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Commodities / Gold & Silver Stocks Apr 07, 2012 - 12:44 PM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticleWhat do the gold market and the weather have in common? You can forecast both, but predict neither, according to Brien Lundin, chief executive of Jefferson Financial and publisher of Gold Newsletter. Lundin, who also organizes the New Orleans Investment Conference, isn't focusing on if there will be rain or sun in the market, he told The Gold Report in this exclusive interview. He's slowly accumulating juniors on the cheap that have big news in the forecast.

The Gold Report: You've compared the gold market to the weather because it's about that predictable. What does your experience tell you about navigating a market like this?

Brien Lundin: You have to be nimble and keep your eye on the big picture. Every asset class is searching for a trend. The U.S. economy is in transition. The equity markets are in transition. Everything is in limbo searching for the next trend line. There's just no telling whether that next direction is upward or downward.

In times like this, investors need to look beyond the day-to-day headlines. They need to keep the bigger picture in mind, focus on buying value on the dips and not getting too aggressive in any case.

TGR: You were recently at the Prospectors and Developers Association Conference in Toronto. What's the common refrain you're hearing from investors and what's your response?

BL: They're wondering when things are going to turn around. I wish I could provide them with the answer because I'm searching for that answer myself. We needed calmer markets, which we have now. We don't have the dancing-along-the-precipice type of markets that we had earlier this year when it seemed Europe could crater at any moment. Now we need to have some recognition that there is going to continue to be an easy-money environment as a backdrop and that there will continue to be monetary inflation to support the commodity markets and, most important, gold. Until we have fairly steady, non-crisis-driven markets with a consensus toward monetary easing, we won't see investors turn to the more speculative assets, such as mining shares.

TGR: Many gold investors believe that continued growth in the U.S. economy will eliminate the need for further quantitative easing (QE) by the U.S. Federal Reserve, which could suppress the gold price. You argue that there is already $1.5 trillion in the system that hasn't been deployed by the Federal Reserve. In February, you wrote, "This money officially doesn't exist. Until the nation's banks start withdrawing it to make loans and insert the funds into the economy, sustained U.S. economic growth, in other words, won't be the end of liquidity injections. Instead, it will mark the beginning of a new phase, as the velocity of today's huge overhanging money supply accelerates and inflation truly kicks in." That sounds promising for precious metals prices, but are banks ready to start lending their hoards of cash?

BL: Simply put, they aren't yet. What I was talking about was a scenario of economic growth, one in which the banks would not only be able to start lending again but would also be eager to start lending to capture that greater margin by creating loans. Under that scenario of economic growth, bank lending would increase and there would be a shot of adrenaline hitting the market as reserves become currency.

The key is that so much debt and currency have already been created that gold wins in virtually any economic scenario, whether it's economic growth or a continued easy-money environment in a more sluggish economy. Under either scenario over the long term, gold is a winner precisely because there's already so much debt and currency.

TGR: Do you have any timeline for that scenario to take place?

BL: One of the important timelines is presented by the presidential election in the U.S. That is going to be a key inflection point for the markets. If the current administration is retained, there would be more easy-money policies. Those policies won't suddenly end if we see a Republican elected, however, because there's been so much debt created in the U.S. and Europe. There's no way to escape that burden through economic growth, austerity plans or tax hikes. We cannot manage that mountain of debt that's already been accumulated. The only way to address it is through monetary inflation, by making the debt less valuable by increasing the quantity of dollars and euros.

TGR: You can't do that with gold.

BL: That's why gold is gold. As J.P. Morgan is rumored to have said, "Gold is money. That's it."

TGR: Newmont Mining Corp.'s (NEM:NYSE) CEO, Richard O'Brien, said on March 27 that $2,000/ounce (oz) gold was "reachable" in 2012. A $350/oz-plus move in the gold price inside nine months seems a little optimistic.

BL: It looks a bit fanciful. However, we could end up looking back at a $300/oz rise in the gold price and think, "Well, that was easy!" We've seen that before in this market. It could happen with just the imposition of a third round of QE, which is what created the last $300 move.

TGR: Gold and silver equities have lagged the prices of their respective commodities since December 2010. What tangible move in the gold price is necessary to lift share prices to float the boat of all these junior companies? They're not even moving on good drill results right now.

BL: It's as much a matter of time as price. It's not just a matter of getting a $100/oz, $200/oz or a $300/oz rise in the gold price, which, of course, would move the juniors if it occurred in a steady fashion against the backdrop of normalcy in the markets and economy. That rise would need to occur over a period of time long enough so that investors would be comfortable in taking on risk. Juniors cannot thrive in an environment where investors are searching for safety.

TGR: As an approach to the moribund gold equities market, you recommend a stick-to-your-knitting strategy of continuing the "slow but steady accumulation of undervalued companies with news on the way." What are some companies that you're expecting some positive news from in the near future?

BL: There are a number of companies in that sweet spot. There are a lot of bargains out there that aren't just grassroots exploration companies with an idea and not much more. These are companies that either have resources or are very likely to turn out very positive news in the near term.

I'm very excited about Elissa Resources Ltd. (ELI:TSX.V; E30:FSE) and South American Silver Corp. (SAC:TSX; SOHAF:OTCBB). Elissa is a rare earth play in Nevada 16 miles away from Molycorp Inc.'s (MCP:NYSE) Mountain Pass project. I've visited the property. Right now, Elissa is drilling a very high-grade surface anomaly and has indications that it could spread elsewhere on the property. It should have news out by early May on its first drill program.

TGR: It's a heavy rare earths play a stone's throw from Molycorp's processing facility at Mountain Pass, yet Molycorp let it slip through its fingers. How does that happen?

BL: It's an early-stage play. That's the kind of thing that these aggressive junior exploration outfits are best at, finding possibilities that other people overlooked.

TGR: Its proximity to Mountain Pass indicates that even a small discovery there would make it economic.

BL: Yes. It would provide precisely what Molycorp needs to complement its project. Molycorp would be the natural buyer and would backstop the value if there were a discovery there. The challenge for Elissa will be trying to find another potential bidder for the property. But given the infrastructure in the area, that really shouldn't be too hard because any concentrates can be easily shipped.

TGR: What about South American Silver?

BL: South American Silver has tremendous value. It's been held back by the perceived country risk in Bolivia, but its Malku Khota silver property is enormous, growing and worth many times the current market cap of the company on a net present value (NPV) basis. The company is going to have a revised economic update in Q212 and that could be a real catalyst.

South American Silver also has a second project, Escalones, in Chile, that is a potential company maker by itself. It will have its initial preliminary economic assessment (PEA) done sometime this year.

TGR: That's a copper-gold-silver discovery with about 4 billion pounds copper in the biggest copper-producing country in the world. It put the resource estimate on Escalones out in December, but it didn't move the stock a lot. Why doesn't the market give more credence to that discovery?

BL: The market isn't giving credence to a lot of things right now, but December isn't the best month to put out big news. That said, Malku Khota has been such a marquee project for South American Silver for so long, very few investors really appreciated Escalones. Quietly in the background, South American Silver's management was doing the necessary confirmatory drilling on Escalones to prove up a resource. Really, it was stunning when it came out. It is fighting a battle to show the market that it has two company-maker projects. If you like silver, there is Malku Khota. If you like copper-gold, there is Escalones. There are two ways to win. The company's value is not only backstopped, but also leveraged to the metals as few other juniors are.

TGR: Could the company spin out Escalones?

BL: It's something I know that management has considered, but I don't think that it's going to do that in the near term.

TGR: When share prices aren't moving a lot, do you focus more on jurisdictions so that if there's one discovery in a given area, then that might raise the prices of a number of juniors operating near by?

BL: Yes, I do. A hot area is one of the things that can overcome other market trends, positive or negative. I think the Yukon, for example, is going to heat up again. There was a big rush into the Yukon last year and it was just a zoo. A lot of the companies anticipated that they would be able to do the necessary groundwork and soil sampling, and then still have time to drill some of their juicier targets before the end of the exploration season. What they didn't count on was the fact that the assay labs were just completely overloaded. Expected three-week turnarounds turned into three-month turnarounds and longer. There was very little drilling done on a lot of these projects, but now they're ready to go. There are some companies up there that have really exciting targets and discoveries. They're ready to drill—and some are drilling right now.

In particular, Golden Predator Corp. (GPD:TSX) has a bona fide discovery at its Brewery Creek project and has virtually year-round access to drill the project, so it has been producing results. This project is undoubtedly going to go into production. It's just a matter of when it has defined enough resource. It's been a past producer, so it has some of the permitting obstacles already cleared.

TGR: It recently did a deal with Alexco Resource Corp. (AXR:TSX; AXU:NYSE.A) that gives Golden Predator full ownership of Brewery Creek in exchange for a 2% net smelter return royalty. What does that mean for Golden Predator?

BL: Bill Sheriff, Golden Predator's chief executive, is an awfully smart guy. He's taken a ground floor, junior company to the New York Stock Exchange before, and he's pursuing a similar game plan here. It's a good deal. It fits Bill's mold. He has a better idea than anyone of what the upside potential of the project is. I think that's a sign that he thinks it's pretty significant.

TGR: Golden Predator says that commercial production and positive cash flow are possible inside of 14 months. Is that realistic?

BL: Absolutely. It's a past-producing project. The question remains how to do it efficiently. It does have to get some numbers in place, but capital is not going to be a problem. It is rapidly drilling and making new discoveries as it goes along.

TGR: Are there any other companies in that jurisdiction that you have positions in?

BL: I like Ethos Gold Corp. (ECC:TSX.V; ETHOF:OTCQX) and Ansell Capital Corp. (ACP:TSX.V). They have good anomalies, but they don't have true discoveries yet. Ethos, for example, has outlined a 17.5-square-kilometer soil anomaly called the Mascot Creek target on its Betty property. It includes a trench running 7.3 grams/ton gold over 50 meters—which is one of the best trench results I've ever seen in the Yukon. Ethos is a widely followed stock, but still a bargain considering that I feel its chances of a major discovery are very high.

In contrast, not many people follow Ansell. It's a very small, micro market cap company. But it's well funded, and has one of the more exciting argots that I've seen in the Yukon. It had some significant drill results in December that were completely ignored by the market. The company is still trading at about the same level that it was in late December.

TGR: Are there other areas that are exciting right now?

BL: Colombia. Seafield Resources Ltd. (SFF:TSX.V) is one of the more undiscovered plays in that area. Not very many people realize that it has about 3 million ounces (Moz) in total resource identified on two targets. It is working toward a PEA on the Miraflores project, which has about 2 Moz in a setting that should be straightforward to mine and with a grade that should allow for a very profitable operation. I see it advancing that project toward either production or a takeout at some point. It will continue to grow the resource, but it is already considerable.

TGR: Its stock is trading at about $0.17, which puts it at about $10/oz. That is kind of a silly price.

BL: Yes, it is. Its goal is to expand the resource as much as possible, but also advance the resource at Miraflores and remove some of that risk so it rises up the value chain. It's just too large of a resource to be ignored.

TGR: At one point, Seafield was one of the most talked about juniors. Then there were some issues and the management team was replaced. What do you think of the new team?

BL: I like them. I'm familiar with other work that they've done. They are serious people experienced in Latin America and have great local relations. The team that was running the company previously was kind of a caretaker team. They were very happy that they found this new group.

TGR: You follow some made-in-America stories, too.

BL: Calico Resources Corp. (CKB:TSX.V; CVXHF:OTCQX) has the Grassy Mountain play in Oregon. It is undervalued because investors feel there's some risk that the project can't get permitted in Oregon. In fact, it will likely end up as an underground project, at least initially, with relatively little surface disturbance. It has the local authorities and community behind it. It has a great leadership team headed by Chairman Buck Morrow, who's done this before and done it correctly.

I believe it will get permitted and eventually go into production. That value will get realized. It has about 1 Moz in total resources. As it focuses on high-grade, underground resources, that's probably going to end up in the 600,000–700,000 ounce range. It has a lot of upside potential.

TGR: Is it open at depth?

BL: Yes. It also has anomalies and geophysical targets outside of the current resource that it will be drilling soon. It has good upside potential.

TGR: It has added silver to the resource, too.

BL: It actually calculated the silver resource for the first time, which will help the economics. It's going to be a long-term value play. The good thing about this project is that the risks are known, and that is primarily the permitting risk. The market is over-concerned about that risk. It's a very valuable, identified resource that's growing.

TGR: What are some other made-in-America stories you like?

BL: Revolution Resources Corp. (RV:TSX; RVRCF:OTCQX) is one of the leading landholders among the juniors in the Carolina Slate Belt play, the location of the first gold rush in North America. It's building up a nice resource at its Champion Hills project in North Carolina. That area is famed for Romarco Minerals Inc.'s (R:TSX) Haile project, which will have a 4–5 Moz resource, but has been delayed by permitting woes. Revolution is drilling its project. It doesn't have the same issues as Romarco, but it is being held back a bit by Romarco's permitting problems. It could delay everything by up to a year.

In the meantime, Revolution made an absolutely extraordinary purchase of the Universo and La Bufa projects in Mexico, which are tremendous land positions with highly prospective targets ready to be drilled. It just raised $5M and will be well funded to advance those properties. I expect it to get some early news out on those projects and then focus back on the Carolina Slate Belt as permitting problems for Romarco get put to bed.

TGR: Some skeptics might say that it got the Mexican projects because it's not sure that its primary project is going to move forward.

BL: I don't think that's true. The problems for Romarco revolve around some wetlands around its landholdings. Revolution doesn't have that problem, but it's tarred by the same brush. It isn't getting any traction in the market despite its exciting Mexican projects. As Romarco's project moves forward, it will open up the Carolina play again and Revolution will be in a position to take advantage of that.

TGR: Any more interesting American stories?

BL: Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) has been building a lower grade but significant resource in Nevada with the idea of using area mills to centrally process the ore from a number of projects in the Oreana trend in a hub-and-spoke strategy. The Oreana trend is a relatively new and still unappreciated gold trend in Nevada. Importantly, the company recently noticed that Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE), which was operating the Rochester silver mine in the region, failed to renew its mining claims with the federal government. Rye Patch went in and staked a claim that is, in effect, an active mining and exploration project by a mid-major mining company.

TGR: There's a lawsuit over Rochester between Rye Patch and Coeur d'Alene. That doesn't seem promising, but Rye Patch certainly seems to have a solid legal position.

BL: Some would call its position unassailable. It's tough to bet on legal outcomes, but this one does look pretty strong. For the court system to invalidate Rye Patch's claims, it would have to overturn over a century of established mining law and precedent, with collateral damage that would put many American mining operations up for grabs. There almost assuredly will be some accommodation made one way or the other to resolve this situation. Whatever that accommodation is, the value of it seems almost certain to be far above what Rye Patch's current market value is.

TGR: The rare earth elements sector took a big hit in 2011, but you still see value in a few plays. Tell us why those still remain on your radar and which ones you like.

BL: The economic fundamentals have not changed. These plays go in and out of fashion in the markets and there are bursts of buying here and there. We saw that recently when Molycorp's competitor in China reported that its earnings had quadrupled, and it boosted buying in Molycorp and in other rare earth plays. Yet, a number of these plays are still much undervalued.

Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A) has been the lead play in the junior sector for some time, and I'm proud to say that Gold Newsletter was the first to recommend it years ago. The company recently came out with a prefeasibility study on the Bear Lodge project in Wyoming that showed tremendous value of $1.7–4 billion (B) NPV. It is one of the most advanced and valuable rare earth deposits in the world today, certainly among publicly traded companies. It's a tremendous value right now.

Another play that I like is Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK; T61:FSE). It recently released an impressive PEA on its Norra Karr project in Sweden. The key to this project has always been its location as a source of critical metals and rare earth metals supply to Europe, breaking that market's lifeline to China. Then it released this PEA that showed a $1.46B NPV at a 10% discount rate. These numbers are stunning because most investors in the market regarded this project as being middle of the road. It's a really remarkable project and one of the most undervalued plays out there—much to my dismay because I am a long-time shareholder. But the company has much brighter days ahead of it.

TGR: Neither Tasman nor Rare Element has offtake agreements with third parties. Is that something that they're going to be looking at?

BL: It would be very important to Tasman because it makes it easier to finance a project. It actually makes it almost inevitable that a project will be financed and constructed. I would not be surprised to see Tasman announce something of that sort. It's not as important for Rare Element, however. I don't think that company is as aggressively searching for that type of an offtake agreement.

TGR: It's been a pleasure speaking with you.

With a career spanning three decades in the investment markets, Brien Lundin serves as president and CEO of Jefferson Financial, a highly regarded publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Lundin publishes and edits Gold Newsletter, a cornerstone of precious metals advisories since 1971. He also hosts the New Orleans Investment Conference, the oldest and most respected investment event of its kind.

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

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: Calico Resources Corp., Ethos Capital Corp., Golden Predator Corp., Rare Element Resource Ltd., Revolution Resources Corp., Rye Patch Gold Corp., Seafield Resources Ltd., South American Silver Corp. and Tasman Metals Ltd. Streetwise Reports does not accept stock in exchange for services.
3) Brien Lundin: I personally and/or my family own shares of the following companies mentioned in this interview: Elissa Resources Ltd., Golden Predator Corp., Ansell Capital Corp., Seafield Resources Ltd., Calico Resources Corp., Rye Patch Gold Corp. and Tasman Metals Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.

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