Correction? What correction? Chris Berry, founder of House Mountain Partners, and Michael Berry, publisher of Morning Notes and Discoveryinvesting.com, think the 2011 price correction in precious metals is nothing but a passing fancy, and that gold and silver will be back on their respective ascents by year-end. If anything, gold and silver equities are currently on sale. In this exclusive interview with The Gold Report, Chris and Michael reveal some of their favorite gold and silver plays in Colombia and the Yukon.
The Gold Report: Gold and silver are off to rocky starts so far this year. But some gold pundits are still bullish on gold, predicting the yellow metal could finish 2011 at about $1,600/oz. Is the roughly 4% drop we've seen in the 2011 gold price simply profit taking by gold investors, or is something more fundamental behind gold's price weakness?
Michael Berry: Well, I don't think there's anything fundamental about it. The gold price ran up toward the end of the year. There was a lot of positioning by the buy-side investors in gold and silver. I think the situations of both gold and silver are fundamentally different today-particularly silver, which could soon have reasonable position limits in the futures markets. We don't yet know what they'll look like.
Legislation on the horizon is going to force hedgers and manipulators of these markets to reduce their short positions. I think it's remarkable that gold traded above $1,400/oz. When I was first involved with silver a few years ago, it was trading at $4.20/oz.; in late December, it traded over $30/oz. I think this current pullback is simply a correction-a needed correction. I don't think it's a fundamental change in the precious metals market at all. If you look around the world today, you see everybody printing money. Economies are trying to drive their fiat currencies down. It's a race to the bottom-Brazil, China, the United States. There is weakness in Europe because of problems with sovereign debt, and those problems aren't completely solved; neither are the problems in the U.S. I just read a report this morning about the state of Illinois needing to raise personal income tax by 75%. People are very leery of the dollar and of fiat currencies in general. Gold and silver will both benefit from that. Maybe gold will go down another 5% or 6%, but then we'll have a nice bounce back.
I should also add that the dollar's been stronger. When the dollar is strong, commodities fall. The dollar is still in demand because it's the world's reserve currency. You've got to have dollars for both deleveraging and paying off debts. There are these periods when the dollar gets stronger and that has a dramatic, negative impact on commodities. It has been a bit painful, and we could still see some weakness in the precious metals and shares; but, in the long term, I don't think fundamentals have changed. I think they have only become stronger.
TGR: What's the average price we're going to see for silver and gold in 2011?
MB: I think gold is probably going to average $1,500/oz., and possibly reach as high as $1,600/oz. That would be a good move for gold if it could do that. I hesitate to predict an average for silver. There will be a short covering in silver. There are still a lot of commercial traders, including JP Morgan, which were significantly short in the silver futures market. The mints around the world are producing several million 1 oz. silver coins a month. We could really see silver go quite a bit higher. But I think we will easily have $35/oz. or $40/oz. If geopolitical and economic trends continue down their current paths of excess liquidity, these metals will move up.
TGR: For the sixth consecutive year, China boosted its gold production. It produced a record 340 tons of gold in 2010-a record-while it imported another 210 tons of gold. What does this tell us about China's potential to impact the gold price and its view of the yellow metal in general?
MB: Stepping back in history, China was on a silver standard for several hundred years. It was pulled off the silver standard through a deflation and a hyperinflation caused by FDR's administration in the 1930s. China has always been a proponent of hard-not fiat-money. As the country eventually allows its yuan to appreciate, it's going to want to have that back. I think what China is doing is very shrewd. It is mining a lot of gold and importing a lot of gold; that will, in essence, back its currency.
China is now the largest silver producer in the world. It will not be a formal precious metal backing, but it will certainly bring power to the Chinese currency as, ultimately, it floats relative to the dollar. The country will have to float its currency at some point because its economy is suffering from inflation. Already it is moving toward convertibility. China really needs a higher yuan to stem investment inflows into the country and douse inflationary tendencies. I think it's very important that the country mine as much gold and silver and import as much gold as it can with its vast foreign exchange surpluses, which continue to accumulate.
TGR: You and Chris recently gave some presentations on The Yukon Room, an online investment conference focusing on the Yukon. Please outline what you discussed there.
Chris Berry: A lot of the work my father and I do focuses on the emerging quality of life cycle associated with the emerging world. Natural resources really underpin this cycle and are the backbone of any economy. I'm referring to the hard assets needed to make the refrigerators, cars and iPods, etc. that add to one's quality of life. With that concept in mind, I visited the Yukon last summer on a property tour. I consider the area an emerging market, but not in the same sense as China or India or Colombia. I think the Yukon shares a lot of similar characteristics with those places, albeit on a smaller scale. There are very few untapped mining exploration areas in developed countries these days. The Yukon is a perfect example of a location with high exploration upside. With The Yukon Room, we advanced the thesis that the Yukon is this generation's emerging market from an exploration perspective.
TGR: You talked a bit about Antioquia Gold Inc. (TSX.V:AGD) in your last interview with The Gold Report in July 2010. The company owns the Cisneros gold project in Colombia and recently published some metallurgical test results from the ore there. What do you know about those tests?
CB: The results from the tests are very promising; they told the company the metallurgy is in great shape. What's most important, though, is that the test results increased the size of the deposit significantly in both strike length and depth. The depth has reached to about 325 meters. In 2010, Antioquia drilled 79 holes and hit gold in all but two of them. The other two holes actually weren't a total loss, as results from those told the company where not to drill.
After Antioquia published the press release on the metallurgical tests, I spoke with President and CEO Rick Thibault. In 2011, he says Antioquia will go underground at Cisneros to get more details on the mineralized gold structures. Another thing I'll say about the company is that core from four holes is still in the assay lab. Those holes were drilled into new underground structures. We don't know the results from those holes or what story they're going to tell, but there could be additional upside there.
TGR: You talked about Antioquia wanting to go underground and examine the deposit at that level because Cisneros has these high-grade pods, but the high-grade mineralization doesn't seem to continue across the property. Did Rick talk about processing some of that high-grade ore as Antioquia goes underground, to generate some cash flow to fund further exploration?
CB: Yes, potentially. The company's goal is to be a small-scale producer while still exploring what is actually a very large property. Ideally, Antioquia would like to produce 30,000 oz. (30 Koz.) per year, generating cash flow and funding exploration over the next couple of years. There's just an awful lot of upside. We mentioned earlier that the Yukon is one of the last unexplored or underexplored places in the world. I would also include Colombia in that group, but for different reasons.
One of the other feathers in Antioquia's cap is this strategic investor, the exploration arm of Peruvian gold producer Consorcio Minero Horizonte S.A., known as Desafio Minero. The company has partnered with Antioquia to help it understand the geology and the process of getting into production. Desafio is producing about 200 Koz. gold per year in Peru, 180 Koz. of which comes from a mine that has geology almost identical to that of Cisneros. That's another reason I really like Antioquia. Its partners have the process to production almost solved.
TGR: Does Desafio have a direct stake in Antioquia?
CB: It does. I think it's 19.9%.
TGR: Are there other exploration companies working in Colombia that you're following?
CB: It's hard not to keep your eye on Ventana Gold Corp. (TSX:VEN). It's the darling of the Colombian gold explorers and it just rejected a potential takeover offer. Another one that's interesting is Galway Resources Ltd. (TSX.V:GWY). That's not just a gold play; it's also a coal play. Another one that I've been keeping my eye on is Mercer Gold Corp. (OTCBB:MRGP). That one is interesting. Its property is actually on the opposite side of a mountain from Medoro Resources Ltd.'s (TSX.V:MRS) Marmato Project, and Medoro is having a little bit of a PR problem there. It has this gigantic deposit-about 9 Moz. gold-but the problem is, it's underneath a village. Medoro is trying to get those issues worked out, but Mercer is on the other side of the mountain and doesn't have those relocation issues. Then again, Mercer has a long way to go with respect to drilling and defining a resource. There's potential upside there if you think that the geology on one side of the mountain crosses over to the other. Mercer could be an interesting one to watch.
TGR: What are some projects that stood out on your visit to the Yukon?
CB: There are about 150 companies exploring up there, but only a couple are producers. The company I'm most familiar with in the Yukon is Golden Predator Corp. (TSX:GPD), which is run by CEO Bill Sheriff. The company has a very large property position-probably about 1,400 square km.-one of the largest exploration plays in the Yukon. Golden Predator is going to drill on two of its most promising properties, Brewery Creek and Grew Creek, in February. Drilling in February is somewhat off the charts because most companies don't even attempt winter exploration in the Yukon. Rather than waiting until April or May to start the drills, I think the company just wants to get up there and get some news out.
The Brewery Creek project is actually a past-producing mine. It's got an NI 43-101 resource estimate. One of the more significant things about Golden Predator is that it just hired Mike Burke as chief geologist. I've met Mike a couple of times; he's a great guy. He has worked for the Yukon Geological Survey for about 20 years; so, if there's one person who knows the Yukon, it's Mike Burke. So, Golden Predator's got this encyclopedic knowledge about Yukon geology on staff. That has to bode well for the company.
The other company with a very large land position in the Yukon is ATAC Resources Ltd. (TSX.V:ATC). It has an even larger land position than does Golden Predator.
TGR: I think drilling in February is significant because the news flow tends to dry up over the long Yukon winter. If a company's not getting the attention of the market, its stock price usually goes down.
CB: No question about it. And with roughly 150 companies in the Yukon now, you really have to fight for investors' attention nowadays.
TGR: Are there any other companies that you're following in the Yukon?
CB: Another one I really like is Alexco Resource Corp. (TSX:AXR; NYSE.A:AXU). CEO Clynton Nauman and his team just achieved commercial production at the Bellekeno high-grade silver mine. It was supposed to happen last quarter, but earlier this month Alexco officially announced that it had reached commercial production. This is significant because Bellekeno is Canada's only primary silver mine. One of the other things I like about Alexco is that it has a small environmental practice that was providing cash flow during the exploration phase. That's something I like to see a company do, instead of having to go back to the market constantly for cash and further dilution. I should add that the company's still exploring its extensive land package, which is in a past-producing region. I know the stock's had a great run in the last few months, largely on the back of this production promise and the rising silver price. But if we see $35/oz. or $40/oz. silver by the end of 2011, that has to benefit Alexco.
TGR: What sort of production guidance are we looking at in 2011?
CB: Alexco is looking at about 2.5 Moz. silver in 2011. The company plans to produce a bit less in 2012 and 2013, but that doesn't factor into any additional discoveries it could make between now and then. I think the cash costs are around $4/oz.
TGR: If you can produce silver at $4 and sell it for $30, that's generally a recipe for success but Alexco's share price has already factored in a lot of those gains.
CB: Yes, I know. It's at $6.11, which isn't a typical price for a junior. That just shows that Alexco is graduating to the next phase of development, which is exciting.
TGR: Mike, we continue to see consolidation in the gold sector-especially among the juniors. In a growing number of cases it's a cash-rich/project-poor junior merging with a cash-poor/project-rich junior. One recent example is Terraco Gold Corp. (TSX.V:TEN) merging with Western Standard Metals Ltd. (TSX.V:WSM). You discussed that business combination in a recent edition of Morning Notes. What do you make of the deal and are we going to see more mergers like this?
MB: We really like the deal. And though it has not yet been approved by the shareholders of Western Standard, we think it will be approved. The resource, which is largely measured and indicated, is about 900,000 of open-pit ounces of gold. We think gold in the ground is worth about $150/oz. If Terraco recovers just half of this, it will be a very accretive deal for the shareholders. But we think the real value in the Almaden resource probably lies deeper and has yet to be discovered. When old pros with great discovery track records like Ken Snyder and Curt Freeman like a deposit, we think it's worth having. There should be quite a few of these kinds of consolidations if, as we believe, gold holds its own over the next few years. Terraco has one of the Street's most admired management teams in CEO Todd Hilditch, who is a real up-and-comer and is admired by the investment banking community for the successful deals he has arranged.
TGR: Do either of you have some parting thoughts on precious metals, gold and silver in particular?
CB: There's been a bit of a blowoff in the precious metals to start the year, but I think it's largely because those metals had such a huge run in the fourth quarter of 2010. People ask me, Is the bubble bursting? I don't think there is a bubble in precious metals. I just look at the macrofundamentals. I look at the eurozone. I look at the fiscal condition of the United States. I look at inflation in China. What has fundamentally changed with these metals since the beginning of the year? Nothing. Nothing has happened to change my opinion that gold is going to continue its upward trajectory, as will silver.
TGR: Thank you for taking the time to talk with us, gentlemen.
Michael Berry was born in Colombia and raised in Canada, but has lived in the U.S. for 36 years. A math major at the University of Waterloo in Ontario, he earned an MBA at the University of Connecticut and obtained a Ph.D specializing in quantitative analysis and investment finance from Arizona State University. While a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia (1982-1990), Michael spent considerable time with some world-renowned geologists on the Carlin Trend, and he also published a casebook, Managing Investments: A Case Approach during that stage in his career. Michael also held the Wheat First Endowed Chair at James Madison University in Virginia, and managed small-and mid-cap value portfolios for Milwaukee-based Heartland Advisors and Chicago-based Kemper Scudder. His Morning Notes publication, distributed worldwide, provides analyses of emerging geopolitical, technological and economic trends, as well as identifying opportunities for the Discovery Investing strategy he developed.
With a lifelong interest in geopolitics and the financial issues that emerge from these relationships, Chris Berry founded House Mountain Partners in 2010. House Mountain firmly contends that the emerging quality of life cycle emanating from emerging markets is a game changer that will affect everyone throughout the world for decades. With that in mind, the firm focuses on the intersection of three topics: 1.) The evolving geopolitical relationship between emerging and developed economies; 2.) The commodity space; and 3.) Junior mining and resource stocks positioned to benefit from this phenomenon. Chris spent 13 years working various roles in sales and brokerage on Wall Street before founding House Mountain Partners. He holds an MBA in finance with an international focus from Fordham University and a BA in international studies from The Virginia Military Institute.
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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: Antioquia Gold, Golden Predator and Terraco Gold.
3) Chris Berry and Michael Berry: We personally and/or our families own shares of the following companies mentioned in this interview: Terraco Gold and Golden Predator. We are paid advisors to Antioquia Gold.
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