The Gold Report: Thomas, the price of gold sank in October even as the stock market was rebounding. Can gold also rebound?
Thomas Schuster: Gold will rebound, it always has and always will. The mining market is almost violently cyclic. Deep lows are followed by spectacular highs. The tough question is when will the gold price rebound happen? There are a lot of nay-saying precious metal bears in the market right now. Many forecasters are predicting that gold will continue to trade within a narrow range—around $1,100–1,225/ounce ($1,100–1,225/oz) over the next few years.
But the fact is, on a global scale, we are not replacing reserves as fast as we're mining them. That simple fact supports only one outcome: higher prices. A recent report on gold production by SNL Metals & Mining observes that when we look at the amount of potential future production from major discoveries made over the last 15 years, we could only replace, at best, 50% of gold produced during that same period. The report also points out that the average time to bring a newly discovered mine into production has been significantly increasing. For mines that went into production between 1985 and 1995, the average wait was eight years from discovery to production. For mines that went into production between 2006 and 2013, the average wait is 18 years.
There are many reasons for this—more details are needed in feasibility work-ups, there are more stringent social and environmental standards, and more demanding permitting processes. Many of these mines are of lower grade. They are more remote, and require lots of capital for developing infrastructure and processing capacities. The capital market is poor at the moment; it is difficult to raise money and it takes more time to move into production than it did before.
TGR: Why was gold so high previously and what happened to the price, in your opinion? Why was it so high, and why did it fall so far?
TS: I believe that a combination of growing U.S. debt, a weaker U.S. dollar, increasing inflation fears and the fact that many foreign central banks, especially in the BRIC countries—Brazil, Russia, India and China—were buying gold as a hedge, helped drive the gold price up, creating a speculative bull market in precious metals. Now, the U.S. dollar appears stronger (at least when compared with other currencies), we are told inflation is less of a threat, and interest rates may begin to rise in the next year. The central banks are still buying gold but not in the quantities they were in previous years. Add to that the fact that resource stock performance has been very poor over the past few years and investor sentiment has turned against precious metals. These, in my opinion, has all helped to push the prices down.
TGR: Have Federal Reserve actions controlled the price movements of gold, silver and copper?
TS: The driving force behind the recent drop in gold and silver has been the Federal Reserve's asset purchases and its hints at raising interest rates. This has strengthened the U.S. dollar and signaled investors to dump gold. Hedge funds typically lead the way.
TGR: What was the advantage of quantitative easing for gold?
TS: When interest rates are below the inflation rate, the market is generally bullish for precious metals. Fed chair Janet Yellen has indicated that job growth takes precedence over fighting inflation. When inflation takes hold, as I believe it inevitably will, there will be another gold bull run because I doubt interest rates will be able to keep up.
TGR: Is the cost of production of the precious metals affecting prices?
TS: A recent Bank of Montreal report has estimated that at $1,200/oz gold, nearly 40% of current gold production that BMO follows is not profitable on an all-in cost basis. The bank estimates that on a global basis as much as half of the world's gold production is unprofitable. I like to look at real costs rather than cash costs or other variations. Real cost is taking total revenue and subtracting it from cash from operations and dividing by the number of ounces sold. Those figures are easy to find on an audited balance sheet; it levels the playing field between companies.
Instead of closing operations in difficult markets, mining producers tend to cost-cut in order to improve their bottom lines. They typically mine the higher-grade portions of a resource and lower the amount of sustaining capital that would normally go into operations. They also curtail mine expansion and exploration. If the cost cutting measures are effective, the overall costs come down and profits look good for a little while. This is a quick fix and is not sustainable over the long run.
TGR: Is the cost of production lower in Mexico?
TS: Generally speaking, some costs are lower in Mexico, yes, but on the other hand, the country recently raised mining royally taxes. Nevertheless, Mexico remains a great place to explore and develop gold mines. I follow Source Exploration Corp. (SOP:TSX.V) in Mexico. Its main focus is the Las Minas project near Veracruz. This project is flying under the radar screen of the market right now. Las Minas reminds me of the big Torex Gold Resources Inc. (TXG:TSX) Media Luna deposit on the other side of Mexico. Like Media Luna, Las Minas hosts skarn-style mineralization.
With its recent drilling, Source Exploration has confirmed continuity of gold-copper skarn mineralization over more than 180 meters (180m) in the Santa Cruz target area. There are lots of other mineralized targets on the property that are identified by small historic mine sites. I believe this indicates that the Las Minas project sits over a much larger skarn system that has not been properly explored.
As Source keeps expanding the mineralization at the Santa Cruz and El Dorado targets, I believe the market will eventually catch on. Source currently has a market capitalization of only $6 or $7 million. At that low market valuation, the company does not want to raise too much money and dilute its stock. I believe the company will look to raise enough money to drill at least another 2,000m at Las Minas.
TGR: Does Source have a preliminary economic assessment (PEA) on Las Minas?
TS: It's too early for a PEA yet, but the property looks very promising. The El Dorado and Juan Bran mineralized zones, which are on opposite sides of a canyon, may be connected at depth. I believe there is potential for at least a 1 million ounce (1 Moz) gold equivalent resource in this area. We are not yet sure how big this thing really is; only more drilling will tell.
TGR: Who is managing Source?
TS: David Baker is the chairman of the board. David has enjoyed a number of successes, the last one being the sale of Goldbrook Ventures Inc. to a Chinese interest for about $100 million ($100M). Brian Robertson is the CEO. Robertson has over 30 years of mining experience. He has run a number of good companies: Victory Nickel Inc. (NI:TSX), Nuinsco Resources Ltd. (NWI:TSX) and Romios Gold Resources Inc. (RG:TSX.V; RMIOF:NASDAQ; D4R:FSE).
The bottom line is that Source has a good management team, a very promising project and a good geologist on board who knows how to work with skarn deposits.
TGR: Will Source continue on its own or be a likely acquisition target?
TS: Once it gets big enough, it should be an acquisition target.
TGR: Let's move north to the Canadian gold fields. Who do you like there?
TS: I follow Integra Gold Corp. (ICG:TSX.V; ICGQF:OTCQX). Integra is in the Val-d'Or region in Quebec, right in the heart of the city next to a couple of past-producing mines. It has the ground just to the south of the Sigma and Lamaque mines. These kilometers-deep mines produced over 9 Moz of high-grade gold for 30 years. Those mines are out of production now, but Integra has found a number of similar-looking mineralized deposits on the nearby ground. It has only drilled down a few hundred meters, but the deposits have a similar structure and grade to Sigma and Lamaque.
The Val-d'Or property is Integra's main focus. The firm will release an updated PEA in November. It is looking to decrease its operating costs by $15–20/tonne. It just acquired a mill in the area. That will definitely cut costs. Expect to see an updated resource in the new year as well. Overall, the project looks very promising.
TGR: Who is on Integra's management team?
TS: Integra is bulking up the management team. It just put in a new COO—Langis St-Pierre. He is a mining engineer from Laval University. He spent 27 years at Cambior Inc. (CBJ:TSX) and some years at IAMGOLD Corp. (IMG:TSX; IAG:NYSE). He has been involved with a number of mines, including the Langlois and Doyon mines.
Hervé Thiboutot is leading Integra's exploration pursuits. He came from Alamos Gold Inc. (AGI:TSX) and he knows how to find and add ounces in the ground. Hervé is a highly sought after person who could have gone anywhere; he decided to go to Val-d'Or and work on this project. That speaks volumes.
TGR: Are you watching anybody in the Yukon?
TS: I've been looking at Rockhaven Resources Ltd. (RK:TSX.V). Its flagship property is called the Klaza property. It is located in the Dawson range of the Yukon. It is a rapidly expanding, high-grade gold-silver system. Rockhaven owns 100% of the property, which is easily accessible by road. So far, Rockhaven has discovered nine mineralized zones with high-grade gold traced down to a depth of 500m. Results from a recent stepout hole on the Western BRX zone returned 16.29 grams per tonne gold and over 1.4 kilograms/tonne of silver over 1.37m. This is a narrow interval, but if mineralization is proven to be consistent to a depth of 500m or more, the company will be able to add tonnage despite the narrow nature of the vein mineralization.
TGR: Is there a PEA on that?
TS: Not yet. This is still an exploration project and more drilling is required. It's an exciting high-grade project. There is a similar project in Argentina called the Cerro Moro deposit. It sports a gold-silver deposit that hosts narrow veins similar to Klaza. It was bought by Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) in 2012 for $414M; that's equivalent to a valuation of about $172/oz gold in the ground.
TGR: Do you visit these sites yourself and look into them from a geologist's perspective?
TS: I like to get my feet on the ground and talk to the geologists. I have been on Integra's property. Visiting Source and Klaza are on my to-do list.
TGR: What companies do you like in silver exploration?
TS: Silver is the devil's metal because it's more volatile than gold. It has deeper lows and higher highs. When the silver and gold prices rebound, investors will be looking for advanced-stage silver projects that are poised to capitalize on a bull market. A number of large producers will be hungry to acquire more ounces and replenish their reserves. I favor Golden Arrow Resources Corp. (GRG:TSX.V; GAC:FSE; GARWF:OTCPK). It is located in Argentina in Jujuy province. It recently completed a 9,000m drill program and it has increased its resources by 60%.
According to its PEA, Golden Arrow has 95 Moz silver equivalent in the Indicated category, another 68 Moz in the Inferred category, and a net present value of $226M using an 8% discount rate. It only has a market capitalization of $8M. It is an undervalued asset because it is in Argentina, which has a bad reputation at the moment.
TGR: Are things getting better in Argentina?
TS: Back in June, First Quantum Minerals Ltd. (FM:TSX; FQM:LSE) acquired Lumina Copper Corp. (LCC:TSX) for its Taca Taca copper deposit in Argentina. That was a $470M deal in the Puna region—the same region where Golden Arrow is developing its deposit. Miners are willing to work in Argentina to develop quality assets for the future. A decade ago, people did not want to invest in Colombia, now they do. It was once thought to be too dangerous, and too difficult. But political regimes change. The companies that get in early get the first crack at the best assets.
TGR: Does Golden Arrow have a management team experienced in Argentina?
TS: Golden Arrow is part of the Grosso Group. Joe Grosso has been in Argentina for many years and he has acquired lots of ground. Brian McEwen leads the team bringing the project to feasibility. He has worked in South America a lot and he is a very capable geologist.
TGR: Are there any rare metals explorers on your scope?
TS: I am bullish on niobium, which is used to produce high-strength low-alloy steel. Basically it produces lighter and stronger steel used in the construction, automotive and pipeline industries. Just $9 of niobium added to a mid-sized car reduces its weight by 100kg and increases fuel efficiency by 5%, which in turn lowers CO2 emissions. The U.S. currently imports 100% of its niobium needs and it is considered a strategic metal.
In Nebraska, NioCorp Developments Ltd. (NB:TSX.V) is developing a high-grade niobium resource, the Elk Creek deposit. There are only three producers of niobium in the world. Most of the metal is mined in Brazil. About 5% comes from IAMGOLD's Niobec mine in Quebec, but IAMGOLD just sold that mine to an Asian company for $500M. I expect that most of that production will probably go to Chinese steel mills. So as demand continues to increase, as it is forecasted to, there will be a definite need for a new supply of niobium elsewhere. I'm sure steel companies will be looking for a secure supply of niobium, and if it can be sourced from the US, even better.
TGR: How did NioCorp find its deposit?
TS: The deposit was part of Molycorp Inc.'s (MCP:NYSE) stable, but the firm focused on developing another asset, and this deposit fell to the wayside. It was a spinoff asset that NioCorp acquired years ago. Now, with niobium prices stable at roughly $40–45/kilogram, NioCorp has an excellent opportunity to develop this asset. To give you an example of just how profitable this metal is, IAMGOLD's one niobium mine in Quebec produced almost half of the company's 2013 earnings, and it sold it for $500M, despite having only eight years' mine life left. There is probably at least 30 years on the Elk Creek deposit in Nebraska at higher grades than what is being mined at IAMGold's operation. Obviously, NioCorp needs to set up an offtake agreement. But CEO Mark Smith has been involved with Molycorp and he has done this all before. He has lots of good connections with offtake buyers.
TGR: Would NioCorp be competing directly with others or setting itself up for an acquisition?
TS: NioCorp is working to put a feasibility together by Q1/15. It just raised $10–11M. It is positioning itself to go into production. After that, I believe someone will probably buy it. It will be a very attractive asset. Since 95% of niobium is sourced from Brazil, I imagine most steel companies would like to diversify their supply in order to protect themselves from any production shortfalls.
TGR: Thanks for talking with us, Thomas.
Thomas Schuster is a geologist with over 20 years of experience in the resource industry. He started his career as an exploration geologist in the Timmins mining camp in Northern Ontario where he worked with a number of companies including Outokumpu Mines. Schuster subsequently worked at The Northern Miner, travelling to, and reporting on, a wide variety of grassroots to production-level projects throughout the world. His experience built a foundation for his later work as a mining analyst with investment firms including Fraser Mackenzie, Pathfinder Asset Management and more recently, Jordan Capital Markets. He has extensive knowledge of the junior exploration and equity markets and has created his own Equity Research Report, which he distributes to industry brokerage houses.
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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 owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) Thomas Schuster: I own, or my family owns, shares of the following companies mentioned in this interview: Source Exploration Corp., NioCorp Developments Ltd. and Golden Arrow Resources Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: Golden Arrow Resources Corp. My company has a financial relationship with the following companies mentioned in this interview: Golden Arrow Resources Corp., Source Exploration Corp., NioCorp Developments Ltd., Rockhaven Resources Ltd. and Integra Gold Corp. 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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