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Successful
entrepreneur turned bullion dealer Greg McCoach
brings more than 20 years of business experience, a vast network of mining
contacts and his unique precious metals industry insights to the mining
investment newsletter he launched in 2001, The Mining Speculator. In this
exclusive interview with The Gold Report, Greg outlines the ‘new’
criteria for junior miners, explains why he favors the juniors over more
senior producers and advises a combination of both physical metal and stocks
for investors to protect themselves in today’s market.
The Gold Report
(TGR): In your January newsletter, there's a table that
shows how the HUI Gold BUGS Index over 10 years was the top asset class. Can
you talk about gold as the top asset class compared to these others?
Greg McCoach (GM): We see by the statistics that the HUI Index, which is a measure of
gold and silver precious metal stocks, has performed better than any other
asset class in the past 10 years. Now what’s interesting is that
we’re still in the process of watching this gold bull unfold. In terms
of the four stages of a bull market, we are probably past the midway point
and heading into the latter stages. This is where the parabolic moves in the
precious metals will start to happen. And with all that is unfolding in the
world economic scene, it's not difficult to see why gold will soon be
soaring.
TGR: So you definitely think this bodes well for the
next phase of the gold bull market; there will be a parabolic move?
GM: Yes. This is where you’re going to see gold
really go to levels that people can’t even comprehend. Up to this
point, gold has been a surprise to many in the mainstream media. What
investors need to understand about the bull market in gold thus far is that
the numbers that we’re dealing with, $960 an ounce gold right now, is nowhere near the 1980 high in gold of $875 an
ounce.
You have to
inflation-adjust those 1980 numbers for 28 years of true inflation. If you
did that, the $875 high in gold would have to be $6,500 an ounce in
inflation-adjusted terms. For silver, it’d be $400 dollars an ounce. So
when you see silver at its current rate of $14 an ounce and gold at $960 an
ounce, in real inflation-adjusted terms, those prices are still dirt cheap,
relatively speaking, compared to where they’re going to be going.
As we see the
world financial system continue to unravel, the dollar along with all fiat
currencies will just implode leaving gold as the currency of last resort. Gold, and silver will go into the stratosphere as this
happens. People need to remember that what took gold and silver to their
all-time highs in 1980 pales in comparison to what we are dealing with now.
The world has never witnessed the likes of the financial destruction that is
now underway. It is truly frightening.
TGR: You say in your “Greg’s Crystal
Ball” section that you think the mania phase is going to start
happening sometime next year, in 2010.
GM: I think by the end of this year things are going to
be so bad worldwide that gold is going to become headline news and that will
become the driving force towards the parabolic moves. What’s happening
right now is that the big money is still playing the paper game of musical
chairs. "Paper musical chairs," I call it. When the music stops,
people run from one chair to the other chair looking for safety. They run
from bonds to dollars to Euros, etc., trying to find the safest place. But
they’re not finding it. Why? Because the paper system as we’ve
known it is unraveling. So people are trying to chase safety. Well, they
can’t find it because it doesn’t exist. They go into dollars, and
they feel comfortable there for a little while; then suddenly the dollar tanks
again, and then they run out of the dollar to another paper currency.
Ultimately, when
the music stops, they’re not going to run to a chair; they’re
going to run for the exits. When that happens, they’re going to
discover the asset class known as gold. That’s when these parabolic
moves are going to happen. As that happens of course, the select precious
metal mining stocks will move up accordingly. The leverage investors can get
will be phenomenal during such a scenario.
TGR: You say the key is to own the physical metal, as
well as the stocks. What do you recommend as far as percentages in a
portfolio?
GM: Right now my personal portfolio is 25% cash, 25%
physical metals. I take physical delivery of gold and silver. I have 35% in
select precious mining stocks, junior mining stocks mostly, and then the
balance is in Canadian oil and gas trusts that pay a monthly dividend check.
TGR: You favor the juniors over the more senior
producers simply because of the growth potential?
GM: Yes. The leverage is better. For me, personally,
I’m willing to take the extra risk with the juniors because I feel like
I know what I’m doing and I’m confident about it, so I feel
comfortable in being able to identify the juniors that are going to perform
very well. The seniors will do well, but they won’t do as well on a
percentage basis. In other words, there’s not as much leverage with the
seniors as there is with the quality juniors. But the big problem for the
average investor is trying to understand what a quality junior is.
There’s so many of these companies out there, 80% of which are nothing
but moose pasture, and it’s very difficult to sort through all the
promotions and scams to find the real jewels. That’s my job as a
newsletter writer; that’s what I do. I travel the world trying to sort
through all the garbage to find the real opportunities that can deliver the
big returns.
TGR: What do you see right now with the juniors? Some of
them definitely are climbing back up.
GM: I think it’s nice to see them recover a
little bit. This is a very good learning situation for investors of mining
stocks. Look at the companies that are rebounding. If we have another
implosion, which companies do you want to buy? The ones that rebounded the quickest and the most in the past several
weeks, months.
Since the bottom
in late November, early December, we’ve had companies that have
doubled, tripled, and even quadrupled if you had enough courage, or any cash,
to buy back then. But there are other companies that haven’t moved at
all, and they’re just stuck in the mud. So, obviously, you have been
given a great opportunity to see the companies that are more quality
oriented, that have the value, that have what the market is looking for, and
those companies are the ones you want to really pay attention to.
Since a lot of
the stocks on our list bottomed out, the top 10 list, in particular, has had
some of the stocks do quite well. Some of them have doubled, tripled, and
have bounced back quite nicely from the bottom. Unfortunately, most of us
probably bought at a higher level and so we’re not even up to the point
where we’re at break-even again. Obviously, we’re still waiting for higher levels.
Now what
I’ve been saying is that, unfortunately, with the severity of the world
economic events, up to this point our mining shares have been sucked down the
drain, so to speak, when world stock markets sell off. Every day that the
world stock markets have had a bad day, the mining stocks have had a bad day
as well. What we’re looking for is the precious metal prices to help us
disconnect from that activity. It hasn’t happened yet. I’m still
worried that the next downturn in the world markets could affect our junior
mining stocks again. I’ve been looking for this key disconnect moment,
where the precious metal prices take us into another realm and help protect
and insulate our select junior mining stocks. You have to use
‘select’ because so many of the juniors are going nowhere.
It’s only the select companies that are going to be protected or
insulated from other market activity that’s going in the wrong
direction. So I’m looking for that moment our quality junior stocks
start to move on their own accord.
TGR: Can you give us an overview of what you consider a
select company? What is the criteria?
GM: The criteria is this. They
have to exceptional management. In other words, out of all the management
teams that exist out there, there’s probably only a small handful that really have the quality background and experience to
do what they say they’re going to do. Most of these other people are
just managers or lawyers who don’t have experience or are hoping to get
involved with a hot sector. They’re highly promotional, and most often
are only looking out for themselves.
So you look for
the people that have the right resumes, the ones who have worked for the
majors for 10, 15, 20 years or more and have the experience (paid their dues
so to speak), learned the business, understand what they’re doing and
what they are trying to accomplish. Do they have experience in doing this
specific task such as find gold? Did they mine gold or silver before? If they
were mining for uranium their whole career and they jump into gold, well,
that doesn’t sound too good to me.
So you have to
have the experience and the knowledge base. That’s key. The way
we’ve been playing this market the last eight years is no longer as
valid as it once was. We need to adjust to the new rules on how to play this
game and win.
What the market
is looking for is very specific. If you make a good gold discovery, it has to
be in an existing mining camp. It has to be in an area where the development
costs aren’t very large. If you make a big gold discovery, and it's in
an area that’s out in the middle of nowhere, the development costs are
going to be too high. No one’s going to fund it; no one’s going
to finance a project like this with the new market environment. It
doesn’t matter how good the results are.
So you have to
find these discoveries in good jurisdictions that have short permitting times
that have existing infrastructure. If it doesn’t have those things,
forget about it. There are plenty of great discoveries that I know of.
They’re just in the wrong area. Some examples would be Romios Gold Resources Inc. (TSX.V:RG), Copper Fox Metals Inc. (TSX:CUU), who have tremendous discoveries but are
unfortunately in the wrong area. It takes too much money to develop such a
desolate area as we have seen with NovaGold Resources Inc. (TSX:NG) (AMEX:NG) in their effort to get the Galore Creek deposit in production. The
cost overruns were so enormous, they had to shut the
whole thing down. Well, the market’s not interested in those kind of projects anymore. I choose to invest in areas that
have what the market wants.
Look in the areas
that have plenty of existing mines and infrastructure. This is where plenty
of experienced mining people already live and juniors who can make a
discovery will most likely be bought out by a major who is in the area.
Now certain
jurisdictions are better than others. The political risk now is more intense
than it was. Political risk is always a big factor, but the political risk
now is just amazing, so you have to be very careful where you’re
willing to invest your money. For me, I’m getting to the point where
there are only a few jurisdictions that I’m willing to look at. Certain
parts of Canada where there’s existing mining camps, certain parts in
the United States, and Mexico which still looks very good. That’s about
it. Everything else is no longer as attractive as it once used to be.
We’re also
looking for higher-grade resources vs. lower grade. We’re looking for
low-cost development situations vs. high-cost development situations.
We’re looking for economic deposits that can be financed.
Here’s
another situation—within mining, the different kinds of discoveries. A
large copper-gold porphyry system is known to house large amounts of gold and
silver,; but, unfortunately, it’s also known
to have very high development costs. Who’s going to finance that?
I’m not as interested in those kinds of stories as I once was.
You’re better off looking for the higher grade—
“epithermal”—smaller vein, higher grade, near-surface
deposits that will have an easier time of actually going the whole distance
and getting into production.
TGR: Let’s talk about some of the companies on
your top 10 list. Pediment Exploration Ltd. (PEZ:TSX) (PEZGF:OTCBB) (P5E:FSE) is at the top; can you give us an update?
GM: Since they bottomed, Pediment has more than
doubled. They’re hanging around the dollar trading range, which some
people have been disappointed with. But what I say is, look, Gary Freeman,
the CEO, is just weighing his options right now. He’s not making much
in the way of news. That’s okay. He’s lying low, he’s
looking at his options right now, and this is a company that is about to
release a new 43-101 that will have more than 2 million ounces of gold in the
ground. This is a verified situation. That’s a significant number
because once a company, a junior, crosses the 2 million ounce gold mark, it gets on the radar screens of the majors.
Gary has a lot of
things he’s weighing out. After the market meltdown, he decided to
reduce costs, get things trimmed down, and get the burn rate really low to
conserve cash. So, in the last few months there has not been much in the way
of news. The company is lying low for now, but I think you’re going to
see that change as PEZ announces their new 43-101 resource calculation. At
that point I think you’re going to see Pediment start to have a lot of
news flow, which should be very good for the share price.
He’s got
the Baja property we just talked about that’s going to have the new
43-101. I don’t see how it’s not at least 2 million ounces based
on my back-of-the-envelope calculations, but you never know with these things
until they actually come out. I would guess it’s going to be over 2
million and there’s plenty more to be discovered there In my opinion,
this deposit could be greater than 3 million ounces before all is said and
done. Well, that’s a major discovery. It’s in the right
jurisdiction, with very low development costs and it’s in an existing
mining area, so it should do very well.
Now, Pediment
also has a project called La Colorada that could be
a near-term producer. It’s the old open pit that El Dorado Gold Corporation
(ELD.TO) (AMEX:EGO) produced from,
which really made El Dorado Gold what they are today—what launched them—that
discovery and putting it into production. Pediment now controls it and other
people are interested in it. Should Gary vend it out to somebody else, take
the cash and run, or should he develop it himself? He has lots of options. He
has lots of cash. He has lots of great properties. Gary has many different
things he can consider at this point, so I think he wisely just stepped back,
started to look through everything that he has and what options are
available. We’ll see what happens but the prospects for the company
look very good..
I’m sure
there’s been interest by majors already on the Baja Project. He’s
probably gotten plenty of calls, where the majors are already saying,
"hey, look, what if we just take you out at this price?" Is it high
enough? Is it worth taking the money now and running, letting somebody else
deal with it? Or is it better for the company to go down the road a little
bit further, develop it themselves in the hopes of getting a much higher
price later on? These are things we all have to weigh out. Is it better for
us as shareholders to take the money and run right now, even though we might
get a lower price for it? Or should we wait a little bit longer, and get a
higher price when they develop it? These are things we have to look at. So,
with that being said, in my opinion, as we see these higher gold prices and
with the news that’s about to come out, I think Pediment’s a two
dollar stock in the next six to eight weeks.
TGR: Capital Gold Corp. (TSX:CGC) is also
on your list, correct?
GM: Yes, and as Capital Gold runs up to the 90 cent
level—it was recently in the 80 cent range—as it gets close to 90
cents Canadian, I’m telling people to start selling, start taking some
profit. What’s going to happen is the company is going to do a reverse
stock split, which is going to be a minimum 4:1 stock split. These stock
splits are always negative for current shareholders. Let’s just say they
decide to do the reverse split at a dollar. They’ll reduce their
outstanding shares by 75% and the stock would be at four dollars at that
point, which would get them their AMEX listing (which is a good thing), and
that’s why they want to do it. But, typically, what happens, after they
do a reverse split, the stock gets hammered. The four dollar share price gets
leveled and it usually retracts to a level that is very damaging to current
shareholders. So this is why I’m saying take some profit as Capital Gold
gets over 90 cents, hold the cash.
I think Capital
Gold is worth holding in the portfolio, but wait ‘til after the reverse
split and the detrimental effects that reverse splits typically have on share
prices. Wait for the share price to retract, and then buy in again because I
think Capital Gold will be a good company to hold. I just think you should
take some profits at this point.
TGR: What about SilverCrest Mines Inc. (TSX.V:SVL)?
GM: Silvercrest is a great
story. Their production scenario at Santa Elena in Mexico is a high-grade
silver-gold kind of scenario. They just came out with their resource update.
The resource is growing and the project should be in production by the end of
2009. Things are looking very good so I’m going to keep the company in
my portfolio. This resource should grow with time. It’s got all the
things that the market’s looking for—precious metals-oriented in
Mexico, near-term production and the company should have cash flow.
TGR: Riverside Resources Inc. (TSX:RRI) just
joined your top 10 list, right?
GM: Yes, they made their entry into the top 10 because
they have shown me that they know how to manage the prospect generator model
with success. The CEO, whom I like very much, really watches and guards the
treasury and watches out for shareholders. He’s managing his properties
very well, and I think he’s got not just one but possibly multiple
discoveries. And this is what you want with a junior exploration stock. Some
people say, "Greg, don’t you want to have people who have a
production cash flow?" Yes. We’re going to have some of those in
the portfolio, but the exploration companies—the good ones that can
make the discoveries—is where you get the biggest leverage of all. And
I think Riverside is in that category. So they are now number nine on our top
10. I like them very much and I think it’s a good play.
TGR: Can you talk about another from your top 10
list— Allied Nevada Gold Corp. (TSX:ANV) (ANV)?
GM: Allied Nevada is a good story because they’re
getting the Hycroft mine back into production.
It’s going very, very well. The stock price has rebounded very nicely,
and I think it’s probably poised to make a new high. Now we saw some
selling pressure, some people were taking profits in January and early
February as the stock was recovering; but now I think that selling pressure
is gone and the stock is back up over the $6 level again. With higher gold
and silver prices, I think you’re going to see Allied make a new
all-time high and I wouldn’t be surprised to see the stock at $7 or $8.
So there could be a profit opportunity on that one coming up here.
TGR: Now Vista Gold Corp. (TSX:VGZ) (AMEX:VGZ) is not on your top 10 list, but you cover them, correct?
GM: Yes, I like Vista Gold. Allied Nevada and Vista
used to be one company before they did the split. The better properties I
thought went with Allied Nevada, but Vista Gold still has plenty of good
situations. Their model of acquiring cheap gold ounces in the ground,
increasing the value of them in a market where gold prices are going higher,
is a very valid market. They have a good share structure, they have cash in
the bank, and they’re a very well-managed company with top management
talent. So, with higher gold prices, that model should do very, very well.
They’ve got
multiple projects with big gold deposits in Australia at the Mt. Todd
deposit, which is a 6 million ounce gold resource. They’ve got the Awak Mas property in Indonesia
that is a very large holding of gold. And higher gold prices make these kinds
of projects worth more and more. They’ve also got some great projects
in Mexico next to Pediment’s project on the Baja. They have the Paredones Amarillos Project,
which is kind of waiting on a permit situation that they thought was already
done years ago that seems to have had a little glitch there, but
that’ll get worked out. And they’ve got some other good projects
in Idaho and one other one (I can’t think of it off the top of my
head), but it’s a good scenario and that model should work well. If you
believe in higher gold prices, Vista Gold should do very well.
TGR: Greg, this has been great. We appreciate your time.
Greg McCoach is an entrepreneur who has successfully started
and run several businesses the past 22 years. For the last eight of these
years he has been involved with the precious metals industry as a bullion
dealer, investor, and newsletter writer (Mining Speculator). Greg is also the President of AmeriGold, a gold bullion dealer.
Greg's years of
business experience and extensive personal contacts in the mining industry
provide unique insights that have generated an impressive track record for The
Mining Speculator since its inception in 2001. He also writes a weekly column for Gold World.
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