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  • Survival Guide For The Mother Of All Bear Markets From Veteran Bottomfisher John Kaiser

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    TMR: Is the world also facing a potash shortage?

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

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

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

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

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

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

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

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

    TMR: Thanks, John, for your time.

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

    John Kaiser, a mining analyst with 25-plus years of experience, produces Kaiser Research Online. After graduating from the University of British Columbia in 1982, he joined Continental Carlisle Douglas as a research assistant. Six years later, he moved to Pacific International Securities as research director, and also became a registered investment adviser. He moved to the U.S. with his family in 1994.

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

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    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Goldcorp Inc. is not associated with Streetwise Reports. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) John Kaiser: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

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

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

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

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

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    May 05 3:44 PM | Link | Comment!
  • Duncan Hughes: The Weak Aussie Dollar Means Strong Aussie Miners

    A weak national currency is bad news for importers and consumers but good news for exporters, such as miners. According to Australian analyst Duncan Hughes of GMP Securities, the 24% drop in the value of the Aussie versus the U.S. dollar means that local gold producers can produce big margins even at US$1,200/ounce gold. In this interview with The Gold Report, Hughes names two Aussie gold miners with great cash flow, as well as several with projects in Africa, and he highlights nickel and copper companies that can expect to flourish when prices rise, as he expects they will.

    The Gold Report: Where do you see the price of gold going this year?

    Duncan Hughes: Gold should remain fairly flat, probably around US$1,225 per ounce [US$1,225/oz], due to the strength of the U.S. dollar. In U.S. dollar terms, gold has underperformed, but when valued in other currencies, gold has actually performed pretty well.

    TGR: How about nickel and copper?

    DH: Current spot prices just don't look sustainable to us. The price of nickel is depressed now because there are 400,000 tons stockpiled in the London Metal Exchange [LME], and the global market is about 2 million tons [2 Mt]. The expected increase in the price of nickel following Indonesia's ban on the export of unprocessed ore has been delayed because of ore coming from the Philippines. But this substitute ore is a lower-quality product, and stockpiles will eventually fall in China. So the supply crunch that was forecast for early 2015 will now occur later in the year.

    At the current price of around US$2.75/pound [US$2.75/lb], a fair amount of the copper industry is underwater. So we expect price increases beginning in the second half of 2015.

    TGR: Canadian mining companies have benefited greatly from the strength of the U.S. dollar. How great has the benefit been to Australian miners?

    DH: It's huge. The Aussie dollar has fallen from parity last year to US$0.76 today. So, for example, gold at US$1,200/oz translates to AU$1,570/oz, and nickel at US$5.70/lb means AU$7.50/lb. Without this currency premium, we'd see many Australian mine closures.

    TGR: So are Australian miners now dependent on this currency premium in order to maintain margins?

    DH: There are some high-cost assets that are producing only because of the Aussie gold price. This effect is even greater with nickel miners, as the price of nickel has really surprised to the downside. A number of Australian nickel producers are in trouble even with the weak local currency. Fortunately, they saved cash from the good times, but if it weren't for the exchange rate, half of Australian nickel production would be underwater.

    TGR: How has mining risk in Africa changed?

    DH: I think it's pretty much the same as it's always been. Africa is always going to have problems with corruption and mismanagement. The big challenge for the continent will be transportation infrastructure, with a major challenge also being power.

    There are still issues with terrorism, which we've seen in Kenya and West Africa, but the risk of nationalization seems to have fallen. A lot of things happen slowly in Africa, but sudden political and social changes often happen quite quickly: a new taxation regime or regime change itself, which we saw in Burkina Faso, one of my favorite jurisdictions.

    TGR: How would you assess the situation in Zambia and the Democratic Republic of the Congo [DRC]?

    DH: Zambia instituted, in my opinion, ridiculously high royalties, and now it seems it will have to step back from that.

    The DRC is proposing a new mining code that could be the same mistake Zambia made, but the DRC has a long history of uncertainty. It is a difficult place to operate, and you need to follow events very closely in that country, not only nationally but regionally as well. For instance, Katanga province, where most of the copper miners are, suffers less risk than other parts of the country. The DRC is a classic risk/reward situation. There is just so much potential there. I mean, you don't get 7% copper outcropping in many parts of the world, but you do in the DRC.

    TGR: Let's talk about Australian nickel juniors.

    DH: This is a subject close to my heart. As I mentioned above, the nickel price will rise, and this will benefit especially Australian producers, not merely because of the weak Aussie dollar but because these are high-quality, nickel-sulfide projects rather than lower-quality, laterite projects.

    TGR: Which nickel juniors do you like best?

    DH: I'll mention a few. Although I don't cover it, Western Areas Ltd. (OTCPK:WNARF) looks good. This is a pure nickel play with a low cash cost from high-grade deposits. The future looks pretty strong for it.

    TGR: What about the nickel exploration and development pipeline?

    DH: Sirius Resources NL (OTC:SRQUF) [SIR:ASX]. I recently visited its Nova-Bollinger nickel-copper mine in Western Australia. This has a AU$443M capex, but it is fully funded through equity and debt, and the company has a cash balance well in excess of AU$200M.

    This mine will be one of the lowest-cost nickel producers around: perhaps US$2.50/lb after the copper credit. The exciting thing is that the management team has a great background in exploration, and is already finding other resources. Sirius recently drilled a gold project called Baloo and published assays of 9 g/t over 10m and 6 g/t over 10m, right next to an operating mine. Even if Baloo doesn't meet the potential for a standalone mine, it certainly looks like it's got a customer on its doorstep.

    TGR: What's your view of the state of the graphite market?

    DH: This is a developing story. Traditional supply has come largely from China, so there's uncertainty about those numbers. We know that the traditional market is currently quite small, about 1 Mt per annum or thereabouts. Many companies are developing potential new supply, which could overwhelm the market. I think the trick in the graphite market is the availability of different types of product.

    TGR: How should investors react to current metal prices?

    DH: I would look to accumulate base metal producers toward the end of 2015 in anticipation of higher prices. Gold investors should seek out high-quality, low-cost operations which provide certainty of profit. And investing in Australian-domiciled projects provides exposure to a highly favorable exchange rate.

    TGR: Duncan, 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.

    Duncan Hughes joined GMP Securities Australia as a mining analyst in 2014. Prior to joining GMP, Hughes was head of research for RFC Ambrian Ltd. in Perth, Australia, beginning in 2010. A geologist, he has more than 15 years of experience in the resources industry and managed the discovery and development of the Prospero, Tapinos and Alec Mairs ore bodies for Jubilee Mines/Xstrata. He worked previously for CD Capital and Linq Capital. He holds a Bachelor of Science [Honours] from Oxford Brookes University and a Master of Business Administration from Imperial College London.

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

    Top of Form

    Bottom of Form

    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher ofThe 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) Duncan Hughes: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    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 (NYSE:I) only in whole (and always including this disclaimer), but (ii) never in part.

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

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

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

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998

    Email: jluther@streetwisereports.com

    Apr 29 3:18 PM | Link | Comment!
  • Picking Undervalued Gold Equities Akin To Picking Strawberries: Randall Abramson

    Randall Abramson, CEO/portfolio manager with Toronto-based Trapeze Asset Management, says that picking stocks can be like picking strawberries. If a strawberry looks terrific, other than a tiny blemish, you simply remove it and enjoy the rest. But if the fruit turns out to be rotten, the entire strawberry is for the birds. Is the stock price below fair market value because there's a little blemish and the market is overreacting? Or is it a sign that the stock is rotten to the core? In this interview with The Gold Report, Abramson offers a fist full of small- and large-cap gold equity names for investors that can look past the blemishes to see quality fruit.

    The Gold Report: A 10-year U.S. bond yields 2% currently. How is that changing the market?

    Randall Abramson: We typically view the markets and our investment process through top-down and bottom-up lenses. Our top-down tools are telling us that all systems are "go," and that there are no immediate hurdles ahead. This low-growth environment has allowed the broader markets to remain in a bull phase for longer than is typical. In fact, we've not had even a market correction of 10% or so for way longer than normal.

    TGR: The World Gold Council [WGC] reports that central banks bought 477.2 tons of gold in 2014, which was nearly a 50-year high. What do you make of central banks buying gold at peak Cold War-era levels?

    RA: Gold does not have a built-in return. When interest rates are higher, everybody is less apt to hold gold because there's too much of an opportunity cost. When interest rates are negative, as they are in some countries today, you'd probably rather own gold than lose money on bonds.

    Central banks are perhaps trying to spur inflation by buying gold, or they could be less interested at these elevated U.S. dollar prices to hold dollars in their reserves, or they could be concerned about the U.S.'s balance sheet. All of those are factors. But the key driver is that there are places like China, which is flush with cash and willing to hold more gold. China always takes a long-term approach to the way it manages things. It may even be making a run at the U.S. dollar for reserve currency status and holding more gold in its coffers will help.

    TGR: The WGC report also said gold demand jumped 6% in Q4/14 to 987.5 tons but was down 4% year-over-year. Does that bolster your spirits as a gold investor?

    RA: The 2014 growth rates were a bit deceiving because the 2013 numbers were out of sight, driven by huge investment demand in both India and China. And at the same time, India put curbs in place to limit gold buying, which probably slowed down demand growth for gold last year. In the overall picture gold demand has been growing nicely over time, while the supply has more or less flatlined. Now that the price of gold is around $1,200/ounce [$1,200/oz] and close to the all-in sustaining cost of production, our take is that about half of the global gold producers would not make a profit below $1,150/oz. That should support the price at that level. And given that the marginal cost of production for gold is around $1,400/oz, we believe that we will see $1,300-1,400/oz gold in the not-so-distant future.

    TGR: Pick one: long gold or short gold?

    RA: Long. The world's central banks are, in aggregate, accommodative, some of them highly accommodative, in terms of quantitative easing. We think that they will ultimately win the day, and this disinflationary period that we've lived through for years will transition into a reflationary period. The key indicator of that so far is that the gold price, while it's near a recent low in U.S. dollars, looks terrific on the charts in just about every other currency.

    TGR: Trapeze positions itself as value investors, stock pickers. Are we in a stock picker's market for gold equities?

    RA: That's a great question. You can go through periods where the overall sector is a better bet than finding a specific stock, especially from a risk-reward perspective. For instance, when the market bottomed in 2009, using a net to capture a bunch of stocks might have been better than a mere handful of particular stocks because the whole market was trading near $0.50 on the dollar. You didn't want to miss out on the market reverting to fair value.

    The gold equities market is in a similar phase. You would have been better off as a stock picker over the last couple of years to avoid highly levered or high-cost producers. Those companies witnessed unprecedented declines in their stock prices. But now that we're sitting with gold stocks versus bullion at the lowest level in 75 years and the price:book value [P:BV] of the overall senior golds in the sector trading at about one times P:BV, it seems to be a period where casting a wide net may make more sense. And that's an interesting comment coming from a bottom-up value investor like me.

    TGR: Everyone obviously has their own methods of picking everything from fresh fruit to baked goods. Tell us about your process for picking equities, especially precious metals equities, in this market.

    RA: You pick baked goods based on what you like to eat. Some people like éclairs. Some people like cookies. But we pick our fruit differently. Most of us like strawberries but not all strawberries are the same. If a strawberry looks terrific other than a tiny blemish, that's no problem. You can cut out the blemish and enjoy the rest. But if that piece of fruit turns out to be rotten, the entire strawberry is for the birds. That's similar to how one should look at stocks on a bottom-up basis. Is the stock price below fair market value because there's a little blemish and the market is over-reacting? Or is it a sign that the stock is rotten to the core? That's what we do as value investors.

    TGR: As you suggested, the large-cap gold space has been beaten up and pushed down the stairs. Where are you finding value?

    RA: Our favorite in the space is Goldcorp Inc. (NYSE:GG) because it is one of the lowest-cost producers, has years of significant growth ahead, has a solid balance sheet, and trades at a reasonable valuation below its net asset value [NAV]. We think we're getting a margin of safety, not just from the price to our appraised value but within the underlying aspects of the business, the fundamentals.

    TGR: What are the near-term catalysts for Goldcorp?

    RA: The reserves should lift nicely this year and projects not in the official pipeline yet could come to the fore with the potential to add millions of ounces. But the key catalyst is the price of gold itself because Goldcorp needs to make, like all others, a higher operating profit per ounce for the market to get excited. Part of that should come from a decline in the U.S. dollar; however, the U.S. dollar continues to show remarkable strength. To have this kind of move in a currency, especially in the world's reserve currency, in such a short period, is not normal.

    TGR: Most of our readers follow small-cap precious metals equities. Please give us an overview of that sector.

    RA: It's been beaten up as badly as the large-cap sector. The large caps are trading at about book value, and the small caps are valued similarly. About 2,000 companies are listed on the TSX Venture Exchange and about two-thirds of those are resource equities, mostly gold and oil and gas stocks. The Venture started in 2001 and the index is now below the level at which it started. It's essentially at the same level it was at the market bottom at the end of 2008. There is a treasure trove of potential investments there.

    The problem is that a lot of companies need capital and the gold business is complex-there are geological issues, engineering issues, commodity price fluctuations and other moving parts. When the sector is out of favor, it's very difficult for some companies to attract capital. It's the ultimate value trap. Having said that, there are companies out there without debt, with cash on their balance sheets and that ultimately can control their own destiny.

    TGR: Tell us about Dynacor Gold Mines Inc. (OTC:DNGDF)[DNG:TSX].

    RA: Dynacor is predominantly a toll-milling company, which hopes to have production of its own one day. It operates in Peru, though its head office is in Canada. The company has about US$15M cash, no debt and only about 36M shares outstanding-a considerable amount of cash per share considering it's trading around CA$2.10. Almost one-quarter of its market value is in cash.

    The company has had solid earnings for years. Its recent quarter was somewhat masked by a few items, one of which was the 4% withholding tax on repatriation of funds from Peru; Dynacor took several quarters of earnings and brought them back to its bank in Canada in one quarter. Nevertheless, the operating profits held in beautifully, and I point that out because even though gold came off, Dynacor is still making healthy profits. The company makes a certain price per ounce as it collects high-grade ore from the various miners that don't have their own mills in the regions where it operates. The icing on the cake is that it was just approved for a new, more efficient mill.

    Dynacor's management believes that once the new mill is built, it will be able to operate both mills, taking its earnings power closer to CA$0.50/share, up from just shy of CA$0.30/share from the middle of this year since it will be boosting throughput with a recently approved expansion at its existing mill. If you merely put a 10 times multiple on the fully expanded earnings power, it's much more than double the current share price.

    TGR: You mentioned production. How far out is that?

    RA: Dynacor is spending about CA$2M per year to explore the Tumipampa gold-silver project in Peru, and the results there have been staggering-as much as 111 grams per ton [111 g/t] on some intercepts. Even if the grade ultimately came in at 15 g/t, Dynacor should have a viable mine-its drilling to date has averaged over 20 g/t. The company will continue drilling Tumipampa over the next year or so and then will likely make an application for a permit to begin mining, perhaps in two or three years. We should be getting an NI-43-101-compliant resource estimate by the end of 2015. It should be above 1 million ounces.

    TGR: Other juniors like Inca One Resources Corp. [IO:TSX.V] have entered the toll-milling business. Do they pose a threat?

    RA: Peru went through a process called formalization where it forced companies to be compliant with two things: the way they milled ore and remitted taxes. A lot of companies either couldn't do it or had been in the business for so long, doing it other ways, that they refused to. That allowed Dynacor to pick up more business and others to come in and scoop up some business as well. The bigger mills have survived, while some of the smaller mills have gone. So even though there looks to be more entrants because we hear about them listing on Canadian exchanges, the reality is there are fewer market participants and some serious barriers to entry.

    TGR: Do you have a target on Dynacor?

    RA: Dynacor, using a 10 multiple on, say, run rate earnings per share of at least CA$0.40, in a year or so should be about $4, plus whatever Tumipampa is worth, which could be significant-there's an amazing chart in its most recent presentation showing all of the landholders around Tumipampa; it's a who's who of majors.

    TGR: What's your best guess as to when the bear market for gold bullion will end?

    RA: Gold in every other major currency except the U.S. dollar is clearly out of a bear market because it's up significantly. Gold in U.S. dollar terms, while it's barely off of its bottom, has already triggered a buy signal in our proprietary Ratio of Adjusted Capital work. Since 1990 we've seen that buy signal happen 14 times with an average gain of about 25% from its trough. Only once did it decline.

    TGR: Could that just be a bear market rally?

    RA: It's possible, but it's unlikely because you have to liken gold to any other commodity, like pork bellies, and look at the commodity fundamentals. While the gold supply is flatlining and demand is growing, at current levels gold is far below the marginal cost of production. Gold is sitting at the average cost of production, but commodities typically sit, on average, at 40% above the average all-in cost of production. The gold price has to normalize to the upside. What's inhibiting gold isn't necessarily disinflation, it's the U.S. dollar and that could continue given that interest rate differentials still favor the U.S. over other regions. If you're a pension investor, you've been earning 2% on your U.S. Treasuries versus next to nothing, or even negative yields, on your European bonds, and worse, the euro has plummeted versus the dollar. But that could all turn on a dime.

    TGR: If you start to see more evidence that your theory holds water, will you increase your weighting in gold equities?

    RA: Yes. There are other names like Randgold Resources Ltd. (NASDAQ:GOLD) and Newmont Mining Corp. (NYSE:NEM) that we've been in and out of over the last couple of years.

    TGR: Any parting thoughts?

    RA: It's interesting that I just conducted interviews with The Gold Report and The Energy Report because as you look around the world, it's very difficult, more than any other time that I've seen, to find value. When you're in a bear market, value abounds, and when you're in a bull market, you can still typically find pockets of value. Yet it's difficult to find undervalued stocks today. But the two groups that keep coming up on our screens, from all over the world, on a bottom-up basis, are energy and gold stocks. Now, if we could just get commodity prices to cooperate.

    TGR: Thank you for your insights, Randall.

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

    Randall Abramson, CFA, is CEO and portfolio manager of Trapeze Asset Management Inc., a firm he cofounded in 1999 shortly after founding its affiliate broker dealer, Trapeze Capital Corp. Abramson was named one of Canada's "Stock Market Superstars" in Bob Thompson's Stock Market Superstars: Secrets of Canada's Top Stock Pickers (Insomniac Press, 2008). Trapeze's separately managed accounts are long/short or long only, and have either an all-cap orientation or large cap-only mandate via the company's Global Insight model. Abramson graduated with a bachelor's degree in commerce from the University of Toronto in 1989, and his career has spanned investment banking, investment analysis and portfolio management.

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

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    DISCLOSURE:
    1) 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 of Streetwise Reports: None. Goldcorp Inc. is not associated with Streetwise Reports. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Randall Abramson: I own, or my family owns, shares of the following companies mentioned in this interview: Dynacor Gold Mines Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I 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.
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    Apr 27 2:11 PM | Link | Comment!
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