John Licata: Consolidation Coming to All
Source: Brian Sylvester of
"It's no longer just an energy market. It's no longer just a metals
market. It's just one commodities market," says John Licata, chief
commodity strategist at Blue Phoenix, Inc. John thinks that the
lines between commodities will continue to blur as companies
diversify their metals and minerals holdings. He also thinks gold
will approach $1,375 by year-end, and that a major uranium producer
will soon be snapped up by Asian interests. It's all in this
exclusive interview with
The Gold Report.
The Gold Report:
The price of gold fell almost 5% in July. Do you think this is the
time to buy? Or is it a sign the economy has found its feet and
that maybe it's time to lighten your gold portfolio?
I think this is a great time to get back into the gold market. The
recent slide is a buying opportunity. We are still facing a very
challenging economic environment as evidenced by recent remarks by
various U.S. Federal Reserve speakers, including Chairman Ben
Bernanke. I think the concerns regarding deflation are completely
overblown. The fact that we're seeing higher energy prices is an
inflationary tidbit that's getting left on the sidelines by
investors. Higher inflation will definitely lift gold prices, and
the renewed strength in the euro vs. the dollar is a bullish factor
for gold prices too. And we're quickly approaching Indian wedding
season, which starts in September; that has historically been a
bullish time for gold prices. And, in recent years, many of the
gold producers have not really had any big finds, which also bodes
well for gold because there is less gold to go around.
Will the senior producers look to takeovers to boost their gold
I think adding capacity through mergers and acquisitions (M&A)
can be cheaper than finding more gold. Commodities in general have
become a unified marketplace. By that, I mean the opportunities to
increase capacity, reserves or output are better served through
Barrick Gold Corporation (NYSE:ABX; TSX:ABX)
announced late last year that they would spend billions to buy back
their hedge book, I think that indicated the gold price would
continue to move higher. If the largest gold producer on the planet
is getting rid of its hedges, obviously there is much more upside
opportunity in the gold price.
Do you see some specific takeover targets out there?
It's my opinion that
NovaGold Resources Inc. (NYSE.A:NG; TSX.V:NG)
is a takeover target. If companies like Barrick or
Newmont Mining Corp. (
are looking to expand their portfolios, I think that NovaGold, with
its Donlin Creek and Galore Creek gold projects, becomes even more
attractive in a rising economy.
I think companies making acquisitions are more open to
diversifying their portfolios. It's not so farfetched to see a
Lonmin plc (
, which is based overseas, getting involved in the Canadian or the
North American gold markets. I wouldn't be surprised to see uranium
companies purchasing gold assets given that uranium has been
stagnant for the last couple of years.
Diversification will be key. Companies that did not have
diversification in their portfolios will look for more
diversification. I think NovaGold presents a very compelling
opportunity, both from a valuation and asset-play perspective.
Will some suitors stay away from NovaGold because of potential
permitting problems, given that their main project is in Alaska and
has a fair number of opponents?
No, I don't think so. And unlike the oil industry, the
repercussions to the environment are greatly lower for mining than
for offshore drilling. Right now, it takes many years to go through
the permitting process. I think a lot of that has been improving.
Alaska is a very interesting place because of its rich mineral
deposits, as well as the oil that's there. A lot of commodities
have become intertwined. I wouldn't be surprised if you saw a lot
of different, unique, joint ventures going forward. And I don't
think Alaska is going to be left in the cold.
In 2009, you called for $1,200 gold, and it hit $1,227 in December.
How high are you willing to go this time around? And what's the
I have a $1,375 target on gold this year; it's a forecast I put out
at the beginning of 2010. I'm still very comfortable with that
forecast. We still have a long way to go before the end of the
year. The fact that gold prices are still high compared to
historical standards means that we've had an opportunity to sell
off multiple times in recent months. Yet, we've always managed to
find gold buyers on dips, and we're still hovering around $1,200. I
think the sellers had their chance to drive down the price of gold
and they're out. The 5% decline that we've seen in the gold price
was not met by increased selling pressure-it was met by buyers
looking for a cheap way to play the yellow metal. That $1,375 is
still very much achievable this year.
What other gold companies have piqued your interest?
Interestingly enough, I came across a company called
Nautilus Minerals Inc. (
, and I thought it was really, really fascinating considering that
it's mining minerals offshore. We often speak of offshore drilling
as it applies to oil and gas, but you can use similar technology
for deepwater metals mining.
They haven't started mining yet, though?
Possibly by the end of this year, whether we're talking about
offshore Papua New Guinea or New Zealand, they could have some
positive assessments on some of their mineral properties that could
perhaps attract JVs with companies like
Halliburton Co. (
Schlumberger Ltd. (
. And maybe one of those companies could apply the same technology
and expertise they have developed in offshore oil and gas
I should let our readers know that we're talking about the Solwara
1 in Papua New Guinea. It's a high-grade gold deposit that's around
4,500 feet below surface in the Pacific Ocean. To me, that seems
fraught with unnecessary risk. Why do you like it given all that
Well, I think the permitting process has become more favorable for
Nautilus in those regions. The new technology that Nautilus has
developed to drill on the ocean floor-I believe it was 80
meters-makes this a much more attractive story. A lot of
competitors have said they're going to enter this space, but I
think Nautilus is ahead of them by a few years. The fact that
Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A;
Anglo American plc (
are shareholders in Nautilus is very significant. What this company
is embarking on could forever change the landscape of mining as we
I agree, but I think it's much easier to bring liquids or gases to
the surface vs. solids. What are some other gold plays you're
In the past, I've talked about
Fronteer Gold Inc. (TSX:FRG; NYSE.A:FRG)
; that's a company I am still enthusiastic about. I like the fact
that they have exposure to uranium and I have had the pleasure of
meeting management on several occasions. I am confident in their
ability to execute their strategy. I think that from a valuation
perspective, this company has a lot of upside.
You mentioned management. When you analyze different companies,
where do you rank management?
Management is very high in my list. As an analyst, I think I need
to go the next step to find out what makes a company tick; it's my
opinion that management is the heart and soul of a company. If
they're not able to share their story or execute on a game plan,
then that management should be replaced-as we have recently seen
BP (NYSE:BP; LSE:BP)
replacing Tony Hayward with Robert Dudley. There's a very low
tolerance for failure at the corporate level. It's extremely
important to have a capable management team that instills
confidence in not only shareholders but in analysts like
What do you think of NovaGold's management?
I am actually meeting with NovaGold president and CEO Rick
Nieuwenhuyse next week in New York. I think Rick has done a great
job of assembling a solid institutional base. Hedge Fund Manager
John Paulson made an investment several months ago. Rick was
very-what's the right word?-
in his pursuit of establishing a group of shareholders that thinks
long term. He's done a good job of getting in front of Wall Street.
I am looking forward to meeting him in person.
What are your thoughts on silver versus gold?
It's funny, we talk about gold so much but we don't hear anything
about silver. I think silver is very interesting from a historical
perspective and how it has traded in concert with gold. In my eyes,
silver is the evil stepchild of gold; and if gold prices move
towards that $1,375 level, it's hard not to think that silver
prices will go along for the ride. If you believe that we're going
to have an economic recovery, then you have to look at silver
because silver is used in so many products and new
Are there some silver companies that you like?
I've always liked
Hecla Mining Co. (
. It's unfortunate that investors have challenged them because of
their location-its stock is down about 20% year to date. If you
want some exposure to asset plays in Mexico, Hecla Mining could be
a very interesting name.
In the past, I've talked about
Pan American Silver Corp. (TSX:PAA; NASDAQ:PAAS)
-another name that's down for the year-but it pays a small
dividend. It is considered one of the bellwethers of the silver
group. When you have a company that is perceived to be a major
silver player with a market cap of only $2.6 billion, it makes me
think the consolidation that I mentioned earlier is going to be
felt across the entire commodities spectrum.
Moving to other precious metals, platinum and palladium prices move
in tandem with global auto sales due to the amount of these metals
used in catalytic converters. What are the prospects for those
metals in light of the current global economic climate?
I think palladium could see more upside. Many auto companies are
moving toward cleaner standards in terms of emissions. That
benefits palladium and platinum. Over the next couple of years, the
entire auto market is going to change. A testament to that is that
Tesla Motors, Inc. (
, an electric car company, just went public. I think companies that
use palladium and platinum for catalytic converters are going to
vie for supply contracts. Unlike the energy sector wherein there is
an excess supply of natural gas, there is a very limited global
supply of platinum and palladium.
What are some platinum and palladium companies you like?
Stillwater Mining Company (
is a name I have talked about for a few years. They have a very
interesting opportunity to change their game plan at this point;
because at the end of 2010, their contract with Ford expires. I
guess they were able to cultivate a new approach with General
Motors, and they were successful. I think Wall Street was waiting
for them to do the same with Ford. If the Ford deal does not go
through, I believe the company can still be quite successful
because many Japanese automakers would probably jump at the chance
to have Stillwater supply their much-needed platinum and palladium.
Stillwater is one of the most dominant players in those metals in
What other metals show some potential?
I think uranium is a forgotten metal. This goes back to what I
mentioned earlier-it's no longer just an energy market. It's no
longer just a metals market. It's just one commodities market.
Uranium is a fascinating story-if we're talking about building
nuclear reactors and having cleaner, more efficient energy sources,
uranium falls into the category of metals that can do very well
Any companies in that space that you're particularly interested
Cameco Corp. (NYSE:CCJ; TSX:CCO)
is a company that, in the past, has been an M&A-opportunity
hunter. It's my view that the hunter will become the hunted, and I
wouldn't be surprised if we see an Asian company look at Cameco as
a very attractive takeover target.
You think Cameco will be taken over?
That would be remarkable; that's a major uranium producer.
Yes, it's a major. For the last few years, the company's share
price has been somewhat suppressed because people wanted to
determine the fallout from Cigar Lake's underground flooding. Now
that the company is closer to putting that behind it, foreign
companies looking to beef up their uranium presence will be much
more receptive to looking it. Because Asian investors were so
enthusiastic to purchase Canadian oil sands assets, I think there
will be a run at Cameco now. A deal could face large regulatory
challenges, but I think Cameco is a takeover target.
Well, that's certainly some interesting speculation. Any thoughts
you would like to leave us with today?
I will say when it comes to metals-and I've said this before-China
is not the saving grace for commodities. If you plan to get into
any metal based on China's prospective growth, I just don't think
that's the right strategy. I think you need to look at commodities
from a global perspective; and while it's great that China is
improving, any slowdown in the Chinese market will have an enormous
ripple effect throughout the rest of the world. But that doesn't
mean the rest of the world economies won't grow and come out of
what is arguably the worst recession since the Great
John J. Licata is chief commodity strategist at
, an energy/metals independent research and consulting firm based
in New York City. He has appeared regularly in the media (CNBC,
Bloomberg TV/Radio, Business News Network, Barron's, etc.) over
the years for his insights and forecasts in the commodity
After studying economics and graduating from Saint Peter's
College (where he received The Wall Street Journal Award for
economic excellence), Licata set his sights on Wall Street. During
his more than 15-year career, John has held both trading and
research positions on the NYMEX, Dow Jones and Smith Barney. Early
in 2005, he founded Blue Phoenix, a leading independent research
and consulting firm focused on energy and metals. John is also the
The Commodity Chronicles,
the Blue Phoenix energy and metals newsletter (
here to receive a 30-day trial membership
). John is currently in the EMBA program at New York University's
Stern School of Business, and was recently voted "Up and Comer
Natural Gas Analyst" in the 2010 Institutional Investor All-America
Research Team Poll. You can follow John on
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1) Brian Sylvester of
The Gold Report
conducted this interview. He personally and/or his family own none
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3) John Licata-I personally and/or my family own the following
companies mentioned in this interview: None. I personally and/or my
family am paid by none of the companies mentioned in this
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