Gold Juniors Available at Bargain Prices: Brien
Source: Brian Sylvester of
What do the gold market and the weather have in common? You
can forecast both, but predict neither, according to Brien
Lundin, chief executive of Jefferson Financial and publisher of
Lundin, who also organizes the New Orleans Investment Conference,
isn't focusing on if there will be rain or sun in the market, he
in this exclusive interview. He's slowly accumulating juniors on
the cheap that have big news in the forecast.
The Gold Report:
You've compared the gold market to the weather because it's about
that predictable. What does your experience tell you about
navigating a market like this?
You have to be nimble and keep your eye on the big picture. Every
asset class is searching for a trend. The U.S. economy is in
transition. The equity markets are in transition. Everything is
in limbo searching for the next trend line. There's just no
telling whether that next direction is upward or downward.
In times like this, investors need to look beyond the
day-to-day headlines. They need to keep the bigger picture in
mind, focus on buying value on the dips and not getting too
aggressive in any case.
You were recently at the Prospectors and Developers Association
Conference in Toronto. What's the common refrain you're hearing
from investors and what's your response?
They're wondering when things are going to turn around. I wish I
could provide them with the answer because I'm searching for that
answer myself. We needed calmer markets, which we have now. We
don't have the dancing-along-the-precipice type of markets that
we had earlier this year when it seemed Europe could crater at
any moment. Now we need to have some recognition that there is
going to continue to be an easy-money environment as a backdrop
and that there will continue to be monetary inflation to support
the commodity markets and, most important, gold. Until we have
fairly steady, non-crisis-driven markets with a consensus toward
monetary easing, we won't see investors turn to the more
speculative assets, such as mining shares.
Many gold investors believe that continued growth in the U.S.
economy will eliminate the need for further quantitative easing
(QE) by the U.S. Federal Reserve, which could suppress the gold
price. You argue that there is already $1.5 trillion in the
system that hasn't been deployed by the Federal Reserve. In
February, you wrote, "This money officially doesn't exist. Until
the nation's banks start withdrawing it to make loans and insert
the funds into the economy, sustained U.S. economic growth, in
other words, won't be the end of liquidity injections. Instead,
it will mark the beginning of a new phase, as the velocity of
today's huge overhanging money supply accelerates and inflation
truly kicks in." That sounds promising for precious metals
prices, but are banks ready to start lending their hoards of
Simply put, they aren't yet. What I was talking about was a
scenario of economic growth, one in which the banks would not
only be able to start lending again but would also be eager to
start lending to capture that greater margin by creating loans.
Under that scenario of economic growth, bank lending would
increase and there would be a shot of adrenaline hitting the
market as reserves become currency.
The key is that so much debt and currency have already been
created that gold wins in virtually any economic scenario,
whether it's economic growth or a continued easy-money
environment in a more sluggish economy. Under either scenario
over the long term, gold is a winner precisely because there's
already so much debt and currency.
Do you have any timeline for that scenario to take place?
One of the important timelines is presented by the presidential
election in the U.S. That is going to be a key inflection point
for the markets. If the current administration is retained, there
would be more easy-money policies. Those policies won't suddenly
end if we see a Republican elected, however, because there's been
so much debt created in the U.S. and Europe. There's no way to
escape that burden through economic growth, austerity plans or
tax hikes. We cannot manage that mountain of debt that's already
been accumulated. The only way to address it is through monetary
inflation, by making the debt less valuable by increasing the
quantity of dollars and euros.
You can't do that with gold.
That's why gold is gold. As J.P. Morgan is rumored to have said,
"Gold is money. That's it."
Newmont Mining Corp.'s (NEM:NYSE) CEO, Richard O'Brien, said on
March 27 that $2,000/ounce (oz) gold was "reachable" in 2012. A
$350/oz-plus move in the gold price inside nine months seems a
It looks a bit fanciful. However, we could end up looking back at
a $300/oz rise in the gold price and think, "Well, that was
easy!" We've seen that before in this market. It could happen
with just the imposition of a third round of QE, which is what
created the last $300 move.
Gold and silver equities have lagged the prices of their
respective commodities since December 2010. What tangible move in
the gold price is necessary to lift share prices to float the
boat of all these junior companies? They're not even moving on
good drill results right now.
It's as much a matter of time as price. It's not just a matter of
getting a $100/oz, $200/oz or a $300/oz rise in the gold price,
which, of course, would move the juniors if it occurred in a
steady fashion against the backdrop of normalcy in the markets
and economy. That rise would need to occur over a period of time
long enough so that investors would be comfortable in taking on
risk. Juniors cannot thrive in an environment where investors are
searching for safety.
As an approach to the moribund gold equities market, you
recommend a stick-to-your-knitting strategy of continuing the
"slow but steady accumulation of undervalued companies with news
on the way." What are some companies that you're expecting some
positive news from in the near future?
There are a number of companies in that sweet spot. There are a
lot of bargains out there that aren't just grassroots exploration
companies with an idea and not much more. These are companies
that either have resources or are very likely to turn out very
positive news in the near term.
I'm very excited about
Elissa Resources Ltd. (ELI:TSX.V; E30:FSE)
South American Silver Corp. (SAC:TSX; SOHAF:OTCBB)
. Elissa is a rare earth play in Nevada 16 miles away from
Molycorp Inc.'s (MCP:NYSE) Mountain Pass project. I've visited
the property. Right now, Elissa is drilling a very high-grade
surface anomaly and has indications that it could spread
elsewhere on the property. It should have news out by early May
on its first drill program.
It's a heavy rare earths play a stone's throw from Molycorp's
processing facility at Mountain Pass, yet Molycorp let it slip
through its fingers. How does that happen?
It's an early-stage play. That's the kind of thing that these
aggressive junior exploration outfits are best at, finding
possibilities that other people overlooked.
Its proximity to Mountain Pass indicates that even a small
discovery there would make it economic.
Yes. It would provide precisely what Molycorp needs to complement
its project. Molycorp would be the natural buyer and would
backstop the value if there were a discovery there. The challenge
for Elissa will be trying to find another potential bidder for
the property. But given the infrastructure in the area, that
really shouldn't be too hard because any concentrates can be
What about South American Silver?
South American Silver has tremendous value. It's been held back
by the perceived country risk in Bolivia, but its Malku Khota
silver property is enormous, growing and worth many times the
current market cap of the company on a net present value (
) basis. The company is going to have a revised economic update
in Q212 and that could be a real catalyst.
South American Silver also has a second project, Escalones, in
Chile, that is a potential company maker by itself. It will have
its initial preliminary economic assessment (PEA) done sometime
That's a copper-gold-silver discovery with about 4 billion pounds
copper in the biggest copper-producing country in the world. It
put the resource estimate on Escalones out in December, but it
didn't move the stock a lot. Why doesn't the market give more
credence to that discovery?
The market isn't giving credence to a lot of things right now,
but December isn't the best month to put out big news. That said,
Malku Khota has been such a marquee project for South American
Silver for so long, very few investors really appreciated
Escalones. Quietly in the background, South American Silver's
management was doing the necessary confirmatory drilling on
Escalones to prove up a resource. Really, it was stunning when it
came out. It is fighting a battle to show the market that it has
two company-maker projects. If you like silver, there is Malku
Khota. If you like copper-gold, there is Escalones. There are two
ways to win. The company's value is not only backstopped, but
also leveraged to the metals as few other juniors are.
Could the company spin out Escalones?
It's something I know that management has considered, but I don't
think that it's going to do that in the near term.
When share prices aren't moving a lot, do you focus more on
jurisdictions so that if there's one discovery in a given area,
then that might raise the prices of a number of juniors operating
Yes, I do. A hot area is one of the things that can overcome
other market trends, positive or negative. I think the Yukon, for
example, is going to heat up again. There was a big rush into the
Yukon last year and it was just a zoo. A lot of the companies
anticipated that they would be able to do the necessary
groundwork and soil sampling, and then still have time to drill
some of their juicier targets before the end of the exploration
season. What they didn't count on was the fact that the assay
labs were just completely overloaded. Expected three-week
turnarounds turned into three-month turnarounds and longer. There
was very little drilling done on a lot of these projects, but now
they're ready to go. There are some companies up there that have
really exciting targets and discoveries. They're ready to
drill-and some are drilling right now.
Golden Predator Corp. (GPD:TSX)
has a bona fide discovery at its Brewery Creek project and has
virtually year-round access to drill the project, so it has been
producing results. This project is undoubtedly going to go into
production. It's just a matter of when it has defined enough
resource. It's been a past producer, so it has some of the
permitting obstacles already cleared.
It recently did a deal with Alexco Resource Corp. (AXR:TSX;
AXU:NYSE.A) that gives Golden Predator full ownership of Brewery
Creek in exchange for a 2% net smelter return royalty. What does
that mean for Golden Predator?
Bill Sheriff, Golden Predator's chief executive, is an awfully
smart guy. He's taken a ground floor, junior company to the New
York Stock Exchange before, and he's pursuing a similar game plan
here. It's a good deal. It fits Bill's mold. He has a better idea
than anyone of what the upside potential of the project is. I
think that's a sign that he thinks it's pretty significant.
Golden Predator says that commercial production and positive cash
flow are possible inside of 14 months. Is that realistic?
Absolutely. It's a past-producing project. The question remains
how to do it efficiently. It does have to get some numbers in
place, but capital is not going to be a problem. It is rapidly
drilling and making new discoveries as it goes along.
Are there any other companies in that jurisdiction that you have
Ethos Gold Corp. (ECC:TSX.V; ETHOF:OTCQX)
Ansell Capital Corp. (ACP:TSX.V)
. They have good anomalies, but they don't have true discoveries
yet. Ethos, for example, has outlined a 17.5-square-kilometer
soil anomaly called the Mascot Creek target on its Betty
property. It includes a trench running 7.3 grams/ton gold over 50
meters-which is one of the best trench results I've ever seen in
the Yukon. Ethos is a widely followed stock, but still a bargain
considering that I feel its chances of a major discovery are very
In contrast, not many people follow Ansell. It's a very small,
micro market cap company. But it's well funded, and has one of
the more exciting argots that I've seen in the Yukon. It had some
significant drill results in December that were completely
ignored by the market. The company is still trading at about the
same level that it was in late December.
Are there other areas that are exciting right now?
Seafield Resources Ltd. (SFF:TSX.V)
is one of the more undiscovered plays in that area. Not very many
people realize that it has about 3 million ounces (Moz) in total
resource identified on two targets. It is working toward a PEA on
the Miraflores project, which has about 2 Moz in a setting that
should be straightforward to mine and with a grade that should
allow for a very profitable operation. I see it advancing that
project toward either production or a takeout at some point. It
will continue to grow the resource, but it is already
Its stock is trading at about $0.17, which puts it at about
$10/oz. That is kind of a silly price.
Yes, it is. Its goal is to expand the resource as much as
possible, but also advance the resource at Miraflores and remove
some of that risk so it rises up the value chain. It's just too
large of a resource to be ignored.
At one point, Seafield was one of the most talked about juniors.
Then there were some issues and the management team was replaced.
What do you think of the new team?
I like them. I'm familiar with other work that they've done. They
are serious people experienced in Latin America and have great
local relations. The team that was running the company previously
was kind of a caretaker team. They were very happy that they
found this new group.
You follow some made-in-America stories, too.
Calico Resources Corp. (CKB:TSX.V; CVXHF:OTCQX)
has the Grassy Mountain play in Oregon. It is undervalued because
investors feel there's some risk that the project can't get
permitted in Oregon. In fact, it will likely end up as an
underground project, at least initially, with relatively little
surface disturbance. It has the local authorities and community
behind it. It has a great leadership team headed by Chairman Buck
Morrow, who's done this before and done it correctly.
I believe it will get permitted and eventually go into
production. That value will get realized. It has about 1 Moz in
total resources. As it focuses on high-grade, underground
resources, that's probably going to end up in the 600,000-700,000
ounce range. It has a lot of upside potential.
Is it open at depth?
Yes. It also has anomalies and geophysical targets outside of the
current resource that it will be drilling soon. It has good
It has added silver to the resource, too.
It actually calculated the silver resource for the first time,
which will help the economics. It's going to be a long-term value
play. The good thing about this project is that the risks are
known, and that is primarily the permitting risk. The market is
over-concerned about that risk. It's a very valuable, identified
resource that's growing.
What are some other made-in-America stories you like?
Revolution Resources Corp. (RV:TSX; RVRCF:OTCQX)
is one of the leading landholders among the juniors in the
Carolina Slate Belt play, the location of the first gold rush in
North America. It's building up a nice resource at its Champion
Hills project in North Carolina. That area is famed for Romarco
Minerals Inc.'s (R:TSX) Haile project, which will have a 4-5 Moz
resource, but has been delayed by permitting woes. Revolution is
drilling its project. It doesn't have the same issues as Romarco,
but it is being held back a bit by Romarco's permitting problems.
It could delay everything by up to a year.
In the meantime, Revolution made an absolutely extraordinary
purchase of the Universo and La Bufa projects in Mexico, which
are tremendous land positions with highly prospective targets
ready to be drilled. It just raised $5M and will be well funded
to advance those properties. I expect it to get some early news
out on those projects and then focus back on the Carolina Slate
Belt as permitting problems for Romarco get put to bed.
Some skeptics might say that it got the Mexican projects because
it's not sure that its primary project is going to move
I don't think that's true. The problems for Romarco revolve
around some wetlands around its landholdings. Revolution doesn't
have that problem, but it's tarred by the same brush. It isn't
getting any traction in the market despite its exciting Mexican
projects. As Romarco's project moves forward, it will open up the
Carolina play again and Revolution will be in a position to take
advantage of that.
Any more interesting American stories?
Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX)
has been building a lower grade but significant resource in
Nevada with the idea of using area mills to centrally process the
ore from a number of projects in the Oreana trend in a
hub-and-spoke strategy. The Oreana trend is a relatively new and
still unappreciated gold trend in Nevada. Importantly, the
company recently noticed that Coeur d'Alene Mines Corp. (CDM:TSX;
CDE:NYSE), which was operating the Rochester silver mine in the
region, failed to renew its mining claims with the federal
government. Rye Patch went in and staked a claim that is, in
effect, an active mining and exploration project by a mid-major
There's a lawsuit over Rochester between Rye Patch and Coeur
d'Alene. That doesn't seem promising, but Rye Patch certainly
seems to have a solid legal position.
Some would call its position unassailable. It's tough to bet on
legal outcomes, but this one does look pretty strong. For the
court system to invalidate Rye Patch's claims, it would have to
overturn over a century of established mining law and precedent,
with collateral damage that would put many American mining
operations up for grabs. There almost assuredly will be some
accommodation made one way or the other to resolve this
situation. Whatever that accommodation is, the value of it seems
almost certain to be far above what Rye Patch's current market
The rare earth elements sector took a big hit in 2011, but you
still see value in a few plays. Tell us why those still remain on
your radar and which ones you like.
The economic fundamentals have not changed. These plays go in and
out of fashion in the markets and there are bursts of buying here
and there. We saw that recently when Molycorp's competitor in
China reported that its earnings had quadrupled, and it boosted
buying in Molycorp and in other rare earth plays. Yet, a number
of these plays are still much undervalued.
Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A)
has been the lead play in the junior sector for some time, and
I'm proud to say that
was the first to recommend it years ago. The company recently
came out with a prefeasibility study on the Bear Lodge project in
Wyoming that showed tremendous value of $1.7-4 billion (
) NPV. It is one of the most advanced and valuable rare earth
deposits in the world today, certainly among publicly traded
companies. It's a tremendous value right now.
Another play that I like is
Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.A; TASXF:OTCPK;
. It recently released an impressive PEA on its Norra Karr
project in Sweden. The key to this project has always been its
location as a source of critical metals and rare earth metals
supply to Europe, breaking that market's lifeline to China. Then
it released this PEA that showed a $1.46B NPV at a 10% discount
rate. These numbers are stunning because most investors in the
market regarded this project as being middle of the road. It's a
really remarkable project and one of the most undervalued plays
out there-much to my dismay because I am a long-time shareholder.
But the company has much brighter days ahead of it.
Neither Tasman nor Rare Element has offtake agreements with third
parties. Is that something that they're going to be looking
It would be very important to Tasman because it makes it easier
to finance a project. It actually makes it almost inevitable that
a project will be financed and constructed. I would not be
surprised to see Tasman announce something of that sort. It's not
as important for Rare Element, however. I don't think that
company is as aggressively searching for that type of an offtake
It's been a pleasure speaking with you.
With a career spanning three decades in the investment
serves as president and CEO of Jefferson Financial, a highly
regarded publisher of market analyses and producer of
investment-oriented events. Under the Jefferson Financial
umbrella, Lundin publishes and edits
a cornerstone of precious metals advisories since 1971. He
also hosts the New Orleans Investment Conference, the oldest and
most respected investment event of its kind.
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1) Brian Sylvester of
The Gold Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Gold Report:
Calico Resources Corp., Ethos Capital Corp., Golden Predator
Corp., Rare Element Resource Ltd., Revolution Resources Corp.,
Rye Patch Gold Corp., Seafield Resources Ltd., South American
Silver Corp. and Tasman Metals Ltd. Streetwise Reports does not
accept stock in exchange for services.
3) Brien Lundin: I personally and/or my family own shares of the
following companies mentioned in this interview: Elissa Resources
Ltd., Golden Predator Corp., Ansell Capital Corp., Seafield
Resources Ltd., Calico Resources Corp., Rye Patch Gold Corp. and
Tasman Metals Ltd. I personally and/or my family am paid by the
following companies mentioned in this interview: None. I was not
paid by Streetwise Reports for participating in this story.
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