The Gold Report: You started your namesake CD Private Equity Natural Resources Fund in 2006 to take advantage of the commodity super-cycle, which you believe could last more than 20 years. Copper, often considered a barometer of global economic health, fell from about $3.60 per pound to less than $3.00 from April to May. Is the super-cycle still in good health?
Carmel Daniele: I still think it's in good health. If you look at history, these super-cycles last on average about 30 years. The U.S. super-cycle involved the urbanization of 100 million people and it lasted 40 years in the 1880s. Then the modernization of Japan in the 1960s involved 30 million people and that super-cycle lasted 30 years. This super-cycle involves the urbanization and industrialization of 3 billion people. We're only 10 years in, so I wouldn't be surprised if it lasts longer than 20 years. I've got a great chart on this that BHP Billiton Ltd. (NYSE:BHP; PKSHEETS:BHPLF) has done, tracking gold alongside copper. The thing is, the swings are quite violent. It's quite common for the price of copper to go up and down, but the long-term trend is up.
TGR: Do you look at anything else besides the chart from BHP that allows you some confidence in the cycle?
CD: I look at the growing number of people in the world; the growing middle class which is fuelling demand for resources. But I also look at the supply side. It now takes a lot longer from the discovery of a mine to the point where it's into production. People have been talking for a long time about lots of copper companies in Alaska, and the DRC getting into production and supply coming on stream, but it just takes a lot longer. So the supply side constraints are heavily fuelling this super-cycle too.
I also look at what some of these emerging countries are doing rather than saying. If you look at China and India, you will see they are securing limited resources around the world in order to continue to build out their empires. So, if you take a macro view, this super-cycle is still very healthy. We try to invest in companies that have an asset that can develop and grow and then be sold to some of these emerging countries that desperately need the resource for their industrial revolutions.
TGR: Nonetheless, we are experiencing some volatile markets right now. I think investors in most places are looking for ways to find shelter.
CD: It's not uncommon. Basically, most people sell in May and go away. It happens every year, and I hear this every year. It's like, "Oh my goodness, the markets are really bad!" There's always something you can blame it on. At the moment, it's being blamed on the euro and the EU crisis. It happens every year.
TGR: German Chancellor Angela Merkel recently said that she fears for the euro.
CD: I think that the whole thing is being blown out of proportion. Nearly 70% of the euro area's economy is made up of the three countries: France, Germany and Italy. So unless their sovereign debt crisis derails, I don't see how the euro could weaken sufficiently. Greece is only a very small part of the EU area, just 2.5%. I can understand why she would say that because all of the euro countries have very different legislation, but they've all got the same currency. They are all affected and interrelated. For the euro to be saved, maybe what you could see is more legislation and some better enforcement so that the laws are aligned a bit more.
TGR: What's your hedge against a possible collapse of the euro?
CD: People are wondering, "Which currency do I hold my money in? The euro? The pound? U.S. dollars?" I hear this all the time. The safest bet is gold. It's the safest currency. It's become a currency. I am actually investing in gold equities as a result. I see gold doing very well.
TGR: How well?
CD: Gold could get really, really high, especially if China, for example, starts buying it. There's often been talk about them diversifying out of the U.S. dollar into gold. It could easily break through $2,000 if you have China suddenly buying it.
TGR: Where do you see the gold price headed in the next 12 months?
CD: I think mid $1,000 to $2,000.
TGR: How should investors get exposure to gold?
CD: Gold equities.
TGR: Are we talking seniors, intermediates, juniors?
CD: I prefer the juniors. You can invest in the juniors, mid-tiers or even the big caps, but my fund invests mainly in the juniors, as that is how you get the most leverage from the gold price.
TGR: What about other ways to gain exposure to gold?
CD: People can always buy gold bullion. That's probably the safest, but then you have to worry about where you're going to store it. Some people have invested in ETFs, but the problem is you don't actually have possession of the physical gold, even though they say they've got it backed by physical gold. I think gold equities are the best because you get a multiplier effect. I prefer the ones that have some exploration upside where the asset can grow. So you're not just betting on the gold price going up; you've got a resource that can potentially grow.
TGR: When you talk about gold the excitement in your voice is apparent. What is it about gold that makes you excited?
CD: Gold's a psychological metal. It's driven by more than just demand/supply dynamics. Basically when economies aren't doing very well, and people aren't feeling very optimistic, they tend to flock to gold. It's a currency as well. The potential is enormous there. Plus you've got China and India; if they start buying gold, it could easily skyrocket. Then you've got inflation because of all the paper money that's being printed and is starting to circulate in the economy due to government stimulus spending. Gold is a great hedge against inflation—to keep the purchasing power of your money. I suppose I prefer the gold equities because you get that multiplier effect. You see, if the gold price goes up, the leverage that you get is so much higher than just holding the gold bar itself.
TGR: What do you look for in a gold company?
CD: I like there to be growth in the underlying asset. There has to be some sort of upside. The deposit has to be in a safe jurisdiction. Very importantly, it has to be run by management with a good track record in developing an asset. The other thing I look for is whether the company is likely to be taken out. Or even better, if it is both predator and prey like the highly successful Osisko Mining Corp. (TSX:OSK).There's a lot of consolidation in the sector, because when companies start producing, they're shrinking, as they are depleting their asset. Every time they're producing gold, they've got to replace that resource. They either have to go out and discover one or buy out a junior.
TGR: What are some companies you're following with those kinds of resources?
CD: I like Greystar Resources Ltd. (TSX:GSL). It's got over 15 million ounces of gold (at its Angostura project in Colombia) with the IFC (International Finance Corp.) as a key investor. The preliminary feasibility study completed in mid-2009 showed it would have an annual production of about 500,000 ounces of gold at a cash cost of $391 an ounce. The only thing is that the project's development could be delayed, because Greystar is waiting for a decision on an appeal due to the retroactive application of a new mining law. The project is seen by very many people as having economic significance to Colombia.
TGR: Are there other Latin American plays you like?
CD: I like Galway Resources Ltd. (TSX.V:GWY) as well, which is near Greystar's project in Colombia. They're drilling targets at their Pie De Gallo property. They've discovered some very high economic grades near another company called Ventana Gold Corp. (TSX:VEN). In the end, Greystar, Galway and Ventana will have to consolidate because they need just one single processing operation that would create synergies, and it would establish a larger economic resource. If they each tried to do it themselves, they would not benefit from the economies of scale of production.
TGR: Which company do you see consolidating the camp?
CD: The one that's got the largest market capitalization is Ventana, but they don't have their National Instrument 43-101 resource yet.
TGR: What are some others you like?
CD: Another one I like is Medoro Resources Ltd. (TSX.V:MRS). They took over a smaller company called Colombia Goldfields and because of Medoro's superior management, it created a lot of value. They consolidated over 6 million inferred ounces of gold and 30 million ounces of silver at the Marmato Project. Their resource stands now at close to 10 million ounces of gold and 61 million ounces of silver. A few months ago, they announced the purchase of the Frontino gold mine in Colombia. Another private one to look out for that will become public at some stage is Gran Colombia, which owns the other half of the Frontino gold mine with Medoro.
TGR: What about a little farther south at Colossus Minerals Inc.'s (TSX:CSI) Serra Pelada project in Brazil?
CD: I haven't been following that one of late, but I do know it's a very large resource with very high grade. The thing is, in Colombia, everywhere, every rock you turn over, you'll find gold because it's such a rich country.
TGR: You're certainly bullish on Colombia.
CD: It's one of the richest places in the world for gold at the moment. That's why everyone is going there. There's so many junior gold companies popping up everywhere in Colombia—it's hard to keep up.
TGR: What companies do you follow outside of Colombia?
CD: There's one called International Tower Hill Mines Ltd. (TSX:ITH, NYSE.A:THM). It's an Alaska-based gold deposit. It's got over 7.5 million ounces of gold. The prefeasibility study is due out the middle of this year. I think the economics might be further improved with increased resources. I think that's likely, given some recent successful step-out drilling and very encouraging metallurgical results. Another one I like is Allied Gold Ltd. (TSX:ALG; AIM:AGLD; ASX:ALD). That's a Papua New Guinea-based producing gold mine. It's got the funds available to grow from an 80,000-ounce producer to 230,000-ounce producer by developing a fairly significant orebody. That's quite significant. It could increase by a further 100,000 ounces by 2013 to become a 330,000 ounce per annum producer.
TGR: Is there anything that we have not talked about that has you excited about the gold sector right now?
CD: I think there's still a lot of money to go into the gold sector that hasn't, to date, and is ready to pile in.
TGR: Where would this money come from?
CD: Pension funds and very long-term money. In the past, funds mainly from the U.S., didn't believe so much in gold as a currency or anything else. Now I think they are starting to see the benefits of it being a hedge against inflation and a safe form of currency.
TGR: Are there other companies in other sectors, such as rare earth, that represent good investment opportunities?
CD: Lithium Americas Corp. (TSX:LAC) is exploring and developing in Argentina. It has one of the largest evaporative lithium projects in development. It's doing its prefeasibility study and it's attracted two strategic investors Magna International Inc. (TSX:MG.A; NYSE:MGA) and Mitsubishi Materials Corp. (Fkft:MMC). So I'm hoping that it's going to be the go-to stock for lithium, basically. The other one in rare earths that is quite interesting is a company that's called Dacha Capital Inc. (TSX:V:DAC; OTCQX:DCHAF). What they try to do is stockpile rare earths to control the physical market. So they're buying it and stockpiling it and storing it away. I know that China does have the monopoly and is trying to make sure that they control that monopoly on rare earths. So it will be interesting to see how Dacha Capital goes. Of course, the Japanese are trying to break that monopoly by looking for acquisitions. They're the only two that I like at the moment.
TGR: Carmel, thank you for talking with us.
Carmel Daniele is the founder of CD Capital and CEO of the CD Private Equity Natural Resources Fund. The Fund's investment objective is to achieve capital growth through pre-IPO and pre-trade sale companies in the natural resources sector, targeting opportunities that deliver substantial returns on exit.Carmel was previously focused on selecting and negotiating natural resource investments for the Special Situations Fund at RAB Capital. Prior to this, she was a Group Executive in Corporate Advisory at Newmont Mining, negotiating and structuring mergers and acquisitions around the world for the Newmont Capital group, which included the US$24 billion three-way merger between Franco-Nevada, Newmont and Normandy to create the largest gold company in the world.
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) Karen Roche and Brian Sylvester of The Gold Report conducted this interview. They personally and/or their families 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: Colossus and Dacha Capital.
3) Carmel Daniele: I personally and/or my family own the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.
Carmel Daniele: I still think it's in good health. If you look at history, these super-cycles last on average about 30 years. The U.S. super-cycle involved the urbanization of 100 million people and it lasted 40 years in the 1880s. Then the modernization of Japan in the 1960s involved 30 million people and that super-cycle lasted 30 years. This super-cycle involves the urbanization and industrialization of 3 billion people. We're only 10 years in, so I wouldn't be surprised if it lasts longer than 20 years. I've got a great chart on this that BHP Billiton Ltd. (NYSE:BHP; PKSHEETS:BHPLF) has done, tracking gold alongside copper. The thing is, the swings are quite violent. It's quite common for the price of copper to go up and down, but the long-term trend is up.
TGR: Do you look at anything else besides the chart from BHP that allows you some confidence in the cycle?
CD: I look at the growing number of people in the world; the growing middle class which is fuelling demand for resources. But I also look at the supply side. It now takes a lot longer from the discovery of a mine to the point where it's into production. People have been talking for a long time about lots of copper companies in Alaska, and the DRC getting into production and supply coming on stream, but it just takes a lot longer. So the supply side constraints are heavily fuelling this super-cycle too.
I also look at what some of these emerging countries are doing rather than saying. If you look at China and India, you will see they are securing limited resources around the world in order to continue to build out their empires. So, if you take a macro view, this super-cycle is still very healthy. We try to invest in companies that have an asset that can develop and grow and then be sold to some of these emerging countries that desperately need the resource for their industrial revolutions.
TGR: Nonetheless, we are experiencing some volatile markets right now. I think investors in most places are looking for ways to find shelter.
CD: It's not uncommon. Basically, most people sell in May and go away. It happens every year, and I hear this every year. It's like, "Oh my goodness, the markets are really bad!" There's always something you can blame it on. At the moment, it's being blamed on the euro and the EU crisis. It happens every year.
TGR: German Chancellor Angela Merkel recently said that she fears for the euro.
CD: I think that the whole thing is being blown out of proportion. Nearly 70% of the euro area's economy is made up of the three countries: France, Germany and Italy. So unless their sovereign debt crisis derails, I don't see how the euro could weaken sufficiently. Greece is only a very small part of the EU area, just 2.5%. I can understand why she would say that because all of the euro countries have very different legislation, but they've all got the same currency. They are all affected and interrelated. For the euro to be saved, maybe what you could see is more legislation and some better enforcement so that the laws are aligned a bit more.
TGR: What's your hedge against a possible collapse of the euro?
CD: People are wondering, "Which currency do I hold my money in? The euro? The pound? U.S. dollars?" I hear this all the time. The safest bet is gold. It's the safest currency. It's become a currency. I am actually investing in gold equities as a result. I see gold doing very well.
TGR: How well?
CD: Gold could get really, really high, especially if China, for example, starts buying it. There's often been talk about them diversifying out of the U.S. dollar into gold. It could easily break through $2,000 if you have China suddenly buying it.
TGR: Where do you see the gold price headed in the next 12 months?
CD: I think mid $1,000 to $2,000.
TGR: How should investors get exposure to gold?
CD: Gold equities.
TGR: Are we talking seniors, intermediates, juniors?
CD: I prefer the juniors. You can invest in the juniors, mid-tiers or even the big caps, but my fund invests mainly in the juniors, as that is how you get the most leverage from the gold price.
TGR: What about other ways to gain exposure to gold?
CD: People can always buy gold bullion. That's probably the safest, but then you have to worry about where you're going to store it. Some people have invested in ETFs, but the problem is you don't actually have possession of the physical gold, even though they say they've got it backed by physical gold. I think gold equities are the best because you get a multiplier effect. I prefer the ones that have some exploration upside where the asset can grow. So you're not just betting on the gold price going up; you've got a resource that can potentially grow.
TGR: When you talk about gold the excitement in your voice is apparent. What is it about gold that makes you excited?
CD: Gold's a psychological metal. It's driven by more than just demand/supply dynamics. Basically when economies aren't doing very well, and people aren't feeling very optimistic, they tend to flock to gold. It's a currency as well. The potential is enormous there. Plus you've got China and India; if they start buying gold, it could easily skyrocket. Then you've got inflation because of all the paper money that's being printed and is starting to circulate in the economy due to government stimulus spending. Gold is a great hedge against inflation—to keep the purchasing power of your money. I suppose I prefer the gold equities because you get that multiplier effect. You see, if the gold price goes up, the leverage that you get is so much higher than just holding the gold bar itself.
TGR: What do you look for in a gold company?
CD: I like there to be growth in the underlying asset. There has to be some sort of upside. The deposit has to be in a safe jurisdiction. Very importantly, it has to be run by management with a good track record in developing an asset. The other thing I look for is whether the company is likely to be taken out. Or even better, if it is both predator and prey like the highly successful Osisko Mining Corp. (TSX:OSK).There's a lot of consolidation in the sector, because when companies start producing, they're shrinking, as they are depleting their asset. Every time they're producing gold, they've got to replace that resource. They either have to go out and discover one or buy out a junior.
TGR: What are some companies you're following with those kinds of resources?
CD: I like Greystar Resources Ltd. (TSX:GSL). It's got over 15 million ounces of gold (at its Angostura project in Colombia) with the IFC (International Finance Corp.) as a key investor. The preliminary feasibility study completed in mid-2009 showed it would have an annual production of about 500,000 ounces of gold at a cash cost of $391 an ounce. The only thing is that the project's development could be delayed, because Greystar is waiting for a decision on an appeal due to the retroactive application of a new mining law. The project is seen by very many people as having economic significance to Colombia.
TGR: Are there other Latin American plays you like?
CD: I like Galway Resources Ltd. (TSX.V:GWY) as well, which is near Greystar's project in Colombia. They're drilling targets at their Pie De Gallo property. They've discovered some very high economic grades near another company called Ventana Gold Corp. (TSX:VEN). In the end, Greystar, Galway and Ventana will have to consolidate because they need just one single processing operation that would create synergies, and it would establish a larger economic resource. If they each tried to do it themselves, they would not benefit from the economies of scale of production.
TGR: Which company do you see consolidating the camp?
CD: The one that's got the largest market capitalization is Ventana, but they don't have their National Instrument 43-101 resource yet.
TGR: What are some others you like?
CD: Another one I like is Medoro Resources Ltd. (TSX.V:MRS). They took over a smaller company called Colombia Goldfields and because of Medoro's superior management, it created a lot of value. They consolidated over 6 million inferred ounces of gold and 30 million ounces of silver at the Marmato Project. Their resource stands now at close to 10 million ounces of gold and 61 million ounces of silver. A few months ago, they announced the purchase of the Frontino gold mine in Colombia. Another private one to look out for that will become public at some stage is Gran Colombia, which owns the other half of the Frontino gold mine with Medoro.
TGR: What about a little farther south at Colossus Minerals Inc.'s (TSX:CSI) Serra Pelada project in Brazil?
CD: I haven't been following that one of late, but I do know it's a very large resource with very high grade. The thing is, in Colombia, everywhere, every rock you turn over, you'll find gold because it's such a rich country.
TGR: You're certainly bullish on Colombia.
CD: It's one of the richest places in the world for gold at the moment. That's why everyone is going there. There's so many junior gold companies popping up everywhere in Colombia—it's hard to keep up.
TGR: What companies do you follow outside of Colombia?
CD: There's one called International Tower Hill Mines Ltd. (TSX:ITH, NYSE.A:THM). It's an Alaska-based gold deposit. It's got over 7.5 million ounces of gold. The prefeasibility study is due out the middle of this year. I think the economics might be further improved with increased resources. I think that's likely, given some recent successful step-out drilling and very encouraging metallurgical results. Another one I like is Allied Gold Ltd. (TSX:ALG; AIM:AGLD; ASX:ALD). That's a Papua New Guinea-based producing gold mine. It's got the funds available to grow from an 80,000-ounce producer to 230,000-ounce producer by developing a fairly significant orebody. That's quite significant. It could increase by a further 100,000 ounces by 2013 to become a 330,000 ounce per annum producer.
TGR: Is there anything that we have not talked about that has you excited about the gold sector right now?
CD: I think there's still a lot of money to go into the gold sector that hasn't, to date, and is ready to pile in.
TGR: Where would this money come from?
CD: Pension funds and very long-term money. In the past, funds mainly from the U.S., didn't believe so much in gold as a currency or anything else. Now I think they are starting to see the benefits of it being a hedge against inflation and a safe form of currency.
TGR: Are there other companies in other sectors, such as rare earth, that represent good investment opportunities?
CD: Lithium Americas Corp. (TSX:LAC) is exploring and developing in Argentina. It has one of the largest evaporative lithium projects in development. It's doing its prefeasibility study and it's attracted two strategic investors Magna International Inc. (TSX:MG.A; NYSE:MGA) and Mitsubishi Materials Corp. (Fkft:MMC). So I'm hoping that it's going to be the go-to stock for lithium, basically. The other one in rare earths that is quite interesting is a company that's called Dacha Capital Inc. (TSX:V:DAC; OTCQX:DCHAF). What they try to do is stockpile rare earths to control the physical market. So they're buying it and stockpiling it and storing it away. I know that China does have the monopoly and is trying to make sure that they control that monopoly on rare earths. So it will be interesting to see how Dacha Capital goes. Of course, the Japanese are trying to break that monopoly by looking for acquisitions. They're the only two that I like at the moment.
TGR: Carmel, thank you for talking with us.
Carmel Daniele is the founder of CD Capital and CEO of the CD Private Equity Natural Resources Fund. The Fund's investment objective is to achieve capital growth through pre-IPO and pre-trade sale companies in the natural resources sector, targeting opportunities that deliver substantial returns on exit.Carmel was previously focused on selecting and negotiating natural resource investments for the Special Situations Fund at RAB Capital. Prior to this, she was a Group Executive in Corporate Advisory at Newmont Mining, negotiating and structuring mergers and acquisitions around the world for the Newmont Capital group, which included the US$24 billion three-way merger between Franco-Nevada, Newmont and Normandy to create the largest gold company in the world.
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) Karen Roche and Brian Sylvester of The Gold Report conducted this interview. They personally and/or their families 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: Colossus and Dacha Capital.
3) Carmel Daniele: I personally and/or my family own the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.
