The Gold Report: You recently implied in an article titled "The Cocked Trigger" in Gold Newsletter that the current prevalence of short gold positions is actually a good thing for gold prices, especially if the Federal Reserve raises rates. That goes against everything we've been led to believe. Why do you say that?
Brien Lundin: We have an unusual situation in the gold market right now in that in the Commitments of Traders reports by the U.S. Commodities Futures Trading Commission, for the first time, the managed money sector has a net short position in gold. Typically, speculators have a net long position, and the commercials—jewelers, bullion dealers, etc.—have a net short position because they have to hedge. But the speculators are now net short, and the commercials have their lowest short position ever. It is a set up for a short covering rally at some point.
Add to that the possibility of a Federal Reserve rate hike at some point, and we could see a big, unexpected move upward in gold. I think the timing of a rate hike has been overhanging the gold market for well over a year. Relieving that issue could actually prompt a short covering rally. It would be kind of a sell-the-news event where the shorts figure that the trade is over and this is a good time to begin covering, more and more head for the door, and we have the rally underway.
October 28-31, 2015
TGR: You also said the Chinese currency devaluation could be a spark for increased gold buying. Will that be a similar sell-the-news scenario?
BL: Yes. The initial announcement devalued the yuan by about 2%, which of course increased the price of gold and other commodities by 2% for Chinese consumers. So you would think that would be a negative. However, it wasn't a one-off devaluation. It was a new currency regime in which the yuan would be allowed to float more freely against world currencies and, in fact, would be allowed to drop against world currencies, in particular the U.S. dollar. So Chinese consumers, the investors and savers domestically who have been buying gold hand over fist, now think that the yuan is going to be depreciated over time, so their incentive to buy gold is heightened. I expect that the devaluation will actually increase gold demand in China.
"Balmoral Resources Ltd. has an extraordinary exploration team."
TGR: A recent Barron's article classified commodities as the most out-of-favor industry group in the global stock market and then concluded it's time to buy commodities. Does the fact that a mainstream publication is making this prediction mean we're not yet seeing what Rick Rule calls complete capitulation?
BL: I think we saw something very near to complete capitulation in gold on July 20 when speculators attacked the entire metals market through orchestrated flooding of short sales onto the futures exchange. Due to greater demand from China and now greater safe-haven demand from Western buyers, gold prices should continue to rise.
TGR: As we move into the fall busy gold equity buying season, you seem to be shifting your portfolio to companies with proven resources. Why now?
BL: Because there is no need at today's price levels to accept exploration risk. There are a few special cases in exploration that I like and will still recommend going forward, but I have been shifting our portfolio more toward companies that have proven world-class resources, some of them with economic studies in hand. I think these will be the first movers in a metals price rebound. Companies with large-scale resources offer the same upside potential that an exploration play would have provided a few years ago, and they're selling for about the same price with a lot less risk.
TGR: Give us some examples of companies that are nearing production but are still bargains in this market.
BL: A number of them have kept working even during the market decline and made some really good progress. Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE), Auryn Resources Inc. (AUG:TSX.V), Balmoral Resources Ltd. (BAR:TSX; BAMLF:OTCQX), Columbus Gold Corp. (CGT:TSX.V; CBGDF:OTCQX), Gold Standard Ventures Corp. (GSV:TSX.V; GSV:NYSE), Kaminak Gold Corp. (KAM:TSX.V), Lion One Metals Ltd. (LIO:TSX.V) and Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) fit that description.
TGR: Let's start with Columbus Gold. Were you surprised by the economics outlined in the company's preliminary economic assessment (PEA) for the Montagne d'Or project in French Guiana?
BL: It was along the lines of what I expected, but I think there's still upside remaining because of the geometry of the deposit and the drill program that will be ongoing. The key with Columbus is that it was able to strike a remarkable deal with Nordgold N.V. (NORD:LSE) that will carry the project through to a bankable feasibility study on a 50/50 basis. That's real value for Columbus Gold and is not being adequately recognized by the market. The company also has a suite of highly prospective exploration projects in Nevada, including the Eastside gold project, which offers a good bit of upside potential, the value of which is not reflected in the market cap right now.
TGR: Balmoral is in the midst of a large drill program on the Detour Trend project in Quebec. When do you expect to see results there? What's it going to take to make an impact on the stock price?
BL: Balmoral will be producing news for a long time on both gold and nickel targets, but I don't know that any particular news release is going to have a huge impact on the share price. This is one of those companies that I recommend investors buy and forget it, then check back in a couple of years, because I think Balmoral is simply doing the right thing. It has an extraordinary exploration team that has been very successful with other projects throughout their careers. It has two premier projects that I think are just going to continue to get larger over time.
"Rye Patch Gold Corp. affords exposure to an economically sound project with proven resources."
TGR: Gold Standard Ventures recently announced its drill results on its property in the Carlin Trend in Nevada. Are you expecting more catalysts from the company this year?
BL: Yes. Gold Standard Ventures is a smart money play. The people behind the company have a lot of experience in Nevada and have demonstrated their confidence by buying the stock. The company recently took on the Pinion gold project, and it is moving that toward development, which was a wonderful move. This company is destined to go far in the next metals rebound.
TGR: What is the next catalyst for Rye Patch on its Carlin Trend Patty project?
BL: That is a high-potential exploration project. But more importantly to me, a lot of people are not giving Rye Patch credit for its progress toward production. It also benefits from royalty income from its agreement with Coeur Mining Inc. (CDM:TSX; CDE:NYSE), which essentially means it can keep progressing toward production without any share dilution. Rye Patch is a great company for investors who want to buy and hold. It affords exposure to an economically sound project with proven resources. Investors just have to wait for the market to come back to reward them.
TGR: Kaminak recently reported drill results from the Coffee project in the Yukon. The market didn't really notice. What did you think of the results?
BL: The market might have greeted the results with a yawn, but to be fair a lot of the results were from infill drilling. Plus, there's apathy across the market right now. It really takes some exceptional drill results to get the market's attention these days. Even then, sometimes a company will put out a great result, get large-scale trading volume, and people will just use the opportunity to exit the stock.
Kaminak is another one of those buy-it-and-forget-it companies. I believe it is going to be one of the first companies to be taken out by a major when the metals markets come back. The Coffee project has wonderful economics and a management team that, again, always does the right thing. All the i's are dotted and all the t's are crossed. Senior companies can be very confident that they're not buying a project with any surprises. They'll know what they're getting, and the numbers really look good.
TGR: You recently added Auryn to the portfolio. Was that based on the strength of the resource, the management team or both?
BL: Quite frankly, the management team. I couldn't bring myself to recommend the company when it had no project whatsoever, but I was thinking about it because the management team has a track record that's unblemished by failure of any kind. They were behind the Keegan Resources Inc. (KGN:TSX; KGN:NYSE.A)/Asanko Gold Inc. (AKG:NYSE.MKT; AKG:TSX) company and its Esaase project with its discovery of over 5 million ounces of gold. In the middle of a down market, they were able to have a success and have their next venture, Cayden Resources Inc. (CYD:TSX.V; CDKNF:NASDAQ), which sold off last year to Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) at a nice profit for all the shareholders. Auryn is their next company and, I believe, their next big success. The Committee Bay gold project is interesting. Auryn's management was so excited after doing initial due diligence that it wasted no time in consolidating their ownership over the project. I have great confidence in the management team. If they like the project, I like it. I think they're going to make a big success out of it as they have in every previous company.
TGR: One more in that same advanced boat is Lion One, which released its PEA on the Tuvatu project in Fiji last month. What did you think of the report?
BL: It exceeded my expectations. It came in with great economics and exceedingly low capital costs to get into production. Not only is the project outstanding, so is the management team. Wally Berukoff runs a very tight ship, and he has put together a team that I have complete faith will be able to bring this project into production. So when the next big turn in the markets comes, Lion One will either be in production or on the verge of production, and would seem to be a prime takeover target for the majors. I know that Wally Berukoff will get full value for it.
TGR: Let's talk about some currently producing companies in the portfolio that you think still have upside.
BL: Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT), GoGold Resources Inc. (GGD:TSX), Excellon Resources Inc. (EXN:TSX; EXLLF:OTCPK) and a new play, Newmarket Gold Inc. (NGN:TSX.V), fit that description.
TGR: Let's start with Great Panther. When will the exploration pipeline at its two operating mines and progress at the Guadalupe de los Reyes project in Mexico begin to impact the stock price?
BL: Normally, production growth or exploration success would be a catalyst, but in this market where silver prices have been trending lower, many silver companies are in a difficult situation. Investors have to closely watch the internal production metrics. Is the company making money at current prices? Will it make money if silver takes another dive downward?
"Wellgreen Platinum Ltd. has a polymetallic project in the Yukon so large that it is a strategic resource for some big player down the line."
That used to be Great Panther's weak point, but its latest quarterly results are amazing. The company generated higher production levels and lower cash costs despite a stronger U.S. dollar. Production was up over 50%. All-in sustaining costs dropped about 50%. I was very pleased with the numbers that Great Panther was able to deliver. It is making money on every ounce of silver it produces, although it did report a net loss due to currency exchange issues. So I'm positive going forward.
TGR: Excellon is a recent addition to your portfolio. What makes you think this company can overcome operational challenges and be profitable?
BL: Excellon has been the highest-grade silver producer in Mexico for over a decade, and the company did encounter some operational challenges as the mine got to a depth below the water table. Its grouting program didn't work very well and production rates fell. Management brought in new expertise and allocated the capital investment necessary to alleviate the problem. A new economic study showed that with the improvements, the company could lower costs substantially and increase production. It has just begun to implement that program, and it looks as if it's getting the expected results. The company should be rerated once it can prove it can lower the production cost-per-ounce to levels that would allow it to make money in virtually any silver price scenario.
TGR: GoGold was one of the few companies that actually impacted its stock price when it announced Q2/15 production numbers for the Parral tailings project in Mexico. Are you optimistic about management's ability to manage debt and put the Santa Gertrudis mine into operation?
BL: Yes, I am. You can never go wrong betting on Fred George of GoGold. He's a relentless entrepreneur who has enjoyed a series of big-time successes. I'm very confident that he'll do the same with GoGold. The Parral project was a very smart acquisition. It's being proven now with revenue coming in higher than expected. This will allow the company to address development of Santa Gertrudis, where it was able to prove up resources that the previous owners were not able to delineate. The company completed a major credit facility raise recently that will allow it to go into production. Not only does it have proven resources, but it also has a production profile that's rapidly rising. Almost irrespective of what the overall market does, I think the shareholder value will increase with GoGold. It's a great investment opportunity.
TGR: Is Newmarket an Australian turnaround story? Are you expecting more acquisitions there?
BL: It's partially a turnaround story. It acquired Crocodile Gold Corp. (CRK:TSX; CROCF:OTCQX), which was a somewhat troubled, midlevel mine in Australia, but in truth, that production turnaround at the mine was already in place as Newmarket was acquiring the company. So Newmarket was very fortunate in its timing. But Newmarket is also more of a thematic play where it is going to be aggressively acquiring producers in this depressed market at very low prices and then riding a rebound in the metals that seems inevitable. If anything, this company would like to have the turnaround in gold and silver wait until it's able to make more acquisitions. Regardless, I think that Newmarket is an up-and-coming company that is going to really surprise the market.
TGR: You also have a platinum group metals (PGM) project in the portfolio. Are you bullish on the supply and demand fundamentals for platinum or is this a management story?
BL: It's a bit of both. You can never divorce management from the equation. It is typically the most important component in analyzing a company. But Wellgreen Platinum Ltd. (WG:TSX; WGPLF:OTCPK) has a polymetallic project in the Yukon so large that it is a strategic resource for some big player down the line. I look at Wellgreen as not so much a play on any specific situation in platinum, palladium or nickel, but as a well-run company with a resource that is absolutely world class. It represents one of the few primary PGM projects that is not in a high-risk political regime. At some point, the Wellgreen project will represent a safe, secure, large-scale source of PGMs, and that will have value much greater than what the market is currently assigning to the company.
TGR: Are there any other companies that you wanted to mention?
BL: There is one company I'm involved in that I haven't been able to recommend to my readers because I am the chairman and largest single investor, and that's Natcore Technology Inc. (NXT:TSX.V). It recently made news that it has developed a solar cell that completely eliminates silver in the production process, an advance that will dramatically lower costs. The cell structure is also amenable to ultrahigh efficiencies. This could really take the market by storm.
TGR: Your annual New Orleans Investment Conference is coming up in October. What will attendees take away from this year's event that will help them position themselves for the next upcycle?
BL: I think the next upcycle in metals is imminent. Because of that, the focus this year is on top-notch investment advice by some of the world's best experts, including Wall Street's leading contrarian Doug Kass, Dr. "Doom" Marc Faber, Euro-Pacific Capital's Peter Schiff and Sprott US Holdings CEO Rick Rule. Plus major newsletter writers like Dennis Gartman, Doug Casey and James Rickards will share their insights on the direction of the markets. We will also explore the geopolitical landscape with Dr. Charles Krauthammer and Canada's famed commentator Mark Steyn. The conference comes at the end of October and ends on Halloween Day, which fulfills a bucket list event for many who have longed to spend this time in New Orleans' French Quarter.
This year will focus more on precious metals and mining stocks than ever before. Typically, the biggest gains have been made at the bottoms of the markets. Some companies in attendance in 1993–1994 and 2000–2001, cyclical market bottoms, subsequently multiplied 10, 20 or even more times when the market turned. I think we're primed to do that again.
The conference is also an opportunity to quiz management about their experience and how much of the stock they own. In this environment, the most important question is the financial resources a company has in the bank. Many companies forced to raise money today have to do it at a nickel or less; that's exceedingly dilutive to a company's share structure. By participating in a nickel private placement, quite often, you're not doing yourself or the company any favors, because at some point that company will have to roll back its shares. You don't want to invest in a zombie company that's just sitting on its hands and not doing anything and trying to wait out the markets. Time is money. You need a company that is going to keep moving forward. When you attend an event like the New Orleans Investment Conference, the companies in the exhibit hall have made a significant commitment, so you know that they are determined to keep working. It's typically a smart management group that's continuing to build shareholder value even at the bottom of the market.
Over and above the speakers and the companies, attendees have the advantage of rubbing elbows with some of the top investors in the world, their fellow attendees. Just by deciding to go to the New Orleans Investment Conference, they're self-identifying as smart, savvy investors who make their own decisions and are information hungry. Our attendees tell us this all the time—that they get some of their best ideas by talking to others in the audience. In fact, even our expert presenters like to mingle with the attendees for that very reason. It really is a gathering of very smart, very experienced investors where ideas for making money are all around you.
TGR: Thank you for the time, Brien.
With a career spanning four decades in the investment markets, Brien Lundin serves as president and CEO of Jefferson Financial, a publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Lundin publishes and edits Gold Newsletter. He also hosts the New Orleans Investment Conference.
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DISCLOSURE:
1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. She owns, or her 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: Great Panther Silver Ltd., Asanko Gold Inc., Rye Patch Gold Corp., Balmoral Resources Ltd., Columbus Gold Corp., Gold Standard Ventures Corp. and Wellgreen Platinum Ltd. 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) Brien Lundin: I own, or my family owns, shares of the following companies mentioned in this interview: Asanko Gold Inc., Wellgreen Platinum Ltd., Kaminak Gold Corp., Lion One Metals Ltd., Rye Patch Gold Corp., GoGold Resources Inc. and Natcore Technology Inc. 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. Natcore Technology Inc., Auryn Resources Inc. and Great Panther Silver Ltd. are exhibiting companies at the New Orleans Investment Conference. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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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