The Gold Report: Gold rose to
$1,200 per ounce ($1,200/oz) Nov. 21 and has stayed close to that price
since. Is this evidence of the end of the bear market?
Chris Ecclestone: It's evidence of a bump
upward in gold. The rise has not been so robust that one would be persuaded
the tide has turned.
TGR: What's your opinion of the
hypothesis that there is an organized shorting campaign to bring gold down to
$1,000/oz?
CE: I don't believe it. Gold is being
pushed around on pretty low volumes by buyers and sellers. The Indian trade
isn't what it was. Western buyers are just not there anymore, particularly
large speculative buyers.
TGR: The Toronto Stock Exchange has had
recent highs led by mining stocks. Are we seeing a recovery in precious
metals equities?
CE: There's an outsized correlation between
the gold price and gold equities. Gold will drop 5%, and then gold equities
drop 20%, but it's not so sticky on the way back up. Investors have seen over
and over again that being a first mover on gold equities is not worth the
effort.
TGR: Why has the gold price fallen so
precipitously?
CE: People are just not feeling
inflationary at the moment. Quantitative easing (QE) is being tapered, and
the money supply apocalypse has not occurred. Exhaustion eventually sets in
when the same old argument keeps being trotted out and proved wrong.
TGR: What about the trillions of dollars
in new money created since 2008?
CE: Much of it is being sterilized and
recycled and has gone off to other places. The gold bulls talk about the
printing presses being run endlessly, but what has happened since 2008 in the
West is not comparable to what happened in Zimbabwe in 2008 or Germany in the
1920s. This isn't funny money. It's still owed to the government and will
have to be repaid.
QE
consisted of the U.S. government loaning money to banks. The banks loaned it
to hedge funds that then put it into emerging markets. One of the reasons why
markets like Brazil have been so floppy over the last year is the carry trade
is over, and the money is coming back to the original borrowers. They, in
turn, are flipping it back to the Federal Reserve or into the U.S. equity
markets, which after a brief hiccup are again ebullient. At least it's not
going into the U.S. property markets again, which is a good thing because
that bubble is not with us anymore.
TGR: You stress the importance of mining
jurisdictions. Which jurisdictions once thought mining friendly are no longer
so?
CE: Chile was a great favorite for years,
but it now has some black marks against it. Yamana Gold Inc. (YRI:TSX; AUY:NYSE;
YAU:LSE) has been hit with a new levy described as a noncash tax charge. How
can you have a tax charge that's noncash? It either is or isn't, particularly
when levied retroactively.
Barrick
Gold Corp.'s (ABX:TSX; ABX:NYSE) problems with Pascua-Lama are much more than
a simple capital expenditure (capex) blowout. Capex exploded because the
process took a lot longer than expected on the Chilean side, not the
Argentinean side. Then there's the water problem. Many Chilean projects at
whatever capex cannot get water because it is needed at lower altitudes to
service the urban areas.
Mexico
has been a happy hunting ground for Canadian miners over the last 10–15
years. When I was based in New York, investors would ask about the cartels.
They were told not to worry because they weren't active in mining areas, only
in Tijuana. That's now been dispelled as a myth.
TGR: How is the mining industry dealing
with this threat?
CE: I went to a presentation recently
where a company said it was employing people to maintain good relations with
the cartels. This sounds like skating on the thin ice of the international
anticorruption rules. The miners are not paying off the government but paying
off some gangsters threatening to blow up their mines or roads unless they
employ some of their factotums as a security force.
Then
there's the issue of royalties. We heard for years that they would never rise
in Mexico. Well, after 10–15 years of the country being open for mining, the
government had not realized the increased revenues it expected, so it decided
to squeeze more juice out of that lemon.
TGR: Which jurisdictions have become more
mining friendly?
CE: One that potentially could surprise
Canadian miners is Bolivia. It has been in the dog house for a long time
because of one or two incidents. Another is Cuba. Frankly, Cuba has been
mining friendly, it's just that people haven't been willing to admit that
companies like Sherritt International Corp. (S:TSX) have had a pretty good
run there.
TGR: Are you expecting a big increase in
mergers and acquisitions?
CE: Bargain hunting has been going on for
a while, and I think we'll see more. In the past, takeover targets demanded a
200–300% premium to the current market price. Now they're so desperate they
will be taken over at whatever price. We saw this recently with Duluth Metals
Ltd. (DM:TSX) taken over for a song by Antofagasta Minerals Plc (ANTO:FSE)
because Antofagasta had Duluth over a barrel.
TGR: What type of companies are likely
targets?
CE: Juniors with companies with
unfinanceable projects, basically anything over $500M. A good example is Chesapeake Gold
Corp. (CKG:TSX.V) and its $4 billion, 18.5 Moz gold Metates project in
Mexico. Goldcorp
Inc. (G:TSX; GG:NYSE) owns about 9% of Chesapeake, and only Goldcorp has
the money to finance Metates. This is too rich for Agnico Eagle Mines Ltd.
(AEM:TSX; AEM:NYSE) or even Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE).
Majors
such as Goldcorp, Newmont Mining Corp. (NMC:TSX; NEM:NYSE) and Barrick Gold
need to plug holes in their future production, and only companies of this
size can realize projects such as Metates.
TGR: The majors have their own bottom
line problems. How can they pay to take on new assets?
CE: I think they'll pay with shares.
Their takeover targets will be able to justify cheap sellouts to their
shareholders by pointing out that cash payouts would be derisory, and the
buyers will not want to dilute their shares; they need their cash to develop
their new properties. They can tell the shareholders that by taking the
shares, if the acquisition works out, one plus one will not equal two but
rather three, four or five.
With
regard to base metals takeovers, I believe that the zinc story is going to
lift off. There are now no properties in the development stage owned by small
companies. That means the projects that will be acquired by the majors such
as Lundin Mining Corp. (LUN:TSX) will be in much more formative states.
TGR: Do you see base metal prices rising
in the near term?
CE: I think nickel could go up despite
the Chinese putting on a brave face about the Indonesia shutdown. If copper
trades above $3 a pound ($3/lb), it's a good place to be. Everybody's
profitable. I'm really bullish about zinc, which I think could break through
$1.20/lb in the first half of 2015 and then perhaps rise above $1.50/lb. That
would be a pretty massive move from the $0.80/lb where it was wallowing a few
months ago.
TGR: Gold and silver, where do you see
them going?
CE: I wouldn't be surprised to see silver
remaining between $15/oz and $18/oz. I don't see gold going much above
$1,300/oz in the near future. Declining production will underpin the future
gold price. The gold production trend was up slightly over the last decade,
but now the big mines in South Africa are pretty much finished, and it's much
harder to get grade in new gold mines.
TGR: You've written that brownfields projects
"trump" greenfields projects. Why?
CE: Basically the work's been done
already. We know that there's something there and that it's mineable. In many
cases, juniors don't have the money to pay for preliminary economic
assessments (PEAs) or preliminary feasibility studies (PFSs). And if they
don't have the money for that, then what's the point of drilling to make the
resource bigger? In any case, we all know the market tends to hit stocks that
come out with larger resources because that indicates the companies must move
on to PEAs and PFSs they can't afford. Those projects are stuck.
TGR: Is there a way out?
CE: A number of companies have recently
been looking at old mines with historic resources. These used to be treated
like the old aunt hidden in the attic. Now the attitude is even though they
are not NI 43-101 compliant, these resources were calculated to a very high
standard by companies like BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) and
Noranda. We're not talking about Bre-X here. If the historic resource is
reliable, why shouldn't companies mine projects on that basis?
Another
advantage of historic resources from shuttered mines is that they were
calculated day-by-day as the mine moved forward. These are not theoretical
blobs supposedly under the ground. These are real deposits that were really
being exploited. These mines have ramps and adits, all sorts of
infrastructure. Even if all the equipment has been removed from aboveground,
having roads, electricity hookups and water constitute significant savings
that you just do not get with greenfield properties.
TGR: What current producers are you
following?
CE: One is Galane Gold
Ltd. (GG:TSX.V), which is producing from its Mupane mine in Botswana.
It's trading at $0.195, and its market cap is actually lower than its cash on
hand. The company's high cash cost was inherited from previous owner IAMGOLD
Corp. (IMG:TSX; IAG:NYSE), which wasn't particularly concerned with costs
from lower-producing mines. IAMGOLD just wanted the ounces.
Over
the past two years Galane has gotten its cash costs down to about $1,100/oz.
The company is working to bring costs down further by shifting to production
from stockpiles, from unworked tailings, at about $700/oz. Investors are not
yet up to speed on this, as they are too concerned with the companies in
their portfolios that have lost 75%.
TGR: Galane has signed an offtake
agreement with Samsung Electronics Co. Ltd. This is the first such agreement
I've heard of. Why has it done this?
CE: Galane has done this to get a nice
cushion of cash, about $5M. Samsung has done this because it is one of the
world's largest industrial consumers of gold through its production of cell
phones and other devices. Samsung is a pretty smart organization, and it's
fascinating that Galane is the horse it's betting on. I think we'll see a
synergistic relationship between these companies in the future. Should Galane
find another project and is considering adding 100,000 oz per year of
production, its first call will be not to Bay Street but to Seoul.
TGR: You have a 12-month target price for
Galane of $0.90.
CE: I know it's a pretty rich target, but
if investors realized this stock's discount to cash, it would have the
potential to rise 20–25% above the cash value. The bigger change will come
when investors realize that production has become profitable. The $100/oz
profit on Galane's stockpiles lowers the average cost of every ounce it
produces. This combined with so few shares issued and such a low market cap
equals an exponential move.
TGR: Now, you follow another low-valued
gold producer, don't you?
CE: Yes, Atna Resources
Ltd. (ATN:TSX), which is producing from its Briggs mine in California.
It's trading at $0.065, which is crazy.
TGR: The company also has the
past-producing Pinson project in Nevada, which has a $67M capex. What do you
think of Atna's prospects?
CE: It always seemed to have too many
projects, but it recently sold two in Nevada for $10M. Focusing on Briggs and
Pinson is the way forward for Atna. I suspect that it will do a deal with a
royalty company or make some other kind of arrangement to get Pinson going.
It will probably have to sell its soul and mortgage its properties to
whomever its funder is, but this stock is so battered after its mistakes of
the past that it's almost all blue sky now.
TGR: You follow another company with what
we might call a "microcapex" project. Tell us about it.
CE: Minnova Corp.
(MCI:TSX.V), which changed its name this year from Auriga Gold. This is a
good example of what I was saying about shuttered mines with historic resources.
Its Maverick gold project in Manitoba still has its entire underground
infrastructure and most of the aboveground as well. Its all-in capex is only
$29.5M, and it has a 55% after-tax internal rate of return, so it might get
snapped up by a midtier even before it goes into production. The stock is
trading at $0.345, and our 12-month target price is $1.13. Another thing in
Minnova's favor is that it's in Manitoba.
TGR: Why is that significant?
CE: For years we've heard that Quebec is
the best jurisdiction in the world and about the advantages of Ontario and
British Columbia, but Manitoba is really hot now. So much is going on there.
It used to be only HudBay Minerals Inc. (HBM:TSX; HBM:NYSE) sort of
struggling along with its base metal mines. But HudBay is expanding. And VMS
Ventures Inc. (VMS:TSX.V) is another example of what can be achieved in that
province. Manitoba has a good mining regime and doesn't have the problems you
get now in British Columbia.
Minnova
is in a position where permitting should be easy. The process can actually be
sped up because for governments to drag their heels on a mine that was
operating until fairly recently would look pretty childish.
TGR: You've acted on your own advice
regarding past-producing mines, yes?
CE: That's right. I'm the president and
CEO of Geodex
Minerals Ltd. (GXM:TSX.V), which has two historic antimony-gold projects,
West Gore in Nova Scotia and Jacaranda in Spain. Our goal is to reactivate
them. Jacaranda is an open-pit mine that was producing up until the 1970s. We
are doing some elementary exploration because it's not such a big pit, and
most of the deposit is near the surface. West Gore produced between the 1880s
and the 1920s.
TGR: Is there a final brownfields project
you could talk about?
CE: Avalon Rare
Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) is an interesting story
because it is reviving the East Kemptville tin mine in Nova Scotia. This mine
was owned originally by Rio Algom, which was bought by Billiton, which became
BHP Billiton. This is another example of a project where the research was
done by majors, so Avalon knew what remained of the resource and how much was
in stockpiles and near the tailings. This has saved the company a lot of
effort and made it much easier to plan its future.
TGR: Heading into 2015, what should
investors in the gold space be looking for in companies?
CE: Production and past production.
Production is kingly, and past production is princely. Anything else, stay
away.
TGR: Chris, thank you for your time and
your insights.
