The Gold Report: In an interview with The Gold Report in April, you predicted that gold will continue to trade "sideways" between $1,200 and $1,410 an ounce ($1,410/oz). That is exactly what happened! Why?
Thibaut Lepouttre: The problem was the lack of catalysts. Nobody was really worried about war in Ukraine, or the Federal Reserve's reduction of quantitative easing (QE). When the market is not at risk of collapsing, gold's appeal as a safe-haven investment fades. And with no inflation on the horizon, gold sours as a hedge against rising prices.
TGR: Is the drop in the price of oil affecting gold?
TL: Gold mining companies that depend on diesel generated power stations can benefit from a falling oil price, but there is no real direct correlation between the price of oil and the price of gold anymore.
TGR: Why did gold drop in October and November?
TL: Some people point at the Fed's decision to reduce quantitative easing, but that is bogus thinking. The gold price did not start to slide until 36 hours after the Fed's decision. I am not a conspiracy theorist, but the temporary drop could have been an orchestrated move to make the weak hands sell. Just a few weeks later, we were back up above the support level of $1,180/oz.
TGR: When you say orchestrated move, who would you be pointing at?
TL: The country that was positioned to benefit the most from a falling gold price was China. Not long ago, a person who works for one of China's biggest gold companies said that when gold trades below $1,150/oz after QE ends, there will be M&A activity from the Chinese in the gold market. What did we see? We saw the quantitative easing program with the Federal Reserve stop and gold slid to $1,150/oz. Go figure.
"One does not often encounter such a valuable phosphate deposit as Focus Ventures Ltd.'s Bayovar in the world today."
TGR: Where is the gold price headed in 2015?
TL: The two main gold price drivers are inflation and market panic. Right now, investors are falling over themselves to buy stock. The European Central Bank and the Bank of Japan are pumping ridiculous amounts of money into the financial system. The main issue is the velocity of money, which is currently at a multidecade low. The higher the velocity of money, the higher the inflation rate if the money supply decreases at a slower rate.
The real problem here is that the money supply is increasing, but because the velocity of money is decreasing, no inflation is being created. When the velocity of money returns to the average velocity of the past 30–40 years, the inflation targets proposed by the European and Japanese central banks will be underwater. We are all walking on thin ice with monetary policy.
TGR: Do you have a timeframe on the ice cracking?
TL: Sooner rather than later; Japan is playing a very dangerous game. It injects $700 billion a year into the financial system. That amounts to 12% of Japan's GDP. Compare that to the United States, which was pumping $1.02 trillion a year into the economy: 6.3% of its GDP. Japan's quantitative easing program is twice as large as the American program. If the velocity of money spirals back up, it will be very difficult for Japan to reduce its money supply. Inflation will rise like a rocket.
TGR: What gold juniors do you favor for the coming period?
TL: Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) has proposed spinning off a few of its early-stage exploration properties. It might be a smart move for Almaden to delay, actually. Spinning off properties in the current market might not be value accretive. Nonetheless, Almaden's Tuligtic project in Mexico has an updated preliminary economic assessment (PEA) calling for a 30,000 ton per day (30 Ktpd) operation worth between $151–260 million ($151–260M). Once inflation pounds the markets and gold will be attractive again, Tuligtic will be in the spotlight.
TGR: Why did Almaden's stock price take a hit last year?
TL: The market views Almaden as still in the PEA stage. Production is four or five years away. The market is understandably a bit wary of exploration stories right now. That will change—gold is not going away! Quite a few juniors are trading at bargain prices.
TGR: What other companies do you like?
TL: Integra Gold Corp. (ICG:TSX.V; ICGQF:OTCQX) recently acquired the Sigma-Lamaque mine, which is across the street from its Lamaque project in Quebec. The mining site sports a 2,200 tpd mill. Integra bought the whole project for cents on the dollar as it paid $7.55M and according to independent consultants the fair value is around $100M. We can expect to see an updated PEA in January.
Because of the mill, the mine's operating expenditures will be reduced by $20 to $25 per ton. That translates into a cost savings of at least $100/oz. It is possible that the Sigma-Lamaque ore can be accessed by the underground workings of the Lamaque mine. That would shave off another $10–15M of capital expenditures. On top of that, the company is in the process of raising $7M in flow-through financing for exploration.
TGR: Any gold juniors to watch in South America?
TL: I just visited the Inca One Gold Corp. (IO:TSX.V) mill facility in Peru. It is a 100 tpd production facility that is currently being commissioned and should be ready for full production in the second quarter of the year. Inca One is bringing Canadian's transparent mining standards to Peru. We noticed local ore suppliers really appreciate the firm's honesty. Inca's $11–12M market cap will certainly rise in 2015.
"Pilot Gold Inc. could do very well in 2015 as it's very well financed and has a seasoned technical and management team."
TGR: Did you visit anyone else in Peru?
TL: By way of a detour, I spent quality time at Focus Ventures Ltd.'s (FCV:TSX.V) Bayovar 12 phosphate project. Site visits are the best way to obtain information. I was impressed by how easy, straightforward and simple the Bayovar project is to mine. All that Focus needs to do is strip off some overburden. The layers of phosphate are visible with the naked eye. The project is located on a paved road 25 kilometers from a working port. A power line goes straight through the property. It is a miner's dream!
Production could start at Bayovar in 2016 as the company is mulling over a small-scale operation. This project could ultimately produce several million tonnes of phosphate per year. Vale's phosphate mine is next door and is producing 4 million tonnes of phosphate per year, gradually increasing the load to 6 million tonnes. Bayovar is a simple and extremely predictable project. One does not often encounter such a valuable phosphate deposit in the world today. I was stoked.
TGR: What gold miners in South America are you watching?
TL: In Colombia, I like Red Eagle Mining Corp. (RD:TSX.V). Red Eagle expects to receive its final permit for the Santa Rosa project in San Ramon before the end of the first quarter of 2015. This ought to be an extremely profitable operation, with all-in sustaining costs less than $800/oz. At a $1,100/oz gold price, that generates a positive after-tax net present value (NPV). Santa Rosa is a small, very neat operation. It will be quite easy to finance it because the upfront capital expenditure is only $75M. Plus, Red Eagle is being backed by Appian Natural Resources Fund L.P. and by Liberty Metals & Mining. It's one of the most promising South American gold stories.
TGR: Anything going on in Argentina?
TL: Golden Arrow Resources Corp. (GRG:TSX.V; GAC:FSE; GARWF:OTCPK) has made a major discovery in Argentina. Two years ago, Golden Arrow bought a grassroots project called the Chinchillas project, which had literally no work done on it. The market was not excited, to say the least. Now, the project has shaped up with an extremely impressive 165 million ounces of silver equivalent. Golden Arrow's updated PEA outlines an after-tax NPV8% of $90M at $18/oz silver. At a silver price of $22/oz, the NPV increases to $225M. The project has a lot of additional upside potential. It has an exploration target of 200 million additional ounces at a low grade, which won't be viable at the current silver price but should be considered as an option on a higher silver price. I would not be surprised if the Chinchillas project contains fully a half billion ounces of silver at different grades.
TGR: What is looking good up in the Northwest Territories?
TL: TerraX Minerals Inc. (TXR:TSX.V) has a dreamy gold project near Yellowknife. It is located within walking distance from the city of Yellowknife, which has an airport and a power grid. The property was acquired out of a bankruptcy, which means it is cheap to advance because it has already seen a lot of exploration work. The company has reassayed 18 meters of 2 grams per ton gold. The only problem is that the mine is far up in the north where it is quite cold. But there is no doubt that there is a lot of gold left in the ground. TerraX has $3–4M in the treasury, which will allow it to continue working for quite a while. It has recently announced it will start drilling again in January.
TGR: Who has your eye in the American West?
TL: The Oxygen Capital Group companies are impressive—Pilot Gold Inc. (PLG:TSX) and True Gold Mining Inc. (TGM:TSX.V). Pilot Gold recently bought Cadillac Mining, which owned the Goldstrike project in western Utah. Pilot Gold is implementing a new geological model on existing exploration projects. It has had huge success applying its model at the Mount Kinsley project with Nevada Sunrise Gold Corp. (NEW:TSX.V), discovering very high-grade zones. I am confident a few million dollars in exploration expenditures will create massive returns for shareholders. At Sprout Money, we believe this company could do very well in 2015 as it's very well financed and has a seasoned technical and management team.
Oxygen Capital is also the group behind True Gold Mining, which is constructing the Karma gold project in Burkina Faso. I consider this to be one of the most impressive near-term production projects in Africa as the company is fully financed and fully permitted, has a low initial capital expenditure and an all-in sustaining cost of $678/oz. There have been some political problems in Burkina Faso quite recently and as the president left the country, all mayors were sacked as well. This created some sort of power vacuum on the local level, which has resulted in True Gold having to slow down its construction activities. However, I do expect the situation to be resolved soon.
TGR: What about the Carlin Trend in Nevada?
TL: In the Carlin Trend, we at Sprout Money like Premier Gold Mines Ltd.'s (PG:TSX) Cove project. I am a bit more excited by Premier's Trans-Canada project, because it is more advanced than the Cove. But the Cove mine has a lot of high-grade potential at depth. Premier has also discovered silver-lead-zinc mineralization. The company has more than $50M in working capital. I expect Premier's managers to spend quite a bit of cash developing the Cove project in 2015, getting ready for an impressive PEA debut.
"True Gold Mining Inc.'s Karma is one of the most impressive near-term production projects in Africa."
On the other hand, Premier's Trans-Canada project should release a feasibility study in the second quarter of 2015. The mine is partly open pit, partially underground. It could be in play in the next year, so keep it in sight.
TGR: It certainly sounds as if gold exploration is not dead, Thibaut. These companies all seem to be rather well positioned for a rebound in gold.
TL: Try to pick companies with cash in the bank, or cash-attracting managers. Premier Gold has over $50M in working capital. Pilot Gold has more than $20M. They are advancing good projects despite the wariness of the gold bears.
TGR: Thanks for your time, Thibaut.
Thibaut Lepouttre is the editor of the Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals. More recently he also became the editor of Sprout Money, a publication focusing on companies in the precious metals sector. Lepouttre has a Bachelor of Law degree and two economics masters degrees that have forged his analytical approach to the mining sector. Considered a number cruncher, Lepouttre focuses on the valuations of companies and is consistently on the lookout for the next undervalued mining company.
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1) Peter Byrne 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 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 Streetwise Reports: Almaden Minerals Ltd., Integra Gold Corp., Focus Ventures Ltd., Red Eagle Mining Corp., TerraX Mining Inc., Pilot Gold Inc., True Gold Mining Inc. and Premier Gold Mines Ltd. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Thibaut Lepouttre: I own, or my family owns, shares of the following companies mentioned in this interview: Integra Gold Corp., Inca One Gold Corp., Focus Ventures Ltd., True Gold Mining Inc., Red Eagle Mining Corp. and Golden Arrow Resources Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: None. Caesar Holdings has a financial relationship with the following companies mentioned in this interview: Integra Gold Corp., Golden Arrow Resources Corp., Inca One Gold Corp. and Red Eagle Mining Corp. Sprout Money does not have a financial relationship with any of the companies mentioned. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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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