The Gold Report: You recently wrote a piece in Exploration
Insights reminiscing about the 1997 to 2002 resource market. What did we
learn about investing in gold and silver in that five-year window?
What I learned is that successful investing in a bear market takes
patience and caution. When you do make an investment, make sure you're
betting on good people.
TGR: One of the things Rick Rule always says is that he's waiting
for capitulation. How can you tell if we've had capitulation, and what causes
it?
BC: I don't think we're going to see a capitulation moment; I think
it will be more gradual. I see it in my newsletter subscribers. Most of them
have been around for a long time, but in the last few months, people who have
been with me from the beginning have started falling by the wayside even
though we had a 16% gain last year and we are not doing too awfully bad so
far this year. They all say they will be back as soon as the market turns.
This is what it starts to look like on the bottom.
I envision it as a band of pioneers walking across the salt flats in July,
one by one dropping to the side. One day, we'll turn around, look back and
notice the hills are starting to get greener. That's how we'll know
capitulation happened, by looking behind us at the wasteland and desolation
we crossed.
TGR: Rick also says that bear markets create bull markets. The
years 2002 to 2010 were pretty good for the commodity markets and everyone
started to look really smart. Are there lessons to be learned from a bull
market?
BC: There always are. A big one is to take profits along the way
and keep some sense of perspective with regards to what a project is actually
worth. This is a cyclical business. We go up and down. This has been true
going back to the salt traders in early Africa. Supply and demand drive
markets. During the last boom, China was building infrastructure and the
world was growing. That created a metal shortage, which drove prices way up.
That has busted. China's growth is slowing. I don't know what's going to
bring the bull market back in commodities this time, but it always comes back
and is usually the result of something we were previously unaware of.
TGR: How is the wasteland you describe as our current market
scenario different than what you went through in 1997 to 2002?
BC: There are actually more similarities than differences. In 1998
nearly every economist said gold was antiquated and of no value in the new
age. Financial publications all said you would have to be a fool in a tin hat
to buy gold. Today, investors and financial publications are shunning this
market again, and to some degree with good reason. In the most recent boom,
profits barely increased due to increased input costs and the shift to mining
lower grade ore. That left a lot of investors who got the commodity price
rise right disillusioned with the sector. The metal prices rose but profits
didn't. It is going to take a fair bit of time for previous investors or new
investors to see a reason to be in the natural resources market. But it will
happen.
TGR: Does that hold true both for the retail and the institutional
investors?
BC: Yes. Retail investors were hammered in the 1997 downturn. The
Bre-X scam triggered the realization that everything was overvalued and much
of what was being presented was not true. New NI 43-101 requirements were put
in place in an effort to provide more transparency for investors. It
certainly helped, but the reality is that a technical report is only as good
as the data that goes into it and the persons doing the report.
I am afraid a lot of these reports are poorly done and do not reflect
reality. People must still do their own due diligence and follow results
closely. One of the most common problems I see in these reports relates to
the resource estimates. A large number of those turned out to be inaccurate,
making the financial models based on them wrong. So investors got burned
again, this time believing the final mine economics in the report that may
have been based on sloppy resource estimates. When a company spends hundreds
of millions buying trucks, building mills and excavating rock only to find
out the ore in the ground is not what was presented in the resource estimate,
it usually loses money. There is a long list of mines that fall into that
category.
TGR: Who are some of the trustworthy veterans still around putting
their experience to work in the market now?
TGR: You've traveled the world visiting projects. Do things look
rosier in other countries? Has the impact of the strong dollar on projects in
Canada and Mexico been good for the bottom line?
BC: Most certainly. The drop in oil and energy prices, as well as
the drop in the Canadian dollar, the Australian dollar, and even the euro,
has been an advantage to companies operating in those countries versus in the
U.S. We have seen a decrease in operating costs. It is a real advantage to
companies mining in Australia and Canada, especially.
We have also seen mining companies severely cut back on development,
exploration, and even maintenance. This will lead to the next bull market
when supply is eventually constrained due to these short-term cost cutting
measures. The metal prices are going to have to move up because companies
can't make money right now, and if it isn't profitable to mine, there will
eventually be a shortage.
TGR: In your travels, what are some of the companies that are well
positioned for a market rebound?
BC: I like companies that are fully funded and building a mine.
That includes Asanko
Gold Inc. (AKG:NYSE.MKT; AKG:TSX), Guyana
Goldfields Inc. (GUY:TSX) and Torex Gold
Resources Inc. (TXG:TSX). They're well positioned to be in production
when the market turns.
Further down the line, Dalradian Resources Inc. (DNA:TSX), Midas Gold
Corp. (MAX:TSX) and Continental Gold Inc. (CNL:TSX; CGOOF:OTCQX) are drilling
out resources that will one day be profitable.
TGR: Asanko just announced plans to combine two of its mines in
Ghana. Is that about cutting costs?
BC: I think it was the plan all along. Because the two deposits are
so close together, the cost savings in the capital expenditure (capex) on the
second mine are substantial. It always made sense to bring that second
deposit in as soon as possible to push up production and profitability
without too much extra capex.
TGR: The market seemed to like it.
BC: Yes. There are very few companies out there building mines in
stable places that people can invest in.
TGR: Continental just updated its resource estimate on the Buriticá
project in Colombia. Did you like what you saw?
BC: I did. In the past, I was a bit negative on the company,
particularly on the resource estimate because I had some issues with it. The
most recent underground sampling pulled together the high-grade center of the
deposit. It looks to me that it has enough gold there to really kick off a
mine. And the details of what's happening at depth and along strike will be
much better worked out from underground rather than continued drilling. I
think it looks pretty good.
TGR: Is Guyana Goldfields still on schedule to start production
this year?
BC: Yes, as far as I know. It appears to be on schedule, on budget
and moving ahead. It's funded, moving toward production. There are not many
projects out there that are doing that these days. Funding is tough to come
by.
TGR: What else have you visited recently?
BC: I just got back from Pilot Gold
Inc.'s (PLG:TSX) TV Tower project in Turkey. This is a great place to explore.
A lot of people have the wrong idea about the country because it is in the
Middle East and its president is a bit of a wingnut. But overall, it's a
functioning democracy. I've taken my family there on holiday and hope to
again. It's a great place to visit. I also think it's a good place to work.
Some 10 mines have been permitted in 10 years, so you can get things done.
Pilot Gold has a very prolific area of mineralization and alteration
offering epithermal and porphyry-style gold and copper potential. This year,
Pilot will spend a fair bit of money to drill some of these more interesting
targets and Teck Resources Ltd. (TCK:TSX; TCK:NYSE) is contributing 40% to
the effort. I'm looking for enough drilling to indicate it is actually on to
something large. This is a huge alteration system and big deposits come from
big systems. All the ingredients are there. We just need to see the drilling
confirm it.
I was also just down in French Guiana visiting Columbus Gold
Corp.'s (CGT:TSX.V; CBGDF:OTCQX) Paul Isnard project. It's a joint
venture with Nordgold N.V. (NORD:LSE), a Russian company listed in London
with very profitable gold mines in West Africa. The project has about 4
million ounces all in at about 1.4 grams per ton. There should be a
preliminary economic assessment coming out shortly that will give us a
ballpark idea of what the costs might be, but there's still a lot of work to
do there. The advantage Columbus has is it's not spending a dime, and it's
carried for 49% through a feasibility study. It also has a major drill
program going on the Eastside project in Nevada. We'll be watching results on
that as well.
Richmont Mines
Inc. (RIC:NYSE.MKT; RIC:TSX) is an old company that recently discovered
considerably more value beneath its Island Gold deposit in Ontario. It's been
a decent mine, not great, but recent drilling and underground work have
discovered mineralization that's twice as thick and about twice the grade.
The advantage is that the mine is already operating. It has the plant. It has
the infrastructure. It just needs to dig down and get it.
This is one of the companies that a major should be looking to take over.
It's in a safe jurisdiction. It's built and running. We know what it looks
like. This would be extremely profitable once it gets into the higher-grade
zone at depth.
TGR: Based on what we have learned from the last few cycles, how
should investors move forward?
BC: Mining and commodities are cyclical. The most money I ever made
was from the stocks I bought in the bust between 1997 and 2002. It was
extremely hard to do because it was scary. I would buy a stock and then it
would drop by half again. You are all alone and the market gives you no
encouragement at all. As I said earlier, we are walking across the wasteland
in the heat of the day into a dust storm while nearly everyone you know is
back at the ranch buying Apple and biotech stocks. I remember I bought
Virginia Gold for $1.50, bought it again at $0.75. It had $0.50/share in
cash, and at one point, it was selling for $0.35. Over the following decade
or so the stock was acquired for $13 and we are still making money on that by
way of Osisko Gold Royalties Ltd. (OR:TSX). In retrospect, that was a
fantastic buy, but at the time, I was close to giving up all hope. I posted
an article on my website titled "What was it like, Dad?" that relives that last bust.
We are in a similar situation now. People have given up all hope. I
suspect most of your readers have no desire to buy another junior exploration
company, but there are some companies out there that have the cash to survive,
strong management that knows what a deposit looks like and the ability to
make those discoveries. If you can buy them for near cash, that's a screaming
deal.
TGR: You're speaking at the Sprott-Stansberry
Vancouver Natural Resource Symposium at the end of July. What do you hope
attendees will take away from that event?
BC: This bouncing along bottom could go for a long time, but this
is the time to start identifying the groups, the managements and the projects
that really have a chance at succeeding. You can buy them for a lot less now
than you will be able to buy them somewhere in the future. My guess is next
year things start to look better, but this takes patience.
TGR: Thank you for your time.
Exploration Insights newsletter focuses on early discovery, high-reward
opportunities, primarily among junior mining and exploration companies.
