Gold $1,600 in Reach
Commodities / Gold and Silver 2011 Jul 16, 2011 - 05:08 AM GMTBy: The_Gold_Report
Gold is once again hitting new highs, closing at $1,589/oz. on July 14. In this exclusive interview with The Gold Report, Dr. Michael Berry, principal of discoveryinvesting.com and editor of Morning Notes, predicts $1,700 gold by year end and points to the juniors that could bask in the enhanced glow of all the metals, including copper and zinc.
Michael Berry: I go before the Federal Reserve twice a year. In this presentation on Monday, I'll talk about the geopolitics of growth in emerging countries and issues related to the dollar, gold, convergence of the rest of the world and the weak global recovery.
Monday afternoon, I'll head over to the House and meet with the Chairman of the House Natural Resources Committee and Senator Lisa Murkowski's (R-Alaska) natural resource staff to discuss extractive resource policy, natural resource exploration in the U.S., critical metals and what's really happening in the rest of the world regarding resource nationalism.
I also believe I'll be meeting with Senator Murkowski's natural resource policy representative, McKie Campbell. I'm trying to educate the Congressmen and Senators and their staffs on how important natural resources are to the U.S. and what's going on in the world with respect to critical metals, metals supply and demand and what policies we need to enact in this country.
TGR: Do you feel you've made progress toward legislation that's a bit more pro-mineral development or metal development?
MB: Yes, I think we've made some progress. It's a long education process and it's difficult to do because you have to be consistently in front of them. Congress has three bills pending now—two in the House and one in the Senate—that relate to natural resource development in the U.S. for critical metals. Not just rare earth elements, but a number of others as well. They also relate to exploration and development policy. I think we're making some inroads with Congress and others in Washington. It's very important that we keep that pressure up.
TGR: On Thursday, the price of gold for delivery in August flirted with $1,600/oz., going as high as $1,594.90/oz. before closing at $1,589.30. What is causing this continued upward climb and what does it mean for juniors going forward?
MB: There is just a tremendous amount of uncertainty regarding the debt ceiling and the U.S. credit rating. That is pushing gold and silver prices higher, which is positive for gold miners and exploration stocks. Look for $1,700/oz. gold by the end of the year.
TGR: What happens if there is no third round of quantitative easing and our elected officials come to an agreement on the debt ceiling? Does the gold price climb lose its momentum?
MB: Nothing is standing in the way of gold and silver going higher. There will be some accommodation on the debt ceiling and something will be done to try to keep the economy moving just because no one wants to see higher interest rates. In the meantime, investors have come to the realization that precious metals play an important role in the portfolios of individuals, institutions and countries, which are now buying large quantities of gold. It will continue to hit new highs as the 250-day moving average is increasing beautifully.
TGR: In the second quarter, we witnessed a significant sell-off in speculative positions in both gold and silver. Do you believe a portion of that speculative money could find its way into copper?
MB: There's tremendous pent-up demand for copper around the world because of emerging economies. It is also much more difficult to make world-class discoveries today. I think copper prices will be very strong. Metals like zinc are also really starting to look very attractive to the exploration industry. There's a lot of potential for discovery investment flows into some of the base metals, including copper and zinc, and some of the special metals such as manganese, vanadium and graphite.
TGR: Any discussion about copper has to include China. Beijing recently raised interest rates to fight inflation, but the economic indicators in China continue to improve and that ultimately means greater demand for copper there. Will supply disruptions converging with greater demand push the copper price above $5/lb. this summer?
MB: That is certainly possible. I can remember when copper was $0.65/lb., so obviously there is real upward momentum. Copper is a "quality of life" metal. Infrastructure can't be built-out without copper. I think that prices are going to be quite strong as we approach the fall season.
It is interesting to note that the Chinese started buying again as the price of copper fell in the last couple of months. Their demand is crucial. They are also bidding for copper companies around the world. I think we're in the third inning of a very long commodity supercycle in the world. Copper rightly will take its place in that cycle. Copper miners in Indonesia and Chile are experiencing labor problems as well.
TGR: Recently, China's Jinchuan Group trumped a $1B bid for the African-focused copper company Metorex Limited (JSE:MTX; LSE:MTX). Do you expect Chinese firms to take more runs at companies as a means to lower the cost of copper?
MB: I do, but I think the primary motivation of the Chinese is going to be infrastructure build out. It's a huge country with a growing middle class. Somewhere around $4 copper is probably very cheap to the Chinese.
But it will be more than just the Chinese that come into this game. Companies like Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) are going to get involved because there just hasn’t been a lot of new high-grade discoveries that have been turned into reserves. It's a very interesting game that's being played. Africa is in play in terms of natural resources. No doubt.
TGR: Given the jurisdiction risk in Africa, could there be a bit of a premium on western copper plays?
MB: The Murkowski Bill, which passed in a unanimous, bi-partisan vote but hasn't been signed by the president yet, should help ease exploration in U.S. Some of the discovery progress in Arizona and Nevada now is going to become increasingly sought after by companies like Freeport, Rio Tinto PLC (NYSE:RIO; Paris: RTZ.PA), even Barrick Gold Corp. (TSX:ABX; NYSE:ABX), and of course some of the smaller copper companies. I think there's going to be a premium on what's happening in the U.S., Canada and, to a lesser extent, Mexico.
TGR: Which companies do you think could benefit?
MB: One that I've followed for years and in which I own a big position is Quaterra Resources Inc. (TSX.V:QTA, NYSE.A:QMM). It just exercised its option to acquire the Yerington Mine, which was mined from about 1952 to 1978 by Anaconda. It's the most significant land position in the Yerington District. Adjacent to it is Nevada Copper Corp. (TSX:NCU), which has a huge skarn find. Rio Tinto has a 13% position in Entree Gold Inc. (TSX:ETG), which acquired the Anne Mason Property in Nevada, also adjacent to the Yerington Mine.
Yerington is the newest and safest copper district in the U.S. It could realize 50 Blb. to 60 Blb. of copper. Anaconda mined 1.7 Blb. during its 25-year life. Quaterra went through the rigorous process of taking this mine and property out of bankruptcy. It now controls water rights and about 8 Blb. of copper. No one understands this story, so the QMM stock is very cheap. I estimate that Yerington, the Bear Deposit and its nearby open pit MacArthur mine are worth $3 to $4 per share of Quaterra.
Another company that I follow closely is Redhawk Resources (TSX.V:RDK; Fkft:QF7; OTCQX:RHWKF). Redhawk sits in the Copper Creek area of southern Arizona, actually Pinal County, where several big copper porphyries are located. It is drilling a huge defined copper and moly resource there. The stock is trading around $0.50, so companies like Freeport, BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) and Asarco Grupo Mexico, whose Hayden smelter is just a few miles away by road, are likely to take a big interest in Redhawk.
TGR: That property has been thoroughly explored before. Is it getting a second look because of where copper prices are right now?
MB: There has been a lack of new high-grade discoveries lately, so companies are coming back and readdressing some of the properties where maybe $0.65/lb. copper didn't work, but $4/lb. copper works beautifully. These are places that already have a lot of infrastructure and safety isn't a risk as in Africa or Indonesia.
TGR: Redhawk said in its scoping study that it's going to need about $400M to build the mine and mill there. Is it going to have to do a joint venture or an off-take agreement?
MB: I would imagine that Redhawk will not raise that kind of money, but it may not have to build one. Several mills operate in the area, including Asarco's Hayden mill, which would be a natural fit. There's good transportation infrastructure and Pinal County is all about mining culture. My guess is that the company will strike a deal to use someone's existing facilities or perhaps be acquired.
TGR: Quaterra and Redhawk are fairly mature. Do you have any earlier-stage prospects?
MB: Southern Silver Exploration Corp. (TSX.V.SSV; Fkft:SEG), southeast of Tucson, Ariz., is in the early stages of exploring for copper porphyries, specifically a Resolution-type target, jointly with Freeport-McMoRan. I think it has a good chance for a discovery at this stage on its Dragoon project. Freeport thinks enough of it to be drilling it at this stage.
It's trading at about $0.17 a share, so it's certainly what some of us would call a "penny dreadful." But I like the management and I like their properties and they have several in addition to the Arizona copper target.
TGR: You recently went to Guyana with a group of Chinese investors. Guyana is starting to see some major gold projects come into development, such as Guyana Goldfields Inc.'s (TSX:GUY) Aurora Project and Sandspring Resources Ltd.'s (TSX.V:SSP) Toroparu Project. However, I see a few challenges facing companies looking to develop mines in Guyana. One is a severe lack of infrastructure and a pristine rain forest environment. Another is a shared border with Venezuela where several gold projects have been nationalized by the Hugo Chavez regime. Also, the Guyanese government is relatively unfamiliar with mining.
MB: You're probably right about some of those concerns. There is a lack of infrastructure. For example, when we flew into the jungle to see GMV Minerals Inc. (TSX.V:GMV), we helicoptered in for about 70 miles. GMV has a huge land position. I think it has perhaps one of the better chances to make a significant discovery. I like the management team under Ian Klassen very much. They just have a good idea of what's going on down there.
I don't believe that Venezuela is a factor at all. I don't foresee any problem with the Venezuelan government interfering in the internal affairs of Guyana.
There are some health risks. Malaria and yellow fever are a problem there. But I still think the glass is half full for Guyana. Especially, if foreign companies—primarily Canadian companies—bring their expertise, talent and jobs for the locals.
TGR: Is the government mining-friendly?
MB: We met with the Prime Minister and it's fair to say that in every developing country there are going to be nationalist undertones. But the government is welcoming in exploration and development. Some of the big companies, like Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A, TCK.B) and Barrick, are now looking carefully at Guyana primarily because Venezuela is so inhospitable. The government seems to know what it's doing with mining law. I don't foresee that the taxes will be more significant there than anywhere else in the world.
TGR: One of GMV's properties is right beside Guyana Goldfield's Aurora Project. Is that property likely to become GMV's flagship operation?
MB: GMV has done the geophysics and flown almost the entire country and analyzed the data carefully. No other company has this database. The company has a better idea of where the gold veins are located than anyone else there. The property it's working on now has tremendous potential. We were there when it drilled its first hole. It's going to be a while before we really know much about GMV, but I really like its potential because it has a lot of targets to drill. I believe the company will farm out some of the properties and drill the best ones.
TGR: Can you tell us about Ian Klassen, GMV's head, and his team?
MB: He's an experienced hand in Guyana. He's really done a thorough job of working with prominent local mining families, soil sampling, ground geophysics and airborne geophysics. He's kept costs to $50/m on the drilling, which are relatively cheap. He's just announced a deal with Canamex Resources Corp. (TSX.V:CSQ; FSE:CX6) for several million shares, where Canamex will take a GMV property that is about 10% of its land position. He's very good at monetizing some of the company's holdings that couldn't be utilized in the near term due to the large size of its land holdings. Ian's had a lot of experience in Ottawa with the Canadian government and is moving forward with Grande Portage Resources, Ltd. (TSX.V:GPG) on the Herbert Glacier where they have reported visible gold intersections. He's ready to create value for GMV shareholders.
TGR: You visited Sandspring's Toroparu gold-copper deposit in Guyana on your previous trip. That junior recently released the results of its infill drill program. Did you see those results?
MB: I did. The company is getting one and two gram gold and has a copper credit. It just needs to step out and keep drilling and it will find a lot more gold. There's a lot of opportunity for the companies already in Guyana with camps set up. Sandspring has about 10 Moz. in various resource classifications from measured and indicated to inferred. I expect that it will get higher grades as it keeps drilling. I've owned that stock for about two years.
TGR: Sandspring shares reached $3 late last year, but fell back below $2.50. What's going to be the next catalyst to push Sandspring stock above $3?
MB: The next catalyst could be the discovery of a higher grade system. Most of the share prices of these gold juniors, even the ones with NI 43-101 resources, came off significantly in the past few months. It wouldn't surprise me to see Sandspring go back above $3. If the company keeps drilling and keeps adding resources, it's going to get a significant premium on a takeout from a major player at some point in time.
TGR: Are there any other Guyana-focused juniors that you're following?
MB: Sacre Coeur Minerals (TSX.V:SCM) was part of a controversial takeout by OAO Severstal (LSE:SVST; RT:CHMF) that ultimately fell through. The stock is very cheap. Coming down from a high of $1.57, it was recently trading at around $0.40. The company's property is very close to GMV and Sandspring's properties in eastern Guyana.
TGR: Recently, the Peruvian government rescinded Bear Creek Mining Corp.'s (TSX.V:BCM) permit for the Santa Ana Silver Project in Peru. Since then, the company's share price has plummeted to about one-third of its previous value. Did that move send some shockwaves through the mining investment community in South America?
MB: Peru and Guyana are on the same continent, but they're almost totally different in every respect. The Peruvian decision has sent shockwaves through the mining community there. There's a lot of gravitation to places like Colombia and Guyana and away from places like Venezuela and Peru. However, Peru, Ecuador and Chile have some of the great deposits and a lot of investors are willing to take that risk.
When something like this happens, there are shockwaves and shockwaves scare investors. The Peruvian government is smart enough to know that they need to attract money into the country. I'm sure that Bear Creek will handle it well and its stock price will come back over time.
TGR: Is there a risk of anything like that happening in Guyana?
MB: There is an election forthcoming in Guyana and things could change. I don't think that they will change for the worse in Guyana. The country recognizes the need to have their country developed, to have capital coming in, to increase investment and infrastructure. I expect the election will be favorable for mining and offshore oil work.
TGR: Any parting thoughts for us, Dr. Berry?
MB: Canadian Nobel Prize winner Michael Spence has written a book on the coming convergence of the emerging world. I think we have between 20 and 30 years. He thinks we have 50 years of this convergence of emerging country quality of life. If that is true, we have the next three to five decades of converging lifestyles. That means that the commodity and natural resource sectors, in particular the mining sector, will be a wonderful place to be invested. And we're going to be there with the discovery investing opportunity. We're going to focus and push very hard toward that down the road.
TGR: Thanks, Dr. Berry.
Dr. Michael Berry has lived in the U.S. for 36 years, but was raised in Canada. A math major at the University of Waterloo in Ontario, he earned an MBA at the University of Connecticut and obtained a Ph.D. specializing in quantitative analysis and investment finance from Arizona State University. He has specialized in the study of behavioral strategies for investing and has been published in a number of academic and practitioner journals. His definitive work on earnings surprise, with David Dreman, was published in the Financial Analysts Journal. While he was a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia, Michael spent considerable time with some world-renowned geologists on the Carlin Trend. While a professor, he published a case book, Managing Investments: A Case Approach.
Dr. Berry also held the Wheat First Endowed Chair at James Madison University in Virginia, and managed small- and mid-cap value portfolios for Milwaukee-based Heartland Advisors and Chicago-based Kemper Scudder. His Morning Notes publication, distributed worldwide, provides analyses of emerging geopolitical, technological and economic trends, as well as identifying opportunities for the Discovery Investing strategy he developed. Dr. Berry has presented testimony to a subcommittee of the Natural Resource Committee and U.S. House of Representatives.
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins.
3) Ian Gordon: I personally and/or my family own shares of the following companies mentioned in this interview:Timmins Gold, Golden Goliath, Millrock and Lincoln. My company, Long Wave Analytics is receiving payment from the following companies mentioned in this interview, for receiving mention on my website, Golden Goliath, Millrock and Lincoln Gold.
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