The Gold Report:
For five years experts have confidently yet
incorrectly predicted higher interest rates and an end to the Federal
Reserve's zero-interest-rate policy (ZIRP). Janet Yellen announced Oct. 28
that the Fed would not raise rates now, but might do so in December. Even so,
some analysts believe the Fed might follow Europe into negative interest rate
territory. What do you think?
Philip Richards: The U.S.
economy has maintained a reasonable rate of growth. Globally, however, growth
has been disappointing, with the emerging markets being particular
stragglers. One reason for this is the tapering of quantitative easing (QE)
that the Fed announced three years ago. The U.S. dollar has gotten
stronger ever since. This has undermined commodity markets and also created
something of a debt crisis in the emerging markets, a crisis that has not yet
come home to roost. Many emerging market companies have debt in U.S. dollars,
and their local currencies have crashed, so servicing those dollar debts has
become rather difficult.
Despite this sluggish global growth, total global debt is now higher than
it was in the 2008 crisis. Given the fragile state of the world economy, I
believe the Fed simply cannot afford to raise rates. I don't believe that
negative rates will be necessary; an announcement by the Fed that ZIRP will
continue for the foreseeable future should suffice to retain market
confidence.
TGR: There's a school of thought that holds that higher interest
rates are impossible, not only because they would kill the recovery, but also
because they would cause U.S. deficits to balloon due to skyrocketing
interest rate payments on the debt. What's your opinion?
PR: The International Monetary Fund (IMF) has considerable influence
on this question. I've been told that IMF Managing Director Christine Lagarde
has asked the U.S. not to raise rates for fear this would trigger a global
debt default crisis that would devastate Europe and then reverberate back to
the U.S.
TGR: Should American economic growth remain nominal, is another
round of QE possible?
PR: Yes. Given the aggressive QE pursued by both Europe and Japan,
the Fed could argue that U.S. QE worked in the past, and now that the dollar
is too strong, it's time for the U.S. to jump back in. [Editor's note:
See chart above.]
TGR: QE served initially as a catalyst for a big upswing in the
price of gold. Subsequent rounds from the Fed and from Europe and Japan have
not had the same effect. Why not?
PR: One reason could be the increase in primary gold production, up
to 95 million ounces (95 Moz) in 2015. Another reason could be that China and
India are not buying as much gold as they have in the recent past.
Technically, it looks to me as if gold has found a bit of a base. The
continuation of ZIRP should allow gold to make progress.
TGR: What effect will the ongoing currency wars have on the prices
of metals?
PR: The currency wars have essentially followed QE. The Fed began
QE in 2008, which led to a weaker U.S. dollar and a stronger euro and yen.
When the Fed began tapering, the dollar recovered, and the euro and yen got
weaker.
Printing money should be good for precious metals. Greater economic
activity is good for non-precious metals and all commodities really, but of
course that's on the demand side. On the supply side, many big iron ore and
copper projects have come on line since 2008 and driven prices down. In
addition, the financial crisis in China has flushed out hidden stocks of
metals, so it appears demand was probably weaker than supposed.
TGR: Some pundits predict that rising all-in sustaining costs
(AISC) will mean a decline in gold production. Do you agree?
PR: I think 2015 will be a peak year for gold production, and, as
you know, it takes a long time to ramp up production. As for AISC, this is
hard to calculate when so much gold production is in countries outside the
U.S.: Canada, Australia, Brazil, Africa. Kinross Gold
Corp. (K:TSX; KGC:NYSE) has definitely benefitted by the strong U.S.
dollar because it has mines in Russia.
TGR: What are your metals price forecasts?
PR: I expect gold and silver to be higher in a year's time. Zinc
will be moving into supply deficit, due to the closure of MMG Ltd.'s
(1208:HK) Century mine in Australia, the largest in the world; the closure of
Glencore International Plc's (GLEN:LSE) Brunswick and Perseverance mines in
Canada; and the possible shutdown of its McArthur mine in Australia.
But I don't know whether there will be a zinc squeeze sufficient to raise
the price of zinc to its old high of $2 per pound ($2/lb). I expect a new
high closer to $1.20–1.30/lb.
I'm cautiously optimistic on commodities. We could see higher copper and
nickel prices in the next year or so. Regardless of whether the U.S. restarts
QE, Europe will continue to print money, and that will be reasonably
supportive of commodity prices.
TGR: Which companies are best placed to profit from a zinc deficit?
PR: Our favorite in this space is Trevali Mining
Corp. (TV:TSX; TV:BVL; TREVF:OTCQX). On Oct. 8, the company announced
record Q3/15 production at its Santander mine in Peru. And it is successfully
commissioning a second mine in New Brunswick, which will surpass Santander as
its leading producer. Trevali has got a pretty low cost base overall. We
expect the shares can at least double from here.
TGR: Is a takeout of Trevali possible?
PR: That's not the reason we own the stock. That said, nobody wants
to buy high-cost production after what we've been through, and Trevali has
assets in the right place on the supply curve: the top quartile. On that
basis, it is a potential takeover candidate.
TGR: Back in March, you told The
Gold Report that HudBay Minerals Inc. (HBM:TSX; HBM:NYSE) was a possible
suitor. Do you still believe that?
PR: I do, although the environment for metals was happier then than
now. The appetite for acquisitions is somewhat diminished at the moment.
TGR: This unhappy environment has resulted in several companies
sitting tight on their projects. Could you talk about one such gold project?
PR: We own Victoria Gold Corp. (VIT:TSX.V), which owns the 6.3 Moz
gold Indicated and Inferred Eagle project in the Yukon. It is quite difficult
to finance that project to production with gold around $1,100/ounce
($1,100/oz). So I believe that Victoria's strategy of waiting until the stars
are in alignment has made sense. If, however, gold has bottomed out and is
heading higher, Eagle will be much more likely to attract financing. Eagle
has got reasonably robust economics but not in the top quartile.
We are one of Victoria's largest shareholders, and we do believe in Eagle.
But the price of gold will need to reach $1,300–1,400/oz—as we believe it
will—for Eagle to be financed on good terms.
TGR: You also hold a position in a similarly becalmed gold project
just over the border in Alaska, correct?
PR: Yes, we do. Northern Dynasty Minerals Ltd.'s (NDM:TSX; NAK:NYSE.MKT)
Pebble project. This is a world-class project with Measured, Indicated and
Inferred resources of 81.5 billion pounds (81.5 Blb) copper, 107 Moz gold,
5.6 Blb molybdenum and 514 Moz silver. I believe that Pebble has turned the
corner and will be developed. The company has amassed evidence of unfair treatment
by the Environmental Protection Agency, and it should now begin to move
forward on permitting.
TGR: What do you make of the business combination of Northern
Dynasty with Mission Gold Ltd. (MGL:TSX.V)?
PR: It brings Northern Dynasty some money and some well-placed
shareholders. Other investors are coming to the same conclusion about Pebble
that we have made. Based on the size of its resource, this company should be
worth 10 times what it is now.
TGR: Which gold producer do you like?
PR: Endeavour
Mining Corp. (EDV:TSX; EVR:ASX) has mines in Burkina Faso, Côte d'Ivoire,
Ghana and Mali producing 500 Koz annually. This is a company highly leveraged
to an increase in the price of gold. In addition, it has some highly
successful exploration results at Agbaou: 6.71 grams per ton (6.71 g/t) over
7.4 meters (7.4m), 7.73 g/t over 7.4m and 3.18 g/t over 6.8m. We believe that
this exploration can rapidly be brought into resource and then into reserves.
I would expect this company to move up significantly from here.
TGR: Endeavour has entered into an alliance with La Mancha, a
private gold producer controlled by the family of billionaire Naguib Sawiris.
How significant is this development?
PR: The takeover of La Mancha brings $63M of cash. The Ity mine, in
which Endeavor will have 55% interest, will boost production from 2016, and
by more than 100 Koz for Endeavor's share by 2019. The family has committed
to be long-term shareholders. So this seems a very positive acquisition both
by bringing more cash to the balance sheet and more gold production and
growth.
TGR: You said in March that you were "very disappointed in
nickel." Are you more bullish now?
PR: Not yet, but I am hopeful for a recovery in 2016. Nickel is
another metal affected negatively by the financial crisis in China, which
revealed previously unknown stocks that were flushed out, bringing the price
down. I think the additional supply has been nearly exhausted, and we are
seeing the beginning of the establishment of a technical base. This could
bring the price back up to $6.50/lb or so in the next year.
TGR: How is the export ban from Indonesia playing out?
PR: It's still holding firm at the moment. The Philippines has
stepped in and exported some nickel pig iron, but that production appears to
have plateaued. Indonesia is not likely to become a major world supplier for
another two to three years.
TGR: Which big nickel project would benefit most from a price rise?
PR: Well, we are the largest shareholder of Royal Nickel
Corp. (RNX:TSX), so we have a vested interest there. Its Dumont project
in Quebec would be the fifth-largest nickel sulfide operation in the world
with a Proven and Probable reserve of 6.9 Blb, and the Royal Nickel has
benefited from some provincial government support. The company is working
hard to reduce the nickel price it needs to make Dumont viable. It received
federal permitting in July.
At $6.50/lb nickel, Dumont is financeable. Royal shares are deeply
oversold right now. Dumont's story is similar to Victoria's Eagle: a
world-class project in a safe political jurisdiction. Situated in Quebec,
Dumont benefits from cheap power and a provincial government that could
assist with financing.
TGR: Can you give us updates on some of the companies we talked
about last time?
PR: In the past we have talked about Largo Resources
Ltd. (LGO:TSX.V); its shares haven't been performing well. However, I'm
encouraged that it continues to ramp up production successfully at its
Maracas vanadium mine in Brazil.
Also, Detour
Gold Corp. (DGC:TSX) has just produced its first 1 Moz of gold at Detour
Lake in Ontario, and NOVAGOLD (NG:TSX; NG:NYSE.MKT) has $130 million in cash
to advance its Donlin gold project in Alaska. We quite like Detour and
NOVAGOLD. We don't own Kinross, but I quite like that company as well.
TGR: We are now close to five years of a bear market in precious
metals and mining stocks. Is there an end in sight?
PR: I'm fairly bullish across most metals. Gold should lead silver
higher. What we're heading into might not feel like a bull market because
prices will still not be very high, nor will mining companies be particularly
profitable. Nevertheless, every bull market starts from the bottom of a bear
market. The past five years have been painful for many, including us. In any
event, I believe that a slow and steady buildup will be much better than
something more dramatic.
TGR: During the previous bull market in precious metals, gold and
silver miners performed poorly compared to the rise in the price of bullion.
How well will the miners do this time around?
PR: The erosion of the traditional premium was brought about partly
by the arrival of the gold ETFs, which obviated the need of investors to buy
miners in order to leverage higher prices. As a result, mining companies have
gone down and down and down. Investors can now buy good-quality companies at
prices quite low relative to their net present values. Those are the ones
that we would like to buy. There are quite a few names out there that can be
bought pretty cheaply relative to the price of gold. That's a big turnaround.
The short answer is that the overvaluation of gold companies relative to gold
was destroyed over the last few years. This time around it will be different.
TGR: Philip, thank you for your time and your insights.
is the founder and president of RAB Capital Limited, having cofounded
the company with Michael Alen-Buckley in 1999. He is the investment manager
for the RAB Special Situations Fund. Prior to joining RAB, Richards was a
managing director of European research and later managing director of
investment banking at Merrill Lynch. Richards holds a Bachelor of Arts
Honours from Oxford University (Corpus Christi College) in philosophy,
politics and economics.
