Goldman Sachs delivered a dire commodities outlook earlier this year, but
RAB Capital Founder Philip Richards still sees compelling buying
opportunities. In this interview with The Mining
Report, Richards discusses his outlook for oil, gold, vanadium, zinc
and nickel, and profiles companies with projects that will see the light of
day even in harsh price environments. A few of these names have doubled in
stock value in recent months, and still others look poised to deliver
multiple returns on investment.
The Mining Report: Goldman Sachs cut its price outlook for
almost all commodities, including oil, which it said could go as low as in
the high $30 per barrel ($30/bbl) range. Do you see that as realistic?
Philip Richards: I think that oil has now made a bottom. I look at
Brent crude more than West Texas Intermediate. Brent bottomed at around
$46/bbl and has since rallied around 30%. The reason for thinking that oil
could go lower is that oil is a relatively price-inelastic commodity. That means
if you have a big move in the price, you don't necessarily get a big response
on the demand side. Nevertheless, demand is picking up at these lower levels.
In fact, even in the U.S., which is a material market, there has been a
notable uptick in the growth of oil use at these lower prices, so oil is
responding a bit on the demand side.
The other question is whether supply can move dramatically in one
direction or the other. Now, Iraq is beginning to pump more oil, and may add
another 1–2 million barrels per day (1–2 MMb/d) within the next two years. On
the other hand, the whole Middle East is becoming increasingly traumatized,
by the Islamic State in particular. There is ongoing unrest across the
region, such as Shi'ite Houthi militia taking over strategic sites in Yemen.
That could destabilize Saudi oil provinces, which have Shi'a Muslims, who are
disaffected with the Saudi regime.
Also, about 5% of oil production drops out of the equation every year
simply because reserves run out. This is a commodity with production running
at around 92 MMb/d, so about 5 MMb/d must be replaced every year. With the
lower oil price, a lot of investment has been curtailed, and consequently,
that will slow the pace of new supply coming on-line.
Generally speaking, my prognosis would be that we are looking at oil
prices slowly increasing over time.
TMR: In this range of oil prices, what oil companies could be
successful?
PR: A number of oil companies had their share prices come down
quite a lot. I think you have to look at the mid caps or juniors for real
bargain prices. The blue chips, the big-cap stocks, didn't come down as much.
Falkland
Oil and Gas Ltd. (FOGL:AIM) has been a long-time favorite. It is just
commencing a major five-well drilling program. The stock should show some
upside, particularly if the oil price rises.
In the U.S., a company like Noble
Energy Inc. (NBL:NYSE), which is a partner of Falkland Oil and Gas in the
South Falklands Basin, is well positioned, and also has some decent
production elsewhere in the world. Noble is a good example of a fairly large
mid-cap stock that could do well in this range of oil prices.
If you looked into something a little bit smaller in, say, the United
Kingdom, you might consider Premier Oil
Plc (PMO:LSE), which has production. The share price has come off very
considerably from its high. In September, the stock was at about 350
pence/share (350p/share). It's now at only 120p. So I would think that's a
good example of a bargain stock.
TMR: One thing that Goldman did see increasing was gold. It raised
its forecast to $1,262/ounce ($1,262/oz) from $1,200/oz, saying that the
downward trend was short of its expectations. What are your expectations for
gold?
PR: Gold should be a beneficiary of all the money printing that's
been going on in the world. Central banks everywhere have been doing
quantitative easing. The European Central Bank is now printing large volumes
of euros. Gold should benefit from that. Likewise, just as with oil, the gold
price has come down a lot from its peak of nearly $2,000/oz in 2011. So it's
about 40% down from its peak. However, that drop has resulted in curtailed
production, which should begin to cause a tightness in supply.
Gold obviously is very much a financial commodity that is used
speculatively; nevertheless, our view is that a money printing environment
with very low interest rates should be good for gold. Also, we believe that
the Chinese would like to increase their central bank holdings of gold, and
they're not alone. There are some other Asian central banks that would like
to increase their holdings of gold. We think the demand side should improve.
TMR: What numbers are you using for your valuation estimates?
PR: We tend to use around $1,200/oz gold to be conservative. We would
also look at projects at $1,000/oz gold, just to make sure companies can
survive a more severe price pullback. I also would look at a scenario where
gold gets back to, say, $1,600/oz. Typically, we would look at a minimum of
three different scenarios so as to see what the leverage could be.
TMR: What are some of those gold companies you're following that
could do well in any of those three scenarios?
PR: Victoria
Gold Corp. (VIT:TSX.V) has done well since we last spoke.
It's up nearly 100%. However, the company is still trading at a very deep
discount to its net present value, which is three or four times the current
share price, depending on what gold price you use. It has a decent project in
the Yukon, which is obviously a safe political jurisdiction. I think this is
one stock that could double again from here.
TMR: Victoria has announced that it is waiting until the market
turns to go into production on its Eagle gold project, and it's focusing more
on mergers and acquisitions. What are some of the opportunities you see for
Victoria? There are a lot of deals out there right now.
PR: Yes. I hope that Victoria doesn't buy anything that is too big.
In the Eagle deposit, it has a very big deposit already. I guess if it's
actually going to try and put something into production, it's better if it's
smaller, quite frankly, unless it buys another very big sleeper project and
waits for the gold price to increase. I think the Eagle project will get into
production at some point over the next couple of years. It's not a project
that requires a very high gold price to be economic.
TMR: What are some other gold projects you're watching?
PR: I quite like the Russian producers. Kinross Gold
Corp. (K:TSX; KGC:NYSE) has big production in Russia. That's a major blue
chip stock, of course. With the ruble having fallen dramatically, the
company's local costs of production have come right down. Kinross is a good
company that is in production and has strong cash flow.
TMR: Let's go to some of the other commodities. What about
vanadium?
PR: Vanadium pricing has been a little bit soft. I guess that's due
to softness in stainless steel. Largo Resources
Ltd. (LGO:TSX.V) has come into production. That's had actually quite an
adverse price movement since we last spoke. Actually, the main worry there
isn't its cash-flow generation, which, even at these vanadium prices, remains
reasonably strong. Most of the worry has been due to the fact that Largo has
some debt that has to be rescheduled in the next month. Hopefully, over the
next couple of months, Largo will have quite a major improvement in share
price due to the successful debt restructuring.
TMR: Is Largo still on track to produce 17+ million pounds of
vanadium this year?
PR: Yes, more or less. It is certainly in production. Whenever you
are in the first year of production, things can come in a little bit lower,
but I think, broadly speaking, Largo is on track.
TMR: A number of people we have interviewed are quite excited about
the prospects for zinc. Do you share that excitement?
PR: Yes. Trevali Mining Corp. (TV:TSX; TV:BVL; TREVF:OTCQX) has
started to do well. I think Trevali has a lot more upside from here. I would
hope that by the time we next speak, it will be up 50–60% from here. Its cash
flows are starting to come through. It has production in Peru. It is just
coming into production in New Brunswick in Canada, and it has some other
assets to exploit. So I'm positive on Trevali and on zinc.
A large-cap zinc stock would be something like HudBay Minerals
Inc. (HBM:TSX; HBM:NYSE).
TMR: Is HudBay looking to acquire more production as it runs out?
PR: Yes, I would figure so.
TMR: Are there any companies you're watching that could be
acquisition targets for HudBay?
PR: Actually, Trevali would be a prime candidate. Selwyn
Resources Ltd. (SWN:TSX.V) still has the ScoZinc deposit in Nova Scotia.
That would be quite a good one for HudBay to buy as well. I remember when
HudBay bought out OntZinc Corp., which operated in Ontario. I think HudBay is
likely to go for North American assets. Trevali and Selwyn's ScoZinc are two
pretty easy targets. Neither company is very expensive and either company
would be quite an easy takeout target.
TMR: What about nickel?
PR: Nickel has been a big disappointment. The price was really
looking to firm up, and it's come all the way back down to the bottom. So I'm
very disappointed in nickel.
TMR: Are you following nickel companies?
PR: Yes, we're still following Royal Nickel
Corp. (RNX:TSX). I think the Dumont project is great, with an NPV clearly
in excess of $1 billion, depending on nickel prices, but frankly, we do need
a higher nickel price for that project to fly. Royal Nickel is going to be a
major beneficiary of any nickel rally. My own view of nickel is demand growth
remains quite good. The supply situation obviously improved dramatically when
the Indonesians imposed their export ban on nickel pig iron. But there has
been leakage of nickel pig iron from the Philippines, and possibly some
leakage out of Indonesia. We are very disappointed by how low the nickel
price has been, and we are hoping for and expecting an improvement in the
next few months. But that has been an unexpected setback.
TMR: What about the Abitibi itself? Are you positive on that
region?
PR: It depends on the project. Typically, people are positive on a
region when it just looks geologically prospective and they're not sure what
opportunities are there. In the case of Royal Nickel, we don't need any
encouragement: we have clearly defined resources. We know what's there, and
we have a mine plan. It's really quite advanced in that respect. We just need
a better nickel market to bring this into production.
TMR: What about iron ore?
PR: Iron ore has been completely disastrous. However, Sable Mining
Africa Ltd. (SBLM:LSE) is one company we would still consider buying at
these levels. It's very, very cheap. Sable has one of the best iron ore
resources in Africa. I think even at these iron ore prices, it's one of the
few African iron ore projects that could be economically viable.
TMR: Investors seem to agree with you. The stock price has been
perking up a bit lately.
PR: It perked up a bit because Sable confirmed it now has an ocean
access railway route through Liberia. So it now has an improved train route
that has been approved by the government to get access to the sea. Sable has
a very, very good product—high grade, low impurities. I'm pretty confident
that this is a project that will see the light of day and possibly reward
shareholders with multiple returns on their investments.
Another early-stage iron ore stock I would mention is Royal Resources
Ltd. (ROY:ASX). Royal Resources has a several-billion-ton resource in
Australia, which should have quite a low production cost because it's near
the sea. This project should be competitive. It will take longer to build
Royal Resource's project than that of Sable Mining, which could probably
build its mine within a couple of years. Nevertheless, Royal is in a good,
safe jurisdiction, and it's a world-class asset. On a five-year view, iron
ore prices could be picking up strongly.
TMR: What is the one thing natural resource investors need to do
this year to take advantage of the opportunity?
PR: I think they have to get involved in decent projects that can
see the light of day. The bottom of the market was December/January. From the
bottom, we've seen a few stocks move over 100%. Falkland Oil and Gas, which
we discussed, bottomed at 18p/share. Recently, it was trading at 36p/share,
so that's a 100% move. Sable Mining bottomed at around 0.65p/share, and it's
actually been as high as 3p/share, so that was a nearly fivefold move. It has
come back down, but it's still well off the bottom. Even though these names
have been very risky and have been very painful to hold for quite some time,
I think there is an opportunity there. People should grasp that.
TMR: Thanks for your insights.
1) JT Long conducted this interview for Streetwise Reports
LLC, publisher of and and provides services to Streetwise Reports as an
employee. She owns, or her 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: Victoria Gold Corp., Largo
Resources Ltd. and Trevali Mining 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) Philip Richards: I own, or my family owns, shares of the
following companies mentioned in this interview: All. I personally am, or my
family is, paid by the following companies mentioned in this interview: None.
My company has a financial relationship with the following companies
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