How tight is money in the mining industry? So much so, according to Chris Ecclestone, mining strategist with Hallgarten & Co., that juniors are punished for resource estimates because the market believes they can't afford to develop their properties further. In this interview with The Gold Report, Ecclestone explains that canny juniors are choosing past-producing properties, which boast dependable resources estimated by majors and already existing infrastructure. And he names two current gold producers he believes are woefully undervalued.
The Gold Report: Gold rose to $1,200 per ounce [$1,200/oz] Nov. 21 and has stayed close to that price since. Is this evidence of the end of the bear market?
Chris Ecclestone: It's evidence of a bump upward in gold. The rise has not been so robust that one would be persuaded the tide has turned.
TGR: What's your opinion of the hypothesis that there is an organized shorting campaign to bring gold down to $1,000/oz?
CE: I don't believe it. Gold is being pushed around on pretty low volumes by buyers and sellers. The Indian trade isn't what it was. Western buyers are just not there anymore, particularly large speculative buyers.
TGR: The Toronto Stock Exchange has had recent highs led by mining stocks. Are we seeing a recovery in precious metals equities?
CE: There's an outsized correlation between the gold price and gold equities. Gold will drop 5%, and then gold equities drop 20%, but it's not so sticky on the way back up. Investors have seen over and over again that being a first mover on gold equities is not worth the effort.
TGR: Why has the gold price fallen so precipitously?
CE: People are just not feeling inflationary at the moment. Quantitative easing [QE] is being tapered, and the money supply apocalypse has not occurred. Exhaustion eventually sets in when the same old argument keeps being trotted out and proved wrong.
TGR: What about the trillions of dollars in new money created since 2008?
CE: Much of it is being sterilized and recycled and has gone off to other places. The gold bulls talk about the printing presses being run endlessly, but what has happened since 2008 in the West is not comparable to what happened in Zimbabwe in 2008 or Germany in the 1920s. This isn't funny money. It's still owed to the government and will have to be repaid.
QE consisted of the U.S. government loaning money to banks. The banks loaned it to hedge funds that then put it into emerging markets. One of the reasons why markets like Brazil have been so floppy over the last year is the carry trade is over, and the money is coming back to the original borrowers. They, in turn, are flipping it back to the Federal Reserve or into the U.S. equity markets, which after a brief hiccup are again ebullient. At least it's not going into the U.S. property markets again, which is a good thing because that bubble is not with us anymore.
TGR: You stress the importance of mining jurisdictions. Which jurisdictions once thought mining friendly are no longer so?
CE: Chile was a great favorite for years, but it now has some black marks against it. Yamana Gold Inc. (AUY) has been hit with a new levy described as a noncash tax charge. How can you have a tax charge that's noncash? It either is or isn't, particularly when levied retroactively.
Barrick Gold Corp.'s (ABX) problems with Pascua-Lama are much more than a simple capital expenditure [capex] blowout. Capex exploded because the process took a lot longer than expected on the Chilean side, not the Argentinean side. Then there's the water problem. Many Chilean projects at whatever capex cannot get water because it is needed at lower altitudes to service the urban areas.
Mexico has been a happy hunting ground for Canadian miners over the last 10-15 years. When I was based in New York, investors would ask about the cartels. They were told not to worry because they weren't active in mining areas, only in Tijuana. That's now been dispelled as a myth.
TGR: How is the mining industry dealing with this threat?
CE: I went to a presentation recently where a company said it was employing people to maintain good relations with the cartels. This sounds like skating on the thin ice of the international anticorruption rules. The miners are not paying off the government but paying off some gangsters threatening to blow up their mines or roads unless they employ some of their factotums as a security force.
Then there's the issue of royalties. We heard for years that they would never rise in Mexico. Well, after 10-15 years of the country being open for mining, the government had not realized the increased revenues it expected, so it decided to squeeze more juice out of that lemon.
TGR: Which jurisdictions have become more mining friendly?
CE: One that potentially could surprise Canadian miners is Bolivia. It has been in the dog house for a long time because of one or two incidents. Another is Cuba. Frankly, Cuba has been mining friendly, it's just that people haven't been willing to admit that companies like Sherritt International Corp. (OTCPK:SHERF) [S:TSX] have had a pretty good run there.
TGR: What type of companies are likely targets?
CE: Juniors with companies with unfinanceable projects, basically anything over $500M. A good example is
Chesapeake Gold Corp. (CHPGF) [CKG:TSX.V] and its $4 billion, 18.5 Moz gold Metates project in Mexico. Goldcorp Inc. (GG) owns about 9% of Chesapeake, and only Goldcorp has the money to finance Metates. This is too rich for Agnico Eagle Mines Ltd. (AEM) or even Yamana Gold Inc. (AUY).Majors such as Goldcorp, Newmont Mining Corp. (NEM) and Barrick Gold need to plug holes in their future production, and only companies of this size can realize projects such as Metates.
TGR: The majors have their own bottom line problems. How can they pay to take on new assets?
CE: I think they'll pay with shares. Their takeover targets will be able to justify cheap sellouts to their shareholders by pointing out that cash payouts would be derisory, and the buyers will not want to dilute their shares; they need their cash to develop their new properties. They can tell the shareholders that by taking the shares, if the acquisition works out, one plus one will not equal two but rather three, four or five.
With regard to base metals takeovers, I believe that the zinc story is going to lift off. There are now no properties in the development stage owned by small companies. That means the projects that will be acquired by the majors such as Lundin Mining Corp. (OTCPK:LUNMF)[LUN:TSX] will be in much more formative states.
TGR: Do you see base metal prices rising in the near term?
CE: I think nickel could go up despite the Chinese putting on a brave face about the Indonesia shutdown. If copper trades above $3 a pound [$3/lb], it's a good place to be. Everybody's profitable. I'm really bullish about zinc, which I think could break through $1.20/lb in the first half of 2015 and then perhaps rise above $1.50/lb. That would be a pretty massive move from the $0.80/lb where it was wallowing a few months ago.
TGR: Gold and silver, where do you see them going?
CE: I wouldn't be surprised to see silver remaining between $15/oz and $18/oz. I don't see gold going much above $1,300/oz in the near future. Declining production will underpin the future gold price. The gold production trend was up slightly over the last decade, but now the big mines in South Africa are pretty much finished, and it's much harder to get grade in new gold mines.
TGR: You've written that brownfields projects "trump" greenfields projects. Why?
CE: Basically the work's been done already. We know that there's something there and that it's mineable. In many cases, juniors don't have the money to pay for preliminary economic assessments [PEAs] or preliminary feasibility studies [PFSs]. And if they don't have the money for that, then what's the point of drilling to make the resource bigger? In any case, we all know the market tends to hit stocks that come out with larger resources because that indicates the companies must move on to PEAs and PFSs they can't afford. Those projects are stuck.
TGR: Is there a way out?
CE: A number of companies have recently been looking at old mines with historic resources. These used to be treated like the old aunt hidden in the attic. Now the attitude is even though they are not NI 43-101 compliant, these resources were calculated to a very high standard by companies like BHP Billiton Ltd. (BHP) and Noranda. We're not talking about Bre-X here. If the historic resource is reliable, why shouldn't companies mine projects on that basis?
Another advantage of historic resources from shuttered mines is that they were calculated day-by-day as the mine moved forward. These are not theoretical blobs supposedly under the ground. These are real deposits that were really being exploited. These mines have ramps and adits, all sorts of infrastructure. Even if all the equipment has been removed from aboveground, having roads, electricity hookups and water constitute significant savings that you just do not get with greenfield properties.
TGR: Heading into 2015, what should investors in the gold space be looking for in companies?
CE: Production and past production. Production is kingly, and past production is princely. Anything else, stay away.
TGR: Chris, 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.
Christopher Ecclestone is a principal and mining strategist at Hallgarten & Company in New York. He is also president, CEO and a director of Geodex Minerals. He was previously head of research at an economic think tank in New Jersey, founder and head of research at the Buenos Aires Trust Company and a corporate finance and equities analyst and freelance consultant on the restructuring of the securities industry in London. He holds a degree from the Royal Melbourne Institute of Technology. Ecclestone is an author at InvestorIntel.
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