Jeb Handwerger: I first came into this sector when everyone was chasing the dot-com stocks. This was after the Bre-X scandal, where they were falsifying the assays. No one wanted to touch the gold miners, especially exploration stocks. They ran into the dot com sector and energy. Many people quit their jobs to become day traders. Gold had been in a correction since 1981 for 20 years. What we're seeing right now is very similar to what we saw back at that 30-year low earlier this decade—miners hedging production, miners cutting off production because of low prices, miners laying off workers, write-downs, initial public offerings of tech stocks with ridiculous valuations and zero earnings.
The resource market is basing. There are benefits to this process. You can see which companies are outperforming and you can see which companies have a strong balance sheet to weather the storm. You can see which companies are getting attention from investors and institutions and which companies are still advancing.
Some people I talk to are thinking about leaving the sector. That's not the right approach. Gains could be exponential. The right approach is to rotate into situations that will outperform, even if gold and silver stay flat. Stick to advisors who are finding the most compelling situations. Corrections take longer than people expect—the longer and the deeper the base, the more powerful the eventual upswing. It could be huge with the record amount of cash on the sidelines and the large number of shorts who may need to cover their position.
TMR: How can investors know which companies are going to outperform?
JH: It doesn't take a rocket scientist. Pull up a simple chart of which companies are beginning to outperform the index over different time frames, the Market Vectors Gold Miners ETF (GDX:NYSE.A) or PHLX Gold/Silver Sector (XAU:NASDAQ). The charts are a reflection of the fundamentals. During the past year, many junior mining companies have outperformed, many of which we featured in my Gold Stock Trades newsletter. For instance, two of our junior exploration recommendations in Nevada, NuLegacy Gold Corporation (NUG:TSX.V; NULGF:OTCPK) and Corvus Gold Inc. (KOR:TSX) show that significant outperformance is critical during these times as capital seeks out the outperformers.
Source: Jeb Handwerger, Gold Stock Trades
TMR: What are those themes?
JH: A success story that I have followed for about a year and a half is Comstock Mining Inc. (LODE:NYSE.MKT). The company is growing production, with the goal of building free cash flow and sustaining itself. The management and technical team is very impressive, with proven track records.
TMR: Comstock Mining is producing right now, but it's not profitable. It just got new permitting to expand. What will it take for it to be profitable?
JH: Just a little more time. It is coming closer to creating earnings per share and free cash flow. It expanded its heap-leach pad. It is going up to 40,000 ounces a year (40 Koz/year), which will bring average costs down, generating greater profit. The company has the potential to grow production to possibly 200 Koz. over the next few years. I visited the property and was very impressed by the experienced team that has been put together to advance such a high-quality producing operation.
Comstock is a junior that is actually producing, with good margins. The company could soon generate positive earnings per share possibly, in Q1/14. This cash flow and sustainability could allow Comstock to explore and add to its massive reserves without diluting current shareholders. Comstock is literally just scratching the surface right now. Its geological team is really excited about exploration, as there are numerous high-grade bonanza targets, most notably the Chute zone. The next few quarters could be huge for this company, as it should achieve positive earnings. Do not be surprised to see majors looking at the company's operations, should the gold price turn higher. Comstock has been flat for two years despite major fundamental progress. To me, this is a screaming buy. The stock is way undervalued and that is why some smart contrarian funds like Century Management have bought millions of shares. Follow the savvy value funds.
TMR: What other companies in Nevada have the balance sheets that would attract investors?
JH: I recommended Corvus back in 2011 and it has been one of my best performers. I have visited the project twice. It is near Death Valley, about 90 minutes from Vegas.
Corvus Gold has been hitting high grades at its Yellow Jacket target. It could be the beginning of a starter pit, which would help out with the economics big time. Corvus is working on a mine plan for the North Bullfrog project, which should be watched as the high grades could significantly improve economics. The company just announced major funding from some of the top investors in the industry to advance this project. The company has an incredible asset, deep pockets, an excellent geological team and a very tight share structure.
TMR: Corvus announced drill results on Bullfrog in October. While the stock is up from May, it's flattened out short of its 2012 high. What's going on there?
JH: I think it will break that 2012 high in 2014 and will eventually be listed on the NYSE. Over the past six months since we reinitiated coverage, it went from $0.50 to $1.20 in one of the toughest junior mining markets. It is up 70% in the past six months, while the GDXJ is down 18%. Being able to pick the winners in a junior environment is no easy task. Luckily, my readers have been blessed with several that put us in a stronger position as we stuck to high-quality stories in mining-friendly jurisdictions. Corvus has the share structure and the support of John Hathaway's Tocqueville Gold Fund and AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) to take the company to the next stage of its growth in 2014.
TMR: Paramount Gold and Silver Corp. (PZG:NYSE.MKT; PZG:TSX) might try to sell its San Miguel mine in Mexico. Could that help it advance the Sleeper project?
JH: Yes. San Miguel is on the radar of the big boys, especially its neighbors Coeur Mining Inc. (CDM:TSX; CDE:NYSE) and Fresnillo Plc (FRES:LSE), two of the biggest silver producers in one of the biggest silver-producing regions of the world, the Sierra Madre. Paramount has the land position surrounding those two companies and has recently published metallurgical results, which may have a significant impact on the project's economics. When the gold price stabilizes and turns higher, look for Paramount’s San Miguel in the prolific Sierra Madre to be one of the first takeout targets. There has been a large increase in M&A activity there. I also recently visited Paramount's Sleeper project in August and was very impressed even though the market is giving it a zero valuation, despite it being possibly the largest undeveloped gold and silver asset in the State of Nevada.
Historically, the Sleeper open-pit mine was one of the highest-grade and lowest-cost producers back in the day. I spoke with the geologists, who believe there may be additional high-grade targets. Remember the Sleeper project when it was in production had armed guards in the pit? That's how rich the gold was there. Sleeper has an advanced preliminary economic assessment showing the positive economics, excellent infrastructure and a huge NI-43-101-compliant resource. Investors can buy it for nearly nothing. It is absolutely a screaming buy.
TMR: People have been mining Nevada for 200 years. Is there still more left to be found?
JH: Yes, there are many projects that are buried and not visible to the human eye. I've always been interested in the Cortez Trend. I've invested in a lot of different situations in the Cortez Trend that never panned out. I finally found a junior that could make it. It has also been one of our major outperformers up over 70% in the past six months, while the index was down 18%. NuLegacy Gold is run by Dr. Roger Steininger, who found the first Cortez Trend deposit, the Pipeline deposit, with Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) in 1989. It eventually got bought out by Barrick Gold Corp. (ABX:NYSE). He has a good relationship with Barrick, and that's how he got this joint venture between NuLegacy and Barrick for the Red Hills project, on land contiguous to Barrick's Goldrush discovery.
I like the joint venture because once NuLegacy spends $3.9 million ($3.9M), Barrick has to either carry it or buy it out. It just closed on an over-subscribed private placement. It raised $2M with Global Resources Investment Trust.
TMR: What else in Nevada should investors watch?
JH: I've always told my subscribers to watch Kinsley Mountain. Let me back up a little. In 2011, Fronteer Gold Inc. (FRG:TSX; FRG:NYSE.MKT), which had the Long Canyon discovery, was our major pick. Many of my subscribers and I made a lot of money off of the takeout by Newmont Mining Corp. (NEM:NYSE) for $2.3 billion ($2.3B). Pilot Gold Inc. (PLG:TSX) is the spin out of Fronteer. Pilot has one of the top geologists who helped advance Long Canyon for Fronteer, Moira Smith. Pilot recently hit nice results from Kinsley Mountain. After selling Fronteer after the Newmont takeout, I just got back in and took an initial position after the good results. It's very impressive. Once this market turns, people are going to become aware that this may have the potential to be the next Long Canyon.
I also just bought Canamex Resources Corp. (CSQ:TSX.V; CX6:FSE), which is hitting unbelievable results on its Bruner project. These are some of the best results I have ever seen in Nevada and don’t understand why investors don’t realize the potential at this project located in Nye County. The stock is trading at only $0.07. Hecla Mining Co. (HL:NYSE) has made a large investment in this company at much higher prices and is represented on the board of directors and the technical advisory. It's a steal for new investors.
TMR: Where else can investors go to prepare for an upswing?
JH: Alaska. Check out the numbers from the Fort Knox mine for Kinross Gold Corp. (K:TSX; KGC:NYSE). Fort Knox is right down the road from International Tower Hill Mines Ltd.'s (ITH:TSX; THM:NYSE.MKT) Livengood project. It has a lot of similarities and advantages to Fort Knox but has been underperforming ever since it announced a feasibility study that most investors and analysts completely misunderstood.
TMR: What does the price of gold have to be for International Tower Hill to make sense?
JH: According to the last feasibility, it needs $1,500 gold to get close to breaking even. But that feasibility was based on a mine plan that was done back at the height of the market in 2010. There are many different options on this project and in many ways it is superior to Fort Knox. That is how the company attracted the people who built Fort Knox and Pogo to advance Livengood. I am confident that one day this will be a mine as it is located in a mining part of the state and it has a technical team that knows how to build mines. One has to be patient with a massive 20 million-ounce asset like this as it has been underperforming. However, it has the potential if gold starts moving higher to significantly outperform to the upside.
TMR: Will there be a new feasibility study?
JH: It is looking at different optimizations. There are strategic partners that are seriously considering it because they may want a mine on their books that can have large production numbers. International Tower Hill is one of those few projects that have the potential to produce 500 Koz/year. It has huge optionality and leverage.
TMR: Are you finding any gold opportunities in Canada?
JH: I recently took a position in Probe Mines Limited (PRB:TSX.V). Probe is developing the Borden Lake project in Ontario. It has made a high-grade discovery near infrastructure and has potential to expand. This project is a unique find because it's a totally new discovery. It may be a totally new district. The potential for it to be huge and grow is great. It's one of the few stocks that's outperforming in one of the toughest junior resource markets. The outperforming companies are going to be the first to build value for shareholders in the coming upswing. Probe recently announced metallurgy, which was very impressive with good recoveries and key for the preliminary economic assessment.
TMR: You also follow uranium. The sector is still way down since Fukushima. Is it too early to get in?
JH: Smart investors look for the biggest bang for the buck. Uranium recently hit eight-year lows, but the fundamentals show there are more reactors under construction today than there were before Fukushima. China, Saudi Arabia, and the U.S., for the first time in 30 years, are building reactors. All around the world there are new reactors being built to provide a diverse energy mix that's safe, clean and economic.
For Asian nations, natural gas is expensive. They're building huge liquefied natural gas (LNG) terminals in British Columbia to help bring down those costs. There is a huge energy boom in Canada, not only in the oil sands, but also in uranium.
CNOOC Ltd. (CEO:NYSE), China National Offshore Oil Corp., bought out Nexen Inc. (NXY:TSX; NXY:NYSE) for close to $15B. It also signed a uranium deal with Cameco Corp. (CCO:TSX; CCJ:NYSE).
I just took a position in Enterprise Group Inc. (E:TSX.V). It's getting awarded contracts in the energy services field. It is earning $0.05/share/quarter. There are great growth aspects there and the company is making some impressive acquisitions.
The Athabasca Basin and Western Canada is an area that's going to be of great interest because the Chinese need energy. Talk about a boom—just look at some of the news coming out of Western Canada with the massive building of liquefied natural gas plants.
In addition, the last shipment from the Russian Megatons to Megawatts program has happened. That's 24 million pounds coming out of the uranium market that the U.S. had for more than 20 years. Utilities are going to have to look for new sources.
But it takes many years to build a mine in the Athabasca Basin. Cigar Lake has taken more than 30 years to build. We think the Athabasca Basin is a great area, but a lot of the activity is very early-stage stuff.
TMR: What about the Preston Lake area, where the Western Athabasca Syndicate is working?
JH: The Syndicate is a strategic partnership between four companies—Skyharbour Resources Ltd. (SYH:TSX.V), Noka Resources (NOV:TSX.V), Athabasca Nuclear Corp. (ASC:TSX.V) and Lucky Strike Resources (LKY:TSX.V). Each company has an option to earn 25% on the property. It's not far from a highway that runs through the land package. It's still very early stage.
In the Athabasca Basin, I focus on Lakeland Resources Inc. (LK:TSX.V). That's mostly because I followed Jody Dahrouge for many years with Fission Energy Corp. He was one of the major forces behind the J Zone and Patterson Lake discoveries. The Western Athabasca Syndicate is in the area of Patterson Lake South, the southwestern area, which is gaining a lot of interest. It's one of the highest-grade discoveries in the Athabasca Basin, which is home to the highest-grade uranium in the world.
TMR: You mentioned that this activity is early stage. How many years or decades will it take to get to production?
JH: If they find a deposit, it would take at least 10 years. That's why I look at near-term producers that are trading cheaply. One of the best is Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT), which just closed on a $20M loan from the state of Wyoming and announced a new president that came from Cameco. I like its strategic land position in the Powder River Basin. Uranerz is coming into production and should be a takeout target. It has offtake arrangements with some of the largest nuclear utilities in the U.S. It has a processing agreement with Cameco. It should be in construction in Q1/14 with the help of the recently closed low-cost loan from the state of Wyoming. It will be one of the few juniors that will be able to bring in some revenue and sales in a commodity that's highly in demand.
TMR: Are you still following rare earth elements (REEs)? Most REE commodity prices have been way down this year.
JH: Keep an eye on rare earth elements (REEs) as China may cut down exports. Pele Mountain Resources Inc. (GEM:TSX.V) is in the Elliot Lake area, which used to be known as the uranium capital of the world, and was producing uranium when it was selling for less than $20 per pound. It also has REEs, which can be produced as a byproduct. It was a source of REEs back in the 1980s, but now REEs are much more valuable. If uranium starts ticking higher, the Elliot Lake region is another place to watch. The company just added a significant former cabinet minister of Ontario to the board, which could help Pele advancing this project.
Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE) and Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX) are two other names that have the REEs, infrastructure and a lot of support from their jurisdictions.
TMR: What are you doing to prepare your portfolio and readers for 2014?
JH: There are still stocks that are outperforming even during this bear market, as I highlighted above. You need to stick to the fundamentals and the companies with the potential to outperform the index. Focus on companies in stable jurisdictions with the ability to fund and build value in this tough financial environment.
TMR: Are there some questions that investors should ask themselves to determine how they should move forward?
JH: If you believe the dollar is strong and healthy, then you should avoid these precious metals and mining stocks. If you think that the U.S. and all the European nations can deal with these astronomical debts and will pay it down, then sell your precious metals and miners. If you believe that there is no significant chance of inflation, then get out of these sectors. But if you think the opposite and decide to stay in the sector, rotating to the higher-quality outperformers, you'll see potentially phenomenal gains. Eventually, there will be a return of the masses and retail investors. Combine renewed accumulation with short covering and you get a parabolic potential spike.
Euphoria will end in social media and bitcoins. The equity and real estate market are extremely overbought. Yet the commodity market and the precious metals market are still providing real value to investors. You have to go against the tide. Follow the value funds and the experienced investors. Master your emotions. The time to buy is when things couldn’t look worse. The worse things appear the better they will get.
TMR: I enjoyed chatting with you.
JH: My pleasure.
Jeb Handwerger is a newsletter writer who is syndicated internationally and known throughout the financial industry for his accurate and timely analysis of the equities markets—particularly the precious metals and natural resources sectors. Subscribe to his free newsletter, Gold Stock Trades.
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DISCLOSURE:
1) JT Long conducted this interview for The Mining Report and provides services to The Mining Report as an employee. She or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Mining Report: Comstock Mining Inc., NuLegacy Gold Corporation, International Tower Hill Mines Ltd., Pilot Gold Inc., Probe Mines Limited, Skyharbour Resources Ltd., Tasmen Metals Ltd., Royal Gold Inc. and Uranerz Energy Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Jeb Handwerger: I or my family own shares of the following companies mentioned in this interview: Corvus Gold Inc., NuLegacy Gold Corporation, Comstock Mining Inc., Paramount Gold and Silver Corp., Pilot Gold Inc., Canamex Resources Corp., Probe Mines Limited, International Tower Hill Mines Ltd., Enterprise Group Inc., Lakeland Resources Inc., Uranerz Energy Corp., Pele Mountain Resources Inc., Tasman Metals Ltd. and Ucore Rare Metals Inc. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview as they are sponsors on my website and newsletter: Corvus Gold Inc., NuLegacy Gold Corporation, Comstock Mining Inc., Paramount Gold and Silver Corp., Canamex Resources Corp., International Tower Hill Mines Ltd., Enterprise Group Inc., Lakeland Resources Inc., Uranerz Energy Corp., Pele Mountain Resources Inc., Tasman Metals Ltd., Ucore Rare Metals Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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