Commodities / Gold & Silver Stocks
Dec 29, 2012 - 06:02 AM By: The_Gold_Report
The past year was a very tough one for the junior gold mining sector. In this interview with The Gold Report, Brien Lundin, CEO of Jefferson Financial, says that the past year has, in fact, put many gold mining companies on the bargain basement shelf. He shares some advice on end-of-year portfolio repositions and talks about some of his favorite stocks that he believes are poised for a rebound in 2013.
The Gold Report: Brien, in late October you and your company Jefferson Financial hosted the New Orleans Investment Conference. What were some of the commodity-related themes consistently making the rounds there?
Brien Lundin: The buzz was that the underlying fundamentals for precious metals would remain bullish regardless of who won the election. But if President Obama were re-elected, then all of the factors favoring gold and silver would become dramatically more bullish.
TGR: You wrote about that in the November edition of Gold Newsletter. Here's a quote from that edition of your newsletter: "The bottom line is that President Obama's re-election means that you need to buy gold and silver, and things that will retain their value as the dollar loses its value." Why were things different on Nov. 7 than they were the day before?
BL: Even before the election, the economic and fiscal situation for the United States was pretty dire. In my view the only hope of recovery and reform, without a major ongoing crisis and very significant inflation, would be if the Paul Ryan plan were to be put into effect immediately.
Instead, we now have the same administration that took the emergency one-year spending levels enacted to keep the economy from crashing during the 2008 credit crisis, and has now made those massive spending levels the new baseline going forward. The difference is that the Obama administration is now unrestrained by the prospect of another election, so the trajectory of government spending is actually being steepened.
TGR: In another passage of the same edition of Gold Newsletter you wrote: "The coming inflation will be similar to what we've experienced in recent years. Huge pools of loose money will continue to flow into commodities and financial assets." What makes you certain that we won't see another round of risk-off sentiment if things go as badly as you suggest they will?
BL: The risk-off episodes that seized the investment markets over the past few years are in reaction to potential fiscal crises in the U.S. and Europe. This headline risk sent investors running to the safety of cash, specifically to the U.S. dollar. This seems counterintuitive, but investors are looking for short-term safety.
When the perceived risk is one of long-term currency debasement, then gold is the preferred safe haven. My whole bull market thesis for gold is based on a developing consensus that neither Europe nor the U.S. is going to face collapse anytime soon. Rather each will be kept afloat on a sea of new money printing by both the Federal Reserve and the European Central Bank. In such an environment, gold and silver are going to absolutely take off.
TGR: Do you think that lack of practicality of gold hampers its status as a safe haven?
BL: Not today. Gold is very liquid. A lot of speculators use the exchange-traded funds (ETFs), which I recommend for trading the metals. But I don't recommend ETFs for core holdings.
In fact, one of the things that is keeping the market buoyed currently is the tremendous retail investor demand for the metals. That comes in the form of skyrocketing physical sales of coins and bullion, and in the ETFs. Metals holdings of the ETFs are at record levels. Coin demand is at near record levels. Yet we see the price moribund due to the whims of speculative demand.
TGR: It's interesting that you're pro ETFs, because most gold bulls aren't. Is this a new tack for you?
BL: Not really. You know a lot of the hard-core goldbugs are somewhat doubtful of whether the EFT gold is actually there. I recognize those concerns, so I don't recommend ETFs for core physical metals holdings, just for trading.
TGR: When should equities enter the mix for a retail investor?
BL: Simply put, right now. The junior resource stocks have been absolutely decimated over the past year. There are bargains galore right now if you have cash to buy them.
TGR: Are these bargains mostly market related or is this part of tax-loss selling season?
BL: I don't really distinguish between the two. We've had a lousy year for the equities. When we have had risk-on environments, they have not lasted long enough to where it filtered down to the highly speculative junior resource equities.
We also have an unusual situation this year where we have not only tax-loss selling but also tax-gain selling as investors take profits to avoid higher capital gains taxes next year. When you combine that with the junior stock market that has been depressed all year, some incredible bargains emerge. I'm pinpointing a number of them in Gold Newsletter right now.
TGR: Let's talk about some of the equities that you follow. You said in a recent edition of your newsletter that Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) has "opted to forego" the prospect-generator model in an effort to develop the promising Ixtaca gold-silver deposit in Mexico that's part of the Tuligtic project. Is that your opinion?
BL: Yes. I have never been a big believer in the prospect-generator business model as an absolute. It should be a business model, not a religion. So when a junior explorer comes across a prospect that is particularly exciting and can provide rapid value advancement with relatively little risk, then I think the company should explore that project fully.
Almaden was the poster child for the prospector-generator model for years. But Morgan and Dwayne Poliquin had the vision and the foresight to see that Ixtaca could be different. Their decision has paid off in spades. Almaden right now is one of my top recommendations and I think that deposit is going to get much bigger than the company's current market cap is indicating.
TGR: Almaden has about $36 million (M) to continue to develop Ixtaca. Do you think that it will sell that project, dividend the money out to shareholders, and then continue on its way? Or do you think it will sell the whole company? Or would it do something similar to what Virginia Mines Inc. (VGQ:TSX) did when it took all the other projects out of that company, put them in a new company, and sold that company to Goldcorp Inc. (G:TSX; GG:NYSE)?
BL: Typically in a case where a company has a number of earlier-stage projects, and it has one major project for which it is primarily being valued, then management will sell the company. Usually you'll see a spin off of those other projects into a new vehicle so that shareholders can keep the benefit of that other property portfolio that really isn't adding value to the transaction. That's a process to fund that new company as well.
TGR: You?ve also written that Brigus Gold Corp. (BRD:NYSE.MKT; BRD:TSX) looked "undervalued" in early November after Brigus bought back much of its gold royalty stream from Sandstorm Gold Ltd. (SSL:TSX.V). Tell us about that deal and the market's reaction to it.
BL: There are a few keys to Brigus Gold and the opportunity it presents. First, the company ran into operational problems when it was trying to ramp up production at its Black Fox Mine, prompting a decline in the share price.
Those production hiccups have been solved and production is now growing. Yet the company's shares are on sale. In addition, there is the exploration drilling the company is doing on its Grey Fox property near the Black Fox Mine. In particular it is getting tremendous results from a high-grade zone called the 147 Zone. Those results are normally enough to absolutely catapult the value of a junior explorer. But the results are getting lost in the shuffle because Brigus is a production story. In fact, this Grey Fox property will become the company's next mine.
TGR: Another company you follow is Comstock Metals Ltd. (CSL:TSX.V). You see more promise in the recent drill results from the company's QV project in the Yukon than the market does. Give us your thoughts on that.
BL: Comstock is a case where expectations were really high before the first drill results came in. The results were actually quite good, but not quite up to the elevated expectations. So the share price sold off, which was unwarranted.
The first results showed the potential for a nice sized deposit at the VG Zone. Importantly, the company also outlined a number of other drill targets from soil sampling and trenching. The real key for Comstock will come with next year's exploration program. The company's geologists plan to mount a comprehensive attack on all those highly prospective targets.
I think Comstock is a longer-term story. It's not going to be built on a few drill holes or even a couple of rounds of drilling. It's a project that has a number of very exciting targets. It's a cross between the Underworld Resources story, which had the Golden Saddle deposit just about 10 or 11 kilometers to the south, and the Kaminak Gold Corp. (KAM:TSX.V) story not far away. Kaminak had a number of anomalies that it had to drill off and is only now starting to connect those anomalies with mineralization.
There's a lot of potential in Comstock. I see some very exciting analogs in the area and the mineralization that it has seen so far is very, very similar to that at the Golden Saddle discovery by Underworld. That discovery was a big winner for Gold Newsletter readers, when Kinross Gold Corp. (K:TSX; KGC:NYSE) took over Underworld at a big premium.
TGR: One hole cut 89.9 meters of 2.34 grams per tonne gold. Could this be a bulk tonnage starter?
BL: That wasn't a very deep intersection, so it could be bulk tonnage. People tend to feel that the grades in the Yukon have to be very high even for a bulk-tonnage or an open-pit deposit for the economics to work. But this whole area is becoming ripe with new discoveries and infrastructure will follow, and, at some point, it's also going to be ripe for consolidation. So I think that the current grades are very close to what a company would need to make a deposit work in the Yukon.
TGR: What did you make of the recent friendly merger between Keegan Resources Inc. (KGN:TSX; KGN:NYSE.MKT) and PMI Gold Corp. (PMV:TSX.V; PVM:ASX; PN3N:FSE)?
BL: It was a great deal for both companies. Everyone's been waiting for one of the majors to come in and scoop up one or both of these juniors and consolidate the projects in this area of Ghana. But those takeovers never happened. So these two management teams essentially decided to do it on their own.
In the near term, this isn't a big share-price catalyst. But considering that the combined companies can now fully find the development of the more advanced Obotan project of PMI and get into production, the financing risk is removed essentially for both projects.
Obotan should get into full production by 2015 at around 200,000 ounces (oz)/year. By 2017, Keegan's Esaase project will get added to the mix and bring production up to around 385,000 ounces annually. The bottom line is that we now have either a must-have acquisition by a major or the emergence of a new midlevel producer with the potential to continue consolidating the region.
TGR: Do you see this as an investible theme? Companies with nearby development-stage projects that are suffering from markets that aren't all that flush with cash getting together?
BL: In this case, both of these companies are fairly well funded. I see them as being potential aggressors in a new round of merger and acquisition activity. These companies also have additional exploration potential. Keegan just made a new, very important property acquisition. It was a property swap with the Ghana government that it's been working on for years and where the company sees the potential for some sizable extensions to the Esaase mineralization. So the story could get bigger on every front.
TGR: You recently added some companies to the rather lengthy list of ones that you cover. One of them is Precipitate Gold Corp. (PRG:TSX.V), which is seeking gold in the Dominican Republic. Does it concern you that it has only $1.8M in exploration capital?
BL: Not really. That amount is actually a decent treasury compared to the peer group. There are hundreds of companies in the junior resource sector now that only have a few $100,000 in the treasury. The company, though, will have to raise more money to advance its projects in the Dominican Republic.
There is potential for further dilution, but the share structure is fairly tight. There's only about 24?25M shares outstanding, no warrants overhanging the stock, and the company is well-held by a strong group of financiers. Bottom line is I don't think they'll have any problems raising additional funds if needed.
TGR: Another company that's exploring the Dominican Republic is GoldQuest Mining Corp. (GQC:TSX.V). It recently had some less than ideal drill results and the market reacted negatively to those. Was Precipitate affected adversely by association?
BL: Absolutely. GoldQuest was another case where the expectations were raised really high. The first few drill holes from GoldQuest were just phenomenal and it would have been very difficult to continue that. GoldQuest really hit the honey holes right at the beginning.
But now the hype has definitely died down from the whole Dominican Republic play and Precipitate did suffer from that. The hype over the Dominican Republic helped obscure Precipitate's outstanding property portfolio in the Yukon and British Columbia, where it has about 19 highly prospective properties that were acquired for really valid geological reasons. That's the side of the company where I expect the next really important exploration news will come from.
TGR: What are some other companies that you follow that could see a rebound in 2013?
BL: The list is starting to grow a bit long. But there are really some remarkable bargains right now as the year draws to a close. Investors should concentrate on companies with either proven resources and/or the likelihood of big news on the near-term horizon.
Some of the prime examples that I would throw into this category are Cayden Resources Inc. (CYD:TSX.V), International Tower Hill Mines Ltd. (ITH:TSX; THM:NYSE.MKT), Gold Standard Ventures Corp. (GSV:TSX.V; GDVXF:OTCQX), Kaminak Gold, and Lion One Metals Ltd. (LIO:TSX.V; LOMLF:OTCQX; LY1:FSE).
TGR: Let's start with Cayden. That's a story that's largely unfamiliar to our readers, with the La Magnetita target in Mexico.
BL: What's important about Cayden is that there are a few aspects to the story. There's the property position that it has at the Morelos Sur gold project. It actually partially surrounds and transects the largest producing gold mine in Mexico, Los Filos, which is owned by Goldcorp.
That mine has to expand, and in fact, it's already encroaching on the surface onto Cayden's property position. That means there's going to have to be some kind of a financial accommodation done there and it could be significant for the company.
In addition, Cayden has the land between the two producing pits on Goldcorp's mine and Cayden has drilled that. It has shown that there is mineralization trending from between those two pits at depth on its property. So Cayden has proven mineralization and an obvious natural buyer for whatever it can prove up.
Then you have the La Magnetita target. The key to that is that every mine and discovery in the Guerrero Gold Belt has been identified through geophysical means. Importantly, La Magnetita is the largest geophysical anomaly in the belt. To date Cayden has gotten some outstanding sampling and trenching results, and is now drilling, so I'm very excited about that potential.
TGR: International Tower Hill is a story that took off a few years ago and seems to have stumbled more recently. What's happening with the company now?
BL: Its Livengood gold project is a case of a really large project with lower grades. The project is still economical, but you have to get the majors out there ready to buy up such a project. That will likely happen, but only when we have a sense of normalcy in the market that we haven't had in the last 18 to 24 months.
TGR: How about Kaminak? We talked a little bit about the Yukon with Comstock and Kaminak's right there too in the White Gold District.
BL: Yes, it is connecting all of these various anomalies on its property and building up a resource that, in its recently released maiden resource estimate, is already totaling over 3.2 million ounces of inferred resource.
Kaminak has come off a good bit and could be a prime takeover candidate. It's being derisked with every drill hole. The company has had incredible success so far and it has just completed one of the most aggressive drill programs to be seen in the junior resource world in many years.
At the current price levels, it's hard to get hurt in Kaminak.
TGR: Gold Standard Ventures, which owns the Railroad gold project in north central Nevada, is a made-in-America story. What's the next catalyst for Gold Standard?
BL: This was a slow motion discovery. When the company first came public, I didn't recommend it in my newsletter because I thought it was too expensive.
The company's first results weren't spectacular by any means, but they were technical successes?not market successes. However, once you understood the story and talked to the geologists, you understood that the company was vectoring in on something that could be big. We were able to get our readers in on the stock before the big run up, which was just wonderful timing, after it had declined a bit after it first came public.
The geologists kept vectoring in on the mineralization while proving up the geological concept, until they eventually found the higher-grade mineralization. At this point, it is still trying to fully understand the mineralization and get a much better handle on it. I think what you'll see is that Gold Standard will be able to advance the resource to a much greater degree over the coming months. This is another example of those very hot stories that have come back a good bit, yet have a proven discovery, and the company will just keep drilling to prove up a resource.
TGR: What's happening with Lion One?
BL: Lion One is progressing with permitting and development of its Tuvatu gold project in Fiji, a project with upside potential that I don't believe is being valued by the market at all. Over $30M was spent on this project by Emperor Mines Ltd. in the late 1990s, including over 85,000m of drilling and 1,600m of underground infrastructure.
All Lion One has to do is dust off and update an existing feasibility study, and get the necessary permits to get into production. It is doing that right now, and will use proceeds from Tuvatu to fund exploration of the multimillion-ounce potential of the project.
Management, including legendary financier Walter Berukoff, owns about 40% of the company, so it has solid support going forward. It's a great buy at these levels.
TGR: It's the end of the year and some retail investors are wondering what to do with their portfolios and if they should make some changes. Is there a process that you go through at the end of the year?
BL: The end of the calendar year is a natural time to clean up a portfolio and rationalize things. But it is also the time of the year that you typically have tax-loss selling that creates a dampening effect on the markets and sometimes creates some pretty attractive bargains. This year, as I said, we've had some screaming bargains created.
I think what investors need to do, and we're doing it with our Gold Newsletter portfolio as well, is to look at the number of companies that you can adequately follow. If you're able to find some really attractive opportunities in this kind of an environment, you need to start switching into these faster horses in exchange for some of the slower horses in your stable. Just turn over the portfolio a bit, rearrange it and get prepared for the future.
It's especially important if you can find companies that are better positioned going forward than the ones you have in your portfolio and you can realize some tax losses going forward. There's no reason to play the psychological games of holding on to a loser just so you can get back what you paid for the stock. Be ready to break emotional ties, sell a company and put the money on a better bet going forward.
TGR: We'd be remiss if we didn't ask a gold bull like yourself to tell us what you think the coming year has in store for gold. Please give us your thoughts on that.
BL: It's going to be a very good year for precious metals and mining stock investors. Once we get through these end of year trading games and that fiscal cliff fiasco, the markets should settle down into an environment where everyone recognizes that massive money printing will continue for years to come. This is the fundamental story that's going to drive metals prices higher and in this environment the equities will begin to benefit once again.
There's also a very powerful technical picture developing. Both gold and silver are tracing out a cup-and-handle formation similar to the ones they formed during the 2008 credit crisis and the subsequent recovery from that crisis. After that, the metals rocketed higher out of those cup-and-handle bottoming formations. I fully expect a similar performance this time around, which would be a pretty exceptionally profitable situation for gold bulls.
TGR: Thanks, Brien, for your insights.
With a career spanning three decades, Brien Lundin serves as president and CEO of Jefferson Financial, a highly regarded publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Lundin edits and publishes Gold Newsletter, a cornerstone of precious metals advisories since 1971. He also hosts the New Orleans Investment Conference, the oldest and most respected investment event of its kind.
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DISCLOSURE:
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: Almaden Minerals Ltd., Goldcorp Inc., Brigus Gold Corp., Precipitate Gold Corp., International Tower Hill Mines Ltd., Gold Standard Ventures Corp. and Lion One Metals Ltd. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Brien Lundin: I personally and/or my family own shares of the following companies mentioned in this interview: Comstock Metals Ltd., Keegan Resources Inc., Precipitate Gold Corp., Cayden Resources Inc., Kaminak Gold Corp. and Lion One Metals Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
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