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An avowed
Keynesian, Equities and Economics Report writer Victor
Gonçalves braces against the economic gale-force headwinds that
threaten to whip gold's stellar run into seasonal weakness. But, before the
new year, the yellow metal will generally see more strength than weakness,
according to Victor, after which "things really get sour." In this
exclusive interview with The Gold Report, Victor says he's rooting for
the juniors in the homestretch, affirming: "This is the best part about
juniors—we're in results season."
The Gold Report: Victor, you and many others were expecting a major
pullback in the market and we had some pullback in late October. Is that what
you anticipated?
Victor Gonçalves: It's roughly what I expected. It could have
gone one of two ways, but technical indicators have been showing that we have
one of those triple-top occurrences that cascade on the way down. Preceding that
pullback was a broad based rally but it gave a false sense of hope, if you
will, in the sense that it wasn't going to go any higher. The TSX, for
example, which is mostly what I follow, hit about 11,700 several times and
then went down. That's telling me is that we're looking at an interim market
top, at least. Whether we're going to have another major crash again now is
still in the air. I don't think we're going to have a major, let's say, 50%
correction on this dip. I think we might have another shot at a rally before
a major correction. And although I do think one is imminent and investors are
taking some profits off the table, I haven't seen all the signs a full-up
crash this time, and fall-to-winter typically sees seasonal strength. The
economic gale-force headwind will be bit of a problem when we get into the
seasonal weakness.
TGR: When does the typical seasonal weakness begin?
VG: We see some tax loss selling toward the end of December, and then
the Santa Claus rally coming out of that. It's a bit of a whipsaw, but
generally more strength than weakness until the early new year, when it won't
be so nice. That's when I expect things to really get sour. But I want to
emphasize this could happen now.
TGR: When we get to the major downturn, will we retest the 2009 March
lows?
VG: The short answer is yes. Based on my model, I don't think we'll
break through them. If we do, it won't be by much. This is healthy. It tends
to happen. With every major crash we've had, we've had a nice euphoric run
after the first major cascading, which happened at the end of last year and
the beginning of this year. It depends on which exchange you're looking at,
but up until the top of the market we've had, effectively, between a 70% and
90% run. We could see the market correct now in a major way or just a
10%–15% pullback, which we're in the middle of right now.
TGR: How are you playing this market?
VG: I've been really aggressive this year. Right now I'm taking some
profits, but I'm not selling everything. I'm keeping strong companies because
they will still rally. A lot of companies have stopped or are winding down
this year's drilling, and more results will be coming. The strong companies
are likely to have better results and are likely to be able to capitalize on them,
especially with the capital markets as strong as they have been. I've
certainly kept a large enough position on a lot of these strong companies to
feel the appreciation of these potential good results coming down the pipe.
TGR: You're a big believer in gold. It's had a pretty good rally this
year, starting at about $850 and now about $1,030. Do you still see that
going close to $1,200 or $1,300 by year end?
VG: I generally don't want to put an exact timeline because these
things never work out as you plan them. Gold is going to have to get
comfortable at $1,000. That's what it's been doing. We're going to have to
get this comfort level really established and some more economic data before
gold can really start taking off.
The price of gold has rallied strongly this year, but really not until the
latter half of the year and not until the China effect kicked in. The Chinese
government now wants the Chinese people to own physical gold. They're
flat-out promoting it. If any one society acts as a collective, it's the
Chinese—and when the world's largest population is acting as a
collective, even if a small fraction buys gold, that can make a huge
difference. This fresh demand is the reason why we have sustainably higher
gold prices now. Once that buying really kicks in and has filtered into the
full supply-demand equation, we'll get to that $1,200 or $1,300 price point
or more.
TGR: Considering the great appreciation we've seen in the junior
equities, do you think there's much more upside potential?
VG: Every commodity has a base of equity that trades around it. You've
got the copper, silver and zinc stocks that tend to trade reasonably 1:1 with
the commodities, depending on whether it's a junior, a mid-tier or a senior
company. With gold it acts a little different. The majors trade about 1:1
with gold in terms of price increases and decreases. That makes sense because
when you're buying a major, you're basically buying a produced ounce.
However, when you're buying a mid-tier, you're buying a near-term produced
ounce, so mid-tiers normally trade at about 0.7:1. Over the past couple of
years, the juniors have been moving only about 0.2:1 at best. So, really,
zero correlation. Junior equities wouldn't really respond to the gold price,
up or down, because junior gold companies don't represent gold, they
represent management, land, cash and so on. In other words, they represent a
venture that is trying to find economic gold and therefore will trade
like a stock and not like gold. So when gold prices are consistently rising,
stocks generally don't do well and gold juniors, because they don't represent
gold, are no exception unless they actually made a discovery. Now people want
to get in on the action of gold, and the best way to is not in the majors;
you might as well buy physical gold. The mid-tiers and juniors will see the
true appreciation because we have had the equity markets and the gold markets
going up at the same time, which doesn't normally happen.
With gold where it is, juniors are more likely to retain equity prices when
investors are taking profits. So while the market is treading water or
getting these initial stages of a downturn, funds are going to flow
somewhere. People are going into something that still has some sizzle and
that's the junior golds and some other categories as well. So I still think
there's appreciation in the gold juniors as a basket. That said, if the
market corrects 50%–70%, everything goes down. When the tide goes out,
all the boats come down.
TGR: If an investor's money is in the juniors, isn't it at greater
risk in the event of a major market pullback, because these equities aren't
as liquid as in the seniors?
VG: Absolutely. Once the market really starts pulling back, the best
thing to do is just to go flat out in cash. That's what I will be
recommending once I see that market really, truly turning south. There's no
point in being in equities when people are selling them. At the moment,
there's still money on the sidelines, there's still some money out there for
juniors particularly because of the discovery factor that's going on. So as
it stands now, juniors are still good to be in.
TGR: And when the market turns up again, investors can be ready and
knowledgeable about which juniors are likely to bounce back first. So what are
some of the companies that should be coming out with some good news and
perhaps some stock appreciation?
VG: My poster boy is Richfield Ventures Corp. (RCVTF.PK). Anyone who took my recommendation
certainly did well because the company not only put out some stellar results,
but went from 12 cents to $1.88 in a matter of maybe two-and-a-half months.
When I first recommended the company, I think the market cap wasn't even $1
million, so they were certainly a junior at the time. Not every company's
going to behave this way, but out of the 15 holes Richfield Ventures drilled,
14 holes had mineralization. That's a success rate of 97%. Very, very good.
And half to two-thirds of those were slamming out-of-the-ballpark type
results—huge results. Their footprint could host easily 2 million
ounces of gold. That is fantastic for a company with all of 14 million shares
out. That's a company that still has a lot of legs to it. Next year they're
thinking about definition drilling and doing some more exploratory work to
the south because they haven't really touched the south part of the property
yet. The beauty about this project is that it's road accessible; you can get
on there in your car.
TGR: Who else are you watching?
VG: A company we talked about in August was Kent Exploration Inc. (TSX.V:KEX). At
that time, I think it was at 7 or 8 cents, and now it's pushing close to 25
cents. It's done quite well, and for good reasons. They've acquired some New
Zealand and Australian properties with almost 700,000 ounces of gold on them.
They have near-term cash flow of barite, anywhere from $1.2 million to $1.5
million a year. They've drilled their Flagstaff property in Washington State,
where they have very high-grade holes that they're trying to prove because
these are historical holes drilled in the early '80s. And it's in a safe
jurisdiction and all those good things we need in a company. It's well run.
Graeme O'Neill (the CEO) is one to spend money where it's required and not do
it frivolously, so that's one thing I like about him. His management team is
the type to make sure things get done from A to Z. That's what they're doing
now. Based on the fact that the company has approximately 28 million shares,
it's only a $7 million company with some very nice results coming out.
They've done well so far, and still have room to grow. I'm quite eager to see
what happens.
TGR: Any others you could share with us?
VG: There are a few other companies that I've looked at that are,
again, in positions to do well. We can look at a company called NioGold Mining Corporation (TSX-V: NOX) (OTC: NOXGF.PK) and that's one that I've been following
for quite some time. NioGold already has a resource of around 600,000 ounces.
They've drilled off a bunch more holes to increase that resource. At that
point they've got the ability and the network, if you will, to go to a mining
decision if they want to, or there are enough others in the area, such as Osisko Mining Corporation (OSKFF.PK) that could very well just buy it out.
NioGold is in a good position here at about 24 cents, because they're due to
have a resource calculation reasonably soon—sometime in November, I
would hope—and that should appreciate the stock notably if they come
out between 1 million and 1.5 million ounces.
What else do we have? I was on Otis Gold Corp.’s (TSX:OOO)
property in August down in Idaho and that's a company that has 706,000 ounces
of gold already at 1.15 grams per ton. This is a historic resource, so it's
not 43-101 compliant, but it was drilled off by some very reputable companies
so I'm pretty confident in the data. And I've talked to the people at Otis,
Craig Lindsay and so on. They're looking to build out a high-grade core, a
nice sweet spot and then see if there's more to the low-grade halo. As with
NioGold, Otis has a lot of risk that has been removed because they have a
resource already and they know where they're going. The geologists who are
working on this property are the ones who originally discovered it 20 years
ago now they're back on the project as managers. This is a fairly new
company, very low float. They've got a lot of their market sizzle still
because no one's heard much about it; Otis has that ability to really
appreciate in value if and when good results come out.
This has to go back to the thesis that we still have some more time for these
juniors to appreciate before the market truly does crash. This is the best
part about juniors—we're in results season. A lot of these companies
are going to have results coming out over the next month, month and a half
and that's really going to make sure that the juniors in the gold space do
well as opposed to juniors in spaces where the commodity may not be as much
in favor.
TGR: You also mentioned Midland Exploration Inc. (TSX.V:MD) in
our last conversation. What's going on with them?
VG: Midland's president and CEO, Gino Roger, is a very good guy. I've
run into him a number of times and have had a lot of good conversations with
him. That is a company that ought to be on the Discovery Channel, How Did
They Do That? This company has very few shares outstanding—23
million fully diluted—is three or four years old and still has $3.2
million in the bank. That, in my mind, is very impressive. By that stage of
the game, a lot of companies would have up to 60 million shares out and
probably a little bit less money. So Midland's done a very good job of
managing their float, managing their money, and it shows in the stock.
It also impressed me in the sense that Midland lost less than 50% of its
stock value in the market crash and downturn last year and early this year,
when most of their peers lost 80 to 90%. Most of their shares are in hands
that they know, too, so the stock doesn't normally have a lot of downside
risk, which is kind of built into their share structure. So that's the first
thing I think was brilliantly done. Secondly, as a project generator they
rarely spend the big money. They spend enough to get the project drill-ready
or drill a couple of holes themselves and pass it on to a company with deeper
pockets and a mandate to drill off a resource or develop the project. They
carry an interest and their shareholders benefit from that.
This isn't a new concept. Quite a few companies do this. Midland just manages
to do it well. In addition, they recently made a strategic, very well-placed
acquisition of a rare earth element property not far from the Strange Lake
area. It's very good because it's right beside Quest Uranium Corporation (QSURF.PK), which has a resource on one of their
projects. This will be attractive to somebody and that's what joint venturing
is all about. I suspect they'll do some work on it, get it ready to drill,
pass it off to somebody who will do bigger things with it and the
shareholders of Midland will benefit. We can see this in the share price;
it's a very beautiful chart.
It is constantly moving up slowly. It's not one of those companies that does
a 10- or 15-bagger in a year. But it is a company that's a little more
consistent. You can sleep a little easier at night.
All these juniors have risk and to think otherwise is deluding yourself. But
this company has a lot of risk taken out just by virtue of their model, by
virtue of the way their shares are positioned and the size of their float.
So they've done pretty well since the last time we talked. They made a rare
earth acquisition, their gold projects are moving along quite nicely, and
this is a company I think everybody should look at.
TGR: Any other juniors that pique your interest?
VG: Sure. Eastmain Resources Inc. (EANRF.PK). All I really tell anybody who asks me
about Eastmain is, "Buy it and put it away." I talk about very few
companies that way, and rarely would that apply to a company that is not a
major. Eastmain is nowhere near a major, but they're in great shape. They
have a beautiful deposit, over a million ounces of high-grade material at
Clearwater. They've had results as high as 75 ounces per ton gold, but the
lower grade 1 ounce per ton material is consistent throughout the property.
The beauty is it's not just some little core area with these nice newsworthy
grades. It's everywhere.
This is very attractive to a major, and Goldcorp (NYSE:GG) just
so happens to be very nearby. So as far as I know, Eastmain will continue to
develop their project until it's time for Goldcorp to buy them out. Goldcorp
already owns 9.9%. But Eastmain is in a perfectly good position. They've got
all weather roads, they've got power lines going to the property, James Bay
is right there. So they have all the ingredients and if they wanted to go
after this on their own, they could. But they've also got the luxury of being
right beside a very interested major. On top of all of this, Eastmain has $17
million in the bank, which is really like having $25 million because for
every dollar you put in the ground, you get 50 cents back from the government
in Quebec. Very few jurisdictions do that.
TGR: You can't beat that.
VG: Another one worth looking at Mexoro (OTCBB:MXOM). I
went to visit their property just an hour outside of Chihuahua Mexico in mid
October and was very impressed. This project is really nice, and from what I
understand, they've applied to trade on the TSX, which would give it a fair
bit more liquidity, a lot more transparency, and a lot more access by the
major funds. The company right now has about 1.2 million ounces of gold on
the property, grading around 3 grams a ton. That's based on 50 drill holes.
They drilled 103, so they're going to update their resource calculation with
the balance of the holes plus some more drilling, so we can expect that the
resource is going to increase reasonably significantly, I would say, just by
adding the rest of the holes they've drilled already. Sometime in early
November the mill should be completed and they should be getting into
production. Once it's up in full production and ramped up, this company
should be producing about 30,000 ounces of gold at a cash cost of around
$300. That's very cheap gold, and cash flow is good. I personally like to see
a company with a) cash flow and b) exploration upside—and Mexoro has
both. The exploration team is one of the best I've seen.
The company is trading at about 40 cents with 50 million shares out. So,
really, it's a $20 million company with a mill that is basically complete, a
resource of 1.2 million ounces of gold as it stands now, and production once
it's ramped up at roughly 30,000 ounces per year. That's all worth more than
$20 million, which is why I'm intrigued with this company.
TGR: Any parting thoughts today, Victor?
VG: I'll reiterate that the junior space is a very good place to be
because it certainly has the most upside potential. This is particularly the
case with the right companies and some of the risk mitigated (i.e., a
resource with some production or an acquisition that was done or something
else where you don't have to do everything from the ground up). Mind you, if
you do get something from the ground up, such as Richfield, you get a big,
big return. I would also repeat a caution: We hope we'll see only a small
pullback here, and then a continued rally. But it is quite possible that this
pullback will be protracted, or will lead into a bit of a crash. It's
important to really be on top of the markets to see what they do.
TGR: With those words of caution and optimism, we thank you once
again.
DISCLOSURE: Victor
Gonçalves
I personally and/or
my family own the following companies mentioned in this interview: Kent,
Richfield Ventures, NioGold, Mexoro and Midland.
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