James West: Junior Gold and Silver E&P Opportunity
Source: Brian Sylvester of The Gold Report 04/01/2011
Despite confusing short-term undulations in the price of gold, the shaky foundation under the U.S. dollar could result in long-term opportunities for gold and silver juniors, says Midas Letter Publisher and Editor James West. In this exclusive interview with The Gold Report, James shares some of his top-15 companies to watch.
The Gold Report: James, Comex gold futures hit an all-time high yesterday before falling back to about $1,431/oz. We're seeing dramatic daily swings in the gold price of $20-$50 regularly. How do you explain the volatility?
James West: The gold market is about as neurotic as a schizophrenic Hollywood starlet hooked on coke. Trying to keep abreast of daily price fluctuations is an exercise in futility. My favorite line on the gold and silver markets is, "He who focuses on the bobbing cork loses sight of the rising tide." That really sums it up beautifully. All of the negative macroeconomic factors on the stability of the U.S. dollar that started the precious metals bull market back in 2000 are now stronger by a factor of at least 10. The U.S. economy has crashed twice since then as a result of too much liquidity in the system, causing asset-class hyperinflation, which, in turn, causes price collapses that engender general market panic.
The first pro-gold/dollar-negative fundamental was the excess commercial and residential real estate inventory based on former Federal Reserve Chairman Alan Greenspan's easy money policy. The result was bank leverage:capital ratios that exceeded 100:1 in many cases. Retail lenders ended up with so much capital they had to reduce the difficulty of borrowing money for individuals with questionable credit histories. Otherwise, the money would just sit there doing nothing-and that is not a tenable situation for bank capital. It has to keep moving. Real estate exceeded inventory, people bought cars and recreational vehicles, took trips and built second homes. Yes, that created the appearance of a robust economy, but it was built on credit that was not going to be repaid.
Just as the Fed set the example by making it so easy for banks to leverage their balance sheets, consumers started to do the same thing. The major difference was that the banks were bailed out, whereas the consumers were thrown a rock to keep them from drowning. That is why we now see two distinct tiers in our economy. The retail consumer is trying to tread water carrying this massive debt rock, while the banks, granted a pair of wings in the form of bailouts and quantitative easing, are busy finding a new generation of retail consumer suckers to encumber with debt.
New home prices in the United States just established an all-time low since the crisis began, so all this nonsense about the economic recovery, obviously, is meadow muffins. The only thing that is up is the stock market thanks to the financial services sector, which was the primary beneficiary of exponential increases in the amount of U.S. dollars in the market. Issuing more currency against a deteriorating asset base and shrinking real GDP (not nominal GDP as is generated by measuring the massive numbers resulting directly from the multiplication of ersatz dollars through derivatives trading) is counterfeiting. How can you print more money when, technically, you are in a state of default on your current obligations? The only reason that a default hasn't been declared is because the two biggest holders of U.S. debt-Japan and China-don't dare upset the global economic apple cart by pulling the rug out from underneath the USD. That would have dire implications for their own economies and central bank balance sheets. Three times as many U.S. dollars are in circulation today than in 2000. That should result in a gold price at least three times higher than a decade ago.
The severe instability of the entire Middle East and, by extension, implied instability within any country that is not a democracy (i.e., China, Russia, Saudi Arabia, Venezuela, Sri Lanka, Indonesia, Mexico, Bolivia, Argentina, Zimbabwe, Yemen, Sudan, etc.), the safe-haven demand for gold and silver is multiplied theoretically. So to answer your question-yes, absolutely. There is daily volatility, but it's meaningless. All that matters in the price movement of monetary metals are the macro movements, which are both heading upward fundamentally and technically.
TGR: Recently, the Portuguese government rejected proposed austerity measures and Portuguese Prime Minister Jose Socrates resigned. Portugal is facing financial collapse and will likely need a bailout from the European Union (EU). At first blush, that would seem to be good for the gold price. However, weakness in the euro generally pushes the USD higher and that leads to weakness in precious metals usually. How do you see the Portuguese situation affecting the gold price?
JW: There are two primary reasons why gold will not be influenced positively by Portugal's collapse. First, the whole idea of the dollar as safe haven makes sense only to people who don't perceive the riskiness of the USD. During the last crash in 2008, everything went down except the U.S. dollar. That demonstrated, in no uncertain terms, that the USD was perceived to be a safer place for value preservation than even gold (in the absence of any speculative market). And that showed clearly that the world's largest capital positions fail to comprehend that the U.S. dollar and its excess capacity is the largest catalyst causing asset bubbles and general economic instability in the world. The supposed 'smart money' is actually the dumbest money on earth. The U.S. dollar is the cause of the majority of our global economic pain.
This perverse paradox is going to correct itself when the penny finally drops in the very limited imaginations of the economists who drive such decisions. Like Pavlov's dog in the famous conditioned-reflex experiment, markets respond when they see familiar situations arise. So, although Portugal's problems should be mildly bullish for physical gold demand, they will in fact manifest as a dollar-positive/gold-bearish effect.
The second reason that the gold price performs less like a safe haven than it should is because the gold price is determined by futures markets, which lead the spot price rather than the other way around. Futures markets long ago ceased to be the price-discovery mechanism they were intended to be, and instead are a way for the biggest banks to influence the direction of the spot price. That gives them the ability to profit from the extreme volatility such massive capital positions can have in a relatively small market. The size of the futures market-which now functions as a betting mechanism for price direction-is infinite, whereas the size of the actual physical gold market is limited by how much gold can actually be moved around. So, the future price of gold is a separate number than the actual price of gold even though the actual [spot] price is influenced by the future price.
TGR: With inflation creeping up and the economy stutter stepping forward, we hear whispers of further quantitative easing (QE). What are you hearing? And what effect would QE3 have on gold and silver?
JW: In the news this past week, we've heard that St. Louis Federal Reserve Bank President James Bullard said the Fed should review whether to complete the $600 billion purchase of T-Bills, which is QE2, because the economy was looking so strong. Now we know that the various Fed branches suffer from persistent irreconciliation based on what is happening both within the Fed and in the economy, so it's not much of a surprise that the St. Louis Fed believes the chairman needs to rethink his strategy. Such statements really just confuse the general public. It doesn't matter one iota what the various Fed governors think. All that matters, and all that becomes U.S. central bank policy, is what Chairman Ben Bernanke and the president's economic advisors decide they are going to do. So, while Bullard might not be cognizant of the fact that the positive economic indicators that led him to think the economy is improving is a direct optical result of QE, there is no doubt that Chairman Bernanke is aware that the only thing propping up the stock market-and, therefore, the appearance of improving GDP growth-is quantitative easing. That's why there's no question that the U.S. Federal Reserve's policy of kiting checks to itself through the U.S. Treasury absolutely must continue. However, I also think the Fed is cognizant of the fact that the term "quantitative easing" is now perceived as negative in the mainstream financial media; thus, it will transition to an unnamed feature of U.S. monetary policy.
TGR: James, you recently sold your equity position in a Peruvian mine to focus on the Midas Letter and to be involved in a precious metals fund based in Luxembourg. First, why Luxembourg? And what are the fund's criteria for investing in companies?
JW: I'm a portfolio advisor to two corporate investment groups. I also launched a fund based in Luxembourg. Combined with the expanded publication products offered by Midas Financial Publishing Group, this is forcing me to streamline my obligations in the interests of time management, which is to say, I still want to have a life outside of work.
The first reason we elected to domicile the fund in Luxembourg is that the private family wealth offices that are the primary sponsors of the fund prefer its very tough regulatory framework, which is managed by the Commission de Surveillance du Secteur Financier. If the bank where the fund is held in Luxembourg goes belly up for whatever reason, the assets of the fund are protected in their entirety, including all cash. The second reason is that these private wealth groups are excellent long-term shareholders, which means we can bring a higher-caliber shareholder to the companies we invest in.
In terms of criteria, we invest only in opportunities brought to us by A-List capital markets entrepreneurs with serial track records of value creation for shareholders. They do this through premium access to projects and superior financings that provide a lower-weighted average cost of capital to the companies, which result in better-retained earnings for the fund in the long run and, therefore, its unit holders. We hold no more than 9.9% of any company and no more than 40% of our holdings will be pre-IPO or private.
TGR: What are your goals for the fund in 2011?
JW: The number one goal is to deliver the best performance possible to unit holders. We achieve that by capturing the absolute best of pre-IPO investment opportunities, as well as IPO and secondary financing opportunities, in the resource sector with particular emphasis on gold and silver explorers and near-term producers. The Midas Letter has access to these companies because we've been around for as long as we have and deliver triple-digit returns consistently, based on the superior product in our portfolio.
TGR: Tell us about some companies in your top-15 holdings.
JW: My top-15 includes Prodigy Gold Inc. (TSX.V:PDG) and Cap-Ex Ventures Ltd. (TSX.V:CEV). Prodigy has a 2.1 million ounce (Moz.) resource at its Magino gold property near Wawa, Ontario, where it recently announced an infill drill hole of 261 meters grading 1.13 g/t gold. Within that hole was a 104.6-meter strike length that graded 2.06 g/t gold. That's just the first group of holes from a 20,000m program now underway that is designed to increase the size of the resource, as well as the category of existing resources. With a market cap of about $75 million-that's less than $40/oz. in the ground, making it very cheap. There likely will be more fantastic results like that, which could take the stock much higher.
Cap-Ex is a fantastic iron ore story in Quebec, and we're in for 100,000 shares or so at about $0.80. If you look at other iron ore deals in the area and consider the average grade and tonnage of properties on trend, in view of the company's geophysical data, its market cap should increase dramatically when drill results come in late spring or early summer.Colossus Minerals Inc. (TSX:CSI) in the Serra Pelada pit in Brazil is another favorite. It is the site of an incredible deposit of super bonanza-grade gold, silver and platinum group metals (PGMs). Some of the ore there is worth hundreds of thousands of dollars per ton, and the company is not going to bother with an NI 43-101 resource estimate-it's going straight to production. The market discounts CSI for that reason; so, even with a $700M market cap, my feeling is that Colossus is vastly undervalued still and, therefore, an excellent buy. We first got in at $1.41, so it's been a huge win for us.
In Brazil's Mato Grosso area, Thomas Obradovich of Aurelian fame is heading up Lago Dourado Minerals Ltd (TSX.V:LDM). He has what I consider a better-than-average chance at a discovery, especially because its flagship property, essentially, is 10 sq. km. of garimpeiro production with persistently high surface gold values.
A Colombian gold story that we love, Sunward Resources Ltd. (TSX.V:SWD), is focused on developing large porphyry gold-copper projects in Colombia. Core assets include the Titiribi project, which hosts an NI 43-101 inferred resource of 3.7 Moz. at a 0.3 g/t cutoff, along with the storied Mande Norte (Murindo) project in northern Colombia.
As the vehicle for acquisition in Colombia for Toronto investment force Power One Capital Markets, Waymar Resources Ltd. (TSX.V:WYM) has a very rosy future. Its current flagship property, Anzá Project, hosts a producing gypsum mine that has exposed a volcanogenic massive sulphide (VMS) system underneath, from which we eagerly anticipate drill results.
Gold Canyon Resources Inc.'s (TSX.V:GCU) Springpole Gold Project is a deposit that just keeps on giving. The project's 100.5m at 7.23 g/t gold assay near Red Lake Mining Camp is just one of the most recent intercepts that points to a deposit that could reach 10 Moz. or more. We think Gold Canyon, one of the real home runs for our portfolio at a $1.43 entry level, has the potential to give us tenbagger returns.
Wildcat Silver Corp. (TSX.V:WS) was trading at just over $0.50 when we first wrote about it in March 2010. Here it is a little more than one year later, and it's better than 400% higher-just the kind of vindication we like to see when we cover a deal that nobody else will touch. Recent drill results of 100m at 4.5 g/t silver with lots of coincident manganese, lead, zinc and copper means the company's Hermosa property (formerly known as Hardshell) located in Santa Cruz County, Arizona, is going to be a big winner.
Meanwhile,Revolution Resources Corp. (TSX:RV) is expanding on the apparent gold revival in North Carolina. Its Champion Hills Property has multiple historic pits and workings within a 25-kilometer long trend in North Carolina. The project occurs within the Carolina Slate Belt, which hosts most of the major gold mines in the southeastern U.S. Significant deposits include Newcrest Mining Limited's (ASX:NCM) Ridgeway Mine, which produced 1.5 Moz. gold from 1988 to 1999, and Romarco Minerals Inc.'s (TSX:R) Haile Mine project.
Evolving Gold Corp. (TSX.V:EVG; Fkft:EV7) is probably one of the best stories, in terms of having an undervalued major discovery in the U.S. The company suffers from lousy shareholders and an incoherent communications strategy as a result of a revolving company-leadership door, which we hope will be solved with the addition of William Gee as CEO.
Two others are African Gold Group, Inc. (TSX.V:AGG) andContinental Gold Ltd. (TSX:CNL). African Gold's recent step-out drill results 4.3 km. north of the relatively well-defined Zone 1 area comprises 10% of the 12 km. gold anomaly at its 200-km.2 Kobada gold project in Mali. Essentially, this new zone is distinct from Zone 1 at this point and demonstrates grade continuity over long intercepts from surface.
Continental Gold recently announced results of the underground sampling of parts of the San Antonio subzone/vein set, yielding indications of a strong and continuous high-grade system at its Buriticá project in Antioquia, Colombia. We've covered Continental Gold since its IPO at $1.75 and expect the company to continue performing strongly as it moves closer to full commercial production.
NioGold Mining Corp. (TSX.V:NOX; OTCPK:NOXGF) has been working in the Cadillac-Malartic-Val-d'Or region in Quebec, close toOsisko Mining Corp. (TSX:OSK) and now has a $20M joint venture agreement in place with Aurizon Mines Ltd. (TSX:ARZ; NYSE.A:AZK), which needs to replace production and is looking to expand on the back of strong cash flows.
Golden Hope Mines Ltd. (TSX.V:GNH) has suffered negative press from individuals who have never set foot on the property but who, unfortunately, have an audience among those ill-equipped to recognize bad information. We're still believers in the 20-kilometer trend theory, as are numerous others in the region that includes a company with management in common with Osisko.
TGR: What excites you today, in terms of equity investing?
JW: The thing that excites me the most at this juncture is the incredible as-yet-unrecognized opportunity in junior gold and silver explorers and producers (E&Ps), as well as in some select oil and gas plays. Increasingly, other asset classes are becoming less attractive, in terms of speculative returns. I think, in the not-so-distant future, the only game in town worth playing will be TSX- and TSX Venture-listed exploration plays.
James West, publisher and editor of the Midas Letter, is an independent capital markets entrepreneur and investor. He has spent more than 20 years working in such capacities as corporate finance advisor, corporate development officer, investor relations officer and media relations and business development officer for companies involved in mining, oil and gas, alternative fuels, healthcare, Internet technology, transportation, manufacturing and housing construction.
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1) Brian Sylvester of The Gold Report conducted this interview. He personally and/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: Colossus, Sunward Resources, Gold Canyon, Wildcat Silver, Revolution Resources, Evolving Gold, African Gold, Continental Gold, NioGold and Aurizon.
3) James West: I personally and/or my family own shares of the following companies mentioned in this interview: Cap-Ex, Prodigy, Evolving Gold, Continental, African Gold Group, Golden Hope, NioGold, Gold Canyon, Waymar, Lago Dourado and Sunward. I personally and/or my family am paid by the following companies mentioned in this interview: None.
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