The four-year-long bear market in metals stocks has resulted in an historic opportunity for investors, says Rick Mills, the owner and host of Ahead of the Herd.com. In this interview with The Gold Report, he explains that gold and other metals must rise as supply falls, so that when the market finally turns, those companies that have continued to increase shareholder value will reward shareholders many-fold. And he highlights four companies poised to do just that.
The Gold Report: Last month, the price of gold reached a five-year low near $1,140/ounce ($1,140/oz). Then it rose quickly to over $1,200/oz. Does this tell you the bottom is finally in?
Rick Mills: Gold will probably remain, in the short term, somewhere between $1,000/oz and $1,200/oz. Medium term, when people realize the Federal Reserve cannot raise interest rates and the global economy has serious problems, gold will rise.
TGR: The last time we spoke, you said, "Federal Reserve Chair Janet Yellen has more to do with the price of gold than anything else going on in the world today." That being the case, what do you make of her recent remarks about losing "patience" and raising interest rates?
RM: Yellen's impatience reflects a concern regarding low to zero inflation. If rising interest rates are needed to curb inflation, yet there is no inflation, why would Yellen raise rates?
If Yellen does raise rates, that will mean a continuing strong U.S. dollar, and that's not something I suspect the U.S. really wants to see considering the recent poor earnings statements from the S&P 500. They have been a disaster, and they're going to get worse as long as the dollar stays strong or gets stronger.
TGR: Over the past four years, metals stocks have performed poorly, even as we have seen enormous growth in the S&P 500 and the broader equity markets in general. Now we are seeing tremendous volatility in the equity markets, which has led some observers to suggest we have a bubble about to burst. What do you think?
"Kootenay Silver Inc. initial phase 2 assays position La Negra as one of the richest, near-surface, pure-silver plays in northwest Mexico in the past decade."
RM: The multinationals listed on the S&P 500 have a lot of overseas earnings, which now come in the form of much weaker currencies because of currency wars. When these earnings are brought home to the U.S., they are converted into U.S. dollars, resulting in the earnings rout I just mentioned. This will not stop as long as the U.S. dollar stays so strong, so I do see the S&P going south.
TGR: In January, you quoted Randgold Resources Ltd. (ADR) 's (NASDAQ:GOLD) CEO Mark Bristow, "The gold mining industry [is] fundamentally broke at a gold price of $1,300/oz." If true, doesn't this mean that either the price rises above $1,300/oz, or most gold companies close shop?
RM: Absolutely. I have previously written regarding all-in sustaining costs (AISC), which is the new reporting metric for gold miners. AISC does not include costs such as project capital, dividends, working capital, taxes, financing and interest charges on debt, costs related to business combinations, asset acquisitions and asset disposals, and items needed to normalize earnings (i.e., stock options, charges for discontinued operations). With gold currently selling for US$1,200/oz, gold miners with AISCs as low as $1,000/oz are not making money, and this is not sustainable.
"North American Nickel Inc. is a well-funded, well-managed company with serious backers."
The producers have reacted to the collapse of the gold price by high-grading deposits, and the explorers have slashed their exploration budgets by 60%. High grading and cost-cutting will result in falling production and reserves.
TGR: Meanwhile, we have tremendous physical gold demand from Asia, and the central banks are buying and not selling gold. Doesn't the law of supply and demand tell us to expect a substantial increase in the price of bullion within the next two or three years?
RM: Demand for gold exceeds mined supply; this situation is going to get worse so I would suggest that you're right.
TGR: Where do you see the prices of silver, nickel and copper going in 2015?
RM: I wish I had a crystal ball; I don't, so I quit predicting prices some time ago. All I'll say now is that given the global economic fundamentals, and my expected lower U.S. dollar, I don't expect any of these metals prices to go lower than the low they just reached and came back up off of.
TGR: What is your favorite silver junior?
RM: Kootenay Silver Inc (KTN:TSX.V). Kootenay has two projects in Sonora, Mexico: Promontorio and La Negra. They are contained in a 25 kilometer (25km) by 15km mineralized corridor known as the Promontorio mineral belt. The Promontorio deposit itself is an absolute monster: 92 million ounces (92 Moz) of silver equivalent Measured and Indicated and another 24 Moz Inferred at 70 grams/ton (70 g/t).
Kootenay doesn't quite yet understand the Promontorio structure, so it is engaged in a very detailed mapping and sampling program to find the high-grade areas. But this problem is not unusual with such structures. Consider AngloGold Ashanti Limited (ADR)'s (NYSE:AU) Cripple Creek gold mine in Colorado. Like Promontorio, it is a diatreme. Cripple Creek was mined for decades before it found a 100 meter (100m) pipe that contained 8 Moz gold. Promontorio is basically a 1.5km long mineralized area, so it requires a comprehensive program to delineate high-grade targets.
TGR: Given how big Promontorio is, why is Kootenay concentrating on La Negra?
RM: This is the reality of running a junior. You need to get the best bang for your buck. For Kootenay, that means La Negra. It's 6km from Promontorio, and it's an exciting, new, pure silver discovery. Last year, Kootenay drilled 3,100m in 25 HQ diameter core holes at La Negra. It was hugely successful—a series of outstanding, high-grade drill intercepts from surface, including:
LN 21-14 Containing from surface and bottomed in mineralization:
156.47 g/t Ag over 200m including
420.34 g/t Ag over 50m from 150 to 200m including
1,337.66 g/t Ag over 6m and
492.30 g/t Ag over 17m at the bottom of the hole excluding the 6m of 1,337 g/t Ag interval
I made a back-of-the-napkin calculation that La Negra phase 1 drilling revealed 20 Moz of pure silver—a conservative estimate on my part. The company is now drilling a phase 2, 30 hole, 3,000m program.
TGR: Kootenay announced initial phase 2 assays March 31. How good are they?
RM: They position La Negra as one of the richest, near-surface, pure silver plays in northwest Mexico in the past decade. The latest results, in my opinion, give an established silver producer(s) the opportunity to fast track into production a low-cost, 4–5 Moz/year mine.
Even if no one comes knocking, Kootenay has the team to advance the project itself. CEO Jim McDonald's track record includes Alamos Gold Inc.'s (AGI:TSX) Mulatos mine, and director Dick Whittington's track record includes Farallon Mining Ltd.'s (FAN:TSX) G-9 mine.
TGR: Agnico Eagle Mines Ltd (USA) (NYSE:AEM) owns 10% of Kootenay. Would it be interested in a takeover?
RM: I would think so. There are not many pure silver mines with around 4–5 Moz/year of pure silver production over 8 to 10 years. That is very special.
TGR: Which junior nickel explorer is your favorite?
RM: I like North American Nickel Inc. (CVE:NAN) for the same reasons I like Kootenay. The company has put together one heck of a management team. It has been able to raise money all through the down cycle. It is being funded by its sister company, VMS Ventures Inc. (VMS:TSX.V). Funding is also being provided by the Sentient Group, which is an umbrella group, so that opens up other conduits to financing. It has $6 million ($6M) in its treasury and will raise more.
North American Nickel continues to advance its highly prospective Maniitsoq nickel-sulphide project in Greenland. It is going exploring this year, putting drill holes into the new targets identified last year and will drill some of the older targets to define resources. North American Nickel will also fly geophysics over new targets and will have boots on the ground doing an extensive mapping and sampling program. The drilling contract has been signed. The camp logistics contract is signed.
TGR: How does it stand for infrastructure?
RM: The company announced April 1 it is moving forward with its plan to buy the port of Seqi from LKAB Minerals, a subsidiary of Minelco AS, a Swedish iron producer. The port is a pier out into a deep-water fjord just a little farther up from its base camp.
When North American Nickel gets Seqi, fog is not going to be as much of a problem. Helicopter expenses will be quite a bit lower, and shipping will be possible year-round. To build or replace this pier and quay would cost about $50–60M. My understanding is that North American Nickel can take over the reclamation bond that was posted with the government. And the port would be a revenue stream should other companies decide to make use of it.
TGR: In February, North American Nickel made two management appointments. What's the significance of this?
RM: It's huge. Patricia Tirschmann, the new vice president of exploration, liked the project and wanted to come aboard; she's an expert in nickel sulphide exploration. She then hired Sharon Taylor as chief geophysicist, again another inhouse expert hired. This shows you the quality of the people that an existing high-quality management team with a high-quality project attracts.
North American Nickel is a well-funded, well-managed company with serious backers working to find nickel sulphide. Such deposits are rare, and anything close to tidewater is even rarer. This company is building shareholder value.
TGR: Which junior gold explorer do you like?
RM: Theia Resources Ltd. (CVE:THH). This company shares management with Kootenay Silver. Kenneth Berry, Theia's CEO, is chairman of Kootenay.
TGR: This is an early-stage company, right?
RM: Correct, very early but with outstanding results for such an early stage. It's operating on the Nechako Plateau, northwest of Prince George, British Columbia, and has discovered two new precious metal systems, Fox and 2 X Fred. Fox has strongly anomalous gold and silver values in surface grab samples and numerous anomalous mineral occurrences over 1 square km. The best mineralization is underlain by a 3km-long magnetic anomaly, and the alteration in mineralization indicates potential for a disseminated, high-grade type discovery.
2 X Fred has consistently anomalous gold with silver in the upper levels of a hot-spring epithermal gold system. Its composite grab samples averaged 0.38 g/t gold with all samples above 0.31 g/t. The geology and mineralization indicate potential for large, low-grade deposits and smaller, high-grade deposits.
TGR: What's special about the Nechako Plateau?
RM: It's elephant country, hosting such notables as the Endako molybdenum mine, the past-producing Equity silver mine and New Gold Inc.'s (NYSE:NGD) Blackwater deposit: 9.5 Moz gold and 70 Moz silver. The plateau is correlated with very large precious metal deposits.
Theia's surface results were very impressive; if mineralization continues to depth, this is going to be a very spectacular play. It could potentially be seen as another Blackwater, and that means it's going to have a lot of eyes on it, including people who have been successful here in the past. The company will raise money this spring and explore its properties with the aim of doing a phase 1 drill program. Everybody should have this one on their radar screens for an exciting, early stage gold exploration play.
TGR: Finally, you wanted to mention a diamond company.
RM: Strike Diamond Corp. (CVE:SRK) is exploring it's large tenure in the North Saskatchewan Craton Diamond Play. In 2013, North Arrow Minerals Inc. (CVE:NAR) released news that it had hit kimberlite. Later that year, it released some pretty spectacular diamond counts. A just-over 200 kilogram (200 kg) sample from PK150 returned 23 commercial-sized diamonds: stones larger than a 0.85 millimeter (0.85 mm) sieve, an amazing return from 200 kg. This led to a staking rush by many juniors. Strike was one of these companies.
The diamond count that this company had released was spectacular, but, unfortunately, everybody thought the diamonds came from a small dike.
TGR: On March 30, North Arrow released news that totally changed how investors should look at this play. What makes North Arrow's news so important?
RM: North Arrow drilled seven holes into PK150, the "dike" in which it found the diamonds. North Arrow has now extended the kimberlite at PK150 to a strike length of 150m and to a depth of 200m below surface, and it's open to the east and to depth.
North Arrow also announced it has changed the classification or the texture of the kimberlite to a pyroclastic kimberlite. This changes the whole complexion of the North Sask Craton Diamond Play play. It has changed from what people thought was a play that had good grade and good chemistry but were dikes too small to be of economic interest, into a play characterized by diatremes that come with large size connotations.
North Arrow also announced three new discoveries. One of them, PK314, is described as a diatreme-like body. PK314 displays textures coincident to pyroclastic kimberlite, which is diatreme-facies kimberlite—as opposed to the purely hypabyssal textural features that characterize dike-like bodies.
TGR: Why is North Arrow's news such good news for Strike?
RM: Strike announced news on March 30 as well. It reported on kimberlite-indicator mineral-sampling results from its tenures to the northeast and to the southwest of North Arrow's Pikoo play. The results from its regional, first-pass, limited-in-number till sampling program were excellent. Strike believes it has already discovered four potential kimberlite indicator mineral dispersion trains on its property.
Strike has a low, publicly available float with a low share price and the largest landholding in the play where a dozen or more indicator trains have already been discovered. For investors seeking speculation on diamond exploration, Strike potentially has tremendous upside.
TGR: You are fond of pointing out that investors realize the greatest leverage from a rising bullion price from owning gold equities rather than owning bullion. Today, even after the four-year bear market, there are still hundreds of zombie companies on the TSX Venture Exchange. With so many juniors now trading under $0.20/share, how can investors seeking leverage distinguish between the moribund companies and those that will flourish?
RM: Investors need to spend the time doing due diligence. They must constantly educate themselves about the market and companies individually.
Investors should find those companies that, even over these last four difficult years, are still raising capital, keeping a strong balance sheet, advancing their projects and building shareholder value. The share prices of such companies are like a spring, and the tension grows ever stronger as their share prices remain at today's low valuations. When the market finally turns, this spring will move with tremendous force, and investors in those companies will reap great rewards.
TGR: Rick, thank you for your time and your insights.