The Gold Report: As you noted in your last interview with The Gold Report in February, Goldman Sachs was predicting that gold would to go down to $1,200/ounce ($1,200/oz) in several years, and now "Dr. Doom," Nouriel Roubini, says it's going to $1,000/oz. What's your view?
Chen Lin: In the near term, I think gold is being controlled by the paper market on Wall Street, which is unfortunate. However, I'm still bullish for the long run.
TGR: Do you see anything on the economic horizon that could create a more positive environment for gold in the near term?
CL: Personally, I'm not sure all the problems are behind us. Japan just had a big swing in the stock market and is going through a risky experiment to do a quantitative easing (QE), which is actually on a much larger scale than that of the U.S. I think Japan, for the next few months if not year or two, will decide how successful QE can be. Japan is doing much, much stronger QE than that of the U.S, which has 100% debt to gross domestic product (GDP). Japan has over 200%. So actually it's a blessing to the U.S. to see what is going to happen with the Japanese experiment. I think that will be a key indicator for the longer term effectiveness of QE.
TGR: What do you think is going to happen with silver in light of the gold price predictions?
CL: Silver has been more volatile than gold. I'm also bullish long term on silver. But near term, there could be more downside because investment demand is down and there could be a surplus this year. Only investment demand can pick up the surplus. So if the demand is not here, we could have more downside with silver. Again, I'm watching the exchange-traded fund inflow and outflow very carefully to see the investment demand for both gold and silver.
TGR: What part of silver demand do you think might be due to industrial uses versus investment or speculation?
CL: Demand has been picking up especially for electronic components, but the total production in silver is much greater than industrial demand. The surplus has to be absorbed by either jewelry, which is limited, or other investment demand.
TGR: You talked last time about your more positive outlook for base and industrial metals. Does your outlook remain the same?
CL: I'm still bullish on platinum and palladium. Both the European Union and China will have new car emission standards starting in January 2014. I believe the car manufacturers will start to stockpile those metals in H2/13. Plus, we have South African labor issues and then Russia finishing up stockpiling palladium. I'm bullish on both metals, and I have been holding both.
I actually turned quite bearish on base metals earlier this year, right after the February interview, because I saw rapid slowing in China. I even told my subscribers to write a note to themselves saying China is slowing down and then put it on their monitors so they would be reminded every time they trade. I believe this is a major change in the commodity market, and it can play out for years. As I stated in my newsletter, I shorted copper as a trade. I also shorted the Australian dollar, oil and U.S. government bonds. I've already closed the Australian dollar short for a nice profit. I shorted it when it was trading at a $1.05 premium to the U.S. dollar and now it has gone down to $0.92. So, generally, I turned very bearish on base metals, but I'm still bullish on the platinum group metals—platinum and palladium.
TGR: I know you were quite excited about Ivanplats Ltd. (IVP:TSX) last time. The company just announced that it is going forward with the Platreef platinum mine in South Africa. Do you have any further thoughts on that? The stock had a little bit of a run-up and then came down. People either didn't care or weren't paying attention. What do you think happened on that one?
CL: It's unfortunate. Actually, I closed out Ivanplats a long time ago when the stock was much higher. Basically, Platreef is a world-class deposit, but the company needs to raise money to build the mine and I'm trying to stay with companies that can be self-funding and make it through this dry patch in the near term.
TGR: How are your current price expectations influencing your investment strategy and stock picks at this time?
CL: Because of the near-term uncertainty and with summer coming, which is usually the weakest period for gold and silver miners, I'm actually trying to stay light on both silver and gold miners except in special situations. For the miners, I focus on those that can be self-funding and do not need to come to the market to issue shares that dilute existing shareholders.
TGR: Can you tell us how your gold and silver stock portfolio has been doing since last February and how you've been coping with this choppy market?
CL: My portfolio has done terribly this year for gold and silver miners. As I told my subscribers, when gold and silver started to crash in early April, I pulled back and I moved the capital to hotter areas, like biotech. I'm still keeping some positions in gold and silver miners, and I believe one day the market will turn around.
TGR: Can you bring us up to date on some of the companies that you talked about last time that you still like and think have potential?
"I focus on miners that can be self-funding and do not need to come to the market to issue shares that dilute existing shareholders."
CL: OceanaGold Corp. (OGC:TSX; OGC:ASX) is doing quite well. It is starting up a world-class Didipio mine in the Philippines, and everything is going quite smoothly. OceanaGold has about $50 million ($50M) of debt due at the end of this year, but it has already arranged a credit line against that just in case it needs to pay it off. So OceanaGold is quite self-sufficient.
The company is guiding about 300,000 oz gold production this year at $650–800 cash costs. Its costs are highly influenced by the New Zealand dollar, which is dropping. The Philippine peso is also dropping. If energy prices drop, that will also help it a lot. So its costs can change with the market conditions. Next year, OceanaGold will be in a much better situation with the Didipio mine fully commissioned, and I believe it will be looking at a dividend policy next year.
TGR: Where is OceanaGold stock trading now?
CL: It's only $1.27/share and has been cut in half in the past six months.
Next, Orvana Minerals Corp. (ORV:TSX) is doing quite well operationally. The company is generating a lot of cash flow this year and I calculated that if gold averages $1,200/oz and copper averages $3/pound for the rest of this year, it will pay back the debt due this year and should be fine. I visited the mine in Spain a few months ago. It's running very smoothly and has a lot of potential to improve next year. The key question for Orvana is its Copperwood property in Michigan. I have been lobbying the management for almost a year not to proceed on its own and not to take on debt to do so. It looks as if the new management team is listening. It is looking at all the alternative strategies for Copperwood and I hope for a positive outcome. Then the company will be a self-generating cash machine by the end of this year.
TGR: How has that stock done at this point?
CL: That stock is also almost down half in the past six months.
TGR: What about other companies?
"This is truly a stock picker's market because people are throwing out the baby with the bath water."
CL: I visited both of Petaquilla Minerals Ltd.'s (PTQ:TSX; PTQMF:OTCBB; P7Z:FSE) operations, in Panama and Spain, in the past few months. They are running very smoothly. In Panama, the heap leach just started. That will bring in additional revenue. The key point that investors are missing about Petaquilla is that First Quantum Minerals (FM:TSX), which bought Inmet Mining Corp., agreed to pay up to $150M for its land position and for its aggregate in Panama. That itself is much more than the current market cap of Petaquilla. I continue to be amazed at how low a valuation the market has given to Petaquilla and believe that one day the market will wake up about it. The market cap is around $66M, and First Quantum is going to pay it up to $150M.
Finally, there is Pretium Resources Inc. (PVG:TSX; PVG:NYSE), which is one of the nonproducers I own. The company has a very high-grade gold mine in the Yukon. Some ore runs at 1 kilogram per tonne. Pretium just announced a feasibility study, showing an internal rate of return on investment of 43% at $1,350/oz gold and $20/oz silver. The payback time is 2.1 years. So if you believe in the long-term future of gold and silver, this is one stock to own.
TGR: When is it going to be in production?
CL: Probably 2015 or 2016, depending on the permitting, etc.
TGR: What kind of a capital expenditure is required to get that into production?
CL: It's in the feasibility study it just announced. It's $660M.
TGR: Do you think Pretium will have problems raising that kind of capital?
CL: For a world-class mine like that, I don't think it will be a problem. Payback is two years.
TGR: Do you have any new names you'd like to talk about?
CL: One company I feel is very attractive right now is Alacer Gold Corp. (ASR:TSX: AQG:ASX). It's an interesting new addition to my portfolio. The company just announced multiple bids on its Australian asset. Alacer did another recent transaction on it Frog's Leg property and if you calculate the production by the reserves, this new transaction could fetch at least $400M, maybe $500M. The company has about $250M in cash. It has a vast world-class asset in Turkey with cash costs of $300/oz. That makes it incredibly undervalued.
TGR: What's the stock trading for now?
CL: Around $2.41/share, with a market cap of around $750M. If the deal, as I calculated, is closed, then it will be trading around cash.
TGR: I suppose that one is down for the year also.
CL: Oh, yes. The stock is down by more than half in the past year and was $12/share two years ago. It shows how depressed the market is. It looks really good at this level. When it sold the last asset, it paid a nice $0.24/share dividend. I wouldn't be surprised if it pays another dividend after the next sale.
Nobody is looking at the market right now, so for our investors, this kind of opportunity wouldn't exist if gold were hot. But if you look deeply in the market, lots of opportunities are available.
TGR: So what kind of strategy should investors be looking at now when it comes to precious metals investments over the next few months?
CL: I'm cautious on gold and silver mining because the end of June is the end of both the quarter and the half of the year. There could be more fund redemptions in the near term. But I like special situations, like Alacer; if it does the deal as I calculated, it will be trading around cash. So those kinds of special situations exist for those investors who are willing to look into the market. The first thing for investors in this brutal bear market is to stay alive. I believe there will be great opportunities waiting for us.
TGR: Do you think any of these companies are takeover targets at this point or do the potential buyers have too many of their own problems to be worrying about takeovers?
CL: That's a great point. The majors are having problems. They are facing management changes and shareholder revolts. There may be some takeover targets, but I would first want the company to be self-funding and self-growing, and there will be winners coming out of this correction.
TGR: Any other thoughts that you'd like to leave with us on the precious metals?
CL: The gold and silver miners are going through a terrible time. Some of the problems are due to the weak gold and silver price, but a lot are due to mismanagement. The miners could be weakened further as we head into the summer, which is the traditional weak season. This is truly a stock picker's market because people are throwing out the baby with the bath water. Right now, I'm focused on special situations. The one thing I hope comes out of this correction is that miners learn lessons from their past failures and that they can run lean and efficiently. Then if gold and silver take off, we can have some huge rallies in the stocks, just as in 2009.
TGR: Managements tend to get overly optimistic when things are going well, just like real estate investors. Then when things get tough, they learn lessons.
CL: Let's hope they learned the lesson. There has been a lot of incredible mismanagement.
TGR: Thanks for speaking with us today, Chen. We appreciate your updates and hearing about your current expectations.
CL: Thank you.
Read Chen Lin's ideas on energy investing in The Energy Report.
Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors, Inc. While a doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis
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DISCLOSURE:
1) Zig Lambo of The Gold Report conducted this interview and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Orvana Minerals Corp., Petaquilla Minerals Ltd. and Pretium Resources Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Chen Lin: I or my family own shares of the following companies mentioned in this interview: OceanaGold Corp., Orvana Minerals Corp., Petaquilla Minerals Ltd., Pretium Resources Inc. and Alacer Gold Corp. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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