December 14th, 2012 - Natural Gas is The Trigger

By Toby Connor
www.goldscents.blogspot.com

NATURAL GAS IS THE TRIGGER:

Last summer I told traders to watch the oil cycle as the CRB was working its way down into a final three year cycle low. At the time I was confident that the entire commodity complex was just waiting for the oil cycle to bottom. Once it did, the rest of the commodity complex launched out of that bottom like a rocket.

Remember at the time virtually every analyst was predicting the end of the commodity bull market. I knew that was baloney. All that was happening was a completely normal decline into a major three year cycle low.

I also correctly predicted that the bottom in the CRB would mark the three year cycle top in the dollar.

As expected the dollar made a halfhearted attempt to regain the 200 day moving average before rolling over in anticipation of QE4. At this point all we are waiting for is a move below the last daily cycle low at 79.56 to confirm the intermediate cycle has topped, and done so in a left translated manner (left translated cycles are an indication of a cycle that is in decline and making lower lows and lower highs).

Once 79.56 is breached the dollar will be on its way down into its yearly cycle low sometime in mid to late February. My best guess is an intermediate bottom somewhere around 76-77 before another mild bounce like we witnessed out of the August low and then a continued collapse of the worlds reserve currency.

Since September when the dollar began it's pathetic countertrend rally, the CRB has been moving down into its first corrective phase. At this point I think the entire commodity complex is just waiting for the leader to turn. And by leader I mean natural gas. As you can see in the chart below Nat gas led the entire commodity complex out of that major three year cycle low.

I think Nat gas began a new cyclical bull market in April. This was the point at which currency debasement overwhelmed the supply/demand fundamentals of a saturated Nat gas market. I don't believe for a minute that this bull market is being driven by supply and demand fundamentals. I think this market is being driven by the same thing that the entire commodity complex is responding to, and has been responding to since last summer, and that is massive global currency devaluation.

As you can see in the chart above the natural gas cycle is now deep in the timing band for a turn. I suspect when Nat gas forms a swing we will see oil, gold, silver, and the entire commodity complex begin another leg up in what I expect to be a severe inflationary spiral culminating in at least a mini currency crisis in mid-2014.

As predicted the stock market rallied violently out of its intermediate bottom logging a 7% gain on the initial thrust. We can now expect stocks to take a breather as a minor profit-taking event unfolds and the stock market moves down into its half cycle low.

My best guess is we will see a bottom somewhere between 1400-1410 followed by a move up to test the all-time highs, probably by the end of the year (especially if we get a resolution to the fiscal Cliff in the next week or two). But if Congress manages to drag this into the new year, then I think we can expect fiscal cliff resolution and at least a marginal break of the September highs before the state of the union address on January 29.

So for commodity traders I think we are just waiting on the natural gas market to bottom before the next leg up begins.

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It May Be Time to Book Some Profits in the Mining Stocks

By Toby Connor
www.goldscents.blogspot.com

IT MAY BE TIME TO BOOK SOME PROFITS IN THE MINING STOCKS: It's been a great run over the last two months but it may be time to tighten stops on mining stocks. You can see in the chart below that at least during this stage of the new C-wave gold is still inversely tethered to the dollar index, as are miners.

During the period from September 2011 to July 2012 the dollar was moving generally higher out of its three year cycle low and that forced a 10 month correction in the precious metals sector.

It's been my opinion that the three year cycle in the dollar topped at that point, and should drift generally lower until the next three year cycle low sometime in mid-2014 (with occasional counter trend rallies from time to time).

I've been expecting one more leg down in the dollar to test the February intermediate low before the first counter trend rally.

However, this bounce is now on the 10th day and in jeopardy of generating a right translated daily cycle (a cycle that rallies longer than half its duration and tends to form higher highs and higher lows).


If a right translated daily cycle occurs it will probably signal that an intermediate degree counter trend rally has already begun. As you can see in the chart above just as soon as the dollar started to rally gold stagnated, mining stocks started to correct, as did the stock market.

If this bounce in the dollar turns into a full-fledged intermediate degree rally then we can probably expect a 3-4 week correction in asset markets. 

I find it hard to believe that Bernanke is going to allow the dollar to rise and asset markets correct right in front of an election but the possibility definitely exists if the dollar doesn't turn down early next week.

Those of you not willing to hold through a 10-15% correction in miners should probably consider tightening stops, possibly right below Thursday's intraday low. If that stop level gets violated it would start a pattern of lower lows and lower highs which is generally the definition of a down trend.
 
If, on the other hand, Monday morning finds the dollar getting hit hard then I think we may see gold test $1900 before the next intermediate degree correction. In my opinion what happens Monday & Tuesday to the dollar index will probably set the stage for market direction over the next month and into the election.

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Short Supply, High Demand for Platinum Group Metals: George Topping and Michael Scoon

07/12/2012
By Brian Sylvester of The Gold Report
www.theaureport.com

The Gold Report: George and Michael, we're here today to discuss platinum group metals (PGMs), as well as some bulk commodities. It's no surprise that each of the 15 commodities you follow has suffered double-digit price declines over the last year, except for potash, which was up about 9%, and gold, which was up a mere 3%. The hardest hit was nickel, down more than 27%. With commodity price performances like that, why should investors stay in the mine commodity sector?

George Topping: Investors are focused on the immediate economic conditions rather than seeing commodities as a store of value during times of currency debasement. Make no mistake about it; the only way out of the current predicament is the printing of money and the debasement of currencies. This short-term focus on European worries and investors reducing risk is putting pressure on most metal prices, but it won't last. As weak as the global economy is, it is interesting that commodities are still historically strong.

TGR: Is what's happening in the market a bit of an overreaction?

GT: Yes, it is. The market is too focused on the short term instead of the consequences of the solution to the economic woes.

TGR: George, you're on the record as saying that large gold companies need to materially boost their dividends in order to compete with gold exchange traded funds (ETFs), which are funneling away billions of investment dollars. How high do dividends need to be to staunch the bleeding?

GT: I'd aim for a 5% dividend yield to attract fund flows back into the sector.

TGR: Big mining companies like Vale SA (VALE:NYSE) and BHP Billiton plc (BHP:NYSE; BHPLF:OTCPK) have dividends that are much higher than the gold companies. Why haven't gold companies taken that approach?

GT: The gold companies have been trying to grow gold production at any price. We call it "GAAP," growth at any price. Circumstances have changed. Growth is now unaffordable due to inflation. Capital costs have doubled in the last four years. It's time for the gold mining companies to wake up, stop building these new $6 billion mining projects and pay more dividends to shareholders.

We calculated that if Barrick Gold Corp. (ABX:TSX; ABX:NYSE) just deferred the obvious low internal rate of return (IRR)/high capital expenditure projects, it would have a free cash flow yield of 8%. Goldcorp Inc. (G:TSX; GG:NYSE) would be 8.5%. Kinross Gold Corp. (K:TSX; KGC:NYSE) would have 12%. Newmont Mining Corp. (NEM:NYSE) would have 9%. There's a lot of free cash flow if they stop wasting it on these low IRR projects.

TGR: PGM-focused companies are also losing dollars to ETFs. Should they raise dividends, too?

GT: Unfortunately, it's a different situation for PGMs. PGM prices are not high enough for most of these companies to generate sufficient cash flow to pay a healthy dividend.

TGR: How do these companies lure investment dollars?

"Companies that have shallow ore, are closer to cash flows and have large resources are the ones that are likely to get taken out."

GT: They should take some free cash flow and invest it in operational improvements. Don't build new mines. Improve existing mines through capital injection, by updating equipment and providing incentives to the workforce. They need to bring about profits per ton rather than focusing on headline production.

TGR: The prices for platinum and palladium are both down more than 20% since June 2011. Is there any relief in sight?

GT: Yes, we're finally starting to see closures. Aquarius Platinum Ltd. (AQP:ASX) shut down its Everest and Marikana mines recently due to low prices, rising costs and labor problems. The mining industry in South Africa, which produces 70% of the world's platinum and 35% of the world's palladium, has been disseminated. It won't be long before prices start to move higher.

TGR: The region has also had issues with electrical blackouts and whispers of nationalization. How are those issues affecting supply?

GT: I was in South Africa recently and I'm not impressed with the way the country is going. Corruption is rife. I must have taken about 15 taxi rides and all 15 taxi drivers told me corruption was endemic such that you couldn't move without paying a policemen or civil servant—jobs that they are meant to provide you for free. Safety inspections are another issue. The competence of inspectors is a problem. It affects the industry very negatively.

If I were a mine manager or a chief executive of a platinum company, I'd aim for the highest grade I can find now because I don't know what's going to happen next. I don't want to leave money in the ground for five years. I'd also be less likely to invest in the next generations of shafts. I wouldn't spend a couple of billion dollars when I wouldn't see the first cash flow for the next six years. I'd be looking outside of the country for growth. It's negative in the short term, but it's going to get even more negative as the consequences of that lack of investment become clear.

TGR: Are those problems creating a lot of value in the space or is it just too risky for investors?

GT: There are pockets of value. Companies that have shallow ore, are closer to cash flows and have large resources are the ones that are likely to get taken out. Rather than spending a couple of billion dollars on deep shafts, it's easier to buy any available assets with shallow ore next to an existing operation. Platinum Group Metals Ltd. (PTM:TSX; PLG:NYSE.A) comes to mind.

TGR: Have you visited the Waterberg property in the Northern Bushveld?

GT: I visited Platinum Group Metals in February. It's developing the WBJV project and is exploring its Waterberg property. Waterberg is important to Platinum Group Metals because it has the potential to be very large. It could be alluring to senior mining companies—Jinchuan Group Co. Ltd. and Impala Platinum Holdings Ltd. (IMP:JSE), for example. It's the sort of project that could attract a bid for the entire company.

TGR: When is production expected to begin there?

GT: Waterberg is still early-stage exploration. It's many years away. In the meantime, it's providing exploration results to the market while WBJV is developed. It's exciting exploration. WBJV should be in production in 2014.

TGR: Are you more bullish on platinum or palladium?

GT: Platinum, mostly because production is challenged in South Africa. Platinum also has a major jewelry role, particularly in China. There's a tremendous amount of growth to come. Palladium will do well, but platinum is safer in the long term.

TGR: The biggest single use for both of these metals is in catalytic converters in automobiles. How far off is global economic growth for that application?

GT: The weightings of platinum, palladium and rhodium in catalytic converters are generally increasing. As countries become more developed, they become more environmentally conscious. There should be a tightening on auto catalytic converters in developing nations just as we have had here. There should be increased usage based on that. In fact, last year North American and European governments mandated that large and off-road trucks have to have catalytic converters.

TGR: Let's move to iron. On June 28, BHP Billiton was offering 80,000 metric tons (mt) iron ore grading 62% for $137/mt on the globalORE trading platform. The best bid was $129.50/mt, which says something about iron ore demand. Overall iron ore prices were down 8% in the second quarter, mostly on weak demand from Chinese steelmakers. Do you expect that price weakness to continue in the near term?

Michael Scoon: Yes. The summer is a seasonally weaker period for all industrial commodities. Low-volume trading activity in the spot market can result in price volatility on any given day, but year-to-date the price has averaged about $145/mt. And, as you said, prices are down about 8% over the quarter. However, I saw a report this morning that the spread between bid and ask-on-the-spot exchange has narrowed substantially.

TGR: The iron ore market used to be governed by yearlong contracts, but Chinese steelmakers would default on those in order to take advantage of lower near-term prices. Do you think we'll get back to the point where the prices are set for a year or will the spot market continue to dominate as it is now?

MS: The spot market is here to stay for the foreseeable future. It was quite an undertaking to change the term of the contracts. Today, there's a substantial amount of iron ore transacted on either monthly or quarterly pricing. Shorter-term contracts are going to be the way of the future.

TGR: What's Stifel Nicolaus's forecast for iron ore prices through 2013?

MS: I forecast prices softening in the summer months in line with the 8% decline over the 2Q12. I see prices remaining soft in the third quarter, but recovering in the fourth quarter to average around $140/mt in 2012. Prices could fall in 2013 to $131/mt, but settle around $125–130/mt in the long term, based on the marginal cost of production.

Over the course of the next five years, new supply from the three major producers—BHP, Vale, Rio Tinto Plc (RIO:NYSE; RIO:LON; RIO:ASX)—may push the high-cost producers off the cost curve into uneconomic territory. However, the Big Three will be incentivized to keep that marginal cost of production high as they sell more iron ore into shorter-term contracts.

TGR: The Big Three carry a reasonably high dividend—at least relative to the mining space. In 2009 and 2010, and even into 2011, steelmakers were going downstream and buying iron ore companies to control the cost of their raw materials. Does that trend have any momentum left?

MS: That trend does have some momentum left in it. The number of transactions has slowed as steelmakers aren't as active as they were. However, large new sources of iron ore supply are coming from risky jurisdictions, such as West Africa. Steel producers will continue to look for joint ventures or to own projects in safe jurisdictions to help control their supply. Steel producers want to avoid being caught in a supply squeeze. It's to their benefit to secure 30–50% of their iron ore requirement through joint venture partners and offtake agreements in order to derisk their businesses.

TGR: There are a number of players in Québec's north, which is considered a safer jurisdiction. What are their prospects for being taken over or developing into producing assets?

MS: There are a number of development-stage companies in the Labrador Trough, the most advanced of which is Alderon Iron Ore Corp. (ADV:TSX; AXX:NYSE.A). It has a partnership with Chinese steel producer Hebei Iron and Steel Co Ltd. (000709:SHE) to develop its Kami iron ore project near Cliffs Natural Resources Inc.'s (CLF:NYSE) operations. Its preliminary economic assessment suggests 8 million tons per year (Mtpa). Hebei is committed to offtake 60% of that. The prospects for development for Alderon are quite good as it's the most advanced of its peers and it has a joint venture partner established.

TGR: How favorable to Alderon were the terms of that joint venture agreement?

MS: Alderon did commit a lot of its future sales to secure the partnership. However, Kami is a project that can be expanded. If it can prove that it can expand to 16 Mtpa, then it may have the ability to attract another steel producer or further investment from Hebei.

TGR: Does it have enough at 60% that a takeover wouldn't be prudent?

MS: Hebei does have a toehold in the project. However, if Kami can be expanded to 16 Mtpa, then the offtake falls to only 30% of production, which wouldn't be a hindrance to a takeover by a third party.

TGR: Indeed. What are some of the other players in that area?

"There's been a tremendous selloff in the equities, so much so that most of the commodity stocks are very cheap relative to metal prices."

MS: I prefer projects in the southern trough for their easier access to infrastructure. Champion Minerals Inc. (CHM:TSX) has a project located near ArcelorMittal's (MT:NYSE) operations. It has a very similar development timeline to Alderon, with the potential to produce 8 Mtpa growing to 16 Mtpa as it develops proximal land next to its key Fire Lake North asset.

And there are others. Labrador Iron Mines Holdings Ltd. (LIM:TSX) and New Millennium Iron Corp. (NML:TSX.V) are located further to the north. Labrador Iron Mines is in production. New Millennium is in construction. Even further to the north is Oceanic Iron Ore Corp. (FEO:TSX.V; FEOVF:OTCQX), which has a very large project, but is more infrastructure-challenged. Oceanic proposes to export from a port that it will construct itself from the northern shore.

TGR: Could Oceanic Iron Ore have a joint venture partner build a port facility given the substantial cost?

MS: There is an opportunity for Oceanic to bring a strategic partner to help absorb some of the upfront capital costs. However, it does come with a degree of uncertainty. There is a fixed pool of potential partners out there. If I were one of those steel producers, I would first consider projects with more familiar technical challenges.

TGR: Do you think Oceanic has an advantage in terms of grade and size of project that could be particularly alluring to a suitor?

MS: Most definitely. It does have a very large resource that has the potential to produce a lot of iron ore. However, it is located in the north. On paper, that large-scale production may seem more feasible than it will prove to be, given the rather harsh working conditions and challenging shipping.

TGR: George, in June 2011 you told Reuters that you believed zinc would be a 2013 story. After reaching roughly $2,200/mt in January 2012, zinc prices have trended steadily lower to around $1,760/mt, or about $0.79/pound (lb). Meanwhile, the London Metals Exchange has almost 1Mmt of zinc in stockpiles that are at a historical high. What underpins your thesis that zinc prices will have climbed dramatically higher by this time next year?

GT: Two things: Nothing cures low prices like low prices. Second, the market is forward looking. In 2013, it will be looking at 2014 and reacting accordingly.

TGR: What's your price forecast for zinc into 2014?

GT: I forecast average prices of $0.90 this year going to $1.08 in 2013 and $1.15 in 2014.

TGR: What companies are currently being developed and positioned for the up-tick in zinc prices?

GT: HudBay Minerals Inc. (HBM:TSX; HBM:NYSE) springs to mind. It's developing the Lalor Lake property in Manitoba, which will start small-scale production this year and ramp up seriously in 2013.

TGR: What is its cost per pound?

GT: About $0.60.

TGR: How does that rank relative to the rest of the industry?

GT: It's in the lower half.

TGR: What are some other companies on your radar?

GT: A small cap that I really like is Foran Mining Corp. (FOM:TSX.V), a sub-$50 million market-cap company. It's very cheap for a company that has a 22 mt volcanogenic massive sulfide (VMS) deposit grading 3.8% zinc, 1.1% copper and 0.7oz/t silver.

It's one-hour away from HudBay's 777 Mine. HudBay is in Manitoba, but Foran is actually just over the border in Saskatchewan. They're very close to one another. If I were HudBay, I wouldn't want anybody coming into my camp and competing with me for labor and supply services. I would be thinking about taking Foran out before it gets too close to production.

TGR: You note in a recent research report on Foran that future equity financings may be necessary. How much cash does the company have in the till and how long will it take to burn through that capital?

GT: At the end of March it had $8.5M. I'd estimate it has roughly $5M now as it's been continuing to drill.

TGR: It's a greater risk now because financing for small-cap companies is increasingly difficult.

GT: That is true. However, Canada has the Canadian exploration tax deduction. It's much easier to raise money in Canada for exploration than most other jurisdictions. I don't think it'll have any difficulty in raising additional funds to drill out the deposit and move it toward its preliminary economic assessment in the first half of next year.

TGR: How much peace of mind does it give you that Pierre Lassonde, a leading gold executive and investor, is an 11% shareholder?

GT: He's well known in the industry and it certainly doesn't do any harm having him invested.

TGR: Do you have any parting thoughts for us today on the natural resources space and the mined commodity space that may allay some investor concerns?

GT: There's been a tremendous selloff in the equities, so much so that most of the commodity stocks are very cheap relative to metal prices. The past is the past. Investors should look forward to stimulus packages in China and Europe. There is a lot more debasement of currencies to come. The commodities will still have a role to play in protecting wealth. We'll continue to see a lot more M&A activity given that share prices have fallen. In the current environment, it's difficult to raise debt and equity financing, so juniors will be driven into the arms of seniors.

TGR: And midtiers. HudBay would fit into that category.

GT: Absolutely. It's a very good value.

TGR: Thanks, gentlemen.

George Topping joined the Stifel Nicolaus Research Team in connection with Stifel's acquisition of Thomas Weisel Partners LLC in July 2010. Topping joined Thomas Weisel Partners in December 2009 as a senior mining analyst covering base metals. Topping brings 10 years of experience in the mining industry and 14 years as a sell-side analyst. Topping began his mining career in 1985 with a senior South African mining company and worked both in operations and mining strategy roles for the gold and coal sectors. In 1995, Topping became a sell-side analyst covering platinum, coal and base metals with Irish & Menell Rosenberg, a South Africa-based financial services firm. Topping moved to Canada in 1997, where he has continued as an analyst covering base metals, including a six-year tenure at Sprott Securities from 1999–2005, and most recently at Blackmont Capital since 2007. Topping earned his undergraduate degree in mining engineering from the University of Strathclyde in Glasgow, Scotland.

Michael Scoon joined the Stifel Nicolaus Research Team in connection with Stifel's acquisition of Thomas Weisel Partners LLC in July 2010. Scoon is a research analyst covering basic materials, exploration, development and production companies in the mining sector. He joined the firm in January 2008 and is based in Toronto. Scoon received a Bachelor of Science in accounting and international business from Miami University in Oxford, Ohio, and is a Level III candidate in the Chartered Financial Analyst program.
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Disclosure:

1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his 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: Alderon Iron Ore Corp., Foran Mining Corp., Goldcorp Inc., Platinum Group Metals Ltd. and Prophecy Platinum Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.

3) George Topping: I personally and/or my family own shares of the following companies mentioned in this interview: None. 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.

4) Michael Scoon: I personally and/or my family own shares of the following companies mentioned in this interview: None. 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.

(Companies Mentioned: ADV:TSX; AXX:NYSE.A, AQP:ASX, ABX:TSX; ABX:NYSE, CHM:TSX,
FOM:TSX.V, HBM:TSX; HBM:NYSE, K:TSX; KGC:NYSE, LIM:TSX, NML:TSX.V, NEM:NYSE,
FEO:TSX.V; FEOVF:OTCQX, PTM:TSX; PLG:NYSE.A, )

Source: Short Supply, High Demand for Platinum Group Metals: George Topping and Michael Scoon:

Build Profits with Deep-Value Energy Stocks: Chen Lin

07/12/12
By The Energy Report Editors
www.theenergyreport.com

Chen Lin is the ultimate do-it-yourself investor, and uses his know-how to add value to his own portfolio. He's up yet again this quarter, a feat he attributes to gains in some of his top energy holdings. In this exclusive interview with The Energy Report, the What Is Chen Buying? author profiles his favorite picks and explains why dividends are pivotal in a risk-averse market.

The Energy Report: Chen, you have had some real successes. Are you going to remain a family office, or will you branch out into hedge-fund management?


Chen Lin: I don't have any plans to start a hedge fund. My own portfolios are growing at very rapid pace in the past decade. I'd rather focus on investing my own money or some money from my family. I feel it is more rewarding and more fun this way.


TER: Do you have a theme right now?


CL: I am quite cautious about the general market. As I mentioned in my newsletter over a month ago, I saw a significant slowdown from China. In addition, the EU is back in a recession and the U.S. is slowing down. However, a lot of people and fund managers I know are holding large cash positions. Everyone is expecting a repeat of 2008 and it may not happen. A lot of companies I own have excellent balance sheets and great cash flow. Their downside is very limited. In general, investors may be holding too much cash and they are creating a huge bubble in U.S. government bonds. That's why I am still close to fully invested.


TER: I understand that your portfolio was up 27% in the first three months of 2012. How did you do in Q2/12?
CL: My portfolio is up nicely again this quarter, thanks largely to nice appreciations in some of my top positions, including Mart Resources Inc. (MMT:TSX.V), Pan Orient Energy Corp. (POE:TSX.V) and Petaquilla Minerals Ltd. (PTQ:TSX; PTQMF:OTCBB; P7Z:FSE). I am up about 40–50% for the year.


TER: We have been in a prolonged period where investors have ignored good news and hammered stocks on bad news. You've found some stocks that have reacted positively to news. Was it just a matter of time before the situation changed? Has it changed?

"The market has once again failed to calculate risk-reward benfits. That could create good opportunities for investors who are willing to take on risk."

CL: The market was and continues to be difficult. However, my stocks were so cheap for so long, and it has been really nice to see them moving up with good news against the market downtrend. I am glad both Mart and Pan Orient started to move up with positive news. However, they are both still extremely cheap. Mart, for example, is still paying a double-digit sustainable dividend with possible increases in the next 12 months. Pan Orient is still trading at cash levels; the market is pricing all its other assets at zero even after the management demonstrated its capability to monetize those assets. These are real companies with real assets, and they are still screaming "BUY" even at their current prices. If they don't move up, I don't know what stocks would.


TER: It's amazing to see good performance in such a weak, risk-averse energy market. What industries have been strong in 2012? Which have been weak?
CL: So far, only fixed-income-related stocks have been strong—almost every other sector has been weak. That's why Mart and Pan Orient started to pay dividends, at which point the market started to pay attention. There is a lot of cash on the sidelines collecting zero interest and subsidizing the U.S. deficit. Once investors see a stock yield in the double digits, they rush to it, just as they did with Mart.


TER: How are you weighting and underweighting now?
CL: I am still overweighting selected energy stocks and underweighting everything else, including gold miners, agricultural stocks and biotech. For 2012, I think it is a stock picker's market. You need to consider each stock on an individual basis. I have plans to use the dividends from Mart and Pan Orient to buy cheap stocks in a few sectors, including gold mining.


TER: Mart investors are looking forward to a dividend. When might that occur?
CL: It looks like the company is going to pay a 10c dividend in July and followed by 5c-per-quarter regular dividend.


TER: Capital investment is so hard to come by in these dislocated markets. Aren't there better ways to use cash than to pay it out? Why not buy new assets in a lower-priced energy market?

"My stocks were so cheap for so long; it has been really nice to see them moving up with good news."

CL: Mart is looking for other assets in Nigeria. However, the Umusadege field is generating huge after-tax cash flow and the capital requirements for other new assets are not high. Mart is still accumulating a lot of cash even after the double-digit dividend payouts. Plus, it is expecting to double or triple cash flow after a new pipeline is built, supposedly sometime next year. I wouldn't be surprised to see higher and higher dividends in the next year or so.


TER: Mart is a very low-cost producer now, but could average cash costs increase if it purchased new assets?
CL: Mart's Umusadege field is one of kind. The company saw no significant oil production decline from the wells over the past three years. I am not sure anyone can find another field like this, even in Nigeria. So it would be hard to duplicate the same success. As a shareholder, I really hope Mart focuses on Umusadege while maybe picking up some other fields nearby.


TER: The company just inked a new pipeline deal with Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE). What kind of leverage does this new capacity give the company? What does this mean for investors?
CL: It can double, triple or even quadruple current production, which will leave room for significant dividend increases down the road. Personally, it is still my largest position and I haven't sold a single share since its huge run-up after the dividend announcement.


TER: Shifting gears to Pan Orient, you recently spoke to some investors earlier this summer who were surprised when you told them the company had a producing field that could be scaled up in a short period of time, significantly mitigating cash burn. Why is this development flying under the radar?
CL: Pan Orient's stock had a lot of wild swings in the past a few years, and it doesn't have a strong shareholder base, much like Mart's earlier days. This means a small rumor could crush the share price and there are all kinds of false perceptions about the company. However, I believe as the management continues to execute, much of the misperception will gradually go away.


TER: On May 23, Pan Orient agreed to sell its 60% interest in its Thailand concessions, from which it would net about $162M. The stock rebounded dramatically, and has held its gains. What does this asset sale mean for the company?
CL: It means that the company is trading at the cash level. All the rest of the assets, which the company has been accumulating for the past five years, are "free" to investors. That includes Batu Gajah, the crown jewel of the company. Pan Orient holds 50% of the concession. PetroChina holds the other 50%, currently producing about 50,000–60,000 barrels of oil equivalent per day, with pipelines and all the other infrastructure in place. The company is planning to start drilling Batu Gajah in two to three months.
It is amazing how cheap Pan Orient is right now. It will also be drilling about 10 wells in the next 12 months. Each well costs a few million dollars to drill, but the upside is it would add $2–3 to the dividend if successful. In terms of risk-reward, there are no other companies like Pan Orient. It is still one of my largest positions.


TER: On May 24, Prophecy Coal Corp. (PCY:TSX; PRPCF:OTCQX; 1P2:FSE) said it had entered into a deal with an unnamed Mongolian buyer for its iron manufacturing plant to purchase 22 thousand tons (22 Kt) of coal this year. What is your impression of this news?
CL: I think it is creditable. I went to the mines over a month ago. It has a lot of coal ready to mine. There is a huge amount of energy demand in Mongolia, so I wouldn't be surprised if the company continues to find more buyers. The key is the selling price. Prophecy has been selling to local buyers at cost to show good will. However, this deal looks like it could have a nice margin.


TER: Chen, Mongolia has not been friendly to mining in the past, but it is now a fledgling democracy and it seems open to Prophecy. Does Mongolia present high hurdles to other companies wanting to enter the market?
CL: Yes, the hurdle is high for newcomers to Mongolia. Prophecy has already been operating there for a while and has the advantage of knowing the country and the people. Mongolia is a huge country and there are a lot of opportunities there, and like many companies I own, Prophecy Coal is deeply undervalued. Now I am waiting to see the company's progress before I decide when to buy more. If there is no significant news and the market doesn't improve for the rest of the year, then tax-loss selling later this year could present a bargain-hunting opportunity.


TER: Do you own shares in Harvest Natural Resources (HNR:NYSE)?
CL: Yes. I am holding, though I am tempted to add to my position on weakness.


TER: On June 21, the company announced that it had agreed to sell its 32% stake in its Venezuelan operation, Petrodelta for $725M, on which it will net approximately $525M. The share price nearly doubled on that news. What's your take on this?
CL: It was a very smart move indeed. The deal was worth more than $12 per share but the stock is still trading at $8–9.


TER: Harvest Natural Resources has fairly advanced exploration programs in Indonesia, Gabon and Oman that it brought to the drilling stage last year. Any one of these could be worth, at minimum, half of the company's current market cap of $326M. What is the market waiting for?
CL: Harvest will need to close the deal first. That would require government approval from Venezuela and Indonesia. If one of the governments doesn't approve, the deal is dead. I think the market is fearing this outcome. However, I believe the market has once again failed to calculate the risk-reward benfits. That could create good opportunities for investors who are willing to take on a little risk.


TER: Thank you for sharing your strategies with us.

Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors Inc. While a doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:
1) The following companies mentioned in the interview are sponsors of The Energy Report: Mart Resources Inc., Pan Orient Energy Corp., Prophecy Coal Corp., Petaquilla Minerals Ltd. and Royal Dutch Shell Plc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
2) Chen Lin: I personally and/or my family own shares of all companies mentioned in this interview. 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.

( Companies Mentioned: HNR:NYSE, MMT:TSX.V, POE:TSX.V, PTQ:TSX; PTQMF:OTCBB; 7Z:FSE,
PCY:TSX; PRPCF:OTCQX; 1P2:FSE, RDS.A:NYSE; RDS.B:NYSE, )

Source: Build Profits with Deep-Value Energy Stocks: Chen Lin:

Secrets for Finding Ten-baggers: James West

By Brian Sylvester of The Gold Report

The Gold Report: Not so long ago, mining promoters—larger-than-life personalities who revved up retail investors about stocks—were an essential part of the junior mining business. But the NI 43-101 limits how much company presidents and CEOs can tout their stocks. Do promoters still have a role or have they disappeared from the scene?


James West: Promoters have not disappeared from the scene. Yes, the NI 43-101 puts a filter on how public companies communicate with the market, but promoters are essential to the life cycle of public companies.

There was a time when promoters were infiltrated by a larcenous element that would create and promote deals that could at best be described as very optimistic. Back then, these misleading statements could be distributed almost clandestinely. Thanks to the Internet and the NI 43-101, that larcenous element has largely been unable to operate as freely. People hear "promoter" and they immediately think "con artist," which is wrong-headed and a throwback to the pre-Internet era. Promoters now are legally responsible for the statements they make on behalf of a company. As a result, promotion is a lot more respectable.
Today, because the level of sophistication has gone up with the proliferation of chat rooms and discussion groups, information considered "overly promotional" is discounted by the audience. People are a lot more savvy about promoters and promotional language than they used to be.

"A great stock promoter can credibly and convincingly convey the technical aspects of a project and the merits of the management team, and can honestly indicate who the other investors are and what the exit strategy is to as broad an audience as possible. He also needs a great Rolodex."

Promoters are still there, they are just more transparent. Today, promoters are part of the management team. They go to the meetings, presentations and trade shows. Excellent promoters attract capital and investors. A company without a good promoter on the management team is a company with few investors, that nobody has heard about and that can't raise money.


TGR: Given the transparency and availability of information, would investors be better off if the NI 43-101 rules regarding resource disclosure were relaxed to allow greater promotion?
JW: No. It is thanks to the NI 43-101 that the Toronto Stock Exchange (TSX) and the Toronto Venture Exchange (TSX.V) are the No. 1 destination exchanges for resource stocks. Those rules create a level of investor trust such that investors expect that any legitimate resource-oriented public company raising money must have an exit strategy that involves the TSX or TSX.V.
However, I believe NI 43-101 enforcement should be undertaken more carefully. For example, look at what happened to Orbite Aluminae Inc. (ORT:TSX) last year. Orbite extrapolated a rare earth estimate between holes two kilometers apart. The geologist at the Ontario Securities Commission took exception to that and halted the stock. Later, the Autorité des Marchés Financiers in Québec did the same thing on the same grounds. Additional NI 43-101 reports were ordered by both agencies. Eventually, 11 independent geologists concluded that Orbite's approach to the assumption was sound and that the estimate was accurate. While it was halted, the stock built up a short position of 11 million (M) shares. When it was finally unhalted, it got hammered, and is now trading at nowhere near where it should be trading.


TGR: Do the recent poor performances of resource equities and the difficulties companies have raising money make a good promoter more valuable?
JW: Absolutely. Some promoters are raising millions of dollars. That is the result of a combination of good projects and good management, which includes a good promoter.


TGR: What makes a good stock promoter?
JW: A great stock promoter can credibly and convincingly convey the technical aspects of a project and the merits of the management team, and can honestly indicate who the other investors are and what the exit strategy is to as broad an audience as possible. He also needs a great Rolodex.


TGR: How do today's promoters differ from your dad's junior mining promoters?
JW: They do not drink or smoke nearly as much, and they probably do not make as much money. Back in the day, you could promote 10 or 15 deals. If just one took off, you would be off to the races financially.
Today, if you are on more than one management team, your attention is assumed to be divided and your effectiveness is perceived to be limited as a result. Promoters cannot have as many balls in the air as they used to. Promoters are a visible part of management and are accountable.


TGR: Who would you consider to be a good, or even great, promoter active today?
JW: A great promoter, without saying too much, gets you so excited about the deal that you buy stock in the market or you participate in a private placement. Without being promotional, he paints the picture and leaves you to read between the lines if it's a truly remarkable project.
I would put Richard Whittall from Newstrike Capital Inc. (NES:TSX.V) in that category. He does not shout from the rooftops. He diligently goes about the business of credibly articulating the structure and financial condition of the company and the deposit. The fact that Newstrike's share price is holding where it is in this market is testimony both to the quality of the deposit and to Whittall's effectiveness as a president and promoter.


TGR: Some might consider you a stock promoter. How do you straddle the line between being a promoter and remaining credible?
JW: Arguably, anybody who speaks positively about a public company is promoting it. In our newsletter, we are happy to promote the stocks we invest in because we own them in our fund, and we think they have value. When we write about these companies, we try to articulate a company's merits in terms of structure, financing, projects and management without being too promotional. The idea is to say, "This company is good enough for me to invest in it, and here's why I like it." It is third-party endorsement in its most sincere form.


TGR: But you also try to create a story and use language that people can easily understand and relate to.
JW: The role of a newsletter writer in mining is to convey complex technical concepts in simple terms that a layperson can understand and use to decide whether an investment is appropriate for them. We aid in the function of promoting the stock, but we are not promoters.

"The best time to participate in a high-risk venture is before a junior makes a discovery."

Increasingly, I have been invited into deals as a founding shareholder. In that instance, I do become more a part of the promoting function, and in most of those cases, I'm proud to be a promoter because I believe in the deal, the project and the team. But you rarely see a newsletter writer on a management team or a board of directors.

There are exceptions, like John Lee, who was a fund manager and newsletter writer with Prophecy Coal Corp. (PCY:TSX; PRPCF:OTCQX; 1P2:FSE) and Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:FSE); Victor Goncalves, who stopped writing to become president of Threegold Resources Inc. (THG:TSX.V); and Jim Sinclair, who has a huge audience and is the president of Tanzanian Royalty Exploration Corp. (TRX:NYSE.A).

TGR: Institutional investors and investment banks are quite active in the junior mining space today. Do you think the space will be reclaimed by retail investors?
JW: First, the sheer size of the investment banks gives them an advantage over individual investors. Second, because the investment bank's business model relies on transaction volume, they are only in it for the structure, not the story.

So, yes, retail investors are reluctant to participate, especially in this kind of market and because of the mercenary nature of the investment-banking model. That being said, the earliest stage of the public company lifecycle is exclusively the domain of retail investors.

TGR: The best times to get into an equity position are at the seed capital stage and at an IPO. But many of our readers do not have those opportunities. What is the next best time in a company's life cycle to invest?
JW: I will start by saying that for the average investor whose portfolio is less than $100,000, the high-risk portion is the only portion that should be allocated to investing in junior mining.

"The best thing you can do in this market is look for companies that have made discoveries but whose share prices do not reflect the value of the deposit."

The best time to participate in a high-risk venture is before a junior makes a discovery. For individual investors that typically means after an investment bank has done a financing and the stock price drops below where the financing was done, and when all signs point to a discovery. At that point, you are in cheaper than the institutions and the share price is unlikely to be driven down lower. After the discovery moment, the stock price goes parabolic for a brief phase.

TGR: The discovery phase is when investors are most likely to tap into the legendary "tenbagger." Can you tell us about some names that may or may not be tenbaggers?

JW: GoldQuest Mining Corp. (GQC:TSX.V) comes immediately to mind. On May 23, 321,000 shares of its stock traded at $0.075. The company announced the Romero discovery at the Las Tres Palmas project in the Dominican Republic; drill results were 230 meters (m) grading 2.4 grams per ton (g/t) gold, which included 160m grading 2.9 g/t gold and 0.62% copper. In textbook fashion, the stock tripled, closing at $0.31 on 16M shares of volume. It touched a high on June 1 of $0.74. From $0.075 to $0.74, that is a tenbagger, a 10-times return investment if you sold it on June 1.

Apart from promising preliminary geology and geophysics, there was no way for an investor to know that GoldQuest was going to pop out a hole like that. That really speaks to one of the keys behind successful resource investing—plain luck.


TGR: Yes, but investors can reduce their odds through due diligence and listening to people like you.


JW: Yes. A good management team and a great geologist can look at a piece of ground and render an opinion about what might lie beneath it. Reinforce that with geophysical and geochemical data, and they might be able to improve on where they would drill a hole. But it is still largely a puzzle.


TGR: Shortly thereafter GoldQuest closed a $6.6M private placement. Could it have done that if it had not made that discovery hole?


JW: It might have been able to do that, but certainly not at $0.45 a share, and I doubt it would have been able to raise $5M prior to that discovery.


TGR: What is GoldQuest's next step?


JW: To keep drilling now that it has the money, and hope that hole is representative of the ground it owns at Las Tres Palmas.


TGR: What other names do you like, James?


JW: The best thing you can do in this market is look for companies that have made discoveries but whose
share prices do not reflect the value of the deposit.

My first example would be Hunter Bay Minerals Plc (HBY:TSX.V; HTBNF:OTCQX). Hunter Bay completed its first drill program on the Sela Creek project in Suriname and announced 42m of 1.2 g/t gold as initial results. Artisanal miners have worked the surface of this area for 50 years. This is a discovery in the sense that modern exploration techniques have discovered the source of all that surface gold.
The nearby Rosebel mine belonging to IAMGOLD Corp. (IMG:TSX; IAG:NYSE) is at 14 million ounces (Moz). Newmont Mining Corp.'s (NEM:NYSE) Nassau deposit is 4+ Moz. Both of these discoveries were found under similar circumstances.

Yet, Hunter Bay trades at just $0.20/share. Nobody understands the implications of the initial drill results, and it is not generating the broad market appeal that GoldQuest did. But that is what makes it an opportunity for investors. Hunter Bay will continue drilling. Chances are it will continue to prove up this kind of drill intercepts, indicating the existence of a mineable deposit.


TGR: In our last interview, you talked about Tinka Resources Ltd. (TK:TSX.V; TLD:FSE; TKRFF:OTCPK) and Seafield Resources Ltd. (SFF:TSX.V). What is happening with them?


JW: Tinka already has 20 Moz silver in combined resources at its Colquipucro deposit in Peru. On May 1, it announced 20m of 86 g/t silver. That is almost 3 ounces per ton silver. There have been other positive announcements as well. This is an existing resource where drilling continues to prove out intercepts that demonstrate the potential for an economic deposit. The company has been beaten down by general market aversion. However, as an investor, if you buy into the idea that the silver price is rising incrementally, it is excellent exposure to silver at an excellent price.


TGR: There have been recent concerns about the viability of mining projects in Peru. What is your view?


JW: Peru's president, Ollanta Humala, was elected on a platform of making sure more money from Peru's resources goes to the poor people who need it most. Now that he is president, he has to deliver on that. Peru's revised tax system for mining does give the government more money.
But the problem with the specific deposit that is causing trouble for Newmont is that it is in an area where the people do not want mining at all. The local people are convinced that a mine will destroy the water they rely on for agriculture. That kind of problem can happen anywhere; it is not specific to Peru.
Now there are questions, because President Humala has been forced to side with the people, that the mine may not move forward. That has created a general sense of enhanced risk that needs to be priced into anything happening in Peru.


TGR: How is that likely to affect a company like Tinka?


JW: It should not affect Tinka. You have to ask yourself: Is this an economic deposit that a major will want to acquire and add to its production portfolio? If the answer yes, Newmont's problems are not relevant to Colquipucro unless it, too, is an agricultural community.
The indications are that the people of Colquipucro are open to a mine for economic reasons.


TGR: What about Seafield?


JW: This is a story with great geology. It has continuous excellent intercepts since its announcement of 449m of 1.25 g/t in December 2010. The stock took off. But Seafield had been financed at very low levels after the 2008 crisis, so there was a lot of stock out there. Insiders ended up killing the momentum in the share price because they had been starving for so long.


TGR: But then management changed, did it not?
JW: Yes. The new management team is led by Cesar Lopez, who was somewhat successful with Apoquindo Minerals Inc. (AQM:TSX.V), now AQM Copper Inc. Seafield has an NI 43-101 coming and the drill results are great. But the sentiment is so negative that is very hard for the stock to move forward.


TGR: This is Seafield's Miraflores property in Colombia. The company just put out a preliminary economic assessment that demonstrated a 50% internal rate of return and a net present value of $249M. What did you think of those numbers?


JW: The proof is in the pudding. If a reputable engineering firm could draw that conclusion, it demonstrates viability. Unfortunately, Seafield still has a lot of shares out. Nobody likes to see that, especially in this environment.


TGR: You are moving more into the energy space. What oil and gas plays do you have positions in?
JW: My top oil and gas position is in Terra Nova Minerals Inc. (TGC:TSX.V) in Australia's Cooper Basin. It will start drilling in October. The Cooper Basin is a rich hydrocarbon field, so the chances are that at least one of the four holes Terra Nova plans to drill will lead to an oil well.

Africa Oil Corp. (AOI:TSX.V) is the poster child for the tenbagger in the oil and gas space. The company had a low share price; investors did not care about it or were selling it.
Then it discovered a major oil find at its Ngamia-1 well in Kenya. The stock went from below $2/share up over $10/share and today is still trading around $8/share.
Then there is EFL Overseas Inc. (EFLO:OTCBB), a big gas play in the north of Canada.


TGR: Is it publicly traded?
JW: It is on the OTC right now, at $2.50/share. It has a land position in the Liard Basin in the Yukon. This is a huge field that could be larger than Papua New Guinea. The company will be listed on the TSX within three months if it succeeds in this undertaking.


TGR: James, you are by-and-large a positive person. Why should retail investors be optimistic today?
JW: Arguably, we are in a continuation of the 2008 crisis, which was offset temporarily by a massive injection of quantitative easing and easy fiscal policies.
A crisis is an opportunity. This is a great time to accumulate as long as you do not put a timeframe on your exit. In many cases, the high-quality juniors have been pulled down along with the lesser quality companies. That is the opportunity and the reason for optimism.

Midas Letter is the journal of investment strategy of the Midas Letter Opportunity Fund, a Luxembourg-based special investment fund that specializes in Canada-listed emerging companies in the resource sector with a focus on precious metals explorers and miners, and the Midas Letter Securitisation Fund, also Luxembourg-based, which provides secured capital to advanced development projects across all commodities and energy. James West is the portfolio and investment advisor to the fund. Every month, West's Midas Letter Premium Edition deconstructs the economic and political events of the past and upcoming week, and identifies risks and opportunities to investors seeking to profit while the majority of investors are losing money.
Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.


DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his 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: Orbite Aluminae Inc., Newstrike Capital Inc., Prophecy Coal Corp., Prophecy Platinum Corp., Hunter Bay Minerals Plc, Tinka Resources Ltd. and Seafield Resources Ltd. Streetwise Reports does not accept stock in exchange for services. This interview was edited for clarity.
3) James West: I personally and/or my family own shares of the following companies mentioned in this interview: Orbite Aluminae Inc., Newstrike Capital Inc., Prophecy Coal Corp., Prophecy Platinum Corp., Hunter Bay Minerals Plc, Tinka Resources Ltd., Seafield Resources Ltd., EFL Overseas Inc., Terra Nova Minerals Inc., IAMGOLD Corp., Newmont Mining Corp., and GoldQuest Mining 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.

( Companies Mentioned: AOI:TSX.V, EFLO:OTCBB, GQC:TSX.V, HBY:TSX.V; HTBNF:OTCQX,
NES:TSX.V, ORT:TSX, SFF:TSX.V, TGC:TSX.V, TK:TSX.V; TLD:FSE; TKRFF:OTCPK, )

Source: James West's Secrets for Finding Tenbaggers:

Gold Avalanche Recommends employing trailing stops on your positions, and to use limit orders and stop-limit orders for buying and selling securities to help mitigate risk. Consult your financial adviser for more information.

Miners Are Unlocking China's Gold: Noel White

By Brian Sylvester of The Gold Report 

Dr. Noel White is a geologist with more than 40 years of experience in mineral exploration, operations and project generation worldwide. He was the chief geologist for former BHP Minerals and has visited over 350 ore deposits/mines in 50 countries, including China, where the first foreign joint venture in its mining industry was built up by BHP. White was a consultant to the World Bank Group on its evaluation of Asian mineral potential. He has a strong involvement with professional societies and universities worldwide, such as serving as international exchange lecturer in 1999 and Thayer Lindsley Lecturer in 2008 for the Society of Economic Geologists and served as the vice president of regional affairs for the Society of Economic Geologists. He has authored and co-authored various publications since 1972. White received a Bachelor of Science degree from the University of Newcastle and a Ph.D. from the University of Tasmania.


The Gold Report: Noel, you're a geologist with about a 40-year history in mineral exploration. These days, public companies pay you for advice on how to run their exploration programs. What are some common mistakes junior mining companies make when it comes to exploration?
Noel White: Junior companies have difficulty developing a clear and realistic strategy.
TGR: You try to temper their enthusiasm?
NW: Not at all. In fact, I try to encourage their enthusiasm. But I try to get what they do aligned with what their objectives are in a realistic way.
TGR: Do they try to drill too quickly? Do they try to drill too much?
NW: Junior companies commonly feel that there is an expectation to drill quickly, but they also need to do their homework properly. If they jump into drilling before doing the appropriate surface techniques, such as geological mapping, geochemical sampling and geophysical surveys, they can completely waste the very expensive drilling work. It is a serious mistake because bad drilling results have a serious negative impact on how investors perceive a project. A company needs the best possible intersections at the start to raise the value of their projects.
TGR: Have you been an active consultant on projects that have reached production and gone on to be successful?
NW: I've worked a long time with Asia Now Resources Corp. (NOW:TSX.V) in China. Asia Now has produced an ore deposit in southern China. That exploration success followed a long period of very careful exploration to find a completely hidden ore body. Without that early work, that success would not have been achieved.
TGR: You often deal with technologies that are new to mineral exploration. Can you talk about how they're changing the game?
NW: The fundamentals of mining haven't changed particularly in 40 years—we just use new technologies to achieve the same goals. The major breakthrough in geophysical technology of recent times was the development of airborne gravity. That was one of the Holy Grails.
One of the most basic tools is a magnetic survey. We can get a lot more out of magnetic surveys today than we could in the past. Those surveys provide us with baseline information that's really important.
Technology is producing major breakthroughs in geochemistry. Geochemistry started off just collecting samples of soil or stream sediments and using simple analytical techniques. More and more sensitive analytical methods have been developed. Partial leach techniques extract part of the geochemical sample to maximize the sensitivity. A major recent development relies on the fact that nature has focused particular elements that are associated with ore deposits into particular minerals. It is now possible to actually look at the chemistry of particular minerals to evaluate the proximity to the target based on its chemistry.
TGR: What do all those technologies mean to the investor?
NW: Smart people follow the lead of smart people and greedy people follow the lead of greedy people. If you follow a greedy person you might get lucky and make a lot of money in the short term. Technically smart people who design exploration programs have a much higher probability of being successful in delivering a discovery.
TGR: A few years ago, the World Bank evaluated the mineral potential of China. How would you characterize China's mineral potential?
NW: To appreciate China's potential, you have to understand its history. In the early days of the People's Republic of China, the country followed the Soviet Union approach and started huge state-funded surveys over massive areas, but the Cultural Revolution disrupted the process. Thousands of state-owned companies with exploration teams suddenly found themselves with no funding. However, the government wouldn't allow them to reduce staff or stop operations—a major dilemma for management. They started mining any little thing to make money.
TGR: The country is literally dotted with all kinds of artisanal mines.
NW: They were so focused on making money that they were acting as if they were the smallest of junior mining companies where making money was the sole focus, not doing good work.
TGR: But the potential is there.
NW: Oh, the potential is staggering. A mineral occurrence map of East Asia shows multiple world-class deposits around the borders of China. However, there are very few inside China. Why did China miss out? It has nothing to do with geology. I has to do with the history of the country and how exploration developed. China is fantastically endowed, but very poorly explored.
TGR: But even the Chinese government is not compelled by its geology. Chinese state-owned companies are spending billions to develop resources beyond its borders. Isn't it difficult to argue for further mineral exploration and development in China when the Chinese themselves seem unconvinced?
NW: A huge amount of money is being channeled by the government into exploration teams in China. Some of them are quite competent, but many of them are not. It's basically pouring good money out after mostly bad.
Then the government asks, "Well, why haven't we found all these deposits in China?" But the "experts" they are asking don't know anything about the economic geology of China. They say, "We've spent a huge amount of money looking for these deposits and haven't found them. Therefore, they mustn't be there." That conclusion is wrong. Most of the money is being used in completely ineffective ways.
TGR: What is the environment for juniors wanting to capitalize on that potential?
NW: The geological potential of China is fantastic. But let's not pretend otherwise—it's a difficult place to work for other reasons. When Asia Now went in 10 years ago, China was encouraging foreign companies to come in. A lot of juniors went into China. Some did quite well. Many of them did really badly. Subsequently, conditions have become less and less favorable. The policies change almost on a yearly basis. It's more challenging today than it was 10 years ago.
TGR: What's the best way to get started in China?
NW: The best way to work in China is to joint venture with a good state-owned company. Asia Now chose very good projects and joint ventured with two partners. It's very much like a joint venture in a Western company. Mining law in China is provincial. Having a Chinese partner that can handle government and community relations for you is a major advantage. Many foreign companies don't understand the system, the requirements—they don't have the connections and the relationships that can make things easier. Life is much easier when you have a good local partner.
TGR: Oyu Tolgoi is the mammoth copper-gold porphyry deposit being developed in Mongolia by Rio Tinto (RIO:NYSE; RIO:ASX). You're an expert in porphyry deposits. Do you believe further exploration of those geological systems could yield a similar deposit in China?
NW: There are a lot of porphyry prospects in China, but there's been very little effective exploration on them. The situation is changing because more Chinese have familiarity with porphyry deposits. However, in most cases, if they even recognize a porphyry, they will drill a couple of holes and walk away because they didn't get what they wanted. Porphyry deposits are very big, but that doesn't mean they're easy to find. They can't just drill a couple of holes and say, "Oh well, we've done it." In fact, Asia Now is exploring a porphyry system that had never been recognized in southeastern China, down toward the Vietnam border.
TGR: Is that Habo?
NW: Yes. Asia Now has drilled about 20 holes, but certainly hasn't finished exploring. The potential remains in that area. But why wasn't it found before? There were about 10 centimeters of forest soil and dead leaves hiding it. Until the surface was scraped away, it couldn't be seen. It's not that geologists hadn't looked in that area, they just hadn't seen it. That's true all around the world. It takes very little to hide something.
China has great potential for more porphyry systems. In fact, there have been a lot of porphyry systems found in Tibet because it's a well-exposed area and a well-defined belt. There is a need for people to get back into eastern China where there are numerous known porphyry systems that have never been explored properly.
TGR: Do you think that Habo will ever get to the point where it is a major porphyry system that is mined and is economic?
NW: It's at an important stage now. The work that is being done right now will make or break Habo. So far, no sufficiently wide zones of high-grade mineralization have been found. Many narrow zones have been found, but that doesn't make a porphyry deposit because large volumes are needed to bulk mine.
It's still an open question. We still don't know the answer. We're drilling targets that have the potential to be an economic ore body. Time will tell.
TGR: Is the work being done on Habo changing the way Chinese geologists think about geology in China?
NW: The Chinese system is very stratified. The people in the field often don't know what's happening just down the road, let alone in another province. That knowledge would not be widespread.
TGR: You've also acted as a consultant on the Beiya project, which is in northern Yunnan Province. What's exciting about that project?
NW: We discovered an ore body at Beiya. It's taken quite a period to achieve that success largely because of the character of the geology. The potential was very clear from the earlier stages. There was a known deposit, which has grown and grown to be the biggest gold mine in Yunnan. Production at the moment is about 200,000 ounces per year from an open pit, but it was a very small underground mine when we started.
The mine was controlled by a state-owned company, now partly privatized, but at the start Asia Now tied up all the surrounding ground because it recognized the potential there. The state-owned company was so focused on drilling and testing that deposit that it wasn't interested in the surrounding ground. A fantastic ground position was secured by Asia Now through joint ventures that ultimately give it more than 70% equity.
TGR: That doesn't happen very often in the West, that's for sure.
NW: It was a fantastic opportunity. It was very insightful to grab it. I'm sure the owners of the Beiya gold mine wish that it had never happened. Now, of course, they're looking and saying, "Where can we expand to?" They're basically locked in.
TGR: You wrote an interesting research paper on Minera IRL Ltd. (IRL:TSX; MIRL:LSE; MIRL:BVL) called "Minera IRL: Projects, Personnel and Potential." Is it common for you to pen pieces like that? I worked at the Northern Miner for 10 years and I've never seen something like that.
NW: It was an internal report. The background to that was Minera was having a staff conference at one of its exploration sites. I was asked to speak at that staff conference and give an overview. I sat in on all its project reviews and was on the ground on several of the projects. It is apparent from that document that I was very impressed.
TGR: Indeed, you were. You talk about the mineral potential of Ollachea in Peru and Don Nicolas in Argentina as being significantly greater than what's being looked at currently. What supports that view?
NW: Ollachea has mineralization exposed in a belt of small workings. The deposit has a fairly shallow dip of about 30 degrees in very dissected country. Very often those sorts of deposits are steeply dipping, which limits the depth at which you can explore them. Here, the host structure extends a long way away from where it's currently being drilled. Minera knows that there is gold at other points along that structure and that that structure is very persistent.
The amount of blue sky attached to that deposit is startling. There's plenty more potential. It's the tip of the iceberg. Nobody knows how much more there is, but definitely one of the things you want with any project, apart from having a good resource, is the potential to grow. There's extraordinarily good potential to grow there.
TGR: Is there significant potential in the Don Nicolas deposit as well?
NW: I didn't review Don Nicolas itself. I was supposed to look a lot more closely at that on my last visit, but a little heart attack got in the way.
TGR: Oh, my goodness!
NW: That cut the visit short. However, Don Nicolas is one of many exploration targets within that region. I was startled, to be honest. It's quite an amazing region. There's a whole series of other deposits that are known. Minera has tied up a very large land holding in an extraordinarily mineralized region. For a geologist in exploration, it's the sort of thing that makes your heart beat faster.
TGR: You spoke earlier about how mining rules vary among Chinese provinces. It's much the same in the different provinces of Argentina. Are the particular provinces where Minera is operating considered mining-friendly jurisdictions?
NW: Yes, very much so. It's the best in Argentina. To be honest, there's not a lot more going for this province apart from mining. It's mostly flat. It's arid. It's quite a difficult environment for any other sources of income. The people there recognize that the best opportunity they have to develop is through the mining industry. Consequently, they're very positive about it. They want to see the mining industry grow.
TGR: There is an economic malaise in this particular sector, but projects are still being found and developed despite lagging share prices. Some of them even look robust. Is that enough to keep investors hopeful about this sector?
NW: Investors are holding onto their money and not investing in anything that's perceived to have risk. But there still are investors who have a taste for something with big upside potential. Now is the time to be investing in the very good exploration companies—the ones that have very good projects and very good management. Investors get in cheaply and the upside is fantastic. There's every reason to be optimistic about the mining industry and exploration. Exploration is the future of mining and mining is essential to civilization.
TGR: Do you have any other thoughts you want to share with us?
NW: There will be discoveries that generate interest. In exploration, we benefit greatly from the power of greed because the discovery that excites the market generates a lot more exploration activity. I remember during my BHP Minerals days the young geologists would say, "Isn't it a pity that we didn't find that deposit?" I'd say, "Don't knock it because we benefit from the fact someone else found a deposit that's got the market excited." It benefits everyone's budget.
TGR: Indeed.

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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his 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: Minera IRL Ltd. Streetwise Reports does not accept stock in exchange for services. This interview was edited for clarity.
3) Noel White: I personally and/or my family own shares of the following companies mentioned in this interview: Asia Now Resources Corp. I personally and/or my family am paid by the following companies mentioned in this interview: I am not currently being paid, but in the past I have done paid consulting for both Asia Now Resources Corp. and Minera IRL Ltd. I was not paid by Streetwise Reports for participating in this interview.

( Companies Mentioned: NOW:TSX.V, IRL:TSX; MIRL:LSE; MIRL:BVL, RIO:NYSE; RIO:ASX,)

Source: Miners Are Unlocking China's Gold: Noel White:

Global PMI: The Trend is Your Friend - Frank Holmes

By Frank Holmes
www.usfunds.com

Manufacturing around the world weakened in June, according to the JP Morgan Global Manufacturing Purchasing Managers’ Index (PMI). Its reading of 48.9 was the lowest in three years and the first dip below 50 since September 2011. The current reading is also below the three-month moving average for the second month in a row. As you can see on the chart, PMI crossed below the three-month in May.

While Europe, China and the U.S. were primarily responsible for the slowed activity, we believe the trend is your friend. In April, global PMI crossed above the three-month moving average, and historically, when a “cross-above” has happened, it’s signaled higher prices for many commodities. Take a look at the chart below which shows the following:

Ninety percent of the time, copper rose 10 percent over the following three months. Eighty-five percent of the time, West Texas Intermediate oil has also increased. Its median three-month change has been an increase of 11 percent.

Materials and energy were also positively affected, with modest results: When the PMI crosses above the three-month average, 70 percent of the time, the S&P 500 Materials Index rose, with a median return of about 3 percent. The S&P 500 Energy Index had a median three-month return of about 5 percent, with an 80 percent chance of the three-month change being positive.

Using history as a guide, this suggests that by the end of July, we could see strength in these commodities and energy and materials stocks. Although volatility and uncertainty rule the markets these days, we believe that the world’s central bankers are taking note of slowed activity and will act if deemed necessary.

The trend is your friend only if your portfolio is “resourceful” enough to benefit. Read the Financial Planning article, which showed how U.S. Global Investors’ Global Resources Fund strengthened a diversified portfolio over the past 10 years. Read the article.


Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Diversification does not protect an investor from market risks and does not assure a profit.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500. The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.

Source: Global PMI: The Trend is Your Friend:

Commodities Just Formed a Final Three Year Cycle Low

July 5th, 2012
By Toby Connor
www.goldscents.blogspot.com

I think it's clear by the action in the dollar index this morning and the response by risk assets in general, that the bottom I have been looking for is here.

Today will be the first day in a commodity rally that should last roughly 2 years topping in mid-to-late 2014 when the dollar puts in its next three year cycle low.

The next two or three weeks should produce an exceptionally violent rally from extreme oversold conditions followed by a consolidation period as the dollar bounces weakly out of its intermediate bottom and rolls over quickly signaling that the three year cycle has topped.

The last two three year cycle lows in 2006 and 2009 generated a 20% and 32% rally during the initial move out of the final low.

This is day one of what should be roughly a two year rally into a massive parabolic spike sometime in 2014.

Let me reiterate that the initial rally out of one of these major cycle lows is always extremely aggressive. Today you have a chance to get in on the first day of this initial move. Those that wait will end up chasing into overbought conditions very quickly.

As is often the case, gold sniffed out this bottom early in May. The rally today confirms that we have a daily cycle bottom in place and a new cycle beginning that should last 15-20 days before the next short-term correction.

Miners confirmed this major bottom with a 24% initial rally on huge volume. This should be a multi-year low that will not be violated until the secular bull comes to an end.

To find out how cycles analysis enabled me to predict this major bottom I have reactivated the one week trial subscription to the premium newsletter.

Source: THE CRB JUST FORMED A FINAL THREE YEAR CYCLE LOW: