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It's no longer just an energy market. It's no longer
just a metals market. It's just one commodities market," says John
Licata, chief commodity strategist at Blue Phoenix, Inc. John thinks that the
lines between commodities will continue to blur as companies diversify their
metals and minerals holdings. He also thinks gold will approach $1,375 by
year-end, and that a major uranium producer will soon be snapped up by Asian
interests. It's all in this exclusive interview with The Gold Report.
The
Gold Report: The price of gold fell almost 5% in July. Do you
think this is the time to buy? Or is it a sign the economy has found its feet
and that maybe it's time to lighten your gold portfolio?
John
Licata:
I think this is a great time to get back into the gold market. The recent
slide is a buying opportunity. We are still facing a very challenging
economic environment as evidenced by recent remarks by various U.S. Federal
Reserve speakers, including Chairman Ben Bernanke. I think the concerns
regarding deflation are completely overblown. The fact that we're seeing
higher energy prices is an inflationary tidbit that's getting left on the
sidelines by investors. Higher inflation will definitely lift gold prices,
and the renewed strength in the euro vs. the dollar is a bullish factor for
gold prices too. And we're quickly approaching Indian wedding season, which
starts in September; that has historically been a bullish time for gold
prices. And, in recent years, many of the gold producers have not really had
any big finds, which also bodes well for gold because there is less gold to
go around.
TGR: Will the
senior producers look to takeovers to boost their gold reserves?
JL: I think adding
capacity through mergers and acquisitions (M&A) can be cheaper than
finding more gold. Commodities in general have become a unified marketplace.
By that, I mean the opportunities to increase capacity, reserves or output
are better served through M&A.
When Barrick Gold Corporation (NYSE:ABX;
TSX:ABX) announced late last year that they would spend billions to buy back
their hedge book, I think that indicated the gold price would continue to
move higher. If the largest gold producer on the planet is getting rid of its
hedges, obviously there is much more upside opportunity in the gold price.
TGR: Do you see
some specific takeover targets out there?
JL: It's my opinion
that NovaGold Resources Inc. (NYSE.A:NG; TSX.V:NG) is a takeover target. If companies like Barrick or Newmont Mining Corp. (NYSE:NEM) are looking to expand their portfolios, I think
that NovaGold, with its Donlin
Creek and Galore Creek gold projects, becomes even more attractive in a
rising economy.
I think
companies making acquisitions are more open to diversifying their portfolios.
It's not so farfetched to see a company like Lonmin Plc (OTCBB:LMNIY), which is based overseas, getting involved in the
Canadian or the North American gold markets. I wouldn't be surprised to see
uranium companies purchasing gold assets given that uranium has been stagnant
for the last couple of years.
Diversification
will be key. Companies that did not have
diversification in their portfolios will look for more diversification. I
think NovaGold presents a very compelling
opportunity, both from a valuation and asset-play perspective.
TGR: Will some
suitors stay away from NovaGold because of
potential permitting problems, given that their main project is in Alaska and
has a fair number of opponents?
JL: No, I don't
think so. And unlike the oil industry, the repercussions to the environment
are greatly lower for mining than for offshore drilling. Right now, it takes
many years to go through the permitting process. I think a lot of that has
been improving. Alaska is a very interesting place because of its rich
mineral deposits, as well as the oil that's there. A lot of commodities have
become intertwined. I wouldn't be surprised if you saw a lot of different,
unique, joint ventures going forward. And I don't think Alaska is going to be
left in the cold.
TGR: In 2009, you
called for $1,200 gold, and it hit $1,227 in December. How high are you
willing to go this time around? And what's the timeframe?
JL: I have a
$1,375 target on gold this year; it's a forecast I put out at the beginning
of 2010. I'm still very comfortable with that forecast. We still have a long
way to go before the end of the year. The fact that gold prices are still
high compared to historical standards means that we've had an opportunity to
sell off multiple times in recent months. Yet, we've always managed to find
gold buyers on dips, and we're still hovering around $1,200. I think the
sellers had their chance to drive down the price of gold and they're out. The
5% decline that we've seen in the gold price was not met by increased selling
pressure—it was met by buyers looking for a cheap way to play the
yellow metal. That $1,375 is still very much achievable this year.
TGR: What other
gold companies have piqued your interest?
JL: Interestingly
enough, I came across a company called Nautilus Minerals Inc. (TSX:NUS), and I thought it was really, really fascinating
considering that it's mining minerals offshore. We often speak of offshore
drilling as it applies to oil and gas, but you can use similar technology for
deepwater metals mining.
TGR: They haven't
started mining yet, though?
JL: Possibly by
the end of this year, whether we're talking about offshore Papua New Guinea
or New Zealand, they could have some positive assessments on some of their
mineral properties that could perhaps attract JVs with companies like Halliburton Co. (NYSE:HAL) or Schlumberger Ltd. (NYSE:SLB). And maybe one of those companies could apply the
same technology and expertise they have developed in offshore oil and gas
drilling.
TGR: I should let
our readers know that we're talking about the Solwara
1 in Papua New Guinea. It's a high-grade gold deposit that's around 4,500
feet below surface in the Pacific Ocean. To me, that seems fraught with
unnecessary risk. Why do you like it given all that risk?
JL: Well, I think
the permitting process has become more favorable for Nautilus in those
regions. The new technology that Nautilus has developed to drill on the ocean
floor—I believe it was 80 meters—makes this a much more
attractive story. A lot of competitors have said they're going to enter this
space, but I think Nautilus is ahead of them by a few years. The fact that
companies like Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A; TSX:TCK.B) and Anglo American Plc (NASDAQ:AAUK) are shareholders in Nautilus is very significant.
What this company is embarking on could forever change the landscape of
mining as we know it.
TGR: I agree, but I
think it's much easier to bring liquids or gases to the surface vs. solids.
What are some other gold plays you're following?
JL: In the past,
I've talked about Fronteer Gold Inc. (TSX:FRG;
NYSE.A:FRG); that's a company I am still enthusiastic about. I like the fact that
they have exposure to uranium and I have had the pleasure of meeting
management on several occasions. I am confident in their ability to execute
their strategy. I think that from a valuation perspective, this company has a
lot of upside.
TGR: You mentioned
management. When you analyze different companies, where do you rank
management?
JL: Management is
very high in my list. As an analyst, I think I need to go the next step to
find out what makes a company tick; it's my opinion that management is the
heart and soul of a company. If they're not able to share their story or
execute on a game plan, then that management should be replaced—as we
have recently seen with BP (NYSE:BP; LSE:BP) replacing Tony Hayward with Robert Dudley. There's
a very low tolerance for failure at the corporate level. It's extremely
important to have a capable management team that instills confidence in not
only shareholders but in analysts like myself.
TGR: What do you
think of NovaGold's management?
JL: I am actually
meeting with NovaGold president and CEO Rick Nieuwenhuyse next week in New York. I think Rick has done
a great job of assembling a solid institutional base. Hedge Fund Manager John
Paulson made an investment several months ago. Rick was very—what's the
right word?—persistent in his pursuit of establishing a group of
shareholders that thinks long term. He's done a good job of getting in front
of Wall Street. I am looking forward to meeting him in person.
TGR: What are your
thoughts on silver versus gold?
JL: It's funny, we
talk about gold so much but we don't hear anything about silver. I think
silver is very interesting from a historical perspective and how it has
traded in concert with gold. In my eyes, silver is the evil stepchild of
gold; and if gold prices move towards that $1,375 level, it's hard not to
think that silver prices will go along for the ride. If you believe that
we're going to have an economic recovery, then you have to look at silver
because silver is used in so many products and new technologies.
TGR: Are there some
silver companies that you like?
JL: I've always
liked Hecla Mining Co. (NYSE:HL). It's unfortunate that investors have challenged
them because of their location—its stock is down about 20% year to
date. If you want some exposure to asset plays in Mexico, Hecla Mining could
be a very interesting name.
In the
past, I've talked about Pan American Silver Corp. (TSX:PAA; NASDAQ:PAAS)—another name that's down for the
year—but it pays a small dividend. It is considered one of the
bellwethers of the silver group. When you have a company that is perceived to
be a major silver player with a market cap of only $2.6 billion, it makes me
think the consolidation that I mentioned earlier is going to be felt across
the entire commodities spectrum.
TGR: Moving to
other precious metals, platinum and palladium prices move in tandem with
global auto sales due to the amount of these metals used in catalytic
converters. What are the prospects for those metals in light of the current
global economic climate?
JL: I think
palladium could see more upside. Many auto companies are moving toward
cleaner standards in terms of emissions. That benefits palladium and
platinum. Over the next couple of years, the entire auto market is going to
change. A testament to that is that Tesla Motors, Inc. (NASDAQ:TSLA), an electric car company, just went public. I think
companies that use palladium and platinum for catalytic converters are going
to vie for supply contracts. Unlike the energy sector wherein there is an
excess supply of natural gas, there is a very limited global supply of
platinum and palladium.
TGR: What are some
platinum and palladium companies you like?
JL: Stillwater Mining Company
(NYSE:SWC) is a name I have talked about for a few years. They have a very
interesting opportunity to change their game plan at this point; because at
the end of 2010, their contract with Ford expires. I guess they were able to
cultivate a new approach with General Motors, and they were successful. I
think Wall Street was waiting for them to do the same with Ford. If the Ford
deal does not go through, I believe the company can still be quite successful
because many Japanese automakers would probably jump at the chance to have
Stillwater supply their much-needed platinum and palladium. Stillwater is one
of the most dominant players in those metals in North America.
TGR: What other
metals show some potential?
JL: I think
uranium is a forgotten metal. This goes back to what I mentioned
earlier—it's no longer just an energy market. It's no longer just a
metals market. It's just one commodities market. Uranium is a fascinating
story—if we're talking about building nuclear reactors and having
cleaner, more efficient energy sources, uranium falls into the category of
metals that can do very well going forward.
TGR: Any companies
in that space that you're particularly interested in?
JL: Cameco Corp. (NYSE:CCJ; TSX:CCO) is a company that, in the past, has been an
M&A-opportunity hunter. It's my view that the hunter will become the
hunted, and I wouldn't be surprised if we see an Asian company
look at Cameco as a very attractive takeover
target.
TGR: You think Cameco will be taken over?
JL: Yep.
TGR: That would be
remarkable; that's a major uranium producer.
JL: Yes, it's a
major. For the last few years, the company's share price has been somewhat
suppressed because people wanted to determine the fallout from Cigar Lake's
underground flooding. Now that the company is closer to putting that behind
it, foreign companies looking to beef up their uranium presence will be much
more receptive to looking it. Because Asian investors were so enthusiastic to
purchase Canadian oil sands assets, I think there will be a run at Cameco now. A deal could face large regulatory
challenges, but I think Cameco is a takeover
target.
TGR: Well, that's
certainly some interesting speculation. Any thoughts you would like to leave
us with today?
JL: I will say
when it comes to metals—and I've said this before—China is not
the saving grace for commodities. If you plan to get into any metal based on
China's prospective growth, I just don't think that's the right strategy. I
think you need to look at commodities from a global perspective; and while
it's great that China is improving, any slowdown in the Chinese market will
have an enormous ripple effect throughout the rest of the world. But that
doesn't mean the rest of the world economies won't grow and come out of what
is arguably the worst recession since the Great Depression.
John J.
Licata is chief commodity strategist at Blue Phoenix, Inc., an energy/metals independent research and
consulting firm based in New York City. He has appeared regularly in the
media (CNBC, Bloomberg TV/Radio, Business News Network, Barron's, etc.) over
the years for his insights and forecasts in the commodity spectrum.
After
studying economics and graduating from Saint Peter's College (where he
received The Wall Street Journal Award for economic excellence), Licata set
his sights on Wall Street. During his more than 15-year career, John has held
both trading and research positions on the NYMEX, Dow Jones and Smith Barney.
Early in 2005, he founded Blue Phoenix, a leading independent research and
consulting firm focused on energy and metals. John is also the Editor of The Commodity
Chronicles, the Blue Phoenix energy and metals newsletter (click here to receive a 30-day trial
membership). John is currently in the EMBA program at New York
University's Stern School of Business, and was recently voted "Up and
Comer Natural Gas Analyst" in the 2010 Institutional Investor
All-America Research Team Poll. You can follow John on Twitter
and LinkedIn.
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