The Gold Report: The Junior Gold Report follows both
gold and oil equities. Please briefly outline your outlook for both commodities.
Kal Kotecha: In December, to my Junior Gold Report
subscribers, I called gold to hover between $1,180/ounce ($1,180/oz) and
$1,250/oz from January until about June, and then averaging above $1,250/oz
for the rest of the second half of 2015. So far, it's been range-bound
between $1,180 and $1,250/oz. I expect gold to average above $1,250/oz
throughout the second half of 2015 before moving quite a bit higher in 2016.
At the time of our interview with The Gold Report in September 2014,
oil was trading around $100/barrel ($100/bbl). I indicated that oil would be
range-bound between $60/bbl and 70/bbl but I didn't expect it to drop so
quickly under $50/bbl. Now, with many tankers full of oil yet to port, oil
could test $42/bbl and if it falls below that, it could go below $40/bbl. I
wouldn't be buying oil or oil shares until we see Saudi Arabia charging more
for oil globally—it announced it is currently doing this with its E.U.
trading partners. I would be accumulating in and around June when there will
be less stock available from the full oil tankers.
Oil fracking companies in the Unites States need oil at least $60–65/bbl
to be above the marginal cost of production, so I believe oil ultimately is
going to be sitting between $60/bbl and $70/bbl. I don't think we're going to
see $100/bbl oil any time soon, but I also don't think we're going to see oil
below $30/bbl as we did a few years ago. It might just remain range-bound
between $42/bbl and $55/bbl for the next few months and go slightly higher
than $60/bbl and stay there.
TGR: Late in 2014, you told The
Gold Report readers that your resolution for 2015 was to bet on junior
gold mining stocks while the sector was still the most undervalued market in
the world. Most New Year's resolutions fall by the wayside. How are you
faring?
KK: We're in a long speculative bear market with junior resource
stocks on the TSX Venture Exchange. We're basically at the bottom. I don't
see the Venture going to 500 as some experts predict; I believe it will hit
1,000 and go higher. That could be in the next 12–24 months. It could be
earlier. It is currently around 700. Buying the right stocks now will make
investors a lot of money in the future. In the bank you're getting only 1–2%
on your money. Just buy good junior mining shares and hold and I believe you
will be handsomely rewarded. These opportunities are rare.
TGR: What criteria are you using to make those bets on junior
resource companies?
KK: I use the same criteria for gold and energy companies.
Management is key. The properties, execution and financing are the other key
ingredients I use in researching and finding good stocks to write about and
suggest to subscribers.
TGR: What are three or four precious metals companies that you
believe offer the best bang for the buck?
KK: CMC
Metals Ltd. (CMB:TSX.V; CMCXF: OTCPK) is one. I've been following CMC
Metals for about five years and it is a sponsor of the Junior Gold Report.
CMC Metals' Radcliff project in California should be in production before the
end of Q2/15. It's a high-grade gold deposit at surface that is amenable to
open-pit mining. In 2010, CMC went into a 50/50 joint venture with
Pruett-Ballarat Inc., a Nevada-based company specializing in engineering.
It's the operator at Radcliff. Partnering with Pruett-Ballarat was good for
CMC because the company has a lot of mining expertise and contacts in
California.
Radcliff's total NI-43-101-compliant resource estimate sits around 300,000
ounces (300 Koz) averaging 3 grams/ton (3 g/t), which is considered high
grade for an open pit. CMC Metals plans to mine 100 Koz at around 15 g/t. The
company expects to produce a minimum of 20 Koz gold per year, generating
sales of about $24 million ($24M) annually. That's a total of $120M over five
years at a gold price of $1,200/oz. Production costs on the first 100 Koz
gold is estimated at $600–700/oz. Net profit should be around $500–600/oz. An
advantage CMC has is that it owns the Bishop mill, which is about two hours
away by truck. The mill will process all the material mined at Radcliff. CMC
is waiting on a permit on its tailings pond at Radcliff and it should get it
shortly. CMC's news release dated April 15, 2015, stated that the preliminary
sample assay results range from 0.058 oz/ton gold to 9.326 oz/ton gold and
the arithmetic average of the samples is 2.55 oz/ton.
TGR: CMC just did a financing of 12.5M shares at $0.04. Why would
it finance at such a low rate?
KK: It's the rate that the market bears. From what I understand, it
was oversubscribed, and insiders took the majority of the shares at that
price. Many companies are in that position. CMC is in a very advantageous
position because even though it financed at that rate, its stock was trading
at that price at that time. It needed the money to ramp up for production.
Raising $500,000 or so will put CMC over the hump.
TGR: The cost of $600–700/oz seems somewhat low given that it has
to truck the ore about two hours to the Bishop mill.
KK: I believe that's the all-in cost. It may seem low, but I don't
think it is especially with the high grades just announced in its April 15
news release. It's a good rough estimate that was provided to me by CMC CEO
Jack Bal, who is at the mine quite often.
TGR: What are some other companies you're following?
KK: Another one is Garibaldi Resources Corp. (GGI:TSX.V). The company has a
strong working capital position, solid management and the company continues
to drill the high-grade Rodadero gold-silver project in Sonora, Mexico. It is
also active in British Columbia (B.C.) and at its La Patilla gold discovery
in Mexico. A recent stepout drill hole at Rodadero intercepted 1,307 g/t
silver over 1.5 meters (1.5m) in a broader interval grading 346 g/t silver
over 6m, north of the actual discovery. It has a lot of advantages in that
area. Garibaldi also has the fully funded Grizzly project in the Sheslay
Valley in B.C. It really has two excellent properties.
TGR: Does Garibaldi have sufficient cash to work on two properties
simultaneously?
KK: It is doing a small financing but it has enough cash to drill
for the near future on both properties.
TGR: What are some other gold names?
KK: The focus of Lupaka Gold Corp. (LPK:TSX.V; LPK:BVL) is to get the
Invicta gold project in Peru into production and continue to grow the
resources on its other properties. The company has a strong management team
and board, as well as a sophisticated investor base with a large position in
the company. It has $2M in the bank and the capital costs at Invicta will be
about $148M. The company will get a small debt loan or line of credit to
finance construction. I do not expect any further dilution. Currently, it has
110M shares outstanding with a share price of around $0.12.
TGR: Do you know what the all-in production costs are going to be
at Invicta?
KK: They should be in the low $900/oz range. The Invicta bulk
sample results should be published soon. That will give us a better idea of
the value of the byproduct credits for copper, lead, zinc and silver.
TGR: Perhaps one more gold name?
KK: Gold
Standard Ventures Corp. (GSV:TSX.V; GSV:NYSE) owns the second-largest
land package in the Carlin Trend and controls the entire Railroad-Pinion
district. It has three gold deposits: Pinion with an Indicated resource of
423 Koz and an Inferred resource 1,022 Koz; Dark Star with a 375 Koz Inferred
resource (these are oxide deposits that could be exploited by simple crushing
and heap leaching at a central location); and the Bald Mountain project. On Jan.
24, 2014, the company reported the Bald Mountain gold-copper oxide discovery
made by Gold Standard last fall on its 100%-owned Railroad project in the
Carlin Trend of Nevada. The tests, performed by Inspectorate Labs of Reno,
Nevada, reported an average 82.2% recovery of gold after one hour of cyanide
agitation leach.
As reported on Oct. 2, 2013, the first hole drilled into the Bald Mountain
target, vertical core hole RRB13-1, intersected 56.1m of 1.47 g/t gold,
including an internal interval of 7.3m of 5.66 g/t gold. Importantly, the
gold intercept was hosted entirely in oxidized hornfels breccia, representing
the most significant oxidized gold mineralization found to date in the
northern Railroad project area.
Gold Standard has the potential to make a ton of cash if it executes
properly. I think this is a potential takeout target.
TGR: What about some non-gold stories?
KK: Lomiko
Metals Inc. (LMR:TSX.V) is an exploration-stage company that's engaged in
the acquisition, exploration and development of resource properties that
contain minerals for the new green economy, specifically graphite. Its
mineral properties include the Quatre Milles graphite property in Quebec and
the Vines Lake property in B.C., both of which are significant discoveries.
Graphite, as you know, has numerous applications, including use in the
fast-growing lithium-ion battery market. Graphite is also used heavily in 3-D
printing. Lomiko seems to have enough money to reach production. Lomiko also
has other avenues from which to stream revenue.
TGR: Lomiko is one of a number of companies in a crowded graphite
space that is not seeing a lot of market love. How is it setting itself
apart?
KK: I think it's setting itself apart because it's not just into
graphite. It has a subsidiary, Lomiko Technologies, which has an agreement to
license from Megahertz Power Systems Ltd. the rights to manufacture and sell
three power converter system designs and acquire a pending supply contract.
So it is branching out, not just in graphite but also into other areas.
TGR: Perhaps one more non-gold story.
KK: Cardiff Energy Corp. (CRS:TSX.V) is one of my favorite
oil companies. The company holds a lot of upside. It is working on developing
the Multi-Zone Oil and Gas project in west central Texas with joint-venture
partner Martin Energies LLC, an experienced operator. About 175 different
zones in that area have produced hydrocarbons. The first well drilled on the
Multi-Zone lease in November 2014 was Bearcat #4, which had an initial
production rate of 180 barrels of oil per day in the Palo Pinto formation and
250,000 cubic feet of gas in the Gardner Lime. The company plans to use
horizontal drilling technology to unlock oil in the Gardner formation. The
company is currently seeking another joint-venture partner to spread out the
cost of drilling the next well.
TGR: Dr. Jeff Lewis recently wrote a piece titled "Black Swans
and White Noise" in the Junior Gold Report. Can you outline some
of the black swans and white noise currently present in the resource market?
KK: Some of the black swans in the political sphere that affect the
resource field are ISIS, racial tensions in the U.S., oil and gold price
manipulation, Crimea, and Syria, but perhaps the biggest black swan is the
U.S. dollar. The U.S. is the self-proclaimed watchdog of the world and it
tests everything. It tests the black swans. It tests other military powers.
And the U.S. Federal Reserve keeps borrowing money. The U.S. is considered a
safe haven but with trillions of dollars of growing debt, the dollar will
eventually collapse, and that's going to be positive for gold. Post-collapse,
gold could resurrect its role as a global currency as some countries back
part of their currencies with gold instead of the U.S. dollar. The U.S. has
to curtail money printing and quantitative easing, but I think the
quantitative easing machine is going to have to get revved up again just to
partially pay back the interest on its debt. That's going to be positive for
resource markets in general.
TGR: Do you have any parting thoughts for us?
KK: A lot of investors, including myself, are dismayed by the state
of the resource market. But the world's insatiable appetite for resources is
not going away. It might have slowed due to increasing supply and decreasing
demand, but that will even out. And with global population growth, the demand
for more resources is only going to increase. The best thing for investors to
do is to continue to pick away at undervalued resource stocks; buy when
there's fear and sell when there's greed. The most decimated market in the
world is the TSX Venture Exchange and that's where the best buys are. The
resource market is cyclical. Even though retail investors are dismayed and are
leaving the market, this is not the time to leave. You should be buying.
TGR: Thank you for talking with us, Kal.
Junior Gold Report, a publication about small-cap
mining stocks. He was the editor and creator of The Moly/Gold Report,
which focuses on critical analyses and open journalism of companies profiting
from the precious and base metals sector. The scope of his current activities
include worldwide onsite analyses and reporting of developing companies.
Kotecha has previously held leadership positions with many junior mining
companies. Kotecha completed his Master of Business Administration in finance
in 2007 and is working on his Ph.D. in business marketing. He also teaches
economics at the University of Waterloo.
