James West: Falling back in love with gold

James West: There’s been an overreaction. Some valuations are so beaten up that they defy all logic. The companies that I’m interested in have the following characteristics: They are in production or are going into production within 12 months; they have cash costs well below $1,000 an ounce ($1,000/oz), but preferably $900/oz or lower; they have a solid management team that is able to access capital on good terms; they still have a strong share structure; and they operate in a safe jurisdiction.

I wouldn’t say that I am prepared to proclaim that the worst is over and it’s time to go all-in on gold and silver stocks. There are still a lot of risks out there.

TGR: What sources of information are you using to inform your investment decisions?

JW: My ideas emanate from monitoring press releases and volume spikes, and obviously I follow successful management teams. I get attracted to companies that are suddenly active or trading at volumes outside of their norms. If a company intrigues me, I will research its share structure, insider ownership and cross-reference board members with other deals that they’ve been involved with to ascertain a track record.

Generally, if there’s slowly building volume over time without any news, that’s an indication that people who are involved with a project or peripheral to the company are aware of some aspect of the project that has not yet been made public and are starting to accumulate shares.

TGR: Tell us about some gold and silver equities you’re following, James.

JW: The one that shocks me the most is Colossus Minerals Inc. (CSI:TSX; COLUF:OTCQX). Colossus is near and dear to my heart because I was the first newsletter writer to cover the company in 2008 when it listed. It was one of my first research successes. It traded as high as $10/share at one point.

To see it below $0.50/share is shocking considering that not that much has changed since I first started covering it, except it now knows that it’s onto one of the highest-grade platinum/palladium/gold deposits ever discovered and it started production. Even if gold went down to $800/oz, this is a project that would still be very economically viable.

TGR: Any other shocking valuations?

JW: Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB). Here’s a company that has very high-grade material in Nevada. It’s very advanced. The share price has been appreciating steadily since April from sub-$1 to the $1.55/share range. It is bulk sampling and on track to go into production. It just released a technical report on the Fire Creek project. The news just keeps getting better and better. It’s a safe investment for a gold mining company. And now with the definitive agreement with Newmont Mining Corp. (NEM:NYSE), investors’ patience is being rewarded.

TGR: President and CEO Paul Huet seems to be a driven individual.

JW: I’ve spoken to him at length on the phone. He was very forceful in his conviction about what was going to happen with the mill under his management. What he said was going to happen is exactly what happened. He made it very clear that he put his own money into this project and that he joined the company because he believed in it.

TGR: Let’s head to another company.

JW: I keep buying Confederation Minerals Ltd. (CFM:TSX.V). It has the Newman Todd project near Red Lake, Ontario. Over the course of a 1.5-kilometer strike length it’s hitting very high grades from 14 to 25 grams per ton (25 g/t) with many assays in the hundreds of grams per ton. About 95% of the drill holes hit gold mineralization better than 3 g/t. I would also note the company just posted a report from a structural geologist on their website. Have a look; it’s a game changer, geologists will know what I mean. Confederation is a company I’m comfortable holding.

TGR: What about silver companies?

JW: I like Tinka Resources Ltd. (TK:TSX.V; TLD:FSE; TKRFF:OTCPK) and know CEO Andrew Carter personally. Ayawilca, its high-grade silver-lead-zinc deposit, is in Peru—where I used to live for two years. There’s a very good possibility that the price of zinc is going to appreciate substantially in the near term, especially if quantitative easing fueled economic vitality continues to manifest itself.

TGR: Could the lead and zinc offset the cash costs or the all-in cost to mine the silver?

JW: Absolutely.

TGR: What’s the next significant event on the horizon for Tinka?

JW: There’s drilling on two projects, so the catalyst is going to be the next fabulous drill result. It’s raising $1 million ($1M) in a private placement. The outcome of that raise will better determine the timing of an updated resource calculation.

TGR: What’s another noteworthy silver play?

JW: Silver Bull Resources Inc. (SVB:TSX; SVBL:NYSE.MKT) in Mexico is just phenomenal. It’s got a huge silver deposit underneath a giant zinc deposit. It’s a highly valued deposit in a safe jurisdiction that could soon go into production. It’s had results of more than 10 kilograms per ton.

TGR: What did you think of the recent preliminary economic assessment?

JW: It’s great. The general rate of return was 23%, so it pays back in three years and it only needs $300M to go into production. Relative to some of the bigger projects out there, that’s not completely undoable.

TGR: Barrick Gold Corp. (ABX:NYSE) said recently that Peter Munk, longtime chairman and founder, would be stepping down after the next annual meeting. Does that make Barrick more or less appealing to investors?

JW: How do I say this diplomatically? The only thing that could make Barrick appealing to investors, in my estimation, would be a complete reversal in the price of gold to levels above $1,500/oz. I don’t think that Peter Munk’s retirement is going to affect the valuation of the company positively or negatively.

TGR: Why do you think small-cap gold equities are a better play than large-cap gold equities?

JW: Small exploration companies have a microscopic fraction of the overhead that a Barrick-type company has. If a small company with a burn rate of $200,000/month discovers a 2 million ounce deposit in a safe jurisdiction and the cash costs are equal to Barrick’s, then the operating profit per share is going to be much higher than it would be in Barrick’s case, because Barrick has such tremendous overhead to maintain.

TGR: Are there large-cap gold stocks that are worth a look?

JW: If I were going to invest in a large-cap gold mining company for the relative security, I would opt for Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) or Goldcorp Inc. (G:TSX; GG:NYSE).

TGR: Because of their growth profiles?

JW: They have less reclamation liabilities on their balance sheets and their strategy of acquisitions and execution is better handled.

TGR: You also follow mining equities that produce graphite, phosphate, uranium and feldspar. What kinds of opportunities have you unearthed in those commodities?

JW: I think I’m going to start to buy Graphite One Resources Inc. (GPH:TSX.V), which has an exploration-stage graphite project in Alaska. It’s a promising, 15,000-acre deposit that it is starting to drill.

Jim Currie, formerly of Placer Dome and First Quantum Minerals Ltd. (FM:TSX; FQM:LSE), is on the board of directors. Jim Currie is a great manager.

I’m especially excited about I-Minerals Inc. (IMA:TSX), which is a developing the Bovill Kaolin deposit, an industrial minerals deposit with kaolin clay, metakaolin, feldspar and quartz. Those are all considered low-value industrial minerals; however, in the case of potassium feldspar, or K-spar, the only other supplier is Imerys SA (NK:PA) and it’s only high-grade mine closed last month. I-Minerals is poised to become the sole supplier of potassium feldspar to the ceramics market for high-quality porcelain, tableware and medical applications.

TGR: Has it signed an offtake agreement?

JW: Not yet. I-Minerals released a prefeasibility study earlier this year and is in the process of developing a feasibility study. However, there are two majors in the industrial minerals space—Imerys (NK:PA) and Unimin Corp.—for whom this could be regarded as a “must-have” asset.

I-Minerals has also been contacted by more or less every major manufacturer of ceramics in the U.S. and by people expressing concern that they need their K-spar sooner rather than later. On the fast track, this deposit could be in production in 24 months.

I-Minerals has the highest grade of halloysite, which is a natural mineral nanotube. Carbon nanotubes are used in electronics, cosmetics and medicine. High-value carbon nanotubes go for as much as $250,000/ton. Hallosyite nanotube, which is essentially a kaolin flake with one water molecule added, is capable of replacing carbon nanotubes in many applications. It is anticipated that it’s going to be in demand as applications mature.

It’s an interesting project because it’s got a low capitalization requirement of $80M to get into production, and that includes sustaining capital for a 24-year mine life.

TGR: Are there some other specialty metal miners you follow?

JW: Mason Graphite Inc. (LLG:TSX.V; MGPHF:OTCQX) is one of my larger holdings. It has a project in Québec with grades up to 20% graphite and beyond. It’s heading toward a prefeasibility study. Benoît Gascon, Mason’s CEO, developed the entire sales channel for TIMCAL Graphite & Carbon’s mine in Québec, which encompassed more than 60 customers.

Arianne Phosphate Inc. (DAN:TSX.V; DRRSF:OTCBB; JE9N:FSE) is currently the subject of takeover talks. The company just came out with a $2 billion net present value on its Lac à Paul deposit. I’m forecasting a takeout price of $8–11/share. It’s currently trading at $1.60/share.

Agrium Inc. (AGU:NYSE; AGU:TSX) has stated publically that it is looking to acquire its own North America-based phosphate deposit. It doesn’t have much of an option outside of Lac à Paul. Somebody’s going to buy it sooner or later. Given the current price, it’s a steal.

Atico Mining Corp. (ATY:TSX.V; ATCMF:OTCBB) is a great opportunity because it’s a producing mine. The company has drilled more ore around it that is not part of the feasibility study. On Nov. 22, it completed the acquisition of the El Roble mine. Atico is a homerun in the making.

TGR: What is your forecast for the market going forward?

JW: Quantitative easing is starting to have less of an ability to generate economic numbers. The great inflection point where quantitative easing fails to generate any economic benefit can’t be too far off.

At that point, currencies will collapse and gold and precious metals will rise and dominate. That will defeat the futures market for gold and silver and let the physical demand drive the price. That’s when gold is going to sail through $2,000/oz. Whether that’s going to be tomorrow or next year or in 10 years, I can’t say.

TGR: You still like gold—is that the bottom line?

JW: I love gold and silver in the long term. It’s the only store of value since the beginning of recorded history that has lasted through every age of man. It’s the only one. All paper currencies have ultimately failed through the abuse inherent in hyperinflation. We are in massive hyperinflation now, so one would argue that we’re on the brink of the expiration of the viability of paper currencies in this particular age and gold and silver will return as the primary stores of value. It’s just a matter of time.

TGR: Thanks, James. It’s been a pleasure.

JW: You’re welcome.

James West is publisher and editor of The Midas Letter, and an independent capital markets entrepreneur and investor. He has spent more than 20 years working as a corporate finance adviser, corporate development officer, investor relations officer, media relations and business development officer for companies involved in mining, oil and gas, alternative fuels, healthcare, Internet technology, transportation, manufacturing and housing construction.

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