The Gold Report's  Instablog

Source: Peter Byrne of The Gold Report (4/24/13)

http://www.theaureport.com/pub/na/15186

After the extreme volatility of gold in the last few weeks, OCM Gold Fund Manager Greg Orrell is more convinced than ever of the necessity of owning gold assets. In this interview with The Gold Report, Orrell lays out the rationale for buying these cheap gold stocks around the world, including California of all places.

The Gold Report: How has your bullish view on the gold sector evolved as a series of crises has jolted both the international stock market and the price of gold?

Greg Orrell: First off, my belief in gold as a monetary asset has not wavered. Japan basically admitted that it is bankrupt with its intention to aggressively debase its currency. Normally such actions would invoke, and may still, a race to the bottom as each country engages in economic warfare to deal with its debt issues. At this juncture the fear of global deflation among the G7 crowd remains its worst nightmare, especially as additional stimulus by the Federal Reserve is showing diminishing returns. With high debt levels in both the private and public sectors around the world, stimulating economic growth is proving elusive. These alarming events are setting the stage for the next leg up in the dollar gold price, in my opinion. The fiscal and monetary crisis is ongoing and underscores the necessity of owning gold assets.

Though agonizing, the past 18 months have been nothing more than a consolidation for gold from the September 2011 highs of $1,900/ounce ($1,900/oz). The recent decline in gold prices below $1,500/oz is not the end of the bull market in gold, despite the barrage of negative commentary by those wanting to dance on gold's grave. The destruction of currencies is in full bloom, but it is not a straight line. The problem for many gold investors is that they can see the endgame. Gold prices rise in a straight line at the end of a monetary system, but we are not there yet. It takes some patience to hold the course while the establishment fights tooth and nail to keep the dollar system from failing.

TGR: The years 2009 and 2010 were better for gold stocks. Can you talk about how things changed after that and how investors can best respond to the precipitous drop in market value?

GO: A number of factors go into the poor performance of the gold shares over the past couple of years besides the gold price. We have seen investor rotation out of defensive posturing and then the gold miners ended up being their own worst enemy. Gold share investors became concerned, and rightfully so, with rising operating and capital costs, poor capital allocation and growing resource nationalization. This in turn made bullion exchange-traded fund (ETF) products more attractive and prompted a trend of shorting the miners versus long gold positions.

Let's look at the world's largest producer, Barrick Gold Corp. (ABX:TSX; ABX:NYSE). It incurred cost overruns at the Pascua-Lama project in Latin America. And it overpaid for a copper asset in Africa after spinning off its African gold assets a couple of years earlier. Each of these instances led to contraction of cash flow and net asset value multiples for the whole sector, and set a theme for the industry. At this point, the pendulum has swung too far, with the shares basically discounting everything that could go wrong and more. Therefore, if an investor is not in the gold sector, now is an opportune time to take advantage of the significant decline in share values as there are signs of positive change taking place within the sector.

TGR: Can you provide any insight as to why longer-term investors, and also new gold investors, should buy into the current gold market?

GO: The rationale for owning gold assets remains simple: global deterioration of sovereign credit and a growing need to debase currencies in order to meet future obligations, whether it's here in the U.S., Europe or Japan. The policy of socializing risk with monetary and fiscal policy has destroyed the balance sheets of the Western world. We are in a phase of experimental central banking, which I believe is going to end badly due to the dislocations of capital it has caused through prolonged periods of negative rates.

In the event economic growth were to take hold, an unleashing of built up reserves in the system would set off inflation with a corresponding rise in rates. Just imagine the effect of a change in the direction of interest rates and the collateral damage that will create in the bond markets and the interest rate derivative markets after all of these years of managing a zero interest rate policy. The cost of funding the U.S. deficit will rise exponentially. More quantitative easing begets more quantitative easing. Investors need to have some type of asset to balance their portfolios. Policymakers who got us into this mess are unlikely to navigate us out of it. History tells us that only gold is a good place to be.

TGR: Is now a good time to be looking at the gold miners, including the juniors?

"The recent decline in gold prices is not the end of the bull market."

GO: Absolutely. With current sentiment negative on the miners, it is an incredible opportunity to buy gold shares and recapture lost value. A major problem for the mining industry is that its business model is flawed. Gold investors are not strictly interested in taking money from one hole in the ground and putting it in another. Investors want participation in cash flow through dividends and earnings leverage to higher gold prices along with the potential for increased shareholder value through discovery . Not paying dividends was great for management, geologists, engineers and everyone but the investor who was locked out of the cash flow.

Now falling share prices have put the onus on management to compete with the ETFs for investor dollars. A number of CEOs are being shown the door. Marginal projects are being shelved. Dividends are increasing. Management is beginning to understand that the needs of shareholders must be prioritized. Granted, the decline has been painful, but in my 30 years in the business, this is exactly what needed to happen.

TGR: Has the balance in your portfolio between bullion, large caps, mid caps, small caps, ETFs, royalties and cash changed over the last five years?

GO: Because production is cheap, we are weighting toward the large- and mid-cap producers. They are poised to recapture value as sentiment turns around in that space. The smaller, macro-cap exploration and development companies are bombed out, and a number of companies are trading where market cap per resource ounce is down to $10 or lower. Those companies are interesting as long as they have a balance sheet and they're not diluting their shares to keep the lights on. Royalty companies have outperformed along with bullion over the last five years because of all the negative factors that I mentioned previously. But I'm not adding to the royalty companies right now because the operating companies offer better value.

TGR: You're not adding to bullion?

GO: Not at this time. We're keeping bullion around 5-6%. The miners, in my opinion, offer tremendous value at this point with gold reserves in the ground.

TGR: Who are some of the companies you think are attractive in the middle and small spaces?

GO: Endeavour Mining Corp. (EDV:TSX; EVR:ASX) is interesting right here. The share price has been washed out because it is a higher-cost producer, around $900/oz. Its market cap is down to under $400 million ($400M) with 300,000 oz (300 Koz) of annual production in West Africa, but is slated to grow to 450 Koz over the next couple of years. That's a 50% increase. Endeavour is driving expansion mostly from internally generated cash flow.

"In the past, the majors looked for big projects because they did not want to operate the smaller mines. Now they are focusing on grade and smaller projects that won't blow up the company."

Esperanza Resources Corp. (EPZ:TSX.V) is cashed up with over $70M and with experienced management is developing a couple of attractive heap-leach projects in Mexico. One project can put up 35 Koz/year and another one can do 110 Koz/year. Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) is a major shareholder. Esperanza could be an early day Alamos Gold Inc. (AGI:TSX).

Avala Resources Ltd. (AVZ:TSX.V), 50% owned by Dundee Precious Metals Inc. (DPM:TSX), is trading down at dirt prices. The company has an entire Carlin-style belt tied up in Serbia where it has outlined close to 3 million ounces (3 Moz) so far. The company's market cap is $12-15M, with $9M in the bank; it's not a bad option-the market will appreciate the optionality value on the company's assets at some point.

TGR: Are you a fan of the royalty model?

GO: I am a fan of royalty companies. The revenue comes right off the top so royalty holders have no exposure to increases in costs and typically have exposure to increases in reserves. Royalty companies often acquire the royalties from the original property owners. Another form of royalty is the creation of a gold or silver stream: the royalty firm helps to finance the project and receives gold or silver in return. We have seen a pick up of companies selling either net smelter royalties or streaming deals on projects as a way to finance in a marketplace where equity capital has become expensive.

TGR: Are there any royalty companies that people should be looking at?

GO: We own a couple of the big ones in our portfolio- Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) andFranco-Nevada Corp. (FNV:TSX; FNV:NYSE). We also own Silver Wheaton Corp. (SLW:TSX; SLW:NYSE).Sandstorm Gold Ltd. (SSL:TSX) is the up and coming player in the royalty space. It's a highly competitive business. Recently a number of junior companies have cobbled together questionable projects that most likely won't come into production in order to claim that they are royalty companies. Franco, Royal and Silver Wheaton have committed significant dollars to individual projects of late, which increases their risk profiles. However, with the diversification of their asset bases at this point, it should not be a problem with all three positioned to grow revenues substantially over the next three years. So overall I do like the royalty model.

TGR: What is your take on pure-play gold producers?

GO: I prefer pure-play gold producers, but those deposits are hard to find. Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE) is a good example of a pure gold play, as are a number of other intermediates and juniors. But often base metals accompany gold. All of the major gold producers produce copper: Goldcorp Inc. (G:TSX; GG:NYSE), Newmont Mining Corp. (NEM:NYSE), Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE), New Gold Inc. (NGD:TSX; NGD:NYSE.MKT) and Barrick. Production has been shelved in many big copper-gold porphyry deposits because it is so capital intensive. Consequently, we are more likely to see the smaller, pure gold projects go forward.

In the past, the majors looked for big projects because they did not want to operate the smaller mines. Now they are focusing on grade and smaller projects that won't blow up the company. It may be smarter to take on 10 projects producing 150 Koz than to try and capitalize one project capable of producing 1.5 Moz.

TGR: Do any particular firms come to mind in that area?

GO: Gold Fields Ltd. (GFI:NYSE) out of South Africa says it is going to focus on smaller projects, around 150-200 Koz. I've heard the same thing from Newmont. Management is not going to be punished for making a small acquisition versus a buy of $5 billion. The big buy days are not likely to return any time soon. Managements' excuse that it was difficult to manage multiple smaller assets rather than a couple of large ones has been cast aside as the large projects have shown to expose companies to too much risk.

TGR: We both live in California where there's a history of gold mining, but current public awareness is limited. What the story?

GO: There is gold in the Mother Lode Belt in Northern California, in Imperial County in Southern California and in Siskiyou County in far Northern California. The unemployment rate in those areas is pretty high, so the residents are open to mining's economic benefits. It is the outsiders who are up in arms about mining. Regulations have been put in place by a very staunch environmental crowd in California, but it's no different than what we see around the world where local residents are in favor of a mine because of its economic benefits, only to have the professional environmentalists come in and oppose the project.

TGR: What junior gold miners in California are worthwhile?

GO: One project that has the potential to turn mining around in California is the Sutter Gold Mining Inc. (SGM:TSX.V; OTCQX:SGMNF) start up of the Lincoln mine on the Mother Lode Belt in Amador County. It's a high-grade, underground mine that's financed by its 50% shareholder, the Rand Merchant Bank. The first 150-200 feet (150-200 ft) of that deposit is going to pay back the capital cost of building and developing the mine. The mines on either side of it historically produced down to 4,000 ft. Production will start off relatively low at about 22 Koz/year. But there are significant growth opportunities at the Lincoln mine and along the Mother Lode Belt for Sutter to exploit once it has established itself. I am very excited about its prospects.

TGR: How do the California companies stack up against Nevada-based mining companies?

GO: Atna Resources Ltd. (ATN:TSX) has a heap-leach mine down in Southern California that has been going for quite some time. New Gold has the old Mesquite mine, which is a heap-leach mine near the border of Mexico. But California has hardly any mining activity, or even exploration activity. So I would say it doesn't stack up at this point.

TGR: Is that primarily because of environmental regulations or the political climate or the availability of gold?

GO: The perceived difficult environmental and permitting climate in California has been a deterrent. If a company wants to do open-pit mining in California, it must be prepared to backfill the pit. That is not required in most places.

TGR: How expensive is it to backfill?

GO: Handling waste material can be quite expensive. So the real California-based opportunity is underground mining in the Mother Lode Belt and that also is where the higher-grade ore is.

TGR: Maybe we'll see a replay of 1849.

GO: We're not going to see a replay of 1849. What we'll see is a replay of the underground mines of between 1900 and 1940. Some of those were just great mines and were the blue chip companies of their day. The gold is still there.

TGR: Thank you, Greg.

Greg Orrell is the portfolio manager of the OCM Gold Fund. He is also president of Orrell Capital Management, the investment adviser to the fund. Orrell has over 28 years of experience in the gold sector as a retail and institutional broker, investment banker and portfolio manager.

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) Peter Byrne conducted this interview for The Gold Report and provides services to The Gold Report 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 The Gold Report: Royal Gold Inc., Franco-Nevada Corp. and Goldcorp Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Greg Orrell: I or my family own shares of the following companies mentioned in this interview: Endeavour Mining Corp., Avala Resources Ltd., Esperanza Resources Corp., Newmont Mining Corp., New Gold Inc., Sutter Gold Inc., Randgold Resources Ltd., Royal Gold Inc., Silver Wheaton, Barrick Gold Corp. and Gold Fields Ltd., all owned through holdings in the OCM Gold Fund. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise - The Gold Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

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

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

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

101 Second St., Suite 110
Petaluma, CA 94952

Tel.: (707) 981-8999
Fax: (707) 981-8998
Email: jluther@streetwisereports.com

Source: Brian Sylvester of The Gold Report (4/22/13)

http://www.theaureport.com/pub/na/15175

Killian Charles, an analyst with Industrial Alliance in Montreal, isn't too concerned if the gold price hits $1,300 an ounce or even $1,000. He's more concerned with the gold breaking point. How low can the gold price go without breaking a project? Investors will be surprised to know that a wealth of junior miners are lean and mean enough to survive a pint-sized gold price. Charles talks with The Gold Report about which companies have resized and redesigned their projects to make it in this unforgiving market.

The Gold Report: Killian, what are the main causes of the disconnect between commodity prices and the share prices of mining companies?

Killian Charles: It's the fundamental difference between the commodity itself and mining companies.

There's an unspoken belief that, when you invest in a junior mining company, you're essentially buying a portion of the deposit. Investors are looking to diversify by having gold as a commodity in their portfolios and they look to gold junior companies. Yet the exit strategy from those gold junior companies results in cash, so they're left tangibly playing the gold space, but not having what initially brought them in.

That is why a lot of companies are considering gold dividends. At least that way investors playing the gold space are actually being paid in the commodity that interested them at the start.

TGR: Do you think that's going to gain traction?

KC: The smaller producers are having a lot of difficulty getting good traction in this market. A lot of them are going to explore some of these alternative routes. Just as we've had alternative routes for financing, we're going to start seeing alternative routes to increase shareholder value.

TGR: The fall in precious metal values has shaken a lot of investors. What is Industrial Alliance's forecast for gold?

KC: We are less worried about noise surrounding the price of gold. We're focused on the breaking point of the projects we cover. Even if the gold price may be $1,300/ounce ($1,300/oz) at the end of the year, we are more concerned if the project may survive at $900/oz.

The gold price is important to companies that have producing assets, however. Into 2014 and out to 2020, we typically take a conservative approach and go well below $1,300/oz. Beyond 2020, we forecast roughly $1,100/oz because a lot of companies should not be getting excessive value for production that is too far down the pipeline.

TGR: What would you be doing to gain traction in this market if you were in the shoes of a junior precious metals company?

KC: Instead of showing how well a project works at $2,000/oz, I would show the market how well a project works in any environment. All gold projects have decent leverage to higher gold prices. What's more important is showing that there is a smaller sensitivity to the downside, showing how they can still stay relevant on a downturn. Quite a few companies out there would survive and make money in almost any scenario.

TGR: Many of the companies you cover are working on mining projects in the Canadian provinces of Ontario and Québec. Is the safety of those jurisdictions a considerable factor?

KC:. Yes, you can't split it any other way. When people here think about royalties, they're haggling at the details. By and large, there's never really going to be any threat of nationalization. There are no military coups happening in the U.S., Canada, U.K., Sweden or Norway, etc. I find that is very important because work will keep going and I do not have to be afraid that an election might change that suddenly. I can plan for royalties and taxes. I cannot plan for a government getting kicked out of a country and losing my property.

TGR: Some industry insiders are saying that only the better projects will get financed in the current tight market. How do you define "better" projects?

KC: For us, better projects are those that are difficult to kill off. We are big believers in finding the project's "gold internal rate of return." What gold price gives us a net present value (NPV) of zero? We try to find that gold price breaking point for different projects. The lower the gold price breaking point, the more interested we are in the project, and the stronger we feel a project could be.

"Just as we've had alternative routes for financing, we're going to start seeing alternative routes to increase shareholder value."

This allows us to have an agnostic approach to what a better project may be. We find that projects with slightly lower capital expenditures but offset by higher operating expenditures end up being stronger and that's not very surprising. It's much more important to get the mine into production through almost any means necessary. Even though it might be a little smaller and might not immediately benefit from economy of scale, expansion could come at a later point. Projects that may not be initially strong could, through a simple redesign, turn out much healthier in this market simply because they scale everything down to a scope that is manageable.

TGR: Some development-stage gold and silver projects are getting financing by forward selling a portion of their production to banks or royalty companies, while others have arranged credit facilities backed by board members. Some even manage equity financings despite record low share prices. What's your preference among those options?

KC: I'd rather see a company do a royalty or gold streaming when it is in a position of power, but that's rarely the case. At the end of the day, I find that most 3-5% royalties don't affect the final NPV greatly and still provide an injection of much-needed cash.

We've seen some companies manage to do equity financings. A lot of companies that our group previously approached to do a financing initially told us they were waiting for better times. As an example, company A's stock was trading at $1/share and went down to $0.50/share. Instead of thinking about the present, it is stuck looking in the rearview mirror at the $1/share. Sure enough, a few months go by and now the company is really hurting for cash. Its share price is possibly even lower and now it has no choice but to raise cash. Importantly, the market opportunity that presented itself previously may not be there anymore.

Convertible debt never really works out. These companies have no real way of servicing the debt so it almost always ends up being converted into shares down the road or renegotiated repeatedly to push back the payment schedule.

TGR: The great thing about royalty streaming is that royalty companies have such efficient and effective people vetting those projects. If a royalty company is willing to give a junior money up front, you know that it's going to go into production and generate cash flow.

KC: That is very true. A lot of streaming or royalty companies do more due diligence than large funds that might take a large position in an equity raise.

TGR: Some Québec-based mining companies can draw on Québec government-owned funds and the expertise of SOQUEM, the province's mining and exploration company. How much of an advantage is that in today's finance market for junior mining companies?

"Companies are going to die, but it's going to make a fair amount of companies much more robust."

KC: SOQUEM is more of an advantage in a bull market. It operates as a government-owned project-generating company that will flip or joint venture early-stage projects out to other companies. It does help.

What's much more interesting is the Québec government-owned funds. They move a lot slower, but what I find interesting with these funds is that there's no secret game being played; there are no backhanded maneuvers. Once they believe in your asset, they'll be stable. They're not going to try to short run your stock before an issue. That said, if your share price is stuck middling in the $0.10 range, they're not going to help you drive it up to $0.30/share either.

TGR: Have any of the companies that you cover taken advantage of those funds or do any of those funds own a position in any of the companies you cover?

KC: Nearly every company that runs through Québec will have some interaction with them. Metanor Resources Inc. (MTO:TSX.V) is a good example; it relied on Investissement Québec to provide some necessary financing.

TGR: Sandstorm Gold Ltd. (SSL:TSX) has agreed to purchase about 20% of gold produced from Metanor's Bachelor Lake mine, which is now up and running. Is everything going as planned at Bachelor Lake?

KC: I think so, but I'm still waiting to see last quarter's numbers. Metanor did have issues last year advancing the underground development as fast as it wanted to. It simply didn't have enough miners. Next quarter will be key to it demonstrating to the market that it's not just another company promising to produce thousands of ounces per year and is one that actually produces.

TGR: What is the production guidance for 2013?

KC: It hasn't put out any large guidance number yet. It should be able to hit anywhere from 30,000-40,000 oz (30-40 Koz) if everything moves along nicely.

TGR: What's your rating on Metanor?

KC: I have a Speculative Buy and a $1 target. It's at about $0.13/share. However, I'm waiting to see quarterly numbers so that I can revalue it.

TGR: I'd like to hear about some other interesting companies that you have under coverage.

KC: I'm a fan of Moneta Porcupine Mines Inc. (ME:TSX.V). The company's asset is about 100 kilometers east of the town of Timmins, Ontario. We're going to see some projects that are in a more agreeable location come in favor. Moneta Porcupine has, by and large, that potential. The project is right along the highway. It has power. There are mines nearby, including Brigus Gold Corp.'s (BRD:NYSE.MKT; BRD:TSX).

Moneta has a sizeable resource of about 4 million ounces (4 Moz) of Indicated and Inferred. It put out a very positive preliminary economic assessment (PEA) late last year.

The company's story is changing. It used to be a simple open-pit and now it wants to look into an underground component. There's a lot of work being done. Moneta recently hired some personnel fromDetour Gold Corp. (DGC:TSX). It will be interesting to see if Moneta is able to leverage its experience to expand the bulk target tonnage and develop the asset.

TGR: Gold Canyon Resources Inc. (GCU:TSX.V) has a similarly sized resource.

KC: There's a difference between the companies, however. Gold Canyon is a little more remote. It's able to leverage a high-grade core that should allow it to be one of the richest open pits in Canada, considering the tonnage it wants to move.

Some of the grade has gone down slightly in subsequent resource estimates, but a high-grade core still accounts for almost 1.5 Moz of the resource. At 200-300 Koz production per year, for five to eight years of production, at anywhere from 1.5-2 gram/ton material-for Canada, that's stellar. There's really nothing that compares to it in Canada.

The problem with Gold Canyon's asset is that a lake overlaps part of the resource. It may delay permitting, but shouldn't choke or kill the project. Similarly, there are metallurgical issues that Gold Canyon is working through; management has alluded that there might be controlled lithological issues, but we're still waiting for confirmation.

TGR: Less than a year ago, this stock was trading at around $4/share. Now it's trading at about $0.33/share. Is it strictly the lake issue that's been the drag on the share price?

KC: I would be surprised if it were the lake because the lake issue has been known since the late 1980s. Investors moved into the story for that high grade. When the global resource grade decreased last year, a lot of people thought that it wasn't going to be able to leverage high-grade material.

What happened was that Gold Canyon added new regions that were lower grade, but the original portions with high-grade shoots and bulk tonnage material haven't disappeared. That's getting muddled and lost in this story.

TGR: Gold Canyon recently released its PEA. What did you take away from that?

KC: I was actually surprised that the capital costs were below what I had expected, especially on removing and dewatering part of this lake. I was pleased to see that. The PEA again highlights the advantage of the high-grade potential over the first few years. That's how this story should be repackaged: if the grades in the higher-grade portion remain constant, then it could be looking at a payback ratio that's substantially lower than its peers.

TGR: The management team has a number of people who have been with companies that have been taken over. Director Richard Hall was with Grayd Resource Corp. when Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) acquired it. CEO Troy Fierro was also with Grayd and FronteerGold Inc., which was acquired by Newmont Mining Corp. (NEM:NYSE). Chairman Conrad Pinette was with Northgate Minerals when it was acquired by AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE). Does that increase the likelihood of it happening again?

KC: It's a hard thing to predict. These executives have a good idea of what is attractive to larger gold companies out there. They definitely want to have their project acquired. However, whether they can do it is impossible to tell.

TGR: What other companies have captured your attention?

KC: I find Integra Gold Corp. (ICG:TSX.V) to be pretty interesting. Integra is at an earlier stage than the other two, but it's an interesting story. Its project used to be part of the Sigma and Lamaque mines, which essentially created Val-d'Or, Quebec. There's never been any real work done on the Integra property, which is just to the south of Val-d'Or. It's one of these interesting assets where you don't actually have to demonstrate a large resource to demonstrate that it works. It's continuous and geologically well understood.

Integra's situation comes back to talking about the gold breaking point. I feel an asset that's in a good location like that, with the grades that it has been putting out, would have a very low gold breaking point. Even though it wouldn't be mining 400 Koz per annum, costs would remain attractive in any gold mining scenario.

TGR: SOQUEM has a drill core database that certainly would have an immense amount of information available from previous operators on the Lamaque property. Do you know if Integra has tapped into that database to learn more about the deposit?

KC: Integra was able to access a wealth of information from various databases. In fact, most of the geological staff on this project has previously worked at Sigma or Lamaque. Not only does the staff have access to drill hole data, but on certain portions, there are drifts that intersect some of its targets at various depth. It's a question of going back and plugging in the holes between these drifts to demonstrate continuity. It's an easy way for the company to leverage this wealth of information and be able to pronounce rather sizeable results for a fraction of the cost of almost any other project out there.

TGR: Companies are not allowed to use any old drill core in NI 43-101 resource estimates, correct?

KC: They can't directly, but it gives them a lot of smoke to go chasing after.

Clifton Star Resources Inc. (CFO:TSX.V; C3T:FSE) ties right back in to that, too. The company has an old asset that's been looked at a number of times. The previous management team didn't do too much; it just kept it going. At a certain point, it may have overpromised and was halted by the British Securities Exchange Commission.

Now, there's a whole new team that is serious about the project. In a span of 12-18 months, the new team has been able to complete a new resource, put out a PEA and advance toward a prefeasibility study. This group can properly bring the project closer to fruition.

Clifton's project is very similar to Aurizon Mines Ltd.'s (ARZ:TSX; AZK:NYSE.MKT) Joanna project, except Clifton's project benefits from having a higher grade and lower strip ratio. Clifton's project is close to a community but the current mine plan doesn't require anyone to move.

TGR: Clifton will produce a gold concentrate at its Duparquet project in Québec. That could be a game changer for that project. But first we have to determine if there's a smelter that's willing to take the gold concentrate. Does that exist?

KC: That's my No. 1 question right now. It's not going to be easy. Clifton will have to market its final product around. A smelter might say, "You know? The gold content is very, very high, but the arsenic content-you're going to have to pay a penalty for it." Clifton Star is currently in the stages of taking a bulk sample and it's going to produce a product that it hopes to market to different smelters across the world.

TGR: Do you have any parting thoughts for us today, Killian?

KC: I think that investors are over-worried about the gold market. Projects are still coming true and companies are still working on interesting things. There is a lot of nervousness out there, but I'm still pleased to see that companies are rethinking and reimagining developing assets. It's going to make strong projects. To be sure, companies are going to die, but it's going to make a fair amount of projects and companies much more robust. If the market does turn, these projects are going to have a very good chance of being the next group of lower midtier gold producing companies.

TGR: Thanks, Killian.

Killian Charles joined Industrial Alliance Securities Inc. in February 2011 and covers small- and mid-cap exploration and producing companies. He graduated from McGill University with a Bachelor of Science degree in earth and planetary sciences. His technical training is an asset in the evaluation of companies in a sector that is changing rapidly. He previously worked with FNX Mining and QuadraFNX before joining the IAS team.

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 The Gold Report and provides services to The Gold Reportas 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 The Gold Report: Brigus Gold Corp., Detour Gold Corp., Gold Canyon Resources Inc., Clifton Star Resources Inc. and Aurizon Mines Ltd. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Killian Charles: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. In the previous 12 months, Industrial Alliance Securities has provided investment banking services to Clifton Star Resources Inc. and Integra 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 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 and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise - The Gold Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

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

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

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

101 Second St., Suite 110
Petaluma, CA 94952

Tel.: (707) 981-8999
Fax: (707) 981-8998
Email: jluther@streetwisereports.com

Source: Brian Sylvester of The Gold Report (4/19/13)

http://www.theaureport.com/pub/na/15171

The recent fall in precious metals prices has investors on edge. Many precious metals equities were hurting even before the latest precious metals drop. In this interview with The Gold Report, Peter Rose, head of mining research with Fox-Davies Capital Ltd. in London, provides a European perspective on mining and advises looking at under-appreciated jurisdictions (think Europe) and neglected metals like tin, lead and zinc.

The Gold Report: Peter, can you give us your long-term view of the Eurozone as it lurches from bailout to bailout?

Peter Rose: Some major things have to happen in Europe and the sooner, the better. Unfortunately, I think it will get worse in the short term.

But from the mining industry perspective, these crises are bringing a lot of realism to certain governments. Greece has opposed mining, despite having quite good ore bodies, as do Portugal, Spain and Cyprus. Mining companies can generate real revenues, exports and jobs and contribute to the financial coffers.

In addition, the European Union has good rules of law. The tenures are pretty safe, there are pro-mining interests and there are deposits of strategic elements. If you compare the operating costs with Australia, the European infrastructure tends to be better; wage rates are significantly lower. It makes for a pretty compelling story.

TGR: You deal with many junior mining companies. In 2004, the junior mining companies listed on the TSX Venture Exchange (TSX.V) averaged 27 million (27M) shares outstanding. Today, the average is 73M shares. Why have share floats risen so dramatically?

PR: I put it down to the euphoria about rising metal prices. There was a long period when it was very easy to raise money due to rising metal prices. On the TSX.V there was always a bigger focus on exploration companies. I believe these to be the major reasons, although sentiment is very different today compared with even two years ago.

A lot of exploration companies had no hope of bringing a mine into production, but it was very easy to raise money in 2004, so they did. Today, the writing is on the wall for quite a few of them. It is exceptionally hard for an exploration company with no near-term development potential to raise money.

From what I understand of the Canadian market, it is easier to raise money for exploration than development. On this side of the Atlantic, it has been easier to raise money for development because you get something at the end, even if it may not be much.

TGR: Your firm, Fox-Davies, helps public companies raise money. Which mine commodities and which types of projects are consistently getting funded now?

PR: It is easier to raise money for oil and gas companies. People like gold and copper, and while the outlook for tin is as good as for any other metal, it is has some in-built resistance.

The funds do not like obscure commodities. As long as you stick to the main London Metal Exchange-traded metals-copper, lead, zinc, gold, silver, and less so, nickel-the funds tend to be content with that.

TGR: But gold and silver don't trade on the London Metal Exchange.

PR: No, but there is a good market for them, and they make the headlines quite often. Tin does not make headlines and nickel is in oversupply at the moment.

TGR: Have there been initial public offerings for tin juniors?

PR: A number of them are trying. We are looking at off-market financing for them. There are private tin companies out there.

TGR: What is your outlook for gold this year and beyond?

"If you think that your currency is going to be devalued dramatically, you are better off buying gold or silver."

PR: I am not positive over the next three months. India has raised import duties to slow down the rate of imports and help with its balance-of-payments deficit. In addition, too many gold companies have chased production instead of profits, and people are a bit fed up, especially fund managers.

Longer term, I am not optimistic. When interest rates return to more normal levels, as they must do eventually, the gold price will come way down. Prices will overreact before stabilizing well off the bottom. However, I am surprised with the speed in which the market turned.

TGR: What is your timeframe for that?

PR: About five or six years.

TGR: What is your outlook for silver?

PR: In the short term, silver will track the gold price. However, given that silver is an industrial metal and that a lot of it is a byproduct of lead-zinc mining, I think there will be a disconnect between the gold and silver prices in 2014 and 2015. A number of lead-zinc mines will be nearing the end of their lives over the next couple of years. That will remove a lot of silver from the market, tightening up the supply side considerably.

TGR: Is silver's recent price weakness an early indicator of global economic weakness?

PR: No, it is more of a sympathy move with the gold market.

While global industrial production is not exactly brilliant at the moment, certain pockets are performing very well. The British automobile industry, for example, is performing as well as it has in the last 20 years. The aerospace industry is going really well, too. These are sectors that use quite a bit of silver, regardless of price.

TGR: Should precious metals investors buy select equities for growth, protection or both?

PR: I think it is probably better to buy equities than the metal, quite honestly. I think you get better leverage.

If you think that your currency is going to be devalued dramatically, you are better off buying gold or silver, depending on what you can afford. But generally, you have more liquidity and better leverage if you buy the correct stocks.

TGR: Should investors be more optimistic than they are right now?

PR: Yes. You can make a valid argument that precious metal mining companies are finally listening to the fund managers and starting to think of profit and returns rather than ounces of production. I think that is a positive development.

TGR: What silver names can you tell our readers about?

PR: The sole silver company I cover is Hochschild Mining Plc (HOC:LSE). While I do not like it in the short term, toward the end of 2014 the company will have two or three mines coming into production. I think Immaculada in Peru will be a cracker of a mine. The gold grades there are better than at Hochschild's other Peruvian operations, and it has good silver grades. At that point, its production will shoot up 50%. You will have to weather some hardships in the short term, but if you were to start buying 12 months from now, you could make some serious money.

TGR: In 2012, Hochschild posted earnings of $0.19/share. How long will it take to get back there?

"We are bullish on lead and zinc because a number of mines will close over the next two years, and the zinc price will remain very firm."

PR: I am not optimistic that 2013 will be as good as 2012. Production measured in silver equivalents will be flat. Peru's currency, the nuevo sol, has been strengthening against the U.S. dollar for about five years, resulting in some imported wage inflation. There also is inflation at San José in Argentina. Profits will probably be down a little bit. It has spent a lot of its cash, so interest income will be down as well. It will struggle this year, but 2014 looks better.

TGR: Hochschild has been something of an acquirer. Given the prices of juniors, might it use some of its cash for acquisitions?

PR: It made a big acquisition late last year. Hochschild also has been putting large amounts of money into exploration with a twofold aim. One was to extend the mine lives of its existing operations and the other was to find more company makers. I think it has 13 company makers in its exploration portfolio right now. My instinct says Hochschild will be more inclined to develop its own properties rather than buy more. However, with the recent dramatic decline in share prices, this may now change.

TGR: What gold names do you follow?

PR: I follow Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE), Minera IRL Ltd. (IRL:TSX; MIRL:LSE; MIRL:BVL), Highland Gold Mining Ltd. (HGHGF:OTCGM; HGM:LSE), Centamin Plc (CEE:TSX; CNT:ASX, CEY:LSE) and African Barrick Gold Plc (ABG:LSE).

TGR: Would you like to expand on any of those?

PR: I think Highland Gold will emerge as an interesting company.

Apart from one prospect in Kyrgyzstan, everything Highland Gold has is in Russia, where it has been operating successfully for a number of years. The company's Belaya Gora mine is coming into production this year, and its newly purchased asset, Kekura, has a pilot plant that will be in production very shortly. Initially that project will produce only 20,000-30,000 ounces/year (20,000-30,000 Koz/year), at a cost of $1,000/ounce ($1,000/oz). But that is the precursor to production levels near 200 Koz/year after 2017 with cash costs around $550/oz. There is a lot of synergistic benefit with its Klen property.

On its conference call on April 9, the company was asked about divestitures. Rather than giving a direct answer, the response was it would be addressed in its 2012 final earnings presentation. I think there probably are one or two divestitures in the pipeline to ease the funding issues related to developing its newer acquisitions.

TGR: Other gold mining companies operating in Russia have had issues with, among other things, nationalization. What gives you confidence something similar will not happen to Highland?

PR: Highland is a small company operating midsized deposits, not big, strategic deposits.

Highland is a good corporate citizen. It is developing mines in Russia and employing lots of Russians, very few Europeans or Americans. Its headquarters is identified as Jersey, but it is de facto a Russian company and will be left alone because of that.

Another thing that interests me about Highland is its Novoshirokinskoye lead-zinc mine, with byproduct gold and silver, which it has always reported as gold equivalents. Highland now owns 96% of Kazzinc and this project.

"I would be optimistic about mining in Europe. If you are selective, there are quite good reasons to be upbeat."

We are bullish on lead and zinc because a number of lead-zinc mines will close over the next two years, and the zinc price will remain very firm. If you combine that with the growing gold production, it becomes a story you can back each way, so to speak.

TGR: Nonetheless, there is a lot of resistance to investing in a Russian asset or a Russia-based gold producer.

PR: I have covered Highland for nearly six years, and apart from a fire just before I initiated coverage, there has not been a single hiccup. Production has gone up and down, but the ore reserves have gone up. Cash costs have remained around $550/oz. It has made some promising acquisitions. There have never been any concerns about ownership or shutting projects down, which you have with Randgold and Centamin, or the social issues faced by African Barrick. Highland has had a much smoother ride than those companies.

TGR: Minera has one producing asset and two at the development stage. The Don Nicolas mine is scheduled to go into production in 2014. Does Minera have enough cash and is it on schedule?

PR: When I asked Courtney Chamberlain, Minera's executive chairman, about that in late 2012, he said he was looking at some innovative financing techniques in Argentina-options that would not be available if a company was developing a mine in Peru, North America or Australia. There are people with dollars in Argentina who cannot use them, and this has led to the development of locked-in funds. He was very optimistic about financing.

I am more interested in Minera's Ollachea mine. The company recently released some very good drill results. If you draw some conclusions, you could estimate that there will be 300-500 Koz additional gold there. The latest drill results were closer to the mine portal than the main ore body, and suggest there is continuity all the way across. I think annual gold production will exceed what is in its feasibility study and the mine life will be longer.

TGR: But Minera has to start generating cash from Don Nicolas before it brings Ollachea on-line, right?

PR: That was the original plan, but I think it might finance the properties separately. Ollachea will certainly lag Don Nicolas, but you might have construction at both sites at the same time.

TGR: There have been some permitting issues in Peru. Is Ollachea fully permitted?

PR: No, the permitting process has only recently started. Peru does have some permitting issues, but if you do your groundwork and get the community on your side before you start, it minimizes the issues. Minera has been exceptionally good at this, so I would not expect any real problems. The environmental and other permits are not too far off, and I expect a good outcome.

Overall, Peru is a very positive place to go mining.

TGR: In a downmarket for mining companies, Randgold had a record year of profit production and earnings per share. Where will its growth come from?

PR: I do not think the Loulo-Gounkoto complex has reached its full potential, and the life of the Morila mine is going to be extended. Its joint venture in the Congo with AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE), Kibali, should be coming into production late this year or early 2014. That will be a huge, low-cost producer with a long mine life.

TGR: Many investors are nervous about the Congo. What is the risk profile of that joint venture?

PR: Everything has gone to schedule and very smoothly to date. Villages have been moved, a hydro system installed and a road built. The project is far from where a lot of the problems in the Congo have been. The lack of problems might be a reflection of excellent management.

TGR: Centamin is a direct contrast to Randgold. It had an awful 2012, but your research report says it could rebound this year. Tell us more about that.

PR: I am not a big fan of Centamin, but having said that, the preliminary quarterly production figures it released this morning were quite good. Its guidance for 2013 is 320 Koz.

I was under the impression that production would ramp up across the year, as the mill moves toward full production and more higher-grade ore was mined. We also expected better recoveries as it improved the carbon stripping. But it actually produced 87 Koz in Q1/13. If you multiply that by four, you have left guidance far behind. It is off to a good start.

When the mine was shut down in December, the company brought some maintenance forward from March 2013. If that maintenance had been done when initially planned, the company probably would not have had quite as good a quarter.

My problem with Centamin is that it based its five-year plan on underground ore reserves that do not exist today. They may exist when the new reserves resources statement comes out in the middle of this year, but not today. When you get to the end of the underground, the grade drops to about 1 gram per ton (1 g/t), with a cash cost of $700-750/oz. Once you add royalties, head office expenses and such, it moves quite swiftly into losses, given my view of the gold price.

But there are a couple of interesting points about Centamin. First, the underground is open and there could be a lot more there. Second, Sukari Hill, located in Egypt, could contain mineralization. Even if it is only 1 g/t, that would halve the stripping ratio. Right now, its stripping ratio life-of-mine is about 5.6:1, which is quite high for a low-grade deposit. If Sukari Hill, which has to be moved, contained metal in downhill-loaded holes, the strip ratio would probably go to 2.5-2.8:1. That could transform the economics of the ore body.

TGR: Nearby assets with significant potential cannot find funding. Is Centamin looking beyond Egypt's borders?

PR: Definitely. Centamin has been investing in companies operating in other countries, but it has to be careful in the short term. Its ramp-up to 5 million tons per annum (5 Mtpa) is going faster than I expected. The next ramp-up will be to 10 Mtpa. In mid-2014, the Egyptian state starts taking its share: 40% for two years, 55% the next two years, and then to a straight 50/50 ownership.

It would be wrong to focus too much on other things in the short term, when the company has a major expansion underway. Once it gets the Sukari mine up to 10 Mtpa, it would have a much clearer run at acquisitions or joint developments outside Egypt.

TGR: Are African Barrick's social issues at its Bulyanhulu project in Tanzania behind it?

PR: I think they are improving. At Bulyanhulu, most of the problems were related to Tanzanian superannuation. It was thought that if the mine kept working, workers would lose some of their pensions. As a result, a lot of the workforce resigned to make sure it got it all. To be honest, I think the problems were driven not by African Barrick, but by the Tanzanian government.

TGR: What are the next catalysts for African Barrick? Is this one of your better stories in 2013?

PR: I hope it is. But when Barrick ran these assets and gave guidance for all its areas, the African assets never met guidance on price, and perhaps once on production. That is an appalling track record.

As Bulyanhulu goes deeper and farther from the shaft, it will have to refrigerate. That will raise its mining costs and add a lot of pressure. I would rather pay up and invest in Randgold.

If Centamin can continue at a run rate of 87 Koz/quarter, it will smash its guidance. Its share price would have to come up on the back of performance like that. If it gets a good 12-month run in Egypt, its share price will strengthen significantly.

TGR: Do you have any words of wisdom for investors in this space?

PR: I would be optimistic about mining in Europe. If you are selective, there are quite good reasons to be upbeat.

For example, I cover Colt Resources Inc. (GTP:TSX.V; COLTF:OTCQX). The company has a gold deposit and a tungsten deposit in Portugal, and I think the tungsten deposit is currently the better of the two. It had a maiden gold resource last year and increased the gold resource this year. None of the drilling has been deeper than 200 meters. It has about 30-35 kilometers of strike. It is right in the middle of civilization. The company wants to develop it small and fund ongoing exploration out of cash flow. I think it has a good game plan. Portugal has a lot of unemployed people the company could employ fairly cheaply. It will not take long to get permits; the Chaminé, Banhos and Casa Novas deposits are on an Experimental Mining License.

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

Peter Rose has 26 years of experience in equities as a resources analyst; he has been at Fox-Davies Capital for six years, after having spent 11 years with Deutsche Bank in Australia. Prior to this he spent three years with Prudential Bache and five years with James Capel. Rose's industry experience includes 16 years as a metallurgist, three years with De Beers in South Africa and eight years in the uranium industry, five of which were spent at the Ranger uranium mine. Rose holds a Bachelor of Science degree in applied mineral science from Leeds University and a Bachelor of Commerce from the University of South Africa. Rose is also a member of the Institute of Materials, Mining & Metallurgy and a chartered engineer.

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 The Gold Report and provides services to The Gold Report 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 The Gold Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Peter Rose: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Colt 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 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 and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise - The Gold Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

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

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

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

101 Second St., Suite 110
Petaluma, CA 94952

Tel.: (707) 981-8999
Fax: (707) 981-8998
Email: jluther@streetwisereports.com