Source: Kevin Michael Grace of The Gold Report (10/9/13)
Greg McCoach, publisher of Mining Speculator newsletter, is not ashamed to admit he has taken a big hit in juniors in the last couple of years. What he has done in response is what he advises all investors to do in this interview with The Gold Report:Get rid of the also-rans and keep and build positions in those companies that have what it takes to gain in multiples when the market recovers. And he suggests six companies that could do just that.
The Gold Report: You wrote recently, "The 2008 crisis will pale in comparison to what is now on the horizon." Given that the 2008 crisis nearly destroyed the world economy, how bad will the next crisis be?
Greg McCoach: The derivative issues were never fixed after the last crisis. In essence, the laws were changed so that the banks didn't have to keep derivative liabilities on their books. That way, bank stocks could soar again. But the banks have acted even more recklessly since 2008 and are now in bigger trouble. The recent White House meeting with all the big financial players should be a warning to investors that something big is about to hit. The media touted this as a meeting to discuss the debt ceiling, but I would say it was about the crisis that is about to envelope the big banks again. Barack Obama didn't run that meeting, JP Morgan Chase ran the meeting and told everyone what was coming. The banks don't have the capital to cover their interest rate derivative problems that are as big as the Pacific Ocean. I would tell investors to expect ten times worse conditions from what we saw in 2008.
TGR: I've read that even if only 4% of the derivatives held by the banks are at risk, and only 10% of that goes south, it would completely wipe out the net worth of the top five banks.
GM: At this point, the acceleration of what I consider tyrannical measures on the part of the U.S. government has reached such a degree it's obvious that something is coming. Why would it buy billions of rounds of hollow-point ammunition? Why is it buying millions of ready-to-eat meals? Why would it take all these extra security measures? Obviously, the U.S. government knows more than the general public does and it reveals something is wrong and the government is worried about it.
TGR: We had this situation after the scandal with HSBC Holdings Plc (HSBA:LSS; HK5:HKG) where the U.S. Department of Justice admitted that criminal acts were probably committed, but prosecution would be unthinkable because the big banks cannot be allowed to fail.
GM: Well, that pretty much tells the story right there. The bureaucrats, Rebooblicans and Dumocrats, as Jim Willie says, don't represent the people of America anymore. They represent themselves and their elitist banker puppeteers. They're trying to control the message and all the outcomes. It's a train wreck in process, but you have to tip your hat to them-they have been able to keep it together for so long. We could have experienced the end game at multiple occasions in the past 12 years, but it now seems to me that the limits of their good fortune are quickly coming to a close.
"Things are not going to get better at least until 2014, and in the meantime a lot of juniors hanging by their fingernails are going to go out of business."
If you're just watching CNN and FOX News, you're oblivious to what's really going on. But if you're a thinking person, you should start getting together food storage and get your investments in line for the major problems ahead. I can't tell you when it's going to happen because I don't have a crystal ball, but it's not a matter of if this is going to happen; it's just a matter of when.
TGR: What will be the warning signs of the next crisis?
GM: The warning signs are all around us right now and have been for the last six months. The big meeting at the White House with all the financial people I already mentioned was a huge sign. The erratic behavior lately of the U.S. government with the Middle East, particularly Syria, is also a sign. In recent weeks we have heard about a worldwide currency reset that is to take place in the very near future. This is telling those who have ears to listen that the Keynesian fraud of creating monies out of this air has reached a limit so they need to reset.
All of this means that we'll wake up one morning and life will be very different. You'll see markets performing erratically. You'll see civil unrest. Most people think it will have something to do with another banking crisis, a derivatives situation. It could be a new war. I think things could happen quickly and take us down a very dark path. All we can do is prepare for ourselves and our families. You have got to own physical gold and silver that is in your possession.
TGR: The macroeconomic indicators suggest that the prices of gold and silver should be much higher than at present. Why do you think that 2013 looks to be the year that the bull markets in these metals ended?
GM: I don't think the secular precious metals bull market has ended. I think we're just taking a pause. I liken this to the move that happened in the 1970s when we made the U.S. dollar the official reserve currency of the world, and people could again own physical gold and silver. Gold went from $35/ounce ($35/oz) all the way up to $195/oz. Then it collapsed to $105/oz. A lot of people thought that was it for gold. But then it ran to $855/oz.
Since then, we've hit $1,950/oz, which was then corrected back to the $1,200-1,300/oz level. We've been bouncing around $1,200-1,400/oz, and I believe this is just setting us up for the foundation of the next big move in gold, which will take us to much, much higher levels. I'm thinking $3,500-5,000/oz. It will be associated with collapsing currencies, the devaluing dollar, problems in the banking sector, etc.
TGR: What will be China's role in this?
GM: China is the world's biggest producer of gold, and now it is becoming the biggest holder of gold. It is dumping U.S. Treasury bills and buying anything it can get its hands on.
TGR: Is there no question in your mind that gold and silver are bargains now?
GM: Absolutely. People should be lining up to buy on this dip. This is a great opportunity. Nothing has fundamentally changed. Has the government started to become fiscally responsible? I laughed out loud when I heard about this "taper" of quantitative easing. What a complete joke. This should show thinking people the gig is up for the financial fraud being perpetrated at the Federal Reserve.
TGR: Many people argue that interest rates can't go up because then the U.S. won't be able to pay its debt, and the whole derivatives market will be threatened.
GM: If interest rates go up they are damned. If interest rates go down they are damned. Either way the Fed is screwed because of the derivative situation with their largest banks. I would expect interest rates to move in the direction that allows their banks and the U.S. government to survive the longest, but there is no way out of this that I can see.
TGR: What do you think of the argument made by the Gold Anti-Trust Action Committee that the big banks and the central bankers are suppressing the prices of gold and silver?
GM: The government doesn't like rising gold and silver prices because it tells the public that something is wrong. Now, does the government come into our market and play games? Absolutely, but I don't really pay too much attention because, ultimately, I believe free markets will dictate the course of the metals prices. It's yet another sign on just how out of control the powers that be are when they seek to control the outcome of everything. They think they are God, but they're about to find out otherwise.
TGR: You wrote on Sept. 20, 2013 that you've lost confidence in "a recovery this fall in our overall junior mining stock market." If you are right, doesn't this mean that many juniors won't survive? And if this occurs, will it make the survivors stronger?
GM: Absolutely. This is an unfortunate chain of events, but in many regards it needed to happen. There were just too many junior mining companies. There are only so many talented teams of professionals in the industry that know how to make the discoveries that can be developed into producing mines. When you look at the monies that have been raised in this sector in the last 5-10 years, we have very little to show for it. All the low hanging fruit has already been discovered.
"Realign portfolios to the highest quality and build positions in companies that can make up for a lot of lost ground when the market recovers."
So this "wipeout," as I'm referring to it, has been very difficult on investors, people employed by mining companies and newsletter writers like myself. I was hoping we would have a recovery this fall. The early signs in July and August seemed to indicate one because the strongest companies started to move and in many cases doubled from their lows in late June, early July. That is usually a sign that things are going to float again, but it all fell apart in September.
TGR: You have recommended that investors reduce their portfolios "to just a few of the highest quality stocks as we await the recovery." What are the criteria that determine the highest quality stocks?
GM: Companies with plenty of cash on hand that don't need to raise money right now. It is almost impossible to raise money in this sector at this juncture. Look for companies that are producing from high-grade projects with low costs, companies that will make money even if gold and silver go down further from current levels.
Even with companies like these, there is always something making things more difficult. There are a lot of great companies I like in Mexico, where the politicians are trying to change the laws to charge more taxes. Politicians have an insatiable appetite for other people's money. It will affect companies in Mexico with low-grade projects to the point it may force them out of business.
TGR: When do you think the market will turn around?
GM: Things are not going to get better at least until 2014, and in the meantime a lot of juniors hanging by their fingernails are going to go out of business. That will solidify the market for the survivors. Maybe that is as it should be. I do believe that monies we've lost in this sector in the last two years can quickly be made up if investors maintain a position, or build positions, during these low times in the highest quality companies. Because when the market does recover, it is going to be a screamer.
TGR: Can we talk about some of your favorite companies?
GM: SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT) is probably the top company I'd like to talk about. It has more than $40 million ($40M) in cash and growing. The company is making money whether gold or silver prices go up or down because it is mining higher grade rather than lower grade ounces. SilverCrest keeps finding more ounces as the Santa Elena mine grows, and it has made another discovery that is moving along quite nicely in another area of Mexico.
The market is so bad currently that SilverCrest is not performing as it should. It's holding its own, but is at a great discount to where it will be. This is a great situation to play because at current prices I see at least a four or five multiple when the market fully recovers.
TGR: SilverCrest was down to about $1.50/share in August, and then the price soared to over $2.20/share. But now it is back down to $1.73/share.
GM: And it could go lower. I would say that even the best companies will move lower. Tax-loss selling is going to come up. People need to clean out their portfolios. Everybody's situation is different. I've never experienced losses like this before, and I've been doing this for a long time. But once it's cleaned out, it will have to recover. If the world wants to have iPhones, computers and high-tech cars, it takes base metals, precious metals and rare earths to build these things.
TGR: You wrote that after Canadian Zinc Corp. (CZN:TSX; CZICF:OTCQB) had been given a water license for its Prairie Creek mine in the Northwest Territories, which is silver, zinc, copper and lead, the market did not get too excited about what should have been an exciting event.
GM: That was shocking to me, like a dagger to my heart. Here is a property that was discovered and developed by the Hunt brothers in the 1970s. Canadian Zinc got control of it in the 1990s and has been trying to develop it ever since. Unfortunately, the key water permit necessary for production was not renewed when it should have been, and it was a long struggle to get it back.
Canadian Zinc traded over $1.50/share many times without the permit even being close to being approved. The permit is a big deal also because it attracts buyouts from larger companies that need to replenish their reserves. And this is a unique polymetallic deposit of size. What has been drilled is already big, and holes drilled a kilometer away from known mineralization have hit. This resource has a huge signature that attracts big players in the industry.
When Canadian Zinc got the permit, the market did nothing. I think it went up $0.04/share that day and has since sold off from its high of $0.70/share. I was really counting on getting at least $1.50/share. Well, when the market does recover, I would expect Canadian Zinc will be trading at a multiple of where it is right now. So it is one to hold for the long term because it's essentially been derisked.
TGR: Let's talk about some other companies you have given a buy rating.
GM: Colorado Resources Ltd. (CXO:TSX.V) is in a unique situation. I can't recommend most exploration companies now because they have very little in the way of funds, and they can't raise money. But Colorado had $8M in the till. Then, with a key copper-gold drill hole at its North ROK property in British Columbia, its stock ran all the way up, in this market, to $1.70/share from $0.16/share. Since then, further drilling hasn't confirmed the first high-grade discovery hole, although it is building a nice resource very quickly with every successful drill hole. In my opinion, it actually may have better potential than a nearby mine that's already slated for production in late 2014 or 2015.
TGR: Is that Imperial Metals Corp.'s (III:TSX) Red Chris mine?
GM: Yes. Red Chris is only 15 kilometers away and has a very similar signature to the discovery at North ROK. Colorado is drilling at 100 meters (100m), 200m, 300m, 400m, 500m away from the discovery hole, and the company is hitting average grade or better than Red Chris'. Based on my back-of-the-envelope calculations-not NI-43-101-compliant-Colorado has already put together 100 million tons (100 Mt) of ore that's economic and closer to the surface than Red Chris'. Red Chris has 300 Mt, so Colorado is already one-third of the way there with only 12 drill holes. And Colorado is closer to the main road.
This is an incredible story. And yet, once again, the market doesn't seem to care. What's encouraging to me is that Colorado has the money in the treasury to finish all the work for 2013 and 2014 without raising new funds. I think North ROK will become a resource that is taken out by a bigger player as the company gets to the 300 Mt of ore level. And because it is trading in the low- to mid-$0.20 range, I think this is a good bet to make some serious money when the market recovers.
TGR: Let's talk about Buy recommendations in Mexico.
GM: Excellon Resources Inc. (EXN:TSX; EXLLF:OTCPK) is also in a good situation. The company has money in the treasury. Excellon is paying for the drilling with profits from production at its La Platosa project in north-central Mexico, right in the main silver belt. I've always believed that Excellon is in control of its own destiny. The company just has to keep doing what it has been doing in hopes of hitting the source of all the known mineralization it has already uncovered.
The big play, the big blue-sky upside potential in Excellon, is that it is paying for all the exploration work with its own funds, without further dilution of current shareholders. It doesn't matter how bad the market gets; this is a very high-grade situation. Even if silver prices go to $5/oz, Excellon could still probably make money at that level. That's because it has negative cash costs when you consider the high-grade lead and zinc that goes along with the silver.
TGR: Now, Orex Minerals Inc. (REX:TSX.V) has projects in Mexico but also in Sweden and Canada, right?
GM: Orex is a very good company with an extremely talented management group. I've been involved with this group before and made money, but at this point I have to be honest and say Orex is in a tough situation. It finds itself with little cash. The company has got to do something with its burn rate and just try and survive right now. Unlike Colorado, Orex does not have a major discovery in play it can fund with current monies. Orex will probably need to raise money, but this would probably be too dilutive, even if it could raise it.
TGR: Is there anything you like in Peru?
TGR: Tinka Resources Ltd. (TK:TSX.V; TLD:FSE; TKRFF:OTCPK) is another company that's on to a potentially very large discovery of merit at Colquipucro and Ayawilca. It started out as a silver resource that the company was trying to build to 30-50 million ounces (30-50 Moz) and then possibly 100 Moz. As Tinka was doing the boots-on-the-ground work, as I like to call it, it uncovered some large anomalies deeper in the system and hit with drilling what looks to be some very high-grade zinc and lead. The more drill holes Tinka can put into these anomalies to define how big this is, the more exciting it will become.
Tinka, however, is caught because it needs to raise money again. But this is one of the very few companies that may be able to actually raise money currently. I don't know how much it would want to raise at current levels, but it may be able to pull it off and keep things going. Otherwise, I would say Tinka may be in a situation where it has to slow things down and just wait for the recovery. If a company has the right people and the right share structure, it can make it. Tinka has cut everything as low as it can and has had to let go of employees. The company has cut salaries. It has enough money to cover itself for a couple of years at that reduced level, so it will probably be just fine.
TGR: Many long-time investors in the junior space have been so battered over the last couple of years that they've given up. What is the best reason for people to stay invested in juniors?
GM: I can't blame people for getting so frustrated. They've taken horrendous losses; we all have. Some of the sharpest people I know in this business have been hammered. And when you suffer a lot, you tend to say, "Hey, I don't want to do this anymore." Those who can gut it out, however, those who have the fortitude and the understanding have to dump the garbage. Just take the pain, and get it over with. Realign portfolios to the highest quality and build positions in companies that can make up for a lot of lost ground when the market recovers.
TGR: Greg, thank you for your time and your insights.
Greg McCoach is an entrepreneur who has successfully started and run several businesses in the past 30 years. For the last 14 years, he has been involved with the precious metals industry as a bullion dealer, investor and newsletter writer (Mining Speculator and The Insider Alert). McCoach is also the president of AmeriGold, a gold bullion dealer. He writes a weekly column for Gold World.
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1) Kevin Michael Grace conducted this interview for The Gold Report and provides services to The Gold Report as an employee. 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: SilverCrest Mines Inc., Colorado Resources Ltd., Excellon Resources Inc. and Tinka Resources Ltd. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
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