The world’s economic woes may be far from over, but deflation or inflation, gold is as good as it gets, according to Jay Taylor. Jay, whose passion for the king of metals prompted him to pursue geological studies after earning his MBA in finance and investments, has established an enviable track record in the markets. According to webeatthestreet.com, “J. Taylor’s Gold & Technology Stocks Model Portfolio has more than tripled its value since January 2000 while the S&P 500 has barely moved.”
After a career in commercial and investment banking, Jay now devotes himself full time to researching stocks and producing widely acclaimed publications that have evolved into his weekly Gold, Energy & Technology Stocks newsletter. In this exclusive chat with The Gold Report, he talks about how gold has not only sustained but strengthened its purchasing power vis-à-vis other metals and commodities, tells readers what he watches for when he evaluating companies and explains why the time may be ripe for picking up gold stocks while they remain at bargain-basement low prices.
[Please click here for Part I of this article]
TGR: Can you share some more of these advanced stage gold juniors?
JT: Let me say a little more about Sangold. Its mine in Manitoba is now producing, and should be producing cash flow positive results by the end of this year and growing its production very substantially over the next two or three years. In addition, it has recently discovered a very high-grade deposit there that actually could rival the Red Lake deposit that was Goldcorp’s company maker. So Sangold is another company with cash flow now that it can use to fund its growth now when equity is so expensive or even impossible to obtain. It can now grow its business from internally generated cash. That’s the ideal given current market conditions.
TGR: How about those that are promising but not yet producing?
JT: As for projects going forward, when they start doing the feasibility studies, they will be looking at energy costs, the cost of labor, the cost of all the inputs. Because it is such a difficult market now, share prices have been obliterated. I’m looking at Luna Gold Corp. (TSX: V.LGC, Stock Forum) as a company on my list, for example. The company’s market cap is only $7 million now. It’s got a bankable feasibility study to produce about 60,000 ounces at $422 in Brazil. When you’re looking at prices, if you figure $800 gold, it would throw off an annual $28 million in operating cash flow over a minimum of eight years. So its current market cap is a mere 25% of a single year’s cash flow. That’s what I call ridiculously undervalued!
I think Luna and a lot of others are going to be targets for takeovers. Especially bigger companies, bigger projects will be attractive to majors unless we see a revival of the share prices of these junior and they can then start to raise their own capital, to put their projects into production. Luna is selling at 10 cents a share. To raise $47 million, which is what it needs to raise to build its mine? At 10 cents a share, it’s just not going to happen.
I think a lot of these juniors that have advanced stage gold projects look like they’ll be very profitable on the basis of bankable feasibility studies. Again, though, if they can’t raise their own capital, I think they’re going to be takeover targets of some of the cash-rich gold mining producers.
JT: AuEx is a very interesting company. They are earlier stage company, but I believe that AuEx is on to a major discovery, at least one and possibly two. They don’t necessarily expect to be a producer. They are mine finders. They have a very good business model, a very conservative business model that has other people spending money to earn into very good projects. AuEx is headed by Ron Parratt (as CEO) and some other very strong operators who picked up some very good exploration prospects and they’re developing those properties. At least one of them looks like it will be a world-class project. Another one is joint-ventured with Agnico-Eagle and that one is also starting to look very exciting. My sense of AuEx is that they’re on to at least one and possible two major deposits. Then I would expect that they’ll get carried into production or work an arrangement, a joint venture or a share deal or something down the road. AuEx has a very low market cap. It’s under $30 million so I think its share price potential is huge in percentage terms from here.
TGR: Any others?
JT: In terms of companies that can soon go into production, I love Romarco Minerals (TSX: V.R, Stock Forum). Like so many others, it’s selling for peanuts at this point, but Romarco has 1.5 million ounces at the Haile mine in South Carolina, of all places. This mine was actually in production in the 1980s by Piedmont Mining. And Robert Friedland headed a company nearby that was a larger scale producer. The region is economically depressed and from what I understand, the permitting process is going along even better and with more speed than in mining-friendly Nevada … looks like it could produce gold at $350. Capital costs should be relatively modest. $800 gold, costing $350 to produce 100,000 ounces per year should result in a very robust gold mining operation. Romarco’s market cap is something like $28 million.
TGR: Anyone else?
JT: ATW Gold (TSX: V.ATW, Stock Forum) is one that’s in Australia that looks really good. ATW Gold is expecting to be a producer in Australia next year. Interestingly enough, they raised some capital, I think, in U.S. dollars and kept it in U.S. dollars. With the surge in the U.S. dollar compared to the Australian currency, they were able to convert those U.S. dollars into Australian dollars without having to raise more capital to build their mine.
TGR: That’s great.
JT: There are some really great opportunities in other overseas locations. Some of the companies we follow have projects in places like Australia, Brazil, even Canada, where profits are rising from favorable currency movements as well. The price they’re getting for the gold they sell in their own currencies has skyrocketed. For example, in Canada they’re getting close to $1,000 an ounce, or maybe more than that now, in Canadian dollars. I understand that Brazil’s currency has dropped dramatically against the dollar, too, so the economics in Brazil look favorable—and we were just talking about Luna Gold, which has a Brazilian project. So there are a lot of opportunities out there.
TGR: Who else is on your list of favorites?
JT: Hawthorne Gold Corp. (TSX: V.HGC, Stock Forum) is another one that I love a lot. Hawthorne has very experienced management. The operating management built Eldorado and Bema Gold in the past. They have a project in northern British Columbia and another one in central British Columbia. They recently acquired from Cusac Gold Mines that had a very high-grade gold mine called the Table Mountain Mine. They have all the permits in place, so they expect to go into production next year. They also have some large-scale, lower-grade deposits in northern British Columbia and in central BC. You’re looking at a company here with a market cap of $10 million to $20 million. It’s miniscule and yet they have the management to succeed in building mines and generating cash flows to grow Hawthorne. I think they’re going to get the job done.
TGR: What do you think about buying into juniors versus buying into seniors, and about investing in physical?
JT: Obviously, owning physical gold is much safer. There’s less risk involved with owning the physical gold. It’s a completely different investment than owning a mining company. In a mining company you’re betting on a company’s ability to produce gold—or whatever the metal is—at a profit. If you actually own the metal outright in your safe at home or in a safe deposit box or somewhere overseas, clearly it’s the bird in the hand so to speak.
So, with the mining companies, you’re looking at a lot of risk. We suggest building a gold share portfolio starting with lower-risk larger-scale producers like Agnico Eagle, Gold Corp, Yamana, etc. as core holdings. Those kinds of companies are doing very well and producing profits. Those are the lower-risk companies and generally speaking, you can pretty much expect to see their share price move with the price of gold. Or if the costs of production are coming down, as I believe they are now, we should see their gold shares gain more percentage-wise than the price of gold.
Having said that, there is that risk aspect, and it’s a depleting resource. Sooner or later these mines are mined out and they have to go find more gold. They have to spend money to search for it, so a certain amount of those profits are being plowed back into the ground. But with higher levels of risk, there is also more upside potential than from owing the bullion. The upside potential comes from new discoveries and also higher gold prices can bring higher margins if costs rise more slowly that the price of gold.
TGR: How about the juniors?
JT: With respect to the juniors, the further down you go in the food chain, the greater the risk. We categorize our companies. A-Progress companies are those that are producing. B-Progress companies are those that have done enough work to have an economic picture in sight. They’ve done the bankable feasibility or at least some scoping studies and so they can pretty well define the economics of at least one of their projects. Our C-Progress companies would be those that haven’t done sufficient work to have formalized the economic picture of one or more of their projects, but have some deposit in the ground.
TGR: Can you tell us how your balance of those categories breaks out?
JT: Actually, we have one more category, D-Progress companies, which haven’t really outlined a resource yet. So the C-Progress companies have a resource, but not an economic resource; the B companies have defined their economics and the A’s are in production. So you can go down the risk level and with risk, of course, comes returns. The majority of companies we cover are C-Progress companies, and they are among the riskiest—companies that are looking for gold and silver and other metals, too. While "C" companies bring a high level of risk, they also provide the biggest returns because when they succeed in finding a viable deposit, the amount of wealth they create is usually very large relative to their market caps.
If you were to ask me which companies on my list I think can do the best, right now the B-Progress companies are my favorites in this environment when raising capital is so difficult. I’m betting my “B” companies are going to be successful and if they are, they jump into the "A" category. Then they should rise dramatically in price as they become “respectable” investments for institutional investors.
Certain “C” companies bring with them lower levels of risk. For example, AuEx, which is in the process of outlining at least one major gold deposit in Nevada, employs the “project generator” model. It’s lower risk because it gets other companies to fund exploration to outline gold deposits. In exchange, it gives up a share of its interest in the deposits. Risk of dilution to fund exploration is significantly reduced using this business model.
TGR: Could you put category labels on some of the other companies you’ve talked about?
JT: Sangold is an "A" and New Guinea is an "A." I don’t know if ATW Gold has flipped the switch yet on production, but they’re about to produce. I have them categorized as a "B" right now, but I think they’re about to start production. Luna Gold and Romarco are on my "B" list right now. So is Timmins Gold Corp. (TSX: V.TMM, Stock Forum), which is one that I hadn’t mentioned. It has a gold project in Mexico that may go into production in 2009. There are others currently in the "C" category that are going to make it up into the "B" category in 2009 and then, hopefully, graduate into the "A" categories.
TGR: Those in the "C" categories seem to be really more balance sheet plays. Do they have enough capital to continue exploration?
JT: They are really more exploration plays with some potential in the ground. You can’t even look to their balances sheets for protection.
TGR: So isn’t there a chance that a lot of those "C" companies, not to mention the "D" companies, will end up going bankrupt. They just won’t be able to survive for long.
JT: Indeed. That has historically been the case, and they’re even more vulnerable in this kind of a market environment where the share prices have been obliterated. How do they raise capital to put more holes in the ground? So those are companies to be very, very cautious of. You have to recognize that they’re higher risk. But having said that, in the gold sector especially, I believe that if this deflationary environment continues, gold mining is going to be one of the few industries in the world that’s going to be profitable. As that happens, there’s going to be more and more capital flowing in at the top of the food chain to start with and then it will find its way down to the “C” companies. Cash produced by the A companies will eventually find its way down to the "B" and "C" companies. A major amount of capital is likely to flow to this industry because it is providing the world with much needed legitimate money to replace mountains of illegitimate fiat money.
For instance, take an AuEx, which we have as a "C" progress company. I think AuEx could become a takeover target very easily. An Agnico-Eagle could very easily pump money into AuEx to buy out its interest in the West Pequop project if/when that evolves toward a sizeable gold deposit. AuEx could very easily get shares in Agnico-Eagle, for example, and vend their project into Agnico-Eagle. Or they could just spin it out. I don’t know how they’re going to do it. But, I think AuEx will be fine. Of course I think that about most of our "C" companies or they wouldn’t be on our list.
Another company on my list that’s very much like AuEx that I have a very high regard for is Riverside Resources (TSX: V.RRI, Stock Forum). It’s also a project generator, and has about a million ounces outlined in Arizona and another couple of very, very attractive projects in Mexico. John-Mark Staude, its President and CEO, had a remarkable record at Teck Cominco. He’s a fairly young guy who wanted to start his own company and he’s doing a remarkable job with Riverside Resources. So that’s another "C" company at this stage, but with one or more of their projects moving up into the economic category, then those companies will graduate into the "B" category.
But you’re right. It’s those companies that are lower on the food chain, the "Cs" and the "Ds," that are the highest risk. At the same time, however, you’re buying these companies a lot of times at 10 cents a share and if they find something really big, it’s not a stretch of the imagination to see a dollar or two or three or four or five dollars a share and you’ve got a huge return on your investment. Returns are commensurate with the risk.
JT: I love Animas. It’s on our "C" list at this point, but at the very least they probably have an open-pit oxide mine in the making with their project in Mexico. They haven’t done the economics yet, but the real target there and what coaxed the management to come out of retirement to run this company was the prospect for finding a Carlin-style high-grade gold deposit at depth. So I think Animas is likely to have an economic ore body of some size, even though that is yet to be proven. The upside potential is gigantic if they find the high-grade feeder zones in the Carlin-style mineralization. That’s what they’re looking for and I think they’re quietly confident they may be successful in that attempt. You never know in this business, but the management is strong and they came out of retirement to run this company because they think they have a chance at finding a world-class gold deposit. If so, Animas shareholders are going to make a lot of money. You never know in this business. It’s a high risk/high return industry. But good management often makes good things happen. Certainly Animas is one of my favorite "C" companies at this time.
TGR: When will they have enough data to validate the size of that deposit and the financials to say they can
economically mine it?
JT: I’m not sure of their goals right now, or how soon they want to do that. A lot of these things can change with time, too, as market conditions change. It’s a less forgiving market now and they may be forced to try to move forward more quickly on the economics of the lower-grade surface oxide deposit. I’m not really sure, but I would guess that for a project like that to come into production, you’d be looking at several years. Just to get into the economic studies, I would guess probably at least a year away yet. But keep in mind that the markets look forward, so big returns are enjoyed long before production begins.
JT: Yes, I am very keen on gold in a deflationary environment, but I should say something about silver, perhaps. Interestingly enough, I was looking at the gold-to-silver ratio and silver has held up relatively well compared to other metals I mentioned and energy, but not quite as good as gold. If we turn into an inflationary environment, if the policymakers gain some traction and are able to reflate this economy—which I’m not sure they can—and if the global economy starts to pick up, then silver should outperform gold.
Certainly, First Majestic is a good silver play, one of the best silver plays out there. I don’t have it on my list now because I cut back a lot of silver plays. I’m going to be revisiting the silver plays and pick up a couple of them. That would be a prime candidate to get back on my list as would another favorite, namely Great Panther Resources (TSX: T.GPR, Stock Forum).
For additional comments on Sangold Corporation (TSX.V:SGR), Agnico-Eagle Mines (TSX:AEM), Newmont Mining Corp. (NYSE:NEM), Goldcorp (TSX:G) (NYSE:GG), Yamana Gold Inc. (NYSE:AUY), New Guinea Gold Corp. (TSX.V:NGG), Luna Gold Corp. (TSX.V:LGC), AuEx Ventures (TSX:XAU), Romarco Minerals (TSX.V:R), ATW Gold Corp. (TSX.V:ATW), Hawthorne Gold Corp. (TSX.V:HGC), Timmins Gold Corp. (TSX.V:TMM), Animas Resources (TSX.V:ANI), First Majestic Silver Corp. (TSX:FR) (PK SHEET:FRMSF) and Great Panther Resources (TSX:GPR) from newsletter writers, money managers, and analysts, click on the respective links or visit The Gold Report.
A baby boomer born in Ohio, Jay Taylor was drawn to the world’s financial capital in 1973, when he went to New York to work for Barclay’s Bank International after earning his master’s in finance and investments. As he followed the demolition of the U.S. gold standard and the rapid rise in the national debt, Jay’s interest in U.S. monetary and fiscal policy grew, particularly as it related to gold. This led to his first investments in junior gold shares toward the end of the 1970s. Sometimes called “the buy and hold guy,” he began publishing North American Gold Mining Stocks in 1981. He was involved in the first modern-times gold loan made in the U.S. (to Amax Minerals, a 250,000-ounce loan facility led by Citicorp). To better understand the potential of the mining stocks he researched, Jay added a BA in geology to his CV in 1988. Pursuing his interest in researching and writing about mining companies as a sideline, Jay maintained his full-time banking career for nearly 10 more years. In August 1997, he left his position in the ING Barings mining and metals group to pursue his avocation as a new full-time career—including publication of his weekly Gold, Energy & Technology Stocks newsletter.
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The GOLD Report is Copyright © 2008 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Visit The GOLD Report – a unique, free site featuring summaries of articles from major publications, specific recommendations from top worldwide analysts and portfolio managers covering gold stocks, and a directory, with samples, of precious metals newsletters. To subscribe, please complete our online form (http://app.streamsend.com/public/ORh0/y92/subscribe).
The GOLD Report is Copyright © 2008 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services, or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees, or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Inc. does not guarantee the accuracy or thoroughness of the information reported.