Eric Coffin: Is Market Sentiment Shifting to Gold?

The Gold Report: Quite a few analysts believe 2015 will be a year of great economic volatility, as foreshadowed by what happened with oil in 2014. Do you agree?

Eric Coffin: I do think 2015 will be pretty volatile, with the potential for nasty financial surprises. We've already seen bond yields go negative in Germany, France and elsewhere, and we could see big moves in and out of different asset classes.

TGR: Could the oil price collapse be a leading indicator of a global economic slowdown?

EC: That's an oversimplification. Economic growth in China has slowed and will probably slow some more. And China is the 800-pound gorilla of commodity consumption. Estimates for worldwide growth in 2015 have recently come down but not enough to justify the drop in the oil price.

The main reason for the oil price crash is oversupply. U.S. supply has grown massively due to fracking and horizontal drilling, while Libya and Iran have both added a million barrels a day. These events have disrupted the equilibrium.

TGR: Mario Draghi, president of the European Central Bank (ECB), has famously boasted he will do "whatever it takes" to save the euro. Greece will hold an election Jan. 25, and the polls tell there is a good chance the new government will reject its current arrangement with the ECB. If this occurs, can the euro be saved?

EC: The euro could survive a "grexit." The rescue package for Greece put together in 2012 essentially shifted all government debt from public and private banks to the International Monetary Fund, the European Rescue Fund and other transnational institutions. Together, they could handle a $300 billion ($300B) write-down. Not easily, but they could manage it.

The real danger for the euro would occur should Greece prosper following a massive devaluation of its currency. Then countries like Italy, with much bigger debt loads, would want out as well, and the euro might be finished.

TGR: The next ECB monetary policy meeting is in Frankfurt on Jan. 22. Will the Germans go along with the launch of the quantitative easing (QE) program Draghi is rumored to unveil there?

EC: Draghi can't just jawbone any longer. He's got to do something, or the market will stop taking him seriously. But I'm not sold on the idea that the Germans will agree to any QE program big enough to impress the market. I think it would take a trillion-euro-sized program to impress the market. Hard to believe the Germans will go along with that.

TGR: You wrote recently that "gold is the world's second strongest major currency." Are you surprised that it has recently outperformed the U.S. dollar?

EC: Not really. I've been waiting quite a while for this to happen. Most market strategists do not view gold as a currency but only as a commodity. And their rule is: dollar up, gold down. But when you do view gold as a currency, you see that compared to many other currencies, including the euro, ruble, yen and rupee, it has been a good place to be in over the last year.

We may be moving to a new model, whereby gold has a weak correlation to the U.S. dollar, or perhaps no correlation at all.

TGR: Is there anything to the recent stories that Vladimir Putin might deal with the oil-induced threat to the ruble with the creation of a new ruble, one backed partially by gold?

EC: Putin clearly likes bullion. The Russian central bank has bought a lot of it in the last two to three years. There's a certain logic to a gold-backed ruble because the ruble is now effectively a petrodollar, and the oil price collapse has been disastrous for Russia. It's far more likely that Putin would sell U.S. dollars rather than gold.

TGR: What are your 2015 forecasts for the prices of gold and silver?

EC: I'm still deciding, but if this reversal in the gold-dollar correlation can be maintained, $1,300 to $1,350 per ounce ($1,300–1,350/oz) is a fairly reasonable minimum target. If things blow up in Greece, it's tougher to call because that would be tough on the euro and good for the U.S. dollar, but it would also drive more people into other asset classes, such as gold. If gold can get to and through $1,350/oz, silver should be able to get to $22–24/oz at least.

A zero-yield bond world would be good for gold because the traditional argument against gold—it doesn't pay interest—would no longer have any force.

TGR: For several years, the gold-silver price ratio has been at a traditionally high 65. Recently, this has risen to 75. Will this trend reverse?

EC: You can probably count on the fingers of one hand all the silver miners making money today. There are few silver projects being financed to production, and the potential for a fall in silver production is greater than that for gold. It won't take many investors to be long on silver to drive the price up $5–10/oz.

TGR: You told The Gold Report in September, "If gold stays at the $1,200–1,250/oz area for an extended period, there will be mine closures." Since then, the price of oil has fallen 50%. How does that affect your calculation?

EC: Oil at $50 per barrel will have a big, positive effect on bulk-tonnage operations, especially ones that run off generators. I've talked to a couple of producers recently about this, and the consensus is that it reduces their cash costs by about $50 to $75/oz. These savings will allow some of these operations to hang on a little bit longer. The strong U.S. dollar helps miners outside the U.S. as well, because so many of their costs are in local currencies.

TGR: You have a particular interest in Yukon gold projects. Doug Loud and Jeff Mosseri told The Gold Report last month that the new Yukon environmental bill has created a regulatory nightmare, with potentially grave consequences for the future of mining there. What's your view?

EC: If you're in a part of Yukon with settled native land claims, and if you can get the local bands onside, that clears a lot of the hurdles at the federal level. If you're not, you've got a big problem. The western half of the Yukon has settled claims.

TGR: Talk about some Yukon gold projects you follow.

EC: I'll mention three. The first is Kaminak Gold Corp.'s (KAM:TSX.V) Coffee project. The company put out a pretty good preliminary economic assessment (PEA) in June, based on $1,250/oz gold. It forecast a post-tax net present value (NPV) of $330 million ($330M) and a post-tax internal rate of return (IRR) of 26.2%, with 1,859,000 ounces (1.859 Moz) gold produced over 11 years at an all-in cost of $688/oz.

Kaminak is working toward a prefeasibility this year. The company has some pretty major backing from a couple of big players in the industry, which will carry it through 2015. Coffee has a really good shot at being one of the few projects that actually gets to production in this environment.

TGR: The company announced good results from its Kona North discovery in October, including 3.12 grams per ton (3.12 g/t) gold over 29 meters (29m) and 4.85 g/t over 16m. Could Kona North be integrated into the general mining plan?

EC: That's basically the idea. The site is pretty much one big plateau; everything could be operated from a central site. Kaminak is making a priority of Kona North to maximize ounces in near-surface oxides. This would eliminate the expected drop-off in gold production in years three and four of the mine life, which in turn would maximize the Coffee's NPV and IRR.

Kaminak is not out of targets yet at Coffee, either. It doesn't need a massive increase in its resource base, but an additional 500,000 near-surface oxide ounces would have a big impact.

TGR: And what is the second Yukon project?

EC: Victoria Gold Corp. (VIT:TSX.V) and its Eagle gold project. I don't follow the stock in Hard Rock Analyst (HRA) but I did visit the project last fall and reported back to subscribers on it. The company put out a feasibility study in 2012, based on $1,325/oz gold. It forecast a pretax $273.1M NPV, a 24.1% IRR and an initial capital expenditure (capex) of $382.8M. Proven and Probable resources are 2.3 Moz, with an all-in production cost of about $600/oz.

I think what Victoria is doing now is quite smart. The company has made some changes, rethought its geological model and generated some new targets. Some of these targets have yielded better-grade, near-surface material. Like Kaminak, Victoria is focused on discovering new near-surface zones that would have the biggest impact on project economics. If Victoria can create two or three zones of that type, it can bring the IRR and the NPV up, especially the former. But the economics aren't bad right now.

The issue Victoria has, mirrored by so many other juniors, is trying to finance the operation without diluting its shareholders into nothingness. I suspect that the perfect scenario for Victoria would be to make a deal with a major that spends the money henceforth and earns most of the project. Or Victoria could sell it at a good price.

TGR: And the third and final Yukon miner is?

EC: Rockhaven Resources Ltd. (RK:TSX.V) and its Klaza project. I know the management quite well. It's run by the same people that run Archer Cathro & Associates, the premier geological consultants in Yukon and the group behind ATAC Resources Ltd. (ATC:TSX.V). Klaza's geological model has changed over time. I've seen the latest version in person, and it's a carbonate base metal-type deposit, rather like Continental Gold Ltd.'s Buriticá project in Colombia or the Porgera deposit in Papua New Guinea.

Rockhaven has relatively narrow high-grade vein sets that display bonanza grades in some sections. The question is whether a couple of hundred meters of bonanza grades up and down dip, what you would expect in an epithermal system, will give it the ounces it needs to make Klaza economic. Carbonate base metal-style deposits can have bonanza zones with much greater dip extent and room for higher grade ounces.

The final hole of the 2014 drill program was a deep hole at the Western BRX zone designed to test this proposition. It intercepted the zone 200m below the nearest high-grade intercept and returned 1.37m grading 16.3 g/t gold and 1,435 g/t silver. Based on that hole it appears the company was right to rethink its model. The potential for 1–2 Moz of high-grade material is good. If Rockhaven can put together a resource that's 10–15 g/t underground and get to it without having to put in a shaft, this project will have good numbers.

TGR: How does Rockhaven stand for cash?

EC: It has about $1M. Strategic Metals and Doug Eaton, managing director of Archer Cathro and a consultant to Rockhaven, have written very big checks and seem willing to do so again. Strategic has lots of cash and is already the largest shareholder in Rockhaven, and I think there is a lot of outside interest in the company. Rockhaven would prefer to raise money externally, but not at $0.17 a share, so some sort of merger could happen.

TGR: Moving directly south, which explorer do you like in British Columbia?

EC: Colorado Resources Ltd. (CXO:TSX.V). Its stock rose tremendously a few years ago based on its North ROK property, but then it got creamed. The company's new property, KSP, makes it one to watch again. There's incredibly high-grade material there and in the area—Comino had one of the highest-grade gold mines in the world there. Colorado is still figuring out KSP with mapping and geophysics, but there are a number of good high-grade targets and a couple of porphyry targets as well. The company has $3–4M in the bank, so it will be able to drill this year. Colorado is working on a mountain, but the local infrastructure is much better than it was a generation ago, the last time the area was really active.

TGR: What do you follow in the Caribbean?

EC: Precipitate Gold Corp. (PRG:TSX.V) in the Dominican Republic is my favorite in the region. Note that I'm a founder of the company and one of its larger shareholders.

TGR: What is the significance for the company's future of its recent exploration at Ginger Ridge?

EC: Ginger Ridge has done great. It's located in the Tireo gold belt, which I think is one of the most prospective stretches of geology around. GoldQuest Mining Corp. (GQC:TSX.V) has a couple of recent discoveries that total over 3 Moz and Unigold Inc. (UGD:TSX.V) has a separate 2 Moz discovery a bit farther to the north.

I really like this belt of rocks. Precipitate discovered the Ginger Ridge target and carried out a small drill program in the fall on an initial induced polarization chargeability high target. Precipitate reported a nice discovery hole from this small program: 4.5 g/t over 18m including 13.4 g/t over 5m. Precipitate recently completed an enlarged geophysical program. That has extended the chargeability anomaly by 800m, more than doubling the size of the target. The discovery hole was near the northern end of the former survey grid. Significantly, the anomaly is now much larger and stronger and the best portions are still to be drilled. I think Precipitate is well positioned to really light things up this year.

TGR: How do you rate the prospects of Precipitate's neighbor, GoldQuest?

EC: GoldQuest has a good discovery at Romero, which hosts over 3 Moz, and there are a number of untested or lightly tested targets it will work on this year. The initial PEA was a disappointment due to the high capex, though the cash cost numbers for gold were good. After the copper and silver credits, the all-in production cost is a fantastic $353/oz gold, but the IRR is only 19.7%.

I think GoldQuest will improve the economics. The people who run the company, Bill Fisher and Julio Espaillat, know the Dominican Republic. They took a company called GlobeStar, which had a copper deposit with some gold, optimized it and put it into production. It was ultimately taken out for about $3.50 a share by Perilya Ltd. (PEM:ASX). Improved economics for Romero and a new discovery would go a long way toward getting GoldQuest back in the limelight.

TGR: Let's talk about copper. Copper prices reached a multiyear low recently.

EC: Pretty much what I expected. There have been problems with oversupply, but there's potential to go back into deficit a year or two out. I think copper will ultimately go quite a bit higher, but I won't be surprised if it spends most of 2015 between $2.50 and $2.80 per pound ($2.80/lb).

TGR: Which copper project do you follow?

EC: Excelsior Mining Corp. (MIN:TSX.V), which has the 3.6 billion-pound Gunnison in-situ leach project in southern Arizona. This is essentially the same technique used to mine uranium in several areas and has been used successfully for copper by a couple of large copper producers in the region. The geological characteristics needed to make in-situ copper leaching work aren't that common. Southern Arizona is one of the few places that has them.

TGR: Curis Resources had an in-situ project in Arizona called Florence, right?

EC: Correct. Curis was just taken over by Taseko Mines Ltd. (TKO:TSX; TGB:NYSE.MKT), which is leading the way through the permitting process. However, Gunnison should be a lot easier to permit than Florence because the latter has a town virtually sitting on top, while Gunnison is in an unpopulated area with its own aquifer. Gunnison's logistics are extremely good. It's literally right next to the highway.

The biggest disadvantage of in situ is that the recoveries are not as high as you get with a sulphide system and open-pit heap leach. On the other hand, an in-situ project can be done incrementally by relatively few people. The initial capex is low: $285M. Excelsior is doing metallurgical studies now, but if the work proceeds as predicted by the prefeasibility study, the economics will be quite strong: a pretax NPV of $1.24B and a 59.7% IRR. Cash costs would be on the order of $0.50-0.70/lb. I don't think anybody's cheaper than that.

TGR: How is Gunnison's permitting going?

EC: Excelsior has some of the early permits. Hydrological studies will go on for most of 2015. Excelsior has very good relations with the local communities and politicians. The state regulators seem to be on board. Permitting should be completed in 18–24 months, probably sooner rather than later. Excelsior may set up a small test operation that generates its own data as part of the permitting process.

TGR: Finally, let's talk about uranium. Late last year, people in the industry were excited because the spot price of U308 went from $30/lb to $42/lb. Since then, the price has fallen to $35.50/lb. How does that affect the prospects for explorers?

EC: It doesn't help. It was easier to raise money in the fall than today. The uranium price has fallen in part because it is traded as an energy commodity, and oil and natural gas have fallen as well. It doesn't make a lot of sense for uranium to trade with oil, but there you are.

I'm still bullish on the sector. The Germans have said they want all their nuclear reactors off line, but Japan intends to get as much of its reactor fleet back on line as possible. I think approvals for restarts will accelerate in Japan. Most important, China is going to build a great number of reactors over the next 20 years. I got interested in uranium again last summer when the spot price fell to $28/lb. At that price, producers were going to lose money; there would be mine closures, and there was no way we would see new production. It had nowhere to go but up. But a fully bullish scenario will take some time to unfold.

TGR: Which uranium project do you follow?

EC: Roughrider Exploration Ltd.'s (REL:TSX.V) Genesis project in Saskatchewan. I'm good friends with cofounder and CEO Scott Gibson and chairman Dale Wallster, and I'm an adviser to the company. Dale was the driving force behind Hathor Uranium, which was taken out by Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) for $654M. Dale is also a director of Kivalliq Energy Corp. (KIV:TSX.V) and had a hand in selecting the Genesis area when Kivalliq staked it. Portions of the property were previously held by Hathor. Roughrider is earning an 85% interest in Genesis from Kivalliq.

Dale's reasoning was that the recent discoveries in and around the Athabasca Basin weren't made in Athabasca Basin rocks themselves but rather in sub-basement rocks. Hathor's Roughrider deposit is a good example, as are the discoveries made by Fission Uranium Corp. (FCU:TSX) and NexGen Energy Ltd. (NXE:TSX.V). Roughrider generated seven or eight good-looking targets last year. It's an enormous property, so the company can work in two or three areas and maybe bring in partners. Roughrider has found boulders with up to 1.5% U308. The company has a really good share structure and shareholder base.

TGR: How does it stand for cash?

EC: Roughrider is in pretty good shape with about $1.5M, enough to take it to the end of 2015, depending on how large the next exploration budget for Genesis is.

TGR: The first big mining conference of the year, the Vancouver Resource Investment Conference, began Jan. 18 in Vancouver. What's the mood of investors going to be, and what should it be?

EC: I'm told that registrations are about the same as 2014, which was not great but not horrible. The last good year for the mining industry was 2011, and investors are pretty tired of being smacked upside the head.

When you look at the world economy, there's no shortage of worries. Anyone expecting 2014-style returns in New York in 2015 will be sorely disappointed. There's nothing to be had in the bond market. So where can investors get returns? There are a lot of very inexpensive mining companies out there. Even small increases in the gold price, coupled with falling energy and currency costs, mean they could put up pretty good numbers in 2015. In the last month, gold was up $40/oz, but most of those companies were up 50%. The mining sector has the best leverage because it's the sector that's been slapped down the most.

On the subject of conferences, HRA is once again cohosting the Toronto Subscriber Investment Summit along with Resource Opportunities (Tommy Humphreys) and the Oil and Gas Investments Bulletin (Keith Schaefer). It's happening the day before the Prospectors and Developers Association of Canada (PDAC) conference, on Saturday, Feb. 28, at the Hilton Hotel. Some of the companies that I mentioned in this interview are presenting at our event—Continental Gold, Precipitate Gold and Excelsior Mining. For more info or to register to attend, go to www.subscribersummit.com. Seating is limited and we usually sell out pretty quickly.

TGR: Eric, thank you for your time and your insights.