The health of the U.S.
economy may not be quite as robust as some government statistics indicate and
more stimulus could be on the way, despite what the Fed may be saying.
Regardless of which way the economy goes, Chris Marchese, contributor to The
Morgan Report, tells us in this exclusive interview with The Gold Report that precious metals will go higher as investors
seek protection from the effects of monetary policies that don't work. In the
process, he expects that greatly undervalued mining shares of silver
producers will again shine in the eyes of investors and highlights several of
his favorites at current bargain prices.
The Gold Report: This is an election year and everybody is waiting to
see what happens with the economy between now and November. The Federal
Reserve just signaled that it may be less willing to provide more stimulus.
What's your reading on that?
Chris Marchese: The Fed meeting minutes signaled that the members are
willing to be very accommodating if gross domestic product (GDP) slows down,
if it doesn't maintain a 2% inflation rate and/or unemployment starts to
creep back up. Then they tried to play the metals down; they don't like high
gold or silver prices because they delegitimize the dollar. I think they are
doing that in preparation for the next round of quantitative easing, which in
my opinion will just be an extension of Operation Twist that ends in June.
TGR: So you think that's all pretty much in place, regardless of how
numbers look, unless there's some drastic change?
CM: Yes, real GDP is supposedly growing, but our deficits are running
higher, and 21.5% of that is government spending, which doesn't include any
Social Security or the like. If you take that $3 trillion (T) out, our
economy is smaller or roughly the same size as it was back in 2006. So there
hasn't been a recovery, even though they try to paint it that there is.
I can make the argument that things have gotten worse. There hasn't been any
growth, and unemployment has been getting worse if you count discouraged
workers, people no longer considered unemployed and people forced to take
part-time jobs or jobs that they're overqualified for. John Williams of
shadowstats.com calculates these numbers. Last month, it was almost at a
record high of 22.5%. Even the U.S. Bureau of Labor Statistics has it at 15%,
and it hasn't really budged.
TGR: What happens if the recovery stalls—or if it takes off
faster than expected?
CM: I think that Fed Chairman Ben Bernanke and President Barack Obama
might do stimulus, tax cuts or something like that to get a short-term hit.
It's like heroin, you get a short-term high, then you come down hard again.
We've been doing that since we got rid of the gold standard altogether. It's
just the boom/bust cycle that eventually runs out when no one trusts our
currency anymore. A growing population is already starting not to trust it.
Politicians like to talk the talk—"oh, we're going to cut $2.6T
over the next decade." Well, it's going to be out of control by that
point. Everyone should read the GAO Report, written by the people who
audit the government. The phrase "material weakness" is used 50
some-odd times. If that was the case when we filed our taxes, we'd be thrown
TGR: What do you think the chances are for inflation getting out of
CM: I think it's already a problem. I use what's called True Money
Supply, which is basically all currency that's readily available for use and
exchange—currency, coins, notes, checkable deposits, savings deposits
and the like. That's been growing between 10% and 15% over the last three
TGR: What's going to happen with precious metals if the economy
stalls, or if inflation really picks up?
CM: I think it's a win-win either way. For one, as opposed to the
1970s, this is an entire-world problem. China has inflation. Argentina has
inflation. Europe is going to have inflation. Everyone is running the money
spigots non-stop. I think Bernanke is not going to let this economy stall.
It's either going to take off through inflation and people will go to the
metals, or he'll do another stimulus and if that doesn't get things going,
he'll do another and another. At some point, it will be too much. Either way,
I don't think the metals will do anything spectacular until the end of the
summer. At that point, if the economy is not looking good enough, I think
Bernanke will do everything in his power to make Obama look good to get
TGR: Do you have any predictions for gold and silver prices?
CM: I think in Q412, we'll break $2,000/ounce (oz) in gold and $50/oz
in silver. It could run up as far as $60–70/oz just because of the
technical buying and no overhead resistance at $50/oz. Toward the end of
2012, it could be $55/oz silver and $2,100/oz gold. That might sound
outrageous now, but last April silver ran from $32/oz to $49/oz in the blink
of an eye.
TGR: When you spoke with us this past September along with Jason
Burack, you talked about some 30 companies that were of interest at that
time. A lot of those were in silver. Of the more-established producers, whom
do you like at this point and what are their prospects now?
CM: I think Silver Wheaton Corp. (SLW:TSX;
SLW:NYSE) is a
no-brainer for someone who wants something conservative. It's well
diversified with the best operators in the world.
I also like what Pan American Silver Corp.
(PAA:TSX; PAAS:NASDAQ) has been doing. It acquired Minefinders Corp. (MFL:TSX; MFN:NYSE), which gives it a lot more exposure
to Mexico, so it's not so concentrated in Peru and Argentina.
TGR: What are the implications of the Minefinders acquisition?
CM: Minefinders is a lot bigger than people think. Dolores mine is
world-class and will produce 7–8 million ounces (Moz) silver and over
100,000 oz (100 Koz) gold, once the mill is optimized. That's going to add
between 12–14 Moz silver equivalent to its growth profile. Its 20 Moz/year
Navidad deposit in Argentina is expected to get fully permitted. Also, 12.5%
has to be paid to Silver Wheaton because it bought a debenture from Aquiline
Resources Inc. (AQI:TSX) from whom Pan American bought the property. Pan
American produced about 22 Moz silver in 2011. With the Minefinders expansion
and developing Navidad, it could be a 50–55 Moz producer and one of the
world's largest primary producers after Fresnillo Plc (FRES:LSE). I think the
Minefinders properties will give Pan American's stagnant share price a huge
TGR: Any others you'd like to talk about that are more majors?
CM: Another one I like is First Majestic Silver Corp.
(FR:TSX; AG:NYSE; FMV:FSE), which is acquiring Silvermex Resources Inc. (SLX:TSX;
just gives it more growth, especially for how much it is paying for it, $175
million (M). It can get this thing up between 3–5 Moz in a few years
plus it already has lots of organic growth through 2015 or so with Del Toro.
First Majestic is still looking really good, especially down around
$16/share. I consider this one of the safer silver plays now that it has five
operating mines and more to come on.
TGR: Let's talk about some of the more junior miners.
CM: One of my favorite junior gold plays right now is a Canadian
company with operations in Panama and development projects in Spain and
Portugal called Petaquilla
Minerals Ltd. (PTQ:TSX, PTQMF:OTCBB, P7Z:FSE). Its main deposit is the Molejon gold
mine in Panama, which reached commercial production in 2010 and has been
ramping up production via several mill expansions ever since. It has been
completely overlooked by the market even though it has one of the best
production growth profiles out there, courtesy of its recent acquisition of
Iberian Resources Corp. in August 2011.
In 2012, Petaquilla's production is projected to reach 100 Koz , 120 Koz in
2013 and nearly 250 Koz in 2015. This is excluding significant copper
byproduct credits, which are forecast to reach 100 pounds per annum by 2015.
Cash costs net of the company's silver and zinc credits were $557/oz in 2011
and are projected to remain between $500/oz and 600/oz going forward as
silver credits will exceed 3 Moz. annually. The company also benefits from
Panama's tax policy, giving Petaquilla a projected effective tax rate of 25%.
Petaquilla is also a "special situation" at the moment, planning to
spin out its wholly-owned infrastructure arm as an independent entity.
Shareholders will receive one share for every four it holds prior to the
spin-off date. I've modeled a net asset value on a fully diluted basis of
over $3/share [using $1,600/oz Au, $2.50 Cu ~ discounted @ 15%],
significantly higher than the current $0.42/share market price.
The composition of a company's largest shareholders often says a lot about
the prospects of a company. In this case, management owns more than 12%,
followed by significant stakes by Sprott Asset Management, U.S. Global
Investors and Libra Advisors. I've always considered having at least 5%
management ownership a huge positive due to an obvious alignment of
objectives, notably increasing shareholder value.
TGR:Do you have any others?
CM: Up in the Yukon there's Alexco Resource Corp. (AXR:TSX;
AXU:NYSE.A), which is
one I've liked for a while. We talked about it last time. Since then, the
company has identified some much larger targets that are much lower grade
silver (on a relative basis), but, given the much wider intercepts, are
candidates for significantly higher tonnage operations. That's at the
Bermingham and Flame & Moth properties. These potential mines vastly
increase the likelihood Alexco will surpass the 10 Moz/year hurdle within
five years. Its Lucky Queen project is averaging over 1,200 grams per ton
(g/t) coming on-line before the end of the year, along with Onek. So it has a
really deep pipeline for continuous growth into the foreseeable future. With
those types of mines, you can add a lot of reserves as opposed to most of the
mines in the Keno Hill district, which are narrow-vein mines. One hopes that
will catch the market's attention a little bit. It's been a good year for it
and it's still cheap.
TGR: What about gold miners?
CM: Basically, gold stocks are trading cheaper than they were in 2008
relative to the underlying gold and silver price. There are only so many
silver companies, but gold companies are a much bigger universe. One I like
Resources Inc. (MTO:TSX.V), located in Quebec. Its main property is the
Bachelor Lake mine, which will be in commercial production this quarter. It
will ramp up to feasibility levels by Q312 just because it's only running the
mill at 65% capacity at this point. It has a $60M market cap but will be
producing 60–75 Koz/year gold, although it does have a streaming
agreement with Sandstorm Gold Ltd. (SSL:TSX.V) whereby it has to sell 20% at
$500/oz. This shouldn't hurt it too much because it produces under $500/oz.
Its average grade is about 7 g/t on that property. When it wants to access its
Hewfran zone, it can increase production by about 25% or 70–80
Koz/year. That's a good smaller play.
It also has other properties. One is the Barry mine, which is also in Quebec
and relatively close. It has a lot of the same features and structure as Canadian
Malartic and Detour Lake. It's a high-tonnage, low-grade gold mine.
Management will probably look for a joint venture partner on that one. This
is another company that's gone under the radar.
TGR: Bachelor Lake used to be a separate company, or at least the mine
was in a company called Bachelor Lake back in the 1980s and 1990s, as I
CM: Yes, it's a past-producing shaft mine. I hate to harp on these
really small caps, but they shouldn't be this small.
TGR: Any others that are interesting?
CM: There's an exploration company, Kimber Resources Inc. (KBR:TSX;
KBX:NYSE.A). It has
the Monterde project in Mexico, which could be on-line in two years if it had
the money. It's not expensive to bring on-line for what's projected to be
production of 60 Koz/year gold and 2 Moz silver for 15.5 years. The initial
capital expenditure is just $100M. This looks like a likely buyout target
unless it can sell a stream or something to that effect to Sandstorm Gold or
someone else. In this market, these miners can't economically raise money
through equity because of low prices and dilution.
This company, along with most others, were trading at two to three times what
they are now. This one is also a $75M market-cap company. I think it will get
bought out within the next 12–18 months.
TGR: What else is happening in Central America?
Resources Inc. (THO:TSX) has a huge project called Escobal in Guatemala and is fully financed.
It is looking at expanding the mill capacity so that it can produce between
26–28 Moz silver with very low cash costs—around $3–4/oz
net of all the byproducts.
TGR: Anything else you like?
CM: There's also Aurcana Corporation (AUN:TSX.V;
AUNFF:OTCQX). It's a
Mexican and soon-to-be American silver producer. It has the Shafter mine in
Texas, which is two months ahead of schedule and should be coming on-line
relatively soon. That will produce about 4 Moz/year, plus byproducts, and
increase total U.S. silver production by 10%. It has the La Negra mine that
produces about 1 Moz silver and 500 Koz silver equivalent, with zinc, lead,
etc. It's going to have a huge growth spurt—a company that produces 1.5
Moz is going up to 5 Moz in a year and a half. People can buy it under
$1/share and should be able to catch a double.
TGR: What would you like to leave as a final takeaway for our readers
on how to best play this nervous market?
CM: Try to buy quality. Buy on dips. Always keep some cash in reserve
because, as we know, things can go lower. You don't feel as bad when you have
money left to deploy if a stock you like drops by 50%. Remember that negative
sentiment in the market is a good thing. That's usually the sign of a bottom
or a bottoming process. The average investor gets scared out of the market
and sometimes liquidates his or her position at the very bottom. Understand
the fundamentals of silver and gold. They are money and have been for
thousands of years. Above all else, own the physical asset, then dabble in
some mining companies.
TGR: Thanks for joining us today.
CM: Thanks a lot.
Marchese is an
equity analyst and contributor at The Morgan Report. He has served as a research
analyst at Morgan Stanley, founded and co-managed a private equity fund and
was an adviser to Vishni Capital. Marchese has published over 150 articles on
various financial sites such as Financial Sense, Goldseek, Kitco and Seeking
Alpha and is co-author of the e-book Treasure Hunting for Precious
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1) Zig Lambo 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: Minefinders Corp., Silvermex Resources Inc., Kimber
Resources Inc., Tahoe Resources Inc. and Aurcana Corp. Streetwise Reports
does not accept stock in exchange for services.
3) Chris Marchese: I personally and/or my family own shares of the following
companies mentioned in this interview: Petaquilla Minerals Ltd., Alexco
Resource Corp., First Majestic Silver Corp., Silver Wheaton Corp., Metanor
Resources Inc., Sandstorm Gold Ltd., Pan American Silver Corp., Bear Creek
Mining Corp. 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 story.