Dr. Michael Berry: Ten-Point Model For Picking Mining Winners (GDX, FCX, RIO, SLW, AXU, GG, QMN, CDE)
Chris Marchese: If this is a bottom, Dr. Michael Berry sees it as the ideal time to pick up bargains in the mining sector. In this exclusive interview with The Gold Report, the Federal Reserve Board expert gives his diagnosis for what ails the markets and names the companies from Alaska to Brazil that could survive the financial plague wiping out equities all over the world.
The Gold Report: The Gold/Philadelphia Gold and Silver Index (XAU) ratio recently surpassed its high in 2008, slightly crossing 11 and peaked in the high 10s at the bottom in 2008. Do you think we have put in a bottom?
Michael Berry: If I were 100% sure, I would be a very wealthy person. I think we’re close to a bottom here. Gold is too important. The long-term secular bull markets, such as we’ve seen in gold and silver and in fact in many of the metals, do not end this way. They end with a parabolic move upward. That is why I don’t think this is the end of the gold bull market at all. I think it’s probably a welcome reprieve. But ultimately, if we are not at the bottom, we’re fairly close to it.
TGR: You testify to the Federal Reserve Board twice a year. In the last meeting, was there any indication of more easing on the way?
MB: There is every indication of more easing; there is every necessity of more easing. But the Fed is divided. Some of the Federal Reserve Bank presidents and governors believe we should tighten, while others have followed the Bernanke line, pushing easing. I cannot even imagine how we could raise rates in this market. I’m not saying that we don’t have food price inflation, but the Fed really wants to inflate out of this problem. So I think we’ll have more easing. But for now, the Federal Open Market Committee is divided between hawks and doves in a way it has never been in the past. It is going to be very interesting to see what happens as we move forward.
TGR: Many of your preferred companies have significant byproducts, primarily copper. Is this because you think copper has a bright future or because having significant byproducts tends to lower cash costs for gold and silver miners?
MB: I think it’s the former. If we are going to go into an irrecoverable economic depression, then there’s no future for copper. But I’m an optimist, and even though these are very difficult days for global growth, I think companies that own copper deposits are going to be very valuable when we exit this down period.
Therefore, I like copper—not necessarily as a byproduct, but as a major primary product. And if you look around the world right now, many countries are nationalizing their copper deposits. Good copper deposits are hard to come by. Copper is clearly an indicator of global economic health, and we are going to continue to grow again. It’s just going to take some time, perhaps a long time.
TGR: When it comes to silver and gold companies, what do you look for in a possible investment?
MB: I have developed a 10-factor model for discovery micro-cap and small-cap companies. First, in extractive resources we look for world-class deposits or at least the potential for world-class deposits. The second critical factor is management. There are a lot of good management teams right now. But it is a very difficult time. Many of these companies have been sold down. And some of them are not going to survive. It’s a pity but that’s just the way it is.
A number of companies that I would have said were good if we were speaking a few months ago are less good today, because a lot of them cannot access capital markets to raise money. One of the characteristics of all junior miners is that they are constantly raising money because, by definition, they don’t have production and cash flows yet. There are some great bargains out there, but it is going to take a strong stomach to buy some of these companies.
One company that I think is really excellent is the silver company Alexco Resource Corp. (NYSE:AXU). The company is in the Yukon cleaning up the old silver dumps from the past century. There are 35 old mines up there with extraordinarily high-grade silver, 40 ounce (oz) silver that it is now beginning to mine. Clynton Nauman is the CEO; I really respect him and I think he has assembled a good team.
Alexco is an example of a company that will have $20–30 million (M) on the balance sheet in cash, so it is sustainable. It probably will make $30M this year and next year. That is the kind of company we like, those with sustainability especially in this tough market environment.
TGR: Do you think Alexco might buy Monster Mining Corp. (MAN:TSX.V) since it owns the rest of Keno Hill?
CB: Alexco is in production and the management team is spending all its time right now trying to figure out how to expand the 8 million ounces (Moz)/year it is currently mining on its property. The company has about 22 targets that were old mines and adits. I would be surprised if it bought Monster. If it were to look for an acquisition, it would look for something a little bigger to move up into the next segment of silver producing companies.
And remember, Alexco is really two companies. It does environmental clean-ups and mining. It will likely split off the environmental side and either vend that out to shareholders or IPO it at some point.
TGR: You have mentioned Galore Resources Inc. (GRI:TSX.V), another Canadian company, before. Are you still following them?
CB: Yes. I really like the idea that Galore is in Canada. There is a lot of talk now about a possible mining unfriendly NDP government coming to power in British Columbia, but Galore is a really interesting play. It is right in the middle of several big developments. I like the company’s Dos Santos Mexican project as well. It is just drilling it out now, but it has a lot of potential.
TGR: Galore is at $0.085 now. Are there any catalysts coming up that could move that company up?
CB: I don’t think catalysts matter today because right now the Toronto Stock Exchange Venture Exchange is off approximately 50%. This isn’t just a bear market, it is a disaster for these exploration stocks. All of these stocks have been taken out and shot, metaphorically. I am not sure such catalysts are going to do much until we unwind the sovereign debt problems. Companies are just learning how to survive through this. So would I be buying something like Galore for $0.08? Yes. It’s a bet the company will survive and will be worth a lot more money.
TGR: Any other silver companies you like? Maybe in Mexico?
MB: Mexico is a country in a bit of turmoil right now. It is a little more difficult to work there. But Mexico and silver go hand in hand. The Faja de Plata, the plain of silver, is famous. The Peñasquito mine, which is now owned by Goldcorp Inc. (NYSE:GG), is the largest silver mine by net asset value in the world and the second largest gold mine by net asset value.
Southern Silver Exploration Corp. (SSV:TSX.V; SEG:FSE) is an exploration company down there. I think it is trading around $0.06 , but it has four deposits, two in Mexico and two in the United States. The best deposit is Cerro Las Minitas. The company is exploring that now. I think it has great potential. It is a very cheap stock, very cheap indeed.
Quaterra Resources Inc. (NYSE:QMN) has a property called Nieves, which is not very far from Southern Silver’s property. It has about 80 million ounces silver at a 15 gram cutoff in Indicated and Inferred categories on that property, according to the NI 43-101. It has real potential.
Quaterra is also one of three companies working on the Yerington project in the former major copper mining district in Nevada. That project is a company-maker in itself. A preliminary economic analysis issued last week showed a 41 million pound/year copper mine for 18 years. It is oxide and calcacite, so it is acid-leachable. That district could add up to 20 to 50 billion pounds of copper over time. Yerington, MacArthur and the Bear deposits are the company’s primary assets.
TGR: Doesn’t Quatterra also have a joint venture with Grande Portage Resources Ltd. (GPG:TSX.V) near the Coeur d’ Alene Corp. (NYSE:CDE) property in Alaska?
CB: Yes it does. Grande Portage and Quaterra have a 65/35 joint venture on Herbert Glacier. It is about 20 miles south of Coeur d’ Alene’s Kensington mine, just north of Juneau, Alaska. Herbert is very high-grade gold, a six-parallel vein system. The company will probably drill at the Herbert Glacier in June. I think it is possible that it could have 0.5 Moz of reasonably high-grade gold after this year’s drilling program, a very nice discovery. Right now neither company is getting much credit for it in their share prices.
TGR: How is the U.S. doing getting project permits through bureaucracy and what projects are you looking at that might work?
MB: That’s a great question. We are doing a lot of work in Washington D.C. now trying to educate the staff of various congressmen and senators on the importance of pending natural resource legislation. The Obama administration is trying to shut off mining for alternative energy solutions. And it is a huge mistake. But at least there is awareness in Washington that we have to have a transparent, faster permitting regimen. The Canadians are going to that. And we need to do it here, because we need to be developing some of our own natural resources. The good news is a pending senate bill could simplify the permitting process. If we have a Republican administration in January, it will be easier to get that passed into law.
In the meantime, Revett Minerals Inc. (NYSE:RMV) has the Rock Creek project in Montana, a potential world-class development near the Troy mine, a beautiful copper/silver mine. I think the general economic environment will push Rock Creek down the road. I have great faith in the efforts of John Shanahan, the CEO. The company has already jumped through every hoop to meet environmental demands.
Once that mine is built, the bigger boys, Rio Tinto (NYSE:RIO), BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) or Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), will want to have that company.
TGR: Any thoughts on Mines Management Inc. (NYSE:MGN), which has the Montanore deposit near there. What are its chances?
MB: It has more complex geology and will not be quite as easy to mine as Rock Creek. I am not sure it will ever be permitted. At some point I think that Revett will probably have an opportunity to take on Montanore as well. We will see.
TGR: Nevada seems to be a hot spot, both for silver and gold. Are there some plays that you like there?
MB: Nevada is a great place because it is a mining state. Utah, Nevada and Arizona are great places to find things and get permission to mine them. Terraco Gold Corp. (TEN:TSX.V) has the Moonlight deposit, which is in northern Nevada, not very far from Reno. It is in the same Black Ridge Fault zone with Pershing Gold Corp. (PGLC:OTCBB), a new company with a new management team led by Steve Alfers, formerly one of the key managers at Franco-Nevada Corp. (FNV:TSX). The company is consolidating the bottom of that trend in a land position around the Relief Canyon mine. I really like that management team. I have been out to see the property and spend time with management. I think it has a lot of potential. More than 150,000 oz of historical gold has been drilled out and I think both companies will find a lot more plus there is a fully commissioned gold plant that is not in operation at the present time.
Yes, I am bullish on Nevada. I think there is a lot of opportunity in gold, silver and copper there. Why go to Africa or China, when you can go to a place like Nevada and make great discoveries and subsequently mine?
TGR: Any other companies you would like to share that meet your model standards?
MB: Graphite has been a hot topic. One of the farthest along companies in this space is Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) in Ontario. It has a great management team led by Greg Bowes. The company is on the road to getting into operation and has an NI 43-101 coming. It is in a great location halfway between Ottawa and North Bay. That is certainly a company to consider.
Northern Gold Mining Inc. (NGM:TSX.V) is also in Ontario. It is pretty close to production, has a great gold deposit and is a very cheap stock right now. I think it will get financed and back into production soon.
I really like the Canadian scene. Carlisle Goldfields Ltd. (CGJ:TSX; CGJCF:OTCQX) is in the Lynn Lake Greenstone Belt of Northern Manitoba. It has 2 Moz of Measured and Indicated that could grow to 5 Moz of Measured. That is bankable feasibility, but nobody cares about the stock. It is selling for around $0.20 right now. These stocks are way too cheap. Some of them will certainly survive. To be good stock pickers, we are going to have to recognize that and get in on these things.
TGR: What is next for Silver Wheaton Corp. (NYSE:SLW)?
MB: Silver Wheaton’s business plan is absolutely brilliant. The company has executed it beautifully. These guys are smart. I wish I owned a lot more stock than I do. I think silver is at $29/oz today, plus or minus. I think it is going to be $200/oz before this is all over. It might take five years for that to happen, but it is going to happen.
The company is cashed up with over $1 billion, $400M revolving debt and approximately $125–150M in equity investments. Silver is off from its highs 33% in the short term. But it is going to go back up. It is a very strong story and a stock that should be owned.
TGR: Thanks for your insights.
Dr. Michael Berry served as a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia from 1982–1990, during which time he published a book,Managing Investments: A Case Approach. He has managed small- and mid-cap value portfolios for Heartland Advisors and Kemper Scudder. His publication, Morning Notes, analyzes emerging geopolitical, technological and economic trends. He travels the world with his son, Chris, looking for discovery opportunities for his readers. His new, free Discovery Investing Scoreboard software covers all companies on all exchanges using a 10-point grid.
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1) Chris Marchese of The Gold Report conducted this interview. He personally and/or his family owns shares of the following companies mentioned in this interview: Alexco Resource Inc., Silver Wheaton Corp. and Colossus Minerals Inc.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Pershing Gold Corp., Terraco Gold Corp., Northern Graphite Corporation, Colossus Minerals Inc., Revett Minerals Inc., Grande Portage Resources Ltd., Goldcorp Inc., Southern Silver Exploration Corp. and Galore Resources Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Dr. Michael Berry: I personally and/or my family own shares of the following companies mentioned in this interview: Northern Graphite Corporation, Goldcorp Inc., Revett Minerals Inc. and Terraco Gold Corp. I personally and/or my family am paid by the following companies mentioned in this interview: N/A. Michael Berry was not paid by Streetwise for participating in this story.
Related: Market Vectors Gold Miners ETF (NYSEARCA:GDX)