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If this is a bottom, Dr. Michael Berry sees it as the ideal time to
pick up bargains in the mining sector. In this exclusive interview with The Gold Report, the
Federal Reserve Board expert gives his diagnosis for what ails the markets
and names the companies from Alaska to Brazil that could survive the
financial plague wiping out equities all over the world.
The Gold Report: The Gold/Philadelphia
Gold and Silver Index (XAU) ratio recently surpassed its high in 2008,
slightly crossing 11 and peaked in the high 10s at the bottom in 2008. Do you
think we have put in a bottom?
Michael Berry: If I were 100% sure, I
would be a very wealthy person. I think we're close to a bottom here. Gold is
too important. The long-term secular bull markets, such as we've seen in gold
and silver and in fact in many of the metals, do not end this way. They end
with a parabolic move upward. That is why I don't think this is the end of
the gold bull market at all. I think it's probably a welcome reprieve. But
ultimately, if we are not at the bottom, we're fairly close to it.
TGR: You testify to the
Federal Reserve Board twice a year. In the last meeting, was there any
indication of more easing on the way?
MB: There is every
indication of more easing; there is every necessity of more easing. But the
Fed is divided. Some of the Federal Reserve Bank presidents and governors
believe we should tighten, while others have followed the Bernanke line,
pushing easing. I cannot even imagine how we could raise rates in this
market. I'm not saying that we don't have food price inflation, but the Fed
really wants to inflate out of this problem. So I think we'll have more
easing. But for now, the Federal Open Market Committee is divided between
hawks and doves in a way it has never been in the past. It is going to be
very interesting to see what happens as we move forward.
TGR: Many of your preferred
companies have significant byproducts, primarily copper. Is this because you
think copper has a bright future or because having significant byproducts
tends to lower cash costs for gold and silver miners?
MB: I think it's the
former. If we are going to go into an irrecoverable economic depression, then
there's no future for copper. But I'm an optimist, and even though these are
very difficult days for global growth, I think companies that own copper
deposits are going to be very valuable when we exit this down period.
Therefore, I like
copper—not necessarily as a byproduct, but as a major primary product.
And if you look around the world right now, many countries are nationalizing
their copper deposits. Good copper deposits are hard to come by. Copper is
clearly an indicator of global economic health, and we are going to
continue to grow again. It's just going to take some time, perhaps a long
time.
TGR: When it comes to silver
and gold companies, what do you look for in a possible investment?
MB: I have developed a
10-factor model for discovery micro-cap and small-cap companies. First, in extractive
resources we look for world-class deposits or at least the potential
for world-class deposits. The second critical factor is management. There are
a lot of good management teams right now. But it is a very difficult time.
Many of these companies have been sold down. And some of them are not going
to survive. It's a pity but that's just the way it is.
A number of companies
that I would have said were good if we were speaking a few months ago are
less good today, because a lot of them cannot access capital markets to raise
money. One of the characteristics of all junior miners is that they are
constantly raising money because, by definition, they don't have production
and cash flows yet. There are some great bargains out there, but it is going
to take a strong stomach to buy some of these companies.
One company that I think
is really excellent is the silver company Alexco
Resource Corp. (AXR:TSX; AXU:NYSE.A). The company is in the
Yukon cleaning up the old silver dumps from the past century. There are 35
old mines up there with extraordinarily high-grade silver, 40 ounce (oz) silver that it is now beginning to mine. Clynton Nauman is the CEO; I
really respect him and I think he has assembled a good team.
Alexco is an example of a
company that will have $20–30 million (M) on the balance sheet in cash,
so it is sustainable. It probably will make $30M this year and next year.
That is the kind of company we like, those with sustainability especially in
this tough market environment.
TGR: Do you think Alexco might buy Monster
Mining Corp. (MAN:TSX.V) since it owns the rest
of Keno Hill?
CB: Alexco
is in production and the management team is spending all its time right now
trying to figure out how to expand the 8 million ounces (Moz)/year
it is currently mining on its property. The company has about 22 targets that
were old mines and adits. I would be surprised if
it bought Monster. If it were to look for an acquisition, it would look for
something a little bigger to move up into the next segment of silver
producing companies.
And remember, Alexco is really two companies. It does environmental
clean-ups and mining. It will likely split off the environmental side and
either vend that out to shareholders or IPO it at some point.
TGR: You have mentioned Galore Resources Inc. (GRI:TSX.V), another Canadian
company, before. Are you still following them?
CB: Yes. I really like the
idea that Galore is in Canada. There is a lot of talk now about a possible
mining unfriendly NDP government coming to power in British Columbia, but
Galore is a really interesting play. It is right in the middle of several big
developments. I like the company's Dos Santos Mexican project as well. It is
just drilling it out now, but it has a lot of potential.
TGR: Galore is at $0.085
now. Are there any catalysts coming up that could move that company up?
CB: I don't think catalysts
matter today because right now the Toronto Stock Exchange Venture Exchange is
off approximately 50%. This isn't just a bear market,
it is a disaster for these exploration stocks. All of these stocks have been
taken out and shot, metaphorically. I am not sure such catalysts are going to
do much until we unwind the sovereign debt problems. Companies are just
learning how to survive through this. So would I be buying something like
Galore for $0.08? Yes. It's a bet the company will survive and will be worth
a lot more money.
TGR: Any other silver
companies you like? Maybe in Mexico?
MB: Mexico is a country in
a bit of turmoil right now. It is a little more difficult to work there. But
Mexico and silver go hand in hand. The Faja
de Plata, the plain of silver, is famous. The Peñasquito
mine, which is now owned by Goldcorp Inc. (G:TSX; GG:NYSE), is the largest silver
mine by net asset value in the world and the second largest gold mine by net
asset value.
Southern Silver Exploration Corp.
(SSV:TSX.V; SEG:FSE) is an exploration
company down there. I think it is trading around $0.06 ,
but it has four deposits, two in Mexico and two in the United States. The
best deposit is Cerro Las Minitas. The company is
exploring that now. I think it has great potential. It is a very cheap stock,
very cheap indeed.
Quaterra Resources Inc. (QTA:TSX.V;
QMM:NYSE.A) has a property called
Nieves, which is not very far from Southern Silver's property. It has about
80 million ounces silver at a 15 gram cutoff in Indicated and Inferred
categories on that property, according to the NI 43-101. It has real
potential.
Quaterra is also one of three
companies working on the Yerington project in the former major copper mining
district in Nevada. That project is a company-maker in itself. A preliminary
economic analysis issued last week showed a 41 million pound/year copper mine
for 18 years. It is oxide and calcacite, so it is
acid-leachable. That district could add up to 20 to 50 billion pounds of
copper over time. Yerington, MacArthur and the Bear deposits are the
company's primary assets.
TGR: Doesn't Quatterra also have a joint venture with Grande Portage Resources Ltd. (GPG:TSX.V) near the Coeur d' Alene Corp. (CDM:TSX; CDE:NYSE) property in Alaska?
CB: Yes it does. Grande
Portage and Quaterra have a 65/35 joint venture on
Herbert Glacier. It is about 20 miles south of Coeur d' Alene's
Kensington mine, just north of Juneau, Alaska. Herbert is very high-grade
gold, a six-parallel vein system. The company will probably drill at the
Herbert Glacier in June. I think it is possible that it could have 0.5 Moz of reasonably high-grade gold after this year's
drilling program, a very nice discovery. Right now neither company is getting
much credit for it in their share prices.
TGR: How is the U.S. doing
getting project permits through bureaucracy and what projects are you looking
at that might work?
MB: That's a great
question. We are doing a lot of work in Washington D.C. now trying to educate
the staff of various congressmen and senators on the importance of pending
natural resource legislation. The Obama administration is trying to shut off
mining for alternative energy solutions. And it is a huge mistake. But at
least there is awareness in Washington that we have to have a transparent,
faster permitting regimen. The Canadians are going to that. And we need to do
it here, because we need to be developing some of our own natural resources.
The good news is a pending senate bill could simplify the permitting process.
If we have a Republican administration in January, it will be easier to get
that passed into law.
In the meantime, Revett Minerals Inc. (RVM:TSX; RMV:NYSE.A) has the Rock Creek
project in Montana, a potential world-class development near the Troy mine, a
beautiful copper/silver mine. I think the general economic environment will
push Rock Creek down the road. I have great faith in the efforts of John
Shanahan, the CEO. The company has already jumped through every hoop to meet
environmental demands.
Once that mine is built,
the bigger boys, Rio Tinto (RIO:NYSE; RIO:ASX), BHP
Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) or Freeport-McMoRan Copper & Gold
Inc. (FCX:NYSE), will want to have that company.
TGR: Any thoughts on Mines Management Inc. (MGT:TSX; MGN:NYSE), which has the Montanore deposit near there. What are its chances?
MB: It has more complex
geology and will not be quite as easy to mine as Rock Creek. I am not sure it
will ever be permitted. At some point I think that Revett
will probably have an opportunity to take on Montanore
as well. We will see.
TGR: Nevada seems to be a
hot spot, both for silver and gold. Are there some plays that you like there?
MB: Nevada is a great place
because it is a mining state. Utah, Nevada and Arizona are great places to
find things and get permission to mine them. Terraco Gold Corp. (TEN:TSX.V) has the Moonlight
deposit, which is in northern Nevada, not very far from Reno. It is in the
same Black Ridge Fault zone with Pershing Gold Corp. (PGLC:OTCBB), a new company with a new
management team led by Steve Alfers, formerly one
of the key managers at Franco-Nevada Corp. (FNV:TSX). The company is consolidating
the bottom of that trend in a land position around the Relief Canyon mine. I
really like that management team. I have been out to see the property and
spend time with management. I think it has a lot of potential. More than
150,000 oz of historical gold has been drilled out
and I think both companies will find a lot more plus there is a fully
commissioned gold plant that is not in operation at the present time.
Yes, I am bullish on
Nevada. I think there is a lot of opportunity in gold, silver and copper
there. Why go to Africa or China, when you can go to a place like Nevada and
make great discoveries and subsequently mine?
TGR: Any other companies you
would like to share that meet your model standards?
MB: Graphite has been a hot
topic. One of the farthest along companies in this space is Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) in Ontario. It has a
great management team led by Greg Bowes. The company is on the road to
getting into operation and has an NI 43-101 coming. It is in a great location
halfway between Ottawa and North Bay. That is certainly a company to
consider.
Northern Gold
Mining Inc. (NGM:TSX.V) is also in Ontario. It
is pretty close to production, has a great gold deposit and is a very cheap
stock right now. I think it will get financed and back into production soon.
I really like the
Canadian scene. Carlisle Goldfields Ltd. (CGJ:TSX; CGJCF:OTCQX) is in the Lynn Lake
Greenstone Belt of Northern Manitoba. It has 2 Moz
of Measured and Indicated that could grow to 5 Moz
of Measured. That is bankable feasibility, but nobody cares about the stock.
It is selling for around $0.20 right now. These stocks are way too cheap.
Some of them will certainly survive. To be good stock pickers, we are
going to have to recognize that and get in on these things.
TGR: What is next for Silver Wheaton Corp. (SLW:TSX; SLW:NYSE)?
MB: Silver Wheaton's
business plan is absolutely brilliant. The company has executed it
beautifully. These guys are smart. I wish I owned a lot more stock than I do.
I think silver is at $29/oz today, plus or minus. I
think it is going to be $200/oz before this is all
over. It might take five years for that to happen, but it is going to happen.
The company is cashed up
with over $1 billion, $400M revolving debt and approximately $125–150M
in equity investments. Silver is off from its highs 33% in the short term.
But it is going to go back up. It is a very strong story and a stock that
should be owned.
TGR: Thanks for your
insights.
Dr. Michael Berry served as a professor of
investments at the Colgate Darden Graduate School of Business Administration
at the University of Virginia from 1982–1990, during which time he
published a book, Managing Investments: A Case Approach. He has
managed small- and mid-cap value portfolios for Heartland Advisors and Kemper
Scudder. His publication, Morning Notes, analyzes emerging
geopolitical, technological and economic trends. He travels the world with
his son, Chris, looking for discovery opportunities for his readers. His new,
free Discovery Investing
Scoreboard software covers all companies on all exchanges
using a 10-point grid.
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DISCLOSURE:
1) Chris Marchese of The Gold Report
conducted this interview. He personally and/or his family owns shares of the
following companies mentioned in this interview: Alexco
Resource Inc., Silver Wheaton Corp. and Colossus Minerals Inc.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Pershing Gold Corp., Terraco Gold
Corp., Northern Graphite Corporation, Colossus Minerals Inc., Revett Minerals Inc., Grande Portage Resources Ltd.,
Goldcorp Inc., Southern Silver Exploration Corp. and Galore Resources Inc.
Streetwise Reports does not accept stock in exchange for services. Interviews
are edited for clarity.
3) Dr. Michael Berry: I personally and/or my family own shares of the
following companies mentioned in this interview: Northern Graphite
Corporation, Goldcorp Inc., Revett Minerals Inc.
and Terraco Gold Corp. I personally and/or my
family am paid by the following companies mentioned
in this interview: N/A. Michael Berry was not paid by Streetwise for
participating in this story.
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