Survival Secrets from Colorado Resource Investing Front Lines

Chen Lin, author of the investing newsletter What Is Chen Buying? What Is Chen Selling?, saw the smaller crowds this year as a benefit because he was able to arrange one-on-one meetings with management and he liked what he heard. "Generally, it was quite positive. A lot of gold mining companies based in Australia, Canada and Mexico where the U.S. dollar buys more, are really putting their acts together, keeping their heads down and high grading for success. They are generating cash flow and paying back debt. A lot of companies actually are debt free or close to debt free. They will be the survivors. I was pleasantly surprised," he said.

Lin had some dire predictions about the impact of companies that still have very high leverage, particularly the majors with share prices that are, in many cases, half of what they were a year ago. "If a company cannot generate real free cash flow and gold drops below $1,000 an ounce ($1,000/oz), we may see a lot of bankruptcies. If a major gold company goes under, that's a great time to buy the survivors," he said.

Headline Impacts—Positive, Negative and Non-Events

Lin is worried about the direction of gold in light of the news coming out of China. "An Asian crisis might lead to people selling gold. They have been known to sell extra kidneys. That is how desperate they are. When you have nothing to sell, you sell gold. That's extremely bearish because the Chinese own a lot of gold. The other scenario is that people looking for an alternative to the yuan may flock to gold. That's obviously very bullish. The bottom line is nobody knows what direction gold is going in the near term even though we all believe in the long run, gold will do very well. I suggest to my subscribers to be careful. Keep some powder dry. There are still a lot of opportunities in the gold mining companies," he said.

The other headline that shook the crowd at Beaver Creek was the Volkswagen emissions cheating scandal. "People were outraged by the pollution cheating and this could lead many to stay away from diesel," Lin theorized. "If people switch to gasoline, especially in Europe, where diesel cars can comprise 50% of the market, that will lead to an increase in demand away from platinum used in catalytic converters for diesel engines to palladium used in catalytic converters for gas engines. This is a fundamental shift that could take a few years. Already there is not enough palladium supply to meet demand because weak prices have squeezed producers of all the platinum group metals and some are close to shutting down."

Lin's choice for taking advantage of this special situation opportunity is Stillwater Mining Co. (SWC:NYSE). "Its palladium-platinum ratio is almost 4:1, which means it produces four palladium ounces for every one platinum ounce. It is based in the U.S., a safe jurisdiction. It has a very good balance sheet, a lot of cash, and it's a low-cost producer, very big and respected in business. I think that company probably can take advantage of this downturn," he said.

Lin was not worried about the Federal Reserve non-interest rate hike. "I think it's built into the price. Gold went up, but it has been volatile. It's the uncertainty that bothers the market more that the actual decision, and that has an impact on the gold market."

Bhandari was worried about the psychological impact of government monetary policies. "Fiat currency encourages short-termism. It seriously hurts not only the morality of the society, but also of the investors. Money manager bonuses are mostly geared toward quarterly performances. The result is that most people look at trends and headlines to make money, rather than by focusing on value—no wonder our economies are stagnating. Despite this, in the short term, as well as in the long term, the most confidence and most upside comes from focusing on value," he said.

Companies Worth a Closer Look

Lin was on the lookout for ultra-low-cost producers with all-in sustainable costs around $500/oz that could conceivably survive to become the next Goldcorp Inc. (G:TSX; GG:NYSE), consolidating the other promising stories.

One that fit that criteria was Pretium Resources Inc. (PVG:TSX; PVG:NYSE). "Its all-in sustaining cost will actually be below $500/oz once it builds the mine in 2017. That will be one of the greatest mines in the world," Lin said.

Another one that caught Lin's eye was OceanaGold Corp. (OGC:TSX; OGC:ASX), which is buying Romarco Minerals Inc. (R:TSX). "This could be another low-cost producer with costs around $500/oz when the Haile mine gets developed in 2017," he said. "You know those companies will survive. They both have good balance sheets. Development is almost fully funded. Those companies I feel comfortable holding, although I still warn my subscribers they have to prepare for the downside."

Bhandari took advantage of the chance to make new friends and revisit old ones. "I was quite impressed with my meeting with Metals X Ltd. (MLX:ASX). CEO and Executive Director Peter Cook explained his investment philosophy to me in detail. This was not a usual sales pitch. He explained why he likes to focus mostly on Australia, and expressed his deep understanding of the culture there. He likes to start small, ensuring that the project has high profit on a percentage basis rather than on an absolute basis. While sacrificing some short-term profit, he prefers to minimize the risks. I left feeling that he thinks like a businessman, rather than like a bureaucrat or a mere professional manager. This was my first meeting with him and I might change my views on the company as I look deeper over the next few days."

Two other companies that Bhandari has followed for a few years are Amara Mining Plc (AMA:LSE) and Caledonia Mining Corp. (CAL:TSX; CMCL:AIM; CALVF:OTCQX). "Both of these companies are in Africa. They seem to have managed their operations well. They have involved the locals in a win-win relationship," Bhandari concluded.

For Robert Cohen, the conferences were a good way to stay up on what is going on at the companies he follows. "Many attendees seemed impressed by the Australian companies performing well on both an absolute and relative basis in light of the Australian dollar weakness. This list of stand-out Australian producers includes Northern Star Resources Ltd. (NST:ASX), St. Barbara Ltd. (SBM:ASX) and Saracen Mineral Holdings Ltd. (SAR:ASX). Some of the West African stories were a bit beaten-up on news of the unrest in Burkina Faso. However, SEMAFO Inc. (SMF:TSX; SMF:OMX) and Roxgold Inc. (ROG:TSX.V) both represent good value in this market," he said.

Up-and-coming producers that are completing construction of their projects might also represent good value between this year and next. Cohen called out Torex Gold Resources Inc. (TXG:TSX) and Asanko Gold Inc. (AKG:NYSE.MKT; AKG:TSX) as examples. Other smaller companies that had a bit of chatter about them included Sabina Gold & Silver Corp. (SBB:TSX; RXC:FSE; SGSVF:OTCPK), Avnel Gold Mining Ltd. (AVK:TSX), Doray Minerals Ltd. (DRM:ASX), Gold Road Resources Ltd. (GOR:ASX) and Kaminak Gold Corp. (KAM:TSX.V).

Forward Looking Statements

Lin was heartened by the appearance of generalists at the conference who have started looking at the gold mining sector again. "Gold mining was the worst performer in the past four years. A lot of stocks went down 90–95%. Those generalists must think it's time to rebalance, so they're looking at the gold mining sector. When they pull the trigger is still an unknown, but it is good to see the interest is still out there," he said.

Cook did not see the current situation as a marked bottom. "As I have stated a number of times in Exploration Insights, capitulation is coming one-by-one as investors and companies fall by the wayside as we trudge across this desert. I don't expect a Capitulation Moment. One day we will look back and see things are very slightly better. We are closer, but I think there is a bit more pain to endure," he warned.

Cohen expected some capitulation in the markets ahead of tax season. "But the markets are the markets—there is no such thing as the market improving if everybody cries uncle. People have to understand that gold is a currency, and most currencies in the world are in a downward trajectory except the U.S. dollar. The only problem is that a lot of the global liquidity in the markets originates from the U.S., so while gold stocks in theory are a good idea for everybody outside of the U.S., the multiples fluctuate with the sentiment driven out of the U.S. due to sheer size."

Bhandari was optimistic. "Among the junior mining companies, good, well-managed companies have bifurcated and are showing life. They have started to outperform. The lifestyle companies, whose managements don't know how value is created, will die slowly. These will continue to fall, taking the index down with them. But there is still a lot of money to be made by investing in good companies."

Mazumdar was hoping for some more consolidation in the small-cap space of the sort seen by Oban Mining Corp. (OBM:TSX). "This would allow for a slower burn rate (lower G&A costs) to keep options alive on several long-term gold exploration and/or development plays. The combined liquidity and market cap would be more attractive for investors, as would the diversification in the asset base," he said.