The Gold Report: Gold has been trading around $1,250 per
ounce. Should investors embrace gold at these levels or wait it out?
Paul Renken: We think the gold price is going to trade around
current levels until something changes in the macroeconomic outlook to alter
the perception of value of the U.S. dollar or a more concerted effort by the
U.S. Federal Reserve to raise or not raise interest rates. Currently gold is
one of the more interesting commodities: we think that neither the upside nor
downside risk is too large. It depends on investors' current positions and
willingness to take action appropriate to their investing situation.
TGR: Do you think gold's recent upward performance is the result of
the global credit markets vetoing the Fed's position on interest rates or is
this something different?
PR: The Chinese government could announce some kind of a stimulus
package in the details of its five-year plan, which will come out this month.
The Fed is concerned about what that might do to the perception of the U.S.
dollar and how a Chinese stimulus plan could influence whether or not the Fed
goes ahead with its four scheduled interest rate hikes this year. Our view is
that current economic activity does not warrant quickly raising interest
rates. The Fed is primarily concerned about the impact of any action on the
U.S. dollar but, also, on the gradual sell-down in the bond market, which is
a far, far bigger market than the gold market. That's the greater concern.
TGR: What would be some positive news for gold investors in China's
five-year plan?
PR: One positive would be that there isn't a lot of additional
economic stimulus, which would suggest that the Chinese economy could slow
down further. If China announces significant stimulus, it could reverse the
economic slowdown, which would be somewhat negative for gold. We don't think
this announcement will have significant stimulus programs attached to it, so
the gold price should stick around its current range.
TGR: British Prime Minister David Cameron believes Britain should
remain in the European Union (EU) but there will be a referendum. Would
Britain leaving the EU have any impact on the gold price?
PR: Britain leaving the EU should cause the gold price to rise in
pound-sterling terms, at least in the short term, until the financial markets
determine how long the transition would take and what kind of a financial
impact it would have.
TGR: Where is VSA Capital positioning itself in the gold equity
markets?
PR: We're taking a particular interest in gold equities. We have
some activity going on with the largest players right down to the exploration
plays. Equity is the more interesting side of the story simply because those
companies that are in production are looking at year-over-year comparative
margins to improve in 2016. To put it another way, the companies that have
already "right-sized" their businesses or made significant progress
toward that by reducing debt and improving their all-in sustaining and cash
costs will look even better in 2016. By and large share prices have yet to
take that into account, so we remain positive.
TGR: Is the gold equities space the most interesting part of what's
happening in gold right now?
PR: It probably has the most sizzle versus the gold exchange-traded
funds or gold bullion stories.
TGR: What are some specific gold equity names that you would like
to discuss?
PR: We've seen a nice recovery in the share price for Randgold
Resources Ltd. (GOLD:NASDAQ; RRS:LSE). It is a large-cap company that's
considered a premium stock on the London Stock Exchange. Randgold has shown
some upward share price action as a result of this recent move in the gold
price.
TGR: Randgold posted record production in 2015. How does it improve
upon that?
PR: The company has always been a believer in exploration and
organic growth as opposed to the growth-by-takeover scenario. Randgold looked
closely at AngloGold Ashanti Ltd.'s (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE)
Obuasi mine in Ghana during the last couple of months and decided that it
could not meet Randgold's thresholds for returns for a project. As an
alternative, it has significantly increased its land position in the
northeastern Democratic Republic of the Congo and into greenstone gold
occurrences around the Kibali operation that it shares with AngloGold.
Randgold management obviously feels that the current license holders don't
understand the true scope and scale of what might be available. Randgold
wants to see if the drill bit proves that premise.
TGR: What are some other equity names you are following?
PR: VSA has a position in a micro-cap stock called Goldplat Plc
(GDP:LSE). It is a producing gold company that recently announced its
interim results, which reflect a turnaround. Positive changes have been
underway since the appointment of Gerard Kisbey-Green, the current CEO, in
February 2015. Goldplat gets its primary production by recovering gold from
the mining residue of other companies. We're not talking about tailings, but
rather all the other pieces of materials that get bits of gold impregnated in
them throughout production and otherwise end up being waste-things like
woodchips, greases or old mill liners that have had free gold pounded into
their surfaces over time. Goldplat essentially re-treats those materials or
burns woodchips to ash and then recovers the gold. It has been doing that in
Ghana and South Africa for some time. The company also has a small operation
in Kenya, which it would like to scale up with some additional investment.
And it holds some other grassroots concessions in West Africa.
TGR: Those names have significant operations in Africa. Are there
others?
PR: I recently visited Pan African
Resources Plc's (PAF:AIM; PAN:JSE) Evander underground mine in South
Africa. It produces around 100,000 ounces of gold per year. The company also
has some nice production from the retreatment of tailings in the
past-producing Barberton mining district.
We also follow a large-scale tailings reprocessor by the name of DRDGOLD Ltd.
(DRD:NYSE; DRD:JSE), which is also based in South Africa.
And in the exploration space, VSA is involved directly with a small
company called Sula Iron and Gold Plc (SULA:LON), which operates in
Sierra Leone, West Africa. Sula had delineated a sizable iron ore resource
just as iron ore prices fell dramatically. It was fortunate that it also had
some artisanal gold mining happening on its concessions. It is now drilling
some surface gold occurrences in Sierra Leone in order to define a resource.
TGR: What are some other commodities that are performing but are
being overshadowed by gold?
PR: Last year, uranium held up relatively well, both from an equity
standpoint and in the spot price. But so far this year, uranium has yet to
excite anyone.
TGR: What trading range are you expecting for uranium in 2016?
PR: Probably up another 10%. If we don't get any significant
announcements of reactor starts or restarts, then I would expect to see the
spot uranium price slide to about $34/pound ($34/lb), and about $44/lb on a
term-contract basis. It depends on the number of reactor starts or restarts
announcements. The more of those we have, the more buoyancy there will be in
the uranium price. But 10% upside from here is our view.
TGR: Are the larger uranium players like Cameco Corp. (CCO:TSX;
CCJ:NYSE) and AREVA SA (AREVA:EPA) the bellwethers of this space?
PR: If you're an institutional investor you need to follow names
like Cameco and AREVA because their market caps essentially mark the changes
in uranium prices; uranium is primarily delivered on term-price contracts as
opposed to the spot market. The institutions will closely follow those names
for major changes in revenue.
Others are more interested in exploration-style discoveries or major
increases in total uranium resources by smaller-cap, nonproducing names
because those are the mines of the future.
TGR: You discussed two smaller-cap uranium names in your previous interview
with The Gold Report. What is happening with those companies now?
PR: Those are NexGen Energy Ltd. (NXE:TSX.V; NXGEF:OTCQX) and Fission
Uranium Corp. (FCU:TSX), and both are finding more mineralization in the
same trend. They're essentially adjoining companies and, because of the
grades in that trend, both NexGen and Fission's properties are going to be
high-grade mines. They're willing, at these current low uranium prices, to find
additional pounds and not push toward production. It's probably the right way
for those companies to add value.
TGR: Some recent drill results by Fission seem to show a new
high-grade discovery. What do you know about it?
PR: There are mineralized extensions to the southwest and northeast
on the R600W zone. They're essentially continuations on the same trend that
contains Patterson Lake South. Fission will continue to add pounds there.
Neither of those areas is included in the current resource, so the company
will end up getting some kind resource boost from both extensions at a future
date.
TGR: Were you surprised at the Fission-Denison Mines Corp.
(DML:TSX; DNN:NYSE.MKT) deal?
PR: I was a little surprised, but it is a natural fit. Both parties
might revisit a merger at a later date because the management teams of both
firms get along well.
TGR: NexGen recently announced a high-grade discovery on its Arrow
zone. Is this essentially a similar discovery at the other end of the trend?
PR: I think the new resource NexGen released last week of circa 200
million pounds U3O8 is a reflection of just how big this system, a single
system, probably is. I believe there is still more to come from both
companies.
TGR: What are some other uranium companies you're following?
PR: We follow two names on this side of the pond. Berkeley
Energia Ltd. (BKY:LSE; BKY:ASX) is developing a near-surface uranium
deposit in Spain. It has nice grade and it would be mined by open-pit
methods. Because it is in Spain, its logical offtaker is the French nuclear
industry and perhaps AREVA directly. I'm satisfied that its returns would be
just fine even at current prices. So that one will probably reach production.
The other one that I follow closely is Uranium
Resources Inc. (URRE:NASDAQ), which merged with Anatolia Energy Corp.
last year and has an in situ leaching project called Temrezli in
Turkey. Those are probably the nearer-term producers in our part of the
world.
TGR: What other commodities are you watching?
PR: We are quite interested in lithium, graphite and cobalt in the
battery materials space. But lithium, in particular, is the one showing the
greatest price movement.
TGR: In a November interview
with The Gold Report, you called lithium a "bright spot" in
an otherwise underperforming commodity space. Do you expect similar price
performance in 2016?
PR: Some underlying indicators suggest that lithium is going to
perform better than it did in 2015. Recent lithium discoveries in the Pilbara
region of Western Australia have certainly caused rather dramatic price moves
in some of the junior mining names there because lithium pegmatites are
outcropping on a number of these properties, and everybody believes that
their property might contain another Talison Lithium Ltd. (TLH:ASX)-type
lithium situation. Talison owns the Greenbushes lithium operation, the major
hard rock spodumene lithium mine in the world. So if the lithium battery
marketplace is going to expand the way a lot of investment dollars in the
battery space are saying it will, then these companies will do quite well
because there is little difference in the style of rock mineralization in
these pegmatites across Western Australia.
TGR: What's the price range for the two key forms of lithium?
PR: There is lithium hydroxide and lithium carbonate. Lithium
hydroxide usually sells at a premium to carbonate. The term quotes have been
trending between $6,200 and $7,500 a ton for lithium carbonate, and perhaps
$1,000 per ton more for lithium hydroxide-although there is a lot of
volatility with lithium prices in China.
TGR: Lithium is a complex market for investors to understand. What
do they need to know before trying to gain a foothold in this space?
PR: First of all, there is plenty of lithium out there to be mined.
The world is not going to run out of lithium. The question is whether or not
these potential mines will be developed fast enough to deliver into the
growing market for lithium batteries. It also puts pressure on the pricing
for all the other primary uses for lithium-ceramics, lubricants, etc.-because
there is only so much lithium available. A lithium brine mine takes from 5 to
10 years to be evaluated, designed, financed and constructed. That's a long
time, and the battery market appears to be moving faster than that. Will
shortages essentially become more evident as we get into the latter end of
this decade? That is the concern.
TGR: What are some lithium equities you're following in Australia?
PR: In West Australia we're following Pilbara Minerals
Ltd. (PLS:ASX) and Neometals Ltd. (RDR:ASX). A third one is Lithium
Australia NL (LIT:ASX). We follow that one because it's using a different
solvent extraction process that hopes to make some other lithium-bearing
minerals economic for extraction.
We're also following some other names that are working outside of that
area because whoever the battery offtakers will be, they will likely want
lithium sources other than Western Australia. One of those names is Bacanora
Minerals Ltd. (BCN:TSX.V), which has a significant lithium clay deposit
in Mexico. We still do not know if the company can deliver a suitable product
to Tesla Motors Inc. (TSLA:NASDAQ), as was outlined in the offtake agreement
Bacanora signed with Tesla.
We also follow Rio Tinto Plc's (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK)
deposit here in Europe for the production of lithium called jadarite.
TGR: Is that a hard rock deposit?
PR: Yes, and it is a sizable resource in Serbia. Any battery
producers in the European market should be interested given its proximity to
their operations.
Another name we follow is Nemaska
Lithium Inc. (NMX:TSX.V; NMKEF:OTCQX), which is probably the deposit in
North America farthest along the path to deliver battery-grade lithium. A few
months ago the company signed an agreement with London-listed Johnson Matthey
(JMAT:LSE) that indicates Nemaska is closest to delivering lithium hydroxide
directly to the European battery or lithium chemical markets.
TGR: Do you think that Nemaska will beat Bacanora to production?
PR: Yes. There is still metallurgical complexity to work out with
Bacanora's lithium clays. The company also needs to make a decision about the
size of its operation, which will have capital cost implications. Those
things have already been determined for Nemaska.
TGR: Does Nemaska have sufficient financing to begin construction?
PR: Yes, it does.
TGR: How should investors handle the current gold rally?
PR: Investors should be bargain hunters. Look for companies that
will see a significant improvement in their profit margin over the comparable
numbers last year. And latch on to those companies that are indicating some nice
grades either for potential open-pit production-in excess of 2.5 grams per
ton (2.5 g/t) for an open pit, and in excess of 10 g/t for
underground-because those are going to be the ones that institutional
investors will be following.
TGR: Thank you for talking with us today, Paul.
Paul Renken is the chief geologist and mining analyst
with VSA Capital and has a broad range of experience in various aspects of
the mining and minerals business. He began his career as a geologist for
Canadian junior resource companies in the Western United States. Owning a
stake in a private consulting firm as vice president of exploration, Renken
searched for various base metals, precious metals and industrial minerals. In
the U.K., he worked in the equity market media outlets of Digitallook and
Hemscott before joining VSA in 2006.
