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  • How To Make Money In Renewable Energy: NBF's Rupert Merer

    As the political and financial pressures on fossil fuels mount, investors are starting to explore the renewable energy space with an eye toward reaping its potential. Rupert Merer analyzes that growing energy sector for National Bank Financial and tells The Mining Report why betting on the future of renewables is a prudent strategy for profit growth.

    The Mining Report: Where is the renewable energy space headed in terms of profitability?

    Rupert Merer: Most renewable power companies have long-term production contracts that provide a relatively low-risk return on invested capital. This is a capital-intensive industry with a lot of invested debt and equity capital. There is excellent visibility on cash flow and revenues-as long as 40 years out in the case of small hydro contracts. The duration of small wind and solar contracts is 15-20 years.

    With steady cash flow, the renewables sector can provide dividends of more than 5% for income seekers, typically with good visibility on future dividend growth. As solar and wind power have seen rapidly declining costs over the last few years, they have also seen very high growth. We think that this growth will continue and there should be an increasing number of investment opportunities.

    Chart 1

    TMR: What are "sustainability investors"?

    RM: There are a few funds in Canada, the U.S., and the United Kingdom that invest only in renewable power assets. Some of these fund managers believe that there is an inherent risk with fossil fuel investments. Of course, if governments start to tax carbon at a higher rate or introduce cap and trade, then that could be a limiting factor for using fossil fuels to generate electricity.

    Investors in the energy sustainability space typically look for a ratio of more than 50% clean energy in the stocks in their portfolios. Clean energy includes renewables and power plants that use natural gas, provided that the plants are high-efficiency co-generation plants or combined cycle plants.

    TMR: How does a renewable energy project secure a long-term contract?

    RM: That depends on the jurisdiction. The Canadian power market is regulated at the provincial level. Ontario is the most populated province in the country and it has been the most aggressive at developing renewable power over the last decade. In the past, the government has offered fixed price contracts, or "Feed in Tariffs," for renewable power at a price that would provide an attractive economic incentive for developers. However, generally, in Ontario or in other provinces, firms will bid on, say, delivering 200 megawatts [200 MW] of wind power, under a competitive request for proposal. The contract will typically go to the lowest price bid from a viable entity.

    In the U.S., contracts are often arranged between developers and utilities or businesses in the private sector. Projects have typically also included financial partners that have purchased tax credits from the developer.

    TMR: Given that wind and solar intermittently generate pulses of energy into the grid, has the grid developed the capability to access renewable energy when it is live, while compensating for it when the generator goes temporarily fallow?

    RM: The easiest way to compensate for intermittency is to increase transmission capability.

    If the local area has more wind or solar power than it can use, it can send it to a neighboring region. Another way to manage intermittency is to decrease the use of power on the grid when there is a deficit of renewable energy. For example, operators can shut off air conditioning loads when there is a deficit of power. As the amount of renewable power grows, we will need to find better ways to store power.

    Today, the best way to manage volatility in electricity supply is the regulation of hydropower production. With our hydro capability, Canada is a giant battery for the U.S! British Columbia controls about 13 gigawatts [13 GW] of hydro. It actively trades power back and forth with California. In Quebec, more than 30 GW of hydro leverages a storage capability that can trade power with the Eastern Seaboard. Manitoba trades 10 or 13 GW with the Midwest. This works for Canada today, but it may not be enough in the future.

    Chart 2

    TMR: Electrical storage is an issue for the renewable energy sector. What are the advancements in battery and other storage technologies?

    RM: The majority of dedicated electrical storage in North America is in pumped hydro. The use of compressed air storage and reliance on batteries is increasing. But the lithium-ion battery technology has only advanced incrementally during the last few decades. The cost of manufacturing batteries has dropped with higher demand for battery use in electronics and electric vehicles. Today, batteries are still relatively expensive, but there is a push to increase the amount of storage on the grid, which could increase the demand for batteries.

    Last year, there were 35 gigawatt hours [35 GWh] of lithium ion batteries produced globally. Now, Tesla Motors Inc. [TSLA:NASDAQ] is slated to produce 35 GWh by 2020 at its Gigafactory. We have seen similar goals for 2020 announced by BYD Company Ltd. [BYDDF:OTCBB], which is the electric car company backed by Warren Buffett. LG Chem Ltd. [051910:KRX] and Foxconn Technology Group are also adding battery capacity. We think that the total production of lithium-ion batteries could increase by a factor of four or five by 2020. Ultimately, we could see dedicated battery storage of electricity on the grid or the use of the batteries in electric cars to manage grid power.

    Hydrogen technology and flywheels also continue to develop and should also play a very important role in grid management in the future.

    Chart 3

    TMR: What is the role of graphite in battery production?

    RM: There is 10 times more graphite than lithium in a lithium-ion battery; it's an important part of the makeup of the electrodes. Typically, batteries employ a mixture of synthetic and natural graphite, but the synthetic material is relatively expensive at up to $6,000/ton. On the other hand, natural graphite is mined and processed for between $400 and $500/ton.

    Graphite prices have been relatively soft for the last couple of years, but the high growth in battery markets should drive an increase in the demand for graphite.

    Chart 4

    TMR: What will be the effect of the demand factor on the price of graphite?

    RM: One can argue that the price will rise because the demand is going to grow, but there are a fair number of deposits that are out there that are feasible at the current price. If the average price was to move up from roughly $1,100-1,200/ton today to $1,500-1,600/ton, a number of deposits could come on line. As with the history of most commodities, the graphite price will remain relatively stable in the long run. It can be volatile in the short term, but I do not assess that it will take a big increase in the price of graphite to increase the supply.

    TMR: Do the existing graphite mines have the capacity to absorb the projected demand or is meeting that demand going to require exploration?

    RM: Most graphite-roughly 500,000 metric tons per year-comes out of China. But in the short term, we believe that there will be a contraction of supply coming from China. The Chinese government is clamping down on polluting mines, and there are news reports suggesting that the quality of the Chinese graphite is degrading as the miners strip the good deposits. Battery-grade material needs to be high purity. We see opportunities for graphite mines outside of China, provided that they can access very good quality graphite.

    Graphite is not like other commodity businesses. A customer cannot just go onto a commodity board and pick up the desired product. Graphite customers have very specific technical needs for their products, and they look for producers who can meet those requirements.

    TMR: Returning to wind, do you have any picks in that space?

    RM: We cover wind farms in Canada, the U.S. and Europe. Wind companies have very good visibility on future revenue to amortize debt and also to pay a healthy dividend to shareholders. Our top pick of the companies that are highly exposed to wind is Boralex Inc. (OTC:BRLXF) [BLX:TSX]. We believe that Boralex is trading at a 10% discount rate today, versus most of its largest peers at about 8% or less. The company has very good visibility on a compound annual growth rate of greater than 20% for its cash flows available for distribution, between 2014 and the end of 2017.

    TMR: Boralex is leveraged across a broad spectrum of renewables-wind, water, solar and thermal, correct?

    RM: That's correct, although 75% of its production comes from wind.

    TMR: Is the technology for wind farms improving? What are the main goals for wind technology going forward?

    RM: Yes, the performance on wind turbines is constantly improving. Wind turbines are larger and cheaper than a decade ago. Whereas the first generation of turbines were 50-100 kilowatts, they are now more than 2 MW. And there are big improvements in turbine blade aerodynamics, which allow for 30% increased production from a single wind turbine. Ongoing technological improvements in turbine design mean that wind farms are efficient in relatively low wind speed environments, and that opens up the number of places where wind power can function competitively. The cost of wind power has dropped across the board. Wind farms are being built that deliver product priced at $0.06/kilowatt hour or less, which is very competitive with power generation from any other source.

    TMR: Are industrial users saying, "We're going to build a big turbine and when the wind is not blowing, we'll tap into the grid?"

    RM: That is a growing trend, but a wind turbine-powered factory could end up paying more for the grid portion of its electricity. When users start to cut out the utilities, they will incur higher standby charges. I expect that industrial users will want to be completely self-generating in order to cut costs. That brings us back to batteries, of course.

    TMR: Is there anybody else in wind that you like?

    RM: We have a Buy rating and a $33/share target price for Pattern Energy Group Inc. (PEGI), which is trading around $30/share. The company pays a healthy dividend of 4.7%. It has recently announced acquisitions. The company has increased its guidance on cash flow available for distribution based upon a 12-15%/year growth factor. Since Pattern Energy went public late in 2013, it has been increasing its dividend by 2% per quarter. That could grow to 3% per quarter. Investors will reward Pattern with a higher share price, and that 4.7% dividend will likely increase. There are some larger yield companies in the U.S., but we think that the valuation on Pattern and its growth profile make it quite attractive.

    TMR: Will companies like Pattern and Boralex be acquisition targets, or should investors expect them to grow on their own?

    RM: In theory, they are acquisition targets of the larger yield-companies, because they do trade at attractive valuations. Boralex is certainly a very attractive takeover target. Pattern Energy is a little bit larger and harder to acquire, but it, too, could be a takeover target. We would not own these stocks for that reason, though, but we would look at them for their attractive dividends, and the growth potential on the dividends.

    TMR: Thanks for your time, Rupert.

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

    Rupert Merer is a sustainability and clean tech research analyst and managing director at National Bank Financial [NBF]. He joined NBF in 2006 after working in private industry, bringing more than 20 years of experience in this sector to his research analysis. Prior to joining NBF, Merer worked for a Canadian gas utility, where he was manager of energy technology. Merer also worked in the hydrogen technology industry in technical, financial, marketing and corporate functions. He began his career as a combustion engineer, working on gas turbine technologies. Merer was ranked No. 1 Alternative Energy analyst by Brendan Wood International in 2013 and for five of the last seven years. Merer has a BSc in engineering physics, an MBA from Queen's University and an MASc in mechanical engineering from the University of Toronto. He is a registered Professional Engineer [ON] and holds a Chartered Financial Analyst [CFA] designation.

    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.

    Bottom of Form

    DISCLOSURE:
    1) Peter Byrne 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 or his family own shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. 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) Rupert Merer: 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: Boralex Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    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.

    101 Second St., Suite 110
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    Apr 21 2:38 PM | Link | Comment!
  • M Partners' Derek Macpherson Found Resource Companies That Have Done The Impossible—Increased In Value 30% This Year

    If you don't like what people are saying about you, change the conversation. Derek Macpherson, an analyst with Toronto-based M Partners, covers companies that are up over 30% year-to-date-and he believes those companies are performing because they got the market's attention by changing the conversation. In this interview with The Gold Report, Macpherson says companies that can change their narrative on the fly-and deliver-will inevitably perform. Macpherson covers some performers and others that he expects will perform in H2/15 and beyond.

    The Gold Report: Can you tell us about several companies that you cover that are up substantially year-to-date?

    Derek Macpherson: Kirkland Lake Gold Inc. (OTCPK:KGILF) [KGI:TSX], and Klondex Mines Ltd. (OTCQX:KLNDF) [KDX] are up more than 30%, with Kirkland up almost 70%. We pick companies that are undervalued and have the ability and the necessary catalysts to move higher and close the valuation gap.

    TGR: What are the key differences between those companies that are moving higher and the others that are flat or lower?

    DM: Companies need to change the story or have good news. That's key. For example, Kirkland Lake is in the process of changing its story. The company is turning around its operation, and is starting to generate free cash flow. That's helping to drive that stock higher, improving its relative valuation.

    TGR: Kirkland Lake has a relatively new CEO. What are some qualities you want in a junior mining CEO?

    DM: There is a basket of qualities we look for. I don't think that any one quality is critical, but they all need to be there in varying degrees. First, with a junior mining or development company CEO, you want solid technical expertise. Lacking that, CEOs should surround themselves with good technical people. Second, you need a CEO who not only intimately knows the company's story but also is passionate about it and can communicate that passion. Third, they should be able to present the story in a formal setting but also one-on-one with investors. And, finally, a junior mining CEO should have a good understanding of capital markets and how to get things done in capital markets-that can be more difficult to find with junior companies than one might expect. Similar to technical expertise, if the CEO has limited experience with capital markets, being surrounded with people who do is a must. Capital markets expertise makes a big difference when you're trying to move your share price out of that undervalued camp.

    TGR: When you meet CEOs for the first time, what do you ask them?

    DM: Typically, I am quizzing them about their assets because I want to learn about them. Usually, the first questions that I'm asking a company are a little bit deeper than what you find in the company's investor presentation and are focused on the asset: what's going on, what the company's plans are and what is the potential of the projects. When I have a CEO sitting across from me, I expect him or her to be able to answer those questions.

    TGR: What is your 18-month forecast for gold and silver in U.S. dollars?

    DM: We see $1,200/ounce [$1,200/oz] gold and $17/oz silver over the next 18 months. That's what we use to value companies.

    The downturn in commodity prices has led to a decline in exploration and development spending as companies have reduced spending both as a result of lower commodity prices and the reduced availability of capital. Spending has been declining since 2012, after the gold price peaked in 2011. This is similar to what happened in 1997 through 2001; however, in 2002 global production started to decline, which coincided with a rise in the gold price starting in 2001. About the same length of time has expired since gold peaked in 2011 and exploration spending in 2012. With global mine production likely to decline in 2016 or 2017, a rally in the gold price could be on the horizon; however, the timing is uncertain.

    TGR: Do you also forecast gold and silver in Canadian dollars?

    DM: We don't, but we use $0.80 for our conversion rate. That equates to about CA$1,500/oz gold and CA$21.25/oz silver.

    TGR: In a flat metals price environment, is the falling Canadian dollar boosting the margins of Canadian producers?

    DM: Yes, that's a key theme we've been focused on lately. When a company is selling its commodity in U.S. dollars and the majority of its costs are in Canadian dollars, it should see margin expansion. With Q1/15 reporting on the horizon, we are likely to see a number of Canadian producers come in with lower than estimated U.S. dollar cash costs, which are likely to be lower than what the companies guided earlier this year because annual budgets would have been completed and approved using a higher Canadian dollar in the latter part of 2014. Canadian producers, along with other non-U.S. based producers, have the potential to see U.S. dollar costs come in below expectations, which is likely to result in expanding margins.

    TGR: Do you think the market will react to those cost numbers?

    DM: We think the market will, particularly for Canadian producers, where 80-90% of costs can be in the local currency. This is especially true for more labor intensive underground operations like Kirkland Lake Gold. For other non-U.S. based producers, a lower percentage of costs are in local currency, reducing the benefit of a strengthening U.S. dollar. For example, in Mexico or other Latin American countries, it could be 50-70% in the local currency, depending on underlying agreements and how developed mining is in that country. We expect the stocks to react as financial results are reported for Q1/15.

    TGR: Are lower oil prices helping, too?

    DM: Lower oil prices are certainly providing some benefit for all mining operations; however, large open-pit operations in remote locations are likely to see the largest impact on costs. With our coverage universe mostly consisting of underground operations, there is a reduced benefit. It is difficult to quantify the magnitude of the impact but it should provide a tailwind for most operations.

    TGR: Tell us about some of the companies that you cover that continue to perform in a rather bearish market.

    DM: One of our favorite names continues to be Klondex. It has two high-grade mines in Nevada. We like high grades in a volatile metal price environment because they provide protection for margins and can provide operating flexibility. With the company ramping up production and actively exploring at both assets, it is likely to have positive news flow throughout the balance of 2015 to support the stock.

    TGR: Is the market giving Klondex sufficient recognition for both Midas and Fire Creek?

    DM: Not yet, but the recent share price performance may suggest the market is starting to reflect the potential of both assets. Klondex recently published some drill results from Midas that continue to highlight the high-grade nature and longer life of that mine. Obviously, we continue to like Fire Creek; it has exceptional grades and has the potential for the mine-life to grow. We believe a portion of the discount that Klondex trades at relates to the fact that it is still at an early stage of production, as it has been in commercial production for just over one year. We believe the discount to peers is likely to decline as Klondex continues to execute at both operations.

    TGR: Is Klondex starting to gain an institutional following?

    DM: It is. We are starting to see a shift in the shareholder base toward institutions and not just traditional mining investors. Some generalists are starting to look at Klondex as a go-to gold name.

    TGR: What are some other companies that are performing but still undervalued?

    DM: In our view Kirkland Lake continues to be a high-potential name. Management is focused on generating cash-flow rather than simply producing ounces. The result has been improved profitability stemming from an increase in head grades and improved operating costs. One thing that stands out with Kirkland Lake is its guidance. When the company initially provided three year guidance in mid-2014, it did so at 15-20% below the planned reserve grade simply because the company had never previously delivered tons to the mill at the reserve grade. However, for fiscal 2015, which ends April 30, the company has delivered almost 19% above guided head grades, approaching the reserve grade. We are now of the view that the guided head grades are likely going to increase for 2016 and 2017, and that the stock is going re-rate. As grade drives margins, with grades likely to improve, margins should also, so it's certainly going to provide additional free cash flow for a company that is already benefiting from a weak Canadian dollar.

    TGR: CEO George Ogilvie cut 200 jobs from the Macassa mine complex and has put together at least three quarters of modest cash flow. What's his next challenge there?

    DM: It's continuing to execute. The turnaround has been good so far, and the company has improved its grade and costs. The challenge now is sustaining the same trajectory that it has developed and continuing to improve beyond this initial stage.

    DM: There are some security risks in Guerrero, but Goldcorp Inc. (GG) operates a mine there, and Torex is building one. Guerrero has a history of security issues, but part of our view is that as the area develops, that security risk could be reduced. We model construction starting in 2017 and production starting mid-2018. The security risks in Guerrero could be different when Timmins needs to make a production decision on Ana Paula.

    TGR: Please leave our readers with one thought on investing in a bear market.

    DM: Investing in a bear market for mining equities is not only about finding quality assets that are undervalued by the market but those companies that have the ability to change the situation. Having that ability, as I mentioned, is both a function of effective management and having the necessary catalysts to change the market's view.

    TGR: Thank you for your insights, Derek.

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

    Derek Macpherson is a mining analyst at M Partners; before joining M Partners he worked in mining research for a bank-owned investment dealer. Prior to entering capital markets, Macpherson spent six years working as a metallurgist. Macpherson has a Bachelor of Engineering and Management in materials science and a finance-focused Master of Business Administration.

    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.

    Bottom of Form

    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: Klondex Mines Ltd. Goldcorp Inc. is not affiliated 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) Derek Macpherson: 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: Klondex Mines Ltd. and Lake Shore Gold Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (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 15 2:16 PM | Link | Comment!
  • Christos Doulis Separates The Precious Metals Saints From The Sinners

    Christos Doulis, mining analyst with PI Financial, hopes for the best but plans for reality. The bear market in precious metals is well into its fourth year and could persist into 2016. In this interview with The Gold Report, Doulis says he remains hopeful that this is the year things take a positive turn, but in case we see more of the same, he recommends a few low-cost producers with saintly management teams that keep delivering on promises.

    The Gold Report: In September 2014, you told us that investors needed to own bulletproof, low-cost producers that can survive lower gold prices. What is your investment thesis for this point in the bear market?

    Christos Doulis: Unfortunately, not much has changed. We certainly do not appear to be in a bull market for gold. All of us would like to see higher prices. They may come at some point in the future but no one knows when that will be. So in the short and medium term, I would continue to recommend owning the lower-cost producers in order to protect oneself from the chances of insolvency.

    TGR: What is your technical analysis of the recent performance of gold telling you about what we're headed for?

    CD: I am still negative. When I look at the trend over the last year or so, there's been quite a bit of volatility, but in general, the highs keep getting lower, and the lows are getting a bit lower as well. For instance, in January 2014 we had a rally that went close to US$1,400 per ounce [US$1,400/oz] before it petered out. Then we had another rally in January of this year when gold got closer to US$1,300/oz, not to that US$1,400/oz level, before it started to give back the gain. If you draw a channel on the gold price, it certainly looks as if we have not reversed course yet. The highs keep getting a bit lower on the volatility, and the lows have been lower. Then again, gold popped US$20/oz in early April. If gold could sustain a rally to US$1,250/oz, I would start feeling a little more enthusiastic about the space.

    TGR: What is your prognosis for this bear market?

    CD: My personal view is that I'm hoping for higher gold prices in the second half of 2015, and hope to see a return to an upward trend in the metal's price. My view is that we are still in a long-term bull market for gold but that after a 10-year bull run, we needed some pullback. This pullback has been particularly vicious, but what else is one to expect after gold went from US$300/oz to US$1,800/oz in a decade?

    TGR: What price would gold have to sustain before you were willing to declare the bear dead?

    CD: If I saw gold trading north of US$1,350/oz, I would start to think that even higher prices might be coming and the bear market was dead.

    TGR: What are your price decks for gold and silver?

    CD: We use US$1,250/oz gold and US$19/oz silver.

    TGR: You have seen a few cycles in your 20 years in the space. What are two or three things you have learned about this bear market that were perhaps not evident in others?

    CD: The one thing I've taken away from this bear market is the longer the run-up, the more painful the correction. I thought that last year would probably be the worst. When gold peaked in 2011, I was not surprised to see a correction. I certainly thought that US$1,300/oz gold was in the cards, but I did not see US$1,150/oz gold as likely. I have definitely concluded that the market can be much more pessimistic than you can, and it certainly isn't going to turn just because you want it to. As I said, I was thinking 2014 would be the year when we would see a reversal in gold prices. Now, I'm hoping for the second half of 2015.

    TGR: Miners have reduced their costs in order to boost margins at US$1,200/oz gold, but some, not all, are doing that by mining the higher-grade portions of their deposits. Were miners high grading to the same degree in previous downturns?

    CD: My take on it is some miners are definitely high grading, but good miners aren't. They understand that if you high grade a mine, you not only reduce its longevity by removing the high grade, but in effect you reduce it even more because all that you have left is low grade, which might never be economic. Imagine you have a deposit that has different zones grading various grades. If you blend them all, you can deliver, call it, 8 grams per ton (8 g/t) to the mill, but if you high grade it, you can deliver 12 g/t. The problem is that means you deliver the high grade for a couple of years, but then you're stuck with delivering 6 g/t or 4 g/t material to the mill. It could mean that entire portion of the deposit is no longer economic. Good CEOs are loath to high grade and, instead, they focus on cost reduction. That is the bigger trend.

    TGR: Do you learn more about a management team in a downturn?

    CD: Absolutely. When gold is trending upward, it covers a lot of mistakes, and the market is more forgiving. When gold is trending downward, we see who the quality executives are because they're the ones who are able to reduce costs without jeopardizing the longevity of their operations. It goes back to the concept of high grading. Good CEOs in the last couple of years have been the ones who have said, "We're going to reduce costs," and have actually done so.

    In bear trends like this, if you promise X and you deliver half of X, you get penalized. This is a market where sins are not quickly forgiven. Therefore, the people who don't sin, vis-à-vis the better CEOs who meet their prognostications, are the ones that the market rewards. Also, as an analyst it allows you to figure out what groups really know their asset[s] and understand how to drive the business from a cost perspective.

    TGR: Who are the saints? Who are the sinners?

    CD: When I look at the saints in my universe, Rio Alto Mining Ltd. (RIOM) has just been stellar. Not only has President and CEO Alex Black delivered at La Arena, but to do a deal on Shahuindo and then to do a deal with Tahoe Resources Inc. (TAHO) within a year is impressive. He is focused on operations, but certainly hasn't left mergers and acquisitions [M&A] off the table.

    I like Endeavour Silver Corp.'s (EXK) management. The company has reduced costs at its Mexican mines but the silver price has fallen harder and faster than the cost savings Endeavour has delivered.

    TGR: And the sinners?

    CD: When it comes to groups that have done poorly, the senior producers are in the penalty box from the investors' perspective. Many of those companies have made big acquisitions at the top of the market and failed to deliver on either the cost savings or other promises made to the market. Senior producers like Kinross Gold Corp. [K:TSX; KGC:NYS] and IAMGOLD Corp. [IMG:TSX; IAG:NYSE] have been considered out of favor for some time due to large acquisitions at the top of the market.

    TGR: What are some companies you're covering that are positioned to weather another two years of stagnant or lower gold and silver prices?

    CD: From my coverage universe, one company that is positioned to really weather the storm is GoGold Resources Inc. (OTC:GLGDF) [GGD:TSX], which is producing at Parral at cash costs of around US$6/oz silver and all-in costs certainly below US$10/oz. So it's well positioned to weather ongoing low silver prices.

    TGR: When do you expect Parral to reach commercial production?

    CD: I have been told that it is imminent. We should see that happen in this month.

    TGR: The Santa Gertrudis project in Sonora, Mexico, is at the preliminary economic assessment stage. When do you expect a production decision? Could GoGold fund development alone?

    CD: The company recently received an environmental permit for Santa Gertrudis and is waiting for a change of land use permit and final engineering on some of the specifics relating to the project. I expect it to begin construction fairly soon, sometime around Q2/15. I don't think GoGold is in a situation to finance it out of existing resources, so it will likely need to do an equity raise or some other form of capital raise. It has Parral up and running, so one would think it could borrow a little more.

    The jury is certainly out on Santa Gertrudis, but on paper, it looks as if it's going to be a low-cost asset. Although I was skeptical initially of Parral, GoGold management has done a great job. If you believe that they knew what they were doing on Parral, hopefully, they'll know what they're doing on Santa Gertrudis. GoGold is certainly one to watch over the next while, as is Orvana.

    TGR: What are some companies you cover with noteworthy news?

    CD: I cover Premier Gold Mines Ltd. (OTCPK:PIRGF) [PG:TSX], a development company that has effectively no revenue. It just inked a deal with Centerra Gold Inc. (OTCPK:CADGF) for its Trans-Canada gold project in northern Ontario. As part of the deal, Premier received an immediate CA$85M cash payment, which goes a long way in this environment. While Premier, as a development company, is subject to market availability for capital, right now it is basically fully cashed up. Centerra will spend CA$185M on the project before Premier has to spend another dime. So Premier's CA$85M from the deal plus the cash that it had previously gives it a lot of flexibility to advance its other projects even in a weak metals price environment.

    TGR: What's the earliest Trans-Canada could enter production?

    CD: It's pretty far out there. I'm hoping to see the first gold pour in 2017 and commercial production in 2018.

    TGR: Premier sold a 50% interest in Trans-Canada for CA$185M. Why didn't Centerra just buy Premier outright?

    CD: In order for it to be a friendly deal, Premier wanted to maintain its independence. Premier wants to continue advancing its other projects, like those in Nevada. I wouldn't be surprised if that discussion happened but I don't think Centerra wanted to pay a big premium for the whole enchilada, given that Hardrock is the focus.

    TGR: Any others with news?

    CD: Sierra Metals Inc. (OTC:DBEXF) [SMT:TSX] just significantly expanded the resource at Yauricocha, its flagship mine in Peru. The previous resource was in the neighborhood of 6 million tons [6 Mt]. It's now 11 Mt, so huge growth. The challenge is that the grade has gone down. My net take here is, yes, the mine is going to run for a lot longer, but that doesn't necessarily add a lot of value given that grades have gone down. The grade had been in the 70 g/t silver range; it's now in the 50 g/t silver range. More marginal material is getting included in the resource. Part of that is driven by lower per-tonne costs that the company is experiencing. It's good to show the longevity of the asset, and I don't think it changes the cash flow from the asset in the short term. Its guidance for 2015 is already out, and I suspect 2016 will be a similar year.

    TGR: Could you give our investors a reason for optimism in this space?

    CD: One reason for optimism is the abounding pessimism in the marketplace. An old adage is "buy when others are selling." Nothing has changed in the grand perspective of post-financial crisis money creation. The only thing that has not happened is visible inflation, and that's why we've seen interest in this space decline. There has never been an economic recovery that has been solely created by monetary expansion that doesn't come with inflation.

    While everyone is worried and nattering about deflation, if we ever see a real economic pickup, which we haven't yet, I think that precious metals will start moving up again. And I want to remind your audience that gold had a run from US$300/oz to US$1,800/oz before it came back to US$1,200/oz. Even at US$1,200/oz, that's four times where it was at the beginning of the 21st century. One of the biggest cases for optimism is that nobody is telling you to buy gold stocks today. When everybody and their uncle are telling you that this is the asset you have to own, whether it's gold, Internet stocks or whatever, it's likely that you already missed the market.

    TGR: Thank you for your insights, Christos.

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

    Christos Doulis, a mining analyst with PI Financial, has spent 20 years in a wide variety of roles within the mining industry. Doulis was a mining research analyst at Stonecap Securities from 2010 to 2014. Previously he was a partner at Gryphon Partners Canada, an advisory firm in the mining industry that was acquired by Standard Chartered, and a vice president at Blackmont Capital. Doulis began his career as a research associate in 1994 at Scotia Capital. He covers a variety of gold and silver companies in the small- to mid-cap market with a focus on producers and late-stage development companies. Doulis obtained a Bachelor of Arts in economics from Queen's University and holds the CFA designation.

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

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for 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: Tahoe Resources Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Christos Doulis: 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: All but Tahoe Resources Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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