An avowed Keynesian, Equities and Economics Report writer Victor Gonçalves braces against the economic gale-force headwinds that threaten to whip gold's stellar run into seasonal weakness. But, before the new year, the yellow metal will generally see more strength than weakness, according to Victor, after which "things really get sour." In this exclusive interview with The Gold Report, Victor says he's rooting for the juniors in the homestretch, affirming: "This is the best part about juniors—we're in results season."The Gold Report: Victor, you and many others were expecting a major pullback in the market and we had some pullback in late October. Is that what you anticipated?
Victor Gonçalves: It's roughly what I expected. It could have gone one of two ways, but technical indicators have been showing that we have one of those triple-top occurrences that cascade on the way down. Preceding that pullback was a broad based rally but it gave a false sense of hope, if you will, in the sense that it wasn't going to go any higher. The TSX, for example, which is mostly what I follow, hit about 11,700 several times and then went down. That's telling me is that we're looking at an interim market top, at least. Whether we're going to have another major crash again now is still in the air. I don't think we're going to have a major, let's say, 50% correction on this dip. I think we might have another shot at a rally before a major correction. And although I do think one is imminent and investors are taking some profits off the table, I haven't seen all the signs a full-up crash this time, and fall-to-winter typically sees seasonal strength. The economic gale-force headwind will be bit of a problem when we get into the seasonal weakness.
TGR: When does the typical seasonal weakness begin?
VG: We see some tax loss selling toward the end of December, and then the Santa Claus rally coming out of that. It's a bit of a whipsaw, but generally more strength than weakness until the early new year, when it won't be so nice. That's when I expect things to really get sour. But I want to emphasize this could happen now.
TGR: When we get to the major downturn, will we retest the 2009 March lows?
VG: The short answer is yes. Based on my model, I don't think we'll break through them. If we do, it won't be by much. This is healthy. It tends to happen. With every major crash we've had, we've had a nice euphoric run after the first major cascading, which happened at the end of last year and the beginning of this year. It depends on which exchange you're looking at, but up until the top of the market we've had, effectively, between a 70% and 90% run. We could see the market correct now in a major way or just a 10%–15% pullback, which we're in the middle of right now.
TGR: How are you playing this market?
VG: I've been really aggressive this year. Right now I'm taking some profits, but I'm not selling everything. I'm keeping strong companies because they will still rally. A lot of companies have stopped or are winding down this year's drilling, and more results will be coming. The strong companies are likely to have better results and are likely to be able to capitalize on them, especially with the capital markets as strong as they have been. I've certainly kept a large enough position on a lot of these strong companies to feel the appreciation of these potential good results coming down the pipe.
TGR: You're a big believer in gold. It's had a pretty good rally this year, starting at about $850 and now about $1,030. Do you still see that going close to $1,200 or $1,300 by year end?
VG: I generally don't want to put an exact timeline because these things never work out as you plan them. Gold is going to have to get comfortable at $1,000. That's what it's been doing. We're going to have to get this comfort level really established and some more economic data before gold can really start taking off.
The price of gold has rallied strongly this year, but really not until the latter half of the year and not until the China effect kicked in. The Chinese government now wants the Chinese people to own physical gold. They're flat-out promoting it. If any one society acts as a collective, it's the Chinese—and when the world's largest population is acting as a collective, even if a small fraction buys gold, that can make a huge difference. This fresh demand is the reason why we have sustainably higher gold prices now. Once that buying really kicks in and has filtered into the full supply-demand equation, we'll get to that $1,200 or $1,300 price point or more.
TGR: Considering the great appreciation we've seen in the junior equities, do you think there's much more upside potential?
VG: Every commodity has a base of equity that trades around it. You've got the copper, silver and zinc stocks that tend to trade reasonably 1:1 with the commodities, depending on whether it's a junior, a mid-tier or a senior company. With gold it acts a little different. The majors trade about 1:1 with gold in terms of price increases and decreases. That makes sense because when you're buying a major, you're basically buying a produced ounce.
However, when you're buying a mid-tier, you're buying a near-term produced ounce, so mid-tiers normally trade at about 0.7:1. Over the past couple of years, the juniors have been moving only about 0.2:1 at best. So, really, zero correlation. Junior equities wouldn't really respond to the gold price, up or down, because junior gold companies don't represent gold, they represent management, land, cash and so on. In other words, they represent a venture that is trying to find economic gold and therefore will trade like a stock and not like gold. So when gold prices are consistently rising, stocks generally don't do well and gold juniors, because they don't represent gold, are no exception unless they actually made a discovery. Now people want to get in on the action of gold, and the best way to is not in the majors; you might as well buy physical gold. The mid-tiers and juniors will see the true appreciation because we have had the equity markets and the gold markets going up at the same time, which doesn't normally happen.
With gold where it is, juniors are more likely to retain equity prices when investors are taking profits. So while the market is treading water or getting these initial stages of a downturn, funds are going to flow somewhere. People are going into something that still has some sizzle and that's the junior golds and some other categories as well. So I still think there's appreciation in the gold juniors as a basket. That said, if the market corrects 50%–70%, everything goes down. When the tide goes out, all the boats come down.
TGR: If an investor's money is in the juniors, isn't it at greater risk in the event of a major market pullback, because these equities aren't as liquid as in the seniors?
VG: Absolutely. Once the market really starts pulling back, the best thing to do is just to go flat out in cash. That's what I will be recommending once I see that market really, truly turning south. There's no point in being in equities when people are selling them. At the moment, there's still money on the sidelines, there's still some money out there for juniors particularly because of the discovery factor that's going on. So as it stands now, juniors are still good to be in.
TGR: And when the market turns up again, investors can be ready and knowledgeable about which juniors are likely to bounce back first. So what are some of the companies that should be coming out with some good news and perhaps some stock appreciation?
VG: My poster boy is Richfield Ventures Corp. (TSX-V: RVC). Anyone who took my recommendation certainly did well because the company not only put out some stellar results, but went from 12 cents to $1.88 in a matter of maybe two-and-a-half months. When I first recommended the company, I think the market cap wasn't even $1 million, so they were certainly a junior at the time. Not every company's going to behave this way, but out of the 15 holes Richfield Ventures drilled, 14 holes had mineralization. That's a success rate of 97%. Very, very good. And half to two-thirds of those were slamming out-of-the-ballpark type results—huge results. Their footprint could host easily 2 million ounces of gold. That is fantastic for a company with all of 14 million shares out. That's a company that still has a lot of legs to it. Next year they're thinking about definition drilling and doing some more exploratory work to the south because they haven't really touched the south part of the property yet. The beauty about this project is that it's road accessible; you can get on there in your car.
TGR: Who else are you watching?
VG: A company we talked about in August was Kent Exploration Inc. (TSX.V:KEX). At that time, I think it was at 7 or 8 cents, and now it's pushing close to 25 cents. It's done quite well, and for good reasons. They've acquired some New Zealand and Australian properties with almost 700,000 ounces of gold on them. They have near-term cash flow of barite, anywhere from $1.2 million to $1.5 million a year. They've drilled their Flagstaff property in Washington State, where they have very high-grade holes that they're trying to prove because these are historical holes drilled in the early '80s. And it's in a safe jurisdiction and all those good things we need in a company. It's well run. Graeme O'Neill (the CEO) is one to spend money where it's required and not do it frivolously, so that's one thing I like about him. His management team is the type to make sure things get done from A to Z. That's what they're doing now. Based on the fact that the company has approximately 28 million shares, it's only a $7 million company with some very nice results coming out. They've done well so far, and still have room to grow. I'm quite eager to see what happens.
TGR: Any others you could share with us?
VG: There are a few other companies that I've looked at that are, again, in positions to do well. We can look at a company called NioGold Mining Corporation (TSX-V: NOX) (otc: NOXGF.pk) and that's one that I've been following for quite some time. NioGold already has a resource of around 600,000 ounces. They've drilled off a bunch more holes to increase that resource. At that point they've got the ability and the network, if you will, to go to a mining decision if they want to, or there are enough others in the area, such as Osisko Mining Corporation (TSX:OSK) that could very well just buy it out. NioGold is in a good position here at about 24 cents, because they're due to have a resource calculation reasonably soon—sometime in November, I would hope—and that should appreciate the stock notably if they come out between 1 million and 1.5 million ounces.
What else do we have? I was on Otis Gold Corp.’s (TSX:OOO) property in August down in Idaho and that's a company that has 706,000 ounces of gold already at 1.15 grams per ton. This is a historic resource, so it's not 43-101 compliant, but it was drilled off by some very reputable companies so I'm pretty confident in the data. And I've talked to the people at Otis, Craig Lindsay and so on. They're looking to build out a high-grade core, a nice sweet spot and then see if there's more to the low-grade halo. As with NioGold, Otis has a lot of risk that has been removed because they have a resource already and they know where they're going. The geologists who are working on this property are the ones who originally discovered it 20 years ago now they're back on the project as managers. This is a fairly new company, very low float. They've got a lot of their market sizzle still because no one's heard much about it; Otis has that ability to really appreciate in value if and when good results come out.
This has to go back to the thesis that we still have some more time for these juniors to appreciate before the market truly does crash. This is the best part about juniors—we're in results season. A lot of these companies are going to have results coming out over the next month, month and a half and that's really going to make sure that the juniors in the gold space do well as opposed to juniors in spaces where the commodity may not be as much in favor.
TGR: You also mentioned Midland Exploration Inc. (TSX.V:MD) in our last conversation. What's going on with them?
VG: Midland's president and CEO, Gino Roger, is a very good guy. I've run into him a number of times and have had a lot of good conversations with him. That is a company that ought to be on the Discovery Channel, How Did They Do That? This company has very few shares outstanding—23 million fully diluted—is three or four years old and still has $3.2 million in the bank. That, in my mind, is very impressive. By that stage of the game, a lot of companies would have up to 60 million shares out and probably a little bit less money. So Midland's done a very good job of managing their float, managing their money, and it shows in the stock.
It also impressed me in the sense that Midland lost less than 50% of its stock value in the market crash and downturn last year and early this year, when most of their peers lost 80 to 90%. Most of their shares are in hands that they know, too, so the stock doesn't normally have a lot of downside risk, which is kind of built into their share structure. So that's the first thing I think was brilliantly done. Secondly, as a project generator they rarely spend the big money. They spend enough to get the project drill-ready or drill a couple of holes themselves and pass it on to a company with deeper pockets and a mandate to drill off a resource or develop the project. They carry an interest and their shareholders benefit from that.
This isn't a new concept. Quite a few companies do this. Midland just manages to do it well. In addition, they recently made a strategic, very well-placed acquisition of a rare earth element property not far from the Strange Lake area. It's very good because it's right beside Quest Uranium Corporation (TSX-V:QUC), which has a resource on one of their projects. This will be attractive to somebody and that's what joint venturing is all about. I suspect they'll do some work on it, get it ready to drill, pass it off to somebody who will do bigger things with it and the shareholders of Midland will benefit. We can see this in the share price; it's a very beautiful chart.
It is constantly moving up slowly. It's not one of those companies that does a 10- or 15-bagger in a year. But it is a company that's a little more consistent. You can sleep a little easier at night.
All these juniors have risk and to think otherwise is deluding yourself. But this company has a lot of risk taken out just by virtue of their model, by virtue of the way their shares are positioned and the size of their float.
So they've done pretty well since the last time we talked. They made a rare earth acquisition, their gold projects are moving along quite nicely, and this is a company I think everybody should look at.
TGR: Any other juniors that pique your interest?
VG: Sure. Eastmain Resources Inc. (TSX:ER). All I really tell anybody who asks me about Eastmain is, "Buy it and put it away." I talk about very few companies that way, and rarely would that apply to a company that is not a major. Eastmain is nowhere near a major, but they're in great shape. They have a beautiful deposit, over a million ounces of high-grade material at Clearwater. They've had results as high as 75 ounces per ton gold, but the lower grade 1 ounce per ton material is consistent throughout the property. The beauty is it's not just some little core area with these nice newsworthy grades. It's everywhere.
This is very attractive to a major, and Goldcorp (TSX:G) (NYSE:GG) just so happens to be very nearby. So as far as I know, Eastmain will continue to develop their project until it's time for Goldcorp to buy them out. Goldcorp already owns 9.9%. But Eastmain is in a perfectly good position. They've got all weather roads, they've got power lines going to the property, James Bay is right there. So they have all the ingredients and if they wanted to go after this on their own, they could. But they've also got the luxury of being right beside a very interested major. On top of all of this, Eastmain has $17 million in the bank, which is really like having $25 million because for every dollar you put in the ground, you get 50 cents back from the government in Quebec. Very few jurisdictions do that.
TGR: You can't beat that.
VG: Another one worth looking at Mexoro (OTCBB:MXOM). I went to visit their property just an hour outside of Chihuahua Mexico in mid October and was very impressed. This project is really nice, and from what I understand, they've applied to trade on the TSX, which would give it a fair bit more liquidity, a lot more transparency, and a lot more access by the major funds. The company right now has about 1.2 million ounces of gold on the property, grading around 3 grams a ton. That's based on 50 drill holes. They drilled 103, so they're going to update their resource calculation with the balance of the holes plus some more drilling, so we can expect that the resource is going to increase reasonably significantly, I would say, just by adding the rest of the holes they've drilled already. Some time in early November the mill should be completed and they should be getting into production. Once it's up in full production and ramped up, this company should be producing about 30,000 ounces of gold at a cash cost of around $300. That's very cheap gold, and cash flow is good. I personally like to see a company with a) cash flow and b) exploration upside—and Mexoro has both. The exploration team is one of the best I've seen.
The company is trading at about 40 cents with 50 million shares out. So, really, it's a $20 million company with a mill that is basically complete, a resource of 1.2 million ounces of gold as it stands now, and production once it's ramped up at roughly 30,000 ounces per year. That's all worth more than $20 million, which is why I'm intrigued with this company.
TGR: Any parting thoughts today, Victor?
VG: I'll reiterate that the junior space is a very good place to be because it certainly has the most upside potential. This is particularly the case with the right companies and some of the risk mitigated (i.e., a resource with some production or an acquisition that was done or something else where you don't have to do everything from the ground up). Mind you, if you do get something from the ground up, such as Richfield, you get a big, big return. I would also repeat a caution: We hope we'll see only a small pullback here, and then a continued rally. But it is quite possible that this pullback will be protracted, or will lead into a bit of a crash. It's important to really be on top of the markets to see what they do.
TGR: With those words of caution and optimism, we thank you once again.
DISCLOSURE: Victor Gonçalves
I personally and/or my family own the following companies mentioned in this interview: Kent, Richfield Ventures, Niogold, Mexoro and Midland
My family has been paid by the following companies mentioned in this interview: Kent.
A proud and avowed Keynesian, Victor Gonçalves developed a strong background in economics at the University of Winnipeg, where he served as a Professor's Assistant as well as earning his degree. His Equities and Economics Report has been accurately picking winners and calling market direction. In 2007, for instance, he correctly predicted the Dow Jones topping 14,000 points and pegged uranium reaching $136 per pound and many more. In addition to EER, Victor also produces the Green Dollar Report , as well as writes for a number of print and electronic publications including CIM Magazine (Canadian Institute of Mining), Western Standard, Barron's and Kitco. He also has been featured on BNN, Mining Industry TV and at numerous industry events and conferences.
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