The Gold Report: The Junior Gold Report follows both gold and oil equities. Please briefly outline your outlook for both commodities.
Kal Kotecha: In December, to my Junior Gold Report subscribers, I called gold to hover between $1,180/ounce ($1,180/oz) and $1,250/oz from January until about June, and then averaging above $1,250/oz for the rest of the second half of 2015. So far, it's been range-bound between $1,180 and $1,250/oz. I expect gold to average above $1,250/oz throughout the second half of 2015 before moving quite a bit higher in 2016.
At the time of our interview with The Gold Report in September 2014, oil was trading around $100/barrel ($100/bbl). I indicated that oil would be range-bound between $60/bbl and 70/bbl but I didn't expect it to drop so quickly under $50/bbl. Now, with many tankers full of oil yet to port, oil could test $42/bbl and if it falls below that, it could go below $40/bbl. I wouldn't be buying oil or oil shares until we see Saudi Arabia charging more for oil globally—it announced it is currently doing this with its E.U. trading partners. I would be accumulating in and around June when there will be less stock available from the full oil tankers.
Oil fracking companies in the Unites States need oil at least $60–65/bbl to be above the marginal cost of production, so I believe oil ultimately is going to be sitting between $60/bbl and $70/bbl. I don't think we're going to see $100/bbl oil any time soon, but I also don't think we're going to see oil below $30/bbl as we did a few years ago. It might just remain range-bound between $42/bbl and $55/bbl for the next few months and go slightly higher than $60/bbl and stay there.
TGR: Late in 2014, you told The Gold Report readers that your resolution for 2015 was to bet on junior gold mining stocks while the sector was still the most undervalued market in the world. Most New Year's resolutions fall by the wayside. How are you faring?
KK: We're in a long speculative bear market with junior resource stocks on the TSX Venture Exchange. We're basically at the bottom. I don't see the Venture going to 500 as some experts predict; I believe it will hit 1,000 and go higher. That could be in the next 12–24 months. It could be earlier. It is currently around 700. Buying the right stocks now will make investors a lot of money in the future. In the bank you're getting only 1–2% on your money. Just buy good junior mining shares and hold and I believe you will be handsomely rewarded. These opportunities are rare.
TGR: What criteria are you using to make those bets on junior resource companies?
KK: I use the same criteria for gold and energy companies. Management is key. The properties, execution and financing are the other key ingredients I use in researching and finding good stocks to write about and suggest to subscribers.
TGR: What are three or four precious metals companies that you believe offer the best bang for the buck?
KK: CMC Metals Ltd. (CMB:TSX.V; CMCXF: OTCPK) is one. I've been following CMC Metals for about five years and it is a sponsor of the Junior Gold Report. CMC Metals' Radcliff project in California should be in production before the end of Q2/15. It's a high-grade gold deposit at surface that is amenable to open-pit mining. In 2010, CMC went into a 50/50 joint venture with Pruett-Ballarat Inc., a Nevada-based company specializing in engineering. It's the operator at Radcliff. Partnering with Pruett-Ballarat was good for CMC because the company has a lot of mining expertise and contacts in California.
Radcliff's total NI-43-101-compliant resource estimate sits around 300,000 ounces (300 Koz) averaging 3 grams/ton (3 g/t), which is considered high grade for an open pit. CMC Metals plans to mine 100 Koz at around 15 g/t. The company expects to produce a minimum of 20 Koz gold per year, generating sales of about $24 million ($24M) annually. That's a total of $120M over five years at a gold price of $1,200/oz. Production costs on the first 100 Koz gold is estimated at $600–700/oz. Net profit should be around $500–600/oz. An advantage CMC has is that it owns the Bishop mill, which is about two hours away by truck. The mill will process all the material mined at Radcliff. CMC is waiting on a permit on its tailings pond at Radcliff and it should get it shortly. CMC's news release dated April 15, 2015, stated that the preliminary sample assay results range from 0.058 oz/ton gold to 9.326 oz/ton gold and the arithmetic average of the samples is 2.55 oz/ton.
TGR: CMC just did a financing of 12.5M shares at $0.04. Why would it finance at such a low rate?
KK: It's the rate that the market bears. From what I understand, it was oversubscribed, and insiders took the majority of the shares at that price. Many companies are in that position. CMC is in a very advantageous position because even though it financed at that rate, its stock was trading at that price at that time. It needed the money to ramp up for production. Raising $500,000 or so will put CMC over the hump.
TGR: The cost of $600–700/oz seems somewhat low given that it has to truck the ore about two hours to the Bishop mill.
KK: I believe that's the all-in cost. It may seem low, but I don't think it is especially with the high grades just announced in its April 15 news release. It's a good rough estimate that was provided to me by CMC CEO Jack Bal, who is at the mine quite often.
TGR: What are some other companies you're following?
KK: Another one is Garibaldi Resources Corp. (GGI:TSX.V). The company has a strong working capital position, solid management and the company continues to drill the high-grade Rodadero gold-silver project in Sonora, Mexico. It is also active in British Columbia (B.C.) and at its La Patilla gold discovery in Mexico. A recent stepout drill hole at Rodadero intercepted 1,307 g/t silver over 1.5 meters (1.5m) in a broader interval grading 346 g/t silver over 6m, north of the actual discovery. It has a lot of advantages in that area. Garibaldi also has the fully funded Grizzly project in the Sheslay Valley in B.C. It really has two excellent properties.
TGR: Does Garibaldi have sufficient cash to work on two properties simultaneously?
KK: It is doing a small financing but it has enough cash to drill for the near future on both properties.
TGR: What are some other gold names?
KK: The focus of Lupaka Gold Corp. (LPK:TSX.V; LPK:BVL) is to get the Invicta gold project in Peru into production and continue to grow the resources on its other properties. The company has a strong management team and board, as well as a sophisticated investor base with a large position in the company. It has $2M in the bank and the capital costs at Invicta will be about $148M. The company will get a small debt loan or line of credit to finance construction. I do not expect any further dilution. Currently, it has 110M shares outstanding with a share price of around $0.12.
TGR: Do you know what the all-in production costs are going to be at Invicta?
KK: They should be in the low $900/oz range. The Invicta bulk sample results should be published soon. That will give us a better idea of the value of the byproduct credits for copper, lead, zinc and silver.
TGR: Perhaps one more gold name?
KK: Gold Standard Ventures Corp. (GSV:TSX.V; GSV:NYSE) owns the second-largest land package in the Carlin Trend and controls the entire Railroad-Pinion district. It has three gold deposits: Pinion with an Indicated resource of 423 Koz and an Inferred resource 1,022 Koz; Dark Star with a 375 Koz Inferred resource (these are oxide deposits that could be exploited by simple crushing and heap leaching at a central location); and the Bald Mountain project. On Jan. 24, 2014, the company reported the Bald Mountain gold-copper oxide discovery made by Gold Standard last fall on its 100%-owned Railroad project in the Carlin Trend of Nevada. The tests, performed by Inspectorate Labs of Reno, Nevada, reported an average 82.2% recovery of gold after one hour of cyanide agitation leach.
As reported on Oct. 2, 2013, the first hole drilled into the Bald Mountain target, vertical core hole RRB13-1, intersected 56.1m of 1.47 g/t gold, including an internal interval of 7.3m of 5.66 g/t gold. Importantly, the gold intercept was hosted entirely in oxidized hornfels breccia, representing the most significant oxidized gold mineralization found to date in the northern Railroad project area.
Gold Standard has the potential to make a ton of cash if it executes properly. I think this is a potential takeout target.
TGR: What about some non-gold stories?
KK: Lomiko Metals Inc. (LMR:TSX.V) is an exploration-stage company that's engaged in the acquisition, exploration and development of resource properties that contain minerals for the new green economy, specifically graphite. Its mineral properties include the Quatre Milles graphite property in Quebec and the Vines Lake property in B.C., both of which are significant discoveries. Graphite, as you know, has numerous applications, including use in the fast-growing lithium-ion battery market. Graphite is also used heavily in 3-D printing. Lomiko seems to have enough money to reach production. Lomiko also has other avenues from which to stream revenue.
TGR: Lomiko is one of a number of companies in a crowded graphite space that is not seeing a lot of market love. How is it setting itself apart?
KK: I think it's setting itself apart because it's not just into graphite. It has a subsidiary, Lomiko Technologies, which has an agreement to license from Megahertz Power Systems Ltd. the rights to manufacture and sell three power converter system designs and acquire a pending supply contract. So it is branching out, not just in graphite but also into other areas.
TGR: Perhaps one more non-gold story.
KK: Cardiff Energy Corp. (CRS:TSX.V) is one of my favorite oil companies. The company holds a lot of upside. It is working on developing the Multi-Zone Oil and Gas project in west central Texas with joint-venture partner Martin Energies LLC, an experienced operator. About 175 different zones in that area have produced hydrocarbons. The first well drilled on the Multi-Zone lease in November 2014 was Bearcat #4, which had an initial production rate of 180 barrels of oil per day in the Palo Pinto formation and 250,000 cubic feet of gas in the Gardner Lime. The company plans to use horizontal drilling technology to unlock oil in the Gardner formation. The company is currently seeking another joint-venture partner to spread out the cost of drilling the next well.
TGR: Dr. Jeff Lewis recently wrote a piece titled "Black Swans and White Noise" in the Junior Gold Report. Can you outline some of the black swans and white noise currently present in the resource market?
KK: Some of the black swans in the political sphere that affect the resource field are ISIS, racial tensions in the U.S., oil and gold price manipulation, Crimea, and Syria, but perhaps the biggest black swan is the U.S. dollar. The U.S. is the self-proclaimed watchdog of the world and it tests everything. It tests the black swans. It tests other military powers. And the U.S. Federal Reserve keeps borrowing money. The U.S. is considered a safe haven but with trillions of dollars of growing debt, the dollar will eventually collapse, and that's going to be positive for gold. Post-collapse, gold could resurrect its role as a global currency as some countries back part of their currencies with gold instead of the U.S. dollar. The U.S. has to curtail money printing and quantitative easing, but I think the quantitative easing machine is going to have to get revved up again just to partially pay back the interest on its debt. That's going to be positive for resource markets in general.
TGR: Do you have any parting thoughts for us?
KK: A lot of investors, including myself, are dismayed by the state of the resource market. But the world's insatiable appetite for resources is not going away. It might have slowed due to increasing supply and decreasing demand, but that will even out. And with global population growth, the demand for more resources is only going to increase. The best thing for investors to do is to continue to pick away at undervalued resource stocks; buy when there's fear and sell when there's greed. The most decimated market in the world is the TSX Venture Exchange and that's where the best buys are. The resource market is cyclical. Even though retail investors are dismayed and are leaving the market, this is not the time to leave. You should be buying.
TGR: Thank you for talking with us, Kal.
Kal Kotecha is the editor and founder of the Junior Gold Report, a publication about small-cap mining stocks. He was the editor and creator of The Moly/Gold Report, which focuses on critical analyses and open journalism of companies profiting from the precious and base metals sector. The scope of his current activities include worldwide onsite analyses and reporting of developing companies. Kotecha has previously held leadership positions with many junior mining companies. Kotecha completed his Master of Business Administration in finance in 2007 and is working on his Ph.D. in business marketing. He also teaches economics at the University of Waterloo.
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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: Gold Standard Ventures Corp. 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) Kal Kotecha: I own, or my family owns, shares of the following companies mentioned in this interview: CMC Metals Ltd. 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: CMC Metals Ltd. 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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