The Gold Report: Byron, many gold investors spent the early part of December exiting their long positions in gold. Is 2013 the year the gold bull market ends?
Byron King: I don't think the gold bull market will end any time soon. I believe that much of the recent gold exit has been a reaction to the impending tax changes on Jan. 1, when tax rates will go up unless there is Congressional action. I don't think very many investors are selling physical gold or silver. I do think people are selling paper and electronic gold to lock in gains and pay capital gains at the lower 2012 tax rate. It is tax-driven selling, not a reflection that the world's monetary or economic system is getting well.
TGR: How should investors handle the tax-loss selling season?
BK: People have to make their own decisions. If investors own a physical precious metal, the last thing they ought to do is sell out. Really, never sell actual gold or silver if you can avoid it. With the paper gold, or electronic gold, or gold shares? It depends on the investor's situation. If you have large gains, perhaps you want to lock in the gains, sell and pay a 15% capital gains rate in 2012, versus selling it after Jan. 1 and paying a higher rate. If that's your case, then sell now and buy it all back next year. Everyone is different, however.
TGR: How should investors position themselves in gold for 2013 and beyond?
BK: Right now, an investor ought to have cash, which is dry gunpowder, as well as physical precious metals in one's possession. I don't mean own a certificate, own a call on gold or gold in somebody else's storage locker. I mean, own the gold!
TGR: What should that portion be approximately?
BK: That's a matter of individual taste. My view is 10–15% of your portfolio ought to be in precious metals. Some people say 5%. Some people say 25%. The University of Texas at Austin, which has a very large endowment, owns over 663,000 ounces (oz) of physical gold. Kyle Bass, a wealthy Texas resource investor, convinced the board of directors of the endowment to put 5% of the endowment into physical gold, and more importantly, to take delivery.
TGR: You say that the sector is poised for a rebound. Which part of the sector is most likely to rebound first?
BK: Large producers are refocusing and re-emphasizing capital discipline. In the last 10 years, as gold went from $300/oz to $1,700/oz, many gold mining companies—most, really—added new ounces for the sake of adding ounces. They expanded their resource base and added reserves without any real regard to the profitability of each ounce. The culmination of that came with Barrick Gold Corp. (ABX:TSX; ABX:NYSE) this summer. The company has all that gold, and not all that much profit. So Barrick fired its chief executive officer and brought in a different management team. The board of directors and the new management announced a re-emphasis on the profitability of each new ounce that it adds.
The Barrick situation was a reflection of how the price of gold went up six times in the last 10 years. In general, the share price of large gold miners did not have that same bounce.
TGR: Perhaps the biggest issue with gold mining companies right now is steadily creeping costs. Some analysts believe that mining companies aren't watching their costs as closely as they could be. Do you believe that some companies have better control of that than others?
BK: Yes. For example, take Gold One International Ltd. (GDO:ASX; GDO:JSE; GLDZY:OTCQX), a wonderfully run company in South Africa. It's had labor issues and strikes. It had to fire workers, just like a lot of other companies. However, its cost control is phenomenal.
I went down into the Modder East mine near Johannesburg in October. It's one of the newest mines in South Africa. It's an absolute model of smart design and high-end safety. In terms of cost control, Gold One management measures everything. Down at the rock face, the miners sweep up the last bit of dust off the bottom of the mining panel. Gold One even prints photocopies on both sides of the paper. It is as cost conscious as any company I've seen in a long time.
Overall, mining is a tough, expensive environment. Energy costs are going up, in South Africa and everywhere else. Oil costs have gone up. Labor wants a larger slice of the pie. The cost for concrete, steel, machinery, equipment—you name it, everything is more expensive. Cost growth is a big problem.
TGR: Is there a solution?
BK: The solution is really good managers building really good relations with really good miners. At the operational level, you need to keep everybody productive and working as hard as they can. The externalities—oil, cement, steel—are things that companies can't control and have to design, build or work around.
The bad news is that we live in an era of money creation and inflation. The good news is that the price of gold will still keep going up. The price of gold may, on occasion, be manipulated downward by the little gnomes of Zurich, to use an old expression from the 1960s, but long-term gold prices are destined to go up. That brings me back to that point I made earlier: Investors who do not own physical gold are truly shortchanging their own future.
TGR: Can you forecast a trading range for gold in 2013?
BK: Gold could hit $2,500/oz during 2013.
TGR: Wow, you're a bull.
BK: I'm a bull. But I like to think I'm a realistic, informed bull. For example, have you seen reports on how Iran is trading oil with Turkey? Iran has to work around economic sanctions on its banking system. Iran can't use SWIFT anymore—the Society for Worldwide Interbank Financial Telecommunication. So Iran is out of the system for currency trades. What can Iran do?
Well, there's massive gold trade between Iran and Turkey for oil. It's in the range of $15 billion/year. Just that little vignette illustrates the point that, whether the monetarists of the world like it or not, gold retains its usefulness as a means of lubricating transactions.
TGR: You wrote in a recent edition of Energy & Scarcity Investor, "We've also followed gold miners like Carlisle Goldfields Ltd. (CGJ:TSX; CGJCF:OTCQX), Mega Precious Metals Inc. (MGP:TSX.V) and others. The gold miners have been drilling core samples, growing their resource base and adding reserves, which is the idea in the junior space. Eventually, with the gold miners, the reserve and resource numbers will be big enough to attract interest from third parties interested in a takeover. Until then, we watch and wait." Is that your thesis? Is it all about patience?
BK: You named two of my favorite small companies. Carlisle and Mega are very similar. They are both located in Manitoba, Canada, in the classic, old Precambrian greenstone-type regions. Both companies have been working in areas that have been historically picked over. Carlisle is working in an area that was mined for copper-nickel back in the 1960s. Mega is working in an area that has been explored by a multitude of companies during the past 25 years.
Both companies are growing their resource bases very nicely from the 2 million ounce range. Mega and Carlisle are among the cheapest gold miners on the whole stock market by share value per ounce. They actually have gold. I have been to both places and seen the cores. The assay numbers are very respectable 2–4 grams per ton with some spikes into much higher numbers in certain sweet spots and zones.
So with both companies, you've got a solid, safe mining jurisdiction, plus great geology. There's plenty of legacy exploration. Carlisle and Mega are both growing their numbers. One of the larger miners or independents, even a biggie, will absolutely have to take a hard look at them. That is the thesis.
TGR: Last time we talked, you told us about Reservoir Minerals Inc. (RMC:TSX.V). What is new with that company?
BK: Reservoir Minerals is a Canadian company, operating in Serbia. It was spun out of Reservoir Capital Corp. (REO:TSX.V). Reservoir Minerals has a play beneath surface deposits, a couple of miles down the road from what was formerly the largest copper deposit in Europe, Bor, in eastern Serbia. Bor is in the Carpathian Alpine mineral district, where people have been mining since the days of the Roman Empire.
Reservoir teamed up with mining giant Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE) and started drilling holes. The first couple of holes were not so great. Then, about a year ago, it pulled out a core that was in the range of 15% copper. Companies are mining copper at fractions of a percent grade, so 15% copper, including a rather scarce mineral called covellite, is really something.
TGR: What's the size of the resource?
BK: Reservoir Minerals should have a number within a year or so. Until the news of that first big core, Reservoir Minerals was trading the rest of the pack in the junior range, sort of floating along. After the high-grade news, shares went from $0.50/share to about $1.50. Then the follow-up news came out and it went to above $3/share, although it's trading down with year-end tax-loss selling. A year ago, investors were looking at Reservoir and thinking it was just another copper-mining wannabe. Now it's up by a factor of six and it's partnered up with mining giant.
TGR: Is there a gold sweetener in that?
BK: There are quantities of gold at that project. Reservoir Minerals also has other localities in Serbia, and it has expanded its footprint on the Gold Coast of West Africa. Reservoir Minerals is a fabulous copper play, and it's quite clear that the overall mineralization holds gold and silver.
TGR: We've seen some friendly mergers and takeovers in the gold space recently with Osisko Mining Corp. (OSK:TSX) and Queenston Mining Inc. (QMI:TSX); PMI Gold Corp. (PMV:TSX.V; PVM:ASX; PN3N:FSE) and Keegan Resources Inc. (KGN:TSX; KGN:NYSE.A); Andina Minerals Inc. (ADM:TSX.V) and Hochschild Mining Plc (LSE:HOC); and Argonaut Gold Inc. (AR:TSX) and Prodigy Gold Inc. (PDG:TSX.V). Is this a trend?
BK: After the year-long share-price meltdown in the Canadian junior space, a lot of companies have their backs against the wall. A good many gold miners, and other resource companies as well, face depleted cash resources. Plus, it's virtually impossible to raise new money without massive dilution. So stronger companies can pick up great assets for a song.
TGR: In a lot of these cases, they were neighboring companies.
BK: Consolidating plays, consolidating ideas, regional trends or adjacent mineral claims is part of it. When adjacent companies come together, they can reduce their overhead.
TGR: Is that an investable theme in the gold space? Should investors look for companies that are operating in the vicinity of each other, one with significant cash on hand and access to capital and one that perhaps has a promising deposit but is a little low on cash?
BK: Yes. It goes back to the game of Monopoly, where you want to own all the same properties with the same colors so when somebody lands on it, they have to pay you even more rent for the house or the hotel that you built there.
TGR: What are some other junior gold plays you're following, Byron?
BK: I've kept an eye on NOVAGOLD (NG:TSX; NG:NYSE.MKT) in Alaska. NOVAGOLD spun out the Ambler project into NovaCopper Inc. (NCQ:TSX.V; NCQ:NYSE.MKT). It's been a longer, harder slog than a lot of people thought to get these two projects going in Alaska. It can be very frustrating, but they are great assets, run by very solid management. NovaGold and NovaCopper are two nice plays.
I've kept an eye on Argentex Mining Corporation (ATX:TSX.V; AGXMF:OTCBB) in Argentina. The company has had mixed visibility. It pops up, then goes out of sight, and then pops up again. However, I've always liked one main key play, with Argentex: It controls a deposit that's rich in indium. Indium is an absolutely critical electronic metal. It is almost always associated with zinc deposits. The Argentex deposit at Pinguino is rich in sphalerite with a high concentration of indium. It may be among the highest concentrations in the world. From an electronic metals and technology metals standpoint, Argentex is a company to keep watching.
TGR: The indium is basically a sweetener in that play. It's mostly a silver-gold project.
BK: That's the latest viewpoint. As Argentex worked up the base metals, and the associated indium play, it drilled into serious silver and gold assays. How lucky can you get? So yes, I know what you mean about the gold and silver side of Argentex, but then again the world is filled with interesting gold and silver plays. Indium? It's quite uncommon. Indium distinguishes Argentex. Indium makes the Pinguino play that much more developable.
TGR: Argentex has multiple projects. It's not all about Pinguino. It's currently trading at about $0.21/share.
BK: Well, yes, there are several plays with Argentex. But in my view, a small, developing, pre-operational, pre-revenue company, which is burning cash, has to decide how much it wants to confuse investors. What are you? Gold? Silver? Zinc? Indium? Pick something, and be good at it. The "flavor of the month" club is a vanishing business concept in this market. Get with a program, and stick with it. Then, as we've seen with other players, a company can double or triple its stock price inside of a couple of days with the right drill hole.
TGR: What's your advice to precious metals investors as we are heading into 2013?
BK: Investors need to own precious metals on several different levels. Physical metal is wealth protection and wealth preservation over time. Yes, metal prices go up, prices go down. Investors need to understand the concept that gold is money. Metal will hold on to its purchasing power and its value over time. There are historical reasons to own gold as a form of money stretching back over the last 5,000 years at least. Investors have to look at it at that level.
Gold is also part of prudent diversification. When you invest in most financial instruments, you're investing in somebody else's liabilities. If you put your cash in the bank, that's not your cash anymore. It's ones and zeros down at the bank. You won't get the same $20 bill back that you put in. So even a bank deposit is a liability, so to speak.
Stocks and bonds are liabilities. Electronic and paper gold are liabilities. However, if you own physical gold, then you control that asset. Obviously, you have to protect the asset. You don't want to just leave the stuff lying around. But it's your asset, and it retains value over time.
Investors should look at gold on numerous different levels of personal wealth protection, growing wealth over time and diversifying a portfolio. In a sense, just simply the act of owning gold, improves your IQ as an investor because once you have gold in your hands, you will never touch paper money quite the same way. If you haven't ever held a gold bar, or gold coins, in your hand? Well, maybe you don't know what I mean. I suggest you do it. There's no fever like gold fever.
TGR: Thanks for your insights.
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Daily Resource Hunter. He edits two newsletters: Energy & Scarcity Investor and Outstanding Investments. He studied geology and graduated with honors from Harvard University, and holds advanced degrees from the University of Pittsburgh School of Law and the U.S. Naval War College. He has advised the U.S. Department of Defense on national energy policy.
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: Argonaut Gold Inc., NOVAGOLD and Argentex Mining Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Byron King: I personally and/or my family own shares of the following companies mentioned in this interview: None. 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.
