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  • John Kaiser's Tips For Escaping The Resource Sector Swamp Alive

    What if the goldbugs are wrong and fiat currency isn't going to throw the world into hyperinflation? What if instead, a steadily growing economy and a new awareness of the importance of having security of supply for critical metals along with a big exciting discovery that heats up the resource sector are what pull sinking gold and silver prices and their related mining companies out of the muck? If so, John Kaiser tells The Mining Report that he has set his sights on a few companies that would star in this horror turned romantic epic adventure.

    The Mining Report: At the Cambridge House Canadian Investment Conference in Toronto, you talked about escaping the resource sector swamp. Why do you call the current market a swamp?

    John Kaiser: There are four key narratives that dominate the resource sector, in particular the junior resource sector. One is the supercycle narrative where a growing global economy catches the mining industry off guard with the result that higher-than-expected demand results in higher real metal prices. That then unleashes a scramble to find deposits that work at these higher, new prices and put them into production. The juniors played an extraordinary role during that cycle in the last decade; however, global economic growth has slowed. Therefore, we are looking at a period of sideways, possibly weaker, metal prices for a number of years, which puts the supercycle narrative on hold. That is one factor keeping the sector in a swamp.

    Another important narrative is the goldbug narrative, where a soaring gold price is going to make deposits much more valuable. We did see that play out. Gold reached $1,950/ounce [$1,950/oz] briefly, but has since retreated 40%. Even though that's still 400% off the low from just over a decade ago, it has turned out to be a wash in real prices. Now, growth projections in the U.S. are having negative implications for the prevailing apocalyptic goldbug narrative. That does not bode well for an escape from the quagmire.

    A third key narrative is security of supply, which we saw manifested in the rare earth [RE] boom in the past five years. However, the RE prices have come back to earth as substitution and thrifting has kicked in. The anxiety that China is going to eclipse the U.S. anytime soon has diminished, and the concern that there will be supply squeezes around the world has diminished.

    The fourth narrative, which has dominated the junior sector for two of the past three decades, is that of discovery exploration. Unfortunately, there have not been many very good discoveries in the past decade that have inspired confidence in the retail sector. Add to that the structural changes in the financial services sector that make it increasingly difficult for junior public companies to source retail investor capital.

    These are the forces that are keeping gold-and junior mining equity-prices bogged down.

    TMR: Let's look at each of those narratives a little bit closer to determine what they mean for junior mining companies. If China's growth is slowing and the U.S. recovery remains hesitant, what does that mean for base metals-copper, nickel, iron and zinc?

    JK: In the last decade, juniors have made a career of picking up deposits found in past exploration cycles and discarded as marginal because the grade wasn't high enough. The juniors did a tremendous job of reevaluating their potential based on new prices and technology. That led to $140 billion [$140B] worth of takeover bids, compared to the $5B per decade in the 1980s and 1990s. These deposits now sit as inventory in the big mining companies.

    That means when we get another price boom, the big mining companies will develop these projects to supply the demand surge, not acquire juniors that claw a new batch of discarded deposits out of the closet. Investors interested in juniors with advanced deposits will have to focus their attention on an existing pool of juniors that will shrink as they disappear through buyouts or mergers with very modest premiums off cyclical market lows.

    TMR: Would you apply that scenario to all of the base metals?

    JK: Copper and iron are the ones that are faced with oversupply in the next couple of years. Nickel is a special situation because it was being oversupplied until Indonesia imposed an export ban on raw laterite ore. The Philippines is contemplating doing something similar. Should this come to pass, then we will have temporary shortages of nickel, and we could see nickel prices going higher. But if Chinese capital builds the capacity to smelt the nickel laterite ore in Indonesia and the Philippines, then we will see weak nickel prices.

    The one metal I think will realize higher prices in the next few years is zinc. That is because major mines have started to shut down, and what is coming onstream is considerably less capacity than what is shutting down. Normally, that doesn't really matter because China has been the elephant in the room, the largest zinc producer. China has nearly doubled its production in the past decade. The prevailing view is that if we get a higher zinc price, China will move quickly to put more mines into production. However, I believe, due to a new environmental focus, the country could actually shut down some of its capacity, worsening the supply situation.

    TMR: Let's go back to your themes. The second one was the goldbug theme. The Federal Reserve is betting that the U.S. economy is good enough to handle rising interest rates as part of a push to jumpstart the global economy. What could this mean for the supercycle we talked about and the apocalyptic goldbug narrative and the companies in the metals space?

    JK: If the Fed successfully finesses the transition from quantitative easing and low interest rates to an economy based on positive real short-term interest rates, then we will see the consumer start to feel more comfortable with the future and spend money. Businesses would then start spending the trillions of dollars they are now hoarding or spending on share buybacks to prop up stock prices.

    If they shift to building stuff again for the long run, which employs people with quality jobs and signals optimism about America's economic future, then the banks become happy and will start lending money to consumers. It creates a virtuous circle where the economy grows organically rather than artificially. This is also good for the rest of the global economy because it will enable emerging markets to hitch their wagon back to the U.S. as a primary export destination and, ultimately, as a flow of capital back to their own economies to fund self-sustaining economic growth.

    A smooth transition to real growth is bad news for the goldbug narrative because if we have higher interest rates and, thus, better yields, that makes gold-which yields nothing-not very competitive. A strong dollar also clashes with the idea that everything is falling apart and, therefore, gold is going to go up due to resulting hyperinflation and fiat currency debasement. But if the Fed is wrong and it merely succeeds in popping a stock bubble and the Dow Jones drops more than the 10-15% that would qualify as a healthy correction, unleashing another asset deflation spiral similar to 2008, then we end up in a very negative scenario for the global supercycle narrative and for the goldbug narrative because gold goes down in a liquidity crunch. Either outcome creates an argument for gold dropping through that $1,180/oz resistance level and touching $1,000/oz on the downside.

    TMR: Are you predicting $1,000/oz gold?

    JK: I see $1,000/oz as a temporary aberration except in the worst case scenario of a global depression. Today 1980's $400/oz gold adjusted for inflation is $1,120/oz, so $1,200/oz is just a 9% real gain. That is sobering when you consider the mining industry extracted 2.3 billion ounces over the last 30 years on the back of gold's big move during the 1970s. As this low hanging fruit got harvested, mining costs rose, even more so than general inflation during the past five years.

    All-in cost estimates average $1,350/oz for new gold, partly due to higher mining costs, but also due to lower grades, more difficult metallurgy and social license costs. A gold price in the $1,000-1,200/oz range implies that the world going forward will be content with the existing 5.4 billion ounce aboveground gold stock plus the billion extra ounces existing mines will produce as they deplete over the next decade.

    As an optimist about global economic growth, I find that hard to believe. If the end of quantitative easing and the arrival of higher real interest rates gives the American economy organic growth legs, rather than sending it into a tailspin that requires the Fed to put it back on life support, it will pull the global economy back into an uptrend with resource-hungry emerging economies with large population bases as the long-term growth engines.

    While your typical North American goldbug owns gold to hedge against catastrophe and a possible capital gain trade, new wealth in emerging nations seeks gold ownership as a form of saving and wealth insurance. This gold is not generally for sale. In my view, global economic growth is a plausible driver for higher real gold prices. The question is how long can gold hang around at price levels where it does not make economic sense to mobilize new gold mine supply?

    What would jumpstart an uptrend in gold is China announcing its actual reserve holdings, which were last reported in 2009 as 1,054 tonnes. Since then China has produced about 2,000 tonnes and because the central bank is the official buyer of domestic gold production, China's official gold holdings are likely over 3,000 tonnes, just behind Germany at 3,384 tonnes. China has also been a heavy importer of gold since its breakdown in 2013, possibly over 1,000 tonnes. That would put China in second place, halfway to America's official holdings of 8,134 tonnes. China sees as the long game the eventual end of the U.S. dollar as the world's single reserve currency.

    For now China is more than happy to see weak gold prices and is unlikely to harm its gold accumulation agenda by updating its official reserve holdings. But if it did, that would make investors think twice about selling the gold they already own and increase demand for more, which would lead to a higher gold price. A shortage could push gold to $1,500/oz without excessive inflation or fiat currency debasement. It would also underpin a new bull market in the juniors, especially if the American economy is back on track and the dominant gold narrative is no longer one that just promises higher gold prices without enhanced mining profitably.

    TMR: It sounds like you can envision a world where what is good for Main Street and Wall Street is also good for the gold miners. Are there some gold miners that maybe are more leveraged to that $1,500/oz gold price and could really benefit?

    JK: Big companies like Barrick Gold Corp. (NYSE:ABX) that have shut down large capital expenditure [capex] projects and unprofitable mines would benefit immediately. Juniors that have done advanced economic study work and are continuing to do feasibility study work would also be able to take advantage of the upside. The share prices have been punished and these companies can now be bought as options on a higher gold price. The risks, of course, are that the company is unable to maintain ownership of the project because of spending requirements or that they are swallowed up by bigger companies during the mayhem that would accompany gold dropping below $1,100/oz.

    Probe Mines Limited (OTCPK:PROBF) [PRB:TSX.V] is working on a PEA for Borden to give us a sense of the economics, something I will be watching closely. Arguably, the best gold discovery in Canada during the past decade was the Éléonore deposit made by Virginia Mines Inc. (OTCPK:VGMNF) [VGQ:TSX]) that Goldcorp Inc. (NYSE:GG) bought for $750M. In a feasibility study published earlier this year, Goldcorp revealed that this project at $1,300/oz gold will have an after-tax internal rate of return [IRR] of only 3% and a marginal net present value [NPV] even though it's producing 400,000 oz per year. At that price, it would take 8 years out of a 10-year mine life to achieve payback of a capital cost of nearly $2B. So there is a lot of concern about the viability of new gold mines. One difference is that Éléonore is in central Quebec and has infrastructure challenges, whereas Probe's Borden deposit is in Ontario next to a highway where infrastructure is already available.

    Probe has shown 1.6 million ounces [1.6 Moz] of high grade and 2.3 Moz of open-pittable low grade with more exploration potential. Probe needs to acquire some key surrounding ground. The market has been waiting for this deal to get done so that it has 100% ownership of the existing deposit and can start chasing the deposit down plunge. In light of weak gold prices, the PEA will focus on a 3,000 tonne per day [3,000 tpd] underground mining scenario that targets the higher-grade gold. Investors get exposure to potential cash flow from gold that can be mined profitability at prevailing weak prices and an option on the impact of a higher real gold price moving the open-pittable resource into the money.

    TMR: Probe just did a $26M funding. How is it planning to use that money?

    JK: A sign of the strength of this story is that even though we are in a very dismal financing market, Probe was able to raise $26M of flow-through money. By definition it has to be spent on exploration. But it still has about $20M of hard dollars left for land acquisition and the new money will be used to delineate the deposit and explore the East Limb project, which could open a whole new area.

    TMR: The property is right next to the recently acquired Cayden Resources Inc. (OTCQX:CDKNF) property. What does that recent deal mean for companies on the same mineralization belt?

    JK: It is nice to see Agnico Eagle Mines Ltd. (NYSE:AEM) pay up to acquire strategic real estate. It tells us that there is an interest in consolidating these districts, including the Cayden property in Mexico.

    TMR: Let's return to the scarcity of supply theme and what that means for companies that mine RE elements and strategic elements.

    JK: In the RE sector, we have seen efforts to mobilize light rare earth [LRE] supply through Molycorp Inc. (NYSE:MCP). LRE prices are almost back to where they started in 2009, meaning that Western deposits are simply not viable. However, heavy rare earths [HREs] are different story. China is still the dominant supplier, but it might be running out. To conserve resources, China could start withholding supply to the rest of the world. Oddly, however, HRE prices have sunk dramatically during the past year and are only about double the levels that they started out at in 2009. As renewable energy becomes a necessity to combat climate change, prices will have to rise for the HREs to play their roles in the renewable energy sector.

    TMR: What other specialty metals do you think would do well under a scarcity of supply scenario? Would tungsten be one?

    JK: The markets have their heads in the sand about tungsten. China is the dominant producer, but much of the resource comes from small mines targeted by regulators for environmental cleanup. Tungsten's use as a hardening metal alloy makes it a war metal, but it is also important for the oil drilling business, which has boomed with the development of tight oil and gas in shale deposits. If the Umbrella Revolution currently playing out in Hong Kong spins out of control, and China ends up withdrawing into itself the way Russia has started to do as a result of its Ukraine intervention, it is conceivable that exports of tungsten could drop precipitously, which would leave the Western world in a bind. This is an outlier but not an implausible scenario. More serious are the risks that China's production from small tungsten deposits may decline through depletion or shutdown for environmental reasons.

    TMR: Do you put scandium in the strategic metals category as well?

    JK: If there was one metal left to have a big manic boom that envelopes both explorers and developers, it is scandium. It's sometimes classified as an RE, but it's really in a separate class as a light transition metal. What it does well is marry with aluminum to create an aluminum-scandium alloy that has a higher melt point than aluminum, is corrosion resistant, is more conductive, is stronger, and allows a weld joint as strong as the material itself. These qualities make aluminum-scandium alloy an important metal of a future where energy costs are higher and the goal is to push materials to achieve much greater energy savings.

    The problem with scandium is it does not concentrate well in Mother Nature. The highest-grade deposit has been in the Ukraine, which the Soviets mined in the Korean War to make fighter jets. For decades, there have been hundreds of patents for innovative uses for scandium, but because there is no meaningful supply, most sit on the shelf. Six years ago enriched laterite deposits with more than 300 parts per million [300 ppm] were discovered in Australia's New South Wales. At today's $2,000/kilogram scandium oxide price, 1,000 tonnes per year output would have a value greater than $1B compared to the $50M value of the 10-15 tonnes eked out as byproduct supply. Of course it might take 10-15 years to develop that level of supply capacity and offtake demand, but money can be made in the pioneers developing this space, which currently consist of several juniors.

    That's similar to the niobium story today. Prior to the 1960s, niobium supply existed only as a byproduct from tin and tantalum alluvial mines in Nigeria and Congo. In the 1950s, it only existed as a low-grade byproduct of other deposits. Then the world-class Araxá deposit was discovered in Brazil and a predecessor to IAMGOLD Corp. (NYSE:IAG) found Niobec in Quebec. These deposits had grades 10 times better than known bedrock resources and offered a scalability that the alluvial mines did not. Niobium's ability to harden steel and raise its melting point made it an important alloy in the Space Age race and is now a $2-3B/year market. Scandium can do the same for aluminum that niobium did for steel.

    TMR: How about a story a little closer to home?

    JK: We are entering a period where getting the public excited about ounces in the ground is going to be a hard sell. It already is a hard sell. In this sort of environment, you need an innovative approach. You need a technology that gives you a shot at finding something that nobody else ever had a chance to find before. The groundwater technology I mentioned that First Quantum is using has been done since the 1950s, but what has changed is that the assay lab detection limits have gone up by several orders of magnitude. Our glasses are finally properly focused to see what has been there all along.

    TMR: We've talked before about the fact that during this downturn, a lot of companies were going to either disappear or be reduced to walking dead on the Toronto Stock Exchange and the TSX Venture Exchange. Is one of the bright spots of the market today that it's easier to tell the good companies from the bad?

    JK: Yes and no. Just under 600 companies out of 1,700 have more than $500,000 working capital and aren't in the big mining company league. Some 300 have between $0 and $500,000 working capital, and about 700 have negative working capital of about $2B. The negative working capital ones are pretty much dead in the water because no one wants to give them real money to replace money that's already been spent. You may find a few companies among them with interesting stories that are worth salvaging. But most of the indebted companies are going to wither away and disappear.

    That leaves about 900 companies with potential to survive. Among those, I gravitate toward the ones that have real management teams-technical personnel who know something about exploration-and projects with a story indicating that the brains of management are actually at work and that they are not just going through the motions of pretending to explore. Some companies are sitting on piles of money where management is collecting big salaries but because they have large shareholders who are treating the company simply as a keg of dry power for extremely bad times, they do not have the go-ahead to do anything along the lines of serious exploration that would risk the capital but also put the company in a position to deliver a substantial reward. One also has to be careful about those companies because they represent opportunity cost.

    But, in general, it is now easier to see companies that are doing something and distinguish those from the rest because the inability to finance and the poor financial condition of most of the resource juniors make it very clear that they have nothing and are doing nothing. There is no reason to invest even a penny in such zombie companies.

    TMR: Thank you for your time.

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

    John Kaiser, a mining analyst with 25-plus years of experience, produces Kaiser Research Online. After graduating from the University of British Columbia in 1982, he joined Continental Carlisle Douglas as a research assistant. Six years later, he moved to Pacific International Securities as research director, and also became a registered investment adviser. He moved to the U.S. with his family in 1994.

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    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
    2) John Kaiser: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the companies mentioned: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over what companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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  • Must Read: Top Companies Adrian Day Sees As Stable In A World That Is Not

    Fund Manager Adrian Day has a ready answer for investors wondering why the gold price has been so depressed. It is the strength of the dollar. The Bank of Japan can act like a drunken sailor buying bonds at negative interest rates and the European Central Bank can do all the quantitative easing it wants, but as long as the dollar remains high, the gold price will suffer. That is why in this interview with The Gold Report, he focuses on a handful of companies that can remain stable at almost any price.

    The Gold Report: Gold has been bouncing around $1,200 an ounce [$1,200/oz] for a while. Why?

    Adrian Day: Until the dollar shot off like a rocket in July, gold had been up and down, perhaps disappointing some people. It closed the second quarter at significantly over $1,300/oz. Since then, both the euro and the yen have fallen and that has affected the price of gold. The concerns about tightening by the Federal Reserve are grossly overblown, however. The number one effect on the price of gold is the dollar.

    TGR: Is there any hope on the horizon for the gold funds?

    AD: Hope is not an investment strategy. But, yes, there are quantifiable reasons for hope. Number one, monetary policy around the world remains easy. The European Central Bank [ECB] is talking openly about instituting a quantitative easing [QE] policy. As you know, the ECB is prohibited from directly buying government sovereign bonds, which is the way that most central banks effect easing policies. The Federal Reserve buys treasury notes. The Bank of Japan buys Japanese government bonds and so on. The ECB is prohibited from doing that; it must use other means to pursue easing.

    TGR: What did Japan do?

    AD: The Bank of Japan is acting like a drunken sailor on a Friday night. It actually bought government bonds at negative interest rates, which is a first!

    In the United States, the Fed is going to end its tapering policy by eliminating $85 billion a month of bond buying. Nonetheless, monetary policy in the U.S. remains easy. Short-term real interest rates are negative. Recently, the Fed said that it expects real short-term interest rates to continue to be negative through the end of 2015 at least. That is actually a strong bullish factor for gold. Technically, we came close to the support level around $1,180/oz. We have not yet broken through that support; this is the level from which gold has bounced three times in the last year.

    The main determent for the gold price at the moment is the dollar. I am not optimistic on a dollar drop in the near term. The dollar is fundamentally overvalued based on a purchasing power parity basis, which is the way most people value currencies. It is overvalued by as much as 20-30% against most of the Asian currencies. That means that the Asian currencies are undervalued.

    Fundamentally the dollar needs to drop.

    The irony here is that the geopolitical tensions that one would have expected to help gold have actually helped the dollar and, therefore, hurt gold. Physical demand for gold in China remains strong. Imports from Hong Kong have declined this year. At the same time, an increase in Shanghai Exchange deliveries has partly offset that. This year will be the best year on record for Chinese demand, other than 2013's extraordinarily strong year. Indian demand has started to pick up again after the elections. Middle East buying has been extremely strong in recent weeks. In the rest of the world, outside of Western Europe and North America, physical demand is strong. Fundamentally, the gold market is quite strong.

    The one big negative is the dollar.

    TGR: As an investor in gold juniors, do you prefer explorers or producers?

    AD: I like a combination. It is ironic that conservative investors go for the bigger, well-known names, but these are not necessarily the best names to buy. Gold mining is an incredibly tough business. It is made worse by the actions of governments, NGOs and environmentalists. But the majors are always in need of more gold.

    A large mining company, such as Barrick Gold Corp. (NYSE:ABX) or Newmont Mining Corp. (NYSE:NEM), mines 5 million ounces [5 Moz] a year. These companies need to find 5 Moz/year just to keep flat. That is not an easy task. During the last 25 years, there has been a sharp decline in the number of large gold discoveries. The senior companies were forced to acquire existing mines and companies. A couple of years ago, large firms were making really idiotic acquisitions at silly prices.

    TGR: Why were they overpaying for non-economic mines?

    AD: Spending on gold exploration has gone up eightfold since 2000, and yet the mines are not being found. Mining company executives are mentally no different from retail investors. Gold investors have a bias toward thinking that the price of gold is going up. No company wants to shrink. When gold went to $1,900/oz, mining companies believed that the gold price would only go higher. The thinking was this expensive mine is not economic now, but at $2,500/oz we will be looking for reserves. The mine will be profitable then. One should also point out that cheap money policies from the Federal Reserve, including ultra-low interest rates, facilitated these acquisitions.

    TGR: Have there been any good bargain juniors in the past few years?

    AD: Pretium Resources Inc. (NYSE:PVG) has given us many good opportunities for profits. It's a good buy again at $5/share. The market rewards discovery.

    Reservoir Minerals Inc. (OTCPK:RVRLF) [RMC:TSX.V] had a fantastic discovery two years ago in Serbia. Its stock price went from under $0.50 to $4.20 today.

    Another great discovery success has been Virginia Mines Inc. (OTCPK:VGMNF) [VGQ:TSX]. Its first major discovery was the Éléonore, about nine years ago. Virginia Mines kept a royalty on Éléonore when it sold the mine to Goldcorp Inc. (NYSE:GG). That royalty drove Virginia's stock price from $5 in 2009 to $13 today. That certainly bucked the trend!

    TGR: What is driving Virginia Mines' rise?

    AD: Virginia Mines has strong, competent, honest and disciplined management and a very solid balance sheet. The company has kept around $40 million [$40M] in cash for the last several years. It does not have to go to the market for funds.

    That is a key thing to look for in a junior. Does it have enough money to carry out its plans? When will it need to go back to the market? If a company needs to go back to the market constantly, the stock price has trouble moving up because everybody knows there will be another offering soon. This was not the case with Virginia. The royalty on Éléonore will be very profitable over many years. You only had to listen to Goldcorp's conference call every quarter to know how keen Goldcorp was on that property.

    TGR: What is the outlook for Éléonore?

    AD: Goldcorp has just poured its first gold at the mine. There will be a ramp up period of course. The current plan is for 600,000 oz/year for 17 years. Virginia's royalty starts at 1.5%. Assuming the gold price stays where it is or moves up, by about year four, we expect Virginia to be getting a royalty at the 3.5% rate, which is a very attractive royalty.

    TGR: What about mixed gold, silver and copper plays?

    AD: Some of the best gold deposits are mixed deposits. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) has the Grasberg project, which is the second largest gold mine in the world. Yet nobody thinks of Freeport as a gold company any more.

    Almaden Minerals Ltd. (NYSEMKT:AAU) has both gold and copper projects in Mexico.

    TGR: What is the story with Almaden?

    AD: Almaden's managers are strong, honest folks. Duane and Morgan Poliquin run the company. Duane, the father, has several discoveries to his credit. The firm's balance sheet is great. Almaden has about $13M in cash plus some gold bullion. And its business plan to function as both an explorer and a producer works.

    A few years ago the Poliquins discovered the Ixtaca deposit in Mexico. The preliminary economic assessment [PEA] showed good economics. The major problem was the capital expenditure [capex], which was high for the size of the deposit. Since the PEA was issued, Almaden has continued to explore and build up the Ixtaca resource. The bigger the deposit, the more the capex can be spread over more ounces. Almaden is also working on bringing down the capital costs. Its amended PEA for Ixtaca already shows lower capex costs. The prefeasibility study should be out during the summer of next year. At $1.30 per share and a less than $100M market cap, Almaden is a good buy.

    TGR: What other stable gold firms do you have on your plate?

    AD: That depends what you mean by stable. Stable firms are different from stable stock prices. There are very few companies with a stable stock price at this time. I look for companies with solid balance sheets that do not need to keep raising money; that is at major risk from these current gold prices.

    For stability, I like royalty companies, Franco-Nevada Corp. (NYSE:FNV) and Royal Gold Inc. (NASDAQ:RGLD). Franco has a stronger balance sheet, a broader spread of revenue-producing properties, but both Franco-Nevada and Royal Gold are good, solid companies. Both are stable and available at good prices. Franco has $600M and no debt, after paying nearly $650M for a gold stream from the Candelaria copper mines. Its cash flow at the current price of gold is $400-450M a year.

    In fact, none of its major producing royalties are at meaningful risk to the price of gold unless it were to drop under $900/oz. To me this is the definition of a stable gold company.

    TGR: What will it take to return gold to its golden days?

    AD: First of all, let's not forget where the price of gold was a decade ago: $250/oz. It has done very well to be "stuck" at $1,200/oz. The number one thing for gold is the dollar, particularly in the near term. The dollar has to turn. What is going to make that happen? Several Asian currencies are slowly, but steadily increasing in price. I do not see much increase from the euro or the yen, though.

    The strong dollar is quite a headwind for the U.S. economy and for the Fed's plans to slowly back out of QE. Several Fed officials are now expressing concern about the strength of the dollar. If we see several weak economic reports in the next few months, the Fed is going to make noises about continuing to ease. That would push the dollar down and push up the price of gold.

    TGR: Thank you for your time, Adrian.

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

    Adrian Day, London born and a graduate of the London School of Economics, heads the eponymous money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the new EuroPacific Gold Fund (MUTF:EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."

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

    DISCLOSURE:
    1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) Adrian Day: I own, or my family owns, shares of the following companies mentioned in this interview: Franco-Nevada Corp., Royal Gold Inc., Reservoir Minerals Inc., Virginia Mines Inc., Freeport-McMoRan Copper & Gold Inc. and Goldcorp Inc. In addition, clients of Adrian Day Asset Management own shares in all companies mentioned herein. 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 determined and had final say over what companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.
    3) The following companies mentioned in the interview are sponsors of Streetwise Reports: Almaden Minerals Ltd., Virginia Mines Inc. and Pretium Resources Inc. Franco-Nevada Corp. and Goldcorp Inc. are not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert can speak independently about the sector.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Oct 13 2:38 PM | Link | Comment!
  • David Morgan's Secret To Being Grateful, Even At $17 Silver

    Manipulation and apathy can't keep silver prices down forever; there is too much demand and too much money sitting on the sidelines. In this interview with The Gold Report, Silver-Investor.com Editor David Morgan tells us why he is grateful for his balanced approach to investing and life. He also explains why he is still excited about four developers that are moving projects forward at any price.

    The Gold Report: A recent GFMS/Thomson Reuters Silver Institute World Silver Survey shows that while the price of silver dropped 23.6% in the last year, there was actually an increase in demand, particularly from China and India. Why is the price so low when the fundamentals seem to point otherwise?

    David Morgan: As the survey shows, there was a deficit of silver, which means fundamentally the price should be higher. But real prices are determined in the paper markets and the pressure there has been downward.

    Additionally, the large physical silver holding companies-Sprott Physical Silver Trust (NYSEARCA:PSLV), Central Fund of Canada (NYSEMKT:CEF) and the Zurich Cantonal Bank, the silver ETF-have not purchased any quantities of bullion in quite some time. That begs the question of why these big, traditionally bullish entities aren't stepping in at these low silver prices.

    The other question investors are asking is, "When is this going to turn around?" They get depressed and say, "I can't win because the manipulators always win. It's pointless to be in this market." That mindset has taken hold of a lot of people who were once very bullish in the silver market.

    This is all proof that we're very close to the bottom, if not at the bottom. When sentiment is this low, people become fearful. As Jim Dines says, the cure for low prices is low prices. It won't go on forever, even though it may seem that way now.

    TGR: What price are you using for silver when you evaluate companies? Do you pencil in what the fundamentals say the price should be or the psychologically beaten down price of the paper market?

    DM: We go with the market, which right now is saying $17 an ounce [$17/oz]. The market cannot be argued with; the price is what it is. Regardless how it got there, manipulation or not, it is what it is. We use the 90-day average price because it's a standard in most industries and tends to smooth out the fluctuations. We might not agree with what the market is saying, but that's immaterial to our analysis. Our analysis has to be based on what the market is showing.

    TGR: Is there a tipping point where the silver price is so low that even non-silver bugs start to see it as an entry point and come into the market?

    DM: There are plenty of people, including money managers, who understand that this is a great price. They are just waiting for the right moment to bite. It usually starts with someone nibbling at the market and starting to accumulate. Or, someone sells aggressively to test the market for the absolute low. The Rothschilds were notorious for this type of market test and probably the first to do so in a manner that the public became aware of such tactics. They sold something they wanted to buy to force the price down so they could start accumulating at the very bottom. Either way, there will come a point where savvy buyers will start accumulating again.

    TGR: Do those sorts of tests happen in the silver market more because it's smaller and more volatile both on the upside and the downside?

    DM: I wouldn't say that kind of market activity happens more frequently, but I would say it's more effective in the silver market because it doesn't take a lot of selling or buying pressure to move the market. It would be more difficult to have the same impact with a large, liquid stock like Google Inc. (NASDAQ:GOOG), for example.

    TGR: Is there a tipping point where the silver price is so low that companies can't afford to produce it?

    DM: Yes and no. The reality is that there are actually very few pure silver operations. As much as 70% of the silver produced is an offtake of mining for base metals. These producers really don't give a hoot about the price of silver. As long as they're making money in copper, lead and zinc, they don't pay attention to the silver price. They will keep producing no matter how low the silver price goes.

    Even primary silver producers are reluctant to turn off the lights temporarily when they are working at a loss. I figure the average all-in sustaining cost per ounce, including taxes, is $23/oz. That makes selling for $17/oz unsustainable. But in the long run, operating minimally at a loss for a few months actually makes more sense than halting production. There are many reasons. Customer and employee contracts would result in big fines if not fulfilled in some cases. Also, keeping the wheels turning is important because mines deteriorate rapidly. A lot of them have to be dewatered, monitored for structural integrity and generally maintained. It actually might cost more to shut down and restart later than run it at a loss for a year as an example.

    TGR: Is high grading taking some of the edge off that loss? Is that going to have an effect a couple of years from now on the number of Indicated resources left when prices are higher?

    DM: Any company that has the ability to high-grade right now is doing it to squeeze out any profit possible. Some companies are in a better position than others. When gold was $1,900/oz, some mined the lower-grade ore that cost them, for example, $1,600/oz all-in costs and took that profit, leaving the $1,100/oz or lower higher grade for a rainy day when margins are tight, such as what we are experiencing now.

    The general trend, however, has been toward lower grade resources. We have a finite planet and the easy stuff is targeted first. It's true in oil, it's true in metals. The grades being mined now are grades that were not considered worth mining three decades ago. But there is very little high grade left, so companies go after whatever can be done profitably.

    TGR: With prices at this level, are fully funded developers in a better situation than explorers or producers?

    DM: Some developers are in better situations than explorers and producers. This, however, is always the case as the quality of an asset typically goes hand-in-hand with the ability to raise financing. One developer we are quietly bullish on is Bear Creek Mining Corp. (OTCPK:BCEKF) [BCM:TSX.V], as we think the government of Peru will return the Santa Ana project in full.

    We also still like Trevali Mining Corp. (OTCQX:TREVF), which is technically a zinc-lead-silver producer but has plans to bring on several new mines over the next three years, starting with the Caribou mine and mill in New Brunswick in 2015.

    Zinc is going to be in short supply in the next few years. A number of large zinc mines will be closing down in the near future and there will be a deficit of a material that is used in everything from gutters and electrical appliances to galvanizing steel. It may not be as sexy as silver, but it is important to our everyday lives and pretty soon there won't be enough of it to go around. The Morgan Report saw that a few years ago and picked Trevali as the best way to leverage that trend.

    Another great example of a developer being in a better situation than many explorers and producers is Guyana Goldfields Inc. (OTCPK:GUYFF) [GUY:TSX], which is now fully funded for construction of the Aurora project in South America. It was able to secure the proper financing rather easily because the quality of its asset.

    The new Mexican royalty tax has taken a toll on all mining companies in 2014. Other premier, low-cost producers such as SilverCrest Mines Inc. (NYSEMKT:SVLC), First Majestic Silver Corp. (NYSE:AG) and Fortuna Silver Mines Inc. (NYSE:FSM) have also been negatively impacted, with all-in costs increasing in 2014.

    TGR: Last time we chatted, you talked about the benefits of royalty companies. Have they been able to maintain profits in this environment? Are some doing better than others?

    DM: Royalty companies have seen profits fall, but far less than mining operators. This has to do with production growth making up for lower metal prices. Some royalty companies are doing better than others, but we are really only talking a few.

    Silver Wheaton Corp. (NYSE:SLW) has significant organic growth taking place with Goldcorp Inc.'s (NYSE:GG) Peñasquito silver mine in Mexico finally operating close to capacity. Plus, Vale S.A.'s (NYSE:VALE) Salobo copper mine expansion in Brazil is ramping up. Add to that Goldcorp's San Dimas mine minimum threshold increasing from 3.5 million ounces [3.5 Moz] to 6 Moz. In addition, Hudbay Minerals Inc.'s (NYSE:HBM) Constancia project in Peru should reach production in the fourth quarter. Silver Wheaton has just begun to see its next phase of growth.

    Franco-Nevada Corp. (NYSE:FNV) has its sights set on something big. That is why it just raised $500 million in equity financing when it already had more than $1 billion in the bank. Long term, the largest and most valuable stream comes on-line with First Quantum Minerals Ltd.'s (OTCPK:FQVLF) [FM:TSX] Cobre Panama copper production start in 2018.

    Royal Gold Inc. (NASDAQ:RGLD) is witnessing a huge growth spurt from its cornerstone asset, a 52.25% gold stream on Thompson Creek Metals Co. Inc.'s (NYSE:TC) Mt. Milligan copper-gold mine in British Columbia. Beyond that, there are no sizeable assets in the pipeline with the exception of Barrick Gold Corp.'s (NYSE:ABX) controversial Pascua-Lama project in Chile. Still, Royal Gold has ample liquidity and could take advantage of new opportunities from companies that need help moving projects forward.

    TGR: As companies are cutting costs, are some parts of the world more attractive than others?

    DM: Absolutely. The Frasier Institute publishes a Survey of Mining Companies each year that assesses things like taxes and regulations all over the world. Mexico was at the top of the list for some time, but the new mining tax there bumped it down. I also like Chile and Peru. What I really like are conglomerates that are spread over a number of geographic locations. For instance, Pan American Silver Corp. (NASDAQ:PAAS) has mines in lots of jurisdictions. If there is a problem with a mine in Peru, the investor is protected because the mine in Mexico is still viable. Billion dollar market caps are safer partly because of the diversified jurisdictional risk.

    TGR: You are going to be speaking at the Cambridge House Silver Summit in Washington this month. What words of wisdom do you have that will help put things in perspective at a time when a lot of investors are feeling stressed?

    DM: First, people need to keep in mind that prices go up and down in all markets. Second, know that the fundamentals of owning precious metals have not changed. Third, remember why they bought the metal in the first place. And lastly, ensure that they are diversified properly, meaning they need to own the right amount of physical metal for their age and objectives. We don't advocate 100% or even 80% allocation to precious metals. But we want the money investors to put into the sector to be profitable, and that is why we specialize in sharing information about this sector.

    A couple of years ago when silver prices had similarly dropped before bouncing up again, I talked at the Silver Summit about being grateful that I even have a portfolio to worry about. I shared some statistics on how the average American lives compared to the average citizen of the world. It was a reminder to myself and the audience that sometimes we get too focused on the monetary aspects of our lives.

    Money is important, but it needs to be put in the proper place. There is more to life than how much money you can make. Nature preaches balance and when things get out of balance, it has a way of bringing them back into equilibrium. This is most evident in the natural resource sector. We're acting as if the earth is income rather than capital. The result is that we are using up our base capital in the form of forests and water and metal and not replacing them. That is unsustainable. I'm afraid we are going to pay a high price for that. We need to live within our means rather than getting all we can. It's more about what you can contribute, maintain and sustain than who has the most toys.

    TGR: Thank you for sharing that.

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

    David Morgan [www.Silver-Investor.com] is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of "Get the Skinny on Silver Investing" and a featured speaker at investment conferences in North America, Europe and Asia.

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

    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
    2) David Morgan: I own, or my family owns, shares of the following companies mentioned in this interview: Trevali Mining Corp., Pan American Silver Corp., Silver Wheaton Corp. and Franco-Nevada Corp. 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: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over what companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.
    3) The following companies mentioned in the interview are sponsors of Streetwise Reports: Trevali Mining Corp., Guyana Goldfields Inc., SilverCrest Mines Inc., Silver Wheaton Corp. and Fortuna Silver Mines Inc. Goldcorp and Franco-Nevada Corp. are not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert can speak independently about the sector.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Oct 08 2:36 PM | Link | Comment!
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