Takeovers The Path To Golden Returns With Gold & Silver Companies (GDX, NEM, KGC, GG, ABX, ANV, CDE)

Brian Sylvester:  Sascha Opel, publisher of one of Germany’s most popular commodity newsletters, looks at the economy with rose-colored glasses. He sees the end of the Euro crisis and sees Asian growth as the engine pulling the world out of its economic malaise. He finds the path to golden returns in gold and silver companies (NYSEArca:GDX) likely to be taken over and in this exclusive interview with The Gold Report, he’s not afraid to name likely targets.

The Gold Report: It’s been four years since you told The Gold Report that gold was beginning the process of re-establishing itself as money. Where are we in that process now?

Sascha Opel: We are in the middle of this process. Many people and even central banks have added gold to their portfolios or balance sheets as they realized that no paper currency is 100% safe anymore. The Greek haircut has made it clear to investors that even European government bonds are not safe havens. The money went into German and U.S. bonds. But what happens in the next few years with growing debt in these countries? 

For me, what is still most important is unlike bank, corporate or government bonds, gold has no risk of failure. Bonds have to pay interest to the investors who take the risk to lend the money. If you own gold you are completely independent from any government or any other institution in the world. You are out of the modern financial system. You don’t owe anyone anything. Since 2008 it has been clear: gold is the only safe haven.

TGR: Do you continue to buy and hold gold or has it become too expensive?

SO: If an investor bought gold at US$300/ounce (oz), it is hard to buy more at US$1,700/oz. But if an investor still has no gold and his whole portfolio is only based on “paper assets”—cash, bonds—then it makes sense to convert some paper into hard assets like gold and silver.

TGR: Do you believe gold will push above the US$2,000/oz threshold in 2012?

SO: I do not know. In our interviews in 2008 and 2009, I was very lucky with my gold forecast. As I am convinced that the so-called “Euro Crises” will be solved soon—the European Central Bank (ECB) is buying time until 2015 with its three-year 1% tender for the banks—I think the big buying from European and even U.S. investors that we saw in the last few years will take a break this year. 

But central banks in Asia used the last correction to add gold to their balance sheets. I am convinced that China is still on the buying side as well. It has not announced its gold holdings since 2009 when it was 1,050 tons. But one thing is obvious: China wants to establish the yuan as a global trade currency in the future. And the Chinese know that if the Chinese Central Bank has large gold holdings, confidence in a free trading currency might be much higher. The U.S. has more than 8,000 tons of gold, Germany has 3,400 tons, the central banks of the entire Eurozone own more than 11,000 tons of gold. My conclusion: China will add several thousand tons to its holdings in the next five years or so. 

And that is one of the main reasons why I think gold will not move much over US$2,000/oz this year. Perhaps we see US$2,000/oz shortly. But most of the central banks that want to buy gold are not interested in such a high gold price and even the Federal Reserve and ECB are not interested in the strong rise of the gold price over a short period. I think we will see another 10–15% climb by the end of 2012, which means something around US$1,800–1,850/oz by year-end. In a few years—or perhaps next year—gold will rise above US$2,000/oz if the devaluation of all major paper currencies continues. 

TGR: Your company, Germany-based Orsus Consult, publishes one of the most popular German newsletters on commodities and junior mining and exploration. Most of the companies you write about are Canada-based companies with additional listings on the Frankfurt Stock Exchange. But the decline of the junior sector in the second half of 2011 took a heavy toll on the junior mining sector and the German market suffered, too. What is the current appetite among German retail investors for junior mining plays?

SO: There is still an appetite for good exploration stories over here. But the 2008–09 collapse in the juniors wiped out many investors. The investors who are still in the business are much more careful. There is no more euphoria; it has been replaced by realism. Another problem pre-2008 was a large number of unserious “pump-and-dump” promotions. We always tried to help investors identify such bad promotions. But many retail shareholders at that time lost money with these highly promoted stocks as well as with good-quality stocks. In the end they saw no difference between the good ones and the bad ones: they all lost money. Many investors sold their stocks and were not involved anymore when many of the good stocks we followed came back or were later taken out, companies like Premier Gold Mines Ltd. (PG:TSX)Osisko Mining Corp. (OSK:TSX)Corriente Resources Inc. (CTQ:TSX; ETQ:NYSE.A) or Potash One Inc. (KCL:TSX).

TGR: Why are there not more Germany-based companies operating in this sector given the potential for lucrative returns?

SO: That is a good question that I have been asking myself for years now! We have a huge industrial base in Germany with big carmakers—Mercedes, BMW, Audi, Volkswagen, Porsche—and we are the second largest export nation in the world. We have almost no mines in Germany, so we are very dependent on importing commodities. The big steelmakers and other companies sold their “boring and unproductive” mining assets in the ’90s to concentrate on core businesses. A few weeks ago some big German companies including BMW, BASF, Daimler, Bosch and others founded the so-called “Allianz zur Rohstoffsicherung” (Alliance for Resource Security). They want to invest in mining and exploration projects, especially in tungsten, rare earth and coal to start. In my opinion, this company comes a little bit late. But better late than never. 

TGR: There are some promising mining projects throughout Europe in places like Slovakia, Spain, Sweden and Romania. Do you have some favorite miners active in these countries?

SO: I like Carpathian Gold Inc. (CPN:TSX)Colt Resources Inc. (GTP:TSX.V; COLTF:OTCQX)Orex Minerals Inc. (REX:TSX.V) and Astur Gold Corp. (AST:TSX.V). Colt Resources has a great tungsten project in Portugal and a gold project with good potential as well. 

Astur owns one of the biggest gold deposits in Western Europe, Salave in Asturias in northern Spain. Recently Astur wanted to merge with Gold-Ore Resources (GOZ:TSX), but then another company bought Gold-Ore. So Astur Gold is on the table again as a potential takeover target in Europe. 

Orex is a small exploration company, which is run by the Orko silver team, and owns the 1 million ounce (Moz) Barsele gold project in Sweden, where it is growing the resource. In addition Orex has a silver project in Mexico, where silver giant Fresnillo Plc (FRES:LSE) stepped in recently by investing CA$2 million (M) in Orex via private placement at CA$0.80/share. 

TGR: Sascha, you have owned junior exploration companies like Aurelian Resources and watched them get taken over at substantial premiums. What companies do you believe could see takeover bids before the end of 2012?

SO: We were involved in quite a few takeovers since 2004, such as Western Silver, bought by Glamis, now Goldcorp Inc. (NYSE:GG); Nevada Pacific Gold, bought by US Gold (NYSE:UXG); Wolfden Resources, bought by Zinifex Ltd. (ZFX:ASX); Miramar, bought by Newmont Mining Corp. (NYSE:NEM); Aurelian Resources, bought by Kinross Gold Corp (NYSE:KGC), Corriente, bought by CRCC-Tongguan); Potash One, bought by the German company K+S; and Blue Pearl Mining, bought by Thompson Creek Metals Co (NYSE:TC). 

We are always trying to find potential takeover candidates. Currently I see many opportunities. From the companies in the gold sector with under a $100M market cap, I see two potential takeovers in 2012: Mansfield Minerals Inc. (MDR:TSX.V) and Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX)

Mansfield owns the 3 Moz Lindero gold project in the Salta region in Argentina. Some 2 Moz are in the reserves already. A prefeasibility study two years ago indicates that at US$850/oz gold, Lindero is a very attractive gold deposit capable of producing 161,000 oz of gold per year at a cash cost of US$373/oz over the initial five years of production. Mansfield is trading at CA$1.20/share, giving it a CA$60M market cap, which is US$30/oz of reserves and US$20/oz including the resources. 

Rye Patch is a special situation. We bought the stock last year around CA$0.30/share as we liked the valuation: 3.9 Moz gold equivalent was trading at a market cap of CA$40M at the time, so US$10/oz. Bill Howald and his team discovered more than 80 Moz of gold in Nevada. Rye Patch has a great management team. Although Rye Patch had CA$9M cash in the bank at the time, the stock was unknown to brokers as it never did a brokered placement. In late November, the stock went up 100% to CA$0.80/share when it announced that it claimed 30 square kilometers around the Rochester silver mine of Coeur D’Alene Mines Corp. (NYSE:CDE). Coeur forgot to pay its annual claim fee and so the claim became open locatable public land. In a press release Coeur announced that 20% of the reserves of the mine and “a substantial” part of the resource—140 Moz silver—fall under these claims. The two companies have met in court, where Rye Patch was granted access to most of the claims outside of a small court-defined boundary inside the operating mine. 

Rye Patch’s geologic team is back on the ground sampling, mapping and starting a drill program. At the court hearing Bill Howald said that he had already received a “low ball-offer” from Coeur to buy the claims back. I am convinced that Coeur has to make a much higher offer than the current share price of around CA$0.60–0.65/share. The current market cap is only CA$85M or US$22/oz gold equivalent WITHOUT the new claims at and around the Rochester silver mine. My opinion: If Coeur offers CA$1/share, it would still be a very cheap takeover. In addition Coeur would get a great geo-team on top of it. But if it waits too long, another big name could step in and take Rye Patch out. Kinross already owns Rye Patch shares and Barrick Gold Corp. (NYSE:ABX) should have an eye on them as well. Rye Patch is drilling only a few kilometers away from Barrick’s recent big discoveries on the Cortez Trend in Nevada. 

Under the larger companies, you can find many, many potential takeover targets, such as Detour Gold Corp. (DGC:TSX), Rubicon Minerals Corp. (NYSE:RBY), Colossus Minerals Inc. (CSI:TSX),Sandspring Resources Ltd. (SSP:TSX.V) and Queenston Mining Inc. (QMI:TSX) as exploration or development companies. Alacer Gold Corp. (ASR:TSX)Perseus Mining Ltd. (TSX:PRU; ASX:PRU),Centamin Egypt Ltd. (CEE:TSX; CNT:ASX, CEY:LSE) and Allied Nevada Gold Corp. (AMEX:ANV) are potential targets under the producers.

TGR: Some of the companies you follow are developing projects in Nevada. Why do you believe Nevada is seeing an unprecedented resurgence in mineral exploration?

SO: As we saw in the past, Nevada is one of the best places in the world to find new gold mines. There are still big discoveries on the different trends, like Carlin Trend, the Battle Mountain/ Eureka Trend and the Cortez Trend. Barrick announced a potential 10+ Moz discovery at its Redhill and Goldrush projects not far from its world-class Cortez mine. The Nevada jurisdiction and infrastructure is very favorable for mining as well. I was in South Africa for Mining INDABA last week and after hearing the ongoing discussions about nationalization of the mining industry in many countries, you know Nevada is a paradise.

TGR: What are some of your favorite plays in Nevada? 

SO: Next to Rye Patch Gold, I like Premier Gold Mines. The company has great assets in Red Lake, right next to Goldcorp’s Red Lake mine. Goldcorp is building a 4.5 kilometer underground train from the Bruce Channel deposit to its Red Lake facilities, right through Premier’s property—a great “exploration program.” With its Trans-Canada project, Premier owns an entire district with many potential new gold mines. And in Nevada it just announced a joint venture with Newmont to bring the Rain/Saddle deposit into production. In the long term, Premium is a takeover target as well. 

TGR: The DAX has climbed more than 500 points in the last month. Is this a sign of things to come? What kind of year are you expecting?

SO: I am very optimistic for 2012. The Eurozone is in much better shape than what you read, especially what you read in the U.S. press. OK, Greece and Portugal are problems, but problems that can be solved. Italy, for me, is not a problem at all. It is a very rich country with a strong industrial base. In Germany the economy is doing very well; we have the lowest unemployment rate in 20 years and the highest employment rate ever. Car sales and exports to China and elsewhere in Asia are at record levels and the growth rates are phenomenal. Some of the German DAX companies are trading on very low valuations and high dividend levels (many yielding between 3.5% and 6%). For the next three years, the ECB has bought time to solve the problems in the Eurozone, which is a reason to be optimistic. 

But the main reason to be optimistic is Asia. To give you just one example: China will build new buildings totaling two times the amount of U.S. living space between now and 2030. You only have to read the 5-Year Plan of the Chinese Communist Party to understand why it is investing all over the world in commodities. In 10 years nobody will talk about the euro crisis or U.S. debt anymore. Everyone will watch how the new Chinese and Asian middle class is developing and what they are consuming.

TGR: Thanks for your optimistic assessment.

Sascha Opel, former chief editor of the first newsletter about the German “Neuer Markt” (New Market), brings a distinctive outlook to the precious metals market. He was also the co-chief editor ofDer Aktionaer (The Shareholder), one of the biggest German stock market magazines, and adviser to an investment fund that achieved an outstanding return of 700% in three years. Today his company, Orsus Consult GmbH, publishes one of the most popular German newsletters on commodities and junior mining and exploration. 

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1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Premier Gold Mines Ltd., Orex Minerals Inc., Rye Patch Gold Corp., Detour Gold Corp., Rubicon Minerals Corp., Colossus Minerals Inc., Sandspring Resources Ltd., Queenston Mining Inc., Allied Nevada Gold Corp., Goldcorp Inc. Streetwise Reports does not accept stock in exchange for services.
3) Sascha Opel: I personally and/or my family own shares of the following companies mentioned in this interview: Rye Patch Gold, Premier Gold Mines, Orex Minerals, Astur Gold, Mansfield Minerals, Queenston Mining, Rubicon. An IR-Company I am involved with is paid by the following companies mentioned in this interview: Rye Patch, Orex, Mansfield. I was not paid by Streetwise for participating in this story.

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