The Gold Report: A lot has happened on the global economic and geopolitical fronts since we spoke last Spring. What's your appraisal of the affects of these developments on the precious metals markets?
Jordan Roy-Byrne: I believe the geopolitics is overplayed. Certain geopolitical events can have a short-term impact but by and large aren't a long-term driving force for precious metals. As far as the economy itself, up until this spring, the markets were essentially pricing in a mild recession globally. Europe was in recession and the emerging world was slowing down considerably. The U.S. situation is similar to Japan after its bust. We're in a flat-lining mode, which I believe will continue for another five to seven years.
I don't see any substantial economic growth, and at the same time I don't see any severe recessions on the horizon. To have a severe recession you need to have an expansion lasting for many years. The Great Recession of 2007/2008 cleansed the system. Granted, we're still not at the point where we can get back to consistent strong economic growth. It's going to take several more years to get to that point.
"I believe we're in a new cyclical bull market for precious metals that started in May."
At the beginning of the crisis, governments financed deficits with huge amounts of short-term debt rather than with long-term instruments. A significant amount of that debt is coming due in the next several years. That's why we're having open-ended quantitative easing (QE) and why we will have permanent QE, given that the debt burden over the next couple of years is going to be substantially greater than it was in the last couple of years. The other point is that even though we have had a recovery, it has not been strong enough to bring down the debt burden, which has gotten worse and worse.
That's why I believe we're in a new cyclical bull market for precious metals that started in May. I'm looking for a little correction/pullback in October. After that, the market could be in position to retest its highs sometime this winter.
TGR: Historically, October can be a scary month in the markets and it is just ahead of the U.S. election. Care to make any short-term predictions for what will happen between now and the end of the year?
JR-B: I think the markets will do what they're going to do. They don't really respond to political events. Markets are forward-looking and lead everything. I don't see something coming out of nowhere and most markets are performing fairly well. October is probably just going to be a pullback, and it's possible the S&P 500 can have a significant pullback. I'm more focused on precious metals, which have been following the seasonality to a T in the last couple of months. Typically, this seasonality calls for weakness in October. The market is ready for a correction anyway, and the typical October seasonality adds more credence to that argument.
TGR: You just got back from the big Toronto investment conference. What was the general sentiment there?
JR-B: There was a good turnout at the show and I think people are more optimistic. The general sentiment has improved regarding the markets and precious metals specifically. Just speaking anecdotally, the average retail investor I spoke with was definitely interested in the precious metals story but still not ready to be fully onboard. I think that's a good thing from a contrarian point of view.
TGR: You approach the markets from a technical standpoint, probably more so than most of the people we talk to at The Gold Report. What do you see from a technical standpoint on the precious metals at this point?
JR-B: I look at the charts, sentiment indicators and money flows. So, it's a much broader study then people think. Then you have to align that with the fundamental picture. However, the technicals always lead fundamentals. We saw that in the last couple of months when the markets completed a bottom and then started to move up a little bit in anticipation of the actual QE announcement. I like to look at everything, but technical analysis is definitely my bread and butter.
"The general sentiment has improved regarding the markets and precious metals specifically."
Now, looking at gold, I had a short-term target of $1,800/ounce (oz), which was predictable because there were previous peaks there. It's consolidating below $1,800/oz with probably another three or four weeks of weakness before it can make an attempt at breaking through again. Over the next two to three months, I have an upside target of $1,900/oz, retesting the old high. After that, I have a potential six-to-nine month target of $2,250–2,300/oz. Once this market breaks $1,800/oz, it only has a little resistance at $1,900/oz to deal with.
I'm a little less keen on silver right now. I had a short-term target of $35–37/oz. Similar to how gold is pulling back at $1,800/oz, we see silver pulling back and consolidating around $35/oz. A good target for the next three months would probably be $40–42/oz. Assuming gold breaks $1,900/oz and $2,000/oz, that would indicate to me that silver is probably going to test $50/oz. So, those are the targets I'm looking at.
In regard to the equities, Market Vectors Gold Miners ETF (GDX:NYSEArca), the large-cap unhedged gold stock producers, peaked just below $56. I had a target of $58, so it didn't quite go as high as I expected. Again, it's consolidating here and I expect that to continue for probably another three weeks or so. Looking at upside targets over the next three or four months, there's strong resistance at $64. Assuming gold breaks above $1,900/oz, the NYSE Arca Gold BUGS Index (HUI:NYSEArca) and the Market Vectors Gold Miners ETF should break to new all-time highs, probably by the end of February.
TGR: Do you think that when gold breaks through $2,000/oz, everybody is going to finally decide it's going higher and pile into it?
JR-B: I think that's fair to say and that in the next leg higher, people will start to get a lot more excited. I also should point out that the junior equities always start to catch fire when gold breaks to a new high. One reason I expect this is that the rebound we've had in the last several months, both in the shares and in the metals, has come with very strong momentum.
When a market is bottoming and then starts to build momentum, that indicates that the internals are very strong and that the rebound is going to be sustainable in the near term. In the last couple of months, the momentum these shares and the metals have achieved has been very strong, which bodes very well for continued movement higher, likely after October.
TGR: Maybe we can talk a bit about the model portfolio you're running in your Daily Gold Premium newsletter. How's that performed since the beginning of the year?
JR-B: At this point, it is up 24% year-to-date. I use Market Vectors Junior Gold Miners ETF (GDXJ:NYSEArca) as my benchmark, which is essentially flat. So, we've been fortunate to have done quite well so far this year.
TGR: That's pretty good, considering the performance of a lot of stocks in the space. What are some of the specific gold names you particularly like at this point?
JR-B: We've avoided juniors for the most part and were cautious on silver for a while, which has helped our performance relative to the rest of the sector. We've also overweighted some of our favorite names, such as Argonaut Gold Inc. (AR:TSX), which is one we have really liked for some time. That stock has performed very, very well. It has exactly what I want to see in what I like to call a growth-oriented producer. It reminds me of First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) a couple of years ago, when I knew that it really had the capability and potential to grow itself into a major producer.
"I like to focus first on the smaller growth-oriented producers, which have the ability to grow for several years."
So, I think Argonaut looks very similar to First Majestic (which I continue to be bullish on and continues to have a stellar pipeline of projects), and I expect it to have a similarly huge move, occurring more slowly over the next several years. It has two growing mines, probably the best management in the industry and is currently permitting a third project. If there are any delays in the permitting, that could cause the stock to fall a little bit and would provide a fantastic opportunity for people to add to their positions and for newer investors to get onboard. But, I definitely remain very optimistic on Argonaut over the next several years. Even though the stock has already advanced substantially, I think it still has significant room to move over the next 12–18 months.
Next, I would mention Corvus Gold Inc. (KOR:TSX), which is an exploration company that has performed fantastically. Corvus has joint-ventured its projects in Alaska and focused most of its resources on its North Bullfrog project in Nevada. Not only does North Bullfrog have substantial exploration potential, but also Corvus has already outlined a deposit there and put out a preliminary economic assessment (PEA). The PEA showed that the project would be extremely economic, even at lower gold prices, with payback at about two years, even on a $1,250/oz gold price.
It also has fantastic exploration potential. Part of the deposit is on privately owned land, which means it can be permitted much faster and get into production much more quickly. Potential production is targeted for 2014. Corvus has tremendous management, which has done everything right to this point. Even though the stock is already up over 100% since we first recommended it, I still believe it has substantial potential from here. Any exploration success in the future, which is a possibility, would be a major catalyst for Corvus' shares. People should definitely keep an eye on these two companies.
TGR: Back in the 1980s and 1990s, it seems that everybody and their uncle were in Nevada. Then companies decided to go south and everywhere else. Now it seems that I see more companies working on properties in Nevada again. Is that a trend you see?
JR-B: Definitely. I think it's a trend for several reasons. First of all, the higher prices are obviously making many formerly uneconomic deposits economic now. Also, Nevada is a safe and very easy place to do business.
TGR: That's an area we're going to be seeing a lot more companies returning to and turning some of these low-grade deals into profitable mines.
JR-B: You said it there. There are a lot of low-grade deposits in Nevada that may be only marginally economic at $1,500/oz or $1,600/oz gold, which are becoming very economic at $2,000/oz. That's where the extreme upside is now. So, that's an example of why I think Nevada is benefiting and why you'll see more people going there.
TGR: What else do you like in the gold area?
I think Primero Mining Corp. (PPP:NYSE; P:TSX) is another one to take a look at. It's a very interesting story because it has a world-class asset in Mexico. It's in the middle of a tax arbitration because it has a streaming deal with Silver Wheaton Corp. (SLW:TSX; SLW:NYSE). Primero has to pay taxes as if it were selling the silver for $30/oz, even though it only gets $4/oz from Silver Wheaton. It has applied to the Mexican authorities for tax relief, and expects there's something like a 70% chance that it can get this overturned.
When I first recommended Primero, the stock was well under $3/share. I felt that it was a no-lose situation, and based on what I was looking at, I had a target of about $3.80/share considering a loss in the tax case. Now, assuming a victory in this tax case, the stock should be worth a minimum of $8/share. The fact that it has gone over $5/share tells me that the market is pricing in a victory. If it loses the tax case, the stock could fall a dollar or so. If it wins, it could shoot up a couple more bucks.
Regardless of that, it has this world-class asset, a great management team and over $100 million (M) in cash, which should allow it to make an acquisition of a producing project. So, Primero really has all the things you want to see in a company that can be a successful growth-oriented producer and would be my top candidate to be the next Argonaut.
TGR: Any others you want to mention or talk about in the gold arena?
JR-B: I recently visited a company called Northern Vertex Mining Corp. (NEE:TSX.V; NHVCF:OTCQX) that has a project in Arizona called the Moss project. This is run by the same people who founded Kootenay Silver Inc. (KTN:TSX.V), which they have run extremely well in a tough market environment. Northern Vertex is focused on becoming a growth producer in the U.S. through this Moss project, where it is earning-in to achieve 70% ownership. I think the potential there is substantial because it already has a Measured and Indicated resource of nearly 1 million ounces (Moz) at an average grade that is close to 1 gram/ton gold equivalent, with a little silver.
If this can be run successfully as a heap-leach operation, with that type of grade it is going to be substantially profitable. There also is the option to run the ore through a nearby mill. That would obviously reduce the capital expenditure considerably. The company also has a pretty large deposit in Idaho. I'm less keen on that at the moment. I would say Northern Vertex is definitely a company to keep an eye on as a potential growth-oriented producer. I believe this Moss project could really springboard it into a nice future.
TGR: You said you weren't that hot on silver stocks, but there must be some you still like there.
JR-B: Up until recently I wasn't that hot on silver stocks. But, looking at where silver is now, we know that whenever gold goes up, silver goes up even more. So, actually I'm looking for more silver plays like Huldra Silver Inc. (HDA:TSX.V), which recently commissioned its Treasure Mountain mill in British Columbia. It's going to start spitting out ounces this month and should be in commercial operation by January. It's a very high-grade producer and should be the second highest grade mine in the world. There are several things I like about Huldra. Number one, although the company has had to raise some money this year, the stock has held up very well, whereas a lot of silver stocks have completely fallen apart technically.
The company has been able to successfully raise money and should produce about 2 Moz silver equivalent per year, which will result in a substantial amount of cash flow. It has about 17M options and warrants that would likely be exercised if the stock exceeds $2/share. The stock is now around $1.40/share. Assuming it goes over $2/share, these options and warrants will get exercised, generating something like $20M. In terms of mining, because its costs are very low and the grade is high, its profits are going to be substantial. Twelve months from now Huldra could have a minimum of $40–50M to work with.
The Treasure Mountain historical resource estimate is 10 Moz silver, but its NI 43-101 estimate is much smaller than that. Huldra really needs to drill out this project and define a more substantial resource, which would give it a higher valuation. Then it could trade at 4–5 times cash flow, versus the current 1–2 times. Also of note is that prior to the most recent financing, Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE) owned 12% of the stock and Sprott also owns a big position. That shows that some institutions think there's huge potential for the resource. Up until earlier this year, only $5M had been spent on this property.
Assuming silver goes above $40/oz and gets to $50/oz again, Huldra is one that I think is going to receive a large amount of interest and is going to be very profitable. I'm very optimistic on it long term.
TGR: On the other side of the coin, it's been a real struggle for a lot of junior companies that have had trouble financing in this market. Is there hope for them or are there going to be a lot of casualties or forced property abandonments due to lack to funding, regardless of gold and silver prices.
JR-B: I think the smart companies that are looking for acquisitions are going to do something similar to what Argonaut just did. It struck a deal with Bravada Gold Corp. (BVA:TSX.V), which has a deposit—Wind Mountain—in northern Nevada with a PEA that looks very economic at current prices. Wind Mountain already has a Measured and Indicated resource of 570,000 oz gold and 14.7 Moz silver. Argonaut is putting a little bit of money into drilling some targets there. If it likes what it sees, it has the option to spend a little more money over the next couple of years doing more exploration. After that, it has the option to buy the project directly for $30/oz in the ground. Essentially, if Argonaut really likes what it sees it could end up acquiring another mine for roughly $40M. Right now it is only committed to spending $250,000 and then $7M over three years.
A lot of these companies, with their stock prices below $0.10/share and not much cash, can't do anything and would be helped by a bigger company coming in. I would really be looking for the companies that are going to acquire these projects because they're going to be able to do so on the cheap and be able to add to their growth substantially and at a low cost. Argonaut has already made several great acquisitions, and looks as if it may be on the cusp of another one. By the way, Primero is also looking aggressively for acquisitions and Northern Vertex told me it is looking at similar types of deals (as Argonaut just did).
For many of these smaller juniors, there's really not that much hope left. You have to play those situations through larger growth-producer companies, like Argonaut. But, at the same time, a lot of the exploration companies and juniors typically catch fire when gold breaks out to a new high. What you want to see there is companies that are either totally cashed up, like Corvus, or companies that have the ability to raise some cash without destroying its share structure. It's a difficult situation for a lot of juniors and you really have to pick and choose very carefully.
TGR: That sounds like a good summary of what people ought to be looking at now. Any other further thoughts on strategy at this point for investors in the metals markets?
JR-B: As I discussed in my presentation in Toronto, when investing in this sector you have to separate things into where you're going to get your growth and where you're basically speculating. You get consistent performance from the growth-oriented producers and royalty companies. We have to realize that on the speculation side, a lot of these development plays and juniors are not real businesses. They're 18–24 month timeframe speculations where you're hoping they'll really do well. And, if something does and you make a nice amount of money, you have to get rid of it because you rarely see juniors, even in a fantastic market, trading over $5/share. You have to liquidate those and go back to the drawing board because they don't consistently make new highs over time. I heard an analyst on BNN say that 90% of these stocks will go right back down. He is exactly right.
You could make a fantastic amount of money on these companies, but I like to focus first on the smaller growth-oriented producers, which have the ability to grow for several years. After that, you go down the food chain and look at the juniors and developers that have potential, not just to double but to make three, four, five times your money. If you're looking at a junior and it doesn't have that potential, then why bother? You could just buy a royalty company or a mutual fund that has less risk but decent potential.
TGR: That makes sense and I think is something all investors ought to consider. Thanks for talking with us today.
JR-B: I appreciate the opportunity.
Jordan Roy-Byrne, CMT, is a Chartered Market Technician, a member of the Market Technicians Association and a former official contributor to the CME Group, the largest futures exchange in the world. He is the editor of TheDailyGold Premium. His work has been featured in CNBC, Barrons, Financial Times, Alphaville, Yahoo Finance, BusinessInsider, 321gold, Gold-Eagle, FinancialSense, GoldSeek and Kitco.
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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: Argonaut Gold Inc., Franco-Nevada Corp. and Primero Mining Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Jordan Roy-Byrne: I personally and/or my family own shares of the following companies mentioned in this interview: Argonaut Gold Inc. shares and warrants, Corvus Gold Inc. and Franco-Nevada Corp. warrants. Argonaut Gold, Corvus Gold Inc., Huldra Silver Inc. and First Majestic Silver Corp. are sponsors of The Daily Gold website. I was not paid by Streetwise Reports for participating in this interview.