The Gold Report: In a recent Casey Research article you asked investors if they are brave enough to buy low. It's difficult to be a true contrarian and have the guts to buy when everyone else is selling. What guidelines do you give people who need reassurance in markets like these?
Louis James: It's good news and bad news. There really aren't reassurances. No matter how far down something has gone, until it hits zero, it can still go down farther. The good news is that precisely for this reason, markets tend to overdo things. They are volatile. They fluctuate. They get manic and go too high, and get depressive and go too low. But that's actually good for those with the discipline to buy.
So, when's the right time to buy? The answer is that there is no right time. You don't try to time the market. That's the fool's game. You look for value. If something you'd be happy to own at $1/share is now at $0.50/share—that's a great buy. Can it go lower? Yes. But it can also go higher and is a better deal than when you first liked it. If you buy value, you increase the odds of coming out ahead of the game, regardless of whether or not the stock goes down before it goes up.
I hate to say it, but really there's a reason why it's hard to buy low and sell high. It's so logical. It's so simple. But so hard for most people to do.
TGR: Money manager Adrian Day recently suggested in an interview that investors should buy quality juniors and hold them for what could be a painful six months before things start moving up. How long do you think investors have to make the plunge before what you've called "stupid prices" are gone?
LJ: I just said I wouldn’t try to time the market, so the real question, if there are six months of pain ahead, is why would I buy today? The answer is that we don't know if it's going to be six months of pain ahead. The global economic situation is surrounded by a swirling cloud of black swans. Which one of these is going to land first and upset the apple cart? It could be any of them, and it could happen tomorrow. That's the reason not to wait six months or whatever number of months you think it is. Things could reverse very sharply, sending certain assets upwards again, particularly precious metals.
TGR: You travel the world doing site tours. Are there some countries that are overlooked because of mistaken risk profiles?
LJ: It's great to buy things in Ontario and Québec where you feel very safe, but you pay a premium for that. That's where everybody else feels safe, too, so it makes it harder to buy low.
However, there is no place in the world, even in Canada, where things can't change all of a sudden. Even Québec increased its royalty a while ago. You have to expect that. When miners are making money, governments are going to want a bigger pound of flesh. It can happen anywhere.
"Things could reverse very sharply, sending certain assets upwards again, particularly precious metals."
There are countries that are extremely high risk and visibly getting worse. Argentina would be one of those, which is a real shame because it has a tremendous mineral endowment. The good news is that regulation of mining and minerals is largely the domain of provinces down there and some provinces are better than others. Depending on your temperament, that could be an opportunity. If the place crashes, it could be a great opportunity to pick up related stocks cheap. I wouldn't want to buy in advance of that, though.
Another good mining jurisdiction that's turned kind of scary is Peru. There is a lot of anti-mining sentiment. There have been riots and violence; mine camps have been burned down. The government is actively trying to help the miners now with the military and other options.
It is a dangerous world out there, but there are overlooked jurisdictions. I like the Guiana Shield in Venezuela, Guyana, Suriname and French Guiana. The big gold deposits in Venezuela are on the same greenstone belts that stretch from Venezuela to French Guiana. It's the same rocks that have big deposits across the ocean in West Africa. They are making discoveries in the Guyanas. Companies have been able to come in and make progress on various projects. The governments seem quite supportive.
TGR: Are there any specific companies you like there?
LJ: I like Columbus Gold Corp. (CGT:TSX.V) in French Guiana. There was a scare in the country when a project on the edge of a river didn't get permitted due to environmental concerns over caiman habitat. Meanwhile, other projects are going. There's gold production in the country and the government has been visibly supportive, eager to see legitimate mining replacing illegitimate mining, which is devastating to the environment.
There are mines operating across the border in Suriname. In Guyana, two high-profile projects have gotten mining agreements with the government.
Guyana Goldfields Inc. (GUY:TSX) is an interesting story, a real deposit, both high-grade and large, and the company has a mining license. I think it's going to pull that one out of the slump it's in.
Sandspring Resources Ltd. (SSP:TSX.V) also has a multimillion-ounce gold deposit, but at bulk grades. Sandspring may be lower grade, but it's all open pit, and that's cheaper to mine.
TGR: Are there any catalysts coming up for Guyana Goldfields that could pull it up in the foreseeable future?
LJ: That's hard to say. The company did disappoint the market. It came out with a full feasibility study and the numbers weren't as robust as the market was expecting. There were a number of planned steps that couldn't be included in the feasibility study and that would have changed those numbers for the better. The study had already been delayed so the company went with what it had, which wasn't the best that it could be, and that was a mistake.
However, the project is better than it seems now. The company is already retooling in ways that will have a positive material impact on the net present value and rate of return. I don't know how well those changes will be received by the market. In a time when investors are scared and circling the wagons, great numbers are often completely ignored. If that happens, it could be a tremendous opportunity. If a company adds material value and the market just yawns, those are the times to sit up and pay attention.
TGR: Are you still a fan of Mexico?
LJ: I am. The violence in Mexico is real and alarming, but it hasn't turned into a broader predatory war against the civilian population the way it did in Colombia. And it's not government violence; it's private sector violence. It's a risk that companies in Mexico can mitigate, primarily by not operating in the hot areas.
TGR: What companies would those be?
LJ: We like some Mexican silver producers, such as Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.A), First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) and Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE). Those are all companies with growth on tap and cash flow in hand.
TGR: Where have you been traveling recently?
LJ: I just returned from China. The jurisdiction is actually quite solid. The Chinese have not expropriated any foreign companies that have invested in mineral resources. Foreign companies have been able to build mines and some of them are even making money doing it.
Silvercorp Metals Inc. (SVM:TSX; SVM:NYSE) is the main example of a company doing well in China. However, it's funny how China scares people. The ridiculous accusations against Silvercorp that were circulated on the Internet by short sellers wouldn't have worked as well if it weren't in China. If it had been a company in Québec, investors would've said, "Oh, that's ridiculous! It's NI 43-101 compliant. The regulators would've caught this." But it was China, so investors were willing to believe the accusations without researching them and the stock sold off in a big way.
"I like the Guiana Shield in Venezuela, Guyana, Suriname and French Guiana."
I've been to those projects and have seen the mining operation. I know that it's real. It's making real money and paying shareholders dividends.
The problem with China now is that while the government welcomed Western companies to explore and build mines in the past, it seems that was for technology-transfer reasons, and lately, China has not been giving new mineral concessions to foreign companies.
It's still a stable jurisdiction, but there aren't a lot of opportunities for new companies going into China.
TGR: You mentioned that the market is ignoring good news. How can a company get its attention?
LJ: A market turning bearish for a time is not a reason to be out of the market. It's a reason to invest differently. Even in a bear market, a takeover or drill results, for instance, can add value.
There are a couple of recent instances of phenomenal drill results driving shares way higher. A favorite story along these lines is Pretium Resources Inc. (PVG:TSX; PVG:NYSE), Bob Quartermain's gold play in British Columbia. It announced 41.5 kilos—not grams, not ounces, kilos—of gold over half a meter in a drill hole. Over the wider interval of 10 meters it's only 2.3 kilos. But those are still out-of-the-ball-park drill results. The share price responded strongly. The market always likes a discovery.
What's going on with Inter-Citic Minerals Inc. (ICI:TSX; ICMTF:OTCQX) makes a really interesting point, too. There are no details yet, but it had a takeover offer and the stock went through the roof. The company has a multimillion-ounce gold deposit in China that keeps getting bigger. A takeover can produce enormous gains from one day to the next.
TGR: Could low stock prices encourage more mergers and acquisitions?
LJ: You would think that. The producers, by their nature, are depleting their assets and needing to replace reserves. Yet, companies have essentially gone on sale and there's very little buying out there.
TGR: Why do you think that is?
LJ: Majors are much more cautious than junior explorers.
The most aggressive of the bigger companies in recent years has been Kinross Gold Corp. (K:TSX; KGC:NYSE). It bought Aurelian Resources Inc. at the time when the government made mining and exploration illegal in Ecuador. That was a very gutsy move.
For the same reason, Kinross has troubles now. It's had a big breakdown in Africa from the Tasiast mine fiasco. Its assets in Russia make people nervous. Its portfolio, on average, is much higher risk than most of the other majors and that makes investors very nervous. So, while I admire management's courage, and I hate to praise excessive caution, one has to wonder if the more cautious majors were right to be so.
Those cautious majors don't really care if something goes on sale because the market is down. They care about making sure that they mitigate risk and make no mistakes. "Blue light specials" aren't going to attract the majors.
What's interesting is that there could be more buying from Asia. When I was in China, I got a lot of questions from Chinese investors about projects that they could buy and countries that they should be investing in. They're very keen on South America, in particular. If Asian investors start picking up assets the Western majors have their eyes on, they might get off their collective rears and start acting to secure assets before Asia grabs them.
"It's extremely important to diversify internationally."
It could also be that the start for the new wave of purchasing and building doesn't come from the top, but from the bottom. Look at Osisko Mining Corp. (OSK:TSX). It managed to finance and build a giant mine in Québec on its own. It just went to the market and raised the money. Detour Gold Corp. (DGC:TSX) is also building a huge world-class mine in Ontario.
Neither of these companies needed a takeout from a major. If they're successful, they'll evolve from junior exploration companies into midtier producers and have the wherewithal to go after other mining projects and potentially become new majors.
Osisko is clearly not just interested in mining its one mine. It's intent on becoming the next large gold producer.
TGR: Are there are still bargains to be had in jurisdictions like Canada, the U.S. and Europe?
LJ: Yes, but investors have got to be very careful. They have to do due diligence, because sometimes there's a reason why something cheap is on sale that may not be readily apparent. If you don't research beyond just the numbers, you can miss fatal flaws—some not even all that hidden.
TGR: Are there some established areas, like Nevada or the Abitibi in Canada, where there are fewer risks, but still are companies that aren't overpriced?
LJ: Yes. This is a good market to go shopping for those. I'm not sure there's one that I can give you as an example. There are some on my radar screen, but I need to do more due diligence of my own before I discuss them. They have significant discoveries in hand in solid pro-mining North American jurisdictions, but are completely discounted by the marketplace. I'm doing my own homework on those, but they're certainly there in the Yukon, Québec, Ontario and Nevada.
LJ: No, but I do like both companies. Balmoral doesn't have a clear company-maker in the bag yet, but it does have an excellent track record of exploration success for a brand new company.
Pilot has a lot of wind in its sails as Fronteer Gold's spinout, so it's not as cheap as some others, but it's a great company.
Premier Gold Mines Ltd. (PG:TSX) is an example of a company that's not exactly cheap, but is cheaper than it has been. It's got several large high-grade gold deposits in safe jurisdictions. They're all within sight of a head frame of some large mining company's gold operations, which increases the odds of a takeover. It's also spinning out a royalty business. Several ways to win with that one.
TGR: Do you consider Pretium and Inter-Citic to be bargains, or have they been priced up too high?
LJ: I would hesitate to speculate on Inter-Citic, because it has doubled in recent weeks. We're glad that we told our readers to average down. We told them that a takeover was likely. Even shareholders who bought an initial slice at $2/share a couple of years ago should come out with measure of gains if they followed the tranche strategy and averaged down. For whatever its worth, I do think that the final deal is likely to be higher than its current trading range.
Pretium is back up again. We bought that right after the initial public offering in the $6/share range. It nearly tripled, so we took profits and we're glad we did because it retreated. And we were happy to buy back in again at lower prices.
Why sell if you're only going to buy back in again? Well, a) you make a bunch of money so take it, b) you don't know what's going to happen next, so you've got to recover your initial investment and c) the company delivered more results and became a better story than when we took profits. We have more confidence in the resource model than we did before. It's bigger and it's more solid then when we took profits and it's cheaper. That's a better deal.
Pretium is a billion dollar company, so people wonder if it could really double or be taken over. The answer is yes. A deposit like this is as rare as they come. It's like Aurelian. It's got the best of all worlds—extremely high-grade and very large—but it's not Ecuador, it's in British Columbia.
It's too rich not to become a mine, but it's unlikely that Pretium will build it. I think another company will build it. There's takeover potential in the play.
The stock jumps every time Pretium puts out drill results with kilos of gold per ton while others are reporting grams. As gold resumes its northward march and the market gets more positive again, those kinds of drill results should propel these shares much higher, regardless of the endgame for the deposit.
TGR: What's your feeling about silver versus gold right now?
LJ: Silver is an industrial metal, as well as a precious metal. If there's a big economic correction, such as in 2008, silver will get hit harder than gold and it will take longer to come back.
On the other hand, silver does move with gold. If there is a big breakout in gold, silver will move as well. If you're bullish on gold, you have to be bullish on silver. And these silver companies are making money. The best can even handle lower silver prices.
TGR: Could a Great Panther or a Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) take advantage of a rising silver price to make an acquisition?
LJ: Great Panther already has its hands full. It's got a new mine it's trying to build. That one, by the way, has more of a gold credit to it as well. We like that a lot. It has permits. We don't see any showstoppers there. We think it will achieve its goals. But it's more likely to be bought by another company than to be an acquirer.
Fortuna, on the other hand, has always been on the lookout for new purchases. It started out in Peru, but then purchased the San Jose mine in Mexico. Its Caylloma mine in Peru hasn't been affected by the trouble in that country. We're happy for that. The company is generating lots of cash. I wouldn't be surprised to see it take something else on, but it's very cautious. For a small company, Fortuna acts like a major. It doesn't want to make any mistakes. It's willing to wait until something's right for it.
TGR: You have forecast a pretty dire economic outlook for the future. How can investors take advantage of any opportunities that might come out of this, or at least protect what they already have?
LJ: That's a short question with a long answer. If things really go off the deep end, the transition to something new is going to be messy. That doesn't mean you just throw up your hands and go home because there's nothing you can do. For financial assets, gold is without question the way to play that. It's the safe-haven metal and the best way to protect yourself.
But don't buy gold as a speculative vehicle. That's what gold stocks are for. Buy gold for prudence. Buy gold because it is gold. Whatever happens in the world, gold remains gold, whereas gold stocks or the pieces of paper in your wallet issued by the government may not remain what you hope they would.
The other thing is that it's extremely important to diversify internationally. There are crazy things going on in Greece, but the trouble is global. Who knows how various governments will react as the crisis deepens? What will it be like in Spain if they leave the European Union? Or if the whole EU ceases to exist? How do you protect yourself against that? Well, having investments outside the EU would be one way.
The more extreme the crisis gets, the more governments will tighten the thumbscrews on anybody who has anything they can tax. Finances aside, for personal reasons, it's important to diversify internationally and have the option to be elsewhere if things get very unpleasant wherever you were.
TGR: Thank you for your insights.
LJ: Thank you.
Louis James will be speaking at the Casey Research Summit: Navigating the Politicized Economy in September. You can learn more here.
Louis James' background in physics, economics, and technical writing prepared him well for his role as senior editor of the International Speculator and Casey Investment Alert. Like Doug Casey, James constantly travels the world, visiting highly prospective geological targets, grilling management and company geologists, and interviewing natives in a variety of languages to find out what they really think (he's fluent in French and Spanish, and speaks a little German and Russian). Whether it's days of back-to-back meetings with mining company executives in Vancouver, pounding on rocks in the Democratic Republic of the Congo, examining drill core in Argentina or eating food with names he can't pronounce with local miners in China, James is constantly looking for the next double-your-money winner. He evaluates dozens of companies every month, conducts due diligence of only the best and then compares notes with Doug Casey in order to bring only those most likely to provide rapid high returns to their subscribers' attention. James also reads all the press releases, financial statements and an enormous quantity of related information to keep track of all of our mineral companies and has become something of a walking database.
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1) JT Long of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Guyana Goldfields Inc., Great Panther Silver Ltd., Pretium Resources Inc., Inter-Citic Minerals Inc., Detour Gold Corp., Pilot Gold Inc., Balmoral Resources Ltd., Premier Gold Mines Ltd. and Fortuna Silver Mines Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Louis James: I personally and/or my family own shares of the following companies mentioned in this interview: Silvercorp Metals Inc. and Endeavour Silver Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.