founder of Beacon Rock Research, incorporates his banking school background
into his mining industry analysis. In this exclusive interview with The Gold Report, he
assesses the macroeconomic situation from a banker's perspective, explains
why he is convinced gold is ready to take off and shares the names of
companies poised to profit from mining in the northwestern United States.
The Gold Report: You were at the Pacific
Coast Banking School last Friday when gold prices dipped and then surged on
Federal Reserve Chairman Ben Bernanke's comments. Why are you attending
former life I was a real estate construction lender; I attended a mid-career
banking school and found out there that I am not a banker. I also learned how
to analyze banks and in 2000 transitioned to become a bank analyst. In 2004,
I found NOVAGOLD (NG:TSX;
NG:NYSE.MKT) and fell in love with
the mining industry. I never forgot the school and was awarded faculty status
eight years ago for providing lecture capture for long-distance learning.
Staying active in the school has allowed me to see outside the bubble and
this I hope has made me a better mining analyst. The skills as a
banker—assessing project, credit and market risk—have helped me
to compete as an analyst.
TGR: Regarding Bernanke's
comments, how does this impact your forecast on gold prices?
MN: I think Bernanke's comments,
as unclear as they were, demonstrate how polarized the world is in its
thinking. The markets are looking for leadership and direction, something
investors can trust to plan their investments. This became clear to me at
banking school. One direction is to stable money, the other indecisive course
will reap the whirlwind. I'm still holding to my original forecast for 2012
of gold ranging from $1,400 to $1,700/ounce (oz)
with the potential for some catalyst to push the upside to reach $1,800 to
$1,900/oz. While it may appear lame to reiterate what has already occurred, I
am quite confident we could see a move to stabilize near the upside of the
forecast toward the end of 2012. Due to the election, we may expect
significant volatility through the end of the year. It should come as no
surprise if silver traces a similar pattern.
TGR: In light of your
involvement with the banking industry, how do you think bankers feel about
the possibility of more quantitative easing and its impact on interest rates
MN: There are individuals
who feel strongly one way or another, but strangely indifferent overall.
There are hints that all is not well. I am not talking about concerns we
might have for deficits, increasing national debt and inflation, but concerns
about the public perception of bankers as a class and on their careers with
the impact of legislation like the Dodd-Frank Act that has not even been
written. Bankers appear to be coming out of a state of denial on Dodd-Frank,
but I believe they understand that it will lead to a declining return on
equity and being required to hold more capital, receiving lower returns on
investment and falling stock prices.
"We are starting to
see some very real activity in Oregon after decades of inactivity."
There is also a split
between large banks and community banks. This should lead to consolidation
and the unforeseen consequence of even larger banks that are "Too Big to
Fail," which, in my opinion, creates even more systematic risk.
Interestingly, some bankers
see low interest rates as a new normal that present selling opportunities to
their customers. There are people on both sides. On the whole, bankers would
rather have the Fed on their side openly, if they want to have access to
funds and support for their banks. I fear with Dodd-Frank the banking
industry is becoming more of an arm of the government than an investible
class of investments. As long as politicians and their regulators, in the
name of risk reduction, continue to pick winners and losers, there will be
unintended consequences. On the whole, they appear to be in a bubble and to
have convinced themselves that they have the ability to shed inflation or
interest rate risk on their balance sheets.
TGR: Do most of the bankers
you know feel that the general economy is in recovery mode?
MN: Yes, it would seem so.
Most of the loans going bad today are small compared with just a few years
ago. Not a lot of new loans are being created. It was said by one instructor
that, "You have got to be terminally stupid to have a new loan go bad in
the first year." As things are less negative or at least stabilized,
bankers' careers are in less danger and this is how they view the world. This
is interesting for a number of reasons. From a microeconomic perspective of
demand and supply, artificially low interest rates would actually create a
shortage of credit, just as price controls create shortages. Once again, just
thinking of additional requirements brought on by Dodd-Frank, the
over-regulation will likely lead to unforeseen consequences, distorting
markets and misallocating credit. Imagine being a lender with stiff penalties
to be assessed by the unaccountable Consumer Financial Protection Bureau or
having lawyers regularly sitting in with regulators on bank audits. The
culture of banking is to reduce risk, and Dodd-Frank is a healthy dose of
reputation, regulatory and political risk. In any event, this will suppress
lending and economic growth in the economy, which will lead eventually to
more imports or higher prices.
TGR: What is the general
sentiment among bankers regarding investing in gold? Does the banking
community regard the possibility of making gold a Tier 1 asset a real
MN: This was strange; in
past years some students mentioned gold, but I didn't hear anyone talk about
gold over the session except the economics professor. This was particularly
odd because the school was held during the Republican National Convention,
with its proposal to complete a study on the gold standard. One would think
it would come up in conversation as this would impact the definition of the
very lifeblood of the banking industry, money and leverage. I suppose this
stems from a misunderstanding or lack of thought on their part of the
definition of money. It was interesting that the recent partnership of PayPal
and Discover came up. This advancement into mobile payments that skirt the
banking system has the attention of both Warren Buffet and banks as
technology innovates ahead and outside the banking system, challenging our
understanding of money. It was also interesting that gold as a Tier 1 asset
never came up. When I prodded some of the knowledgeable instructors on the
subject, they said simply that this idea had been around but it never really
went anywhere, except maybe in Europe.
TGR: How do you account for the indifference of a group of financial
professionals toward gold, considering the higher prices over the last
MN: I think the greatest
pearl of wisdom I took away from being a student at the school in the 1990s
was that people are different. They may look alike but they are different,
not just because of their education or background, but how they process
information and make decisions. People are individuals and they can be
counted on to act one way or another in their own self-interest, and
particularly in how they see the world. This is what makes markets so
difficult to predict and makes it impossible to craft policies that
micromanage business, investment decisions or personal behavior. On the other
hand, groups of people bind themselves into special interests that in a silo
or bubble become increasingly unstable over time. This is more than armchair
philosophy. Demographics and an expanding culture of entitlement have hurt
Europe beyond repair and are driving politics and economic trends in the
U.S., perverting the role of money in an efficient economy, which is clearly
the best case for higher gold prices in the near to long term.
TGR: Why does this make you
so sure that this will lead to higher gold prices?
MN: It's just my opinion,
but the world appears to be polarizing. I am in the minority where I come
from, sort of a combination of a Classic Liberal, Austrian School, Friedmanite, Supply-Sider. I
think, like Frédéric Bastiat, that the Law is to protect the individual's
life, liberty and property. This requires free will, choice and belief in the
virtues of mutually agreed upon free exchange, an economy regulated to
eliminate deception and reinforce trust. Stable money is essential here and
gold is the very essence of trust that all people desire. The other side is
driving the boat in Europe and the United States. They work their own book
and believe that they are smarter and can organize society. They believe
demonizing the 1% and co-opting the bottom 50%, thereby destroying
capitalism—moral capitalism—is actually going to benefit them.
After they get done taxing the rich and destroying the economy, the only
option left is to enforce redistribution of wealth through inflating the currency.
It may be too late to turn back. I think this is why the U.S. Presidential
election is so important and historic for the global and national economies.
TGR: That's a pretty
MN: Yes, I know, and I'm an
optimist. At the current birth replacement rate the world population will
voluntarily decrease without wars and pestilence for the first time in human
history. The population of the world is expected to start declining around
2050. This is a big deal for Europe, India and China, and less so for the
U.S. An aging population is likely to politically guarantee distribution and
easy money, which is good for gold.
are starting to look more favorably on mining."
On the other hand, in
the United States, the baby boom each day is declining in importance compared
to an equal size group, right around 75 million, born between 1982 and 2000.
This group plus immigrants pursuing the American brand of moral capitalism is
seeking a better future than the one I just portrayed. This group will outgrow
the hang-ups of the aging and increasingly irrelevant baby boomers.
Keynesianism has periodically relied on tricking people with easy money and
counting on "money illusion." Then they count on wage and price
controls, which always have and will always fail. Young people will figure
this out—if only the hard way. This is my children's generation, but
despite my negative prognosis, for them I am intensely positive. Until they
move into leadership, gold is the best hedge for the market distortions caused
by social justice.
TGR: You're from Portland,
Oregon, and are an advocate of the business development in the northwestern
U.S. Don't most of the locals feel negatively about expansion of mining in
that general region?
MN: The funny thing about
the Occupy Movement is that Portland has been occupied for decades. Private
sector jobs here have declined for over 10 years. Decades ago
environmentalists worked their book and succeeded in destroying the lumber
industry. They had no concern for the communities, schools and lives they
upset. As an optimist, my money is on entrepreneurs, including those in the
mining industry, that continue to contest monopolies and special interests.
Most people who feel negatively live in the cities. My son calls these the "haves"
in the "moneyburbs." These folks just are
not educated to understand that they could not exist without mining. Until
the population of the planet begins to shrink, mining will become
increasingly more important and so will the need to educate both investors
and the uninformed. I built my business on this idea and I love my job.
TGR: Is there a significant
core group of resource investors in that part of the U.S.?
MN: Yes, primarily adults
in eastern Washington, Idaho and Montana. They may be outnumbered by
Californians, but the legacy of mining has not totally disappeared. In these
areas even politicians recognize the importance of wealth-creating,
good-paying jobs that fund schools and communities.
TGR: With lackluster economic
growth throughout the West, do you see mining projects in Oregon, Montana,
Idaho and Utah progressing through the permitting process more quickly now?
MN: No, but there is a real
effort in Montana to boost jobs in the energy sector. They probably see how
neighboring states are benefiting. I suspect this is having some spillover to
Montana, but it is a start. Idaho is pretty consistent. We are even starting
to see some very real activity in Oregon after decades of inactivity. This is
primarily a function of metal prices drawing entrepreneurial mining companies
with willing allies in county government who have not given up on their
communities. State governments are starting to look more favorably on mining
but this may require a change at the top. Once again, a change in national
leadership would be immensely positive for the mining and energy sectors, and
we could have Friedman-like policies and expect a burst of economic activity
as we saw under Ronald Reagan in the 1980s.
TGR: What are some of the
most interesting mining projects/companies in the Northwest?
MN: Seabridge Gold Inc. (SEA:TSX;
SA:NYSE.A) sold its Oregon project,
Grassy Mountain, to Calico Resources
Corp. (CKB:TSX.V; CVXHF:OTCQX) and its Quartz Mountain
property to Orsa Ventures Corp. (ORN:TSX.V). We were quite interested
to visit Quartz Mountain about a month ago. The project has an Inferred gold
resource of about 2.8 million ounces of which over a million of the ounces
are in oxides. Orsa has put together a strong
management team in a short period. The company maintains a modest share
count. It has done an exceptional job pulling together historic studies.
About 270,000 feet have already been drilled on the Quartz Mountain project.
"The potential to
surprise investors with a new producing gold mine in California is
The property is located
near state highways and is accessed by numerous well-maintained roads. It is
situated near Lakeview, Oregon, and as the area welcomes development,
management has jumped on establishing good relationships with local
officials. We see Orsa as a deep value idea with
good potential to locate more ounces, growing the resource or advancing the
project and upgrading the classification of the identified resource.
TGR: Do you have other
American mining projects that you are excited about?
MN: We visited High Desert Gold Corp.'s (HDG:TSX.V) Gold Springs project on
the Nevada-Utah border about a year ago. High Desert has a district-size land
position and has completed comprehensive geophysical surveys complementing
already successful preliminary drill and sampling programs. There were
several historic producers on the property and management appears to be
pulling all this together to understand the project. This has led recently to
bonanza-grade gold results. The company is waiting for assays on other
promising targets. We believe High Desert is also well managed and maintains
a competitive capital structure. While High Desert has established a modest
initial resource, we anticipate this is just the first of numerous resources
at the project. We also see the market taking note and responding to
potential high-grade drill intercepts.
Prior to our visit to Orsa's Quartz Mountain project, we toured the Yukon.
Although Alexco Resource Corp.'s (AXR:TSX; AXU:NYSE.A) Keno Hill silver project
is in the Yukon, it is populated by American management. This remains one of
my favorite companies based on the quality of management, its high-grade
silver resource in the politically stable Yukon, and its potential production
and exploration profile.
With lower metal prices
and a statistically challenging production quarter, disappointed investors
took the stock price down to a two-year low. We believe it is nearly
impossible to repeat the same performance as in the second quarter, and with
metal prices showing upward potential, we anticipate a much stronger finish
to 2012 and Alexco meeting its guidance for silver
production positively surprising investors. We also took the opportunity
following the release of second quarter results to increase our position.
TGR: Any companies in the
U.S. that are ready to surprise?
MN: After the Independence
Day holiday we visited North Bay
Resources Inc.'s (NBRI:OTCBB) Ruby gold mine in the
Sierra Nevada northeast of Sacramento, in the northern extension of the
California Mother Lode. This is a fully permitted, past-producing underground
placer and lode gold mine. The Ruby was in production until World War II. The
mine at that time was enjoying the greatest operating results. The mine and
equipment have been maintained in exceptional condition and, pending completion
of financing and completing rehabilitation of underground workings, should
move back into production.
While modest in
appearance for its early production potential, management is preparing to
reopen the mine and begin gold production while initiating an exploration
program to further expand and delineate the resource. We see long-term
potential with Ruby, but more important for our purposes, the potential to
surprise investors with a new producing gold mine in California is
TGR: That's a great note to
end on. Thanks for your time.
Mike Niehuser is the founder of
Beacon Rock Research LLC, which produces research for an institutional
audience and focuses in part on precious, base and industrial metals, and
alternative energy. Previously a vice president and senior equity analyst
with the Robins Group, he also worked as an equity analyst with The RedChip Review. He currently holds faculty status with
the Pacific Coast Banking School and is on the board of the Oregon
International Airshow. Niehuser holds a bachelor's
degree in finance from the University of Oregon.
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3) Mike Niehuser: I personally and/or my family own
shares of the following companies mentioned in this interview: High Desert
Gold Corp. and Alexco Resource Corp. I personally
and/or my family am paid by the following companies
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