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  • Contrarian Economist John Mauldin: How To Position Your Portfolio To Win In The Currency Wars

    Collateral damage from the currency wars in Europe, Japan and Russia could topple political leaders, put banks out of business and homeowners on the street. It can also play havoc with a portfolio. That is why The Gold Report called Mauldin Economics founder John Mauldin to ask how can readers protect themselves and perhaps even prosper.

    The Gold Report: The beginning of 2015 has been volatile for global currencies, not the least of which was the Swiss National Bank removing its cap on the franc versus the euro. What precipitated that and what does it mean for the Swiss franc versus other currencies going forward?

    John Mauldin: The Swiss National Bank had already expanded its balance sheet to 80% of GDP to maintain the link and would have had to buy more euros if the joint currency continued to weaken. It would be similar to the U.S. Federal Reserve having a balance sheet of $13 trillion. As late as the week before the big move, the chairman and vice chairman of the Swiss National Bank announced publicly that the peg was a cornerstone and the bank would continue to maintain it. Once it became clear that some very serious quantitative easing (QE) was coming from the European Central Bank (ECB), everything changed.

    Now we see that European bond buying could be on the order of €1.1 trillion, which is a relatively serious amount, and it is open ended with €60 billion a month planned until inflation hits 2%. Given all the deflationary pressures in Europe, that could be quite a long time. Consider that Japan has had massive quantitative easing for decades off and on and its nominal GDP is roughly where it was 25 years ago. The country hasn't witnessed anything that looks like inflation, so it's not clear to me that the move by Europe is going to be able to create inflation.

    The Swiss National Bank saw this reality and concluded it could be facing another $150 billion in losses and balance sheet expansion. There is only so much pain a central bank can handle. So it walked away from the whole euro mess. And it shocked the markets because Swiss financial leaders didn't want to start warning people and have it leak out. They decided to get over it and deal with getting taken off the Christmas card lists later.

    TGR: Is this just the beginning of the financial moves by the Swiss?

    JM: Switzerland already lowered key interest rates and has indicated it is willing to do it again. It wouldn't surprise me if we see a 1.5% or 2% negative factor in the future as the country puts a "you are not welcome here" mat out. Basically, it is charging you to hold Swiss francs.

    If you're a Russian that makes a lot of sense. You can lose 75 basis points on your Swiss franc or 25-30% on your Russian ruble. Swiss francs are better than euros and dollars aren't available.

    Other countries could follow. Denmark lowered its interest rates further into negative territory after the ECB announcement, and then lowered them again the next day. The Danes don't want the krone to become the next currency that everybody piles into. Negative rates have arrived in about six countries now in Europe-negative out into the four-to-five-year bond range. Europe is just upside down. It doesn't make any sense.

    TGR: Will the ECB be able to buy bonds at this rate indefinitely?

    JM: Sure. The Japanese are doubling down. In an October move dubbed the Halloween Surprise, the Bank of Japan announced its open-ended commitment to quantitative easing until the economy reached 2% inflation and the yen took a big drop against the euro. After the recent QE announcement by the ECB, the euro-to-yen swap rate has gone back to where it was and the yen is even stronger! This is precisely what Germany wants because the country's biggest competition in machine tools, robotics and automation is Japan. This is currency wars. Currency wars are not genteel, friends-and-family squabbles. This could get ugly.

    TGR: Are we going to see more collateral damage from the currency wars?

    JM: Absolutely. Korea at some point will throw in the towel trying to maintain its currency against the yen. The Chinese are going to have to allow their currency to fall against the dollar, which will send some U.S. senators into a tizzy.

    TGR: What about the businesses that trade in currencies? We saw a couple close overnight. Will there be more shockwaves like that for banks that are short the Swiss franc or mortgages denominated in francs?

    JM: I'm sure we'll lose a few banks here and there. Banks are always going out of business. We're certainly going to lose a lot of currency brokers. We will lose some hedge funds that were on the wrong side of the trade.

    TGR: There have been shockwaves from the freefall of oil prices. That has impacted currencies around the world including the Russian ruble and the Canadian dollar. What could happen if the price of oil stays under $50 a barrel ($50/bbl)?

    JM: It wouldn't surprise me if we see $30/bbl before this is over. It is down 60%. That's a pretty significant drop. I don't think oil stays down. The marginal cost of production is probably in the $60/bbl range so my guess is at some point over the next year to year and a half it gets back to that level, but it doesn't rise to $80 or $90/bbl. It's not going to get back up to where a lot of countries would like to see it. I think Saudi Arabia is perfectly fine to sell its oil at $70/bbl and take market share.

    TGR: Wouldn't that have political implications in places like Russia and Venezuela?

    JM: Sure. And it couldn't happen to a better bunch of terrorists. I'm not particularly worried about how difficult a time they have.

    TGR: What about the impact in Canada, where oil is a big export product?

    JM: The Canadian dollar lost parity already and leaders there are worried about the country slowing down. That is why the Bank of Canada cut its key interest rate in a surprise move earlier this month. The economy in Canada is getting softer. It is doing exactly what you would think a central bank would do.

    TGR: Should we brace for more of these surprise announcements?

    JM: Typically central banks don't do something just once. We are starting a cycle of lower rates.

    TGR: With all of the problems in Europe and China, what is supporting the dollar and the U.S. stock market climb and talk here of raising interest rates?

    JM: Currencies move in long cycles. The dollar was irrationally weak not that long ago. I predicted three years ago, when the dollar was dropping and some were pointing to the Chinese currency as the next reserve currency, that the dollar would remain the strongest currency in the world. People chuckled and shook their heads, but nobody's chuckling or shaking their heads anymore.

    The dollar is going to get a great deal stronger. Oil production in the U.S. is part of the rising dollar. We're keeping more of our petrodollars. When oil gets back to the $65/bbl range, you're going to be surprised how much production comes back in the shale oil fields. The cost of taking oil out of the ground is falling every quarter. Lower demand is cutting the price of drill rigs and salaries are getting back to normal. It's going to get cheaper. There are silver linings to the drop in oil prices as opportunities open up. There is a lot more oil out there and at $65/bbl it will be profitable.

    TGR: If oil floats between $30/bbl and $70/bbl, can the U.S. stock market continue to go up or is this a bubble and we're waiting for it to pop?

    JM: No, it's not a bubble. We don't have ridiculous valuations. We could see a correction just as we see in any move, but not a serious one like 2008 or 2001 until we have another recession. I think the next recession will also be the end of the secular bear market, but you just never know what the markets are going to do. The market will do whatever it can to create the most pain for the most number of people.

    TGR: What does all of this mean for gold?

    JM: If you're in Japan or Europe, you probably want to be buying gold because it's a bull market in those currencies.

    I have never been an investor in gold. I am a buyer and believer in insurance gold. I think you ought to own some gold in your portfolio as central bank insurance. The day will come when the dollar will turn and our central bank will start doing QE again because that's what central banks do. Then we'll have another bull market run and it will get a new resetting for a new valuation. You know what I'll do with my gold? Absolutely nothing. It'll sit there gathering dust.

    My point is if I ever use my gold, that's not a good sign for me personally. It either means that something really bad is happening in my life and I need the one thing I can convert to ready cash or the world is going to hell in a handbasket. My great hope is that I give my gold to my great grandkids and they look at me and ask what those shiny coins represent because that would mean the world turned out really well. But I like the insurance just in case it goes the other way.

    TGR: What about other commodities?

    JM: Other commodities are telling us the world has built up too much capacity and we're in a deflationary world. Nearly all the metals have gone down. Copper is way down. That is an indication of slower global growth for 2015.

    TGR: What alternative investments do you like?

    JM: My biggest personal winners for the last two years have been my short yen trades. I basically took my mortgage and hedged it in terms of yen with 10-year put options. I have been killing it with that and some funds that are basically short the Japanese government (not Japanese stocks, which I like!)

    TGR: When we talked last time you also were excited about biotech stocks.

    JM: I am a big believer in biotech. I think we're going to see some biotech stocks just breathtakingly go through the ceiling. Now there will be more that go to zero so you have to be very selective and thoughtful about what you do.

    TGR: Any final words of wisdom for our readers, investors who are trying to figure out how to protect themselves with all of these currency wars?

    JM: Long-term growth in your portfolio will only come from long-term growth in the global markets. Japan, Europe, China and the emerging markets are all going to have a crisis in the next five years. In the U.S. we will have to figure out in 2016 how we want to structure our country. Debate will center on questions such as: What do our taxes look like? What does our regulatory environment look like? We're going to get to make a decision as a country. It could either be massively bullish or not.

    Your core game plan has to be positioning yourself to take advantage of volatility. How can you take advantage of these rolling crises? You want to be able to have a strategy that's going to let you go long and short, move in and out on a rolling basis. You have to be long global growth.

    TGR: Thank you for your time.

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

    John Mauldin is an economist and financial writer of the New York Times best-selling books "Bull's Eye Investing," "Just One Thing," and "Endgame." His most recent book is "The Little Book of Bull's Eye Investing." Mauldin's free weekly e-letter, Thoughts from the Frontline, is one of the most widely distributed investment newsletters in the world. Launched in 2000, it was one of the first publications to provide investors with free, unbiased information and guidance.

    Mauldin is also the chairman of Mauldin Economics, and president of Millennium Wave Advisors, an investment advisory firm registered with multiple states. As a highly sought-after market pundit, Mauldin is a frequent contributor to publications such as The Financial Times and The Daily Reckoning and is a regular guest on CNBC, Yahoo! Daily Ticker and Breakout, and Bloomberg TV and Radio.

    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) 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.
    2) John Mauldin: 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.
    3) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    4) 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.
    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. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

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

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

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

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

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  • Why Companies With Female Board Members Outperform Those Without: Amanda Van Dyke

    Women aren't necessarily better than men, but men and women on boards together make better decisions that lead to higher returns, according to a new study on the impact of women on the boards of mining companies. As a matter of good governance, Amanda van Dyke, chair of Women in Mining (UK), analyzed the performance of companies open to new ideas, including moving beyond the old boys' network, and found that they excelled in profitmaking, environmental and social sustainability, and a host of other factors. Imagine, she challenges shareholders in this interview with The Mining Report, how much more you could make on your investments if a critical mass of the talented and best women in the industry made it to the top.

    The Mining Report: Amanda, you are the chair of Women in Mining, a group that recently published with PwC part three of a "Mining for Talent" report studying the impact of gender diversity on boards of mining companies. It looks as if the presence of women decision makers is a positive one. How did you evaluate the performance for the companies and what did you find?

    Amanda van Dyke: We took the top 500 mining companies by market capitalization and counted the number of women on their boards. Then we evaluated the companies based on 75 different metrics, including profitability and return on capital. We compared the results to the number of women on their boards and came up with a comparison of how companies with women on their boards did versus companies without women on their boards.

    TMR: Why would that be relevant to investors?

    AVD: Women in leadership positions have been correlated to better profitability overall, better return on capital, lower risk and better environmental social and governance management. Our findings show that despite the fact that there are considerably fewer women on mining boards, 7.9% actually in the top 500 mining companies, those women made a huge difference to how those companies performed.

    Over three years, we found that mining companies with women on their boards approximately doubled the return on capital employed, enterprise value/reserves and dividend yield compared to companies that had no women on their board. Actually the earnings per share were 13 times higher for companies that included women.

    The real winner is the shareholder. There's no question about it.

    TMR: Over the three years, did the percentage of women on boards increase, decrease or stay the same?

    AVD: It went from about 5% to 8% overall, which is a good result, but still far lower than any other industry and lower than what's considered optimal. An average of 25% to 30% has been shown to be the tipping point where you get the best benefits from women on boards. The results that I just gave you are with 8% women on boards. Can you imagine how high they would be if a critical mass of women were in a position to contribute?

    That being said I have to be careful to caveat that just any woman on a board is not going to make a company perform better. By definition if you are picking on merit and you double the number of people available for a job, you are going to get better talent. With overall better talent comes better performance. Affirmative action, quotas vis a vis women on boards don't work, as can be seen by how badly Norwegian companies with their 40% quota have performed.

    TMR: You talked about all the different metrics that you measured and we discussed profitability. What about some of the other measurements, like community relations and environmental compliance? Was there a difference seen there?

    AVD: Yes, and it was significant. Things like environment management, community programs, clean water, all of the things that really matter to the communities where mines exist, get much more attention when women are on the board or in management positions. Women tend to have a better understanding of the fact that the operations of mining and exploration go far beyond just drilling holes in the ground. Miners work in communities with governments, environmentalists, non-governmental organizations (NGOs), and all of those peoples' needs and wants have to be managed. When you don't, you have costly delays like Pascua Lama, Barrick Gold Corp.'s (NYSE:ABX) stalled $8.5 billion gold-silver project in Chile.

    Environmental, social and governance scores showed that companies with two or more women on the board had almost double the scores for companies with no women on the board. It's really impressive. On a consistent basis women make a positive difference in a company's sustainability performance.

    Surely by now board diversity would be best practice, but the problem in the mining industry is that it's very homogenous. It is largely an old boys' club of people from similar backgrounds and similar schools that have come up through the mining industry and they don't take on outside best practice management techniques. That is why we need fresh blood, from not just women but overall, in order to bring more innovative thinking into the mining industry. This is not a case of women being smarter or better, but putting them on boards and on management teams adds new and balanced perspectives, which allows boards to make better decisions. That's the difference.

    TMR: You mentioned women in management roles. Are you finding that more women are CEOs, COOs and CFOs of mining companies and is that making a difference?

    AVD: It is. When it comes to both boards and executive positions, the larger companies have embraced female executive managers first. There seem to be more CFO positions followed by legal, HR and Sustainability on the existing boards. Very few CEOs and chairmen. It seems to have been recognized that women tend to be very good guardians of cash.

    The other thing that women bring to management teams is they're not scared of questioning things. They are the first to put up their hands and question doing something just because that is how the company has always done it. Someone who asks why and makes managers justify their decisions at a company level is going to be the person who pushes the company toward making better decisions.

    TMR: Let's talk about some examples. What are some of the companies that have brought women into management roles or onto their board?

    AVD: In the large caps, the standouts are Rio Tinto Plc (NYSE:RIO), Anglo American Plc (OTCPK:AAUKF) [AAUK:NASDAQ] and Newmont Mining Corp. (NYSE:NEM). Gold Fields Ltd.'s (NYSE:GFI) chairman is a woman. Diana Garrett from Romarco Minerals Inc. (R:TSX) is a CEO and Catherine McLeod-Seltzer is chairman of Bear Creek Mining Corp. (OTCPK:BCEKF) [BCM:TSX.V]; all are associated with a fair bit of success and were featured in WIM's 2013 Top 100 Global Inspirational Women in Mining report.

    One of the things that women are associated with is higher enterprise value to reserves. That is a measure of the market valuing a company compared to the theoretical dollar value of resource it has; it's a way of comparing apples to apples in the mining industry. Similar to other metrics, that was about double for companies with women in key positions. This shows that the market is not necessarily consciously valuing companies with women on their boards higher than those without. A company can't just be running efficiently; it has to be seen as delivering value to shareholders for running a company efficiently. That's where women seem to be very helpful.

    TMR: The issue of including women in mining companies has been discussed for more than a decade. Why has it been such a challenge?

    AVD: The initial reason that most men said is that there simply wasn't enough talent. There weren't enough women engineers and geologists to bring women on in mining. Our analysis has proven that to be incredibly incorrect. Over 50% of geology graduates are female. That holds across countries. And realistically, the modern mine has so many more roles than just geology and mining engineering. Project management, finance management, stakeholder management, the business of mining is much bigger than geology. Actually there are some that say that the business of management needs more attention because that's what ensures shareholder returns. In that sense there are just as many qualified women as there are men for the majority of positions required on a modern mine from the bottom to the top.

    TMR: You've been studying this issue for three years; have any companies successfully put in place incentives or programs to bring women into these positions?

    AVD: Our sponsors support us as an extension of the fact that they already heavily support women. I would definitely say that Rio Tinto and Anglo American stand out for putting those procedures in place. We've outlined in the report a number of ways that companies can encourage more women to move up the ranks and onto boards. It's actually not that hard. The problem is that you have to convince the people that run the mining companies right now that it's within their interest to more actively recruit women and keep women. That is the biggest problem.

    Mining companies are male dominated. Over 90% of the people who work in mining are male. People tend to hire people who are like them. Actively seeing what the value is in recruiting women has been hard. It's the corporate culture that is holding women back the most. What we're trying to do is convince mining companies that if they change the corporate culture, they will see better results. The business case is pretty absolute at this point. We're hoping that this series of three reports will actively sell the business case to the mining industry to get it to embrace the idea of including more women.

    TMR: You are a woman in mining; what has the experience been like for you? How did you get interested in the field? Were your challenges different than the challenges that men face?

    AVD: I'm not sure if my challenges have been different from the challenges men faced. I started in gemology, diamonds, rubies, emeralds, etc. There are a lot of women in the world of precious rocks. Then pursued a business degree and then started working in a brokerage house that naturally gravitated toward mining. I don't think the people in the mining industry are actually sexist. It's just male dominated and habits of a lifetime are hard to break. When a woman walks in, they are surprised to see her talking about mining, selling mines or analyzing mines. But once one proves one's worth, miners are very practical people and they embrace whatever helps them. It's just getting them past the initial hesitation and helping them see that there is value in a woman's perspective. That takes some convincing, but I don't think it is impossible.

    What the industry needs most is more promotion and more understanding of the fact that over and above just merit-and we don't suggest that women should get ahead on anything other than merit-there is innate value in diversity. To be very clear, that doesn't mean that women are better than men. What it means is that putting women and men together is better than just women or just men on their own. Together they make better decisions. There's a huge amount of evidence to support that.

    Ultimately it is my belief that the lack of women on boards in mining are a symptom rather than the disease. The disease is bad governance, especially in junior mining. Boards are there to protect shareholders' interests, not management's interests. The time of good old boys' clubs needs to go. Boards represent and prioritize shareholders' interests and best practice governance, and one of the indicators of enlightened governance is the presence of women on the board.

    Mining company shareholders need to actively demand better governance generally beyond just hiring and promoting women. One reason, beyond weak commodity prices, that mining companies trade at multiples far lower than other industries is that investors have lost confidence in the management of mining companies to deliver results. On average, producing mining companies trade at a 5x price-earnings ratio while tech companies trade at 15-20x. I truly believe that shareholders actively demanding better governance from their mining companies and the better results that go with better governance can help turn the mining industry around. And one of the many things better governance includes is women.

    TMR: Thank you for your insights.

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

    Amanda van Dyke is managing director, Europe for Palisade Capital. Palisade Capital is an offshore merchant banking group that invests principal capital with a focus in the natural resource sector. It strategically supports its investments by applying bespoke business development strategies specific to junior resource companies. She worked previously for Dundee Securities, Ocean Equities and GMP as a mining specialist in equity sales, and has raised more than $500M in mining-related financing. She worked as a gemologist before getting a master's degree in business administration and a master's degree in international economics from SDA Bocconi. Van Dyke is also the executive chairman of Women in Mining UK, sponsored by Rio Tinto, Anglo American and Glencore.

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

    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Bear Creek Mining Corp. 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) Amanda van Dyke: I own, or my family owns, shares of the following companies mentioned in this interview: None. Newmont Mining Corp., Rio Tinto Plc and Anglo American Plc are sponsors of Women in Mining. 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 (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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    Tel.: (707) 981-8999(707) 981-8999(707) 981-8999(707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

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  • Which Commodity Horses Will Be Up And Which Down On Joe Reagor's Merry-Go-Round?

    Metals are like horses in a merry-go-round, believes Joe Reagor of ROTH Capital-as some rise, others fall. In this interview with The Mining Report, Reagor explains how looming surpluses, shortages and reduced confidence in central banks will be negative for copper but positive for silver, gold, uranium and, especially, zinc. And he suggests a handful of companies in these sectors that look to be best in show.

    The Mining Report: Gold rose 2.5% Jan. 15, and is up 8.4% for the year already. What do you make of that?

    Joe Reagor: I think there's a lot of money flowing into the sector. It's been two rough years in a row for gold, but now there's a feeling that a solid floor has been established in the $1,175-1,200 per ounce [$1,175-1,200/oz] range.

    TMR: Marc Faber says investor confidence in central banks is collapsing, and gold could rise 30% in 2015 as a result. What do you think?

    JR: Investor confidence in the large banks and the world economy has been reduced. Gold should have a steady increase throughout the year, but just one or two examples of positive economic data could result in a loss of some of the upside we've seen so far this year. Our 2015 forecast for gold is an average of $1,263/oz.

    TMR: The gold-silver price ratio has risen to 75. Does this surprise you?

    JR: We've believed since 2012 that gold would outperform silver. Looking at the new projects being built around the world, we've seen silver projects at 80-100 grams per ton [80-100 g/t] and gold projects at 0.09-1.1 g/t. So after we applied our recovery rate, this suggested a higher gold-silver ratio on a rarity basis.

    TMR: Will the gold-silver ratio decline in 2015?

    JR: Silver should outperform gold this year because silver has industrial uses. So the ratio should approach 70, for a silver price of about $18/oz.

    TMR: A number of experts interviewed recently by The Gold Report have said that at $16/oz the prospects for pure silver producers are poor. Do you agree?

    JR: At that price, the pure silver producers would struggle. However, silver has risen to almost $18/oz, and if it continues to rebound, pure silver equities should perform better than those that derive silver credits from base metals operations.

    TMR: What's your top silver pick?

    JR: Hecla Mining Co. (NYSE:HL). It produces mostly silver but also some gold and zinc. We believe that in H2/15 the zinc price could make a really strong move. We recently downgraded Hecla from a Buy to a Neutral, but that was a timing issue based simply on its current valuation. We still believe it's in position to outperform some of its peers.

    TMR: Hecla pays a dividend.

    JR: It's linked to the silver price, so it's quite small at today's prices. In the event of a significant spike in silver, however, this dividend would rise.

    TMR: Which near-term gold projects do you like best and why?

    JR: I'll name two. The first is Pretium Resources Inc. (NYSE:PVG) and its Brucejack project in British Columbia. We believe it should complete its financing, get its permits and break ground by the middle of 2015. Companies that go through that transition generally see a significant value-curve adjustment.

    TMR: Pretium's shares have risen substantially in the last month, despite no material news. Is a takeover bid imminent?

    JR: A takeover bid is unlikely until the company has its permits in hand. Pretium has agreements with local First Nations, and new ownership could result in those groups asking for additional permitting requirements or additional review time. The company is certainly acting as though it will finance Brucejack and put it into production itself. Moving forward decisively is certainly the right decision for current shareholders, instead of just waiting for an offer.

    TMR: What are your forecasts for 2015 base metal prices?

    JR: We follow copper, lead and zinc. Our forecast for copper is an average price of $2.74 per pound [2.74/lb], with $2.70/lb in Q1/15 and $2.60/lb in Q2/15. We expect little movement in lead, with a flat $1/lb price for the year. And for zinc, we expect $1.10/lb for the year, with the price rising as high as $1.30/lb in Q4/15.

    TMR: Given how important copper is to economic expansion, could its recent price decline be a leading indicator of a global slowdown?

    JR: I think the biggest issue is a slowdown in China. That country had stockpiled large amounts of copper but now appears to be selling back into the market, which is what's driving the price down. We think that world economic growth has lagged a bit and may continue to do so. We further believe that the strength of the U.S. dollar is more a reflection of the weakness of other currencies than it is of the strength of the U.S. economy.

    TMR: Assuming for the sake of argument modest global economic growth, does this favor the so-called currency metals, gold and silver, over the industrial metals?

    JR: For the most part, yes. Zinc should be the best performer this year, but after that, it should be pretty close between gold, silver and maybe uranium.

    TMR: Is the world running out of zinc?

    JR: A more accurate evaluation is that the zinc price has been so low for so long that we are running out of current supply. In 2012, the world zinc market was significantly oversupplied. The price fell to the $0.80/lb range, so there was no incentive for reinvestment. Since then, Glencore International Plc's (OTCPK:GLCNF) [GLEN:LSE] Brunswick and Perseverance mines in Canada have shut down.

    The London Metal Exchange's zinc inventory has fallen from 1.2 million tons in 2012 to below 700,000 tons [700 Kt], which means a roughly 250 Kt/year shortage right now, even before the Century shutdown. So world zinc inventories could drop to dangerously low levels by the end of 2015 or early 2016.

    TMR: When will new zinc projects come on line to make up the deficit?

    JR: If the price of zinc spikes, there could be a three to five year delay before the world can get zinc mines permitted and built. China has massive zinc reserves that aren't currently being produced, and a laxer regulatory regime than the rest of the world. But even if it brought some of its shuttered mines back on line and began construction of new ones, we'd still be looking at six months to get the former producing and a year or two for the latter.

    TMR: Let's talk about polymetallic projects. Which is your favorite?

    JR: PolyMet Mining Corp. (POM:TSX; PLM:NYSE.MKT) and its NorthMet project in Minnesota. This is essentially for similar reasons as to why Pretium is our top gold pick. This year, 2015, is the key year for NorthMet to be permitted, financed and begin construction. However, whereas Brucejack could be delayed three to five months and still break ground in 2015, NorthMet has only a one- or two-month window in late Q3/15 to early Q4/15 to begin construction because of its location. Delays beyond that would push NorthMet into 2016. That said, it seems to be on schedule, and we think it will make it to the finish line, winning the same value-curve adjustment we're predicting for Pretium.

    TMR: Does PolyMet have a new permitting strategy?

    JR: The current management, led by CEO Jon Cherry and CFO Douglas Newby, has learned from its mistakes and is now on the right course. PolyMet expects to issue its final environmental impact study in early spring. That will be, essentially, the end of the permitting process, and the company can then complete its financing.

    TMR: NorthMet has 72 million pounds [72 Mlb] copper. How does the recent fall in the price of copper affect its profitability?

    JR: If the copper price decline occurred when NorthMet was going into production, it would have been more of a concern. Generally speaking, a fall in copper prices today usually bodes well for three years from now. By the time NorthMet begins production, the price of copper will likely have rebounded significantly. Even at $2.50-2.60/lb, it would still be profitable. In addition, the company has offtake agreements with Glencore.

    TMR: Let's talk about uranium. To what extent is the fall in the spot price of U3O8 to $35/lb from $42/lb a short-term reaction to the oil price collapse?

    JR: I don't think it had much to do with that. In November, Japan announced that the Sendai reactor would be restarted, and this spurred a uranium buying spree by world utilities. Back then, there wasn't much spot supply available, which caused a momentary price spike. Keep in mind that the spot price was under $28/lb last summer, and now it's over $35/lb.

    TMR: You indicated earlier in the interview that you are bullish on uranium. Explain why.

    JR: Our forecast is for a long-term shift from fossil fuels to uranium as an energy source. And besides Cameco Corp.'s (NYSE:CCJ) Cigar Lake mine in Saskatchewan, little uranium production has been added in the last few years. If more power plants come back on line in Japan, and China continues its nuclear power expansion, uranium demand will continue to increase. This could lead to the removal of the current surplus and the creation of a shortage.

    We don't anticipate a major move in the price of uranium. Some industry experts expect a quick move to the $70/lb range, but we expect a staged recovery to the mid-to-high $40s by the end of 2015.

    TMR: Which specific uranium company can you discuss?

    JR: We currently follow Energy Fuels Inc. (OTC:UUUU), which recently announced its acquisition of Uranerz Energy Corp. (NYSEMKT:URZ).

    TMR: What do you make of this merger: ambitious, overambitious or just right?

    JR: I think it's probably just the right move for the two companies. Uranerz had a long road to finally reach production, but sometimes you get a management group that's ultimate goal is to prove concept and then sell to a company that can move it forward. I think that's what has happened here. Dennis Higgs, the executive chairman of Uranerz, will be on the board of the new company. He brings a lot of capital markets experience to the company, but he will also be able to do other things as well. That's ideal for him.

    From Energy Fuels' standpoint, it's a great acquisition. It provides the in-situ recovery [ISR], low-cost production option, while maintaining the conventional mining option. Should there be a significant uranium price spike, it would have the flexibility to restart large-scale mining, which gives it more of a production upside than, say, some of the ISR-only producers out there.

    TMR: How do you rate ISR uranium mining versus traditional mining?

    JR: ISR is the mining method that works when the industry is under fire because it requires lower upfront capital. The downside is that the permitting of additional wells and additional production areas can cause large fluctuations in production levels and impact overall profitability, whereas with conventional mining you're either producing or you're not. With conventional mining, once you're in production, you're done; you don't have to worry about repermitting as you go. Each approach has its advantages, but in today's market, ISR is clearly the leader. Should the price of uranium hit $70/lb, however, conventional mining would again be the preferred method.

    TMR: What's your general counsel for investors in 2015?

    JR: We favor the macro approach. Investors today aren't so much looking for analysts to pick specific stocks to buy and sell at specific prices as for general investing themes and some names that fit within them. So, for instance, we tell investors that with the U.S. dollar growing stronger, they should look for companies with all, or at least significant, production outside the U.S. Their costs are denominated in local currencies, so companies that mine metals whose prices are flat in U.S. dollars will benefit from the strong U.S. dollar.

    We're negative on current copper producers because of our negative outlook on near-term copper prices. We like pure zinc producers or those with significant zinc contributions because of the zinc shortage. In precious metals, we're targeting silver companies over gold companies because we expect the gold-silver price ratio to fall from 75 to 70.

    TMR: Given that mining equities have been bearish for almost four years, the good news of the past six weeks might lead investors to conclude that happy days are here again. Is this a reasonable conclusion?

    JR: A cautious optimism is reasonable. Mining equities in general are going to benefit from the lower oil price, and gold and silver equities in particular will benefit from the higher prices of those metals.

    I should again caution that better-than-expected economic data from Europe or China could easily reverse the recent trends in gold and silver. In addition, we note that the upward move in precious metals equities has outpaced the price increases in bullion. Therefore, we need further increases in gold and silver to support equity prices. Some gold stocks are up as much as 20-30% this year, so gold must continue to trend toward $1,300/oz to justify these gains. We expect moderate strength in the precious metals sector in 2015.

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

    This interview was conducted by Kevin Michael Grace of The Mining 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 Mining Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit The Mining Report home page.

    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Pretium Resources Inc., PolyMet Mining Corp., Energy Fuels Inc. and Uranerz Energy Corp. 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, research analyst primarily responsible for the content of this public appearance, certifies the following: I hereby attest that all views expressed in this public appearance accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this public appearance. Energy Fuels Inc.: Within the last 12 months, ROTH has received compensation for investment banking services from Energy Fuels Inc. ROTH makes a market in shares of Energy Fuels Inc. and as such, buys and sells from customers on a principal basis. Shares of Energy Fuels Inc. may not be eligible for sale in one or more states. Pretium Resources Inc.: Within the last 12 months, ROTH has received compensation for investment banking services from Pretium Resources Inc. ROTH makes a market in shares of Pretium Resources Inc. and as such, buys and sells from customers on a principal basis. Shares of Pretium Resources Inc. may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities. Within the last 12 months, ROTH has managed or co-managed a public offering for Pretium Resources Inc. Hecla Mining Company: Shares of Hecla Mining Company may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities. PolyMet Mining Corp.: ROTH makes a market in shares of PolyMet Mining Corp. and as such, buys and sells from customers on a principal basis. Shares of PolyMet Mining Corp. may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities. Please access this link for an important electronic communications disclaimer. 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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    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

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

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

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

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