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.