Thibaut Lepouttre's Commodity Plays In A Sideways Market
Gold, Commodities, Gold & Precious Metals, Base Metals
Seeking Alpha Analyst Since 2009
Metals prices have been trading sideways for some time. How can you make gains in your portfolio when commodity prices are in a stalemate? In this interview with The Gold Report, Thibaut Lepouttre, editor of Caesars Report, talks about ways to play metals from gold to copper and tungsten in a market with weak price movement, and scans the globe to find 11 potential winners.
The Gold Report: The crisis in Ukraine may feel a little bit different in Brussels than in North America. From your point of view, does this look like a civil war? An invasion? Or is this just politics?
Thibaut Lepouttre: Russia took advantage of the political turmoil in Ukraine to occupy the pro-Russian Crimea region. Crimea has always been closer to Russia than it has been to Ukraine. You could say that Russia is reclaiming a piece of ground it had for more than 200 years that was only separated from it in the past 60 years. Russia wanted to safeguard its interests from the new pro-European Union government in Ukraine.
TGR: What role should Europe play in restabilizing the area? What about the role of the U.S.?
TL: I don't think Europe should do too much. This is a leftover problem from the dismantling of the Soviet Union-it should be dealt with internally between Ukraine and Russia. However, we should react if human rights are being infringed.
I think the role of the West will be quite limited to acting as some kind of intermediary between Ukraine and Russia. Political sanctions are perilous because Russia has real opportunities to retaliate. Look at the gas imports from the European Union: Germany imports 35% of domestic consumption from Russia, Hungary is about 45-50%, and the Czech Republic and Bulgaria are more than 70%. The moment the West and Europe try to impose some kind of economic sanctions on Russia, the Russians will retaliate.
TGR: What about actions such as what happened at the airport in mid-April-small, measured attempts to destabilize the Ukraine?
TL: Russia may attempt to destabilize the pro-EU government, but I do not think that the country will go into a full-on attack or invasion of Ukraine. There may be small infringements on Ukrainian sovereignty, but not full-out war.
TGR: The West seemed to dismiss Russia's actions in Crimea as "one and done." Was that the right approach?
TL: Yes. The Crimea region was historically Russian and more than 80% of the people speak Russian. Western countries realize that it might make more sense that Crimea be a part of Russia instead of an autonomous region of Ukraine, which could continue to cause political instability inside Ukraine.
TGR: Do you see this situation as having any further impact on commodities, such as gold, silver and perhaps even base metals?
TL: Full-on war in the Ukraine could be a real catalyst, but commodities will likely continue to trade sideways at least through the summer.
TGR: In October, you said you thought gold would continue to trade sideways between $1,200/ounce [$1,200/oz] to $1,410/oz. You've been pretty accurate with that prediction. Does a possible realignment in Eastern Europe impact your predictions?
TL: We saw a short spike in the gold price the moment that Russia flexed its muscles in the Crimea region, but I fail to see a decent catalyst that could catapult the gold price in one direction or the other.
TGR: Do you see silver tracking gold throughout 2014 or do you see a bit of a separation occurring?
TL: There will continue to be some kind of correlation between the gold and silver prices. Silver won't track gold one-on-one, but the difference in price variations and changes will not be that high.
TGR: Can silver be profitably mined at current prices?
TL: Yes, margins are much thinner than if silver were between $25-30/oz, but there are some companies that would be profitable at the current silver price. A PEA has shown an after-tax NPV of around $100M using a silver price of $22/oz. The operating expenditures outlined in the PEA were about $11/oz silver, but the NPV could be much higher if more resources can be added. After talking to the management team, I'm convinced there's potential for probably 200 Moz Ag eq. The mine life could be extended much longer. I think we'll see a lot more ounces in the ground after this year's drill program, which is expected to total about 25,000 meters. I'll be looking forward to seeing another resource update.
TGR: Let's talk about copper. The Chilean Copper Commission [Cochilco] revised its copper price forecast downward by about $0.10 to $3.05/pound [$3.05/lb] in 2014. What do you predict for copper prices for the remainder of the year?
TL: I've always been conservative about the copper price because I expect a lot more supply coming on the market than demand. I always use a long-term copper price of $2.75/lb.
TGR: Are there any other companies you are following?
TL: I'm also following Nevada Copper Corp. (NEVDI), which is constructing the Pumpkin Hollow project in Nevada. Pumpkin Hollow is a two-phase project. In the first phase, the company is expected to open an underground mine, which is fully permitted and almost fully financed. It still needs about $75-100M. In the first few years of the operation, the underground project should produce about 75 Mlb/year copper. At a $2.75/lb copper price, the after-tax NPV is in excess of $200M. Besides the underground project, Nevada Copper also plans a large, open-pit operation. It has recently completed the feasibility study, forecasting a 70,000-ton-per-day [70 Ktpd] operation.
There is a land change bill going through Congress that could make the permitting easier for Nevada Copper's second phase. If the land could get transferred from the federal government to the city and the state, that would shorten the permitting process by about two years.
The initial capital expenditures for the large, open-pit project are about $1 billion [$1B]. Nevada Copper will likely need a partner to build the project. My main fear is that the company will be bought out before it's producing from the open pit. It's a huge copper asset containing 5.2 Blb copper, 1 Moz gold, about 33 Moz silver and about 0.5 billion tons iron ore. It's on the radar of a lot of companies. I wouldn't be surprised if it were taken out. Fortunately, the CEO of the company has about 9% fully diluted shares, so his interests are aligned with the shareholders' interests.
TGR: Let's move to tungsten. What does the supply-demand picture look like?
TL: The supply-demand ratio in tungsten is very tight. Tungsten is dominated by a few countries, mainly China. That has led Western Europe and the U.S. to look at the security of their supply of strategic minerals like tungsten. Over the past few years, when the tungsten price started to move up again from $200/metric ton [$200/mt] to in excess of $400/mt, more and more companies have evaluated previously producing assets and tried to reopen them. Assets that were not profitable at $100/mt might be highly profitable at $360/mt.
TGR: Over in Peru, there are a couple of companies that are toll milling gold operations. Tell us about toll mining and the risks involved.
TL: Toll milling is a very interesting concept because companies that are engaged in toll milling aren't real miners. They provide service to artisanal miners that have no efficient way to treat their ore.
The toll milling company pays the miners based on the average gold grade of the expected recovery rate and factor in a little wiggle room in case the gold price changes. It's a win-win situation because the artisanal miners have a way to efficiently treat ore. If they did it themselves without the right permits, they would be breaking the law and could go to jail for a long time.
The average recovery will be much higher than what a private person could reach. Most artisanal miners reach a recovery of about 40-60%, while modern toll milling companies with modern equipment can reach recoveries of 90% and higher. It's a win-win situation. The toll milling company takes a cut of the value of the gold, the artisanal miner has a way to efficiently process ore and the Peruvian government gets more tax income because everything will be formalized.
The small-scale mining sector in Peru is officially estimated at about $2B/year. Unofficially, that number could be much higher, perhaps even $3-4B/year. As a country that has become serious about formalizing its mining sector, there are a lot of possibilities in Peru in toll milling.
TGR: What companies do you want to talk about?
TL: There's one other company I'd like to highlight: Tsodilo Resources Ltd. (TSDRF). It's operating in Botswana, which has been called the "Switzerland of Africa" because it's the African country with the least corruption. There is less corruption in Botswana than Spain, Portugal or Colombia. It's one of the safest mining jurisdiction, not only in Africa but worldwide.
Tsodilo Resources has a two-step approach. It has a joint venture with First Quantum Minerals Ltd. [FM:TSX; FQM:LSE] on its copper project. First Quantum will have to spend $6M and an additional $9M in exploration expenditures. If it results in a resource estimate of more than 4.4 Blb copper, First Quantum retains 70% ownership in the project. If it's less than 4.4 Blb copper, First Quantum keeps a 51% stake. First Quantum has partnered up with Tsodilo because it is hunting for the big elephant. It doesn't care about a 1 Blb copper deposit.
TGR: Tsodilo is a story with diamonds, copper, base metals and uranium. Doesn't that confuse investors?
TL: Don't forget the iron ore, Brian. It does confuse investors. The company is trying to rebrand itself as a copper and iron ore company, as those projects are closer to development. The uranium overlaps with the metal licenses so additional resources are not needed for that project and the diamond exploration continues, however with a secondary emphasis at this stage .
TGR: Botswana is well known for its diamond mining. De Beers has some prolific mines there. What do you know about its diamond assets?
TL: Diamond mines in Botswana will have to go underground during the next decade, increasing the cost and reducing the output. It's one of the main reasons why Botswana is supporting the development of other mineral and commodity projects. It's helping these companies out by trying to unlock the country-it's a land-locked country with no access to the sea. It signed an agreement with Namibia last month whereby Botswana and Namibia will construct a Trans-Kalahari Railway. That will be important for gold and iron projects because it will provide rail access to the Port of Walvis Bay in Namibia. Botswana understands the needs of the companies working in the country and is trying to accommodate them. It wants to continue to be one of the most important and safest mining destinations in Africa.
TGR: Do you have any other advice to investors that you'd want to leave us with?
TL: Do your homework. Understand every aspect of a company and its project. Never be afraid of getting in touch with the investor relations division of the company. Never be afraid to ask questions. You have to make sure you fully understand every aspect of the business before considering an investment.
TGR: Thank you for your insights.
This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.
Thibaut Lepouttre is the editor of the Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals. Lepouttre has a Bachelor of Law degree and two economics masters degrees that have forged his analytical approach to the mining sector. Considered a number cruncher, Lepouttre focuses on the valuations of companies and is consistently on the lookout for the next undervalued mining company.
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1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report and and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Streetwise Reports does not accept stock in exchange for its services.
3) Thibaut Lepouttre: I own, or my family owns, shares of the following companies mentioned in this interview: Nevada Copper Corp. and Tsodilo Resources Ltd. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Tsodilo Resources Ltd. and Nevada Copper Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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