Scott Gardner: Europe's Debt Crisis and Its Effect on
Source: Brian Sylvester of
The Gold Report
If you want to know the future, pay attention to the decisions
European policymakers will have to make regarding debt, says
Scott Gardner, chief investment officer at Verdmont Capital. In
an exclusive interview with
The Gold Report,
he shares his analysis of debt policy investment implications,
plus which gold mines Verdmont likes in Latin America and
: AngloGold Ashanti Ltd. - Belo Sun Mining Corp. - Desert Sun
Mining & Gems -
Lydian International Ltd.
- Pershimco Resources Inc. -
Red Eagle Mining Corp.
Smash Minerals Corp.
Sunward Resources Ltd.
The Gold Report:
In one of your June research reports you wrote, "In the Eurozone,
there has been limited political will to really make an impact on
the debt side of the equation. With gross domestic product (
) growth set to slow, things should really get interesting for
euro policymakers as they attempt to make their shaky union
work." In the Eurozone, there is more than adequate money to take
care of the debt situation, but the question remains, is there
enough political will to keep all the member countries inside the
Eurozone? What sort of impact will pending Eurozone issues have
on the gold price?
First off, you say that there's enough money, but I think that a
lack of money is the primary concern. The European Financial
Stability Fund has something like €440B in committed capital and
the members haven't agreed upon future funding requirements.
Also, the European Central Bank (ECB) itself only has €10B. If
you compare that to the three largest banks in France, for
example, they own roughly $600B in PIGS (Portugal, Ireland,
Greece, and Spain)-related debt. You can see how imbalanced the
system is and how undercapitalized some of these organizations
are that are meant to be the solution.
In terms of a percentage of euro GDP, it's a relatively small
I think the overall liability in the banking system has been
estimated at about €2.5 trillion, in terms of PIGS-related
financing needs over the next few years. This is significant.
People talk a lot about the economics behind the crisis, but the
issue in the Eurozone is just as much a social one. It's
questionable whether or not, for example, the German populace
will remain in favor of bailing out some of the peripheral
regions' largess. This is where we get into the will of keeping
the Eurozone together, and Europe is going to see ongoing
George Soros said we are in a double-dip recession, and he
believes that the euro will come apart. Is that your view on both
People have been focusing largely on the numerator in the
debt:GDP ratio and the market has become used to the pressures as
they stand now. However, austerity measures and other proposed
solutions will put a tremendous amount of pressure on GDP. A
double-dip recession cannot be ruled out. Clearly, this will only
exacerbate the debt:GDP ratio and further handcuff policymakers
in terms of the policy response.
How will these issues impact gold and silver prices?
During the acute stages of a systemic selloff, all investments
typically get punished. We saw that during the correction at the
height of the credit crisis in 2008. We're also seeing that today
in the current selloff, with gold and silver both down
substantially. Over the long run, the crisis in Europe is clearly
very bullish for gold and silver because the only way out of the
current situation is additional stimulus from central banks.
Additional stimulus will put further downward pressure on all the
In one of your June research reports you wrote, "Gold continues
to break out in all major currencies despite prevailing concerns
in the market that gold is due for a major pullback. Of course,
since then, gold has had a dramatic rise, but more recently, it's
beginning to look like there is a major correction under way in
the gold price." Is the correction for real? If so, what range do
you believe it will bottom in?
Nothing goes up in a straight line, and a gold correction from
current levels is actually quite healthy as the short-term rise
was technically overextended. We remain in a gold bull market and
the market usually uses the 200-day moving average as a floor
within a long-term uptrend. Therefore, we would be aggressive
buyers in and around the $1,600 range, which would bring gold
close to its 200-day moving average.
Do you believe that pullback will inhibit the performance of
junior precious metals plays, given that the dramatic uptick in
the gold price in August didn't seem to carry many precious
metals juniors much higher?
We learned during the selloff in 2008 that junior gold stocks
behave like stocks first and gold investments second. If there is
substantial risk in traditional investments, gold stocks selloff
in sympathy. This time around, we believe investors will look
through short-term weakness and see the inherent profitability
that gold stocks offer. Arguably, in the current environment,
gold stocks are the only game in town, given that they're the
only sector that is growing earnings and profitability to the
extent that it is.
In a May research report you wrote, "Despite the recent
correction in the base metals complex, it is too early to
initiate positions or increase underweight allocations within
resource-focused portfolios. Our preferred segments of the
commodity market remain energy and precious metals at the expense
of agriculture and base metals." Has your position changed?
No. We were lucky enough to advise clients to short copper a few
months ago, and we still see continued pressure in base
metals-related equities. Many argue that current base-metal stock
valuations are reasonable, but we believe overly optimistic
commodity forecasts are baked into earnings estimates. Analysts
are still forecasting 2012 copper at around $4.30/lb. We'd like
to see more conservative copper estimates before we get more
enthusiastic on the base metals complex. Meanwhile, gold analysts
are forecasting, on average, something like $1,600/oz., which may
prove overly cautious.
You're based in Panama, and you get to regularly visit gold
projects in Latin America. What are some projects you visited
We recently visited
Sunward Resources Ltd. (SWD:TSX.V)
property, which was very exciting. We advised clients to buy
Sunward in May of this year, and we've done quite well. We were
impressed with how advanced the project was and how quickly
management was moving along. The company just came out with an
updated resource of 8.2 Moz. of gold, which more than doubled the
existing resource of 3.7 Moz. That is very encouraging.
That's a gold-copper porphyry project in Colombia. Five rigs
continue to drill the property; is that right?
It has seven drills currently turning, and it's moving toward
nine at the end of the month. There is still tremendous
exploration upside at the property, given that the current
resource estimate only incorporated two of seven identified
Is the project's metallurgy relatively simple? Is there potential
for a bulk-tonnage target?
Given that Titiribi is a low-grade project, it's key for Sunward
to really get the tonnage up and it has proven the ability to do
that with the recent resource update. One of the main concerns
with the project is metallurgy. The company is coming out with
some metallurgical testing in October, which we believe is a key
catalyst for the stock and will answer a lot of questions
Colombia is certainly seeing all kinds of exploration since the
government has become more mining-friendly. What other projects
in Colombia are you following?
We've been supporting a company by the name of
Red Eagle Mining Corp. (RD:TSX.V)
for over a year. We were involved in the pre-initial public
offering (pre-IPO) financing. The company IPO'd in June of this
year. Generally, we're guiding our clients toward developed
projects with recognizable assets and advanced-stage projects,
but Red Eagle Mining is an example of an early-stage exploration
company that people should look to take a small position in. It
has two highly prospective projects in Colombia and they have a
great management team. Even though the company only recently
IPO'd, it already has a team of 15 geologists in place and a
25,000-meter (m) drill program under contract. In this market, we
want to focus on companies that have near-term news flow and REM
will be coming out with results in mid-October.
Red Eagle is trading at about $1.05. Is that a good entry
Yes. Whenever there's heightened systemic risk in the system,
these early-stage plays get hurt. Moving forward, due to the fact
that Red Eagle has a sizeable and prospective land package, is
drilling and is well capitalized, we think the market will start
looking beyond current weakness.
What other projects in Latin America are you hot on?
We've recently bought
Belo Sun Mining Corp. (BSX:TSX.V)
. It is an interesting story in the Pará state of Brazil. The
company has a 3.4 Moz. resource at its Volta Grande project. It
has 11 rigs on site, and the main resource envelope remains open
in many directions. The company is due to have an updated
resource estimate at the end of October. Analysts are expecting
it to boost ounces into the 4 Moz range.
Peter Tagliamonte is on Belo Sun's board. He was also part of
Desert Sun Mining & Gems, which got the Jacobina gold mine up
and running, and that spurred a takeover bid from Yamana Gold
Inc. (YRI:TSX; AUY:NYSE; YAU:LSE). Does the presence of someone
like that, who's been involved with takeovers and successes in
the past, hearten your investment choice?
Without question, Belo Sun is a company that a larger-size
company would find attractive given the known resource, the
exploration upside and its location in a mining-friendly region.
The recent takeover of
Grayd Resource Corp. (GYD:TSX.V)
is a perfect example of what the larger-size companies are
looking for. They're looking for an existing resource with decent
exploration upside in a mining-friendly region, and Belo Sun fits
that bill rather nicely.
How about one more in Latin America?
We've been actively supporting
Pershimco Resources Inc. (PRO:TSX.V)
, which is advancing its Cerro Quema project right in our
backyard here in Panama. Pershimco has a 500 Koz. deposit, and we
see the potential for this to grow considerably. It has two
drills on site, and recent results in the easternmost segment of
the property expanded the footprint of the mineralization to more
than 4 km.
Pershimco also has a couple of projects in Mexico and one in
Canada. Do you like that diversification, or is it spreading
resources too thin?
PRO has assembled quite a team, and the focus has been primarily
on Panama. I think it's done a tremendous amount with the
property here, and we've been very pleased. Things might begin to
look up at the Quebec property. The market has been assigning
little value to the project, but management has been slowly
building up a sizeable land package in the area. As seasonal
factors make drilling possible, that might wake people up to the
property's merits. Management could always do a joint venture on
their other assets if they were concerned about being spread too
thin due to their focus on Panama.
Verdmont invests all over the world. What are some other juniors
Verdmont has taken an interest in?
We tend to favor advanced-stage exploration plays in the current
Lydian International (LYD:TSX)
is an attractive prefeasibility, heap-leach gold development
story in Armenia. The project has great infrastructure and a
strong management team that's led by Timothy Coughlin. He's the
former chief geologist with
AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE)
That's the Amulsar gold project. It has outlined about 2.5 Moz.
and is working toward a feasibility study and production in 2014.
Is that realistic?
We don't have any issues with that. The company has been focused
on expanding the known resource. It's currently due to finish
40,000m of drilling over the course of 2011. Even though it's a
little bit off the beaten path, Armenia has favorable,
Western-style mining policies in place. We don't see anything
that makes the project's timeline unrealistic, and we don't see
any real permitting issues.
Name one more strong junior.
With the majors and the advanced-stage gold stories being so
cheap, we're focusing a lot of our efforts and investors' capital
in those areas. But one pure exploration name that shows up on
our radar screen is
Smash Minerals Corp. (SSH:TSX.V)
. Smash is a relatively advanced exploration company with a
sizeable land package in the white-gold district of the Yukon.
Smash was put together by Adrian Fleming, the founder of
Underworld Resources (UW:TSX), which was sold to Kinross Gold
Corp. (K:TSX; KGC:NYSE) in early 2010.
Smash is interesting due to its very prospective and sizeable
land package. It has more than 4,000 claims representing
something like 800 sq. km. One thing that concerned us before we
started investing was that the white-gold district was quite hot,
as well as the Yukon in general. We were concerned that with
Adrian Fleming and Shawn Ryan (owner of Ryanwood Exploration
Inc.) involved, the story might be overly promoted, but in the
current selloff, the stock is trading at an enterprise value in
the single millions. For a highly prospective exploration company
like Smash Minerals, it's a no-brainer at current levels.
One issue with a number of the Yukon plays right now is that
assay labs are backed up at an unprecedented level. These
companies can't get the news flow out as quickly as they would
like, and that's hurting share prices in some instances. What
would you tell investors about that phenomenon?
I think the weakness in Yukon plays is largely due to the fact
that they ran so far so quickly, and a lot of them have
outstanding paper. The assay lab issue is not a primary concern.
That simply creates an opportunity to invest in Smash Minerals,
which has been dragged down with the group. It's one of the few
early-stage companies that are drilling this summer. Results are
due out in October, so there is lots of news in the pipeline.
Tell us one economic situation that you're going to watch the
most closely as Q311 comes to an end and Q411 begins.
All eyes will be on Europe and the pressures there. Generally,
the market is trading in sympathy with both European financial
stocks and, to a lesser extent, American financial stocks.
Policymakers need to find a solution before we get a base and see
strength in a lot of these junior mining stocks.
Thanks, Scott; it's been a pleasure.
Scott Gardner, CFA
is the Chief Investment Officer at Verdmont Capital S.A. based
in Panama. He is responsible for guiding firm investment
strategy and is the head of the company's discretionary
investment management program, research and corporate finance
operations. Prior to joining Verdmont, Scott was a portfolio
manager with an offshore bank in Bermuda, where he managed
discretionary investment portfolios, mutual funds and was the
bank's lead strategist for commodity-related investment
programs. Scott is a CFA charter holder and a member of the CFA
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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:
Grayd Resource Corp., Sunward Resources Inc. and Smash Minerals
3) Scott Gardner: I personally and/or my family own shares of the
following companies mentioned in this interview: SWD, BSX, LYD,
REM, PRO, SHH. I personally and/or my family am paid by the
following companies mentioned in this interview: None.
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