The Casey Downturn Millionaires' Message: Why David Galland Is Answering His Broker's Calls Again

By JT Long of The Gold Report
www.theaureport.com

The Gold Report: You are moderating a webinar for Casey Research titled "Downturn Millionaires: How to Make a Fortune in Beaten-Down Markets." This is going to air on Monday, April 8. It's an interesting title considering the current state of the precious metals market. Gold hasn't even flirted with $1,900/ounce ($1,900/oz) since 2011 and dropped below $1,600/oz. Silver fell from $43/oz that same year to below $30/oz. Will this conference deliver the painful message that the bull market is over or do you have some good news for listeners?

David Galland: We have some good news. The genesis of the webinar is somewhat interesting. Long-term friend Rick Rule, founder and chairman of Sprott Global Resource Investments Ltd., sent an e-mail saying, "Guys, this is a real market capitulation and one of those rare opportunities to make serious money on the rebound."

"The global demand for minerals is only going to continue to grow, and the role of precious metals is especially important given the complete lack of monetary and fiscal restraint on the part of the U.S. and other large governments."

The proverbial light went off in our collective heads because we, too, have seen this sort of extreme opportunity several times during our careers. And so we scrambled to pull this webinar together in about a week to help make our subscribers and friends aware of the importance of the market capitulation and how to take full advantage. Simply, this is one of those rare moments when absolutely no one wants anything to do with gold stocks, even though gold bullion itself really hasn't sold off all that much compared to the gold stocks, which are off by as much as 50%.

The overarching purpose of the webinar, therefore, is to serve as a gut check and to help people focus on the opportunity. After all, the global demand for minerals is only going to continue to grow, and the role of precious metals is especially important given the complete lack of monetary and fiscal restraint on the part of the U.S. and other large governments. The role of gold and silver is certainly not over, which points to a huge opportunity because the tremendous apathy and capitulation in the gold share market has knocked even the best companies flat on their backs.

TGR: The demand argument makes sense, but were the smart people in this group able to come up with the reason why the stocks are doing so poorly compared to the bullion?

DG: We discussed the stocks in depth, starting with the macro-picture for precious metals, and then, by extension, why people want to own the stocks. The speakers had some great insights about why we've gotten to this point. Then they focused on what they see ahead for the sector and specific ways to profit as the market bounces back.
TGR: One of the featured speakers is Doug Casey, chairman of Casey Research. When we interviewed him in January for "The World According to Doug Casey," he said "speculation is capitalizing on politically caused distortions in the marketplace." We've had years of quantitative easing, but none of the inflation he predicted. Is the government winning? Is that answered in the webinar?

DG: I wouldn't say we've had none of the inflation. The government does its very best to cover it up but we all know that prices have gone up considerably on a lot of things. Look at the basics—foodstuffs, energy and so forth. Are governments winning? No, they are just digging themselves and their respective economies a deeper and deeper hole. That said, you could certainly say that at this stage of the battle, people seem to have forgotten that there's a connection between money printing and inflation. It is baffling because deconstructing the Great German Inflation and other inflations around the world, it was clear to everyone that money printing was the primary culprit. Yet people seem to have once again forgotten that connection. The faculty in this webinar address the questions of where the inflation is heading, why hasn't it shown up and what can we expect when we see it. The consensus view among the faculty was that we're looking at inflation rates in the high double digits and maybe worse within the foreseeable future, maybe not tomorrow, but it will come.

"The role of gold and silver is certainly not over, which points to a huge opportunity."

Governments around the world seem to think that their economies are like washing machines that can be fixed with a bit of tinkering, but they'll have serious trouble turning off the money printing machines. Social promises have been made, hundreds of millions of people now rely on governments for the bulk of their sustenance.

Yet it's important to remember that governments don't actually make anything, except maybe wars. Where is the money going to come from for all these social programs? It's going to be magically whipped up out of thin air essentially. That will have an effect on the purchasing power of the currency units already in circulation, and it will have a positive effect on the prices of tangibles, most importantly gold and silver.

TGR: Participant Bill Bonner, who is the editor of The Diary of a Rogue Economist, also watches macrotrends. Does he see any end to the emergency-of-the-week theme playing out on the global stage? And does he have any suggestions for how investors can protect themselves from the fallout?

DG: Bill completely understands the role that gold plays in preserving personal net worth, but doesn't usually discuss gold shares per se. Even so, in our webinar he said something that really got my attention, "The time to buy these shares is when nobody wants to own them, when even you don't want to own them." That struck home with me because I've been investing in this market since the 1970s, and long ago I learned that the time you really want to back up the truck is when you have exactly the kind of bombed out markets that we have today.

As Bill spoke, it really resonated because I, too, have been ducking calls from my broker, and I have a lot of respect for my broker. Worst of all, my broker is calling me offering me financings on great companies that come with five-year warrants, which is a very rare thing and only seen in periods of complete capitulation. But I didn't want to take the guy's calls because of the same mistake a lot of people are making at this point, which is just to assume that the market is dead forever when, in fact, that's very much not the case.

TGR: So when David's scared, that's the time to buy. Is that what you're saying?

DG: Well, not so much scared. I just didn't want to hear about the sector anymore. Listening to this webinar inspired me to spend time looking at stocks of companies that I know have great projects, and great management and cash in the bank. Universally, these great companies have sold off by 50-60% or more. Yet, there is nothing wrong with these companies other than this panic out of the risk-on trades in the junior resource sector. That was a real wake up call.

TGR: Webinar speaker John Mauldin, author of Thoughts from the Frontline, predicted, in a November interview with us, "John Mauldin's Roadmap to Surviving the Fiscal Cliff," that politicians would find a way around the fiscal cliff that was looming at that time, but he warned that the economy would be in for a bumpy ride. In this webinar, did he have any predictions for when or how things would get better?

DG: John jokes that even as a relative pessimist, he looks like an optimist when in the company of the Casey Research team. John still thinks there is the possibility of a political solution to the economic crisis. If there is, I haven't seen it, and nothing on the horizon looks like it's going to happen as far as I can see.
Despite his cautious optimism, John was absolutely in sync with the rest of the speakers' opinions about the great contrarian opportunity in gold and the gold share market, an opportunity that most people will miss, but shouldn't.

TGR: Another speaker, International Speculator Editor Louis James, stressed the importance of thinking long term when we interviewed him last September for the article "How Investors Can Protect Themselves in a Politicized Economy." He said the junior market was looking "bottomish" and it looked like a good time to buy. Will he be mentioning what companies he likes in the webinar?

DG: He talks about a couple of companies he likes as examples. He's also quite adamant about the criteria that people should use in deciding what precious metals shares belong in their portfolio and what shares people should be selling now. The reality is that a good number of these companies will not survive this downturn. If you're sitting on a company with no cash in the bank, an only so-so project and average management, there's a reasonable chance it's going to go to $0 even though it may have already gone down by 50%.

"We have a classic contrarian opportunity where pretty much everybody who is going to sell has sold, leaving only one way to move—up—for the companies with the right combination of attributes to survive."

In the webinar, Louis covers the specific aspects of companies you want to own in your portfolio and the ones you should lose. It's an important message because these things are, as Doug Casey likes to say, not family heirlooms but burning matches. And the ones that aren't going to make it just aren't going to make it. You have to come to that reality. But the good news is that by rotating into the certain winners you can claw back pretty quickly when the market sentiment shifts, as it most certainly will.

TGR: Another one of the webinar speakers, Rick Rule, is a very popular expert with The Gold Report readers. When he spoke to our president, Karen Roche, last November for an article titled "Be a Risk Manager, Not a Reward Chaser," he called gold "catastrophe insurance." Does he have any specific advice for how investors should adjust their portfolios in a downturn?

DG: I would say similar to Louis, his message is very clear. There are definitely companies that aren't going to make it, and then there are companies that are going to make it and make it in a very big way. It was interesting because I've known Rick for a couple of decades now and I have seen him give a lot of presentations, but he was very vocal in pointing to an urgency in this market that most people are missing.
Rick, Louis, Doug and all of the people on this webinar are really on the same page about this. Investors need a wakeup call. They need to really be paying attention at this moment because it's one of those rare, once-in-a-generation opportunities to, as John Mauldin says, get in front of a bubble.

We've seen this before. We saw this in July 1982, another classic capitulation with gold falling from over $800/oz in 1980 to below $350/oz. As you might imagine, the gold shares were completely sold off with the volume on the Canadian stock exchanges falling to next to nothing.

But then there were a couple of discoveries in the Hemlo district of Canada, coinciding with a rally in gold, and the market skyrocketed. One of the companies involved in a Hemlo discovery, Golden Sceptre, went from a low of $0.41/share up to $31/share in about a year. Another, Goliath Gold, went from $0.45/share in March 1982 to $32/share in March 1983, an increase of over 7,000%.

That sort of opportunity is pretty much only available following periods of market capitulation such as we are experiencing today. People have forsaken reason, and they don't want to know about gold stocks. That alone should point the way to a classic contrarian opportunity where pretty much everybody who is going to sell has sold, leaving only one way to move—up—for the companies with the right combination of attributes to survive.

TGR: So as painful as this has been for all of us over the last couple of years, after listening to these speakers, are you ready to say you welcome a down market for the opportunity it affords?

DG: Absolutely. And as I said, it was a complete wakeup call for me. Until participating in the webinar, I had completely stopped paying attention to the sector. Now I am completely re-engaged and talking to my broker again.

TGR: Thank you for taking the time to talk to us.

DG: It was nice to be with you.

The free "Downturn Millionaires: How to Make a Fortune in Beaten-Down Markets" webinar will go live April 8 at 2 pm ET. Sign up in advance to register.

David Galland is the managing director of Casey Research, LLC, a private investment research company serving a subscriber base of over 180,000 independent mining investors in over 180 countries. Prior to joining Doug Casey as a partner in Casey Research, Galland was a founding partner of EverBank, one of the world's most successful online banks. Galland cut his teeth in the natural resource sector by working at the Climax molybdenum mine while in his teens, and has previously served as managing editor of the Gold Newsletter, the Aden Analysis, the International Speculator and The Casey Report, among others. He is also a contributor to Casey's Daily Digest, which each business day features rotating articles on precious metals, energy, technology, politics and more.

International investor Doug Casey, chairman of Casey Research, LLC, has written several books on crisis investing, including the groundbreaking "Crisis Investing: Opportunities and Profits in the Coming Great Depression" (1979). He has appeared on NBC News, CNN and National Public Radio, and he's been featured in periodicals such as Time, Forbes, People, Barron's and The Washington Post. He has also written countless articles for his own publications.

Bill Bonner is co-founder and president of Brickburn Asset Management, a Calgary-based investment counseling firm largely focused on the Canadian energy sector. Prior to founding Brickburn Asset Management, Bonner was a founding director of Network Capital, the predecessor to Brickburn. His career also included 14 years with Peters & Co. Ltd., where he was a significant shareholder, member of the Executive Committee, and managing director of institutional sales and trading.

Louis James is the master of metals at Casey Research, where he's the widely read and well-respected senior editor of the International Speculator, Casey Investment Alert and Conversations with Casey. Fluent in English, Spanish and French, James regularly takes his skills on the road, evaluating highly prospective geological targets and visiting explorers and producers at the far corners of the globe and getting to know their management teams.

John Mauldin is the author of four New York Times bestsellers. They include Bull's Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market, Just One Thing: Twelve of the World's Best Investors Reveal the One Strategy You Can't Overlook, and Endgame: The End of the Debt Supercycle and How it Changes Everything. He also edits the free weekly e-letter Outside the Box. Mauldin also offers The Mauldin Circle, a free service that connects accredited investors to an exclusive network of money managers and alternative investment opportunities. He is a frequent contributor to publications including The Financial Times and The Daily Reckoning, as well as a regular guest on CNBC, Yahoo Tech Ticker, and Bloomberg TV. Mauldin is the president of Millennium Wave Advisors, an investment advisory firm registered with multiple states. He is also a registered representative of Millennium Wave Securities, a FINRA-registered broker-dealer.

Rick Rule, founder and chairman of Sprott Global Resource Investments Ltd., began his career in the securities business in 1974. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. His company has built a national reputation on taking advantage of global opportunities in the oil and gas, mining, alternative energy, agriculture, forestry and water industries.

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Source: http://www.theaureport.com/pub/na/15132

Precious Metals the Antidote to Fiat Currency Threat: International Resource Specialist Peter Krauth

By Brian Sylvester
The Gold Report
www.theaureport.com

The Gold Report: Peter, playing equities is all about timing. With many resource equities trading near all-time lows, it seems like a buyer's market. Do you agree?

Peter Krauth: Central banks have been on a fiat money printing binge since 2008. In the last 18 months, that is starting to have the desired effect. The global economy seems to be healing: Demand for goods is coming back strongly, the Dow Jones Industrial Average is setting new records. But at the same time, there will be a serious price to pay with inflation. Commodities tend to benefit from inflation. This is a very good and important space that investors need to include in their portfolios.

TGR: Does that hold true across all commodities?

PK: The entire secular commodities bull market is not completely over. It has been going for 12 years, but the average tends to be closer to 17 years. This bull market might last 20 years or even longer, if you consider development in China and India—home to nearly one-third of the world's population—along with the rest of the developing world. These populations are improving their standards of living, growing their incomes and looking for a better lifestyle. That means someone will have to make all the stuff they will want to acquire.

"Precious metals will remain an overarching requirement to have exposure to commodities."

However, there could be a serious low or even a setback in the form of seriously reduced economic demand or an inflationary crisis. That would quiet things for a while, but would also do a lot of cleansing. After that, we will be back on our way.

Nonetheless, investors have to be picky. Every resource has its own cycle. It takes a lot of research to decide where you should be and when.

TGR: What are you telling the readers of your newsletter about increasing their exposure to natural resources in their portfolios?

PK: Right now, I see opportunities in base metals, energy and agriculture. And of course, precious metals will remain an overarching requirement to have exposure to commodities.

"The larger gold miners have become extremely cheap, with very compelling valuations."

The larger gold miners have become extremely cheap, with very compelling valuations. As a group, they have not been cheaper since the secular bull market started. Gold may have been in consolidation mode since it reached $1,900/ounce ($1,900/oz) in September 2011, but I believe the secular bull market is far from over, despite the possibility of some sideways or downward price action.

The Market Vectors Gold Miners (GDX), an exchange-traded fund (ETF) that many consider a proxy for the Amex Gold BUGS Index (HUI), has a price-to-earnings ratio (P/E) of 10, far better than the average blue chip stock, which is closer to 16–17 P/E.

TGR: Some say the gold price is like a ball when you drop it. The first bounce is the highest, and the bounces keep getting smaller after each drop. Does that pattern worry you?

PK: No. As the consolidation moves forward in time, the price range gets narrower and narrower. At some point, that will have to change. The price will either drop down or break out of its narrowing price range. I believe it will break out.

The gold price is unlikely to stay very stable for an extended period. There is too much political and economic instability. The run on the banks in Cyprus is an example; a lot of Southern Europe has too much unemployment and sovereign debt. Ongoing gold purchases by the central banks provide renewed support for the gold price. All of these factors, and others, will support the gold price, at least in the $1,500/oz range. It could continue sideways for some time, but the bias is very much on the upside.

TGR: What analysis do you do on small- and mid-cap resource names before adding them to your portfolio?

PK: My main filters are management, location, cash strength, ease of execution and asset quality. This analysis eliminates many potential plays, but there are more than enough attractive opportunities if you stick to those that stay within those parameters. I see no reason to take on additional risk.

TGR: Which small- and mid-cap resource names in your portfolio might you share with our readers?

PK: My favorite development-stage play is Paramount Gold and Silver Corp. (PZG:NYSE.MKT; PZG:TSX). The company recently released a preliminary economic assessment (PEA) on its San Miguel project in Mexico. The numbers look very attractive. Its initial capital requirements of $232 million ($232M) are pretty reasonable. The mine would actually produce about 57,000 oz (57 Koz) gold and more than 3 million ounces (3 Moz) silver annually for 14 years.

If you were to convert the forecast silver production to gold, it would be more than 115 Koz gold equivalent (Au eq) produced annually. With the 5% discount rate that the company used to evaluate the project, the net present value (NPV) exceeds $707M, with an internal rate of return (IRR) around 32%. This single project at a $707M NPV is more than double the company's current market cap of $290M. On that basis alone, the stock should be twice its current $2.16/share trading price. Shares barely budged on the news of the San Miguel PEA. That is a ridiculous reaction, and a clear sign that sentiment is coloring everything gold-related.

TGR: You buy Paramount for San Miguel, and you get Sleeper, its precious metals project in Nevada, for free. Is that what you are saying?

PK: Or vice versa, or you buy Paramount for both San Miguel and Sleeper and get a lot for free.

"We are in a secular resource bull market that still has lots of legs and will last several more years."

Paramount released PEA results on Sleeper in July 2012. The startup costs would be about $340M; production would be 172 Koz gold and 263 Koz silver annually. The average operating cost was $767/oz Au eq and the IRR was about 26%, at $1,384/oz gold price. If you bumped up the gold price to $1,615/oz, the IRR shoots up to 40%. This makes Sleeper very attractive at the current gold price. Paramount prudently used lower gold and silver prices in its estimates.

TGR: Will Paramount have any trouble raising that $232M to develop San Miguel?

PK: Paramount just had some warrants exercised, so it is cashed up to $18M. That should carry it through 18 to 24 months. I believe it will keep moving both projects forward. Both are attractive and could draw the interest of a major.

TGR: Might Paramount sell one project to develop the other?

PK: I could see that as a possibility, however, given its advantageous cash balance compared to the rest of the industry, I doubt Paramount will be pushed into that situation anytime soon. It could probably even raise cash to tide it over without being overly dilutive to its shareholders.

Both projects are in great jurisdictions and have great infrastructure. With each project worth about $700M, that is close to $1.4 billion ($1.4B) in value, and the market values Paramount at less than $300M. Realistically, the shares could be 4.5 times what they are trading at now.

TGR: Please tell us about another name.

PK: We hold Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT), a small producer whose San Francisco mine is in Mexico. The company had record gold production last year, a 27% increase year over year (YOY). It is expanding its crushing capacity, which should allow for another 25–30% growth in 2013. For a small producer, its P/E is 10.5, and its forward P/E is 7. It has a $28M cash balance and roughly $20M in debt. Timmins is very well run. It is a smaller producer with a great future.

TGR: Timmins looks to be a company that would benefit from a change in market sentiment. Do you think the market is already factoring in last week's news that the Mexican government may raise taxation rates and royalties on mining operations?

PK: That is possible, but the Mexican government understands what it is doing. Gold production is growing fast there.

On raising taxes and royalty rates, Mexico will be the rule, not the exception. We expect to see this everywhere. Governments are hungry for income. If gold continues to rise, these companies will be increasingly profitable. This rise in taxes will have only a temporary dampening effect; it will not hurt the bull market in any way.

TGR: What will Timmins do with its cash flow?

PK: Timmins is expanding its crushing capacity, drilling off and expanding its resource. I believe that as the company was drilling off and delineating more ounces, its finding costs were $10/oz—an incredible return. Its exploration program is relatively aggressive, but the company also is confirming the gold in higher confidence categories.

TGR: Are there any other names you would like to discuss?

PK: In silver, we hold Aurcana Corporation (AUN:TSX.V; AUNFF:OTCQX), which also has been growing its production quickly. In mid-December, the company reached commercial production at its Shafter mine in Texas. It also produces in Mexico from a project called La Negra.

Shafter is a milestone that will move Aurcana to much higher production levels this year. I look forward to seeing Shafter's contribution in the company's Q1/13 results. Even without Shafter, Q4/12 production was up 34% YOY; overall 2012 production was up 42%.

La Negra is another exciting project. In October 2012, Aurcana announced a new resource there, which brought the silver resource from 4.9 Moz to more than 115 Moz.

Aurcana's P/E is relatively high, at about 39. It is a smaller silver producer but it is profitable, which means a lot. Its forward P/E is estimated at 5.3, which is very low and makes it very attractive. The forward P/E reflects the higher production levels and, therefore, profitability.

TGR: Aurcana has four institutional analysts covering it. Does institutional coverage on a small company reassure you?

PK: Institutional ownership is more important. Ownership means more than just giving an opinion. Institutional investors tend to take a longer view.

TGR: Both Shafter and La Negra are past-producing assets. Aurcana has nothing in the pipeline beyond those two, although both are producing fairly strong cash flow. What does Aurcana plan to do with that cash flow?

PK: The plan is to plow it back into drilling off and expanding the resource and increasing production capacity. Aurcana wants to mill and crush more of the ore it gets out of the ground.

At La Negra, the company wants to prove up higher levels of its 115 Moz silver. Shafter is a similar story. In the first phase, production at Shafter will be around 3.8 Moz with 1,500 tons per day (1,500 tpd). The second phase will achieve 2,500 tpd. That could actually increase the Shafter production to approximately 6.3 Moz silver annually. That is close to 70–80% growth from the initial production targets. If Shafter reaches its phase 2 targets, it will be the third-largest primary silver mine in North America.

TGR: You recently wrote about the coming global shortage of palladium and the likely rise in the palladium price. Investors have heard similar refrains from experts relative to rare earth elements, lithium and even some base metals. Those commodities have witnessed only what one might call sporadic price gains. Are you "crying wolf" when it comes to palladium?

PK: The fundamentals for palladium's supply-demand profile are very solid. On the demand side, two-thirds end up in vehicles, mostly for catalytic converters. Car sales are growing very quickly. In 2011, 77M vehicles were sold worldwide; in 2012, 81M. This year, the forecast is to reach 85M and the 2018 estimate is 104M. A lot of that growth will happen in China, which also has a serious pollution problem. China has been increasing its emission standards as its air becomes relatively unbreathable.

On the supply side, Russia accounts for 44% of palladium production; South Africa for 38%.

South Africa has serious labor disruptions. In August 2012, miners at Lonmin Plc's (LMI:LSE) Marikana mine went on strike. Clashes between strikers and the police resulted in 46 deaths. Protests and strikes have multiplied since then. In January, Anglo American Plc (AAUK:NASDAQ) decided to close and sell off several of its platinum mines. Labor problems and production costs have just become overbearing. The mines are not profitable anymore. That does not help supply.

Ore grades from Russia have been falling quickly. Output from Norilsk, the world's largest palladium producer, is declining. Russia also sells palladium into the physical market from Gokhran, its state repository. In 2010, as much as 1 Moz of the physical palladium—representing 15% of the global supply—came from Gokhran. In 2011, that dropped to 775 Koz and last year to 250 Koz. This year, Johnson Matthey forecast Gokhran will supply only 150 Koz. In four years, supply from Gokhran will have dropped from 15% of the global supply to only 2%. Some insiders say there will be no supply from Gokhran in 2014.

TGR: Are resource equities the best way to play palladium?

PK: They are. Palladium's demand outlook is solid, and Russia and South Africa—source of 80% of the supply—will have a difficult time keeping up with demand. As a result, palladium prices will continue climbing. That will attract investors to things like palladium ETFs. As those ETFs use the metal as backing, it will drive up physical demand further.

The equities provide leverage to the palladium price. If companies can mine palladium at a relatively low cost, they can generate healthy profit margins. That is how investors should play this trend.

TGR: There are few platinum group metals (PGM) plays out there. Can you give us one or two names?

PK: I like Colossus Minerals Inc. (CSI:TSX; COLUF:OTCQX), a developing precious metals miner. Its flagship project, Serra Pelada in Brazil, is fully permitted and has environmental, installation and mining licenses going back to 2010. The mine is under construction, with first production planned for early H2/13. It has done all kinds of metallurgical testing and expects very good recoveries.

The company has come across some extremely high-grade intercepts for gold, platinum and palladium. Some of the high-grade intercepts have been 4,600 grams per ton (4,600 g/t) gold over admittedly short intercepts, about 2–2.5 meter (2–2.5m) sections, 1,600 g/t platinum and 1,700 g/t palladium. Its margins are likely to be extremely wide, so it should be a very profitable producer. Some of the grades at Serra Pelada are among the highest on record. The project has drilled 100,000m to date, and a lot of exploration upside remains.

TGR: For a long time, a group of workers called the Cooperativa de Mineração dos Garimpeiros de Serra Pelada (COOMIGASP) held a percentage of Serra Pelada. Does it still own a percentage?

PK: Yes, that group still owns 25% of Serra Pelada.

TGR: Is Colossus likely to try to buy them out?

PK: I think that could be part of its long-term plan.

TGR: Is Colossus on target for production in H2/13?

PK: Yes. It has a $75M contingency for construction and working capital. It sold some of its production in advance to Sandstorm Gold Ltd. (SSL:TSX.V) and Sandstorm Metals & Energy Ltd. (SND:TSX.V), but it has the right to repurchase half of those commitments.

Platinum and palladium production will be relatively important, in addition to gold. This makes it an interesting way to play the PGM space. Investors can be part of a company that is very close to production and should have attractive profit margins.

TGR: With its margins and its unusual gold-PGM project, is this a takeover target?

PK: Yes. Imminent producers inevitably become targets because they are irresistible in terms of adding to production and reserves. Colossus would be a trophy piece for a miner that wanted to own potentially large, high-grade reserves in a good, relatively safe jurisdiction.

TGR: Why have we not seen a pure PGM royalty play?

PK: The market for a pure royalty play in PGMs is probably just too small for a given royalty company to focus solely on these metals; its growth opportunities would be limited.

There are few PGM projects being developed. PGMs are found in places that are not the best or most attractive places to work. Outside of South Africa and Russia, there are relatively few viable locations, therefore, there are very few PGM projects coming onstream in the next two years.

TGR: Large-cap royalty plays in the precious metals space have had a pretty good run. Some are trading around 21 times projected 2013 cash flow. Is there still value there?

PK: I think so. Some are trading at relatively high P/Es, but there is opportunity. First, along with other precious metals equities, they have sold off to some extent. Second, and more important, they are being valued using gold prices that are probably too low.

The average analyst thinks that gold will average somewhere around $1,500/oz by 2015. They may be right, but if you look at their projections since 2007, analysts have regularly underestimated the gold price by several hundred dollars.

Inflation and money printing by central banks will not back down. Precious metals royalty companies will certainly come back quite strongly as gold continues to rise.

TGR: What are a couple of your favorites in the royalty space?

PK: Our portfolio has Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX). About 68% of its revenues come from gold. Of its large inventory of assets, 39 are producing, 28 are development stage and almost 140 are exploration.

We also hold Sandstorm Gold Ltd. (SSL:TSX), a smaller royalty company with an $870M market cap. It has been aggressive, and is growing quickly. It has very savvy, experienced management, including Nolan Watson from Silver Wheaton Corp. (SLW:TSX; SLW:NYSE). Sandstorm's recent purchase of a controlling interest in one of its competitors, Premier Royalty Inc. (NSR:TSX), grew its book quite quickly. It also closed a large deal with Entrée Gold Inc. (EGI:NYSE.A).

This is a great space. Royalty companies will continue to perform very well over the medium and long term. I definitely want to maintain exposure to precious metals royalties.

TGR: Shares of Royal Gold were trading near $100/share last fall, and now it has fallen to below $70/share. It is rare to see a royalty company fall that far so quickly. What happened?

PK: I believe delays by Barrick Gold Corp. (ABX:TSX; ABX:NYSE) on a large project that Royal Gold has a royalty in weighed on the stock.

That does not concern me. We doubled our purchase price and took profits. We continue to hold Royal Gold as a free ride. On a technical basis, Royal Gold is trading below its 200-day moving average. That 200-day average tends to be a magnet that a stock gravitates back toward and sometimes moves considerably beyond. When it does so, it can be a time to take some profits and wait for it to become more of a value once again.

TGR: Do you have some parting thoughts for us?

PK: We are in a secular resource bull market that still has lots of legs and will last several more years. The imprudent behavior of central banks printing copious amounts of fiat money just makes serious inflation more of a threat to people's savings.

Commodities tend to be a strong beneficiary of inflation. I think everyone needs some exposure to commodities. But there is the element of cyclicality for all resources; at any given point in time, it makes sense to be in certain resources or to play them certain ways over others.

TGR: Peter, thank you for your time and your insights.

Peter Krauth is a former portfolio adviser and a 20-year veteran of the resource market, with special expertise in energy, metals, and mining stocks. Krauth is the resource specialist for Money Map Press and has contributed some of its most widely read and highly regarded investing articles to Money Morning. As editor of Real Asset Returns, he travels around the world to dig up the latest and greatest profit opportunity, whether it's in gold, silver, oil, coal, potash, chromium, or even water. Krauth holds a Master of Business Administration degree from McGill University and is headquartered in resource-rich Canada.

Want to read more 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 Streetwise Interviews page.

DISCLOSURE:

1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He 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: Paramount Gold and Silver Corp., Timmins Gold Corp. and Colossus Minerals Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Peter Krauth: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.

5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

( Companies Mentioned: AUN:TSX.V; AUNFF:OTCQX, CSI:TSX; COLUF:OTCQX, PZG:NYSE.MKT; PZG:TSX, RGLD:NASDAQ; RGL:TSX, SSL:TSX, TMM:TSX; TGD:NYSE.MKT)

Source: Precious Metals the Antidote to Fiat Currency Threat: International Resource Specialist Peter Krauth:

The Gold Miners are Bleeding. Time to Buy?

By Ryan McGuire
for Gold Avalanche

The Gold Miners, as represented by the GDX, are bleeding.

Click here for a live version of the chart: http://scharts.co/YeZfU7

For Long term investors, current levels present a compelling opportunity to either initiate a position, or to add to already established positions. There is a chance we haven't seen the bottom of the bear market in Gold and other commodities, but I am willing to bet that we are pretty close.

What I do know is that with current analysis, getting into the main indexes looks to be a bad plan. As someone who looks for value, I am just finding a more compelling case in the Gold and Silver markets than in general equities.

Market Technician Jordan Roy-Byrne's Charts Predict Precious Metals Will Outperform

Source: Alec Gimurtu of The Gold Report  (3/25/13)

Jordan Roy-Byrne, editor and publisher of TheDailyGold Premium, was able to achieve some marked success in last year's choppy market by buying growth-oriented producers. After the broader market tops out, Roy-Byrne is watching for the same stocks to outperform again. In this Gold Report interview, Roy-Byrne talks about how a decoupling in the market between stocks and gold is an indication he's right about buying stocks with relative strength, and growing cash flow and production.

The Gold Report: Since November, there's been a decisive break between the S&P 500 and gold, bullion and the AMEX Gold BUGS Index (HUI:NYSE). The HUI has provided leverage to gold, but it's been leverage to the downside. There are new highs on the S&P 500 almost daily. Does that mean that you're looking for new lows in mining equities?

Jordan Roy-Byrne: There's been a negative correlation between precious metals and the equity market that became quite pronounced in November. However, the negative correlation really began in the summer of 2011, when gold peaked at $1,900/ounce ($1,900/oz) and the HUI gold stock index and Market Vectors Gold Miners ETF (GDX:NYSEArca) also peaked.

The negative correlation is in place over a long period and not necessarily over a day-to-day or week-to-week period. The precious metals complex has likely bottomed due to extreme bearish sentiment. In the near term, I think a move higher in the S&P 500 could be speculative and actually benefit mining shares before the larger correlation comes back into play.

Many investors forget history. Everyone is focused on what happened in 2008. There were times in the 1960s through the 1980s, during that bull market, when precious metals were rising along with the stock market. There were times when precious metals went down with the stock market, and there were times when the two diverged, such as from 1972 to 1977. That negative correlation repeated itself in 2000 to 2002, when precious metals began this secular bull market and the equity market was in a bear market.

The key factor is the correlation between the two. If it is positive, then it will remain positive during the next cyclical bear market or recession. Examples include the late 1960s and mid- to late 2000s. If the correlation is negative, then it will remain negative. Examples of that include the late 1990s to 2002, and 1972 to 1977. Currently the correlation is negative, which means precious metals will benefit during the next cyclical bear market or recession.

TGR: This is the perfect setup if you believe there's going to be a top in the stock market on a cyclical basis. Could there be a cyclical top in the market fairly soon?

JRB: Yes. There are many reasons the equity market is headed for a cyclical top. However, we expect it will be a very mild bear market that will probably last several years.

TGR: It goes out with a whimper.

JRB: That is what happened in the late 1970s.

There have already been two 50% bear markets in the last 12 years. It's very likely that the next one is going to be mild, because the average bear market is about 40%. If there are two 50% bear markets, the next one is likely to be 20–25%.

Ultimately, that's going to be very bullish for precious metals due to the current negative correlation and the fact that the hot money will move out of stocks and into precious metals.

TGR: How will interest rates affect precious metals? You've said before that rising interest rates would be positive for precious metals, why is that?

JRB: It depends. If rates are rising because of inflation concerns and rising inflation expectations, then yes, it could be positive for precious metals. If rates are rising because it's an improving macro environment and investors are confident enough to move money out of safe assets, like bonds and gold, then no. The bottom line is that rates have to stay low to keep the interest payments on debt manageable. Eventually it will reach a point where the authorities will have to start doing even more quantitative easing to suppress rates.

TGR: What are your investment themes to profit from that macro scenario?

JRB: Precious metals will be the best performing sector over the next three to five years. I focus on gold and silver companies with cash-flow growth, which comes from production growth. A royalty company produces cash-flow growth from more accretive transactions.

"The precious metals complex has likely bottomed due to extreme bearish sentiment."

The reality is that in any bull market, no matter what the sector or industry is, the market always wants growth. The producing companies that have been able to grow cash flow and production without diluting shareholders and taking on huge amounts of debt are the companies that have performed the best in this difficult period. I call them growth-oriented producers.

TGR: Are there examples of companies that are role models of what you look for?

JRB: Primero Mining Corp. (PPP:NYSE; P:TSX) is a company that I really like. The stock had a huge move in 2012 because of a positive resolution to its tax status. The stock peaked at about $8/share and it has digested that huge run. It bottomed just above $5/share. I forecast that it will likely trade in a range from $6–8/share during the next four to five months.

Fundamentally, Primero has very strong cash flow from its San Dimas mine in Mexico, which is a world-class asset. The company also has more than $100 million ($100M) in cash.

Primero has a strong management team and a world-class board of directors. The roster of people involved with this company is simply stellar. They have done this before, so Primero is a good model for what I'm looking for.

"If interest rates are rising because of inflation concerns and rising inflation expectations, that could be positive for precious metals."

The company has already been a huge winner for us because we got in at less than $3/share. Primero has the capital to continue to grow the San Dimas asset, but it also made an acquisition last year and is hoping to put that asset into production in 2015.

This is a company that's very strong financially. It's strong on the charts. It's not falling apart during this downturn. It has the financial strength to grow its production. I think Primero is going to be the nextArgonaut Gold Inc. (AR:TSX). Argonaut is a very strong model and one we've been very positive on for several years now. Primero is where Argonaut was about a year ago.

TGR: Most producers are facing a lot of cost increases across the board in production. But it appears Primero and Argonaut have maintained cost per ounce of production during the last several years.

JRB: In Primero's case, San Dimas is a very high-grade underground mine. Argonaut's assets may not be as high grade, but it's done a really good job managing them.

In both cases, I chalk it up to having management teams with enough experience in this industry to know how to control costs. They're thinking ahead. They're thinking about what could potentially affect costs next year and the year after. For example, last year Argonaut sensed a cyanide shortage in Mexico and was able to secure cyanide for the next several years. Now the cyanide price is more expensive.

TGR: You also believe there is potential for rising valuations among the producers. Wouldn't that require a sustained bullion price increase in a market that hasn't shown a lot of belief in high metals prices?

JRB: That's why valuations are at a trough. The gold price isn't going up. It is going sideways. The market needs the gold price to reach $1,800/oz or more to see valuations increase. There's a lot of potential for these companies to see tremendous increases in their value because, assuming gold breaks out, valuations will naturally increase. Because they are currently at a floor, they have substantial room to move higher. Valuations are currently near 2000 and 2008 levels, and those were the two best buying opportunities in this bull market.

Many stocks are trading at cheap valuations, but that's because those companies don't have the pipeline needed to grow. I'm looking for companies that have the ability to grow production and cash flow in the coming years. Over time, they will be rerated.

TGR: Are there additional companies with good cash flow that are undervalued or ignored?

JRB: The cheapest stock that I'm aware of is producer Lachlan Star Ltd. (LSA:TSX; LSA:ASX) in Chile. The management team acquired a woefully underperforming mine and is currently ramping up production and methodically reducing costs.

The company is not cash-flow positive at the moment. Its all-in costs last quarter were above $1,800/oz. However, costs are trending down and will likely come down this quarter by 15%. It has implemented its own mining fleet, which could save it about $150/oz. The company is also mining its highest-grade pit, which it wasn't mining last year. The company expects to be cash flow positive in Q2/13 and I think all-in costs will be below $1,400/oz in Q3/13.

On the production side, Lachlan should produce 75,000 oz (75 Koz) this year and is targeting 100 Koz in 2014.

The company has a $54M market cap, $7M in cash (as of January) and took out a $10M debt facility. It's going to be fine as long as the gold price doesn't drop below $1,500/oz.

This is a very cheap stock that has strong potential to trade at $2–3/share if the gold price exceeds $1,800/oz.

"Precious metals will be the best performing sector over the next three to five years."

I really like the management team at this company. The chief executive officer, Mick McMullen, has built mines before, and his specialty is turnarounds. I'm confident this stock can make a huge advance over the long term. It has been pounded in recent months, but once the gold price nears $1,700/oz, it will rebound quickly.

TGR: Are there any silver producers that you're excited about?

JRB: First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) just commissioned its sixth mine at Del Toro in Zacatecas, Mexico. Del Toro will likely be producing at an annual rate of 6 million ounces/year (6 Moz/year) by the end of next year. First Majestic could go from 9 Moz in 2012 to 15 Moz in 2014. That is substantial growth in a short period of time and few companies can match that.

Also, the stock has held up very well. When the market turns around, it's going to be one of the first to breakout.

TGR: Any other silver companies you would like to talk about?

JRB: I'm not a fan of development stories, generally speaking, but Bear Creek Mining Corp. (BCM:TSX.V)in Peru has a world-class asset, the Corani project, which is moving toward production. This mine could be in production by the end of 2015.

This asset will produce more than 20 Moz silver equivalent in the first five years. The most recent feasibility study, done at a base case of $18/oz silver, showed Corani to be an economic deposit. If silver is at $30/oz, Corani will be hugely profitable. If the silver price is even higher? They will be swimming in money.

Bear Creek had some problems with its smaller Santa Ana deposit. The previous Peruvian government took away its rights to the project, but the company is in negotiations with the new government, led by President Ollanta Humala, and is optimistic.

Investors at the time lumped Corani in with Santa Ana and punished the stock. The reality is, Corani is located in one of the poorest and most sparsely populated parts of Peru. Bear Creek has engaged the community from the start and, overall, the project is well on track to production. The company has $70M in cash and will have no trouble financing the project when the time comes.

It's going to take time for the stock to move back up, but it hasn't hit a new low. It's showing some long-term strength compared to much of the sector. Investors have to be patient, but I believe there is substantial potential and limited long-term risk at this price.

TGR: Are there any exploration plays you're following?

JRB: With regard to mergers and acquistions, I think Balmoral Resources Ltd. (BAR:TSX.V; BAMLF:OTCQX) fits what major companies are looking for, which are high-grade, high-margin deposits that are 3–5 Moz in size.

It's a question of what the potential is of this deposit. What's the potential metallurgy? How big is this deposit? Balmoral will have a resource estimate out later this year, but it is well funded and has had a lot of drilling success. If you favor exploration companies, this is the type of company that you need to be looking at.

TGR: Any others?

JRB: I also like Corvus Gold Inc. (KOR:TSX), which has a simple, open-pittable and heap-leachable deposit known as North Bullfrog that's going to become a Nevada gold mine in the next several years.

The key for Corvus is that it found some high-grade mineralization on the Yellow Jacket portion of the property. It will be going after that area hard this year. If Corvus is successful and Yellow Jacket turns up a big resource, Corvus shares will move much higher.

TGR: The stock is off of its all-time peak, but it is above its 2012 lows.

JRB: An excellent point that I want to comment on, as it applies to my technical work on these stocks. We're not chasing momentum stocks here. When a stock has fallen and it has no support, unless it's a producing company, it's going to take a long time to rebound. We want to find stocks that are showing relative strength while the market is weak. These are the stocks that are likely to be the leaders, and the first to break out during the next sector-wide advance. The time to buy is now, when they are trading well off their highs. At the same time, if you like a company but it is showing poor relative strength, it is a sign that something is wrong.

"I believe we're going to get a good rally in the mining stocks over the next two months—I'm short-term bullish."

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) is a simple example. We first bought that in October 2011 at $35. It was a very strong stock that had corrected and appeared to have bottomed. Franco-Nevada went up to $60/share recently, but it's had a severe correction because of a huge amount of redemptions. It's about $46/share, about 20% off its high. It has cash-flow growth, and it's consistently leveraged to the bull market. Now is the time to buy. It's a no brainer. That's what I'm looking for. Don't buy the strong stocks when they are making all-time highs. Buy them after they've corrected, when they offer value.

TGR: That's good advice. Do you have any parting thoughts?

JRB: I believe we're going to get a good rally in the mining stocks over the next two months—I'm short-term bullish. Gold has put in an important low amid extreme bearish sentiment. That is very encouraging. We should see a rally, and then a potential soft period in the summer or early fall. However, by the end of the year I think gold has a good chance to break past $1,800/oz. I'm more bullish on 2014 than on 2013.

Now is the time to do your research. Look at companies that have the ability to grow their cash flow and production over the next few years, because these companies are consistent winners that are consistently leveraged to the bull market.

In regard to the juniors and development companies, I'd offer two criteria for research. Look for companies that are cashed-up, and are trading above their 52-week lows. Cash and relative strength!

TGR: Thanks for speaking with us today, Jordan.

Jordan Roy-Byrne 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; the TDG Premium Model Portfolio was up 32% in 2012. His work has been featured in CNBC, Barron's, Financial Times, Alphaville, Yahoo Finance, BusinessInsider, 321gold, Gold-Eagle, FinancialSense, GoldSeek and Kitco.

Want to read more 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 Streetwise Interviews page.

DISCLOSURE:1) Alec Gimurtu conducted this interview for The Gold Report and provides services to The Gold Reportas an independent contractor. He 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: Primero Mining Corp., Argonaut Gold Inc., Balmoral Resources Ltd. and Franco-Nevada Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Jordan Roy-Byrne: I or my family own shares of the following companies mentioned in this interview: Argonaut Gold Inc., Bear Creek Mining Corp., Corvus Gold Inc., Lachlan Star Ltd., Primero Mining Corp., Franco-Nevada Corp. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: First Majestic Silver Corp., Argonaut Gold Inc., Bear Creek Mining Corp., Corvus Gold Inc., Balmoral Resources Ltd. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise

Source: http://www.theaureport.com/pub/na/15102

Five Mining Companies that Meet Jamie Mackie's Success Criteria - The Gold Report

Source: Brian Sylvester of The Gold Report  (3/22/13) 

www.theaureport.com

While Jamie Mackie, senior vice president and investment adviser with Macquarie Private Wealth, thinks the mining sector could sink further, he also believes now is the time to buy, carefully. In his first Gold Report interview, he discusses strategies to mitigate junior mining risk, including royalty and streaming companies, large and small.

The Gold Report: Investing in mining equities is a cyclical play. Are we at a point in the cycle for investors to return to mining equities?

Jamie Mackie: I think the gold mining stocks are at or near the bottom. Research from the Ned Davis Research Group shows that pessimism is extremely high—typically an indication that we are close to a bottom. From our perspective, that is the best time to position yourself. Once the market begins to turn, it will happen rapidly. Investors need to recognize value and get in reasonably early to avoid paying up later.

I compare the situation to being at a huge party; the party being the blue chip, dividend-paying sector. The party has been going on for quite a while, and it is hard to leave the party and sit in a room all alone. But that is what investors should do, spend time in the room alone, waiting for others to join them.

TGR: From a wealth-building perspective, how do mining equities fit in a world that is deleveraging?

JM: Your choice of the word deleveraging is interesting because I would say the world as a whole is not deleveraging.

True, U.S. households have begun to deleverage, which has been positive for the market. Corporations have been deleveraging for some time, but now, due to artificially low interest rates, they are beginning to take on more debt.

"People who want to protect against the ongoing depreciation of their savings need to have hard asset exposure."

Governments—except for those with austerity programs, like Greece, Ireland and Italy—have leveraged up massively. They are trying to make up for shortfalls in spending by corporations and consumers. Once governments ramp up spending, it is difficult for them to reduce expenditures later on. Governments are engaging in currency wars in 
an attempt to get their currencies down so their economies can compete globally. This is self-defeating. It inflates the money supply and puts downward pressure on the value of the currency.

Money printing is an insidious form of taxation on personal savings. People who want to protect against the ongoing depreciation of their savings need to have hard asset exposure. This process isn't stopping. Witness the March 20 decision by the U.S. Federal Reserve to continue with the Quantitative Easing program. Owning quality mining and energy companies or the commodities themselves offers protection against this.

TGR: As a private wealth manager, how much of a typical portfolio are you allotting to junior mining equities?

JM: Right now, in the 2–3% range, so fairly modest. Our focus is more on energy equities right now.

TGR: How do you counterbalance the risk junior mining equities represent?

JM: Our approach to offsetting the risk in junior mining focuses on senior blue-chip and dividend-paying equities. Although as things get more expensive we are taking money off the table. As price/earnings ratios for specific equities get out of our comfort range, we want safer opportunities.

People often ask whether bonds would be a good risk offset. We view the bond sector as the most expensive, inflated bubble ever. Apart from very short duration bonds, we are on the sidelines.

Perhaps a better way to offset the mining stock risk is with a larger portion of physical gold, perhaps a 70/30 ratio. Of that 30% in equities, 70% would be in larger-cap, Goldcorp Inc. (G:TSX; GG:NYSE)-type equities and the rest in smaller, well-capitalized juniors.

TGR: How do you mitigate risk before you take positions in junior mining equities?

JM: Management is number one. Does management have skin in the game? It is important that management be aligned with our interests.

TGR: Do you have a rule of thumb for ownership percentage?

JM: The bigger percentage of management's net worth, the better. Quality of the management team is really more important. Generally, if members of the management team are confident in their abilities and their projects, they will take significant positions.

TGR: What other factors help you mitigate risk?

JM: Time to production is important. The mining sector has something we call the "valley of death." A company has a great discovery, it takes six years to get into production; meanwhile, the stock plummets and the company cannot get financing. It is at 6–12 months before production that interest in the equity picks up again.

"Quality of the management team is really more important." 

Then you look at the size of the ore body: Is the project big enough to attract the attention of an even higher-quality buyer? Is the project in a good jurisdiction? We have had what could be described as investment fatigue over political issues.

TGR: Investment fatigue is an interesting concept. Can you expand on it?

JM: When a government changes, the question becomes what one owns after the change. Egypt and Mali are two examples. Countries that follow British common law tend to be more stable from the point of view of jurisdiction and ownership. Russia is a country with a legal system quite different from British common law. It has been difficult to work in China from a property ownership point of view. Argentina's somewhat erratic government has been tough.

Other countries—Peru, Colombia and Chile, for example—have improved a lot.

TGR: Which small-cap mining equities have withstood the rigors of your due diligence?

JM: B2Gold Corp. (BTO:TSX; BGLPF:OTCQX) has a number of high-quality projects in decent jurisdictions. It is reasonably capitalized and can still raise money.

TGR: The B2Gold management team has built companies before, for example, Bema Gold, which was sold to Kinross Gold Corp (K:TSX; KGC:NYSE) for about $3.5 billion. Do you think management plans the same with B2Gold?

JM: Junior gold miners tend to be taken out by the bigger players. That is the ultimate liquidity event, and it would not surprise me if that was the plan. B2Gold could go to a Kinross or a Goldcorp, but for the time being I think it will stay independent.

TGR: What other companies are on your list?

JM: Detour Gold Corp. (DGC:TSX) has come through the valley of death and is on its way to production in about six months. Its capital risk is almost out of the way. The company is capitalized now and it looks quite cheap by most measures.

TGR: It published guidance of 350,000–400,000 ounces gold this year. Has Detour said what it plans to do with its cash flow?

JM: Management says it wants Detour to remain a single-purpose mining company. It does not want the headache of running more than one mine. I suppose its first step would be to pay down debt or perhaps issue a dividend.

TGR: It is a pretty impressive mine, located in a very stable jurisdiction in northeastern Ontario. Do you want to see a dividend?

JM: We would be delighted with a dividend. Dividends help the market value an equity differently. The idea is to start with a dividend program that allows a company to improve its business without taking on additional debt. When companies pay too much dividend, it hurts their stock.

TGR: Do you have any other names?

JM: There is IAMGOLD Corp. (IMG:TSX; IAG:NYSE). It has a great balance sheet and interesting projects. The company is trying to reposition itself in Canada, and the stock looks cheap because of those efforts and issues with a couple of their international projects. It has an almost 4% dividend now. We have been buying IAMGOLD.

TGR: Do you expect a price rebound or might future events keep the price down?

JM: I see way more upside in IAMGOLD than downside. Mali may not be the best jurisdiction, but the company has not had any interruptions there. The project generates a lot of cash.

"If you take a position in the junior mining sector, you have to be patient."

The issue in Mali is that the mine is not being expanded. IAMGOLD is a minority partner and does not really control its destiny. That is why the company is trying to reposition in Canada, where it controls 100%.

IAMGOLD has huge cash on the balance sheet. The company can move forward regardless of what the share price does. I think it should recover nicely; maybe not to $16/share, but to $11–12/share.

TGR: Does its exposure to Africa concern you?

JM: I think that is already discounted in the share price. Every day that passes, IAMGOLD is generating more cash.

Sanatana Resources Inc. (STA:TSX.V) has a property immediately adjacent to the Cote Lake in Ontario, Canada, property owned by IAMGOLD.

TGR: Was that the Trelawney acquisition?

JM: Sanatana was a partner with Trelawney on the Watershed project.

TGR: Is this play based on the idea that if Cote becomes a mine, Watershed will be developed?

JM: I would think so, yes.

TGR: Sanatana is a very small market-cap company doing exploration. The two questions are management and cash. What are your thoughts on both?

JM: I trust Sanatana's management. The team does what it says it will do. Peter Miles is a straightforward, honest guy. The team's technical capability is way beyond what you would anticipate in a small mining company. Buddy Doyle and Troy Gill are as good or better than you would find in any senior mining company.

The company has enough cash to keep going for a while, probably until it has NI 43-101 equivalent resources.

TGR: Is there enough cash to get the company through 2013?

JM: Yes, I think so.

TGR: What other companies would you like to discuss?

JM: We have followed Gold Standard Ventures Corp. (GSV:TSX.V; GSV:NYSE) through its ups and downs. The company seems to be on the road back up. It is in a highly prolific area in the Carlin Trend in Nevada. The company has had great results. The management team includes highly qualified technical people.

TGR: You visited the site. What were your impressions?

JM: Gold Standard's mine is next door to a number of great mines, which you can see from the property. That dramatically improves the likelihood of success. The company also has people very experienced with developing bigger mines in the area.

TGR: What did you think of the most recent drill results on the North Bullion Fault Zone?

JM: The company had some great results, 5–15 grams per ton on the target zone, and long length. This is not a tiny vein. This is a small company that would be attractive to a potential buyer.

TGR: I would like to change the subject to royalties. You are fairly bullish on precious metals royalties. The royalty model is inherently lower risk than actual mining, but royalty companies typically have a lot of exposure to movement in metals prices. What is your outlook for gold and silver prices for the rest of 2013?

JM: The party going on in the blue-chip, dividend-paying equities has resulted in an exodus from the mining sector and from the gold exchange-traded funds (ETFs) into stocks that generate income. The resulting sales of gold drove the gold price down.

On the other hand, physical gold is being bought by longer-term, stronger investors, i.e., the Chinese, Indian and other developing countries' governments, as well as individuals there. Private investors seeking insurance against currency debasement are buying the commodity, too. The ETF liquidations will cease at some point in the near future so in two to six months out we should see stronger gold prices, mid-$1,600/ounce (mid-$1,600/oz) or higher.

Silver is different. It has industrial uses, including some pretty healthy growth areas, such as electronics and water treatment. A lot of its uses are consumptive, and although there is some recycling, a lot of silver disappears. The ETF market has not been nearly as big on the silver side, and therefore not as disruptive as the gold ETFs. By year-end, silver could be, on a percentage basis, somewhat higher than today.

TGR: Could it push $35/oz by year-end?

JM: Silver is a volatile market. There will be spikes and retrenchments, but it could get there.

TGR: As of March 7, 2013, Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) and Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) were trading at about 21 times their estimated 2013 cash flow. Does that suggest the larger royalty plays are overpriced or is there further upside?

JM: Franco-Nevada and Royal Gold deserve to be trading at some premium. However, at current levels I would probably be liquidating some percentage of my holdings to reinvest in the next tier down.

Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) and Gold Royalties Corp. (TSX.V:GRO) are good examples. You would not transfer your entire Franco or Royal Gold positions down, but by taking a percentage off, you would see bigger upside on the smaller royalty companies.

TGR: Would you explain the difference between Silver Wheaton and Gold Royalties for our readers?

JM: Royalty companies get the pure price flow-through for the commodity without any of the production cost risk. Streaming companies effectively pay for capital development, which helps companies build out a mine or develop a project, then the streaming company takes, for example, the gold stream of a gold-copper play as Silver Wheaton recently did with Vale SA (VALE:NYSE). The streaming companies allocate an operating-cost component or production-cost component, so they have slightly more risk to commodity price variations than a pure royalty play.

TGR: How do royalty companies benefit from resource expansion on their mining properties?

JM: That is the big upside on royalty companies. In most of the projects they finance, they are buying into a royalty stream based on resources outlined in an NI 43-101.

Gold mining companies tend not to make capital expenditures to develop new reserves on their existing properties until they need to. Once a project is up and running smoothly, and the company has paid down some debt or proven that the economics are justifiable, it will drill up the surrounding land and get more reserves from that.

The streaming company gets huge upside on the pure future development of the mine. That is probably one of the reasons Franco and Royal are trading at such great multiples.

TGR: Smaller royalty players have entered the market, such as Premier Royalty Inc. (NSR:TSX) andAmericas Bullion Royalty Corp. (AMB:TSX). Do they offer value or are they simply trying to piggyback on the success of the larger names?

JM: I am sure there is some mimicry of larger royalty companies. However, given the disarray in the mining sector and the dearth of capital on the junior side, there is an opportunity for smaller royalty companies to structure really attractive deals. There are just a handful of royalty companies. It is difficult for Franco, Royal Gold or Sandstorm Gold Ltd. (SSL:TSX.V) to take on these smaller projects. So there is lots of room for small entrepreneurial companies to do deals smaller than, say, $100 million.

TGR: In effect, if Franco finds a royalty play that could be profitable but does not meet its scale, the company could pass it on to Gold Royalties Corp., which already has an agreement in place with Franco to accommodate this.

JM: And the reverse, too. Gold Royalties could find a project that is too big and go to Franco for help on the funding.

TGR: What does Gold Royalties have in the pipeline that will produce growth for shareholders?

JM: The company has a number of projects. The Metanor Resources Inc. (MTO:TSX.V) project is onstream and producing cash flow. Its next projects are 18 to 24 months out, even up to three years out. Most of those projects are in Québec, Ontario and the Yukon.

TGR: Premier Royalty has a chart on its website showing that a royalty index consisting of Silver Wheaton, Franco-Nevada and Royal Gold outperformed the gold spot price by 54% from January 2008 through January 2013. Should investors expect similar gains over the next five years?

JM: These stories are evolving and benefiting from expansions in reserves and resources as the companies move projects forward. Royalty companies have the benefit of not having to pay for exploration or construction and are protected from operating cost escalation. The royalty companies could outperform the gold spot price.

TGR: What are your royalty holdings?

JM: Franco, obviously. We have owned Gold Royalties from its genesis. We own Silver Wheaton and are buying more. That one has a lot of upside; it is doing great deals in the right sectors, and has expanded into gold.

TGR: What advice would you give retail investors that they ought to hear, but might not want to hear?

JM: The stock market is massively fickle and the mining sector is in difficult times that could prevail for an extended period. In the long run, this is a self-correcting event. Mines will be delayed if things carry on as they are until demand returns, grows and outstrips supply.

Further decreases in the commodity price will damage equity values. Strong companies have the upper hand, and at some point, they will use it. They will find and purchase the best projects, although we have not seen much merger and acquisition activity lately.

I think even Goldcorp and Barrick Gold Corp. (ABX:TSX; ABX:NYSE) are shell-shocked. They have had huge cost escalation in projects and are looking to finish them before taking on others. That has been a real wet blanket on the junior mining sector.

The world keeps growing, along with demand for commodities. Currencies will continue to be debased. Inflation will begin to drive commodity prices higher.

The biggest question right now is when. Nobody has a good answer. The inflation numbers provided by governments are nowhere close to accurate. Good measures might be the cost of building a mine or the associated operating cost. If the costs were the prescribed inflation rate of 1.5%, the mining sector would not be having such huge cost overruns.

If you take a position in the junior mining sector, you have to be patient, although patience does not seem to be a virtue in the current market.

TGR: Jamie, thank you for your time and your insights.

Jamie Mackie has more than 33 years of experience in the investment banking and oil and gas industries to his position as senior vice president and senior investment adviser with Macquarie Private Wealth. He was founding partner and director of Finance of First Energy Capital Corp. and co-founder of Wilson Mackie and Company Inc. Prior to forming J.F. Mackie, which evolved into Mackie Research Capital Corp., he was an investment adviser with National Bank Financial Corp., previously First Marathon Securities. He worked at Suncor, Hudson Bay Oil and Gas, Dome Petroleum and Canadian Hunter on both the commercial and technical sides of the business. He holds degrees from the University of Calgary and a Master of Science in resource management from Yale University.

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DISCLOSURE: 
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an employee or as an independent contractor. He 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: Goldcorp Inc., B2Gold Corp., Detour Gold Corp., Gold Standard Ventures Corp., Franco-Nevada Corp. and Gold Royalties Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Jamie Mackie: I or my family own shares of the following companies mentioned in this interview: Goldcorp Inc., Barrick Gold Corp., Gold Royalties Corp., Silver Wheaton Corp., IAMGOLD Corp. and Sanatana Resources Inc. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Not to my knowledge. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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( Companies Mentioned: AMB:TSX, BTO:TSX; BGLPF:OTCQX, DGC:TSX, FNV:TSX; FNV:NYSE, TSX.V:GRO, GSV:TSX.V; GSV:NYSE, G:TSX; GG:NYSE, IMG:TSX; IAG:NYSE, MTO:TSX.V, NSR:TSX, RGLD:NASDAQ; RGL:TSX, STA:TSX.V, SLW:TSX; SLW:NYSE, )