Global Insecurity Is Good for Gold
Commodities / Gold and Silver 2015 Feb 17, 2015 - 04:02 AM GMTBy: The_Gold_Report
International anxiety may be good for gold prices, as gold continues to have a place as a store of value in uncertain times, says Mike Niehuser of Scarsdale Securities. Lower energy prices and a stronger dollar may provide relief for precious metal miners, especially explorers and miners working outside the United States. Management teams that have been forced to adapt to survive should do well in an upturn, and in this interview with The Gold Report, Niehuser discusses a handful of companies that fit the bill, including one in renewable energy.
The Gold Report: Gold and silver have both demonstrated explosive growth in 2015. Why has this happened, and will it continue?
Mike Niehuser: Well, I am not sure that I would categorize a higher gold price in the first part of 2015 as "explosive." Since the beginning of 2015, gold appears to be trading within a band of $1,200 to $1,300 an ounce ($1,200–1,300/oz). While this is not "explosive" from a broader perspective, it is certainly a relief compared to declines in 2013, so let's just say gold has done well so far in 2015.
Despite declines over the last couple of years, gold is still well above its lows prior to Sept. 11, 2001. It has held up in spite of concerns for deflation resulting from a global economic slowdown. This has not been helped by loose monetary policies.
I think the strength is in part due to what Sen. John McCain characterized as being in "an unprecedented period of global turmoil." Russia has reclaimed the Crimea and is in the process of annexing eastern Ukraine. The same could be said for insurgents in Iraq and eastern Syria. Concerns over the repayment of Greek debt, nuclear issues in Iran and an unsettled path for a maturing China should keep things interesting for gold.
Also, it is not clear how the recent collapse in oil prices will impact the economies or political stability of oil-producing nations, such as Russia and Iran. The conventional solution seems to be economic sanctions, but it has been said, "When goods stop flowing across borders, armies soon follow." At least North Korea is out of the headlines.
International anxiety may be good for gold prices as gold continues to have a place as a store of value in uncertain times.
TGR: What are your metals prices forecasts for 2015?
MN: I don't have an exact forecast for metal prices in 2015, but I have a hunch that from a U.S. perspective, gold will continue to trade mostly between $1,200 and $1,300/oz. The national perspective is an important distinction. If companies are exploring or mining for gold outside the U.S., their expenses are in the local currency, which may provide a competitive advantage for some projects and investors.
This advantage may provide an inducement for sector rotation from fully valued companies in the U.S. to oversold resource opportunities internationally. A more important boost to sector rotation might be a weakening dollar, but this would require a faltering U.S. economy or the resumption of economic growth outside the U.S. So from the U.S. perspective, 2015 could be another tough year for precious metals and mining stocks, but this could make for a target-rich environment for patient value investors.
TGR: You stress the critical importance of management to mining success. How have good managements acted to preserve their companies during a downturn that lasted almost four years?
MN: It has been an exceptionally painful four years for optimists, but I am comforted by the old adage that the bear market ends when the last bull capitulates, and I am almost there. The downturn has heaped scorn by investors on management teams, even ones who have added value facing the headwinds of declining metal and stock prices and tight capital markets. Good projects in good locations have not been immune in the downturn.
I continue to believe in the positive aspects of a market decline, which cull the herd, while forcing management teams to adapt to new realities in order to thrive. Management teams that have sought to advance projects and increase resources while minimizing shareholder dilution by resisting issuing shares at lower prices, or securing other creative ways to advance projects without dilution, should be applauded, and should do well in an upturn.
TGR: You believe that cash and good projects are not enough and that mining managements must be both aggressive and realistic in their planning. What are the signs that investors should be looking for in this regard?
MN: Obviously, management with a good track record over a long period has probably developed an understanding of how to keep faith and survive the cyclical nature of this business. This is becoming more obvious as there are fewer seasoned teams out there. In assessing the strength of a management team, I think it is helpful to determine how long the team has held together. If they have worked with each other through tough times, it is safe to say they have the ability to work together in challenging environments and have the ability to go all-in to push a project forward.
Most important, I would be interested that if management is paid well, are they buying their own stock in the open market at lower levels? This is the easiest way to recognize if management believes in the project they wish investors to support. Needless to say, when insider buying picks up, this will be a clear sign that resource equities have moved off the bottom. So look for insider buying in the market.
TGR: Which specific precious metals companies exemplify an aggressive but realistic approach?
MN: There is Alexco Resource Corp. (AXR:TSX; AXU:NYSE.MKT). Despite critics of the company's silver stream agreement, as evidenced by the recent restructuring to more realistic terms, I am convinced that had Alexco gone the conventional development route with bankers' requirements such as a feasibility study and fees and hedging, the mill at Keno Hill would not have been built, and if it were built, it would not have been without significant dilution. But while the mill operation has been suspended, Alexco's environmental business continues to grow and cover overhead while the company unlocks the exploration upside at Keno Hill to recommence production as an expanded and more profitable operation.
TGR: Alexco recently released an updated preliminary economic assessment (PEA) and strong assay results. How much does this news improve its prospects?
MN: The updated PEA was completed to provide investors with a more comprehensive description of resources at Keno Hill in the Yukon. The study included the Onek resource, as well as other updates. Most important, the study provided additional information on progress at the Flame & Moth deposit and exploration at the Bermingham target. The significance of this is that management is making progress breaking the code on exploration and appears to be closing in on another Hector-Calumet type deposit, which produced 90 million ounces (90 Moz) of silver over 20 years.
To give you some idea of the potential at Keno Hill, the company recently reported a 6.2 meter intercept at Flame & Moth of 47.7 ounces per tonne silver. These exploration results, along with the amendment to the silver stream agreement and a weaker Canadian dollar, not to mention the environmental business, make Alexco more interesting to investors than one may realize.
TGR: Another company?
MN: Columbus Gold Corp. (CGT:TSX.V; CBGDF:OTCQX). I visited the company's Paul Isnard gold project in French Guiana a couple of months ago. French Guiana is a Department of France and enjoys participation in the European Union. This area has been rapidly advancing its legal structure favorable to mining, and the Guyanas are highly prospective for gold exploration. Columbus has already outlined a gold resource of at least 4 Moz.
Columbus' management team has structured a deal with Nordgold N.V. (NORD:LSE) requiring Nordgold to spend at least $30 million and advance the project to feasibility in early 2017 to earn 50.01%. Columbus Gold remains the operator and is paid a fee, so exploration and overhead is covered by Nordgold through feasibility.
TGR: What is the importance of the decision by the government of France not to object to Nordgold's plan to acquire 50.01% of the Paul Isnard project? How close is Paul Isnard to production?
MN: That was a bit of a non-event, but you ask an interesting question. The concern on the face of it would be that if the government of France had objected, Nordgold would have pulled out, disrupting the development program. If this happened, Columbus Gold would have had the benefit of Nordgold funding one year of development and it would retain a 100% ownership position.
The existing agreement with Nordgold benefits both companies, but Columbus Gold's Montagne d'Or project at Paul Isnard has good potential to expand. As investors catch on to the upside of both doing business in French Guiana and the exploration potential at Paul Isnard, a 100% ownership position of the project looks better from Columbus Gold or Nordgold's point of view. I think this may lead to some arrangement prior to feasibility, where Nordgold will seek to buy Columbus Gold out. In this case, Columbus Gold has a portfolio of projects in Nevada and a top exploration team, making it a target for further investment.
TGR: Are there any other gold or silver projects that particularly impress you?
MN: Following my visit to French Guiana, I visited Columbus Gold's Eastside project located about 20 miles west of Tonopah, Nevada. This project appears a bit underwhelming based on drill results, but this has been impacted by permitting with limited disturbance in challenging topography. The company is working to be awarded a Plan of Operations, which should result in an appropriate level exploration program. The exploration team is first-in-class and they appear as excited about this project as any they have worked on over their careers. While it is still very, very early, I believe that there are still world-class projects out there waiting to be discovered and this one is interesting.
The same day I visited Eastside I drove up to Canamex Resources Corp.'s (CSQ:TSX.V; CX6:FSE) Bruner gold project. This is a significantly smaller project than Eastside, but is partially located on patented property, which could speed development. The project also has higher grades of gold and the resource is open to expansion. Also, unlike Eastside, which is a virgin project, Bruner has a history of high-grade underground mining leading up to World War II.
TGR: Which company do you like most in the renewable energy sector and why?
MN: We have spent a lot of time working on Alter NRG Corp. (NRG:TSX; ANRGF:OTCQX), which has developed plasma technology to gasify municipal waste. High temperatures generated by plasma torches vaporize waste, allowing the separation of hydrogen and carbon monoxide for syngas, while the remaining material is vitrified in a non-soluble, environmentally friendly byproduct. This technology may address the problem of growing production of waste in developing economies such as China. This is probably the greatest unrecognized threat to the global environment.
The temperatures from the plasma torches are high enough to destroy hazardous and medical waste and hot enough to prevent the formation of dioxins, which are produced in conventional incinerators. Last June we visited a project in England in which Air Products and Chemicals Inc. (APD:NYSE) had invested about a billion dollars. The commissioning of this facility will prove the concept and lead to long-term opportunities in the waste management industry.
Another interesting company I visited while in Nevada is American Vanadium Corp. (AVC:TSX.V). Vanadium has been used to strengthen steel, but is now being entertained for inclusion in flow batteries, which may be an answer for managing power generated from wind and solar farms. Vanadium appears to be more stable and competitive with lithium solutions. American Vanadium's deposit near Eureka, Nevada, is of a quality that may be uniquely suited for the purity requirements for industrial-quality vanadium-flow batteries.
TGR: Heading into what might be a new bull market in 2015, how can investors best benefit, and which pitfalls must they avoid?
MN: The conventional wisdom with a stronger U.S. economy is to hate gold, which from a contrarian point of view may lead you to believe that this is a good time to look around for new gold ideas. So my advice is for investors to take their time, do their homework and ask lots of questions. Despite threats that the Federal Reserve will be increasing rates, most of the rest of the world is pursuing loose monetary policies and easy credit and so the Federal Reserve is still up in the air. We believe that these policies are disruptive and institutionalize misallocations of capital, increasing systemic risk and asset volatility. So this is my case for gold still being relevant in 2015.
Mike Niehuser is an analyst with Scarsdale Equities LLC. Prior to working with Scarsdale, he founded Beacon Rock Research, LLC, which produces research for an institutional audience and focuses in part on precious, base and industrial metals, oil and gas and alternative energy. Previously a vice president and senior equity analyst with the Robins Group, he also worked as an equity analyst with The RedChip Review. He holds a bachelor's degree in finance from the University of Oregon.
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DISCLOSURE:
1) Kevin Michael Grace 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: Alexco Resource Corp. and Columbus Gold 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) Scarsdale Equities LLC, at the time of publication, does not make a market in any security. The author has a financial interest in any security covered in this report. Part of the author's compensation may consist of a portion of the commissions generated by transactions in this issuer's securities placed at Scarsdale Equities LLC for the credit of the author. Scarsdale Equities LLC may seek or receive advisory or investment banking compensation from Alexco Resource Corp., Columbus Gold Corp. and Alter NRG Corp. in the next ninety days. Scarsdale Equities LLC serves as the Principal American Liaison (PAL) for Columbus Gold on OTCQX.
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