quantum, the same thing. For First Quantum's existing operations, I use a lower discount rate than for valuing the operations that it hopes to bring onstream in a few years in Panama or Zambia. I use an even higher discount rate on something that isn't in production yet, simply because of the technological, political and community risks associated with that prospect.

    TGR: Do you follow any explorers?

    RG: One explorer I cover is NovaCopper Inc. (NCQ).

    NovaCopper is a company that has one of the world's highest-grade copper deposits, but it's in a part of Alaska that requires a road to be built. Until that road is built, probably around 2021, the mine is going to sit there. So the risk in that case, even though it's in the U.S., is a political risk.

    TGR: Does NovaCopper's resource make the risk worthwhile?

    RG: I assume that it's not until about 2025 when it comes into production, and I discount that back to the present. Every year you discount it, you make it worth a little less or you value it at a little less. If NovaCopper were in production today, it might be worth $10/share, but because it's so far in the future, I think it's worth about $5/share. The company is trading under $2/share, so there is upside.

    TGR: What's the timeline on these? Are these all long-term investments?

    RG: NovaCopper could be up and running by 2025. First Quantum's Panama project should be in production around 2016.

    TGR: With all of these great ideas, what advice do you have for resource investors who are looking to keep their portfolios healthy during the next two or three years while they wait for some of these things to happen?

    RG: There are two questions that investors should ask about any investment they make: Is the value there? When should I seize on that value? Most copper mining stocks are trading as if the price of copper were $2/lb and is going to be about $2/lb forever. But copper on the LME 10 years out is actually $3/lb. That means the equities are definitely a value story. As to when to buy it, given the SAD cycle we mentioned earlier, investors might want to wait until the end of June.

    TGR: Thank you for your advice.

    RG: Thank you.

    *"Pitch-point curve™" is a term trademarked by Raymond Goldie.

    This interview was conducted by JT Long of The Gold Report and can be read in its entirety here.

    Raymond Goldie, vice-president of commodity economics and senior mining analyst at Salman Partners, has extensive experience in the investment business, including more than 20 years as a mining analyst covering non-precious-non-ferrous and precious minerals [gold, silver, PGEs, diamonds] and fertilizer companies. In geology, Goldie holds a Bachelor of Science from Victoria University in Wellington, New Zealand; a Master of Science from McGill University; a Ph.D. from Queens University; and a Diploma in Business Administration from the University of Toronto.

    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 recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
    3) Raymond Goldie: I own, or my family owns, 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: 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. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 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

    Apr 16 4:17 PM | Link | 1 Comment
  • When The Major Equity Market Bubble Crashes, Michael Berry Will Take Refuge In Gold Stocks

    An overinflated equities market could be good news for metals and mining stocks. In this interview with The Gold Report, Morning Notes Publisher Michael Berry shares two scenarios that could follow an imminent crash and tells investors how to ride the coming gold wave to portfolio success.

    The Gold Report: Mike, you've been watching the stock market and, by extension, the precious metals markets very closely for signs of a larger equity market blow-off that could send gold higher. What makes you think the Dow Jones Industrial Average and the NASDAQ are in a bubble? What are the signs that a crash might be imminent?

    Michael Berry: I have been watching bubbles since 1987. In September of that year I correctly predicted the 25% crash of October 19. We have been blowing through mini and maxi bubbles for 30 years; this one is nothing new.

    The solution to our macroeconomic issues has been to inflate new bubbles, to inflate asset values to soften the blow from the last bubble, all the while creating the conditions for the next one. That is how we ended up with the current equity market bubble. It is driven solely by the Federal Reserve's liquidity. Always remember that liquidity begets liquidity. I also see a debt market that I consider to be a bubble. These markets are just not sustainable. I can't say when, but we have an equity market decline coming, maybe a severe decline.

    TGR: The housing bubble and the tech bubble were, by definition, confined to certain niches initially and then the impact reverberated to other sectors. Are you predicting a market-wide crash where everything falls or will it be confined to certain sectors?

    MB: The correction will impact everything. As of April 8 I'm measuring the Dow technically, fundamentally and behaviorally, and I see a clear top by all three measurements. The top is not quite as clear for the Standard & Poor's 500, but it's certainly there. A major event could cause this bubble to burst and the markets turn down. I think it's imminent, probably this year. With the Federal Reserve pulling back on its quantitative easing, I can't see the equity market being able to sustain itself.

    TGR: Are there any specific indicators that might tell when a crash is about to happen or will we only know after it happens?

    MB: The money multiplier, M1, which is a measure of how well the banking system is working, is at its lowest level ever-0.69, according to the St. Louis Federal Reserve. [It usually has been above 1.0]. It has continued to decline for the last five and a half years. That is the sign of a disabled banking system, a coming bear market and a severe recession or worse. There's no doubt about that. The velocity of money has been in a decline for quite some time. These indicators mean our banking system is not working properly. These conditions were last this serious during the Great Depression. Even Milton Freidman acknowledged this when he suggested the Fed's problem will be dealing with its own drastically expanded portfolio. Freidman claimed that the Great Depression was the result of a falling multiplier and the failure to increase the money supply. That has not been the case this time but we are still in serious trouble.

    Europeans are now concerned about deflation, the slowing of the economy and the falling of prices. The "D" word is actually spoken. The International Monetary Fund is particularly concerned. We've certainly seen falling prices in the metals markets over the last year and a half. China's tightening and slowing along with the U.S. tapering its quantitative easing mean the economic winds are in our face, not at our back. Those are the things I am concerned about.

    TGR: So when this bubble does burst, how might the different metals-gold, silver, copper-respond differently to a market crisis?

    MB: That is a good question. The answer is it depends. If we don't fix the broken credit cycle and deal with exploding government debt, we will probably begin to see disinflation and deflation. Then prices will fall. Gold, copper, silver, tin, lead and zinc will decline, but probably less than the valuations in the macroeconomic economy. That will be the time to buy metals because we will recover once we see a new credit cycle. However, it could be a three- to five-year hiatus. The Fed and others will have to deleverage. Only then will the economy be able to recover and break out of it torpor. We'll see a new bull market in the commodities then.

    On the other hand, if we were to inflate out of the crisis, which the Fed would prefer, we will see gold achieve very high prices. I wish I could give you a very clear answer. Personally I think deflation is much more likely.

    TGR: If we experience inflation, and the gold price goes up, will the equity prices follow?

    MB: Absolutely. When we have inflation-and we will as soon as a new credit cycle is in place-then we are going to see gold miners take off. A lot of them are really struggling-Barrick Gold Corp. (ABX), Newmont Mining Corp. (NEM) are all down 50%. They are reacting to a lower gold price. Right now there isn't a bottom on the price of these stocks because if gold goes much below $1,250 an ounce ($1,250/oz), then the cost of producing gold is going to be a problem for the big gold producers. These stocks have been punished and are close to their bottoms now. People interested in precious metals and who are patient ought to be buying these on any declines in their current share prices.

    TGR: Are some mining stocks going to come back faster than others?

    MB: Yes. A lot of the big-cap miners are highly leveraged with debt. They need to deleverage, and that's difficult to do in this environment, so investors want to be buying the big stocks that are not highly leveraged.

    The midtier producers have a real problem because they're really not big enough to go to the next level in this kind of a capital market environment. We are going to see that quite a few of them will be taken out.

    The juniors and explorers have been decimated. It's a bloodbath. There's no other word for it right now. These stocks are trading anywhere from $0.07 to $0.40/share. They are worth a lot more, but not in this environment. I have a number that I follow that have good management and good assets, and the ability to sustain themselves over the next year or two until we see a recovery. Sustainability will be very important.

    TGR: Any companies you think could benefit when precious metals prices take off?

    MB: One company is U.S. Precious Metals Inc. (OTCQB:USPR). Nobody knows about it. I just visited its property in the state of Michoacán, Mexico, which is on the Pacific Coast roughly parallel to Mexico City. It has a 37,000-acre property. I actually call it my "pregnant virgin" because the gold and copper systems are visible, but it has never been properly explored. The Spanish were there in the 1500s and 1600s and there were adits from the Spanish but no real production records. You can pick up copper float on the ground so it is definitely pregnant. It is a huge mineralized system. We just don't know how big it is yet. It's a $0.12 stock. I don't own it yet, but I will probably take a position in it at some point.

    What's really interesting about U.S. Precious Metals is that the management is using satellite-generated, ground-penetrating radar to identify the mineral composition of the anomalies. It also will be using a thermal process based on plasma torch for extracting the ore-eventually.

    TGR: Tell us about the processing. How will this new technology make the project more profitable?

    MB: Just as hydraulic fracturing revolutionized the oil industry and may make us energy independent in the next 30 years, I think plasma arc processing, developed here in New Jersey at Princeton University by Dr. Edgar Choueiri, could revolutionize mining. Plasma arc will be used to propel satellites. It's the fourth state of matter, a state of ionized gas. This process increases the recovery of the ore significantly and with much less environmental impact. This is the most efficient way to separate minerals from waste. It could well be transformational for the mining industry. My understanding is that at present there is a pilot plant in operation at 29 Palms in California.

    TGR: What are the risks of being in this part of Mexico?

    MB: Whenever you talk about mining in Mexico, you worry about illegal activities. U.S. Precious Metals has decided put together a security force mainly because there's a lot of gold that can just be panned from the dry riverbeds on this property in the Tierra Caliente region. So management has decided to provide its own security. But U.S. Precious Metals and its associates are very close to the Mexican government, so I believe the risks are minimized. When I visited the property I saw a road being built to the property by the Mexican government.

    Mexico is still a country that has to be mined in spite of the new 7.5% tax. A lot of good players are there: Coeur Mining Inc. (CDE), Hecla Mining Co. (HL), Endeavour Silver Corp. (EXK). U.S. Precious Metals is likely to become a big copper-gold play with a silver byproduct. I think management has really done a good job of minimizing the risk with respect to the cartels and the exploration risk.

    TGR: Is this a long-term investment? When might the thesis for the processing and the thesis for the asset be proven?

    MB: The plasma arc technology is proven. U.S. Precious Metals is the first to license it for processing the ore. The company is not yet in mining operations. Its property contains 37,000 acres in one land position and only several hundred acres have been explored.

    So it is early days at U.S. Precious Metals, but a good investment for those people who like early exploration plays on potentially world class assets. Let's face it, you do not find properties like this easily.

    TGR: The silver market is more volatile than gold. What companies are worth looking at in that space?

    MB: I love silver. I'm on the board of a couple of companies that have big silver plays. But the silver market is volatile; it's a much smaller market and an industrial, as well as a precious metals, market. Gold is down 27%, but silver is down almost 45% from its October 2012 top. We produce about 800 million ounces [800 Moz]/year silver globally, and we basically use it all for everything from electronics to medical technology. The price can't stay at $20/oz for very long because new silver mines are going to be required. So I'm very bullish on silver.

    Right now, I think you have to look at Coeur and Hecla as two companies that are self-sustainable, generating cash, and are going to be around.

    Then there are companies that are midtier, and I think they are probably takeout candidates eventually. First Majestic Silver Corp. (AG) would be one. It produced 11 Moz silver last year. It has five mines, and is an $11 stock. It will likely produce 12 Moz this year.

    Then there is Endeavour Silver. It produced about 6.8 Moz silver last year, and it has three operating mines.

    Silver investors must be believers today. They must live with the volatility of the market and believe the price of silver will appreciate eventually. If you believe in silver and you believe in the ultimate limited supply/excess demand dynamic, then I think you ought to own a portfolio of these companies, put them away and let silver do its thing, because it will over time.

    TGR: Would that same advice go for the other metals?

    MB: Not exactly. Copper is a totally different market. I like copper a lot. I'm on the board of a company that has a big copper play. It is becoming increasingly difficult for companies to bring big mines on line. The Indonesians have done some things that hurt both Newmont and Freeport-McMoRan Copper & Gold Inc. (FCX) by disallowing them to ship ore overseas. Freeport actually declared force majeure in Indonesia. The Chileans and other South Americans have had some problems. There are problems in Mongolia with BHP Billiton Ltd.'s (BHP) big copper facility there. That makes North American copper plays in Arizona, Nevada, Canada and, to a lesser degree, Mexico, a great place to be right now. Copper could go below $3/pound, but with the rest of the world growing a new middle class of consumers, we're going to need more copper and that means more copper mines. It takes a long time to bring a copper mine into production, so I think copper is also very cheap today and should be considered selectively.

    TGR: So these are long-term investments?

    MB: Certainly. We are seeing a lot of private equity players now that are picking up properties for cents on the dollar. The private equity players can afford to sit with a property for two or three years until the commodity prices improve. Most junior mining management teams cannot do the same thing. Juniors are going to have to be able to survive over the next couple of years, so look for companies that can conserve resources. Some developers have stopped drilling. A few marginal producers have stopped producing. Everyone is, or should be, reining in costs, cutting costs. The Vancouver model of financing is broken right now. The capital market is telling us that nobody cares. If nobody cares, then it's time to tread carefully in the exploration space.

    TGR: Thank you for your insights.

    This interview was conducted by JT Long of The Gold Report and can be read in its entirety here.

    Michael Berry served as a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia from 1982 to 1990, during which time he published a book, Managing Investments: A Case Approach. He was the Wheat First Professor of Investments at James Madison University. He has managed small- and mid-cap value portfolios for Heartland Advisors and Kemper Scudder. His publication, Morning Notes, analyzes emerging geopolitical, technological and economic trends. He travels the world with his son, Chris, looking for discovery opportunities for his readers.

    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 recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
    3) Michael Berry: I own, or my family owns, 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: 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. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 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

    Apr 14 5:05 PM | Link | Comment!
  • Are You Prepared For A Bull Market That Will Shock Even The Most Ardent Goldbugs?

    Source: Kevin Michael Grace of The Gold Report (4/9/14)

    www.theaureport.com/pub/na/are-you-prepa...

    Jay TaylorJay Taylor understands why investors in gold and gold equities are consumed with caution. But the publisher and editor of J. Taylor's Gold, Energy & Tech Stocks and host of the radio show "Turning Hard Times into Good Times" urges them not to lose sight of the big picture. The big, bull-market picture. Gold juniors with cash and good projects are trading at tiny fractions of their worth. But not for long. In this interview withThe Gold Report, Taylor argues that we are on the cusp of a bull market for the ages and suggests eight junior candidates for mind-blowing multiples.

    The Gold Report: Janet Yellen's about-face on quantitative easing (QE) makes two panicked pullbacks so far by the Federal Reserve from the end of QE. Is it fair to say we now have QE forever?

    Jay Taylor: I don't know about forever because nothing lasts forever. Your premise is largely correct, however, because the discontinuation of quantitative easing would be so painful it's a pretty good assumption that it will continue for a long time to come.

    It will probably end only when the system breaks down, which is inevitable because it is becoming increasingly insolvent.

    TGR: We've been hearing for three years about the end of QE and the zero interest-rate policy (ZIRP). It has been argued that this is unlikely for several reasons. QE is the only thing responsible for whatever recovery we've had since 2008, and if ZIRP ended, the U.S. government couldn't pay the interest on its debt, and trillions of dollars in derivatives would go south.

    JT: That's exactly right. Not to mention that the private sector too is dependent on the narcotic of easy money. As I say, QE and ZIRP won't end until the system breaks down and forces the creation of a different monetary regime.

    What we call "the economy" is really more of a casino. The money that is created isn't getting into the real economy. The Wall Street guys with the Ph.Ds in mathematics have built pick-pocketing machines that misallocate capital into their wallets, into endlessly bigger government and further military action on the part of the United States. It's going to end very badly. All we can do is try to prepare as best we can to protect ourselves and our families.

    TGR: How does the system break down?

    JT: We saw the first hint of that with the Lehman Brothers bankruptcy in 2008. Generally, the banking system goes first. They can pretend that they've fixed it, but I see that Citicorp just failed its stress test. After the banking system fails, the commercial system fails because you can't stock the shelves in stores. Then you can't pay the fire and police departments. Then you have chaos.

    TGR: You've agreed with Jim Rickards that attempts by the U.S. to "get tough" with Russia will fail. Can you explain why?

    JT: Russia has its own interests to protect, but so does Europe. I'm not so sure that the Europeans will necessarily side with the United States. There could be a real crack in the NATO alliance. The Germans need natural gas, and the Russians have it. I see that the French energy company Total S.A. (TOT:NYSE) is helping Russia increase its gas and oil production through fracking. Many German companies are very much involved in Russia, as well.

    TGR: You've talked about the petrodollar being replaced by "petrogold."

    JT: An enormous amount of gold is flowing into China. And China has established a second gold exchange that will allow non-Chinese to buy and sell it. Not paper gold, which is fantasy gold, but real, physical gold. The gold price is being manipulated by the futures markets, by the very people we were just talking about, the bankers, the bullion guys, the people that really can't afford to lose the dollar confidence game.

    The Chinese want no part of this. They have enough dollars and don't want more. Moreover, they don't want to finance America's military-industrial offensive, which is paid for by dollar manipulation.

    TGR: How would petrogold work in practice?

    JT: Russia would provide China with much of its energy needs and would be paid in renminbi. The Russians would then take their renminbi to the Chinese exchange and get gold for it, if they so desire. I think the infrastructure is being set up, both with petroleum exchanges and gold exchanges, in Russia and China and other countries in Asia.

    We would have a much more balanced world right now if Nixon hadn't taken us off the gold standard. That allowed the elite and the military-industrial complex to pull the whole of the world into the American orbit and saddle them with American debt and American power.

    Now there's blowback against American power, the currency wars and the U.S. dollar as reserve currency. Russia and China and other countries are saying, "enough already."

    TGR: Gold and gold equities had an excellent winter, but spring has not at all been kind to them. Why?

    JT: I think what we've seen recently is just part of the natural ebb and flow. This is probably the last good buying opportunity for many junior mining stocks. I am more excited now than I have been at any time since 1981 when I first started writing my newsletter. I think we're going to see a bull market that's going to shock even the most ardent goldbugs.

    TGR: Which gold junior most excites you?

    JT: Novo Resources Corp. (NVO:CNSX; NSRPF:OTCQX) and its Pilbara project in northern Western Australia. It is listed on the CNSX, a secondary exchange that is not very well established.

    TGR: Quinton Hennigh is Novo's CEO. What does that mean to you?

    JT: His involvement gives me great confidence, as does the fact that Newmont Mining Corp. (NMC:TSX; NEM:NYSE) owns 32% of the stock, with 18% owned by management. There are only about 55 million (55M) shares outstanding, although there will be another 23.6M issued in exchange for the acquisition of an additional 70% or 18,000 kilometers of prospective land in the area. Those additional shares will be issued to Mark Gareth Creasy, a major mine prospector in Australia.

    TGR: The term "world-class" has become a cliché in our industry. Could Pilbara be the real thing?

    JT: The Witwatersrand deposit in South Africa has produced 1.6 billion ounces of gold since the late 1800s, more than any other district in the world. Quinton Hennigh wondered if there could be another such district elsewhere. When he was a Ph.D. student at the Colorado School of Mines he began to doubt the prevailing geological theory of how the Witwatersrand was formed.

    TGR: What did he eventually conclude?

    JT: He hypothesized that Witwatersrand was a precipitation event. There was virtually no oxygen on earth 2.7 to 3 billion years ago when simple plant life and photosynthesis began to appear on earth. With photosynthesis came the production of oxygen, which is required for the precipitation of gold and other minerals out of the sea water. As oxygen appeared, very large amounts of gold present at that time in the oceans was attracted to carbon layers on the sea floor that also became more abundant with a growing abundance of plant life. Thus, Quinton believes the abundance of gold at Witwatersrand is explained by the large amount of gold at that time being precipitated out of sea water on to the shallow seabed.

    Cross Section of Witwatersrand Geology

    Fig. 1

    The Massive Pilbara Target

    Fig. 2

    Note: The thin layers or reefs of conglomerate rock in the illustration above left are where the extremely high-grade gold is contained. Mining is now taking place at very deep levels in the Witwatersrand in South Africa but in the late 1800s it was initially at or near surface. Above top, the prospective ground picked up by Novo is illustrated by the pink areas, which represent Archean Fortescue formation rocks. It is interesting to note that this target is massively larger than the gigantic Witwatersrand (as you can see from the lower illustration).

    Hennigh then searched for basins old enough and in the right kind of geological environment to host another Witwatersrand. And he thinks he found one in northern Western Australia in the Pilbara Region.

    TGR: What has Novo done to prove Hennigh's hypothesis?

    JT: Like most companies, Novo preserved its cash in 2012. But the company did some auger drilling and came up with an NI 43-101 resource on a very small portion of the project: 421,000 ounces (421 Koz) at or near surface with 1.47 grams per ton (1.47 g/t).

    It's my understanding the Newmont has sent up to a dozen geologists to Pilbara to map the outcrops. This will in effect outline the shorelines of this ancient seabed. Quinton told me that Newmont will be sharing this information with Novo and I expect Novo will put that out into the public domain very soon. I believe this process will be helpful in setting up drill targets, all of which will be shallow, near surface. I expect there will be very extensive drilling and that we should receive a significant number of drill results over the next number of months this year.

    TGR: How close is Hennigh to success?

    JT: I think he may be very close based on my discussion with Quinton at the Prospectors and Developers Association of Canada (PDAC) conference in Toronto in March. He is obviously thrilled at having found gold hosted in carbon chunks in the drilling that has been carried out so far. He says that Novo has not yet found what are known as the "carbon leaders" or "reefs" that are typical at Witwatersrand and which measure not in ounces per ton but in percentages. He believes a carbon leader has not yet been found because the exploration is still up higher in the system, near the shoreline.

    TGR: How speculative is Novo as an investment?

    JT: It is very speculative and it will remain so until the market understands whether or not Hennigh is right about his theory and whether or not the deposit is economically viable. The stock is thinly traded and is held by Newmont (32%) and management (18%), and Creasy will soon own 17%. The technically oriented people who are on to this story are not willing to sell, so a small amount of demand has driven the stock dramatically higher since I talked about it at the PDAC. If the market starts to get the sense that Henning has discovered another Witwatersrand, the sky is the limit for this stock. Of course that is a big "if," so if the market is disappointed for one reason or another, these shares could fall dramatically. It's selling now at about $1.80/share but it was as low as $0.80 in January.

    Fig. 3

    As to the probability of success, all I can say is that Quinton Hennigh's hypothesis looks pretty good so far. With just a small portion of this shallow target drilled last year (see illustration above) the company has an NI 43-101 Resource of 421 Koz gold with an average grade of 1.47 g/t. But equally important, I think, is the presence of gold-hosted carbon.

    TGR: Closer to home, you've written extensively about gold juniors in Québec. What are your favorites there?

    JT: I've just written about a new one, Alexandria Minerals Corp. (AZX:TSX.V). The company has the Cadillac Break properties in the Abitibi Greenstone Belt: 1.4 million ounces (1.4 Moz) gold Measured, Indicated and Inferred. The company just sold 14 claims to Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) for $5M, with Alexandria keeping a 2% net smelter royalty. Agnico owns 9% of the company; Teck Resources Ltd. (TCK:TSX; TCK:NYSE) owns 3.5%; and IAMGOLD Corp. (IMG:TSX; IAG:NYSE) owns 3.5%.

    Alexandria's exploration potential looks absolutely phenomenal. The company has good management and $5M in cash. At $0.05/share, this stock makes a lot of sense. I see the stock has picked up a lot of volume over the past couple of days, so it seems someone is waking up to the story.

    TGR: What's your second Quebec favorite?

    JT: Metanor Resources Inc. (MTO:TSX.V) is finally coming into its own. Its Bachelor Lake mine has begun commercial production at 4.5 Koz per month. In addition, Metanor has the Barry project, which gives it real blue-sky upside. That's an open-pit, very large, low-grade, bulk-tonnage target in which Metanor has already established a fairly decent resource.

    Unfortunately, Metanor has seen an awful lot of dilution: 267M shares at $0.18.

    TGR: How many ounces could we see at Bachelor Lake?

    JT: It's underground, so those ounces are harder to prove up, but their exploration has been quite promising. These systems run very deep. I think we could be looking at something in the order 1.5 Moz ultimately.

    TGR: Is there anything else you like in Quebec?

    JT: I've recommended Eastmain Resources Inc. (ER:TSX) and Globex Mining Enterprises Inc. (GMX:TSX; GLBXF:OTCPK). I think they both have great prospects. Globex is a project generator. It is prudently managed and does what project generators are supposed to do-use other people's money.

    TGR: Which juniors are your favorites in Nevada?

    JT: I like two. The first is Canamex Resources Corp. (CSQ:TSX.V; CX6:FSE). I like its ownership structure. Gold Resources Corp. (GORO:NYSE.MKT; GORO:OTCBB; GIH:FSE) owns 18%, Hecla Mining Co. (HL:NYSE) owns 11.7% and management owns 6.2%. Its Nevada Bruner project has a historic non-NI-43-101 resource of 385 Koz. Canamex has had some exciting recent intersections: 4.08 g/t over 110 meters (110m), 3.1 g/t over 91m and 5.23 g/t over 58m.

    The company's target here is a shallow-oxide, heap-leachable deposit, which looks very good for building the ounces that would make this project economic. And Canamex believes it may have found the feeder zones in these high-grade intercepts. It is planning an NI 43-101 resource and a preliminary economic assessment (PEA) by the end of 2014. At $0.105 a share, add a little more excitement in the gold industry, and I can see this doing extremely well this year.

    TGR: And what's the second?

    JT: Paramount Gold and Silver Corp. (PZG:NYSE.MKT; PZG:TSX). This is really well funded with a major Toronto financier standing behind it. The company has the Sleeper project in Nevada and San Miguel in Mexico. Between them, that's around 6.9 Moz gold and 160 Moz silver.

    The company did a PEA on San Miguel: $707M net present value based on $1,500/ounce ($1,500/oz) gold. More recently, Paramount did a PEA on Sleeper: $695M based on $1,300/oz gold. There's a lot of exploration potential at both. At last look, shares were $1.26. When gold moves higher, Paramount could be a takeover target because it has the ounces to attract a major mining company.

    TGR: Let's talk about companies you like in Central America.

    JT: Cayden Resources Inc. (CYD:TSX.V; CDKNF:OTCQX) in Mexico.

    TGR: Another takeover target?

    JT: I think so. There are only 41.8M shares outstanding and it has very savvy management. CEO Ivan Bebek co-founded Asanko Gold Inc. (AKG:TSX; AKG:NYSE.MKT), and he has brought in strong technical people. Cayden is very well funded. On April 1, it closed a $9M financing at $1.70. The stock is trading at $1.93 now.

    The company has two properties. El Barqueño is a shallow target that can be developed fairly quickly. Cayden has something like nine targets there, and on the first target Cayden drilled, the Azteca, it hit commercial-grade gold on 24 of 25 holes.

    Cayden's other property is Morelos Sur. That's in the Guerrero Belt, which is an up and comer. Cayden thinks this might have greater long-term upside than El Barqueño. Some of its claims there are right smack dab in the middle of Goldcorp Inc.'s (G:TSX; GG:NYSE) Las Calles property, and Goldcorp is going to have to have them. In fact, Goldcorp's pit runs onto its territory. I think Cayden wants Goldcorp to know that it is not desperate and won't be forced to take whatever Goldcorp offers it.

    TGR: Heading down to South America, what strikes your fancy?

    JT: Columbus Gold Corp. (CGT:TSX.V) and its Paul Isnard project in French Guiana.

    TGR: This is perhaps the most acclaimed of all junior gold projects, and yet it sits at $0.55 a share with a $71.8M market cap.

    JT: This goes back to what we were talking about earlier. Investors haven't really come out of their shells yet. As you mentioned, we've had another dip in the gold price, and people are saying, "Oh no, here we go again." Well, I don't think so.

    That said, Columbus Gold is a tremendous bargain. Paul Isnard has 5.37 Moz, but the most important part of this story is the outstanding agreement the company made with Nordgold N.V. (NORD:LSE). That's a Russian company that produced somewhere around 800 Koz last year. Nordgold is very aggressive and growing very rapidly.

    According to the agreement, Columbus has a 49.9% interest in Paul Isnard carried to feasibility. Then, if it decides against putting up its 49.9%, it gets a 25% carried interest to production. It cannot be knocked below 25%. French Guiana is probably not the easiest place for English speakers to work, but it's got French law, so its legal system is reasonably good. And Nordgold has shown it can work anywhere and do well.

    Columbus also is a project generator. It has two properties in Arizona and 18 in Nevada. Some are earlier stage, but it has gotten some good drill results in Nevada. I think Columbus is looking to farm some of those out. This is a company that won't need to spend a lot of cash to stay in the game.

    TGR: And your final gold junior pick is?

    JT: Brazil Resources Inc. (BRI:TSX.V; BRIZF:OTCQX), I've known its founder and chairman, Amir Adnani, for a long time. And, of course, many people know his American energy company, Uranium Energy Corp. (UEC:NYSE.MKT).

    Adnani went out and took advantage of the weak gold market to pick up Brazilian gold properties: 2.59 Moz gold in three properties that are relatively close together. Added to the property he had before, that makes something like 3.9 Moz all told. Amir said to me that he hopes we don't see a resumption in the gold price right away. He'd like to see more weakness so he can get his hands on more low-priced properties. The companies that have the cash and the resources to finance themselves are today in a great position to enrich their shareholders.

    This company has a really good ownership structure. Management and insiders own 25%, and 30% is held by institutional investors. This includes a very wealthy Brazilian financier who has the deep pockets. Adnani is a very smart manager. He's done very well in the past, and I think he's on to something here. I like this one a lot.

    TGR: Final thoughts?

    JT: Investors are still shell-shocked. And the mainstream is convinced that gold isn't going anywhere because they've been sold on the idea that the Ph.D. standard is much better than the gold standard. And if you believe that, why would you buy gold stocks? I'd say that 99% of American investors aren't in the least bit interested. Canadians are a little different because mining is a big Canadian industry.

    But I think we're on the verge of a secular bull market for the ages, something greater than I've seen in my lifetime.

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

    As he followed the demolition of the U.S. gold standard and the rapid rise in the national debt, Jay Taylor's interest in U.S. monetary and fiscal policy grew, particularly as it related to gold. He began publishing North American Gold Mining Stocks in 1981. In 1997, he decided to pursue his avocation as a new full-time career-including publication of his weekly J. Taylor's Gold, Energy & Tech Stocksnewsletter. He also has a radio program, "Turning Hard Times into Good Times."

    Read what other experts are saying about:

    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 recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Metanor Resources Inc., Cayden Resources Inc., Columbus Gold Corp. and Brazil Resources Inc. Goldcorp Inc. is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services.
    3) Jay Taylor: I own, or my family owns, shares of the following companies mentioned in this interview: Brazil Resources Inc., Canamex Resources Corp., Cayden Resources Inc., Columbus Gold Corp., Novo Resources Corp. and Paramount Gold and Silver Corp. Research carried out and recommendations made in J Taylor's Gold, Energy & Tech Stocks are intended solely for the paid subscribers of that newsletter and fees are never paid in exchange for recommendations. However, Taylor Hard Money Advisors, Inc., the publisher of J Taylor's Gold, Energy & Tech Stocks, has received reprint fees and radio sponsorship fees from all of the family-owned companies except Novo Resources 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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