The Gold Report: Over two days, July 14 and 15, the price of
gold fell over $40 per ounce ($40/oz), more than 3%
of its value. To what do you attribute this drop?
Jeffrey Mosseri: I don't think it was a very extraordinary event. Gold has been trading
around $1,300/oz. We see sharp upward and downward movements triggered by,
for instance, something Federal Reserve Chair Janet Yellen
said or a negative report by Goldman Sachs. It looks as if gold will stay in
the $1,300/oz range for a little while. We'll see
which way it breaks out. We believe it's going to break out on the upside.
Douglass Loud: Gold had been running up for a
while, and every so often investors want to take some money off the table.
TGR: How high do you believe gold will
go?
JM: The average sustaining cost of
production for gold is about $1,500/oz. If gold continues to trade below that
level, at some point no new mines will be brought on. Supply and demand
indicates higher prices for gold. At the same time, we're dealing with a
seasonal trading pattern. Usually the position for those commodities tightens
up around September�October. We think this will happen
again this year. Higher prices? Yes. How much higher? We don't know.
TGR: Given that the financing for
junior gold companies collapsed years ago, shouldn't the concomitant shortage
of new supply have led already to higher prices?
DL: Well, there are games going on.
Every once in a while some big bank will say that gold is too high. Then it
goes down. After that, some big bank will say investors should buy gold and
gold goes back up again. Institutions can profit by shorting gold and then
buying it back before it rises in price, or so the conspiracy theorist in me
thinks.
TGR: The world is becoming a more
dangerous place. We have the civilian airliner shot down over Ukraine, civil
wars in Iraq and Syria, Hamas attacking Israel, and Israel striking back, as
well as a burgeoning territorial dispute between China and Japan. As a
result, do you expect a flight to safety by investors?
JM: Actually, we are flummoxed by the
apparent disconnect between what's going on in the world and commodities
prices in general. We think that the reason for this is that the U.S. dollar
is the least dirty shirt in the laundry basket. Investors are fleeing to the
dollar because it's easier and cheaper, but if these hot spots continue to
get hotter, it will almost certainly translate into more gold buying.
DL: Then there's the issue of real
gold versus paper gold. There may be much more paper gold than real gold to
support that paper.
TGR: The traditional argument for gold
bullion is that it is a rare, real good that cannot be multiplied endlessly.
Before gold exchange-traded funds (ETFs), if investors wanted exposure to
gold that wasn't in bullion they had to invest in mining stocks. Do you think
ETFs have resulted in a substantially changed gold market?
JM: For many years the traditional
relationship between gold and gold stocks was that the stocks predicted the
direction the metal would go. This changed with the introduction of ETFs, and
for the last few years, the tail has been wagging the dog.
The ETFs were an
interesting introduction. They have been and will continue to be a very good
way to play gold, but they did result in putting gold stocks out of favor.
Now people are beginning to realize that it is the mining companies that
produce the gold, and they're going to make the profits.
TGR: Historically, the end of a
recession led to big increases in gross domestic product. We've yet to see this
after the post-2007 recession. Why not? Are we now living in a new world of
permanent low growth?
DL: We're supposedly out of a
recession because a bunch of statistics say so, but tell that to the shopping
malls that are one-third empty and to the people who don't know how they're
going to pay for the increases in food and fuel that are no longer included
in the inflation statistics.
JM: Serious economic growth has been
stymied by a rash of new regulations and by the standoff between Congress and
the Obama administration. This disincentivizes capital investment and capital
creation. Most of the stimulus money created from 2008 went to firm up bank
balance sheets and did not get into the economy proper. And so the recovery
has been a lot more anemic than in the past.
Now, however, business
loans are beginning to be made by the banks. Little by little this will
percolate into the economy. And the $8 trillion ($8T) created by the central
banks has to find a home somewhere. We believe this will be reflected in
higher gold prices, and, in fact, higher prices for commodities in general.
TGR: The Financial Times
reported in June that public institutions, central banks mostly, have
invested $29.1T in the markets, mostly the equity markets.
JM: Well, because of continued very
low interest rates, most of the stimulus has gone into improving bank balance
sheets and into the equity markets but not into the economy proper.
TGR: HudBay Minerals Inc. (HBM:TSX;
HBM:NYSE) has
taken over Augusta Resource Corp. and Osisko Mining Corp. was taken over by
Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) and Agnico-Eagle Mines Ltd.
(AEM:TSX; AEM:NYSE). Can we expect more such buyouts?
JM: Yes. What's interesting about
recent takeovers is that they were initiated as hostile bids. This is very
unusual for Canada, which is a much more gentlemanly arena than America,
Britain or Australia. We believe it's a question of value. Mining assets are
now cheap, and well-financed companies can buy good properties cheaply.
DL: We were in a meeting the other day
with some executives whose company almost went under simply because their
project took longer than expected. The company kept having to make payments
on its equipment to keep its place in line, and pretty soon it used up all
its cash. Time can kill a smaller business. And so mining companies can be
bought on the cheap because they have no money and can't raise it.
TGR: The Osisko buyout has resulted in
the creation of a new royalty company called Osisko Gold Royalties Ltd.
(OR:TSX), which
began trading at the beginning of June at $13.50/share and has since risen to
$15.95/share. Why does the market value this company so highly?
DL: Because it has a royalty on the
Canadian Malartic gold mine in Quebec. So the company is like a mine without
the mine.
JM: Streaming companies are very
attractive so long as they finance good projects. Investors see this stream
of cash flow, and they love it. It's less risk with more visibility.
TGR: Osisko Gold Royalties has $157
million ($157M) in cash. How big a player does it intend to become?
JM: Clearly it will be a major player.
The question is, will it buy other existing streams or will it buy other
projects that will stream later? I think it will do both.
TGR: HudBay now has Augusta. Its Reed
copper mine in Manitoba is now in production, and its Constancia copper mine
in Peru is scheduled to begin commercial production in the second half of
2015. How do you rate this company?
JM: Very positively because we see its
production going up radically in 2014�2015. Copper production should
increase by over 50% next year. We happen to be very positive on copper. We
also think HudBay will increase its gold production. And Augusta may not be
its last acquisition.
TGR: How likely is it that HudBay will
be able to move forward its newly bought Rosemont copper project in Arizona
within a reasonable amount of time?
JM: All these big projects come down
to two things, permitting and financing. The financing part should be easier.
We think HudBay will move it along at a good pace, and that it will overcome
any permitting hurdles.
DL: Otherwise, there would have been
no point in HudBay buying it.
TGR: How ambitious is HudBay? How big
does it want to be?
JM: HudBay has extremely good
management and will operate within its financial constraints. Other than
that, I think the company will grow as big and fast as it can.
Talking of permitting,
after 10 years, we feel that Polymet Mining Corp. (POM:TSX;
PLM:NYSE.MKT) is
very close to obtaining its permits and its financing, and will finally be
going into production on its huge copper-nickel deposit in Minnesota.
TGR: The Reed copper mine is owned 30%
by VMS Ventures Inc. (VMS:TSX.V). After VMS pays back HudBay and
the cash flow from Reed begins to accrue, how transformative will this be for
VMS?
DL: The cash flow will be very
helpful, but the company shouldn't run out and make any acquisitions
tomorrow. It's going to take a while for it to receive actual cash from that
project versus accounting entries of cash flow. We like some of its other
projects. One of them is in Greenland, and that's very interesting, but it is
Greenland.
TGR: You're referring to the fact that
VMS owns 22% of North
American Nickel Inc. (NAN:TSX.V) and its Maniitsoq nickel sulfide project in Greenland. Rick Mills told The Gold Report that he thinks the world of this project and that VMS was quite
clever to get a piece of it.
DL: We think it's clever, too. Right
now everybody's worried about gold and silver, but they should be paying
attention to copper, nickel, zinc and molybdenum. One of these days these
metals are going to tap us on the shoulder and say, "Remember us?"
TGR: In a previous interview, you talked a fair amount about
Yukon mining. Are you still keen on that region?
DL: Yes. There are those who feel that
expenses went through the roof, which they kind of did, but we still like
some of our companies up there. For instance, Alexco Resource Corp. (AXR:TSX;
AXU:NYSE.MKT) and
its Eastern Keno Hill Silver District. The company is run by some really
smart guys. For example, Alexco used to pay Air Canada about $600,000 yearly
to fly its workers in and out. It has solved that problem, and it has gotten
other costs under control as well. Additionally, there's a lot of zinc up at
Keno Hill, and if zinc comes back, it will be a very profitable project.
When I was in the Yukon a
while back, someone told me jokingly that the Yukon ought to annex northern
British Columbia (B.C.) because it was more like the Yukon than B.C. There
are a lot of good projects in that region, like Pretium Resources Inc. (PVG:TSX;
PVG:NYSE), with
its huge high-grade gold discovery that's just waiting to be taken advantage
of. And there is Western
Copper and Gold Corp. (WRN:TSX; WRN:NYSE.MKT) and its Casino project, which is going to
produce copper at a very low cost. Any company that can accomplish this will
do very well because the need for copper isn't going to go away.
TGR: What is the status of Alexco's
Bellekeno silver mine?
DL: I think it's coming along very
nicely. And Alexco has found a wonderful new site called Flame & Moth.
Unfortunately, it's right under the mill it just built, so it is building the
entrance to this new mine right next to the mill. The company will have two major
production areas going. If it produces, for the sake of argument, 3 million
ounces (3 Moz) of silver a year, it could well do 6 Moz of zinc.
In addition, Alexco has
its environmental recovery division. There are an awful lot of big companies
that have bought a lot of little companies over the years, and they've got a
whole bunch of little mines that maybe weren't cleaned up the way they should
have been. Alexco is poised to profit from that.
TGR: Which gold juniors do you like in
Nevada?
DL: We've always liked Midway Gold Corp. (MDW:TSX.V;
MDW:NYSE.MKT) and
its Pan project because it's plain and simple. You take it out of the ground
and put it on the pad. I also like Paramount Gold and Silver Corp.
(PZG:NYSE.MKT; PZG:TSX) because it owns the Sleeper gold project. It was hugely successful
before and could be again.
JM: We also like Allied Nevada Gold Corp. (ANV:TSX;
ANV:NYSE.MKT).
TGR: Midway just closed a $27.5M
bought-deal financing. Pretty good for a junior these days, no?
JM: It is and speaks well to the
probability of it getting into production and cashing in.
TGR: Moving on to South America, are
you still fond of Exeter
Resource Corp. (XRC:TSX; XRA:NYSE.MKT; EXB:FSE) and its Caspiche project?
DL: We still like Exeter a lot.
TGR: From June onward there has been a
rather significant appreciation in its share price.
JM: That's because Exeter pared back
its Caspiche project from a major copper-gold porphyry, whose capital
expenses would be around $4.5 billion ($4.5B), to a $200M capital expense
(capex) oxide-only project, which stands on its own two feet and should be
very profitable. Then, if commodity prices rise enough to attract capital for
large projects once again, the underlying porphyry will still be there for
further development.
TGR: What else interests you in South
America?
DL: Because of the government of
President Cristina Kirchner, Argentina has rather taken itself off the grid.
If she is replaced with a more mining-friendly leader, then we like Yamana,
which bought Exeter's Cerro Moro project. We would also revalue McEwen Mining Inc. (MUX:TSX;
MUX:NYSE ) and Goldcorp Inc. (G:TSX; GG:NYSE).
JM: A better regime would also benefit
Barrick Gold Corp. (ABX:TSX;
ABX:NYSE) and Pan American Silver Corp.
(PAA:TSX; PAAS:NASDAQ).
TGR: Argentina has been troublesome for
business ever since Juan Per�n first came to power in 1946.
Does there come a point when mining companies decide to write off a country
once and for all?
JM: In the end, greed trumps grief.
DL: And don't forget the grades in
those Argentine projects are extremely high, which should make them very
profitable.
TGR: Are there any other precious
metals companies you'd like to mention?
DL: In Mexico, there's First Majestic Silver Corp.
(FR:TSX; AG:NYSE; FMV:FSE), which is well run and keeps finding more silver.
JM: It has very high-quality
management, and the company always seems to find a way around whatever
problem is presented.
TGR: You are interested in rare earths
as well. Which particular company do you like?
JM: Texas Rare Earth Resources Corp.
(TRER:OTCQX) and
its Round Top project in Texas.
TGR: What makes this special?
JM: It's a big hill that's all rare
earths and ready to go. The capex is only $292.7M with a mine life of 20
years. The pre-tax net present value is $1.47B, and the internal rate of
return is 69%.
DL: The company has a very good share
of heavies, which is quite important. It's in America. It is strategic. It
knows how to do it, and it's relatively easy. It's a big mountain, and it
will go right in there and take it out.
TGR: The current bear market in precious
metals goes back to April 2011. When will it end?
JM: We think it may have already
ended. The recession has cleaned out a lot of doubtful companies. The
survivors with really good projects will either be bought out or get
financed. We think that's going to start to happen in the very short term.
TGR: How long will the trend have to
keep moving upward before we can say that we're now in a bull market?
JM: Metal stocks did extremely well
from 2002 to 2010. Then there was a correction. We think that we are
preparing for the next upward move, which should last for several years.
There is a tightness in various metal markets, which will mean higher metal
prices. This could lead to more mines going into production in the future.
TGR: When you consider your favorite
companies, which qualities do they share?
JM: Good, solid management is one.
Good deposits and good grades are another, and either being in production or
being close to production is a third.
DL: And we're very sensitive to
country risk. I mean, we're not going to touch the best mine in the world, if
it's in the Congo.
TGR: Jeff and Doug, thank you for your
time and your insights.
Douglass
N. Loud
joined Greystone Asset Management at its founding in 2005 and has been senior
managing director of Axiom Capital Management Inc. since 2009. Prior to that,
he was with Murphy & Durieu, where he served as executive director of the
Private Clients Group. Loud has over 35 years of investment management and
securities industry experience. He holds a degree from Yale University and a
law degree from the University of California, Berkeley.
Jeffrey
N. Mosseri
established Greystone Asset Management in 2005 and became a director of Axiom
Capital Management Inc. in 2009. He was a stockbroker and investment manager
at Goldsmith & Harris for 20 years. Mosseri also worked as a stockbroker
and investment manager for Carnegie Capital, the investment advisory division
of Prescott Ball & Turben, where he ran the international arbitrage
division and developed the gold mining research and investment department.
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DISCLOSURE:
1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC,
publisher of The Gold Report, The Energy Report, The Life Sciences Report
and The Mining Report, and provides services to Streetwise Reports as
an independent contractor. He owns, or his family owns, shares of the
following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of
Streetwise Reports: North American Nickel Inc. and Pretium Resources Inc.
Allied Nevada Gold Corp. and Goldcorp Inc. are not affiliated with Streetwise
Reports. Streetwise Reports does not accept stock in exchange for its
services.
3) Jeffrey Mosseri: I own, or my family owns, shares of the following
companies mentioned in this interview: Alexco Resource Corp., Exeter Resource
Corp., First Majestic Silver Corp., Goldcorp Inc., McEwen Mining Inc. and
Pretium Resources Inc. I personally am, or my family is, paid by the
following companies mentioned in this interview: None. My company has a
financial relationship with the following companies mentioned in this
interview: None. The fund has holdings in the following companies mentioned:
None. I was not paid by Streetwise Reports for participating in this
interview. Comments and opinions expressed are my own comments and opinions.
I had the opportunity to review the interview for accuracy as of the date of
the interview and am responsible for the content of the interview.
4) Douglass Loud: I own, or my family owns, shares of the following companies
mentioned in this interview: Alexco Resource Corp., Exeter Resource Corp.,
First Majestic Silver Corp., Polymet Mining Corp. and Western Copper and Gold
Corp. I personally am, or my family is, paid by the following companies
mentioned in this interview: None. My company has a financial relationship
with the following companies mentioned in this interview: None. The fund has
holdings in the following companies mentioned: None. I was not paid by
Streetwise Reports for participating in this interview. Comments and opinions
expressed are my own comments and opinions. I had the opportunity to review
the interview for accuracy as of the date of the interview and am responsible
for the content of the interview.
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