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Source:
Interviewed by Karen Roche, Publisher, The Gold Report 01/22/2010
Itchy money
made 2009 one of the best years on record for the junior resource sector,
according to Mickey Fulp, the Mercenary Geologist. In sector terms, it won't
be so easy to prosper in 2010, but nevertheless he's confident about the
prospects ahead for specific companies that remain undervalued with respect
to their peers. Further, he tells The Gold Report in this exclusive
interview, by careful consideration of three key criteria—share
structure, people and projects—investors have a strong chance of
picking up equities that could double within 12 months.
The Gold Report: 2009 turned out to be quite a successful year for
equities even though a lot of the economic trends showed only mild
improvement, if any. How would you summarize what happened in 2009?
Mickey Fulp: The markets were so beat up in 2008 that equities became
a place of safe haven. A lot of cash—itchy money, if you
will—sitting on the sidelines poured into equities. In times of
financial duress equities can become the preferred investment vehicles. It
surprised everybody, I think, but 2009 turned out—especially in our
junior resource sector—to be one of the best years on record.
TGR: And what do you think 2009's performance means for 2010?
MF: I don't want to venture there right now. I am still digesting
things that happened in 2009 and trying to make up my mind where I see things
going. Maybe we can talk about that the next time.
TGR: Certainly. Your specialty is to find undervalued junior resource
companies and clearly there were a lot of them at the end of '08. How does
that picture shape up going into 2010?
MF: I don't see a lot of undervalue in the precious metals sector, but
there are specific companies that haven't reacted yet or have catalysts
pending. So there are a few of those that I'm looking at.
TGR: Would you say the market's overvalued at this point?
MF: The market is valued at what the market says it is. It's
oftentimes driven simply by psychology and those are touchy-feely things that
are hard to get a handle on. The junior resource sector is certainly valued a
lot higher than it was last year. Will it go higher or lower or will we see a
correction? I think a lot of that depends on the price of gold.
TGR: We'll come back to gold prices specifically in a moment. In your
last Mercenary Musing, you wrote about how we are led to believe
things from trusted sources such as Santa Claus and the Easter Bunny. More
relevant, you discuss the government talking about organizations that are too
big to fail that we have to bail out, and—in terms of gold
price—pundits telling us that gold prices will climb to multi-thousands
of dollars per ounce. As an investor yourself, what are you hearing that
really can't be trusted?
MF: I mitigate the risk of undeserved promotion with very detailed due
diligence and research. You too need to do your own due diligence and your
own research on anything you consider, looking at the three key
criteria—share structure, people and projects. If you follow my
investment philosophy, you're looking for stocks that have a strong chance to
double within 12 months. Everything gets promoted. Reduce your risk by doing
your own research and figuring out what's real and what isn't.
TGR: Adrian Ash of BullionVault recently wrote that holding or buying
gold today is a "bet on things staying all too much the same." This
is interesting because most people who urge buying gold now expect inflation,
hyperinflation, value devaluation and all of that. What's your viewpoint?
MF: My view on gold hasn't changed. It's been the same since I bought
my first gold nuggets in 1979; that's more than 30 years now. It is simply a
safe haven. It's an insurance policy. You can speculate in gold if you so
choose, but it is a horrible investment. It should not be bought as an
investment.
Except for the "Decade of the Aughts," the decade that just ended,
it has provided no return on investment. You would have made more money if
you'd put your hard-earned dollars in a savings account in your local
hometown bank in 1979. The idea that gold is going to thousands of
dollars—which we've heard continually since the early '80s when
newsletter writers were talking about $1,000 to$4,000 gold…in my
opinion, these gold bugs are promoting their own publications.
Gold is money. It goes up and down based on speculation, but there is a fair
market value of gold that basically has to do with the money supply and the
gold supply, and the inflation of the money supply and the gold
supply—which is basically annual mine production.
TGR: So if it's based on money supply and we are increasing money
supply, will gold escalate in synch with the money supply? Or at a different
rate?
MF: That's just up to the speculators. I haven't seen Paul
van Eeden's latest charts, but if memory serves, he
last calculated the fair market value of gold based on the money supply at
about $850 an ounce. I'm comfortable with that. I'm comfortable with $1,100
gold. Gold miners that do not make money at $900 or $1,000 gold don't belong
in the business. There are good mines; there are bad mines. My holdings of
gold at any time are at least 10% of my net assets and always will be. I buy
gold and sock it away for a rainy day. If the world goes into financial
crisis again, I will be a well-to-do man because I own real money.
TGR: And many are saying that we are heading into a financial crisis.
Our increasing money supply is going to cause inflation. Why wouldn't you buy
more insurance when you believe the impending risk is even greater?
MF: Number one, I don't think that, and number two, I don't buy the
hyperinflation scenario that the gold bugs promulgate. They will latch on to
anything that will give them some fire power to convince the general populace
that gold's going to the moon. I've been in this game for 30 years. I haven't
seen gold go to the moon once. Have you?
TGR: Not at all.
MF: I'm not a gold bug. I never have been one. Gold closed at $1,096
at the end of 2009. I know one guy who guaranteed it was going to be $1,500,
and another who guaranteed $1,260. And some people are way out in left field.
Show me the beef. I'll stand behind my record of being bullish on gold, but
not a gold bug. One of these years perhaps those of us who aren't gold bugs
will be proven wrong. But so far we have a track record and the gold bugs
don't.
TGR: Let's talk a bit about gold equities. A lot of the companies that
couldn't make money at $900 gold have seen amazing increases in their stock
prices this year. Granted the market was beaten down in '08. Considering
where the gold price is now, do you think gold equity companies are generally
valued correctly?
MF: Of course, it has to do with market psychology. And certainly the
sector as a whole is valued much higher than a year ago. We all knew some
good gold companies were undervalued a year ago. Whether they're going higher
or lower or are due for a correction is tough to say. I think, again, it
depends on the price of gold.
Suppose the price of gold goes up $100. I don't think it will, but if it goes
back up to $1,220, the gold companies will go up. If it drops to $1,040 or
even below $1,000, those companies are going to go down. It's difficult for
me to get a sense of whether the gold sector as a whole is going higher or
going lower. In times like these I would look for specific companies that are
grossly undervalued with respect to their peers.
TGR: We'd like to hear about some of those companies, but first, help
us understand why—with the amazing increase in gold price over the last
two years—profit growth is nowhere near the increases in equity values.
MF: It's because operating costs have gone up. Mining is such an
energy-intensive industry that the price of oil, and therefore fuel, tires,
mining equipment, etc., all came to a head with $145 oil prices. Oil prices
are high again, so operating costs have increased. Getting an ounce of gold
out of the ground costs considerably more today than it did three years ago.
That's really why you don't see mining companies making windfall profits.
In addition, all the major miners are scrambling to keep their production up.
They're mining lower grades and less economic portions of their deposits
because in a capital market environment they strive to maintain their ounces
of gold production. There just aren't enough new good gold deposits being
found and developed for the majors to be able to do that without mining lower
grades, less economic ounces, and with higher strip ratios.
TGR: With this increased cost of production, what would you consider a
fair market price for gold now?
MF: I'll go back to Paul van Eeden's concept of what gold is worth. A
fair market price is probably somewhere between $800 and $900 an ounce now.
TGR: Now, could you tell us about some of those specific companies
that you consider grossly undervalued vis-à-vis their peers?
MF: Sure. I have a few new ones. One company I'm looking at and
haven't said boo about previously is Otis Gold Corp. (OGLDF.PK), a very well-run company with a low
number of shares operating in southeast Idaho with an advanced deposit. Otis
did a 65-cent private placement in the late fall and is currently trading in
the 55-cent range.
I also like Amarillo Gold Corporation (AGCBF.PK), a company with two advanced gold
projects in Brazil, superior management, and drill results expected soon. Sierra Minerals (SIEZF.PK) is another. It is a small gold producer
in Mexico that is looking to grow much bigger. An explorer I follow is Canadian Shield Resources (CSRFF.PK) which has a very tight share structure,
a new leader, and a new focus on prospect generation in southern Peru.
A company that I've watched for two years and just wrote up in December, is Oremex Resources Inc. (ORXRF.PK), a pure silver play in central Mexico.
It was a 15-cent stock when I wrote it up and it's been trading as high as 20
cents recently. Oremex was on my radar screen because it has a very nice
silver deposit, but it has had surface rights problems. It's making progress
on those, and I think we can expect some positive news to come out on Oremex
in the short- to mid-term.
TGR: How do you rate silver in comparison to gold as an insurance
policy?
MF: Silver falls down drastically by that metric. Silver generally
functions as an industrial metal. Most of the silver in the world is a
byproduct of lead, zinc or copper mining, so the silver price tends to track
base metal prices when the world economy is humming along. In times of
financial distress it tends to operate more like gold, as a precious metal.
TGR: So you aren't big on silver?
MF: I personally hold silver. I own bags of junk silver, silver bars
and silver coins. I hold silver as a hedge and as a safe haven against financial
calamity, but these are holdings for the worst-case scenario. If the world
goes to hell in a hand basket, it will be a lot easier to take a Mercury dime
to your local baker and trade for a loaf of bread than it is to shave off a
piece of a gold coin.
TGR: But you aren't seeing that worst-case scenario unfold?
MF: I'm not as concerned about financial calamity as I was 12 to 18
months ago. In the summer and fall of '08, I was very concerned.
TGR: It's interesting that you're not as worried about financial
calamity when so many other people are saying we've now spent even more money
than we'd ever dreamed of spending, we're inflating the M-1 and have the cost
of national healthcare pending. Most people think it's worse today than it
was a year ago.
MF: I would agree that those things are happening, but here are the
reasons perhaps I'm less concerned than I was. I'm more financially
comfortable now. 2009 was my best year ever in the stock market. I'm pretty
much convinced the U.S. and the world are not going to melt down financially
now as opposed to 12 to 18 months ago when that scenario looked like a
possibility. And being an exploration geologist, I am by nature skeptical but
an optimist at heart.
The Mercenary Geologist, Michael S. "Mickey" Fulp is a Certified
Professional Geologist with a bachelor's degree in Earth Sciences with honors
from the University of Tulsa (1975), and a master's degree in Geology from
the University of New Mexico (1982). He has nearly 30 years' experience as an
exploration geologist searching for economic deposits of base and precious
metals and other resources. Mickey has worked for junior explorers, major
mining companies, private firms and investors as a consulting economic
geologist for the past 22 years, specializing in geological mapping, property
evaluation and business development. Respected throughout the mining and
exploration community due to his ongoing work as an analyst for public and
private companies, investment funds, newsletter and website writers, private investors
and investment brokers, Mickey launched
MercenaryGeologist.com in late April
2008 and can be reached at Mickey@MercenaryGeologist.com.
DISCLOSURE:
1)
Karen Roche of The Gold Report conducted this interview. She personally
and/or her family own none of the companies mentioned in this interview.
2) The following
companies mentioned in the interview are sponsors of The Gold Report: Otis
Gold Corp., Canadian Shield Resources.
3) Mickey Fulp: I
personally and/or my family own the following companies mentioned in this
interview: Otis Gold, Amarillo Gold, Sierra Minerals, Canadian Shield
Resources, Oremex Resources. I personally and/or my family am paid by the
following companies mentioned in this interview: Oremex Resources is a
sponsor of my website.
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