Timing & trends

Gold “A Bit Overcooked” & “This party is just getting started”

Posted by Ben Traynor - Mark Leibovit Comment

on Friday, 7 September 2012 14:18

“Thursday’s announcement of a bond buying program on the part of the ECB was expected but welcomed news nonetheless in the precious metals markets. Gold and Silver have been leading the charge over the last few weeks as the powers that be in Europe, and here in the U.S. have talked about taking action to stimulate their economies. With more money printing now virtually guaranteed, traders are looking for inflation hedges, and of course are turning to the metals. This action has pushed the price of gold back above $1700/ounce.

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The recent buying push has also caused both gold and silver to break their long term downtrend lines. Gold’s downtrend line has been in place for a year and silver’s for 16 months. The action this week has also pushed each over its 50 week moving average (the blue line). This is bullish action, however in each case the stochastic (circled) is in overbought territory, which means that we can expect a pullback of some sort before the uptrend resumes. As money printing becomes the remedy of choice for worldwide economies, the appeal of gold and silver will only grow. This party is just getting started as we are now entering the positive season for gold and silver prices.” –  Mark Leibovit via his VR GOLD LETTER Published This Morning September 7, 2012 

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Gold “A Bit Overcooked” Ahead of US Nonfarms Data, “Bazooka” from ECB “Is Just a Can Kick Down the Road”


by Ben Traynor BullionVault

SPOT MARKET prices for buying gold rose to $1698 an ounce Friday morning, in line with where they started the week, while stock markets also rose, following yesterday’s announcement of the European Central Bank’s bond market intervention plan.

US Treasuries fell, while commodities were broadly flat, with the exception copper, which posted gains. Copper traders are now more bullish than at any time since last October, according to a survey by newswire Bloomberg, which sites “mounting speculation” about central bank stimulus measures, such as a third round of quantitative easing (QE3) from the Federal Reserve.

A day earlier, gold hit its highest level in six months at $1713 per ounce Thursday, although it fell following the publication of a stronger-than-expected ADP Employment Report, a precursor to today’s official August nonfarm payrolls release.

“There is definitely long liquidation going on after the ADP number,” says one trader in Singapore.

“People spent the whole of yesterday buying gold and it is a bit overcooked up here. Now we have good data and the market is struggling to see how it can get a bad [nonfarm] payrolls data.”

“The consensus expectation for today’s nonfarm payrolls is 130,000 [jobs added in August],” says a note from Rabobank this morning, “although in reality it may [now] have been revised upwards…the final clues for today’s nonfarm payrolls were positive, at least for the economic recovery, not for the chances of QE3.”

Prices to buy silver meantime climbed to $32.40 per ounce this morning – on course for a 2% weekly gain – while on the currency markets, the Euro rose to its highest level in more than two months, a day after ECB president Mario Draghi announced the new Outright Monetary Transactions program, aimed at tackling the Eurozone crisis by buying distressed Eurozone sovereign bonds.

“OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the Euro,” Draghi told Thursday’s press conference.

There will be “no ex-ante limits” on the size of OMTs, Draghi added. 

“This is your bazooka,” Organisation for Economic Cooperation and Development chief Jose Angel Gurria told the Financial Times yesterday, having used that phrase earlier in the week when urging the ECB to act.

OMTs will target debt of up to three years in maturity, Draghi said, and will also be fully sterilized – meaning the ECB will sell other securities to absorb the liquidity created.

In addition, OMT purchases will be subject to conditionality, meaning governments would have to enter into some form of bailout program with at least the possibility of bond purchases by the European Financial Stability Facility, or its scheduled permanent successor the European Stability Mechanism. Governments that fail to fulfill their bailout commitments could face a withdrawal of ECB support. 

Benchmark 10-Year Spanish bond yields fell to their lowest level since April this morning, dipping below 5.7% – two percentage points below their high in July. Italian 10-Year yields hit a six-month low at just over 5%.

Neither Italy nor Spain has formally requested a bailout, although Spain’s government agreed a €100 billion credit line in June to finance the restructuring of its banking sector.

Germany’s Constitutional Court is due to rule next Wednesday on whether or not the creation of the ESM is at odds with German law.

“Investors still view gold as a non-paper currency and I don’t think anything the ECB said or did yesterday has changed people’s psyche,” says Simon Weeks, head of precious metals at Scotia Mocatta.

“Really they just kicked the can down the road.” 

In Switzerland meantime, the central bank may be considering a de facto devaluation of the Swiss Franc, moving its price floor for the Euro-Franc exchange rate from SFr1.20 to SFr1.30, FT Alphaville reports.

Over in China, the world’s second-biggest gold buying nation behind India last year, Beijing has approved 1 trillion Yuan worth of infrastructure spending, equivalent to around $158 billion.

“With clear signs of a worsening slowdown of economic growth, China’s central government has finally taken real actions,” says Bank of America Merrill Lynch economist Lu Ting.

“They are clearly stepping up the infrastructure investment push to help boost confidence and revive growth,” adds Zhang Zhiwei, chief China economist at Nomura in Hong Kong.

“We believe the decision for the Chinese government to intensively announce these projects over the past two days signals a significant change in its policy stance from the incremental and reactive approach to a more decisive and proactive approach.”

In November 2008, China announced a 4 trillion Yuan stimulus package as a response to the global financial crisis.

The deputy governor of India’s central bank meantime has again cautioned Indians against buying gold, following comments he made in July.

“Because interest rates are very low, people are investing in gold,” said KC Chakrabarty on Friday.

“But the poor should never invest in gold for whenever they have purchased gold, it either lands up in the temple or in the hands of the moneylender or, at the most, it may be given away during a daughter’s marriage.”

Earlier this week, key figures in India’s bullion industry expressed fears that gold import duties may be hiked for the third time this year.

Ben Traynor, 

BullionVault

Thinking of ? Make it safer, cheaper and easier with BullionVault…

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics. Ben writes and presents BullionVault’s weekly gold market summary on YouTube and can be found on 
 

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


The ECB Move, $5,000 Gold & $150 Silver

Posted by Egon von Greyerz: Matterhorn Asset Mgmt.

on Friday, 7 September 2012 14:10

Investors are shifting from gold ETF’s to physical gold, and that the “move in gold and silver has barely started.” says Egon von Greyerz the founder of Matterhorn Asset Management

In an interview with King World News  von Greyerz says the shift has commenced because investors are concerned about the prospect of a systemic collapse.

Greyerz made these remarks following the ECB’s approval of unlimited bond buying, observing that the European Central bank will do everything in its power to preserve both the euro and eurozone.

According to Greyerz money printing is “absolutely guaranteed” and the prospects for the EU’s Mediterranean members are dire with Greece bankrupt and Spain a “basket case.”

In the event of systemic financial collapse, Greyerz says the only surefire means of preserve wealth is to keep physical gold outside of the banking system.

Gold in a safe deposit box in a bank is also not safe because if something happens to the financial system banks will close, and who knows when they will reopen? You will not have access to your gold. So I would not keep gold in a safe deposit box. The bottom line here is that gold and silver stored outside of the banking system is the ultimate way to preserve wealth

Greyerz also sees both gold and silver hitting stratospheric heights in the face of imminent catastrophe, with gold reaching $4000 – $5000 and silver $150.

….read more HERE

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The Key Stocks & 4 Reasons Why Buffett-Munger’s Model Portfolio Gained 16.1% Year-To-Date

Posted by Guru Focus

on Friday, 7 September 2012 7:00

The model portfolio of Buffett-Munger screener has gained 16.1% until September 4. Focusing on predictable, high-quality companies, GuruFocus Value Strategies continue to outperform. 

As the market approaches rich valuation, a lot of value investors and value strategies struggle. The portfolio that stands out is the Buffett-Munger model portfolio. Year to date the S&P 500 has gained 11.7%, Buffett-Munger model portfolio has gained 16.1%. The overall performance since inception in 2009 is 89.3%, outperforming the S&P 500 by 33.8%.

The strategy for the Buffett-Munger portfolio is what we used in our backtesting study. This strategy focuses on high-quality companies traded at reasonable prices. To learn more, please go to:

· What worked in the market? Part I 
· What worked in the market? Part II 
· What worked in the market? Part III 

Among the four value strategies, the Buffett-Munger top 25 idea portfolio has shown the lowest volatility and the most consistent performances. It has outperformed the S&P 500 every single year since inception in 2009. The other three portfolios underperformed slightly in 2011. They have more than made up their underperformances of 2011 this year.

All of these portfolios are rebalanced just once a year. During the January 2012 rebalance, 13 out of the 25 stocks in Buffett-Munger portfolio are replaced. So the annual turnover is slightly above 50%. Among the best performers this year BioReference Laboratories Inc. (BRLI) gained 68%, and Express Scripts Inc. (ESRX) gained 41%. The 36% gain of Walmart (WMT) stock has also contributed to the overall performance of the portfolio. 

The outperformance of these strategies is achieved by focusing on high-quality companies that are traded at fair or undervalued prices. Thus we believe that the portfolios carry smaller risk than the general market. This is clearly shown in the performance of the positions in the portfolio. It is almost always the case that the outperformance is driven by the universal outperformance of all the positions. Even for the positions that underperformed, the underperformances of these positions are usually small.

This is just what we expected when we developed the Concept of Business Predictability. By investing in the companies that have consistent and predictable revenue and earnings growth traded at fair prices, we will avoid the losers, and the winners will take care of themselves.

Of all these strategies, we like the Buffett-Munger portfolio the most. As mentioned above, this portfolio invests in the top 25 stocks in the Buffett-Munger screener and is rebalanced once a year. The reasons are:

1. These companies are of high quality. They can grow their revenues and profits consistently.
2. These companies can maintain and even grow their profit margins over time. They have the “moat” that prevents others from entering their market.
3. They incur little debt while growing business.
4. They are at the low end of their historical valuations.

They may not have the market momentum with them, and they may face headwinds which bring the valuations low. But if business continues to grow, we believe it is safer to invest in these companies. Indeed, these companies have outperformed the market every year since inception.

These companies also outperformed the market by wide margins over long period of time in our backtesting. For details, go to: What Worked In The Market From 1998-2008? Part II. Undervalued Predictable Companies And Buffett-Munger Screener.

GuruFocus premium membership is needed to access the details of the portfolios and screeners. We also publish a monthly Buffett-Munger newsletter which features the picks from the Buffett-Munger Screener. If you are a premium member, you can download this for free. If you are not a Premium Member, we invite you for a 7-day Free Trial.

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A Year of Deflation Coming Up?

Posted by John Rubino via DollarCollapse

on Thursday, 6 September 2012 23:21

Being deeply in debt is like being grossly overweight. You’re carrying around this extra baggage that slows you down, and without continuous, conscious effort you tend to stop moving.

That’s the situation in which the world finds itself. The debts accumulated in the past couple of decades are weighing down the major economies, threatening to pull them back into recession if not countered by massive deficit spending and monetary ease. This, according to the following Bloomberg article, is causing prices to fall in most sectors:

IPhone Price Cuts Send Bond Inflation Bets to 11-Year Low
Price cuts on everything from iPhones to Folgers coffee show why investors in U.S. government bonds anticipate low inflation for the next decade even as the Federal Reserve considers injecting more cash into the economy.

A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, has averaged 2.54 percent this year. That’s the lowest since 2001 for the measure, which gauges expectations for inflation between 2017 and 2022. Economists surveyed by Bloomberg forecast that 10-year government bonds will yield 1.76 percent by Dec. 31, down from 2.76 percent in 2011 and 3.19 percent in 2010.

Bond yields show investors expect that soaring gasoline and corn prices will fail to spread throughout the U.S. economy amid a slump in wages and unemployment at more than 8 percent since the beginning of 2009. That’s giving the Fed scope to add to the $2.3 trillion of government securities it has bought since 2008, an option Chairman Ben S. Bernanke said last week is possible amid “grave concern” about joblessness.

“The bond market doesn’t view inflation as a problem,” Anthony Valeri, a market strategist in San Diego at LPL Financial, which oversees $350 billion of assets, said Aug. 28 in a telephone interview. “The bond market still views deflation as a greater risk to the economy for the next one to maybe two years.”

‘Constrained’ Budgets 
Retailers are responding to sluggish economic growth by cutting prices. Sales rose 0.8 percent in July from the previous month, the biggest increase since February, government figures showed Aug. 14. That followed three straight months of declines, including a 0.7 percent drop in June, the most since May 2010.

“What we’re suffering through in the job market is reverberating through the economy,” Adolfo Laurenti, deputy chief economist in Chicago at Mesirow Financial Inc., which oversees $61.7 billion, said in a telephone interview Aug. 27. “These lackluster sales at many major retailers are really reflecting the fact that budgets are still constrained.”

Average hourly earnings rose 1.7 percent in July from a year earlier, the smallest increase since December 2010 and down from a peak of 3.8 percent in June 2007, the latest Labor Department data show. The Bloomberg Consumer Comfort Index was little changed at minus 47.3 in the week ended Aug. 26, from the prior reading of 47.4 that was the weakest since January.

Price Cuts
J.M. Smucker Co., which owns the Folgers coffee brand, lowered retail prices in May by about 6 percent as Arabica bean prices fell. Orrville, Ohio-based Smucker sees lower coffee costs for the remainder of the year, President and Chief Operating Officer Vincent Byrd said Aug. 17.

Procter & Gamble Co. (PG), the world’s largest consumer-products company, rolled back $400 million of the $3.5 billion in price increases it made last year, Chief Financial Officer Jon Moeller said Aug. 3 during a conference call. The move boosted Cincinnati-based P&G’s U.S. market share of laundry detergents, including category leader Tide, by 0.6 percent in July, he said.

Bentonville, Arkansas-based Wal-Mart Stores Inc. (WMT) cut its price for Apple Inc.’s 16 gigabyte iPhone 4S to $148 from $188, which was already cheaper than the manufacturer’s suggested retail price of $199. Second-quarter sales at Wal-Mart’s U.S. stores open at least a year gained 2.2 percent, below the 2.6 percent in the previous quarter, the company said Aug. 16.

Wal-Mart Cuts
Wal-Mart cut prices on paper household products by 14.1 percent in August from a year earlier and health and beauty aids by 13.7 percent, according to Bloomberg Industries data. The cost of laundry goods has climbed 18 percent since September 2010 at the stores, while household paper items have increased 2.3 percent, the data show.

The company announced a program discounting gasoline by 15- cents-per-gallon on Aug. 29. The average U.S. price of a gallon of regular unleaded gasoline has risen 16 percent this year to $3.80, according to AAA.

“Our customers are under pressure from the economy,” Duncan MacNaughton, chief merchandising officer for the world’s biggest retailer, said that day on a conference call. “We have always had aggressive prices on gas. This takes it to the next level.”

A measure of prices tied to consumer spending was the same in July as in the previous month, according to an Aug. 30 Commerce Department report. The core personal consumption expenditure deflator, which excludes food and energy costs, rose 1.6 from a year earlier, down from 2.2 percent in March.

Price Index 
The consumer price index was unchanged for a second month in July after plunging 0.3 percent in May, the most since December 2008, according to the Labor department.

Food price inflation caused by the worsening U.S. drought, as well as higher gasoline prices, is being offset by employment and wages that have failed to recover sufficiently, Valeri said.

Corn has surged 57 percent since June 15, reaching a record $8.49 a bushel on Aug. 10, as the drought parched millions of acres across the U.S. Soybeans gained 33 percent since mid-June and reached a record $17.605 a bushel on Aug. 27. Oil touched a 15-week high of $98.29 on Aug. 23, and gained 20.9 percent on Aug. 31 to $96.47, as Tropical Storm Isaac strengthened, crimping output in the Gulf of Mexico.

“The real driver of inflation is labor costs, how much people are making,” LPL Financial’s Valeri said. “Salaries aren’t increasing much at all.” Valeri said he favors intermediate-maturity corporate bonds because “interest rates are going to stay low for a while.”

Some thoughts
To summarize, prices for grains and oil (and health insurance and college tuition) are way up but since wages are stagnant, higher prices for some things leave less disposable income for other things, which fall in price due to reduced demand. The increases and decreases tend to cancel out, resulting in low or no inflation, and maybe, if the process gathers momentum, deflation. That’s the story of the coming year.

Now the question is how governments will respond. If their goal is to inflate away their debts, then they will, very soon, open the monetary floodgates and give us the much-anticipated global coordinated quantitative easing. In which case by late 2013 we’ll be back in inflation mode, with soaring commodity prices, falling currencies and a general sense of things spinning out of control.

But what if near-term inflation is not their goal? As reader Bruce C noted in a comment on a previous DollarCollapse article:

I’m still unclear on what the Fed’s (and all of the big central banks’) real agenda is. I know the official and conventional belief is that the Fed works for the benefit of the US, and that all the other central banks are exclusively concerned about their own country of domicile, but that is not necessarily true. Another perspective is that the central banks form a global cartel that is primarily interested in a global consolidation of the banking and financial system, often described as “a one world government with a single currency.” I honestly don’t know if, or the extent to which, that conspiracy theory is true, but I think we are all going to find out pretty soon. I say this because the way things have evolved so far all over the developed world is a perfect opportunity to usher in global governance, if that is their intention. Basically, what I’m saying is IF the Fed or the ECB initiates a significant level of “monetary stimulation” relatively soon then I submit that the one-world conspiracy theory is wrong. Stated differently, by holding back on additional monetary aid the resulting economic chaos will foster the level of desperation required for Westerners to accept global “solutions”. Watch what is actually done going forward, not what they say.

Agreed. The global slowdown is forcing policy makers’ hand. Either they ease big-time (as yesterday’s announcement of ECB bond buying indicates that Europe may do), in which case growth and inflation are their near-term goals. Or they wait and let the recession turn into a depression – which it will if not fought with more credit – implying that we’re being softened up for something even more dramatic.

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DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

Click here to contact him

Papernick’s Formula to Profit from Canada’s Booming Resource Exploration

Posted by Arie Paernick via The Gold Report

on Thursday, 6 September 2012 16:31

Bonanza-grade discoveries in precious and base metals are energizing exploration across Canada. Arie Papernick of Secutor Capital Management Corp. believes that unflappable investors stand to be rewarded for buying at the bottom of the market. In this exclusive interview with The Gold Report, Papernick points to promising developments for issuers prospecting in Canadian gold fields, including the mineral-rich black tar sands and the Labrador Trough. He also suggests techniques for preserving capital so to survive the coming black swans.

COMPANIES MENTIONED: AROWAY ENERGY INC. –BALMORAL RESOURCES LTD. – BEAUFIELD RESOURCES INC. – DNI METALS INC. – FANCAMP EXPLORATION LTD. – GOLD CANYON RESOURCES INC. – GOLD REACH RESOURCES LTD. – GOLDQUEST MINING CORP. – GTA RESOURCES AND MINING INC. – IAMGOLD CORP. – MEGA PRECIOUS METALS INC. – NORTHERN GOLD MINING INC. – PINETREE CAPITAL LTD. – SANATANA RESOURCES INC. – SANDSTORM GOLD LTD. – ST ANDREWS GOLDFIELDS LTD. – CLIFTON STAR RESOURCES INC. – EQUAL ENERGY LTD. – FORAN MINING CORP. – MIDLAND EXPLORATION INC. – PAGET MINERALS CORP. – PRODIGY GOLD INC. – QUEENSTON MINING INC.

The Gold Report: With the shares of many functional junior gold mining firms experiencing a slump in market price, what will it take to bring them back to life?

Arie Papernick: Institutional and retail investors invest in gold mining when they believe they will make a return. This belief is driven by an increase in discoveries, merger and acquisition (M&A) activity and larger bought-deal financings closing. M&A deals generate confidence in the longevity of the junior gold mining sector and establish valuation reference points for stocks to trade up to. Mergers and acquisitions have been quiet on the junior side sinceIAMGOLD Corp.’s (IMG:TSX; IAG:NYSE) takeout of Trelawney Resources Inc. and Yamana Gold Inc.’s (YRI:TSX; AUY:NYSE; YAU:LSE) takeout of Extorre Gold Mines Ltd. (XG:TSX; XG:NYSE.A; E1R:FSE).

TGR: How are discoveries a catalyst for building investor confidence?

AP: Bonanza-grade discoveries remind investors that meteoric returns are possible, and that brings people back into the sector. We’ve recently seen a few such dramatic moves. Balmoral Resources Ltd. (BAR:TSX.V; BAMLF:OTCQX) saw its stock rise dramatically from its discovery on the Martiniere property east of Detour Lake. And JV partner GTA Resources and Mining Inc. (GTA:TSX.V) saw its shares rise on the Hemlo-Schreiber greenstone belt. Other names enjoying really good stock pops are Gold Reach Resources Ltd. (GRV:TSX.V) and Gold Canyon Resources Inc. (GCU:TSX.V). And the jolt that everybody is talking about now is the GoldQuest Mining Corp. (GQC:TSX.V) copper-gold result from the Dominican Republic. Its stock shot from $0.10 to $2/share.

TGR: Where is the capital coming from for these types of investments?

AP: Financings are crucial for the exploration industry. Companies need money to do the drilling to create the news to motivate the investment, and we’ve seen a pick-up in that. Quite recently, Sandstorm Gold Ltd. (SSL:TSX.V) announced a $130 million (M) bought deal. More moves like that will likely build confidence among institutional investors in the sector.

TGR: Where are the most exciting new discoveries for precious and base metals in Canada?

AP: Manitoba is exciting. Mega Precious Metals Inc.’s (MGP:TSX.V) most advanced project there is called Monument Bay. The company is well funded. It has an open and an underground project. It has close to a 3 million ounce (Moz) compliant resource. Mega Precious is currently drilling 20,000 meters with a plan to update the resource in 2013. It has a very large land package with several targets and also has good relations with the First Nations. It kick-started its environmental and socioeconomic studies early on in the program.

There are new iron ore discoveries in the Schefferville area in Quebec. The Plan Nord and the province’s commitment to expanding infrastructure in the north is encouraging to junior explorers. This is in addition to having favorable tax structures for both mining companies and investors. Beaufield Resources Inc. (BFD:TSX.V) has a large land package in a great location in that area. It’s surrounded byNew Millennium Iron Corp. (NML:TSX), Tata Steel Minerals Canada Ltd. (NML:TSX), Labrador Iron Mines Holdings Ltd. (LIM:TSX), Century Iron Ore Holdings Inc. (FER:TSX.V) and Champion Minerals Inc. (CHM:TSX). It’s undeveloped, but Beaufield just completed a small drill program of 2,000 meters, and the results are encouraging.

We’ve been following another junior in that area, Fancamp Exploration Ltd. (FNC:TSX.V). It monetized its interest in Champion Minerals and now owns 12.5% of it. It also owns 100% of Lac Lamêlée, which is north of ArcelorMittal S.A.’s (MT:NYSE) producing Fire Lake mine. Fancamp has produced some great intercepts. It is doing a drill program right now, with the expectation of delivering an NI 43-101 by the end of the year. Plus, the company just released some great news on a nearby property belonging to privately held Magpie Mines Inc., of which Fancamp owns 46%. The project recently made its billion ton historic resource compliant. It also has an agreement with a Chinese company, Sichuan Nonferrous Material Technology Co. Ltd., to perform metallurgical analysis. Positive feedback from the metallurgy study would be great, as Fancamp plans to spin the venture off as a public company.

TGR: What potential aquisitions are poised to take advantage of initiatives in Canada by the juniors?

AP: Large firms with positive cash flows and companies looking to diversify their assets among resource classes and jurisdictions are in the buy market.

TGR: Looking at the Alberta region, is there a synergy between metal mining and the oil tar sands operations that are already in place?

AP: Not yet, but there’s a company called DNI Metals Inc. (DNI:TSX.V; DG7:FSE) that is attempting to change that. Its large Alberta property has expansive black shale hosting low metal concentrations. Its initial resource estimate for Buckton, which covers a fraction of its total land package, contains about 250 million tons with low parts-per-million grades of a host of different minerals like molybdenum, nickel, uranium, vanadium, zinc, copper, cobalt and even rare earths. It’s a new type of deposit in Canada, but there are companies developing similar types elsewhere in the world. Talvivaara Mining Company Plc (TALV:LSE) in Finland is probably the first of that sort to go into production. DNI is taking advantage of infrastructure that’s already in place for the mining of oil sands and applying that to bulk metal mining, instead of building everything from scratch.

TGR: DNI proposes to bioleach the black shales. How does that work?

AP: Bioleaching operates with very low concentrations of various metals that cannot be efficiently smelted because there is no leading metal in these shales. In bioleaching, bacteria is cultured from a host shale, which is a living organism, and then used to extract the metals out of the ore. It’s similar to, but much cleaner than, the traditional heap-leaching technique, which uses cyanide. It’s a low-cost method and it’s well known, but it takes a long time to process the ore and separate the metals out. Difficulties arise because of the different chemical behaviors of the metal mixes embedded in the shale. Metals respond differently to different chemical environments. DNI has been working on perfecting this technique with the CanmetENERGY technology center in Ottawa.

TGR: There are advantages to exploring for metals in the areas in which the oil and gas companies are making a lot of headway. To what degree will the majors allow the juniors to keep absorbing the exploratory risk before investing in new projects?

AP: What makes acquisitions attractive to a major is a quick, derisked addition to reserves. Juniors traditionally have absorbed the risk inherent in exploration work, and a major company generally won’t pay an acquisition premium for a project that hasn’t been derisked. Especially in the current climate, majors are looking for no loose ends, projects with everything ready to go so they can put in their capital and get into production. Of course, there are always exceptions, such as when the exploration potential is really, really strong, and a major will take over the exploration work before it gets to development.

TGR: Are the seniors willing to compete against each other over these prospects in the junior space?

AP: I think so. Right now, deposits with high-grade, multimillion-ounce potential are becoming rarer, especially in low-risk countries, such as those in North America, which is why you’re seeing more and more acquisitions in foreign, high-risk countries. It’s not by choice that the firms end up dealing with nationalization risk, high royalties and other political risks. We’ve also seen some movement away from the high-risk countries. Barrick Gold Corp. (ABX:TSX; ABX:NYSE) is selling its stake in African Barrick Gold Plc (ABG:LSE) due to security risk and blackouts in the region. Properties with all the right features will definitely see competing offers from the majors.

TGR: Alongside the opportunities in base and precious metals that you’ve mentioned, are there any junior energy firms that you like in the same regions?

AP: One of the companies that we follow in the energy space is Aroway Energy Inc. (ARW:TSX.V; ARWJF:OTCQX), located in Alberta’s Peace River Arch. It’s a well-managed, fast-growing company. It has a joint venture with a private company with significant infrastructure, which has lowered Aroway’s operating costs. Aroway has expanded its land package significantly over the past year with positions near five majors. Current production is 650 barrels oil equivalent per day (boe/d), and 90% of that is oil. Management plans to double that production by the end of the year to 1,200 boe/d. They have a great track record and are exceeding their production targets; it’s refreshing to see a team setting goals and meeting them.

TGR: Are there any exciting developments in Ontario?

AP: The IAMGOLD acquisition of Trelawney that was announced in early spring has major implications for Ontario miners. IAMGOLD has stated that it expects its gold production in North America to increase to 36% from 3% when Côté Lake goes into production. What’s interesting here is that IAMGOLD inherited a joint venture partner called Sanatana Resources Inc. (STA:TSX.V) when Trelawney acquired Augen Gold Corp. Sanatana will complete its earn-in very shortly to be a 50% joint venture partner. The joint venture lands surround the Côté Lake deposit and may be needed for mine waste and tailing storage. Recent drilling indicates that the Côté Lake Trend could continue through some of those joint venture claims.

Another name we like in Ontario is Northern Gold Mining Inc. (NGM:TSX.V), which just announced that Greg Gibson, former CEO of Trelawney, is its new CEO. The property package is along the Destor-Porcupine Fault zone, with unexplored ground along strike. So far, the company has announced over 1 Moz in the Measured and Indicated category with grades seeming to increase at depth. Northern Gold has just raised $13M, so it’s well funded and will aggressively drill the property to convert resources to reserves and produce a prefeasibility study. Greg Gibson has many fans after the completion of the sale of Trelawney, so future work on Northern Gold will get noticed.

Another name that we’ve covered with Ontario properties is a producer, St Andrews Goldfields Ltd. (SAS:TSX). The company has three producing mines in the Timmins Camp. Operating costs have been coming down. It just announced strong Q2/12 and Q1/12 earnings, and production has been ramping up at its Holt mine. Management has been meeting guidance. It is forecasting 90–100 Koz production for this year and seems to be in a good position to meet that. Once the Taylor mine is put into production—the company hopes by 2014—production will increase to 120–130 Koz. Meanwhile, it continues to do exploration around the surrounding areas to increase reserve life and mine life.

TGR: Your investment firm, Secutor Capital Management Corp., specializes in “defensive capital management.” Can you explain how that investment strategy applies to looking for solid investments in the junior metals mining space?

AP: My practice at Secutor is restricted mainly to sophisticated, institutional portfolio managers who specialize in junior mining, as well as high net worth investors who meet the accredited investor criteria. I provide my clients with fundamental research and strategies to provide pricing advantages, which help create a defense to price swings in a volatile market. One way that I find pricing advantages is through initiating flow-through private placements, which provide investors with a reduced after-tax cost base. Also, many of the private placements that we organize and participate in include warrants. These provide extra leverage and an option of keeping exposure after a position has been sold to conserve capital.

I also organize off-market transactions priced at discounts to the market for those who need to trade restricted shares. This process can only be done with accredited investors. Most of the institutional investors that I deal with have the capacity to buy large baskets of stocks in the sector, and I think this kind of diversification is just as, or even more important than, fundamentals in the sector. It’s increasingly difficult to pick out the next major discovery, in advance, with only limited exposure.

TGR: How can retail investors best manage a portfolio of investments divided between junior and senior sectors?

AP: A basket approach is mandatory when investing in the junior gold market space. It’s really the only way to increase the chance to get exposure to the so-called home run events before those results hit the market. The best way for individuals to do this is through a fund. Pinetree Capital Ltd. (PNP:TSX), which trades on the exchange, can be bought and sold like a stock. It basically represents a basket of juniors. It’s managed by Sheldon Inwentash, who is a seasoned professional. It is clearly focused on the junior side of the market. You won’t get much exposure to producers in this stock.

If you’re looking for producers, people like the well-respected Kevin MacLean, at Sentry Select Capital Corp., are more focused on cash-flowing names.

TGR: What would reasonable ratios be for a retail investor looking to invest in both juniors and majors?

AP: I can’t really pinpoint a blanket ratio because it really depends on an individual’s risk tolerance and net worth. Investing in the mining space, regardless of the size of the company, is risky, and it’s clearly not for everyone.

TGR: For the firms that you recommended, do you have any target prices that you’re suggesting?

AP: On our company reports, we do not include target prices. We do comparison tables so the clients can see relative value. Our clients are generally experienced investors and will pick their exit points as required when they’re managing their portfolios. I think retail tends to put too much importance on actual target prices, whereas institutional investors want to be shown good ideas, and they figure out their own entry and exit points.

TGR: Are there any tips, either for institutional or retail investors, on how to pick an exit point and stick to it?

AP: The more important exit point is on the downside, needed for preservation of capital. I think to be a successful investor long term in any sector, you need to pick and stick to your downside exposure threshold. It’s always harder to sell at a loss, but that’s the more important discipline. It gets much easier as the stock is moving into a profit territory. Frankly, my feeling is that where you get out on the upside isn’t as important as where you get out on the downside.

TGR: Is this fundamentally part of a hedging strategy?

AP: Hedging is a synonym for the preservation of capital. The only way to stay in the sector long enough to make sure that you have exposure to the next home run is to be in the game long term. The only reliable way is to focus your strategy on preserving your capital. That’s just common sense.

TGR: Thank you for your time.

Arie Papernick runs the Equity Capital Market’s team at Secutor Capital Management Corp. in Toronto. His team specializes in raising private placement financings for the junior resource sector with a focus on those conducting exploration in Canada. Papernick brings over 17 years of hands-on capital markets experience to his clients. After completing an Honors Bachelor of Commerce degree at McMaster University in Hamilton, Ontario, he started his finance career in Toronto. He completed the Chartered Financial Analyst program in 2000. Papernick has established a successful role for himself among issuers, institutional and high net worth investors.

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DISCLOSURE: 
1) Peter Byrne 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: Extorre Gold Mines Ltd., Balmoral Resources Ltd., Gold Canyon Resources Inc., DNI Metals Inc. and Pinetree Capital Ltd. Aroway Energy Inc. is a sponsor of The Energy Report. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Arie Papernick: I personally own shares of the following companies mentioned in this interview: Sanatana Resources Inc., Beaufield Resources Inc., Fancamp Exploration Ltd., DNI Metals Inc. and Pinetree Capital Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.