Edward Karr, CEO of
Geneva-based RAMPartners, favors a disciplined,
patient and steady approach to investing in junior gold mining companies. In
this exclusive interview with The Gold Report, Karr shares his
thoughts on the European crisis, its effect on gold prices and some of his
favorite junior gold mining companies.
The Gold Report: Edward, because you're
based in Switzerland, it would be interesting to get your perspective on the
Eurozone's new rescue fund, the Eurozone Stability Mechanism (ESM). There is
talk in the market that it could get a banking license, which would provide
it access to European Central Bank (ECB) funds, aiding it in bailing out
Spain and other economies. Do you believe that will happen?
Edward Karr: The idea of the ESM
actually getting a banking license was floated recently by ECB council member
Ewald Nowotny. The
question you have to ask is why would it want to give the ESM a banking
license? The answer is leverage. The ESM right now has about €500
billion in it, large enough to handle Greece. But now bond yields in Spain
have gone above the critical 7% level and banks in Spain and specific regions
of Spain, such as Valencia, have asked for their own bailouts, meaning the
whole house of cards is starting to tumble. With yields above 7%, Spain has
effectively gone over the event horizon of the financial black hole. A
deflationary gravity and negative feedback loop is so strong that there is no
return once you go over the event horizon.
Next in line are two
countries that are going to give the European governments and global central
bankers nightmares—Italy and France. The ESM is just not large enough
to handle these bailouts in its current configuration, so it has to be
increased. The ECB is looking to give the ESM a banking license so it could
leverage up to handle some of these larger countries.
TGR: Recently ECB President
Mario Draghi said he would do "whatever it
takes to support the euro." Your thoughts?
EK: I believe the ECB will
do this. I think that it is going to print and print and print. We're talking
trillions and trillions of euros to bail out these countries.
TGR: How does the ECB get
around European law that prohibits it from undertaking liquidity measures?
EK: First of all, there
will be a big ruling coming in September from a German constitutional court
about the ESM's legality. Nevertheless, there are a number of ways the Eurocrats can get around European law. The aforementioned
banking license for the ESM will leverage it up; they can also change the law
to allow the ECB to lend directly to banks. We're going to see creative
solutions and we're going to see a lot more liquidity pumped into the system.
TGR: That is what many
economists believe the European economies need. What are your thoughts?
EK: It's really a path of
no return and it's going to be very difficult to change course. I don't
believe that this is what the economies need. Printing money out of thin air
is never positive. What is needed, in my opinion, is for a massive cut in
government spending so it does not crowd out the free market. The solution is
for government to get out of the way and let the private sector flourish, but
that is not happening.
TGR: The Bank for
International Settlements is discussing the idea of reclassifying gold from a
Tier 3 asset to a Tier 1 asset. That would mean that gold is valued at 100%.
How do you think that would affect the gold price?
EK: It would be interesting
if that does happen. Historically a bank's gold holdings under a Tier 3
classification have to be discounted 50% of the current market value. So a
lot of commercial banks have little incentive to hold gold as an asset
because they could only lend out half of it. If the Basel Committee does agree
to let banks use gold as a Tier 1 capital, I think it could create
substantial demand for physical bullion. That would be an important step
toward gold's remonetization, having commercial
banks and ultimately central banks hold a lot more gold as reserves on their
balance sheets. More bank lending may have inflationary effects, too, which
would give physical gold bullion a nice double whammy effect if this happens.
"If the Basel
Committee does agree to let banks use gold as a Tier 1 capital, I think it could
create substantial demand for physical bullion."
TGR: Marshall Auerbach, an economist with
Toronto-based Pinetree Capital, wrote in a blog
that central banks routinely take hedge positions against their underlying
reserve assets but never report the derivative overlay. He writes, "if
the European national central bank, with 2,000 tons of gold in its vault,
sells forward against that position, basically thereby eliminating it, it
doesn't report the corresponding forward position. Consequently, it may be
that the official institutions do not have the gold they report to hold on their
balance sheets." Do you think that's happening and how would that news
affect gold equities?
EK: I think this has been
happening for a long, long time. Groups like Gold Anti-Trust Action Committee
have done an excellent job documenting this fact. The major central banks
around the world have entered into forward contracts to try and gain a
slightly higher return on their physical holdings. If central banks were
caught short and had to cover, it really could have the potential to send the
gold price higher. And this would be a big positive for gold equities.
TGR: Where do you see gold
finishing this year?
EK: I think that gold will
end 2012 a little lower than the current levels today. So, I'll say
TGR: Let's talk about fear.
In the fall of 2011 you said, "When people get scared, markets and stock
prices get way out of line. That is when you need to have the courage to
really step in and accumulate." Lately it's taking even more courage
than it used to, to do just that. Did you expect the fall in the junior
mining companies to be this steep?
EK: Actually, no, I did
not. It has been such a difficult last nine months with the junior mining
sector; since January it has been straight downhill. And I personally don't
believe we have even seen the panic stage yet, when there is a Lehman
Brothers-type moment, perhaps when a major international bank goes under. We
haven't seen that yet, but we're getting close. When it does happen, that is
when investors have to step up and accumulate more.
TGR: Can you connect the
dots between the instability in Europe and the different debt crises going on
and what's happening in this sector and the lack of risk tolerance?
EK: Not directly, but
indirectly. Fear is approaching an all-time high. Clients around the world,
both individuals and institutions, want to hold on to cash. They want
liquidity at all costs. That is hurting the junior mining sector overall.
The second factor is
that a lot of people after the 2008 financial crisis requested redemptions
from some of the hedge funds. Some did redeem client shares and closed their
doors while others did not, leaving customers anxious to get their funds
back. Some of the funds that specialized in junior mining stocks are either
out of business or they have redemptions; they're in liquidation and they've
been forced to sell.
The final factor is that
in this sector liquidity can dry up when the prices start to go down. It's a
negative feedback loop. As soon as the prices start to go down due to fund
liquidations, investors can see their positions go down 30%, 40%, 50%. It's
probably going to stay that way for a while until we get some sort of
resolution of the crisis in Europe and then ultimately the United States.
TGR: How does RAMPartners, which is a Swiss-based investment management
and investment banking firm, become interested in tiny mining equities
operating in North America?
EK: The usual way. We get
lots of research reports. We get brokers that call us. We do our own
analysis. We're constantly out there looking at different ideas, talking to
people within the industry, attending trade shows and presentations, etc. We
also go on site visits to see the projects themselves. For instance, I was
recently in Nevada visiting several companies and seeing their operations.
TGR: Overall, are you still
accumulating in this environment? Are you still buying junior mining and
junior mining explorer equities?
EK: 100% yes. Everything
out there today really looks very, very attractive. This is a fantastic time
to accumulate. This is also why in this industry, with its volatility, you
always need a pretty high reserve of cash so you can go in and accumulate.
One factor that a lot of people in this industry seem to overlook is the
potential for declining energy prices in the future. The United States is
currently undergoing an energy revolution. More and more oil and gas
production is coming on-line due to the unconventional shales.
My view is that energy prices are going to continue to fall and we could see
crude back to $50 a barrel (bbl). But, for the
reasons we've discussed before, I believe that gold will continue to hold
firm at around $1,500/oz or higher and oil will go
down to $50/bbl, making gold mining companies a
TGR: Gas and diesel are two
of the big input costs of the junior miners.
EK: Yes, they are huge.
TGR: You have management
teams from different small-cap resource companies coming into your office and
pitching you on investing in their companies. What are some things you look
EK: First, everything in
life is run by human beings. You've got to understand the management; I like
to see people who are positive and passionate about what they do. I also like
to see management with experience in the industry and a good track record.
Finally, I like to see a management team that has invested its own money into
the company. I like to see management have a very big equity stake in the
company. These are all junior companies so I don't want to see management
that is taking large cash salaries and having very high travel expenses and
other things like that. Let them put the money in the ground.
TGR: How has your approach
changed since 2007, a period in which we've been in and out of a recessionary
EK: We're not doing as many
deals as we did in the past. During a big bull market, the rising tide lifts
all boats. And with a big commodity super cycle, investors could invest in a
lot of different companies and most likely the market would bail them out. That's
just not the case anymore. We do a lot of research. We really get to know the
management teams. We do onsite visits to most of the deals that we're
involved in. We do fewer deals but have bigger positions and know the
TGR: Do you believe this is
something you're going to continue once the sector picks up again?
EK: We're very
opportunistic; if we see the whole sector picking up, if we really start to
see investors deploying capital and we think it is sustainable through an
economic recovery, then we might start deploying some more cash. Obviously,
we'd be looking at other opportunities at that point. But for now, we're
going through a very, very challenging time both in the financial markets and
in the junior side of the gold companies and explorers. That means that we
have to keep some cash reserves out there in case any of our portfolio
companies, for whatever reason, might need some money.
TGR: Are you getting more
favorable terms from these junior companies?
EK: Without a doubt. Today,
if you're an institution that actually has cash and has liquidity and is
still writing checks and funding into the junior space, you can almost
dictate the terms of your deals these days. That wasn't the case three or
four years ago. But, you have to make sure that you use prudence and caution,
don't overleverage and keep a lot of cash reserves because the juniors might
come back to you for another round of financing.
TGR: What advice would you
give to an investor today seeking a private placement in a mining exploration
EK: The most important
thing is to do your homework. In this sector there could be a lot of lottery
tickets but you should not approach this as a lottery. There are thousands of
junior mining companies out there and this is not an easy sector in which to
invest. Lots of companies are not going to make it. You've got to make sure
the company has solid management, a solid project and enough financing to
execute. Then you look at the stock and its chart. See if you can get in at a
very reasonable valuation. And, continue to know everything about that
TGR: Could you tell our
readers about some of the small-cap stocks that your company holds and why
you bought them?
EK: Last time we spoke I
had mentioned Pershing Gold Corp. (PGLC:OTCBB) and I'm still very
excited about that company. That's a Nevada exploration company moving into
production shortly. I was recently in Nevada and visited its Relief Canyon
mine and processing facility. I have to tell you, since leaving Franco-Nevada Corp. (FNV:TSX) and taking the helm at
Pershing, Steve Alfers has done a tremendous job of
advancing the company. He's done a land deal with Newmont Mining Corp. (NEM:NYSE) and Victoria Gold Corp. (VIT:TSX.V) that
dramatically increased Pershing's land position, which is critical. The
Pershing geologists can now go out and conduct their exploration programs
based upon geology and not worry about prior claim boundaries.
"You've got to make
sure the company has solid management, a solid project and enough financing
Pershing recently closed
a private placement with Coeur d'Alene Mines Corp. (CDM:TSX;
CDE:NYSE), Pershing's neighbor to the north and the largest silver producer
in the United States. The investment by Coeur into Pershing is a real game
changer; it shows that Pershing can pass serious institutional due diligence.
I would also imagine that we'll be seeing more deals between Pershing and
Coeur in the future.
In addition, Pershing
recently announced what looks like a new discovery. The company drilled a
target at the Pershing Packard project located near its boundary with Coeur.
The press release said that the deposit showed alteration and mineralization
typically observed with other producing deposits in the area. I'm really
looking forward to the assay results when they come out.
The real key with
Pershing is its Relief Canyon Processing Facility, which is fully paid for.
Add to that the recent Coeur financing and Pershing should be fully funded,
in my opinion, to production. I estimate it is going to enter production
toward the end of next year. And, I believe Pershing can produce 50,000 oz gold in 2014; the processing facility can easily be
expanded to 100,000 oz a year. If we assume a cash
cost of $700/oz as energy costs come down, and a
$1,500/oz gold price, Pershing can potentially
throw off $80 million (M) a year in cash flow and I think it will be able to
produce for at least 10 years. If you use a pretty aggressive 10% discount
rate, you still come up with about a $500M net present value. I think Pershing
is one of the most exciting Nevada exploration and production plays I know.
TGR: But there's no way to
hold Pershing without actually holding Pershing.
EK: But there is. Pershing
acquired a company called Continental
Resources Group Inc. (CRGC:OTCBB), which is basically now a
tracking stock for Pershing Gold. The mathematics of the deal is that for
every share of Continental Resources, investors will end up getting 0.8
shares of Pershing. So, there's a real arbitrage opportunity here for astute
investors because Pershing Gold is trading today at approximately $0.37/share
in the open market and Continental Resources is only trading at $0.22/share.
It should be trading at $0.30/share. So by buying Continental Resources,
you're actually getting Pershing shares at about a discount. That's a great
sale. I'll buy that all day long.
TGR: How long is that window
going to remain open?
EK: That's a good question.
Pershing recently filed a registration statement with the Securities and
Exchange Commission. So the window will be just as long as it takes for that
registration statement to go effective. Usually registration statements take
anywhere from 30 to 60 days to become effective. I'd imagine in the next two
months Continental Resources shares will convert into Pershing Gold shares.
So, the big opportunity will not last long.
TGR: Can you give us one or
two more names?
EK: Here's another one in
the same family. Pershing Gold recently spun off its exploration portfolio
outside of Pershing County and rolled it into a new company called Valor Gold Corp. (VGLD:OTCBB). Pershing Gold is the
largest shareholder of Valor Gold but Valor Gold is an independent company
with some very interesting properties including Red Rock, which is located in
the heart of the Battle Mountain-Eureka Gold Trend. Barrick
Gold Corp.'s (ABX:TSX; ABX:NYSE) Pipeline and Cortez
Hills deposits lie to the east. The McCoy-Cove mine is just to the west and
Newmont's Phoenix mine is to the north. This is big elephant country of
world-class deposits. All of the surrounding mines I've just mentioned are at
least 5 million ounces (Moz). The geology at Red
Rock looks as if it may potentially host a major Carlin-style deposit. The
CEO, Art Leger, is a very experienced geologist and has led teams that have
discovered millions of ounces of gold in his career. The real exciting thing
with Valor Gold is that its 2011 drill program already found gold. It was a
small amount, but could be a potential feeder zone that will lead the company
to a major deposit. Valor is planning a follow-on drill program this year
following lots of geophysical work to pinpoint its targets.
TGR: Anything else in Nevada
that you like?
EK: There's a bunch of
companies that we like and own. I really like Gold
Standard Ventures Corp. (GSV:TSX.V; GDVXF:OTCQX). Its vice president for
exploration, Dave Mathewson, is one of the top geologists out there. He
really has the tiger by the tail at Railroad. The company recently raised
$20M on a financing at $2/share, making it well funded. Gold Standard
Ventures is onto a major world-class discovery. The question is how big does
this thing get? And, in my opinion, when will it be taken out?
"I really like
Nevada as a jurisdiction and I think it has a lot of benefits for
TGR: As far as Nevada goes,
is that something that you're specifically looking for? In the U.S., there
really isn't another mining district that compares to it but you have a
number of companies in a very safe jurisdiction that are exploring for gold
resources. Is that a part of your thesis? Would you be less likely, for example,
to invest in a deposit in Argentina versus some company coming to you with a
gold exploration project in Nevada?
EK: Not necessarily. But
there are several great reasons why we want to be in Nevada. Number one,
stable political jurisdiction. I don't think the United States is going to
nationalize the gold mines in Nevada tomorrow. Number two,
there is the rule of law in Nevada, which some other jurisdictions don't
have. Number three, the geology. There are very few areas in the world like
Nevada that have the geological results to deliver major gold deposits.
Number four, the infrastructure. The majors, like Barrick
and Newmont, have billions and billions of dollars of infrastructure already
invested in the state. That's fantastic for a junior exploration company
because if it ends up finding a deposit, the odds are one of the majors is
going to come in to take it out. Nevada has modern infrastructure such as
roads, etc. It's a lot different when you discover 5 Moz
way in the jungle of Brazil or the depths of Siberia
or in western China. You'd have to build a tremendous amount of
infrastructure. We don't preclude ourselves from looking in any jurisdiction.
But I really like Nevada as a jurisdiction and I think it has a lot of
benefits for investors.
TGR: Thanks so much for your
Edward Karr is the founder of RAMPartners S.A., an investment management and investment
banking firm based in Geneva. Since 2005, RAMPartners
has helped raise more than $100 million for small capitalization companies in
fields such as natural resources, high technology, health care and clean
energy. Prior to founding RAMPartners, Karr worked
for a private Swiss asset management, investment banking and trading firm
based in Geneva for six years. Prior to moving to Europe, Karr worked for
Prudential Securities in the United States and has been in the financial
services industry for 20 years. Before his entry into the financial services
arena, Karr was affiliated with the United States Antarctic Program and spent
13 consecutive months working in the Antarctic, receiving the Antarctic
Service Medal for his contributions of courage, sacrifice and devotion. Karr
studied at Embry-Riddle Aeronautical University and Lansdowne College in
London, England, and received a Bachelor of Science degree in
economics/finance with honors from Southern New Hampshire University. He is the current
president of the American International Club of Geneva.
Want to read more
exclusive Gold Report interviews like this? Sign up for our free
e-newsletter, and you'll learn when new articles have been published. To see
a list of recent interviews with industry analysts and commentators, visit
1) Brian Sylvester of The Gold Report conducted this interview. He
personally and/or his family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Pershing Gold Corp., Franco-Nevada Corporation, Continental
Resources Group Inc. and Gold Standard Ventures Corp. Streetwise Reports does not accept stock in exchange for services. Interviews
are edited for clarity.
3) Edward Karr: I personally and/or my family own shares of the following
companies mentioned in this interview: Newmont Mining Corp., Barrick Gold Corp., Pershing Gold Corp., Continental
Resources Group Inc. and Gold Standard Ventures Corp. I personally and/or my
family am paid by the following companies mentioned
in this interview: None. I was not paid by Streetwise Reports for
participating in this interview.