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  • Five Mining Companies Joe Reagor Believes Are Ahead Of The Curve

    ROTH Capital's Joe Reagor believes that the price of gold will rise as confidence falls in the value of the U.S. dollar. In the meantime, several companies with great assets are struggling to raise financing and are thus considerably undervalued and possible takeover targets. In this interview with The Gold Report, he highlights three juniors and two mid-cap producers that are flying under the radar of investors.

    The Gold Report: What's your gold price forecast for the rest of 2015?

    Joe Reagor: For the full year, our average price is $1,260 per ounce [$1,260/oz]. If the U.S. dollar were to remain steady and not strengthen, gold could reach $1,300/oz by year-end.

    TGR: Gold was sold off heavily in the last week of April based on an anticipated interest rate hike by the Federal Reserve. Should the Fed actually raise the rate, how much of a negative effect will that have on gold and for how long?

    JR: It is commonly believed that rates will rise because the U.S. economy is improving, but we keep getting mixed signals. The most recent jobless claims were exceptionally good, but the Q1/15 GDP increase was only 0.2%. If we see a stiff rate increase because the Fed thinks the economy is strengthening, that could be bad for gold. Should the Fed choose to raise rates slowly over time, giving it the option to lower rates again if need be, I don't think that's bad for gold.

    TGR: Some people believe that a stiff rate hike would spook the market and cause an equities crash. What do you think?

    JR: I doubt the Fed would move on that without first providing a cushion to the markets. Should a rate hike spook the market and force the Fed to quickly lower rates again, I think gold would move higher quickly.

    TGR: Is it possible an interest rate hike has already been priced in to the price of gold?

    JR: The expectation of rate hikes is definitely priced into gold inherently through the strength of the U.S. dollar, as compared to, say, Europe, which has been forced to introduce further quantitative easing.

    TGR: The World Gold Council [WGC] 2014 survey showed continuing strong demand for physical gold both from Asian consumers and central banks. Do you think this trend will continue?

    JR: Definitely. The WGC's Q1/15 survey demonstrates that this trend is continuing. We believe that China will maintain its position as the world's largest consumer of gold as a store of value, with India as the largest consumer of gold for jewelry.

    TGR: Over the past year Russia has bought more than $7 billion [$7B] worth of gold bullion. Its total gold holdings of 1,208 tons are worth $49B, making it the world's fifth-largest holder. Some suggest that Russia and China are working in concert to use gold as part of a strategy to shift economic power from the U.S. to this rival axis. Is there any credence to this?

    JR: I believe Russia and China would prefer that the U.S. dollar not remain the world's reserve currency, which would shift the dynamics of the pricing of many commodities, not just gold. Exactly how they intend to accomplish this is not certain, but there's no question that this pushback against the U.S. dollar has the support of many countries.

    TGR: Shouldn't rising physical gold demand force higher gold prices?

    JR: The contract [or paper] gold market is significantly larger than the physical gold market. So an increase in physical demand doesn't necessarily result in enough of a total increase in gold demand to force higher prices in U.S. dollars.

    Outside the U.S., the value of gold in other currencies is up almost 20% already this year, which should result in better margins for non-U.S. producers. Should the U.S. dollar weaken by, say, 10%, that would move the gold price up to around the $1,300/oz we're predicting for year-end 2015. Beyond that, we believe that rising marginal production costs could drive gold to $1,450/oz.

    TGR: What are your forecasts for the prices of silver and zinc for the rest of 2015?

    JR: We expect a gold-silver price ratio of 70. Based on $1,300/oz gold, that would mean a silver price of about $18.50/oz.

    Our zinc forecast is a conservative $1.15 per pound by year-end. We believe there could be a serious zinc shortage by 2016. MMG Inc.'s [1208:HK] Century mine in Australia, which alone produces 4% of world zinc, will close shortly. Already, the London Metals Exchange [LME] zinc inventory has fallen from 1.2 million tons two years ago to under 500,000 tons [500 Kt] today.

    TGR: Given that silver is easier to buy and store than gold, could a decline in confidence in the U.S. dollar lead to the gold-silver ratio falling toward lower historic norms?

    JR: Perhaps over time the ratio will move to 65 or 60, but I doubt that we will see a return of 2010-2012, when it was below 50. The recoverable ratio of silver to gold in the average deposit discovered today is now closer to 80. This is due to significant recent improvements in silver recovery rates that have not been matched by gold recovery rate improvements, which came decades earlier.

    TGR: Can we expect an increase in the number of pure-play silver companies?

    JR: Not without sustained higher gold and silver prices. Miners generally are moving away from pure plays in order to lessen the impacts of swings in the prices of precious metals. In recent years, a number of big silver producers have made gold asset purchases and have built mines with strong base metals components so they can operate even in down markets.

    TGR: Which Canadian juniors with near-term gold projects are your favorites?

    JR: Pretium Resources Inc. (NYSE:PVG) is more of a mid cap, but because it is in the development stage and doesn't have revenues, we put it in the junior basket.

    TGR: Pretium has reached two milestones this year: permitting approval of the Brucejack project by the British Columbia government and the signing of a cooperation and benefits agreement with the Nisga'a Indian band. How do these events affect their valuation?

    JR: Pretium has derisked its asset but still has two hurdles remaining. The company needs federal permitting, which is expected to take 150 days from the receipt of the environmental permits, and it needs to complete the financing process. Part of the reason we like this company so much is that it is now so close to the finish line.

    There has been an overhang on Pretium's valuation since Strathcona Mineral Services stepped away during bulk sampling in October 2013.

    TGR: The Brucejack deposit has been characterized as "nuggety," which is often hard to understand. Has Pretium demonstrated greater confidence in the quality of its resource since 2013?

    JR: When Strathcona stepped away, Pretium was only 2 Kt into a 10 Kt bulk sample. The remaining 8 Kt came in above expectations and demonstrated that Brucejack does have significant gold-production capabilities. Pretium got 5,800 oz gold out of 10 Kt, and its target was only 4,000 oz.

    Brucejack is not "nuggety" in the sense of how we understand that term in the U.S. and Canada. The deposit structure is more similar to that which we see in islands in the Pacific Ocean, which makes sense because geologists tell us that part of British Columbia was an island before it joined the mainland. Brucejack has high-grade veinlets and thus manifests quite variable gold grades. There will be pockets with a low-grade halo and then a spike of visible gold will appear.

    TGR: How does Pretium propose to deal with this variability?

    JR: By employing large-scale bulk mining in order to capture all the gold.

    TGR: Brucejack will require a capital expenditure [capex] of $747 million [$747M]. How does Pretium intend to raise it?

    JR: The company raised CA$81M in equity in January. We expect that the rest will be raised through a combination of bank debt and a gold-streaming agreement, perhaps 50% bank debt and 25% gold streaming, which wouldn't leave much in the form of equity to be raised. We're pretty confident that we'll see that in the next two to three months.

    We would also note that because of the weakness of the Canadian dollar, the capex might be reduced by as much as 20% in U.S. dollar terms.

    TGR: When do you expect Brucejack to begin construction and then production?

    JR: Should Pretium break ground in July, that would put it on a timeframe of Q1/17 for first production.

    TGR: Is Pretium a takeover target?

    JR: We don't really expect this unless it was to happen before financing is completed, and that's expected pretty soon. To buy Pretium and develop Brucejack would cost about $1.5-1.8B all told, and that would be a big risk for a major to take on in this environment.

    TGR: Would you name a mid-tier gold producer you think is underappreciated by the market?

    JR: IAMGOLD Corp. (IAG) has not gotten credit for its improvements.

    TGR: How specifically has the company improved?

    JR: First, IAMGOLD sold a niobium mine for $500M. This put the company in a net cash position for the first time since 2013. There is no longer any worry it could be forced into bankruptcy when its debt came due assuming the cash is used to repay debt. The company is considering using some of this capital to finance acquisitions or potentially to buy out some partners on smaller-scale assets. Our preference would be that IAMGOLD uses the majority of the half-billion dollars to repay debt, and I expect it to make a decision to do so by the end of 2015 or early 2016. This would fundamentally strengthen the company.

    The second way the company has improved is by reducing costs at the majority of its mines. That puts IAMGOLD in a much better position to be sustainable at low gold prices, but because it is also somewhat of a higher-cost producer, it still has significant leverage in a gold price recovery.

    TGR: What are its prospects for growth?

    JR: Mostly through the expansion of existing assets over the next two to three years.

    TGR: Do you see IAMGOLD as a takeover target?

    JR: I don't think the company is a takeout target because its management team is a bit different from the norm. They're more from the energy sector and so they don't have the usual personal connections with other companies in this sector.

    I think IAMGOLD's management is more concerned with delivering value to shareholders. On the acquisition side, I think a smaller-scale buy would be viewed as a positive by the market. There has been some speculation about larger asset purchases, but I think that's a bit more than the company can afford to bite off at this time. And I think IAMGOLD knows this.

    TGR: Agnico Eagle Mines Ltd. (AEM) has bought three companies in the last two years at very attractive prices. Should miners strike while the iron is hot, and valuations are low?

    JR: Some of the smarter companies with very strong balance sheets-and Agnico falls into that category-are buying up earlier-stage assets that are far enough along so that there is a vision of how long it will take to get them into production and what their potential returns are.

    The vast majority of people expect that over the next two to three years there should be a substantial recovery in gold prices. So Agnico is trying to be ahead of that curve, as are some other mid caps. I don't see this sort of thing coming as much from the majors, however. A lot of them did their buying at the top, and their balance sheets aren't as clean as they once were.

    TGR: A great many investors in gold equities fled after the price of gold fell from over $1,900/oz to almost $1,100/oz. Does this smaller market mean more bargain companies with greater leverage?

    JR: Yes, there are some bargains out there. But I think it will take a catalyst of some sort for investors to return to the market. I've heard repeatedly that many investors believe certain spaces are a bit frothy now, and if we see a pullback in some of them, capital would be freed up to invest in mining as an alternative in longer-term portfolios.

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

    This interview was conducted by Kevin Michael Grace of The Gold Report and can be read in its entirety here.

    Joe Reagor is a research analyst with ROTH Capital Partners, providing equity research coverage of the natural resources sector. Prior to ROTH, he worked in equity research at Global Hunter Securities and at Very Independent Research, covering a wide array of resources companies including metals [steel and aluminum], mining [gold, silver and base metals] and forest products [containerboard, OCC, UFS and pulp]. Reagor earned a Bachelor of Arts in economics and mathematics from Monmouth University.

    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 Interviews page.

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    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report and provides services to Streetwise Reports 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 Streetwise Reports: Pretium Resources Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Joe Reagor: I own, or my family owns, shares of the following companies mentioned in this interview: Agnico-Eagle Mines 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 determined and had final say over which 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.
    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.
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    May 11 3:24 PM | Link | Comment!
  • Chris Mancini's High-Quality Gold Miners That Have Positioned Themselves Well In The Downturn

    Chris Mancini, an analyst with the Gabelli Gold Fund, is confident that gold's day will come, perhaps as soon as 2016. He argues that the decline of confidence in paper currencies is inevitable and that the Federal Reserve is fast running out of ways to prop up the U.S. dollar. In this interview with The Gold Report, Mancini advises investors to go for the best of the best: gold miners with cash flow, great balance sheets, low costs and good management. And he also highlights several companies that are unloved now but will become so when the gold price rises.

    The Gold Report: The U.S. Federal Reserve has downgraded its forecasts for both economic growth and inflation. That being the case, why would it raise interest rates?

    Chris Mancini: There's a certain contingent in the Fed that believes that its zero interest monetary policy might result in adverse consequences going forward. This contingent is dead set on raising rates and trying to get back to some level of normalcy in interest-rate policy.

    TGR: There's a school of thought that holds that the U.S. economy has become addicted to cheap money. What's your view?

    CM: There's no question that much of U.S. economic growth in recent years is due to very low interest rates. The average interest rate on auto loans is the lowest ever. That obviously spurs auto sales. The rates charged for federally subsidized student loans are close to historic lows. That spurs demand for college and university courses. And even though the housing industry is still struggling with an inventory glut, the 30-year mortgage rate of 3.75% spurs demand for housing.

    So, I think that if interest rates do rise, there's a good chance that the economy will slow, and there will be a panicked reaction from the stock market.

    TGR: Despite this soft recovery, the equity markets have never been stronger. Why has this happened?

    CM: It's another function of low interest rates. If you keep your money in the bank, you're getting zero percent and thus losing money on a real basis. This has forced savers into other asset classes. And money is flooding into America from all over the world because, compared to, say, the Eurozone and Japan, which are struggling with deflation, the U.S. economy looks pretty good.

    TGR: Is an economy that punishes savers sustainable?

    CM: It's sustainable until it's not. Asset prices continue to increase greatly, and at some point people will start to realize that the value of money is not what it seems. That will lead to a crisis of confidence and, eventually, to the deterioration of the monetary system. The question is when. And I don't know the answer to that.

    TGR: Should an interest rate hike backfire, could we see the return of quantitative easing [QE]?

    CM: If the economy slows after a rate hike, I think the first thing the Fed will do is to lower rates to zero again. And if that doesn't kick start the economy, which it probably won't, there's a good chance we will get QE4.

    TGR: You've argued that "Paper speculators in the gold futures market have been a more important factor in determining the movement of the gold price this year than has physical demand from gold consumers." Does the speculation depress the gold price?

    CM: On certain days it definitely does. Days when the shorts come back in and when the speculative longs take their positions off. But speculation can also lead to a higher gold price. For instance, when gold went to $1,300 per ounce [$1,300/oz] at the beginning of this year, I think a lot of this rise was due to speculators putting longs on and covering their huge short positions.

    TGR: Aren't these speculators flirting with disaster?

    CM: We have recently seen huge moves up or down in the gold price in the space of minutes. That tells me that speculators who are using leverage are making moves to avoid being wiped out.

    TGR: Physical gold demand from Asia and from central banks remains strong. Are we getting close to the point where, as you put it, "Rock will beat paper?"

    CM: That will happen when Americans lose hope in the ability of the Fed to direct economic policy and buy gold again, whether in physical form or more likely in the physically backed exchange-traded funds like SPDR Gold Shares [GLD:NYSEArca]. That's what happened in 2011, when the gold price topped $1,900/oz.

    TGR: What's your gold price forecast for 2015?

    CM: I expect it will trade in the $1,200-1,300/oz range. There's a very good chance 2016 could be a much better year for gold, especially if the Fed lowers interest rates again and embarks on QE4.

    The potential end game for gold is if a complete loss of confidence in the U.S. dollar forces the government to peg it to gold.

    TGR: In a Gabelli note dated April 24, you wrote, "High-quality gold mining companies have positioned themselves well during this current downturn in the gold market." What are the qualities that distinguish high-quality gold miners?

    CM: We look for companies with very little debt on their balance sheets, low operating costs and very good management. One example would be Randgold Resources Ltd. (NASDAQ:GOLD). It has net cash on its balance sheet, no debt and great management. Its all-in sustaining costs [AISC] this year should be around $900/oz. Randgold would be able to survive a significant drop in the gold price. And this company has the means to make good acquisitions at low prices and arrange profitable joint-venture [JV] deals on strong assets. Its management has been talking about doing just that.

    TGR: What other miners do you consider to be high quality?

    CM: Fresnillo Plc (OTCPK:FNLPF) [FRES:LSE], Agnico Eagle Mines Ltd. (NYSE:AEM) and Tahoe Resources Inc. (TAHO) are three others.

    Fresnillo has a very small and manageable debt burden. It is in a growth phase now. It's operating costs are declining because of the Mexican peso's weakness against the U.S. dollar and declining construction and drilling costs. The cost of labor in Mexico is not declining, but it's not increasing as it did in the recent past when there were lots of projects being built in Mexico. This company's AISC are around $5/oz for silver and $800/oz for gold. Fresnillo is well positioned for the future.

    TGR: Do you have any concerns about the political and social climate in Mexico?

    CM: There are issues in Zacatecas and Sonora where Fresnillo operates. I expect that the company will take steps to increase security to the extent that it's necessary. Fresnillo is a Mexican company that has been operating in the country for over 40 years. The recent robbery of McEwen Mining Inc. [MUX:TSX; MUX:NYSE] was a wake-up call for the industry.

    TGR: What do you like about Agnico?

    CM: Agnico has debt, but it's manageable. Its Osisko acquisition last year positioned it as the 800-pound gorilla in the Abitibi Belt, one of the best places in the world to mine. Agnico is a low-cost producer with management that has a track record of investing capital wisely. And it has good growth potential.

    TGR: Besides Osisko, Agnico has also bought Cayden Resources Inc. and Soltoro Ltd. What do you make of this strategy?

    CM: Agnico has been taking advantage of the downturn and buying these companies very much on the cheap. Because the company didn't come into the downturn with much debt, it was able to borrow money to buy Osisko, which is cash-flow generative.

    TGR: And what impresses you about Tahoe?

    CM: It has Escobal in Guatemala, one of the best primary silver mines anywhere. The merger with Rio Alto Mining Ltd. gives it cash on the balance sheet, La Arena in Peru, which produced 222,000 ounces [222 Koz] gold in 2014, and the Shahuindo gold-silver project in Peru. Both of Tahoe's producing mines are low cost.

    Tahoe will able to build Shahuindo at low cost. After that goes into production, the company will then have three cash-flowing mines and no debt. This gives it the opportunity to make another acquisition and use its cash flow to build it.

    TGR: One of Tahoe's employees is being confined by a Guatemalan court. Does this concern you?

    CM: Guatemala is a difficult place to mine. The people are great, but the politics are a mess. It was a huge shame to see the royalty rate increase after a last-minute deal with no consultation with the mining sector. It is a real testament to Tahoe and to the Guatemalan people that the company has been able to ramp up production to 4,500 tons a day from an all-underground mine with an almost exclusively Guatemalan workforce trained onsite.

    TGR: Which streaming companies does Gabelli hold?

    CM: Our biggest holding is in Franco-Nevada Corp. (NYSE:FNV) followed by Royal Gold Inc. (NASDAQ:RGLD), Silver Wheaton Corp. (SLW) and Osisko Gold Royalties Ltd. (OTC:OKSKF) [OR:TSX].

    Franco-Nevada is the gold standard of royalty and streaming companies. It has some of the highest-quality streams and royalties in the world, a well-diversified portfolio, cash on its balance sheet and management that is willing to invest at the down points in the cycle.

    Royal Gold's portfolio isn't as diversified as Franco's, but it has some very good royalties, including Goldcorp Inc.'s (NYSE:GG) Peñasquito mine in Mexico and Thompson Creek Metals Co. Inc.'s [TCM:TSX; TC:NYSE] Mount Milligan mine in British Columbia. It has been a little bit less aggressive in deploying its cash during this downturn, but it has done some prudent deals recently.

    Silver Wheaton has been very aggressive and has royalties on some very good projects, including Peñasquito. It has been dealing with a tax problem in Canada, but I think that will be resolved this year. It does have debt, but this company is a very good buy today.

    TGR: Will Silver Wheaton go more aggressively into gold?

    CM: It is doing that already. Its most recent deal was buying an additional 25% stream of Vale S.A.'s [VALE:NYSE] Salobo mine in Brazil for $900 million [$900M]. That was a very big deal for Silver Wheaton and pleases us because we prefer gold streaming to silver streaming.

    TGR: And what do you like about Osisko Gold Royalties?

    CM: We got Osisko Gold Royalties after Agnico and Yamana Gold Inc. [YRI:TSX; AUY:NYSE; YAU:LSE] bought Osisko. Now, after its takeover of Virginia Mines, Osisko Royalties has royalties on Éléonore and Canadian Malartic, two of the world's best gold mines in a fantastic jurisdiction, Quebec. These are net royalties, so the money comes off the top line. Osisko Royalties has a lot of cash, which it can use to make further acquisitions.

    TGR: Do you expect to see any merger and acquisitions among the gold majors?

    CM: The proposed merger of Barrick Gold Corp. (NYSE:ABX) and Newmont Mining Corp. (NYSE:NEM) would have made sense from an operational point of view because of the synergies it would have created in Nevada. The new chairman of Barrick, John Thornton, saw an opportunity, but it didn't materialize. I don't expect we'll see any mega-mergers anytime soon.

    TGR: What do you think of Barrick's prospects?

    CM: We have a position in Barrick. It has some of the best assets in the world, but it's over-leveraged and going through a structural reorganization. If the company executes this properly, the stock will do very well. It's cheap relative to the quality of its assets, and it's cash-flow generative even at $1,200/oz gold.

    TGR: What can you tell us about the other gold majors the Gabelli Fund holds?

    CM: Newmont Mining has really executed on its plan of bringing down costs. The company has maximized the potential of every single asset it has, and has sold some assets to deleverage its balance sheet. Now it's in a good position to produce profitably, pay a small dividend and also build projects that generate good rates of return. Newmont is building two projects now: Merian in Suriname and Long Canyon in Nevada. Newmont is now producing close to 5 million ounces [5 Moz] of gold per year. The company has a lot of upside if and when the gold price moves back up.

    AngloGold Ashanti Ltd. (NYSE:AU) has a lot of leverage relative to its cash flow and level of production. If the gold price does go up, AngloGold is going to go up, by multiples. The company has good assets, and we like its management.

    Goldcorp is another high-quality gold miner. It has a very manageable debt position and low costs and has been taking advantage of the current downturn in the market.

    TGR: Let's talk about companies that are less loved by the market than they should be.

    CM: I'll mention two: MAG Silver Corp. (NYSEMKT:MVG) and Richmont Mines Inc. (NYSEMKT:RIC).

    TGR: Why are they unloved?

    CM: The bear market has driven out the generalist investors. To the degree you have anybody getting back in, they will first look at royalty/streaming companies, then safe producers like Randgold, Fresnillo, Agnico and Goldcorp. Then leveraged producers like Barrick, Newmont or AngloGold. Finally, they would look at mid-tier producers like B2Gold Corp. [BTG:NYSE; BTO:TSX; B2G:NSX], Centerra Gold Inc. [CG:TSX; CADGF:OTCPK] or AuRico Gold Inc.[AUQ:TSX; AUQ:NYSE]. Companies like MAG Silver and Richmont aren't getting the attention they deserve.

    TGR: What impresses you about MAG Silver?

    CM: It has one of the best undeveloped silver deposits in the world, Juanicipio, a JV with Fresnillo, which is adjacent to Fresnillo's flagship mine in Zacatecas. This will be extremely cash-flow generative with an AISC of about $5/oz. MAG Silver has a great exploration team. Peter Megaw is one of the best geologists around, and he has discovered another silver deposit in Mexico called Cinco de Mayo, which I think will be the company's second mine. MAG Silver is trading at a big discount relative to just its Juanicipio deposit, so once its permitting problems at Cinco are sorted, shareholders will be getting that for free.

    TGR: And what impresses you about Richmont?

    CM: It's a small producer now, but it has a lot of growth potential at its Island gold mine. It's in a great jurisdiction, northern Ontario. From a valuation perspective it's trading at a big discount to its potential net asset value based on currently delineated resources. It's a lot less risky than a predevelopment company because the operation is built, and we know how much it costs to mine and mill there. Richmont has an unleveraged balance sheet and net cash.

    TGR: Given your belief that gold will likely have a good year in 2016, what's your advice for investors today?

    CM: Investors should have a bunch of gold equities. They should look first for companies that will do well in a higher market and are also protected on the downside. They should then look for companies that are unloved now but whose leverage will make them lovable when gold goes higher.

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

    This interview was conducted by Kevin Michael Grace of The Gold Report and can be read in its entirety here.

    Chris Mancini is a research analyst for the Gabelli Gold Fund, specializing in precious metals mining companies. He has over 15 years of investment management experience, including research analyst positions at Satellite Asset Management and R6 Capital Management. Mancini earned a bachelor's degree in economics with honors from Boston College and is a holder of the CFA designation.

    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 Interviews page.

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    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Tahoe Resources Inc., Silver Wheaton Corp., MAG Silver Corp. and Richmont Mines Inc., Goldcorp Inc. and Franco-Nevada Corp. are not associated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services.
    3) Chris Mancini: I own, or my family owns, shares of the following companies mentioned in this interview: Agnico Eagle Mines Ltd., AuRico Gold Inc., Centerra Gold Inc., Franco-Nevada Corp., Fresnillo Plc, Goldcorp Inc., MAG Silver Corp., Osisko Gold Royalties Ltd., Randgold Resources Ltd., Royal Gold Inc., and Tahoe Resources Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. The Gabelli Gold Fund holds the following companies: Agnico Eagle Mines Ltd., AngloGold Ashanti Ltd., AuRico Gold Inc., B2Gold Corp., Barrick Gold Corp., Centerra Gold Inc., Franco-Nevada Corp., Fresnillo Plc, Goldcorp Inc., MAG Silver Corp., Newmont Mining Corp., Osisko Gold Royalties Ltd., Randgold Resources Ltd., Richmont Mines Inc., Royal Gold Inc., Silver Wheaton Corp., Tahoe Resources Inc. and Yamana Gold Inc. 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 which 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.
    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 (NYSE: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
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    Email: jluther@streetwisereports.com

    May 06 2:57 PM | Link | Comment!
  • Survival Guide For The Mother Of All Bear Markets From Veteran Bottomfisher John Kaiser

    When North Americans wake up to the dangers of relying on China and Russia for essential metals like zinc, rare earths, antimony, niobium and scandium, the juniors now suffering with anemic stock prices could turn into cash producing machines worth writing home to mom about. In this frank assessment of everything from gold and diamonds to potash and zinc, Kaiser Research Online author John Kaiser names for The Mining Report readers the companies that could be swept up in a rush to security of supply.

    The Mining Report: John, what are the global issues you are watching that could have an impact on commodities, particularly gold?

    John Kaiser: There is a risk that the economic growth slowdown already underway can deteriorate further, precipitating major general market declines and causing demand for raw materials to flag. This would worsen the current situation where the supply response from the bull period of the past decade is already, in most cases, exceeding demand and, therefore, resulting in a further glut to depress prices and hurt companies involved in both development and mining of raw materials. At the same time, the subdued global growth outlook is creating domestic stresses that in turn are translating into geopolitical conflicts, which have me thinking about security of supply risks should globalized trade come unglued.

    TMR: What effect does political instability in Russia and the Middle East have on gold prices today? History would suggest that uncertainty would drive prices up but that doesn't seem to be the case right now.

    JK: A major market correction and evidence that the world is sliding back into recession would be negative and push gold down toward that $1,000/ounce [$1,000/oz] level. Many projects are not viable even at the current $1,200/oz level. This would certainly harm the valuations for producers and the near producers.

    On the other hand, even if we avoid a global economic downturn, we are still vulnerable to geopolitical disruptions such as Russia's gradual annexation of Ukraine and its increasingly precarious relationships with Europe spinning out of control and creating some serious supply issues in the gas, oil and nickel sectors. In the Middle East we are witnessing a regional power struggle between the Sunni and Shiite branches of Islam with America's ally, the Saudi monarchy, as potential roadkill. If Obama is unable to bring Iran out of its pariah status and establish a balance of power between Sunni and Shiite, we could see major oil supply disruption.

    Meanwhile, China continues to assert its dominance in its neighborhood, as seen by the creation of man-made islands within the Spratly Island chain in the prospective oil rich South China Sea. This expansion of China's footprint is largely at the expense of American influence in that part of the world. That could be geopolitically destabilizing if the U.S. attempts to push back.

    TMR: But wouldn't that hurt the dollar and, therefore, be good for gold?

    JK: China pushing against the U.S. would have the perverse effect of boosting the dollar higher because the U.S. is still the biggest economy and the military superpower controls the world's shipping lanes. It can function as an island unto itself, especially if it forges a closer relationship with South America. In fact, its attempts to end the cold war with Cuba are part of this initiative. I would say that cases of this sort of instability would cause the dollar to rise and gold to go up. The main hope for a gold uptrend that is beneficial to gold developers and producers because it is not just a reflection of a declining U.S. dollar or global inflation is geopolitical uncertainty. Bad news for gold would be a scenario where the world peacefully sags into a depression.

    TMR: You have talked about gold as a store of energy. What does that mean?

    JK: I point that out in reference to people who call gold money. Money is an information system, which keeps track of credits and debits. It allows an economy to go beyond the barter system by enabling the exchange of goods and services extended through space and time. Gold has in the past served as a guarantor of the integrity of money, but that is not the same as money, which is an information system whose underlying cost should be as low as possible. Gold requires a fair amount of energy and time to bring it out of the ground into concentrated form. In that sense, gold is a form of stored energy that cannot be unleashed to produce work in any other form. If you wanted more gold aboveground to back the expansion of economic turnover, you would have to invest energy.

    Unfortunately, the energy required to bring incremental gold out of the ground is rising as we deplete the low-hanging fruit at the surface of the earth. That, by the way, is a key problem with the gold sector in general. We are now producing 89 million ounces [89 Moz] annually, the highest ever in history, and the price to bring this gold out of the ground is also at an all-time high. Gold makes sense as an asset class because it is a reservoir of expended energy, and the ability to "make" more gold today requires a higher input of energy per unit gold than ever before. The existence and size of an abstract information system such as money should not be linked to the cost of energy.

    TMR: How are companies pulling gold out of the ground creating value when the input costs keep going up, but prices aren't rising?

    JK: In a lot of cases, companies are simply shutting operations. Where they can, they are rationalizing the costs. Low oil prices are helping some companies, particularly those in remote locations dependent on diesel, provided they did not hedge the future cost of fuel. They may benefit down the road if they are hedging their future consumption at the current levels, for it's unlikely that oil prices will stay at low levels for long.

    Some miners are grade flexing. They mine higher grades when the price is low and lower grades when the price goes up. Companies have to be careful not to damage the mineability of the lower-grade portions being saved for later. Some are running the risk of destroying the longevity of the resource, and therefore the future of the company.

    TMR: What's an example of a company that is mining gold successfully right now?

    JK: Probably the most successful company at the moment is Goldcorp Inc. (GG). It has done a good job of acquiring deposits and putting them successfully into production.

    Others like Agnico Eagle Mines Ltd. (NYSE:AEM) have also done a good job in this regard.

    Then there are companies like Barrick Gold Corp. (ABX), which has done well with its Nevada assets but not so well elsewhere in the world.

    TMR: Is security of supply becoming a more important story particularly for materials like antimony, tungsten and scandium?

    JK: Yes, for multiple reasons. I think the assumption that globalized trade is going to be with us forever is flawed. We are already seeing extensive use of trade sanctions instead of physical warfare. The side effect of using sanctions is that it fragments the global supply chain. I also see a retrenchment of parts of the world into their own trading arenas. One example is the Asian Infrastructure Investment Bank, a development bank that China is inventing as an alternative to the World Development Bank and the International Monetary Fund, that every country except the U.S. and Japan have decided to join. Its goal is to develop infrastructure in Southeast Asia where China expects to be the dominant player.

    Another reason unrelated to geopolitical conflict is government environmental policy. There are no Chinese leaders declaring, "I am not a scientist" when asked about the cause of climate change. They understand that without changes China will move from being the second biggest source of the problem to the biggest source. They are also getting tired of their self-appointed role as the world's toilet for industrial emissions. An environmental awakening similar to what swept the United States during the 1960s is underway.

    The result could be a shrinking supply of critical metals as Chinese mines are forced to shut down or increase their cost of production by following environmental rules. The resulting supply gap will push up metal prices that will not be greeted by new Chinese supply. Projects elsewhere in the world that are sitting idle because their operations must meet environmental standards will end up in the money and receive a development green light.

    Yet another reason to think about security of supply is the innovation surge accompanying the rush to deal with environmental policy goals. China's crackdown on pollution is disruptive of metal supply, but its adoption of climate change-related greenhouse gas reduction goals is a demand driver as new energy-related technologies get developed. The innovation frontiers are alternative energy and energy efficiency. Personally I much prefer to see metal prices rising because of environmental policies rather than geopolitical conflict.

    TMR: Let's talk about some of those supply and demand equations for the individual materials. Start with tungsten and what companies could meet that demand.

    JK: Tungsten is an important metal. It is used as a hardening agent largely in the tool industry and has seen considerable demand growth during the shale drilling boom. But demand tends to follow the global economic trend, so it is suffering a bit from the worldwide slowdown. It is, however, also a war metal used in weapons and as a hardening agent for armor. If we do end up in a period of conflict that encourages an arms buildup, we could see demand for tungsten go up dramatically.

    TMR: When we talked in October, you were waiting for an environmental report. Did that work out as you'd hoped?

    JK: There are many stages in the environmental process. I don't expect to see final approvals until the end of this year, maybe early next year.

    There is another concept that people don't think very much about. That is the idea of natural depletion. In the zinc market, major Western mines are shutting down because they have run out of ore and there is not much in the pipeline to replace this lost production. But no one has really cared because China has increased zinc production 3,000% from 160,000 tonnes in 1980 to 5 million tonnes in 2014. Its global share has expanded from 3% to 38%. China's mines tend to be small scale, poorly operated, aging and polluted. And it is getting more expensive to access Chinese antimony, tungsten and zinc deposits as high-grade near-surface zones get mined out.

    Nobody except perhaps the Chinese know what the Chinese zinc cost curve looks like. Production was unchanged in 2014. I suspect that we will see a decline in output and an increase in the price of zinc. I think we will see the same happen with other metals such as antimony, tungsten and graphite in which China dominates. If China has the geological capacity to switch from "small and messy" mines to "big and clean" mines, it will take quite a few years to happen.

    Although gold does not fit into a security of supply framework because all 5.4 billion aboveground ounces are scattered all over the planet and theoretically for sale immediately, the Chinese depletion and environmental policy themes also apply to gold mining. China has grown from 225,000 oz production in 1980 to 14 million ounces in 2014, representing 16% of global supply. Yet nobody has heard of a world-class Chinese gold mine. Goldbugs may finally get some price upside as government regulations put China's small scale gold mining entrepreneurs out of business.

    I'm of the view that this is an ideal year to look at advanced projects. The stock price downtrend since 2011 has bottomed. If they have sufficient money to carry on for another year, this is a time to buy these stocks, tuck them away with a one-year or longer time horizon in mind, and monitor global affairs for developments that may disrupt the supply or boost the demand for the metals these companies hope to produce in the future.

    TMR: What about the supply and demand story for scandium?

    JK: Scandium is an unusual metal in that demand is restricted by available supply, which is only 10-15 tons per year of scandium oxide from a variety of byproduct sources, such as in situ uranium leaching, titanium dioxide waste stripping and byproduct from the Bayan Obo rare earth mine. None of these sources is scalable in a serious way, and all of them tend to have fairly high costs, even for the recovery circuit needed to strip the scandium out as a byproduct.

    So it's a pitifully small market worth about $20-50 million annually depending on price, which can range from $2,000 to $7,000 per kilogram [$2,000-7,000/kg]. But scandium is to aluminum what niobium is to steel. It makes aluminum stronger, more weldable, corrosion resistant with a higher melting temperature and doesn't affect the conductivity. These factors enable scandium-aluminum products to save energy, which plays right into the greenhouse gas emission reduction movement, as well as universal cost consciousness. So scandium is a potential important player if it can become available on a scalable basis.

    In the last seven years, deposits have been recognized in Australia's New South Wales that have grades three to six times higher than what was mined in the Zhovti Vody deposit in Ukraine by the Soviets during the Cold War. The aircraft industry alone would harvest a 15% weight savings for its aircraft by replacing all its aluminum parts with aluminum-scandium. The automotive industry has potential to adopt aluminum scandium alloy in parts of cars where strength might be needed or where the melting point is an issue, such as in brake rotors that are still made of cast iron and weigh double the aluminum equivalent. The rail industry could also benefit from using stronger aluminum scandium alloy to pull less of the train's own weight and more cargo weight and save fuel.

    Scandium is a story that is going to explode with demand going up to 1,000 tons per year in about 10 years from next to nothing simply because juniors have discovered deposits that no one thought could exist at this grade. These companies are investing the time and effort to sort out the metallurgy and going through the feasibility demonstration stages. We will probably see the first small-scale mine in production in 2017. When the industry sees that scandium oxide can be produced at $2,000/kg or less, from a deposit where production can be scaled up to whatever level demand requires, then end users will start to commercialize all these applications that are sitting on their drawing boards.

    TMR: What are the juniors in the niobium market that you're watching?

    JK: There are only three major niobium mines. The first is Araxá, which is owned by a private Brazilian company that sold 30% to a consortia, one Chinese and one non-Chinese from Asia, for nearly $4B in 2011. It produces about 80% of global supply.

    There is another project owned by Anglo American Plc (OTCPK:AAUKF) [AAUK:NASDAQ] in Brazil that produces 10% of global supply.

    Then there's the Niobec mine in Canada, which IAMGOLD Corp. [IMG:TSX; IAG:NYSE] recently sold for $500M to Aaron Regent's Magris Resources Inc.

    TMR: Has the need for REEs been sufficiently recognized for its security of supply role in non-Chinese mining companies?

    JK: We have tentative supply coming out of Molycorp's Mountain Pass operation. However, with the current prices for REEs, most projects are not viable. The bubble three years ago had the negative effect of spurring demand destruction as end users looked at ways of doing without REEs as critical inputs. China's ability to expand production, in particular in the heavy rare earth element [HREE] department, will be constrained by the environmental crackdown because ion adsorption clay mining operations are among the most polluting mines in the world. The deposits are also very inefficiently mined, which is of concern to China because the country could face depletion of these surface deposits within about 10 years.

    TMR: You mentioned the natural depletion cycle of some minerals. What are the commodities and companies that could benefit from a natural depletion cycle?

    JK: The companies with advanced zinc deposits are the ones that I think should be accumulated at this point. Zinc still hasn't had that price breakout above $1.20/pound [$1.20/lb] needed to get the market truly excited, but the investment community has been watching zinc very closely. A supply deficit is supposed to be just around the corner, though that has been a prediction for years. However, the zinc mountain in the LME warehouse has declined by a third since peaking in 2013, and after a pause late last year, has started to drop again. If China does not mobilize additional supply as everybody cynically expects will happen, or perhaps even starts to decrease its supply, the warehouse stocks could drop sharply and then we get that price breakout through $1.20/lb.

    TMR: Is the world also facing a potash shortage?

    JK: Potash does not so much have a depletion problem as a supply disruption problem. A good chunk of the world's supply comes from Belarus and its neighbor Russia. If this shoving match between Russia and Europe over Ukraine spins out of control, we could end up seeing supply disruption for potash pushing prices higher. The potash supply is controlled by a half-dozen or so major companies with Canada's Potash Corp. [POT:TSX; POT:NYSE] as the giant producer. The capacity to expand supply exists, but it will take time to mobilize. For example, BHP Billiton Ltd. [BHP:NYSE; BHPLF:OTCPK] owns the Jansen Lake deposit in Saskatchewan whose development it is ready to fast-track once potash prices turn up again.

    TMR: Give us a story that brings the conflict and depletion cycle together and could get investors excited again. What's something that you would want to write home to mother about?

    JK: Diamonds are a luxury good, which means that if all the gem diamonds for some mysterious reason flash evaporated, it would leave a lot of unhappy people behind, but the world would carry on as though nothing happened. Its demand is driven by fashion, and thus driven by a growing economy, especially where the growth is in the form of an expanding middle class, such as is the case in China and no longer in the United States. If we assume emerging markets will remain the main component of global economic growth, demand for natural gem diamonds will expand. That's a problem because although 5 trillion carats have been mined since the South African diamond fields were discovered, diamonds tend to just disappear.

    Unlike gold, where the 5.4 billion ounces that have been mined in the last 10,000 years are all sitting there in vaults or hanging from people's necks ready to be melted down and resold when the price is right, diamonds seem to disappear into nooks and crannies from which they never emerge to flood the market. Although the stones are valuable, they do not get recycled. That's an issue for the jewelry industry because there have been no giant new discoveries made in the last 15 years, and the big mines like Jwaneng and Orapa in Botswana and others in Russia will be depleting in the next 20 years.

    Unless diamonds fade as a coveted luxury good, a supply-demand imbalance will emerge that drives prices higher at a greater rate than inflation. This is important because if a junior owns a diamond deposit whose development costs have been established, the profitability of the mine will increase over time because the revenue side of the equation increases at a greater rate than the inflation-based increase of the operating costs. This is not done with a gold project because the main reason to expect a higher gold price is inflation. Adjusting revenues and operating costs by the same inflation rate is frowned upon because it mathematically boosts the present value of the cash flow. And there is no empirical basis to project a higher real price for gold. Diamond projects have been out of favor while gold was in an uptrend, but now that gold has stabilized at $1,200/oz in a low inflation environment, diamond projects are set to sparkle again.

    TMR: What is the one thing investors should be doing to shift to a security of supply-focused portfolio?

    JK: They should forget about expecting the sort of instant gratification that big exploration discoveries or dramatic gold price moves generate for shareholders of resource juniors. Not enough drilling is being done on high-risk, high-reward targets to give us the Voisey's Bay type of surprise that ignites a market frenzy. There also is nothing on the horizon to justify a sharply higher gold price except geopolitical developments that belong in the category of things we would wish had not happened.

    Resource sector investors need to adopt a longer time horizon and choose resource juniors where the stock price would respond to identifiable future developments whose emergence can be monitored by reading the international news and becoming a globally plugged in citizen. It is wonderful if people do this for its own sake, but it is better when they can convert their understanding of global affairs into implications for a portfolio of resource juniors with security of supply-linked projects. You can see the benefit to your pocket if something goes wrong in Russia or if China undergoes an environmental awakening. That will make investing fun again.

    TMR: Thanks, John, 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.

    Want to read more Mining 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 Mining Report homepage.

    Bottom of Form

    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Goldcorp Inc. is not associated with Streetwise Reports. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) 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 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 which 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.
    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 Mining 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 (NYSE: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 Mining 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

    May 05 3:44 PM | Link | Comment!
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