Fans of gold have been following Federal Reserve Board announcements for any sign of relief, but H.C. Wainwright & Co. Analyst Jeff Wright says change may be a long time coming. That is why in this interview with The Gold Report, Wright is focusing on three companies that can be successful even in a low gold price environment. He also offers three questions every investor should ask before buying a junior mining stock.
The Gold Report: What do the Fed’s recent statements about the timing of possible future interest rate hikes mean for the price of gold?
Jeff Wright: The Fed is almost finished buying mortgage-backed securities in an attempt to stabilize the market. We anticipate it will gradually increase interest rates by Q2/15. The most recent Federal Reserve minutes showed that there is no real drive to accelerate that pace. We will probably see low interest rates for the foreseeable future. Anything more is just not feasible, given the level of U.S. governmental debt. We would have to dedicate as much as three-quarters of the U.S. budget to interest payments if rates were to go back to normal historic levels.
It has not been pretty for gold over the last few months. The recent selloff in gold was predicated on a stronger dollar more than anything else. Anticipation of a rise in interest rates has also played into the strengthening dollar. And new quantitative easing in Europe and Japan just add to the relative strength of the dollar over the euro and the yen.
TGR: Some experts we interviewed told us that the extreme negative sentiment toward gold is a sign that we are at a bottom and getting ready for a turnaround. Even former Federal Reserve Chair Alan Greenspan has made bullish comments about gold. Are you seeing indicators that gold is ready to turn again?
JW: Picking bottoms or tops is not for the faint of heart. Even the most researched call can easily be wrong the very next day. It is a function of a global price commodity that trades 24/7 that one headline can change the price dramatically. While gold has supply and demand fundamentals, it has emotional characteristics as well. It’s not as rational or as forecastable as other investments. That is why I look for sustained trends. One of those is the demand for physical gold from China, which is down since 2012. I am not confident that Chinese buyers will come in this time to keep gold above $1,200 an ounce ($1,200/oz). And we will have to see how the traditional Indian wedding season plays out.
I think Greenspan’s recent comments in an article in Foreign Affairs about the possibility that China is buying gold in an attempt to make its currency convertible to gold are a shot across the U.S. bow. We need to get our financial house in order because the level of deficits that we’ve had for the past 10 years is not sustainable. That is probably not the greatest news for the U.S. economy, but it could be a good sign for gold long term.
TGR: In the short term, if the gold price is range bound, which is what you said in your last interview, how are junior miners adjusting their operations to be successful?
JW: Companies are attempting to reign in labor and energy costs. They are more selective of what material they’re putting through the mill and what material they’re stockpiling for higher gold prices down the road. Some projects are being selectively mined for higher-grade material. The survivors will be the companies that can extract savings from operations while limiting discretionary exploration. That is going to come back around to impact the industry in a couple of years when there is a dearth of exploration for organic growth and acquisition potential. But for now, there is just not an appetite for true exploration. Even positive news is being met with a shrug.
TGR: Would you say that the funded developers are in the best position because they can move forward with the hope that by the time they go into production the gold price will be higher?
JW: They certainly are in a better place than an unfunded developer, because the equity markets just are not there right now for large capital requirements. A number of companies are slow-walking projects into a production decision to avoid mining a project at close to a breakeven point.
We are seeing merger and acquisition activity around the edges, but not a full scale movement toward some of the juniors being acquired and going away, at least not yet.
A bigger trend on the horizon is broader industry consolidation. Some large companies have been selling assets. One example is Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Goldcorp Inc. (G:TSX; GG:NYSE) selling the Marigold project to Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ). That is a good project, but it didn’t make sense for the two larger companies.
TGR: Let’s talk about some of the companies that you have under coverage.
JW: One of the companies I cover is Pretium Resources Inc. (PVG:TSX; PVG:NYSE)(Rated: Buy). I conducted a site visit in August of its Brucejack project in northern British Columbia. The company has done a very good job managing the project, increasing the size and the quality of the reserve. The grades there are phenomenal. It is a near-surface, underground mine, so the development is not that expensive. The company has to raise approximately $700 million ($700M), but the updated feasibility study shows the project is still quite profitable at $1,200/oz gold.
TGR: How will Pretium raise the capital for mine construction?
JW: It will probably be a mixture of debt and equity, but with the scale tilted more toward debt. I don’t see management wanting to overly dilute the project. I think that’s a really good example of management not trying to unnecessarily accelerate development. Pretium is letting the project play out. It’s looking to grow a true mining company with a good resource base and a reserve that will be mined with outstanding economics for 15–20 years. $700M is a large number to fund, but it makes sense based on the grade and the tonnage that the project can sustain.
TGR: Is permitting going to be a challenge?
JW: The project is on track to get its permits by the middle of 2015. Brucejack doesn’t have the environmental concerns of some other projects. It’s in a fairly isolated place with no major water or wildlife issues, and management has a good relationship with the First Nations in that area of British Columbia. It’s a mine that makes sense.
TGR: What is another company that you think is doing a good job?
JW: One that the market has not caught on to yet is Gold Standard Ventures Corp. (GSV:TSX.V; GSV:NYSE)(Rated Buy). It has the Railroad-Pinion project in north-central Nevada on the Carlin Trend. The company has successfully consolidated the project and conducted a confirmatory round of drilling. It recently released a maiden NI-43-101-complaint resource calculation that shows about 1.4 million ounces gold in the Indicated and Inferred categories, as well as a little bit of silver. It has fairly shallow mineralization and could be an open-pit, heap-leach mine in the 2016–2017 timeframe with little technical risk. It is in the right neighborhood, with infrastructure and a ready-made workforce in close proximity. The permitting is straightforward. The next round of drilling is underway as management looks for extensions at depth and along strike. This company is moving the ball forward with a relatively low capital budget on the exploration and development side. It is still a couple of years out, but it is certainly interesting.
TGR: You initiated coverage with a 12-month target of $1.75/share. What do you think is going to take it there from its current price of $0.73/share?