John Kaiser: Strategies For Success In A Bloody Market

With so many junior mining companies going into hibernation, John Kaiser of Kaiser Research Online fears that the entire mining sector could fall dormant. In this interview with The Gold Report, he outlines approaches to discovery and development that smart, nimble companies are deploying to stay alive. Whether precious, base or critical metals, or in jurisdictions as exotic as Morocco and as familiar as Nevada, these are the basics required for survival in today's brutal market.

The Gold Report: John, early this year you predicted that as many as 500 companies listed on the TSX Venture Exchange would go under by the end of 2013. Do you stand by that?

John Kaiser: I think at least 500 companies are endangered; I doubt they will disappear by the end of the year. The critical time will be next summer, when their audited financials are due and their annual meetings will be held. If we have not had a turnaround by then, many management teams will hand the keys over to the stock exchange and abandon their companies.

Of the 1,800 companies we follow, 761 as of June 28 have less than $200,000 ($200K) in working capital left. That is the bare minimum needed to merely exist as a publicly listed company.

TGR: Is capital on hand one of the first things that you look at when deciding whether to invest?

JK: Yes. If a company has no working capital, we look at whether management owns sufficient shares to make it worth its while to salvage the company and whatever resource assets it still owns.

Our ideal company has working capital of at least $3 million ($3M) and a management team that holds a reasonable equity stake and has well-rounded exploration and development expertise. We want a company that is working its property. Too many companies, despite being well endowed with cash, are hunkering down, waiting for metal prices to turn around.

That is the deadly danger we face: companies with cash going into hibernation. No money gets spent on exploration. No new discoveries emerge. Existing deposits are mothballed because they require heavy capital spending to advance them. The entire sector goes dormant.
TGR: In your chart of 1,788 resource sector companies, 73% are trading below $0.20/share. The percentage trading below $0.10/share jumped to a seven-year high of 53% in late 2008, dipped to 12.6% in February 2011 and is back up above 58% this year. What is causing those swings?

JK: While equities in general are near record highs, the resource sector has been targeted for a massive selloff. We are now more than two years into a serious bear market. Two things are driving this. One is the perception that the supercycle has run its course and that the global economy will, at best, grow at a very modest rate. At worst, we may end up in a global recession or depression. The other perception is that the main narrative for gold has not really delivered what was promised: a substantially higher gold price.

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The mining sector has also seen substantial cost escalation over the last five years. Now we get the extra whammy of declining metal prices. Investors see the mining sector as just one big way to lose money.

TGR: In April, you attributed blame for falling gold prices to the goldbug narrative that took pleasure in bad news. Is a good economy good for gold?

JK: The apocalyptic goldbug narrative posits that if fiat currencies are debased, the gold price will rise. However, that is just a mathematical adjustment to inflation; it does not create a profit margin for existing gold mines.

An alternative argument is that much of the demand for gold in the last decade has been purchases made possible by the prosperity created through the emergence of China as a major economic engine. The private sector now owns 82% of all the gold that exists; central banks own about 18%, the lowest since 1910.

If the global economy were to keep growing, emerging market economies would grow at a greater rate than mature Western economies, eventually eclipsing them. The resulting shift in the balance of economic power to these new kids on the block would introduce anxiety over what the world might look like 10–15 years from now, when the U.S. economy no longer dominates.

It would be prudent for the private sector to park some of its growing wealth in physical gold and for central banks, particularly in countries with emerging economies, to accumulate gold in preparation for a period of instability when the U.S. dollar no longer serves as the single reserve currency. A reviving American economy would benefit the global economy, which should boost demand for gold. I disagree with the conventional goldbug view that a strong American economy is bad for gold. The market, however, has for now taken their view, which creates a bottom-fishing opportunity.

TGR: June was tough for gold and mining stocks. Physical gold dropped through the $1,200/ounce ($1,200/oz) barrier, and the Market Vectors Junior Gold Miners (GDXJ) basket of miners sank to new lows. Let's talk about some of the companies that could survive in this new reality and their strategies.

JK: A number of strategies can help a company survive and investors can do well if they ride out this downturn.

Probe Mines Limited (PRB:TSX.V) is a junior with a new, low-grade gold system discovery in an Ontario greenstone belt where no significant gold had ever been discovered and mined. The company did not publish an expected preliminary economic assessment (PEA) in Q1/13 based on its 4 million ounces (4 Moz) 1 gram/tonne gold. Instead, its drilling last December discovered a new aspect to the existing gold zone. This opened up the potential for underground gold mining at a higher grade and may indicate that the low-grade gold system is part of something much bigger and richer.

Probe gives you a dual hedge. If gold turns around, the low-grade, open-pittable resource becomes very valuable again. Or if we have a brand-new discovery play on our hands, nobody will care about the gold price because the grade will work at even lower gold prices.

TGR: When do you expect a PEA?

JK: At the end of 2013, with a resource estimate issued in September 2013. Probe Mines is closing some property agreements to consolidate ownership of the land position. The stock is in a holding pattern. Once these loose ends are tied up, the stock will stand out.

TGR: Could Probe be a takeover target for Agnico-Eagle Mines Ltd. (AEM)?

JK: Agnico-Eagle has bought just below 10% already. Probe still owns its Borden project 100%, but Agnico-Eagle has an equity foothold and is in a position to provide technical advice. When a takeover bid becomes justifiable, Agnico-Eagle would have a head start on any competitors, but it would still be an auction among any interested producers. Incidentally, Probe Mines has $39M in working capital.

TGR: What is another strategy and company?

JK: John Kaiser , a mining analyst with 25+ years of experience, produces Kaiser Research Online. After graduating from the University of British Columbia in 1982, he joined Continental Carlisle Douglas as a research assistant. Six years later, he moved to Pacific International Securities as research director, and also became a registered investment adviser. He moved to the U.S. with his family in 1994.

DISCLOSURE:
1) JT Long conducted this interview for The Gold Report and provides services to The Gold 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 Gold Report: Probe Mines Limited., Franco-Nevada Corp., Clifton Star Resources Inc., Tasman Metals Ltd., Namibia Rare Earths Inc., Southern Arc Minerals Inc., Golden Arrow Resources Corp., Silver Standard Resources Inc., Rye Patch Gold Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) John Kaiser: I or my family own shares of the following companies mentioned in this interview: Peregrine Diamonds Ltd., Rye Patch Gold Corp., Tasman Metals Ltd., Nevada Exploration 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: None. 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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Written By: The Gold Report