Can Gold Prospectors Cushion Against Market Volatility?
Commodities / Gold & Silver Stocks Jun 23, 2011 - 04:51 AM GMTBy: The_Gold_Report
Mercenary Geologist Mickey Fulp has adopted a new prospector-generator model portfolio with an emphasis on good people. In this exclusive interview with The Gold Report, he outlines the impact global volatility could have on junior mining companies.
The Gold Report: Is there a danger of food shortages starving emerging economies and putting an end to the secular commodity bull market? In your March 21 Musing newsletter, you tracked the commodities market back to 1955, illustrating the worldwide food inflation problem crushing poor countries. You have also written about the important role of these same emerging economies in pushing the eighth year in a commodity bull market. So I have to ask, could food shortages choke growing commodity demand?
Mickey Fulp: I think yes. I am less concerned about food inflation now that oil is down to less than $95 a barrel than I was when it was $115. It eases the pain a bit. But, we saw in the early part of the year two Middle Eastern countries with oppressive regimes fall. In Tunisia, a government that reigned for 23 years was taken down because of food riots. In Egypt, the catalyst for the government's fall was food inflation. It is my opinion that if unrest were to spread to eastern Asia where a lot of the commodity demand growth is located, that could create another economic crisis and a collapse in the secular bull market for commodities—similar to what happened from mid-2007 to early-2009 when a U.S. banking crisis spread worldwide, bringing the global economic system to the verge of collapse.
TGR: Didn't all commodities drop during that collapse, even gold at least for a short time?
MF: Absolutely. It went down to $680/oz.
TGR: I don't even think the U.S. dollar did that well. Everyone just pulled in. So, if we see a shortage of food in eastern Asia, would that instill a growth slowdown and thus inhibit commodities? Or would precious metals begin to soar?
MF: I think precious metals would shine. Let's use an analogy. In November of 2008, the gold price collapsed. It went down to $680/oz. and it hit a double bottom before it started rising. An amazing thing is that in the early part of 2009 gold and the dollar index increased at the same time. That's quite unusual. The reason for that, in my opinion, was a run to what were perceived as safe havens. In the scenario we're talking about right now, I would be very bullish on gold. That won't preclude a selloff like we saw in the early fourth quarter of 2008, but to be safe, I will always want to have 10% of my net wealth in gold.
TGR: Wasn't some of that 2008 decrease in gold due to massive deleveraging as people were forced to cash out to pay their calls?
MF: Yes and the reverse of that is happening now. The hedge funds and speculators pouring cash into gold paired with quantitative easing is a big reason for the run-up in the price of gold in the last year. We're printing more and more fiat currency. So, if a crash were to happen again, the hedge funds will pile out of the commodities, take profits and sit on the sidelines for a while. If stocks start to collapse and margin calls come, people will liquidate whatever is . . .
TGR:. . .liquid.
MF: Yes, and that could be the precious metals again. But, the long-term purchasing power of gold is going to remain the same. So, overall we would expect gold to do quite well in an economic crisis.
TGR: You mentioned QE2 and hedge funds. Quantitative easing usually increases the price of gold while hedge funds depend on numerous other variables.
MF: Right. Hedge funds rush to the next big thing. That's what we saw in early May when we experienced an across-the-board commodities correction. It didn't last very long and it was not very deep, but hedge funds en masse ran out of commodities. Now, for the most part, commodities have stabilized. In the meantime, the junior resource sector continues to slowly progress to the downside.
TGR: That is my next question. You say the hedge funds will go to the next big opportunity. Since the junior precious metals market has underperformed compared to the gold price, do you see any probability that hedge funds will go into the junior market in the expectation of an equity catch up?
MF: That's an interesting thought. Certainly, the junior sector looks downtrodden right now. There is always low liquidity during the summer doldrums. Toronto brokers summer in their cottages on the lake; Vancouver's sharks go to the mountains; Europeans take leave for six weeks; and everybody in New York City is in the Hamptons. The Toronto Venture Index valuation lost 30% since closing above 2,400 on February 28. A post-Prospectors & Developers Association Conference pro selloff started in March, then we had "sell in May and go away." Now we have a couple of months of summer doldrums looming. We generally see a seasonal uptick after everyone comes back to work in the first part of September. That is the time of year when we would expect higher volumes that could lead to higher junior valuations.
TGR: We started this conversation with agricultural intrigue. In the U.S., we've had an amazing amount of flooding, slicing into crop forecasts. As we move through the summer, do you expect more interest in "flight to safety" vehicles like gold for wealth preservation?
MF: Maybe. But here's another argument to that scenario. We are approaching the seasonal low for gold. In most years, precious metals dip in July and August. For me, this is one of the annual opportunities for buying gold. I'll get it for a better price than I will once the wedding, holiday and festival seasons start in the early fall in India and continue into China and the Muslim world. Low season's coming up.
TGR: When you analyze companies, you review share structure, people and flagship projects. As you look at the juniors, are there some downtrodden companies that possess that unique combination of features that merit acquiring during the summer?
MF: I recently moved out of two gold companies because they experienced healthy run-ups and decided to move on to something else. That moved me out of the precious metals sector and more into the prospect-generator model. I cover Almaden Minerals Ltd. (TSX:AMM; NYSE:AAU), Avrupa Minerals (TSX.V.AVU), and Estrella Gold Corp. (TSX.V:EST) and am going to add another prospect generator soon. I have also added one new startup gold company called Brazil Resources Inc. (TSX.V:BRI). It's the same team that was successful with Uranium Energy Corp (NYSE.A:UEC).
TGR: But this is a gold play?
MF: Yes. The company's goal is to build a mid-tier gold mining company in Brazil in the near to midterm. I wrote about it in a recent Musing on my web site. It's available free to all email subscribers and it's an easy process to sign up and gain access.
TGR: Mickey, you have done quite a bit of geology in Peru and Chile in your career. How does Brazil play in terms of geological wealth compared to Peru and Chile?
MF: The geology is very permissive and it has a phenomenal gold budget. In my opinion, Brazil has been underexplored because it's mostly in the Amazon with little outcrop and infrastructure; only about 15 juniors have active projects in Brazil and no major discoveries have occurred so we don't see as much competition there. Additionally, Brazil is fairly bureaucratic, making business startup difficult. I like the people involved in Brazil Resources because they have run a successful startup before, I have a positive working relationship with them, and I respect them. I think they will be successful. I also like the relative lack of competition in Brazil paired with a tight share structure in the company.
TGR: Earlier, you said that on a macro-level you're moving your portfolio out of gold plays and into prospect-generator models. What is it about this type of company that intrigues you?
MF: Prospect generators spend someone else's money to advance projects. That means the company can avoid share dilution and preserve capital. The key is to find good prospects and good partners. It is an especially effective model in unsettled and down times in the market.
TGR: So, it is unsettled times that made you focus on the prospect-generator model?
MF: Not necessarily. I have been in prospect generators for at least two years now. I've just moved out of some pure precious metal plays because they had very good run-ups so I took profits. Part of it is I need to be stimulated. I will move into and out of stocks and pick new things because I like to generate ideas and make speculative money work for me and my subscribers. So, when a company has a two- or three-time run-up and I don't see another double in the next year, then I take that money off the table and move it into another stock. If I pick a stock at $0.25 and it goes to $0.50, that's a two-bagger. The chances of it going to $2 and another two-bagger is a lot less than if I go find another $0.25 company and play it to go to $0.50. It's a matter of the power of two, of doubling your money. So, if you don't think something has potential to double from where it is right now and you already have your double, then take that money off the table and go find another cheaper one.
TGR: In the prospect-generator model, you're talking about spending someone else's money to avoid dilution. But, it ultimately does need some good projects. You have often talked about a missing generation of geologists. In fact, in one of your Musings you talked about the importance of mentors. In a prospect-generator model, how important are the company geologists?
MF: They are of paramount importance. A prospect-generator model works only if the company has a cadre of excellent, field-savvy geologists with particular expertise in an area, a commodity or a deposit type. So, the geologist's skill set is the first and foremost key to making a prospect generator work.
TGR: Tell me about the geologists and management at the three companies you mentioned earlier, Almaden, Estrella and Avrupa.
MF: Sure. Most of the time in these companies, the geologists and the management are one and the same. Almaden Minerals is run by geological engineer and Chairman Duane Poliquin. He founded the company in 1986 and it has been very successful. Almaden's recent discovery is high grade and looks like it could be a district-wide gold-silver play in eastern Mexico. His son, Morgan, is now the company president. They are both good geologist prospectors and they're the brains behind the outfit. Almaden really is a family-run organization. It is AMEX listed, has only 56M shares out and over $25M in working capital.
Estrella Gold is a fairly new company run by geologist-CEO Keith Laskowski who was responsible for Eurasian Minerals Inc.'s (TSX.V:EMX) success in Haiti. He is working in Peru, where the country is becoming more left-leaning in the wake of the election of a former military man. Economic and social policies no doubt will swing left in the country. However, Peru is a great destination for major mineral deposits. And Estrella Gold has the right set of investors behind it, with a low number of shares. It's also a bit beaten up right now because of the political uncertainty. Avrupa Minerals is a relatively new prospect generator, less than a year old. It holds base metal plays in Kosovo and Portugal. The company announced recent success in vending four projects in Portugal, including a tungsten-gold play with potential. The company focus is on the Iberian Pyrite Belt and it just signed a joint venture agreement for three strategically-located properties with Antofagasta plc (LSE:ANTO).
TGR: Who are the geos there?
MF: The geologist-CEO is Paul Kuhn, a man I've known for 25 years. He's spent a significant part of his career in eastern to southern Europe and western Asia—Avrupa Minerals' focus areas. The company has a very competent staff in Portugal and I expect continued success there.
TGR: So, if we are looking at summer doldrums for the next several months and Rick Rule advises becoming accustomed to volatility, what is your favored investment strategy in the short term?
MF: I have a "wait and see" attitude right now. I've been buying some uranium stocks on weakness. As a contrarian, I like to buy when other people are exiting. There will be other buying opportunities in the near term, but I'm not sure if this is the time to do it. I suggest finding some good, fundamentally strong companies that you like, that you think will be healthy for the long term and can survive a downturn, and put in some low bids—stink bids. If they get filled so be it. And, if they don't, oh well, they didn't get to the level that you thought was a good risk-reward price. Don't sell on emotion or panic. Develop a core speculating philosophy and stick with it. Modify it as market conditions require, but stick with what your basic investing philosophy demands.
TGR: Mickey, I appreciate your time.
Michael S. "Mickey" Fulp is author of The Mercenary Geologist. He is a certified professional geologist with a B.Sc. in earth sciences with honors from the University of Tulsa and M.Sc. in geology from the University of New Mexico. Mickey has more than 30 years experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas and water in North and South America, Europe and Asia. Mickey has worked for junior explorers, major mining companies, private companies and investors as a consulting economic geologist for the past 24 years, specializing in geological mapping, property evaluation and business development.
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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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