Brien Lundin Plays the M&A Game

The Gold Report: In mid-January the Chinese stock market plunged almost 10% and the world barely blinked. You spend a lot of time looking at China and how that market influences the gold price. What are your thoughts on China's massive market correction as it pertains to gold?

Brien Lundin: I don't think the performance of Chinese equity markets greatly affects physical gold demand in China. But as a backdrop of general uncertainty, the correction did nothing to hurt gold demand.

TGR: Nonetheless, you believe China is the story in gold.

BL: The big story for gold is China and Asia in general. We saw Chinese gold demand spike in 2013 after an orchestrated attack on the gold price earlier that year. We all thought that level of physical gold demand from China would eventually abate, but it never did. Then we thought physical demand would fall off in 2014, but it did not. The World Gold Council reported that gold demand in China was off some 50% in 2014, but in reality it was running close to the record rates of 2013, as gauged by deliveries from the Shanghai Gold Exchange, a little known metric that few gold market insiders follow.

Chinese gold demand in 2014 was about 2,100 tons (2.1 Kt), roughly 4% off record-setting 2013 levels. More important, Chinese demand was running over 50 tons per week throughout most of the fall and into 2015—a rate that projects to about 2.6 Kt/year. Only about 3 Kt gold is mined each year. If you combine, say, 2.2 Kt from China and about 0.8–0.9 Kt from India, those two nations alone would consume more than all the newly mined gold in the world. We just need a minor shift in Western investment demand to create a tremendous strain on the global gold supply.

TGR: The gold price fell hard late in 2014, but managed to avoid slipping below $1,000 per ounce ($1,000/oz). You're suggesting that underlying demand in China and India kept gold above $1,000/oz.

BL: Absolutely. Whenever we've had any sort of significant decline in the gold price since this bull market started in 2000, price-sensitive buyers in China and India have supported the gold price. And during that massive selloff in Spring 2013, Asian demand strongly supported the gold price. In other words, Asian buyers think gold at these levels is a bargain. They are taking all the gold that the West will sell them—it is a massive flow of metal from west to east.

Moreover, the calls for gold to slip below $1,000/oz were somewhat shortsighted given that the average all-in cost of production is around $1,200/oz. While the price of gold can go below the cost of production, it can't go too far below that level for too long, before supply constraints bring the price back up.

TGR: From where will gold price drivers emerge in 2015?

BL: China will remain an important story, and at some point that flow of gold from west to east will cause severe supply strains. In other words, we will reach the bottom of the Western vaults at some point. In addition, the U.S. dollar has shown some signs of exhaustion after its almost parabolic rise. That will end at some point, because the U.S. government will re-enter the battle of currency depreciation, along with the rest of the Western nations. Those are two important drivers. The turmoil in equities markets and a growing recognition that the Federal Reserve will not be able to raise rates this year will also benefit gold prices throughout 2015.

TGR: In the December/January double issue of Gold Newsletter, you mentioned gold's "whiplash inducing" volatility. Should investors get used to that?

BL: Greater volatility in all asset classes in all markets will be a hallmark of the world going forward. In particular for gold, we saw some volatility toward the end of 2014 during the thinly traded holiday period. Speculators took advantage of low volumes to push the market around. Broadly speaking, we're going to see either a continuing of the bottoming formation in gold through 2015 or the beginning of a new upturn. It's going to happen this year or next. I don't think the forces at work in the global economy will be able to prevent gold from rising beyond next year.

TGR: What are some signs that an upturn is taking hold?

BL: We need to get the price consistently above $1,400/oz. Gold has been around $1,300/oz after a nice rally since the end of 2014, but at this time last year the price was above $1,350/oz. I'd like to see the price well above $1,400/oz before I start to get excited.

TGR: What about inflows into exchange-traded funds (ETFs)?

BL: They're starting to come in. That's a good sign. The real killer for gold in 2013 was the huge outflows in ETFs. We're not going to see that again in the near future. We've reached the die-hard core of gold owners in ETFs. As I said, if we get Western investment demand—and I use ETFs as a proxy for Western investment demand—in addition to Asian demand, that is really going to carry gold into the next big rally.

TGR: Early in 2014 we saw a rally in mining equities, especially among the A-list names. Should investors expect a similar rally now?

BL: We're already seeing interest in the bigger names and that should subsequently filter into the smaller names. We saw that in 2014, but it all went away after the peak in March. If we can maintain the momentum in mining shares into May, that would provide some investor confidence. That's a key for this year. The takeover of Probe Mines Limited (PRB:TSX.V) by Goldcorp Inc. (G:TSX; GG:NYSE) has added a reason for investors to get excited about further merger and acquisition (M&A) activity.

TGR: You recently returned from the Vancouver Resource Investment Conference. Were people talking about M&A?

BL: Absolutely. The Probe Mines takeover was announced while I was there. Although there are some obvious synergies between Goldcorp and Probe, the takeout price per ounce was relatively high. There's cautious optimism that we might see more M&A activity and there's certainly no shortage of targets out there.

TGR: You're constantly writing about dozens of names in Gold Newsletter. What are some key themes you are focusing on?

BL: One of the key things that I've concentrated on is buying resources in the ground at these bargain basement prices. Buying resources in the ground is the safest way to invest, yet that strategy still offers significant upside as the markets reawaken. There are lots of companies with proven resources and advanced economic studies on their projects that I think are wonderful takeover candidates.

TGR: What are some that come to mind?

BL: Kaminak Gold Corp. (KAM:TSX.V), Columbus Gold Corp. (CGT:TSX.V; CBGDF:OTCQX), Asanko Gold Inc. (AKG:TSX; AKG:NYSE.MKT), Romarco Minerals Inc. (R:TSX), Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) and Midas Gold Corp. (MAX:TSX) would all be prime takeover candidates. But they're not waiting for buyers. They're retaining the option of developing the projects themselves. That guarantees the highest price in a takeover.

TGR: Let's go through those companies. Kaminak is developing the Coffee gold project in the Yukon. What is the latest there?

BL: Kaminak just released some new drill results that were pretty exceptional for infill drilling on the Double Double deposit, like 32.8 grams per ton (32.8 g/t) gold over 6.1 meters (6.1m) and 37.6 g/t gold over 5m. It already had great economics and it's only getting better.

TGR: Does Kaminak need to consolidate its land position as Probe did before it received the Goldcorp takeover bid?

BL: Kaminak has all the land it needs. The issue there is that the resource occurs in a number of smaller deposits. The mine plan is a bit more complicated, but nothing that would intimidate a major mining company.

TGR: You recently labeled Columbus Gold "a long-term play on higher gold prices." Could the preliminary economic assessment (PEA) provide a near-term catalyst?

BL: Yes, both the PEA and a resource increase. Columbus is trying to expand the resource and its margins. The current drill program is primarily infill drilling, but that infill drilling will add significantly to the resource at the Montagne d'Or deposit in French Guiana. That's because the resource estimates to date have been done conservatively without counting much of the resource between holes. Columbus should be able to steadily increase the resource by bringing new mineralization between holes into the proposed pit. I expect the PEA to pleasantly surprise people.

TGR: Next is Asanko, which recently released its definitive project plan for the first phase of mining at its Asanko gold mine in Ghana. The market did not respond. Why?

BL: A while back Asanko added some resources from drilling that were something of a surprise, but the plan is pretty much laid out. Construction is in progress and on budget. At current levels I think Asanko is a great bet on gold and mining shares waking up over the next year or two.

TGR: You suggested in a recent edition of Gold Newsletter that the current Asanko valuation doesn't give any value to the company's promising Esaase project.

BL: The market is neither valuing Esaase nor the potential value of the company once it reaches production. Esaase's value will come in the later phases of mining when Esaase gets brought into the mine plan. Asanko is going to be a world-class mine but it is not being valued like one. It's a waiting game. It's a stock where people can have some confidence that the company is going to be worth considerably more in time.

TGR: You suggested, too, that Romarco Minerals is a potential takeover target. Many mining pundits think it should have already happened. Is there cause for hesitation?

BL: Despite the fact that the Haile mine sits in South Carolina, the market looked at the Carolinas as a kind of new frontier because there haven't been any major gold projects permitted there in a long time. To its credit Romarco did everything correctly and recently cleared its final permitting hurdle. Shortly thereafter it raised $300 million ($300M) in a bought-deal financing.

TGR: So either way it's moving ahead with mine development.

BL: Yes, Romarco is retaining the option of developing the project on its own. That way the company can afford to say no to any offer that doesn't adequately reward shareholders.

TGR: What makes Almaden a target?

BL: A resource of about 4 million ounces (4 Moz) in Mexico, a good jurisdiction. The revised PEA cut down the capital costs; now it's a highly economic project in an area where most major mining companies are comfortable operating.

TGR: And Midas Gold?

BL: Midas's recent prefeasibility study on the Stibnite gold project in Idaho said that the company would produce about 4 Moz gold and 100 million pounds (100 Mlb) antimony over 12 years at an all-in sustaining cost (net of byproduct credits) of $616/oz. The initial capital cost is pegged at $970M. Like Romarco, there's the perception of some permitting risk in Idaho, but I think those fears are unfounded. In fact, development of the project would remediate ecological damage from previous operators.

TGR: Those are mostly advanced projects. Are you following some early-stage gold companies?

BL: Despite the fact that I'm focusing on companies with proven resources in the ground that essentially have gone on the clearance rack, I can't resist the tremendous upside potential of a drill-hole play. Among those, one of the best is Precipitate Gold Corp. (PRG:TSX.V). It has a lot going for it. It executed the initial drill program on Juan de Herrera project in the Dominican Republic and hit a nice intercept at its Ginger Ridge target of 13.4 g/t gold over 5m within 18m averaging 4.5 g/t gold. The key is that there's about 200m of untested anomaly behind that hole that Precipitate needs to drill. The company recently conducted another geophysical survey along strike and added another 850m that require drilling. Precipitate will likely drill along this geophysical signature sometime in the spring. We'll have some great news flow after that.

TGR: How do Precipitate's drill results compare with those on GoldQuest Mining Corp.'s (GQC:TSX.V) Romero project next door in the Dominican Republic?

BL: It has only drilled one successful hole on Ginger Ridge so far, but Precipitate is using the same tools at Ginger Ridge that were used to locate the 3 Moz resource at Romero and it is getting similar types of signatures. Importantly, Precipitate's geophysical target comes to surface, whereas GoldQuest's was buried at some depth.

TGR: Is there any talk about consolidating Precipitate's land position with that of GoldQuest?

BL: Not yet, and I don't think it makes sense for either company at this stage. GoldQuest needs to improve the economics at Romero to make it the kind of project that a larger company would want to develop. If Precipitate outlines a significant near-surface deposit, then it could begin to make sense to combine the projects. Any major looking to buy one of those projects would naturally look at both.

TGR: Recently you have written about some uranium equities in Gold Newsletter. That commodity has teased and generally disappointed investors in recent years. Do you expect uranium prices to finally make a significant move higher in 2015?

BL: The uranium price made a significant move in the latter part of 2014—at one point rising about 40% and taking the market by surprise. It has since come off those levels, but it's still stronger than it was. That quick price burst reawakened a lot of interest in uranium stocks. There are a number of companies that I like that will do well over the long term.

Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT) and Energy Fuels Inc. (EFR:TSX; EFRFF:OTCQX; UUUU:NYSE.MKT) are merging, which is significant in such a tiny sector. I've always followed Uranerz and I'm going to take another look at the combined entity. I like Uranium Energy Corp. (UEC:NYSE.MKT) a lot because it is in production and therefore highly leveraged to increases in the uranium price. Of course, Fission Uranium Corp. (FCU:TSX) blew the doors off with its 105 Mlb maiden resource for the Triple R (formerly Patterson Lake South) project. The deposit has a huge high-grade core. Fission has yet to define the limits of that deposit and it's launching another 20,000m winter drill program. I really like Fission.

TGR: Isn't it true that there probably isn't a more bona fide takeover target than Fission in the mining equities space, but none of the big time uranium players have the cash to make a bid?

BL: They always have stock. This is also an opportunity for a major that isn't involved in uranium to instantly become one of the big players. The project is that large and it's going to grow. Fission keeps diluting the stock by drilling off the deposit, but you can't really blame the company when it can discover so many high-grade pounds for each dollar of drilling. At some point this deposit is going to be worth considerably more than the company's current market cap. Investors with the patience to wait out the game should be richly rewarded.

TGR: What are some other uranium equities you follow?

BL: A highly speculative play that I like is Roughrider Exploration Ltd. (REL:TSX.V). The geological mind behind it is Dale Wallster, part of the team that discovered Hathor Exploration's famed Roughrider uranium deposit. Roughrider Exploration is working on finding the theoretical extension of that same Roughrider deposit and has a large land position that it optioned from Kivalliq Energy Corp. (KIV:TSX.V), another uranium company I like. Companies with resources in the ground, like Fission and Kivalliq, are great plays on the uranium price because once the uranium price inevitably rises, the value of these companies will soar.

TGR: What are some little known names that you could introduce to our readers?

BL: I like Excelsior Mining Corp. (MIN:TSX.V) as a copper play. We've seen a precipitous decline in copper prices recently, but they should remain above $3/lb over the long term. Excelsior is using an in situ recovery method at the Gunnison copper project in Arizona that lowers its capital and extraction costs, so it has great economics for a large copper deposit. It also has a great financial and management team that should be able to support and advance the project.

TGR: There's a prefeasibility study on Gunnison that reports a pretax net present value of $1.2 billion. That's considerable.

BL: I think it's going to work. It's a matter of timing, but when a company has the financial strength of the team backing Excelsior, that helps a lot.

TGR: What are some other new or newer names?

BL: Avrupa Minerals Ltd. (AVU:TSX.V) is exploring areas where few other companies are, places like Portugal, Kosovo and Germany. It made a volcanogenic massive sulphide (VMS) discovery in Portugal and has a nice gold discovery in Kosovo that is not getting much attention yet. It continues to drill those projects.

I have been buying Calibre Mining Corp. (CXB:TSX.V). It has some remarkable projects in Nicaragua, most notably the Minnesota gold project. The trench results from Minnesota are among the best I've ever seen. I'm looking forward to some good news from that company in the near future.

Source Exploration Corp. (SOP:TSX.V) is getting some great drill results on its Las Minas gold-silver-copper property in Mexico. It's not an official recommendation in Gold Newsletter as yet, but the drill results are something that investors should look at. I will soon determine if I'm going to recommend the company, but you can't argue with the tremendous drill results so far.

Wellgreen Platinum Ltd. (WG:TSX.V; WGPLF:OTCPK) is about to release a revised PEA on its Wellgreen platinum group metals (PGM)-nickel-copper project in the Yukon. The challenge with that project is that it is so large and so rich that it's tough for a small company to develop on its own. Wellgreen is looking at the economics of a smaller, high-grade operation that makes the case for near-term development. It's almost a must-own project as a strategic asset for a major producer. Most of the world's PGMs are mined in South Africa and Russia, which aren't the most secure regimes. Wellgreen is one of the few significant PGM resources in a stable jurisdiction.

TGR: Are there other little known equities that you could introduce to our readers?

BL: It is not in the resource space, but I am chairman and cofounder of a solar research and development company called Natcore Technology Inc. (NXT:TSX.V). Natcore has announced a number of advances in solar technology that we think the industry will simply have to adopt over the long term. Specifically, we have laser processing and black silicon technology that we think will eventually add about 4% in power output to solar cells and cut costs of production by 30% or more. That would be huge for this highly competitive industry.

We will license our technology to solar cell manufacturers, but not actually get into manufacturing. We will profit from licensing fees and equipment sales, and are planning to collect a royalty on every panel made.

TGR: Is this technology patented?

BL: Yes. It's all patented either with issued or pending patents. We have been the leaders in developing antireflection surfaces and laser processing capabilities for solar cell manufacturing.

TGR: When we last talked, you were anticipating former U.S. Federal Reserve Chairman Allen Greenspan's address and panel discussion at your New Orleans Investment Conference. What did you learn from Dr. Greenspan?

BL: One thing is that Dr. Greenspan believes that excess bank reserves overhanging the U.S. economy is "explosive inflationary tinder" that has yet to be ignited.

He told me in a private conversation that there's no way the Fed is going to be able to exit quantitative easing and a low interest rate policy without a significant market event, such as a major selloff in U.S. equities.

And despite being at the helm of the Fed when many of the bubbles were inflated, he remains a radical, committed gold bug who believes that gold will move higher over the long term.

TGR: Thank you for your insights, Brien.