The Gold Report: On June 11, on GoldStockTrades.com you wrote, "Some of my charts are showing a potential reversal in the precious metals." What are those charts telling you in late July?
Jeb Handwerger: In early June it appeared that the junior miners—tracked by the Market Vectors Junior Gold Miners ETF (GDXJ), which I use as a proxy for the junior gold miners—was making an inverse head-and-shoulders pattern between $34 and $35. Then the junior miners had a very strong rally in June, with an intraday high of $46. Now we're forming what I believe is a potential crossing of the 50-day and the 200-day moving averages—a golden cross. This could signal the final turn from a secular bear market to the beginning of an uptrend.
TGR: Is gold close to a golden cross?
JH: Yes, it did in early July and I believe it will hold. Gold is now trading below both the three-year and five-year moving average. That's very rare. The last time we saw the gold price move below the long-term moving averages was in the 1999–2001 bear market. If you can get gold at a discount, then it's a great opportunity. The greatest opportunity may be the Philadelphia Gold and Silver Index (XAU), an index of 16 gold miners.
The miners are usually closely correlated to gold, but are much more volatile. For instance, in the 2008–2009 correction we saw the Philadelphia Gold and Silver Index decline from 200 to below 80—more than a 50% decline—even though gold only corrected from $1,000 per ounce ($1,000/oz) to $700/oz.
Now we're seeing higher lows in the $1,200/oz range and the Philadelphia Gold and Silver Index is trading around $100. If gold moves up even $50 or $100/oz, the miners and the index could have much larger percentage gains, so the leverage opportunity is really in the miners. The miners outperformed gold by a wide margin from 2000–2008.
TGR: Should investors buy the ETF or the miners?
JH: If you're able to beat the Market Vectors Gold Miners ETF (GDX) and the Market Vectors Junior Gold Miners ETF, then buy them directly. I try to find companies that outperform the large producers and their junior peers. If you find companies that are leading both in fundamentals and technical data, you have a good chance of beating the indexes.
"Red Eagle Mining Corp.'s Santa Rosa project could be the first permitted major gold producer in Colombia."
TGR: What ranges do you expect gold and silver to trade in at the end of 2014?
JH: The three-year trailing moving average is around $1,510/oz; the five-year is about $1,415/oz. That is where gold should be trading. Throughout the 2002–2011 rally gold was trading at a huge premium to the three-year and five-year trailing moving average. Now it's trading at a discount.
TGR: What about silver?
"Integra Gold Corp.'s Lamaque project is one of the highest-grade undeveloped gold projects in Québec."
JH: The long-term charts for silver and the Philadelphia Gold and Silver Index are closely correlated and leading indicators to gold; silver and the miners will usually top a few months ahead. They were also the strongest gainers after the 2008 crash. Silver has pulled back to that crucial $20/oz range—a major breakout point in 2011 when quantitative easing was announced and silver ran close to $50/oz. Now that it has pulled back to that breakout point again, silver should provide leverage and outside gains to gold.
I also like platinum group metals. In 2012, I became bullish on platinum and palladium because both were trading at a discount to gold. Palladium is now breaking out on concerns about supply from South Africa and Russia, while industrial and investment demands are increasing. There are few platinum group metal major assets. Investors should check out the juniors with advanced platinum group metals resources in North America.
TGR: In the same June 11 commentary you posited that institutional buyers were returning to junior mining equities. What are some signs that you're correct?
JH: One sign is a huge uptick in volume in the Market Vectors Junior Gold Miners ETF. The volume increase in the first seven months of 2014 has been exceptional, whereas volume is decreasing in a rising market in the SPDR S&P 500 ETF (SPY:NYSE), an ETF tracking the S&P 500. The rising volume in the juniors may indicate accumulation, whereas decreasing volume in a rising market may indicate that the rally in the S&P 500 is overbought and running out of steam. The equity market has not had a significant correction in more than three years and it's dangerous territory for a correction.
To be clear, by institutional buyers, I meant value investors. Value investors are buying junior mining companies at book value per share (Note: cash on the balance sheet/share float) that is double or triple the market caps. There are other companies that have spent millions on their projects, yet the market cap is only a fraction of what they have spent. I've spoken to fund managers that I haven't spoken to in years, people who have made money in previous cycles and have been out of the market. Those people are finally dipping their toes back into the junior sector.
TGR: Are you expecting a broad market correction in the near term?
JH: Yes. That's why I'm expecting inflation to pick up and that's going to make things difficult for some of the overvalued equities. I see a big rotation from the overbought large-cap equities into the small-cap base and precious metals junior miners and energy plays. I expect the fall to be quite busy. After Labor Day we're going to see some fireworks.
TGR: On June 25 you wrote, "Investors need to pick carefully in the junior mining space and research the asset, share structure, balance sheet, jurisdiction, growth profile and investigate to see if management is ethical." Let's examine those criteria more closely, beginning with assets.
JH: If you think gold is going to be flat, you have to ask: Will this company survive at the current gold price? If it's a high-cost mine, it's going to have more challenges, yet a low-cost or higher-grade mine can usually withstand difficult times.
Good financial backing is also crucial. Most of the companies I follow are oversubscribed when a financing is offered. I stay away from companies that are desperate for money.
Share structure: I like a company that doesn't have too many shares outstanding. The ownership mix would preferably be a good institution that's a long-term investor with around 19.9% ownership. I like finding companies with a significant position held by a major producer or a well-respected fund because they have done a lot of the homework for you. Those companies have strong geological and technical research teams.
Balance Sheet: Cash that equals something close to 20 times the active burn rate.
Jurisdiction: There's a lot of geopolitical risk in today's world. Stable jurisdictions are at a premium. Some of the majors have had to take huge write-downs in places like Argentina and Chile, whereas investment interest is growing in places like Nevada. Nevada has by far the most economic gold mines.
If it weren't for Nevada, major producers like Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Newmont Mining Corp. (NEM:NYSE) would be in serious trouble. Barrick's most profitable mines are in Nevada's Cortez and Carlin trends. In Canada, there's a lot of merger and acquisition activity in Ontario. Québec recently elected a government that's pro-mining. There are pockets of opportunity in Africa but you have to look at specific areas. And some of these jurisdictions are changing, such as in Colombia where three or four juniors have been bought by majors over the past few years.
I recently returned from a site visit to Red Eagle Mining Corp.'s (RD:TSX.V) Santa Rosa project. The market cap is $20 million ($20M) and the company is 18 months from production. There are exceptional opportunities right now.
Management: How do you know if management is ethical? You look at the salary and ask questions. Does the company have higher general and administrative expenses than its peers? Does management own shares? Did management partake in the last round of financing? I tend to shy away from any companies where management is selling stock. I like to see management ideally own 15–20%. One red flag is when we see a CEO with only a few shares and the rest in options. Track record is important, too. Has management done this before? All these things are publicly disclosed and you can find them with the click of a button.
TGR: You talked about Nevada. What are some companies you're following there?
JH: Canamex Resources Corp. (CSQ:TSX.V; CX6:FSE) is one. It has two major shareholders, Hecla Mining Co. (HL:NYSE) and Gold Resource Corp. (GORO:NYSE.MKT; GORO:OTCBB; GIH:FSE). Canamex has hit some phenomenal near-surface results at its Bruner project—one intercept hit 44.2 meters grading 6.97 grams per tonne (6.97 g/t) gold.
TGR: Canamex has two major shareholders in Gold Resource and Hecla, but it doesn't seem to get a lot of attention. Why aren't more people following that story?
JH: Now people are becoming more aware. I started covering and buying the stock in December 2013 at around $0.06/share. That was one-third of what Hecla paid for it. Now it's trading around $0.18/share, so that's a triple for my subscribers. Then Gold Resource took a position and this summer Canamex has been hitting incredible drill results at Bruner—near-surface, high-grade material that's amenable to heap leaching. I think it's just the beginning. Canamex is going to publish soon a maiden resource. I believe that this is a takeout target because it's an asset that would probably have low capital costs and a quick payback. We're probably going to see Hecla or Gold Resource make an offer or finance another round.
TGR: You recently visited several gold projects in Nevada. Tell us about some.
JH: I recently visited NuLegacy Gold Corporation (NUG:TSX.V; NULGF:OTCPK). The company is sitting next to Barrick's Goldrush deposit, probably one of the best discoveries in the world at 15.6 million ounces (15.6 Moz) gold in all categories. The company partnered with Barrick, which is rare in the junior sector and only happened because of NuLegacy's management's team. COO Roger Steininger was one of the people who discovered the Pipeline gold deposit in Nevada's Cortez Trend for Royal Gold Inc. (RGL:TSX; RGLD:NASDAQ); the project has since been purchased by Barrick. NuLegacy is beginning to outline a deposit in an area of Nevada where there are potential elephants. I'm excited to see the results of its exploration program, especially the Avocado Anomaly, throughout the summer and fall.
Gold Standard Ventures Corp. (GSV:TSX.V; GSV:NYSE) is on my watchlist as it has made multiple discoveries in Nevada's historic and famous Carlin Trend, which is home to a bunch of majors such as Newmont and Barrick. Gold Standard just consolidated the Pinion asset, which may have nearer-term production capabilities. The company is planning to release an NI 43-101 resource estimate in the near term, which will give me a better sense of the asset. The geological team has several additional targets that they will follow up on after the publication of the resource.
TGR: Perhaps one or two more in Nevada?
JH: I also like Corvus Gold Inc. (KOR:TSX), which is exploring the North Bullfrog project in Nevada. I've been following Corvus Gold since it was spun out from International Tower Hill Mines Ltd. (ITH:TSX; THM:NYSE.MKT) almost three years ago. It went over $2/share in a difficult market and has since pulled back. The company continues to make high-grade discoveries at the Yellowjacket deposit, part of North Bullfrog. Corvus' technical team is very strong. CEO Jeff Pontius has made other million-ounce discoveries, including the Livengood gold deposit in Alaska. In Nevada, it looks as if Corvus is just beginning to scratch the surface of a major gold discovery.
Another one in Nevada that is quite exciting is Comstock Mining Inc. (LODE:NYSE.MKT). The company is increasing production and lowering costs in the historic Comstock district. This year Comstock is putting some of that capital into drilling an area with some of the best exploration potential in Nevada.
TGR: Comstock's ultimate goal is to produce 200,000 ounces per year (200 Koz/year) via heap leaching. Is that realistic?
JH: It started off at 10 Koz/year; now it's targeting 40 Koz/year. Comstock could likely make it to 100 Koz/year by 2016–2017. In the meantime, the company could make another discovery. Some drill results in the Chute Zone look promising. It could be onto something there.
TGR: What else do you own?
JH: I took a large position in Red Eagle Mining in Colombia. I recently returned from a trip to Medellín to visit the Santa Rosa project with analysts from major financial institutions. I like the project for a few reasons. In my opinion it could be the first permitted major gold producer in Colombia. Red Eagle is only a few weeks away from publishing a bankable feasibility study on Santa Rosa, which should reach production in the next 18 months. It's a very large project—it could be a district, it's already 320 square kilometers. An earlier preliminary economic assessment (PEA) showed production of around 50 Koz/year with cash costs around $620/oz. This means the mine could cash flow close to $60M even if gold stays around $1,300/oz. The PEA showed a payback period of 1.4 years, which is impressive. The bankable feasibility study should be published by the end of September.
TGR: Why is the share price not performing?
JH: Some people are concerned about the mining license. I was there and saw the community support, especially from La Universidad de Antioquia, the local university. It assisted the company with the development of the environmental impact studies. And COO Robert Bell has helped build 10 to 12 mines. It's going to have an exciting second half if Red Eagle gets the necessary financing and a mining license. It has a strong shareholder in Liberty Metals & Mining Holdings LLC, which owns about 20%. Management owns around 12%.
TGR: Red Eagle recently bought the San Ramon extension from AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE). What does that mean for shareholders?
JH: It's a strategic piece of land on the exploration package. Some valuable opportunities could be there. One of the knocks on Red Eagle is that it doesn't have a huge resource, but the goal is to get into production. Once it is in production and generating cash flow, there will be further exploration to build reserves and resources. I believe there is a lot more gold there than most investors realize.
TGR: What are some other equities that you're telling your readers about?
JH: One of our favorite companies, Integra Gold Corp. (ICG:TSX.V; ICGQF:OTCQX), recently closed a private placement that was oversubscribed due to major demand from investors. There's so much interest in Lamaque because it is one of the highest-grade undeveloped gold projects in Québec with over 3.3 million tons at over 7 g/t gold. An updated resource incorporating the latest drill results should be out soon.
TGR: Integra's PEA showed an internal rate of return of 38% with a payback period of 1.8 years. Why didn't the market respond more favorably?
JH: The market wants to see all the pending assays from the 57,000m of drilling that has yet to be added to the previous resource. An updated resource with all this exciting drilling data will make the majors take notice.
TGR: Could that lead to a takeover bid?
JH: Integra could be a classic takeover target. Osisko Mining Corp., which had the nearby 10 Moz Malartic gold project, was bought by Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) and Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE). Integra's Lamaque project sits right next to Agnico-Eagle's 1.6 Moz Goldex mine in an area with great infrastructure and skilled labor.
TGR: Perhaps one or two others before we leave the gold space?
JH: Another one that investors may want to look into is Barisan Gold Corp. (BG:TSX.V). The company hit 412m of 1.1% copper equivalent in a gold-copper porphyry at its Upper Tengkereng discovery. It's in Indonesia, which just elected a more business-friendly prime minister. Barisan is publishing some of the best drill results that I've recently seen in the junior mining space.
TGR: Any others?
JH: It's not in Nevada, but keep a close eye on International Tower Hill Mines. It has one of the largest resources in the junior gold space in Alaska. If we're hitting the bottom, we want situations that are going to provide a lot of leverage to a rising gold price. Tocqueville Asset Management has been buying International Tower Hill shares throughout 2014. Some of the smart money may be looking at a bottom here.
I love Alaska even though it is currently out of favor. It is stable and secure in a chaotic world. NOVAGOLD (NG:TSX; NG:NYSE.MKT) is on our watchlist as it owns the Donlin project, where it is partnered with Barrick. It has around 45 Moz gold in the Resource category. Donlin could possibly produce over a million ounces of gold annually at a high grade of 2.2 g/t. It can be purchased at a major discount. NOVAGOLD is currently trading under $4/share. In previous gold bull markets, the company was trading in the mid-teens. As the sector turns, I wouldn't be surprised if it makes that move again.
TGR: Would you tell us about some action that the Alaskan government recently took?
JH: The Alaskan government is approving up to $145M in financing support for Ucore Rare Metals Inc.'s (UCU:TSX.V; UURAF:OTCQX) Bokan project near Ketchikan. The rare earth sector is beginning to wake up from a multiyear slumber. Investors are returning as more people realize that these metals are critical for automobiles, batteries, smart phones, wind turbines and military equipment. It's a $4 billion industry and China controls it, especially the heavy rare earths. The Market Vectors Rare Earth/Strategic Metals ETF (REMX) is breaking above the 200-day moving average and I've been alerting readers to a potential bottom.
One of the best potential projects in the West is Ucore Rare Metals' Bokan deposit, which has incredible financial and permitting support from the State of Alaska. It also has a great partner in the U.S. Department of Defense. There are plenty of rare earth projects, but very few are making authentic progress. Ucore is doing that technically and financially, and Ucore is moving closer to a bankable feasibility study. Pull up a chart of Ucore versus Molycorp Inc. (MCP:NYSE) and you will see the outperformance. I think that's just the beginning.
TGR: The PEA for the Bokan Mountain Rare Earth Element project pegs capital costs at $221M. It has loans for up to $145M but that still leaves Ucore $76M short. Where's that capital going to come from?
JH: That's a good question. All the rare earth equities have to face these questions but only Ucore has up to a $145M loan guarantee from the State of Alaska. Ucore has a good shot and other financiers may be more confident to lend to Alaska as they see the strong lead backing by the State of Alaska.
TGR: Please give our readers one final thought to ponder.
JH: We're in a period known as the summer doldrums, yet we're seeing a lot of activity in precious metals. There is geopolitical instability both in Eastern Europe and the Middle East. The potential for black swan events is increasing and that is the fuel that lights up the gold sector. We could still see another pullback but post-Labor Day should bring a powerful seasonality effect. Now may be the time to position in August for what I believe is going to be an exciting fall season for precious metals and the junior resource sector.
TGR: Thank you for talking with us, Jeb.
Jeb Handwerger is an author, speaker and founder of GoldStockTrades.com. He studied engineering and mathematics at University of Buffalo and earned a master's degree at Nova Southeastern University. After teaching technical analysis to professionals in South Florida for over seven years, Handwerger began a daily newsletter, which grew to include thousands of readers from over 40 nations.
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1) Brian Sylvester 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: Comstock Mining Inc., Gold Standard Ventures Corp., Integra Gold Corp., NOVAGOLD, NuLegacy Gold Corp., Red Eagle Mining Corp. and Ucore Rare Metals Inc. Streetwise Reports does not accept stock in exchange for its services.
3) Jeb Handwerger: I own, or my family owns, shares of the following companies mentioned in this interview: Ucore Rare Metals Inc., International Tower Hill Mines Ltd., Barisan Gold Corp., Integra Gold Corp., Canamex Resources Corp., NuLegacy Gold Corp., Corvus Gold Inc., Comstock Mining Inc. and Red Eagle Mining 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 as they are sponsors on my website: Ucore Rare Metals Inc., International Tower Hill Mines Ltd., Barisan Gold Corp., Integra Gold Corp., Canamex Resources Corp., NuLegacy Gold Corp., Corvus Gold Inc., Comstock Mining Inc. and Red Eagle Mining Corp. 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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