The Gold Report: Sean, over the next two months, you'll be launching two different newsletters. The first one will be called Gold and Resource Trader. Why is now the right time to debut?
Sean Brodrick: It is a good idea because gold is generally hated right now. I like to look smart. One way to look smart is to buy things near a bottom and then hold onto them as they increase in value.
There is real value in the gold mining area. I ran a screen recently showing 25 miners trading on U.S. exchanges below book value. Some of them I wouldn't buy, but some I would. This shows that real value is there. We are closer to the bottom than we were to the top, so now is a good time to get in.
TGR: Tell us about the second newsletter you're going to launch in January?
SB: Oxford Resource Explorer is about energy, metals and other resources. It's more energy focused because there are tremendous opportunities right now. If you told people 10 years ago that the U.S. would be producing at this level, you would have gotten some head shaking. They just wouldn't have believed that.
"In gold mininig, we are closer to the bottom than we were to the top, so now is a good time to get in."
The amazing stuff is what's coming down the pike. The Gulf of Mexico is just kicking into high gear again. This shows how the natural resource market can turn on its head. People think they have the story figured out, and something comes along and changes the whole thing around. That's why people are so bearish on gold. They think, well, that's it, gold's done; gold has had its day in the sun. No, it hasn't. There are many good fundamental reasons for gold to go higher.
TGR: In some recent posts on your blog, King One Eye, you note that China is the driving force behind physical demand for gold, yet the central banks are on pace to buy almost half the gold they did in 2012. Does that trend concern you?
SB: Sure, it concerns me and it bears watching. But what the world's central banks will buy is a guess. The proof is that Chinese demand for gold just keeps rising year over year. There's extraordinary growth in China as millions join the middle class. And it's not just China. There is lot of uplift in the whole economic atmosphere across Asia.
"Chinese demand for gold just keeps rising year over year."
The central banks are important and I am absolutely keeping an eye on what they're doing. But you have to understand why the central banks buy gold. They buy gold because they want to have something real and tangible, in case there's ever a run on their currency or some other kind of financial crisis, to keep people from freaking out.
But there are some good reasons to freak out. We have quantitative easing, not just in the U.S. where it's $85 billion/month, but around the world. The balance sheet of the whole of central banks system is now estimated to be more than $20 trillion by Bloomberg. Central banks keep buying gold because they are worried that some of those pigeons will come home to roost eventually.
TGR: Are higher gold prices necessary to make money in mining equities?
SB: Many companies do need the price of gold to go higher. Mining costs have been going up. Some companies that could make it on $400–500/ounce ($400–500/oz) during the last decade can't anymore. There are low-cost miners out there. In fact, I love finding low-cost miners. Those are the companies I'll be recommending to my subscribers in my new publication. But unless we see the price of gold go higher, we're probably going to see even more large projects shut down.
Also, declining ore grades are putting pressure on companies. There used to be nice, rich gold ore that could be dug up cheaply. Now, companies are mining the gold ore that they used to drive over to get to the easy gold ore that they mined up. That's the problem with gold. It's a non-renewable resource. Ore grades are declining and costs are going up. That's a one-two punch that means the price of gold needs to trend higher for companies to make money.
TGR: You recently told MarketWatch that you examine earnings to see if they're telling you the story on the individual company or if they're indicative of a larger trend. Please explain that idea.
SB: Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) recently came out with pleasantly surprising earnings. For one thing, it is using an expected price of around $950/oz to build its models. That shows a company that is thinking in realistic terms. If there is a pullback in gold price, Yamana will be prepared and actually survive.
"The miners you want to buy are the ones that are smart enough to buy something now, when things are so darn cheap and there are projects that are going for a song."
The earnings of other companies have really taken a slide year over year as the price of gold has gone down. However, there are companies that can make it at the current price. Primero Mining Corp. (PPP:NYSE; P:TSX) has a great low-cost gold structure. It also continues to do exploration, when some companies have pulled back because they don't have the money for it.
That's what I look for in an earnings report. If a company can't make it at $1,400/oz gold, it definitely won't make it at $1,100/oz gold.
TGR: You've noted in your blog that you're buying on the dips and pullbacks. What are you buying?
SB: What I'm seeking isn't right for everyone. It depends on individual appetite for risk. Investors need to know their appetite for pain in an unforgiving market like this. If you don't have an appetite for that, then you might just want to stick to exchange-traded funds (ETFs), like the Market Vectors Gold Miners ETF (GDX:NYSE.ARCA), which is the large gold miners, and the Market Vectors Juniors Gold Miners ETF (GDXJ:NYSE.ARCA), which is the juniors. In fact, I bought both of those, not because I don't have an appetite for risk but because I need something to benchmark my holdings against.
That said, I also like to buy individual companies because that's where you're really going to see the outperformance.
Primero is a great gold miner. Management knows what it is doing. The company has a really bright future. It also produces silver, though it sells most of that to Silver Wheaton Corp. (SLW:TSX; SLW:NYSE).
I also like SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT). It is raising production and seems to be doing all the right things. It only has one big project, but it is working on more. That's a company that should have a great future. It has a low cost of mining.
I also like some large-cap names, such as Yamana. Larger cap works for some people. Some people should not be playing in the juniors anyway.
TGR: To that end then, Sean, you're going to build a portfolio in Gold and Resource Trader. How are you going to structure it?
SB: I actually plan to include some of the larger caps. There are not that many large caps anymore. There are only about four mining companies that are still valued at more than $10B. I'll also include the mid-cap range. But small caps are where I think the real value is.
Take Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB), which is an excellent project. I visited its Fire Creek mine; the company is doing all the right things there. Klondex had a rough patch when I was worried about its funding, but it knew what it was doing and was able to bridge the gap. Things seem to be working out quite well.
I also recently visited Comstock Mining Inc. (LODE:NYSE.MKT), which is trading near the low end of its range. However, it is ramping up its production and will be able to do incredibly well.
I also like B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX). The company is doing great stuff in Nicaragua, where it has multiple mines. It spends its money wisely and is in the process of making another purchase. B2Gold has a great team.
I'm always looking for companies that have smart management so they can make it through hard times and reposition themselves for the next upswing.
TGR: Comstock's project in Nevada is in an area that was mined before, but a lot of mineralized ore was left behind. You visited the project. Does that premise stand up?
SB: Yes. There are some smart geologists on Comstock's team who have been doing excellent modeling. The drill results seem to be bearing this out. The company is going to be finding a lot more ore. It is already getting nice results—every time it drills, it comes up with something good. I expect we'll see more and better news. Comstock has the right geologists, knows that it's in the right place, has a plan for how it should unfold and is following that plan. It should work out great.
TGR: B2Gold issued guidance of 360,000–380,000 oz (360–380 Koz) this year. It plans to produce about 400 Koz in 2014. Why isn't that share price performing better?
SB: Optimism has been beaten out of the market. Investors don't believe good news at this point. Natural resource investors are like Boston Red Sox fans. They have been getting bad news for so long, they have a hard time believing that something good has happened.
TGR: What were some other stories in that part of the world that caught your interest?
SB: I went to see Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.MKT), which was interesting. I think it is being too optimistic about what it can accomplish in a short amount of time because it wanted to be in production so quickly. There aren't always delays on mining projects, but there often are. Midway is not planning for anything bad to happen. If something bad does happen, then that stock will get hammered.
I also went to visit Corvus Gold Inc. (KOR:TSX), which I've been to a few times. It is early stage, but it has a handle on a high-grade zone. Things seem to be working out the way it wants them to. It is moving ahead with the development of the project and recently came out with a new resource estimate. Corvus had to readjust some things because its plan had shifted.
There are such incredible values in producing miners that have exploration upside and will be likely adding to their resources and their production that I'm not picking up the developers at this point. I know some people are saying, "You should see how cheap the explorers are right now!" Yes, I know that. The explorers are super, super cheap. There are probably some that will do extraordinarily well, but I don't need to raise my level of risk at this point. The producers are also so darn cheap, so why not just buy them?
TGR: But what about their all-in production costs?
SB: That's a great point to bring up. I still see miners using cash costs of production. It makes me roll my eyes. I then have to go in and see what their all-in costs are. Investors know enough not to just go with the cash costs of production. They have to figure out what it is actually costing the miners by crunching the numbers.
Moreover, costs can fluctuate. For example, Mexico is going to move ahead with a 7.5% tax on miners. Now those companies will have to adjust their cost basis higher.
In this environment, some larger miners that had been planning on putting new projects into production when they thought the cost of gold was going to get to $2,000/oz very quickly are going to have to reassess. Many of them are also sitting on big, ol' fat cash piles. They are going to buy these smaller producing miners that have resource upside and just move them right into their production pipelines. That's one of the trends I hope to be playing because we will see some great mergers and acquisitions in that area.
TGR: That's noteworthy because we certainly haven't seen much of that to date.
SB: No, we haven't. You can look at it two ways. No one is going to start doing mergers until the price goes higher. But the companies that wait that long aren't really the ones you want to own. The miners you want to buy are the ones that are smart enough to buy something now, when things are so darn cheap and there are projects that are going for a song. They could be really mercenary and wait for another company to go out of business and then try to buy the project at a super-discount. But there's no guarantee that they'll actually get control of it because everybody is trying to do the same thing.
TGR: You'll have more bidders.
SB: We'll see some smart deals made at these prices because people will have their eye on the longer term. Smarter miners think about the longer term.
TGR: Are you still enthusiastic about Mexico as a jurisdiction given the impending tax situation?
SB: I was really keen on Mexico. We'll have to see how that shakes out, though I think the bad news is priced in already.
Nicaragua is great. Parts of Canada are wonderful. You can get some real benefits for working in a place like Quebec that you can't get somewhere else. I like parts of Africa as well. There are some opportunities in Turkey, Greece and Spain. They had historical mining and now they're starting to examine those projects again.
Some places are heating up and you don't want to go there—at least not at the present time. Nobody wanted to go to Peru when it had a really nasty political situation. Now it is becoming much more amenable to foreign investment. It's actually looking like a good place to put money to work. On the other hand, Ecuador was pushed as the next place to be for a while. Now its government is getting kind of grabby. I wouldn't want to be working in Ecuador right now.
The more politically upset the world gets and the more frothy with all this violence, new taxes, etc., the better North America looks. I think we have some great opportunities right around here.
TGR: What's one helpful thought you can leave with our readers, Sean?
SB: The overall pessimism is overwhelming. I was speaking to a mining analyst recently—a sharp guy who has been at this for years. He was so pessimistic. He was talking about going off and doing something else because he just can't take it anymore. When we see that kind of pessimism in anything, that's a real contrary indicator that things might be about to move the other way.
There are three bullish forces for gold. First is global stimulus. We're seeing the world's central banks start to increase stimulus because they're worried about economic growth as estimates have slowly lowered. Now, the banks are starting to pile in more stimulus. That generally tends to pump up the price of gold.
Second is selling by gold ETFs, which is starting to taper off. If that does taper off and end, then a major bearish force in the market will be lifted. That could really lift a weight off the price of gold rather quickly.
Third is the emerging middle class in Asia. It's enormous. They want all the things we have, all the cars, the air conditioners, you name it, but they have a cultural affinity for gold. They don't trust banks. That's one thing they are going to buy.
You put those three things together and we could have a good year for gold in 2014.
TGR: Thanks for your time.
Sean Brodrick, a natural resources strategist for the Baltimore-based Oxford Club, travels far and wide seeking out investment values in the sector. A graduate of the University of Maine, Brodrick has more than 25 years of experience as a professional journalist and financial analyst. He is a regular contributor to InvestmentU.com and occasionally contributes to Dow Jones' MarketWatch. Brodrick's expertise has led to many financial talk show appearances. His book, "The Ultimate Suburban Survivalist Guide," was published in 2010.
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DISCLOSURE:
1) Brian Sylvester conducted this interview for The Gold Report 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: Primero Mining Corp., SilverCrest Mines Inc., Klondex Mines Ltd. and Comstock Mining Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Sean Brodrick: I or my family own shares of the following companies mentioned in this interview: Primero Mining 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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