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  • Adrian Day's Embarrassment Of Riches: Gold Companies Cheap To Buy But Not For Long

    Fund Manager Adrian Day believes that the U.S. dollar is fundamentally overvalued and we can expect a devaluation at some point. This is good news for the price of gold. In this interview with The Gold Report, Day adds the even-better news for investors in gold equities is that so many good shares now sell for so little, and he discusses several companies that won't remain bargains for long.

    The Gold Report: Despite the lack of an economic recovery and the reality of ever-increasing debt, the U.S. dollar and the equity markets remain strong, while gold [as denominated in U.S. funds] remains weak. Do you expect these conditions to change?

    Adrian Day: Yes, absolutely. The strong dollar and equity markets are two of the main reasons why gold has been down over the last 18 months. The third reason is anticipated higher interest rates.

    Gold will recover because the U.S. dollar is overvalued against most other currencies, by as much as 25-30% against most Asian currencies. We're not expecting an equities crash any time soon, but the risk level in the market has increased, and stocks are no longer fundamentally cheap. So investors will increasingly look to the protection gold affords. As for higher interest rates, the U.S. Federal Reserve has, by its actions if not its words, made clear it is waiting for perfect conditions before raising rates. I'm not quite sure when we're going to see such conditions. In any event, higher rates are already factored into the gold price, and should the Fed approve a quarter-point rise, I would actually expect gold to rise on that news.

    TGR: The current bear market in precious metals equities began in April 2011. Despite all the talk of "creative destruction" among mining equities, are there still too many "zombie" companies?

    AD: Far too many. It is too easy to raise mining money in Canada. If you discount a company's stock and give a five-year warrant at a small premium, someone will buy it, even if it's only an existing shareholder who liquidates his current holding to get a more attractive deal in the new round. In addition, there is flow-through financing, which would often not be possible were there no tax benefits.

    In 2014, 57% of the financings in the gold sector were for less than $1 million [$1M]. We're now seeing financings for as little as $100,000 or even $50,000. This money is spent merely to keep the lights on and pay salaries. It's not spent on actual work in the ground. I've even heard of financings where the entire point was to repay old debt owed to directors and managements. About 45% of TSX-listed gold companies have less than three months cash on hand.

    TGR: A higher number of listed companies means more fees for the exchange, but what effect does the continued existence of hundreds of zombie companies have on the gold sector as a whole?

    AD: It affects the whole sector negatively because every $1M put into a bad company is $1M that's not going into a better company. Investors burned by investing in zombie companies turn away from gold companies for good.

    TGR: Which companies have you been buying lately?

    AD: Over the last couple of months, we have been buying a lot of companies. The seniors include Franco-Nevada Corp. (FNV) and Goldcorp Inc. (GG) [G:TSX]. Smaller producers include Eldorado Gold Corp. (EGO) and B2Gold Corp. (BTG) [BTO:TSX; B2G:NSX]. We've also bought Pretium Resources Inc. (PVG).

    TGR: Which prospect generator do you like in Europe?

    AD: Reservoir Minerals Inc. (OTCPK:RVRLF) [RMC:TSX.V], though not specifically because it's in Europe! It already has a big discovery, the Timok copper-gold project in Serbia, which has an Inferred resource of 65.3 million tons [65.3 Mt] at 2.6% copper and 1.5 grams per ton [1.5 g/t] gold, including 6.8 Mt at 9.6% copper and 5.9 g/t gold. This is a JV with Freeport-McMoRan Copper & Gold Inc. [FCX:NYSE]. Should Freeport take the project to feasibility, Reservoir will retain 30%. Freeport is drilling Timok extensively now, and if the existence of a large enough deposit is confirmed, it's pretty clear it will buy that remaining 30%.

    Reservoir Minerals Inc. has several other JVs in the Balkans and North Africa. The company has about $40M in cash, about 25% of its market cap. This puts it in an excellent position to develop what it has and generate further prospects. And this cash also allows it to take a strong position with Freeport with regard to the sale of Timok. Simon Ingram, Reservoir's president and CEO, is technically very competent and knows how to tell his company's story.

    TGR: How have the majors come out of the bear market?

    AD: As a group, they bought at the top and sold at the bottom. They bought heavily in 2009-2011, and they've sold heavily ever since then. They've taken over $50 billion in write-offs. For an industry as small as gold mining, that is really quite appalling.

    Now we have a situation where many companies with advanced projects are valued so cheaply, but few of the bigger companies have taken advantage. There are some exceptions: Franco-Nevada, Agnico Eagle Mines, Goldcorp. But even today, some of the majors are continuing to try to sell their assets into a weak market.

    TGR: Would two of those be Barrick Gold Corp. [ABX:TSX; ABX:NYSE] and Newmont Mining Corp. [NEM:NYSE]?

    AD: Yes, as they were two of the companies that went a little crazier during the good times. We are beginning to see a pickup in mergers and acquisitions [M&As], and as gold begins to move up on a sustained basis, which I expect by early next year, we should see a sustained increase in M&As.

    As I mentioned above, the gold companies need reserves. Barrick Gold went from 104 million ounces [104 Moz] to 93 Moz in reserves, even though it kept the price at which it values its reserves the same. Goldcorp reserves are down 8%, while IAMGOLD Corp.'s [IMG:TSX; IAG:NYSE] are down 15% and Coeur Mining Inc.'s [CDM:TSX; CDE:NYSE] 27%.

    TGR: Why have you been buying Goldcorp?

    AD: It has shown a strong growth profile. Over the last year, it has brought three new mines on-stream: Éléonore in Quebec, Cochenour in Ontario and Cerro Negro in Argentina. It has a good jurisdictional-risk profile, operating as it does mainly in Canada and the Americas. And it has the lowest net debt to market cap of any major mining company at 24%. The sector average is about 47%.

    Goldcorp is a disciplined company. Remember that after its hostile offer for Osisko Mining, Osisko found white knights in Agnico Eagle Mines and Yamana Gold Inc. [YRI:TSX; AUY:NYSE; YAU:LSE]. Goldcorp then raised its offer, but after Agnico and Yamana raised theirs in turn, Goldcorp walked away. That's unusual. Most companies let ego get in the way in battles of this sort. Having increased its line of credit and sold off its shares in Tahoe Resources Inc. (TAHO) [THO:TSX], Goldcorp is now poised to make a major acquisition.

    TGR: Which companies in the royalty/streaming sector are your favorites?

    AD: Franco-Nevada and Royal Gold Inc. (RGLD) [RGL:TSX]. There's not much to say about Franco except to say that, if you want only one gold company, buy Franco. It has the best people in the business. It has a great balance sheet, strong cash flow and a diversified asset base with a strong growth profile. It has about 350 mineral royalties, of which about 35 are producing now, so there is plenty of potential. It is a good buy at less than $50/share.

    Royal is also a great company, although its balance sheet is not as good, and it is not as diversified as Franco. But it probably has more near-term upside, and with Thompson Creek Metals Co. Inc.'s [TCM:TSX; TC:NYSE] Mt. Milligan mine in B.C. now producing, it will probably see a bigger revenue increase than Franco over the next 12 months.

    We also like Altius Minerals Corp. (OTCPK:ATUSF) [ALS:TSX.V]. This is non-gold, of course, but it is a diversified company with roots as a prospect generator that has consistently sought out royalties.

    TGR: Are you confident that Pretium will get the permits for its Brucejack project in B.C.?

    AD: Pretium will get the permits, but it's a long process. While it waits, it continues to drill and is coming up with some very good results. I believe that this stock still suffers an overhang from the dispute a couple of years ago about the reserve calculation. Considering its Proven and Probable resources of 6.9 Moz gold, the mine capital expenditure [capex] of $747M is quite reasonable. Pretium is a very good buy right now.

    TGR: Is the purpose of Pretium's current drilling to define what it has, expand what it has, or both?

    AD: Both. This is a very "nuggety" deposit, so much tighter drilling is required.

    TGR: How do you expect the capex will be raised?

    AD: I doubt Pretium will have much difficulty financing once it starts getting the building construction permits. The Zijin Mining Group Co. Ltd. already owns 9.6% of the company. I suspect that a Chinese group will come in and take over the company eventually.

    TGR: On June 3, West Kirkland published a prefeasibility study of its Hasbrouck project in Nevada. Were you impressed?

    AD: Yes. Hasbrouck is a relatively small, relatively unexciting project of 567 Koz gold. The after-tax net present value is $75.3M, with an internal rate of return of 26%. But it's also a simple project with no metallurgical problems, so all-in mining costs will be cheap at $779/oz, and the initial capex is only $54.3M. Permitting in Nevada is more time consuming than it once was, but given Hasbrouck's economics, shares are just ridiculously cheap at $0.06. Part of the problem is that investors are always looking for more excitement, for the big killing, and you won't get that with West Kirkland.

    TGR: Will the company have difficulty raising the capex?

    AD: Well, $54.3M is not a lot of money in absolute terms, but it is a lot for a company with an $18M market cap. I have faith in Mike Jones, West Kirkland's president and CEO. He's not going to do anything foolish. He will raise the money in the most appropriate way, debt mostly. West Kirkland has little downside and represents a possible triple or quadruple over the next 18 months or so.

    TGR: How long do you think that gold equities as a class will remain cheap?

    AD: Much depends on the gold price. Investors want a higher price on a sustained basis before they really come back to this sector. Anyone still in the gold market must be patient. That said, the senior gold companies are trading at pretty much their lowest valuation levels ever, and many of the juniors have market caps lower than cash on hand.

    Investors can afford to be selective. They need to look at market caps and ask what they are getting for their investment. They need to consider not the number of ounces but their quality. They want companies that have sufficient cash to pursue at least the next stage or two of their business plans. It may take another year or 18 months before we see a general recovery in this sector, but in the meantime, this is just a great time to be buying gold companies. There's an embarrassment of riches.

    TGR: Adrian, 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.

    Adrian Day, London born and a graduate of the London School of Economics, heads the eponymous money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund [EPGFX]. His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."

    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) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Pretium Resources Inc. and Tahoe Resources Inc. Franco-Nevada Corp. and Goldcorp Inc. are 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) Adrian Day: I own, or my family owns, shares of the following companies mentioned in this interview: Altius Minerals Corp., Franco-Nevada Corp., Freeport-McMoRan Copper & Gold Inc., Goldcorp Inc., Reservoir Minerals Inc. and Royal Gold Inc. In addition, clients of Adrian Day Asset Management own shares in Franco-Nevada Corp., Goldcorp Inc., Eldorado Gold Corp., B2Gold Corp., Pretium Resources Inc., Agnico Eagle Mines Ltd., Yamana Gold Inc., Royal Gold Inc., Altius Minerals Corp. and West Kirkland Mining Inc; clients of Adrian Day Asset Management hold more than 5% in the following stocks mentioned in the interview: Reservoir Minerals 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.
    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

    Jul 02 2:56 PM | Link | Comment!
  • Jeb Handwerger: Fed Interest Rate Increase Could Be Best Thing To Happen To Gold

    A true contrarian knows that when everyone says an interest rate hike by the Federal Reserve would kill stocks, that is the best time to double down on junior mining names. In this interview with The Gold Report, Gold Stock Trades author Jeb Handwerger shares the names of the companies he thinks could do well through the drill bit or by acquisition regardless of when the inevitable turnaround comes.

    The Gold Report: Common wisdom says that when the U.S. Federal Reserve raises interest rates later this year, it will prove negative for gold. Do you agree?

    Jeb Handwerger: I think it'll be the opposite. Money printing and easy credit has fueled the stock market rally and beaten down commodities. Investors flocked to dividend-paying stocks, and became speculative in tech, which has led to huge overvaluations similar to the late 1990s dot-com debacle. We've had a four-year parabolic rise in the Dow without a meaningful correction. Most investors who have been in this business for a while know that every four years you get a bear market with about a 30-50% correction. Rising interest rates may be the catalyst that causes investors to flee the general stock market, which has proven attractive in a low rate environment. Higher interest rates concurrent with a pickup in inflation could result in a rush to a safe haven in commodities and wealth from the earth-natural resources and precious metals, which is historically a hedge against a pickup in inflation.

    The Dow-gold ratio is a critical tool to see the inverse relationship between stocks and gold. When stocks move higher investors abandon gold and vice versa. Notice the pattern since 1913 when the Federal Reserve was created. The stock booms and busts are much more dramatic. In the 20th century we saw the Dow-gold ratio move close to parity during the Great Depression and in 1980 when interest rates soared to record territory.

    Notice in the 1970s there was a much more severe decline than in the 1930s as money printing and debt soared after gold was completely abandoned during the Nixon Administration. Eventually this will revert back to 1:1 or possibly lower sometime in the next 10-20 years. Investors must be prepared for such a scenario as the supply of global fiat money is much higher than in the past. It may not occur as fast as people expect it to, but over the next four to five years, we could eventually see the Dow-gold ratio correct.

    Notice the recent uptick in favor of the Dow. It looks quite similar to what happened in the 1970s when investors were suckered back into stocks only to witness a major parabolic move in gold from the sidelines. This move higher in the Dow could be a suckers' rally and that is what we're preparing for. The balancing will probably come from a combination of a real spike in gold prices after underinvesting in resource exploration constricts gold supplies and the popping of our current stock market bubble, 2000 dot-com style. It has to happen eventually.

    The broad overvaluation in banking and technology is not supported by fundamentals. Mobile app companies are getting billion-dollar valuations with no revenues; that's a sign that we're near a market top. Quantitative easing and negative interest rates are some of the causes of the inflated market prices. Once rates start moving back up again, that's when we'll see precious metals start moving again as in the 1970s. Gold will top again as it did in the 1980s with record high interest rates, not negative interest rates. Rising rates might be the catalyst for investors to rotate into the commodities, particularly into precious metals.

    TGR: We are also in the middle of an annual summer seasonal low. How are you positioning yourself to take advantage of the opportunities you're seeing right now?

    JH: There are two periods where you get bargains in the junior mining sector: December tax-loss selling and the summer doldrums, characterized by a lack of market activity due to investors being on summer vacation. But summer is actually one of the best times to buy because that's when explorers and developers, especially the ones in the snowy north with a limited work year, have the most news flow. Investors who buy now and then wait until September or October can see huge upside.

    This is bargain time for the junior mining sector. If you're a contrarian investor, this is a great opportunity to take at least some of your profits from the overblown markets and wade into the beaten down junior mining sector where the best opportunities live.

    TGR: Are you looking at that as a mergers and acquisitions [M&A] play?

    JH: Yes, but the uplisting from the OTC is key to raising capital from institutions. That would make it an exciting story in H2/15.

    Canada has had a lot of M&A activity because of the relative value of the Canadian dollar. The Alamos Gold Inc. (NYSE:AGI) -AuRico Gold Inc. (AUQ) deal was partly the result of Alamos looking to expand into Canada.

    TGR: Please debunk one myth in the gold space that could hold resource investors back.

    JH: One of the myths that you always hear is that gold is going to be sold off if interest rates rise. If interest rates rise, that means the powers that be are worried about inflation. Why do we invest in gold? To hedge against inflation.

    The real myth, especially in the U.S., is that hyperinflation can never come to America. It can happen in Argentina. It can happen in Greece. It can happen in Europe. It can happen in Japan. But it will never happen in the U.S. because the dollar is king. That myth could cost people their fortunes. We have had cheap prices since the 1970s. The greatest misconception is that it will stay like that. But trends change direction. It's wrong to think that just because we've seen a trend in lower interest rates and low inflation that there can't be higher interest rates and higher inflation down the road.

    That is what we're prepared for at Gold Stock Trades, and that is why subscribers continue to read and stick with junior mining investments. Those might not be their whole portfolios, but they maintain a percentage of their wealth in gold because they're concerned that hyperinflation could happen anywhere. The greatest concern I have right now for U.S. investors is that they've become complacent. They think that everything is hunky dory. Unemployment is going down. There's no inflation. But there really are issues. We're seeing riots, drought, increased conflict in Syria and Iraq. The euro is collapsing. What happens if interest rates rise while oil companies are sitting on huge amounts of debt in the U.S.? The greatest danger, I think, is complacency.

    TGR: Thank you for sharing.

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

    Jeb Handwerger is an author, speaker and founder of Gold Stock Trades. He studied engineering and mathematics at University of Buffalo and earned a master's degree at Nova Southeastern University. After teaching technical analysis to professionals in South Florida for over seven years, Handwerger began a daily newsletter, which grew to include thousands of readers from over 40 nations.

    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) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences 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. 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) Jeb Handwerger: 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 as they are sponsors of Gold Stock Trades: 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 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

    Jun 29 3:23 PM | Link | Comment!
  • Rick Rule And Porter Stansberry's Guide To Protecting Your Portfolio From The Ravages Of The Currency Wars

    Russia, China and the U.S. are in a battle for currency dominance and natural resource stocks have been buffeted as a result. When the dust settles, smart natural resource investors could be the big winners as long as they have taken the right protective measures. In this interview with The Gold Report, Sprott USA Holdings CEO Rick Rule and Stansberry & Associates Investment Research founder Porter Stansberry-the men behind the upcoming Sprott-Stansberry Vancouver Natural Resource Symposium-share their strategies for picking good companies no matter what happens on the political front.

    The Gold Report: One of the themes of the Sprott-Stansberry Vancouver Natural Resource Symposium at the end of July is "the global currency war." From your perspectives, who are the major stakeholders in this war and what can investors do to protect themselves?

    Porter Stansberry: The three major stakeholders in the currency war are the United States, China and Europe. The volatility in those currencies over the last 18 months has been historic. It has resulted in even greater volatility in more minor currencies, including the huge moves that have occurred in the Swiss franc. I expect to see China and the yuan join the International Monetary Fund [IMF] currency basket, which will lead to a very significant and large move of reserve currencies into the Chinese yuan. That will definitely have the impact of weakening the euro and the dollar.

    TGR: Do you expect the yuan to replace the U.S. dollar as the world's reserve currency or will there be a dual reserve currency?

    PS: I do not believe that the U.S. dollar will be replaced in the short term. What is significant is that the amount of dollars held as a reserve around the world has been reduced and continues to decline dramatically. Twenty years ago, U.S. dollars made up more than 80% of all reserve currencies around the world. Today, that number is closer to 60%. I think after the inclusion of the yuan, we're going to see the dollar drop below 50%. This means at the margin it will become harder for the United States to borrow abroad and it will become more difficult for the U.S. to finance its debts.

    Rick Rule: I agree with Porter. It's difficult for the yuan to replace the U.S. dollar. The yuan could, however, challenge the hegemony of the U.S. dollar. I think that the Chinese are making efforts to make their markets more transparent, but the Chinese central government's need for control will make it difficult for the Chinese debt markets to rival the U.S. dollar's role.

    I will tell you why. I questioned an Asian investor at one point about the size of his U.S. treasury portfolio and commented that I considered the U.S. treasury to represent return-free risk. He looked at me, smiled and said, "What you say is true, but we still trust you more than we trust each other." When I referred to the U.S. 10-year treasury as being sort of a fiscal lie, the same man smiled and said, "Yes, but a deep, transparent, liquid lie." I think that's illustrative of where we are in the market now.

    PS: Any country whose currency is used as a reserve enjoys tremendous benefits because those currencies gain a significant discount to financing costs. They're able to float huge amounts of credit around the world. Today, almost all currencies are traded primarily in dollars. The fear is that if the dollar falls below 50% of the currency basket held by commercial and central banks and insurance companies, there may be a democratization of the way currencies are priced. The huge growth in bilateral trade agreements between Russia and China or China and Australia foreshadow a time where there will be no need at all for those economies to deal in dollars. That will significantly reduce demand for dollars held overseas.

    TGR: As commodities move to trading outside U.S. dollars, will we see more volatility in prices?

    PS: We are going to see unprecedented volatility in currency values. This has already happened. It makes no sense whatsoever for the euro to have declined 40% against the dollar in the last 18 months. These are the two largest economic zones in the world. How can the global economy function if the weights and the measures between these two trading blocks are constantly in such flux? It becomes impossible for producers and consumers to hedge the currency risk because of the volatility and the cost involved in hedging. These are big impediments to global growth and enormous opportunities for speculators. That's great for newsletter publishers and retirees who can trade currencies successfully, but it has a terrible impact on growth and the increasing value of wealth around the world.

    TGR: How will this currency war end?

    PS: That's the $64,000 question, isn't it, Rick? Currency regimes in the past were always destroyed by volatility. So sooner or later, people desire a currency that is stable. Of the three major players in the currency wars, which currency do you think is most likely to become the most reliable? Do you think it's the euro, which is falling apart by the seams as the world watches? Is it the dollar, which supports unfunded liabilities of $200 trillion [$200T]? Or do you think it's the yuan, which has a massive labor pool, tremendous domestic savings, giant trade surpluses and huge natural resource capability? I don't think it's very hard to figure out which of those currencies over the long term is going to be the most stable.

    TGR: What does that mean for natural resources and the attendees at your conference?

    RR: The currency wars are particularly good for precious metals, which have traditionally fared well in times of fear. It's worth noting that precious metals, unlike most other commodities, respond to both greed and fear. But in my experience, fear has usually been the catalyst that begins to move precious metals higher. The volatility that Porter talks about, particularly downside volatility associated with currency, is what motivates people to store part of their wealth in precious metals.

    This connection between currency values and natural resources is evident historically. The increase we saw in natural resource prices in 2001, 2002 and the beginning of 2003 had more to do with the rollover in U.S. dollars than it did with actual increases in resource prices in other currencies. In 2000, the gold price performed very well in all currencies in the world with the exception of the U.S. dollar. In 2001, we began to see gold rising in tandem with the U.S. dollar, and as the U.S. dollar rolled over, we saw a commodities bull market get underway in earnest. There were fundamental factors associated with the bull market in resources to be sure, particularly emerging markets' demand, but the beginning part of that bull market really was the rollover in purchasing power of the U.S. dollar. The scenario Porter described will benefit natural resource prices and, by extension, investors who are prepared for the coming shift.

    TGR: With the devaluation of the euro we have already seen, why hasn't fear of further currency erosion resulted in higher gold prices so far?

    PS: I don't believe we're likely to see a rise in the gold price in periods where the dollar is radically strengthening. It has occurred from time to time. It happened in 2005, 2006 and 2007 as inflation heated up in the U.S. and the dollar was still relatively strong, but it is certainly a very unusual circumstance. I think it's far more likely to see gold rally when there is uncertainty in the currency markets, volatility and a falling dollar.

    RR: The only explanation I have is that people became very nervous as a consequence of the global financial crisis. The fact that the world as they knew it didn't end caused them to put inordinate faith into the "big thinkers" of the world, the Yellens, Obamas and Merkels, and eased that sense of fear, even if that trust is misplaced.

    Additionally, the manipulation of interest rates by what those big thinkers call quantitative easing [QE] [and Porter and I call counterfeiting] has led to a transfer of income from savers to spenders. It has forced savers into riskier means of maintaining wealth and created an equity markets recovery that generates no real jobs.

    George Soros famously said that he became a billionaire by finding broadly held public precepts that were wrong and betting against them. It took two and a half years for him to be proved right about the British pound. After billionaire hedge fund manager John Paulson realized the U.S. mortgage securities markets were doomed in 2005, he spent two years on the bad side of the trade before his intuition paid off. I consider the confidence associated with global debt and the equities market to be a similar anomaly, where sentiment is temporarily stronger than arithmetic, but I can't tell you how long it will take for arithmetic to prevail.

    TGR: The TSX Venture Exchange [TSX.V] is off about 90% in real terms. Rick, you have said you are starting to see a bifurcation. Those companies that have strong financials are starting to appreciate, and the many more weak companies are languishing, thus hiding the "recovery" in the natural resource equity market. What needs to change before investors can realize a recovery?

    RR: Three things. First, equities markets and commodities markets generally are cyclical. A market that's down by 90% is exactly 90% more attractive than it was before.

    The second thing is the bifurcation I have been talking about. A purging is taking place on the exchange. It's also taking place in the minds of investors and speculators. There is beginning to be more concentration on the best names and a total lack of attention to the worst names, which is healthy. The circumstance that existed in resource markets between 2005 and 2011 was a complete non-acceptance of the concept of risk. People just wanted to be in the market, and they were willing to take any sort of chance. They got what they had coming to them and ran for cover. Now, there is a return, a gradual and begrudging return to be sure, to the TSX Venture.

    The third factor is what we have been discussing today, the impact of currencies on commodity prices. We believe that if the economy is fundamentally bad and something happens that calls currencies into question, then the natural resource business, in particular precious metals, will do well. And even if we are wrong and the big thinkers are right, and a real economic recovery is taking place, then resources will do well too, but they'll do well as a consequence of demand. In that case, it won't necessarily be precious metals that will do well, but the energy and the base metals complex will flourish.

    When the global natural resources business doesn't earn its cost of capital, which is basically what is happening now, one of two things can happen. Either real resource prices go up or the stuff of civilization-copper, fertilizer, food and energy-ceases to become available. I think that investors should ask themselves which of the two outcomes is more likely.

    TGR: What will happen to the energy and mining companies on the down side of that bifurcation? Will they go bankrupt or be consolidated?

    RR: Yes and yes. Bankruptcies are very good. I think another important function of the conference will be to bring home to attendees that probably 80% of the companies on the TSX.V are worthless. If you took every public resource junior in the world and merged them together to form one company called Junior Explore Co., in a very good year that company would lose $2 billion [$2B], and in a bad year it would lose $5B. So the question becomes: What is the industry worth as a whole? Is it worth 6 times losses, 9 times losses, 15 times losses? That pessimism ignores the fact that the best 10% of the companies on the exchange generate such fantastic performance that they add legitimacy and occasionally luster to a sector that is overall a massive loser. The conference is focused on discriminating between the good, the bad and the ugly. Most investors, including institutional investors, don't take enough time and don't have enough expertise to segregate.

    The good news is that companies exhibiting at the conference are all either a Stansberry recommendation or a Sprott fund position. The fact that we have money and reputation at risk doesn't mean that they're all going to be successful, but it sure means that we've studied them and we believe they're a decent opportunity. That makes the job of segregating much easier for attendees.

    TGR: I was looking at the list of companies sponsoring the conference and there were some interesting trends. Most are natural resource explorers or producers, but you also have a royalty company, a streaming company and a joint venture model company or two. Were they chosen as a way to take some risk out of investing in the sector?

    RR: The answer is yes, yes and yes. The royalty and streaming companies, Franco-Nevada Corp. (NYSE:FNV) and Silver Wheaton Corp. (NYSE:SLW), respectively, take out a lot of the operational risk and capital deployment risk associated with the mining business. If you look at the assets deployed relative to the cash generated, the royalty and streaming companies enjoy tremendous market share in terms of margin in the mining industry relative to the capital that they have deployed. So, yes, your supposition as to our bias is accurate. It all has to do with risk management. The Sprott Gold Miners ETF is skewed to the royalty and streaming companies because of margin relative to capital deployed. So it makes perfect sense that they would be there.

    Silver Wheaton and Franco-Nevada are also there because we have asked David Harquail and Randy Smallwood, who played key roles in building those companies, to share their stories from the stage so that investors can benefit from the real-world experience of executives rather than relying on analysts to filter it.

    PS: If you look at the returns on net tangible assets across the resource space, you will see a lot of terrible numbers. That is important because the return on net tangible assets tells you the degree to which those companies are subject to cyclicality, low margins and high capital costs-the main killers of all equity return. But royalty companies tend to be the exception. Silver Wheaton made over $430M in cash last year, which was a terrible year for silver, and it did so on a net tangible asset base of around $3B, which produces almost a 12%, return on net tangible assets. That's a pretty good business no matter what industry it's in. These companies are clearly worth more than the average individual producer. The management teams in these royalty and streaming companies have the highest-quality research and the most visibility into all of the producers. So if you really want to know what's going on in the resource space, you should talk to the management team of a royalty company.

    TGR: How important is political risk and jurisdiction to your decision about adding to your coverage list or fund?

    RR: It's fourth place for me. Quality of deposit; quality of management, particularly management experience specifically correlated with the task at hand; and financial capability all come ahead of political risk.

    TGR: Do you look at the same factors in the same order when it comes to energy companies-quality of deposit, quality of management and quality of balance sheet before political risk? Or do geopolitical factors impact supply and demand more in oil and gas?

    RR: Many of your readers will remember the old Purolator oil filter commercial with a greasy mechanic holding up an oil filter with the message, "You can pay me now," pointing to a $10 oil filter, "or you can pay me later," pointing to a $5,000 blown engine. That's where the entire commodity markets are now. If you could keep the oil price in the $65-75 a barrel [$65-75/bbl] range, producers would adjust and the oil industry could earn its cost of capital. If the oil price were to fall to $45/bbl and stay there for three years, it would destroy productive capacity and the oil price would go to $150/bbl five years out. It is very much a "pay me now or pay me later" scenario for commodities.

    PS: Rick knows me as a long time energy bear. I have believed since 2007 that we were very likely to have a secular increase in production of hydrocarbons because I saw the crazy increases to capital spending that were going on across the industry. I didn't understand anything about fracking or horizontal drilling until about 2010, when I first learned about the Eagle Ford. So I didn't know how exactly companies were going to discover it, but I knew they were throwing so much money at it that it was inevitable that they would find it, and when they did they would produce too much.

    RR: I would argue that it hasn't been so much an increase in production that's pushed down the oil price. The increase in production is more an American and Canadian phenomenon largely offset by decreases in Mexico, Venezuela and elsewhere. The real reason for the decline in oil prices has been maintaining steady production in the face of declining demand as a consequence of a world economic recovery that didn't occur.

    Going back to the capital-intensive nature of shale, I think there are two things that you need to consider. One is that the economic shale deposits are much less ubiquitous than is commonly believed. Six or seven counties account for most of the economic shale production in each of the deposits, Bakken, the Eagle Ford and the Marcellus.

    The second thing is that capital is a constraint to technological innovation, and both equity capital and debt capital may not be as available to the North American exploration and production industry as it has been in the last eight years. I believe that capital will be less available and, hence, more expensive. That will be an important determinant in future production decisions. I don't think that we have to pay that piper yet because my understanding is that there are as many as 20,000 wells that have been drilled to hold leases and still need to be completed. So we have some pretty good fairway.

    Most people also fail to consider the production tail. The production profiles associated with artificial fracturing are hyperbolic, meaning that the flow rates decline by 60 or 70% the first year and then by 50% the year after. So effectively all the net present value happens in the first two years, then you have a very long tail, which is of course free. But when you slow down the pace of drilling, the pace of decline production relative to conventional oil and gas is extremely stiff.

    Investors also need to understand that the competitive nature of 50 or 60 operators trying different fracking methods in North America will continue to result in technological advances not possible in a country like China, where one state agency is charged with following the protocol to meet a quota. Plus, the advanced capital markets in the U.S. and Canada make increased production possible at a rate not imaginable in other places.

    TGR: I just interviewed Marin Katusa and he suggested looking to the U.S. and Canada for uranium investments. He believes the fact that U.S. imports 94% of the uranium it needs to power its nuclear facilities is dangerous and an opportunity to develop domestic supplies. Do you share his same concerns?

    RR: I disagree when it comes to U.S. supplies. Uranium is extremely fungible. The biggest supplier of U.S. uranium for a substantial period of time has been Russia and I suspect will continue to be Russia. U.S. utilities hold an average in excess of four years' uranium supply. It could be that capital markets reward U.S. production better than they reward production in other parts of the world as a consequence of the ethnocentricity, but the opportunities to invest in the U.S. in the uranium business are constrained by deposit size.

    I agree with Marin on the importance of Canadian uranium opportunities. The Athabasca Basin is the Persian Gulf of uranium. While U.S. in situ leach deposits may be 3 or 4 million pounds [3 or 4 Mlb], Athabasca Basin deposits are consistently in excess of 100 Mlb. Athabasca Basin grades are measured in percents rather than parts per million. But I wouldn't constrain myself as a uranium investor geographically in response to political concerns.

    TGR: What is the one thing you hope readers will take away from this interview?

    PS: I think now is a fantastic time to build expertise in the resource space. The best way to do that is to meet the people involved in it. If you're serious about putting some capital to work in resources, the key is to know the people and know the cycles. That's exactly what you're going to learn if you come to the Sprott-Stansberry conference.

    RR: I would hold out just one tickler. Porter and I are working on a joint project, which assuming we get regulatory approval, we will unveil at the conference. That's all I'll say.

    TGR: Gentlemen, thank you for your time.

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

    Rick Rule, CEO of Sprott US Holdings Inc., began his career in the securities business in 1974. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. His company has built a national reputation on taking advantage of global opportunities in the oil and gas, mining, alternative energy, agriculture, forestry and water industries. Rule writes a free, thrice-weekly e-letter, Sprott's Thoughts.

    Porter Stansberry founded Stansberry & Associates Investment Research, a private publishing company based in Baltimore, Maryland, in 1999. His monthly newsletter, Stansberry's Investment Advisory, deals with safe-value investments poised to give subscribers years of exceptional returns. Stansberry oversees a staff of investment analysts whose expertise ranges from value investing to insider trading to short selling. Together, Stansberry and his research team do exhaustive amounts of real-world independent research. They've visited more than 200 companies in order to find the best low-risk investments. Prior to launching Stansberry & Associates Research, Stansberry was the first American editor of the Fleet Street Letter, the oldest English-language financial newsletter.

    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) Karen Roche conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences 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: Silver Wheaton Corp. Franco-Nevada Corp. is not affiliated with The Gold Report. 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) Rick Rule: I own, or my family owns, shares of the following companies mentioned in this interview: All. 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) Porter Stansberry: 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.
    5) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
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