The Gold Report: Over two days, July 14 and 15, the price of gold fell over $40 per ounce ($40/oz), more than 3% of its value. To what do you attribute this drop?
Jeffrey Mosseri: I don't think it was a very extraordinary event. Gold has been trading around $1,300/oz. We see sharp upward and downward movements triggered by, for instance, something Federal Reserve Chair Janet Yellen said or a negative report by Goldman Sachs. It looks as if gold will stay in the $1,300/oz range for a little while. We'll see which way it breaks out. We believe it's going to break out on the upside.
Douglass Loud: Gold had been running up for a while, and every so often investors want to take some money off the table.
TGR: How high do you believe gold will go?
JM: The average sustaining cost of production for gold is about $1,500/oz. If gold continues to trade below that level, at some point no new mines will be brought on. Supply and demand indicates higher prices for gold. At the same time, we're dealing with a seasonal trading pattern. Usually the position for those commodities tightens up around September–October. We think this will happen again this year. Higher prices? Yes. How much higher? We don't know.
TGR: Given that the financing for junior gold companies collapsed years ago, shouldn't the concomitant shortage of new supply have led already to higher prices?
DL: Well, there are games going on. Every once in a while some big bank will say that gold is too high. Then it goes down. After that, some big bank will say investors should buy gold and gold goes back up again. Institutions can profit by shorting gold and then buying it back before it rises in price, or so the conspiracy theorist in me thinks.
TGR: The world is becoming a more dangerous place. We have the civilian airliner shot down over Ukraine, civil wars in Iraq and Syria, Hamas attacking Israel, and Israel striking back, as well as a burgeoning territorial dispute between China and Japan. As a result, do you expect a flight to safety by investors?
JM: Actually, we are flummoxed by the apparent disconnect between what's going on in the world and commodities prices in general. We think that the reason for this is that the U.S. dollar is the least dirty shirt in the laundry basket. Investors are fleeing to the dollar because it's easier and cheaper, but if these hot spots continue to get hotter, it will almost certainly translate into more gold buying.
DL: Then there's the issue of real gold versus paper gold. There may be much more paper gold than real gold to support that paper.
TGR: The traditional argument for gold bullion is that it is a rare, real good that cannot be multiplied endlessly. Before gold exchange-traded funds (ETFs), if investors wanted exposure to gold that wasn't in bullion they had to invest in mining stocks. Do you think ETFs have resulted in a substantially changed gold market?
JM: For many years the traditional relationship between gold and gold stocks was that the stocks predicted the direction the metal would go. This changed with the introduction of ETFs, and for the last few years, the tail has been wagging the dog.
The ETFs were an interesting introduction. They have been and will continue to be a very good way to play gold, but they did result in putting gold stocks out of favor. Now people are beginning to realize that it is the mining companies that produce the gold, and they're going to make the profits.
TGR: Historically, the end of a recession led to big increases in gross domestic product. We've yet to see this after the post-2007 recession. Why not? Are we now living in a new world of permanent low growth?
DL: We're supposedly out of a recession because a bunch of statistics say so, but tell that to the shopping malls that are one-third empty and to the people who don't know how they're going to pay for the increases in food and fuel that are no longer included in the inflation statistics.
JM: Serious economic growth has been stymied by a rash of new regulations and by the standoff between Congress and the Obama administration. This disincentivizes capital investment and capital creation. Most of the stimulus money created from 2008 went to firm up bank balance sheets and did not get into the economy proper. And so the recovery has been a lot more anemic than in the past.
Now, however, business loans are beginning to be made by the banks. Little by little this will percolate into the economy. And the $8 trillion ($8T) created by the central banks has to find a home somewhere. We believe this will be reflected in higher gold prices, and, in fact, higher prices for commodities in general.
TGR: The Financial Times reported in June that public institutions, central banks mostly, have invested $29.1T in the markets, mostly the equity markets.
JM: Well, because of continued very low interest rates, most of the stimulus has gone into improving bank balance sheets and into the equity markets but not into the economy proper.
TGR: HudBay Minerals Inc. (HBM:TSX; HBM:NYSE) has taken over Augusta Resource Corp. and Osisko Mining Corp. was taken over by Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) and Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE). Can we expect more such buyouts?
JM: Yes. What's interesting about recent takeovers is that they were initiated as hostile bids. This is very unusual for Canada, which is a much more gentlemanly arena than America, Britain or Australia. We believe it's a question of value. Mining assets are now cheap, and well-financed companies can buy good properties cheaply.
DL: We were in a meeting the other day with some executives whose company almost went under simply because their project took longer than expected. The company kept having to make payments on its equipment to keep its place in line, and pretty soon it used up all its cash. Time can kill a smaller business. And so mining companies can be bought on the cheap because they have no money and can't raise it.
TGR: The Osisko buyout has resulted in the creation of a new royalty company called Osisko Gold Royalties Ltd. (OR:TSX), which began trading at the beginning of June at $13.50/share and has since risen to $15.95/share. Why does the market value this company so highly?
DL: Because it has a royalty on the Canadian Malartic gold mine in Quebec. So the company is like a mine without the mine.
JM: Streaming companies are very attractive so long as they finance good projects. Investors see this stream of cash flow, and they love it. It's less risk with more visibility.
TGR: Osisko Gold Royalties has $157 million ($157M) in cash. How big a player does it intend to become?
JM: Clearly it will be a major player. The question is, will it buy other existing streams or will it buy other projects that will stream later? I think it will do both.
TGR: HudBay now has Augusta. Its Reed copper mine in Manitoba is now in production, and its Constancia copper mine in Peru is scheduled to begin commercial production in the second half of 2015. How do you rate this company?
JM: Very positively because we see its production going up radically in 2014–2015. Copper production should increase by over 50% next year. We happen to be very positive on copper. We also think HudBay will increase its gold production. And Augusta may not be its last acquisition.
TGR: How likely is it that HudBay will be able to move forward its newly bought Rosemont copper project in Arizona within a reasonable amount of time?
JM: All these big projects come down to two things, permitting and financing. The financing part should be easier. We think HudBay will move it along at a good pace, and that it will overcome any permitting hurdles.
DL: Otherwise, there would have been no point in HudBay buying it.
TGR: How ambitious is HudBay? How big does it want to be?
JM: HudBay has extremely good management and will operate within its financial constraints. Other than that, I think the company will grow as big and fast as it can.
Talking of permitting, after 10 years, we feel that Polymet Mining Corp. (POM:TSX; PLM:NYSE.MKT) is very close to obtaining its permits and its financing, and will finally be going into production on its huge copper-nickel deposit in Minnesota.
TGR: The Reed copper mine is owned 30% by VMS Ventures Inc. (VMS:TSX.V). After VMS pays back HudBay and the cash flow from Reed begins to accrue, how transformative will this be for VMS?
DL: The cash flow will be very helpful, but the company shouldn't run out and make any acquisitions tomorrow. It's going to take a while for it to receive actual cash from that project versus accounting entries of cash flow. We like some of its other projects. One of them is in Greenland, and that's very interesting, but it is Greenland.
TGR: You're referring to the fact that VMS owns 22% of North American Nickel Inc. (NAN:TSX.V) and its Maniitsoq nickel sulfide project in Greenland. Rick Mills told The Gold Report that he thinks the world of this project and that VMS was quite clever to get a piece of it.
DL: We think it's clever, too. Right now everybody's worried about gold and silver, but they should be paying attention to copper, nickel, zinc and molybdenum. One of these days these metals are going to tap us on the shoulder and say, "Remember us?"
TGR: In a previous interview, you talked a fair amount about Yukon mining. Are you still keen on that region?
DL: Yes. There are those who feel that expenses went through the roof, which they kind of did, but we still like some of our companies up there. For instance, Alexco Resource Corp. (AXR:TSX; AXU:NYSE.MKT) and its Eastern Keno Hill Silver District. The company is run by some really smart guys. For example, Alexco used to pay Air Canada about $600,000 yearly to fly its workers in and out. It has solved that problem, and it has gotten other costs under control as well. Additionally, there's a lot of zinc up at Keno Hill, and if zinc comes back, it will be a very profitable project.
When I was in the Yukon a while back, someone told me jokingly that the Yukon ought to annex northern British Columbia (B.C.) because it was more like the Yukon than B.C. There are a lot of good projects in that region, like Pretium Resources Inc. (PVG:TSX; PVG:NYSE), with its huge high-grade gold discovery that's just waiting to be taken advantage of. And there is Western Copper and Gold Corp. (WRN:TSX; WRN:NYSE.MKT) and its Casino project, which is going to produce copper at a very low cost. Any company that can accomplish this will do very well because the need for copper isn't going to go away.
TGR: What is the status of Alexco's Bellekeno silver mine?
DL: I think it's coming along very nicely. And Alexco has found a wonderful new site called Flame & Moth. Unfortunately, it's right under the mill it just built, so it is building the entrance to this new mine right next to the mill. The company will have two major production areas going. If it produces, for the sake of argument, 3 million ounces (3 Moz) of silver a year, it could well do 6 Moz of zinc.
In addition, Alexco has its environmental recovery division. There are an awful lot of big companies that have bought a lot of little companies over the years, and they've got a whole bunch of little mines that maybe weren't cleaned up the way they should have been. Alexco is poised to profit from that.
TGR: Which gold juniors do you like in Nevada?
DL: We've always liked Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.MKT) and its Pan project because it's plain and simple. You take it out of the ground and put it on the pad. I also like Paramount Gold and Silver Corp. (PZG:NYSE.MKT; PZG:TSX) because it owns the Sleeper gold project. It was hugely successful before and could be again.
JM: We also like Allied Nevada Gold Corp. (ANV:TSX; ANV:NYSE.MKT).
TGR: Midway just closed a $27.5M bought-deal financing. Pretty good for a junior these days, no?
JM: It is and speaks well to the probability of it getting into production and cashing in.
TGR: Moving on to South America, are you still fond of Exeter Resource Corp. (XRC:TSX; XRA:NYSE.MKT; EXB:FSE) and its Caspiche project?
DL: We still like Exeter a lot.
TGR: From June onward there has been a rather significant appreciation in its share price.
JM: That's because Exeter pared back its Caspiche project from a major copper-gold porphyry, whose capital expenses would be around $4.5 billion ($4.5B), to a $200M capital expense (capex) oxide-only project, which stands on its own two feet and should be very profitable. Then, if commodity prices rise enough to attract capital for large projects once again, the underlying porphyry will still be there for further development.
TGR: What else interests you in South America?
DL: Because of the government of President Cristina Kirchner, Argentina has rather taken itself off the grid. If she is replaced with a more mining-friendly leader, then we like Yamana, which bought Exeter's Cerro Moro project. We would also revalue McEwen Mining Inc. (MUX:TSX; MUX:NYSE ) and Goldcorp Inc. (G:TSX; GG:NYSE).
TGR: Argentina has been troublesome for business ever since Juan Perón first came to power in 1946. Does there come a point when mining companies decide to write off a country once and for all?
JM: In the end, greed trumps grief.
DL: And don't forget the grades in those Argentine projects are extremely high, which should make them very profitable.
TGR: Are there any other precious metals companies you'd like to mention?
DL: In Mexico, there's First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE), which is well run and keeps finding more silver.
JM: It has very high-quality management, and the company always seems to find a way around whatever problem is presented.
TGR: You are interested in rare earths as well. Which particular company do you like?
JM: Texas Rare Earth Resources Corp. (TRER:OTCQX) and its Round Top project in Texas.
TGR: What makes this special?
JM: It's a big hill that's all rare earths and ready to go. The capex is only $292.7M with a mine life of 20 years. The pre-tax net present value is $1.47B, and the internal rate of return is 69%.
DL: The company has a very good share of heavies, which is quite important. It's in America. It is strategic. It knows how to do it, and it's relatively easy. It's a big mountain, and it will go right in there and take it out.
TGR: The current bear market in precious metals goes back to April 2011. When will it end?
JM: We think it may have already ended. The recession has cleaned out a lot of doubtful companies. The survivors with really good projects will either be bought out or get financed. We think that's going to start to happen in the very short term.
TGR: How long will the trend have to keep moving upward before we can say that we're now in a bull market?
JM: Metal stocks did extremely well from 2002 to 2010. Then there was a correction. We think that we are preparing for the next upward move, which should last for several years. There is a tightness in various metal markets, which will mean higher metal prices. This could lead to more mines going into production in the future.
TGR: When you consider your favorite companies, which qualities do they share?
JM: Good, solid management is one. Good deposits and good grades are another, and either being in production or being close to production is a third.
DL: And we're very sensitive to country risk. I mean, we're not going to touch the best mine in the world, if it's in the Congo.
TGR: Jeff and Doug, thank you for your time and your insights.
Douglass N. Loud joined Greystone Asset Management at its founding in 2005 and has been senior managing director of Axiom Capital Management Inc. since 2009. Prior to that, he was with Murphy & Durieu, where he served as executive director of the Private Clients Group. Loud has over 35 years of investment management and securities industry experience. He holds a degree from Yale University and a law degree from the University of California, Berkeley.
Jeffrey N. Mosseri established Greystone Asset Management in 2005 and became a director of Axiom Capital Management Inc. in 2009. He was a stockbroker and investment manager at Goldsmith & Harris for 20 years. Mosseri also worked as a stockbroker and investment manager for Carnegie Capital, the investment advisory division of Prescott Ball & Turben, where he ran the international arbitrage division and developed the gold mining research and investment department.
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1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: North American Nickel Inc. and Pretium Resources Inc. Allied Nevada Gold Corp. and Goldcorp Inc. are not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services.
3) Jeffrey Mosseri: I own, or my family owns, shares of the following companies mentioned in this interview: Alexco Resource Corp., Exeter Resource Corp., First Majestic Silver Corp., Goldcorp Inc., McEwen Mining Inc. and Pretium Resources Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. The fund has holdings in the following companies mentioned: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Douglass Loud: I own, or my family owns, shares of the following companies mentioned in this interview: Alexco Resource Corp., Exeter Resource Corp., First Majestic Silver Corp., Polymet Mining Corp. and Western Copper and Gold Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. The fund has holdings in the following companies mentioned: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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