The Gold Report: Victor, one of the big headlines since we last spoke is Europe's loan to Greece. Some are calling it an E.U. bailout. As an economist, what's your perspective?
Victor Goncalves: I think it's a positive thing actually, given the parameters. A lot of your Austrian guys would say this is the devil's work and you should let markets run free. Given the economic policies of the European Union, which is not a free market, that's probably one of the only options it has.
TGR: What impact is this going to have on the markets?
VG: It'll have a positive impact because what it basically says is we're not having a country go into default. That's the short-term impact. The longer-term impact isn't just Greece, it´s the bigger picture in relation to the EU. Will more countries come out of the closet with bad debt? I don't know if that's the case, but I'm suspecting that might happen.
TGR: When we last spoke in January, you said that the economic fundamentals weren't stellar and you were expecting a correction within the markets. The TSX is still trading around 12,000, while the Dow remains around 11,000. Do you still see a correction coming and if so, when can we expect it?
VG: We actually did get a correction, albeit a small one. We did have about a 10%, 11% drop in the market. It wasn't as much as I would've liked to have seen, but it still happened, nonetheless. The fundamentals of the market really act in weird ways, so I'm not sure we're going to see the correction we should see in the short term. Technically, we should be seeing one quite soon. We should've seen one already.
If you look at the TSX Venture, which is a better barometer because it shows a better picture of who is putting money in venture capital, it's moved up parabolically recently. So that has to cool off a bit. Whether it will do it now or in a couple of months, that's a lot harder to tell. It's a situation where investors really need to watch the market a lot closer for the volatility. Investors need to watch for the change in sentiment. It's a little harder to figure out now, compared to what it was even a couple of years ago when you could better predict when these things would happen.
TGR: We're currently in a decent earnings season. Historically, after a good earnings season we've seen corrections. Some are saying that because the mood is positive we won't see a selloff this time. What's your opinion?
VG: There's two ways to look at this. Earnings can look good, but what kind of expectations are we giving ourselves? That's really what it comes down to. If we reduce our expectations a lot and then all of a sudden we meet those expectations, we end up fulfilling our own prophecy. So I think short term, the market will probably do well if earnings levels are met, given the current sentiment of the market. That's because we've lowered the bar. Longer term is the issue. In the long term if nothing has changed, or if a little has changed, the problems are still there.
Realistically we'll probably see a rally in the Dow. Even the TSX should probably jump, but I don't think a ton. We are also coming into seasonal weakness in the summer. Adding all those things up means that we're probably going to see some strength near term going into the summer, and then a selloff going into the summer.
TGR: If there's a summer selloff, how would you advise investors to play that correction?
VG: There's multiple ways of doing it. The easiest way to do it is to look back in history and see where the corrections have happened. Typically, you're looking at the middle of May. Just sell the stocks that you've made money on.
Now if they're really good stories, stories that you should be involved in long term, then have a trading position and a core position. That core position is something you want to build; it's one that you only want to sell once you hit your target, which should be either full valuation of the company or a level where you feel comfortable selling. The trading position is something that you keep building and peeling away as the market dictates.
TGR: Do you have any companies in mind that you see presenting these kinds of opportunities?
VG: Oh, absolutely. The first one is a no-brainer and I love no-brainer stories. No-brainer stories are great because you don't have to worry about them. Century Mining Corp. (TSX.V:CMM) is one of those no-brainer stories. Century Mining got really beat up for quite a while. Then it turned around quite nicely for multiple reasons. One reason is a Russian group bought 45% of the company to get the company into production. They got the money they needed to put their Lamaque Mine into production. It's not in production yet, but they're working on that right now. What's interesting is the numbers. Between their Peruvian operation and their Quebec operation, which is the Lamaque Mine, the company should be producing between 140,000 and 150,000 ounces of gold a year. All-in costs should be around $460 an ounce. So you're looking at a company that could be making in the order of $70 million or $80 million a year before taxes. You factor a 10 or 12 multiple into that, which is quite low, and you could be looking at a stock price that is $2, $2.50 just for fair valuation. The share price is currently at $.60. It's moved up a little bit in the past couple of weeks-month, but it's still very cheap. That's a no-brainer.
TGR: Is Century Mining something you would hold on a long-term basis?
VG: I would and do have a core position on Century Mining. The company has 6 million ounces of gold in all categories as it is now. To date it's produced 9 million. I think the blue-sky potential is multiple millions more. That's certainly a company that can expand production. It can potentially even start consolidating the Val D'or area just by default of having a stronger stock price and a lot of money in the bank. Whether it is Century or some else like Agnico-Eagle Mines (TSX:AEM), I think that it is a likely scenario.
TGR: Any other no-brainers out there?
VG: There are companies that aren't necessarily absolute no-brainers that are still significantly interesting. Kent Exploration Inc. (TSX.V:KEX; PK SHEETS:KXPLF) is one that is doing very good work and building shareholder value. They're trading around the $.20 range. We've talked about them in the past. They're separating their assets into two different companies to give Kent, and ultimately the new company, Archean Star, shareholders more value.
A lot of times you'll see companies have 10 properties in their portfolio and really one of them is getting value, maybe two. There are eight or nine others in the portfolio, so the way to unlock that value is to put them in a vehicle where they can get all the attention that's needed to build those new projects. Graeme O'Neill, the president of the company, saw that. Very quickly he decided that a spinning off of the Australian assets and the New Zealand assets into a new company was the best way to unlock value for the shareholders while maintaining the other properties in a vehicle that could be worked on. So Kent right now is at $.20. What they're doing with their spinoff is with every four shares you own of Kent you'll get one of Archean Star. You'll be able to participate in both stories just by owning one.
TGR: Victor, share price is typically calculated by ounces in the ground and progress toward production. Why does splitting it into two companies provide more value to the shareholder?
VG: Let's say you have a company and it's got four projects. Say the company has got 50 million shares that are trading at $.20. That gives you a $10 million market cap. Now let's say one project has 600,000 ounces. That project should be worth say, $8 or $9 million. Then you've got a bunch of other projects that are effectively worth $1 million. The market tends to value what you're working on now. The market doesn't look at the fact that you've got three other projects. They're looking at what can become tangible soon or reasonably soon. The only thing that's going to become tangible soon is what you're working on now. So what ends up happening is the stuff that's on the sidelines or in your portfolio ends up getting zero value. If you look at 50 companies in that situation, you'll find that probably 50 of them have the same problem.
The other reason is because, quite frankly, you're going to dilute your company to raise the money you need to work on all the projects. For example, to work on one project you need $3 million. If you want to work on say two projects you need $8 million. You've got to raise a lot more money so your share structure gets shot. The problem is all that work will not get reflected in the stock price. So the best way to do it is to get a new vehicle that can raise money for one particular project or a set of projects that can be the focus.
So what happens is you get Project X with a valuation on it and then you've got a small number shares with a higher nominal price. You can raise more money with a higher stock price, consequently issuing less paper. How you unlock shareholder value is the price of the shares has to be high to make it worth anything. The market capitalization can move higher and higher and higher, but if you're issuing shares at an even faster pace, dollars per share, or cents per share will go down long term. Even though the company's gotten more value, what you paid for your shares ends up going down. Spinning off the asset makes a lot more sense.
TGR: In January, gold was still around $1,000. We've gone up to $1,150. Where do you think gold is going as we head into the summer and through the rest of 2010?
VG: You're going to see technical moves one way or the other. You may see a drop to $1,000 and I wouldn't panic if that happens. You may see it run to $1,250, $1,300. I certainly wouldn't get overly excited if that happens, unless it holds there for a little while so it creates a new base. We're probably not going to see a strong gold market in the summer. That doesn't normally happen. So really we'll probably see more weakness going forward than strength.
That being said, the price of gold-based equities still has to catch up to $1,000 valuation of gold, let alone where we are now. So even if gold were to come off a little bit during the summer, gold equities still have to catch up to that valuation point before they can keep moving up. I think we're really going to see a move in gold when we saw it last year, around September. We might see a little strength here for the next month or so. We may hit $1,200. We may test $1,240 but it should come off after that during the summer. For really June, July and August it should see some weakness and that's normal. So I wouldn't be concerned.
Long term, at the end of 2011, $1,500 I think is fair. Now if we see a huge debacle in Europe, and let's say three or four countries start singing the same tune as Greece, then I'm suspecting we'll see the $1,500 level come a lot quicker.
TGR: What other junior mining companies do you see as a good value?
VG: Paramount Gold and Silver Corp. (NYSE:PZG;TSX:PZG) looks good. They're developing quite a strong asset, 2.6 million ounces of gold equivalent. That being said, I think that company will take a little longer to go anywhere. It's going to keep adding ounces. That's what that story is about; it's just an adding-ounce story. It gives the company an intrinsic value. As it develops more ounces, it will give the stock a higher and higher price or a better value for it. So I think a company like this, at the current level of $1.40, $1.50, should continue to do well. It's not going to start screaming up in price, but it's going to have a steady increase going forward. It's also going to get insulated against market activity a lot more because it has that intrinsic value. You can say these shares should be worth X because there's X amount of ounces of gold associated with it. So a company like that is going to fair quite a bit better against a company that still has to find their first or second ounce.
TGR: Anybody else in this category?
VG: Yes, we have Otis Gold Corp. (TSX:OOO) in that category as well. They've got ounces, and they've already shown about 700,000. They also have exploration that they're doing. So they have this intrinsic value from the current ounces they have. Plus they have the upside potential that you get when you're trying to prove up more ounces and that's what they're doing. Otis Gold, in the $.50 range, is actually quite inexpensive given the number of ounces they have, plus their exploration upside potential.
Let me talk about one more company in all of this. This one kind of goes against everything I just finished saying. We're talking about all these companies with ounces that are defined, companies that have an intrinsic value. Richfield Ventures Corp. (TSX.V:RVC) is entirely different in that regard. They don't have a resource defined yet. This is a discovery story. Richfield is in the process of finding and proving to us a new gold camp in British Columbia. There could be a lot of activity with that company this summer. They're going to be doing a 25,000-meter drill program to define what some people are calling 4 to 7 million ounces of gold, which is very significant. They're able to do this rather inexpensively, and they also have a lot of money in the bank to do it with. They'll be sitting on somewhere in the range of $15 to $16 million in cash right now if you consider all the warrants that are well in the money. This is a very interesting situation because they're in the process of proving now what I think will be a new gold camp. They entered the last hole they drilled last year that gave 1.25 g/t over 329 meters ending in 5 g/t over the last 9 meters. They recently announced that they have re-entered that hole and are planning to take that hole to over 700 meters. In that announcement they said that they were past the 500-meter mark and are still in the same rocks that they got in the first 329 meters. This will be a very exciting story, especially if they come up with the same spectacular results that they have been getting so far.
TGR: Very interesting, Victor. Thanks for spending time with us today.
A proud and avowed Keynesian, Victor Gonçalves developed a strong background in economics at the University of Winnipeg, where he served as a Professor's Assistant as well as earning his degree. His Equities and Economics Report has been accurately picking winners and calling market direction. In 2007, for instance, he correctly predicted the Dow Jones topping 14,000 points and pegged uranium reaching $136 per pound and many more. In addition to EER, Victor also produces the Green Dollar Report as well as writes for a number of print and electronic publications including CIM Magazine (Canadian Institute of Mining), Western Standard, Barron's and Kitco. He also has been featured on BNN, Mining Industry TV and at numerous industry events and conferences.
Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.
DISCLOSURE:
1) Tim McLaughlin of The Gold Report conducted this interview. He personally and/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 Energy Report or The Gold Report: Richfield Ventures, Paramount Gold and Silver, Kent Exploration and Otis Gold Corp.
3) Victor Goncalves: I personally and/or my family own shares of the following companies mentioned in this interview: Century Mining, Richfield Ventures, Paramount Gold and Silver and Kent Exploration. My family is paid by the following companies: Kent Exploration.
Victor Goncalves: I think it's a positive thing actually, given the parameters. A lot of your Austrian guys would say this is the devil's work and you should let markets run free. Given the economic policies of the European Union, which is not a free market, that's probably one of the only options it has.
TGR: What impact is this going to have on the markets?
VG: It'll have a positive impact because what it basically says is we're not having a country go into default. That's the short-term impact. The longer-term impact isn't just Greece, it´s the bigger picture in relation to the EU. Will more countries come out of the closet with bad debt? I don't know if that's the case, but I'm suspecting that might happen.
TGR: When we last spoke in January, you said that the economic fundamentals weren't stellar and you were expecting a correction within the markets. The TSX is still trading around 12,000, while the Dow remains around 11,000. Do you still see a correction coming and if so, when can we expect it?
VG: We actually did get a correction, albeit a small one. We did have about a 10%, 11% drop in the market. It wasn't as much as I would've liked to have seen, but it still happened, nonetheless. The fundamentals of the market really act in weird ways, so I'm not sure we're going to see the correction we should see in the short term. Technically, we should be seeing one quite soon. We should've seen one already.
If you look at the TSX Venture, which is a better barometer because it shows a better picture of who is putting money in venture capital, it's moved up parabolically recently. So that has to cool off a bit. Whether it will do it now or in a couple of months, that's a lot harder to tell. It's a situation where investors really need to watch the market a lot closer for the volatility. Investors need to watch for the change in sentiment. It's a little harder to figure out now, compared to what it was even a couple of years ago when you could better predict when these things would happen.
TGR: We're currently in a decent earnings season. Historically, after a good earnings season we've seen corrections. Some are saying that because the mood is positive we won't see a selloff this time. What's your opinion?
VG: There's two ways to look at this. Earnings can look good, but what kind of expectations are we giving ourselves? That's really what it comes down to. If we reduce our expectations a lot and then all of a sudden we meet those expectations, we end up fulfilling our own prophecy. So I think short term, the market will probably do well if earnings levels are met, given the current sentiment of the market. That's because we've lowered the bar. Longer term is the issue. In the long term if nothing has changed, or if a little has changed, the problems are still there.
Realistically we'll probably see a rally in the Dow. Even the TSX should probably jump, but I don't think a ton. We are also coming into seasonal weakness in the summer. Adding all those things up means that we're probably going to see some strength near term going into the summer, and then a selloff going into the summer.
TGR: If there's a summer selloff, how would you advise investors to play that correction?
VG: There's multiple ways of doing it. The easiest way to do it is to look back in history and see where the corrections have happened. Typically, you're looking at the middle of May. Just sell the stocks that you've made money on.
Now if they're really good stories, stories that you should be involved in long term, then have a trading position and a core position. That core position is something you want to build; it's one that you only want to sell once you hit your target, which should be either full valuation of the company or a level where you feel comfortable selling. The trading position is something that you keep building and peeling away as the market dictates.
TGR: Do you have any companies in mind that you see presenting these kinds of opportunities?
VG: Oh, absolutely. The first one is a no-brainer and I love no-brainer stories. No-brainer stories are great because you don't have to worry about them. Century Mining Corp. (TSX.V:CMM) is one of those no-brainer stories. Century Mining got really beat up for quite a while. Then it turned around quite nicely for multiple reasons. One reason is a Russian group bought 45% of the company to get the company into production. They got the money they needed to put their Lamaque Mine into production. It's not in production yet, but they're working on that right now. What's interesting is the numbers. Between their Peruvian operation and their Quebec operation, which is the Lamaque Mine, the company should be producing between 140,000 and 150,000 ounces of gold a year. All-in costs should be around $460 an ounce. So you're looking at a company that could be making in the order of $70 million or $80 million a year before taxes. You factor a 10 or 12 multiple into that, which is quite low, and you could be looking at a stock price that is $2, $2.50 just for fair valuation. The share price is currently at $.60. It's moved up a little bit in the past couple of weeks-month, but it's still very cheap. That's a no-brainer.
TGR: Is Century Mining something you would hold on a long-term basis?
VG: I would and do have a core position on Century Mining. The company has 6 million ounces of gold in all categories as it is now. To date it's produced 9 million. I think the blue-sky potential is multiple millions more. That's certainly a company that can expand production. It can potentially even start consolidating the Val D'or area just by default of having a stronger stock price and a lot of money in the bank. Whether it is Century or some else like Agnico-Eagle Mines (TSX:AEM), I think that it is a likely scenario.
TGR: Any other no-brainers out there?
VG: There are companies that aren't necessarily absolute no-brainers that are still significantly interesting. Kent Exploration Inc. (TSX.V:KEX; PK SHEETS:KXPLF) is one that is doing very good work and building shareholder value. They're trading around the $.20 range. We've talked about them in the past. They're separating their assets into two different companies to give Kent, and ultimately the new company, Archean Star, shareholders more value.
A lot of times you'll see companies have 10 properties in their portfolio and really one of them is getting value, maybe two. There are eight or nine others in the portfolio, so the way to unlock that value is to put them in a vehicle where they can get all the attention that's needed to build those new projects. Graeme O'Neill, the president of the company, saw that. Very quickly he decided that a spinning off of the Australian assets and the New Zealand assets into a new company was the best way to unlock value for the shareholders while maintaining the other properties in a vehicle that could be worked on. So Kent right now is at $.20. What they're doing with their spinoff is with every four shares you own of Kent you'll get one of Archean Star. You'll be able to participate in both stories just by owning one.
TGR: Victor, share price is typically calculated by ounces in the ground and progress toward production. Why does splitting it into two companies provide more value to the shareholder?
VG: Let's say you have a company and it's got four projects. Say the company has got 50 million shares that are trading at $.20. That gives you a $10 million market cap. Now let's say one project has 600,000 ounces. That project should be worth say, $8 or $9 million. Then you've got a bunch of other projects that are effectively worth $1 million. The market tends to value what you're working on now. The market doesn't look at the fact that you've got three other projects. They're looking at what can become tangible soon or reasonably soon. The only thing that's going to become tangible soon is what you're working on now. So what ends up happening is the stuff that's on the sidelines or in your portfolio ends up getting zero value. If you look at 50 companies in that situation, you'll find that probably 50 of them have the same problem.
The other reason is because, quite frankly, you're going to dilute your company to raise the money you need to work on all the projects. For example, to work on one project you need $3 million. If you want to work on say two projects you need $8 million. You've got to raise a lot more money so your share structure gets shot. The problem is all that work will not get reflected in the stock price. So the best way to do it is to get a new vehicle that can raise money for one particular project or a set of projects that can be the focus.
So what happens is you get Project X with a valuation on it and then you've got a small number shares with a higher nominal price. You can raise more money with a higher stock price, consequently issuing less paper. How you unlock shareholder value is the price of the shares has to be high to make it worth anything. The market capitalization can move higher and higher and higher, but if you're issuing shares at an even faster pace, dollars per share, or cents per share will go down long term. Even though the company's gotten more value, what you paid for your shares ends up going down. Spinning off the asset makes a lot more sense.
TGR: In January, gold was still around $1,000. We've gone up to $1,150. Where do you think gold is going as we head into the summer and through the rest of 2010?
VG: You're going to see technical moves one way or the other. You may see a drop to $1,000 and I wouldn't panic if that happens. You may see it run to $1,250, $1,300. I certainly wouldn't get overly excited if that happens, unless it holds there for a little while so it creates a new base. We're probably not going to see a strong gold market in the summer. That doesn't normally happen. So really we'll probably see more weakness going forward than strength.
That being said, the price of gold-based equities still has to catch up to $1,000 valuation of gold, let alone where we are now. So even if gold were to come off a little bit during the summer, gold equities still have to catch up to that valuation point before they can keep moving up. I think we're really going to see a move in gold when we saw it last year, around September. We might see a little strength here for the next month or so. We may hit $1,200. We may test $1,240 but it should come off after that during the summer. For really June, July and August it should see some weakness and that's normal. So I wouldn't be concerned.
Long term, at the end of 2011, $1,500 I think is fair. Now if we see a huge debacle in Europe, and let's say three or four countries start singing the same tune as Greece, then I'm suspecting we'll see the $1,500 level come a lot quicker.
TGR: What other junior mining companies do you see as a good value?
VG: Paramount Gold and Silver Corp. (NYSE:PZG;TSX:PZG) looks good. They're developing quite a strong asset, 2.6 million ounces of gold equivalent. That being said, I think that company will take a little longer to go anywhere. It's going to keep adding ounces. That's what that story is about; it's just an adding-ounce story. It gives the company an intrinsic value. As it develops more ounces, it will give the stock a higher and higher price or a better value for it. So I think a company like this, at the current level of $1.40, $1.50, should continue to do well. It's not going to start screaming up in price, but it's going to have a steady increase going forward. It's also going to get insulated against market activity a lot more because it has that intrinsic value. You can say these shares should be worth X because there's X amount of ounces of gold associated with it. So a company like that is going to fair quite a bit better against a company that still has to find their first or second ounce.
TGR: Anybody else in this category?
VG: Yes, we have Otis Gold Corp. (TSX:OOO) in that category as well. They've got ounces, and they've already shown about 700,000. They also have exploration that they're doing. So they have this intrinsic value from the current ounces they have. Plus they have the upside potential that you get when you're trying to prove up more ounces and that's what they're doing. Otis Gold, in the $.50 range, is actually quite inexpensive given the number of ounces they have, plus their exploration upside potential.
Let me talk about one more company in all of this. This one kind of goes against everything I just finished saying. We're talking about all these companies with ounces that are defined, companies that have an intrinsic value. Richfield Ventures Corp. (TSX.V:RVC) is entirely different in that regard. They don't have a resource defined yet. This is a discovery story. Richfield is in the process of finding and proving to us a new gold camp in British Columbia. There could be a lot of activity with that company this summer. They're going to be doing a 25,000-meter drill program to define what some people are calling 4 to 7 million ounces of gold, which is very significant. They're able to do this rather inexpensively, and they also have a lot of money in the bank to do it with. They'll be sitting on somewhere in the range of $15 to $16 million in cash right now if you consider all the warrants that are well in the money. This is a very interesting situation because they're in the process of proving now what I think will be a new gold camp. They entered the last hole they drilled last year that gave 1.25 g/t over 329 meters ending in 5 g/t over the last 9 meters. They recently announced that they have re-entered that hole and are planning to take that hole to over 700 meters. In that announcement they said that they were past the 500-meter mark and are still in the same rocks that they got in the first 329 meters. This will be a very exciting story, especially if they come up with the same spectacular results that they have been getting so far.
TGR: Very interesting, Victor. Thanks for spending time with us today.
A proud and avowed Keynesian, Victor Gonçalves developed a strong background in economics at the University of Winnipeg, where he served as a Professor's Assistant as well as earning his degree. His Equities and Economics Report has been accurately picking winners and calling market direction. In 2007, for instance, he correctly predicted the Dow Jones topping 14,000 points and pegged uranium reaching $136 per pound and many more. In addition to EER, Victor also produces the Green Dollar Report as well as writes for a number of print and electronic publications including CIM Magazine (Canadian Institute of Mining), Western Standard, Barron's and Kitco. He also has been featured on BNN, Mining Industry TV and at numerous industry events and conferences.
Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.
DISCLOSURE:
1) Tim McLaughlin of The Gold Report conducted this interview. He personally and/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 Energy Report or The Gold Report: Richfield Ventures, Paramount Gold and Silver, Kent Exploration and Otis Gold Corp.
3) Victor Goncalves: I personally and/or my family own shares of the following companies mentioned in this interview: Century Mining, Richfield Ventures, Paramount Gold and Silver and Kent Exploration. My family is paid by the following companies: Kent Exploration.
