The Mining
Report: Gold rose 2.5% Jan. 15, and is
up 8.4% for the year already. What do you make of that?
Joe Reagor: I
think there's a lot of money flowing into the sector. It's been two rough
years in a row for gold, but now there's a feeling that a solid floor has
been established in the $1,175–1,200 per ounce ($1,175–1,200/oz) range.
TMR: Marc Faber says
investor confidence in central banks is collapsing, and gold could rise 30%
in 2015 as a result. What do you think?
JR: Investor confidence in the
large banks and the world economy has been reduced. Gold should have a steady
increase throughout the year, but just one or two examples of positive
economic data could result in a loss of some of the upside we've seen so far
this year. Our 2015 forecast for gold is an average of $1,263/oz.
TMR: The
gold-silver price ratio has risen to 75. Does this surprise you?
JR: We've believed since 2012
that gold would outperform silver. Looking at the new projects being built
around the world, we've seen silver projects at 80–100 grams per ton (80–100
g/t) and gold projects at 0.09–1.1 g/t. So after we applied our recovery
rate, this suggested a higher gold-silver ratio on a rarity basis.
TMR: Will the
gold-silver ratio decline in 2015?
JR: Silver should
outperform gold this year because silver has industrial uses. So the ratio
should approach 70, for a silver price of about $18/oz.
TMR: A number of
experts interviewed recently by The Gold
Report have said that at $16/oz the prospects for pure silver
producers are poor. Do you agree?
JR: At that price, the pure
silver producers would struggle. However, silver has risen to almost $18/oz,
and if it continues to rebound, pure silver equities should perform better
than those that derive silver credits from base metals operations.
TMR: What's your
top silver pick?
JR: Hecla
Mining Co. (HL:NYSE). It produces mostly silver
but also some gold and zinc. We believe that in H2/15 the zinc price could
make a really strong move. We recently downgraded Hecla from a Buy to a
Neutral, but that was a timing issue based simply on its current valuation.
We still believe it's in position to outperform some of its peers.
TMR: Hecla pays a
dividend.
JR: It's linked to the silver
price, so it's quite small at today's prices. In the event of a significant
spike in silver, however, this dividend would rise.
TMR: Which
near-term gold projects do you like best and why?
JR: I'll name two. The first is Pretium Resources Inc. (PVG:TSX; PVG:NYSE) and its Brucejack project in British Columbia. We believe it
should complete its financing, get its permits and break ground by the middle
of 2015. Companies that go through that transition generally see a
significant value-curve adjustment.
TMR: Pretium's
shares have risen substantially in the last month, despite no material news.
Is a takeover bid imminent?
JR: A takeover
bid is unlikely until the company has its permits in hand. Pretium has
agreements with local First Nations, and new ownership could result in those
groups asking for additional permitting requirements or additional review
time. The company is certainly acting as though it will finance Brucejack and
put it into production itself. Moving forward decisively is certainly the
right decision for current shareholders, instead of just waiting for an
offer.
TMR: What's your
other favorite gold project?
JR: Solitario Exploration & Royalty Corp.'s (SLR:TSX) Mt. Hamilton project in Nevada. This is a much more modest
project than Brucejack, with 600,000 Proven and Probable gold-equivalent
ounces, compared to 6.9 million ounces (6.9 Moz) gold at Brucejack. Mt.
Hamilton already has its environmental permitting, so it's further advanced
than Pretium in that respect. The only permits it still needs are minor
construction permits, which are generally a matter of following the letter of
the law, and a water quality permit, which is pretty standard for Nevada. We
expect Solitario will have those in the next couple of months and then be
essentially shovel ready.
TMR: Befitting
its more modest size, Mt. Hamilton's capital expenditure is only $91.7
million ($91.7M), as opposed to Brucejack's $746.9M. How does Solitario stand
for financing?
JR: Solitario's
market cap is only $42M, so a pure equity fundraising would be difficult. We
expect the company will use a combination of debt and a gold-streaming
agreement. Sandstorm Gold Ltd. (SSL:TSX.V; SAND:NYSE.MKT) currently holds a
net smelter return on the project. There's also the possibility that Mt.
Hamilton could be bought by a better-financed, larger gold company looking
for a near-term, ready-to-go project with a reasonable rate of return at
today's gold prices.
We believe that at the end of the day, Solitario is really a royalty
company and will refocus on that.
TMR: Solitario
also owns 30% of a major zinc project, Bongará, in Peru. How does that affect
your valuation?
JR: We value
Bongará at about half the company's total value. Investors don't value it
highly because, although there is an initial resource and the zinc grade is
very high, there is yet to be a publicly available financial study of any
kind done on the project. We value Solitario based on the potential cash
flows of Mt. Hamilton and the potential move in zinc later this year.
TMR: What are
your forecasts for 2015 base metal prices?
JR: We follow copper, lead and
zinc. Our forecast for copper is an average price of $2.74 per pound
(2.74/lb), with $2.70/lb in Q1/15 and $2.60/lb in Q2/15. We expect little
movement in lead, with a flat $1/lb price for the year. And for zinc, we
expect $1.10/lb for the year, with the price rising as high as $1.30/lb in
Q4/15.
TMR: Given how
important copper is to economic expansion, could its recent price decline be
a leading indicator of a global slowdown?
JR: I think the
biggest issue is a slowdown in China. That country had stockpiled large
amounts of copper but now appears to be selling back into the market, which
is what's driving the price down. We think that world economic growth has
lagged a bit and may continue to do so. We further believe that the strength
of the U.S. dollar is more a reflection of the weakness of other currencies
than it is of the strength of the U.S. economy.
TMR: Assuming for
the sake of argument modest global economic growth, does this favor the
so-called currency metals, gold and silver, over the industrial metals?
JR: For the most part, yes. Zinc
should be the best performer this year, but after that, it should be pretty
close between gold, silver and maybe uranium.
TMR: Is the world
running out of zinc?
JR: A more accurate evaluation
is that the zinc price has been so low for so long that we are running out of
current supply. In 2012, the world zinc market was significantly
oversupplied. The price fell to the $0.80/lb range, so there was no incentive
for reinvestment. Since then, Glencore International Plc's (GLEN:LSE)
Brunswick and Perseverance mines in Canada have shut down. And MMG Ltd.'s
(1208:HKSE) Century zinc mine in Australia, the largest in the world at 4% of
zinc supply, will be depleted this year.
The London Metal Exchange's zinc inventory has fallen from 1.2
million tons in 2012 to below 700,000 tons (700 Kt), which means a roughly
250 Kt/year shortage right now, even before the Century shutdown. So world
zinc inventories could drop to dangerously low levels by the end of 2015 or
early 2016.
TMR: When will
new zinc projects come on line to make up the deficit?
JR: If the price
of zinc spikes, there could be a three to five year delay before the world
can get zinc mines permitted and built. China has massive zinc reserves that
aren't currently being produced, and a laxer regulatory regime than the rest
of the world. But even if it brought some of its shuttered mines back on line
and began construction of new ones, we'd still be looking at six months to
get the former producing and a year or two for the latter.
TMR: Let's talk
about polymetallic projects. Which is your favorite?
JR: PolyMet Mining Corp. (POM:TSX; PLM:NYSE.MKT) and its NorthMet project in Minnesota. This is essentially for
similar reasons as to why Pretium is our top gold pick. This year, 2015, is
the key year for NorthMet to be permitted, financed and begin construction.
However, whereas Brucejack could be delayed three to five months and still
break ground in 2015, NorthMet has only a one- or two-month window in late
Q3/15 to early Q4/15 to begin construction because of its location. Delays
beyond that would push NorthMet into 2016. That said, it seems to be on
schedule, and we think it will make it to the finish line, winning the same
value-curve adjustment we're predicting for Pretium.
TMR: Does PolyMet
have a new permitting strategy?
JR: The current management, led
by CEO Jon Cherry and CFO Douglas Newby, has learned from its mistakes and is
now on the right course. PolyMet expects to issue its final environmental
impact study in early spring. That will be, essentially, the end of the
permitting process, and the company can then complete its financing.
TMR: NorthMet has
72 million pounds (72 Mlb) copper. How does the recent fall in the price of
copper affect its profitability?
JR: If the copper price decline
occurred when NorthMet was going into production, it would have been more of
a concern. Generally speaking, a fall in copper prices today usually bodes
well for three years from now. By the time NorthMet begins production, the
price of copper will likely have rebounded significantly. Even at
$2.50–2.60/lb, it would still be profitable. In addition, the company has
offtake agreements with Glencore.
TMR: Let's talk
about uranium. To what extent is the fall in the spot price of U3O8 to $35/lb
from $42/lb a short-term reaction to the oil price collapse?
JR: I don't think
it had much to do with that. In November, Japan announced that the Sendai
reactor would be restarted, and this spurred a uranium buying spree by world
utilities. Back then, there wasn't much spot supply available, which caused a
momentary price spike. Keep in mind that the spot price was under $28/lb last
summer, and now it's over $35/lb.
TMR: You
indicated earlier in the interview that you are bullish on uranium. Explain
why.
JR: Our forecast is for a
long-term shift from fossil fuels to uranium as an energy source. And besides
Cameco Corp.'s (CCO:TSX; CCJ:NYSE) Cigar Lake mine in Saskatchewan, little
uranium production has been added in the last few years. If more power plants
come back on line in Japan, and China continues its nuclear power expansion,
uranium demand will continue to increase. This could lead to the removal of
the current surplus and the creation of a shortage.
We don't anticipate a major move in the price of uranium. Some
industry experts expect a quick move to the $70/lb range, but we expect a
staged recovery to the mid-to-high $40s by the end of 2015.
TMR: Which
specific uranium company can you discuss?
JR: We currently
follow Energy Fuels Inc. (EFR:TSX; EFRFF:OTCQX;
UUUU:NYSE.MKT), which recently announced its
acquisition of Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT).
TMR: What do you
make of this merger: ambitious, overambitious or just right?
JR: I think it's probably just
the right move for the two companies. Uranerz had a long road to finally
reach production, but sometimes you get a management group that's ultimate
goal is to prove concept and then sell to a company that can move it forward.
I think that's what has happened here. Dennis Higgs, the executive chairman
of Uranerz, will be on the board of the new company. He brings a lot of
capital markets experience to the company, but he will also be able to do
other things as well. That's ideal for him.
From Energy Fuels' standpoint, it's a great acquisition. It provides
the in-situ recovery (ISR), low-cost production option, while maintaining the
conventional mining option. Should there be a significant uranium price
spike, it would have the flexibility to restart large-scale mining, which
gives it more of a production upside than, say, some of the ISR-only
producers out there.
TMR: How do you
rate ISR uranium mining versus traditional mining?
JR: ISR is the mining method
that works when the industry is under fire because it requires lower upfront
capital. The downside is that the permitting of additional wells and
additional production areas can cause large fluctuations in production levels
and impact overall profitability, whereas with conventional mining you're
either producing or you're not. With conventional mining, once you're in
production, you're done; you don't have to worry about repermitting as you
go. Each approach has its advantages, but in today's market, ISR is clearly
the leader. Should the price of uranium hit $70/lb, however, conventional
mining would again be the preferred method.
TMR: What's your
general counsel for investors in 2015?
JR: We favor the
macro approach. Investors today aren't so much looking for analysts to pick
specific stocks to buy and sell at specific prices as for general investing
themes and some names that fit within them. So, for instance, we tell
investors that with the U.S. dollar growing stronger, they should look for
companies with all, or at least significant, production outside the U.S.
Their costs are denominated in local currencies, so companies that mine
metals whose prices are flat in U.S. dollars will benefit from the strong
U.S. dollar.
We're negative on current copper producers because of our negative
outlook on near-term copper prices. We like pure zinc producers or those with
significant zinc contributions because of the zinc shortage. In precious
metals, we're targeting silver companies over gold companies because we
expect the gold-silver price ratio to fall from 75 to 70.
TMR: Given that
mining equities have been bearish for almost four years, the good news of the
past six weeks might lead investors to conclude that happy days are here
again. Is this a reasonable conclusion?
JR: A cautious optimism is
reasonable. Mining equities in general are going to benefit from the lower
oil price, and gold and silver equities in particular will benefit from the
higher prices of those metals.
I should again caution that better-than-expected economic data from
Europe or China could easily reverse the recent trends in gold and silver. In
addition, we note that the upward move in precious metals equities has
outpaced the price increases in bullion. Therefore, we need further increases
in gold and silver to support equity prices. Some gold stocks are up as much
as 20–30% this year, so gold must continue to trend toward $1,300/oz to
justify these gains. We expect moderate strength in the precious metals
sector in 2015.
TMR: Joe, thank
you for your time and your insights.
DISCLOSURE:
1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC,
publisher of The Gold Report, The Energy
Report, The Life Sciences Report and The Mining Report, and provides
services to Streetwise Reports as an independent contractor. He owns, or his
family owns, shares of the following companies mentioned in this interview:
None.
2) The following companies mentioned in the interview are sponsors of
Streetwise Reports: Pretium Resources Inc., PolyMet Mining Corp., Energy
Fuels Inc. and Uranerz Energy Corp. The companies mentioned in this interview
were not involved in any aspect of the interview preparation or
post-interview editing so the expert could speak independently about the
sector. Streetwise Reports does not accept stock in exchange for its
services.
3) Joe Reagor, research analyst primarily responsible for the content of this
public appearance, certifies the following: I hereby attest that all views
expressed in this public appearance accurately reflect my personal views
about the subject company or companies and its or their securities. I also
certify that no part of my compensation was, is or will be, directly or
indirectly, related to the specific recommendations or views expressed in
this public appearance. Solitario Exploration & Royalty:
ROTH makes a market in shares of Solitario Exploration & Royalty and as
such, buys and sells from customers on a principal basis. Shares of Solitario
Exploration & Royalty may be subject to the Securities and Exchange
Commission's Penny Stock Rules, which may set forth sales practice
requirements for certain low-priced securities. Energy Fuels Inc.: Within the last 12
months, ROTH has received compensation for investment banking services from
Energy Fuels Inc. ROTH makes a market in shares of Energy Fuels Inc. and as
such, buys and sells from customers on a principal basis. Shares of Energy
Fuels Inc. may not be eligible for sale in one or more states. Pretium Resources Inc.: Within the
last 12 months, ROTH has received compensation for investment banking
services from Pretium Resources Inc. ROTH makes a market in shares of Pretium
Resources Inc. and as such, buys and sells from customers on a principal
basis. Shares of Pretium Resources Inc. may be subject to the Securities and
Exchange Commission's Penny Stock Rules, which may set forth sales practice
requirements for certain low-priced securities. Within the last 12 months,
ROTH has managed or co-managed a public offering for Pretium Resources Inc. Hecla Mining Company: Shares of Hecla
Mining Company may be subject to the Securities and Exchange Commission's
Penny Stock Rules, which may set forth sales practice requirements for
certain low-priced securities. PolyMet Mining Corp.: ROTH makes a
market in shares of PolyMet Mining Corp. and as such, buys and sells from
customers on a principal basis. Shares of PolyMet Mining Corp. may be subject
to the Securities and Exchange Commission's Penny Stock Rules, which may set
forth sales practice requirements for certain low-priced securities. Please
access this link for an
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