When the market bears are growling, contemplating a trip to a showcase of
the companies currently in the grip of that punishment can seem daunting, but
resource experts say now is exactly the time hard-core investors need to be
out talking to management, hearing their stories and figuring out which
companies will be on top when the good times come. The Gold Report
spoke to some of the experts at the recent Metals Forum and Cambridge House
Vancouver Resource Investment conferences, who shared some of the nuggets
they gleaned from the podium and exhibit hall.
On the supply side of the balance sheet, Holmes warned that reserves for
some commodities—particularly copper, gold and zinc where not enough had been
invested over the last 15 years—are starting to shrink. "Any disruption
in supply or pickup in demand will lead to a higher price. That could happen
as soon as this year," he said.
On the demand side, in addition to the traditional seasonal jewelry
demand, he cautioned investors to watch the actions of the Federal Reserve as
interest rate hikes could cause a rush of fear trade to the safe harbor of
gold.
Kaiser believes that "the transition to higher real interest rates is
critical to put the American economy back onto an organic growth track, but I
think the anxiety about an accompanying earthquake that topples the economy
into a depression is misguided. We need the banks to start lending to
consumers again so that businesses stop sitting on their trillions, buying
back their own stock, and instead start investing in a future. There is no
productivity windfall at hand to fuel economic growth so it will require a
consumer credit expansion, particularly in the home mortgage area where the
deleveraging has come to an end, but net mortgage growth is not yet
happening. I suspect that when the interest rate hike happens bond yields
will adjust so quickly markets will simply accept the lower bond prices and
equity investors will be relieved that the long awaited correction has
finally happened. When the so much anticipated "train wreck" of
higher interest rates happens, it will not be the catastrophe people expect.
It will be the trigger for a rush back into the resource sector that has been
busy cleaning up its affairs. This transition to higher real interest rates
will be bad for gold in the interim, but if I am correct that higher interest
rates are key to putting the global economy back onto a prosperity growth
track, gold will not remain weak for long. The scenario that I dread for the
resource sector is that the normalization of interest rates will keep being postponed
into the future, leaving us stuck with a weak near- to medium-term outlook
for all metals."
The Companies
A number of experts, including Coffin, Lepouttre and Kaiser, commented on
the preliminary economic assessment on the Tuvatu gold project in Fiji issued
May 31 by Lion
One Metals Ltd. (LIO:TSX.V). It showed a net present value of $117
million ($117M), internal rate of return of 67% and preproduction capital
costs of $48.6M for gold production of just under 353 ounces (353 oz) with a
resource of 1.1 million tons (1.1 Mt) Indicated and 1.5 Mt Inferred.
"This is a starter story, a base builder with a capital cost that is
within reach for a junior," said Kaiser. Lepouttre was intrigued as
well. "The low-capex, low-opex project has a very good chance of getting
funding within the next three months. It's definitely a company to keep an
eye on," he said.
Nevsun
Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) was also a favorite. "This
company is always impressive," Coffin said. Nevsun reported $37M in
operating cash flow from the Bisha open-pit copper mine in Eritrea in the
first quarter of 2015. "Nevsun Resources has a large cash position and
is transforming itself into a zinc producer from next year on,"
Lepouttre said.
Coffin singled out GoldQuest Mining Corp. (GQC:TSX.V) and Excelsior
Mining Corp. (MIN:TSX.V) for doing a good job of presenting themselves as
value propositions.
Kaiser used Sabina
Gold & Silver Corp. (SBB:TSX; RXC:FSE; SGSVF:OTCPK) as an example of
a turnaround story. The company had put out a "lousy" economic
study in 2013 showing too short of a mine life based on too high of a gold
price. Then in February, the board of directors recruited Bruce McLeod to replace
Rob Pease as president and CEO. On May 20, McLeod announced a new feasibility
study on the Back River gold project in Nunavut, Canada. It showed a 10 year
life-of-mine of just under 20 Mt with an average of just over 400,000 oz per
year in the first four years and an initial capex of $695M and a $1,200/oz
gold base case price. "The numbers look much better and with $28M in
cash on hand, the company doesn't have to dilute shareholders for a
while," Kaiser said.
Kaiser pointed to InZinc Mining Ltd. (IZN:TSX.V) as a company that
"could break out dramatically if there are supply problems in the zinc
market." He believes that China's new emphasis on environmental
stewardship will preclude it from swooping in and flooding the market again
with cheap commodities.
No More Hyperventilation
The best news at the conference, according to Kaiser, was that all the
talk about pending hyperinflation was gone. "After five years of being
wrong, no one wants to hear that anymore," he said. He classified the
attendees not as goldbugs investing based on emotion or ideology, but real
investors with an appreciation for how the resource market works. "They
are there looking for insights on the cycle and specific companies, not
sermons on the debasing of the dollar."
