Jordan Roy-ByrneApril-04-12 1:00 AM
The Gold Report:
The Gold Report: When we last spoke four months ago, gold and silver stocks generally, and the juniors in particular, were in their year-end, tax-loss-selling doldrums. What is your view on where these things are now?
Jordan Roy-Byrne: I think the sector is basically in a bottoming process. It has been in a state of negative sentiment for weeks but has been unable to rally. We thought the market had bottomed last week but it now appears a final washout is beginning, which could be ugly. There has been a lot of technical damage inflicted on the sector. Over the next several months or so, I think we'll see a rebound but a breakout to new highs is now unlikely to happen this year. If you have ample cash then you will be able to take advantage of the coming major bottom.
TGR: Last November you were expecting a breakout in the gold stocks that would start sooner than it has. Metal prices haven't cooperated very well. Do you think it's going to take $1,800/oz gold to get people's attention again for things to move, or something other than that?
JR-B: Well, first of all, the stocks have to lead the metals and that is what will happen eventually. As far as what it's going to take, that's a great question. In the larger view, we see that a lot of money has gone into bonds and also into conventional stocks. Stocks have been doing well, and there's been at least the perception that corporate profits have been growing and there's a statistical economic recovery. That provides competition to the precious metals sector and so money has moved away from precious metals and, secondarily, the resource sector.
Bonds appear to have put in a potentially major peak and now look like they're going to decline in price, which means rates will rise. I think the stock market has more upside, but fairly soon it's going to start to run into some major resistance. At that point I expect a neutral market or mild bear market. So I think the combination of bonds and stocks struggling simultaneously, probably at some point later in the year, is going to be a significant but stealth catalyst for precious metals because that's what's going to make people look at other things, such as precious metals.
TGR: You're a technician and you study charts in great detail. What's your technical work telling you at this point as far as where the metals are headed and when the turnaround is near?
JR-B: It appears that we are near the end of the bottoming process. Sentiment is obviously very negative and that is one of the conditions you need to see for a bottom. The other condition you need is positive price action with bottom building followed by higher highs and higher lows. We have not seen that, but with the market starting a capitulation phase, we are likely to see a V bottom develop. This coming bottom will be the fourth major bottom in the sector following 2000, 2005, and 2008. Again, if you have ample cash you will be able to pick up some major bargains. Most investors are probably despondent now but the professionals will be the ones that are looking for bargains at the bottom, which could rebound 30, 40 or 50% right away.
TGR: Can you see any particular catalysts outside of a higher gold price where people are going to jump on these things and cause them to lead the metals prices, as they would normally do?
JR-B: I do not see any immediate catalysts other than a potential V bottom. Fundamentally, here is what will sustain that bottom and lead to a new bull run. We have had a recovery, but it is a weak recovery that has not improved the financial condition of the government sector in the U.S., Japan and Europe. More monetization of existing and new debt will be required and is imperative to keeping the global economy functioning. Rising interest rates increase the burden of interest payments on the debt. Meanwhile, a stagnant or slowing economy puts pressure on budget deficits. These factors, while not important today, will become very important within the next year and, again, will require new rounds of monetization and quantitative easing.
To conclude, any negative economic news or softening in the U.S. or global economy is a potential catalyst for this sector.
TGR: What are you looking for these days in potential winners, and what kind of characteristics would they have?
JR-B: I'm looking for a strong combination of present value, growth potential, a chart that shows that there's actually some accumulation taking place and potential for near- and long-term gains. I'm looking for growth of a resource that's likely to become a mine. In the case of producers, you want to see production growth. The big winners tend to have projects in the pipeline that are close to production and, therefore, can continue to grow. Our two biggest winners in recent years—First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) and Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE)—have had mines operating but projects in the pipeline to increase production. The market wants growth. Investors should be looking for companies with multiple mines and/or projects close to production.
Sandstorm Gold Ltd. (SSL:TSX.V) has performed very well for us. It's a royalty company and has continued to make new deals and acquire new streams as they are called. That equates to growth and the company's share price has responded favorably and consistently.
More recently, we and our subscribers have profited handsomely with Argonaut Gold Inc. (AR:TSX), which has begun to produce gold from its second project that was acquired along with the San Antonio in its brilliant acquisition of Pediment Gold Corp. San Antonio would be the third mine for the company and could be in production by the end of 2013. Analysts are projecting 250,000 ounces (250 Koz) for Argonaut in 2014, up from about 75 Koz last year. Thanks to the exercise of some warrants, the company could have about $170 million (M) in cash by the end of the year. Given that huge cash position and two recent acquisitions, it's fairly obvious that it's going to make another acquisition. With management's track record, we could see more than 300 Koz production in the next two to three years. Based on our criteria of operational performance, management competence, cash-flow growth, growth potential and also downside protection, we believe Argonaut is the finest gold or silver mining company in the world today.
The way the stock has performed may cause some investors to think they're too late, but I think that Argonaut's best days are still ahead in the next several years. I would definitely be accumulating that stock on any pullbacks. Argonaut is our baseline and we're searching for another Argonaut. Obviously, a company like that only comes along once every few years. If there is any other company in the Americas that looks like it could become another Argonaut, I think Argonaut itself might acquire that company. So that's something to keep in mind.
One company we thought could be another Argonaut was Richmont Mines Inc. (RIC:TSX; RIC:NYSE.A). It performed very well in 2011 and is a very well-structured and well-run company with a very large cash position. It only has about 33M shares and a multimillion ounce resource from several different properties. Last year, it produced close to 80 Koz. This year, it's looking to ramp that up to about 100 Koz. It also has a property called the Wasamac property, in Quebec. If that goes into production in the next two or three years, it could take its production to close to about 200 Koz/year. However, Richmont's CEO resigned and the company's preliminary economic assessment (PEA) on Wasamac was quite disappointing.
TGR: It certainly is a fairly tight share structure. You don't find too many decent-size companies these days with 33M shares out.
JR-B: That's right. With 33M shares out and having the amount of production it has, as well as a multimillion ounce resource and significant earnings last year, is very impressive. But the company is experiencing some headwinds presently.
TGR: Maybe you can talk a little about your model portfolio and how that's performed since we last spoke.
JR-B: Last year our portfolio was down about 6%. To compare to the overall market, Market Vectors Junior Gold Miners ETF (GDXJ), the junior exchange-traded fund, was down 37%. We have to remember that there was a bottom at the very end of the year that makes 2011 performance look very negative. So far this year, our portfolio is up 7.6% while Market Vectors Junior Gold Miners is down 8.0%. We've been fortunate because, based on what we said in our last interview, we really had expected the gold stocks as a group to perform a lot better. We've been wrong about that, but we haven't been wrong about our favorite companies, which have performed fantastically and really helped overall performance. We also put a hedge on in the last month because we felt the market would be moving down, and that's helped our performance.
TGR: Looking at past market cycles, most of these Canadian juniors would tend to congregate in certain hot areas. For a while there, they were crawling all over Nevada and British Columbia (B.C.). Now, a lot of the action has turned to Mexico, South America and Africa. What's going on in Nevada and B.C. these days? There are obviously companies that are still exploring those areas because there's still lots of potential there.
JR-B: Yes, there is. We actually like four companies operating in those areas. We can start off with Nevada. There are two companies I really like in Nevada. One is Meadow Bay Gold Corp. (MAY:TSX.V; MAYGF:OTCQX), which acquired the old Atlanta mine, a producing mine back in the 1980s. When Meadow Bay started, management just figured it was going to increase and develop that resource to over 1 million ounces (Moz), perhaps 2 Moz. There's a historical resource estimate of about 500 Koz. Meadow Bay was pretty confident it would be able to increase that right away to 1 Moz. Its initial drilling program discovered a gold porphyry that is separate from the Atlanta mine fault zone. Now it appears that the new porphyry itself could be bigger than the old Atlanta mine fault zone.
Meadow Bay Gold is going to have a resource estimate out in the next few months and management is openly talking about 2 Moz Au. I'm expecting slightly more than 2 Moz. With only about 40–42M shares out, at the current stock price, the market cap is not much more than $50M. So there is a lot of significant upside potential in Meadow Bay based on the numbers.
After making a pretty good run, it came back with the market and seems to be putting in another short-term bottom here, making an excellent risk-reward opportunity at around $1.00/share. Also, it received its first analyst coverage, coming from Dahlmann Rose & Co. in an initial report, which came out with a price target for Meadow Bay of $4.27. And keep in mind, Meadow Bay is in a great jurisdiction and is working around a past producing mine. Those two things are very encouraging in addition to the present value.
The next company I like in Nevada is Corvus Gold Inc. (KOR:TSX). That's one we've had in our portfolio since last summer/early fall and it has performed fantastically. Corvus Gold has joint ventured its properties in Alaska and is focusing most of its resources on its North Bullfrog project in Nevada. The North Bullfrog PEA issued a few weeks ago showed that at about $1,300/oz gold, this low-grade, heap-leach operation would have a 2.5-year payback. The company is working very hard on drilling to move it toward production. The PEA took into account less than 1 Moz. The initial resource estimate was about 1.6 Moz, and there is still significant expansion potential as demonstrated by some recent high-grade results from a section of North Bullfrog that was not included in the PEA. So if Corvus can continue to increase this resource and get it over 2 Moz, I think it will attract a lot of suitors.
At the same time, it has some really prospective properties in Alaska. It has one called the Terra project that it joint ventured out, which could actually begin small-scale production this summer. It is a small but high-grade resource. We believe Corvus has significant upside potential, even from present levels.
TGR: How about in British Columbia?
JR-B: There's one company that we've just begun covering that we really like. We met with management at the Prospectors and Developers Association of Canada (PDAC) conference. It's Huldra Silver Inc. (HDA:TSX.V) and is going to be a new high-grade silver producer. It is expecting its final permit in April before it can go into production at its Treasure Mountain property. It's very well structured and also tightly held and currently has less than a $45M market cap. Once it gets going, management expects to produce 2 Moz/year. That would be very significant for this new tiny company relative to its market cap. We think there's some good near-term upside with very high leverage to rising silver prices. A move in silver above $40/oz could be a second major catalyst for Huldra Silver. Finally, the cash flow from production will enable the company to invest in developing and expanding the resource at Treasure Mountain while maintaining the share structure.
Finally, there's a brand-new company in British Columbia that we just began covering. It's called Banks Island Gold Ltd. (BOZ:TSX.V) and is run by a pair of mining engineers with real expertise in underground mining. Banks Island has one property, Yellow Giant, that currently only has a two-year mine life, but it believes it's going to be able to put that in production in Q113. Once it puts that into production, the hope is to expand the resource and, therefore, the mine life.
Banks Island is also in the process of acquiring a property from Seabridge Gold Inc. (SEA:TSX; SA:NYSE.A), which is going to take probably two to three years to put into production. This is called the Red Mountain property, with a resource estimate of close to 700 Koz gold. The grade there is actually very good. This will also be an underground mine with significant further potential as the deeper it goes, the more ounces can be found. If the company is able to successfully put Yellow Giant into production as expected, that's going to provide a significant amount of cash flow that will help develop Red Mountain. Again, this is basically a brand-new company with very exciting potential.
TGR: What's the market cap on that one?
JR-B: Right now, the market cap is about $11M. There are only about 17M shares out, but it will have to do a couple of financings. It will take about $10M to put the first property in production. Considering the numbers, Yellow Giant should be able to go into production with 40M shares or less. The significant amount of cash flow from that will help it develop the second property. It still owes some payments to Seabridge Gold for the second property. Again, this is a potentially very exciting situation over the next few years.
TGR: Is there anything else you'd like to mention?
JR-B: We had a very significant recovery in the sector between the end of 2008 and 2011. It's going to take the market some time to consolidate those gains before the next move higher. At the same time, valuations have come down, which is really a symptom of the "wall-of-worry" phase in a bull market.
After the first big correction in a bull market, it takes the market between four to five years to make its next big breakout and pull away from the first major high. In that extended period, sentiment obviously tends to be neutral to negative. Investors are worried that the bull market's over and not going to make new highs, yet companies continue to add value. That's why you tend to see improved valuations, which in itself is a major catalyst for the sector. Right now the market is likely entering a final washout phase. Looking at the long-term charts, there is nothing that says the bull market is over. The market is soon to make a major bottom and should be in position for a great rebound. I'm actually seeing several similarities between this year and 2005.
There are several things readers should look at. One, they can look at companies that have performed very well yet still have value to offer. You really want to buy them when they're trading 20–30% off their highs, which will happen at least twice a year. Now is obviously one of those times. If you see an Argonaut come 20% off a high, that's something you really want to take a serious look at. Established growth-oriented companies like Fortuna Silver (though it's struggling), First Majestic and Silver Wheaton are trading well off their highs. At the same time, I'm not against bottom fishing per se, but you have to be careful with those companies. There are fundamental reasons why companies fall 50, 60 or 70%. But if you find the right one, you could certainly double or triple your money very quickly. I'd just be extremely selective there. It will be a few years before those companies come back into favor, universally.
TGR: Thanks for joining us today.
Jordan Roy-Byrne, CMT, is a Chartered Market Technician, a member of the Market Technicians Association and a former official contributor to the CME Group, the largest futures exchange in the world. He is the editor of TheDailyGold Premium. His work has been featured in CNBC, Barrons, Financial Times, Alphaville, Yahoo Finance, BusinessInsider, 321gold, Gold-Eagle, FinancialSense, GoldSeek and Kitco.
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DISCLOSURE:
- Zig Lambo of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
- The following companies mentioned in the interview are sponsors of The Gold Report: Goldcorp Inc., Fortuna Silver Mines Inc., Argonaut Gold Inc. and Meadow Bay Gold Corp. Streetwise Reports does not accept stock in exchange for services.
- Jordan Roy-Byrne: I personally and/or my family own shares of the following companies mentioned in this interview: Argonaut Gold Inc. and Corvus Gold Corp. Argonaut Gold Inc., Corvus Gold Inc., Meadow Bay Gold Corp. and First Majestic Silver Corp. are sponsors of TheDailyGold.com. I was not paid by Streetwise Reports for participating in this story.
( Companies Mentioned: AR:TSX, BOZ:TSX.V, KOR:TSX, FR:TSX; AG:NYSE; FMV:FSE, FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, HDA:TSX.V, MAY:TSX.V; MAYGF:OTCQX, RIC:TSX; RIC:NYSE.A, SSL:TSX.V)
