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James West: Time to Buy Battered Juniors
Source: The Gold Report (8/3/11)
Move into gold and silver was the advice James West, founder of the Midas Letter Opportunity Fund, gave Midas Letter subscribers in June. He recommended moving from the junior stock market to 100% gold, silver and precious metals funds backed by bullion. For a while it looked like a bad call. But as markets tanked, gold and silver soared, and it turned out to be a smart strategy. Now might be a good time to sell the metals and get back into the juniors, he says.
James West: It was evident to me that the risk to equities in our space, the junior miners, was going to increase as the debt issues in Europe and the United States continued to fester. Back in June, the likelihood of the U.S. not raising the debt ceiling in time for the August 2 deadline was considered very remote. But the last minute deal was nothing more than a Band-Aid on an open artery. The partisan politicking could result in rating agencies downgrading the U.S. triple A rating with or without a default. You can hardly rate the world's largest sovereign debt load as triple A after this most recent fiasco. And when you consider that the only solution is to raise the debt limit, issue more debt, print more money and further debase the currency of the world’s largest economy—well, to me, it's just plain dangerous to be holding equities in anything under those circumstances. That environment only bodes well for gold and silver prices.
TGR: So now that there is a deal, will equities rise and gold and silver fall?
JW: Temporarily, yes. That's exactly what I think will occur. Given the gnat-like attention span of investors and the deluge of information flow we are all immersed in, it is what's happening right now that dictates market movements. With these temporary deals done, for the next few weeks, it will seem like the problems have been solved, disaster averted and the party will be back on.
TGR: So we should sell gold and silver and buy equities?
JW: You bet. Sell the precious metals at the high, buy the juniors who have been beaten up in recent months and wait for the next batch of horrible news to make precious metals turn around and head north. It's a volatile market, but junior precious metals explorers and near-term producers are finally going to get some of the attention that has been absent for the last few months.
TGR: We saw you on BNN last week in Canada, and you mentioned that you were looking at copper juniors as well. Is copper going to benefit from the same influences as gold and silver?
JW: Well, copper has been holding on close to all-time highs despite softening growth in China. That's because speculative groups, like hedge funds and ETFs, are actually buying physical copper and storing it in warehouses. So not only do we have a growing portion of diminishing global production being taken off-line and stored for investment reasons, but copper consumption for industry, while it may weaken as China growth slows up a bit, is still strong in India and Brazil as those economies continue to expand rapidly.
TGR: We hear you have also launched a fund to invest in emerging miners. What's that all about?
JW: The Midas Letter Opportunity Fund is a Luxembourg-registered Special Investment Vehicle, which is a sub-fund of the Commodity Capital AG fund. Tobias Tretter, the former top fund manager for Deutsche Bank's gold fund, and I came up with this idea to capture all of the early-stage, pre-IPO opportunities that come my way as publisher of the Midas Letter. Up until now, I just haven't had the bandwidth or the manpower to take advantage of these ideas. So we put together this fund, which is capitalized by members of the Canadian A-List of mining entrepreneurs on one hand, and the A-List of high net-worth, private family offices in Luxembourg and Switzerland, to provide a place where the two groups can access each other's value propositions. The fund does well because it's got access to pre-public deal flow, and the European investors do well because they have a window into these pre-public opportunities through the fund, where they get the chance to participate in secondary and tertiary post-IPO rounds.
For Midas Letter subscribers, it's a win as well, because now the newsletter becomes the journal of the fund's investing activity. While subscribers can't generally participate in the fund, they can participate in what the fund is buying, and hear about pre-IPO opportunities that other newsletters generally don't bother to cover because there is no way for the investing public to access these deals.
TGR: So, the Midas Letter now only covers what the fund is doing?
JW: No, no. Of course, I still have my personal investing activity that will make up a lot of the content of the newsletter, too. But most likely, my personal activity will reflect the opportunities that the fund has uncovered. This will also free us up to shoot more Midas Letter Mine Tour videos, where we visit developing projects around the world, and in a National Geographic- or Discovery Channel-level of production video, answer the questions that all investors, institutional and private, would want to know about these projects.
TGR: Wow. So, you are busy, to say the least. What companies do you see yourself investing in going forward?
JW: Well, as far as gold companies are concerned, we follow closely what's going on at Baron Group in Vancouver, headed by David Eaton. He has a process where he gets companies to list inexpensively on the CNQ before moving over to the TSX Venture. Baron has an absolutely stellar collection of strong companies coming together.
TGR: For example?
JW: Well, where to begin? I guess we'll start with the older ones, Evolving Gold Corp. (TSX.V:EVG; OTCQX:EVOGF; Fkft:EV7), which is one of Quinton Hennigh's first big wins. Quinton is an epicenter of geological discoveries unto himself, and he figures prominently in a lot of the stories we like right now. As most people know, Evolving Gold has a joint venture with Agnico-Eagle Mines Ltd. (TSX:AEM; NYSE:AEM) on its Rattlesnake Hills project in Wyoming, and is owned at least 15% by Goldcorp Inc. (TSX:G; NYSE:GG). Despite that, the company trades at a great discount to enterprise value considering the advanced stage of the deposits.
United Silver Corp. (TSX:USC) is another excellent example of the Baron Group. It started life on the CNQ and raised $10M (million) there before moving over to the TSX senior board. Things were going well until Charles Pitcher was hired to lead the company. He blew the treasury and let the company stagnate before leaving it in shambles. Fortunately for USC shareholders, a deal with Stan Bharti's Forbes & Manhattan merchant bank will see new leadership, another round of capitalization, and the advance of the company's project at the Crescent Mine. If you don't think it is cheap now, compare that to the $250M IPO planned for the Sunshine Silver Mines Corp. (NYSE:AGS) with participation from Morgan Stanley, UBS Investment Bank and RBC Capital Markets. The Sunshine Mine produced an astonishing 360 million ounces (Moz.) of silver since 1880, but the Crescent Mine, which has produced only 25 Moz. in its history, did so at a grade of 27 oz./ton—the highest in the district. Keep in mind that Sunshine has 17 other exploration projects and a second very advanced project in Mexico, so comparing USC to Sunshine is not exactly apples to apples. My point is that silver mining in the Coeur d'Alene belt in Idaho is attracting some weighty players.
Current offerings from the Baron Group include Golden Fame Resources Corp. (TSX.V:GFA), whose mission is to "acquire and put into production historically productive gold, silver and copper properties that have become economic due to the robust upward movement in metals prices." The company has $7M in the kitty, and started work in July on the Algun Dia copper-gold-silver project located near the city of Guanajuato, Mexico, into which it is earning a 70% interest. Algun Dia is an advanced-stage exploration project with demonstrated past economic production of gold, silver and copper from a major vein-hosting structure with mineralized true widths exceeding 10m (meters). Historical reports indicate that 2002 through 2007, the property produced approximately 15,000 tons of ore during periods of test mining. That resulted in approximately 750 tons of gold, silver and copper concentrate processed at the Peñoles Mining mill.
Another one I'm looking forward to with great expectations is Novo Resources Corp. (CNQ:NVO), which has management in common with Gold Canyon Resources Inc. (TSX.V:GCU), a Midas Letter favorite for the last year. In particular, Quinton Hennigh, the geologic force behind many of the Baron Group's deals, is said to be particularly excited about Novo's prospects, and is the company's president. Novo has the exclusive right to earn a 70% interest (as to gold and minerals associated with and normally mined with gold) in the tenements comprising certain mining leases covering the Beatons Creek conglomerates located in Western Australia.
I can't stress enough the value in Confederation Minerals Ltd.'s (TSX.V:CFM) Newman Todd project, a joint venture with Redstar Gold Corp. (TSX:RGC). That project in the Red Lake district in Ontario is starting to shape up into what is looking more and more like 5 Moz. of gold. The source of that geological opinion has requested anonymity, but, safe to say, it's not me pulling a number out of the air. In my opinion, the current share price level will prove to be a steal when the market realizes what's going on underground here.
TGR: Now what about copper? You've recently been quoted as being quite bullish on copper.
JW: To be clear, I think copper is in a long-term bubble formation in the classic sense. The price is rising despite weakening demand fundamentals out of China, and Brazil and India are absolutely not the sustainable demand powerhouses painted by the mainstream media. J.P. Morgan is taking delivery of physical copper into warehouses in support of its copper ETF, which is putting an insanely artificial demand pressure on the metal. That means when the copper bubble pops, so will this and other ETFs based on copper, which will exacerbate the downward momentum copper will face when China pops. And increasingly, there are signs that the China bubble may be starting to deflate a little.
That all being said, the China growth machine will still gobble up a lot of copper, so for the time being, world consumption, diminishing supply and growing demand for the physical metal for investment and hoarding purposes will continue to maintain the price near or beyond all-time highs, which makes copper exploration plays are of supreme interest to us.
In particular, I'm a huge fan of CuOro Resources (TSX.V:CUA) and its Santa Elena property near Medellin, Colombia, where two shallow holes were drilled to depths of 3.55m and 7.61m, respectively, at a down dipping angle of 20 degrees (widths represent down hole core lengths and the true width is unknown at this stage). At 1m intervals, 1.5 in.-dia. cores were assayed from these shallow holes. The highest individual result was from hole C4-4; it returned a 1m interval grading 9.51% copper, while the two holes averaged 5.63% copper over 7.61m and 4.53% copper over 3.55m. Those are some stellar grades. Now there's at least one drill going on the project with two more on the way. The company will drill an initial 25 km. to be immediately followed by an additional 15 km. With over $20M on hand to cover exploration for the next two years, it's as "de-risked" a copper exploration play as you can get, which is why you're seeing the premium valuation.
TGR: I understand you're in the Yukon right now. What are you doing up there?
JW: We're here to make some videos with a professional TV crew in support of our new product, Midas Letter Site Visit Reports. We are visiting exploration projects in the Yukon that will be the subject of videos seeking to answer all of the questions that determine a mining project's economic viability. We do that through interviews with technical talent on the ground, as well as interviews with regional stakeholders to make sure we are not just getting the sweetened version from the companies. Then we distribute the videos first to Midas Letter subscribers and unit-holders of the Midas Letter Opportunity Fund, and then to the general public.
TGR: So who are you going to see while you are there?
JW: Well, the primary one at this point is the Wellgreen Deposit held by Prophecy Platinum Corp. (TSX.V:NKL; OTCPink:PNIKD; Fkft:P94P), John Lee's spin-out from Prophecy Coal Corp. (TSX.V: PCY) that just announced a 10 Moz. combined platinum group metals and gold inferred resource, with 0.4% nickel and 0.4% copper to go along with it. Some pretty good rare earth grades are in there that are not part of the equation yet. All of this is just from 2.3 km. of a 17 km. strike length. We are going to find out just how good the potential is for a major extension to the existing resource as drills are turning and a lot of analysts head up there to kick the tires.
A list of other companies we'd like to shoot is a little premature to discuss, but suffice to say we are looking at the cream of the Yukon crop.
Publisher of Midas Letter, James West has devoted 20 years to helping small companies in the resource sector—helping them raise money, further their projects, build their identities and get their stories in front of investors on the lookout for quality investments with excellent returns. The Midas Letter Opportunity Fund, is an institutional and high net-worth-only open-ended fund based in Luxembourg that specializes in early stage investments in Canadian-listed precious metals explorers.
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1) The following companies mentioned in the interview are sponsors of The Gold Report: Gold Canyon Resources, Forbes & Manhattan, Goldcorp Inc., Evolving Gold Corp.
2) James West: From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.