Small Cap Power Interviews James West

Smallcappower.com is pleased to feature an interview with Mr. James West, publisher and editor of “The Midas Letter”, an independent capital markets entrepreneur and investor, and portfolio advisor to the Midas Letter Opportunity Fund, which is a Luxembourg-based fund that captures early stage financing opportunities with premium management teams

In this exclusive interview with SmallCapPower.com, Mr. West provides his perspective on markets, impact of European debt crisis and outlook for gold.

James West: Gold heading ‘much higher,’ no crisis in Europe

James West, publisher of the Midas Letter, says gold will climb above the US$2,000-per-ounce threshold in 2012 and that silver will rise along side the yellow metal. With the long-term picture in mind, Mr. West launched the Midas Letter Opportunity Fund in 2011 and he discusses a number of the fund’s positions in this exclusive interview with SmallCapPower.com

SmallCapPower.com: James, in 2011 you launched your Midas Letter Opportunity Fund, but then the markets, especially the small-cap junior mining sector, slumped badly over the remainder of the year. Will the junior mining sector rebound in 2012 or will it take longer than that?

James West: I think we’ve already seen a bit of a rebound in the first weeks of trading, but it’s rebounding selectively. There are some companies with very strong projects, with good access to capital, that have made significant advances in the past year, markets notwithstanding, and those companiesare recovering very nicely. I can think of10 or 12 stocks in my portfolio that essentially doubled in value in January.

SmallCapPower.com: What subsectors of that space are most likely to display some strength in 2012?

James West: Precious metals will be the leader and I believe oil and gasis going to be extremely strong in 2012. Iron ore is going to continue to see solid demand throughout 2012.And that’s pretty much it. I think real estate investment trusts in Canada are very strong, but not so much in the United States.

I don’t think mostbase metals or lithium or rare earths are going to be very attractive to investors this year. I think that it’s really only going to be those two sectors that perform – precious metals, and oil and gas.

SmallCapPower.com: Nonetheless, let’s get your perspective on copper.Copper started 2011 at around US$4.40/lb. but finished at US$3.43/lb., a drop of about 22%. How do you expect copper to fare in 2012?

James West: I expect it to rebound over the $4.00/lb. level in late 2012.I’ve become very bullish on copper after studying the supply/demand picture more closely going into 2012. There is a tremendous shortage of copper building, and so we’re looking to get involved with more copper stories this year.

SmallCapPower.com: Do you have any exposure to copper through your Midas Letter fund now?

James West: We do. We are building a position in Redhawk Resources Inc. (TSX:RDK), which I fully expect to become the target of takeover bids onceits next resource update is published, which should happen in mid-April. Redhawk already has 5 billion lbs. of copper at its Copper Creek copper-molybdenum project in Arizona and, judging by recent drill results, that number looks poised to nearly double.

CuOro Resources Corp. (TSX-V:CUA) is the best early stage copper exploration story that I know of. It recently announced a fantastic intercept of over 102.9 metres of 1.44% copper at its Santa Elena property in Colombia, and the company just released a technical study that supports the idea that there could be some rather significantVMS-hosted copper mineralization present.

I also have exposure to copper in Prophecy Platinum Corp. (TSX-V:NKL). Prophecy owns the Wellgreen platinum group metals+gold-nickel-copper deposit in the Yukon, which is easily North America’s largest and most valuable undeveloped platinum group metals target. It all comes in ataround 0.4% copper so there is some exposure to copper there.

And I have a position in New Gold Inc. (TSX:NGD), which has exposure to copper as a byproduct at some of its gold mines.And that’s about it for my copper exposure.

SmallCapPower.com: No conversation with you would be complete without some talk about precious metals. What’s your outlook for gold and silver?

James West: I continue to believe precious metals are headed much higher. I think you’re going to see an increase in the price of gold over the next 10 years that will be very similar to what we saw over the previous 10 years, which were average annual increasesof more than 20%. I expect that to continue but I fully expect there will be episodes, such as the one that began on Sept. 2, 2011, where the price of gold plummets by 23% over a couple of weeks due to extreme unloading in both the SPDR Gold Trust ETF (NYSE:GLD) and the futures market. That was a co-ordinatedliquidity event by parties who would appear to be unrelated. But are you telling me that they just coincidentally got together and decided that they were going to get out of gold at all costs, even if it meant taking a loss? Some people say that it’s just the banks manipulating the futures market for profit, while others believe the market is being manipulated by central banks. In any case, the gold market’s so small relative to equities that the gold market is easily manipulated no matter which entity is doing it.

I think the price of gold is going to break through US$2,000/oz in 2012. It could go over US$2,500/oz. but it all depends on what the people who recklessly sell gold have in mind for 2012.

SmallCapPower.com: And will silver see a similar rise, at least in percentage terms?

James West: The trend in silver during the last three years is that when the precious metals are rising strongly as the market appears to be reacting to a drop in demand, we see the ratio of gold to silver – the number of ounces of silver that it takes to buy an ounce of gold –coming down.And then we see it widen again duringmajor selloffs like we saw in the third and fourth quarters of 2011.So, if gold goes to US$2,500/oz, I think the ratio of gold to silver could go as low as 30 to 1 from the current ratio of roughly 45 to 1.

But then if the holders of SPDR Gold ETF and gold futures suddenly become short the market, for whatever reason, then I think that ratio will widen again. That’s why I find it hard to say whether it’s going up or it’s going down because everything to do with precious metalsalso depends on what this completely unpredictable group is going to do.

SmallCapPower.com: Let’s get into some economic situations that could affect the gold price. If the European debt crisis continues to be the dominant theme that it was in investment circles toward the end of last year, is that likely to negatively impact precious metals prices?

James West: No, I don’t believe so. Prior to the European debt crisis, the U.S. had its own debt crisis, even though it never was admitted or discussed in the mainstream financial media. I think the debt crisis is really a global debt crisis and, at the same time, it’s not really a crisis. Time and again central banks have demonstrated that when they have no choice but to print money, they will print money. Therefore, there is no possibility of a crisis because in 2011 we came to measure our debt in trillions. And before that it was billions. And so, if you’re looking into the future, we will measure our debt in quadrillions, quintillions, septillions, ad nauseam, untileverybody decides that it’s a crisis again. Everyone has become so accustomed to it and the market is priced that way.

SmallCapPower.com: What are some of the Midas Letter Opportunity Fund’s holdings in the junior gold space?

James West: My top holdings are Hunter Bay Minerals Plc (TSX-V:HBY); Giyani Gold Corp. (TSX-V: WDG; Corazon Gold Corp. (TSX-V:CGW); Meadow Bay Gold Corp. (TSX:MAY); Foundation Resources Inc. (TSX-V:FDN), Prophecy Gold; and Scorpio Gold Corp. (TSX-V:SGN).

SmallCapPower.com: You have a number of plays in Northern Ontario’s Red Lake camp.Why are you so bullish on that area?

James West: In terms of political risk it’s non-existent in Ontario.Ontario is the most prolific province for gold in Canada.It’s produced more gold than any other province by a factor of about four.My father was born in Timmins, Ont.His father worked in the mines in Timmins, and his father came to Canada to work in the mines in Ontario. And so apart from Ontario’s political stability and its precious metals-rich geological systems, it’s also in my blood.

SmallCapPower.com: Could you tell us more aboutwhat you consider your top three or four names?

James West: Well, Hunter Bay’s flagship development project isSela Creek in Suriname. It’s on trend with several multimillion-ounce gold mines in the area. It’s just north of Brazil so there’s probably 10 mines in the vicinity. EldoradoGold Corp. (TSX:ELD) has a mine on the same type of geology as Sela Creek. Eldorado acquired that when it took over BrazauroResources. These types of deposits have been identifiedby the existence of artisanal miners whobasically remove the overburden and process it because it’s relatively rich in gold. Most of the major artisanal mining camps in that part of Latin America have turned out to host multimillion-ounce gold deposits. And so with Sela Creek being one of those, I am relatively confident that we’re going to see that type of a mining scenario develop. Whether it’s 1 million ounces(Moz) or 10 Moz is really, in my mind, the only question mark.

SmallCapPower.com: Tell us about some of your fund’s other positions.

James West: OK, let’s talk about Giyani Gold. Giyani’s land package hosts a group of past-producing mines in South Africa’sGiyani greenstone belt.There are seven past-producing mines and they are all outside of the Witswatersrand Basin area, South Africa’s traditional gold mining region, which is why they’ve sort of been overlooked. These mines were in the northwestern area of South Africaand all seven were operated independently. No one has ever looked at that area as one continuous mineralized system, which is basically Giyani Gold’s theory, and that’s how the exploration program is going to be approached. The deal just got finalized at the end of December so we expect drilling to start soon. Being in South Africa, that one has a lot of potential, so that’s why I’m excited about Giyani.

Foundation Resources is one of my larger positions and that company is developing the Coldstream Gold Project just outside of Thunder Bay, Ont. That’s not quite the Red Lake camp but it’s in that same part of the world. Coldstream has a National Instrument 43-101-compliant resource of 860,000 ozgold (763,276 ounces gold inferred and 96,400 ounces gold indicated) on its Osmani deposit. Foundation has a market cap of about $5.8 million so you’re actually buying your ounces in the ground there for about $7.00/oz in the ground. And that’s just one of five highly prospective gold targets Foundation has within a 16-km trend.

SmallCapPower.com: Does the fund have a position that leans more toward silver?

James West: I could point to Kootenay Gold Inc. (TSX-V:KTN).It’s called Kootenay Gold but it owns thePromontorio silver-lead-zinc deposit in Sonora, Mexico. Promontoriois a silver-dominant system with grades up to 2 oz per tonnesilver.Kootenay continues to drill Promontorio, which should only add to its existing resource. Kootenay is certainly my biggest silver play right now.

SmallCapPower.com: Are there some ways that retail investors can compete or even outperform institutional investors in this space?

James West: Outperform?

SmallCapPower.com: Yes.

James West: Well, that’s tough. In the mining space it’s virtually impossible for retail investors to compete with institutions. Institutions buy wholesale and they buy wholesale repeatedly so their average cost per investment is generally much lower. If I were to compete with institutions, I would look for companies that have already done their financing and where the share price has dropped far below where the institutions financed it. These companies would also have to have a geological resource that has increased in value despite the market failing to recognize that. Those are the kinds of opportunities where a retail investor could come in and develop a big position at much cheaper rates than the institutions paid.But they wouldn’t have the benefit of a warrant, which typically comes with the wholesale financing that an institution would participate in. That’s really the only way that an individual could outperform an institution.

SmallCapPower.com: But the conditions seem just about ideal for that kind of cherry picking because a lot of these juniors are at all-time lows.

James West: Yes, absolutely. In terms of Foundation Mining, for example, almost all of its private placements were done at almost double the money. So, you could buy a million shares of Foundation for probably less than $0.15 a share and you would outperform the institutions, for sure.

SmallCapPower.com: How has your fund performed to date?

James West: The fund has not been in existence for a year, so we have not done a net asset value calculation at this point. The fund is still in “developmental” mode; it’s still bringing in subscriptions.

SmallCapPower.com: As it turned out, was2011 was the right time to launch your fund?

James West: It was in terms of it being a great time to be buying stock. It wasn’t in the sense that raising the money was very difficult.Nobody wanted to put money into anything speculative in the last six months of 2011. Basically, it was the people with whom I’ve developed very long relationshipswho finally opened their wallets to participate because it’s simply been a risk-off market. In fact, in Asia 123 funds actually closed their doors in 2011. So in that sense it was a horrible time but we only set out to raise 20 million euros, so it wasn’t that much of an issue.

SmallCapPower.com: And you plan to launch another fund this year, no?

James West: Yes. Our next fund will be a resource capitalization fund where we’re going to extend loans to advanced exploration projects heading toward production in exchange for a portion of their production. We’re looking to raise $1 billion to start, and that’salready underway.

SmallCapPower.com: What is 2012 going to look like for you? Please give us a picture of that.

James West: My goal this year is totarget double-digit growth in all of my investments, and I think that’s going to be very feasible.Because of the new discipline inflicted by the bad markets of 2011, I’m 10 times more picky than I was at the beginning of 2011. So I’m looking for double-digit performance and I plan to get it.

SmallCapPower.com: Thank you for talking with us today, James.

Interview Disclosure: This interview was conducted by Brian Sylvester on behalf of SmallCapPower.com. Mr. Sylvester and/or his family may own shares of the companies mentioned in this interview.