Warning Don’t Try to Time the Gold Market
Commodities / Gold and Silver Stocks 2013 Aug 16, 2013 - 03:25 PM GMTBy: Casey_Research
Don't ask Louis James if the gold price has reached bottom. He doesn't care. The senior editor with Casey Research is too busy trying to ferret out those gold miners with a bird in the hand, as he calls it in this interview with The Gold Report. He travels the world, most recently visiting Ethiopia, looking for companies with an overlooked story, an undervalued mine, an underappreciated grade. While James knows no one can time the market, he is quite certain he has found some good values.
The Gold Report: You warn investors against trying to time the market. If even experts don't know a bottom until it's behind them, how do regular investors know when to invest, when to buy the next tranches, and when to cut losses?
Louis James: The wisdom of not trying to time the market is tried and true. Benjamin Graham said the same thing 60 years ago. I shouldn't have to defend this premise. Even though investors all know it, they fervently wish it weren't so; they just can't help themselves.
You can't time the market. A bureaucrat in Washington can open his mouth and send the price of gold up or down 5% in an afternoon.
Fortunately, we can look for value. Value tends to be slippery in the junior sector when you have a bunch of companies that, as Doug Casey famously says, are little better than burning matches. They have no income. Even the biggest players in the field are so volatile that Benjamin Graham would never touch them.
However, there are things that we can look for. We can compare companies to their peers. We can look at the ounces in the ground and see if something is out of whack. We can look at cash in the bank. The market is so beat up now that some companies with viable projects are trading for cash or less. It's actually possible in a market this beat up to make relatively low-risk acquisitions.
TGR: You can't really tell when to buy, but you can tell which one to buy. What's the most important factor to look at when picking a stock?
LJ: I use Doug Casey's "eight Ps" formula. "People" is the first "P." The best projects can still be messed up if the wrong people run them. If you know the people involved have a track record unblemished by success, as Rick Rule likes to say, that's absolutely a warning, regardless of how cheap the shares are. Don't throw the fundamentals out just because it's on sale.
In fact, investors should start with themselves when evaluating any investment. Before they start buying shares, they need to determine what kind of investors they are. Risk-adverse investors probably want to stick with the producers. Investors after potentially big gains—those ten-baggers, the 1,000% returns—have to take a chance on early-stage, high-risk speculations.
TGR: Grade is important, but how does a regular investor reading a press release or a report on test results determine which are quality projects?
LJ: Grade is king for good reason. High grade forgives many sins and makes many things possible. People also say that size is king—that can also be true. I have been to projects that have very low grades and still make a lot of money, due to economies of scale.
Today, there's a great deal of skepticism about low-grade bulk tonnage projects. Companies have been taking write-downs on projects that haven't worked out. Troubled projects are making headlines. There's a sentiment that low-grade bulk tonnage is out.
Investors want high grade, but that's too simplistic. Large high-grade projects, like Pretium Resources Inc.'s (PVG:TSX; PVG:NYSE) Brucejack project, with its bonanza-grade Valley of the Kings zone, are very few and far between. There are not enough of those to sustain the industry.
I strongly urge readers not to throw the whole class of bulk tonnage out. You do need to be selective. If a company does a reasonable job and presents credible numbers in its economic studies, that does tell a lot.
TGR: You travel the world looking at investment opportunities and recently returned from Ethiopia. How do investors know what jurisdictions are safe?
LJ: There is no place that's completely safe. There have been adverse actions in Canada—even in Québec. Nothing is sacred. However, at some level, price trumps risk. Yes, Africa, as a general rule, is higher risk than Canadian provinces are. That's the nature of the beast. The market often factors that into prices, but sometimes it overdoes the discount, and that can be an opportunity.
A number of the countries in West Africa have been relatively stable: Ghana, Burkina Faso, and the Ivory Coast. The bad boy in the area is Mali, which unfortunately had military problems with rebels in recent memory, but those never affected the mining areas. The country just had a peaceful election. Negative headlines can be alarming, but it's a grave mistake to sell off everything in Africa just because one country had a problem.
For example, Eritrea and Somalia have garnered negative headlines recently, but though nearby, Ethiopia is different. It does not deserve to be painted with the same brush. I did more than just look at projects. I walked the streets. I did man-on-the-street interviews. I haven't bought in to any Ethiopia plays yet, but I came away quite impressed with the country, and am keeping my radar on, looking for targets.
TGR: What companies in other parts of Africa do you like?
LJ: Endeavour Mining Corp. (EDV:TSX; EVR:ASX) is operating in multiple jurisdictions in West Africa, which gives it some mitigation of political risk through diversity. The company bought out Mali-based Avion Gold Corp., a profitable and growing producer that was deeply discounted because the coup I mentioned scared the market. Endeavour Mining has cash, it has doubled its mill capacity in Mali, and has completed more than 80% of the construction of its Agbaou gold mine in the Ivory Coast. The company is growing fast, and market just doesn't seem to notice or care because it's scared of Africa.
TGR: What else in Africa do you find interesting?
LJ: PMI Gold Corp. (PMV:TSX.V; PVM:ASX; PN3N:FSE) in Ghana is an interesting story. The company has a large resource with favorable economics. It raised about half the money it needed to build its mine, but then the market turned south and it hasn't been able to raise the rest of the money. If it can arrange the rest of the money, the stock should get a rerating.
TGR: Like a lot of juniors right now, is it a matter of having money in the bank to move forward?
LJ: PMI Gold is different because it isn't at risk of going insolvent and having to padlock the door. The company has more than $100 million ($100M) in the bank; it's not going anywhere. It has a viable project and money to wait for the market to get better if it needs to.
TGR: You've spent a lot of time in Latin America. What catches your eye there?
LJ: French Guiana is an interesting, "off the radar" place. It has the same geology as West Africa and has been home to significant discoveries. French Guiana is not an independent country, but a department of France—the regulators are in Paris—which has shown a willingness to work with miners.
TGR: You've said before that you also like Colombia.
LJ: I like Colombia a lot because it was basically held off the market for decades due to the war there, making it a target-rich environment. That said, the country does have an active environmental movement, and you do need to take care to do things right.
TGR: Are there any countries that concern you?
LJ: Argentina has great mineral resources, but has become a very risky political jurisdiction, and Chile, once one of the most pro-mining countries in Latin America, has taken several turns for the worse recently. We wouldn't touch anything in Bolivia or Ecuador, and don't care much for most of Central America for mining.
We were quite concerned about Peru after the election of the current president, Ollanta Humala, because he used a lot of anti-mining rhetoric in his campaign. We completely exited all our Peru plays at the time. However, he's since turned out to be more practical than he sounded. Some projects are still on ice there, but mining isn't easy anywhere in the world, and Peru does have a terrific mineral endowment.
We recently recommended Dynacor Gold Mines Inc. (DNG:TSX) in Peru because it's a producer without the danger and technical challenges of actual mining. It is a licensed gold mill and buys ore from miners in the area. Peru is cracking down on illegal mining and milling by so-called artisan miners that are harming the environment. The government decided to get serious about milling in environmentally sound ways and is actually enforcing the law. Dynacor has the only legal mill in an area full of high-grade gold veins, and presto, now it can pick and choose from the highest-grade supplies of gold ore. The real beauty of this setup is that if the price of gold drops, Dynacor pays less for the ore it buys—it's more "correction proof" than any other producer I know.
Dynacor is a small, thinly traded stock, so buyers should take care. But as long as gold doesn't go so low that the miners stop mining, this one makes money. It's an example of opportunity where the bottom for gold doesn't matter. Share-price appreciation doesn't depend on higher gold prices, just on the company executing its business plan.
TGR: What about farther north. What companies are promising in Mexico?
LJ: I like the high-grade silver producers in Mexico, like Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE), First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) and Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE).
And then there is Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE), which I like a lot. It has made a large, good-grade discovery. It's well above average for an open-pit mine and has a lot of characteristics that lend itself to a profitable operation. That is the bird in the hand. There's also the potential for more such zones to be discovered on the same property.
TGR: The next catalyst is a resource estimate?
LJ: There's a resource update due this fall. Drills are still turning. At some point this fall, management will have to draw a line in the sand—because I don't think they'll run out of mineralization to drill—and come up with new numbers.
TGR: A country that doesn't get a lot of attention as a gold producer is Turkey. Does it have the geology to fit your profile of what can make money?
LJ: I would encourage investors to reconsider any negative attitudes they may have about Turkey, because the country has shown that it is truly open to responsible mining. It has permitted eight major gold mines that have gone into production this cycle alone, including several owned by Western companies. There have been some protests unrelated to mining and some violence along the border with Syria in the news. However, the companies mining in Turkey are mostly far from those sources of tension, and have not been affected. If the market sees the place as higher risk than it is, that's an opportunity.
The Turkey play we like the most is Pilot Gold Inc. (PLG:TSX); the company's high-grade discovery at its TV Tower gold project has helped put Turkey back on the radar for many investors. There's no resource estimate yet, but there have already been several spectacular drill holes and many excellent ones. Most recently, it reported 45 meters (45m) of 15+ grams/ton (15+ g/t), and it's wide open. The project is demonstrating strong, multimillion-ounce potential. The beauty is that the project is not just one hot spot, but a whole district with outstanding potential. I've been to this one. You drive from one end to the other and there are outcroppings and showings of hydrothermal activity all over the place.
But there is more. With Pilot, investors also get a great project in the prime jurisdiction of Nevada: Kinsley Mountain. The company has already reported several high-grade intercepts, as well as others one might call merely "encouraging." They are looking for a big, low-cost discovery, as the same team delivered at the now-famous Long Canyon project they sold to Newmont Mining. That's a bit of a speculation, but the question of how likely success is will be answered after this year's drilling. The market is focused on the discovery in Turkey and isn't giving Pilot anything for Nevada. That gives investors the Nevada upside, whatever it is, for free.
TGR: When might its resource estimate be out?
LJ: It's premature to say that there will be a resource after this year's drilling at Kinsley Mountain. If the drilling goes well, and is consistent enough, there should be enough holes to estimate a resource, but we won't know that until it happens. Pilot's target in Turkey is much more likely to produce a resource estimate after this field season's drilling. It could be the first quarter of next year.
TGR: Closer to home, what are some companies in Canada that you're excited about right now?
LJ: The No. 1 pick has to be Pretium Resources. Bob Quartermain's large, high-grade discovery, the Valley of the Kings zone at the Brucejack project, is one for the record books. There are people who are skeptical of the current resource model. Some of these are not just people who are professional critics, but good people with years of experience in the field. They know how tricky Mother Nature can be, and that's fine. However, if you're going to speculate on a mineral discovery, you want to speculate on something that's really big or really high grade. This project is both. It could be a mega-bonanza-grade deposit—and not in some kleptocratic banana republic. It's certainly worth a swing for the bleachers on this one. The project is undergoing a bulk-sampling test now. The results, expected in the fall, should tell us if it's real.
TGR: Is there a cutoff for grade or size that you are looking for?
LJ: No, it's really about consistency. Do the results from underground match the model that was generated from the surface? The model that was generated from the surface is extremely robust. This could be a highly profitable mine. Even at low gold prices, it still makes money.
By the way, while this is going on, Pretium is still making discoveries. It just announced results from the Cleopatra vein where it reported 2.5 kilos—not grams, not ounces, but kilos—of gold over a thickness of more than 5m. That's a honking fat vein for such high grades. In Mexico they say, un vetaso. A vena is a vein so un vetaso is a great big vein.
TGR: We love those technical terms in all languages.
LJ: I'm also very fond of Balmoral Resources Ltd. (BAR:TSX.V; BAMLF:OTCQX). The company has a high-grade story coming together. It has made a high-grade discovery that keeps returning high grades over significant thicknesses. One of the zones is 500+m in shallow drilling along strike. That's great because these kinds of deposits tend to be deeper than they are wide. If the long dimension is down, this thing will be big. There's no initial resource. There's no preliminary economic assessment. There's no feasibility study. But the company has a discovery in hand and plenty of money. It's drilling it now.
I also like Premier Gold Mines Ltd. (PG:TSX). The company has multiple high-grade projects all adjacent to mines in production. It has tons of money, which it can deploy in various ways. Whether the company gets taken over or if it needs to advance its projects itself, it's not going to need to go to the market any time soon.
TGR: Is there a catalyst on the horizon or is Premier just waiting for the gold price to go back up?
LJ: There will be drill results as catalysts. The real game changer is a sleeper project that it has had for years: the Red Lake joint venture with Goldcorp Inc. (G:TSX; GG:NYSE). Goldcorp dug a tunnel through the property to connect their two mines in the area. Premier has a geological theory that there's a lot of high-grade ore to be discovered near where that tunnel passed by. That is being drill tested now. Will it work? Will they find as much or will it be as consistent and high grade as it hopes? We don't know, but the cost is pretty minimal, and Premier has more than $100M in cash. Investors get the upside almost for free.
TGR: What companies might offer a bit more immediate upside?
LJ: There's a little stock with light volume, Banks Island Gold Ltd. (BOZ:TSX.V), that I view as a "little engine that could" story. This little engine hasn't made it to the top of the mountain yet, but it has momentum. It has a small but very high-grade deposit on Banks Island, British Columbia, called Yellow Giant. It's not a giant yet (the company is working on making it bigger), but it's near the surface, so it should have a very high return. The study Banks Island Gold did on Yellow Giant had a one-month payback and only needed $6M to put it into production. It recently signed an offtake deal that provides all the capital and then some. We'll see if the little engine makes it or not, very soon. If it does, Yellow Giant will throw off a significant amount of cash, even at low gold prices.
That leads us to the second part of the story. Banks Island Gold has a much larger project called Red Mountain with a lot of upside. If the little one works out, it gives shareholders a chance to see the big one advance with minimal shareholder dilution.
TGR: Any others in Canada?
LJ: I also like ATAC Resources Ltd. (ATC:TSX.V), because it has sold off without any bad news from the company. I can say the same thing about Kaminak Gold Corp. (KAM:TSX.V). Both are up in the Yukon, which the market seems to have suddenly realized is remote. Of course the Yukon is remote, but it's no more remote this year than it was last year. It's as if Mr. Market believes somebody has moved the Yukon farther up to the North Pole.
ATAC has been drilling into exceptionally high-grade stuff in multiple discoveries along its very large Rackla property. It will take more drilling to prove all that up into NI-43-101-compliant resources with attractive economics, but the ingredients are there.
Kaminak is like that, too. Its base-case resource has 3.2 million ounces (3.2 Moz) at over 1.5 g/t on average. That's a good average for an open-pit resource. What people forget is that within that it has almost 2 Moz at almost 3 g/t.
TGR: What advice can you give to investors who have been on this wild ride for the last year, looking for ways to protect or even grow their wealth in the current market?
LJ: Don't blink. Don't lose your courage. Do not sell just for portfolio-balancing reasons or any other Procrustean approach. Gold is off, but don't panic. Don't realize losses you don't need to. Be disciplined.
This is an opportunity to average down. That can be a scary thing to do, but if your investment premises remain true—gold is going higher, the company's story is still compelling, etc.—averaging down is a necessary part of success. Let's say an investor buys something at $1/share; it drops to $0.50/share and goes back to $1/share—the investor is merely back at the starting point and hasn't made anything. Suppose the investor averages down, buying an equal amount of the stock at $0.50/share. When it goes back to $1/share, the investor's average cost is $0.75/share. That's the way to come out ahead.
If it's a great stock, a great story, a great company run by great people, and you believe the fundamental premise of rising metals prices going forward, don't be afraid.
TGR: Thank you so much for your time.
LJ: Sure, my pleasure.
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, James regularly takes his skills on the road, evaluating highly prospective geological targets and visiting explorers and producers at the far corners of the globe and getting to know their management teams.
To learn more about what James sees ahead for precious metals and precious metals explorers and producers, grab a seat now for the only Casey Research conference to be held this year: 3 Days with Casey, October 4-6 in Tucson, AZ. Along with the Casey brain trust—which includes the inimitable Doug Casey himself—you'll hear featured speaker Dr. Ron Paul, Lacy Hunt, Chris Martenson, Rick Rule, John Mauldin, and many more outstanding minds. Reserve your spot while spaces are still available—and do so before September 1 at a $100 discount. Get all the details and sign up today.
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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