TICKERS: GIX; GIXEF, LIO, NES, PPG, RV; RVRCF, SSH
Quality Gold Juniors Poised to Soar: Lawrence Roulston
Source: Zig Lambo of The Gold Report (2/29/12)
After a tough 2011, the junior resource market is turning and things are definitely looking up, Resource Opportunities Publisher Lawrence Roulston tells us in this exclusive interview with The Gold Report. The mood of investors in the resource sector has turned positive, and based on the sentiment and interest shown at recent investment conferences, the smart money is looking for deals that have real upside potential. Roulston tells us about several he feels are poised for significant action as the market heats up.
Lawrence Roulston: Of course, most people who have invested over the past year have probably suffered some pretty serious losses and may be wondering why they ever got into this business. From where we sit now, I think the worst is over, and I'm very optimistic about what's coming up in the near term. There was a tremendous amount of uncertainty over the last year with the euro, the dollar and the growing debt levels.
Gold and silver, of course, have again become a safe haven for investors who are concerned about all of this uncertainty, reflected in very strong metals prices. Governments both here and in Europe are throwing out trillions of dollars and euros in bailouts to prop up failing companies and countries. Longer term, that's going to have a tremendous impact through devaluated currencies. That brings us back to gold and silver, not just as safe havens in the near term, but also as long-term hedges against currency devaluation. So that is very positive for the precious metals markets.
In the meantime, the companies that are involved in these metals were clobbered last year. Investors wanted the security of bullion, but fled from the risk of equities. But it's very clear now that the equity prices are coming back. Over the past couple of weeks, we've seen fairly strong growth in trading volumes and prices, which are starting to trend higher. I think now is just absolutely the best time in years to be getting into the market with the major risk factors being more-or-less put aside and stock prices beaten down to a level where there's tremendous value.
TGR: One hopes a lot of these juniors will be able to benefit from some of this market movement, too, because a lot of the really cheap stocks don't seem to have any ability to go anywhere regardless of what kind of news they come out with.
LR: We're in an early-stage recovery here. The smart money always gets in first—the people who are closest to the industry, who understand it. A lot of sophisticated investors who've been waiting for the opportunity are the first ones to make a move. These are the people who are best able to judge the companies and pick the high-quality ones from the also-rans. Typically, in the early stages of recovery like this, it would be the higher quality companies that get the early attention for their long-term potential. Some of the companies in this business don't deserve to be here at all. They will eventually get recognition, but it's going to be later, once the recovery is well underway.
TGR: Going back a little bit to the euro crisis and the whole financial situation, what's your opinion on what's going to happen? Are they going to get it taken care of or is it going to keep dragging on?
LR: It's going to drag on forever. The whole multi-country, single-currency concept is basically unstable. But, in the near term, they can't afford to let the euro fail. The bailout will require enormous amounts of money and the Germans, who have more to lose than anybody if the euro fails, will ultimately have to fund most of it. They're going to hold Greece's feet to the fire and get as much out of it as they can in terms of promises of fixing up their economy. But they're going to do what's required, and we're going to muddle through.
TGR: It seems that the whole Eurozone has turned into the financial equivalent of a fabricated country like Yugoslavia, where ultimately you can't consolidate all these different regions with different risks and cultures and try to make them into a single country.
LR: Exactly. It's never going to go as far as a single country, but everybody recognizes the long-term benefits of a common currency. As a traveler through Europe pre-euro, one could see the need for a common currency. The benefits are enormous. Of course, if you're doing business and the world gets more globalized and countries become multinational, it's more and more important for so many reasons to have that single currency. I believe strongly that they will do what is required to see it stay together.
TGR: Let's talk about metals prices. We hear predictions from different experts all over the map as far as where they think gold and silver are going. Some people say prices are going back down while others are talking about $10,000/ounce (oz) gold and $500/oz silver. What do you think?
LR: I would stay away from the extremist views and look for something in the middle. I think the best guideline for what is coming for both gold and silver is the price charts from the last decade. Realistically, those price charts over a decade take into account every conceivable variable impacting the markets and show us the real effect of all of those variables. In the absence of any further dramatic change, that pattern continuing forward, to me, is the best, most reliable indicator of what's coming in the metals markets. We just take the existing long-term uptrend with a fair amount of volatility and project that into the future.
TGR: So what's your most optimistic upside on the gold price in the next two or three years?
LR: I think the gold price over the next couple of years is very likely to be above the $2,000/oz mark. It could be significantly above that for a brief period. I think it's a completely meaningless exercise to try to pick a specific number at a particular date, but there will certainly be enough strength in the metals markets over time that the mining industry will want to continue to produce and to build new mines. That's my basic philosophy with regard to the metal markets.
TGR: In your business, you attend a lot of investment conferences all over the world. What has been the mood at recent conferences?
LR: In late January here in Vancouver we had the Cambridge House Conference. I have to say, I was actually blown away by the number of people. It was record attendance, not just record attendance for that event but I'm pretty certain it also was the biggest turnout to any resource-investment conference anywhere, ever. An amazing number of people, both local and from all over the world, came to that conference. It was generally a very upbeat kind of mood. I think people had reached the point where they were convinced the market was going to turn at some point. There was very clearly a mood of "I may not buy stock on Monday, but I'm going to be buying in the near term and now's a good time to be doing research." So it was a very positive mood among a very large number of people.
In the weeks since that conference, we've seen pretty substantial gains in the indexes and in many of the companies. Trading volumes in the junior markets have been building. I think that is a very good indicator of what's coming. The next big one, of course, is the Prospectors and Developers Association of Canada (PDAC) in Toronto, a massive gathering of mining industry people. It's really more of an industry conference. It will be interesting to see how that one turns out. Just as a side note, we're co-sponsoring a one-day investment conference, the Toronto Subscriber Investment Summit, which takes place before PDAC, so it's really more of an investment-focused component to the big industry trade show. Please visit the website for further information.
TGR: And you'll be speaking there, I presume?
LR: Yes, I will.
TGR: You've been publishing Resource Opportunities now since 1998. Looking back, how would you compare what's going on with the juniors right now to years past?
LR: When I started the newsletter in 1998, I'd left a position as an executive with a mining company. People thought that I was absolutely crazy. Resources were totally out of favor, nobody wanted to invest in the resource industry, prices were down and the metal prices were all heading for record lows. For a couple of years, the people who thought I was nuts looked like they were right, but in the end, it was the best thing that I had ever done, getting in at absolutely the bottom of the market.
From 1998 to 2001, metal prices continued downward. It was just a very, very dismal time, much worse than even the last year. I have to say in the very first issue of my newsletter, I featured a company that within two to three years had provided a 10x return on investment, even in that very dismal market environment. So it's really about picking companies more than it is, or at least as important as, looking at the markets. Over the years now, we've had several ups, and we've had several downs. Last year was one of the downs. It was a painful process as it unfolded, but I think we're now on a solid uptrend. Now's the time to come back into the markets.
TGR: What are you concentrating on in this market environment?
LR: I'm focusing on the more advanced-stage exploration projects over earlier stage exploration because that's where we're going to see the near-term price action. The gold and silver companies are getting a lot more respect than base metal companies. One of the most important criteria investors want to see now is potential for a big payoff. If they're going to put their money at risk, they want to know there's at least the chance of a big payoff.
To throw out a couple of companies here to illustrate these various points, Newstrike Capital Inc. (NES:TSX.V) is an early-stage exploration company but its share price is up 2.5x in the last year. It's getting strong support from investors even though it's well ahead of having a resource estimate. The investor interest in that company is based on the possibility of a very large deposit that it's drilling in Mexico.
On the flip side of that is Geologix Explorations Inc. (GIX:TSX), which has an advanced-stage project with a significant amount of gold and also a base metal component. Because there's a perceived limit to the potential size of the deposit, Geologix is not getting the same kind of valuation in the market. But that's exactly the kind of company that is going to rebound strongly as investors come back into the market. It has a decent gold grade, with a byproduct copper component, and it has potential yet for a significant size.
Another example is Revolution Resources Corp. (RV:TSX; RVRCF:OTCQX), which has an exceptional exploration team and several high-potential exploration projects. The projects are early stage and, therefore, the company is not getting a lot of respect in the market, now. But, as investors come back into the market, they're going to recognize the merits of the exploration team and the upside on these projects and the company is going to see a strong rebound.
Another example is Smash Minerals Corp. (SSH:TSX.V). Investors are giving very little credit right now for the project that's held by its merger target, Prosperity Goldfields Corp. (PPG:TSX.V). Prosperity has made a very substantial gold discovery in Nunavut in Northern Canada, but it's in a far-off place and early stage and not getting much credit. Investors will soon realize that the Nunavut discovery is actually far better than the early-stage results that came out of Underworld Resources Inc.'s (UW:TSX) discovery that kicked off the Yukon Gold Rush. Those are just some examples of the kind of stories that should attract a lot of attention as investors come back into the market, which they're beginning to do now.
TGR: When would you expect that people will recognize these companies and really get onto them versus the companies that are getting most of the action these days?
LR: Newstrike is getting significant recognition now. It has a multi-hundred-million-dollar market value in advance of any kind of formal resource. So there is potential for a company to get that kind of valuation even in a really bad market. The other ones are starting to move. I think within weeks those companies are going to start to get much higher valuations than they're getting now.
TGR: Are there any other ones you'd like to talk about?
LR: If I were to describe the ideal company for the present market, it would be in gold. It would have near-term production potential with longer term, large-scale discovery potential. One company, Lion One Metals Ltd. (LIO:TSX.V; LOMLF:OTCQX; LY1:FSE), fits that description well. It has a project in Fiji where about 650,000 oz of gold have been identified. There is underground development. It is in the process of evaluating near-term production, but at the same time, it has enormous potential for a large deposit similar to others in the same geological setting in the South Pacific region. In fact, there is a deposit just 50 kilometers (km) away in an identical setting that has 11 million ounces (Moz). That, to me, would be the ideal company for this market—gold, near-term production but also that large, longer term upside potential.
TGR: How far away would it be from potential production?
LR: It's hard to say, a couple of years or more.
TGR: That's not bad by most standards.
LR: No. And the fact that it has underground development in place has a huge impact on the timeframe to development.
TGR: Fiji is not a place that people think of as being a gold mining hotbed by any means.
LR: You're absolutely right. Very few people have recognized that, but that deposit 50 km away has produced 7 Moz gold over a century. So there is a long and well-established mining history in the country.
TGR: Are there any other things you'd like to discuss that might be useful to our readers?
LR: The one thing that I would really encourage people to do is not get fixated on the day-to-day headlines. Whatever is in the headlines is already factored into share prices. You make your money by stepping outside of the group-think approach to investing. You need to dig deeper and get some specialist knowledge and look for the investment situations that are more in tune with the bigger picture and the longer term trends. You really make your money by following the longer term trends and not reacting to the near-term headlines. Over the last year, there was so much focus on fear. Now, the headlines are still full of the fear thing, but if you take a step back and look at the bigger picture, you can see that we've gotten beyond it and we're moving forward.
TGR: I guess it's a matter of finding companies with good solid potential, doing all the research you can on them and waiting for the dramatic move.
LR: Well, you're not necessarily going to have a dramatic move, but I think you can make very good money by just being patient and going with companies that provide a steady progression of news and a steady value-added kind of approach as they systematically advance projects toward production.
TGR: Thanks for joining us today, Lawrence.
Lawrence Roulston, editor of Resource Opportunities, is a geologist with engineering and business training and more than 25 years of hands-on experience in the resource industry. After completing his studies at the University of British Columbia in 1975, Mr. Roulston worked as an analyst for Cominco Ltd. and for a mid-sized Calgary oil group for several years. In 1984 he became the CFO for a group of mineral exploration companies. He was also vice-president in an investment management firm focused on the resource industry. From 1994 to 1997, he was CEO and director of a mineral exploration company. Since then, he has been a resource industry consultant and independent mining analyst. Roulston's years of hands-on experience and extensive personal contacts in the industry provide unique insights that have generated an impressive track record for Resource Opportunities.
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 our Exclusive Interviews page.
1) Zig Lambo 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: Newstrike Capital Inc., Geologix Explorations Inc., Revolution Resources Corp., Lion One Metals Ltd. Streetwise Reports does not accept stock in exchange for services.
3) Lawrence Roulston: I personally and/or my family own shares of the following companies mentioned in this interview: Geologix Explorations Inc., Revolution Resources Corp., Lion One Metals Ltd., Smash Minerals 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 story.