Crisis Creates Opportunity with Junior Gold Miners
Commodities / Gold and Silver 2011 Mar 19, 2011 - 05:57 AM GMTBy: The_Gold_Report
Good rocks and good people are the core building blocks of successful junior miners. Casey Research Senior Editor and Mining Strategist Louis James wants to see the mineralization close up and talk to geologists to verify the powerful upside potential that may be in these stocks, which are also vulnerable to staggering corrections. In this exclusive interview with The Gold Report, Louis reveals how to benefit from the combination of geopolitical and domestic uncertainty and growth potential in the ground.
The Gold Report: You are a fundamental investor and as such you don't look at macroeconomic trends quite so closely. As you say in one of your reports, you "kick the rocks." But, are you still bullish on gold?
Louis James: I don't think those two are necessarily antipodes, nor is there any tension at all between keeping an eye on the big picture while looking for value in a specific opportunity. The one is the context for the other. I look at the overall picture, and the basic idea is to find a trend that's going to be your friend and place your bets accordingly. But, of course, you want your bets to be the best possible ones. A rising tide may lift all ships, but you don't want to bet on a leaky one. So, yes, I go out and kick the rocks to try to pick the best ones.
To answer the question—yes, I am very bullish on gold. Gold is in the midst of a $25/oz. retreat as we speak, and I love days like that. That actually helps us to buy gold or gold stocks from weaker hands that are shaken by such moments.
The reasons for the bull market in gold haven't gone away; in fact, they've only gotten worse—or better, depending on your perspective. We were amongst the few contrarians that were calling for a financial crisis leading to a currency crisis, before the crash of 2008. Anybody can look back at our publications to verify that, and the reasons for those predictions are still in full force. If anything, they've been made worse by quantitative easing (QE), Bernanke's non-printing printing of money (he has claimed both that the Fed is and is not printing money) and all the other things governments are doing that are, as our founder Doug Casey likes to say, not only the wrong things but the exact opposite of the right things to do. And what's bad for fiat currencies is good for gold, so, yes, we're very, very bullish on gold. That said, one we should never forget that we'll be taking one step back for every two steps forward.
TGR: You believe there are fundamentals in global economies that are acting as catalysts for inflation?
LJ: That is correct. And, not just inflation but, political. . .
TGR: Catastrophe?
LJ: Trouble. Look at the protest in Wisconsin from the government trying to balance the budget there. Unlike the federal government, state governments can't print money. So, at some point, they have to cut somewhere or they won't have anything to pay the bills. The huge response in Wisconsin is quite interesting—part of a bigger trend that is much, much deeper than trouble in the Middle East. There's a lot of trouble on many different fronts. We don't think it's a coincidence that you see political unrest at times of economic difficulties. Look at the price of food and cotton and other commodities. These are things that have immediate and direct impact on the lives of the masses—the transmission belt between economic trouble and political trouble—and eventually social upheaval.
TGR: Were you implying that the Wisconsin protests are similar to the anti-austerity protests and rallies that we saw in Europe, particularly in Greece and Spain?
LJ: I'm saying just that. Belt tightening is never popular, and it's just getting started. Americans are still relatively comfortable compared to people in other places. You framed your question about Europe in the past tense. That's just the warm up. The musicians tuned their instruments, and we heard the overture. All the ingredients for significant social turmoil are there, as the concert goes into full swing. The implications are quite significant and they're global.
TGR: You have written about black swans.
LJ: Yes. A black swan is any unexpected event that upsets your projections. Many people were expecting Arab-Israeli tensions to increase, but weren't expecting the collapse of Arab despotisms. I can't say that we saw that specific thing coming either, but I can say that we have stated in print that such despotisms eventually have to go the way of the dodo bird. Actually, it wasn't so long ago that Doug Casey did a report on Egypt wherein he said it was basically a caldron that was waiting to bubble over. But those are just examples of certain kinds of black swan—anything can come and upset the apple cart. If, for example, some U.S. state is suddenly unable to pay its bills and the lights go off, a lot of people will call that a black swan—though it should be no great surprise. Or it could be China, India or Japan. It could be the Koreas shooting at each other. I just think the climate is right; it's a black swan-friendly environment.
TGR: Given that you're a bit cautious currently, you were recommending a dollar-cost-averaging strategy to enter new long positions that your readers didn't already own.
LJ: Yes.
TGR: If we are in a rising market, a dollar-cost-averaging strategy is a negative. It hurts investors.
LJ: I disagree completely. This is not investing. This is speculation.
TGR: Ok. Go ahead.
LJ: To be able to sleep at night has enormous value. Of course, that's just a rubric for a larger financial concept here. We are dealing with serious risk, and I think it is very dangerous to imagine that you're investing when what you're really doing is speculating. These two are not the same thing.
The junior resource sector, our focus at Casey Research, is without question the most volatile market on earth. These stocks all correct. They all fluctuate. Even market darlings and great success stories frequently will retreat 50% or more, even without a 2008-style crash, before they go on to new heights. So, there's always reason to be careful, to deploy wisely, to wait for days when the markets pull back to buy, to take cash off the table when you accumulate gains.
Going all-in is a gambler's game. I can't stress this enough to people. Gains are not gains until you realize them. At Casey Research, when we report a track record it includes realized gains—not just high-watermarks stocks reach after we recommend them. We include the profits we've taken off the table, which we do routinely.
TGR: Back in the fall, you visited some mining operations in Colombia. It was a due diligence trip. What do you do on these trips? You're fluent, or at least conversant, in multiple languages and I'm sure that's a big help to you. What are you looking for?
LJ: I use what we call the "8 Ps," Doug Casey's formula for resource stock evaluation. As the words "due diligence" imply, my function is to verify all of the Ps, as much as I can. But it does tend to boil down to a few things. One is to go and physically look at the rocks and see if they match what management is saying. They don't always. You can go down the ladder of the mine and look at the vein on one level, see that the vein continues on levels below and reasonably conclude that there's mineralization between. That's the kind of physical verification I do.
Particularly crucial is the first "P"—people. I meet with management and the technical people who will actually do the work that adds shareholder value. Do they seem to know what they're doing? What kind of experience do they have? Is it relevant to the task at hand? Will they look me in the eye when I ask them questions? Sometimes that's the most important thing. You could call it the smell test. And yes, the languages help.
TGR: So, you want to get away from the guided tour. What happens when you feel like there's a discrepancy between what you're seeing with your eyes and what management has said?
LJ: It's rare to get a flat out lie. It's more common for something to be not quite as rosy as described. Typically, when there's some kind of discrepancy, I discuss it with management and give them a chance to explain. I'm not interested in conflict, and we don't generally report negatively on companies. If something doesn't make the grade, we just move on to the next opportunity.
TGR: What about takeover targets? Antares Minerals is gone. Newmont Mining Corp. (NYSE:NEM) is picking up Fronteer Gold Inc. (TSX:FRG; NYSE.A:FRG). Ventana Gold Corp. (TSX:VEN) is in the process of being taken over. What are some of the good opportunities left for investors, particularly in Colombia?
LJ: In Colombia, one obvious candidate would be Sunward Resources Ltd. (TSX.V:SWD). It's developing a new project that has big multimillion-ounce potential, but the company hasn't finished drilling it off yet. There's still a lot of work to do. It's a new story, gathering a lot of interest.
The other obvious one in Colombia would be Galway Resources Ltd. (TSX.V:GWY), which is immediately on strike from Ventana. It's got more going for it than just the proximity—good drill results show that Ventana's mineralization does indeed continue onto Galway's property. On the other hand, Galway did not get taken out with Ventana; so you have to ask yourself: If Brazilian billionaire Eike Batista is not in a hurry to take Galway over, is there any reason for us to hurry to own thestock?
Colombia is perhaps my favorite jurisdiction in Latin America. The country is now headed in the right direction with new free-trade agreements and a population that wants to work and is very focused on rebuilding the economy. There are environmental issues, particularly the high-altitude Páramo ecosystem protection legislation with which Greystar Resources Ltd. (TSX:GSL) has run into trouble recently. It's important for people to understand that this was not a new regulation slapped onto Greystar. It was an existing regulation that the government never had the power to enforce before because they were in a war for 40 years or more. The government did not start changing the rules on the company—that was always a risk there.
In line with that and your question about disciplined buying, we like to recommend that people buy in tranches. Buy a first tranche, maybe just 20% of your ideal position to make sure you don't miss the boat. Then, when it corrects—and they always do—buy another 20%. That gives you 40%. Then, if you get a big reversal without any bad news from the company—things go on sale periodically in our sector—back up the truck and buy a big block at low prices. That would be the sort of approach I would recommend with something like Sunward, which already has seen a great deal of share price appreciation in advance of the anticipated results. I also like Colombian Mines Corporation (TSX.V:CMJ).
TGR: Colombian Mines is down 20% over the past 12 weeks, while Sunward is up 24% over the same period.
LJ: Yes. Sunward has had some good drill results. It drilled into thicker and higher-grade mineralization than previously at its Titiribi Project, which is known for being big but low grade. The new results are not high grade—but higher-grade, which is important for a big bulk-tonnage project like this. It makes sense for SWD shares to appreciate.
Colombian Mines hasn't had a game-changer like that yet. The company has identified a gold porphyry at its Yarumalito project. It's big and potentially could be a company-maker; but so far, the drill results haven't really sewn that up. There are assays pending that may bear on that. We'll have to see. Columbian also has the higher-grade El Dovio project, which is earlier stage but potentially very rich for the company. CMJ also has joint ventures (JVs) on some of its projects, including one with Miranda Gold Corp. (TSX.V:MAD). I like using OPM (other people's money) on high-risk exploration, so I like Colombian Mines. We already own the stock and are happy with our position. We'd like to see the company gain some traction on these projects before we buy anymore.
Miranda is a newcomer in the region, but I know the management and I like them a lot. In spite of the good people and prospective properties, Miranda hasn't had a lot of luck with its projects yet. That does happen sometimes; even with the best geologists, Mother Nature isn't always cooperative. So, I like the company but I'm waiting for it to have the tiger by the tail, or at least some indications of a company-maker on hand.
TGR: What about others?
LJ: Pulling back to the global picture looking for takeover targets, one of my favorites is Premier Gold Mines Ltd. (TSX:PG). That's Ewan Downie's spin out of Wolfden Resources Inc. with projects that are all potentially big, high grade and in top mining jurisdictions. Most are within spitting distance of Goldcorp Inc.'s (TSX:G; NYSE:GG) producing assets. Premier is working to proving up significant high-grade, multimillion-ounce potential targets—it has takeover written all over it. I don't know when it will happen, but I think it will. Goldcorp might be happy to see Premier spend its money and do a lot of work for it, but if Goldcorp starts thinking that somebody else may come in and scoop them up, I would expect it to move aggressively.
An earlier-stage one we've mentioned in our publications would be Bayfield Ventures Corp. (TSX.V:BYV). It has a continuation of the Rainy River deposit called the Burns block. This has graduated from being just "the property next door" to having a high-grade gold shoot immediately on the Bayfield side of the property line. And you know that high-grade pocket is not going to be left hanging in the wall of an open pit. Somebody's going to want to produce that gold—it's just crying out for a takeover.
Trade Winds Ventures Inc. (TSX.V:TWD) is a similar situation but not quite as extreme. It's got a multimillion-ounce gold resource growing on trend from Detour Gold Corporation's (TSX:DGC) Detour Lake deposit. The project is a 50/50 JV with Detour already, so there's a natural synergy there and potential for takeover, but it could get big enough to justify a stand-alone operation.
TGR: Any other companies you might be able to discuss?
LJ: Because you're interested in Colombia, I could mention Mercer Gold Corp. (OTCBB:MRGP). I like the company, I like the people and I like this particular model, which is to try to explore on the other side of the mountain from the famous Medoro Resources Ltd. (TSX.V:MRS) project in the Marmato district. Marmato is an infamous environmental disaster zone in Colombia with hoards of illegal miners dumping cyanide down the mountainside, and Medoro is the company that's working to clean that up. There aren't any swarms of illegal miners on the other side of the mountain; in fact, there are only five miners and they're all in an association with which Mercer has formed an alliance. There's no established gold resource on Mercer's side, however, and so far, Mercer's drill results have not produced any company-making discovery holes. It has the right kinds of rocks, so it's got potential but it's early stage. Medoro's riskier at this point but certainly has a great deal of upside if the company hits what it's looking for.
TGR: Louis, are there any closing comments you'd like to leave with our readers?
LJ: Yes. We see a great deal of possibility for correction ahead. If the trouble in the Middle East settles down, and if the economy seems to be continuing to recover and the fear factor recedes, we could see gold retreat significantly. The retreat we had in January was only about 5%, which is really quite small as far as gold corrections have gone during this cycle. Gold has retreated as much as 25% in this cycle before going on to new highs. We really haven't seen a major retreat in gold since the big ramp-up last year; so, we are urging people to be cautious. If you do buy anything now, make it a first tranche and keep some powder dry for lower prices ahead. If that doesn't happen, and if the market doesn't correct, the market may go really manic, inflating a major gold bubble. If that starts happening, you'll be able to see it and there will be time to redeploy into that bubble. So, we do urge caution right now.
TGR: Many thanks, Louis.
LJ: You're very welcome.
Always on the lookout for the next double-your-money winner, Louis James is the master of metals at Casey Research where he's the widely read and well-respected senior editor of the International Speculator, Casey Investment Alert and Conversations with Casey. Fluent in English, Spanish and French—and conversant in German and Russian, to boot—Louis regularly takes his skills on the road, evaluating highly prospective geological targets, visiting explorers and producers at the far corners of the globe and getting to know their management teams. In addition to subject matter expertise, he's built a following on the basis of a dynamic combination of investment savvy, practical advice, experience in physics and economics and a gift for comprehensible technical writing.
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins.
3) Ian Gordon: I personally and/or my family own shares of the following companies mentioned in this interview:Timmins Gold, Golden Goliath, Millrock and Lincoln. My company, Long Wave Analytics is receiving payment from the following companies mentioned in this interview, for receiving mention on my website, Golden Goliath, Millrock and Lincoln Gold.
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