Gold Investment Opportunities Emerge in the Americas
Commodities / Gold and Silver 2011 Apr 23, 2011 - 11:04 AM GMTBy: The_Gold_Report
From Quebec, Canada to Sonora, Mexico, House Mountain Partners Founder Chris Berry constantly uncovers new opportunities in the Americas. In this exclusive interview with The Gold Report, Chris outlines the geopolitical changes that are driving renewed interest in areas considered too risky or not profitable enough in the past.
The Gold Report: Investing in junior mining companies across the Americas requires balancing risk and reward. What has changed in countries like Colombia, where violence and corruption hampered investment in the past, that make it worth considering investing in gold and nickel companies today?
Chris Berry: Historically, Colombia has been one of the largest gold producers in South America; strife brought on by the FARC (Fuerzas Armadas Revolucionarias de Colombia, or the Revolutionary Armed Forces of Colombia) rebels changed that. It wasn't long ago that many considered Colombia to be on the verge of being labeled a failed state. Over the past 10 years, however, two pro-business presidents (Álvaro Uribe and Juan Manuel Santos) came into office and instituted business-friendly policies and directly took on the criminal elements in the country with the help of the United States. This has fostered economic growth and offered companies—Canadian juniors among them—an opportunity to do what they do best in an under-explored region. Don't forget about oil and coal either, as they're plentiful in and also have helped put Colombia back on the map as a resource-investment destination.
Colombia produces and exports about 85 million tons (Mt.) coal each year, making it a top-five global exporter. An interesting note is that it's not just Canadian juniors and investors that have rediscovered Colombia's potential. A story came out not long ago that China has made a serious proposal to the Colombian government to build a railway from Cartagena to the country's Pacific coast in direct competition with the Panama Canal—a sign that things have changed for Colombia, to be sure. The country also is on the verge of finalizing a free trade agreement with the U.S. and is working to create a regional stock exchange, inviting more investment into the country.
TGR: In a 2010 interview with The Gold Report, you estimated that gold miners would invest $4.5 billion in Colombia during this decade. Is that number still accurate and how long will it be before those companies see returns on those investments?
CB: As far as I know, yes, it is accurate. The country's credit rating recently was upgraded to investment grade, which is a good sign for increased foreign investment. Economic growth is forecast to increase more than 5% next year, according to Colombia's Finance Minister Juan Carlos Echeverry. So, from a macroeconomic perspective, the country appears to be gaining strength that is underpinned by strong commodity prices. Returns on any project, though, are dependent on a host of factors, such as making a discovery that has good economics behind it, solid management and serendipity. Each project is different in this regard. A number of companies have been investing in Colombia for years and, as their projects move toward feasibility and production, I'd anticipate seeing a return on their investments by then.
TGR: How does that compare with the risks and rewards in Mexico?
CB: Mexico has been in the news for all the wrong reasons. The stories are well known and I won't belabor them here; but keep in mind that dozens of junior and senior miners are operating successfully and safely in Mexico and have done so for years. Mining is a part of that country's culture. I know the government has made valid attempts to confront the scourge of drug gangs and that must continue. The fact that Colombia has been able to minimize that threat within its borders is a huge feather in its cap from an investment perspective.
TGR: What about the rest of South America?
CB: Like many other parts of the world, South America has preferred investment destinations and others that are shunned. While a country like Venezuela is synonymous with the threat of expropriation and nationalization of natural resources, Venezuela still provides the U.S. with a great deal of its oil imports, so that country will muddle along with foreign assistance and likely continue to be a regional thorn in the side of the U.S. Also cries of potential nationalization of lithium assets in Argentina and Chile are something to keep an eye on. This is all likely a natural outcome of rising commodity prices and governments looking to raise additional revenue to get their "fair share." But overall, countries like Chile, Argentina, Colombia and Peru offer many opportunities for investors looking at exploration, as well as production in the resource space.
TGR: What companies are doing a good job of capitalizing on those opportunities?
CB: Coming back to Mexico for a moment, one company in particular that I've followed for some time is Geologix Explorations Inc. (TSX:GIX), which has two deposits both in Mexico—Tepal and Libertad. Tepal, a copper-gold porphyry, is 100%-owned by Geologix. A recently updated preliminary economic assessment (PEA) showed the potential for 1.55 million ounces (Moz.) gold and 677 million pounds (Mlb.) copper in the life of mine (LOM) plan. These numbers increased 58% and 93%, respectively, over the company's 2010 PEA, doubling the projected mine life to 18 years. So this particular project continues to get stronger economics behind it and should get bigger as resource expansion continues here.
One more example is Endeavour Silver Corp. (NYSE:EXK; TSX:EDR), a company I've watched for quite some time that is producing high-grade silver out of two projects in Mexico—Guanajuato and Guanacevi. This company is highly leveraged to the price of silver and its share price shows that. As the silver price has gone on quite a run, Endeavour has been able to explain its vision of building what it calls a "mid-tier" silver producer to the market and, in turn, execute that vision. The company is in an extremely strong financial position with no debt, roughly $100M in working capital and a production cash cost (net of byproduct credits) of $5.70/oz. With silver at $45/oz., cash costs this low and the company's production forecast of 3.7 Moz. silver in 2011, Endeavour offers a tremendous case study in creating shareholder value.
TGR: You also follow strategic metals companies and have written about the importance of electrolytic manganese metal (EMM), a key component in the manufacture of steel for infrastructure worldwide. How are geopolitical trends impacting demand for this metal and what companies are poised to fulfill that demand?
CB: The demand for steel is clearly emanating out of Asia, as that region continues its infrastructure buildout unabated. Manganese is critical in steel manufacturing and, as such, deposits around the world should be given a good, hard look by investors. EMM is interesting in that its production, effectively, is controlled by a single country—China—to the tune of 97%. With the size and scale of the infrastructure buildout happening there, it's no surprise that China controls its production. And it stands to reason that more and more of the EMM produced could be kept "onshore" to eliminate any need to import this critical element. Electrolytic manganese metal is used to upgrade steel, aluminum alloys and electronics—and it's a 2.6 billion-pound-per-year (Blb./year) market growing at 26%.
I'm aware of only three manganese deposits in North America—one in Canada and two in the U.S. (both of which are located in Arizona). American Manganese Inc. (TSX.V:AMY, OTCPK:AMYZF) has 100% ownership of the Artillery Peak deposit in Mohave County, Arizona. This deposit produced manganese from 1928–1955 and contributed to a national stockpile for the war effort. The company has an NI 43-101 resource estimate on the deposit of roughly 14 Blb. manganese in the measured and indicated (M&I) and inferred categories. The grade is rather low at roughly 3.5% but, from my perspective, I'd rather have a past-producing, low-grade deposit on my own shores than have to import the overwhelming majority of this critical material from elsewhere.
CEO Larry Reaugh has designs on getting the deposit back into production by 2014 and the company's PEA shows a capital expenditure of $90M, which I think is very reasonable given the size and history of the deposit. AMY plans to produce EMM at a cost of $0.44/lb.; the current world price is $1.87/lb. These are healthy margins and, should the deposit expand from additional drilling, the project economics have the potential to become even more robust. Also, AMY is in the process of patenting a new hydrometallurgical technique for producing electrolytic manganese metal and has done so in the lab. Scaling this up to commercial production levels will be a key catalyst for the company.
TGR: How do you quantify the variables of grade and production cost when evaluating a company?
CB: In the metals and mining sector, grade and cost of production are two of the most important variables—right up there with quality and management experience. While they are both important, sometimes it's difficult to quantify without a resource estimate. We use a multi-step process known as Discovery Investing, which looks at 10 distinct factors to rank a resource stock and get a better handle on whether or not a company merits investment.
We think that all wealth begins with a discovery; for example, Barrick Gold Corp. (TSX:ABX; NYSE:ABX) was a junior one day, long ago. After many discoveries and ounces of production, it has created tremendous wealth for shareholders and stakeholders alike. Some of the factors we look at include management experience, asset ownership, immediacy of the asset (e.g., how soon could the company be in production and generating cash flow) and the catalyst, or macro force, at play that gives a company a chance to succeed. We then rank each of those factors on a scale and that then determines whether or not it merits investment.
The companies we rank go into three "tiers," if you will—incubator, mature and legacy discovery investments. Barrick would be an example of a legacy discovery investment for the reasons I mentioned previously. Geologix and American Manganese would be incubator discovery stocks because discoveries have been made but more work is needed to develop the respective projects. And Endeavour Silver would be a mature discovery, as it's achieved production and its metrics are growing. Is grade really 'king' (as is often said in the mining industry)? Likely, but I find that the lowest-cost producer in an industry almost always wins. One seems to drive the other here.
TGR: Another steel component that seems to be enjoying increased demand is vanadium. In a January interview with The Gold Report, you said, "Vanadium can be the next big thing" and referred to its use in cleantech energy-storage technology. How do you see international market forces impacting vanadium prices in the coming years and what companies do you think will capitalize on the demand?
CB: Right now, about 85% of the vanadium produced globally is used as an alloy in strengthening steel. So, like manganese, vanadium is certainly a metal to learn more about if you believe the infrastructure buildout in emerging markets will continue.
What excites me the most, though, is vanadium's budding role in energy storage. One of the knocks against renewable energy, such as wind and solar, has always been the fact that it is "lumpy" or unreliable, forcing the install of backup systems when the wind isn't blowing or the sun isn't shining. This is what many people mean when they refer to renewable energy as "uneconomic." The vanadium redox battery (VRB) can store a great deal of energy and release it into the grid during peak hours when demand is higher. These batteries have some flaws but, currently, they're being used in Utah and offshore in Japan for grid-level energy storage.
As more governments confront the realities of increased energy demand in the future, renewables absolutely will play a role in addition to traditional sources like hydrocarbons. There is a tremendous amount of federal money now being funneled to universities, research labs and companies involved in innovating next-generation energy storage; and vanadium, along with lithium and manganese, is at the forefront. Obviously, this could have a positive effect on vanadium and the juniors with deposits.
Almost all of the vanadium produced today comes from China, Russia and South Africa, so we like to look for deposits that are near production and a little closer to home. One I've mentioned in the past is American Vanadium Corp. (TSX.V:AVC), which owns a sedimentary deposit in Nevada called Gibellini. The company has an NI 43-101-compliant M&I resource estimate of 18 Mt. vanadium at a grade of 0.33. It also has a PEA demonstrating $89M capex at a production cost of $2.96/lb. The company plans to produce 14 Mlb./year. With vanadium currently priced at roughly $7.50/lb., this is a relatively straightforward project with good economics. American Vanadium is targeting production from an open-pit mine by the end of 2012. The company also owns additional deposits along the same trend as Gibellini, so there's additional upside here with more drilling to complement the economics of the project.
While vanadium supply and demand is currently in balance, I like the idea of a domestic source of this metal—especially with so much at stake regarding clean energy technologies and "owning" the intellectual property around the innovations.
TGR: For investors eager to capitalize on these trends but looking to limit their exposure to risk, what role can publicly traded resource-investment companies' play?
CB: I'm not a registered investment advisor, so please remember anything I've said thus far is my opinion only and should not be relied upon. That said, investing in junior mining stocks is a high-risk proposition and there's no substitute for extensive due diligence and a stomach for volatility. If an investor is looking to eschew risk altogether, I'm not sure that this is the ideal market sector. I think there is a place in everyone's portfolio for a certain level of risk and, generally, the younger you are, the more risk you can take. Investing in silver or gold bullion is certainly on the rise, as people are looking to a store of value in the face of depreciating fiat currency values. The limitation there is that you don't get the same amount of leverage you would by investing in junior resource companies.
I am watching developments in the cleantech space now because, in my opinion, those applications paint a positive picture of future demand for various metals. I've also been closely following events in locations like Colombia and the Yukon, as recent political changes there have welcomed mining investment and given a number of juniors a real chance to succeed.
TGR: Chris, we appreciate your time.
With a lifelong interest in geopolitics and the financial issues that emerge from these relationships, Chris Berry founded House Mountain Partners in 2010. The firm focuses on the intersection of three topics: 1) The evolving geopolitical relationship between emerging and developed economies; 2) The commodity space; and 3) Junior mining and resource stocks are positioned to benefit from this phenomenon. Chris spent 13 years working various sales and brokerage roles on Wall Street before founding House Mountain Partners. He holds an MBA in finance with an international focus from Fordham University and a BA in international studies from the Virginia Military Institute. Chris is also a member of the Canadian American Business Council. He invites readers to receive a complimentary subscription to Morning Notes, which provides analyses of emerging geopolitical, technological and economic trends at www.discoveryinvesting.com.
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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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