'Mania' in Junior Mining Stocks Predicted: Fayyaz
Source: Source: Brian Sylvester of
The Gold Report
Fayyaz Alimohamed, CEO of Altair Ventures Inc. and publisher
offers historical perspective and predictions on the global
economic crisis. In this exclusive
interview, he foresees a "mania" in junior mining stocks and
recommends holding physical gold outside the banking system as a
The Gold Report:
Fayyaz, in June 2008, using readily available economic data, you
wrote that the global economy was on the verge of financial
collapse. What do those sources tell you about where the global
economy is headed today?
In November 2006, I predicted that the U.S. was headed into a
recession. Seven months later, the Bear Stearns funds cracked,
beginning the crisis. By June 2008 it was obvious to me that the
crisis would escalate into a crash.
Today, the U.S. cannot meet its gargantuan future unfunded
liabilities. Europe and Japan face debt levels that ensure
eventual sovereign debt defaults and declining standards of
living. There is potential for all of this unwinding to seriously
affect an entire generation.
These economies cannot grow their way out of their problems
and the cuts needed to balance budgets would create massive
social turmoil because the cuts themselves would lead to sharp
drops in gross domestic product, creating vicious negative
spirals. The current solution being utilized is more debt and
quantitative easing. That can only keep things afloat until it
can't anymore. I would say that we will have the next major
crisis within the next two years.
I would like to flesh that out a bit. What do you believe will
trigger the next crisis?
Genuine reform has not been implemented. This crisis was caused
by unprecedented levels of consumer and corporate debt and Wall
Street greed. When the crisis happened, government rescued
distressed debt by massively increasing its own debt. For
example, the Federal Reserve and the European Central Bank are
using their balance sheets at about a 30:1 leverage. This is the
same sort of leverage that Wall Street banks had recklessly
indulged in. When government debt was substituted for corporate
and consumer debt, the whole system rolled over into a much more
Do you think the European debt crisis will remain the dominant
theme in 2012 or will other themes take center stage?
The European crisis is simply a proxy for a global debt crisis.
It happens to be focused on Europe because Germany has not been
as eager as the Federal Reserve to print money. Germany remembers
the hyperinflation of 1924, when unbridled money creation led to
prices doubling every two days.
Today, governments have a preponderant influence on the
economy, while large corporations, through lobbying, have
inordinate influence over the government, to the detriment of
other stakeholders. As the danger of a deflationary depression
increases, governments are attempting to reinflate the economy;
they may well overreach and create hyperinflation.
Thus, the broadest theme by far is debt and the reaction to
debt. We just saw France's debt downgraded and a negative watch
put on the European Financial Stability Facility. This negative
spiral will continue. Even though the U.S. has tepid signs of
economic growth, it is at the cost of enormous amounts of
stimulus being put into the economy.
Given that the U.S. and Europe are its two largest export
markets, China also is headed for a hard landing unless it can
increase internal consumption substantially.
Much of the discussion of the European crisis has centered on
Greece. But a recent auction of six-month Italian bonds was
priced at an interest rate of 6.5%-the highest rate of a bond
auction since Italy joined the Eurozone 13 years ago. What do you
make of that?
In literature, readers are invited to enter into a "suspension of
disbelief" to go along with the story, even if implausible.
Before the 2008 crisis, that was the mindset of investors. Now
they want to believe that governments can solve these
Greece was not the primary cause of the European crisis. It
was caused by German, French and U.S. banks. These banks are all
insolvent if they were to mark their assets to market and not to
theoretical models. But, we are suspending disbelief because we
all have skin in the game and need things to work out.
The drive for austerity ensures that Portugal, Ireland, Italy,
Greece and Spain (PIIGS) will continue to see their economies
shrink, leading to lower tax revenues and the continued inability
to meet budget targets, which will require larger debt relief. It
is a vicious downward spiral that will lead to declining
standards of living.
Greece, Portugal and Ireland would be much better off leaving
the EU, defaulting on their debts and devaluing their currencies.
That is a time-honored tradition. After some pain things will
work out, as they did in Argentina and Russia in the 1990s.
Investors want to believe that heavily indebted countries can
solve the problems of other heavily indebted countries; that an
insolvent banking system can be rescued by governments through
more debt issuance and debt monetization.
The European Central Bank has floated the idea of euro bonds,
backed by all 17 members of the Eurozone, as a solution to this
problem. But Germany does not want to go down that path unless
the indebted countries adopt more severe austerity measures. Do
you think we'll ever see euro bonds?
We are really into the realm of absurdity. For example, the
European Financial Stability Facility is a private company
authorized to borrow €450 billion (
) from the private sector backed by a guarantee from all the EU
members who are already heavily in debt and being downgraded
periodically. One proposal I saw was that it would use the €440B
of debt as collateral to borrow another €1-2 trillion of debt to
lend to the PIIGS!
Can this type of thinking ever end well?
As Europe enters a recession, the problems will only get
worse. Euro bonds issued by indebted countries just mean France
and Germany are putting their own balance sheets at risk. It may
provide time, but it does not solve the problem. The question is,
should they bailout the PIIGS or take the same money and bailout
their own banks? There are no good solutions.
A final thought on yields: when I studied economics we were
taught that U.S. Treasuries were the risk-free asset to be used
as an absolute benchmark. Given the recent downgrade and outlook,
perhaps the economics profession should start looking for another
risk-free benchmark, just as the U.S. dollar replaced the pound
Given all of this, how are you protecting yourself?
One of the primary measures of protection is a healthy cash
balance. You have to be in a position where you are able to ride
out any crisis and also to take advantage of valuations in case
of a crisis. If the crisis is as bad as I think it will be, you
will be able to find and acquire assets at generationally low
The other way to protect yourself is to invest in precious
metals. I believe precious metals will do well whether we
continue to stagnate or actually see another crisis. I think
silver and gold equities will do very well in the long run.
Investors have been seeking greater security for at least seven
months. How long do you think that risk-off sentiment will
Brian, U.S. domestic stock funds have seen net redemptions for
five straight years. Due to negative real interest rates,
equities are undervalued in historical terms. This is tempered by
the dangerous, rising systematic risk. Fund managers are paid to
perform or else they face redemptions. So, the bias is for stocks
to rally as we are seeing now, unless the second phase of the
crisis clearly emerges, which in my opinion is inevitable.
Ironically, in another crisis, governments will likely turn to
quantitative easing with a vengeance, which means that, despite a
crisis in sovereign debt, we will see a substantial rally in
commodities, particularly gold and equities, as substantial sums
of newly created money finds its way into the system and money
leaves the bond markets. You may find prices rising while the
economy is being undermined.
Fayyaz, your background is in insurance and finance, how did you
find your way into the gold and silver space?
From 2001 onward, I realized that the U.S. seemed to lack the
political will to deal with its increasing levels of budget and
trade deficits. In fact, the Fed was creating asset bubbles that
were bound to end badly. At the same time, I knew from history
that fiat money generally ends badly, starting with Kublai Khan.
I came to anticipate the decline of the U.S. dollar and the rise
of gold. I believe that the price of gold will be much higher in
the coming years and that gold will become part of the monetary
system in some capacity.
Gold is interesting in another way. Throughout history booms
have been localized geographically. As an example, the average
Canadian investor is unlikely to invest in, say, Argentinian real
estate or in its stock market even if they are booming. The
Internet bubble was the first time that a global audience became
aware of an asset category that was rising dramatically,
ironically thanks to the Internet itself. But you could not
participate unless you had a U.S. brokerage account. Gold is the
first truly global asset boom that investors at all levels can
participate in. Today investors are more savvy and more heavily
invested across markets and categories but gold is fundamentally
money and all investors and savers can buy it. Local yet
Investors also have different tools.
That's right. They can do a lot of research. They have a lot more
liquidity. The potential impact on the market for gold as an
asset class is phenomenal. It appeals to all levels of investors.
Someone buying a few grams of gold in China creates demand that
directly helps the value of your gold holdings. I mean, how many
people sleep with a barrel of oil tucked under their
Not if you could help it.
Historically, gold and silver equities leveraged the returns on
gold. In 2011, mining companies were producing gold at an average
cash cost just under $600/ounce (oz) and were getting about
$1,600/oz in revenue. Cash flows are very impressive and price
earnings are healthy. Mining companies continue to buy juniors
with good assets, especially at these low share-price values. I
moved into the sector to take advantage of this bull market in
gold. And, I believe we will see a mania in junior mining stocks
before this is over.
And, when will that be?
I think we will see this happen within the next two years as
people begin to realize that solutions to the global economic
situation are not forthcoming. There will be more and more
nervousness and gold will find a larger and larger audience.
We now have a situation where central banks, which were net
sellers of gold for 20 years, became net buyers in 2009 and are
accelerating their buying programs. We are seeing tremendous
support for gold from central banks, institutional and retail
investors across the world.
Do you have positions in any gold and silver juniors?
Yes, one is Colombia Crest Gold Corp. (CLB:TSX.V; EAT:FSE). This
company has a huge land package in a prolific gold belt,
surrounded by several large deposits including Sunward Resources
Ltd.'s (SWD:TSX.V) 8 Moz Titiribi project. IAMGOLD Corp (IMG:TSX:
IAG:NYSE) took a 19.9% stake in October 2011, which validates
Colombia Crest's exploration program. With many large, prolific
gold targets, the company will commence a 5,000m drill program
next month. It also has a high-grade gold resource in Bolivia, a
$25 million (
) market cap and $6M in cash. There is good upside potential as
the company gets decent drill results.
Is there one project that will attract notice to Colombia Crest
It has two projects in Colombia called Venecia and Fredonia.
And are they underground mine systems or bulk tonnage
I think Colombia Crest has a number of prolific targets. Some
will be potential heap leachable targets and others are
underground and, therefore, higher grade. So, the company has a
dual approach in the Antioquia Province.
As far as management goes, are there people onboard that you are
I mostly talk to Hans Rasmussen, the president and CEO. He
strikes me as being very focused. He is a geologist and
geophysicist and has worked with a number of senior companies. He
was brought in by a group of investors to sort out various issues
and he created the opportunity in Colombia. Rasmussen is the kind
of person that you can have confidence in.
Do you have another junior name?
I would also mention Coral Gold Resources Ltd. (CLH:TSX.V) with a
3.4 million ounce (Moz) Inferred resource. Its Robertson property
in Nevada sits adjacent to Barrick Gold Corp.'s (ABX:TSX;
ABX:NYSE) 14 Moz Cortez Pipeline mine, which produces gold at a
cash cost of $312/oz. The preliminary economic assessment just
came out, showing a net present value at a 5% discount at
$1,500/oz gold of $147M for just three of its multiple zones. Its
market cap is about $15M. Coral is a natural takeover target. I
believe there is good value here for a patient investor.
Coral has not put out any news since February 2011. The lack of
news for almost a year has done nothing but erode shareholder
confidence. What is the problem?
From what I understand, unlike nearby exploration companies,
Coral has had its mine for a couple of decades and is a past
producer. The company was given some very rigorous regulatory
environmental conditions to meet regarding migratory patterns of
birds and insects and such. Coral had to study these for a given
period of time, which delayed its drilling permit. I think that
situation is now on the verge of being resolved.
If that happens, Coral has the cash and is ready to drill. You
should see movement in terms of activity and, potentially, share
Let's move to silver. Great Panther Silver Ltd. (GPR:TSX;
GPL:NYSE.A) is led by Bob Archer, a real veteran. The company is
producing from its Guanajuato mine in Mexico. In 2012, the
company plans to produce 1.72 Moz silver, up from 1.5 Moz last
year. It also expects to produce 10-11 thousand ounces (Koz)
gold, up from 7.8 Koz in 2011. That news, although good, was not
met with much enthusiasm from the market. What are your
I think a 20% year-over-year increase is very healthy for any
producer. The company's profit margins are excellent. It has a
30% net margin for the year to date. So, it should generate very
decent cash flows going forward. Great Panther has $40M in the
bank. It is growing the resource at the San Ignacio project, is
looking for acquisitions and it is mining a recently discovered
high-grade zone in Cata.
Overall, the junior sector has stagnated over the last few
months and I think Great Panther has just been part of that
What are your thoughts on what Bob Archer has done there?
I think Bob has delivered tremendous value for shareholders. He
is very competent and is a man of integrity. I think his share
price is closely linked to the price of silver, which is
generally true for most silver producers. Guanajuato has a rich
history. It was mined by the Spaniards and has been in production
for 400 years. It was once considered the richest silver mine in
the world. Bob has taken it from when silver was down to $4/oz,
resurrected it, capitalized it, built out infrastructure and
delivered tremendous value.
In your time in this space, what have you learned that the
average retail investor ought to know?
This is a very volatile sector, subject to investors jumping in
when there is a bullish trend and a lot of enthusiasm, and those
same investors not wanting any part of equities when there's a
pullback in prices.
Given the overall increase in volatility in the markets,
investors really should take a look at gold and silver. If they
are bullish, any pullbacks in the commodity prices or in the
associated equities should be seen as buying opportunities. When
there is a lot of enthusiasm, it should be seen as creating
You also have to have physical gold and silver in your
possession. We learned a lesson with MF Global. We saw $1B of
segregated funds in clients' accounts vanish. My understanding is
that some of those funds were comingled and used to settle MF
Global's liabilities to other financial institutions. There is
this whole issue of counter-party risk, which gold does not have.
That should be a cautionary reminder to people. You need to have
physical cash balances. You need to have physical gold and silver
outside of the banking system as a safety net because, as Warren
Buffet said, we are in uncharted waters now.
You grew up in Pakistan, where gold is part of the culture, given
as gifts at weddings and such. Do you think you would have that
same opinion about physical gold as a personal asset if you had
grown up somewhere else?
Not in my case. I had no involvement or affinity with gold. I was
a finance professional. My involvement with the gold sector is
purely intellectually driven, from looking at trends within the
macro economy and realizing that gold and silver really are
hedges against turmoil and currency debasement.
But that is a very good question and it points up the
importance of watching out for biases in the commentaries that
you read. People have vested interests and they do tend to have
agendas, both in the mainstream media and elsewhere. For your own
protection, you need to be sensitive to those influences and to
study track records at key inflection points before relying on
other people's judgment.
Fayyaz, thank you for your time and your insights.
Fayyaz Alimohamed is president, CEO and director of Altair
Ventures Inc. and publisher of the
. He has over 20 years of experience in investment
management, finance and consultancy. He previously worked at the
Aga Khan University Hospital, Financial and Management Services
Ltd. (a management consultancy set up by Morgan Grenfell &
Co. Ltd. and Booz Allen Hamilton Inc.) and as the chief financial
officer of the Key Capital Group before becoming director of
investments for the Cupola Group, a large operating and
investment conglomerate based in Dubai. He holds a Bachelor of
Science (Honors) degree in economics from the London School of
Economics, University of London, and is a Certified General
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1) Brian Sylvester of The Gold Report conducted this interview.
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