The Gold Report's  Instablog

Source: JT Long of The Metals Report (5/14/13)

http://www.theaureport.com/pub/na/15268

Last month's landslide at Utah's Bingham Canyon, one of the world's largest copper mines, triggered significant discussion on possible copper shortages. Brent Cook, veteran geologist and publisher of Exploration Insights, puts the landslide into perspective in this interview with The Metals Report. And for investors who want to dig out profit potential beyond the yellow metal, Cook gives us a byproduct primer and suggests base metals are a great way to diversify.

The Metals Report: In April, a landslide shut down operations at one of the largest copper mines in the world, Rio Tinto Plc's (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) Bingham Canyon mine. Thankfully, no one was injured. Are landslides always a threat at large, open-pit mines? Will this change the standards for how mines are built and their size?

"The slide represents close to 165 million tons of rock that will need to be moved out eventually-the equivalent of moving a whole mine."

Brent Cook: Landslides and rock falls are always an issue in open pits, and companies put a lot of effort into understanding the rock mechanics in order to build these mines and pits properly. They generally are not a major problem if sufficient upfront studies are done. The Bingham pit was opened in the early 1900s and has been expanding since then. While the slide is a major event, I do not think it will change how anyone builds mines per se.

TMR: Rio Tinto was looking at another expansion there. Will this make it tougher for that mine, or another of similar size, to expand?

BC: What happened at Bingham should not affect other mines of that size. I imagine the company is going through a lot of engineering analysis and trade-off studies to figure out what exactly it has to do at Bingham this year and over the next decade.

As you can see from the photo [below], this was a major landslide. I've worked at Bingham, so I know it real well. The mine produces about 400,000 ounces of gold and 430,000 tons of copper annually but I would guess there's enough ore stockpiled to last several weeks.

The slide represents close to 165 million tons (165 Mt) of rock that will need to be moved out eventually-the equivalent of moving a whole mine. Kennecott hasn't released specific plans so I don't know how much, if any, of the slide material would go to the ore pile versus waste. As I recall, the company had plans to go underground.

TMR: You think it will go underground instead of expanding the open pit?

BC: No, the underground mine was to be sequenced in and the open pit continued or expanded. But now that has to be one of the options being considered.

TMR: I understand that mine produced 25% of U.S. total supply. How will that affect the copper market dynamics?

BC: Not all that much, really. There is a lot of copper sitting in Chinese and London Metal Exchange warehouses. In terms of the global copper market, this mine represents only about 1%, but close to 25% of the U.S. market.

TMR: Copper is considered an economic indicator. Is the fact that prices have dropped from $3.70/pound ($3.70lb) in January to $3.10/lb in April an indicator that the world's economies are not recovering? Or is there just too much copper in the market right now, sitting in warehouses as you mentioned?

"Predicting short-term copper demand versus supply is only useful for long-term investors in this sector to the degree that it points out mispriced equities."

BC: That is a tough call. Copper has always been considered an indicator of future economic stability and growth. But in the past decade, speculators have taken heavily to buying and selling copper. I don't think anyone really knows how much copper is being hoarded in China as an investment, or for pure speculation. I have seen photos published by Standard Chartered Bank showing copper overflowing warehouses and filling parking lots. I think power consumption is probably a better indicator of economics these days than copper, but we will see.

TMR: Do you predict copper will stay in that $3.10/lb to $3.70/lb range for the near to long term?

BC: I do not really like to make those sorts of predictions because I am relying on data of varying quality published by people with a variety of agendas. I suppose I have a 50/50 chance of getting the direction right, but I still seem to miss more often than I should. In my mine models, I am keeping copper at a steady $3/lb. I see my job as laying out the technical data as best I can and leave it at that; I prefer to let my subscribers plug in their own optimistic or pessimistic numbers based on how they see the future.

Predicting short-term copper demand versus supply is only useful for long-term investors in this sector to the degree that it points out mispriced equities. You really need to consider what demand will be 2, 5, 10 or 20 years out. That is because it takes at least seven and upwards of 20 years to find and bring a new copper mine into production. I base my investments on what is happening further down the line, which, hopefully, allows me to recognize underpriced assets.

TMR: Does it cost more to mine copper now, as the easy copper is going away?

BC: Operating costs are going up considerably. I am not sure of the average production cost of copper, but I would assume it is in the $2-2.50/lb range.

Copper Supply Considerations

• Long mine development timelines
• High capital costs
• Likely project failures

TMR: All-in costs?

BC: Yes, all-in costs. If the copper price started dropping below $2.75 or $2.50/lb, a lot of miners would be in big trouble because operating costs will exceed the price they can get. That would take a lot of copper offline. That built-in mechanism of price support will eventually kick in.

When looking at the copper price, supply and demand, you really must consider the time it takes to bring a large mine into production, the very high capital expenditures, and the real likelihood that a number of projects in the works will not get built. I think in the long term, we are facing a supply shortage.

TMR: Because copper is often a byproduct of gold mining, sometimes companies will mine copper whether the supply-demand equation is there or not. How does a polymetallic ore change the prospects for projects?

BC: More often than not, one of the byproducts of a copper mine is gold. A good copper mine like Bingham produces 0.4 Moz gold as a byproduct and somewhere near 3 Moz silver annually. Those are economically important byproducts of the copper mine. When you are evaluating the economics of a porphyry copper deposit, the price of those two metals enters into the equation. It is very important.

Likewise, in a polymetallic metals deposit, copper, lead, zinc, gold and silver all flow into the stream. It takes different processing methods to recover those. With most types of polymetallic deposits, miners produce a few different concentrates and send them off to a smelter.

In a pure gold mine, miners just produce gold doré. You do not have to worry about anything else. Well, actually you have to worry about everything else, but at least there is only one metal produced.

TMR: Does how a mine is labeled (gold with copper credit or copper with gold credit) depend more on the makeup of the ore body or how the company wants to market the mine?

"Know what you are buying, why you are buying it and what your expectations are. Then, keep track of whether your expectations are met."

BC: When you are looking at a base metal deposit like a porphyry copper deposit or a volcanogenic massive sulphide deposit (VMS), the gold and silver are generally byproducts. The degree to which they factor into an economic valuation depends on the grade and recovery as well as the ultimate value they add to the operation. It depends on the deposit itself what the important metal is.

Typically, with a silver deposit, miners will recover lead and zinc as well, both important byproducts that can often account for half the value received from the sale of concentrate. Pure silver deposits are fairly rare.

TMR: Which polymetallic projects are you following? How are they making the most of all of the pieces of their projects?

BC: One is MAG Silver Corp. (MAG:TSX; MVG:NYSE). Its Juanicipio deposit in Mexico is mostly a silver deposit, averaging 600 grams per ton (600 g/t) silver. It also contains economically important levels of lead, zinc and gold that will factor heavily into the ultimate economics of the mine. Its Cinco de Mayo deposit is a true polymetallic deposit.

A company in Colombia called Atico Mining Corp. (ATY:TSX.; ATCMF:OTCBB) has a gold-rich VMS deposit. The gold will be approximately 40% of the total revenue; the rest being copper with some lead, zinc and silver.

TMR: MAG Silver just released its annual report. Were you happy with what you saw?

BC: There was not much in the way of results, but I do like the deposit. The Juanicipio property hosts one of the best silver discoveries over the past 10-20 years. Its joint venture partner, Fresnillo Plc (FRES:LSE), is in charge of bringing this on-line. Fresnillo is the operator; it is putting in a tunnel and conducting a lot of geotechnical studies. It is exploring and going through the permitting process. Things are happening, just not very exciting things.

TMR: One name in your portfolio is Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE). What do you like there, and what do you think of its recent results from the main Ixtaca zone?

BC: The Ixtaca deposit is a gold-silver deposit, about 50/50. It has a resource of a little over 3 Moz, at better than 1 g/t gold equivalent.

"The degree to which byproducts factor into an economic valuation depends on the grade and recovery as well as the ultimate value they add to the operation."

We have known this company and its management a long time; a great company, great guys. When I visited the Ixtaca property after the first drill hole, I recognized it as a major mineral system with a lot of potential. I still believe there is more than the 3 Moz found so far. I think there is more high-grade mineralization that is yet to be intersected in the current resource or elsewhere on the property. I hope Almaden will be able to find it over the next 12 months or so.

TMR: Do you own base metals because of your confidence in the global economy, to diversify, or because you just like the project regardless of the metal involved?

BC: A little of all three. Coming into 2013, I was negative on the gold price and wanted to diversify. So we bought Alderon Iron Ore Corp. (ADV:TSX; AXX:NYSE.MKT), which has an iron ore deposit in Labrador. It is well located, has good infrastructure and a Chinese partner. The feasibility study points to this deposit being worth well over $3 billion. The company is selling for $150 million now. We bought it because I think it is probably the best, undeveloped iron deposit in North America and maybe the world. And it has a partner. In that case, I was trying to diversify out of holding so much gold.

We also bought Fission Energy Corp. (FCU:TSX.V; FSSIF:OTCQX) when it released a drill hole into its R390 East discovery. That made me realize that it could be onto a major uranium discovery. With that, we got about 0.33 shares of Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT) per Fission share, in the Athabasca, again to diversify somewhat out of gold. We got two uranium plays out of that initial purchase. Denison is a likely acquisition target because of where it sits in the basin. Fission is on to the most exciting uranium discovery to come around in quite a while.

TMR: Iron ore, uranium, copper. What else are you using to diversify your portfolio?

BC: At the end of 2012, we bought a company called Synodon Inc. (SYD:TSX.V), which has nothing to do with minerals. It is a tiny company that has developed a proprietary technology to detect gas leaks from pipelines and such from the air. If this works-and it does-once the company starts lining up contracts, it will be a huge money-maker.

As diversification out of minerals, Synodon was an obvious choice. Gas-leak detection is a rapidly growing global business that both regulators and pipeline companies are pushing. Flying the length of a pipeline with a helicopter is a lot more efficient than some guy walking through the bush with a hand-held instrument.

BC: The last one is Westshore Terminals (WTE:TSX), a pure play on the commodities being shipped from Canada to China, and we pick up a dividend on the way.

TMR: There are lots of oil transportation companies, why did you choose Westshore?

BC: It pays a good dividend. It is in a real easy business: taking stuff off trains and sticking it on a boat. I like the simplicity.

TMR: Do you have any final advice on investing outside of gold for people looking to protect themselves?

BC: In the mining and exploration sector, it is really important to know what you are buying, why you are buying it and what your expectations are. Then, you have to keep track of whether your expectations are met or not. If they are not met, it is time to sell. Too many people hold on and their investment thesis turns to hope, just hoping something good will happen so the share price goes up. That has never worked for me.

TMR: That sounds like great advice, Brent. Thanks for your time and your insights.

Brent Cook brings more than 30 years of experience to his role as a geologist, consultant and investment adviser. His knowledge spans all areas of the mining business, from the conceptual stage through detailed technical and financial modeling related to mine development and production. Cook's weekly Exploration Insights newsletter focuses on early discovery, high-reward opportunities, primarily among junior mining and exploration companies.

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

DISCLOSURE:

1) JT Long conducted this interview for The Metals Report and provides services to The Metals Reportas an employee. She or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Metals Report: MAG Silver Corp., Atico Mining Corp. and Almaden Minerals Ltd. Fission Uranium Corp. is a sponsor of The Energy Report. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Brent Cook: I or my family own shares of the following companies mentioned in this interview: Fission Uranium Corp., MAG Silver Corp., Almaden Minerals Ltd., Alderon Iron Ore Corp., Denison Mines Corp. and Synodon 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. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise - The Gold Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

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

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

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

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Source: Brian Sylvester of The Gold Report (5/13/13).

http://www.theaureport.com/pub/na/15265

Many junior mining investors have run off with their tails between their legs. And who can blame them when even the portfolios of market veterans like Peter Grandich, publisher and editor of The Grandich Letter, have taken a beating? But before you cash in, you might want to read why Grandich still has hope for $2,000/oz gold, and which companies he believes have the mojo to make it through this trough in this interview with The Gold Report.

The Gold Report: Peter, the last time we talked you said that the success of your marriage was resting on the performance of your junior resource equity portfolio. You are still married, so is your portfolio performing or is your wife an extremely patient woman?

Peter Grandich: Living in the doghouse isn't that bad once you get used to it. It's wise during this horrific bear market not to let your wife see your monthly brokerage statements.

TGR: A reader of yours apparently suggested that you should have a "kennel portfolio" for some of your dog stocks.

PG: And that was one of the kinder comments that came in recently. I would be better off running a kennel than speaking about my junior resource clients.

TGR: Tell us about what has happened and what you're expecting for your portfolio.

PG: This has been the worst junior resource market in the 30 years that I've been on Wall Street. It may not be the largest percentage decline, but at least there were legitimate reasons for previous bear markets. It's hard to justify the most recent gold takedown. Nevertheless, it happened. I just can't seem to find any particular reasons to justify where we went.

TGR: You're not alone. There are people who took positions in these stocks when they thought the market had bottomed and they're still sitting with them in their portfolio. What are you doing with these stocks?

PG: These stocks have sunk way too low. Yet, I believe that this will be like the last dozen or so bear markets. There will be an inevitable bull market rally that will follow. The only justification to be a seller is that the mental stress and anguish has become so acute so that you literally can't take another day of it. In fact, I think that's what we've seen of late.

TGR: Are you still holding?

PG: I believe we've gone way past that level. I know inevitably a bull market will be onboard, but I don't know if that bull market will make us whole. This was so devastating and widespread. Prices should eventually rise higher than they are now, but it will take months.

TGR: In early April, gold bears were out in force after a lengthy hibernation. Are you less bullish on gold than you were a year ago?

PG: A year ago, the technical picture suggested that the market was coming to a major change that could have been several hundred dollars up or down. My brain said it could be down, but my heart said up and I stuck with my heart.

Even after this takedown, I still don't believe that the secular bull market that's been ongoing for 12 years has come to an end. I still believe we'll have a two in front of the gold price before it ends. We're going to have to get to $2,000/ounce ($2,000/oz) before there's any decision on my part about the end of the bull run.

TGR: What's your message to gold bears out there?

PG: The vast majority of so-called professional advisers and the media simply hate gold. Expecting them to rally around it would be similar to going into a Ford dealer and expecting to be told, "If you really want a good car go down the block to the Chevy dealer."

I would be worried about being a gold bear right now. You have to ask yourself what is it going to take to really crack the market? We had an onslaught of bear forecasts. We had an onslaught of selling in the paper market. Yet, as we speak, much of that decline has already been taken back. There's going to be a reversal and these bears are going to have to run for cover.

TGR: Do you have an anecdote on physical buying that illustrates your point?

PG: In a few months' time, I believe that we'll learn that one of the biggest buyers was one or more central banks of significance. That's why I believe the short sellers have a big problem going forward.

"There's going to be a reversal and these bears are going to have to run for cover."

TGR: In December, you said you expected to see restructurings, rollbacks and repricing of options in early 2013. "Then we will have all the classic signs that the worst bear market in some time is behind us," you said. We're four months in. Are you seeing those signs?

PG: My eyesight has been impaired by the severity of the fall. Those of us still breathing in the junior market are in total shock and frozen in our tracks. It's similar to living in New Jersey after Hurricane Sandy. We're just starting to see the enormity of the damage now that the storm has almost passed. The takedown of the gold price a few weeks ago was the last leg of that storm. Now we should start to see the restructuring, rollbacks and repricing of stock options. We'll all gain momentum between here and the end of the year.

TGR: What do the surviving junior companies do from here?

PG: I looked at the exhibitor list of an upcoming mining and gold show and about every company had a share price of $0.10 or less. Share prices are low and share structures are not tightly held-the inevitable has to happen if they're going to continue. But you're not going to see much general financing any time soon.

TGR: In a recent post on Gradich.com you talked about the coming collapse of the bond market. Tell us more about that.

PG: U.S. bonds will end up the worst investment for the next decade. The best recommendation I can make is a book that's just been released, "The Coming Bond Market Collapse," by Michael Pento. It clearly foreshadows what's going to happen in the bond market.

TGR: Should the junior resource space forget about the potential for takeovers given that the majors seem to have their hands full with high capital expenditure projects and disgruntled shareholders?

PG: It's not a question of if, but when we will see significant mergers and acquisitions (M&A). The bad news is that the prices will add very little premium. Unless the gold price rises, signaling a new leg in the market, junior market share prices won't get much higher.

TGR: What kinds of resource companies are poised to rebound?

PG: The higher you go up the food chain the more likely you'll see those rebounds. It's going to be very hard for a pure exploration company that has yet to develop a project to attract significant capital any time soon.

TGR: The top of the food chain is the majors. It's pretty difficult to find a major producer without a lot of warts. Do you still think they're going to bounce back?

"A consolidation is coming. It will have to get smaller before it gets bigger."

PG: In 30 years, I've never seen a spread in the valuations of major mining shares and metal prices as there is today. Newmont Mining Corp. (NEM:NYSE) has a 5% yield. Everything that can go wrong has already been priced into the majors at this point. The expectation is that they're going to do the things that are necessary to get better.

However, part of that will include slowing down on some growth opportunities they thought that they had to take. There won't be as much new gold coming into the market and that will support the gold price.

TGR: Tell us about some companies in your book and the progress they're making, despite what's happening in the market at large.

PG: Without a doubt, the best performer among my client companies has been Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT). You really have to marvel at what it has achieved. Timmins began its quest to become a significant producer during the worst financial crisis in decades and is now a clear leader in the next generation of major producers.

Three other of my clients have had their shares bloodied, yet the potential for them to be significant producers has never been better in their entire corporate history. Normally these share prices are down because companies have failed at what they set out to achieve, but all three have taken great steps toward, or already achieved, their goals.

The only bad news that could come out of this is they are either taken over or merged without full price appreciation.

Those companies are Geologix Explorations Inc. (GIX:TSX; GIXEF:OTCQX), Oromin Explorations Ltd. (OLE:TSX; OLEPF:OTCBB) and Sunridge Gold Corp. (SGC:TSX.V). Those three are my largest personal holdings.

TGR: You recently posted a Timmins Gold chart on your website. What's that chart telling you?

PG: Unlike many other gold stocks that have gotten creamed, Timmins did not decline close to them percentage-wise. It's a sign that investors have recognized it to be an amazingly well-run company that is either going to be an acquirer or a takeover target. It's doing too well to sit back. I would suggest that in 12 to 24 months we will learn that Timmins has gone on the acquisition trail,or was attempted to be taken over by a larger company.

(click to enlarge)

TGR: Oromin put out a feasibility study earlier this year. What were your thoughts when you started going through that?

PG: Oromin has the single largest set of deposits in a country where gold deposits and gold mining is growing-Senegal. If it were not for this horrific bear market, the share price would be a lot higher. There are concerns of its ability to finance given what's happened to its share price, but I suspect it could combine with its neighbor Teranga Gold Corp. (TGZ:TSX; TGZ:ASX).

Teranga would likely be the surviving company. I don't think Oromin management wants to stay on the production side of the business.

TGR: How would investors benefit from that deal?

PG: This is one of the true rarities where combining is better for both of the companies. Each may not like what I'm about to say, but what Teranga has mostly going for it is its mill. It hasn't been very successful on the exploration side. Oromin, on the other hand, is in partnership with one or more other parties on a series of deposits that have about 5-10 million ounces. It would be fairly expensive to build its own mill and foolish when the company next door has one and can use all the ore it can get in the coming years. The outlook for each company is vastly improved if they combine.

TGR: Is there a potential merger that would benefit Sunridge Gold?

PG: It is insanely discounted, not only because it operates in Eritrea, but also because of what happened in the junior resource market. It would have a share price probably 5-10 times higher if it were operating just about anywhere else in the world.

The bottom line is that any day Sunridge will have an updated resource study that should make it evident to everybody how ridiculously undervalued it is. It is definitely a candidate to be taken out. Unfortunately, it will not get anywhere near the price it could have gotten a year or two ago.

TGR: Sunridge put out a prefeasibility study just about a year ago. That showed a net present value (NPV) of $555 million and an internal rate of return of 27%. Do you expect the feasibility study, which is due out within the next month, to have even better numbers than that?

PG: It's very likely. That's why this market is so frustrating. Something has to give. You just can't keep adding value the way Sunridge has and discount the price. If nothing else happens, a bigger company will come along that is better financed and take Sunridge out. The ore in the ground doesn't know that it has been discounted to the level it has, and it's still being sold around the world for a nice price.

TGR: What about the jurisdiction risk?

PG: Everybody I talk to that works there says it's perhaps one of the best places they ever worked in all of Africa. Unfortunately, Africa creates a lot of negative buzz in the media.

TGR: Geologix is a story that's been around for a while. It has a project in Mexico. What's the path to making money for investors with Geologix?

PG: It's almost to the point where it's giving the stock away for nothing. The market cap is probably not even 10% of the NPV of the project. It's a fairly easy deposit to develop and should not have major hiccups. It's probably on radar of multiple companies as a possible acquisition because it's in a good jurisdiction and has a lot going for it.

Does the fact that the market has taken this one down to a dime cause a problem for the company? Sure, but the management seems to think it has an alternative to raising capital with a general equity financing and says to stay tuned. You've got to give Geologix the benefit of the doubt and give it the time to see what develops.

TGR: Does Geologix have any cash-rich neighbors in Mexico?

PG: I don't know about the cash-rich neighbors, but there are significant mines and miners operating in the general area, the type of companies that are going to be the first to notice this asset is so cheaply priced.

TGR: Do the companies we've discussed have enough cash to wait this market out?

PG: They have enough cash for the very short term, but all these companies are always burning matches. Until they have assets that they're selling and can take in more money than they're spending, they always have to raise money. That's another reason why they're priced where they're at.

TGR: What should investors expect during the remainder of this year and into 2014?

PG: The U.S. stock market is nearing the end of the single largest bear market rally in history. This is what I predicted in 2009 would occur. There won't be a collapse as soon as it does top out because quantitative easing will create a cushion. With the economy rolling over again, I don't foresee the end of quantitative easing.

There will probably be some more shenanigans by the Federal Reserve to give another kick to the can, but the time will come when the world realizes that we cannot afford to pay back what we owe, much less the interest. That's when the financial markets will be hit hard. That's when there will be a collapse of the bond market and a very sharp decline for general equities.

In the meantime, we will see $2,000/oz gold. The recent gold takedown was not driven by fundamentals. It was not fun living through it, but it was actually something that is going to fortify this secular bull market that's been underway for 12 years and is going to mark the next leg of the bull run for gold.

TGR: What's your advice to the average retail investor in this climate?

PG: It's just too late to sell unless you just can't tolerate the mental anguish another day. Companies are down 90% off their highs in some cases, but some are viable. A consolidation is coming. It will have to get smaller before it gets bigger. Eventually, gold will stop making news for going down and start making news by going up sharply. That's something I still think we have in our future. That's why I still have hope for the junior market.

TGR: Thanks, Peter, for your insights.

Financial Adviser and Market Analyst Peter Grandich started publishing The Grandich Letter-now a blog-without a high school diploma or even a day of formal training. His ability to interpret and forecast financial happenings-which once earned him the moniker "Wall Street Whiz Kid"-has led to hundreds of media interviews. He is regarded as one of the world's foremost market strategists.

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

DISCLOSURE:
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins Gold Corp., Oromin Explorations Ltd., Sunridge Gold Corp., Geologix Explorations Inc. and Teranga Gold Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Peter Grandich: I or my family own shares of the following companies mentioned in this interview: Timmins Gold Corp., Oromin Explorations Ltd., Sunridge Gold Corp., Geologix Explorations Inc. I personally am or my family is paid by the following companies mentioned in this interview: Timmins Gold Corp., Oromin Explorations Ltd., Sunridge Gold Corp., Geologix Explorations Inc. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise - The Gold Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

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

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Source: JF Gunter of The Gold Report (5/10/13)

http://www.theaureport.com/pub/na/15258

In today's challenging finance environment, some miners are looking to royalty companies to fill the funding void. Royalty sales give the junior mining company capital to explore or build a mine in exchange for a percentage of future production. It is a win-win. Investors have exposure to gold profits, but are immune to much of the risk. Juniors get the money they need to move forward. But not all royalties are the same and a number of new types have entered the market to fill specific investing and funding niches. In this special primer from The Gold Report, we survey the heads of the companies to explain the role they see themselves playing in investment portfolios and the future of mining.

In December 2012, at the Mines and Money conference in London, Sandstorm Gold Ltd. (SSL:TSX)President and CEO Nolan Watson proclaimed, "Mining finance as you know it is dead!" He proposed that streaming could be part of the solution to a lack of bank financing now available by buying the right to purchase future profits. This works best, Watson said, when mining company and royalty company interests are aligned. While royalty companies started as value arbitrage businesses, he now sees a broader role as funding partners. Sandstorm has started to invest in equity and debt. He went on to predict that royalty space would expand from the big four royalty companies worth $27 billion ($27B) at the end of 2012 to 10 or 20 companies worth hundreds of billions of dollars in the next decade.

We asked other executives in the space if they agreed with Watson's analysis of the sector. "It's a tight point in the cycle," said Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) CEO Randy Smallwood. "Now is the time, however, when streaming and royalties should play a very pivotal role." Smallwood took a long-term view. "It is important to remember that this is a cyclical industry. At some points in the cycle, exploration finance is very hard to come by, which subsequently results in a dearth of new discoveries and ultimately a supply shortage. When supply becomes tight, the funding comes back, and hence the cycle. For Silver Wheaton, these periods of tight financing create opportunity-and this is exactly what we are seeing now."

Others saw royalties as part of the funding mix going forward. "In the past 20 years, mine construction was viewed as being funded exclusively through equity or debt," explained Gold Royalties Corp. (GRO:TSX.V) CEO Ryan Kalt. "Going forward, I believe mine construction will be funded by three pillars: a royalty component, a debt component and an equity component. Adding royalty funding is accretive for a mine developer as it can use less equity and debt, while leveraging the cost of capital advantage from its royalty company partner."

Callinan Royalties Corp. (CAA:TSX.V) CEO Roland Butler noted, that perhaps "we are witnessing an end to traditional but unsustainable exploration financing approaches. This has opened the door to re-examination of the role royalty financing can serve, especially in the area of royalty creation at early exploration stage. This would be an adaptation of the grubstake model used decades ago."

Raising equity can result in massive shareholder dilution. Debt, when available, means forcing the unique challenges of building each particular mine into rigid bankers' timetables and punishing covenants. Royalty financing, noted Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) CEO David Harquail, "is patient money assuming risk on project performance, timing and. . .commodity price risk. Royalty financing also means giving up part of the upside of a single project rather than in all the assets and future of a company." He put the role of a royalty somewhere between equity and debt. "There is a lot to like from a developer's perspective."

Royalties today come in lots of sizes and structures. A number of smaller royalty companies have entered the space recently. Americas Bullion Royalty Corp. (AMB:TSX), which was previously known as Golden Predator Corp., CEO Paul Zink is talking to companies in the $5-50 million ($5-50M) range as he prepares to do the company's first deal. He sees a role for small royalty companies to come into a niche that is not being filled by the established companies, where it takes a large transaction to move the needle.

Zink also sees demand for royalty companies, including small royalty companies, on the investor side. "The market is now recognizing that based on the gap between mining stocks and gold valuations, royalties are faring relatively better." Zink believes royalty companies play a research role in the industry. "We play the role of vetting projects technically, something an individual investor may not be able to do," he said.

Not all royalties are structured the same. Some start collecting their returns after a company starts processing and making money. Some collect regardless of company profits. Gross smelter royalties or net smelter royalties (NSR) involve a single up-front payment in return for a life-of-mine percentage of cash smelter proceeds, net of pre-negotiated costs. Net profit interests (NPI) pay out only after mining costs have been recovered and profits attained, per an operator's accounting. An in-kind royalty receives metal rather than cash, which minimizes accounting disputes. A stream involves an upfront payment plus a per-ounce payment often covering "cash costs" as metal is produced.

Glossary of Royalty Terms

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All of Silver Wheaton's revenues are from 19 producing streams. Founded in 2004, Silver Wheaton was the first to implement streaming in hard-rock mining. Focusing on secondary streams of precious metals from primarily base metal producers, Silver Wheaton helps ensure economic viability of mines by covering the co-product cost of the silver and gold attributed to Silver Wheaton. The company is the largest in the business, with a market cap of $8.6B.

Franco-Nevada, which has a market cap of $6.3B, bought its first royalty in 1986 and has 211 mineral-based royalties, the majority of which are NSRs. Franco regards NSRs as the simplest type of royalty to manage and "highest margin, as any deductions for refining are very minor," said CEO Harquail. Still, 39% of 2012 revenues came from stream-based royalties.

Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX), founded in 1991 with a current market cap of $3.6B, has 200 assets, encompassing both streams and NSRs. Royal Gold has made private equity investments to obtain options on future royalties [Seabridge Gold Inc. (SEA:TSX; SA:NYSE.MKT)] and has even funded exploration on the Carlin Trend, then sought a operator for development and production [Placer Dome, now Barrick Gold Corp. (ABX:TSX; ABX:NYSE)] from which royalties were obtained upon highly lucrative terms.

Among new entrants, Sandstorm Gold, which was founded in 2009 by Silver Wheaton's first employee, Nolan Watson, has closed 10 gold streams, but has also bought three NSR advanced exploration royalties on projects Watson regarded as too early stage for a stream. Streams comprise 95% of Sandstorm's net asset value (NAV), which has a market cap: $0.6B.

Newer, more junior entrants such as Premier Royalty Inc. (NSR:TSX), Gold Royalties and Callinan Royalties prefer NSRs. This may be because NSRs as a rule range up to 5% of a mine's output, while streams range from 10% to 20% or more. Streamers finance initiation or expansion of production, providing larger amounts of capital than an NSR buyer, and therefore need greater and lower cost access to capital. "Unlike metal streams, which require a significant per delivered unit cost (e.g., $500/ounce), each dollar of cash flow generated by an NSR royalty has a comparatively much higher operating margin as there are normally more nominal deductions associated with that royalty structure, including smelter, transportation and insurance costs," explained Gold Royalties CEO Kalt. He added that NSRs can have royalty revenue margins in excess of 95%, "much better than metal stream or NPI royalties."

At the same time, Kalt pointed out that an NSR takes less of a producer's cash flow stream-typically less than 5%-versus a sizeable gold stream, which can be greater than 25%. "Sustainability of the metal stream for the operator will be a go-forward consideration around streams, as operators also need to have strong full cycle-businesses to help fund the exploration that both NSR and metal stream royalty holders are carried on," he said. All 10 of Gold Royalties' acquisitions have been NSRs.

Americas Bullion has a market cap of $29M and a historic portfolio of Nevada in-kind royalties based on a 25-year-old royalty portfolio Golden Predator CEO Bill Sheriff acquired in 2008. CEO Paul Zink is in the process of turning the company from an explorer into a royalty company.

And some of the royalty companies are mixing it up. Sandstorm bought 60% of Premier Royalty and will pass smaller opportunities to Premier, which will continue to operate as before. Franco-Nevada has obtained rights to invest 50% in Gold Royalty's asset deals up to CA$15M.

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Finding the Sweet Spot

All respondents acknowledge that senior miners are retreating from large new projects and focusing on profitability of existing development projects and producing mines. Streams are aiming at midtiers or juniors approaching starting or expanding production. NSRs typically aim at earlier stage projects, often explorers. Callinan CEO and Altius co-founder Butler observed that senior miners, "perhaps sensing opportunity. . .are auctioning their royalty interests on the market. Today there are few large royalty portfolios that remain available."

Silver Wheaton and Sandstorm favor production stage, with a small number of development stage assets. By contrast, Franco-Nevada CEO Harquail states, "we love exploration royalties, and can never have enough of them. Right now, we have 137 exploration royalties and our royalties now cover almost 10M acres on geologically prospective trends." Royal Gold has 36 producing, 28 development and 41 exploration royalties.

Callinan CEO Butler will invest at any stage, but now sees "greater value in smaller and earlier stage opportunities." Of the six investments he has made in the past year, two are for advanced projects with a development and production timeline, accounting for approximately two-thirds of the investment value, and the remaining four are at various stages of exploration.

Gold Royalties CEO Kalt sees the best risk/reward "once an operator has defined a resource and its economic parameters. . .and is in the range of 2 to 4 years from first gold pour." He also finds it "prudent to allocate a modest percentage of a balance sheet to exploration royalties, as unlike exploration stocks, the fixed royalty percentage is carried to production without future dilution and the optionality can have a material impact to NAV per share."

Store of Value

In the paper gold versus bullion hoarding debate, Silver Wheaton CEO Smallwood was not a fan of hedging or hoarding. "Our goal is to be an alternative to owning bullion or an exchange-traded fund and therefore sell our silver and gold as it is delivered. . . .Also, the dynamic nature of the opportunities means that we cannot hold a substantial amount of our capital in bullion as it would limit our ability to readily access those funds."

Sandstorm CEO Watson and Gold Royalties' Kalt agreed. "We intend to continue converting our gold into cash and complete additional gold streams. Our investors can get better leverage to gold by Sandstorm growing its streaming portfolio."

Kalt said, "Royalty companies provide torque to bullion ownership in that they are carried at the project-level for exploration and resource expansion. Hedging that bullion could reduce leverage to that upside characteristic."

Callinan's Butler sees the value of keeping some gold around. "We see holding approximately 20% of our market value in cash as providing option value in that it provides us the ability to swiftly and readily act on exceptional value opportunities. . . .Also, we are careful in cash management and are becoming more wary of where our money is held and in the form in which it is held. Gold, as always, is an increasingly attractive form of money." Courageous words written April 18, after gold's most precipitous drop in decades!

The Investor's Bottom Line

The founder of Adrian Day Asset Management has been buying more royalty companies than ever. "There are more royalty companies available today," Day said in a recent interview in The Gold Report. "For investors, the main goal should be to mitigate risk. For the bigger, senior companies, the biggest risks are replacing ounces produced because a mine is a depleting asset, and because of the continual things that go wrong with a mining operation. The big royalty companies with revenue from various mines diversify and mitigate risk to a very large extent. Once you've bought a royalty, your first dollar in is your last dollar in. You're not obligated to pay for cost overruns. If the government increases taxes, you don't have to pay them. If the water table breaks and the mine shaft floods, you don't have to pay to fix it. You mitigate the risk by avoiding all those unforeseen additional expenses. The owner of a royalty just has to be a little patient and wait for the mine to finally get built and produce gold. That's a big benefit."

Jonathan Gunter co-founded and built two South American wireless companies. Since their sale, he has studied and invested in gold equities.

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DISCLOSURE:
1) Jonathan Gunter wrote this article for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: Callinan Royalties Corp., Premier Royalty Inc., Americas Bullion Royalty Corp., and Sandstorm Gold Ltd.
2) The following companies mentioned in the article are sponsors of The Gold Report: Gold Royalties Corp., Franco-Nevada Corp. and Royal Gold Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Streetwise Reports does not make editorial comments or change experts' statements without their consent.
4) The article 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.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise - The Gold Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

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

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

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

101 Second St., Suite 110
Petaluma, CA 94952

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