The Gold Report: You recently implied in an article titled
"The Cocked Trigger" in Gold Newsletter that the current
prevalence of short gold positions is actually a good thing for gold prices,
especially if the Federal Reserve raises rates. That goes against everything
we've been led to believe. Why do you say that?
Brien Lundin: We have an unusual situation in the gold market right
now in that in the Commitments of Traders reports by the U.S. Commodities
Futures Trading Commission, for the first time, the managed money sector has
a net short position in gold. Typically, speculators have a net long
position, and the commercials—jewelers, bullion dealers, etc.—have a net
short position because they have to hedge. But the speculators are now net
short, and the commercials have their lowest short position ever. It is a set
up for a short covering rally at some point.
Add to that the possibility of a Federal Reserve rate hike at some point,
and we could see a big, unexpected move upward in gold. I think the timing of
a rate hike has been overhanging the gold market for well over a year.
Relieving that issue could actually prompt a short covering rally. It would
be kind of a sell-the-news event where the shorts figure that the trade is
over and this is a good time to begin covering, more and more head for the
door, and we have the rally underway.
TGR: You also said the Chinese currency devaluation could be a
spark for increased gold buying. Will that be a similar sell-the-news
scenario?
BL: Yes. The initial announcement devalued the yuan by about 2%,
which of course increased the price of gold and other commodities by 2% for
Chinese consumers. So you would think that would be a negative. However, it
wasn't a one-off devaluation. It was a new currency regime in which the yuan
would be allowed to float more freely against world currencies and, in fact,
would be allowed to drop against world currencies, in particular the U.S.
dollar. So Chinese consumers, the investors and savers domestically who have
been buying gold hand over fist, now think that the yuan is going to be
depreciated over time, so their incentive to buy gold is heightened. I expect
that the devaluation will actually increase gold demand in China.
BL: I think we saw something very near to complete capitulation in
gold on July 20 when speculators attacked the entire metals market through
orchestrated flooding of short sales onto the futures exchange. Due to
greater demand from China and now greater safe-haven demand from Western buyers,
gold prices should continue to rise.
TGR: As we move into the fall busy gold equity buying season, you
seem to be shifting your portfolio to companies with proven resources. Why
now?
BL: Because there is no need at today's price levels to accept
exploration risk. There are a few special cases in exploration that I like
and will still recommend going forward, but I have been shifting our
portfolio more toward companies that have proven world-class resources, some
of them with economic studies in hand. I think these will be the first movers
in a metals price rebound. Companies with large-scale resources offer the
same upside potential that an exploration play would have provided a few
years ago, and they're selling for about the same price with a lot less risk.
TGR: Give us some examples of companies that are nearing production
but are still bargains in this market.
BL: A number of them have kept working even during the market
decline and made some really good progress. Almaden Minerals
Ltd. (AMM:TSX; AAU:NYSE), Auryn Resources Inc. (AUG:TSX.V), Balmoral Resources
Ltd. (BAR:TSX; BAMLF:OTCQX), Columbus Gold
Corp. (CGT:TSX.V; CBGDF:OTCQX), Gold Standard
Ventures Corp. (GSV:TSX.V; GSV:NYSE), Kaminak Gold
Corp. (KAM:TSX.V), Lion One Metals Ltd. (LIO:TSX.V) and Rye Patch Gold
Corp. (RPM:TSX.V; RPMGF:OTCQX) fit that description.
TGR: Let's start with Columbus Gold. Were you surprised by the
economics outlined in the company's preliminary economic assessment (PEA) for
the Montagne d'Or project in French Guiana?
BL: It was along the lines of what I expected, but I think there's
still upside remaining because of the geometry of the deposit and the drill
program that will be ongoing. The key with Columbus is that it was able to
strike a remarkable deal with Nordgold N.V. (NORD:LSE) that will carry the
project through to a bankable feasibility study on a 50/50 basis. That's real
value for Columbus Gold and is not being adequately recognized by the market.
The company also has a suite of highly prospective exploration projects in
Nevada, including the Eastside gold project, which offers a good bit of
upside potential, the value of which is not reflected in the market cap right
now.
TGR: Balmoral is in the midst of a large drill program on the Detour
Trend project in Quebec. When do you expect to see results there? What's it
going to take to make an impact on the stock price?
BL: Balmoral will be producing news for a long time on both gold
and nickel targets, but I don't know that any particular news release is
going to have a huge impact on the share price. This is one of those
companies that I recommend investors buy and forget it, then check back in a
couple of years, because I think Balmoral is simply doing the right thing. It
has an extraordinary exploration team that has been very successful with
other projects throughout their careers. It has two premier projects that I
think are just going to continue to get larger over time.
TGR: Gold Standard Ventures recently announced its drill results on
its property in the Carlin Trend in Nevada. Are you expecting more catalysts
from the company this year?
BL: Yes. Gold Standard Ventures is a smart money play. The people
behind the company have a lot of experience in Nevada and have demonstrated
their confidence by buying the stock. The company recently took on the Pinion
gold project, and it is moving that toward development, which was a wonderful
move. This company is destined to go far in the next metals rebound.
TGR: What is the next catalyst for Rye Patch on its Carlin Trend
Patty project?
BL: That is a high-potential exploration project. But more
importantly to me, a lot of people are not giving Rye Patch credit for its
progress toward production. It also benefits from royalty income from its
agreement with Coeur Mining Inc. (CDM:TSX; CDE:NYSE), which essentially means
it can keep progressing toward production without any share dilution. Rye
Patch is a great company for investors who want to buy and hold. It affords
exposure to an economically sound project with proven resources. Investors
just have to wait for the market to come back to reward them.
TGR: Kaminak recently reported drill results from the Coffee
project in the Yukon. The market didn't really notice. What did you think of
the results?
BL: The market might have greeted the results with a yawn, but to
be fair a lot of the results were from infill drilling. Plus, there's apathy
across the market right now. It really takes some exceptional drill results
to get the market's attention these days. Even then, sometimes a company will
put out a great result, get large-scale trading volume, and people will just
use the opportunity to exit the stock.
Kaminak is another one of those buy-it-and-forget-it companies. I believe
it is going to be one of the first companies to be taken out by a major when
the metals markets come back. The Coffee project has wonderful economics and
a management team that, again, always does the right thing. All the i's are
dotted and all the t's are crossed. Senior companies can be very confident
that they're not buying a project with any surprises. They'll know what
they're getting, and the numbers really look good.
TGR: You recently added Auryn to the portfolio. Was that based on
the strength of the resource, the management team or both?
BL: Quite frankly, the management team. I couldn't bring myself to
recommend the company when it had no project whatsoever, but I was thinking
about it because the management team has a track record that's unblemished by
failure of any kind. They were behind the Keegan Resources Inc. (KGN:TSX;
KGN:NYSE.A)/Asanko
Gold Inc. (AKG:NYSE.MKT; AKG:TSX) company and its Esaase project with its
discovery of over 5 million ounces of gold. In the middle of a down market,
they were able to have a success and have their next venture, Cayden
Resources Inc. (CYD:TSX.V; CDKNF:NASDAQ), which sold off last year to Agnico
Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) at a nice profit for all the
shareholders. Auryn is their next company and, I believe, their next big
success. The Committee Bay gold project is interesting. Auryn's management
was so excited after doing initial due diligence that it wasted no time in
consolidating their ownership over the project. I have great confidence in
the management team. If they like the project, I like it. I think they're
going to make a big success out of it as they have in every previous company.
TGR: One more in that same advanced boat is Lion One, which
released its PEA on the Tuvatu project in Fiji last month. What did you think
of the report?
BL: It exceeded my expectations. It came in with great economics
and exceedingly low capital costs to get into production. Not only is the
project outstanding, so is the management team. Wally Berukoff runs a very
tight ship, and he has put together a team that I have complete faith will be
able to bring this project into production. So when the next big turn in the
markets comes, Lion One will either be in production or on the verge of
production, and would seem to be a prime takeover target for the majors. I
know that Wally Berukoff will get full value for it.
TGR: Let's talk about some currently producing companies in the
portfolio that you think still have upside.
BL: Great
Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT), GoGold
Resources Inc. (GGD:TSX), Excellon Resources Inc. (EXN:TSX; EXLLF:OTCPK) and a new
play, Newmarket
Gold Inc. (NGN:TSX.V), fit that description.
TGR: Let's start with Great Panther. When will the exploration
pipeline at its two operating mines and progress at the Guadalupe de los
Reyes project in Mexico begin to impact the stock price?
BL: Normally, production growth or exploration success would be a
catalyst, but in this market where silver prices have been trending lower,
many silver companies are in a difficult situation. Investors have to closely
watch the internal production metrics. Is the company making money at current
prices? Will it make money if silver takes another dive downward?
That used to be Great Panther's weak point, but its latest quarterly
results are amazing. The company generated higher production levels and lower
cash costs despite a stronger U.S. dollar. Production was up over 50%. All-in
sustaining costs dropped about 50%. I was very pleased with the numbers that
Great Panther was able to deliver. It is making money on every ounce of
silver it produces, although it did report a net loss due to currency
exchange issues. So I'm positive going forward.
TGR: Excellon is a recent addition to your portfolio. What makes
you think this company can overcome operational challenges and be profitable?
BL: Excellon has been the highest-grade silver producer in Mexico
for over a decade, and the company did encounter some operational challenges
as the mine got to a depth below the water table. Its grouting program didn't
work very well and production rates fell. Management brought in new expertise
and allocated the capital investment necessary to alleviate the problem. A
new economic study showed that with the improvements, the company could lower
costs substantially and increase production. It has just begun to implement
that program, and it looks as if it's getting the expected results. The
company should be rerated once it can prove it can lower the production
cost-per-ounce to levels that would allow it to make money in virtually any
silver price scenario.
TGR: GoGold was one of the few companies that actually impacted its
stock price when it announced Q2/15 production numbers for the Parral
tailings project in Mexico. Are you optimistic about management's ability to
manage debt and put the Santa Gertrudis mine into operation?
BL: Yes, I am. You can never go wrong betting on Fred George of
GoGold. He's a relentless entrepreneur who has enjoyed a series of big-time
successes. I'm very confident that he'll do the same with GoGold. The Parral
project was a very smart acquisition. It's being proven now with revenue
coming in higher than expected. This will allow the company to address
development of Santa Gertrudis, where it was able to prove up resources that
the previous owners were not able to delineate. The company completed a major
credit facility raise recently that will allow it to go into production. Not
only does it have proven resources, but it also has a production profile
that's rapidly rising. Almost irrespective of what the overall market does, I
think the shareholder value will increase with GoGold. It's a great
investment opportunity.
TGR: Is Newmarket an Australian turnaround story? Are you expecting
more acquisitions there?
BL: It's partially a turnaround story. It acquired Crocodile Gold
Corp. (CRK:TSX; CROCF:OTCQX), which was a somewhat troubled, midlevel mine in
Australia, but in truth, that production turnaround at the mine was already
in place as Newmarket was acquiring the company. So Newmarket was very
fortunate in its timing. But Newmarket is also more of a thematic play where
it is going to be aggressively acquiring producers in this depressed market
at very low prices and then riding a rebound in the metals that seems
inevitable. If anything, this company would like to have the turnaround in
gold and silver wait until it's able to make more acquisitions. Regardless, I
think that Newmarket is an up-and-coming company that is going to really
surprise the market.
TGR: You also have a platinum group metals (PGM) project in the
portfolio. Are you bullish on the supply and demand fundamentals for platinum
or is this a management story?
BL: It's a bit of both. You can never divorce management from the
equation. It is typically the most important component in analyzing a
company. But Wellgreen
Platinum Ltd. (WG:TSX; WGPLF:OTCPK) has a polymetallic project in the
Yukon so large that it is a strategic resource for some big player down the
line. I look at Wellgreen as not so much a play on any specific situation in
platinum, palladium or nickel, but as a well-run company with a resource that
is absolutely world class. It represents one of the few primary PGM projects
that is not in a high-risk political regime. At some point, the Wellgreen
project will represent a safe, secure, large-scale source of PGMs, and that
will have value much greater than what the market is currently assigning to
the company.
TGR: Are there any other companies that you wanted to mention?
BL: There is one company I'm involved in that I haven't been able
to recommend to my readers because I am the chairman and largest single
investor, and that's Natcore Technology Inc. (NXT:TSX.V). It recently made
news that it has developed a solar cell that completely eliminates silver in
the production process, an advance that will dramatically lower costs. The
cell structure is also amenable to ultrahigh efficiencies. This could really
take the market by storm.
TGR: Your annual New Orleans Investment Conference is coming up in
October. What will attendees take away from this year's event that will help
them position themselves for the next upcycle?
This year will focus more on precious metals and mining stocks than ever
before. Typically, the biggest gains have been made at the bottoms of the
markets. Some companies in attendance in 1993–1994 and 2000–2001, cyclical
market bottoms, subsequently multiplied 10, 20 or even more times when the
market turned. I think we're primed to do that again.
The conference is also an opportunity to quiz management about their
experience and how much of the stock they own. In this environment, the most
important question is the financial resources a company has in the bank. Many
companies forced to raise money today have to do it at a nickel or less;
that's exceedingly dilutive to a company's share structure. By participating
in a nickel private placement, quite often, you're not doing yourself or the
company any favors, because at some point that company will have to roll back
its shares. You don't want to invest in a zombie company that's just sitting
on its hands and not doing anything and trying to wait out the markets. Time
is money. You need a company that is going to keep moving forward. When you
attend an event like the New Orleans Investment Conference, the companies in
the exhibit hall have made a significant commitment, so you know that they
are determined to keep working. It's typically a smart management group
that's continuing to build shareholder value even at the bottom of the
market.
Over and above the speakers and the companies, attendees have the
advantage of rubbing elbows with some of the top investors in the world,
their fellow attendees. Just by deciding to go to the New Orleans Investment
Conference, they're self-identifying as smart, savvy investors who make their
own decisions and are information hungry. Our attendees tell us this all the
time—that they get some of their best ideas by talking to others in the
audience. In fact, even our expert presenters like to mingle with the
attendees for that very reason. It really is a gathering of very smart, very
experienced investors where ideas for making money are all around you.
TGR: Thank you for the time, Brien.
Gold Newsletter. He also hosts the New Orleans Investment Conference.
