The Gold Report: In an interview
with The Gold Report in April, you predicted that gold will continue
to trade "sideways" between $1,200 and $1,410 an ounce ($1,410/oz).
That is exactly what happened! Why?
Thibaut Lepouttre: The problem was the lack of catalysts. Nobody
was really worried about war in Ukraine, or the Federal Reserve's reduction
of quantitative easing (QE). When the market is not at risk of collapsing,
gold's appeal as a safe-haven investment fades. And with no inflation on the
horizon, gold sours as a hedge against rising prices.
TGR: Is the drop in the price of oil affecting gold?
TL: Gold mining companies that depend on diesel generated power
stations can benefit from a falling oil price, but there is no real direct
correlation between the price of oil and the price of gold anymore.
TGR: Why did gold drop in October and November?
TL: Some people point at the Fed's decision to reduce quantitative
easing, but that is bogus thinking. The gold price did not start to slide
until 36 hours after the Fed's decision. I am not a conspiracy theorist, but
the temporary drop could have been an orchestrated move to make the weak
hands sell. Just a few weeks later, we were back up above the support level
of $1,180/oz.
TGR: When you say orchestrated move, who would you be pointing at?
TL: The country that was positioned to benefit the most from a
falling gold price was China. Not long ago, a person who works for one of
China's biggest gold companies said that when gold trades below $1,150/oz
after QE ends, there will be M&A activity from the Chinese in the gold
market. What did we see? We saw the quantitative easing program with the
Federal Reserve stop and gold slid to $1,150/oz. Go figure.
TGR: Where is the gold price headed in 2015?
TL: The two main gold price drivers are inflation and market panic.
Right now, investors are falling over themselves to buy stock. The European
Central Bank and the Bank of Japan are pumping ridiculous amounts of money
into the financial system. The main issue is the velocity of money, which is
currently at a multidecade low. The higher the velocity of money, the higher
the inflation rate if the money supply decreases at a slower rate.
The real problem here is that the money supply is increasing, but because
the velocity of money is decreasing, no inflation is being created. When the
velocity of money returns to the average velocity of the past 30–40 years,
the inflation targets proposed by the European and Japanese central banks
will be underwater. We are all walking on thin ice with monetary policy.
TGR: Do you have a timeframe on the ice cracking?
TL: Sooner rather than later; Japan is playing a very dangerous
game. It injects $700 billion a year into the financial system. That amounts
to 12% of Japan's GDP. Compare that to the United States, which was pumping
$1.02 trillion a year into the economy: 6.3% of its GDP. Japan's quantitative
easing program is twice as large as the American program. If the velocity of
money spirals back up, it will be very difficult for Japan to reduce its
money supply. Inflation will rise like a rocket.
TGR: What gold juniors do you favor for the coming period?
TL: Almaden
Minerals Ltd. (AMM:TSX; AAU:NYSE) has proposed spinning off a few of its
early-stage exploration properties. It might be a smart move for Almaden to
delay, actually. Spinning off properties in the current market might not be
value accretive. Nonetheless, Almaden's Tuligtic project in Mexico has an
updated preliminary economic assessment (PEA) calling for a 30,000 ton per
day (30 Ktpd) operation worth between $151–260 million ($151–260M). Once
inflation pounds the markets and gold will be attractive again, Tuligtic will
be in the spotlight.
TGR: Why did Almaden's stock price take a hit last year?
TL: The market views Almaden as still in the PEA stage. Production
is four or five years away. The market is understandably a bit wary of
exploration stories right now. That will change—gold is not going away! Quite
a few juniors are trading at bargain prices.
TGR: What other companies do you like?
TL: Integra
Gold Corp. (ICG:TSX.V; ICGQF:OTCQX) recently acquired the Sigma-Lamaque
mine, which is across the street from its Lamaque project in Quebec. The
mining site sports a 2,200 tpd mill. Integra bought the whole project for
cents on the dollar as it paid $7.55M and according to independent
consultants the fair value is around $100M. We can expect to see an updated
PEA in January.
Because of the mill, the mine's operating expenditures will be reduced by
$20 to $25 per ton. That translates into a cost savings of at least $100/oz.
It is possible that the Sigma-Lamaque ore can be accessed by the underground
workings of the Lamaque mine. That would shave off another $10–15M of capital
expenditures. On top of that, the company is in the process of raising $7M in
flow-through financing for exploration.
TGR: Any gold juniors to watch in South America?
TL: I just visited the Inca One Gold Corp.
(IO:TSX.V) mill facility in Peru. It is a 100 tpd production facility
that is currently being commissioned and should be ready for full production
in the second quarter of the year. Inca One is bringing Canadian's
transparent mining standards to Peru. We noticed local ore suppliers really
appreciate the firm's honesty. Inca's $11–12M market cap will certainly rise
in 2015.
TGR: Did you visit anyone else in Peru?
TL: By way of a detour, I spent quality time at Focus
Ventures Ltd.'s (FCV:TSX.V) Bayovar 12 phosphate project. Site visits are
the best way to obtain information. I was impressed by how easy,
straightforward and simple the Bayovar project is to mine. All that Focus
needs to do is strip off some overburden. The layers of phosphate are visible
with the naked eye. The project is located on a paved road 25 kilometers from
a working port. A power line goes straight through the property. It is a
miner's dream!
Production could start at Bayovar in 2016 as the company is mulling over a
small-scale operation. This project could ultimately produce several million
tonnes of phosphate per year. Vale's phosphate mine is next door and is
producing 4 million tonnes of phosphate per year, gradually increasing the
load to 6 million tonnes. Bayovar is a simple and extremely predictable
project. One does not often encounter such a valuable phosphate deposit in
the world today. I was stoked.
TGR: What gold miners in South America are you watching?
TL: In Colombia, I like Red Eagle
Mining Corp. (RD:TSX.V). Red Eagle expects to receive its final permit
for the Santa Rosa project in San Ramon before the end of the first quarter
of 2015. This ought to be an extremely profitable operation, with all-in
sustaining costs less than $800/oz. At a $1,100/oz gold price, that generates
a positive after-tax net present value (NPV). Santa Rosa is a small, very
neat operation. It will be quite easy to finance it because the upfront
capital expenditure is only $75M. Plus, Red Eagle is being backed by Appian
Natural Resources Fund L.P. and by Liberty Metals & Mining. It's one of
the most promising South American gold stories.
TGR: Anything going on in Argentina?
TL: Golden
Arrow Resources Corp. (GRG:TSX.V; GAC:FSE; GARWF:OTCPK) has made a major
discovery in Argentina. Two years ago, Golden Arrow bought a grassroots
project called the Chinchillas project, which had literally no work done on
it. The market was not excited, to say the least. Now, the project has shaped
up with an extremely impressive 165 million ounces of silver equivalent. Golden
Arrow's updated PEA outlines an after-tax NPV8% of $90M at $18/oz silver. At
a silver price of $22/oz, the NPV increases to $225M. The project has a lot
of additional upside potential. It has an exploration target of 200 million
additional ounces at a low grade, which won't be viable at the current silver
price but should be considered as an option on a higher silver price. I would
not be surprised if the Chinchillas project contains fully a half billion
ounces of silver at different grades.
TGR: What is looking good up in the Northwest Territories?
TL: TerraX
Minerals Inc. (TXR:TSX.V) has a dreamy gold project near Yellowknife. It
is located within walking distance from the city of Yellowknife, which has an
airport and a power grid. The property was acquired out of a bankruptcy,
which means it is cheap to advance because it has already seen a lot of
exploration work. The company has reassayed 18 meters of 2 grams per ton
gold. The only problem is that the mine is far up in the north where it is
quite cold. But there is no doubt that there is a lot of gold left in the
ground. TerraX has $3–4M in the treasury, which will allow it to continue
working for quite a while. It has recently announced it will start drilling
again in January.
TGR: Who has your eye in the American West?
TL: The Oxygen Capital Group companies are impressive—Pilot Gold Inc.
(PLG:TSX) and True Gold Mining Inc. (TGM:TSX.V). Pilot Gold recently
bought Cadillac Mining, which owned the Goldstrike project in western Utah.
Pilot Gold is implementing a new geological model on existing exploration
projects. It has had huge success applying its model at the Mount Kinsley
project with Nevada Sunrise Gold Corp. (NEW:TSX.V), discovering very
high-grade zones. I am confident a few million dollars in exploration
expenditures will create massive returns for shareholders. At Sprout
Money, we believe this company could do very well in 2015 as it's very
well financed and has a seasoned technical and management team.
Oxygen Capital is also the group behind True Gold Mining, which is
constructing the Karma gold project in Burkina Faso. I consider this to be
one of the most impressive near-term production projects in Africa as the
company is fully financed and fully permitted, has a low initial capital
expenditure and an all-in sustaining cost of $678/oz. There have been some
political problems in Burkina Faso quite recently and as the president left
the country, all mayors were sacked as well. This created some sort of power
vacuum on the local level, which has resulted in True Gold having to slow
down its construction activities. However, I do expect the situation to be
resolved soon.
TGR: What about the Carlin Trend in Nevada?
TL: In the Carlin Trend, we at Sprout Money like Premier Gold
Mines Ltd.'s (PG:TSX) Cove project. I am a bit more excited by Premier's
Trans-Canada project, because it is more advanced than the Cove. But the Cove
mine has a lot of high-grade potential at depth. Premier has also discovered
silver-lead-zinc mineralization. The company has more than $50M in working
capital. I expect Premier's managers to spend quite a bit of cash developing
the Cove project in 2015, getting ready for an impressive PEA debut.
On the other hand, Premier's Trans-Canada project should release a feasibility
study in the second quarter of 2015. The mine is partly open pit, partially
underground. It could be in play in the next year, so keep it in sight.
TGR: It certainly sounds as if gold exploration is not dead,
Thibaut. These companies all seem to be rather well positioned for a rebound
in gold.
TL: Try to pick companies with cash in the bank, or cash-attracting
managers. Premier Gold has over $50M in working capital. Pilot Gold has more
than $20M. They are advancing good projects despite the wariness of the gold
bears.
TGR: Thanks for your time, Thibaut.
