http://www.theaureport.com/pub/na/15380

Australian mining companies have been hard hit by falling commodities prices and rising costs. But Petra Capital Analyst Andrew Richards believes his country's resource sector has turned a corner. In this interview with The Metals Report, Richards says that costs are falling and China's need for Australian metals will continue to grow. He also names companies that are well positioned to flourish in the near future.

The Metals Report: Australian mining Newcrest Mining Ltd. (NM:TSX; NCM:ASX) has announced huge layoffs and capital expenditure cutbacks. Does this signify a crisis in the space?

Andrew Richards: "Crisis" is certainly a strong word, but there is definitely a correction occurring in the market. Gold and iron ore in particular have come off their peaks. What we are seeing in Australia is a lot of cost-cutting across the board. That's probably something that needed to happen because labor costs had risen significantly over the last few years due to competition for personnel. The big companies, such as BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) andRio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK), have said that Australia has become relatively uncompetitive because of very high labor and engineering costs.

With the fall in some of the commodity prices, companies have had to lay off people where they can and put a stop to some of the planned growth projects. Newcrest was an example of that. Companies are now focusing on cash flow rather than just growth. They want to maintain or improve margins where they can. But I will say I think Australian costs have peaked and are already on their way down.

TMR: Australian mining billionaire Gina Rinehart last month accused Prime Minister Julia Gillard of treating the mining industry like an ATM. How much of a threat to the industry is the Labour government's mining tax?

AR: The mining tax, at this stage, affects only iron ore and coal. And companies need to make a profit of at least $75 million ($75M) before that tax kicks in. It certainly has an impact on big companies, such asFortescue Metals Group Ltd. (FMG:ASX), BHP and Rio Tinto. Having said that, the government had estimated significantly higher revenues from the tax than it has received. Maybe that's a reflection of the pullback in commodity prices, particularly iron ore.

Moving forward, there is an election in Australia in September, and the polls are saying that the current government will lose. The incoming government, should they win, has said publicly that they would remove this tax. So we'll wait and see what happens in September.

TMR: Let's talk about some of the companies you cover. Alkane Resources Ltd. (ANLKY:OTCQX; ALK:ASX) has zirconium, niobium and gold. What are the challenges of managing a company that has such diversified resources?

AR: Alkane's Dubbo zirconium-niobium project is certainly unique. With these sorts of projects, you have to make sure you have a flowsheet that works and is proven. Alkane has had a pilot plant operating for over four years now, so it has actually proven that flowsheet and sent product off to customers. It has signed an offtake agreement with a significant Japanese company, Shin-Etsu Chemical Co. Ltd. (SHE:Fkft). Obviously, there are always risks as you scale up from the pilot plant to the major plant, but I think the company has mitigated them as much as possible. The key now is getting Dubbo funded.

TMR: In April, Alkane came out with a revised feasibility study for Dubbo with a capex of $996M. How is this new feasibility study better than the previous one?

AR: Alkane did reduce the capex by around $70M. It made some improvements with the water recycling, which means that it could reduce the size of the evaporation ponds required. That was quite positive. Also, it slightly improved the costs, and the company has some improvements coming through on recoveries, which could help on the revenue side.

TMR: How does Alkane intend to raise this nearly $1 billion ($1B)? How important are offtakes and cash flow from its Tomingley gold project in this regard?

AR: Tomingley will produce 50,000-60,000 ounces (50-60 Koz) annually starting early next year. It's a nice little cash flow generator: At current gold prices, the project should generate about $20-25M/year. Alkane may well look to do some hedging should the gold price find support and have a bit of a run up over the next three to six months.

The plan with Dubbo is to sell up to 15% at the project level for anywhere from $150-200M. I mentioned Shin-Etsu, which has signed a memorandum of understanding (MOU), and there is strong interest from other companies in Asia and North America. The company is also talking to government agencies, which could provide cheap debt, up to $400M at low interest rates. So that adds up to around $550-600M. Alkane has appointed Credit Suisse and Sumitomo Corp. (8053:TKY; SSUMF:OTCPK) of Japan to help facilitate the project selldown and negotiate government debt. All together, that could mean $800M in funding. The balance would be equity, and Alkane is targeting a maximum of $200M. The first thing we'll see will be the selldown, hopefully by the end of this year.

TMR: How crucial have offtakes become to companies involved in setting up nonprecious minerals projects?

AR: They are important; there's no doubt about it. I think there is a window open over the next four to five years for companies such as Alkane to lock in long-term offtakes. Shin-Etsu is a major player in the rare earth element industry. It has a separation plant in Japan, and it will be treating the concentrate that Alkane produces. The market will be looking to see these MOUs convert into offtake agreements over the next six to 12 months.

TMR: How confident are you that Alkane is a winner going forward?

AR: I think it is in a great position. I'm confident that it will get the funding for Dubbo and deliver on what it has said it is going to do. Dubbo's economics are very attractive. The $1B capex should be paid back within five years. Dubbo's current reserve equates to a mine life of over 30 years, and the resources equate to over 70 years. And it will be providing not just light rare earths but a majority of heavy rare earths, which are in short supply, as well as the zirconium and niobium. It is certainly far more advanced than a number of other competing projects globally.

TMR: Let's talk about Crusader Resources Ltd. (CAS:ASX). It has the Posse iron ore project and the Borborema gold project in Brazil. Posse just went into production. How does this affect Borborema?

AR: Posse is a small iron ore project. It started producing at 300,000 tonnes per annum (Ktpa) and recently just got the environmental approval to expand to 1 million tonnes per annum (Mtpa). What distinguishes Posse is its cash costs. It is targeting $12/tonne, which is bottom quartile globally. Current iron ore prices are around $110/tonne. It will be selling high-grade ore for anywhere between $75-100/tonne. So the margins are quite good. That will start generating some good cash flow: at current production rates, probably at least $1M/month. At the expanded rate of production, it could be three times that.

Posse provides cash flow to Crusader, which can then be used to move Borborema forward. Crusader is currently doing a bankable feasibility on Borborema. We're talking about production of about $100 Koz/year at cash costs of around $750 an ounce ($750/oz).

TMR: Is that all in?

AR: All-in cash costs are probably more like $950/oz, so it's still attractive at current prices. We won't get the final numbers until probably later this year, so these are my estimates. It has 1.6 Moz in reserves and 2.4 Moz in resources. It is open-pit, and the costs should be low because of the cheap labor and power available in Brazil.

TMR: Where do you see iron ore prices going?

AR: What I've read from some of the larger brokers is that prices are close to the bottom right now. We'll wait and see. Commentators say that stockpiles in China are falling, and there is a real possibility they could look to restock in the second half of 2013, which might help support prices.

TMR: Alara Resources Ltd. (AUQ:ASX) has the Khnaiguiyah zinc-copper project in Saudi Arabia and the Washihi-Mullaq-Al Ajal and Daris copper-gold projects in Oman. Is the Gulf Region particularly mining friendly?

AR: It is. Saudi Arabia, obviously, has a long history with oil and gas. However, it is now looking to develop its mining industry to create employment and a more diverse economy. We've seen some companies move into Saudi Arabia in the last five to six years. Citadel Resources Group had a copper-gold project that Equinox Minerals Ltd. bought, which was then bought by Barrick Gold Corp. (ABX:TSX; ABX:NYSE). There is another zinc-copper project to the south called Al-Masane, and there are some government-owned gold projects. Saudi Arabia is a good place for investment. Corporate tax for 100% foreign-owned entities is only 20%. There are no royalties. Diesel is just $0.08/liter.

Oman has a longer mining history. It is copper rich and has a copper smelter on the coast. Fuel is only slightly more expensive there than it is in Saudi Arabia but is still very cheap.

TMR: What are the highlights of the Khnaiguiyah feasibility study released in April?

AR: The feasibility study showed a 13-year mine life, production of 80 Ktpa zinc and about 6 Ktpa copper. Cash costs are attractive at $0.46/pound ($0.46/lb) zinc. That's after copper credits in the first seven to eight years. Life-of-mine cash costs are $0.50/lb. So at current prices of around $0.85/lb, it looks good. Longer term, I think it should be quite exciting, as most groups forecast that zinc will be in a deficit within two to three years because of some large mines shutting down. That could be very good timing for Alara with first production targeted to begin by late 2015.

The capex is $257M. The Khnaiguiyah project has access to the Saudi Industrial Development Fund, which has billions of dollars and can provide up to 75% of the capex. The application process to this fund is underway, and the company is targeting completion of that by the end of this year. So Alara is in a much better position to get its project funded than some of the other juniors.

TMR: What do you think about the copper-gold assays that Alara has been getting at Washihi?

AR: They're very good. It has been getting big, thick intersections of 70-80 meters (70-80m) and over 100m of over 1% copper plus gold, at reasonably shallow depths as well. It looks like it could be an open-pit operation with quite a modest strip ratio. More important, the deposit is still open along strike and also at depth. The current resource is around 9 million tonnes (Mt), and I think that will be upgraded in the next couple of months. I think Washihi will start off small, but Alara could get it up and running within two years, so the company could have two projects running by late 2015.

TMR: How would you rank Alkane, Crusader and Alara?

AR: All three offer significant upside. Crusader has just started generating cash flow, which is attractive to investors in the current market. Alkane is not far behind, with its gold project starting up early next year. And Alara has its low-cost zinc project in Saudi Arabia and upside from its copper project in Oman.

TMR: Briefly, are there any other Australian mining projects (not necessarily ones that you cover) that you think are particularly noteworthy?

AR: In this market, everyone is looking at projects that have low costs and can make money throughout the cycle. In gold, Regis Resources Ltd. (RRL:ASX) is one that stands out. It certainly has low costs and an appealing growth profile. In copper, PanAust Ltd. (PNA:ASX) and Sandfire Resources NL (SFR:ASX)are certainly making very healthy margins. In iron ore, BC Iron Ltd. (BCI:ASX) has been a standout. It has been one of the best performers of the past few years with very healthy margins at current prices.

TMR: How much does the economy of Australia depend on Chinese industrial expansion?

AR: Australia is quite dependent on China because we are still a commodity country, and China now consumes around 40% of metal production across the board. It's a big consumer of our iron ore and coal. There is concern at the moment that China is slowing, but with growth figures of 7-7.5%/year, it still looks pretty healthy. And, of course, China's base is a lot bigger than it was even a few years ago.

TMR: How do you stand on the debate over the so-called commodity supercycle? Do you think we can expect it to last for a while longer?

AR: Yes, I do not think that the cycle is over. Our view remains that China still has a lot of growth ahead of it, and it looks like the U.S. is starting to pick up as well. Hopefully, we'll start to see that come through in the next six to 12 months. Europe still has its issues, but if the U.S. and China continue to grow, then the outlook is pretty positive.

TMR: Do you think that the Australian economy's best days are ahead of it?

AR: Good question. Australia has done well for quite some time. A number of mining companies said that our resource market has become uncompetitive, but we're starting to see improvements. Also, the Australian dollar had been very strong for a couple of years now, but it's now back down to around $0.94 to the U.S. dollar. A weaker currency really positively impacts revenue in the Australian resources industry because commodities are priced in U.S. dollars. And Australia remains a very attractive place for investment given its low geopolitical risk. Looking ahead, there is a lot to be positive about, and I expect better times from the second half of 2013 onward.

I think that investors just have to be a bit more selective. There are a number of projects that are high cost and will struggle, but there are also plenty of attractive projects, including the ones I've mentioned, that will make good money throughout the cycle. And when the cycle picks up again, these projects will do extremely well.

TMR: Andrew, thanks so much for your insights.

AR: A pleasure, Kevin.

Andrew Richards is a rated analyst in gold and base metals with Petra Capital of Australia. He is a geologist and has worked for such major miners as Newcrest Mining and Western Mining. He has over 15 years experience as an analyst, including for such leading firms as Merrill Lynch and Shaw Stockbroking.

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DISCLOSURE:
1) Kevin Michael Grace 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: Alkane Resources Ltd. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Andrew Richards: I or my family own shares of the following companies mentioned in this interview: Alkane Resources, Crusader Resources and Alara Resources. Petra Capital has previously raised capital with the following companies mentioned in this interview: Alkane Resources, Crusader Resources and Alara Resources. 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.
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http://www.theaureport.com/pub/na/15376

The price of gold remains in the doldrums, but Jay Taylor, host of the radio show "Turning Hard Times into Good Times," expects the bull market to come roaring back. In this interview with The Gold Report, Taylor cautions that not all miners are equal and advises investors to look for companies with cash flow and the potential for organic growth.

The Gold Report: Many believe that the price of gold represents a market referendum on the value of paper money and the health of the world economy. Do you agree?

Jay Taylor: Yes, I do. Gold rose from the mid-$200s/ounce (mid-$200/oz) in 2002 to as high as $1,900/oz. That clearly suggests that things are not all right in the global economy. Politicians like to create the illusion that they can create something out of nothing and give it to people in exchange for votes. Gold gets in the way of that falsehood politicians wish to use to deceive voters for their own gain and the gain of those who fund their election campaigns.

TGR: Gold has fallen from $1,900/oz to below $1,400/oz. Some people say this proves the bubble has burst.

JT: I wish that were the case because that would mean that the policymakers-the people in charge of the Federal Reserve, the Treasury and of other countries and banks around the world-had fixed everything, but I don't believe that for a minute. If anything, their policies are making things worse.

I wish there was a reason to be optimistic about the global economy. Keynesian economic policies didn't work in the 1930s, and they're not working now. Franklin Roosevelt's Treasury secretary and a personal friend of the president said after the second term, "We have just as much unemployment as we had at the start of the downturn, and we have a huge amount of debt to boot." And the same thing can be said now if we use the same measure of unemployment as we did in the 1930s.

As David Stockman said recently, Fed Chairman Ben Bernanke is in the process of destroying capitalism. Pushing interest rates to zero destroys savings and creates malinvestment. That works very well for the people who control the supply of money and credit, but it doesn't work very well for the people who are actually contributing to the economy: miners, manufacturers, farmers. The middle class is being destroyed. That's why, if you are not on Wall Street or in government, you have to own gold and silver because the currency is being used to reallocate wealth from most of us to those who rule us from Washington and Wall Street.

TGR: But we keep hearing that the recovery is just around the corner.

JT: Well, that's what they said in the 1930s, too.

TGR: You've talked about gold "being increasingly a bipolar market." Do you think we're going to see a divorce between the paper and physical gold markets?

JT: I think that, ultimately, physical will win, especially as those in the futures markets demand delivery, only to find the gold doesn't exist. ABN Amro has already defaulted on its delivery obligations and required settlement in paper. As long as people think they can take paper money and still go out and buy the gold or whatever else they want, this fraudulent system can hold together. But ultimately, as trillions upon trillions of new money is created, it will fail. I don't know how long that will take. The paper markets are controlled and dominated by Wall Street, which joins Washington in this con game. But the real markets for gold are not only the Chinese but also average Americans and average citizens everywhere who have their eyes open and their ears shut to mainstream propaganda. They know the ruling elite are the parasites eating away at their wealth.

TGR: If there were a divorce between the physical and paper gold markets, wouldn't this be a severe blow to financial instruments generally?

JT: Yes, ultimately it should be. But we have had all manner of immoral behavior on Wall Street with the housing bubble, yet nobody has gone to jail. The fox is in charge of the chicken coop. If the markets force some sort of honesty on these evildoers, it would be a good thing. But it wouldn't necessarily be pleasant for anyone. A fair amount of circumstantial evidence from the Gold Anit-Trust Action Committee (GATA) and other sources supports the contention that the big bullion banks are manipulating the precious metals markets. That's supposed to be against the law. But as Dr. Karen Hudes, former chief counsel at the World Bank, pointed out on my radio show on June 11, there is a powerful group of corporations that rule America and that are above the law. That would include the bullion banks, the mainstream media and the governments of the Western world.

TGR: Why do you think the big run-up in the equities markets has not buoyed the prices of precious metals stocks?

JT: Mining stocks have not performed well relative to the price of gold even before the price of gold fell. Part of the reason is that the cost of production has gone up faster than metals prices. Mining profits started to erode as Quantitative Easing 2 (QE2), QE3 and QE infinity started pumping up the prices of other commodities such as energy and materials. In addition, the gold mining companies were scaling up and became fairly reckless. I watch very closely the "real" price of gold, which I define in terms of the Rogers Raw Materials Index. After Lehman Brothers, the "real" price of gold rose dramatically and with that so did the earnings of major gold producers.

Note from the charts above that the upward trend in the "real" price of gold has been broken and with that major gold mining company profits have also declined and are projected to decline further this year.

TGR: New Gold Inc.'s (NGD:TSX; NGD:NYSE.MKT) takeover of Rainy River Resources Ltd. (RR:TSX.V) and its Rainy River project in Ontario is not a big takeout. It's $310 million, but it's the first of any size that we've seen for some time. Do you think this is a one-off, or do you think that we can expect bigger companies taking advantage of the depressed share prices of the smaller ones?

JT: No, I think it's not a one-off. It's likely to become a trend. Something like 50% or more of the junior resource companies are on death's door; they don't have enough money to stay in business for another year. Many of those companies can now be had for a song. Shareholders will say, gee, at least I'm getting something out of it. They won't have a choice.

TGR: Which of the bigger companies are actively looking for acquisitions?

JT: Certainly Sandstorm Gold Ltd. (SSL:TSX), which employs a streaming model, is a company that's looking to pick up some assets. I suppose some of the really big miners that I don't follow as much, the household names like Newmont Mining Corp. (NEM:NYSE) and Goldcorp Inc. (G:TSX; GG:NYSE), will be in a position to pick up some of the smaller juniors.

But it's not so much mergers and acquisitions that I'm interested in. My target is mostly smaller juniors that are cash-flow positive, don't have to issue tremendous numbers of shares, have great exploration potential and can grow organically. For example, Dynacor Gold Mines Inc. (DNG:TSX) is one of my favorites. The company will produce about $0.30/share in cash flow this year. It is selling at around $1.15/share and will probably double its production to over 100,000 oz by 2014. Dynacor also has some wonderful exploration targets. The company has about 28 million shares outstanding, and it never issues more. It funds its needs internally from cash flow.

One of the biggest risks that shareholders have to be cognizant of in this industry, especially among the exploration companies, is dilution. Dynacor has been patient and has grown slowly but steadily over the past several years. It provides milling facilities in Peru to high-grade mom-and-pop operators. Peru has something like 75,000 small, licensed operators, so Dynacor has really carved out a niche business and its growth prospects are very substantial.

Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT) is another company with good cash flow and is certainly in a position to grow organically from its San Francisco mine in Mexico.

TGR: There has been a fair amount of protests against foreign mining companies in Peru. Do you think that Peru is solid from a mining viewpoint?

JT: I do, though you have to look at companies in Peru on a case-by-case basis. Dynacor has been there for a long time, and it has done an extremely good job of working with the government and the people. Dynacor has not been arrogant, like many of the majors. I'm not saying Peru is risk free. I don't think any place on earth is risk free, including the United States. But Jean Martineau, the president and CEO of Dynacor, has worked from the bottom up, and the company is viewed as almost a Peruvian company. The capital has come from outside, but it's really the Peruvian people that are the company and they are benefitting from Dynacor's business model. Rather than a Canadian company going into Peru and grabbing major tracts of land and putting smaller producers out of business, Dynacor enables small mining operations to continue producing gold and building the wealth of middle- to upper-class family wealth.

TGR: Could you comment on some other companies that you follow?

JT: I met with Golden Arrow Resources Corp. (GRG:TSX.V; GAC:FSE; GARWF:OTCPK) management a couple of weeks ago. The company is really on to something very significant with its Chinchillas silver project in Argentina. The project already has outlined some 110 million ounces (110 Moz) silver equivalent, and it has barely scratched the surface of its exploration targets. Joe Grosso, the chairman, has really done a remarkable job of forming relationships with the local people in Argentina.

San Gold Corp. (SGR:TSX.V) is a completely different story. The company's operating performance over the last number of years has been a big disappointment. But I believe we're going to see a turnaround. San's revised management team has a much better grasp of costs and is employing capital to make its mining operations in Manitoba much more efficient by linking high-grade zones together. San should be able to pull more high-grade ore out of the ground. That's why I placed a fairly heavy bet on it personally and in my newsletter. San's infrastructure is in place. I could be wrong, but if I'm right, we could be looking at a $1.80/share price instead of a $0.14/share stock.

TGR: You met with Prophecy Platinum Corp. (NKL:TSX.V; PNIKF:OTCPK; P94P:FSE) CEO and President Greg Johnson at the World Resource Investment Conference in Vancouver. Afterward, you said that this company's story "stood out head and shoulders above the rest." What is it about Prophecy's Wellgreen platinum group metals and nickel-copper project in the Yukon that so impresses you?

JT: A whole lot of factors. I visited the project a couple of years ago before Prophecy brought on Greg Johnson, and I've always believed that it was perhaps one of the greatest PGM projects in the world. I didn't feel at that time that the company had the management in place to really pull it off. A project of this scale is going to require a massive amount of technical talent. Greg was a co-founder of NOVAGOLD (NG:TSX; NG:NYSE.MKT) and also worked with South American Silver Corp. (SAC:TSX; SOHAF:OTCBB).

After Johnson came on, John Sagman was added to the team. He was with Xstrata Plc (XTA:LSE) and also with Vale S.A. (VALE:NYSE), handling the nickel and platinum group metals operations. I think Sagman and Johnson form a management team core that can actually get it done. Wellgreen's scale, size and dimensions of mineralization and the grades of the platinum group metals are remarkable. We're looking at widths and thicknesses that exceed anything that Ivanplats Ltd. (IVP:TSX) and the other companies in South Africa have. The big question here has to do with metallurgy. This is a deposit of 7 Moz platinum group metals plus gold, 2 billion pounds (2 Blb) nickel, 2 Blb copper and the exploration potential is absolutely enormous. But can Prophecy get enough of the metals out? Can it be optimized to the point where the deposit is economic? I think with Prophecy's new management team the answer to those questions is most likely yes.

TGR: Wellgreen's preliminary economic assessment shows a capital expenditure (capex) of $863 million. Is that going to be a problem considering the current economic conditions for raising money?

JT: Absolutely. That is certainly the other major concern here. Close to a $1 billion in capex is not very easy for a company selling at $0.65/share. But management is looking at the potential to develop high-grade starter pits, which would enable it to start out at a smaller scale with a much smaller capex.

TGR: Do you like the prospect-generator model?

JT: Yes, mainly because prospect generators use other people's money to derisk projects and avoid dilution. Prospect generators, at least the companies that I follow and respect, have very strong technical talents in exploration. They've identified projects that have a reasonable potential to host meaningful ore deposits. Most companies have a couple of projects and blow through huge amounts of money to drill them out. Prospect generators do some low-cost preliminary work to establish a geological thesis for exploration. Then they get other companies to come in and spend their money.

TGR: What companies do you like in this area?

JT: Eurasian Minerals Inc. (EMX:TSX.V) is my favorite. There are other companies that I would call hybrid prospect generators, companies like Aurvista Gold Corp. (AVA:TSX.V), Bravada Gold Corp. (BVA:TSX.V)and Paramount Gold and Silver Corp. (PZG:NYSE.MKT; PZG:TSX). But among pure project generators, Eurasian has the biggest projects and the most money, and it is allied with the biggest mining companies. I think it's just a matter of time before Eurasian comes up with at least one major economic deposit that sends the stock to much higher levels.

There are others I like, such as Riverside Resources Inc. (RRI:TSX). John-Mark Staude, the president and CEO, is doing a remarkable job. Riverside has projects in Mexico and in the United States and also now some base metals deposits that are being explored by major companies in British Columbia. The company just announced some excellent high-grade silver results from trench assays and drill core on its Jesus Maria mine on its Penoles project in Durango, Mexico. This could be the first discovery that catapults the company from a $0.35/share stock into the mining big leagues.

Millrock Resources Inc. (MRO:TSX.V) has copper and gold projects that major companies are spending some serious dough to explore. Miranda Gold Corp. (MAD:TSX.V) just hooked up with Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) as a strategic partner in Colombia. Miranda has an ample amount of cash but is looking hard at picking up good projects from companies unable to stay alive in this difficult market.

Paramount is definitely a takeover target. This is a company with a little less than 10 Moz gold equivalent in Mexico. Lots of exploration upside remains on both of its projects. Paramount has deep pockets. I like this one a lot.

And I like Aurvista quite a bit as well. I think that if we get a rise in the equity markets, the company is going to be fine. Aurvista's grades are around 1 gram/tonne, with lots of exploration potential. It could be a multimillion-ounce deposit. Aurvista could be a takeover target somewhere down the road.

Bravada is skating on thin ice right now. The company just lost its partner in the Wind Mountain gold-silver project in Nevada, Argonaut Gold Inc. (AR:TSX), but that project is very strong. Argonaut walked away not because it didn't like the project, but it just picked up Prodigy Gold Inc.'s projects, so it had to preserve its capital. The geologists loved the project. I think Bravada will get another partner in there and will do extremely well, if it survives.

TGR: John Kaiser expects a wholesale cull of mining juniors: 500 companies or more. What do you think?

JT: I think John's right. Some will disappear in acquisitions, and some will just stop doing what they're doing. As much as I love gold and silver, the mining sector is not immune to malinvestment. Some stocks rise in the good times but can't be sustained because there's no organic growth, no cash flow to sustain them. And thanks to the creation of money out of thin air, they were born as public companies but no doubt should never have been on the scene in the first place, thanks to dishonest fiat money, which funds the yachts for Vancouver stockbrokers, but ends up sending average people to the poor house.

TGR: A great many investors in mining stocks have moved from gloom to despair. Do you have any words that would cheer them up?

JT: We are still in the bull market of a lifetime in gold. I follow the work of Charles Nenner, who is a cycles analyst. Charles is calling for a mid-June turnaround in gold and silver. I'm 66 years old. I was around for the last gold bull market in the 1970s. This is going to make that one look like child's play. I think we can expect something comparable to what we saw in the 1970s, when gold went from $35 to $200 to $100 and then from $100 to $850/oz. It's not necessarily something to be happy about because it portends a lot of trouble geopolitically and in the global economy, and that's not something I want to see. I don't invest in gold because I'm cheering for the world to fall apart. I invest in gold and silver because I believe the policymakers are guaranteeing the world will fall apart.

TGR: If this big run-up starts this summer, how long before the benefits start accruing to mining companies?

JT: That's a very good question. I'm not absolutely sure they will. I hope so, but this will happen only if we see deflation rather than hyperinflation. If we have a hyperinflationary event, I think the only real thing to do is to own the metals itself. If we head into a deflationary depression, I think gold mining will do extremely well as it did in the 1930s. But mining is like any other business. Revenues need to be higher than expenses. In a hyperinflationary environment, costs tend to rise faster than the price of gold.

TGR: Gold producers did well during the Great Depression.

JT: Extremely well. Homestake rose by six or sevenfold, while the Dow went down 89%; gold producers did well because the real price of gold rose. While the price of gold was fixed at $35/oz, deflation caused wages and materials costs to decline and profits to surge.

TGR: Thanks, Jay.

JT: My pleasure.

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 Gold, Energy & Technology Stocks newsletter. He also has a radio program, "Turning Hard Times into Good Times."

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) Kevin Michael Grace 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: Goldcorp Inc., Timmins Gold Corp., Golden Arrow Resources Corp., Prophecy Platinum Corp., NOVAGOLD, Aurvista Gold Corp., Paramount Gold and Silver Corp. and Argonaut Gold Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Jay Taylor: I or my family own shares of the following companies mentioned in this interview: Aurvista Gold Corp., Bravada Gold Corp., Dynacor Gold Mines Inc., Eurasian Minerals Inc., Golden Arrow Resources Corp., Millrock Resources Inc., Miranda Gold Corp., Riverside Resources Inc., Paramount Gold and Silver Corp., Prophecy Platinum Corp., San Gold Corp., Sandstorm Gold Ltd. and Timmins Gold Corp. I have never been paid by any of the companies mentioned in this interview in exchange for their coverage in my newsletter. However, with the exception of Sandstorm Gold, the companies my family or I own as noted in 3), all of the other companies have at one time or another in the past been sponsors on my radio show, "Turning Hard Times into Good Times." 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
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In his 36-year career, Michael Ballanger, director of wealth management at Richardson GMP, has seen good markets and bad. As a true contrarian, he sees opportunity in undervalued precious metals assets and lauds George Soros' recently reported large gold-related positions. In this interview with The Gold Report, Ballanger discusses market sentiment and some companies that he expects to take off when the market turns.

The Gold Report: A news story in mid-May reported that billionaire hedge fund manager George Soros had almost $240 million ($240M) in gold-related positions. Moreover, on May 16 he had purchased $25M in call options on the Market Vectors Junior Gold Miners ETF (GDXJ). What are your thoughts on that move?

Michael Ballanger: All one needs to look at is the historical relationship between gold and gold shares to see the logic behind such a move. With every market on every continent now surging to record high levels in response to central bank stimuli, it would be reasonable to manage risk by owning one of the most beaten-down sectors I can ever recall.

TGR: Why does someone like Soros buy gold-related instruments and not equities, even the large caps?

MB: In the case of the GDXJ, he is actually buying a "basket" of equities related to gold/silver mining and exploration. By doing this, he spreads his risk over a large population of companies in the same space. Picking individual companies in this space invites execution risk because as we have seen in numerous cases in the past decade, a one-off event such as politics or natural disasters can undermine a correct call on the sector as a whole.

TGR: Are you aware of other big-time players that are making similar moves?

MB: Not specifically and certainly no one as notable as Mr. Soros. It is interesting that the managers who were early in the gold trade such as Eric Sprott are more bullish today than ever and that is noteworthy given gold's performance since 2000; despite this current correction and in my view, it is a correction rather than a secular bear.

TGR: When last we spoke you were convinced the market had found a psychological bottom. You noted that at the end of 2012, the TSX Venture Exchange (TSX.V)-acting as a proxy for the junior mining sector-was trading at 0.71 times the gold price. As of May 31, it was 0.69 times the gold price. Do you see the TSX.V-gold price ratio moving further sideways for the foreseeable future?

MB: I based my "bottom call" on sentiment. The sentiment in the junior space in January was abysmal and it is just as abysmal today. However, weak sentiment numbers, while historically reliable, do not tell you that the price has stopped declining. In that context, I was early because not only has the Venture Exchange dropped to new lows under 1,000, the TSX.V-gold ratio has recently hit .66 versus the bull market high over 5.0, which is actually quite remarkable.

TGR: What's your thesis for investing in mining equities (large, mid and small cap)? Precious metals investors want to know what they should do over the course of the summer months. What's your advice?

MB: There is always a degree of seasonality to the mining sector and the numbers dictate that one should wait until mid-August to begin initiating positions but I suspect that may be too "cute" because of the severity of the valuation compression we are witnessing in the juniors. Companies that were considered good value at $75/ounce (Measured) are now trading at under $20/ounce and so these prices may not wait for mid-August if gold decides to reverse or if sentiment shifts early back to the bull camp.

TGR: In our last interview you discussed "well incubated" junior mining companies, ones with a core of investors that understand how the game is played and have the long play in mind. Where are those companies?

MB: In a nutshell, some have done quite well but most have been disappointing. Despite either positive earnings reports or new discoveries, each time they try to lift off the bottom, they have been sold as a liquidity event. It is almost a Pavlovian reaction; they sell off because they have sold off in the past and until new volumes come in to relieve the supply that will not change until sentiment changes.

TGR: In January, you told our readers about Tinka Resources Ltd. (TK:TSX.V; TLD:FSE; TKRFF:OTCPK). What's happening with Tinka now?

MB: Since the January interview, Tinka has continued to execute its corporate strategy of upgrading the Peruvian silver resource to Measured from Inferred while adding more ounces, but the big event was the recent A13-05 drill result, which was arguably one of the best massive sulphide intercepts in at least my time in this space. Sixty meters of 7.75% zinc with the total section of mineralized envelope running north of 200 meters is a very encouraging, if not spectacular, intercept. The company completed a financing in May (full disclosure: RichardsonGMP participated in that funding) and is now poised to recommence with further exploration on Ayawilca (the zinc) while finishing off the redefinition of Colquipucro (the silver). The share price has retrenched from the all-time high of $1.25 in March to the current $.75-.80 range.

TGR: Would you like to give any other updates on companies you've mentioned in previous interviews? At the moment, are there any other companies you're closely following?

MB: Bitterroot Resources Ltd. (BTT:TSX.V) is another name in the unloved category. When I met its president, Michael Carr, he showed me the geophysics on his project in northern Michigan, just south of the White Pine mine. Within the exploration sector, this is a compelling story that speculators could sink their teeth into at $0.09 or $0.10/share. It is an exploration play so it may not be suitable for all investors but for those that can bear the risk, it is an interesting speculation.

MB: Another Peruvian junior I have been dabbling in is Darwin Resources Corp. (DAR:TSX.V). The company has a gold property in northern Peru, sandwiched by Rio Alto Mining Ltd. (RIO:TSX.V; RIO:BVL; RIOAF:OTCQX) and Barrick Gold Corp. (ABX:TSX; ABC:NYSE). Darwin trades around the $0.12 range on the TSX Venture Exchange. Darwin was a spinout of Mawson Resources Ltd. (MAW:TSX; MWSNF:OTCPK; MRY:FSE). Early geochemical results have been very interesting, to say the least.

TGR: Before we let you go, please give our readers something to ponder.

MB: Whenever I am interviewed for my comments on the precious metals sector, I am usually addressing an audience that is predisposed to understanding the value of holding gold or silver bullion or equities in their portfolios, but what is rarely addressed is the correct allocation. There are some who believe that it is the ONLY asset that one should own and there are others that believe that it should be used as a balancing tool within a larger mix of assets.

No greater example of the need for a correct mix of assets could have been more obvious than the behavior of gold versus the S&P 500 since mid-2011. While bullion has dramatically outperformed the S&P 500 since 2000, the S&P 500 has been a superstar versus gold for the past 18 months. For this reason, it is critical to be flexible in your allocations because while I am certainly one of the most fervent believers in the importance of gold in protecting the purchasing power of portfolios, as a wealth manager I have to maintain a balance and that is something everyone must remember.

TGR: Thank you for your time.

Originally trained during the inflationary 1970s, Michael Ballanger, director of wealth management at Richardson GMP, is a graduate of Saint Louis University where he earned a Bachelor of Science in finance and a Bachelor of Art in marketing before completing post-graduate work at the Wharton School of the University of Pennsylvania. With more than 30 years of experience as a junior mining and exploration specialist, as well as a solid background in corporate finance, Ballanger's adherence to the concept of "Hard Assets" allows him to focus the practice on selecting opportunities in the global resource sector with emphasis on the precious metals exploration and development sector. Ballanger takes great pleasure in visiting mineral properties around the globe in the never-ending hunt for early-stage opportunities.

Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

DISCLOSURE:
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold 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: Tinka Resources Ltd. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Michael Ballanger: I or my family own shares of the following companies mentioned in this interview: Tinka Resources Ltd. and Bitterroot 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: Tinka Resources Ltd. 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

http://www.theaureport.com/pub/na/15372

Data on trades made by company insiders-key executives and directors-demonstrates to Ted Dixon, co-founder and CEO of INK Research, that most of them are contrarian in their approaches. Lately, Dixon finds that insider indicators in the gold and junior gold miner sectors are "off the charts." In this interview with The Gold Report, Dixon shares the names of frequent traders in recent months, along with insights into why, when and how insiders are trading.

The Gold Report: Ted, INK Research monitors stock transactions made by key executives and directors inside their companies and uses that data to develop sentiment indicators for various indices and sectors. How does your system work?

Ted Dixon: When we look at a market and a sector, we use insider activity-buys and sells in the public market-to get a sense of how those insiders feel, not just about their company, but about the overall market or sector. This led us to develop what we call a sentiment indicator, which is basically a daily poll of insiders. You could compare it to the polls you see during election campaigns. Every night, we take a poll of what insiders are doing within the market and the sector. We aggregate all of the buys and sells in the different companies in that sector to get a sense of the overall mood of insiders in that area.

TGR: The sentiment indicators at the moment show almost twice as much insider buying among Toronto Stock Exchange-listed stocks as selling. Yet, the opposite is happening in the American market. How do you explain that?

TD: One of the rules of thumb when looking at insider activity is that insiders tend to be contrarian. They like to do the opposite of what other people are doing.

In 2013 to date, the U.S. market has had a nice run as the indices have been hitting new, all-time highs. As everyone else is piling into the market and chasing momentum, insiders, being contrarians, are selling into that and are taking profits.

We have not had quite the same ride here in Canada; different sectors have experienced different fortunes. Some sectors and stocks have been hit hard. Because they are contrarian, insiders will go shopping for bargains during periods of selloff. While everyone is hitting the sell button, insiders and select companies will pick up stocks that have been beaten down. The key element to keep in mind here is the time horizon. Insiders typically have a long time horizon. The fact that they may be buying does not mean they expect a 50% reversal over the next two or three months. It means that, over the long term, the risk-reward ratio has improved enough for them to jump in.

TGR: Among the TSX Venture Exchange-listed stocks, insiders are buying almost eight times more than they are selling. What trends have emerged from insider buying on the Venture Exchange?

TD: Before the Lehman Brothers collapse, insiders were a bit more opportunistic in their buying and selling. Since then, we have seen a long-term, secular commitment to buy among junior miner insiders. This has been going on for quite a while, but as we go through bouts of selloff in the sector, insider activity within the junior miners tends to pick up. That is happening now.

In fact, it would concern us if there were no increase in insider activity when junior miners sold off. That might indicate that insiders are giving up on the sector. We are not seeing that.

TGR: Where is your Venture Exchange sentiment indicator on a 12-month horizon?

TD: It is near all-time highs, just as the Venture Exchange index works down toward new multiyear lows. We have been at elevated buying levels, driven primarily in the gold group. The spring saw a massive spike.

TGR: Does a spike in insider buying in an underperforming sector generally predict medium- or long-term equity performance?

TD: It is important to remember that insider activity and the INK indicators are not a silver bullet to market timing. They are used in conjunction with the technical indicators that many of your readers follow and the fundamental research they do.

"As we go through bouts of selloff in the sector, insider activity within the junior miners tends to pick up."

It is important to look at insider activity during a major selloff correction or a major rally: What are the insiders doing? Is insider activity spiking, suggesting a turning point is near?

Right now, we see a major move to the downside in commodity stocks and a major spike in insider buying. That is also what happened in December 2008. It is almost as if the mining industry is going through its own Lehman Brothers moment. Our indicators suggest now is the time to be bargain hunting for good companies. The time to exit the industry was a while ago.

TGR: Did you notice a significant change in insider buying or selling in the gold sector when gold had that significant selloff in April?

TD: Absolutely. When gold sold off in April, our indicator for the gold group jumped substantially. It got as high as 10:1, meaning 10 gold companies had key insider buying for every one that was selling. That is an astronomically high level of buying.

We had another test of that in early June when we saw renewed weakness in the gold stock indices and the gold price. Buying picked up. Insiders seem to be suggesting that they are very interested as the S&P/TSX Gold Composite Index toys with the 1,500 level.

TGR: Is there any seasonality at play, given the adage "sell in May and go away?" Or, has it changed to "buy in May?"

TD: I think price level is the key factor, not the month of the year. In the U.S., there was a nice rally into May, and we saw a lot of insider selling across the board. In Canada, among the miners, prices have tumbled to a level that is attracting significant insider interest.

TGR: It is also meaningful that, in the junior mining sector, when an executive adds to his or her position in a smaller company it can mean a significant percentage of ownership; for a larger company, it is often a drop in the bucket. What are some recent examples in the junior gold space where an executive has exercised options or bought shares that resulted in a significant increase in his or her stake in the company?

"On average, you get a better bang for your buck with smaller companies. I say on average because in some cases, insiders still suffer from wishful thinking and miscalculation."

TD: You are absolutely right about the importance for smaller companies, Brian. When Nejat Seyhun did his comprehensive study of insider activity in 1998, "Investment Intelligence from Insider Trading," he found that top executives such as CEOs and CFOs of smaller firms outperform the market by about 8% a year.

You get a better bang for your buck, on average, with smaller companies. I say on average, because in some cases insiders still suffer from wishful thinking and miscalculation.

Most of the insider buying is in the junior and the small companies. We have an indicator list that tracks what we call key insider buying-beneficial ownership buying where officers or directors directly own the interest in those stocks; they are not managing other people's money. Our users can also generate net buying lists.

TGR: What are some of the smaller names on your 30-day activity list, meaning there has been insider trading in the last 30 days?

TD: The smaller names would include Belo Sun Mining Corp. (BSX:TSX.V) and Veris Gold Corp. (VG:TSX; YNGFF:OTCBB).

Remember, because these are small companies, some small gold miners may not be easy to invest in, as a matter of liquidity. Some may not trade much. Nor are these investment recommendations. They are companies on our list showing insider buying in the last month.

TGR: Veris Gold insiders bought 555,000 shares.

TD: As of June 10, it was 605,000 shares.

TGR: In general, do you know who is making such purchases?

TD: In the case of Belo Sun Mining, CEO Mark Eaton has been buying. He bought throughout the month of May: 2,000 shares on May 30 and 425,500 on May 15-16. Another company executive bought nearly 230,000 shares on May 31 at $0.59/share after buying 11,500 shares earlier in the month. All my dollar and cents figures are in Canadian currency. On May 16, a third officer bought 100,000 shares. That makes three insiders buying in the public market during May. During that same period, there were no insider public-market sales. That is a good example of the type of insider buying you want to see when there is market weakness in a stock.

TGR: Have you ever done a study of share price performance versus buying? Is there a greater correlation with more executives buying than with just one buyer?

TD: In general, the more, the better. You want to see situations where multiple insiders are buying and no one is selling.

When the CFO is buying is another good signal. Always keep an eye on what the CFO is doing. I say that because, in general, they tend to be more conservative.

TGR: What other small juniors are buying and selling?

TD: Orvana Minerals Corp. (ORV:TSX) is another multiple insider buyer situation. CEO Michael Winship bought 60,000 shares at $0.53/share in May and was joined by a director, Audra Walsh. Together they spent $52,000 of their own money in buying in the public market. That seems to be good timing because the stock is now trading around the $0.60/share level.

TGR: And they bought where?

TD: It looks as if they bought between $0.50 and $0.53/share.

"The time to start looking for bargains is when everyone has left the room."

TGR: Can you tell us about other companies where insiders are buying?

TD: Angkor Gold Corp. (ANK:TSX.V) is being bought by CEO Michael Weeks. Over the last 30 days, he has spent about $44,000 buying stock in that company. His purchases have been in a range of $0.38 and $0.42/share. Angkor Gold is a smaller company based in Cambodia. It is interesting to see its insider buying among the top 10 by dollar amount for over the past 30 days.

Interestingly, in the gold group we are seeing not only a lot of insider buying, but buying with a very broad geographic reach. It is not just the names in Nevada, Mexico and Ontario.

Centerra Gold Inc. (CG:TSX; CADGF:OTCPK), based in the Kyrgyz Republic, has gone through quite a news cycle over the past few weeks. Mine production, I believe, is expected to be restarted after some political events there. But we see some insider activity in that company as well.

Centerra is a high-risk stock. What the insiders seem to be signaling there is that perhaps the stock price has overshot the risks. Even when insiders are buying, you still have to look at the stock's risk profile to see if it is something you want to get into. Just because insiders are buying does not mean the stock is not risky. It sends a signal related to the risk-reward outlook on average. The risk level may still be quite elevated.

TGR: Which companies are on the Top 5 list for officer and director buying on the 60-day list?

TD: In that time period in terms of development companies, the top net buyer was Colossus Minerals Inc. (CSI:TSX; COLUF:OTCQX), a development-focused miner in Brazil.

Orex Minerals Inc. (REX:TSX.V) would be No. 2, followed by Belo Sun and Veris Gold. Large-capTurquiose Hill Resources Ltd. (formerly Ivanhoe Mines Ltd.) (TRQ:TSX; TRQ:NYSE), which also owns producing assets, would be the fifth one.

Luna Gold Corp. (LGC:TSX.V), another Latin American company that you would classify as a producer, also has seen a lot of insider buying.

One name that is more of a pure gold play, junior nonproducer at this point is Giyani Gold Corp. (WDG:TSX.V). It is in South Africa. Duane Parnham, who founded Forsys Metals Corp. (FSX:TSX) and UNX Energy Corp., has now turned his attention to Giyani Gold. He has been buying a fair amount lately.

TGR: Are well-known CEOs or executives buying the junior companies, people like Ross Beaty?

TD: Ross Beaty's latest purchase was in the alternate energy area. Maybe that is a story for another day. And of course, we have talked about other CEOs who have been buying.

TGR: Are there any mid-cap names that stand out?

TD: Centerra and Luna Gold would be in that category.

We saw insider buying in both Colossus Minerals and Detour Gold Corp. (DGC:TSX) during the selloff in April. Subsequently, both companies have gone to the capital markets to raise some money. That shows that the gold sector is perhaps not as bad as everyone thinks.

It is nice to see some emerging investor interest in the sector beyond the insiders. Lately, the news flow has been so negative that sometimes it sounds as if only insiders are interested in their companies' stocks.

TGR: There also is activity in some of the gold sector's biggest names. Who is buying there?

TD: Peter Munk, chairman of Barrick Gold Corp. (ABX:TSX; ABX:NYSE), has come back to the market. He bought 100,000 shares worth $2.1 million at $21.05/share on May 9.

TGR: Are other Barrick Gold executives buying its shares?

TD: In the last 60 days, Peter Munk is the only insider with public-market buying at the firm.

A few months ago Ian Telfer, chairman of Goldcorp Inc. (G:TSX; GG:NYSE), bought his company's shares.

Compensation schemes at larger companies are structured a little differently than smaller companies. At Goldcorp, insider holdings have been on the rise through a combination of net public market activity and compensation-related acquisitions. It is nice to see insiders building their positions at these levels. Even though some of it is compensation-related, that is what we would like to see and are seeing in Goldcorp.

TGR: Are you seeing any other insider buying at the big gold names?

TD: There has been some net buying at Kinross Gold Corp. (K:TSX; KGC:NYSE) and there has been a fair amount of insider activity at IAMGOLD Corp. (IMG:TSX; IAG:NYSE). It is in fourth place on our list of direct insider buying over the last month. Over the last 90 days, IAMGOLD insiders have spent $504,778 buying shares in the public market. Notably, both the CEO and CFO have been buying shares. That is a positive contrarian signal for longer-term investors with the right risk tolerance.

TGR: How do your subscribers use your research?

TD: One of the most popular ways of using INK is to look at what insiders are doing with their options, both when they are being granted in some of the smaller companies and when they are exercised. Do they sell all their shares? Do they hang on to all or some of them?

That is particularly important in some of the mid- to larger-cap companies. We want to see if they are exercising options and not selling. That is why we are encouraged by what we see at Goldcorp. A lot of the Goldcorp activity is compensation-related acquisitions. It is encouraging to see insiders building their positions.

That said, sometimes insiders have to sell a portion of their compensation-related awards to pay taxes and the exercise costs, depending on the plan. There is no real standard in how compensation plans are structured. It is important to dig down into the details. We like to see insiders paying their taxes or exercise costs and then hold on.

TGR: What are the best ways to use the information INK provides?

TD: Three rules of thumb. First, good things come in small packages. Small companies are where you will get the most bang for the buck following insider activity.

Second, insiders usually go against the flow. They are contrarian. When a stock is falling, it is a good signal if insiders are buying.

Third, sometimes insiders go with the flow. When they are selling when everyone else is selling, that typically is not good news. When they are buying when other people are buying, it is usually pretty good news.

TGR: And four and five would be to follow the CFO and look for multiple executives buying.

TD: Right. Multiple executives buying along with the CFO indicates a good situation, especially if it is real discretionary buying as opposed to stock awards. If we see the CFO and other executives buying during a selloff, we have more confidence in that signal than if it is a single insider.

TGR: Investors in the gold space and the junior gold space have been beaten and battered. Can you leave them with something that might raise their spirits?

TD: For contrarians, the best time, up until now, to buy junior gold miners was November and December 2008. However, in the wake of the recent pullback, our insider indicators are off the charts. The time to start looking for bargains is when everyone has left the room, not when your next-door neighbor is talking about the latest gold stock he or she bought.

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

Ted Dixon is co-founder of INK Research; INK stands for Insider News and Knowledge and is Canada's first online financial news and research service providing investor insight into what public company executives and significant shareholders are doing with their ownership interests. INK is also first in North America to provide a free source of insider trading alerts and reports across both the U.S. and Canadian stock markets. Free INK services are found on CanadianInsider.com and InsiderTracking.com. Dixon has also lectured in corporate finance at the British Columbia Institute of Technology. Before starting INK, he worked at the Connor, Clark & Lunn Financial Group where his responsibilities included portfolio strategy and product development. He has also been an analyst at the Fraser Institute and a treasury specialist at TD Bank. In the early days, he was a floor trader on the Vancouver Stock Exchange. Dixon is a Chartered Financial Analyst and member of CFA Vancouver (formerly The Vancouver Society of Financial Analysts). He holds a Master of Business Administration in financial management from the University of Chicago and a Bachelor of Commerce from the University of British Columbia.

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DISCLOSURE:
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Reportas an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Orvana Minerals Corp., Angkor Gold Corp., Colossus Minerals Inc., Detour Gold Corp. and Goldcorp Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Ted Dixon: 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: 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.
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

http://www.theaureport.com/pub/na/15360

The recent drop in gold prices is a confirmation, or a revelation, to investors of the battle between the physical and paper gold markets. In this interview with The Gold Report, Brien Lundin, editor of Gold Newsletter, predicts the timing of a handoff from Asian physical demand to Western speculative demand and assesses the readiness of the junior market to respond to a revival in commodity prices. Plus, in a tip to Father's Day, he discusses his efforts to groom the next generation of investors.

The Gold Report: In your latest newsletter, you advocate that gold investors pay close attention to the Federal Reserve meeting taking place on June 18. What are you looking for out of that meeting?

Brien Lundin: The main driver for gold right now is quantitative easing (QE). An investor trying to figure out where the gold market is heading in the near to intermediate term needs to focus on QE. Investors should look for clues to the future prospects of the Fed's QE program-that's what's going to drive gold in the short and intermediate term. The question really is: To QE or not to QE? The next Fed meeting will be a prime indicator of that, and the one after that and the one after that.

My general view is that the reports of a resurgent U.S. economy are way ahead of themselves and some data points are indicating that the recovery is not that robust and may even be in danger. The jobs numbers will shed some light on this. If such a scenario develops, then the snap back for gold would be pretty dramatic. A weakening U.S. economy would be bullish for gold because it's bullish for continued QE, and that's the real factor for gold going forward.

TGR: Besides the jobs numbers and the Fed meeting minutes, what indicators are you watching to get some insight into whether the economy really is improving?

BL: People need to listen to the Fed. The Fed is trying to be more open and transparent, despite the typical central banker doublespeak. But it is looking at two numbers right now: jobs and inflation. The jobs number is predominant because every indicator that economists currently use to measure inflation is showing no significant inflation. Now, the consumer price index (CPI) is not the CPI of our fathers, and it has been jiggered here and there to underreport price inflation. Regardless, until we start seeing price inflation in the CPI, the Fed will be more conducive to easing. The unemployment numbers, however, are where we'll see some real action or perhaps some tapering if the unemployment rate starts to improve.

TGR: What's your take on the price behavior in the precious metals markets? Where do we go from here?

BL: I think the big price action that's happened in gold over the last six weeks or so is a big revelation. It has revealed the character of the modern gold market, which has developed into a West versus East or paper gold versus real gold market. In the West, there are speculators who invest in the future exchanges primarily. They are more concerned about the short-term direction for gold and the other precious metals. The future exchanges are really nothing more than an opinion poll on the price of gold. It's not really a place where real metal gets bought and sold but, rather, the futures market is a place to trade derivatives. In a real sense, it is fractional reserve investing.

In mid-April, when we had the big smackdown in gold, over 400 tons sold on the Comex. In a matter of an hour or two the amount of metal sold exceeded, by over 100 tons, the amount of gold in the Comex warehouse. The Comex trading on that day had no relation to the physical markets. Conversely, the price drop resulting from that selloff spurred physical demand throughout the world, but particularly in price-sensitive markets in Asia.

One of the things people looked at throughout all of this was the big drawdown in the exchange-traded funds (ETFs) of physical gold. Since the beginning of the year, the remarkable drawdown in the ETFs amounted to around 370 tonnes of gold. Over that same timeframe, I estimate that more than 600 tonnes of gold have been consumed in China alone. And that doesn't include the huge demand in India or the rest of Asia. It also doesn't include the surging physical demand for gold in the Western markets or the renewed central bank demand. If you add it all up, I think that price smash in April did nothing but increase global gold demand.

TGR: How does an investor get data on increased physical consumption worldwide?

"Reports of a resurgent U.S. economy are way ahead of themselves."

BL: It's tough. I've tried to compile these numbers many times before. You get some information from the World Gold Council. Now, you get some information from the Shanghai Gold Exchange, which, although it's a futures market, represents more of a physical market in China. You look at imports through Hong Kong into China. Indian import data is more difficult. And you have anecdotal reports of demand. The World Gold Council is the only group that actually tries to sum up all of these totals, and it doesn't offer much in the way of real-time information. So it's really tough, but there are seasonal trends that investors or retail investors need to keep in mind.

Unfortunately, although we've had tremendous physical demand providing an underpinning for the market recently, we're entering the seasonal slow period of early to mid-summer for physical gold demand. One of my concerns is that as physical demand lessens, we may see some resulting price weakness in gold.

TGR: That was the commodity, but what about the miners? During this pullback, have most miners mirrored the underlying commodity?

BL: Yes, mirrored and magnified. The good thing about the mining equities is that they tend to leverage the moves in gold and silver. The bad news is that they tend to leverage the moves in gold and silver. In this cycle, as the metals have dropped, the equities have absolutely been lambasted. I tell my readers that there is too much uncertainty in the near term.

The longer-term picture remains very bright for the metals because the world's governments are going to continue to float their economies on an ocean of new liquidity for the foreseeable future. So the fundamental economic backdrop for gold and, ultimately, the equities remains bullish. But in the near term, especially as we get into the seasonal slow period for physical demand, too much risk exists out there. I'm advising people to keep their heads low, be patient and wait for mid to late summer before they make any new purchases.

TGR: It's a little bit of a risk-off trade for the mining equities. Does that mean you are weighted toward producers rather than explorers?

BL: In a very general sense, the producers will benefit much more quickly from a rebound in the precious metals. With that said, there are specific juniors that are hot on the trail of big, new discoveries and/or are expanding discoveries with the drill bit right now. The juniors have always been more of a news-driven sector. So looking at the broad sector, it will take a while for enthusiasm to filter down through the producers, through the majors and down to the juniors, but specific companies could have significant and company-making news in that meantime.

TGR: You mentioned juniors and then producers. One company that has attributes of both that you have followed for a long time is New Gold Inc. (NGD:TSX; NGD:NYSE.MKT). It was a junior several years ago, and grew into a midtier. It recently acquired Rainy River Resources Ltd. Is this the start of a new trend in consolidation in the sector?

"As physical demand lessens, we may see some resulting price weakness in gold."

BL: I hope so, but New Gold is kind of a special case. It's a very well-run, very aggressive company. Our readers in Gold Newsletter have benefitted from that for years, as that company has been one of our recommended producers. It is much more aggressive than the rest of the producer flock, but that's really not saying a lot because nobody has been very aggressive recently. I hope it's the beginning of a trend, but New Gold has always been a bit of a special case. It has been able to move quickly to secure companies and projects that have turned out to be very economic. You see the opposite by some of the larger majors having reached, in the past, too far and too aggressively and paid too high a price for projects that did not turn out to be as economic. I'm very bullish on New Gold, and I do hope it's the beginning of a trend.

TGR: What are your thoughts on silver?

BL: I'm very bullish on silver. Silver offers optionality to gold. Silver equities offer optionality to silver, so you can really get a lot of bang for the buck through some really well-run, well-positioned silver producers.

I like Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ), SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT), Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) and Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT). There is a nice selection of companies out there on the smaller end of the scale, companies that have good, solid production growth profiles.

TGR: Do you have a forecast or an expectation of silver prices?

BL: Not to any decimal places, but silver will track gold. And silver will move more quickly than gold in whatever direction gold is headed. I'm bullish on gold, so I have to be bullish on silver.

TGR: Across the industry, pundits are talking about the death of the junior mining sector. Is the death of the junior mining sector exaggerated?

BL: I don't think the junior sector is dead, although it may be comatose. The thing that will surprise the people who are waiting for further and further levels of capitulation in the junior market is how quickly this market can wake up. I've seen worse days. If you look in the late 1990s and even the very early 1990s or late 1980s, you'll see times when the market was comparatively worse off. In those days, the financing infrastructure was limited relative to where it is today. Since then, capital markets have matured. With the money available from the previous rounds of QE, a lot of money is available to come into the junior market when that market turns around.

TGR: Positives include financial infrastructure, a large investor community, positive fundamentals and money on the sidelines.

BL: Absolutely, but first we need a turnaround in prices to start a rally.

TGR: For juniors, where do you see good risk-reward opportunities now?

"I am targeting the end of July as a good time for investors to come back into the market and pick up some bargains."

BL: I see the best investments in the sector on a case-by-case basis. I don't do a lot of macro-level analysis because once you start off with the big picture, then drill down to a more focused picture and down to the project level, there are lots of places to make false assumptions. Rather than top down, I like to take things on a story-by-story basis and see if a company, particularly in the juniors, has a shot at finding an economic deposit. That analysis is somewhat independent of the global economic picture. A good deposit or a great deposit can overcome a lot of other problems.

With that said, I'm turning more bullish on uranium lately. After looking at that story, I believe that we're going to go into a supply deficit toward the end of this year or early next year. That's a very powerful story that we'll start seeing develop over the coming months.

TGR: The big player in uranium is Cameco Corp. (CCO:TSX; CCJ:NYSE), which has a large majority of the production globally. Apart from it, most of the other players are explorers. Does that mean that you're interested in uranium explorers?

BL: To some degree, as I say, the ones that have very good individual stories. The last time we had a really rollicking bull market in uranium and uranium juniors was about five years ago. They called it uranimania back then, and any company that had some version of the word uranium in its name and its property position could have a $20 million ($20M) market cap. The companies that have survived from then are the better-run companies with the better prospects, and a number of them are in production or are about to get into production. So they are very highly exposed to the uranium price.

Uranium Energy Corp. (UEC:NYSE.MKT) is one, as is Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT). On the exploration front are the Alpha Minerals Inc. (AMW:TSX.V) and Fission Uranium Corp. (FCU:TSX.V) stories. And I think that's going to get much bigger. One of the better stories out there, and a story many are overlooking, is Kivalliq Energy Corp. (KIV:TSX.V).

TGR: You're not concerned, with the names that you just mentioned, that near-term or short-term new production will come on-line to flood the market?

BL: No, I don't think that a big flood of new production will swamp the market, at least not enough to overcome the deficit position. The Highly Enriched Uranium agreement with Russia that's ending this year is going to take 15-20 million pounds off the market and most likely put the global market into a significant deficit position.

TGR: Besides uranium, you like the fundamentals for platinum. Do you want to talk about that?

BL: I cover Prophecy Platinum Corp. (NKL:TSX.V; PNIKF:OTCPK; P94P:FSE). Where else in the world do you have a high-grade, bulk mineable, platinum-palladium project? There isn't one, especially in a geopolitically reliable region. Wellgreen is an extraordinary project; plus, platinum and palladium have positive fundamentals that are tremendously powerful right now. The key to that project is that the preliminary economic assessment (PEA) that came out was good and was economic.

However, the size of the project assumed in the PEA presented challenges. It was neither small and quick to production nor large enough to bring long-term production forward. It was right in the middle and showed a mine life of 37 years. For Wellgreen to work best, it needs to be either much larger or significantly smaller than what the PEA showed. In this market, I think it needs to rework that plan to show it as a smaller project with lower capital expense and, therefore, a much higher rate of return. With that said, it's still very large and still has the potential to grow significantly with this season's drill targets. The deposit has a lot of allure for a major company.

TGR: What would Wellgreen's path to production look like?

BL: Prophecy itself could develop and finance a smaller project focused on some higher-grade starter pit scenarios, and it has gone a long way in trying to identify those starter pits. It could end up joint venturing with a major to develop a slightly larger scenario or it could get sold off to a major for a much larger scenario.

TGR: You also cover several companies with projects in Mexico. What are the highlights there?

BL: Mexico is a great place geologically and a fairly good place politically. The country has a long history of mining and mining laws are well established. The business climate helps companies work and secure land title. Its more streamlined path to production is a great benefit to the smaller producers. Mexico offers a lot of great opportunities and many discoveries are yet to be found.

TGR: Any specific names?

BL: I like Cayden Resources Inc. (CYD:TSX.V; CDKNF:NASDAQ). For a junior, Cayden offers a lot to like, including a good share structure and money in the bank. The company sold a small portion of its project in the Guerrero Gold Belt to Goldcorp Inc. (G:TSX; GG:NYSE) for approximately $16M. That will fund exploration on its primary projects for the next two years. One highlight is the El Barqueño project, which is showing impressive trench results, including 21 meters at 8.3 grams per ton. Cayden should be able to start drilling that target in the near term.

TGR: You also watch companies in the Yukon. The latest Yukon gold rush, which started in 2009, brought high expectations that haven't been fulfilled. Can you give us an update? Are there some exploration opportunities that have stood the test of time?

BL: When the Yukon erupted with Underworld Resources Inc.'s Golden Saddle discovery, Gold Newsletter was the only publication to recommend Underworld, and we did it before that discovery. It turned out to be a very profitable experience for our readers. Along with a couple of other projects, Golden Saddle really ignited a gold rush in the Yukon.

Along the way, there were some speed bumps. People didn't realize how long it takes to develop prospects and get them to drill-ready status. In that environment, the shortened drill season affects project speed-you can only explore one season a year. As a result, development has taken longer, and it is much more difficult than people had imagined. When you combine the slow project progress in the Yukon with the correction in the junior market, the net result is that some companies that have already made discoveries are selling for fractions of what their ultimate worth will be.

One example of this is Kaminak Gold Corp. (KAM:TSX.V) with its Coffee project. At today's prices, it represents real value. Eventually, I believe it will be taken out at a multiple to today's price.

I'm interested in and have been recommending Comstock Metals Ltd. (CSL:TSX.V) as well. I'm a fairly large shareholder in the company. Comstock's project is interesting for many reasons, including that it may be an extension off the same structure as Underworld's Golden Saddle discovery. It had interesting drill results last year. Comstock is following up with its VG zone this year and, hopefully, will be able to advance some of other targets to drill-ready status before the season is over.

TGR: If investors were looking for, in the best possible sense, the next Yukon or the next underappreciated region that has potential to be a world-class district, where would they look?

BL: Let me share some of the key takeaways of going through a few cycles in the precious metals market. One of the things we saw in the early 1990s was the perception of a revolution of freedom across the world. New regions opened to modern mineral exploration. Two examples were Southeast Asia and Indonesia-and then came the Bre-X scandal. Another example was Venezuela-and then came the leftist Hugo Chavez. The Next Big Thing is a moving target. Success breeds, in some cases, envy and expropriation. I stress to investors that they don't need to be pioneers-it's the pioneers who get the arrows in the back. Investors don't have to take on added geopolitical risk when we have well-positioned companies with proven deposits and proven exploration teams that are selling at huge historic discounts.

TGR: Is there anything else you want to say?

BL: Looking at the general market, the concern I have right now is that we're beginning to see speculative demand in the West come back into gold. We're beginning to see some short covering by Western speculators. While that is positive in the short term, we may see a falloff in physical demand as we get into summer. I'm not sure that the strong physical demand that we're seeing now will be handed off in an orderly fashion to the Western speculators. If so, we could have some further weakness in gold going into midsummer. And that's why I am targeting around the end of July as a good time for investors to come back into the market and pick up some bargains.

TGR: I noticed that you have expanded the scope of attendees that you are welcoming to the next New Orleans Conference. As Father's Day approaches, can you talk about this?

BL: A few weeks ago, I was on the phone with Frank Holmes, the CEO of U.S. Global Investors, discussing ideas for the next New Orleans Investment Conference. Frank came up with an idea that hit me like a thunderclap: Let parents bring their kids to the conference for free. I love the idea. This would encourage more attendees to bring along their kids, to show them the benefits of free markets, expose them to the constant threats to their liberty, reveal the hidden dangers of on-going monetary debasement and teach them how to protect their money and freedoms. I'm always searching for ways to expand our unique experience and outlook to younger people who rarely get exposed to the free market ideals that we promote.

We wrapped up the idea as a limited-time special opportunity between Mother's Day and Father's Day, but I decided to extend it through the end of June. And, incidentally, it also applies to children who want to bring along their parents.

Interested investors need to call our offices at 800-648-8411 to take advantage of this special opportunity.

TGR: That's a great way to get the next generation introduced to the investment markets. We look forward to speaking with you again.

BL: Thanks, it was great to speak with you.

With a career spanning three decades in the investment markets, Brien Lundin serves as president and CEO of Jefferson Financial, a highly regarded publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Lundin publishes and edits Gold Newsletter, a cornerstone of precious metals advisories since 1971. He also hosts the New Orleans Investment Conference, the oldest and most respected investment event of its kind.

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) J. Alec Gimurtu 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: Silver Standard Resources Inc., SilverCrest Mines Inc., Great Panther Silver Ltd., Cayden Resources Inc., Prophecy Platinum Corp. and Goldcorp Inc. Uranerz Energy Corp. and Fission Uranium Corp. are sponsors of The Energy Report. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Brien Lundin: I or my family own shares of the following companies mentioned in this interview: New Gold Inc., Fission Uranium Corp., Kivalliq Energy Corp., Uranerz Energy Corp., Prophecy Platinum Corp., Cayden Resources Inc., Kaminak Gold Corp. and Comstock Metals 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

http://www.theaureport.com/pub/na/15354

Commodities may have broken out of a commodity supercycle and could be hitting a cyclical trough. Lisa Morrison, the principal consultant of CRU Group in Philadelphia, analyzes the price outlook for 26 commodities over the next four years and gives them a temperature rating from hot to freezing. In this interview with The Metals Report,Morrison, using this rating methodology, details which commodities she expects to offer the best upside for investors and which to avoid.

The Metals Report: Lisa, CRU recently published a report, "CRU Commodity Heat," which measures the near- and medium-term outlook for 26 different commodities, most of which are mined. How does CRU measure the market heat of these commodities?

Lisa Morrison: We start with the average for each commodity price in the first quarter of 2013 and then we compile CRU's view of the change in price between the first quarter and the annual average for 2013 and then each year through 2017. We do this analysis every quarter.

We categorize commodities according to their anticipated price movements. A hot commodity has an anticipated price increase of 15% or greater, warm is 5% to 15%; mild is 0% to 5%, cool is 0% to -5%, cold is -5% to -15% and freezing is greater than -15%.

TMR: Are there any hot commodities right now?

LM: Looking at the 2013 annual average, we don't see any hot commodities. That's because most commodities have come off of some very high points. The end of last year saw a bit of a crash. The strongest increase that we see between Q1/13 and the 2013 annual average is cobalt.

(click to enlarge)

But looking further out into the forecast to 2017, we see some commodities that could move into the very hot region.

(click to enlarge)

TMR: With so many commodities in the mild, cool, cold and freezing zones currently and in the future, does that mean we could see mines being shut down?

LM: A steep drop in the commodity price certainly could indicate that we have a period coming where strong oversupply means that producers may need to shut down, especially the higher cost ones. If a commodity has been very expensive in the past, meaning its price has been much higher than its cost of production, a steep drop in price doesn't necessarily mean output would be curtailed. It just means that the market is returning to some sense of normalcy. Copper is a good example of that.

Gold is a case where prices have come down quite a bit too, but because of lack of investor interest rather than needing to shut down gold mines. Aluminum is a case where the market is much oversupplied and the commodity is under some cost pressure. We've seen prices come off quite a bit in aluminum, but our heat chart doesn't show prices are going to decrease much further, simply because prices can't fall much more. They've gotten to the point where producers have to start shutting down because of overcapacity.

TMR: Has the lack of heat in your forecast led you to conclude that the market for these metals has hit a cyclical trough?

LM: That is our view on 2013, but by 2017, we're looking at markets that are sending a signal to producers to cut back or maybe not ramp up capacity quite so quickly.

The macroeconomic environment is uncertain. Is China going to pick up? Is the U.S. going to pick up? Is Europe ever going to come out of recession? With so many questions on the demand side, producers are being very, very cautious.

We're probably in the cyclical trough now and I would point to October 2012 as an inflection point. At least in exchange-traded commodities, investors were selling off because they realized that Chinese economic growth was not going to be 9% anymore. It was going to be something more like 7% or 7.5%. There also was a recognition that the U.S. wasn't going to be picking up and that Europe wasn't going to do very well in the coming year. Then, of course, we had another selloff in the spring, in March-April, because, again, the economic growth prospects weren't very good. We're probably in the low period right now. It's hard to say how long cyclical troughs last because they vary by commodity.

Depending on the commodity it takes a longer time or a shorter time to shut a mine or shut an operation. A lot of commodities are sold on contract basis, on a one-year contract or six-month, nine-month, etc. Production happens and continues to happen because an agreed-upon arrangement exists. It takes more than six months for commodities to really respond to lower prices. As for the 2017 outlook, today's lower prices are causing producers to ramp up much more slowly or even cancel new projects. But by the time we get through 2014 and into 2015, we may be back in the situation where we really need more capacity in these commodities.

TMR: What's CRU's outlook on China?

"With so many questions on the demand side, producers are being very, very cautious."

LM: It's easy to feel depressed about China because we've been accustomed to such a fast growing economy, with double-digit industrial production growth. You can't sustain that kind of growth for long. The economy now is going through a transition. If you think about Korea in 2000 versus where it was in 1980, it's a similar situation, but China is a much, much bigger economy. Our view is that China will still achieve strong GDP growth in the 7-8% range over the next couple of years. Industrial production growth won't probably be double-digits except in a very good month or a quarter here and there, but something in the 7-9% range. China still has a lot of infrastructure to build. People will get wealthier and will need and want more and better food. They are going to need more oil and more cars; they are going to want homes and washing machines. Even though the super fast growing commodity story in China may be over, it isn't as if we're getting to a point where China is not going to need commodities anymore.

TMR: Does your view of China lead you to conclude that the commodity supercyle is over?

LM: The commodity supercycle is probably over, but I don't think it's the death of commodities. The supercycle was after all driven by the unexpected strong growth in China and expected weakness of the U.S. dollar. At the same time, the metals and mining industries had gone through a period cost cutting, so there had been no investment in capacity or exploration. As a result, the mining industry was completely unprepared for the large surge in demand from China starting in 1995 and picking up again after the Asian financial crisis, in 1997, 1998, 1999 and the end of 2000, which was a peak period for commodities in general. That was very attractive for investors and that is what promoted the supercycle. Now we are going to see that back off. China's commodity growth isn't going to be 10% year-on-year; it's going to be much smaller. But don't forget that economies with large populations in Asia and in Africa are eventually going to be transitioning as well.

TMR: Do precious metals prices tend to be a leading indicator of a cyclical trough or are they more likely to be some of the last commodities to fall?

LM: Precious metals often function as a safe haven in times of high uncertainty. After the financial crash we didn't know if the economy was going to survive or how we were going to get economic growth. We saw investors very interested in gold and silver at those times. Of course, prices remain very elevated compared to prior to the crash. Precious metals prices certainly seem to be countercyclical and have high demand, both financial and physical, during periods of high uncertainty.

"Although the demand for steel and iron ore may go down and those prices may fall, that shift to something consumer oriented is going to support nickel prices going forward."

We have witnessed a certain amount of selling in gold and silver since the middle of last year. That's because the worst-case scenarios, such as a Eurozone breakup or China sliding into recession, didn't come about. Even President Obama and Congress managed to get past the fiscal cliff. Investors began telling themselves that because the worst didn't happen, they didn't need to be invested in safe havens anymore. That caused a selloff in gold and silver that turned out to be a precursor to selloffs in the rest of the metals space. In that respect they were a lead indicator that the worst of the uncertainty had passed. I don't think you could look at precious metals demand as necessarily a lead indicator for an economic cycle per se. I think they definitely have a role to play during a cycle and may play a leading role again with consumers when things are looking better.

The U.S. economy is on a much stronger footing than it has been since 2006. The U.S. economy has been a nonentity in the story for the last seven years. Our view is that this year we're likely to get 2.5-3% GDP growth, moving to the 3-3.5% range for the next two years. That is even slightly above trend compared to what demographics would give you. The U.S. economy is really looking in much, much better shape than it has been for quite some time.

Don't forget that Japan is going to emerge as well. It's also been an absent actor on the global economic stage. It's a big economy and it's going to emerge from this sleepwalking stage in the next year or so. I think that's very exciting. It's hard for me to be very negative about what I see over the next two years. Maybe the next six months aren't that great for commodities, but over the medium to longer term the outlook is very positive.

TMR: What is your outlook for gold, silver, platinum and palladium?

LM: Our forecast is that the gold price peaked in 2012 and that the good times for gold are pretty much over. We expect prices to come down through 2017. In silver that is also the case. If the interest in gold has peaked, the interest in silver is gone and that price is going to come down a lot faster. I certainly would not want to be holding either one of those for any length of time.

Platinum and palladium are a bit different because they are much more industrial type metals. They are produced in very small quantities in markets with supply constraints. Particularly in palladium, we also have had inventories that were coming out of the former Soviet Union and those Russian stockpiles and shipments are ending. There's no more left there, so we are coming back to the actual private market.

This means producers of palladium now have to increase capacity to meet demand. We're looking for pretty strong price increases-extremely strong in palladium. That's one of the super hot commodities. Going out through 2017, platinum would also fall into that super hot period because it's expected to increase well over 15% over the next five years. We've got lower prices now, but new capacity is going to be needed, so prices will pick-up after 2015.

TMR: What other commodities do you expect will move from neutral into the hot category over the next few years?

LM: We're looking at cobalt, which has had the strongest price increase this year. The best of the price increases are going to be in the very near term and things will slide off after about 2015-2016. Tin also has had some supply constraint problems, so that's going to move into the hot category next year.

Zinc, which is much oversupplied at the moment, is quite likely to move into the hottest commodity category five years from now because the new mines that we are going to need can't be financed at today's prices. With financing as tight as it is, those zinc mines are not going to be started for the next couple of years. It takes quite a few years to bring a zinc mine into production, so we could be looking at a late decade squeeze in zinc.

TMR: What about copper?

LM: Copper prices have been well over $7,000/tonne and have found it quite difficult to break below $6,800/tonne. Copper is likely to be better supplied than it has been for 10 years, so a major shortage going forward is unlikely. Of course, that assumes that the mine supply comes on the way it is supposed to. The mines are coming on in places that traditionally have had some difficulties such as Peru and Africa.

We will probably still see relatively high copper prices, meaning something in the $6,500-7,500/tonne range, to bring on these new mines needed in the next five to seven years to meet demand. Everything in copper hinges on whether or not mine supply comes on as expected.

TMR: Nickel prices have been very weak over the past four or five years; why are you predicting a 41% increase between now and 2017?

LM: Nickel has been punished because it's in oversupply. Supply came on at the wrong time, just when demand was coming off. Demand hasn't really picked up terribly well. In China nickel pig iron is used as a cheaper alternative to pure nickel. This was how China dealt with its shortage of nickel resources and its need for more nickel for stainless steel. Stainless steel is a higher-end commodity. China is shifting from heavy industrial or heavy infrastructure to something that's more consumer oriented and more high-value added. Although the demand for steel and iron ore may go down and those prices may fall, that shift to something consumer oriented is going to support nickel prices going forward. It's really a China story in nickel again.

TMR: How are gold and silver likely to react to the unwinding of quantitative easing in the U.S., Japan and Europe?

LM: If we get a lot of inflation because of the unwinding of quantitative easing, we may not see the drop off in prices that we've forecasted. Our view is that quantitative easing in the U.S. isn't going to start to get unwound probably until the end of next year to any significant extent. It will be done in a relatively gradual way. Unwinding in Japan probably won't happen until well after that because its central bank has institutionalized yet another round of it. It's going to be a gradual process. The winding down will be difficult to time because we can't even get that information out of the Federal Reserve Board at the moment.

As those uncertainties are reduced and things become clearer, then what we do at CRU is look at sentiment in the next year or two and try to figure out how that affects the price forecast. Then, as we move away from year two, we really should revert to the fundamentals of supply and demand in those markets.

We can't really see how the current price of silver is justified given that the lack of massive investor influx to support the price. That's why we expect the price to come down. Gold is a little a bit different, but similar. We look at supply and demand. We look at what investors are doing. Investors have really sold off. The question that you need to ask with gold is what's going to make investors buy again? Or will they keep unwinding at opportunistic times?

TMR: Do you have an answer to your own question?

LM: The only thing I think that would cause people to buy more gold again and to go through another cycle of this massive investor buying would be if it became a commonly held perception that quantitative easing was going to be unwound in a way that was going to cause very high levels of inflation. In that case, all commodity prices would go up, but certainly with gold and silver as safe havens, the demand for them would be even stronger.

TMR: Where should investors be long with mined commodities?

LM: The best prospects for being long over the next year in exchange-traded type commodities are probably tin and palladium. Looking at 2017, economic growth picks up after 2015. We hope that market conditions are more normalized. We should be getting finished with quantitative easing. We should have better market signals. In those cases probably the really good prospects there for exchange-traded commodities are zinc and nickel.

TMR: Thanks, Lisa, for your insights.

Lisa Morrison was a speaker at the Society for Mining, Metallurgy and Exploration "Current Trends in Mining Finance-An Executive's Guide" conference.

Lisa Morrison is an industry analyst in the copper and aluminum markets with the CRU Group, a business intelligence company. She specializes in assessing risks to the short-term outlook and is currently building a research platform to help CRU better predict and model investor behavior in the metals market. She has worked at CRU since 1995 and spent 12 years in the firm's management consulting division working on projects in aluminum, steel and base metals. Prior to CRU, she spent five years at Haver Analytics and before that more than one year at the Korea Trade Promotion Center. Morrison holds a masters degree in economics from New York University and a bachelors in economics from Drew University.

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