The Gold Report:
After flirting with $1,300 per ounce ($1,300/oz)
in January, gold has fallen to around $1,200/oz. What happened?
Olivier Tielens: Deflationary
forces are still leading the game. There's a 50% chance that we may go to a
new low, very probably the final bottom, and a 50% chance gold will trade
throughout 2015 in a tight range.
TGR: A few years ago, gold
rose tremendously after the U.S. Federal Reserve began quantitative easing
(QE). Since then, further rounds of QE from the Fed and, more recently,
massive QE from Japan and the European Union have not buoyed the price of
gold. Why not?
OT: QE is not working.
Europe is in a depression. The velocity of money continues to decrease and is
now lower than for decades. People are hoarding cash, and that's
deflationary. Zero and even negative interest rates continue, and that could
help gold because even though gold doesn't pay interest, at least bullion
owners aren't losing money by holding it.
Inflation will arrive after confidence in the central
banks fades. Investors will then want out of the U.S. dollar and into gold.
When will that happen? Nobody knows, but it always comes like a thief in the
night. Or we could have another black swan event, but this is less likely
than in 2008 because the powers that be have learned from that, and there is
now so much liquidity in the system.
TGR: QE and zero interest
rates are not helping gold, but they are highly correlated to growth in the
broader equity markets, with the S&P 500 continuing to hit record highs.
How long can this last?
OT: I can see the Dow
Jones hitting 30,000. All that liquidity has to find a home. So I'm bullish
on the broader equities.
TGR: So, if we haven't yet
seen a bottom for gold bullion, would the same hold for gold equities?
OT: They go hand in hand.
I told people at the Vancouver Resource Investment Conference last month that, despite the general bullishness, I was not
particularly impressed by the equity gains following the end of tax-loss
selling in December. One of the best leading indicators of the last 14 years
since the bull market started was that a rise in shares always preceded a
rise in bullion. So, if we had reached the bottom, gold producers should have
realized much bigger share increases.
That said, the price of gold has increased. And the
margins of the gold producers are rising for two reasons. First, the price of
oil has been cut in half. Second, pretty much every currency has
fallen against the U.S. dollar, and most of the world's gold is produced
outside the U.S.
TGR: The gold-silver price ratio, which had been at around 65 for
several years, recently advanced toward 80. It has now declined to about 71.
What are the prospects for silver, and how will the gold-silver ratio change?
OT: I'm bullish on silver. Of course, most of those who are bullish
on gold are bullish on all precious metals. But I think we are heading toward
a bubble phase in gold, and when gold becomes too expensive, investors will
buy silver instead.
Another reason to be bullish on silver is that it is both a monetary metal
and an industrial metal. About 55–60% of silver is bought for industrial use.
And industrial demand is pretty inelastic because the cost of silver in
products is such a small part of total production costs.
Growth in the demand is to be expected in some segments of silver as an
industrial metal, so the ratio of 55% of silver going to industrial
applications will go on for the foreseeable future, which then doesn't leave
too much for when investment demand comes back.
TGR: It has been the received wisdom for several years that
institutional investors are not interested in gold and silver. Has this
changed?
Since then, many banks have said they'll put gold on the agenda for their
next allocations. I will be meeting with several chief economists and bank
CEOs in the next few weeks. They want to know more, and I want them to be
prepared for gold's next bull run. Gold needs buyers at $1,200/oz, at
$1,600/oz and again at $2,000/oz. In the long term, I think gold will end up
much higher than that.
TGR: So the European money men are no longer so bullion-averse, but
what about gold equities?
OT: I think we'll need to wait for the next bull run in gold
equities for European investors to show much interest beyond the usual
suspects. The mainstream financiers I talk to will have one or two majors and
one or two royalty companies, usually Franco-Nevada
Corp. (FNV:TSX; FNV:NYSE) and Silver Wheaton
Corp. (SLW:TSX; SLW:NYSE).
Canadian financiers are different. You see it in the coverage. Most of the
producers have coverage from each and every Canadian bank and Canadian
brokerage house. In Europe, coverage is restricted to 5–10 precious metals
stocks, and that's because of demand from some clients. European investors
live in a big cocoon, but that will change when gold goes mainstream.
TGR: I notice that several of the companies you follow are project
generators. What do you like about that model?
OT: It's a matter of risk versus reward. The project generators
have joint-venture (JV) partners that spend the money and do the heavy
lifting of advancing projects. Risk is thus spread over several potential
discoveries and in some cases over several mining jurisdictions. Most project
generators have cash, as well as tight share structures, which means they can
raise money without too much dilution.
TGR: Which project generators are your favorites?
OT: Midland
Exploration Inc. (MD:TSX.V), Strategic
Metals Ltd. (SMD:TSX.V) and Riverside
Resources Inc. (RRI:TSX.V).
I'll start with Midland. This is a well-run company with cash, access to
cash and, even in this market, 10 active JVs, which is remarkable. Midland
has big partners, like Teck Resources Ltd. (TCK:TSX; TCK:NYSE) and Agnico
Eagle Mines Ltd. (AEM:TSX; AEM:NYSE). It is operating in Quebec, a good
jurisdiction, with proven people and with 10,000 meters (10km) of drilling
scheduled for this year, which is, of course, paid for with other people's
money. Midland has good exposure to discovery.
TGR: What do you like about Strategic?
OT: This company has pretty much the most experienced team in the
Yukon. This is a very nice risk-reward situation as Strategic's market cap is
slightly less than its cash in hand. The company also has interests in
several spinoffs that have good potential, companies such as ATAC Resources
Ltd. (ATC:TSX.V), Rockhaven Resources Ltd. (RK:TSX.V) and Silver Range
Resources Ltd. (SNG:TSX.V).
All three of those companies have discoveries, and Strategic has the cash
to keep its stakes when those three raise money. This is not a tenbagger
situation tomorrow as they're not yet producing at today's low prices, but
when the market comes back, there will be a lot of value in the projects
Strategic will keep, the projects it will JV with other companies and its
spinoffs.
TGR: What do you like about Riverside?
OT: Riverside has three company-owned gold and silver projects in
Mexico, and four JV projects there. It has strategic alliances with
Antofagasta Plc (ANTO:LSE) and Hochschild Mining Plc (HOC:LSE). It's a
well-run company with a good share structure and cash in the bank. It's
probably a little less active than Strategic and Midland, but again it's a
nice risk-reward situation with good potential for discoveries and exposure
to higher gold and silver prices.
TGR: Riverside Resources is in Mexico, as are many of the companies
you follow. What makes Mexico a good jurisdiction?
OT: Mexico has historic core strengths in mining. It has the
resources: the gold and the silver. And it has the people, the investment,
the infrastructure and the expertise. Seven or eight years ago, there were
over 200 Canadian juniors active in Mexico. We are seeing less activity than
before because of the new royalty regime, but this is a global problem. When
governments want more revenue, they go after the mining companies. We've seen
this most recently with Guatemala and Zambia.
TGR: Let's talk more about jurisdictions. What's your philosophy in
this regard?
OT: We look to spread country risk. We like Canada first, then the
U.S. and then parts of Europe. As a European, I have fewer problems with
Africa than Canadians do. Many Canadians would never consider investing in
companies that operate in Africa, and that is not the wisest course. Some
countries there have risk no higher than in Central or South America.
For all the talk of the coup in Mali, there's never been a gold mine there
that has stopped producing for even one day. Mali gets 20% of its revenue
from mining, and the plan is to raise that over the next decade to 40%. I
think Mali is back on track.
I'm more cautious about Burkina Faso because unlike Mali, which has two
centrist parties, Burkina Faso is threatened by the rise of extreme leftists.
Should they come to power, we're likely to see a new mining code or much
bigger royalties. We could end up with mining suffering for several years
before the new regulations are reversed. This sort of thing is always
happening in Africa.
TGR: Returning to Mexico, which is your favorite gold producer
there?
OT: We're long-term supporters of Timmins Gold
Corp. (TMM:TSX; TGD:NYSE.MKT), which announced record production for
2014: 122,000 oz (122 Koz) gold equivalent. In December, the company bought
Caballo Blanco from Goldcorp Inc. (G:TSX; GG:NYSE). That was a smart move. If
Timmins can get that permitted, say in the next year, that would add
production of 90 Koz per year. In addition, Timmins has recently announced
good discoveries on its land adjacent to its San Francisco mine: 1.29 grams
per ton (1.29 g/t) gold over 33.9 meters (33.9m), 5.52 g/t over 10.2m and 8
g/t over 14m.
So Timmins looks to be able to increase production and reserves, while
lowering cash costs. This will have a double effect on its bottom line. As
suggested above, the company has much exploration potential on these two
properties because little of it has been explored. It has eight other
properties in its portfolio, which results in a pipeline of years of organic
growth. And this is a company that has proved it can deliver. Timmins Gold's
all-in cash cost guidance for 2015 is $800–850/oz.
Timmins announced very recently that it would take over Newstrike
Capital Inc. (NES:TSX.V), which gives it a superb pipeline if the deal
gets confirmed. Indeed, with Newstrike's Ana Paula project, Timmins can add
substantial production at even lower cost than what it produces at today.
Clearly for us it is a winner down the road, led by a superb team that
managed to go into production in 2009, just after the financial crisis, and
so far only has had quarters with positive cash flow.
TGR: What's your favorite silver producer in Mexico?
OT: Great
Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT) is a good silver producer
with growth. Its recent discoveries at San Ignacio are amazing, including 5
g/t gold and 194 g/t silver over 13.8m announced Jan. 27. It's no wonder
Great Panther is looking to acquire other projects or companies. Should it do
so, we have no doubt that it would succeed with them. Great Panther is
producing silver at about $16–17/oz. That's sharp, but it will come down,
especially as it ramps up San Ignacio. This is a company that finds solutions
to its problems.
TGR: Which precious metals explorers do you follow in Mexico?
OT: The gold explorer I like is Minaurum Gold
Inc. (MGG:TSX.V). The advantage of explorers is that, of course, their
share prices do not simply rise and fall with prices of gold and silver. In a
sideways market, as we have today, the biggest value can be created with good
drill holes.
Minaurum is a company with solid management and a great deal of experience
in Mexico. CEO Darrell Rader worked with IMPACT Silver Corp. (IPT:TSX.V) and
Energold Drilling Corp. (EGD:TSX.V). The company has on its board Peter Megaw
and David Jones, two of the country's most successful geologists. Jones is,
in fact, known as "Mr. Guerrero Gold Belt." Minaurum has four great
properties, one of which is optioned to Lowell Copper Ltd. (JDL:TSX.V). It's
been a bit of a waiting game for the last year, but the company is making
headway now.
TGR: Do you like the Guerrero Gold Belt?
OT: Yes, and that's where Minaurum's key project, Vuelcos del
Destino, is located. It's just 19km from Goldcorp's Los Filos mine, which has
16 million ounces (16 Moz) gold. Minaurum is working on permits, and I hope
to see good news soon. We may also see JV interest in the company's two other
projects.
TGR: What Mexican silver explorer do you like?
OT: We've been shareholders of Defiance Silver
Corp. (DEF:TSX.V) for years. The company has the San Acacio deposit in
the Zacatecas Silver District, and it is busy drilling. Defiance published a
few holes last month that are wider and richer than ever before. San Acacio
is a former producing mine that was dug to only 250m. It is very probable
there is much more underneath. The big potential will come from the
continuity of the promisingly named Veta Grande, which extends for another
3.5km before it was cut. So there should be much more horizontally as well.
TGR: Which near-term Nevada gold producer are you fond of?
OT: Midway
Gold Corp. (MDW:TSX.V; MDW:NYSE.MKT). Its Pan gold project will begin
production this quarter. It's all about delivering, of course. What I like
about this company is its fantastic pipeline. Pan has much room for
exploration. The Gold Rock project is close by, which should see permitting
in the next year. On top of that Midway has a 25% interest in Spring Valley,
of which Barrick Gold Corp. (ABX:TSX; ABX:NYSE) owns 75%. That will provide
additional ounces in the future. If Pan goes ahead according to plan, it
should get a rerating.
TGR: Let's talk about juniors you follow outside North America.
OT: We follow two in South America and one in North Africa. Brazil
Resources Inc. (BRI:TSX.V; BRIZF:OTCQX) is led by a smart young
entrepreneur called Amir Adnani. The company has a bunch of targets in Brazil
with total gold resources of 3.9 Moz.
My advice to companies today is to look for assets, to line up your ducks
for when the bull market starts. And that's what Adnani has done. He's just
raised $4.46 million ($4.46M) in an oversubscribed financing. Brazil
Resources' share price remains strong, so he's looking to acquire more
assets, perhaps even outside Brazil. When the market comes back, the company
will do more work on its properties. I feel confident it will be a winner
down the road.
TGR: What else do you follow in South America?
OT: Goldsource
Mines Inc. (GXS:TSX.V) has the 980 Koz Eagle Mountain project in Guyana.
It has a top management team, being the people behind SilverCrest Mines Inc.
(SVL:TSX.V; SVLC:NYSE.MKT). Goldsource just raised CA$7.6M, and the company
will be in production by summer. In the first year, the company will produce
only 5.6 Koz gold, but years 2, 3 and 4 will see 14.4 Koz, 21.6 Koz and 28.8
Koz of production. This is at an all-in cash cost of only $650/oz. There is a
lot more gold on Eagle Mountain, and I expect the company will pick up more properties
as well.
TGR: And the company you like in North Africa is?
OT: Maya
Gold & Silver Inc. (MYA:TSX.V) in Morocco. Over 30% of its shares are
held in Belgium, so its executives come here regularly. The company is
producing 560 Koz silver per year at Zgounder for $8–10/oz. Maya has positive
cash flow and will raise more money to bring production to 1.4 Moz yearly.
This company has a pipeline of other prospective projects in Morocco, which
is an excellent jurisdiction. For the first five years of production Maya
doesn't pay any tax; this is a unique situation. For the life of the company,
it pays only half the corporate tax. Management is exceedingly dedicated,
going so far as to lend money to the company. Maya has turned a corner, and
there will be much more good news.
TGR: Will 2015 be a good year for investors in precious metals
juniors?
OT: Right now, I like exploration stories because that's where you
can build the biggest value. Increasing production builds value over time,
but discoveries result in immediate and profound value increases.
Assuming gold trades in the range of $1,200–1,300/oz, 2015 will be a good
year for investors in some companies. When Goldsource announces positive cash
flow this fall, it should get a rerating. When Midway announces positive cash
flow after the summer, it is going to get a rerating. Should Defiance
announce a new resource and many more drill holes as good as it announced a
month ago, it will get a rerating. Timmins Gold, if it can expand on the
high-grade under its existing pit, find financing on competitive terms for
the Ana Paula project and get Caballo Blanco permitted, will get a rerating.
If and when Minaurum can put a successful drill hole in its Guerrero Gold
Belt property, Vuelcos del Destino, it could give a boost to the share price
as it is in elephant country. And if and when Lowell Copper is successful in
drilling the Santa Marta property that it has under option from Minaurum, it
could be the discovery of a new volcanogenic massive sulfide (VMS) system.
TGR: Thank you for your insights.
