CL: I don’t think Russia and China together could create a currency to rival the U.S. dollar. Sanctions and the drop in the oil price have pushed Russia toward China. I don’t think they will become allies; their systems are too different, and they are historic rivals. But they will be friendlier.
TGR: Gold heading toward $1,000/oz has resulted already in decreased production, and this decrease will become significantly greater over time. Shouldn’t this result in a significantly higher gold price?
CL: Over the long term it will. In the short term, however, there’s a large quantity of gold in storage. Annual production is minimal compared to stored gold.
TGR: Do we really have any idea how much gold exists? If the world’s gold is endlessly loaned out and rehypothecated, is this a shell game that can run and run?
CL: I don’t know how much gold really exists. Many people put money in ETFs, which may not own gold. But most investors don’t regard gold as a long-term investment; they regard it as a trading vehicle. This situation won’t change until the world recognizes gold as currency.
TGR: You said that investors should look to gold companies that can produce positive cash flow at $1,000/oz. How many companies can actually achieve this?
CL: Not many. Gold at $1,000/oz could potentially bankrupt even companies as well run as Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE).
TGR: Can we expect a revaluation of the few companies able to profit at $1,000/oz gold?
CL: I’m not sure we will get a revaluation upward because it depends on investor perceptions of the gold mining sector, and that depends on the gold price. One thing for sure is that I sleep well at night holding these companies because even at $1,000/oz, they can flourish. And when the bottom happens, these companies with cash will be able to buy out the overleveraged companies.
TGR: Which junior gold producer is your current favorite and why?
CL: I own mostly OceanaGold Corp. (OGC:TSX; OGC:ASX), a company headquartered in Australia. It has mines in New Zealand and the Philippines. In particular, at its Philippines mine, the copper content is such that its gold producing cost is negative. So we are talking about an exceedingly healthy margin. Even at $500/oz gold, OceanaGold would be making a lot of money.
TGR: You are referring to Oceana’s Didipio mine?
CL: Exactly. I’ve been there twice. This is one of the few recent mines that was actually on time and on budget and produced more than its original plan.
TGR: Didipio has just over 2.8 million ounces (2.8 Moz) Measured and Indicated (M&I) gold and 250 Kt copper. What is its copper production price?
CL: It uses copper as a byproduct credit; that’s why the gold is free. This is the first mine in the area and it has huge exploration upside. Oceana is accumulating cash to fund exploration of satellite deposits. This can be a district play. In New Zealand, Oceana is a high-cost producer: about $1,000–1,200/oz. But the company has hedged the next two or three years of production to keep this operation cash-flow positive.
There are a lot of rumors. One is that Oceana may buy out Alacer Gold Corp. (ASR:TSX: AQG:ASX). I’ve been there as well; it’s in Turkey. Alacer is finishing its mining of oxide and going to sulphide. So it needs a roaster, and Oceana has one in New Zealand. After it closes its local mine in a few years, its then-free roaster would be a good fit for Alacer.
TGR: Are you invested in any other junior gold producers?
CL: I’ll name two. The first is Gold Resource Corp. (GORO:NYSE.MKT; GORO:OTCBB; GIH:FSE), which is a low-cost gold and silver producer in Oaxaca, Mexico. The company is doing quite well. It has no debt on its balance sheet and pays a monthly dividend.
TGR: Gold Resource devotes one-third of its cash flow to dividends. Should it continue to do so?
CL: If the gold price continues to drop, I would argue that management should cut the dividend and buy other assets instead because every other asset is a fire sale. The point is Gold Resource has financial flexibility, and that’s a very good thing for a mining company right now. That’s why I like it.
TGR: Gold Resource rose 11% Nov. 7. In fact, many gold companies rose substantially that day. Was that a one-off as well?
CL: Yes, and most of these companies have fallen a lot since then. Gold miners are now quite volatile. Probably by the end of 2014 or early 2015, we will see a very good buying opportunity. This could be a tradable bottom. We are going to have tax-loss selling in November and December. Following Dec. 31, the end of the quarter and of the year, there will be the sector rotation of index funds. We will see the rebalancing of index funds. Until then, gold mining stocks are like a casino, and I’d rather gamble in Vegas.
TGR: What’s the second company?
CL: Orvana Minerals Corp. (ORV:TSX), which is now debt- and hedge-free. Its cost base in Spain is about $1,000/oz and a little bit less in Bolivia. It is one of the companies that will survive $1,000/oz gold.
TGR: Can you talk about a junior gold miner you follow?
CL: Virginia Mines Inc. (VGQ:TSX). It’s a prospect generator and royalty company in Quebec. It owns a production royalty on Goldcorp Inc.’s (G:TSX; GG:NYSE) Éléonore mine: 2.2% now, rising to 3.5%. Commercial production began in October, generating $1 million ($1M) per quarter in cash flow to Virginia. This will increase as Goldcorp ramps up production. So Virginia Mines has a very strong balance sheet.
Virginia Mines is probably going to sell royalties at very high premiums, giving the company the ability to acquire more prospective properties.
TGR: Which near-term gold producer do you like best and why?
CL: I like Pretium Resources Inc. (PVG:TSX; PVG:NYSE) a lot. I’ve been there twice, as recently as a few months ago. Its Brucejack deposit in British Columbia is phenomenal—one of the highest grades in the world in a politically safe jurisdiction. It is looking to become a very low-cost producer: just over $400/oz. So even if gold drops below $1,000/oz, the mine will be built.
TGR: British Columbia has not been particularly friendly to mining recently, especially considering the recent court decision that gave First Nation groups rights to all the province’s Crown lands. Are you confident that Pretium can be permitted in a reasonable amount of time?