TICKERS: AEM, ASM; GV6, EDR; EXK; EJD, FR; AG; FMV, , GIX; GIXEF, GPR; GPL, MAG; MVG, RVM; RMV, SGN, SLW, SSV; SEG1
Mexico's Silver Mines Shine: 'Mexico Mike' Kachanovsky
Source: Peter Byrne of The Gold Report (3/12/12)
Precious metals analyst "Mexico Mike" Kachanovsky, who opines on junior mining and exploration stocks at smartinvestment.ca, is bearish on the world economy, but bullish on mining stocks. Although he has seen a recent rise in narco-violence, in this exclusive interview with The Gold Report, Kachanovsky urges sensible investors to continue to look at firms exploring Mexican metal deposits because the upside is enormous.
Mike Kachanovsky: I also suggested that silver would hit $50/oz before the end of last year. I was dead wrong on that prediction as well. But my outlook hasn't changed. It's difficult to put a specific timeline on price trends. It's more important to have confidence that the factors that have contributed to the rise in both gold and silver prices for the last decade are still in effect. What we can accurately predict is how factors driving these prices will play out, while sometimes delays and countertrends and mini bear markets occur along the way.
We are currently trading at a sideways consolidation for gold in the $1,600–1,700/oz range and silver $30–35/oz. I am confident that we are going to see a lot higher than $2,000/oz gold and higher than $50/oz silver. Metal trading is volatile. But I feel very strongly that before the end of 2012, we'll see both of those levels surpassed.
TGR: You said in your September interview with The Gold Report that we're likely in a double-dip recession. Is the global economic situation improving now or worsening?
MK: The United States is still in a recession. A lot of people have tempered their bearish sentiment because the official data suggests that things are getting better. A case in point is the way unemployment is calculated. It appears that the unemployment rate is falling because of the way government agencies classify and organize the data. But there are more people looking for work now than there were at this time last year.
There is lasting recession in Europe. There's less spending. Gross domestic product is generally in decline. Worldwide, more people are unemployed and looking for work. That reality is not necessarily reflected in the data.
TGR: Are we headed into a triple-dip recession?
MK: No matter how you look at it, we are in a secular slump. It's a real challenge. Decades of malinvestment and debt buildup have to be resolved. It's going to take years before the economic foundation is reset for another period of growth.
TGR: Will another round of quantitative easing help?
MK: Quantitative easing has been in place all along, although it has not been officially acknowledged. But where's the money coming from? Interest rates are being held at artificially low levels. The Federal Reserve prints money by buying bonds to keep the interest rates low. That officials have not acknowledged this fact does not mean that it's not occurring.
TGR: How does quantitative easing affect mining stocks?
MK: In the wake of the first two rounds of quantitative easing, a lot of hot money started chasing natural resource stocks. Printing money contributes to inflation. One of the ways to protect against inflation is to be leveraged in commodities—real stuff, for lack of a better word. But the prices of oil and gas and gold and silver and metals and hard commodities rise in an inflationary environment. Speculators flock to resource stocks to protect against inflation and more inflation ensues.
TGR: What statistical indicators are key when looking at junior mining stocks?
MK: You can't talk about junior mining stocks as a group. There are three different subsectors. The first subsector is the early stage explorers who don't have any real assets. They control properties, and they're spending money on defining a deposit. The second subsector is the emerging producers. These companies have recently commenced mining, and they generate money from operations. The third subsector is the established producers who have been around for a few years. They are far less risky. They are earning lots of money in the current metals price environment. They have strong balance sheets. Investors need to be aware of those distinctions. The early stage companies are attractive only if you're going to be patient. It may take months or years before those stocks become market leaders.
TGR: Is it still possible to hit a homerun with an early stage company?
MK: Absolutely. History hasn't changed. But you must be very selective. Look for companies that have management teams in place that can survive difficult times. Look at the property base—is there a legitimate chance of finding a deposit that has the magnitude to allow for a rapid up cycle in value? Be careful, but leverage to that sector, because that's where the biggest money will come from eventually.
TGR: Your particular area of expertise is Mexico. How do you assess the physical and financial safety of mining ventures in Mexico, considering the drug wars?
MK: That's the big question about the Mexico stocks. There is a perception that things are spinning out of control there. I travel to Mexico regularly to visit mining projects. For sure, the violence has intensified. In the past, people's daily lives were not much affected by the gangs. Now rival gangs fight turf wars and the violence spills over into the daily lives of average people and businesses in Mexico. But, overall, it's still contained.
It is still safe to walk the streets at night. Well, you do need to have your head on your shoulders. If you're driving on a major highway at night, you are at risk of being carjacked. If you travel in certain parts of Mexico City, you're asking for trouble. The senior executives of mining companies could be targets for kidnapping. I'm not aware of that happening yet, but many executives travel with armed security guards. If you are cautious, you can go about your business safely.
TGR: Have the drug wars affected labor pools in the rural areas of Mexico?
MK: Often people who are working in the mines have close relatives who are working with the drug cartels in the hills, growing marijuana. It's unlikely that the drug gangs have a reason to target the local labor at the mine. People are very pragmatic. I've been in towns that are centers of the drug trade. In some ways, they are the safest places in all of Mexico, because the cartels won't allow anything to get out of line.
TGR: What gold and silver mining production companies do you follow in Mexico?
MK: There is a basket of established midtier level companies that I like: First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE), Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE), Avino Silver & Gold Mines Ltd. (ASM:TSX.V; ASM:NYSE.A; GV6:FSE) and Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.A).
TGR: What do you like about these companies?
MK: They have recurring production in place. They are profitable. They have fantastic leverage to the upside for future discovery. Their strong balance sheets enable them to look further afield, to make acquisitions of late-stage deposits that have been stalled and can't move forward without more money. They've just been huge winners.
TGR: What's been the effect on Avino's prospects after being listed on the various stock exchanges?
MK: Anytime a junior mining stock secures a listing on a major exchange, like the NYSE, it increases that firm's pool of investors. I mentioned Endeavour and First Majestic and Great Panther. After these companies secured senior listings, their share prices went up substantially. I expect Avino to attract a larger following, causing its share price to increase.
TGR: Are there any other catalysts for Avino this year?
MK: Avino has had limited production. The company needed to reach an agreement with the landowner about dividing up royalties for its main mine. A few days ago, Avino announced it has reached that agreement. It is going to resume production from two separate mining zones, instead of just one. When Avino runs larger tonnage of ore through the processing plant, its unit costs will go down. Profit margins should improve.
TGR: Does Endeavour Silver still have some upside left to it?
MK: Endeavour trades at a higher price than Avino because it has more magnitude. But four years ago, Endeavour was where Avino is today. Avino has a growth path firmly in place, and it can advance to the next level. Five years ago, First Majestic was where Avino is today: it had one major mine that was expanding. First Majestic went on to acquire other assets. It achieved the $1 billion+ valuation that it has today. These companies are all pretty much following the same path.
TGR: And is Great Panther on that same path? Does it still have upside ahead?
MK: Absolutely. We're waiting for consolidation. A number of the smaller mines are starting to make money, but not as efficiently as they would under the umbrella of a single company. We recently saw a first indication of consolidation, when Minefinders Corp. (MFL:TSX; MFN:NYSE) announced that it had been acquired by Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ). I suggest that Avino is either going to be a takeover target, or it is going to start acquiring weaker companies to build growth.
TGR: Who could take over Avino?
MK: Any company that has a strong balance sheet that is looking to grow its total production by adding over a million ounces of silver a year. I don't necessarily think Avino will be a target for Pan American Silver or Goldcorp Inc. (G:TSX; GG:NYSE). But, Avino could partner with other mid-size producers. There's probably a dozen companies that could see an incremental value by bringing Avino under their umbrellas.
TGR: Galore Resources Inc.'s (GRI:TSX.V) Dos Santos project is next to Goldcorp's successful Peñasquito mine. Is there a catalyst that would allow the market to value Dos Santos more in line with Peñasquito?
MK: Galore might get a higher speculative premium based on its proximity to large deposits in Mexico. Unfortunately, that hasn't happened yet. But Galore has drill programs in place that are capable of hitting a big new discovery zone.
A general catalyst would be for gold and silver to break out of its range, reaching a new high. And, again, that could happen very quickly. That could happen when all of the analysts are expecting lower prices and, out of the blue, a strong uptrend kicks off when no one is expecting it.
TGR: Do you see that happening this year?
MK: No. But, again, trying to put a timeline of a specific year on any stock or price target is just inviting yourself to look bad. The present pause in the bull market is long in the tooth. At some point, valuations will snap back in line with a strong bull market. I'm being cautious because there are existential issues on the economic radar screen, like Europe.
Interestingly, another catalyst that makes a difference is when a high-profile newsletter writer or analyst recommends a stock. Higher share price generates more money to work on finding metal.
TGR: Is the opposite also true? If newsletter writers frown on a company, does that affect its stock price?
MK: Oh, for sure it does. Analysis is a double-edge sword. Most analysts, including me, are biased toward finding good companies to talk about instead of being quick to pan a stock or to suggest that it doesn't have the goods. The vast majority of these mining companies are run by sincere, qualified, capable people who are doing their very best to move companies forward in a very difficult market. I think it's a very rare situation when you have a real problem in any of these stocks that would warrant putting a sell on it.
TGR: Do you have any thoughts about what has given MAG Silver Corp. (MAG:TSX; MVG:NYSE) and Geologix Explorations Inc. (GIX:TSX) recent bumps in the market?
MK: MAG Silver went up after announcing exploration success at the Cinco de Mayo project. It has a molybdenum resource there. It started to find polymetallic resource zones that previously had not been valued in the stock price. It looks like MAG has a second major discovery underway, in addition to its Juanicipio project, which was a company maker.
With Geologix, there's about 1.5 million ounces gold and significant copper at its Tepal prospect. The company has outlined new target areas. That is contributing to its slightly stronger share price.
The entire exploration sector is trading at almost bear market lows. They're all representing fantastic opportunities. It's just a question of waiting it out and letting the sector rotation do its thing. Eventually, the market will rediscover these stories and get excited again about them.
TGR: What about Southern Silver Exploration Corp.'s (SSV:TSX.V; SEG:FSE) partnership with Freeport McMoRan Copper & Gold Inc. (FCX:NYSE)? Is that a positive sign?
MK: It's a great sign for Southern Silver, because anytime you can close a deal with a senior producer you are getting somebody else's money to advance a project. Southern Silver has a number of attractive projects in Mexico. Any one of them could yield a major discovery.
TGR: What producers do you like north of the border?
MK: I like companies that have production in place and are making money and showing a strong growth curve. I'm extremely excited about Revett Minerals Inc. (RVM:TSX; RMV:NYSE.A). My optimism is based on the fact that Revett is leveraged to both silver and copper. Both metals are headed for all time highs in the months ahead, in my opinion. The company is debt free and it's profitable. Plus, its mineral inventory is large enough to sustain it for decades. And it looks like it is getting very close to receiving the green light on its Rock Creek project. That mine, on its own, has the potential to elevate Revett to the stage of a midtier producer.
TGR: Revett's stock price increased 500% in the last year.
MK: Part of the reason Revett's stock price went up is because it had a share rollback. The share price roughly doubled, because its risk went down. The firm paid off its debt. It built a cushion of cash in the balance sheet. It operated profitably and efficiently.
TGR: I've noticed that Scorpio Gold Corp. (SGN:TSX.V) in Nevada has enjoyed a steady rise in share price over the last year. Any thoughts about what's backing that?
MK: I visited that project last December. I like Scorpio because it is located in Nevada, which is very friendly to mine development. It's a very low tech operation. It's a conventional open-pit mine that has a relatively low strip ratio. It's low cost to run. Scorpio's gold recoveries are running at a fairly high level. It is drilling other expansion zones on its current open-pit mine. And, it is developing a second nearby satellite pit with a currently defined deposit. It still has some debt on its books and some of its monthly production is deployed to pay down that loan. But when that loan is paid off, in a year or so, Scorpio is going to be a cash-flow factory.
TGR: What are your current top picks?
MK: I bought more shares in Revett Minerals this week. I bought more Silver Wheaton Corp. (SLW:TSX; SLW:NYSE), which is a royalty play. It's not even a mining company. But, it has a strong outlook for an even higher share price in the future. Buying the lows makes great sense now. I have not bought any Scorpio Gold, but if it dips in price, I'm going to buy it. I bought more Avino Silver at the end of last year. I bought some Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), which is a gold miner that has seen its share price cut almost in half over the last six months. But it remains a very high quality company.
TGR: Do you tend to hold junior mining stocks for a while?
MK: Most of these companies I've owned for five years or more. I also have an active trading portion of my portfolio. When the market corrects, I can buy low. And I sell holdings during speculative highs. That is the nature our market. It can be volatile. We do not have to like it, but we have to acknowledge it and accept it is what it is: three steps forward and two steps back.
TGR: Thanks for sharing your insights.
"Mexico Mike" Kachanovsky is a consultant providing analysis of junior mining and exploration stocks. His work is published on a freelance basis in a variety of publications, including the Mexico Mike column in Investor's Digest of Canada. He is a founder of www.smartinvestment.ca, which serves as an online community for the discussion of all topics relating to junior mining stocks.
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) Peter Byrne 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: Endeavour Silver Corp., Avino Gold & Silver Mines Ltd., Great Panther Silver Ltd., Minefinders Corp., Goldcorp Inc., Galore Resources Inc., MAG Silver Corp., Geologix Explorations Inc., Southern Silver Exploration Corp., Revett Minerals Inc., Scorpio Gold Corp. Streetwise Reports does not accept stock in exchange for services.
3) Mike Kachanovsky: I personally and/or my family own shares of the following companies mentioned in this interview: First Majestic Silver Corp., Endeavour Silver Corp., Avino Gold & Silver Mines Ltd., Galore Resources Inc., MAG Silver Corp., Revett Minerals Inc., Great Panther Silver Ltd., Silver Wheaton Corp., Agnico-Eagle Mines Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: Avino Gold & Silver Mines Ltd. is a paid advertiser on my website. I was not paid by Streetwise Reports for participating in this story.