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Peter Grandich believes that we're in the midst of a stealth
gold bull market. Grandich, editor and publisher of
The Grandich Letter, recently penned the
book Confessions of a Wall Street Whiz Kid, the moniker "Good
Morning America" gave to him after he predicted the Black Monday stock
market crash in 1987. He's now predicting gold to top $2,350/oz in this exclusive interview with The Gold Report.
The Gold Report: Going back to your time
as a fund manager in the '80s on Wall Street, how does what was happening
then compare with what is happening now?
Peter Grandich: It's dramatically different.
The biggest change is that the game is stacked against the average investor
more so than at any other time. For example, the mortgage debacle a few years
ago was equivalent to all the big car companies manufacturing cars that they
knew were going to crash and buying life insurance on the people that they
sold the cars to knowing that they would die so they could collect on both
ends. That's what the financial institutions did. Those people are still in charge
of the game. I take exception when I hear people talking as if the game is
fair and the average person has a reasonable chance.
TGR: One revelation in your book is that your struggles led you to a
belief in Christianity. Does your spiritual life influence your investment
decisions?
PG: Yes. There's far less chance of me pushing the envelope and
touching the gray area—or even going into the red area.
TGR: Another theme in the book is about being wrong and accepting that
as an investor. Could you talk about the psychological pitfalls of investing?
PG: I could write a book about losing. The ultimate crime of investing
is not being wrong. The crime is staying wrong and that happens to a lot of
investors. They institute the worst investment strategy and simply hope
things will change. Hope is a wonderful spiritual strategy but a very bad
investment strategy.
The majority of investors usually can withstand the financial risk that
they're taking, but greatly underestimate the mental anguish that can come
from the downside of what their investments or speculations/gambling will
bring. Wall Street created the word "speculating" so that it
doesn't have to use the word "gambling," but it's gambling. You
have to be prepared to lose part or all your money when you gamble and I
don't think most investors are. They think of the best possible scenario and
never think of the worst.
Most investors don't operate with a real plan either. That's why they lose
over time because they don't have a written strategy and instead choose
emotions and day-to-day, seat-of-their-pants thinking.
TGR: At the Cambridge House investment conference in Vancouver, you
said that you don't look fondly upon the economic outlook for the U.S., but
you remain bullish on some foreign markets, especially China. China's markets
lack transparency and even some Chinese companies listed on North American
markets have proven to be less than trustworthy, such as Chinese timber
producer Sino-Forest Corp. Are you sending investors into the lion's den?
PG: It's foolhardy to think that the U.S. is the safest place and
China's the worst place to invest in equities. There's no question that
China's going through some growing pains. But there are also shady things
that go on here in the U.S. that don't get reported or are twisted.
It's no longer a question of if China will become the world's largest
economic power, but when. To not have exposure to Chinese equities over the
next several years would be like not getting exposure to U.S. equities during
our greatest growth in markets from the '50s–'90s. And right behind
China will follow India. If we don't have exposure to China and India and the
companies that do business there over the long term, we're shortchanging
ourselves.
TGR: How should investors get exposure to China without getting
exposed?
PG: The simplest, safest way is through exchange-traded funds or
mutual funds that specialize in a group of stocks to avoid getting caught in
one particular stock or style of business.
TGR: What are some Chinese investment themes that perhaps investors
can piggyback on?
PG: China has a tremendous need for resources. That appetite is not
going to disappear anytime soon. It's underpinning the commodities bull
market, in particular steel and iron ore.
TGR: I read a report recently that said China was seeking alternative
sources of iron ore for its smelters as part of an effort to limit its
reliance on iron ore from Australia and Brazil. China's looking to
northeastern Canada in the Labrador Trough. Do you know anything about that?
PG: A couple of my clients are there and some of my largest personal
holdings are there. The Labrador Trough is probably the most interesting play
in the world right now. A Chinese company recently did a big deal with Adriana Resources Inc. (ADI:TSX.V; ANARF:OTCBB; A7R:FSE) up there.
I'm very bullish on Alderon
Iron Ore Corp. (ADV:TSX; ALDFF:OTCQX). I call it the son of
Consolidated Thompson because it has many of the people who were successful
at Consolidated Thompson and is following Consolidated's
path, but in a more expedited way. I believe it's going to go the same way
and be taken over within 12 months.
TGR: Alderon has the Kami iron ore project
near to Consolidated Thompson's Bloom Lake deposit in the Labrador Trough. A
recent preliminary economic assessment (PEA) on the project reported a
pre-tax net present value (NPV) of just above $3 billion (B). How does the
Kami deposit compare with its peers?
PG: Alderon should be able to develop Kami
at a lower cost, which is key in that area. There's
no question that there's a lot of iron ore up there, but success is a
question of cost, efficiency and effectiveness. The expectation is that it
will get port access in a relatively short period. The last missing
ingredient will be an offtake agreement with a
Chinese company, and the company seems to be suggesting that it's in advanced
talks. All in all, the next big deal in that area appears to be Alderon.
A year from now, Alderon could be worth
$10–12/share based on what Consolidated Thompson was worth. It's a
legitimate target to have in the back of our minds.
TGR: Are there any other iron juniors that you're following?
PG: A big story on the exploration front is going to be Cap-Ex Ventures Ltd. (CEV:TSX.V). I was able to see
Cap-Ex's plans for its drill program in 2012 and it's just unbelievable. This
deposit already looks like it's much bigger than anything else there. The
company plans to have four to six drills going. It's an interesting story.
There is also Zone Resources Inc. (ZNR:TSX.V; 7ZR.F:FSE), a little company that is
very low priced, very early stage and high risk. Its recent results from its
2011 program indicate that it could be into something significant. There is
some serious talk that Quebec's government and the Chinese may expand
infrastructure in the far north, where there presently isn't much now.
TGR: You expect the U.S. dollar to weaken once attention shifts away
from the troubled euro. At that point, do you expect gold to have a sizeable
run?
PG: I have called this the mother of all gold bull markets. I don't
think we'll see a bull market like this again in our lifetime. However, it's
also been the most stealth bull market. North Americans, and particularly
Americans, have shown little or no participation, yet the price has increased
five to six fold. All the fundamentals remain in place: central banks have
gone from big sellers to net buyers and major producers don't forward sell
much anymore.
The news that the Fed plans to continue flooding the system with cheap paper
is just another example of why gold's path of least resistance is to the
upside. I believe an all-time high, not just a nominal high, but adjusted for
inflation, could reach $2,350–2,500/ounce (oz).
TGR: Which of your junior gold equities that you follow have recent
news that could act as catalysts?
PG: Of all the companies that I am involved with, just about every one is an undervalued junior because they have
multiple, advanced-stage exploration projects in either prefeasibility or
feasibility studies. Their values are far more than their market caps. For
instance, if Sunridge Gold Corp.'s (SGC:TSX.V) project wasn't in
Eritrea, this stock would already be many times its current price.
TGR: Wouldn't it then be taken out?
PG: Yes. The market is discounting this project somewhere between 80%
and 99% because it's in Eritrea. However, the country risk is even less than
what it was. The U.N. sanctions against the country ended up getting watered
down. The Chinese have announced a major investment in Eritrea and are
talking about doing more.
It's extremely good for Sunridge and bullish for
the bigger company in Eritrea at the moment, Nevsun
Resources Ltd. (NSU:TSX; NSU:NYSE.A). I would not put it past Nevsun to acquire it, but I would think Nevsun would wait until Sunridge's
projects are more advanced. Once Sunridge's studies
are in, Nevsun, another company or Sunridge will develop it. It's close to getting updated
resources on multiple projects, so it's just too compelling.
Even though they've moved up somewhat, Sunridge
shares are still substantially lower than their 52-week high. This is a key
year for Sunridge. It's gone through tough times.
Its stock went down to pennies on the dollar. If it demonstrates what I think
it's going to in these reports, no matter that it's in Eritrea, it should
have a much higher valuation.
Some people that I've met who are familiar with Sunridge
believe its Emba Derho
zinc-gold-copper VMS deposit is bigger than Nevsun's
Bisha project. That says a lot.
TGR: Could Nevsun be taken out by something
like Rio Alto Mining Ltd. (RIO:TSX.V; RIO:BVL;
RIOAF:OTCQX), BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) or a Chinese company?
PG: Both Nevsun and Sunridge
could be gobbled up by a bigger company. But Nevsun
could also be interested by something that's worth 5 to 10 times more than
its current value with the advantage of being in its own backyard.
Also, Cliff Davis, the chief executive of Nevsun,
and the principals of Sunridge go back a long time.
They have cooperated on a lot of things. But no matter what happens, Sunridge's stock is extremely
cheap.
TGR: Many retail investors hope that they will exit their junior
resource equity positions via a takeover at a considerable premium.
Shareholders of Minefinders Corp. (MFL:TSX;
MFN:NYSE) recently got their wish
when Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) made a $1.5B takeover
bid in January. Did that news bolster your hopes of takeovers for other
companies with properties in Mexico, like Timmins Gold
Corp. (TMM:TSX.V; TMM:NYSE.A) and Geologix Explorations Inc. (GIX:TSX)?
PG: I believe that they're
both prime takeover candidates. The difference is that only Timmins could
actually be an acquirer, as well as be acquired.
TGR: Pan American is putting a lot of stock in Mexico. Obviously, Minefinders has had some problems with its Dolores
operation, but it's going to bring its expertise to bear on a promising
deposit.
Timmins Gold had production of about 21,500 oz in
Q411 from its San Francisco mine. But its recoveries were only 65%, up from
about 50% in Q311. Do you have any reservations about Timmins because of its
low recoveries?
PG: No. Timmins started from scratch and was producing within three
years during the worst financial crisis in the modern era. CEO Bruce Bragagnolo should be congratulated. The company seems to
be quite assured that it has the heap leaching all worked out. It is quite
confident that it will reach 100,000 oz in 2012.
TGR: Geologix continues to drill the Tepal project in Mexico, which is really a copper play.
Drilling has revealed that there's significant mineralization at depth. That
could lead to an underground operation after the open pit is completed. What
could that do to the share price?
PG: The share price is just too cheap. Regardless of that, the
drilling news indicates that it could have something bigger. But by the time
the reports start to come together in the spring, Geologix
may not be around. It could become an acquisition target before it has a
chance to be reasonably priced. That's not a problem for those of us who
entered recently, but it may not get the full value that it wants.
So many good, advanced-stage exploration projects were beaten down in
2011—some to 80% below their 52-week highs. The Geologixs
of the world are on the lists of the majors because the majors still struggle
with replenishing resources. Mexico, despite its problems with crime, is
still a very favorable mining district without many of the headaches some
other areas of the world have.
TGR: Do you have any other stories you'd like to tell us about today?
PG: There is one company: Excelsior
Mining Corp. (MIN:TSX.V), a copper project in
Arizona. It's my largest holding, so I'm speaking my book. It's incredibly
cheap, but once management puts a couple of things in place, it's going to
tell the story in a big way and I hope the stock will react. It's truly an
unknown story right now. It could be worth a lot more than it currently is.
TGR: Its primary project is North Star, where it is doing in-situ
recovery. What are your thoughts on that method of copper recovery?
PG: It's safe and environmentally friendly, but people don't
understand it. Another company has run into some issues with part of its
project being close to a town and there's been a push to not allow it to have
permits. The good news for Excelsior is that it's truly out in God's country.
There's no situation like that facing it.
TGR: The PEA stated an NPV of $480M with an internal rate of return of
34%. Would you like to see that a bit higher?
PG: Making money at about $0.60 copper costs is livable. There still
needs to be a better understanding of the deposit, metallurgy and exploration
potential, too. Because of the style of the management team, I anticipate
that this won't end up being a one-project company.
TGR: Any parting thoughts for us today, Peter?
PG: The mother of all gold bull markets remains intact. The bears have
once again been bloodied and they'll go into hiding until we go through
$2,000/oz and then they'll come out again. Then the
media will flock to them to tell us for the 19th time why gold has topped
out.
TGR: Thanks for sharing your forecast.
Financial Adviser and Market Analyst Peter Grandich started publishing The Grandich
Letter—now a blog—without a high school diploma or even a day
of formal training. His ability to interpret and forecast financial
happenings, which once earned him the moniker "Wall Street Whiz
Kid," has led to hundreds of media interviews. He is regarded as one of
the world's foremost market strategists. He's also published a new book
called Confessions of a Wall Street Whiz Kid.
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He
personally and/or his 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: Alderon Iron Ore Corp., Geologix Explorations Inc., Sunridge
Gold Corp., Timmins Gold Corp. Streetwise Reports does not accept stock in
exchange for services.
3) Peter Grandich: I personally and/or my family
own shares of the following companies mentioned in this interview: Alderon Iron Ore Corp., Cap-Ex Ventures Ltd., Excelsior
Mining Corp., Geologix Exploration Inc., Sunridge Gold Corp. and Zone Resources Inc. I personally
and/or my family am paid by the following companies mentioned in this
interview: Alderon Iron Ore Corp., Cap-Ex Ventures
Ltd., Excelsior Mining Corp., Geologix Explorations
Inc., Sunridge Gold Corp, Zone Resources Inc.,
Timmins Gold Corp. I was not paid by Streetwise for participating in this
story.
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