There wasn't much sizzle in the gold equities space in recent years, but that has recently changed. Paul Renken, chief geologist and analyst with London-based VSA Capital, says the recent uptick in the gold price-which he says should stay near current levels for a while-will boost the margins of already profitable gold producers. Renken is even more bullish on lithium, while remaining optimistic about uranium. In this interview with The Gold Report, Renken provides the gold, lithium and uranium names with sizzle.
The Gold Report: Gold has been trading around $1,250 per ounce. Should investors embrace gold at these levels or wait it out?
Paul Renken: We think the gold price is going to trade around current levels until something changes in the macroeconomic outlook to alter the perception of value of the U.S. dollar or a more concerted effort by the U.S. Federal Reserve to raise or not raise interest rates. Currently gold is one of the more interesting commodities: we think that neither the upside nor downside risk is too large. It depends on investors' current positions and willingness to take action appropriate to their investing situation.
TGR: Do you think gold's recent upward performance is the result of the global credit markets vetoing the Fed's position on interest rates or is this something different?
PR: The Chinese government could announce some kind of a stimulus package in the details of its five-year plan, which will come out this month. The Fed is concerned about what that might do to the perception of the U.S. dollar and how a Chinese stimulus plan could influence whether or not the Fed goes ahead with its four scheduled interest rate hikes this year. Our view is that current economic activity does not warrant quickly raising interest rates. The Fed is primarily concerned about the impact of any action on the U.S. dollar but, also, on the gradual sell-down in the bond market, which is a far, far bigger market than the gold market. That's the greater concern.
TGR: What would be some positive news for gold investors in China's five-year plan?
PR: One positive would be that there isn't a lot of additional economic stimulus, which would suggest that the Chinese economy could slow down further. If China announces significant stimulus, it could reverse the economic slowdown, which would be somewhat negative for gold. We don't think this announcement will have significant stimulus programs attached to it, so the gold price should stick around its current range.
TGR: British Prime Minister David Cameron believes Britain should remain in the European Union [EU] but there will be a referendum. Would Britain leaving the EU have any impact on the gold price?
PR: Britain leaving the EU should cause the gold price to rise in pound-sterling terms, at least in the short term, until the financial markets determine how long the transition would take and what kind of a financial impact it would have.
TGR: Where is VSA Capital positioning itself in the gold equity markets?
PR: We're taking a particular interest in gold equities. We have some activity going on with the largest players right down to the exploration plays. Equity is the more interesting side of the story simply because those companies that are in production are looking at year-over-year comparative margins to improve in 2016. To put it another way, the companies that have already "right-sized" their businesses or made significant progress toward that by reducing debt and improving their all-in sustaining and cash costs will look even better in 2016. By and large share prices have yet to take that into account, so we remain positive.
TGR: Is the gold equities space the most interesting part of what's happening in gold right now?
PR: It probably has the most sizzle versus the gold exchange-traded funds or gold bullion stories.
TGR: What are some specific gold equity names that you would like to discuss?
PR: We've seen a nice recovery in the share price for Randgold Resources Ltd. (NASDAQ:GOLD). It is a large-cap company that's considered a premium stock on the London Stock Exchange. Randgold has shown some upward share price action as a result of this recent move in the gold price.
TGR: Randgold posted record production in 2015. How does it improve upon that?
PR: The company has always been a believer in exploration and organic growth as opposed to the growth-by-takeover scenario. Randgold looked closely at AngloGold Ashanti Ltd.'s (NYSE:AU) Obuasi mine in Ghana during the last couple of months and decided that it could not meet Randgold's thresholds for returns for a project. As an alternative, it has significantly increased its land position in the northeastern Democratic Republic of the Congo and into greenstone gold occurrences around the Kibali operation that it shares with AngloGold. Randgold management obviously feels that the current license holders don't understand the true scope and scale of what might be available. Randgold wants to see if the drill bit proves that premise.
TGR: What are some other equity names you are following?
PR: VSA has a position in a micro-cap stock called Goldplat Plc (OTC:GDPTF). It is a producing gold company that recently announced its interim results, which reflect a turnaround. Positive changes have been underway since the appointment of Gerard Kisbey-Green, the current CEO, in February 2015. Goldplat gets its primary production by recovering gold from the mining residue of other companies. We're not talking about tailings, but rather all the other pieces of materials that get bits of gold impregnated in them throughout production and otherwise end up being waste-things like woodchips, greases or old mill liners that have had free gold pounded into their surfaces over time. Goldplat essentially re-treats those materials or burns woodchips to ash and then recovers the gold. It has been doing that in Ghana and South Africa for some time. The company also has a small operation in Kenya, which it would like to scale up with some additional investment. And it holds some other grassroots concessions in West Africa.
TGR: Those names have significant operations in Africa. Is there another?
PR: We also follow a large-scale tailings reprocessor by the name of DRDGOLD Ltd. (NYSE:DRD), which is also based in South Africa.
TGR: What are some other commodities that are performing but are being overshadowed by gold?
PR: Last year, uranium held up relatively well, both from an equity standpoint and in the spot price. But so far this year, uranium has yet to excite anyone.
TGR: What trading range are you expecting for uranium in 2016?
PR: Probably up another 10%. If we don't get any significant announcements of reactor starts or restarts, then I would expect to see the spot uranium price slide to about $34/pound ($34/lb), and about $44/lb on a term-contract basis. It depends on the number of reactor starts or restarts announcements. The more of those we have, the more buoyancy there will be in the uranium price. But 10% upside from here is our view.
TGR: Are the larger uranium players like Cameco Corp. (NYSE:CCJ) and AREVA SA [AREVA:EPA] the bellwethers of this space?
PR: If you're an institutional investor you need to follow names like Cameco and AREVA because their market caps essentially mark the changes in uranium prices; uranium is primarily delivered on term-price contracts as opposed to the spot market. The institutions will closely follow those names for major changes in revenue.
Others are more interested in exploration-style discoveries or major increases in total uranium resources by smaller-cap, nonproducing names because those are the mines of the future.
TGR: You discussed a smaller-cap uranium name in your previous interview with The Gold Report. What is happening with that company now?
PR: It is NexGen Energy Ltd. (NXGEF), and they are finding more mineralization in the same trend. It is essentially adjoining companies and, because of the grades in that trend, NexGen properties are going to be high-grade mines. They are willing, at these current low uranium prices, to find additional pounds and not push toward production. It's probably the right way for this company to add value.
TGR: NexGen recently announced a high-grade discovery on its Arrow zone. Is this essentially a similar discovery at the other end of the trend?
PR: I think the new resource NexGen released last week of circa 200 million pounds U3O8 is a reflection of just how big this system, a single system, probably is. I believe there is still more to come from both companies.
TGR: What other commodities are you watching?
PR: We are quite interested in lithium, graphite and cobalt in the battery materials space. But lithium, in particular, is the one showing the greatest price movement.
TGR: In a November interview with The Gold Report, you called lithium a "bright spot" in an otherwise underperforming commodity space. Do you expect similar price performance in 2016?
PR: Some underlying indicators suggest that lithium is going to perform better than it did in 2015. Recent lithium discoveries in the Pilbara region of Western Australia have certainly caused rather dramatic price moves in some of the junior mining names there because lithium pegmatites are outcropping on a number of these properties, and everybody believes that their property might contain another Talison Lithium Ltd. [TLH:ASX]-type lithium situation. Talison owns the Greenbushes lithium operation, the major hard rock spodumene lithium mine in the world. So if the lithium battery marketplace is going to expand the way a lot of investment dollars in the battery space are saying it will, then these companies will do quite well because there is little difference in the style of rock mineralization in these pegmatites across Western Australia.
TGR: What's the price range for the two key forms of lithium?
PR: There is lithium hydroxide and lithium carbonate. Lithium hydroxide usually sells at a premium to carbonate. The term quotes have been trending between $6,200 and $7,500 a ton for lithium carbonate, and perhaps $1,000 per ton more for lithium hydroxide-although there is a lot of volatility with lithium prices in China.
TGR: Lithium is a complex market for investors to understand. What do they need to know before trying to gain a foothold in this space?
PR: First of all, there is plenty of lithium out there to be mined. The world is not going to run out of lithium. The question is whether or not these potential mines will be developed fast enough to deliver into the growing market for lithium batteries. It also puts pressure on the pricing for all the other primary uses for lithium-ceramics, lubricants, etc.-because there is only so much lithium available. A lithium brine mine takes from 5 to 10 years to be evaluated, designed, financed and constructed. That's a long time, and the battery market appears to be moving faster than that. Will shortages essentially become more evident as we get into the latter end of this decade? That is the concern.
TGR: What are some lithium equities you're following in Australia?
PR: In West Australia we're following Neometals Ltd. (OTCPK:RDRUY).
We're also following some other names that are working outside of that area because whoever the battery offtakers will be, they will likely want lithium sources other than Western Australia. One of those names is Bacanora Minerals Ltd. (OTC:BCRMF), which has a significant lithium clay deposit in Mexico. We still do not know if the company can deliver a suitable product to Tesla Motors Inc. (NASDAQ:TSLA), as was outlined in the offtake agreement Bacanora signed with Tesla.
We also follow Rio Tinto Plc's (NYSE:RIO) deposit here in Europe for the production of lithium called jadarite.
TGR: Is that a hard rock deposit?
PR: Yes, and it is a sizable resource in Serbia. Any battery producers in the European market should be interested given its proximity to their operations.
TGR: How should investors handle the current gold rally?
PR: Investors should be bargain hunters. Look for companies that will see a significant improvement in their profit margin over the comparable numbers last year. And latch on to those companies that are indicating some nice grades either for potential open-pit production-in excess of 2.5 grams per ton (2.5 g/t) for an open pit, and in excess of 10 g/t for underground-because those are going to be the ones that institutional investors will be following.
TGR: Thank you for talking with us today, Paul.
This interview was conducted by Brian Sylvester of The Gold Report.
Paul Renken is the chief geologist and mining analyst with VSA Capital and has a broad range of experience in various aspects of the mining and minerals business. He began his career as a geologist for Canadian junior resource companies in the Western United States. Owning a stake in a private consulting firm as vice president of exploration, Renken searched for various base metals, precious metals and industrial minerals. In the U.K., he worked in the equity market media outlets of Digitallook and Hemscott before joining VSA in 2006.
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