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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.
    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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  • Eric Coffin: Is Market Sentiment Shifting To Gold?

    Equities past their peak? Bond market dead? So where do investors go looking for returns? Eric Coffin suggests gold, both bullion and stocks. In this interview with The Gold Report, the publisher of Hard Rock Analyst explains how changes in the currency and energy markets have reignited interest in the sector, and suggests why investors could profit from this new economic reality.

    The Gold Report: Quite a few analysts believe 2015 will be a year of great economic volatility, as foreshadowed by what happened with oil in 2014. Do you agree?

    Eric Coffin: I do think 2015 will be pretty volatile, with the potential for nasty financial surprises. We've already seen bond yields go negative in Germany, France and elsewhere, and we could see big moves in and out of different asset classes.

    TGR: Could the oil price collapse be a leading indicator of a global economic slowdown?

    EC: That's an oversimplification. Economic growth in China has slowed and will probably slow some more. And China is the 800-pound gorilla of commodity consumption. Estimates for worldwide growth in 2015 have recently come down but not enough to justify the drop in the oil price.

    The main reason for the oil price crash is oversupply. U.S. supply has grown massively due to fracking and horizontal drilling, while Libya and Iran have both added a million barrels a day. These events have disrupted the equilibrium.

    TGR: Mario Draghi, president of the European Central Bank [ECB], has famously boasted he will do "whatever it takes" to save the euro. Greece will hold an election Jan. 25, and the polls tell there is a good chance the new government will reject its current arrangement with the ECB. If this occurs, can the euro be saved?

    EC: The euro could survive a "grexit." The rescue package for Greece put together in 2012 essentially shifted all government debt from public and private banks to the International Monetary Fund, the European Rescue Fund and other transnational institutions. Together, they could handle a $300 billion [$300B] write-down. Not easily, but they could manage it.

    The real danger for the euro would occur should Greece prosper following a massive devaluation of its currency. Then countries like Italy, with much bigger debt loads, would want out as well, and the euro might be finished.

    TGR: The next ECB monetary policy meeting is in Frankfurt on Jan. 22. Will the Germans go along with the launch of the quantitative easing [QE] program Draghi is rumored to unveil there?

    EC: Draghi can't just jawbone any longer. He's got to do something, or the market will stop taking him seriously. But I'm not sold on the idea that the Germans will agree to any QE program big enough to impress the market. I think it would take a trillion-euro-sized program to impress the market. Hard to believe the Germans will go along with that.

    TGR: You wrote recently that "gold is the world's second strongest major currency." Are you surprised that it has recently outperformed the U.S. dollar?

    EC: Not really. I've been waiting quite a while for this to happen. Most market strategists do not view gold as a currency but only as a commodity. And their rule is: dollar up, gold down. But when you do view gold as a currency, you see that compared to many other currencies, including the euro, ruble, yen and rupee, it has been a good place to be in over the last year.

    We may be moving to a new model, whereby gold has a weak correlation to the U.S. dollar, or perhaps no correlation at all.

    TGR: Is there anything to the recent stories that Vladimir Putin might deal with the oil-induced threat to the ruble with the creation of a new ruble, one backed partially by gold?

    EC: Putin clearly likes bullion. The Russian central bank has bought a lot of it in the last two to three years. There's a certain logic to a gold-backed ruble because the ruble is now effectively a petrodollar, and the oil price collapse has been disastrous for Russia. It's far more likely that Putin would sell U.S. dollars rather than gold.

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

    EC: I'm still deciding, but if this reversal in the gold-dollar correlation can be maintained, $1,300 to $1,350 per ounce [$1,300-1,350/oz] is a fairly reasonable minimum target. If things blow up in Greece, it's tougher to call because that would be tough on the euro and good for the U.S. dollar, but it would also drive more people into other asset classes, such as gold. If gold can get to and through $1,350/oz, silver should be able to get to $22-24/oz at least.

    A zero-yield bond world would be good for gold because the traditional argument against gold-it doesn't pay interest-would no longer have any force.

    TGR: For several years, the gold-silver price ratio has been at a traditionally high 65. Recently, this has risen to 75. Will this trend reverse?

    EC: You can probably count on the fingers of one hand all the silver miners making money today. There are few silver projects being financed to production, and the potential for a fall in silver production is greater than that for gold. It won't take many investors to be long on silver to drive the price up $5-10/oz.

    TGR: You told The Gold Report in September, "If gold stays at the $1,200-1,250/oz area for an extended period, there will be mine closures." Since then, the price of oil has fallen 50%. How does that affect your calculation?

    EC: Oil at $50 per barrel will have a big, positive effect on bulk-tonnage operations, especially ones that run off generators. I've talked to a couple of producers recently about this, and the consensus is that it reduces their cash costs by about $50 to $75/oz. These savings will allow some of these operations to hang on a little bit longer. The strong U.S. dollar helps miners outside the U.S. as well, because so many of their costs are in local currencies.

    TGR: You have a particular interest in Yukon gold projects. Doug Loud and Jeff Mosseri told The Gold Report last month that the new Yukon environmental bill has created a regulatory nightmare, with potentially grave consequences for the future of mining there. What's your view?

    EC: If you're in a part of Yukon with settled native land claims, and if you can get the local bands onside, that clears a lot of the hurdles at the federal level. If you're not, you've got a big problem. The western half of the Yukon has settled claims.

    TGR: Let's talk about copper. Copper prices reached a multiyear low recently.

    EC: Pretty much what I expected. There have been problems with oversupply, but there's potential to go back into deficit a year or two out. I think copper will ultimately go quite a bit higher, but I won't be surprised if it spends most of 2015 between $2.50 and $2.80 per pound [$2.80/lb].

    TGR: Finally, let's talk about uranium. Late last year, people in the industry were excited because the spot price of U308 went from $30/lb to $42/lb. Since then, the price has fallen to $35.50/lb. How does that affect the prospects for explorers?

    EC: It doesn't help. It was easier to raise money in the fall than today. The uranium price has fallen in part because it is traded as an energy commodity, and oil and natural gas have fallen as well. It doesn't make a lot of sense for uranium to trade with oil, but there you are.

    I'm still bullish on the sector. The Germans have said they want all their nuclear reactors off line, but Japan intends to get as much of its reactor fleet back on line as possible. I think approvals for restarts will accelerate in Japan. Most important, China is going to build a great number of reactors over the next 20 years. I got interested in uranium again last summer when the spot price fell to $28/lb. At that price, producers were going to lose money; there would be mine closures, and there was no way we would see new production. It had nowhere to go but up. But a fully bullish scenario will take some time to unfold.

    TGR: The first big mining conference of the year, the Vancouver Resource Investment Conference, began Jan. 18 in Vancouver. What's the mood of investors going to be, and what should it be?

    EC: I'm told that registrations are about the same as 2014, which was not great but not horrible. The last good year for the mining industry was 2011, and investors are pretty tired of being smacked upside the head.

    When you look at the world economy, there's no shortage of worries. Anyone expecting 2014-style returns in New York in 2015 will be sorely disappointed. There's nothing to be had in the bond market. So where can investors get returns? There are a lot of very inexpensive mining companies out there. Even small increases in the gold price, coupled with falling energy and currency costs, mean they could put up pretty good numbers in 2015. In the last month, gold was up $40/oz, but most of those companies were up 50%. The mining sector has the best leverage because it's the sector that's been slapped down the most.

    On the subject of conferences, HRA is once again cohosting the Toronto Subscriber Investment Summit along with Resource Opportunities [Tommy Humphreys] and the Oil and Gas Investments Bulletin [Keith Schaefer]. It's happening the day before the Prospectors and Developers Association of Canada [PDAC] conference, on Saturday, Feb. 28, at the Hilton Hotel. Some of the companies that I mentioned in this interview are presenting at our event-Continental Gold, Precipitate Gold and Excelsior Mining. For more info or to register to attend, go to www.subscribersummit.com. Seating is limited and we usually sell out pretty quickly.

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

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

    Eric Coffin is the editor of the HRA [Hard Rock Analyst] family of publications. Coffin has a degree in corporate and investment finance and has extensive experience in merger and acquisitions and small-company financing and promotion. For many years, he tracked the financial performance and funding of all exchange-listed Canadian mining companies and has helped with the formation of several successful exploration ventures. Coffin was one of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997. He also predicted the start of the current secular bull market in commodities based on the movement of the U.S. dollar in 2001 and the acceleration of growth in Asia and India. Coffin can be reached at ecoffincustomerservice@hraadvisory.com or the website www.hraadvisory.com.

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

    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for 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.
    2) Streetwise Reports does not accept stock in exchange for its services.
    3) Eric Coffin: 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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  • Ron Stewart Presents Juicy Gold Takeover Targets

    The gold sector has always had a boom-and-bust mentality. Ron Stewart of Macquarie Equity Research says the flip side to the bear market is that the next bull market will produce phenomenal gains, and the companies leading the pack will be those that can still flourish at $1,000/ounce. In this interview with The Gold Report Stewart identifies low-cost, high-grade miners, several of which are likely to excite interest from cashed-up suitors.

    The Gold Report: There was a widespread assumption in 2011 that the price of gold could only go higher. As we have seen, this assumption was very much mistaken. Today the mood is much more pessimistic. Could this pessimism be just as mistaken as the optimism was?

    Ron Stewart: Yes, it could, but it's my experience that markets tend to overshoot on the upside and downside alike.

    TGR: Why has gold lost so much value?

    RS: Several reasons. Gold tends to rise in times of high inflation, and inflation is pretty low right now. The U.S. economy is doing well compared to other countries, and gold has a negative correlation with the U.S. dollar. Money is flowing into the U.S. economy and to the U.S. dollar and exiting other instruments such as gold.

    TGR: What do you make of the argument that financial institutions such as Goldman Sachs are using shorts to beat down the gold price?

    RS: It's really hard to point a finger at any one institution or entity that could drive the gold price one way or another. There are so many factors in play. For example, Russia now has the fifth-largest central bank holding of gold and continues to accumulate it. Should Russia become sufficiently distressed economically and need to acquire foreign currencies, it might become a gold seller.

    It's important to remember that the gold sector is a relatively small one in the global economy, and so its volatility is exacerbated as a consequence.

    TGR: How long will the price of gold remain depressed?

    RS: The last time the gold and gold mining sectors were so out of favor lasted from roughly 1998 to 2002. We're now two to three years into the current bear market. How long will it last? That's the $64,000 question.

    TGR: In 2008, economic shocks led to rapid gold appreciation. Do similar conditions exist today?

    RS: The situation today is considerably different than in 2008. Back then, several major banks were on the brink of collapse, and the markets were basically frozen almost overnight. Today, we have a weak European economy and a slowdown in China. But I don't consider another almost catastrophic failure in the financial system to be imminent.

    TGR: What are your near- and longer-term predictions for the price of gold?

    RS: In the near term, we're looking at a range of $1,150 to $1,300 per ounce [$1,150-1,300/oz]. Could it go lower? Yes. Over the next three to five years, we see the opportunity for a constructive price increase.

    TGR: The Gold Report interviewed Oliver Gross in October, and he told us that all-in sustaining costs for gold producers are now above $1,150/oz and that increased production will require a gold price of at least $1,400/oz. That being the case, doesn't it suggest that absent a significant rise in the gold price many mines will become marginal or will be shuttered?

    RS: We are seeing some margin squeeze at the top end, but the recent fall in the oil price helps miners by reducing operating costs. More important, any analysis based on the U.S. dollar price of gold fails to consider the local impact of different currencies. For instance, if one considers the Canadian or Australian dollar, the gold price fall in these currencies hasn't been as dramatic, and so Canadian and Australian operations haven't been squeezed quite as badly as operations priced purely in U.S. dollar terms.

    Mines don't shut simply because they are losing money in the short term. Mines are long-term investments, and their owners have taken and will take steps to further reduce costs.

    TGR: Toward the end of last year, hundreds of precious metals stocks reached 52-week lows. Will investors consider this a buying opportunity?

    RS: Buying and selling are individual decisions, so it's hard to make sweeping predictions. Investors who take the long view should consider Warren Buffett's advice: Be fearful when other investors are greedy and greedy when other investors are fearful.

    TGR: Investors in gold companies are fearful, so what are the critical factors they should consider before buying shares?

    RS: We look for good management teams, good balance sheets and projects that are not highly leveraged. Investors should also take care to choose stocks that have sufficient liquidity to allow them to get out, should circumstances change or they change their minds.

    TGR: Which junior gold producers today are your favorites and why?

    RS: We like smaller Canadian producers because of the currency advantage I mentioned above.

    TGR: Could you give some examples?

    RS: AuRico Gold Inc. (NYSE:AUQ) and Richmont Mines Inc. (NYSEMKT:RIC) are two. Both are well managed and have bright futures. In the case of AuRico, it is currently gearing up its Young-Davidson mine in Ontario. We expect this to be a long-life, low-cost asset.

    Richmont is developing a deep, high-grade zone at its Island gold mine. At around 9.5 grams per tonne [9.5 g/t], this zone is almost double the 5.5 g/t of the upper zone that it has been mining. We expect this high-grade will drive strong cash flow and earnings for some time.

    Alamos Gold Inc. (NYSE:AGI) has $350 million [$350M] cash, no debt and is producing at a profit. Rio Alto Mining Ltd. (NYSE:RIOM) is also profitable and can weather the storm. SEMAFO Inc. (OTCPK:SEMFF) [SMF:TSX] has no debt and is generating cash. These are companies that could still do relatively well with gold at $1,000/oz.

    TGR: There's a gold mine currently under construction in Mexico you rate highly, correct?

    RS: That's Torex Gold Resources Inc.'s (OTCPK:TORXF) [TXG:TSX] El Limon in Guerrero State. It's a 2.5 g/t open pit with a $700M capex. It's fully financed. Torex has already started the pilot mine, and it is stockpiling ore. Pre-commercial production will begin August 2015, with a nine-month ramp up to full commercial production. That will be over 300 Koz per year at about $700-800/oz all-in cost.

    This is a compelling story made even more so because the company has a 5.8 Moz gold equivalent discovery to the south of El Limon, Media Luna. Torex is considering development options that would allow it to bring that forward and combine it with El Limon to enable yearly production of 500 Koz. This is a very well-managed company.

    TGR: Guerrero State has been racked by turmoil since 43 students were abducted by police in September. Has this had any effect on Torex?

    RS: There is a national and international outcry about this. And it happened only 60 kilometers from the Torex site, so there's heightened security there. We spoke to CEO Fred Stanford. He's mindful of the situation, but it has not affected the company at this stage.

    We rate Torex Outperform, with a target price of $2.25/share, a 64% appreciation over the current share price.

    TGR: Given the state of the industry, juniors with deep-pockets joint venture [JV] partners are sitting pretty. Which such junior are you particularly interested in?

    RS: Reservoir Minerals Inc. (OTCPK:RVRLF) [RMC:TSX.V], which has a JV on its Timok copper-gold project in Serbia with Freeport-McMoRan Copper & Gold Inc. [FCX]. Reservoir has come up with what is shaping up to be a world-class system with fantastic opportunity to the upside.

    Freeport has the right to buy 75% of Timok, and in return Reservoir is fully funded to feasibility. I know Simon Ingram, Reservoir's CEO, quite well. He's working with and negotiating with Freeport on an operating JV agreement right now. This is a process that's been ongoing for the better part of a year because Ingram is determined to establish the best possible working arrangement.

    TGR: Will Freeport buy out Reservoir?

    RS: Well, Freeport certainly has a lot on its plate, but Freeport's CEO Richard Adkerson has recently made it clear just how bullish he is on Timok. So a takeover is possible. That said, I believe Simon and his team will do everything they can to unlock maximum value for Reservoir's shareholders. We think Reservoir brings some welcome excitement to a sluggish market.

    We've given Reservoir an Outperform rating with a $9/share target price. As you know, the stock was recently up around $5/share, but now it's back down to $4.15/share. This is an example of the volatility I've spoken of. We see a considerable opportunity for value in Reservoir with continued exploration success.

    TGR: What reasons do precious metals investors have to be cheerful?

    RS: Investors really have to look at their timelines and determine what's motivating them to put money into any sector and when. Certainly anyone who's been invested in precious metals over the last three years is feeling a lot of pain right now. I understand that, but going back to the famous Warren Buffett quote, fear has become dominant across the entire materials spectrum: gold, silver, copper, iron ore, etc. But the world is not going to stop needing metals.

    There are good places to invest, if you have the patience and fortitude to ride out the downturn. When the next bull market begins, returns will be phenomenal. When that's going to happen I leave to a higher authority.

    TGR: Ron, thank for your time and your insights.

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

    Ron Stewart, P.Geo., has over three decades of experience in the mining industry and is currently a research analyst of metals and mining with Macquarie Equity Research in Toronto. He was formerly executive vice president at Dundee Securities, CEO of Belo Sun Mining and senior vice president of exploration at Kinross Gold.

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

    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for 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: Richmont Mines Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Ron Stewart: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. Within the past year I have visited the material operations and development assets of the following companies mentioned in this interview: Reservoir Minerals Inc. My company has a financial relationship with the following companies mentioned in this interview: Reservoir Minerals Inc., Richmont Mines Inc. and Torex Gold Resources Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

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