The Gold Report: With gold trading around $1,800+/ounce (oz.), famous precious metals investor Eric Sprott announced that he is selling 2 million units, or $30 million (M), of the Sprott Physical Gold Trust. Sprott then said he would take that cash and put it into silver, which he called "the investment of the next decade." What do you think of his long-term silver strategy?
Chen Lin: Silver and gold are both precious metals, but they move at different times. Right now, the gold:silver ratio is a little bit over 40. Obviously, Sprott is more bullish on silver versus gold. I take a pretty even point of view. I like gold. I like silver. I know that historically the gold:silver ratio is much lower than it is right now. I checked Chinese history and it's about 10:1. Even China has much less gold than the rest of the world and is richer in silver. We could have a much lower ratio, which means silver would outperform gold going forward, but personally I'm betting evenly on gold and silver.
TGR: Another interesting development is that Venezuelan President Hugo Chavez has announced that he will nationalize all of the remaining non-state-owned gold mining operations in the country. Is this announcement likely to affect the share prices of small-cap companies operating in other countries with leftist leaders, like Bolivia or Peru?
CL: I think it's possible. What Chavez is doing will probably destroy the country's gold mining industry because it needs the juniors to lay the groundwork so the majors can dig out the gold. If Chavez nationalizes, it will probably lower the gold production. I think one day he will regret that. It will increase concerns about the political risk in countries that have those close ties to Chavez.
TGR: Recently, we saw the Dow Jones Industrial Average drop a little over 400 points in a day. What's your outlook for gold? Are we going to see $2,000/oz. gold before the end of 2011?
CL: It's very possible. I personally do not want to see the parabolic move of gold. I hope gold doesn't rise as fast as silver did in the second half of last year. But in the back of my mind, I think gold could do that. There is a dramatic difference between this year and 2008, however. In 2008, gold initially went down along with the stock market. This year gold went up as the market went down, which means investors believe gold is the place to put money. I read a report that some banks in China have low gold inventories because individual investors are buying gold like crazy. It's very possible gold goes to $2,000/oz., but I hope it goes slower. I invest in gold. I have gold exchange-traded funds, gold futures, silver ETFs and silver futures on my recommendation list. But I hope they go up gradually.
TGR: Do you fear a correction?
CL: I hope we have some correction. I expect that the margin will increase another six times before gold has a real correction. That probably will push into early next year. Usually the gold season is strong from September into Chinese New Year. A severe correction could come in February.
TGR: You've said that you are seeing a decoupling of gold stocks versus stocks in the broader market. Can you explain that?
CL: Now, when the market takes a huge dive, gold goes up. Quite a few stocks, including Yamana Gold Inc. (TSX:YRI; NYSE:AUY; LSE:YAU) and Franco-Nevada Corp. (TSX:FNV) actually went up into the green. Many others, such as Pretium Resources Inc. (TSX:PVG), are up as well. Majors will start to stabilize and move up despite the stock market going down. As things stabilize, the juniors will likely catch up. As gold moves up, gold stocks are likely to outperform gold for the rest of the year.
TGR: Your investment success is somewhat legendary. You took about $5,000 in 2002 and turned it into about $1.56M by the end of 2010. Even as your portfolio regressed this year, it's only by 10%. What's changed in 2011 that is making it more difficult to find small-cap companies poised for big gains?
CL: This year has been difficult. The resource stocks got hit as investors took profits and ran. Fortunately, I have a pretty diverse portfolio. I have stocks, ETFs and futures. It is a very difficult year for small-cap companies, but I see some great opportunities. I'm ready to buy because investors are selling gold stocks indiscriminately. This is the time to buy. There are some great opportunities for investors that have a relatively long-term vision.
TGR: So then, what is Chen buying?
CL: Pretium, which I mentioned earlier, is run by Bob Quartermain, the founder of Silver Standard Resources Inc. (TSX:SSO; NASDAQ:SSRI). Management is really key at gold and silver companies. There are tons of companies that just go nowhere. The management raises money to pay themselves. With great management, like Bob Quartermain, there is a proven track record. He doesn't just grant options to management. He buys them. He bought shares on the market like every other shareholder. He has a couple of projects that are becoming very promising in British Columbia, which I am visiting next week.
TGR: Is that the Snowfield Project?
CL: Yes. Pretium is in low-grade Snowfield and high-grade Brucejack. I think the Snowfield Project will likely do a deal with Seabridge Gold Inc. (TSX:SEA; NYSE.A:SA). Quartermain is more focused on the high-grade area with about 15 kilograms/ton of gold. Some people don't believe it. They say it must be silver. It's gold. That is what he is focused on. He is looking to do a very high-grade underground operation, which was permitted before. He just needs to reapply for a permit and get into production.
TGR: The company has a positive preliminary economic assessment, but it really hasn't produced a dramatic rise in the stock price.
CL: That was based on previous results. In the new drilling tests, the company intersected a lot more gold. That will help them when people realize the valuation of the deposit. Another catalyst would be the deal with Seabridge and a major investing in the lower-grade area. The feasibility study is not very high, but the company used a conservative gold price. Eventually, people will catch up with it.
TGR: What are some other names on Chen's radar screen?
CL: Barkerville Gold Mines Ltd. (TSX.V:BGM) has been on my list for a pretty long time. I like the company. I met the management. The stock has already gone up pretty significantly since my recommendation. However, it recently has been in consolidation, which could be an entry point. The company keeps making progress. It keeps producing gold, which means it can generate a lot of cash flow at the current gold price. That will fund its next move versus going into the market begging for money.
TGR: Barkerville is planning to mine about 50 thousand ounces (Koz.) from the QR Mine this year. Is it on target?
CL: I will be following that very closely. As long as the company is producing gold, it should be doing fairly well. As long as it can produce, even if it's not 100% as planned, the higher gold price will compensate. If the company can make its target, that will be a great bonus.
TGR: Has Barkerville forward-sold any of its gold or is it fully exposed to the gold price?
CL: No, it is fully exposed to the gold price. You don't want to invest in any company that has hedges in place. Then it would be selling gold at maybe $1,000/oz. when it could be getting $1,800/oz. or more.
TGR: Barkerville has about 937 Koz. outlined in all categories. That is still a pretty small operation. Do you believe that as the company produces gold and takes some of that money to further exploration, it will continue to discover more resources?
CL: The company is getting good drilling results. I'm sure when it updates its new resource, it will be much higher. Once the company starts to get into a good financial situation, it will do more exploration. Gold is prolific in that area—there is a lot to find.
TGR: What else is Chen buying?
CL: There is a very small company called Majescor Resources Inc. (TSX.V:MJX) that just announced fantastic drilling results. The stock is actually up about 89% right now. It's a very tiny company with about a $20M market cap. It's drilling next to Newmont Mining Corp.'s (NYSE:NEM) latest project in Haiti. Newmont's chief executive said it is one of his most important projects. It's had fantastic drilling results of 77 grams over 10 meters (m). It's very shallow at about 100m deep. Plus, it has many other intersections with very high-grade gold and copper. For this market cap, it looks very promising.
TGR: It's trading between $0.25 and $0.30. Is that a good entry point?
CL: I think the current price still looks very good.
TGR: How high could it go and still be a good entry point?
CL: There are heavy insider purchases at $0.20. I think anything between $0.20 and $0.30 is a great buy.
TGR: Majescor is effectively almost like an exploration arm for Newmont at this point. Does Newmont have a position in it?
CL: No, but Majescor has a mining license while Newmont is still applying for a mining license. That makes them a very good target for Newmont.
Haiti is on the same island as the Dominican Republic, which hosts one of the largest gold mines in the world. Since the earthquake, the U.N. is trying to help the country create jobs. One of the key areas it is looking at is mining. Haiti could be opening up and this could be a hot new mining area in the world.
TGR: What's another name, Chen?
CL: I just visited Prophecy Platinum Corp. (TSX.V:NKL; OTCPink:PNIKD; Fkft:P94P). It's in the Yukon, very close to the Alaska border and only about 10 miles from the Alaskan highway. It just announced a NI 43-101 for about 12 million ounces (Moz.) of platinum, gold and palladium. The key for the company is to have very high grades. Right now, it has consolidated a little bit as the company is probably going to raise money. Sprott just announced it bought about 10% in the open market. I would assume Sprott would probably participate in one of many raisings. Then we can potentially consolidate the stock and it could go higher.
TGR: It also has a producing coal mine in Mongolia, correct?
CL: That's actually its parent company, Prophecy Resource Corp. (TSX.V:PCY). Prophecy Resource owns 45% of Prophecy Platinum, which is a spin-off. Prophecy Resource is also a very interesting story because Prophecy Platinum's price almost covers the entire market cap. You've got a producing coal mine almost for free.
TGR: It just discovered a substantial coal seam in Mongolia about 20 kilometers away from its existing coal mine, which actually hasn't had any effect on the stock to date. It certainly could be a promising find in the future.
CL: Exactly. There are bargains almost everywhere. Investors are just selling by emotions. There are a lot of opportunities and Prophecy is a perfect example. It owns 45% of Prophecy Platinum. You can calculate the market cap. It doesn't make sense, but the market still treats it like this. I bet the market probably won't treat it this way for too much longer.
Another is Romios Gold Resources Inc. (TSX.V:RG; NASDAQ:RMIOF; Fkft:D4R), which I am going to visit next week as well. It is drilling the Trek Property in northwestern British Columbia, right next to NovaGold Resources Inc. (TSX:NG; NYSE.A:NG) Galore Creek Project. It's actually drilling on top of the company's proposed mill site, so drilling results are pending. This stock could have a very explosive movement because its market cap is very small at about $70M.
NovaGold and Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A, TSX:TCK.B) need to build a $1B tunnel to get ore from the other side of the mountain. But if the pair can find ore on the Romios side of the mountain, right on top of the mill, they could save $1B and take the company over. If there are good drill results, Romios will be an easy takeover target for NovaGold and Teck.
TGR: Romios recently found some massive sulfide mineralization at the Trek Property, which is known to host large gold and copper deposits. Can you tell us about those results?
CL: It has a lot more results coming. The assay is pending, but it looks very promising. If it has a grade similar to Tech and NovaGold's Galore Creek, this is a very easy takeover target.
I want to mention another stock that is under the radar, Helio Resource Corp. (TSX.V:HRC), which is drilling in Africa and already has 1 Moz. of gold. Its market cap is very tiny, but it has some very important, pending results coming in the next few weeks. It is drilling to a mere 200m for open-pit gold. If it can upgrade its resource to a few Moz., that could make the company very cheap versus its market cap. It could see some major movement in the second half of the year.
TGR: That is the SMP Gold Project in Tanzania that has multiple zones of gold mineralization at shallow depths. Could that be a target for a company like African Barrick Gold plc (LSE:ABG)?
CL: It's possible. Helio is an exploration company run by geologists. Its goal is to find a deposit and then sell it to the majors. If we use $100/oz. in its existing gold inventory that is already worth $100M and it is looking at a much higher stock price. It could expand dramatically with its recent drilling results. The company is well funded with $8M in the bank. It doesn't have to raise money for a long time.
TGR: Helio is trading at just below $0.30 right now. At what point would you not get into Helio?
CL: I think it is dependent on its drill results and those are unknown. When the stock moves, it can move very fast. With its existing resource, around $0.30 is pretty good. But I don't know what the drill results look like, so that will decide what the new valuation will be.
TGR: On the other side of the ledger, what are you divesting yourself of right now?
CL: I have been gradually selling some gold and silver ETFs. They have appreciated a lot, so I use them as buying power on the dip on the miners. Instead of following Sprott by selling gold and buying silver, I'm reducing a little bit to use that as capital to buy undervalued small-cap gold and silver miners.
TGR: You have had success in pulp, paper and oil and gas. What other sectors do you believe are poised for growth?
CL: I like the pulp sector, including the company Mercer International Inc. (NASDAQ:MERC). There are a lot of very undervalued energy stocks, as long as oil finds a floor somewhere in the $60–$70/barrel range. China does not have enough strategic oil reserves. If oil really dips, China would probably use the opportunity to build up more oil reserves. India has no strategic oil reserve. The pressure is on both countries to stock up if oil dips. In 2008, the worldwide oil demand only dipped like 1–2%. As long as investors stay with low-cost producers with good balance sheets, they will ride out the storm.
TGR: Any parting thoughts for us?
CL: I think this market correction will create a lot of opportunity for us. The market is putting a lot of pressure on the European leaders to get their acts together. There is a lot of pressure on Federal Reserve Chairman Ben Bernanke to do another round of quantitative easing. I hope the outcome will have some stabilizing effect on the market. In the meantime, when investors are selling everything, that's a very good buying opportunity.
TGR: Excellent. Thanks, Chen.