George Topping: Price Outlook for Gold, Copper and Uranium

by: The Gold Report

The following is excerpted from The Gold Report's March 31st article:

TGR: What are some stocks that you like in the uranium space?

GT: I like Paladin Energy Ltd. (OTCPK:PALAF), it’s a growth company. They’re going to be building production up quite rapidly over the next several years. They really just started, and this year they should do about 2.9 million pounds of uranium production. It should be 6.8 million pounds by 2011 and about 14 million pounds by 2014. It’s one of those Australian deposits that I believe will be coming on stream.

TGR: Because the government will say it’s all right to add another mine.

GT: Yes, I’m sure they will.
TGR: So you’re counting on that.

GT: There’s nothing like a worldwide downturn to open up governments’ minds. I like the growth of that company. Another interesting one that’s a lower technical risk is Uranium Participation Corp. (OTCPK:URPTF), which just holds physical uranium. So you don’t have any of the technical risk.

TGR: Wasn’t that created by Denison Mines Corp. (NYSEMKT:DNN)?

GT: Denison is the manager of it.

TGR: So that’s really a pure play. How would that differ from buying an ETF of a particular commodity?

GT: It’s not particularly different. You get the straight increase in NAV when the price goes up. What is slightly different from an ETF is it tends to trade at multiples on discounts to NAV depending on sentiment. For example, when uranium was in the bull market, Uranium Participation Corp. was trading at a price-to-NAV ratio of 1.45 times, so a 45% premium to its NAV. Right now it’s trading at about a 12% discount.

TGR: Isn’t there another nuclear holding company traded on the AIM?

GT: It’s called Nufcor Uranium Ltd. They recently listed on the Toronto Stock Exchange as well. There’s no liquidity in the TSX though, so if you want to buy it, you have to buy it on the AIM. Nufcor has higher expenses than Uranium Participation Corp. They do lease out the uranium to undisclosed counterparties, too, so it’s a higher risk exposure because you don’t know what the counterparty risk is.

TGR: That’s probably why it sells at a much larger discount.
GT: Probably.
TGR: Any other uranium companies?

GT: Cameco (NYSE:CCJ), of course. Then the ones I mentioned are about the only ones I’m looking at. The others, I find, are a bit higher risk.

TGR: Any comments on Cameco aside from its Cigar Lake problems?

GT: Cameco probably serves as a good vehicle for exposure to the uranium market because there are so few large liquid names out there. I have a hold on Cameco just now. They’ve got a lot of cash flow from third-party sales, so production isn’t keeping up with their sales growth. I find the accounting to be very complicated with Cameco as well.

TGR: Do you have a comment to give us on U3O8 Corp.?

GT: It is one of the better quality juniors. I know management; I’ve met them several times. I’m not sure how much cash they have now, but you could describe them as a cash-rich junior with good management.

TGR: In today’s market, that’s what you want. Gotta have the cash; otherwise, that’s a problem. And then you need the management who can figure out what to do with it, ride the storm. Where are U3O8 Holdings’ assets?

GT: Guyana. They have a small resource, 5.8 million pounds, already delineated. That’s the hardest bit, you know, getting the first resource. It’s easier from then on to keep drilling it and build it out.

TGR: Are they currently mining some of this resource?
GT: No, just exploration at this point.

TGR: Another name on your list is Fronteer Development Group (FRG); their recent ‘bring back home the baby’ deal with Aurora gives them more than 90% ownership.

GT: Yes, for cash, really.

TGR: Gosh, (Fronteer CEO) Mark O’Dea really has done a shrewd deal there.

GT: That’s right. He’s brought it back in, basically, paying not much more than cash. For the time being, though, Fronteer is really more of a gold company because they’re not going to be doing anything with the uranium asset so long as the mining moratorium is in play.

TGR: But aren’t there other things they can work? They could be getting ready to mine once that moratorium is over.

GT: Yes, you can spend a little bit of money getting ready, doing some metallurgical test work and doing some background for the environmental impact statement. But if I were Fronteer—and I think this is what they are doing—I would not be spending much money there at all to send the message that you can’t treat private companies like that and expect them to continue to employ people.

TGR: Is it a foregone conclusion that the moratorium will be lifted?

GT: It’s still an open issue, but I think it will be lifted. It’s more a case of the Inuit not being ready to accept an environmental impact statement and to manage a process like that. They have neither the skill set nor the people.

TGR: But they realize they have potential jobs and royalties and taxes and so on. They’re basically a new nation within a nation.

GT: I’m sure they’re well aware of that and it was a very close vote not to let the mining go ahead, so I think three years from now they’ll be ready for that deposit to proceed.

TGR: You have Fronteer as a speculative buy?
GT: Yes.

TGR: Could you talk about Fronteer a little bit in terms of the gold opportunities?

GT: Yes, I like the outlook for gold. The metal itself, in these difficult times, gathers a lot of investment demand. Also, Fronteer has its assets in the U.S., and typically the weaker U.S. dollar gives you a higher gold price, so you get the full benefits. With that in mind, they’re in the right country; they’re in the right state with Nevada. It’s easy to get mining licenses. It’s run by a geologist, Mark O’Dea. He has quite a good team working on building out that resource. In fact, they have several deposits. They just put one out recently on Long Canyon. It’s not a large resource at this point, but it’s near-surface oxide gold so it’s a start and they’ll continue to drill this year and build out that resource.

TGR: They have a joint-venture partner in that property, right? Ron Parratt and his company, AuEx Ventures Inc. (AUXVF.PK? And doesn’t Fronteer have another property in which they’re involved with Newmont Mining Corp. (NYSE:NEM).

GT: That’s the Northumberland. Of course, AuEx recently got an investment from Kinross Gold Corporation (NYSE:KGC), too.

TGR: Yes, there’s a lot of activity, as you said, in Nevada.
GT: It’s a good place to be politically.

TGR: And it’s where there’s been gold before, gold and silver. Going back to your view on gold, have you set a price point for ’09 or ’10?

GT: We have a gold analyst here at Blackmont who does the gold forecasts. We have it just as $950 flat.

TGR: Through 2009?
GT: Yes, and ’10, ’11—flat. In real terms.
TGR: You also have Tournigan Gold Group as a speculative buy?

GT: Yes. But it’s actually Tournigan Energy Ltd. (OTC:TVCFF) now. It used to be Tournigan Gold, but it is principally a uranium company. It’s pretty small. They have a deposit over in Slovakia; basically a very good deposit with about 40 million pounds of high grade uranium at 0.5%. The problem there is that it is, I believe, followed by environmentalists right now. I think they’ll probably get permission, but it’s going to be a long haul. If you’re patient, it’s one with a lot of value.

TGR: Gabriel Resources Ltd. (OTCPK:GBRRF) had quite a time in Romania trying to get its big gold and silver deposit, Rosia Montana, permitted. Once you make the big discovery and all, that’s when the real work begins.

GT: That’s right. Particularly in Europe, it’s so easy for NGOs to travel from London to any European city. That makes it a lot easier to protest. You don’t see many protests in the Congo.

TGR: Switching to copper, you recently suggested that it might be a bullish signal for copper if speculators rush in to cover their shorts. Where do you see copper going as the year goes on?

GT: I cover mainly copper companies. We’ve had a nice run up in the copper price lately, due I think to three factors. Principally, a lot of it has to do with Chinese buying. As I mentioned, you’ve got the arbitrage the situation, you’ve Chinese buying for stockpiles, and less scrap material on the market. There are two reasons why the amount of scrap available has really contracted. One is, of course, that lower copper prices make it less economic to strip wire out of cable and out of buildings. In addition, though, a lot of the scrap dealers have to deal with banks; they need loans to pay for the scrap they collect and accumulate and then send over to China. When they get paid, they pay the banks back. What we’re hearing is that there’s a lack of trade finance. The fact that banks aren’t lending to these scrap merchants as they had in the past is really disrupting the scrap trade. That will take a bit of time to sort itself out. When it does, I think by the middle of the year we should see copper prices back down to about the $1.50 level and that’s my forecast for the year—$1.50.

TGR: And today, it’s what —$1.80 or so?
GT: Yes, about that.

TGR: So you believe the when the scrap market adjusts, copper prices will fall again.

GT: Yes, you’ll get the scrap market supply increasing. Also I don’t believe the Chinese want to chase the price up. I think they’re much happier letting the price come to them. And the arbitrage gap has shrunk significantly between China and London. It’s only a few percent now.

TGR: What would you see in another two years in China for copper?

GT: In two years I have copper at $1.80. But there’s nothing wrong with $1.50 to $1.80 copper price. It’s a nice price and a lot of companies make good money at that level.

TGR: You have Antares Minerals Inc. as a buy. What can you tell us about this company?

GT: Yes. Antares has a great management team; John Black, who is President and CEO, is a good geologist, very knowledgeable about the sector in South America in particular. Antares’ Haquira project has 2 billion pound copper oxide deposit underlain by at least a 4 billion pound sulphide deposit. And it’s still open, so there’s still more exploration work to do there. Antares still has about $17 million in cash, so won’t be going out of business any time soon. I think it’s a case of waiting for better markets and then this sort of thing will be back in favor again. This Haquira deposit is right next door to Las Bambas, which is Xstrata PLC’s (OTC:XSRAF) exploration copper project in Peru.

TGR: Is this near the Norsemont Mining Inc. property too?

GT: It’s about four hours away from Norsemont’s Constancia project.

TGR: Okay. Because Xstrata’s Las Bambas deposit and Tintaya Mine are near Norsemont as well.

GT: That’s right. Looking at copper deposits that are nearer production or further advanced, one that stands out is Chariot Resources in Peru. It’s like Antares, except it’s further along. They should have a feasibility study out pretty soon. That’s an interesting one. $45 million market cap, $20 million in cash and a 6 billion pound copper deposit. It’s very easy to develop. Starts off as an SX/EW mine with the sulphides underneath, so it’s a pretty standard Peruvian copper porphyry mine.

TGR: Some of the copper companies— Quadra Mining Ltd. (OTC:QADMF) is one—have had really nice moves in the last few of weeks in terms of copper firming up and what you said about creating these strategic stockpiles.

GT: We’re seeing a lot of interesting things. As you just mentioned, Quadra is taking out Centenario, a near-term copper producer. We saw Southern Peru Copper fighting with Invecture over Frontera Copper. So larger companies are prepared to take smaller bets on copper.

TGR: What price does copper have to reach before these mining stocks become more vibrant?

GT: A lot of the producers were pricing in as if copper was going to go below a dollar at one stage. It was ridiculous. For example, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) and Quadra and First Quantum Minerals Ltd. (OTCPK:FQVLF), they’ve all had very good runs almost since the start of the year. It doesn’t take much of a move in copper. I think what investors were looking for was just assurance that it wasn’t going to fall down to $1.10 or $1.20.

TGR: How low did it get?
GT: About $1.35.

TGR: Throughout the whole market, since last fall, everyone’s been asking, “Is this really the low? Are we there yet?”

GT: Yes, are we there yet? Well, as I said, I think we’ll come back down a little bit in the summer. It’s typically a quiet period. The ones I’m recommending tend to be those with solid balance sheets and good valuation. With copper, it’s always been a cycle and it always will be a cycle. As long as you pick a company that can survive right through any trough and be there at the end, you should be okay. Companies such as Capstone Mining Corp. (OTCPK:CSFFF), for instance, produce copper at a dollar a pound, 100 million pounds production per annum, virtually no capex, good management. They’re clearly survivors. So is HudBay; there’s another one that I’m recommending, with all that cash.

TGR: Are there any substantial holders in that stock who are somewhat vulnerable with all that cash?

GT: Several shareholders have 10% each. The best thing I think can happen is a larger company comes in and takes it out for its cash. That would be the best thing.

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