INTERNATIONAL. The convergence of an assortment of forces—probably the least compelling of which is jewelry demand and the possible role of gold in oil transactions probably the most powerful—promise to keep driving up the price of gold, according to GoldSeek.com founder and president Peter Spina.
Still, in this exclusive Gold Report interview, as the gold price climbs toward US$2,000, he suggests that investors might wait for another market rally in mining stocks, take some profits and invest the proceeds to add some physical gold to their portfolios. A year from now, says Peter—who also co-founded GoldForecaster.com—we'll look back on US$1,000 gold as a bargain.
The Gold Report: We've seen some big bumps for gold several times this month, with the price nudging the US$1,050 mark now. What's behind the spike?
Peter Spina: There's a lot of confusion out there now, but the bull market in gold is not about jewelry demand; it's about money. As gold keeps reaching new record highs, it's becoming more apparent what's driving it. The true issue at hand is trust (or lack of it) in the value of paper money—specifically the U.S. dollar. What's really made this country so strong has been the value of its currency.
We're seeing a shift away from U.S. dollar reserve assets. The value of the dollar had been primarily driven by demand in its global use, including trade in dollars, specifically, the oil trade. There are growing rumors about shifting some of that oil trade away from the dollar, and at the same time, central banks around the world are diversifying away from it. Combine that with other factors we're experiencing—trade deficits, internal deficits, the incredible amount of printing of dollars to bail out banks and provide stimulus and so on. It can't go on.
The U.S. internal deficit is nearing US$2 trillion a year and growing, especially in the last year. Now they're talking about projections from the recent financial bailouts total obligations exceeding US$20 trillion.
That doesn't take into account future banking and derivative issues, which are upcoming. Already, we do not have the ability to finance our debt. It requires about 80% of the world's savings to support our debt habits, and we're just increasing our debt load so quickly—our appetite for a debt is increasing.
How do we continue to finance this kind of system? This has to play itself out at some point and I believe inflation will be the outcome from all this paper printing via growing monetization of U.S. debt. It will cheapen the debt load, but there will be some severe consequences to pay.
The price we'll pay will be reflected in devaluation of the U.S. dollar along with a degree of influence such power provides. Gold will benefit from this process. As people look for sound money and a safe-haven asset, gold will be the obvious choice.
TGR: Aren't most governments printing more currency to do some form of stimulus in their own countries, and not just the U.S.?
PS: Yes, they are. Gold is actually moving up in foreign currencies as well as U.S. dollar terms, and we could see a widespread devaluation of paper currencies versus gold. A global paper currency problem really brings gold to the forefront.
TGR: Why didn't gold take off earlier in the year, when a lot of that activity you described was already taking place? This is not news.
PS: It's a process. In relative terms, gold is such a tiny market that it commands quite limited attention in the financial world. That's changing, but it's a process that takes time. Some heavy accumulation behind the scenes helps support the gold price to this point, but some other factors tended to calm down the price appreciation. Primary among these factors has been general stabilization of this turmoil that engulfed us toward the end of last year and early this year. The mass psychology of the markets has shifted and is actually quite good, all things considered. Removal of the fear factor has driven away tension and stabilized things.
I just think there's not a broad understanding of the process, which is ongoing. I believe the U.S. dollar is going to really start losing its footing but the stock market is going to continue to stay firm and grow. As the dollar begins losing its value and gets to the point where that may happen very quickly, the situation will change and people should realize quickly what's going on. The squeeze on the dollar will be reflected in the gold price taking off.
TGR: How high can gold go? Won't people who aren't invested in it already going to get minimal return because it's already spiked up so much?
PS: There are definitely short-term risks after spikes. Gold reached US$1,000 a couple of times and then pulled back to the US$900 for most of this year. Now, after breaking through US$1,000 again, it could rally to US$1,100 to US$1,300 and then pull back somewhat. That said, same time next year I believe we'll look back and say, "Wow, US$1,000 was cheap; it was a bargain." So US$1,500 to US$2,000 gold in the next 12 to 18 months seems definitely within sight.
TGR: Do you see a situation where we might use gold as actual currency and actually go back to a gold standard?
PS: Direct use of it, while possible, is not likely. But I believe we'll be using gold in form or other in trade and/or in backing a new currency. We'll see central banks holding more gold in attempt to stabilize their currencies. They've already shifted from disposing gold on a net basis to accumulating gold to their reserves.
TGR: As you look at the gold sector just in the last year, the spot gold price has gone up 20% to 25% up until these recent bumps. But during that period, the gold equities have doubled, tripled, quadrupled. It's been amazing. Is the play here in gold the physical or the gold equities?
PS: When you invest in mining stocks you take on a greater degree of risk; for that you are entitled to a greater reward. As we saw last year when the markets collapsed, mining equities dropped quite severely. Valuations on many of the stocks went down 70%, 80%, 90%—so these equities are a lot more volatile and sensitive to general market conditions.
There are arguments for and against, but I believe a good portfolio should contain both bullion and mining stocks and, within the mining stocks, include more stable mining equities and some high-risk speculative investment opportunities such as exploration plays. But I believe the mining stocks, the gold stocks, will outperform the metal itself.
TGR: You mentioned that an investor should be looking at fairly stable equities along with some more speculative exploration opportunities. Do you define "stable" as the majors?
PS: Yes, the Goldcorps (TSX:G) (NYSE:GG) and Agnico-Eagles (TSX:AEM) of the world, those that would be classified as senior gold companies, with annualized gold production in the multi-millions of ounces. With a basket of those companies, you can march down to the mid-tiers and the smaller-cap gold stocks for more leverage.
TGR: A couple of years ago, when we had a handful of uranium companies, uranium had a run up, and then suddenly hundreds and hundreds of uranium companies flooded the market. Does that happen any time a mania begins? Are we likely to see the same thing in gold, except that hundreds of gold companies may multiply into thousands? If that happens, how do you decide where to invest?
PS: As the gold prices rise, I think we will see some companies coming in that people should be very careful about investing in. They may do well in the bull market, but when all is said and done, if there's nothing really behind them, they will be the ones that will go away first. As you know, we saw a bit of a washout last year with the market correction. Some good quality companies took a hit and went under or emerged as somewhat different companies. But there were others that I would never have invested in, kind of moose pasture want-to-be gold investments. When those faded away while the good assets remained, that was good for the market.
TGR: So what would a careful investor look for?
PS: When investing in junior exploration gold and/or silver stocks, I first look at the management, look at their history. A company comprised of solely financial backgrounds who have no mining experience should be an obvious red flag. Junior explorers typically have to go to the capital markets to raise equity to explore and develop a project, so company with a bloated share structure to start off with will have a difficult time building a strong share price as it develops these assets. So in the junior exploration stocks, share structure also is very key.
With any of these small capitalization companies, it is typically about raising money in the public markets. So has the company been capable of obtaining a proper value of their assets for their shareholders? So ask yourself some questions: Are they communicating with the public? It's a publicly traded company; are they telling their story to the public? That's very important factor to attract investors and to preserve a small capitalization's primary key advantage which is share structure
And then, of course, the property. You want to look at various criteria in that respect including geography. I prefer locations in Mexico, Canada and Nevada for mining companies. Grades, environmental location, etc. are all very key investment decision makers.
Also look at the business model. Does the company provide any cash flow or is it expecting any near-term cash flow perhaps because it's close to production? You don't want to get into another situation like last year where your business model is entirely dependent on raising capital in the equity markets and the capital markets fall apart. However, that seems to be less of a threat if the gold price continues to rally and new capital sources, interest in the gold sector continues to grow. That would keep investment capital flowing into the sector at an accelerated pace
Those are several of the criteria that I look at. All things considered, you have to be very careful. The best thing an investor can do is to just do your research. Call up the company and speak with them and really get a feel for who's managing the company. Public filings provide excellent insights into the financial condition and management discussions. The resources available online add other easily accessible data and information.
TGR: Can you give us examples of some junior stocks that meet your criteria?
PS: One is Timberline-Resources Corp. (NYSE/AMEX:TLR) which has a terrific share structure, around 35 million shares. They're about a year away from gold production in Montana, an underground high-grade gold project.
They're in a 50-50 joint venture with Small Mine Development, Llc (SMD), one of the largest underground mining contractors in the United States – serving clients including Newmont Mining Corp. (NYSE:NEM) and Anglo Gold (NYSE:AU, JSE:ANG, ASX:AGG, LSE:AGD).
With Small Mines Development carrying the project to production, Timberline does not require to finance to reach production point, which means their share structure should stay intact. At $1,000 gold, they should be bringing in up to $20 million in pre-tax cash. For a company with about $25 million market cap, that's quite the value.
Additionally, Timberline is looking at other near-term gold production assets and has two drilling divisions, which I believe pull in around $15 million a year. Drilling margins are not very exciting right now because a lot of exploration activity has been slow to come back from last year's market correction. Still, I believe we'll see a nice uptake in the next six to 12 months in exploration and thus drilling services. So that company is definitely of interest.
TGR: Who else is on your radar?
PS: Another would be Gold Resource Corp. (OTCBB:GORO, FSE:GIH), which has several properties in Oaxaca in southern Mexico. They have under 50 million shares, no debt. They have several large shareholders, including management. One of the largest investors is Hochschild Mining (HOC: LSE) and the Tocqueville Gold Fund. Gold Resource Corp. is expected to produce 70,000 ounces of gold in the first year at $100 an ounce production cost at its El Aguila property.
That's very high-grading gold. They're going to increase that to 110,000-plus ounces in years two,177,000 gold equivalent ounces in year three and onwards. As they encounter more base metals, those will be used as credits against production, so their production costs will go to zero or even go to a negative cost.
A lot more exploration work is needed to define the size of this project because of the significant upside their property remains huge. Right now they have several years of production reserves, and we'll see how that exploration work pans out.
TGR: How close are they to production?
PS: They're actually mining the open pit ore right now. They have all permits in hand. From what they've said in the recent past, the mill should be completed within a matter of days, weeks. I would expect some sort of initial production to begin this month or next.
TGR: So they meet your criteria of being able to essentially live on their own cash flow, not needing to go to the capital markets.
PS: Exactly. They're going to be producing an incredible amount of cash flow. If you're looking at 70,000 ounces with a net $100 an ounce margin in the first year alone, that's up to $1.50 a share right now in free cash flow. Gold Resource also plans to pay out about a third of their cash in the form of a dividend payment, which could be quite the dividend going forward. That's definitely a company to consider.
TGR: Any others?
PS: Timmins Gold Corp. (TSX.V:TMM) is another one in Northern Mexico. They're just starting production in an old open pit gold heap leach operation in Sonora. I believe this class of gold producers will soon see additional attention from investors and larger gold miners looking to grow their reserves and production levels therefore providing more upside. With just over 100 million shares, it's not as attractive of a share structure, but Timmins is now fully financed and soon producing cash flow with their first gold pour expected in January. They're looking at 80,000 ounces a year, $400 or so an ounce production cost, and they're trading around 70 cents a share. They have other prospective projects and some strong investor backing. That looks like a pretty good value to me.
TGR: Great. That's a pretty good list.
PS: Then there's a new company, Canada Gold (TSX-V:CI; FSE:T9N; OTCBB:CNGZF). They're just getting going, actually, and I'm not an investor in the company yet. They have a unique business plan, to build a toll mill facility in northern Peru and work with several thousand plus local small and independent gold miners that don't currently have an ideal place to have their gold ore milled.
The Peruvian government estimates that around 3,000 tons per day of high grade gold is currently being extracted. I would expect this number to swell along with the gold price.
These miners have been either loading their pickup trucks with ore and driving roughly 1,400 kilometers for processing at a cost of up to $100 per ton, or using mercury for on-site gold recovery, which is health risk to the artesian miners and a potential environmental biohazard. Inevitably these miners only get a fraction of what they could and should.
So within a year, Canada Gold is looking to open its first toll mill and to cater to these small miners, giving them a higher payout and milling the gold for them so they will no longer need to involve themselves in using mercury for extraction. Starting at 300 tons a day with grades pushing ¾ to 1 ounce a ton average, there is significant cash flow potential. Add mill number two, three and more, Canada Gold could grow into a significant gold operation and they can do this without having to deal with the mining and exploration risks.
That's definitely an interesting and new story. They have a $4 or $5 million dollar market cap and the several million dollars required to get the first mill going has already been financed, so additional capital needs are minimal Definitely, it's a good win-win situation, which I think will find good backing from some non-traditional sources, including environmental groups and NGOs.
I try to look for stories like that—unique business models and win-win situations.
TGR: It sounds good, but the value of a mill depends on the ounces it can process, so this one will depend on what these small miners can produce. Where's the guarantee their production will continue in some meaningful fashion through the life of the mill?
PS: With the price of gold where it is and the fact that these miners bring in on average about three-quarters of an ounce a ton of gold with no mill capacity nearby, the payback period could be within a year. Thus, there shouldn't be much fear that this won't progress for some years down the road. Because Canada Gold doesn't have to spend all kinds of money and time trying to find a deposit and mine it, this puts them in a much lower capex situation to get cash flow going. And at the same time these miners who are spending a day mining and two days extracting gold now will be able to focus strictly on mining.
TGR: So the payback period is a year. Why didn't someone jump on this earlier?
PS: I've been asking myself the same thing. I wish I had an answer. I know one or two private firms that do work like this, but no other public company has gone this route that I am aware of. I believe the business model is going to be quite successful, and from everything I've looked at initially, it strikes me as a really good story. They want to build this thing up quite aggressively, to the point where they could be producing half a million ounces annually within two, three or so years down the road. The gold's there. It's being processed. I believe their advantage will be in making higher payouts to the locals for their gold and being in a strategic location where a lot of this mining is going on along with all the necessary circuits to process various ore types
TGR: Is the Peruvian government likely to facilitate things for Canada Gold, given the ecological question?
PS: They already have government support and see continued support coming in for these environmental reasons as well as general economic ones.
TGR: So there's another win in this win-win scenario for Canada Gold.
TGR: Are there any other companies that you're following?
PS: Otis Gold Corp. (TSX:OOO) has five projects in Idaho and one in Nevada. I just visited their flagship, the Kilgore Gold Project in southeastern Idaho. It's an old gold property with some old production workings on it from the mid-'90s.
A few companies such as Placer Dome, Echo Bay and Pegasus have previously worked it. Over 120,000 feet of drilling has been performed on the property to date. The deposit they're trying to define with the drilling exploration work that's ongoing as we speak, is to step out on some historic high-grade gold intercepts in an effort to define a high grade deposit that could be mined by underground mining methodologies . In addition, there is an existing bulk tonnage, open-ended 700,000 ounce gold resource that has significant expansion potential. This could turn out to be a multi-million ounce gold deposit.
With a market cap of around $12 million dollars right now, Otis is looking pretty cheap. Their per-ounce gold valuation is in the neighborhood of $12 an ounce with their million ounce or so gold resource. The drilling expansion should continue to bump up those numbers. We're seeing around $40, $50 an ounce valuation now for this kind of deposit reserves, so they're looking rather inexpensive to me.
TGR: When will they be able to validate the presence of that high-grade intercept?
PS: The high grade exists. They need to continue to drill it out both the high grade and bulk tonnage targets to build the model better to confirm their ideas of this gold deposit. I think they're doing a 12,500-foot drill program now and the first results should start coming out soon. This first round will help define the deposit and see if indeed this high-grade gold deposit can be expanded. There are a lot of signals that it has the potential.
Once gold really gets at $1,200, $1,300, $1,500 an ounce and these majors need to replenish reserves, deposits that fit certain criteria—and I believe the Kilgore Project that will be one of them—definitely will become quite attractive. So it's a good opportunity to still get into some of these junior exploration stocks that have very inexpensive per-ounce valuations. Otis also has a terrific share structure, under 20 million shares. With some exercise of warrants coming up, they should have a couple of million dollars in the bank, so they're cashed up and have quite a few drill holes coming through soon. That could provide some upside pressure on the stock.
TGR: Sounds like another winner.
PS: It could be. If these exploration stocks hit some high-grade gold, you can see things really take a pop. Especially I love these older gold projects that had work done on them. Back in the mid-'90s a lot of these projects had millions and millions of dollars worth of work done on them. But then the gold price drop made them uneconomical and exploration development budgets were extinguished, so they just sat there. With the gold price making them very economical now, I'd say a lot of good gold projects like that are just waiting to be developed.
TGR: It was in the mid-'90s—1995 to be precise—that you founded GoldSeek.com. What did you see then, when everyone else was looking at the high-tech bubble?
PS: At that time, interest in the gold market related to the imbalance of supply and demand. A declining supply was coming from the major gold-producing countries, specifically South Africa, and demand was well above the supply. Investors perceived the imbalance as a market opportunity. But unfortunately it was too early. Central Bank selling closed a big part of the gap along with gold producer forward selling.
The gold market bottomed out in the late '90s-early 2000. At that time it was about that opportunity to buy low. Today it's different. It's the interest in gold market and gold itself as money that led us to the point we are today. Gold is now finally becoming more and more recognized for historical attribute as money.
TGR: GoldSeek.com is still going strong, and more recently, you've also co-founded GoldForecaster.com. Could you tell us a bit about major trends you're recommending there?
PS: GoldForecaster.com follows the gold markets from a global perspective on a weekly basis. We're watching the record high gold price around $1,035. If we have some consecutive closes above this, we expect another surge, a wave of demand to take the price a lot higher, so we're in the view that any pullbacks are excellent buying opportunities.
It looks as if the sub-$1,000 gold phase may be coming to a close, so we're looking for gold to move up to a much higher range and, in the process, take these mining companies to much higher values. So we see a lot of opportunity in all parts of the gold mining stock sector. As the price gets higher and the bullishness and excitement grow, the smaller caps and the juniors will start getting a lot more interest, too.
TGR: Are we in the mania stage yet?
PS: No, not at all. I believe we're entering the next phase of this global market, which will bring it more into the mainstream. Right now the average investor still doesn't own gold. They're starting to know what's going on. They know gold is getting to a record price but not exactly fully understand why. The big institutions, the big buyers are just starting to get coming in, but it's still not a mainstream investment yet. That still may take years—not just months—to develop. The mania stage is still quite a way off.
TGR: Thank you, Peter. Any parting thoughts that you want to give to our readers?
PS: I believe the key here in the gold market is what gold represents, what it has been and that's honest money and as we see this bull market develop, the reason for it is going to be from investment demand. It's going to from people looking for stable, honest money and with declining trust and confidence in paper currencies and as they continue to devalue, gold will become one of the choices for investors to preserve wealth.
I think we'll see some extreme volatility continuing on forward. We saw some examples of that last year and mining stocks will just amplify that. So you have to recognize that there will be some extreme wild swings in this market. Taking profits on the way up and diversifying those profits, I think, is always a great idea. Personally I am more overweight in the mining stocks. My strategy at this time would be to wait for the next significant rally and then start monetizing those profits into physical gold and silver.
Note. Peter Spina's experience with the precious metals markets dates back to the 1990s, and the GoldSeek.com website he debuted in 1995 now ranks among the top three most popular gold websites globally. When a secular bull market in precious metals was taking shape, Peter established the technically focused subscription newsletter, Gold Seeker Report; early in 2005, he merged it into the more comprehensive GoldForecaster.com service. In addition to the newsletter and websites, Peter frequently appears in the media, including Investor's Business Daily, Wall Street Journal's MarketWatch, Reuters and TheStreet.com.
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