Investors have been beaten down and battered over the last year. Withcorrelations between markets continuing to shift unpredictably, manyare uncertain about where to put their money. "It's been a strangeyear," says Eric Coffin, co-editor, along with his brother David, ofthe HRA (Hard Rock Analyst) publications. Thegood news, he says, is that it's probably not going to get worse thanMarch; the bad—a bear market this deep almost always revisits the majorbottom. Read what Eric foresees going forward and why he's stickingwith the exploration stories that work in this exclusive interview withThe Gold Report.
The Gold Report: So, Eric, what do you make of this market? Is the rally going to continue or are do you see us moving sideways for a while?
Eric Coffin: We've been expecting a summer rally on companieswe deal with. We've been a little more skeptical, to be honest, on thesummer rally for the large companies. There is not a lot in terms ofmacroeconomic numbers to drive markets very much higher in the shortterm. It's going to come down to more earnings surprises. At the startof July, Dave and I were looking at the market and thinking, we'realmost in earning season, and there really haven't been a lot ofpre-announcements, which is a good sign. The pre-announcements areusually the bad news, not the good news.
So far, at least, it looks like we're going to have a few companiesbeating their numbers and some of them have beaten them quiteresoundingly, so that may get us over 1000 on the S&P. What happensthen? I went back and looked at a lot of market cycles and, given howhorrendous the market crash was, we think March was probably it. It'sprobably not going to get worse than that, but that's the good news.
The bad news is every time there's been a bear market this deep(there have only been three) you've almost always had the major bottomrevisited. Given that, it's a little hard to imagine us being so luckythat we don't see this market come back a bit some time going into thefall. That sort of consolidation after a major move off the bottom isnormal. We've had some pretty good gains and we're happy with those andwe're staying with the exploration stories that are working.
But we're going to continually tell people, look, the market'sgiving you a triple or quadruple, whatever; don't be too brave. Takesome money off the table. Make sure you keep yourself liquid becausethere's still real potential for something to go bad. I don't thinkanybody has any illusions that the U.S. is going to come out of thisdownturn strong. It's going to come out of it and it may be bottomingnow, but it's not like we're going to turn around and have 4% or 5%growth next year. That's just not going to happen.
TGR: So if you're looking at a stronger S&P, how do you see that affecting gold and gold stocks?
EC: Gold has tested and didn't get through $1,000 three orfour times now. I think it's probably going to have to do that toreally bring in the masses. That said, in the last little while, thestrongest correlation I've seen with the dollar has actually been aninverse correlation with the major indices.
There are people jumping in and out of Treasuries and some of that'sobviously foreign money because there's recently been a fairly strongnegative correlation between the New York indices and the dollar. Ifthe S&P goes through 1000, I think gold's probably got a shot ofgoing through it as well, because the dollar will be coming off aspeople bail out of the Treasury market, at least for the short term.That'll happen because people are bailing out of bonds and going intoequities. And that same trade seems to be driving the dollar down. Ifthe S&P goes through 1000, gold may well go with it. It's a weirdmarket these days. The correlations between markets seem to just keepshifting all the time and it's been a strange year.
TGR: In terms of your newsletter, what approaches are youtaking? How do you divide your universe? Are you looking at soon-to-beproducing companies, explorers, producers?
EC: We cover all of them, though we tend not to initiatecoverage of large producers for the simple reason that there are justtoo many guys doing that. Our feeling has always been that ourstrength, because of our background, is dealing with the explorationand development level companies because we've got the experience. Daveand I used to run our own exploration consultancy before we started thenewsletter, so we're used to looking at these companies, and Dave liveson airplanes and flies around the world all the time looking at theseproperties.
As far as our newsletter, when we came into the new year, Dave and Ifelt that base metals had bottomed; copper, in particular, so werecommended a couple of copper miners on the list that were producers, Capstone Mining Corp. (TSX:CS) and First Quantum Minerals Ltd. (TSX:FM), specifically (HRAsubsequently closed out the position in First Quantum, originallyrecommended in 2001 at $2, at $67, having taken profits in 2007 at $100). They've both had pretty large moves since then. Other producers like Goldcorp (TSX:G) (NYSE:GG), Teck Cominco Ltd. (TSX:TCK.A) (TSX:TCK.B) (NYSE:TCK), and Silver Wheaton Corp. (NYSE:SLW)are on our list because they've taken over companies that we followed.About 15 other companies we follow have been taken over in the lastthree or four years by large producers, so you might say we "back into"those.
In April-May, gold was coming back. There were exploration storiesthat we'd looked at and liked but we were waiting to make sure themarket had actually bottomed. We saw money coming into the sector andmoving down the food chain, particularly on the gold side. Funding isstill very tough for grassroots exploration but companies that have abona fide discovery that they're working on were starting to getattention. We added four companies in the last few months that wethought had particularly strong gold exploration stories. Companiesthat could grow their assets and could go from zero ounces, officially,to a relatively large resource in the space of a couple of drillcampaigns, and that had either enough following or strong enoughmanagement that they could get the money to do it.
Of course, the market still isn't that great, so even with a goodexploration story, you've got to have some comfort that management canget the money it's going to take to get from A to B without dilutingthe heck out of everybody.
TGR: Copper's had one heck of a move. Where do you see the copper going the next 6 to 12 months?
EC: Yes, it has had a heck of a move. It's gone from $1.25 to$2.50. Our expectation is it will probably go sideways here for acouple of months. It might actually dip a bit. It is an industrialmetal, after all, and when you get into July-August, a lot of the bigusers tend to cut the shipments down as factories are on vacationschedules and the buying starts again in the fall. I think that thebuying we've been seeing is real. A lot of people are wondering if thebuying out of China is real. I'm sort of in the "buying is buying"school. Even if they are buying it for inventory, so what?
I think the Chinese, who tend to take a longer view of these things,are honestly worried about what's coming three to five years down theroad, which I realize most traders don't care about. But the Chineseare looking at the basic physical supply-demand equation and areworried about miners' ability to keep supply coming when the worldeconomy heats again. From the start of this cycle in 2001, Dave and Ihave talked about this being a secular commodity cycle—and we haven'tchanged; we still think it is a secular commodity cycle—all of what'shappened in the last year hasn't altered the basic picture in our view.
Everybody focuses on demand and, obviously that's important, butpart of our focus has always been the supply side because there reallyhaven't been supply responses. It's amazing, when you look at how muchprice movement there was in copper, for instance. It's actuallysurprising you haven't seen more production come online. For example, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)a couple of months ago said, look, at $2 a pound, we're building what'salready in development, but all you guys that are expecting us to addanother billion pounds of copper production, it ain't happening. We arenot starting anything else new until we know we have long-term metalprices that will deliver the returns we need.
If you look at the industry, production costs have gone crazy rightalong with prices. I think the days are over where the mining industrywas everybody's chump. They would increase production until they wereall losing money, and then keep losing money until the economy turnedaround. I'm not saying every metal price will go to the moon, but thinkof oil as an example. You're seeing the start of a similar trend inmost metals. The days of $1 copper and $2 nickel and 50 cent zinc areprobably gone forever. We're not saying there is no copper left; we'resaying there is no (or very little) $1.00 copper left.
TGR: Let's talk silver. We've been hearing more and moreabout silver being undervalued relative to gold or oil. What do you seeon a macro basis there?
EC: It is certainly true that the gold-silver ratio haswidened quite significantly recently. Silver hasn't really followedgold in the last couple of moves. For all its investment appeal, silverto a much larger extent than gold is really an industrial metal. Abouthalf of its demand is industrial, after all, and I think that does holdthings back.
Another way silver is unlike gold is that there are a lot more goldmines that are just, well, gold mines. There are very few silver minesthat are just silver mines. Most silver mines are actually silver-basedmetal mines. If somebody looks at a three-year chart for copper or zincor lead, they think this stuff really crashed. If you look at a 10-yearchart, they got cut in half or went down by two-thirds, but the movesdown last year weren't nearly as large as it has been in the past. AndI think one of the effects of that is a lot of the marginal polymetallic producers are still hanging in there by their fingernails. Sothat silver production is still coming into the market; whereas, in a"normal" cycle, there's probably 50 small- to medium-sized mines inMexico that would have shut down by now that haven't this time. I thinkthat's part of it. I think the main thing, however, is just that it's amore industrial metal. More of its usage is going into themanufacturing sector and we all know what that looks like right now.
TGR: Can you share with us some of the stocks that you think our readers should be looking at and buying today?
EC: I think for the summer season the gold specs are probablyyour best shot and all the companies I'll mention are active right now.That's very important. In a market that's still weak, if you're goingto be trading, you need to know there's going to be news flow and,hopefully, a significant amount of news flow going forward because youneed that to keep the market's attention when the market's still weak.
The first one I'll mention is a company called East Asia Minerals (TSX.V:EAS) (Download Hard Rock Analyst's "Special Delivery" news alert that covers East AsiaMinerals.) It's an interesting company. They've got a couple ofgold-copper porphyries. They'll probably have 43-101s sometime thisyear that between them probably have a million or two million ounces.
The real story for us though is a project of theirs called Miwah, inAceh Province, Northern Sumatra. It's a large epithermal system,basically a big ridge. They noted that the gold all seemed to be comingup structures, which is normal for this sort of thing, and their takeon it was the closer you get to these structures, the better the gradeswill get.
Dave and I sat down and ran the numbers based on the size of theridge and the sampled areas. If the drilling replicates the averagesthat they're getting in the trenches, this thing honestly has room for5 or 10 million ounces. We think it's going to be a very big story thisyear. We started talking about it about four months ago at about 42cents. It's about $1.73 now. It's been trading a lot of volume lately.They raised money at 51 cents a little while ago. That'll carry themfor a few months. I think if they get good results in the kind of pricegain we expect, they'll probably put more money in the bank, but wethink this one's going to be a pretty big story. (Note – EASreleased its first drill results from Miwah after this interview tookplace. HRA is maintaining its strong spec buy rating on the stock)
Another company that we're following, Evolving Gold (TSX.V:EVG) (DownloadHard Rock Analyst's "Special Delivery" news alert that covers Bravo andEvolving Gold), has put their initial results out and gotten a prettybig bump out of it. Evolving has a series of properties in Nevada and,more importantly, Wyoming, which is where they're working right now. Ithad a big run up about a year and a half ago based on hopes for hotresults out of the Nevada projects. They did manage to put a bunch ofmoney in the bank during that run up, but the Nevada results weren'treally up to snuff. They put out some pretty strong drill results fromtheir Rattlesnake Hills project in Wyoming last winter, but, of course,that was last winter, so it didn't really have much impact. Nobodycared then, but it got our attention and prompted us to initiatecoverage at $0.35 before the current Rattlesnake Hills program beganthis summer.
They put out their first drill hole in mid-July from their currentdrill campaign. That was 67 meters of 10.8 grams gold. It was importantfor two reasons. One, obviously, it was 67 meters of 10 grams. That wasenough for most people. But what it showed was that this project does,in fact, have the high-grade structures. Their model for this is theCripple Creek mine in Colorado. That mine has produced about 20 millionounces and it's almost two systems overprinted on each other. There isthe high-grade structurally hosted material, which is what got minedfirst at Cripple Creek. That is surrounded by a large halo oflower-grade bulk tonnage material, which is what is now being mined byopen pit. Another project of this type is Porgera in Papua New Guinea.They discovered the large low-grade halo there first and it was severalyears before they hit on and started to chase the higher-gradestructural material that made it economic.
The one caution I would give people is that it's had a big move—westarted talking about it at 35 cents and it's about $1.73 right now andhas traded tons of volume, so it's building a nice base. But becausethey are drilling different target styles, you shouldn't expect everyhole to look like this last one. Some of the holes are not targeted onstuff that's going to be high grade. They are, in fact, targeted on abulk tonnage target, so they might get 200 meters of .8 grams orsomething like that. And we've cautioned our readers, don't freak ifyou see a drill hole like that. It's probably a different target.Again, very well managed—very strong technical group, lots of cash;that's not an issue. They upped their drill budget to 25,000 meters forthis year and just added a fourth drill so there's going to be tons ofnews.
TGR: Great. Any others?
EC: Another we're following that just started drilling and Iwouldn't expect to see results for probably a month at least, is acompany called Bravo Venture Group (TSX.V:BVG) (DownloadHard Rock Analyst's "Special Delivery" news alert that covers Bravo andEvolving Gold). It's a very strong management group, very strongtechnical group. They're drilling a project called Homestake Ridge upin the Eskay Creek area in B.C. It's actually one where we got a goodgain in the middle of the horror last year because they pulled somereally amazing high-grade numbers out of it.
We think the odds of them getting to 1.5 or 2 million ounces aregood. It has 900,000 ounces gold equivalent already and that does notinclude drill intercepts from last year's work and there is quite a bitof trend still to be tested. If they manage to grow it that much ormore, it's likely they will also be putting out some more prettyspectacular drill holes. We think it's a good trading stock. I think atthese prices it's fine because it's fairly valued for the ouncesthey've got. Given the current pricing, it's got about a $50 millionmarket cap, so it's basically priced to the ounces it has now, but wethink there's room for the resource to get to be 50% or 100% larger.But, if that happens, it will happen because they're putting out holesthat include some spectacular gold/silver intercepts. So far thissummer, spectacular holes have led to some spectacular trading. We seeno reason that shouldn't apply in Bravo's case as well.
TGR: You mentioned Nevsun Resources Ltd. (TSX:NSU) (NYSE.A:NSU). Can you talk more about that one?
EC: Nevsun's another one that we used to follow years andyears ago and then we picked up again when Robert Bishop passed hissubscribers and company list to us when he retired from publishing the Gold Mining Stock Report.They had their trials and tribulations in Eritrea, but that's behindthem now, though I think the politics are still a negative for manypeople. They discovered a deposit, Bisha, which is a really, reallynice deposit. It's very high grade all the way top to bottom. They havea joint venture with the government of Eritrea and we've talked tomanagement numerous times. They've always said, look, once we got thisJV done, we've never had any issues with these guys. They've been greatwith permitting, helpful with local relations and never late with theirJV contributions.
Bisha's got quite high oxide gold grades at surface; then you moveinto quite high copper grades in the supergene zone, followed by highzinc grades at depth. It shifts from basically two years of high-levelgold production, then about three years of high-level copperproduction, and then high-grade zinc production. And they do haveseveral other targets and several other projects in the area, wherethey're likely to add more resources. Eritrea is Eritrea. It's got somepolitical discount there. There are no illusions, but I think as theyget closer to completing this thing and finishing the construction, itlooks like a pretty obvious takeover to us, frankly.
TGR: You think they'll be in production third quarter of '10?
EC: Yes. They've actually built a lot of the groundwork and camp already. They've already probably spent 30% of the cap ex.
TGR: This has been great. Any last words you'd like to give our readers as we continue into summer?
EC: Right now it looks like we've again got a market wheresuccess is being rewarded on the exploration side. We're not quitethere yet with base metals, but we're hoping that as we go towards thefall we will be and some of the base metal explorers that we've kind ofhad on the back burner will, hopefully, go to the front burner. But,that said, we are in a market where if companies deliver the kind ofresults we hope for, the gains have been there. We're certainly ridingsome of these, but given the overall state of the union, if you will,use some common sense. If the market gives you a triple, take enoughoff the table, then you're playing with house money.
DISCLOSURE: Eric Coffin
David and/or I, personally hold positions in all of the companies mentioned in this interview.
HRA(Hard Rock Analyst) publications are all subscriber-supported; weneither request, require nor accept compensation from companies thatare covered in HRA publications.
For Gold Report readers, HRA is offering a discount on HRA Special Delivery, their premium "as-needed" alert service. Take advantage of this limited-time offer.
Eric Coffin and his brother David are the co-editors of the HRA(Hard Rock Analyst) family of publications. David is the "rocks side"of HRA, and has been active in mining exploration for over 30 years inroles spanning prospecting through feasibility studies, and now marketscommentary. Responsible for the "financial analysis" side of HRA, Erichas a degree in Corporate and Investment Finance. He has extensiveexperience in merger and acquisitions and small company financing andpromotion. For many years he tracked the financial performance andfunding of all exchange listed Canadian mining companies and has helpedwith the formation of several successful exploration ventures.
Eric was one of the first analysts (along with David) to pointout the disastrous effects of gold hedging and gold loan capitalfinancing (1997) and to predict the start of the current secular bullmarket in commodities based on the movement of the US Dollar (2001) andthe acceleration of growth in Asia and India.
David logs, literally, hundreds of thousands of miles every year,visiting exploration sites on six continents in order to bring back thereal goods for HRA subscribers. Eric and David can be reached at firstname.lastname@example.org or through their website at www.hraadvisory.com .
Want to read more exclusive Gold Report interviews like this? Sign upfor our free e-newsletter, and you'll learn when new articles have beenpublished. To see a list of recent interviews with industry analystsand commentators, visit our Expert Insights page.