Mark Lackey: Will Growth Hamper Gold?
Interview

The Gold Report: Mark, when you worked for the Bank of Canada, you made regular forecasts on the U.S. economy. What is Pope & Co. expecting from the U.S. economy in 2011?

Mark Lackey: We're expecting the gross domestic product in the second and third quarters to be in the 3% range with inflation around 1%. We're not looking for huge growth, but there could be some improvement in the labor market and in industrial production in a scenario with little inflation. Unlike some people who think deleveraging is going to continue and cause subpar growth in the U.S., we see potential growth of 2.5%–3.0%. That's not bad.

TGR: That might not necessarily be good for gold stocks or the gold market in general. We've seen a correction already this year. Gold is down about $60 an ounce, or about 3%, from what it was in late December. Should we expect that correction to last awhile, or will the climb resume shortly?

ML: We don't think there will be much of a decline. We thought there would be a little bit of a correction in the short run—and that has happened—and we think it could go a little bit lower. I don't think the strength of the U.S. economy is so much an issue with gold. The bigger issue is that investors will look at the debt problems in the U.S. and ask themselves how those are going to be resolved. Gold prices could be back up to close to $1,600 an ounce by the end of the year. Some people on the Street are forecasting $2,000, but we are not quite that bullish. The underlying factor is that some investors in the world aren't comfortable with any paper currency and they're more comfortable owning gold.

TGR: What will push it to that level?

ML: Investors will start to realize that commodity prices are rising. There's been a pretty large rise in copper and a big move in silver. Companies are going to try to pass production costs through, which could lead to inflation coming out of the commodities sector. In addition, as the unemployment rate decreases in the countries comprising the G-7, the market is going to realize that inflation can come back. It won't be at the same levels as in the '70s when inflation hit between 16% and 20%, but there are some indications that inflation is going to start to come back and will feed into gold's performance.

TGR: Will gold be the only beneficiary, or are we going to see continued upward momentum in other precious metals like silver or platinum group metals like platinum and palladium?

ML: We like silver because it doesn't get recycled. Also, 90% of the silver in the world comes from secondary sources as a byproduct of copper or nickel. There aren't many pure silver mines out there. The demand for silver has increased as well, because investors use it as a hedge against currencies and it also has a number of industrial uses. Although silver had an incredible year last year, we don't expect that performance to continue. However, we certainly expect that silver prices will rise again this year.

Palladium could benefit from any continued rebounding in the auto sector because it is used in catalytic converters.

TGR: We saw some interesting things in the gold space in 2010. Avion Gold Corp. (TSX:AVR; OTCQX:AVGCF) entered production without an NI 43-101 resource estimate on its gold mine in Mali, and Kinross Gold Corp. (TSX:K; NYSE:KGC) took out Underworld Resources Inc. while Underworld was still drilling out the White Gold deposits in the Yukon, which didn't have an NI 43-101-compliant estimate at the time either. Do you expect more companies to move forward without those technical reports?

ML: I think the technical reports were instituted when there were scandals in the '90s and the market was looking for a standard approach in order to determine the size of a company's resource. The regulators said, "Okay, we're going to try to protect investors," and these reports will provide investors with inferred and indicated results that will provide an estimate of the resource size. The flip side is that companies will have various types of deposits like a gold deposit that is very nuggety that turns out to be a higher grade in a bulk sample than when it is drilled. But in order to be NI 43-101 compliant, they have to drill the property. Sometimes, there are cases where the 43-101 actually understates the resource.

Kinross' acquisition of Underworld was a very good move; if the company made that offer today, it would be considerably higher given the higher gold price and rising drilling activity in the White Gold district. The company did its due diligence and was willing to make the offer even though it lacked an NI 43-101-compliant resource.

TGR: Do you see that as a positive trend, though? Doesn't that open the door to somewhat less-reputable companies perhaps exploiting that trend?

ML: There's no reason to worry because the companies that have the labs that determine the drilling results have rules and regulations that must undertaken or they will be out of business. Also, the vast majority of companies are likely to get their 43-101s quickly. In the case of Underworld, it hadn't been working on that property all that long. In fairness, you wouldn't have expected a 43-101. I think the company was surprised that it was taken over at that point in its exploration development.

TGR: Goldcorp Inc. (NYSE:GG; TSX:G) was successful with that type of arrangement at its Red Lake Gold Mine. It's never had a resource estimate per se, but the company just kept developing further and further into the ground. The gold's there.

ML: That's right. Some mining companies say, "Here's our NI 43-101 estimate but, because we're doing so much mining, we're finding more and more as we go along." So, recent drilling is not always represented in the most recent 43-101 because they're not updated all the time. One has to recognize that every project is different and investors also have to consider both political and execution risk when they consider investing in a corporation.

TGR: I had a conversation with Richard Thibault, who is the president and CEO of Antioquia Gold Inc. (TSX.V:AGD), which is drilling the Cisneros project in Colombia. He said there's a chance AGD could enter limited production without a 43-101. The company has found pockets of gold that are very high grade. It would do limited amount production, maybe 25,000 ounces a year, while it continues to develop underground. How do you think the market would react to something like that?

ML: The markets will judge every project by the results. You have to understand how he's approaching that situation in Colombia and that it's a little different than some traditional mining operations due to the nature of gold the company has found. Now, admittedly, if the company had a 43-101, it would help the share price. But the market should still be positive about the fact that AGD's got actual production and cash flow.

TGR: The market has certainly reacted very well to Avion Gold, but that's a much bigger operation. We've seen AVR shares go from just less than $1 a couple of months ago to $1.88 now. What are your thoughts on what Avion is doing, in general?

ML: Avion commenced gold production in February 2009 in Mali, West Africa and by the end of 2009 it was producing 51,291 ounces. At the end of 2010, the company was producing 87,661 oz.—an increase of 74% on a year over year basis. Additionally, in the past few days, the company released some excellent drilling results from the Kofi project in Mali. Avion also acquired a very promising land position in Burkina Faso in 2010. We believe Burkina Faso will become one of the best gold mining districts in the world. We also believe that Mali and Burkina Faso are two of the most politically stable countries in Africa.

TGR: It's just one of a number of promising micro-cap gold stocks. What are some other micro caps you're following?

ML: We've been looking at Goldrush Resources Ltd. (TSX.V:GOD) in Burkina Faso. Burkina is a rising gold star. SEMAFO (TSX:SMF), Orezone Gold Corporation (TSX:ORE) and Volta Resources Inc. (TSX:VTR) all have had terrific performances. Goldrush has the next best potential in the country and it's had some pretty good drilling results. One of the last ones was 3.1 grams over 34 meters. Some of the work the company's done indicates that some of the zones are larger and more extensive than previously thought. We like the management and we know the geology, geologist and the president. They're experienced people. We actually did some financing with the company late last year.

TGR: The company has about 115 million shares outstanding. Is that high for a company this size?

ML: No, that doesn't bother me. That's not a bad level given Goldrush's prospects.

TGR: Do you expect political instability in Côte d'Ivoire to affect other countries in the region like Burkina Faso?

ML: Côte d'Ivoire clearly has a problem. Obviously, we don't want anything that's operating there right now. We don't feel that the issues in Côte d'Ivoire will have any significant impact on Burkina Faso, which has pretty good growth in its economy, a stable government and has seen rising capital inflows into the mining sector.

TGR: What mines are operating in Burkina Faso now? Also, can you provide us with a Yukon company?

ML: Production in Burkina includes the Youga mine operated by Etruscan Resources Inc. [now owned by Endeavour Gold] and the Mana mine operated by SEMAFO; and the Yukon company is White Pines Resources Inc. (TSX.V:WPR). White Pines recently signed a deal with the prospector Shawn Ryan, who was just named 'Prospector of the Year' by the Prospectors & Developers Association of Canada (PDAC).

Shawn is one of the key guys in the recent revival in the Yukon. He's spent a lot of time doing soil work over the years. He came up with a way to better understand the geology of the area, particularly in the White Gold area. The successes of Underworld and Kaminak Gold Corporation (TSX.V:KAM) both resulted from work that Shawn has done, as well as the excellent management of those companies. We did participate in a previous financing with the company given the excellent management team at White Pines Resources.

Creso Exploration Inc. (TSX.V:CXT) is another company we like. It's in Northern Ontario, south of Timmins in the Shining Tree area, and has been around for a long time. It's one of those areas that was impacted when gold prices fell in the '80s and '90s and companies decided not to do as much work in Northern Ontario. Of course, that has changed now that prices have risen. Creso brought in Mining Geologist Robert Casaceli—just about everyone knows him—to lead development of the Shining Tree area. The company has recorded some pretty impressive results. The hole it pulled back in August had 82.5 meters of 11 grams—that's a phenomenal hole. We expect a lot of good news flow soon, given the extensive drilling that was done recently. Other companies in the area have had some good drilling results recently, as well. We did participate in a previous financing with the company.

TGR: At one time, that area was the heartland of gold mining in Ontario.

ML: Yes, that's right.

TGR: Earlier you said you doubt that silver will see another increase of 83%, but could we peg that down a little bit? Could it maybe go to $40 by year-end?

ML: Silver could reach the high $30s, somewhere around $37 or $38. In about three years, we could see $50 silver. I think we've got a 10-year cycle for commodities left; so, silver could be $75–$80 down the road.

TGR: Let's move into some micro-cap silver plays you've been following. What are some highlights?

ML: We like Aura Silver Resources Inc. (TSX.V:AUU). We like the management. President Bob Boaz has been involved with a very successful uranium company and, previously, he was with AuEx Ventures Inc., which was taken out by Fronteer Gold Inc. (TSX:FRG; NYSE.A:FRG). I like that he was able to acquire a very good property in the San Jose Mining District in Taviche, Oaxaca—an area of Mexico that doesn't have a drug cartel and other problems.

We are also very interested in Aura Silver's Greyhound Lake Project up in Nunavut, Canada. A lot of companies got out of Nunavut when the prices fell and, admittedly, there were some First Nation issues in those days that have since been resolved. First Nations is very positive and the government is pro-mining. There are Archaean greenstone belts in the area. Historically, this has been where Canada's best metal ore bodies are found. There's some great silver potential in this area.

As much as Taviche is an interesting play, the biggest win for this company could be Nunavut because a lot of work was done there in the old days, most of which wasn't 43-101 compliant, but people knew what they found. I think people will be surprised at the array of metals and minerals in Nunavut. Having the support of First Nations is also key. It wants to be involved, wants the jobs and even wants to invest in some of these plays.

Nunavut is a politically stable area that is really coming into its own. It's a lot like the Yukon was a couple of years ago. Nunavut is another place where companies want to do business, and Aura is sitting on one of the potentially better properties there.

TGR: Well, Aura certainly had some good samples that it was processing last year.

ML: It has and it's going to drill early spring when the weather improves. There could be some good news. The advantage of also having a Mexican play is that the company can drill there when it can't drill in Northern Canada.

TGR: How much cash does the company have for these drilling projects? Also, can you tell us something about Aura that most investors might not know?

ML: The company just raised $4 million. I expect it will have to come back to the market sometime this year if it has some success. Presumably, Aura would raise money at higher prices. I like the fact that Bob was once on the Street because he can market himself well. A company can come through with some pretty good projects, but if it can't sell the deals to the institutions, then it isn't going to get financed. It's that simple. Investors see thousands of deals and a company has got to be able to distinguish itself from the crowd. A guy like Bob can do that. You may say a great project sells itself, and it does sometimes. But some people in the mining business struggle to get money, and one of the reasons for that is they just can't market their company properly.

TGR: Do you have some parting thoughts on precious metals, in general?

ML: I was at a meeting yesterday where a number of people were suggesting that the tide had turned when they saw the weakness in gold and silver, but I don't think that's the case. Not every country in the world feels comfortable with paper currencies. Russia and China are trading with each other in their own currencies—they're no longer using the U.S. dollar. Also, there is a limited amount of gold and silver in the world. It's been hard to increase the supply of gold. The supply/demand issue is one of the reasons that I anticipate a higher price by year-end.

TGR: Thanks so much for your time, Mark.

Mark Lackey, currently the investment strategist at Pope & Company Limited, has 30 years of experience in energy (oil and gas; hydro), mining, central and corporate banking and investment research and strategy. He worked at the Bank of Canada where he was responsible for the production of U.S. economic forecasting, briefing Governor Gerald Bouey on U.S. economic developments on a weekly basis. Mr. Lackey was a senior manager of commodities at the Bank of Montreal where he helped to determine whether or not the bank would loan money to companies in the commodity space. He spent 10 years in the oil industry with Gulf Canada, Chevron Canada and Petro Canada where his main responsibility was developing corporate plans. This involved forecasting oil and natural gas prices, oil and natural gas demand, oil and natural gas supply, downstream products and their competitive position versus other oil companies. During his tenure at Trans Canada Pipelines and Ontario Hydro, Mr. Lackey helped develop corporate plans while also working closely with each company's pension funds.

In the investment community, Mr. Lackey was director of research at Brawley Cathers and the investment strategist at both Blackmont Capital and Hampton Securities. He is a regular guest on BNN, having made more than 200 appearances in the last 10 years (more than 40 of which were in 2010). On his most recent appearance, Mark discussed his new role at Pope & Company and branded Pope as an up-and-coming institutional resource boutique dealer.

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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: Antioquia Gold.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Avion, Antioquia and Goldcorp.
3) Mark Lackey: I personally and/or my family own shares of the following companies mentioned in this interview: Goldrush Resources. I personally and/or my family am paid by the following companies mentioned in this interview: None.