Mike Niehuser: Mining Stocks Not Reflecting Record Gold
The Gold Report
Uncertainty will certainly push gold prices higher. In this
exclusive interview with
The Gold Report,
Mike Niehuser, founder of Beacon Rock Research, LLC, is bullish
on gold and well-managed producers, advanced development and
exploration companies. He shares his top eight picks and advice
on easing into an investment instead of buying all at once.
Antioquia Gold Inc.
Brigus Gold Corp.
Geologix Explorations Inc.
Inter-Citic Minerals Inc.
Kent Exploration Inc.
Kiska Metals Corp.
Revolution Resources Corp.
- Romarco Minerals Inc.
The Gold Report:
What is your perspective on the price of gold and your forecast
Based on gold's recent price history, it looks like we were a
little conservative. Our forecast for 2011 included the price of
gold ranging from $1,300/oz. to $1,500/oz. with the potential in
the wake of a catalyst to go over $1,600/oz. by year-end.
With gold prices at record levels, do you attribute weakness in
mining stocks to seasonal weakness or is the market forecasting
lower gold prices in the near to midterm?
The accuracy of the forecast is not as important as providing a
more or less arbitrary gauge for assessing the buoyancy of mining
stock prices against the primary metal underlying these
companies' assets. Considering sustained gold prices and
softening mining stock prices, we can draw a number of
conclusions: One, that gold prices are ahead of themselves and
ready for a seasonal correction, or two, markets are signaling
lower prices, implying that higher metal prices may not
materialize in later years when projects accelerate production.
On the contrary, we remain confident in our earlier forecast and
see few forces mobilizing to take gold prices lower in the mid to
Why are you bullish on gold prices?
In normal times, if there is such a thing, we might see a
seasonal correction in the spring or following a period of
excitement, much like we recently saw with silver approaching
record levels a couple months ago. I find it interesting that
gold has long since moved through record levels of the late 1970s
but has yet to produce a price chart like silver peaking just a
couple months ago. Gold prices have been remarkably resilient and
appear to be setting a new normal. Considering the excitement for
gold at half the price just a couple years ago, and gold
stabilizing at record levels, it is somewhat amazing that
investors seem almost indifferent.
What do you credit for breaking seasonal patterns?
We are living in historically uncertain times. A populist
uprising against the banks has not taken place in Europe, as
banks appear more willing to restructure debts and kick the can
down the road, rather than discipline member countries' loose
financial behavior. China appears to be facing both inflation and
limits to growth, a new concept for them in recent history, and
it's unclear how they will deal with a discontented population if
they increase interest rates. It would appear that the strategy
here in the states is to manage interest rates and inflation, at
least as they are measured globally, but high commodity prices,
high rates of long-term unemployed and anemic growth expose the
limits of monetary policy and increasing regulations. In all
three instances, government intervention is likely to increase
misallocation of resources that will lead to a more extreme
Are higher gold prices inevitable?
Not necessarily, despite loose monetary policy. With weak demand
for credit and investment, and QE2 ending, in the near term we
see interest rates declining and unemployment increasing. An
uncertain regulatory and tax environment may reduce the velocity
of money leading to lower gold and commodity prices in the near
term. But the only tool at the Federal Reserve's disposal, the
only one that they appear to understand, is loose monetary
policy. It is hard to see how they can back away from a QE3 with
indifference toward deficit reduction and the willingness of the
Chinese to continue to buy Treasury bonds.
So you see modest increases in gold prices until inflation
becomes a concern?
Yes, as long as low-cost imports from China, financed by Treasury
purchases, continue to roll in, deflation rather than inflation
remains a concern. Lower growth or production in the United
States is eventually inflationary without free trade or allowing
wages to fall. "Money illusion" temporarily placates the masses,
but only temporarily. In the meantime, should legislators cap the
debt or foreign investors require higher rates on Treasuries, the
blindfolds will drop from their eyes. Systematic risk and moral
hazard have gone global and we are all now "Too Big To Fail."
Gold prices measure the progress of political and market
economies. Sustained higher gold prices suggest global failure to
maintain confidence or to protect the essential element of
currency to be a store of value. The direction of gold prices
appears inevitable so it is only a matter of time and
If gold prices are, on average, ahead of your forecast and in
your opinion moving higher, what accounts for the recent softness
in demand or prices of mining stocks?
Good question, the easy answer is uncertainty. Not only do we
have excessive government intervention, but the world almost
daily appears more unstable. Pollsters used to ask people if they
felt less secure after 9-11. Now the question is do people feel
more secure after Bin Laden's death? Democracies are inherently
unstable. In the nuclear age, lessons may be final. Whether in
the Middle East or in the United States, it is not the outcome,
but an uncertain journey that increases the risk premium
component of interest rates. This clearly decreases the present
value of future cash flows. While this may push stock prices
down, at some point they bottom and reach equilibrium, and
investors may expect abnormally high returns for risk taking.
Investors buying in early 2009-deep value investors and true
contrarians that held through the spring of 2011-have been richly
rewarded. It is starting to feel a lot like the fall of 2008.
What do you mean?
In the second half of 2008, it seemed like fundamentals didn't
matter. Management teams that executed on guidance for developing
projects or production seemed to be punished for any news.
Following silver peaking in April, most mining companies have
taken a significant haircut. This appears to be from a lack of
demand or buying, rather than fundamentals or investors
liquidating positions. This has created a similar buying
opportunity, not as extreme as 2008, but possibly quite
significant. Should gold prices strengthen through the end of the
year, lower stock prices should increase the demand for industry
consolidation, acquisitions, stock repurchases or value
investors. Major mining companies or the Chinese wanting to
secure pipelines of production may set off a rally in 2011.
What are you recommending investors consider when analyzing a
We believe markets should eventually recognize value and
investors should focus on companies with potential to build value
that may be recognized. This would include competent management
and a balance sheet sufficient to execute on its strategy. Should
metal prices provide for positive margins-and $1,500/oz. gold is
arguably sufficient for projects to be economic-advancing
projects up the value curve should lead to higher stock prices.
Because the market may favor production or exploration, we look
for companies with near-, mid-, and long-term upside. We believe
this may provide the greatest opportunity for companies to gain
recognition and secure and retain a shareholder base-in other
words, build market capitalization. This characterization of
near- to long-term upside fits the full range of producers,
advanced development and exploration companies.
What companies fit this profile?
Minefinders Corp. (TSX:MFL; NYSE:MFN)
provides a good example of a producer that has rewarded patient
investors by moving into production of gold and silver in Mexico.
The company has capable management and has consistently improved
the balance sheet by creating additional opportunities. This
includes planning to build a mill at their Dolores project, which
will increase recoveries and expand the resource, leading to
production growth in the near to midterm. The company is also
moving closer to a decision on constructing a low-cost La Bolsa
gold project and exploring La Virginia. The company is
progressing down the path of building near-, mid- and long-term
We also were on
Brigus Gold Corp.'s (TSX:BRD; NYSE.A:BRD)
analyst day visiting their Black Fox gold mine and mill near
Timmins, Ontario. Management has succeeded in eliminating the
hedge book and reducing debt. Brigus has about $29M in cash and
expects to produce over 73 Koz. of gold in 2011 at about $625/oz.
As the company ramps up underground outputs with higher grades,
production is expected to increase to over a 100 Koz. in 2012 and
costs should drop. In addition to this scheduled upside in the
near term, the area is known for deep underground gold mining.
Brigus has had great exploration success near surface down the
trend in the Contact and 147 Zone. Together, this indicates good
potential to increase production and the life of the mine.
Improving prospects in the near and midterm should lead to Brigus
achieving an entirely new investment profile.
While on the subject of producing mines, I would like to
mention one interesting deep value company,
Kent Exploration Inc. (TSX.V:KEX;
, which is putting into production its Flagstaff barite mine
north of Spokane, Washington. Barite is used as a weighting agent
for drill mud. This is important for preventing blow outs like in
the Gulf of Mexico. It is really a simple crushing operation of
high-grade barite for operations in Canada. The company
anticipates cash flow of over $2M/year. Cash generated from this
operation should be deployed in advancing the Alexander River
gold project in Reefton, New Zealand. This project has a
potential historic resource of over .5 Moz. gold. Kent plans to
upgrade and expand the resource, which may provide feed for
depleting mines in the area. Here again, we see near-term value
and mid-term upside. Cash flow reduces dilution typical of
exploration companies, and the resource in New Zealand appears to
have little recognition in the market.
What advanced development companies fit your profile?
Geologix Explorations Inc. (TSX:GIX)
is rapidly advancing its gold-copper project in Mexico. The
company has established a 3.8 Moz. gold equivalent resource
supporting an 18-year mine life and has $20M in the bank. It has
seven drill rigs turning, which are likely to lead to upgrading
the resource classification, if not resource size and grade. It
will take about $8.5M to bring the project to prefeasibility in
the spring of 2012, and feasibility by year-end. In addition to
this near-term upside and expansion of the existing resource, the
company has only explored 15 square km. of a 172 square km. land
package. It appears to us that they are well positioned to locate
additional low-cost gold oxides at surface, which should lead to
higher production in the mid to long term. If investors believe
in copper along with gold, the substantial amount of news flow
coming out over the next 12 months should increase the visibility
of the company.
We also think
Inter-Citic Minerals Inc. (TSX:ICI)
fits this growth profile. The company is advancing its 3.4 Moz.
Dachang gold project in Western China to feasibility in late
2011. China has been in the news a lot lately, but Inter-Citic
appears to have strong backing from two significant Chinese
investors and is well aligned with the largest gold producer in
China. Inter-Citic has a long history of development in China,
and a manageable political risk. We see good likelihood that the
Dachang project will advance to feasibility with low operating
and capital costs. There is a good opportunity the company will
establish a central operation that could scale with discoveries
and other potential mines on their 279 square km. land package.
Inter-Citic plans to complete at least 15,000m of exploration
drilling, again combining near-, mid- and long-term upside.
Lastly, what exploration companies do you see having both near-
and long-term upside?
These are typically companies with historic or modest resources
or with large land positions.
Kiska Metals Corp.'s (TSX.V:KSK)
Whistler project is about 150 km. northwest of Anchorage, Alaska.
Kiska has established a copper-gold resource of over 5 Moz. gold
equivalent at its Whistler target and has about $20M in the bank.
This could be the first of several copper-gold porphyries
discovered on its large 527 square km. land position. We think
Kiska is well underway to doubling the resource, is well into a
35,000m drill program, and is approaching the project as if it
was a major mining company. The company continues to organize the
camp for ongoing exploration, and we suspect that by the end of
the day it will be competing with other large gold deposits in
Alaska and British Columbia.
Antioquia Gold Inc. (TSX.V:AGD)
also is pursuing a rather large land position in Colombia like an
experienced mine builder rather than a junior explorer. Antioquia
controls over 37,000 hectares in Colombia, but the focus has been
on Cisneros, which is about 5,600 hectares. Antioquia has
methodically explored Cisneros with mapping soil samples and
geophysical surveying that has led to ongoing drill success. The
company has also taken on a strategic investor with extensive
gold mining experience in similar host rock in Peru. Altogether,
Antioquia should enjoy near-term exploration success at Cisneros,
as well as other targets over the wider Cisneros project. Over
the long term, Antioquia will work to establish strategic
partnerships over the balance of its properties.
We also recently visited
Revolution Resources Corp.'s (TSX:RV;
project in the Champion Hills Trend in the Carolina Slate Belt
near Greensboro, North Carolina. Revolution is exploring in an
area of the U.S. that is known for the first gold rush, first
silver mine and the primary producer of lead for munitions in the
Civil War. The project follows the success of
Romarco Minerals Inc.'s (
4.2 Moz. Haile gold project in South Carolina. Revolution's land
position of 7,500 acres is second only to Romarco with 9,700
acres. Revolution's land position is also on private land with
similar host rock. The area is economically depressed and is
surprisingly welcome to mine development. While relatively early,
it appears that Revolution is well positioned to repeat Romarco's
experience, now about a $1B market cap, and may become an
integral part of Romarco's growth strategy.
Thanks for sharing your insights with us, Mike.
is the founder of Beacon Rock Research, LLC, which produces
research for an institutional audience and focuses in part on
precious, base and industrial metals, oil and gas and
alternative energy. Previously a vice president and senior
equity analyst with the Robins Group, he also worked as an
equity analyst with The RedChip Review. He holds a B.S. in
finance from the University of Oregon.
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1) The following companies mentioned in the interview are
The Gold Report:
Minefinders Corp., Brigus Gold Corp., Kent Exploration Inc.,
Geologix Explorations Inc., Inter-Citic Minerals Inc., Kiska
Metals Corp., Antioquia Gold Inc., Revolution Resources Corp.
2) Mike Niehuser: I personally and/or my family own shares of the
following companies mentioned in this interview: Minefinders
Corp., Brigus Gold Corp., Kent Exploration Inc., Geologix
Explorations Inc., Inter-Citic Minerals Inc., Kiska Metals Corp.,
Antioquia Gold Inc. Revolution Resources Corp. I personally
and/or my family am paid by the following companies mentioned in
this interview: None.
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