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Rick Mills isn't looking for huge producers with so much overhead that
they can't profitably mine an ounce of gold. Instead, Mills, the publisher,
editor and president of Aheadoftheherd.com, seeks out the
smaller mines with low capital costs. That's where the money will be made in
the next two years, he tells The Gold Report.
The Gold Report: Rick, is this a good
time to be buying gold?
Rick Mills: There are three key
reasons to have exposure to gold bullion. The traditional reason is to
protect against inflation. We're printing money. More quantitative easing has
taken place and inflation looks to be coming down the pike. I buy groceries.
I pay for gas. I can see inflation. I firmly believe it's going to get higher
over the coming months and years. Buying gold as a protection against
inflation is realistic.
The second reason
investors have traditionally bought gold is as a safe-haven investment.
There's a lot going on in the world—from secession talk in the U.S. to
turmoil in Israel, Iran, Syria, the South China Sea region and Turkey.
One of the things that
most investors don't know about gold is that adding a gold allocation to your
portfolio, especially over the last decade or so, has provided substantial
enhancements to the portfolio's return.
Gold helps minimize the
downside deviations in an overall portfolio. In 2002, the S&P 500 was
down 23%. Emerging market equities were down 6%. International equities were
down 16%. Yet gold was up 25%.
TGR: That was early in the
bull run in gold.
RM: Even in 2008, the
S&P 500 was down 37%, international equities were down 43% and emerging
market equities were down 53%. However, gold was up 8%.
TGR: It felt like the end of
the world in 2008. Gold has saved the portfolios of a lot of investors who
were smart enough to start collecting it in 2001 and onward. However, there
are investors who don't believe that gold has the multiples now.
RM: It's true. I believe
gold producers have shot themselves in the foot because of their reporting
methods. They use cash cost for reporting. In 2001 and 2002, miners were
producing gold for below $180/ounce (oz). By 2005,
cash costs had risen 45% to $250/oz. Data from research consultancy Thompson
Reuters GFMS shows that world gold production costs for the first half of
2009 averaged $457/oz. In 2011, they were $657/oz. GFMS' Gold Survey 2012
says it's now $727/oz.
"Buying gold as a
protection against inflation is realistic."
But if investors have
been looking at that, they've been misled because that's not really the cost
of producing gold. These average cash-cost figures include only the costs
directly associated with the production of gold, such as wages, energy and
raw materials. The problem is that gold cash costs are not the only costs
associated with mines. Investment bank CIBC just produced a complete
breakdown of costs. Yes, operating costs are $700/oz,
but there is also sustaining capital, construction capital, discovery costs
and overhead. CIBC pegs those at an average of $600/oz. Add in $200/oz for taxes on average, and you're looking at $1,500 to
produce an ounce of gold.
TGR: In that environment,
many of the gold mining producers would be out of business.
RM: The gold price is
$1,700/oz. Companies are not making a lot of money here. The funny thing is
that the sustainable costs for gold—the sustainable number gold miners
need—according to CIBC, is $1,700/oz. You can see why investors are
leery to jump into the space with numbers so tight.
TGR: But you're a gold bull.
You believe that people should be investing in bullion. The bullion has to
come from somewhere. What's an investor to do when he believes in the
fundamental reasons for owning gold, but doesn't understand how the equities
can perform?
RM: Historically, the
precious metals equities have given investors the most leverage to a rise in
gold and silver prices. We need to have a rise in gold and silver price. We
need to get into that environment again, like it was from 2001 to 2006 when
gold equities went up 900%.
Let's look at why
companies aren't making a profit. One of the biggest reasons is capital
expenditures (capex), which is the basic cost of
building a mine and its supporting infrastructure. There are lower grades
being mined—down 23% over the last five years and expected to drop
another 4% this year—and more complex metallurgy. Companies are
increasingly going into more remote areas that lack infrastructure.
Environmental regulations are increasing. We are seeing more money-grabbing
governments and resource nationalization. There's a serious shortage of
skilled personnel and labor unrest is pretty much everywhere: strikes,
protests and unions demanding higher wages. Everything you can imagine is
working in a perfect storm to increase costs and risks on mining companies.
Costs are going through
the roof, yet gold is stuck in a holding pattern at $1,700/oz. Then, when
people want exposure to the sector, they buy an exchange-traded fund (ETF).
In the past, a lot of that money would have gone into mining equities.
"Gold helps
minimize the downside deviations in an overall portfolio."
There's a huge increase
in exploration spending—more than $8 billion ($8B) in 2011—but a
serious lack of new discovery. There have been very few large, high-grade deposits
discovered during the past few years. Barrick Gold Corp.
(ABX:TSX; ABX:NYSE) said at the Precious Metals Conference 2012
that of the "super giant" discoveries, those that are more than 20
million ounces (Moz), 18 were discovered in the
1900s. Fast-forward to the 1980s when 14 were discovered. In the 1990s, 11
were discovered. In the 2000s, only five were uncovered.
The number of annual
gold discoveries of more than 5 Moz since 2007 is
six in 2007, one in 2008, one in 2009, three in 2010 and one in 2011. None is
producing yet. A lot of people who think that they're going to produce are in
for a disappointment because of resource nationalism, permitting problems,
environmental problems, lack of water, labor unrest and protests.
TGR: Assuming gold demand
will continue to escalate due to macroeconomic pressures, will the price of
gold continue to increase?
RM: Gold demand is still
rising. Five-year average quarterly demand is rising, so that's correct.
TGR: What do you forecast
for the 2013 gold price?
RM: That's a mug's game,
trying to predict gold prices, but it'll be higher.
TGR: You believe the price
of gold can only go up.
RM: That's right.
Inflation, world events, diversification—gold does offer leverage. So
do equities, or at least they will again. I'm not
looking at huge mines with billions and billions of dollars in capex. I'm much more comfortable with the smaller mines
with lower capex and under-control operating
expenditures. I like the lowest-cost producers. That's where the money is
going to be made over the next two years.
TGR: Canada, the U.S. and
some places in Latin America are the preferred jurisdictions for risk
reduction, infrastructure, rule of law and
reliability of government.
RM: Absolutely. Look at the
Muslim Brotherhood in Egypt canceling a nearly 20-year-old license for a
mining company. In Madagascar, a DJ gets elected president and the first
thing he wants to do is cancel permits and do a review. That's not happening
in Canada, the U.S. or politically stable places like Greenland. There is
enough risk in this business as it is without intentionally inviting more.
TGR: Given that backdrop,
what are some companies you find interesting right now?
RM: Let's stick with
soon-to-be producers or companies that are going to be very low-cost
producers. They're all in geopolitically acceptable countries with superior
management teams.
According to a July 2012
research report by Natural Resource Holdings, there are only 164 undeveloped
gold deposits globally, with more than 1 Moz of
gold in all categories, that are owned by non-major
mining companies. The average grade of all these deposits is 0.66 grams per
ton (g/t). Since we're mining +80 Moz a year, that makes these non-major-owned deposits quite
valuable.
The total current gold
resource on Altair Gold
Inc.'s (AVX:TSX.V) Kena
property sits at 1.06 Moz. In the Kena Gold Zone,
Measured and Indicated (M&I) resources are 300,000 oz
(300 Koz) at 0.64 g/t Au, and Inferred are 85 Koz at 0.70 g/t Au. In the Gold Mountain Zone, M&I
resources are 249 Koz at 0.71 g/t Au, and Inferred
are 428 Koz at 0.60 g/t Au.
"Everything you can
imagine is working in a perfect storm to increase costs and risks on mining
companies."
I like Altair Gold
because the company has an amazing technical team and they are putting some
serious money into their project. Altair put $1.75 million ($175M) into the Kena property in British Columbia this year. The company
drilled 7,400 meters (m) and got some results back, but is going to put a
comprehensive plan together based on the complete results. That will be
exciting. Altair has proven it can raise money. It can run a technical drill
program. It can get the word out to investors. With the right results, this
management team can take this project all the way to being one of those
low-cost producers. Altair could have something spectacular.
TGR: Bob Archer, who has had
great success with Great Panther
Silver Ltd. (GPR:TSX; GPL:NYSE.MKT), is behind this
company, as well as Fayyaz Alimohamed.
Do you foresee a problem
with Altair getting permitting due to the rise of the green movement and
First Nations issues?
RM: Most of the companies
in British Columbia that have had problems with the First Nations created
their own problems by not getting the First Nations involved in the projects
early. They show disrespect to the traditional ways. A company that engages
the First Nations, is willing to work with them and
is willing to provide jobs and help them, isn't likely to be road-blocked by
them. The First Nations are not against resource development. They want jobs.
Engage them early in a project and you won't have a problem.
As for the greens,
Altair is a historic mining district. There is not really much you can say
when you're in an area of past-producing mines.
TGR: It sounds as if it
won't be an issue.
RM: The next one we'll talk
about is NioGold Mining Corp.
(NOX:TSX.V; NOXGF:OTCPK). I like this project,
which is a joint venture with Aurizon Mines Ltd. (ARZ:TSX; AZK:NYSE.MKT). There has been some
uncertainty surrounding it. Aurizon was supposed to
have made a decision to invest in the third phase, but it is going to wait
and see the next NI 43-101.
The first NI 43-101
didn't have phase two results and was very conservative. The phase one report
has delineated 2.1 Moz, most of that in the Marban deposit. The goal of the phase one drilling on the
Marban deposit was to bring as many surface ounces
as possible into a pit shell. The stripping ratio looks pretty high, but the
grade is good and that should compensate for the high strip. Now, NioGold is going to look at the open pit, the high grade
and strip ratio.
TGR: When does NioGold expect to publish the updated NI 43-101, and how
good was the grade in the first NI 43-101?
RM: Next March. Phase two
included $5M of drilling, and that is being added to the NI 43-101 report
now. The NI 43-101 shows 1.58 g/t and that compares with 1.07 g/t across the
road at Osisko Mining Corp.'s Canadian Malartic mine. And the 43-101 report was quite conservative, using a punitive grade capping that
discounts the contained metal by as much as 30%. The phase two report will be
more detailed, using tighter intervals and high- and low-grade envelopes to
more accurately detail the deposit, and this should capture more of the
ounces.
TGR: So if the phase 2
report shows improved ounces and grade, what happens next?
RM: This is the best part
of the story. Aurizon has already spent $11M and at
this stage the company has not earned anything. If it doesn't continue with
phase three, the entire deposit reverts to NioGold
and it will have 100% ownership of a 2.1 Moz
deposit. Assuming Aurizon continues with the
earn-in, then another $9M is spent over 9–12
months. Then a final 43-101 is delivered to Aurizon
and it has to make a resource payment to NioGold
for half of the gold in the deposit at a rate of $40/oz
for Measured and Indicated, and $30/oz for Inferred.
This payment is already estimated at $39M, just
including the gold outlined with phase one. The payment could easily grow to
$50–60M by the end of the program. And that is only for half of the
deposit. NioGold gets to keep the other half. Aurizon would then be the operator and it can go to 60%
by delivering a feasibility report, and up to 65% by arranging project
financing. But that last 5% is at NioGold's option.
Don't forget that this
deal with Aurizon is for only part of NioGold's property—about 8% of its land package.
The company has several other gold discoveries and showings to follow up on
its own.
The stock is trading in
the low $0.30s, and with just a little over 100M shares that's a cap of about
$32M. The payment from Aurizon is already going to
be bigger than the entire market cap right now.
TGR: What is your third
pick?
RM: Terraco Gold Corp. (TEN:TSX.V) has several irons in
the fire. Nutmeg Mountain, the Almaden project, is
putting out an updated NI 43-101. It has 887 holes that were inherited. They
were rotary air blast (RAB) drilling and reverse circulation (RC), but those
types of drilling wouldn't give you the best representation. The company has
done 52 core holes and four 4-inch metallurgical holes that it is going to
include in the new NI 43-101.
Institutional interest
in large-scale gold and copper discoveries has dropped off mainly because
every time it puts some money into them, its interest just gets totally destroyed.
It gets delay after delay. It gets cost increase after cost increase. These
smaller ones, which have low costs to put into production along with low-cost
producers, are going to be the way that we're looking at things as retail
investors.
"I like the
lowest-cost producers. That's where the money is going to be made over the
next two years."
Almaden seems to be a perfect
example of a low-cost deposit. We're looking at a new NI 43-101 with better
recovery in the cores, and the holes support that. The diamond-drill holes
were 20–40% better grade than the RAB and the RC. We're waiting on
metallurgical results that should be out shortly. The biggest knock on this
deposit is that it has only been able to recover 63% of the gold. It doesn't
absolutely kill you economically, but it's not a huge incentive either.
However, there are reasons for the lower recoveries, namely that the column
tests weren't leached for a full 90 days. It never separated the sulfide,
oxides and the mix into separate columns.
Terraco should have a
preliminary economic assessment (PEA) early in 2013. It could come up with
some superior numbers that show Almaden as a
serious low-cost producer. It's heap leach. The company has $1.8M in the
treasury. Terraco is going to do its PEA and see if
it can produce out there.
TGR: Terraco
has the benefit of its primary asset being in northern Idaho, where mining is
well accepted, and in Nevada, which is a fantastic jurisdiction. What CEO
Todd Hilditch has done with his career is
impressive.
RM: I was lucky to get in
on his company Salares Lithium Inc., which merged
with Talison Lithium Ltd. (TLH:TSX).
The buyout by Talison was 400% of what I originally
bought it. Of course, now we have the bidding war for those who got Talison shares.
TGR: That's been a wonderful
thing for the shareholders of Salares.
RM: Then Hilditch turned around and did something that is almost
as impressive—buying the royalty on the Barrick
deposit.
TGR: That's part of the
assets in Terraco, right?
RM: Yes, it's on a project in
Nevada, the Spring Valley joint venture (JV) project of Barrick
and Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.A). Midway's Spring Valley deposit
is at 3.5 Moz. That's $40M net present value (NPV to Terraco.
After $13M to exercise its option, that's a $27M NPV, which is $2M more than
its current market cap.
TGR: Just on the royalty.
RM: Yes. If it does expand
that deposit to, say, 6 Moz, which is certainly not
out of the realm of possibility, that's a NPV of $64M. After exercising its
options, it's a NPV of $51M. That's double the market cap—just on the
royalty.
There is also a lot of
blue-sky potential. The Barrick/Midway JV's best
hole is on the north end of Spring Valley. They have in hand a permit to
drill toward the north, which is the south end of Terraco's
Moonlight project. If the JV hits Moonlight is in play.
TGR: What's up next?
RM: My next one for your
readers is Northern Vertex
Mining Corp. (NEE:TSX.V; NHVCF:OTCQX). This is a company that
is fast-tracking its Moss project in Arizona.
In the last six weeks,
Northern Vertex has drilled 200 percussion holes and raised
$9.1M. Ken Berry just stepped aside as CEO to bring on Dick Whittington, a
mining engineer. Whittington took Farallon Mining
Ltd.'s (FAN:TSX) project in Mexico to production in
four years. He's also put a voice behind mining interests in Mexico. He
gathered together miners and explorers worth $50B in assets and they speak to
the Mexican government as a single voice. Whittington is well respected and
is very good at what he does. The mission is to fast-track Moss into
production. When this happens, Northern Vertex is definitely going to be one
of the lower-cost producers out there.
TGR: Tell me about the
asset.
RM: Moss is a gold and
silver project in northwestern Arizona with all the
necessary infrastructure nearby. It has a gold-equivalent (eq) NI 43-101 resource of 950 Koz
Measured and Indicated and 266 Koz Inferred gold eq, and it's growable. It's got
a low strip ratio and is amenable to low-cost, heap-leach open pit mining. It's
a major stockwork vein system that outcrops at the
surface for 5,500 feet. It has a unique three-phase plan. The third phase
will be paid for by production. It's a smart plan run by some very smart
people. I have no doubt that this one is going to be successful.
TGR: The fact that it was
able to raise $9.1M in this environment is pretty
impressive. That's been within the last 30 days.
RM: Exactly. Its management
team is extremely popular with investors and institutions for several good
reasons. When they say they're going to do something, they go out and they do
it. They're a no-nonsense team.
TGR: This has been an
interesting list. Thanks, Rick.
Richard (Rick) Mills is the founder, owner
and president of Northern Venture Group, which owns Aheadoftheherd.com, as well as publisher,
editor and host of the website. Focusing on the junior resource sector, Mills
has had articles appearing in more than 400 different publications, including
the Wall Street Journal, Safe Haven, the Market Oracle,
USA Today, National Post, Stockhouse, LewRockwell, Pinnacle Digest, Uranium Miner, Beforeitsnews, Seeking Alpha, Montreal Gazette, Casey
Research, 24hgold, Vancouver Sun, CBS News, Silver Bear Cafe, Infomine, Huffington Post, Mineweb,
321Gold, Kitco, Gold-Eagle, The Gold/Energy
Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FN Arena, UraniumSeek, Financial Sense, GoldSeek,
Dallas News, VantageWire, Indiatimes,
ninemsn, IBTimes, jsmineset,
the Association of Mining Analysts and Resource Clips.
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DISCLOSURE:
1) Sally Lowder of The Gold Report conducted
this interview. She personally and/or her family own shares of the following
companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Altair Gold Inc., Great Panther Silver Ltd., Aurizon Mines Ltd. and Terraco
Gold Corp. Streetwise Reports does not accept stock
in exchange for services. Interviews are edited for clarity.
3) Rick Mills: I personally and/or my family own shares of the following
companies mentioned in this interview: None. Great Panther Silver Ltd.,
Altair Gold Inc., NioGold Mining Corp., Terraco Gold Corp. and Northern Vertex Mining Corp. are
paid sponsors of Mills' website, aheadoftheherd.com. I was not paid by
Streetwise Reports for participating in this interview.
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