The fundamentals at many junior mining companies have improved, yet their stock prices continue to languish. In this interview with The Gold Report, market guru Peter Grandich gives his thoughts on when this may end and where gold is headed in 2013, and names some of his picks in unlikely jurisdictions.
The Gold Report: Peter, when we talked in the spring, you were essentially all in on a number of junior resource equities that were trading at what you believed were at or near their lows. Have you changed your course of action or are you still all in?
Peter Grandich: I am still on course. While 2012 may not have been the worst junior resource market by percentage losses, given the prices of metals now versus other markets and other market conditions compared to last year, it was the worst bear market since I entered Wall Street in 1984.
I've been in this market since the late 1980s, when it felt that if gold could just get over $400/ounce (oz), all would be well in the junior market. Now gold is at an average price of $1,600-something for the year, yet most companies did not do well. It is befuddling.
TGR: We are not far from exiting 2012. What is your perspective on the junior precious metals sector heading into 2013?
PG: I have believed since midsummer, as much as I would like the market to have a V- or U-shaped recovery, the recovery will look more like an L, at least into the early part of 2013. There are still some excesses in the junior market that have to be worked through.
I suspect we will see by early 2013 announcements of restructuring, rollbacks, etc., and repricing of options. Then we will have all the classic signs that the worst bear market in some time is behind us. It will take a number of months before the junior market can not only go up, but also stay up.
TGR: Are you more bullish on the higher-beta, high-volatility silver or gold?
PG: I still favor gold over silver. Silver is really a base metal, but because it's part of the precious metals family, it gets the tagalong and does not get separated.
Retail investors tend to like silver over gold because they tend to like quantity over quality. But at the end of the day, gold is money and will eventually be money again. One of the reasons gold has done what it has in recent years is because some investors want real money and not paper currencies.
TGR: You're a quality over quantity guy?
PG: Yes, in terms of the metals themselves. When it came to shares this past year, quality was also better. The further you went up the food chain toward emerging producers, producers and significant producers, the damage was less expensive than it was when you went down the food chain to pure explorers or early-stage explorers where that market was creamed.
TGR: That's owing to the risk-off sentiment on a large scale.
PG: I am not the first to say that juniors are burning matches, producers aren't. Producers have the luxury of not only borrowing a substantial amount of money, but also doing secondary offerings and getting cash flow out of assets. Juniors continually have to raise money.
TGR: Nonetheless, you are still heavily invested in the junior space.
PG: It is where my expertise lies. Many juniors have just gone too far on the downside. Many of their total market capitalizations don't come close to their perceived value now. If they are not already off their bottom, they are starting to build substantial bases. That may not thrill people, but share prices have been trading within a fairly tight range now for several months. That is base building. It may not be ready to take off, but it's far too late to be a seller now.
TGR: How would you characterize your approach? You seem to have great faith in these stocks.
PG: Since I got involved in the junior resource market, there have been probably 10 or 11 bear markets where there has been a decline of 20% or more. At least half of them were 40%, 50% or more. Each time the market rebounds. Each time many investors think that maybe this time it will be different and it won't rebound. But eventually markets go from one extreme to the other.
This past year was as extreme as you can get on the negative side. Even the most optimistic bulls were beaten up and have retreated to the safety of hedging their views, if not outright turning bearish. That is just a contrarian investor's dream come true.
My faith is based on everything in life is like "ferry" investing. People will say the boat is going to sail without you. My response is that there is no such thing as a boat. There are just ferries. When one goes out, eventually another one comes in. It is just a matter of being diligent to stay long enough and be diversified enough. That way even if some stocks don't rebound, the rest of them should more than make up for it.
It won't be straight back up, but as bad as this bear market has been, we'll eventually have a bull market again. It will probably be in the middle part of next year when we really see it take hold.
TGR: That is certainly good news. Are you willing to predict a breakout for either silver or gold?
PG: For gold, it is only a question of when, not if, it gets to a magical number. That will dramatically ramp up interest in metals as well as in the juniors and producers. The magical number is the $2,000/oz gold price.
A $2,000/oz gold price will be the same as when the Dow Jones Industrial Average first crossed 10,000 and what that led to—the average person getting deeply involved in the market at that point. It allowed a speculative fever to take hold.
We will see something like that when gold crosses $2,000/oz. That will bring enough players back into the market that we can finally have a speculative run. That is something we have not seen in several years in the junior market.
It is still amazing that something can go up the percentage that gold has over the last decade and still 99% of North American investors have little or no exposure to it. Every time I hear the gold permabears talk about the end of the bull market, I ask how it could be an end when 99% of people are still not in it.
TGR: Do you think there could be a breakout among juniors in H2/13?
PG: Juniors can rebound and stay up but, again, it will not be a V-shaped or a U-shaped recovery. There will continue to be base building into the early part of 2013. The substantial up-move and ability to hold the gains will coincide with gold getting above $2,000/oz.
TGR: Did you read Paul Van Eeden's comments where he said that gold is overvalued right now and that he doesn't see the dire inflation that so many goldbugs are predicting?
PG: I have respect for Paul Van Eeden that I don't have for other gold permabears. He's just expressing his honest opinion. Unfortunately, he has had that opinion for as long as I can recall, from maybe $500–600/oz gold. So he has not been on the right side of the market, to my knowledge, for over $1,000 of the gold price increase.
TGR: Beyond gold and silver, in what subsectors of the junior mining space do you see some value or some opportunity?
PG: One of the things that always happens in bear markets is the classic saying, "The baby gets thrown out with the bath water." The iron ore market is one segment that clearly got overdone to the upside, but now is way overdone to the downside.
While we won't see a rally back to its all-time highs of $180/metric ton (Mt), those who have stated that it won't be able to ever keep itself above $100/Mt again are likely to be sadly mistaken. I already see the early signs of a rebound. Iron ore should stabilize, and many of the shares that have been very hard hit, especially the emerging market group ones, can rebound.
TGR: What are some iron ore juniors you're following?
PG: My second largest personal holding is in an iron ore play, Alderon Iron Ore Corp. (ADV:TSX; AXX:NYSE.MKT). As a soon-to-be producer, it's a bellwether stock of North America.
Management has delivered on everything promised, but was caught in this downdraft. There was a tremendous, overdone reaction to a very slight delay in a crucial report. Management is not delaying it because of a problem, but to actually maximize shareholder value. Alderon Iron Ore is a leading candidate in the sector if you believe that iron ore-related issues have seen their worst days and will rebound.
TGR: Kami is Alderon's project. It has over 1 billion tons iron ore. There are a number of small iron ore plays out there with significant iron deposits. Why did you choose Alderon over some others?
PG: I have met dozens and dozens of top executives in the junior resource or even the major producer segment of mining in almost 30 years in this business. I can literally count on my hands the number of them that I would entrust my family's fortune to.
One of those is the executive chairman of Alderon, Mark Morabito. Management is so critical in the junior area as it greatly influences the potential success or failure of a company. When you look at the entire management team at Alderon, it is nothing but a who's who of success in the industry. It's a group of people who not only come from the iron ore business but also from major mining. That is one of the reasons I feel I can make a major bet on it and not have it spread out among others.
Within the iron ore group, there are more speculative plays that have been beaten down including Cap-Ex Ventures Ltd. (CEV:TSX.V) and Ridgemont Iron Ore Corp. (RDG:TSX.V). Even the Labrador Trough itself and many of the players there have come to a point where their stocks are very appealing for speculators who envision a stabilization in the iron ore price. That stabilization should come from the ever-increasing demand for steel, not only in China, but also in the inevitable rebound that should come worldwide, maybe not in 2013, but certainly in the foreseeable future.
TGR: Do you have to believe in a global economic recovery to make money in the junior iron ore space?
PG: You have to believe in at least a price of $100/Mt or more for iron ore. I believe we can count on that because of what continues to come out of China.
What I also like about the situation is that most people have discounted any real economic strength anywhere else. People have already built into their minds and their models that economic malaise will still grip most of the world. But if we get a little blip up, if the European economy ends up not being as bad as forecast, then it's only good news for the iron ore plays. The bad news has been priced into them, but not much potential good news has been priced in and, therefore, they have a lot of upside future potential.
TGR: In a recent post on www.grandich.com, you took issue with a Raymond James report on Geologix Explorations Inc. (GIX:TSX; GIXEF:OTCQX). Why did you feel compelled to challenge the analysis done by Raymond James?
PG: I felt that the report was not as accurate as it could be and misinterpreted a lot of things. Therefore, I felt the need to respond and not just because it's a client.
I saw a similar story like this with another client of mine, Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT), which got impacted negatively in its share price by an analyst with whom I and others, including Timmins, strongly disagreed with. I was scoffed at for responding and was told the only reason I was responding was because it's a client.
Yet Timmins ended up proving how wrong that analyst was and recently traded at an all-time high. Timmins Gold started its road to riches during the worst financial crisis ever and is near an all-time share price high in a market where most companies have gone the opposite direction. It continues to come out with good news of advancing resources and higher production.
I see similar traits in the Geologix story, and that's why I took the time to respond to the analyst report.
TGR: Geologix has meandered around sub-$0.40/share for a while. What's going to bring Geologix back and allow shareholders to make money on this stock?
PG: Geologix is not much different from a lot of other companies that continue to have success on the corporate side but have seen their share prices languish and/or deteriorate.
The company has made great progress with advancing its resource projects. The analyst's report ignored a very large deposit and when the company releases an economic report soon, that can demonstrate it is a very viable project.
That's one of the things that can eventually lift the juniors market; majors are in great need of replenishing resources. Many deposits like the ones that Geologix has, which are well advanced, are likely to be taken over. They may not be taken over at prices that people paid a year or two ago, but they should be at a decent premium to where they are now. That's a reason why I continue to hold my position in Geologix.
TGR: What did you make of the recent drill results from prospect drilling at Tepal?
PG: The results weren't barn burners, but I've never owned it for just those drill results, but for the many more to come. What was lost in the news is how its results have moved from raw to Measured and Indicated and how much closer to viable the deposit has come.
TGR: Mike Bandrowski at Clarus Securities said, "Geologix could see a rerating once it publishes its prefeasibility study." Do you share that opinion?
PG: That's more of a realistic view by an analyst. I would hope that if such a report demonstrates the true viability of this project, people will pay up for the stock. But one of the things we'll see next year is the Geologixes of the world, and a lot of these mid-development-moving-into-production type companies, merge and be acquired. They've moved so far along in achieving their corporate goals, but their share prices have gone in the other direction.
TGR: The companies have derisked, but their share prices haven't really shown that. You now have a lower risk at a great price.
PG: Right. That stinks for those who are already all in, but for anybody who isn't, Geologix is a classic example of where the share price hasn't represented the advancement that the company has seen in the last year.
TGR: In another post on www.grandich.com, you talk about your accumulation of shares of Oromin Explorations Ltd. (OLE:TSX; OLEPF:OTCBB). You pull up a technical chart to help make your case. You strongly believe it will receive a takeover offer. Why is that a reasonable thesis?
PG: It's my single largest holding ever in any company, period. Oromin has the footprint of a company that's heading in that direction. To begin with, the company has made it known multiple times for almost a year now that it has engaged an investment banker to explore all sorts of strategic potential factors, including being taken over.
Second, the country in which it operates, Senegal, has been actively promoting that district as the next up-and-coming gold district in Africa and the world.
Third, for another public company that has a substantial position already in Oromin, that has built a mill near Oromin's projects and that will be forced sooner or later to look for resources elsewhere, it makes a lot of sense for it to look at Oromin as an acquisition. The combination of both of them coming together could then pose a very attractive takeover and another bump up by someone even larger in the area.
It's a combination of all of these factors, plus Oromin has been around a long time. It's been a story that's been in development for years. Managements of these types of companies like to get to this point and be taken out because they would like to start over somewhere else.
TGR: What are some other compelling stories in the junior mining space?
PG: As I said earlier, we are at the point where a lot of companies that greatly advanced their projects and their share prices may have not gone in that same direction. Sunridge Gold Corp. (SGC:TSX.V) is one that fits that mold as is Spanish Mountain Gold Ltd. (SPA:TSX.V). Donner Metals Ltd. (DON:TSX.V) is another classic example.
My surprise pick for 2013, something I have not spoken about publicly before, is South Africa. It may be wise for speculators to look at South Africa again for gold plays for a lot of reasons. One reason is the rand, South Africa's currency, is finally going down in value, which is a critical point. Second, the necessary changes that needed to happen politically, economically and on the labor front are ongoing and advanced.
In South Africa, a particular company that I happen to represent is Wits Gold Ltd. (WGR:TSX; WGR:JSE). But really, South African mining in general could be a very interesting speculative play for 2013.
TGR: What are some equities based in South Africa?
PG: At the moment, I would look for a fund, an exchange-traded fund or a company that has several plays under its belt in South Africa. That's what I hope to do in the next month. This is certainly not something that needs to be rushed into overnight. But everything I know about it and people whom I've trusted for almost 30 years have, in the last few weeks, started to feel that South Africa has gotten to the point where it needs to be back on the map when we look for gold plays. I am certainly going to target that in the early days of 2013.
TGR: You mentioned Sunridge Gold, which we have talked about it in previous interviews with The Gold Report. Sunridge recently announced that it's going to publish its full feasibility study for its Asmara project in Q2/13. It plans to lower its capital expenditures and mine direct-shipping ore first to generate more cash flow off the top. What were your initial impressions from that news release?
PG: If Sunridge Gold were suddenly lifted up by a gust of wind and fell anywhere on the map in North America, its stock price would be 5 to 10 times higher than where it is, everything else remaining the same. It has been punished for being in a perceived not-great place, Eritrea. But in fact management attests, and we can see also from the results of Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT), that it's been a good place to work in. But the world's perception of Eritrea still remains, and people tremendously discount values of companies operating there.
I believe that both Sunridge and Nevsun can be acquired, most likely by a Chinese-led company. The Chinese have been building their position in Africa. To me, it's only a question of which one receives the bid first, Nevsun or Sunridge.
There is still the chance that Nevsun—which has much in common with Sunridge—may buy it, concluding that based on where Sunridge's price is, it can only enhance Nevsun's value.
TGR: Any copper projects you want to talk about?
PG: Excelsior Mining Corp. (MIN:TSX.V) has a copper project in Arizona that is very viable. But it's another company that many have perceived as being further down the road than it was and had hiccups early this year, which seemingly have regressed, that impacted Excelsior. If that ends and people look back to that area positively again, Excelsior can turn around. Mark Morabito is chairman of the board. In the past, he has managed to bring major investment parties into his projects. That's something we can hope can happen with Excelsior.
TGR: Since year-end is approaching, how should retail investors handle tax loss selling season?
PG: My No. 1 advice on juniors is to realize failure is the norm in the junior resource business. Not realizing that leads to a whole host of difficulties. If we understand that, we won't get as mentally and financially distressed as we do when we overindulge.
One of the things that I see corporations battle so much is this need on the part of speculators to have constant news, almost on a daily basis, from these companies. Even IBM and Microsoft cannot put out news every day, and people expect far too much and far too soon developments from juniors. They set themselves up for disappointment that should never be there in the first place. So failure is the norm in this business, and it takes a lot longer for the ones that work out to get to where they have to get to. Patience is clearly a virtue. Have a plan for when things don't work out because a lot of them, even some that I've spoken to you about today, may not reach all the goals that we originally thought they could.
TGR: That sounds great, Peter.
Financial adviser and market analyst Peter Grandich started publishing The Grandich Letter—now a blog—without a high school diploma or even a day of formal training. His ability to interpret and forecast financial happenings, which once earned him the moniker "Wall Street Whiz Kid," has led to hundreds of media interviews. He is regarded as one of the world's foremost market strategists.
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1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Alderon Iron Ore Corp., Geologix Explorations Inc., Timmins Gold Corp. and Sunridge Gold Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Peter Grandich: Disclosure information is available here. Peter Grandich was not paid by Streetwise Reports for participating in this interview.
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