Positives for Natural Gas Prices

• Natural gas in storage is down 10.1% from a year ago at 2.107Tcf vs. 2.344Tcf, for the week ending May 27, 2011.
• Overall consumption Y/Y is up +2.5%. In the Users Component,
• the best demand growth Y/Y was in the Electrical Power area with a 4.2% increase.
• The inventory/sales ratio for natural gas is improving. For the month of March 2011 the ratio stood at 25.6 days as demand was 71.4Bcf/d In March 2011. The inventory/sales ratio is down from the March 2009 high of 27.1 days.
• It  appears  that  shale  production  is  peaking  and  conventional production  is falling  rapidly.  Production  fell  in  March  2011  by18.7% in the Gulf of Mexico and by 10.2% in Wyoming versus March 2010 data.

Negatives for Natural Gas Prices

• Dry Natural Gas production continues to increase Y/Y, up 5.4% for March 2011 over March 2010.

Conclusions

• We expect consumption to strengthen further, putting upward  pressure  on  the  price  of  natural  gas.  Look  for  NYMEX  to  be >$5/mcf for a sustained period during the injection season and for AECO to move over $4/mcf over the same period.  Prices should move up to US$7/mcf for NYMEX and C$5/mcf for AECO by winter 2011‐ 2012.
• We remain convinced a bottom was reached in October 2010 for  natural gas prices and recommend investors Buy favourite natural  gas  producers  for  this  new  natural  gas  cycle.    Use  periods  of  market weakness to add to favourite Natural Gas investments.
• Our  top  Maison  covered  Natural  Gas  Recommendations  are:  DEE, GO, GSY, and VRO

….read the full 16 page report with great charts HERE

Michael: Do you believe that the commodity bull market is still in play and the gold bull market is still in play?

Martin: Oh absolutely, I think that loosely we have another ten years to run at least on the resource side. We are going to have an interruption, we always have interruptions in these long cycles. By the way these long cycles can last 15 20 25 years, and I would be foolish to argue that the cycle that we’re in now will be the shortest cycle in the history of the data that goes back to 1800. It would seem to me that Asia holds such a key to the overall scenario. Clearly our own commodity markets have been driven by demand, and there’s been major demand out of Asia. The list is a long one,  and it seems to me that if we were going to have a focus it should really be on the ebbs and flow of the Chinese, Indian and other developing Asians.

The Commodity Bull & Gold Bull Update

Michael Campell: Let’s start with what you’re looking at these days, what are some of the factors that are at the top of your list, that trickle down into what your investment decisions are?

Martin Murenbeeld: Well, I’ve got ten bullish factors for gold and I can run through those very quickly. There is monetary reflation. I think that’s one of the things that came back into the market this week when we saw the weekly US economic data. There is certainly a sense there that something more has to be done about the US economy and possibly there has to be a little bit more fiscal reflation although that seems very difficult to imagine at this point. One of my factors is of course that the US dollar has to go down somewhat more. I still think that the US dollar is a little too highly priced relative to the Asian currencies. I was interested to see the recent study they do once a year at the Peterson Institute out of Washington rated one of the, I think the best research sort of research place in the world. They recently came out and said that the dollar was at least 25% if not 30% overvalued against the major five Asian currencies including obviously the Chinese renminbi. Those currencies are, were seriously under valued.

Michael: Yes so another 25% down to get it where they thought equilibrium it will be for the US dollar.

Martin: That is correct.

Michael: Which of course where does that put the Canadian dollar then?

Martin: Well, and actually the Canadian dollar turns out was pretty dead on, and that kind of confirms our models that we run when we look at the commodity prices and so forth, that somewhere in this 102 range is about right at the moment for the…

Michael: But even if the US dollar drifted lower Martin, is that saying that the Canadian drifts lower also by keeping it’s relation with the US?

Martin: Absolutely yes that’s a good point. So you’ve got a dollar that’s got to go down and you’ve got excessive foreign exchange reserves that are being diversified, and we are seeing lots of news on that with respect to some central bankers that are buying gold. The Russians bought some more gold in April as did the Mexicans. You’ve got a major increase in investment demand that is running through the world gold market. One of the things I stress is just how much the regulatory environment in Asia has changed over the last 15 or so years. I might have mentioned before here that back prior to 1995 gold coming into India had to be smuggled. Now you have banks in India that are offering gold ETFs, so over the last 15 years you’ve had a massive change in regulatory environment. In China before 2002 every ounce of gold in China went through the fingers of The People’s Bank, and in fact The People’s Bank had a price for gold that was quite different from the world price of gold. Now all of that’s become integrated, so what we saw in the data that the world gold council put out, is that these two markets are just booming with respect to gold demand. Now that’s also then helped by the fact that people there are getting wealthier and there is more inflation in Asia. So you get a whole bunch of factors beyond just looking at the dollar and what’s going on in the US that are telling you gold is well bid.

Michael: It’s interesting some of the things that you’re alluding to here, especially the currencies. I’ve been saying on this show for nine years that if I only could know one thing I wanted to know the direction of the US dollar, and the big that debate over there is whose got the worst problems. Is it the euro, is it the dollar or is it the yen? I think is a pivotal thing to understand, and I’m interested the way you bring up that we had better recognize this huge shift in global economic power and we’d better start looking at that relationship vis-à-vis Asia.

Martin: Well you know it’s, in my view it’s actually quite normal that the US dollar goes down. I mean the US dollar goes up at times and it goes down at times, and the times that it goes down is against a currency of a country that is emerging. We saw all this all through the 1960s you know Germany and Japan were devastated of course at the end of the Second World War, and they were kind of the emerging economies of that period, and what you saw over that period is constant upward pressure on the yen and the deutsche mark. That’s happening now with respect to Asia. You’ve got a very large motivated labor force becoming more productive, putting better products out onto the market, and it’s very natural that these currencies rise.  Economics determines that’s these currencies should rise because that is one way that these people gain value for their inputs. Now the problem with Asia is that they’ve been sitting on those currencies. They’ve not been letting them rise and that’s been very unfortunate both for them because they are now fighting inflation and it’s unfortunate for the rest of the world including the United States because they’re running a higher unemployment rate than they might otherwise be running.

Michael:One of the things that I love about your research is that you always provides scenarios and the probability of the movement. Run me through a couple of the more prominent scenarios you’ve got right now for pricing of gold as we go out?

Martin: Our baseline scenario is actually very, very modest and it certainly wouldn’t gladden the heart of a gold bull. We have a sort of a 1,500 1,550 dollar range going into 2012, the kind of range that we’re in now. The underlying aspects of that are no interest rate hikes but not much more monetary stimulation. The more interesting scenario is a high price scenario, and there we have significantly more monetary inflation. One of our key variables is global liquidity when we do the models for the gold, and global liquidity is essentially the sum of foreign exchange reserves around the world and including some monetary base, specifically the US monetary base. That could blow up more and we have seen it blown up of course over the last several years. For that to continue in the line that it is now we’d be looking at gold prices somewhere in the $1,800 range next year. So those are the two key scenarios, we have a very low probability on an alternative scenario and that of course is the bearish scenario, and the kind of numbers we have in that scenario are sort of low 1,100s. Now that would shock everybody to see gold going in that direction, and some of the assumptions that are included in that scenario are not really extremely likely that’s why of course we have a low probability on it. But, so that sort of gives you a range of the kind numbers that we’re looking at. When we do a probability weighted outlook we have an average for next year of 1,675, and I think that’s not a bad number to kind of plan on.

Michael: It is fascinating because there are so many variables that do come into play and it’s great to hear you elaborate on some of them. What is the relationship with silver on that, because silver has been such a huge performer. What do you look for, for silver?

Martin: We don’t actually have a price forecast for silver, and mostly I, as an economist, say to people if you have the iron stomach for the kind of volatility that silver is going to deliver be my guest. It’s a high beta gold, gold prices go up silver prices are likely to go up at a more rapid pace. But as we saw recently we saw a little bit of softness in the gold price, and of course silver plunged from whatever $47 down to about $34 or so. That’s the kind of thing you’re dealing with in silver; it’s not something that I could recommend as an investment unless it is absolutely well diversified so that the volatility in silver doesn’t affect the volatility in the whole portfolio.

Michael: Let’s talk a little bit about diversification. It’s kind of one market meaning if the US dollar goes down or if it goes up all the other market moves in tandem. For example the world equity markets seem to go in one direction, and so it’s hard to get diversification now on a portfolio.

Martin: Well yes and no. We saw some interesting things just this week that kind of highlighted how we might want to play diversification and one of my favorite things to say to an investor who’s looking for diversification to buy some gold and hope it doesn’t go up. The World Gold Council have run lots of statistics to show that the correlation between gold bullion and the equity markets is essentially there. Now of course there’s a little higher correlation with respect to the TSX but that’s because the TSX is more heavily dominated in materials relative to the S&P for example. Even gold equities are not that highly correlated with the equity indices. So that’s one area of diversification, a little bit of gold. The second one is obviously debt, you know we’ve not been that bullish on debt, but we have stressed repeatedly do not have debt in the portfolio because there are all kinds of potentials for the economies of the world to slow down or for the other prices to appear where you get a rush into the safety of US government debt, and in fact that’s what we’ve seen again. So the equity markets are struggling a little bit, and the debt markets have done very well again. I know what you’re saying,equity markets tend to run a little bit more together as of late, but we do get diversification out of debt. Now I’m not saying let’s be loaded up on debt. I mean if you’re loading up on debt you’re saying my gosh let’s invest heavily in the countries that are borrowing trillions of dollars. On the surface of it that doesn’t sound like a great thing to be doing.  

Michael: Bottom line what is your interest rate scenario?

Martin: Well our baseline is kind of like the baseline for gold, not that exciting. We’ve got US ten year treasuries which are just hovering around 3% at the moment, staying around there for the next few months and then possibly drifting up a little bit towards the middle of next year to something in the order of 3.35 to 3.40 that sort of thing. So that’s kind of the baseline in terms of the Fed funds target and that gives you a sense of what the Fed would be doing. We don’t really see the Fed changing anything until around March or so of next year, and at that point it is likely to move its range from 0 to 25 points, so I mean it’s not anything that we’re likely to notice. With respect to The Bank of Canada, I think some of the numbers that have been coming out would tend to encourage them to stay their hand. We had been looking for them to maybe move in September, we were never part of the group that thought they might move in May. But we are starting to think that maybe The Bank of Canada is going to hold off a little bit more as well, because the first quarter GDP numbers that came out this week kind of set up a good number for the second quarter, and they’ll come out about the time when the Bank of Canada is thinking about raising rates up. If those numbers are weak then I think The Bank of Canada will stay off. So sort of our baseline is more of the same basically very, very low interest rates.

Michael: This backdrop of low interest rates I personally believe are having an impact on the market in that you’re not giving an alternative for major amounts capital looking for places to go,  so the stock market can be a beneficiary. I’m one of those guys who looks at the Canadian banks and sees them with a 4% dividend that’s higher than the 10 year treasury rate and I got more faith in the banks than I do in the treasury. It’s hard to make sense of the kind of growth numbers that we’re seeing. I’m not seeing too many scenarios that have robust growth coming in the next half year to two years.

Martin: No and it’s difficult to find growth. I mean if you go through the US GDP numbers and some of the listeners will remember from economics how they put these together. It’s household consumption plus government spending plus investment business investment plus the trade balance, and you know when you’re thinking about that you say now exactly out of which one of those four components is growth going to come? Well you know the household sector in the US is heavily in debt, so the best we are going to see there is maybe a 2% spending rate, that’s kind of your bedrock. Now that’s about 70% of the economy so, but you know we’re not getting anything out of exports minus imports. That goes back to what I was saying earlier with respect to the dollar being overvalued, and why would companies want to invest at the moment if the companies that are investing are investing in Asia.  Of course the idea is that we’d like them to invest in North America. In Canada there are some reasons to invest, so but you know Canada in the scheme of things is a small economy. So you got some problems there that make it very difficult to see anything like the kind of growth numbers that we’ve been used to in years past.

Michael: I certainly have a problem seeing anything robust coming out of the broad European Union. I mean those problems just seem like early innings of a game that’s going to run a little further.

Martin: Yes I know this is actually a very sad situation. Many of us who are not believers in fixed exchange rate systems, and we probably have more of those in Canada than we have elsewhere because Canada is a devout flexible free floating currency kind of country. For those of us who don’t believe in fixed exchange rate system have seen something like this coming. You kind of knew that if Germany gets into a fixed exchange rate system with a country like Greece, Greece had better start to look more like Germany or we’re going to have problems, and of course Greece didn’t start to look like Germany. In fact what they got was a mass of convergence in interest rates as they joined the euro, which encouraged them to borrow even more than they were already borrowing, and so now of course we find out that they are heavily over borrowed. The same thing has happened with Portugal, and I’m concerned about Spain as there’s 21% unemployment in Spain. Someone said, it wasn’t me, that Spain is sort of an Egypt waiting to happen. You know you have these kinds of problems, so it’s difficult as you say to see growth there other than growth in Germany. Germany has a very good mandate in Asia, you know Germany makes products that Asians want, and so Germany actually is doing quite well.

Michael: It would seem to me that Asia holds such a key to the overall scenario. I mean clearly our own commodity markets have been driven by demand, and there’s been major demand out of Asia. You were mentioning earlier the accumulation of gold, the changing of holding rules in China and India, and them being big buyers of gold now. Copper has also had a big boom on that, uranium probably is going to get out of demand out of China. The list is a long one,  and it seems to me that if we were going to have a focus it should really be on the ebbs and flow of the Chinese, Indian and other developing Asians.

Martin: You’re absolutely right on this, in fact I was at a conference earlier this week and that was one of the key things I tried to get across to our, to our investment advisors. You know that the focus here should should be on China with respect to the Canadian market. I know that the US is very important to us, but at the margin now China is driving things. Resource demand of course plays directly into our equity markets, and we’re seeing here with China raising interest rates trying to slow the economies a little bit that there’s been some pullback in resource prices, and of course right away our equity markets feel that. But my biggest concern looking forward is some kind of an economic speed bump that China hits. I expect it’s going to hit it, I wish I knew when, but when it hits it we’re all going to feel it.

Michael: Yes, interesting stuff Martin and let me just finish with a bottom line question. Do you believe that the commodity bull market is still in play and the gold bull market is still in play?

Martin: Oh absolutely, I think that loosely we have another ten years to run at least on the resource side. We are going to have an interruption, we always have interruptions in these long cycles. By the way these long cycles can last 15 20 25 years, and I would be foolish I think to argue that the cycle that we’re in now will be the shortest cycle in the history of the data that we have, and that data goes back to 1800. So this is going to go on for quite a while but there will be interruptions.

Michael: Great stuff Martin I really appreciate you coming into work on a Saturday with us, your insights are much appreciated.

Martin: You’re more than welcome Michael.

Gold rising further from current levels is possible, but history clearly shows the yellow metal suffers summer doldrums

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School’s out for the summer and junior explorers are back in the field commencing summer drilling programs. That’s what makes early summer a good time to seek out bargains in the junior equity sector, according to Fraser Mackenzie Analyst Mike Starogiannis. In this exclusive interview with The Gold Report, Mike offers some promising names from Canada to Peru (where, yes, it is winter).

The Gold Report: In a recent National Post article about gold’s rising price versus the languishing prices of gold equities, Mining Reporter Peter Koven quoted Yamana Gold Inc.’s (TSX:YRI; NYSE:AUY; LSE:YAU) CEO Peter Marrone as saying, “. . .people rely on net asset value to value gold companies, and the calculations don’t seem to rise so dramatically because the long-term gold price used by analysts is at a deep discount to the current price. . .there’s a tendency to say, ‘I’m not taking advantage of the equities because they’re not reflecting the current gold price.'” As an analyst, what’s your view?

Michael Starogiannis: I think Peter is correct in that the long-term gold price deck used in net present value (NPV) calculations is relatively sticky. But a lot of people also use a cash flow multiple to value companies. Cash flow isn’t relevant for junior exploration companies, but it is relevant for junior producers. I think pricing, to some extent, reflects fluctuations and the steep gold price. If you combine valuation methodologies, including NPV and cash flow multiples, you should see some fluctuations in the junior-producer space.

TGR: But do you think Marrone is right? Could there be something else behind those languishing prices?

MS: I think it also reflects the part of the cycle we’re in; we had a very busy fall and winter with respect to the number of new equity raises in the space. If you use the show-and-tell analogy, all the companies told us their stories. The markets have raised money for them and now they’re trying to show us what they can do with it. We’re in that pause stage, as companies begin their summer drill programs and sink those big equity raise dollars into the ground, into mine development or building new mill facilities.

TGR: But you’re referring more to smaller rather than large companies. As the news cycle picks up and drill results come in, do you expect to see a rise in the juniors share prices?

MS: Provided that the gold price remains in the $1,400–$1,500/oz. range, the juniors should start to come back in earnest. All of that deployed capital will have been put into the ground and results will start showing which projects are of merit and which will fall by the wayside.

TGR: In your five years as an analyst with Fraser Mackenzie, you’ve seen a lot of market fluctuation. How does what we’re seeing now in the funding cycle compare to what was going on in 2007?

MS: Overall, the market is fairly efficient right now, particularly in valuing gold stocks. We’re benefitting from having gone through a little bit of a retracement, as we did in 2008 when the juniors pulled back and the market got a bit savvier. Prior to that 2008 blip, the valuations in the junior space were getting a bit ridiculous. Now, the valuations in gold stocks reflect the true value of the companies.

TGR: Prices for precious metals typically fall off in early summer before strengthening in August and into the fall. How would you recommend playing the precious metal sector now, in terms of junior equities?

MS: Many of our companies under coverage have a drilling and news flow hiatus this time of year, which coincides with a drop-off in commodity prices. For investors who believe in commodity prices coming back in the fall and in the long-term health of those commodity prices, the early summer months might be the opportunity to pick up some bargains.

TGR: You’re based in Toronto and cover many Canadian-based companies with gold and silver projects. What role does Canada play in the global gold market today?

MS: I have a biased view because I’m based here and I don’t see a lot of the work that’s being done elsewhere. But I believe Toronto and Vancouver are powerhouses in financing the junior sector, in particular. But more than just financing, a lot of the companies are headquartered here. That means much of the technical talent resides, or is based, here. So, Toronto and Vancouver, and Canada in general, play a very important role in advancing projects in the junior space—particularly on the precious metals side.

TGR: What are some of the companies with projects in Canada that you feel are the better buys right now?

MS: Gold Canyon Resources Inc. (TSX.V:GCU) is one of our top picks in the exploration space. Its flagship asset is the Springpole Gold project, an alkaline gold deposit about 100 km. from Red Lake. The company’s had quite a bit of success over the past 18 months delineating a zone of mineralization that’s about 1,300 meters long, at an average of 75m wide by 300m–350m deep. The grade is particularly interesting. For a bulk deposit, the grade seems to be averaging 1.3–1.4 grams per ton (g/t). If you compare that to some of Canada’s better-known bulk mineable deposits, such as Osisko Mining Corp.’s (TSX:OSK) Canadian Malartic project, that grade is about .97 g/t. Detour Gold Corp.’s (TSX:DGC) Detour Lake deposit grade is about 1.02 g/t. So, the Springpole zone appears to have 30%–40% higher grades than either of those.

TGR: But is the deposit as large as those others?

MS: Based on our in-house estimates, we think there’s the potential to demonstrate 5–6 million ounces (Moz.) at Springpole, which is a fair bit smaller than Osisko’s or Detour’s deposits. However, grade is a very telling factor in the potential economics of any deposit. There is also still some significant depth and strike potential.

TGR: Would you compare Gold Canyon to Brett Resources Inc. (TSX.V:BBR)?

MS: Well, Brett is no longer there. The Hammond Reef project is now owned by Osisko. But, yes, it’s a good comparison from the perspective of permitting challenges. The Hammond Reef and Springpole deposits would face very similar permitting challenges with respect to their proximity to adjacent or overlying bodies of water. From the perspective of grade, the Springpole grade is more than double that of Hammond Reef.

TGR: When do you expect more news from Gold Canyon?

MS: Gold Canyon put out its final few holes from the winter program on May 31, with some good infill results. The company showed grades and widths very consistent with our 5–6 Moz. estimate. There will be a bit of a news hiatus as we await results from its deep-drilling program, which is designed to show some depth potential. Gold Canyon won’t start its summer program until mid-June. We wouldn’t expect to see new step-out or infill drilling until early to mid-July.

TGR: You also cover Confederation Minerals Ltd.’s (TSX.V:CFM) Newman Todd Project in the Red Lake District. Why haven’t we heard this name before?

MS: This project has been around for quite some time. It languished from not having had systematic drilling across the length of the property. Previous operators were very cautious in the way they drilled. New management has taken over, with good technical talent that is starting to drill in a more systematic way. This is not a large property package in the context of the bigger players in the Red Lake District, such as Rubicon Minerals Corp. (NYSE.A:RBY; TSX:RMX) or Premier Gold Mines Ltd. (TSX:PG). However, in the context of finding a deposit within the property limits, it’s quite conceivable that Confederation may find a high-grade zone within 2,000 meters of strike length that it can contain within the Newman Todd property package.

TGR: Confederation is trading at about $0.71 right now. What will push Confederation to new levels?

MS: The current drill program is designed to do systematic drilling and stepouts from drill fences that the company’s already drilled and which have demonstrated consistently high-grade hits at various depth horizons at four different locations along a 1,500m–2,000m strike. We expect that all successful fences will build the case that there’s a significant gold resource hiding on the Newman Todd property.

TGR: Are there other Canadian plays you’d like to share with our readers?

MS: Two other exploration plays that I would mention are Kaminak Gold Corp. (TSX.V:KAM) and Taku Gold Corp. (TSX.V:TAK; OTCBB:TAKUF), both of which have significant land packages in the White Gold District of the Yukon Territory.

TGR: Kaminak has the Coffee Gold Project, close to Kinross Gold Corp.’s (TSX:K; NYSE:KGC) White Gold project, which was previously owned by Underworld Resources before Kinross bought out that company. One hole there hit 17 g/t gold over 15.5m. Do you expect similar results from the current drill program?

MS: Yes, that was an early discovery hole in the Supremo Zone. Chances are they’ll hit similar grades this summer with follow-up drilling. We also expect Kaminak to hit different types of systems; for example, lower grades but broader intersections, such as in its Latte Zone. The company will do follow-on drilling in all of the previously discovered zones, including Supremo, Latte, Double Double and Americano, as well as more grassroots exploration in targets that have yet to be drilled.

TGR: Taku just added about 13,000 hectares in claims to its holdings in the White Gold District. When will it start drilling those?

MS: It probably won’t drill on those claims this year. Instead, the plan is to drill the Rosebute and Portland properties. There is good soil geochemistry and geophysical anomalies on those properties. The plan is to drill about 7,500m on various drill targets, split between the two properties. In the meantime, the company’s work program, basically, is follow-up soil geochemistry grids, ground proofing, ground mapping and some geophysics.

TGR: And that’s a relatively cheap stock, trading just below $0.38.

TGR: Looking more to the south, you like Evolving Gold Corp. (TSX.V:EVG; OTCQX:EVOGF; Fkft:EV7).

MS: Evolving Gold is largely a Nevada-focused player with its Carlin-Humboldt projects. It’s engaged in a deep-drilling program targeting a horizon that’s anywhere from 700–1,500 meters deep. The company’s looking for a true Carlin-type system, right in the heart of the Carlin Trend. Evolving Gold is one of the largest property holders along the Carlin Trend, second only to Newmont Mining Corp. (NYSE:NEM).

TGR: One interesting thing you state in your report on Evolving Gold is that the economic mineralization in the Carlin Trend should be valued more highly, given its proximity to major players like Barrick Gold Corp. (TSX:ABX; NYSE:ABX) and Newmont, as well as the existing infrastructure.

MS: That’s right. Most of our companies under coverage, for which we do have targets, are resource-based valuations that we value at $100/oz. of potential in situ. Assuming that Evolving can show us sufficient drilling information on the potential for some ounces, we would likely value the company much higher than $100/oz., given that it’s in the heart of one of the world’s most prolific gold trends.

TGR: It’s not as if Evolving hasn’t found anything. One hole from the most recent drill program intersected six separate zones of mineralization, including one intersection at 31 g/t gold over 4.6m.

MS: Yes. Based on what we’ve seen so far, it seems like the company is into a Carlin-type system. That’s microscopic gold in the right kinds of rocks, such as muddy limestones and siltstones. But, Evolving Gold demonstrated those kinds of grades and widths only in holes 7 and 10. The trick now is to go back, do some systematic step-out and infill drilling and prove some continuity in those higher-grade zones.

TGR: For readers who are unfamiliar with that, it’s like a grid where the company’s putting holes in between the holes to track where the mineralization is along a given line.

MS: That’s right.

TGR: You also like some companies with projects in South America, including Apogee Silver Ltd. (TSX:V:APE). Isn’t it aggressive to be bullish on a company whose main asset, the Pulacayo Silver Project, is in Bolivia?

MS: Bolivia has seen a rise in political uncertainty in recent months. There’s talk of nationalizing assets, but it’s our firm belief that much of that talk was political posturing on the part of the current government to curry favor with the unions. Furthermore, Apogee’s underlying property interests are already owned by Bolivian Mining Corporation (COMIBOL), the state-owned mining company. So, the asset doesn’t have the same level of exposure to nationalization as some other projects in Bolivia.

TGR: Don’t you also think there is short-term potential for another 30 Moz. silver equivalent there?

MS: That’s right. Apogee is now doing a systematic infill and step-out program in the heart of the mine proper, where there is already an existing resource, basically, it is a step-out to that resource. And it appears to be hitting consistent grades and widths. Volumetrically, based on some of our in-house estimates, we believe there is immediate upside to show a bump up in the resource within the next 12 months.

TGR: Are there other projects in South America that you like?

MS: Another one of note is Sulliden Gold Corp.’s (TSX:SUE; OTCQX:SDDDF) Shahuindo Project in Peru. It’s doing an infill program on the core of the mineralization trend and demonstrating fairly consistent mineralization of good grades and widths. This would be a relatively low-grade, bulk-tonnage type of deposit with grades somewhere around 0.65 g/t. We’re currently valuing Sulliden on a NPV basis. We’ve got a cash-flow model that assumes it has 2.2 Moz. of mineable oxides, which it would be mining and heap leaching within a timeframe of, say, three years.

TGR: Sulliden recently found a new mineralized zone highlighted by the discovery that the zone was 1.6 g/t gold and silver over 33m. That’s a little bit higher than the average grade there.

MS: That’s right. If you start accounting for mining dilution and such, the zones so far have consistently shown that it’ll probably end up with 0.6–0.65 g/t. We would be pleasantly surprised if there was a grade uptick, because that would be good for the economics of the project. But even if you just value the company at the lower-grade assumption, we still show ample upside for Sulliden.

TGR: Some majors operate in that area of Peru. Could that be a factor?

MS: I think if Sulliden demonstrates a project of sufficient scale, it could be a factor in the company’s valuation. At this point, with anywhere from 2–3 Moz. of potentially mineable gold near the surface and open pittable, it probably would not be a prime candidate for a major or midtier to come in as a suitor. However, if it can demonstrate parallel zones and show multiples to that potential resource size, the company could be in serious contention.

TGR: Certainly, CEO Peter Tagliamonte has done it before.

MS: Yes, he has he’s done it before. Peter has generated, and knows how to generate, shareholder value and build good projects.

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

Michael Starogiannis is an analyst for Fraser Mackenzie covering the metals and mining sector. He is a professional engineer and a graduate of the University of Toronto with a BASc in geological and mineral engineering. He started his career as a consulting geotechnical engineer working for Golder Associates on a variety of projects entailing rock mechanics, hydrogeology and tailings. Since finishing his MBA at the Rotman School of Management in 2001, he has held roles in equity research, private business and investor relations. He has prior experience researching the gold and precious metals sector for several Canadian broker/dealers.

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