The Gold Report: How is the third round of quantitative easing (QE3) changing the playing field for retail investors?
Steve Cochrane: It has certainly done a lot to stimulate the market and improve market performance overall—not only the announcement of QE3, but also the summer was rife with anticipation of QE3. As a result, all equity markets performed very well in the latter part of the summer.
TGR: Is there a significant risk that QE3 could disappoint the markets and have a nominal effect on equities?
SC: The risk is if the economy continues to stumble, if the stimulus doesn't have the desired impact, then there could be another slump in earnings and further weakness in equity markets.
One of the issues is that the Federal Reserve is pushing more liquidity into the system by buying back bonds and mortgage-backed securities, but we haven't seen the banks loosening the purse strings. The banks have to make liquidity and capital available for QE3 to really have a positive impact on the economy.
TGR: Where should retail investors position themselves to get the most out of QE3?
SC: In equities. Bonds, which have been the stellar performer arguably for the last 18 months, are probably long in the tooth as far as their rally. QE3 is designed to stimulate the economy, to be inflationary to encourage growth, and bonds tend not to do well in an inflationary environment. Equities tend to do very well initially within a recovery and an inflationary environment. Commodities within that group tend to do extremely well. I would weight my portfolio toward the commodity sector: oil, resources, gold and base metals.
TGR: What about bullion itself? Are you bullish on gold?
SC: I am very bullish on gold. Gold has really been a great performer this year. It's up about 12% year-over-year. The gold sector should be represented in any portfolio. A greater argument is whether to go with bullion or gold-related equities. Every portfolio should have a position in both. I tend to play bullion through some of the listed bullion funds. Sprott Asset Management has a physical gold bullion fund that trades and just holds gold. But one has to be exposed to gold mining companies and gold equities in general.
As we've seen in the past year, bullion has performed better than equities even though some of the major gold mining companies, like Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Goldcorp Inc. (G:TSX; GG:NYSE), have seen their price performance arguably improve lately. There has been a major recovery in the price of senior gold producers' equities, but for the better part of this year, the gold equities have underperformed bullion. Investors would be prudent to have some exposure to gold and gold equities.
TGR: You mentioned some of the large-cap gold names, but retail investors are starved for growth in their portfolios. When should investors dive back into small-cap resource equities?
SC: That's the $64,000 question. Small-cap companies have certainly underperformed and have been under a lot of pressure for the last year. That's a result of two things. Most of the junior resource companies' trading activity is driven by the retail investor. With recent market volatility and the overwhelming negativity of recent headlines, the retail investor has been on the sidelines for the better part of the last 12 months. Many retail investors have kept their investment dollars in cash and the junior mining equities have underperformed. Second, until recently most metal prices have been depressed as well, putting further pressure on the juniors.
Lately, we've seen that reversed. There is some optimism coming back into the market. QE3 has gone a long way to stimulate the optimism that things will get better. We see that reflected in the senior producers. Goldcorp and Barrick have both moved from the low-$30s/share to the mid-$40s/share in the last 30 days. Typically, large-cap stocks are the first to move. Investors will see this recent appreciation and seek out those so-called undervalued situations.
Given their recent performance, most of those undervalued situations are in the junior and micro-cap gold mining companies. There are a lot of juniors that are trading at their 52-week lows, and in some cases at their all-time lows, but still have solid assets and growth prospects. I hope that the retail investor recognizes that and starts to take a position.
TGR: Do you believe QE3 is likely to have a greater impact on some global jurisdictions versus others?
SC: Certainly. As evidenced by the issues in Europe and the impact China has had on the world, we are no longer individual, country-based economies. QE3 will have a positive impact around the globe, hopefully stimulating economic activity.
It seems that all the central bankers recognize this global economic community and have moved to provide their own versions of QE3. Japan recently announced a bond-buyback program. China has cut its interest rates and is looking to further stimulate its economy. Europe finally got its act together and proposed a European Central Bank bond-buying spree.
Areas with emerging economies will probably benefit the most. China, which has seen a slowdown, will still be the economic growth engine. Some of the Latin American economies, such as Brazil and Mexico, have picked up. Those are the economies where you'll probably get the biggest bang for your buck. The more developed economies—U.S., Europe—should see growth, but we're talking 2–3% versus the 7–9% in the emerging economies.
TGR: Your research suggests that you favor Southeast Asia and countries like Vietnam, Cambodia and Myanmar. What are some tangible signs that those countries are going to witness exceptional growth?
SC: Looking back at the last half-century, Japan had a large population base and cheap labor costs that gave rise to a boom as the old economies outsourced their manufacturing. When Japan got expensive, manufacturing moved to Korea. Korea boomed, manufacturing got expensive and moved to China. China continues to be the global labor pool with some of the lowest labor costs in the world. However, even costs in China are going up. Some of the garment industry has moved into places like Bangladesh. Some manufacturing has shifted to Vietnam. Most recently, because of Cambodia's emergence as a democracy and free enterprise economy, a lot of businesses in the garment/clothing industry are locating their manufacturing capacity in Cambodia.
This trend leads to driven economies—5–7% growth in gross domestic product in these countries and rising expectations. People start spending money in those countries and investing in property. I've seen this happening through my own experience in Cambodia. Vietnam is 10–15 years ahead of some of the other Southeast Asian countries like Cambodia, Myanmar and Laos. Thailand and Indonesia have all experienced 7–8% growth and should continue to do so.
TGR: A company operating in that part of the world that you helped finance is Angkor Gold Corp. (ANK:TSX.V). Tell us about that company.
SC: Angkor Gold is a company in a unique situation. In a nutshell, the great tragedy of Cambodia is the Khmer Rouge. Other countries in the region started to expand economically after the end of the Vietnam War in 1975. At that same time, the Khmer Rouge terrorized Cambodia for four more years. Unfortunately, it took close to 18 years after that of civil war and isolation before Cambodia could move forward.
There is excitement and opportunity in Cambodia today. From 1975 on, most of Southeast Asia—Thailand, Laos, Vietnam, Indonesia, Malaysia—expanded their economies, attracted investment, identified natural resources and have seen great growth in their economies. Cambodia has just embarked upon this road of growth, modernization, attracting foreign investment and exploring its natural resources. Cambodia is only now beginning to catch up.
TGR: The Angkor region is a World Heritage Site that covers some 400 square kilometers (sq km) and is the home of the former Khmer empire. Are Angkor Gold's properties going to run into interference with that heritage site?
SC: The bulk of Angkor Gold's properties are in Ratanakiri province, which is a long way from Angkor Wat and outside of the major national park areas. All of the Angkor Gold properties are outside of the parks area, so I don't see that as an issue.
Angkor Gold does have a very strong commitment to the country, both from an environmental and humanitarian standpoint. It has been supporting the local tribespeople, drilling water wells and donating to local hospitals and health care. It has a very strong community service mandate and it is very cognizant about treating the environment with respect.
TGR: What are your thoughts on Angkor Gold's management?
SC: I've worked with a lot of management teams. I don't think I have ever seen a management group more passionate and committed to a project and also to a country. Mike Weeks, Angkor Gold's CEO, is probably one of the most philanthropic gentlemen I've ever met. He's been able to appeal to my own humanitarian feelings—I personally donated a water well. I've rarely come across as committed a management group.
Dr. Adrian Mann is the vice president of exploration and John-Paul Dau is the country manager. Their level of excitement and conviction that there is a huge mineral resource in Cambodia goes beyond question. It's catching. When you see the work they've done and the results that they have been able to generate, you get that sense that there's not a question about if there's a major resource deposit there, it's just a question of when they'll find it.
TGR: Among Angkor Gold's several properties, which is its most advanced?
SC: Border North. It has had the most work done on it. It's one of seven properties Angkor Gold owns and one of nine targets that it has worked on this drilling season. Border North has had the most holes put into it over the last several years because work was done on it prior to Angkor Gold taking over the property from Liberty Mining International Ltd. Angkor Gold is now starting to understand the structure that's on that property. While it's still very early, the company is starting to see a potential 150,000–200,000 ounce resource materialize. The company thinks it will expand with additional drilling.
One of the opportunities and challenges is that Angkor Gold drilled nine targets last year and early into this year. It was hoping that it would have two or three of these targets prove to be worthless or be low-grade, low-priority targets. Interestingly, all of them came back mineralized and with results that were tantalizing. The company is faced with the decision of having nine projects that look worthwhile. Where does it go from here? That will be one of the challenges Angkor Gold will have to deal with.
TGR: Will it joint venture any of those projects?
SC: It would be wise to. I've had some correspondence with other little mining companies that I deal with, which have asked me if Angkor would be interested in a joint venture. Cambodia is starting to gain some traction.
It's rare to find a country with the political stability, the pro-business, pro-free market, pro-populism government that's in place in Cambodia. It's a free-market democracy. Foreigners can own 100% of the assets. The currency in Cambodia is the U.S. dollar. It's a political system and capital market that are very similar to North America.
TGR: What are some stories that you helped get started in other jurisdictions?
SC: I like opportunities from a global perspective. One of the little deals that I was involved in a number of years ago was Hunt Mining Corp. (HMX:TSX.V). It's a junior mining company that has been in the penalty box the last year due to the lackluster market. However, Hunt has had some unique circumstances that have put pressure on the stock.
Hunt Mining has about 2,800 sq km in the Santa Cruz Basin of Argentina. Santa Cruz is proving up to be prolific. There are a number of players, including Andean Resources Ltd., which made a major discovery of 3 million ounces projected resource. It was taken out for in excess of $3 billion (B) by Goldcorp.
Eldorado Gold Corp. (ELD:TSX; EGO:NYSE) was in the bidding for Andean, but was outbid by Goldcorp. Eldorado still likes Santa Cruz, so this summer it joint ventured with Hunt. The agreement gives Eldorado the option of looking at all of Hunt's exploration opportunities. In fact, Hunt gets to work up its best exploration projects with the greatest potential and present them to Eldorado. Eldorado then has the option to finance 100% of that exploration. It has the formula to pay Hunt some capital upfront and joint venture on the property.
For Hunt, it's a great deal—one that certainly gives recognition and acknowledgement that its properties have some merit. Having a senior partner like Eldorado on its exploration team and paying the bills is a great plus for the company. I expect a natural exit strategy for Hunt would be the eventual acquisition of the company by Eldorado.
TGR: Hunt has La Josefina, El Gateado and Bajo Pobre projects. Which is considered its flagship?
SC: Right now, La Josefina. Hunt has elected to keep a couple of parts of La Josefina 100% for itself. There is an additional property, La Valenciana, which is contiguous with La Josefina and seems to have the same potential. The license has been approved. Both of those are core properties. I expect Hunt would not be averse to joint venturing with Eldorado if it has interest in developing those properties.
TGR: A lot of investors get weak-kneed when they hear Argentina. Santa Cruz is in the southern part of that country, which tends to be a mining-friendly province. What's the risk profile there?
SC: The biggest risk is if rules change. There have been more leftist-leaning governments in South America the last few years. That has scared some people. Argentina recently restricted currency transactions for the mining and oil and gas industries, which had been previously exempt. It moved to nationalize the oil company Yacimientos Petrolíferos Fiscales (YPF). Investors and companies don't like to see these changes in rules. It makes them wonder how secure their investments are. That's certainly the big concern.
There have been a couple of environmental issues come up in permitting in some of the more agriculture-focused areas of Argentina, but not in Santa Cruz. It's my understanding that Santa Cruz is basically barren plateau.
TGR: What are some other commodity plays you're following?
SC: Cobalt Coal Ltd. (CCF:TSX.V; CCCXF:OTCBB), based in Calgary but with its principal property in West Virginia, has 1.5 million tons (Mt) of high-grade, metallurgical coal. It is on the cusp of breaking even. It had a net $350,000 profit in July.
Met coal has stayed in demand, while there's been some weakness in thermal coal. Low gas prices in North America have put pressure on thermal coal. But met coal, because of demand for steel, has stayed relatively buoyant. Some of the most accessible and highest-grade met coal in the world is in Appalachia in West Virginia. It's been mined there for hundreds of years.
Cobalt just announced the acquisition of six tracts totaling more than 5,000 acres, but more importantly, a potential reserve of 240 Mt met coal. It's a company-maker. Cobalt is now tasked with funding that. The purchase price was very reasonable. Two tracts already have been permitted for development. It has an NI 43-101 technical report filed with the exchange that puts the measured coal resource at 15 Mt, which gives it a net present value of about $205 million.
TGR: There is high unemployment in Appalachia, too, which could encourage development.
SC: There is some incentive there. The infrastructure is all in place—roads, rail lines, a wash facility. It's really an interesting acquisition for the company. "If it's so great, why was it still out there?" some people have asked. The simple answer is that it was owned by six different families. None of them saw eye to eye over the years. Interestingly enough, one of the tracts was owned by a Hatfield—an actual descendant from the Hatfields and McCoys. It was the work of Mike Crowder, Cobalt's CEO and a third-generation coal miner, and his knowledge that allowed the company to bring the six parties to the table and negotiate a deal.
TGR: What other companies do you find interesting right now?
SC: ATAC Resources Ltd. (ATC:TSX.V) has a very high-grade, prolific gold deposit in the Yukon. In fact, it's been referred to as the only Carlin Trend-type deposit outside of Nevada.
ATAC has been drilling for a few years and defined a number of high-grade ore bodies. It said this week that it stepped out about 10km from its Conrad property and target where it has been getting very high-grade results to date. It drilled 8.5 meters (m) 19.87 grams (g) on its first hole. The stock moved from $2.40/share to about $2.70/share.
It has drilled three holes into this new structure, but only reported on one. It starts to show that this is a significant deposit when one can step out 10km essentially, drill a separate target and get grades on the first hole over 90 grams per ton over almost 9m.
We're hoping that the other two holes that it has put in will assay and show similar resources. This could start to put into perspective that this could be a very large, high-grade deposit for ATAC.
TGR: I definitely "Spocked" an eyebrow when I saw this news come across my email. B2Gold Corp. (BTO:TSX; BGLPF:OTCQX) announced that it was taking out CGA Mining Ltd. (CGA:TSX; CGX:ASX), which operates the Masbate gold mine in the Philippines, for $1.2B in stock. Is this deal a harbinger of things to come?
SC: Hopefully, yes. It just reinforces some of the things we've been discussing. Bullion is up 12%. Mining stocks were down 25%. There's a disconnect between the underlying commodity price and the companies that explore, produce or have assets in the space.
I'm hoping it's the start of a trend toward additional acquisitions. There has been some speculation that companies like Goldcorp, Barrick and Teck Resources Ltd. (TCK:NYSE; TCK.A:TSX) are cash rich and are going to go on an acquisition spree. The suggestion has been made that it would be better for the economy if a lot of these companies that are sitting on cash started to deploy it.
There is value in some of these companies. The fact that they have seen their share prices depressed over the last year when the underlying commodities have continued to firm should reinforce that there is real value. If that value is recognized by their peer group, investors may start to see that value in depressed mining stocks, too.
TGR: Thanks for speaking with us today, Steve.
SC: My pleasure.
Steve Cochrane joined Pitfield Mackay Ross as an investment adviser in 1981 after attending University of Calgary. He joined Levesque Securities in 1986 when Levesque opened its first office in Western Canada. While an investment adviser for Levesque, Cochrane also acted in a corporate finance capacity and was involved in some of the earliest CPCs done on what was then the Alberta Stock Exchange. During his tenure with Levesque and its successor company National Bank Financial, he was involved in numerous IPOs including Wilan and Resverlogix. Cochrane joined Blackmont/Macquarie in 2003. Since 2003, Cochrane has spent a lot of time in Asia and Southeast Asia assisting companies raising funds and listing on the TSX Venture Exchange.
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DISCLOSURE:
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: Goldcorp Inc., Angkor Gold Corp. and B2Gold Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Steve Cochrane: I personally and/or my family own shares of the following companies mentioned in this interview: Angkor Gold Corp. and Hunt Mining Corp. 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 interview.
