The Gold Report: A lot has changed in the resource space
since we interviewed
you last. From your perspective in Mexico, how did we get to where we are
today?
We are four years into this pullback right now, which means we have to be
getting close to the end of this bottoming process. Two recent events
stressed to me that we are near a bottom. One was the folding of our friends
Casey Research into Stansberry & Associates Investment Research. Over the
last decade Doug Casey has built an empire of services and expert newsletter
writers. That he would join forces makes me think we must be near a bottom.
A second one that hits even closer to home for me is that I recently received
an email from my brokerage firm at market close on Friday that it was going
out of business. This was a total shock. We have used Penn Trade for the last
10 years. The parent, Pennaluna & Company, is based in Coeur d'Alene,
Idaho, and has been in business since 1926. Most of the firm's client base
included resource investors. That is a dramatic contrarian sign that maybe,
just maybe, we are close to a bottom.
TGR: If that's the capitulation that Rick Rule has talked about,
what would the signs be that regular investors are starting to come back?
DB: Let's face it. The average investor does not want to step in
right now. For me, if I can find opportunities, I'm still going into this
market. Is it premature? Perhaps. But I don't want to miss all the upside
coming. I'm afraid average investors are going to wait until we have one hell
of a rally before they get their confidence back. It's going to take
something well north of $1,250 an ounce ($1,250/oz) gold before the
generalist takes notice, and at that point there's a high probability that it
will be too late.
TGR: What if, as many have predicted, we end up with sub-$1,000/oz
gold?
DB: It is always a possibility that we could go down from here. I
do not want to see lower prices, but it could break down. If we break the
previous low, $1,070/oz, there's no support until we get to $1,000/oz gold.
That could happen really quickly and the faster the better. Let's get it over
with. If we have to have a final cleansing, bring it on. Let's not drag this
thing out for months. Then we can get a fresh start on a new uptrend.
The more likely scenario is that we have already bottomed. Of course, no
one knows for sure. That is why we have to make our own decisions and be
prepared for whatever happens. It is scary to step into these markets right
now, but this is the game you have to be playing today. You have to be a
contrarian, even if that means being a little early.
TGR: During this bottoming process, where is it that you're finding
the best opportunities? What types of companies are best positioned to come
back strongly?
DB: I have a whole basket of resource and non-resource companies in
my portfolio. The challenge right now is timing. Who has good properties and
the cash to survive this downturn? The ones that fit that description include
New Gold Inc.
(NGD:TSX; NGD:NYSE.MKT), Sandstorm Gold Ltd. (SSL:TSX; SAND:NYSE.MKT), Quaterra
Resources Inc. (QTA:TSX.V; QTRRF:OTCQX), Starcore
International Mines Ltd. (SAM:TSX) and Pilot Gold Inc.
(PLG:TSX). These are companies that are going to weather this downturn
and be great performers when the markets turn.
TGR: Quaterra recently announced that Freeport-McMoRan Copper &
Gold Inc. (FCX:NYSE) is investing $7.1 million ($7.1M) over the next year
that will be used to explore the Bear copper project in Yerington, Nevada. Is
that an example of how some of these juniors are surviving by joint venturing
with majors?
DB: I have followed Quaterra for over a decade and been in and out
and made some really nice money. In 2006, the stock rose to over $4/share.
The company has restructured to become more of a copper play and it is
sitting with around $4M in cash, weathering the storm. It is headed up by Tom
Patton, one of the legends in the business. For a small company, Quaterra has
incredible upside potential. I'm always looking for a minimum 500–1,000%
potential when I go into something. This could be one of those companies when
the market starts heating up.
TGR: Are you looking for the same thing with Starcore
International?
DB: Starcore is a small gold producer in Mexico. It is producing
some 19,000 oz (19 Koz) gold equivalent per year and sitting on $5M in cash.
This could be a sleeper now that it has purchased the Creston Moly assets in
Mexico out of bankruptcy for $2M. Those assets were purchased for $195M just
four years ago. Starcore management was savvy to pick that resource up for
less than a penny on the dollar. When the market turns, Starcore is going to
be an interesting little play.
TGR: Pilot Gold has been the exception to the rule and actually
realized a share price increase when it released results on the Kinsley
Mountain project in Nevada. We hardly ever see stocks go up on good news
anymore. How did management accomplish that?
DB: The share price had been beaten down so badly to the
low-CA$0.30s that it was due for a pop to the upside. This is also just
another really interesting company. It has the Nevada property and a joint
venture in Turkey with Teck Resources Ltd. (TCK:TSX; TCK:NYSE). Plus it's
sitting with around $12M of working capital. It is so important to me that we
don't wake up one morning and one of our companies disappears. Cash takes the
worry out of the game.
TGR: Is New Gold well funded?
DB: New Gold has over $300M in cash in the bank. It has producing
mines in Canada, the U.S. Australia and here in Mexico, plus a pipeline of
development projects.
TGR: Sandstorm is a royalty streaming company. Is this a good time
for the royalty companies to be investing, to be looking to the future?
DB: I would think so. Sandstorm just announced it is raising $150M+ to
acquire new streams by financing junior mining companies. That will be
something to watch.
With so many mining company share prices beaten down, if you're not
already in, you can step in at this price and build a really nice core
portfolio of interesting companies that will help you sleep well at night.
TGR: If you were to pick one other company from the bargain
basement we are now in, what would it be?
DB: Another interesting one that is definitely going to survive is Endeavour
Mining Corp. (EDV:TSX; EVR:ASX). This company has been a favorite for
quite a few years. It's sitting in the mid-$0.50 range right now. It is a
gold producer with four mines, all in West Africa. Currently, it is producing
over 500 Koz of gold a year and it has $50M in cash. Just think, if gold goes
up $100–200/oz or more, this is going to be a cash cow.
TGR: One way to take advantage of these opportunities is to buy
stock. Another way is to buy stock warrants, and that is what your website is
about. Can you explain the difference between those two?
DB: Once you've done your research and you know you like a company
like New Gold or Sandstorm Gold, the next step is to see if the company has
warrants trading. Common
Stock Warrants is a complete database of all stock warrants trading in
the U.S. and Canada for all industries and sectors. A lot of companies in the
resource sector struggle to raise money in this environment. Many include
stock warrants in transactions to make them more appealing. Management has to
decide whether to make those available for trading. Every transaction that
Sandstorm Gold has ever done has included trading stock warrants. The last Silver Wheaton
Corp. (SLW:TSX; SLW:NYSE) warrant expired about a year ago, but for the
last decade the company offered a long-term warrant that was really
interesting. Today, we are focusing on the resource sector, but a lot of
warrants are coming out in pharmaceuticals, biotechs, gaming companies and
financial organizations as well. Several hundred companies now have stock
warrants trading. And many of the biotech stocks have five-year windows. That
is a wonderful opportunity.
Stock warrants are similar to options. They have an exercise price and an
expiration date, both of which are very important. Both New Gold and
Sandstorm warrants run around CA$0.20 as opposed to, say, $3 or for the
common stock and they both expire in 2017. If the bottoming process takes another
couple of years, you're going to lose that $0.20. But that is better than
buying a $3 stock that drops to $1. You're going to lose less money with the
stock warrants if you use proper money management. Each investor has to
determine appropriate risk exposure. A warrant allows you to get in with less
money, but in a rising market, you could end up making twice as much. What
better time than now?
I'm always looking to make at least double what I could make by buying the
common stock. If the common went up 100% in value, we'd like to think the
stock warrant is going to go up 200%; that is 2:1 leverage. Otherwise, it's
not worth taking the risk to buy the warrants.
Another company that just announced a warrant is Dalradian
Resources Inc. (DNA:TSX). This is a small exploration company with a gold
project in Northern Ireland. One warrant already trading expires in 2017, but
the company's $35M offering could be an even better deal.
These are just a few examples of the opportunities that are available
right now for those contrarians brave enough to act when the mainstream is
holding back.
TGR: Thank for your time.
