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  • John Chu: Investors Can Feast On Fertilizer Yields

    As the world grows ever larger, its people demand more and better food. This trend will continue to benefit investors in fertilizer companies, declares John Chu of AltaCorp Capital Inc. In this interview with The Mining Report, Chu explains that a near-term supply crunch is good news for juniors and highlights four companies with projects than can meet demand, as well as a revolutionary Canadian company that is pioneering agricultural streaming.

    The Mining Report: Ding Xuedong, chairman of the $650-billion [$650B] China Investment Corp. [CIC],wrote in the Financial Times June 17 that the CIC is "keen to invest more across the entire value chain" of the agriculture sector. What does this mean for Chinese and world food supply?

    John Chu: It could be very big, not just for China but for the world. We're going to see some significant investments from CIC in agriculture and into regions that have seriously lacked funding. China has already been investing in African farmland, which should increase food supply and alleviate some of the recent pressures we've seen. Last year, China bought Smithfield Foods, America's largest pork producer, and Chinese state-owned entities have invested in egg production as well.

    In 7 of the last 12 years, crop demand has exceeded supply. This has led to higher food prices across the globe.

    TMR: Can we expect food prices to continue to increase?

    JC: Yes. Developing countries are becoming richer, which leads to greater demand for beef, chicken and pork, which in turn leads to greater demand for cereals and grains.

    TMR: Ding Xuedong also said that the CIC is "keen to work with the right partners to invest in greenfield projects." Can we then expect major Chinese investment in the Western fertilizer sector, as we have seen with oil and gas and the purchase of Smithfield?

    JC: I'm a little skeptical about that. China is now the world's number one nitrogen producer, with four times as much capacity as Russia. And China is also number one in phosphate fertilizer production. The only area where it's actually lacking is potash. It does have some domestic reserves in the Qinghai Salt Lake Potash Company Ltd. [000792:SZSE]. Once that ramps up to full capacity, it can probably meet 40% of China's domestic needs.

    CIC has just made investments in Uralkali (OTC:URALL) [URKA:RTS; URKA:MCX; URKA:LSE], a Russian potash player, and has an equity stake in Potash Corp. (NYSE:POT). But given how weak the markets are now, China is not likely in a big hurry to make any further major potash investments anytime soon.

    TMR: What is the projected growth of the fertilizer sector, and can supply keep up with demand?

    JC: Potash has the strongest growth. This is driven by China, India and Brazil, which have considerable upside potential in potash demand. Historically, 5-to-10-year projections for annual potash demand growth have been in the 3-5% range. But that growth will come from a lower base, given how weak demand was last year.

    Phosphate comes next, with a 2-4% annual growth forecast. Nitrogen comes last, in the 1-3% range, but it's always had the most stable and predictable growth. Currently, we've probably got excess supply for most of the fertilizers, and demand has been a bit choppy considering the sharp run-up in prices over the last several years. Some of the major buyers are playing a cat-and-mouse game, not necessarily following through with what they've ordered in the past, to try to keep prices down a bit. So supply now meets demand, but over the longer-term we expect that demand should catch up and require new capacity coming on-line.

    TMR: Will the rapidly growing world population lead to the benefits of the green revolution topping out?

    JC: Probably not. There's so much unused arable land in such places as Russia, Brazil and Africa. Significant new investment will be required, but technologies such as new seeds and GPS systems and techniques such as proper fertilizer balance cannot help but contribute to higher food yields and production growth. To give one example, U.S. corn yields are expected to potentially hit a new record high, and the U.S. is a mature corn growing region.

    TMR: How much corn is used for biodiesel?

    JC: Upward of 40% of U.S.-produced corn is used for ethanol. Some of the byproduct can be used for feed, so on a net basis it's probably around 25%.

    TMR: Does this mean edible corn shortages and higher prices?

    JC: It has led to shortages and higher prices, but typically in the agriculture sector, higher spot prices lead to a supply response. I mentioned the record U.S. corn harvest. The Chinese situation is similar, and Ukraine and Brazil are stepping up as well.

    TMR: To what extent is phosphate production dominated by North African and Middle Eastern suppliers?

    JC: Production of the fertilizers that farmers use is dominated by China, Russia and the U.S. Africa and the Middle East control about 75% of the production of phosphate rock, which is the raw material.

    TMR: Could this be considered a strategic problem?

    JC: Not quite yet. There is more than sufficient reserve out there. But that region is beginning to get into added value, and that could raise prices for phosphate rock.

    TMR: How do you rate the prospects for the current North American producers?

    JC: They're all in a good position now because the North American fertilizer market across the board is very strong. On the nitrogen side, prices favor Agrium Inc. (NYSE:AGU), but, overall, shale gas has helped change many North American players from high-cost to low-cost producers. North American demand remains strong, which is good for PotashCorp, as is the potential for greater demand from China and India.

    The global fertilizer market is tightening up. Uralkali and Belaruskali [its Belarus equivalent] had formed a marketing arm, which some people like to call a cartel. Along with Canpotex, which is the North American version of that, composed of PotashCorp, Agrium and The Mosaic Co. [MOS:NYSE], they controlled about 65-75% of world potash supply, and their focus was always on price over volume. Uralkali announced a year ago it was walking away from its partnership. That's when potash prices plunged. Now, however, we hear that Uralkali and Belaruskali could resume some sort of working arrangement, which would restrict supply and raise prices.

    TMR: Is being a North American fertilizer producer advantageous?

    JC: It is because the home market is a mature one without many swings in consumption, unlike developing markets such as Brazil, China and India. And the North American producers have good access from the East Coast and West Coast to serve those developing markets.

    TMR: It will produce thermal potash. Is this particularly suited to Brazil?

    JC: Thermal potash has a lower potash content than some of the other potash products. It has unique characteristics, such as a slow release into the soil. This is particularly good for sugar cane, coffee and other crops specific to Brazil. It also contains lime and other micronutrients that the Brazilian soil needs. Thermal potash has a history in Brazil and will not be anything new to local consumers.

    TMR: Does the Brazilian government expect to be repaid for its investment, or is it considering an equity position?

    JC: My understanding is that there is a loan component that must be repaid, but that's several years down the road. Part of the loan could be forgiven.

    TMR: You wanted to bring readers' attention to an agricultural company that is not involved in fertilizer.

    JC: That would be Input Capital Corp. (OTC:INPCF) [INP:TSX.V]. Its initial public offering was last year. The company has a new idea: giving loans to canola farmers to help fund their working capital. In exchange, Input receives an interest in each farmer's canola crop. For example, it may give $2M to a farmer for what is effectively 1.5 Kt of canola per year over a six-year period, with a floor price for the grain set in advance.

    This is a fascinating concept, considering that Canada is the world's leading canola producer. The potential market is quite large. Canadian grain farmers were squeezed by the extraordinarily cold winter of 2014. This resulted in rail delays whereby farmers weren't able to monetize their crops. They sat in storage bins, temporary storage bags or on the field waiting for delivery. This created some havoc in the agriculture space in general. Equipment companies saw their sales fall because the farmers didn't have the cash. Nonetheless, the farmers still had loans to repay, and this triggered higher interest rates. As a result, farmers are looking at nontraditional ways to fund expansion plans and working capital needs.

    TMR: What does Input's new idea offer investors?

    JC: It gives investors good exposure to agriculture with limited downside risk.

    TMR: The streaming model in silver and gold has been enormously successful. How much of this have we seen in agricultural commodities?

    JC: Input is the first publicly listed agricultural streaming company. Shares were floated at $1.60 and have since risen to $2.61. So we know there is investor interest; investors have seen the success of companies streaming other commodities. That said, I think there are investors waiting to see how well Input executes.

    Input offers a quicker return. If you invest in Input, every year you get crops. It doesn't have to be canola. For example, a farmer facing a supply shortfall in canola can repay Input in other crops. I wouldn't be surprised should other companies pop up to follow Input's lead.

    TMR: The company closed a bought-deal offering of $46M on July 18. This was oversubscribed by $6M, which indicates a fair degree of institutional confidence, correct?

    JC: The financing confirms that Input is seeing more interest from farmers seeking to engage in streaming contracts. The company said in its last quarterly result that the pipeline of potential customers looks strong, having been boosted by the rail delays and attendant problems. We believe that when Input begins to deploy its new capital to further streaming contracts, this will further improve investor confidence.

    TMR: To sum up, how do you rate the investor prospects for the fertilizer sector as opposed to other commodities?

    JC: There are a limited number of players in this sector compared to other commodities. The fertilizer sector boasts bellwether companies that offer good yields and demonstrate consistent growth. This makes them a pretty safe harbor for investors.

    In talking to investors we have heard that many have switched from other basic-material commodities to fertilizer companies because farmers need to use fertilizers year in and year out. This offers stability and explains why the fertilizer sector has held up reasonably well year-to-date despite the recent somewhat soft fertilizer market globally.

    TMR: John, 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.

    John Chu, CFA, is managing director of Agri-Industry Institutional Equity Research at AltaCorp Capital Inc. He was previously senior vice president in agriculture and industrials research at Mackie Research Capital and also worked for Scotia Capital and HSBC Securities. He holds a Bachelor of Arts with Honors in economics from Queens University and a Master of Business Administration from the University of Western Ontario.

    Want to read more Mining Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see 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: None. Streetwise Reports does not accept stock in exchange for its services.
    3) John Chu: 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. AltaCorp Capital is a market maker for the following companies mentioned in this interview: Agrium Inc. AltaCorp Capital was involved in an equity financing for Input Capital Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. 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.

    Jul 29 5:18 PM | Link | Comment!
  • Paul Renken: Bottom-Fishing For The Best Junior Resource Equities

    It's the lazy days of summer and Paul Renken, senior geologist and analyst with VSA Capital, is bottom-fishing. He sees a lot of value in unloved resource equities and spends much of his time sifting through the lot to find juniors that will get the increasingly sparse financing needed to turn potential into production. Renken offers an abundant catch of equity picks in this interview with The Gold Report.

    The Gold Report: VSA Capital recently published a research report that reads, "One of the key parts of exploration funding and the acceptance of risk versus monetary reward was the considerable correlation between share price appreciation and the reduction of geological risk." However, this no longer seems to be the case. What's broken?

    Paul Renken: What has transpired for the last couple of years, particularly in the junior and very small-cap exploration space, is that the money to find deposits and advance them along the risk profile to a bankable state has largely disappeared. The dollars required to define a resource have been viewed by the market as an opportunity to sell shares to take advantage of any short-term price strength. From the long-term shareholders' point of view, the money was wasted. Companies should have sat on the cash and not bothered with any exploration.

    The directors of these companies need to realize that at the early stages of a project, they have to consider the probability of finding a significant deposit and how much it's going to cost to define it. Investors, and institutional investors in particular, are looking for very low costs of discovery.

    TGR: Has that become part of your investment thesis for junior resource equities?

    PR: Yes, we're looking to bottom-fish particularly good stories with good deposits that have languished for some time but that are now showing good economics. There are many firms out there seeking capital but there just isn't much capital to finance all of them, or even the majority. If you're going to commit capital to bring some of these stories to production, why not cherry-pick the best stories and the best deposits at the most economical cost? The smaller you get in the resource space, the good deposits or good corporate stories are available at very low valuations simply because the sector has been so out of favor for so long.

    TGR: When is risk capital going to return to the sector?

    PR: The exploration side of the business, a subsector of the mining space, needs to show that it has the same or greater potential for a return on investor capital versus other sectors. It is a competition for the available dollars among all the different companies in all the different sectors-as well as debt capital and currency markets-not just other mining companies.

    We seem to be at the bottom or bouncing along the bottom in the small-cap mining space. I'm looking forward to seeing some signs, likely in a matter of weeks, that we have seen the bottom of the market.

    TGR: Where in the bulk commodity space should investors look for performing equities?

    PR: Companies that have a strong component of their earnings in industrial metals-lead, zinc, nickel, etc.-should do better than those in the iron ore space. As a large-cap company, Glencore International Plc (OTCPK:GLCNF) [GLEN:LSE] is likely best positioned among large mining firms listed in London. Glencore is pretty well situated in metallurgical coal and base metals concentrates, particularly lead-zinc concentrates. It is also getting involved in vanadium. It has its finger on the pulse of a variety of different bulk commodities that are traded on the London Metal Exchange, as well as on the mining side.

    TGR: You cover a number of industrial commodities, including tungsten. Tungsten has the highest melting point of any metal, but at $370/metric ton unit [$370/mtu], it's not exciting many investors. What's the investment case for tungsten?

    PR: Tungsten's primary use is in carbide cutting tools, essentially a proxy for manufacturing activity. If the banks and governments across the world are going to get the economy moving faster, they have to increase manufacturing activity. Manufacturing activity means being able to create, cut and sell metal-everything from fabricated products to metallic tools to sheet metal, including auto body panels.

    Auto manufacturing is increasing in both China and the United States. And because China wants to maintain its manufacturing dominance, it is no longer exporting tungsten as it did in the 1980s, when it essentially swamped the worldwide tungsten market. These days, some sources say as much as three-quarters of the arable land in China is contaminated. The Chinese must address this issue and that means no longer accepting quick and dirty methods of metals production. We expect Chinese tungsten exports to continue to tighten, and therefore tungsten should have fairly robust demand going forward.

    TGR: You also follow the rare earth elements [REE] subsector. It seems to be the most volatile, yet Reuters reports that one of its biggest players, Molycorp Inc. [MCP:NYSE], may have finally overcome their many challenges to become bona fide REE producers. Should investors believe the hype?

    PR: Molycorp has disappointed investors simply because they are taking too long and using too much money to reach their goals. Molycorp continues to have issues with bringing its mine back to the level of commercial production that it had achieved decades earlier. Institutional investors are going to have to be very patient to realize any return on capital.

    TGR: What's your view on the REE space in general?

    PR: I'm positive on the REE space. Further down the food chain there are a number of interesting REE stories with simpler mineralogy that should require simpler plants and processes to produce REE. That means their capital expenses should be a lot less, too. The Chinese have controlled REE production for a number of years but China is trying to seize greater control of the market inside its borders because there has been so much illegal REE mining and smuggling.

    The Chinese realize that the volatility experienced in REE pricing just a few years ago caused many end users to seek alternatives. The subsequent steep decline in REE prices has been difficult for Chinese REE producers. By the same token, annual REE demand growth is in the high single-digit range. That's expected to continue for some time.

    TGR: Perhaps one more REE junior?

    PR: Another one is Tasman Metals Ltd. (NYSEMKT:TAS) [TSM:TSX.V; TASXF:OTCPK; T61:FSE]. Tasman has two REE deposits, but the primary one is called Norra Kärr in Sweden. That particular deposit is relatively low grade in total REE at below 1%, but geologically it is skewed toward the heavy rare earths. It may also very well be quite profitable. The other interesting thing is that it is the only rare earth deposit in the development stage with a direct market into the European Union [EU]. The EU has declared REEs to be among a number of different metals and materials, including tungsten, that are critical to its industrial future as a trading block. I suspect that once the Norra Kärr feasibility study is complete, some financing doors will open in short order.

    TGR: In a February 2014 interview, you told us that investors should be in precious metals, gemstones and uranium. While precious metals' prices were up in the first half of this year and the diamond equities you mentioned have performed, uranium continues to flounder. Is it as simple as asking investors to have more patience?

    PR: It certainly has been a disappointment for uranium investors and for analysts who can see that it should be performing much better. The issue is that Japan has not brought its nuclear program back on-line. Japan has a surplus of uranium from long-term contracts that it can't use because those reactors are not operating.

    Japan is forced to resell that material for whatever it can get. This is costing the Japanese economy billions. How long will it continue to do this? It has already gone on longer than any of us anticipated. The government intends to bring these reactors back on-line at some point, when it is satisfied that it is safe to do so.

    TGR: What should investors do?

    PR: If they are still holding uranium equities, they must decide whether it's worth holding that position. A few uranium equities out there are definitely good bottom-fishing situations because the grade or size of the deposit dictates that they will be put into production as long as there is a global nuclear industry.

    TGR: Could you give us an overview on the nickel space?

    PR: The nickel space has been quite interesting ever since the Indonesian export ban went into effect in January. It's done wonders for the value of nickel. The price moved to the $9/pound [$9/lb] range from about $6.50/lb. We expect nickel to stay in that range until Chinese pig iron producers are able to source other nickel-laterite ore or cheap nickel concentrates. Until a source is found, we think the price will remain strong.

    TGR: Do you want to discuss gemstones?

    PR: The fundamentals for diamonds were looking quite good at the end of 2013 and that has proven to be the case. Most diamond equities, particularly the producing equities, are showing nice gains this year. That's based on improvements in both cut and raw stone prices on the auction tenders of these companies over the first seven months of 2014. U.S. and Asian retail demand continues to improve and we're comfortable projecting further gains.

    Among the names are Gem Diamonds Ltd. (OTC:GMDMF) [GEMD:LSE; GEMD:VIRTX; ZVW:FSE]; Petra Diamonds (OTC:PDMDF) [PDL:LSE]; and Dominion Diamond Corp. (NYSE:DDC), formerly Harry Winston. Those are names that I follow closely.

    TGR: In a report titled, "Emerging Market Forex and the End of the Commodity Market Super-Cycle," Goldman Sachs says that bulk commodities, like iron ore, copper and oil, will see five years of price softness to the tune of $80/ton iron ore, $6,600/mtu copper and $100/barrel for Brent crude. Do you concur?

    PR: We'll probably see some volatility in that very flat marketplace. Goldman Sachs is quoting prices that are 10-20% under the current prices, yet some of these prices are moving in the opposite direction. For instance, geopolitical risk is pushing up the price of Brent crude.

    To reach $3/lb or lower for a sustained period, copper would require a significant surplus over the next five-year period. The amount of copper coming into the market has been consistently lower than analysts' projections. Last year, there was a slight deficit. There may be as much as a 400,000-tonne surplus this year in my view, but that isn't significant enough to sway prices. I would peg the five-year average copper price closer to $3.20/lb.

    As far as iron ore is concerned, it may try to test $80/ton at some point, particularly if there's a decline in steel output in China. I suspect that the overall average for five years would be closer to $90-100/ton for 62% iron CFR [cost and freight].

    TGR: Parting thoughts?

    PR: I'm hopeful that we are looking at the bottom for mining equities. We may see another trading range for gold and for silver. Silver is certainly playing out according to what we had anticipated at the end of last year. Gold is a bit stronger than we had expected, largely because of geopolitical risk and retail interest from Asian investors. Platinum group metals prices are looking quite good and will continue to because of labor risk in South Africa and geopolitical risk in Russia. Overall, we see strength in a number of different commodities. It's time for equities to catch up.

    TGR: Thank you for talking with us, Paul.

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

    Paul Renken has a broad range of experience in various aspects of the mining and minerals business. He began his career as a geologist for Canadian junior resource companies in the western United States. Owning a stake in a private consulting firm as vice president of exploration, Renken searched for various base metals, precious metals and industrial minerals. In the UK, he worked in the equity market media outlets of Digitallook and Hemscott before joining VSA as mining analyst in 2006.

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

    DISCLOSURE:
    1) Brian Sylvester 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: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
    3) Paul Renken: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I 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.

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    Jul 28 4:56 PM | Link | Comment!
  • Doug Loud And Jeff Mosseri: Three Reasons Why Gold And Gold Stocks Will Rise

    It's hard to see the present until it's in the past. What does this mean for gold? Money managers Doug Loud and Jeff Mosseri of Greystone Asset Management say that a bull market may have already begun. All the signs are there: rising political tension, a shortage of new supply and a cull of the weakest stocks. In this interview with The Gold Report, Loud and Mosseri list a dozen gold, silver and copper companies that should ride the crest of the wave.

    The Gold Report: Over two days, July 14 and 15, the price of gold fell over $40 per ounce [$40/oz], more than 3% of its value. To what do you attribute this drop?

    Jeffrey Mosseri: I don't think it was a very extraordinary event. Gold has been trading around $1,300/oz. We see sharp upward and downward movements triggered by, for instance, something Federal Reserve Chair Janet Yellen said or a negative report by Goldman Sachs. It looks as if gold will stay in the $1,300/oz range for a little while. We'll see which way it breaks out. We believe it's going to break out on the upside.

    Douglass Loud: Gold had been running up for a while, and every so often investors want to take some money off the table.

    TGR: How high do you believe gold will go?

    JM: The average sustaining cost of production for gold is about $1,500/oz. If gold continues to trade below that level, at some point no new mines will be brought on. Supply and demand indicates higher prices for gold. At the same time, we're dealing with a seasonal trading pattern. Usually the position for those commodities tightens up around September-October. We think this will happen again this year. Higher prices? Yes. How much higher? We don't know.

    TGR: Given that the financing for junior gold companies collapsed years ago, shouldn't the concomitant shortage of new supply have led already to higher prices?

    DL: Well, there are games going on. Every once in a while some big bank will say that gold is too high. Then it goes down. After that, some big bank will say investors should buy gold and gold goes back up again. Institutions can profit by shorting gold and then buying it back before it rises in price, or so the conspiracy theorist in me thinks.

    TGR: The world is becoming a more dangerous place. We have the civilian airliner shot down over Ukraine, civil wars in Iraq and Syria, Hamas attacking Israel, and Israel striking back, as well as a burgeoning territorial dispute between China and Japan. As a result, do you expect a flight to safety by investors?

    JM: Actually, we are flummoxed by the apparent disconnect between what's going on in the world and commodities prices in general. We think that the reason for this is that the U.S. dollar is the least dirty shirt in the laundry basket. Investors are fleeing to the dollar because it's easier and cheaper, but if these hot spots continue to get hotter, it will almost certainly translate into more gold buying.

    DL: Then there's the issue of real gold versus paper gold. There may be much more paper gold than real gold to support that paper.

    TGR: The traditional argument for gold bullion is that it is a rare, real good that cannot be multiplied endlessly. Before gold exchange-traded funds [ETFs], if investors wanted exposure to gold that wasn't in bullion they had to invest in mining stocks. Do you think ETFs have resulted in a substantially changed gold market?

    JM: For many years the traditional relationship between gold and gold stocks was that the stocks predicted the direction the metal would go. This changed with the introduction of ETFs, and for the last few years, the tail has been wagging the dog.

    The ETFs were an interesting introduction. They have been and will continue to be a very good way to play gold, but they did result in putting gold stocks out of favor. Now people are beginning to realize that it is the mining companies that produce the gold, and they're going to make the profits.

    TGR: Historically, the end of a recession led to big increases in gross domestic product. We've yet to see this after the post-2007 recession. Why not? Are we now living in a new world of permanent low growth?

    DL: We're supposedly out of a recession because a bunch of statistics say so, but tell that to the shopping malls that are one-third empty and to the people who don't know how they're going to pay for the increases in food and fuel that are no longer included in the inflation statistics.

    JM: Serious economic growth has been stymied by a rash of new regulations and by the standoff between Congress and the Obama administration. This disincentivizes capital investment and capital creation. Most of the stimulus money created from 2008 went to firm up bank balance sheets and did not get into the economy proper. And so the recovery has been a lot more anemic than in the past.

    Now, however, business loans are beginning to be made by the banks. Little by little this will percolate into the economy. And the $8 trillion [$8T] created by the central banks has to find a home somewhere. We believe this will be reflected in higher gold prices, and, in fact, higher prices for commodities in general.

    TGR: The Financial Times reported in June that public institutions, central banks mostly, have invested $29.1T in the markets, mostly the equity markets.

    JM: Well, because of continued very low interest rates, most of the stimulus has gone into improving bank balance sheets and into the equity markets but not into the economy proper.

    TGR: HudBay Minerals Inc. (NYSE:HBM) has taken over Augusta Resource Corp. and Osisko Mining Corp. was taken over by Yamana Gold Inc. (NYSE:AUY) [YRI:TSX;YAU:LSE] and Agnico-Eagle Mines Ltd. (NYSE:AEM). Can we expect more such buyouts?

    JM: Yes. What's interesting about recent takeovers is that they were initiated as hostile bids. This is very unusual for Canada, which is a much more gentlemanly arena than America, Britain or Australia. We believe it's a question of value. Mining assets are now cheap, and well-financed companies can buy good properties cheaply.

    DL: We were in a meeting the other day with some executives whose company almost went under simply because their project took longer than expected. The company kept having to make payments on its equipment to keep its place in line, and pretty soon it used up all its cash. Time can kill a smaller business. And so mining companies can be bought on the cheap because they have no money and can't raise it.

    TGR: The Osisko buyout has resulted in the creation of a new royalty company called Osisko Gold Royalties Ltd. (OTC:OKSKF) [OR:TSX], which began trading at the beginning of June at $13.50/share and has since risen to $15.95/share. Why does the market value this company so highly?

    DL: Because it has a royalty on the Canadian Malartic gold mine in Quebec. So the company is like a mine without the mine.

    JM: Streaming companies are very attractive so long as they finance good projects. Investors see this stream of cash flow, and they love it. It's less risk with more visibility.

    TGR: Osisko Gold Royalties has $157 million [$157M] in cash. How big a player does it intend to become?

    JM: Clearly it will be a major player. The question is, will it buy other existing streams or will it buy other projects that will stream later? I think it will do both.

    TGR: HudBay now has Augusta. Its Reed copper mine in Manitoba is now in production, and its Constancia copper mine in Peru is scheduled to begin commercial production in the second half of 2015. How do you rate this company?

    JM: Very positively because we see its production going up radically in 2014-2015. Copper production should increase by over 50% next year. We happen to be very positive on copper. We also think HudBay will increase its gold production. And Augusta may not be its last acquisition.

    TGR: How likely is it that HudBay will be able to move forward its newly bought Rosemont copper project in Arizona within a reasonable amount of time?

    JM: All these big projects come down to two things, permitting and financing. The financing part should be easier. We think HudBay will move it along at a good pace, and that it will overcome any permitting hurdles.

    DL: Otherwise, there would have been no point in HudBay buying it.

    TGR: How ambitious is HudBay? How big does it want to be?

    JM: HudBay has extremely good management and will operate within its financial constraints. Other than that, I think the company will grow as big and fast as it can.

    Talking of permitting, after 10 years, we feel that Polymet Mining Corp. (NYSEMKT:PLM) [POM:TSX] is very close to obtaining its permits and its financing, and will finally be going into production on its huge copper-nickel deposit in Minnesota.

    TGR: In a previous interview, you talked a fair amount about Yukon mining. Are you still keen on that region?

    DL: Yes. There are those who feel that expenses went through the roof, which they kind of did, but we still like some of our companies up there. For instance, Alexco Resource Corp. (NYSEMKT:AXU) [AXR:TSX] and its Eastern Keno Hill Silver District. The company is run by some really smart guys. For example, Alexco used to pay Air Canada about $600,000 yearly to fly its workers in and out. It has solved that problem, and it has gotten other costs under control as well. Additionally, there's a lot of zinc up at Keno Hill, and if zinc comes back, it will be a very profitable project.

    When I was in the Yukon a while back, someone told me jokingly that the Yukon ought to annex northern British Columbia [B.C.] because it was more like the Yukon than B.C. There are a lot of good projects in that region.

    TGR: What is the status of Alexco's Bellekeno silver mine?

    DL: I think it's coming along very nicely. And Alexco has found a wonderful new site called Flame & Moth. Unfortunately, it's right under the mill it just built, so it is building the entrance to this new mine right next to the mill. The company will have two major production areas going. If it produces, for the sake of argument, 3 million ounces [3 Moz] of silver a year, it could well do 6 Moz of zinc.

    In addition, Alexco has its environmental recovery division. There are an awful lot of big companies that have bought a lot of little companies over the years, and they've got a whole bunch of little mines that maybe weren't cleaned up the way they should have been. Alexco is poised to profit from that.

    TGR: What else interests you in South America?

    DL: Because of the government of President Cristina Kirchner, Argentina has rather taken itself off the grid. If she is replaced with a more mining-friendly leader, then we like Yamana, which bought the Cerro Moro project. We would also revalue McEwen Mining Inc. (NYSE:MUX).

    JM: A better regime would also benefit Barrick Gold Corp. (NYSE:ABX) and Pan American Silver Corp. (NASDAQ:PAAS) [PAA:TSX].

    TGR: Argentina has been troublesome for business ever since Juan Perón first came to power in 1946. Does there come a point when mining companies decide to write off a country once and for all?

    JM: In the end, greed trumps grief.

    DL: And don't forget the grades in those Argentine projects are extremely high, which should make them very profitable.

    TGR: Are there any other precious metals companies you'd like to mention?

    DL: In Mexico, there's First Majestic Silver Corp. (NYSE:AG) [FR:TSX;FMV:FSE], which is well run and keeps finding more silver.

    JM: It has very high-quality management, and the company always seems to find a way around whatever problem is presented.

    TGR: The current bear market in precious metals goes back to April 2011. When will it end?

    JM: We think it may have already ended. The recession has cleaned out a lot of doubtful companies. The survivors with really good projects will either be bought out or get financed. We think that's going to start to happen in the very short term.

    TGR: How long will the trend have to keep moving upward before we can say that we're now in a bull market?

    JM: Metal stocks did extremely well from 2002 to 2010. Then there was a correction. We think that we are preparing for the next upward move, which should last for several years. There is a tightness in various metal markets, which will mean higher metal prices. This could lead to more mines going into production in the future.

    TGR: When you consider your favorite companies, which qualities do they share?

    JM: Good, solid management is one. Good deposits and good grades are another, and either being in production or being close to production is a third.

    DL: And we're very sensitive to country risk. I mean, we're not going to touch the best mine in the world, if it's in the Congo.

    TGR: Jeff and Doug, 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.

    Douglass N. Loud joined Greystone Asset Management at its founding in 2005 and has been senior managing director of Axiom Capital Management Inc. since 2009. Prior to that, he was with Murphy & Durieu, where he served as executive director of the Private Clients Group. Loud has over 35 years of investment management and securities industry experience. He holds a degree from Yale University and a law degree from the University of California, Berkeley.

    Jeffrey N. Mosseri established Greystone Asset Management in 2005 and became a director of Axiom Capital Management Inc. in 2009. He was a stockbroker and investment manager at Goldsmith & Harris for 20 years. Mosseri also worked as a stockbroker and investment manager for Carnegie Capital, the investment advisory division of Prescott Ball & Turben, where he ran the international arbitrage division and developed the gold mining research and investment department.

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

    DISCLOSURE:
    1) 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: None. Streetwise Reports does not accept stock in exchange for its services.
    3) Jeffrey Mosseri: I own, or my family owns, shares of the following companies mentioned in this interview: Alexco Resource Corp., First Majestic Silver Corp. and McEwen Mining Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. The fund has holdings in the following companies mentioned: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I 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) Douglass Loud: I own, or my family owns, shares of the following companies mentioned in this interview: Alexco Resource Corp., First Majestic Silver Corp. and Polymet Mining Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. The fund has holdings in the following companies mentioned: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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