Asset protection

Tips for Escaping the Resource Sector Swamp Alive

Crocodile580by John Kaiser: What if the goldbugs are wrong and fiat currency isn’t going to throw the world into hyperinflation? What if, instead, a steadily growing economy and a new awareness of the importance of having security of supply for critical metals, along with a big exciting discovery that heats up the resource sector, are what pull sinking gold and silver prices and their related mining companies out of the muck? If so, John Kaiser tells The Mining Report that he has set his sights on the dozen companies that would star in this horror-turned-romantic epic adventure.

The Mining Report: At the Cambridge House Canadian Investment Conference in Toronto, you talked about escaping the resource sector swamp. Why do you call the current market a swamp?

John Kaiser: There are four key narratives that dominate the resource sector, in particular the junior resource sector. One is the supercycle narrative where a growing global economy catches the mining industry off guard with the result that higher-than-expected demand results in higher real metal prices. That then unleashes a scramble to find deposits that work at these higher, new prices and put them into production. The juniors played an extraordinary role during that cycle in the last decade; however, global economic growth has slowed. Therefore, we are looking at a period of sideways, possibly weaker, metal prices for a number of years, which puts the supercycle narrative on hold. That is one factor keeping the sector in a swamp.

Another important narrative is the goldbug narrative, where a soaring gold price is going to make deposits much more valuable. We did see that play out. Gold reached $1,950/ounce ($1,950/oz) briefly, but has since retreated 40%. Even though that’s still 400% off the low from just over a decade ago, it has turned out to be a wash in real prices. Now, growth projections in the U.S. are having negative implications for the prevailing apocalyptic goldbug narrative. That does not bode well for an escape from the quagmire.

A third key narrative is security of supply, which we saw manifested in the rare earth (RE) boom in the past five years. However, the RE prices have come back to earth as substitution and thrifting has kicked in. The anxiety that China is going to eclipse the U.S. anytime soon has diminished, and the concern that there will be supply squeezes around the world has diminished.

The fourth narrative, which has dominated the junior sector for two of the past three decades, is that of discovery exploration. Unfortunately, there have not been many very good discoveries in the past decade that have inspired confidence in the retail sector. Add to that the structural changes in the financial services sector that make it increasingly difficult for junior public companies to source retail investor capital.

These are the forces that are keeping gold—and junior mining equity—prices bogged down.

TMR: Let’s look at each of those narratives a little bit closer to determine what they mean for junior mining companies. If China’s growth is slowing and the U.S. recovery remains hesitant, what does that mean for base metals—copper, nickel, iron and zinc?

Screen Shot 2014-10-15 at 7.11.15 AMJK: In the last decade, juniors have made a career of picking up deposits found in past exploration cycles and discarded as marginal because the grade wasn’t high enough. The juniors did a tremendous job of reevaluating their potential based on new prices and technology. That led to $140 billion ($140B) worth of takeover bids, compared to the $5B per decade in the 1980s and 1990s. These deposits now sit as inventory in the big mining companies.

That means when we get another price boom, the big mining companies will develop these projects to supply the demand surge, not acquire juniors that claw a new batch of discarded deposits out of the closet. Investors interested in juniors with advanced deposits will have to focus their attention on an existing pool of juniors that will shrink as they disappear through buyouts or mergers with very modest premiums off cyclical market lows.

Screen Shot 2014-10-15 at 7.11.05 AMTMR: Would you apply that scenario to all of the base metals?

JK: Copper and iron are the ones that are faced with oversupply in the next couple of years. Nickel is a special situation because it was being oversupplied until Indonesia imposed an export ban on raw laterite ore. The Philippines is contemplating doing something similar. Should this come to pass, then we will have temporary shortages of nickel, and we could see nickel prices going higher. But if Chinese capital builds the capacity to smelt the nickel laterite ore in Indonesia and the Philippines, then we will see weak nickel prices.

The one metal I think will realize higher prices in the next few years is zinc. That is because major mines have started to shut down, and what is coming onstream is considerably less capacity than what is shutting down. Normally, that doesn’t really matter because China has been the elephant in the room, the largest zinc producer. China has nearly doubled its production in the past decade. The prevailing view is that if we get a higher zinc price, China will move quickly to put more mines into production. However, I believe, due to a new environmental focus, the country could actually shut down some of its capacity, worsening the supply situation.

Because most large zinc deposits are in remote locations, they will take 7 to 10 years to develop. So I am focusing on smaller-scale zinc deposits, such as the West Desert deposit of InZinc Mining Ltd. (IZN:TSX.V) in Utah, which could jump onstream faster than some of the big, remote projects. InZinc’s updated preliminary economic assessment (PEA) showed it could turn the magnetite skarn zinc into a salable byproduct rather than a costly waste material.

This project appears to work at $0.90 a pound ($0.90/lb), and if we do get zinc at $1.20/lb., it should work extremely well. The company has been able to raise money and has more than $1 million ($1M) in the treasury so that it can ride out any interim weakness in the market. Its next step is to do a $4M exploration program designed to find the limits of the deposit, so that when it embarks into prefeasibility study mode, it will know the perfect project scale.

TMR: When could the prefeasibility study come out and doesn’t it still need permitting?

JK: Utah is a very friendly state for permitting mines and even more so with regard to approving exploration programs. Permitting InZinc’s delineation drilling program is not the holdup; raising the capital at non-punitive prices is. I hope the company can raise the money it needs to spend in 2015, setting the stage for a prefeasibility study in 2016. Simultaneous environmental studies would put the company in a position to go for a feasibility study in 2017.

Screen Shot 2014-10-15 at 7.11.28 AMWe are still talking about 2020 as the earliest it could be in production, but that is much shorter than the decade needed to bring giant remote zinc deposits such as Howard’s Pass onstream. The uncertainty about the longer-term outlook for zinc creates a window of opportunity to develop smaller zinc deposits such as West Desert.

TMR: Let’s go back to your themes. The second one was the goldbug theme. The Federal Reserve is betting that the U.S. economy is good enough to handle rising interest rates as part of a push to jumpstart the global economy. What could this mean for the supercycle we talked about and the apocalyptic goldbug narrative and the companies in the metals space?

JK: If the Fed successfully finesses the transition from quantitative easing and low interest rates to an economy based on positive real short-term interest rates, then we will see the consumer start to feel more comfortable with the future and spend money. Businesses would then start spending the trillions of dollars they are now hoarding or spending on share buybacks to prop up stock prices.

If they shift to building stuff again for the long run, which employs people with quality jobs and signals optimism about America’s economic future, then the banks become happy and will start lending money to consumers. It creates a virtuous circle where the economy grows organically rather than artificially. This is also good for the rest of the global economy because it will enable emerging markets to hitch their wagon back to the U.S. as a primary export destination and, ultimately, as a flow of capital back to their own economies to fund self-sustaining economic growth.

A smooth transition to real growth is bad news for the goldbug narrative because if we have higher interest rates and, thus, better yields, that makes gold—which yields nothing—not very competitive. A strong dollar also clashes with the idea that everything is falling apart and, therefore, gold is going to go up due to resulting hyperinflation and fiat currency debasement. But if the Fed is wrong and it merely succeeds in popping a stock bubble and the Dow Jones drops more than the 10–15% that would qualify as a healthy correction, unleashing another asset deflation spiral similar to 2008, then we end up in a very negative scenario for the global supercycle narrative and for the goldbug narrative because gold goes down in a liquidity crunch. Either outcome creates an argument for gold dropping through that $1,180/oz resistance level and touching $1,000/oz on the downside.

TMR: Are you predicting $1,000/oz gold?

JK: I see $1,000/oz as a temporary aberration except in the worst case scenario of a global depression. Today 1980’s $400/oz gold adjusted for inflation is $1,120/oz, so $1,200/oz is just a 9% real gain. That is sobering when you consider the mining industry extracted 2.3 billion ounces over the last 30 years on the back of gold’s big move during the 1970s. As this low hanging fruit got harvested, mining costs rose, even more so than general inflation during the past five years.

Screen Shot 2014-10-15 at 7.11.55 AMAll-in cost estimates average $1,350/oz for new gold, partly due to higher mining costs, but also due to lower grades, more difficult metallurgy and social license costs. A gold price in the $1,000–1,200/oz range implies that the world going forward will be content with the existing 5.4 billion ounce aboveground gold stock plus the billion extra ounces existing mines will produce as they deplete over the next decade.

As an optimist about global economic growth, I find that hard to believe. If the end of quantitative easing and the arrival of higher real interest rates gives the American economy organic growth legs, rather than sending it into a tailspin that requires the Fed to put it back on life support, it will pull the global economy back into an uptrend with resource-hungry emerging economies with large population bases as the long-term growth engines.

Screen Shot 2014-10-15 at 7.10.43 AMWhile your typical North American goldbug owns gold to hedge against catastrophe and a possible capital gain trade, new wealth in emerging nations seeks gold ownership as a form of saving and wealth insurance. This gold is not generally for sale. In my view, global economic growth is a plausible driver for higher real gold prices. The question is how long can gold hang around at price levels where it does not make economic sense to mobilize new gold mine supply?

What would jumpstart an uptrend in gold is China announcing its actual reserve holdings, which were last reported in 2009 as 1,054 tonnes. Since then China has produced about 2,000 tonnes and because the central bank is the official buyer of domestic gold production, China’s official gold holdings are likely over 3,000 tonnes, just behind Germany at 3,384 tonnes. China has also been a heavy importer of gold since its breakdown in 2013, possibly over 1,000 tonnes. That would put China in second place, halfway to America’s official holdings of 8,134 tonnes. China sees as the long game the eventual end of the U.S. dollar as the world’s single reserve currency.

For now China is more than happy to see weak gold prices and is unlikely to harm its gold accumulation agenda by updating its official reserve holdings. But if it did, that would make investors think twice about selling the gold they already own and increase demand for more, which would lead to a higher gold price. A shortage could push gold to $1,500/oz without excessive inflation or fiat currency debasement. It would also underpin a new bull market in the juniors, especially if the American economy is back on track and the dominant gold narrative is no longer one that just promises higher gold prices without enhanced mining profitably.

TMR: It sounds like you can envision a world where what is good for Main Street and Wall Street is also good for the gold miners. Are there some gold miners that maybe are more leveraged to that $1,500/oz gold price and could really benefit?

JK: Big companies like Barrick Gold Corp. (ABX:TSX; ABX:NYSE) that have shut down large capital expenditure (capex) projects and unprofitable mines would benefit immediately. Juniors that have done advanced economic study work and are continuing to do feasibility study work would also be able to take advantage of the upside. The share prices have been punished and these companies can now be bought as options on a higher gold price. The risks, of course, are that the company is unable to maintain ownership of the project because of spending requirements or that they are swallowed up by bigger companies during the mayhem that would accompany gold dropping below $1,100/oz.

One to consider is Midas Gold Corp. (MAX:TSX), which is completing a prefeasibility study on its Golden Meadows project in Idaho. That project was, according to the PEA, viable at $1,300/oz gold, probably not so at $1,000/oz gold. It has the funds in place to complete the prefeasibility study, hopefully by the end of the year. The next step is environmental permitting, which will be the primary obstacle in a state like Idaho.

Another company that has interesting optionality is Exeter Resource Corp. (XRA:NYSE.MKT; XRC:TSX; EXB:FSE), whose gold-copper Caspiche deposit in Chile has been modeled for multiple mining scenarios. The limiting factor is water access. The company is sufficiently funded with the $12M it needs to complete its studies and get its environmental permits for the smaller-scale scenarios. It has $40M in the treasury, which puts it in excellent shape to continue to advance the understanding of the deposit, search for water and be ready to move at different scales of production when gold starts to move on the upside.

The most extreme scenario is Clifton Star Resources Inc. (CFO:TSX.V; C3T:FSE) whose project is marginal at $1,300/oz gold. It is facing a balloon payment and an extremely low valuation right now so it would definitely benefit from gold jumping back through $1,500/oz.

Probe Mines Limited (PRB:TSX.V) is working on a PEA for Borden to give us a sense of the economics, something I will be watching closely. Arguably, the best gold discovery in Canada during the past decade was the Éléonore deposit made by Virginia Mines Inc. (VGQ:TSX)that Goldcorp Inc. (G:TSX; GG:NYSE) bought for $750M. In a feasibility study published earlier this year, Goldcorp revealed that this project at $1,300/oz gold will have an after-tax internal rate of return (IRR) of only 3% and a marginal net present value (NPV) even though it’s producing 400,000 oz per year. At that price, it would take 8 years out of a 10-year mine life to achieve payback of a capital cost of nearly $2B. So there is a lot of concern about the viability of new gold mines. One difference is that Éléonore is in central Quebec and has infrastructure challenges, whereas Probe’s Borden deposit is in Ontario next to a highway where infrastructure is already available.

Probe has shown 1.6 million ounces (1.6 Moz) of high grade and 2.3 Moz of open-pittable low grade with more exploration potential. Probe needs to acquire some key surrounding ground. The market has been waiting for this deal to get done so that it has 100% ownership of the existing deposit and can start chasing the deposit down plunge. In light of weak gold prices, the PEA will focus on a 3,000 tonne per day (3,000 tpd) underground mining scenario that targets the higher-grade gold. Investors get exposure to potential cash flow from gold that can be mined profitability at prevailing weak prices and an option on the impact of a higher real gold price moving the open-pittable resource into the money.

TMR: Probe just did a $26M funding. How is it planning to use that money?

JK: A sign of the strength of this story is that even though we are in a very dismal financing market, Probe was able to raise $26M of flow-through money. By definition it has to be spent on exploration. But it still has about $20M of hard dollars left for land acquisition and the new money will be used to delineate the deposit and explore the East Limb project, which could open a whole new area.

TMR: Was there another one you wanted to mention?

JK: Soltoro Ltd. (SOL:TSX.V) is primarily a silver company in Mexico with some gold zones. The company reevaluated its resource estimate using a higher cutoff because at $20/oz or lower silver, the metallurgical challenges made the earlier resource estimate marginal. By identifying a smaller core that works at $15/oz silver, it made the project better. Soltoro has multiple projects, El Rayo, La Tortuga and several others, where partners have spent money to advance the deposit. This gives it both an existing resource demonstrating feasibility at the prevailing metal prices and exploration potential for the future.

TMR: The property is right next to the recently acquired Cayden Resources Inc. (CYD:TSX.V; CDKNF:OTCQX) property. What does that recent deal mean for companies on the same mineralization belt?

JK: It is nice to see Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) pay up to acquire strategic real estate. It tells us that there is an interest in consolidating these districts, including the Cayden property in Mexico. This is a good reason for Soltoro to step up its game and attract a bigger audience, get some capital going and make itself attractive as part of that consolidation process.

TMR: Let’s return to the scarcity of supply theme and what that means for companies that mine RE elements and strategic elements.

JK: In the RE sector, we have seen efforts to mobilize light rare earth (LRE) supply through Lynas Corp. (LYC:ASX) and Molycorp Inc. (MCP:NYSE). Both companies are ailing right now. LRE prices are almost back to where they started in 2009, meaning that Western deposits are simply not viable. However, heavy rare earths (HREs) are different story. China is still the dominant supplier, but it might be running out. To conserve resources, China could start withholding supply to the rest of the world. Oddly, however, HRE prices have sunk dramatically during the past year and are only about double the levels that they started out at in 2009. As renewable energy becomes a necessity to combat climate change, prices will have to rise for the HREs to play their roles in the renewable energy sector.

One RE company that I continue to look at favorably is Namibia Rare Earths Inc. (NRE:TSX, NMREF:OTCQX). The company has just completed a PEA for its Lofdal project that envisions an open-pit 1,500 tpd mine that will produce a concentrate consisting mainly of heavy rare earths. The PEA reported an after-tax IRR of 43% and NPV of US$147M at 10%. The PEA does use FOB base case prices that are nearly double current levels, which would be a problem if 98% of the rare earths were not heavy rare earths representing over 99% of the recovered value.

A key aspect of the PEA is the plan to have separation done by parties with that capacity outside of China. One of these is Solvay SA (SOLB:NYSE; SOLB:BRU), whose subsidiary Rhodia has a facility in France with surplus separation capacity. The other would be Molycorp, which has potential to develop heavy rare earth separation capacity at its facility in Estonia. Namibia Rare Earth’s goal is to find a partner to fund and develop the Lofdal mine, as well as separate the mixed oxides. Securing such a deal will be the next milestone because the junior would prefer to use its remaining $6M to explore for additional HREO enriched zones and other critical metal deposits within the Lofdal carbonatite complex in Namibia.

TMR: What other specialty metals do you think would do well under a scarcity of supply scenario? Would tungsten be one?

JK: The markets have their heads in the sand about tungsten. China is the dominant producer, but much of the resource comes from small mines targeted by regulators for environmental cleanup. Tungsten’s use as a hardening metal alloy makes it a war metal, but it is also important for the oil drilling business, which has boomed with the development of tight oil and gas in shale deposits. If the Umbrella Revolution currently playing out in Hong Kong spins out of control, and China ends up withdrawing into itself the way Russia has started to do as a result of its Ukraine intervention, it is conceivable that exports of tungsten could drop precipitously, which would leave the Western world in a bind. This is an outlier but not an implausible scenario. More serious are the risks that China’s production from small tungsten deposits may decline through depletion or shutdown for environmental reasons.

That is why I very much like the Northcliff Resources Ltd. (NCF:TSX) Sisson project in New Brunswick. It has a tungsten-molybdenum deposit that could provide nearly 10% of current global supply. If we see further concern emerge over China, the capital will arrive to enable Sisson to go into production.

TMR: Northcliff put out a feasibility study in 2013. What is the next catalyst?

JK: The main thing we’re waiting for there is the environmental permit. A New Zealand partner could put up as much as $25M for a minority percentage. Once Northcliff has this permit, a funding arrangement may emerge to put this into production. It could also be bought by a major, something the management group Hunter Dickinson group has orchestrated before.

TMR: Do you put scandium in the strategic metals category as well?

JK: If there was one metal left to have a big manic boom that envelopes both explorers and developers, it is scandium. It’s sometimes classified as an RE, but it’s really in a separate class as a light transition metal. What it does well is marry with aluminum to create an aluminum-scandium alloy that has a higher melt point than aluminum, is corrosion resistant, is more conductive, is stronger, and allows a weld joint as strong as the material itself. These qualities make aluminum-scandium alloy an important metal of a future where energy costs are higher and the goal is to push materials to achieve much greater energy savings.

The problem with scandium is it does not concentrate well in Mother Nature. The highest-grade deposit has been in the Ukraine, which the Soviets mined in the Korean War to make fighter jets. For decades, there have been hundreds of patents for innovative uses for scandium, but because there is no meaningful supply, most sit on the shelf. Six years ago enriched laterite deposits with more than 300 parts per million (300 ppm) were discovered in Australia’s New South Wales. At today’s $2,000/kilogram scandium oxide price, 1,000 tonnes per year output would have a value greater than $1B compared to the $50M value of the 10–15 tonnes eked out as byproduct supply. Of course it might take 10–15 years to develop that level of supply capacity and offtake demand, but money can be made in the pioneers developing this space, which currently consist of several juniors.

That’s similar to the niobium story today. Prior to the 1960s, niobium supply existed only as a byproduct from tin and tantalum alluvial mines in Nigeria and Congo. In the 1950s, it only existed as a low-grade byproduct of other deposits. Then the world-class Araxá deposit was discovered in Brazil and a predecessor to IAMGOLD Corp. (IMG:TSX; IAG:NYSE) found Niobec in Quebec. These deposits had grades 10 times better than known bedrock resources and offered a scalability that the alluvial mines did not. Niobium’s ability to harden steel and raise its melting point made it an important alloy in the Space Age race and is now a $2–3B/year market. Scandium can do the same for aluminum that niobium did for steel.

The leading scandium company is EMC Metals Corp. (EMC:TSX), which owns the Nyngan deposit in Australia. It should have a PEA out this year and a feasibility study and a mining permit in hand by the end of next year. It will initially be a small-scale project, 20–30 tonne scandium oxide likely, but that will be enough to demonstrate to the industry that scandium can be produced in a scalable primary mine. Once the industry sees that, there will be all sorts of offtake interests in scaling this up to 100, 200 tpa and beyond. The deposit is so large that such a scale up is conceivable. Similar deposits have been found in Australia by other juniors that are less advanced in sorting out the metallurgy of these near-surface laterite deposits.

TMR: EMC is also exploring in Norway. Is that a new frontier for scandium?

JK: The Tørdal pegmatite field is one of the known scandium-enriched places in the world. Mozambique also has similar pegmatite deposits with grades over 1,000 ppm. The problem with pegmatite deposits is that they tend to be irregular and small, so it’s difficult to put together a large tonnage of a consistent grade. They also have complex mineralogy, though in the case of Tørdal recent work by EMC suggests that the scandium reports to a mineral that separates easily from the rest of the rock.

In the Australian laterite deposits, the scandium is embedded in the lattice of goethite, an iron-magnesium oxide that is dominant in bauxite (aluminum) and nickel laterites. Figuring out the right combination of acid and temperature to liberate the scandium takes a fair amount of test work, but it is doable and EMC has worked on it since 2010. Although Australia will become the dominant scandium producer, production from Norway and other parts of the world is important because the aluminum alloy industry is concerned about security of supply. If there are supply problems with the Australian deposits, end users, such as aircraft builders, want to know there are alternative supply sources long term. As awareness of scandium spreads, and the implications for the aluminum industry get understood, led by EMC’s pioneering example, a Canadian exploration boom targeting intrusive complexes around the world will blossom.

TMR: That takes us to the project generators and their role in the discovery exploration theme. Could the project generators be the Cinderellas of the ball, delivering excitement in a flat commodity price environment?

JK: The prospect generators have adopted a strategy where they use their capital to generate prospects that attract other partners to spend the heavy lifting dollars of testing drill targets. In past decades, that has included other juniors with the promotional skills to move the story along. That worked quite well. A junior would have multiple projects going and when one results in a significant discovery, the prospect generator folds its minority interest into the other company for stock, so that the big mining company is buying a junior with 100% ownership of the deposit. Those junior farm-in partners are now few and far between because of the funding crisis in the sector. So the prospect generators have had to find majors as partners.

One company that has succeeded as such is Avrupa Minerals Ltd. (AVU:TSX.V), which has been a prospect generator in Europe, Portugal and Germany. In Portugal, the Alvalade project attracted Antofagasta Plc (ANTO:LSE) with a new way of interpreting the geology that hosts high-grade volcanogenic massive sulphide (VMS) mineralization in the Iberian Pyrite Belt similar to the world-class Neves Corvo deposit now owned by Lundin Mining. The Alvalade property straddles a segment of the belt that is covered by barren younger rocks up to 100 meters thick that has stymied past exploration efforts. Earlier this year Avrupa intersected VMS mineralization in stratigraphy that, unlike Neves Corvo, is tilted on its side with local faulting. This achievement at Sesmarias was quite a coup, but finding the main zones will still require the deep pockets of Antofagasta.

Avrupa has drill programs going on in Kosovo, where a partner is drilling a target. The challenge with prospect generators is the pace of the exploration is controlled by the partner. The data flow is controlled by the partner. The partner does not usually have a need to raise additional capital on the what-appear-to-be good results, so advancing an exploration play generally lacks the urgency involved when a junior is in charge.

Another company that really isn’t a prospect generator in the sense that it deliberately sets out to generate prospects and farm them out to others for drilling is a company in Botswana called Tsodilo Resources Ltd. (TSD:TSX.V). It was originally a diamond explorer whose pursuit of magnetic anomalies as kimberlite targets put it into a region where it didn’t hit any kimberlite, but it started hitting very interesting, sulphate-bearing geology that subsequently was interpreted as being very similar to the geology of the Zambian Copperbelt. This has attracted the attention of First Quantum Minerals Ltd. (FM:TSX; FQM:LSE), the big copper producer, which has mounted an astonishingly aggressive grassroots program on this project. It optioned 70% in August last year and will have spent $14M by the end of 2014 to understand the basin geology and be in a position to spend another $6M in 2015 drilling priority targets.

In addition to a series of deep stratigraphic holes, First Quantum is drilling 220 holes on 2km centers through the Kalahari sand into about 6 meters of bedrock, collecting groundwater samples, conducting extensive geophysical surveys—magnetic, electromagnetic—and gravity surveys. As part of its groundwater testing, First Quantum will assay for certain copper isotopes, which groundwater dissolves when it oxidizes chalcopyrite, a key copper sulphide.

First Quantum has access to proprietary information about the relative rate that these isotopes stay in solution. By plotting the ratios between these isotopes, First Quantum hopes to establish the distance the copper it assays in the groundwater samples has traveled from the source. Spending $20M on such a sophisticated grassroots program is beyond the means of a typical junior, and pretty hard for the exploration departments of major mining companies to get approval for. First Quantum seems to be in a special class of such majors in targeting world-class deposits hidden under barren cover.

At Tsodilo’s Xaudum project in Botswana it is looking for underground minable copper deposits grading more than 2% copper and containing 5–10 million tons with an in-situ value approaching $100B. A high-impact discovery like this would send a stock like Tsodilo into double digits and turn First Quantum into an icon for what needs to be done nowadays if flat metal prices do not allow wandering down the grade curve for new mine supply.

TMR: All of that because it failed when it was looking for diamonds.

JK: Yes, Tsodilo turned failure into a potentially much bigger success by thinking out of the box about the “disappointing” drill results.

TMR: How about a story a little closer to home?

JK: We are entering a period where getting the public excited about ounces in the ground is going to be a hard sell. It already is a hard sell. In this sort of environment, you need an innovative approach. You need a technology that gives you a shot at finding something that nobody else ever had a chance to find before. The groundwater technology I mentioned that First Quantum is using has been done since the 1950s, but what has changed is that the assay lab detection limits have gone up by several orders of magnitude. Our glasses are finally properly focused to see what has been there all along.

Nevada Exploration Inc. (NGE:TSX.V) has pioneered the use of groundwater surveys for gold down to the parts per trillion. Ten years ago assay lab detection limits for gold were much higher. But as this changed Nevada Exploration worked with a geochemist to develop gold measurement protocols for groundwater samples. It has since collected 5,000 samples from gravel covered basins in northern Nevada that have highlighted 20 interesting areas and it owns four important prospects with reasonably developed anomalies. However, it has run out of money. Until it delivers its own proof of concept, nobody wants to give it money.

Barrick Gold is now doing groundwater collection in its own plodding way as it attempts to find the 300–400 Moz that disappeared 15M years ago when extension created Nevada’s basin and range topography. These ounces are hidden in the down-dropped bedrock under the gravel covered basins. One reason Barrick is keen to acquire Newmont Mining Corp. (NEM:NYSE) is to be in a position to consolidate the checkerboard land Newmont owns so that it will not matter that another Goldrush or Cortez Hills system it might find through groundwater sampling straddles Newmont claims. Of course, one has to wonder why Newmont does not embark on such a program given its land position.

TMR: Is this a race or a long-term story?

JK: It could turn hot overnight if a major groundwater generated discovery were made. Nevada Exploration needs a strong partner to buy a major equity stake and bring greater credibility to the process. This would enable it to finish the sampling program and acquire claims on the hotspots that it could either explore further on its own or farm out to other juniors. Nevada has the potential to become an extraordinary regional area play that brings the resource juniors back into the exploration game. And in doing so it would secure for America an in-the-ground gold legacy exceeding its current Fort Knox holdings, something that might be helpful down the road when China’s central bank gold holdings pass those of the United States.

TMR: We’ve talked before about the fact that during this downturn, a lot of companies were going to either disappear or be reduced to walking dead on the Toronto Stock Exchange and the TSX Venture Exchange. Is one of the bright spots of the market today that it’s easier to tell the good companies from the bad?

JK: Yes and no. Just under 600 companies out of 1,700 have more than $500,000 working capital and aren’t in the big mining company league. Some 300 have between $0 and $500,000 working capital, and about 700 have negative working capital of about $2B. The negative working capital ones are pretty much dead in the water because no one wants to give them real money to replace money that’s already been spent. You may find a few companies among them with interesting stories that are worth salvaging. But most of the indebted companies are going to wither away and disappear.

That leaves about 900 companies with potential to survive. Among those, I gravitate toward the ones that have real management teams—technical personnel who know something about exploration—and projects with a story indicating that the brains of management are actually at work and that they are not just going through the motions of pretending to explore. Some companies are sitting on piles of money where management is collecting big salaries but because they have large shareholders who are treating the company simply as a keg of dry power for extremely bad times, they do not have the go-ahead to do anything along the lines of serious exploration that would risk the capital but also put the company in a position to deliver a substantial reward. One also has to be careful about those companies because they represent opportunity cost.

But, in general, it is now easier to see companies that are doing something and distinguish those from the rest because the inability to finance and the poor financial condition of most of the resource juniors make it very clear that they have nothing and are doing nothing. There is no reason to invest even a penny in such zombie companies.

TMR: Thank you for your time.

John Kaiser, a mining analyst with 25-plus years of experience, produces Kaiser Research Online. After graduating from the University of British Columbia in 1982, he joined Continental Carlisle Douglas as a research assistant. Six years later, he moved to Pacific International Securities as research director, and also became a registered investment adviser. He moved to the U.S. with his family in 1994.

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1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None. 
2) John Kaiser: I own, or my family owns, shares of the following companies mentioned in this interview: Nevada Exploration Inc., InZinc Mining Ltd., EMC Metals Corp., Northcliff Resources Ltd., Namibia Rare Earths Inc., Avrupa Minerals Ltd. and Tsodilo Resources Ltd. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the companies mentioned: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over what companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
3) The following companies mentioned in the interview are sponsors of Streetwise Reports: Namibia Rare Earths Inc., Clifton Star Resources Inc., Exeter Resource Corp., Virginia Mines Inc., Soltoro Ltd. and Probe Mines Limited. Goldcorp Inc. is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert can speak independently about the sector. 
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Don’t Get Ruined by These 10 Popular Investment Myths (Part VI)

Interest rates, oil prices, earnings, GDP, wars, peace, terrorism, inflation, monetary policy, etc. — NONE have a reliable effect on the stock market

You may remember that after the 2008-2009 crash, many called into question traditional economic models. Why did they fail?

And more importantly, will they warn us of a new approaching doomsday, should there be one?

This series gives you a well-researched answer. Here is Part VI; come back soon for Part VII.

Myth #6: “Wars are bullish/bearish for stocks.”
By Robert Prechter (excerpted from the monthly Elliott Wave Theorist; published since 1979)

… If the stock market is not reflecting macroeconomic realities, what else could it possibly be doing? Well, how about political news? Maybe political events trump macroeconomic events.

It is common for economists to offer a forecast for the stock market yet add a caveat to the effect that “If a war shock or terrorist attack occurs, then I would have to modify my outlook.”

For such statements to have any validity, there must be a relationship between war, peace and terrorist attacks on the one hand and the stock market on the other. Surely, since economists say these things, we can assume that they must have access to a study showing that such events affect the stock market, right?

The answer is no, for the same reason that they do not check relationships between interest rates, oil prices or the trade balance and the stock market. The causality just seems too sensible to doubt.

Claim #6: “Wars are bullish/bearish for stock prices.”

Observe in the form of this claim that you have a choice for the outcome of the event. Economists have in fact argued both sides of this one. Some have held that war stimulates the economy, because the government spends money furiously and induces companies to gear up for production of war materials. Makes sense.

Others have argued that war hurts the economy because it diverts resources from productive enterprise, not to mention that is usually ends up destroying cities, factories and capital goods. Hmm; that makes sense, too.

I will not take sides here. We can negate both cases just by looking at a few charts.

Figure 11 shows a time of war when stock values rose, then fell.

35458 a


Figure 12 shows a time of war when stock values fell, then rose.


35458 b

Figure 13 shows a time when stock values rose throughout.

35458 c

Figure 14 shows a time when stock values fell throughout.

35458 d

Who wins the war seems to mean little, either. A group of Allies won World War I as stock values reached 14-year lows; and nearly the same group of Allies won World War II as stock values neared 14-year highs.

Given such conflicting relationships, why and how, exactly, does an economist expect war to affect his economic forecasts?

(Stay tuned for Part VII of this important series, where Prechter examines another popular investment myth: Namely, that “Peace is bullish for stocks.”)Free Report:


“Unimaginable Consequences” for Hong Kong

Unimaginable consequences?

These are not my words. They’re the words of the People’s Daily, the leading voice of the Chinese Communist Party. And they’re not a forecast or a speculation.

They’re a thinly-veiled threat!

In a moment, I’ll explain what I think those consequences might be — for the world and for you. But first let me give you a sense of how important this is and why I’m qualified to opine.

Hong Kong is the biggest financial center of the largest, most populous, fastest growing continent on the planet — Asia.

Only two other centers eclipse Hong Kong in power and size — New York, the financial capital of the world’s dominant superpower; and London, the center of the greatest empire in history.

Hong Kong’s banking, stock market, bond market and derivatives market are bigger than those of Frankfurt (the largest financial center of continental Europe) and of Tokyo (despite a national GDP that’s 22 times larger).

Tens of thousands of corporations, operating all over Asia, are incorporated in Hong Kong.

Over 1,600 companies, half based in mainland China, are listed on the Hong Kong Exchange.

And no matter what, if you want to do business in Asia, you almost invariably must go through Hong Kong.

I know from personal experience.

Screen Shot 2014-10-12 at 1.58.18 PMIn the early 1980s, I was working in Tokyo as a stock analyst for Wako Sh?ken, one of Japan’s larger brokerage firms.

And soon after I began there, my boss sent me off to Hong Kong for a project with their local subsidiary.

My task was to develop presentations about Japanese stocks, while interpreting from Japanese to English and to Cantonese. (They overestimated my linguistic abilities.)

Even back then, business at their Hong Kong subsidiary was a big deal for them — bigger than their subsidiaries or branch offices in New York, London, Dubai and a half dozen other centers. And that was 35 years ago, before Hong Kong’s meteoric expansion!

Why? Because of one single, powerful force that has propelled Hong Kong’s growth:


Freedom to trade, freedom from taxes, freedom from regulations, and above all, freedom from political interference or manipulation.

The authorities in Beijing seem to understand this — so much so that they’ve pursued something similar for Shanghai and other Chinese cities (within strict limits, of course).

What they don’t yet seem to understand is this: Economic and financial freedom cannot forever co-exist with political and social repression.

The Rise and Fall of

“Peaceful Co-Existence”

This is also an extremely important issue. So let me give you a quick overview.

Historically, the concept of peaceful co-existence was all about the relationship between communist and capitalist economies.

It first emerged in the early years of the Cold War. Moscow embraced it. But Beijing did not. And this landmark dispute became a key aspect of a great Sino-Soviet split — years of conflict, border clashes and even wars between the two communist powers.

Why did China and Russia disagree? One reason was because Mao Zedong rejected the idea out of hand. He called it “Marxist revisionism.” He argued that capitalism and communism are fundamentally incompatible.

Was he right? Or let me ask it this way …

Is it ultimately possible for capitalist free markets to survive under the thumb of an overarching — and over-reaching — communist dictatorship?

That is THE fundamental question that’s coming to a head in Hong Kong right now.

Now, some might argue that communism survives in China in name only. But that’s beside the point.

Img2Indeed, that’s what Mao’s sixth successor, China’s president Xi Jinping, must decide very, very soon.

Whether it’s under the rubric of “communism,”  “fascism”  or some other -ism, the question still boils down to the same thing:

Is economic freedom ultimately

viable without political freedom?

If the answer is “no” … if it is not possible for capitalism to survive under a repressive dictatorship,” then …

Mr. Xi and China lose their most valuable single asset. They lose the richest, most prosperous 436 square miles of the entire Middle Kingdom, their pipeline to global capital, their gateway to Western markets. They lose what makes Hong Kong what it is.

But that’s not the only question Mr. Xi is worried about. In fact, no matter how valuable Hong Kong may be to him, it’s not even his greater concern.

“What could possibly be more important to President Xi than the fate of Hong Kong?” you ask.

It should be obvious: The fate of China.

Just go back to that fundamental question I asked you a moment ago. Turn it upside down. And then ask it this way:

Is it ultimately possible for dictatorships to survive as the grand masters of free-enterprise? Can they forever repress the demands for freedom of a rising middle class and newly-empowered corporate elites?

Img3For this question, no speculation is required, and no evidence is lacking.

A thorough — even a cursory — review of history gives us all the answers we might ever need. I know. Because I was there when it happened — several times, in fact.

You see, as a young stock analyst in my 30s, I saw a lot in Asia.

But as a student in my teens and early 20s, I also lived and traveled a lot in Latin America.

In Brazil, I saw the generals come to power after central bank money printing went wild. Then, twenty year later, I saw them fall as their stubborn rigidity gave way to free markets and free enterprise.

I was in Guatemala, El Salvador, and Nicaragua … Chile and Argentina … Uruguay and Paraguay … when those countries were in the throes of similar cycles — guerilla wars, states of siege, and worse.

More recently, I crisscrossed East Germany not long after the fall of the Berlin Wall.

A few years later, I visited one of the former “closed cities” of the Soviet Union (nuclear and aerospace centers that even Soviet citizens could not enter).

And I can tell you flatly: In every case, I saw how dictatorships come and go … how free markets, free enterprise — and freedom of self-determination — always prevail.

That’s the great lesson of history.

That’s what Mao Zedong was afraid of when he split from his communist counterparts in Moscow.

And that’s also the great fear of his sixth successor, China’s President Xi Jinping, the man who must decide history’s next major turn.

So what WILL be the final outcome of the Hong Kong crisis?

What will be the “unimaginable consequences” that China’s People’s Daily is referring to.

I cannot speak to what they’re able (or unable) to imagine. But I can tell you what’s in my mind …

Consequence #1 is a crackdown. Mr. Xi is resolute in his view that there is simply no other alternative.

He’s the hardest-line leader of China since Mao.

Screen Shot 2014-10-12 at 2.01.00 PMHis entire support base and source of power derive from a no-negotiation, no-compromise line in the sand he’s drawn between China’s Communist party leadership and China’s 1.4 billion people.

He’s convinced that, if he gives in to the tens of thousands mobbing the streets of Hong Kong, he will unleash pent-up revolutionary forces on the mainland akin to those that toppled the Berlin Wall and doomed the Soviet Union.

If he’s pushed against the wall, he will crack down!

Will it be as bad as the 1989 Tiananmen massacre, which killed thousands and shattered China’s democracy movement?

In terms of lives lost, I doubt it.

But in terms of global impact, it could be a lot worse.

Consequence #2 is a hotter phase of the new cold war. We’ve been warning you about a new cold war for over a year. Now it’s here.

And, depending on the consequences in Hong Kong, imaginable or not,  we may be on the verge of a new round of escalation.

Already, Chinese authorities have warned the West to stay out of the conflict. Already, they’re accusing the West of fomenting the chaos.

Consequence #3 is a global money tsunami.

I’m not the only one who sees trouble ahead in Hong Kong.

Global investors also fear a massive police crackdown on tens of thousands of protesters, massive censorship of the media and the Internet, untold numbers of arrests, and worse.

In response, they have embarked on a new flight to quality — away from commodities, currencies and many stock markets.

The big island of safety in their view: The United States.

The big winner (for now): The U.S. dollar.

But make no mistake: Just as we warned you, global crises are spreading — from Russia … to Ukraine … to ISIS … to Europe’s economic woes … and now to Hong Kong.

Just as we predicted, these crises are driving wave after wave of flight capital to our shores.

And just as we said, all of this is reaching a crescendo, injecting more emotion into investor decision-making, including fear of global chaos.

The Global Dash for Cash

That’s why, over the past few days, most of this new capital has moved into cash or cash equivalents, earning practically zero yield.

It’s all clear as day. But it’s also raising urgent questions for investors like you and me …

How long will foreign investors be content to hold zero-yielding cash? How long will they sit there, dead in the water?  When will they resume moving that money into stocks for a more decent return?

No one has the precise answer, of course. Markets could fall further.

That’s why, in my ultimate portfolio, I still have 83 percent of my money in cash.

That’s why I’m waiting patiently for bargains.

And that’s why, when the time is right, I will target exclusively top-quality investments that are the first choice of risk-adverse investors all over the world.

I suggest you do the same.

The full story of how my family and I have been building this strategy since 1930 … and why I’ve decided to implement it now for the first time … is on my website.

Good luck and God bless!



Yield-Hungry Baby Boomers Are on a Death March

Today’s forecast: yield-starved investors forced into the market by seemingly permanent low interest rates will continue to be collateral damage. For some, that collateral damage may involve more than the loss of income opportunities… many could be wiped out completely.

I asked the participants in a discussion group: “If there were safe, fixed-income opportunities available paying 5-7%, would you move a major portion of your portfolio out of the market?”

They all answered a resounding, “Absolutely.”

Participants relying on their nest eggs for retirement income said they felt forced into the market for yield. Their retirement projections weren’t based on 2% yields, the rough rate now available on fixed-income investments. They’d planned on 6% or so. What other choice do they have now?

The Federal Reserve knows seniors and savers are collateral damage. Former Fed Chairman Ben Bernanke has openly acknowledged that the Fed’s low-interest-rate policy is designed to prompt savers to take more chances with riskier investments. In their book Code Red, authors John Mauldin and Jonathan Tepper shine a harsh light on that policy, writing:

Central banks want people to take their money out of safe investments and put them into risky investments. They call it the “portfolio balance channel,” but you could call it “starve people for yield and they’ll buy anything.”

I have to agree with Mauldin and Tepper.

The collateral damage inflicted upon seniors and savers is twofold. First, it’s the loss of safe income opportunities. The Fed’s low-interest-rate policies have saved banks and the government an estimated $2 trillion in interest alone. $2 trillion added to the balances of 401(k) and IRA accounts would sure bolster a lot of desperate retirement plans.

But there’s no sign the Fed will reverse its low-interest-rate policies in the foreseeable future. So, yield-starved investors, including throngs of baby boomers maturing into retirement age each day, play the market and risk their nest eggs in the process.

The Federal Reserve has succeeded in forcing savers to take billions of dollars out of fixed-income investments to hunt for better yields. Take a look at the chart below showing the S&P 500’s performance since 2004. The Index has almost tripled since its 2009 bottom. There hasn’t been a major correction in well over 1,000 days.

Screen Shot 2014-10-09 at 2.16.56 PM

When the bubble burst in 2007, the S&P took a 57% drop. I had friends just entering retirement who suffered

40-50% losses. Their stories are not uncommon, and some are now back at work—and not by choice.

This is the second form of collateral damage, and it can be much more devastating. It’s one thing to lose an income opportunity and call it collateral damage, but quite another to lose 50% or more of your life savings. If the market drops radically, as it did less than a decade ago, the life savings of many baby boomers could be destroyed.

No one knows when the next correction will occur. However, many pundits believe a major correction is due. Others say we can continue on the same track, much like Japan has done for 25 years.

Here’s what we do know: the Fed has made it clear that it plans to hold interest rates down for quite some time.

When you invest money earmarked for retirement, you risk trying to time the market. Even seasoned investors would be foolhardy to think they’ll have enough time to easily exit their positions and lock in gains. It never works that way.

Now is the time for caution. Whether you’re a do-it-yourself investor or work with an investment professional, it’s a good time for a complete portfolio analysis with an eye on this question:

What happens to my portfolio if the market completely collapses?

There are concrete steps you can take to avoid catastrophic collateral damage. Sticking to firm position limits, diversifying geographically (including international holdings), non-correlated assets, setting trailing stop losses, and holding short-duration bonds come to mind.

Be wary of any advisor touting the “buy and hold” philosophy. They’d point to the chart above and note that the market went from 700 to 1,900+ in five years. If investors are patient, it will come back after the next drop. Unfortunately, seniors don’t have time to sit around and wait.

No one can guarantee the market will rebound as quickly as it did in the last decade. It’s not the “buy” in “buy and hold” that concerns me. There are excellent companies out there that pay healthy dividends and will rebound relatively quickly. Depending on your age and financial condition, it’s the indefinite holding that could be a problem.

If you’re not comfortable holding an investment for a decade or more, consider using a stop loss. After all, would you rather suffer a major loss and hope against hope that the market rebounds fast, or be proactive and keep your nest egg intact?

The best way to avoid becoming collateral damage is to take safety precautions before the next big, bad event takes place. 

The article Yield-Hungry Baby Boomers Are on a Death March was originally published at

US Stock Mkt Now Very Close to Another Historic Crash

7011p-stockten-days-that-shook-the-nation-stock-market-crash-of-1929-posters-243x175US stock markets tumbled again yesterday as the recent sell off gathers speed. Traders note that the markets are now very close to their 200-day moving averages and when those are passed there is every possibility of a major crash for the most overvalued equities in the world whose internal support has been hollowed out over the past year.

After the falls on Tuesday the Dow is under 200 points away from the 200-day moving average trigger line, and the Nasdaq is even closer to this tripwire with 90 points to go. Automated selling could turn into a market panic to get out at this point.

Exhausted rally

The long rally is exhausted. The QE3 money machine is coming to an end. Where are the buyers going to come from now? Besides the small caps have been selling down for ages. This is a hollow shell of a market just waiting for the big guys to join the rout.

It’s also a market exhibiting every sign of the madness of crowd buying, from the all-time high for margin debt to the leveraging of corporate balance sheets to buy back stocks on an epic scale. The most overvalued stock market in the world now faces a global recession and high dollar.

Subscribers to our highly regarded monthly newsletter have been aware of this for some time and will have crash proof portfolios if they have heeded our advice (subscribe here). How well are you positioned for a Black Monday 1987-style of a 2010-vintage Flash Crash?


We are close to the brink now with not a sign of anything on the horizon to alter this inevitable fate.

Have we gotten this sort of prediction right before? Well have a look back at our whacky prediction of a crash back in October 2008 (click here). How was that for timing and accuracy about the level of the fall?

Where to this time round? Dow at 6,000 anybody?

Why All Hell Is Breaking Loose & Fear Is Taking Hold

shapeimage 22Today a 42-year market veteran & founder of Matterhorn Asset Management out of Switzerland speaks about the gold market & why all hell is breaking loose in the global markets and fear is taking hold. 

Greyerz:  “Eric, we’ve had a long period now when all news is good news for stocks, and that’s typical for a bull market.  But we are now very close to a period when all news will instead be bad news for global stock markets.  For instance, the mainstream media is telling people that stocks are falling because of the end of QE and the Ebola crisis….

“Previously, this type of bad news was simply ignored.  But as I said, everything that comes out now will begin to add to the selloff in global stock markets.

People being interviewed on KWN have discussed Ebola and how it will have a major impact on the world economy.  In Liberia productivity is down between 50 – 75 percent and inflation is surging and food prices are going up.  We could see this happening to a lot of countries in the world if the Ebola virus really starts to spread.

In Argentina we just had the head of the central bank resign because he was not printing enough money.  Argentina has a history of currency disasters.  The peso is crashing.  It’s down 75 percent since 2012 and the inflation rate is now 40 percent.  I mention what is happening in Argentina because I believe this is going to happen to a lot of countries once the global money printing starts in earnest.

Countries will eventually get to a point where they can’t borrow enough money.  This will even happen to the United States.  And the eurozone is in decline.  Production is down, lending is down, and GDP is down.  The latest German PMI figures were down for the first time in 15 months.  France is continuing to decline.  And in Greece 60 percent of the people live in poverty or on the verge of poverty. 

In the U.S. the PMI figures were also down.  This is at a time when the United States is officially ending QE.  The end of QE won’t last because as the stock market decline becomes too painful and European banks come under increasing pressure, there will be a new stimulus program announced.

The U.S. government is now borrowing a staggering $8 trillion each year.  $8 trillion of new Treasuries are issued every year.  That represents half of the debt that is renewed annually.  This means the U.S. is conducting a policy which is very unsound by borrowing short-term to take advantage of the extremely low or virtually zero interest rates.  If interest rates go to 5 – 10 percent, which I believe they will, it will be disastrous for the U.S. government because there is no way they could service their debt.  This would mean the U.S. would technically default due to the collapsing dollar.  This will also mean the dollar will be displaced as the world’s reserve currency.

Coming to gold, I’ve included two charts.  One illustrates the price of gold vs the dollar.  If you look at the chart since 1999, gold is up almost 400 percent (see chart below).

… more of what Egon von Greyerz had to say in this extraordinary interview (with much larger charts) HERE

KWN Greyerz 10-2-2014

… more of what Egon von Greyerz had to say and view much larger charts) HERE