When gold escapes the pork belly trap

September 17, 2015 03:32 PM

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TGR: What are some of the small producers with growth potential that fit that description?

LJ: One of my favorites is Klondex Mines Ltd.. It's a high-grade gold story in Nevada. Klondex has actually been one of our best performers in the portfolio over the last year. It's been up even while gold was down, because it is mining up to half an ounce per tonne. It is making money hand over fist, even at current prices. Obviously, that attracts a lot of attention.

TGR: Klondex recently announced that it discovered some new veins at the Fire Creek project, and it's going to be doing a resource update. What are you looking for in that update?

LJ: I think it will get bigger, and I think it will get better. But the most important thing is that this is not just surface drilling on some prospect that may or may not be mineable at some point. This is underground exploration. These new discoveries are near existing underground development so they could be put into production quickly and easily. This is a company that already has a profitable, fully permitted plant in operation within trucking distance of these discoveries. That's one reason why I think this story has done so well despite how poorly the market has done. You can see how close these high-grade discoveries are to hitting the bottom line.

TGR: Are there other companies with similar upside?

LJ: A similar story is Kirkland Lake Gold Inc. It's actually not so similar if you get into the technical details of the deposit, but it is a high-grade vein story. This one is in Ontario, Canada, another nice, mine-friendly jurisdiction. It is deep, and it's more expensive mining than Klondex, but the company has many things going for it. Management has been retooled, and is cutting costs. Mining underground is going into increasingly higher-grade stopes. The company has growth already in its existing reserves, as well as lots of exploration potential. The great thing is that the mine plan works at current prices. Even if gold prices go down, Kirkland is mining into higher-grade ore, so the company could continue to do well—and it should do phenomenally well at higher gold prices.

TGR: Are there more companies with that kind of potential?

LJ: Two more are up-and-coming producers. One would be Guyana Goldfields Inc. and the other is Rubicon Minerals Corp., which is in Red Lake. Both have just built world-class mines based on high-grade deposits. Rubicon's is underground. Guyana Goldfields has an open-pit operation in Guyana. Both have poured their first gold.

Guyana Goldfields has been doing better on the stock market. In fact, it's gone up more than 300% since its low last year, a move that is common as a development story transitions into production. The market likes it when a company succeeds. Hats off to management and the whole team. I have high expectations. If it keeps going, I could easily see another double on that stock, even without higher gold prices. My only concern is political uncertainty. There have been troubles with the local government, nothing mining related, just internal political fighting. There's also been some trouble with the psychotic regime in Venezuela, over the border. Anyone considering a company in Guyana needs to understand the political risk, but the project is doing great.

The next catalyst will be reporting how much money is going to the bottom line. It should be announced after the next quarter at the latest. If I were new to the story and the political situation remained calm, I would want to own that stock before it reports its first net income.

TGR: What is the story on Rubicon's stock price?

LJ: Rubicon has reported some unexpected developments underground, which it is currently negotiating. The company has been taken out behind the woodshed and thoroughly thrashed over this. The share price is back where it was before it even started building its plant, and the plant is actually working better than expectations.

Of all the difficulties mining companies routinely face when they start up, problems with the plant are the most potentially fatal. It is really a very complicated chemistry set. You're shoveling a bunch of dirt through it and if it doesn't work right, it may never make money. Underground, if things are not quite as you expect, as long as they aren't too bad, you can adapt your mine plan and usually get to where you were going. In fact, this happens to the biggest players in the field. Goldcorp Inc. (G:TSX; GG:NYSE) just announced that it has to revise its mine plan at Éléonore, one of the highest-profile, new underground gold mines in Canada. That's a spare-no-expense, five-star mine, and it is still adjusting to the realities once it is in operation. Until we hear that Rubicon encountered a seriously fatal problem, I think it's oversold and a real opportunity.

TGR: When gold prices increase, do you see silver prices following or leading?

LJ: They always vary together. They can, as you know, vary by larger or lesser amounts. Right now, it's a relatively large amount. It's not quite a record amount, but it is close. It's about an 80:1 ratio last I looked. That's pretty far from the recent norm of 50 to 60:1. That means it might move more quickly. If you push that elasticity, a rubber band wants to snap back.

TGR: That's what Eric Sprott has told us.

LJ: He's right, but never forget that silver, in addition to being a precious metal, is an industrial commodity. It is produced as a byproduct more than by pure silver mines. Actually, there are really no pure silver mines. Even silver primary mines are largely zinc or lead mines that have a lot of silver in them. The point is that silver production is largely determined by demand for other metals. Several mega-copper projects coming on line soon in places like Peru have very strong silver credits. So we could see supply exceeding demand on the industrial side and affecting the price, regardless of what gold does. Or it could go the other way, if Glencore International Plc. and a lot of other companies do scale back operations. It is unpredictable short term. Long term, it has to come back.

TGR: Are there some silver companies you like?

LJ: My favorite right now in silver production is Fortuna Silver Mines Inc. Fortuna's main focus currently is the San Jose project in Mexico, where the credit is not lead or zinc, but gold. I like gold as a credit in my silver mine. Fortuna recently drilled off a new zone that's even higher grade than what it's mining now. Fortuna also has a cash cow called Caylloma in Peru that's been mined on and off over 400 years. There's some stability there, and there's exploration potential in both camps. What I like most is this company is actually profitable at current prices, or lower.

TGR: You are going to be sharing more ideas at the Casey Research Summit in Arizona in October. What can attendees expect to take away from that conference.

LJ: This will be the first year we are putting on the conference as part of Stansberry & Associates family, so you know it will be a first-class experience for attendees. That means the speakers and the amenities will be top notch. This conference will cover a wide range of sectors, from metals, to energy, to technology, to water. On that last one, with El Niño gaining strength and all the environmental hype about water scarcity, this is a topical story. But there's a lot of money to be made in all these sectors.

TGR: Thanks for your insights.

 

 

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