Commodities

Gold Mining
Mick Carew, a research analyst with Haywood Securities, hopes we have found the bottom of the commodity cycle but expects M&A activity to continue apace through the rest of this year and into 2016 as low metals prices force the hands of underfunded management teams. Carew says M&A is commonly viewed as a potential indicator of a swing in market sentiment, and in this interview with The Gold Report, he discusses a handful of his favorite names, some of which could become M&A targets.

The Gold Report: In Q2/15, Oban Mining Corp. (OBM:TSX), backed by Osisko Gold Royalties Ltd. (OR:TSX), consolidated a number of micro-cap gold equities in Québec and Ontario while Crocodile Gold Corp. (CRK:TSX; CROCF:OTCQX) merged with Newmarket Gold Inc. (NGN:TSX.V) in an effort to become a consolidator in its own right. These are two consolidation stories in the gold sector. Should investors expect more?

Mick Carew: As we approach what we hope is the bottom of the commodity cycle, we view this as an opportune time for consolidation in the mining space. We’ve seen a migration toward increased mergers and acquisitions (M&A) activity over the last couple of years. This year in particular has seen a number of high-profile mergers, including Alamos Gold Inc.’s (AGI:TSX) acquisition of AuRico Gold Inc. and Tahoe Resources Inc.’s (TAHO:NYSE; THO:TSX) acquisition of Rio Alto Mining Ltd. We’ve also seen major gold miners, including Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) sell non-core assets to address debt concerns.

Balmoral Resources Ltd.’s management team has a proven track record.

We believe M&A is likely to continue as exploration funding is cut further and development pipelines are also affected. Furthermore, we think that this activity will be more pronounced as miners continue to refine their operating costs after the dramatic fall in commodity prices that started in 2011. M&A is commonly viewed as an indicator of a potential swing in market sentiment as intermediates and majors continue to scour for undervalued assets and potential targets. Therefore, any pick up in this type of activity could be deemed a positive.

TGR: Do you expect M&A activity to increase throughout the remainder of the year and perhaps even gain momentum next year?

MC: Yes, this activity and other novel funding approaches are an expected artifact as exploration funding dries up and project development prospects continue to shrink.

TGR: What are some companies or what types of companies in the gold space stand to benefit most from further consolidation?

MC: Cashed up and cash flow producing companies have a clear advantage over their cash-challenged counterparts (e.g., exploration companies and unfunded development-stage companies). Exploration companies will continue to struggle to raise capital given depressed equity prices relating to low commodity prices. We believe companies with healthy balance sheets and proven management that already hold high-quality assets will continue to be more attractive investment opportunities. In turn, as I addressed earlier, these companies will look to accumulate assets that are considered relatively undervalued as their holding companies struggle to raise capital.

TGR: How long do you expect the low gold price environment to persist?

MC: Gold is obviously a hedge against macroeconomic concerns. The lift in the gold price since early August has been substantial as it now resides well over $1,100 per ounce ($1,100/oz). We will have to wait to see whether this recent move in gold is a short-term climb or whether it is part of a sustained movement to the upside.

TGR: What is Haywood’s price deck for gold near, medium and long term?

MC: We recently lowered our 2015 gold price forecast to $1,210/oz . We have a flat price deck of $1,250/oz gold from 2016 onwards.

TGR: Please provide us with an outline of your investment thesis.

MC: With the recent upward swing in the price of gold, a basket of gold mining equities is likely to respond in kind, providing an opportunity for investors. However, we still believe the market is keeping an eye out for new discoveries and companies that are well funded and run by proven management that can advance projects efficiently. In the developer space, projects that require relatively low up-front capital expenditure (capex) also hold an advantage over their peers and are more likely to attract funding in the current environment.

We expect Integra Gold Corp. to release an updated resource estimate later this year, which will add to an already robust PEA.

TGR: Tell us about some of the equities you follow for Haywood Securities.

MC: My focus is largely concentrated on some of the junior companies among the mining equities. It’s been a difficult few months for the junior mining space, with the TSX Venture dropping almost 30% since November 2014. It dropped almost 10% in July alone. Despite this backdrop, we continue to feature a number of junior explorers in Haywood’s quarterly “Junior Exploration Reports.” A couple of names in particular are Balmoral Resources Ltd. (BAR:TSX; BAMLF:OTCQX) and TerraX Minerals Inc. (TXR:TSX.V).

Balmoral is focusing on the Grasset nickel-copper-platinum group metals (PGE) project in Québec. The project is situated along a southeast-northwest trending coincident magnetic/electromagnetic anomaly, about 80 kilometers (80km) east of Detour Gold Corp.’s (DGC:TSX) Detour Lake gold mine. The nickel-copper-PGE mineralization at Grasset is similar to what we see at Vale S.A.’s (VALE:NYSE) Voisey’s Bay base metals mine in Labrador. Drilling along the southeast extension of the Grasset anomaly has identified multiple stacked sulphide horizons. One assay returned an intersection of 58 meters (58m) of over 1.8% nickel and contained copper, platinum and palladium. In addition to that, some reconnaissance drilling by Balmoral northwest of the main Horizon 3 zone, 8km along strike, intersected nickel, copper and PGE mineralization, including some gold-rich zones. These gold-rich zones suggest there may be more than one mineralizing event. We view this as positive given that the presence of multiple mineralizing events suggests the mineralized system is dynamic and complex. This added level of complexity ultimately enhances the potential for a significant discovery at Grasset.

TGR: Considering the amount of drilling that has been completed at Grasset thus far, what sort of picture emerges?

MC: It’s still too early to talk about specific numbers or size, but when we look at the drill results on the southeast portion of that anomaly, there appears to be continuity, particularly along the net-textured sulphide zones. Of particular interest is the presence of massive sulphide lenses. At this stage, Balmoral has only intersected narrow intervals of massive sulphide, but these high-grade lenses could be a game changer for the project—especially considering some of these massive sulphide lenses grade up to 14% nickel. If the company can identify similar zones with greater width and continuity elsewhere, we could be dealing with a significant system reminiscent of other magmatic nickel sulphide systems worldwide.

TGR: How much cash does Balmoral have to continue its exploration program?

MC: Definition drilling and metallurgical studies are underway and expected to be completed in Q3 or early Q4/15, the costs of which were included in a $3.8 million ($3.8M) summer/fall exploration budget. In addition to the resource delineation work at Grasset, Balmoral continues to delineate and expand the high-grade Martiniere gold system located 40km east of Grasset. The company has indicated it aims to produce a maiden resource estimate for Grasset in late 2015 and an initial, partial resource for the Martiniere system in Q1/16. The company has results from about 40 drill holes pending from both projects and currently has two drills on site.

TGR: What about TerraX?

MC: TerraX Minerals has the Yellowknife City gold project situated immediately north of Yellowknife and hosts the past-producing Con and Giant gold mines. Osisko Gold Royalties now owns about 17% of TerraX and has a 1% net smelter royalty option. TerraX has set aside $2.2M in support of a 6,000m drill program plus some field work, structural and mapping, in partnership with Osisko. Drilling will focus on what the company terms the “Core Gold Area,” which includes the Barney Shear, which is interpreted as the extension of the Con and Giant deposits, as well as the Crestaurum deposit, which has similar high-priority targets. The company conducted 1km of channel sampling along strike of the Barney zone, which returned 11m grading 7.55 grams/ton (7.55 g/t) gold. We view TerraX’s exploration portfolio as one of the more prospective in the Canadian junior gold mining space. This view is further supported with Osisko coming in as a partner and providing technical support to the exploration program.

We view TerraX Minerals Inc.’s exploration portfolio as one of the more prospective in the Canadian junior gold mining space.

TGR: Do you have more faith in TerraX and Balmoral given that key members of the management team have had previous success?

MC: It certainly provides a degree of confidence if a company’s management has a successful track record. Exploration is a high-risk venture in which most companies that raise capital fail to discover assets that migrate into production. We like companies that have strong management teams with histories of discovery success, capital to explore and portfolios of prospective projects.

In this context, the management teams of both TerraX and Balmoral have proven track records. Darren Wagner, CEO of Balmoral, is the former CEO of West Timmins Mining that was acquired by Lake Shore Gold Corp. (LSG:TSX) for $424M. TerraX CEO Joe Campbell was central to the discovery and delineation of the Meliadine gold project in Nunavut, which was subsequently acquired by Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) through its acquisition of Comaplex.

TGR: Are there any other small-cap gold names that are worth mentioning?

MC: At Haywood, we also follow Calibre Mining Corp. (CXB:TSX.V) quite closely. The company has adopted the project generator model, an increasingly popular way for explorers to gain access to capital in exchange for a key stake in the project or company. Calibre has a number of projects in Nicaragua including its Borosi project in joint venture with B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX), where B2Gold holds a 51% interest with the option to earn an additional 19% interest by spending $6M over three years. In addition, the Calibre’s Eastern Borosi project is under an earn-in agreement with IAMGOLD Corp. (IMG:TSX; IAG:NYSE), which can earn 51% by spending $5M. Both agreements are such that exploration is completely funded by B2Gold and IAMGOLD. Both projects are early stage but have already returned several high-grade gold intercepts and we expect more over the coming months.

TGR: What about Nicaragua as a mining jurisdiction?

MC: B2Gold is operating in the country with its El Limon and La Libertad gold mines and obviously views Nicaragua as an investible jurisdiction. Given its history, we believe that the country has shown its potential to provide a reasonable environment for explorers to work.

TGR: Let’s go through some recent news events among the companies you follow.

MC: Atlantic Gold Corp. (AGB:TSX.V) recently posted an updated resource estimate and feasibility study for its Touquoy project in Nova Scotia. The feasibility outlined robust economics with a net present value (NPV) of $168M, an internal rate of return (IRR) of 30% and an assumed capex of $137M with a 9 year mine life.

The feasibility study outlined a comparatively simple operation featuring a 2 million ton per annum carbon in leach (CIL) plant fed by ore material exploited via small-scale open-pit mining methods. The study examines material extracted from both Touquoy and Beaver Dam where material from Beaver Dam will be crushed and then trucked to the facility at the Touquoy processing facility. There is also operating expansion upside potential given the proximity of the Cochrane Hill and Fifteen Mile Stream deposits that have defined resources containing 550 Koz and 584 Koz gold, respectively. In light of the economics of the study, underpinned by relatively low capex requirements, we see Atlantic as being ideally positioned in the developer group and a stock to keep an eye on. We note that Beaver Dam’s environmental impact assessment is due to formally commence later this year with an eye on completion in early 2016, assuming provincial-level review only.

TGR: Another company that released news?

MC: Integra Gold Corp. (ICG:TSX.V; ICGQF:OTCQX) recently announced additional intervals from the Triangle zone on its 100%-owned Lamaque South gold project in Val-d’Or, Québec. The latest results from Lamaque have provided Integra with a better indication of the structural controls on gold mineralization, which in turn has aided in producing a more representative geological model. In particular, recent results have shown that major sub-vertical mineralized structures at Triangle bear a close affinity to the C structures at the Main Plug at the historic Lamaque mine, which was mined to a depth of 1,100m and produced over 4.5 million ounces of gold. We expect an updated resource estimate later this year, which will add to an already robust preliminary economic assessment (PEA). The most recent PEA, which was based on the last published resource estimate for Triangle, returned a pre-tax NPV of CA$184.3M and 77% IRR. The PEA considers average annual production of ~110 Koz/year over 4.5 years, with preproduction capex of CA$61.9M, noting that Integra purchased the Lamaque mine mill last year. The new interpretation will no doubt improve the current resource, which will ultimately result in improved economics moving forward.

TGR: Thank you for your market insights today, Mick.

See Mick Carew’s thoughts on investing in the energy sector in The Energy Report.

Mick Carew is a research analyst with Haywood Securities. Carew has mineral exploration experience on three continents, Asia, Australia and North America, with specific expertise in a variety of uranium, base and precious metal ore deposits. He also brings extensive technical experience in the evaluation of potential targets and geological properties. Carew holds an Honors Bachelor of Science from Monash University of Melbourne and a Ph.D. from James Cook University.

DISCLOSURE:
1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Balmoral Resources Ltd., Integra Gold Corp., TerraX Minerals Inc. and Tahoe Resources Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Mick Carew: I own, or my family owns, shares of the following companies mentioned in this interview: None. 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: Integra Gold Corp. and Tahoe Resources Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

Source: Haywood’s Mick Carew Explains Why Now Is an ‘Opportune Time for Consolidation’ in the Mining Space

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markets crash gold rises
U.S. Investors are on edge following last week’s and today’s sell-off in stocks around the globe. The carnage impacted equity markets in Asia, Europe, and the U.S.

Interestingly, the U.S. dollar also weakened. And bonds and gold are getting most of the safe-haven buying.

People are starting to wonder what the central planners might do in response, or if they may be losing control altogether. It must be discouraging for Chinese officials to see selling continue in stocks despite threats to throw people in jail for dumping shares.

Central planners in Washington and New York are likely share the frustration of their Chinese counterparts. They have long been promising an end to the ultra-loose monetary policy that is now nearly a decade old.  But these stimulus-addicted markets aren’t cooperating!

The probability of U.S. interest rate hikes this fall is now falling a rock. We are once again hearing the familiar call from Keynesian economists, including Paul Krugman, for more stimulus and debt.

They acknowledge the trillions already printed and borrowed haven’t worked – but say it is only because it wasn’t nearly enough.

The Dow Jones index has fallen over 1,000 points in the last few days. At the same time, gold has risen about 4%.

Gold futures had not been benefitting from safe-haven buying in recent months.  But that’s changed in recent days as confidence in worldwide equity markets and the dollar has waned.

Should Investors Wait for Even Lower Gold Prices… or Jump In Now?

Looking at 2015 overall, precious metals have not fared well.  Many people are hesitate to make their first precious metals purchase with the fear prices will fall further.

It’s certainly true that metals recently have not, for the most part, functioned as an attractive alternative to these conventional assets.

That’s largely because gold and silver prices are set in paper futures markets. And these markets are prone to all the same weaknesses: high-frequency trading, bankers manipulating markets in order to cheat their brokerage clients, central bank interventions, and extraordinary leverage.

In other words, prices set there do not fully reflect supply and demand in the real world.

It is understandably tempting to wait for even lower prices before buying.  But with price discovery as broken as it is, relying on price charts alone to make investment decisions is unwise.  The shakier financial markets get, the wiser it looks to diversify out of paper assets including dollars, stocks, and bonds.

Investors should consider what’s going on in the physical market for gold and silver coins, rounds, and bars. The fundamentals in the physical market paint a radically different picture than the paper and electronic markets do.

While a handful of traders may be selling half the annual world production of silver short on the COMEX and other futures exchanges, there is record buying in the physical market.

Mints and refiners are already unable to keep up with demand. This at a time when, according to CNBC and some of the financial press, gold is no more useful than a stupid “pet rock.”  What will happen when mainstream sentiment starts to shift, and some of those “paper bugs” become “gold bugs”?

Investors shouldn’t let a fixation on trying to pick the bottom in prices distract them from the more important mission – diversifying out of paper assets.

We believe those that currently own little or no gold or silver are taking a huge risk by not fixing that problem immediately. Such folks don’t have the luxury of timing the market.

We agree with this insightful analysis at the SRSRocco Report. Investors aren’t going to get advance warning of the next crisis in financial markets. When it happens, most will be caught short.

And by the time it is clear metal prices have bottomed in the paper futures markets, it may be hard, if not impossible, to get actual physical metal.

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0 5703
Rare Metals
Hard to believe, 170 days since potentially game-changing announcements by Ucore Rare Metals (OTCQX:UURAF(TSXV:UCU), yet the stock is lower than it was then. On March 3rd, Ucore’s stock closed at C$ 0.33, the day of its 2nd blockbuster announcement. On August 18th, the stock closed at C$ 0.305, (down 7.5%). Both early March press releases centered on the Company’s use of Molecular Recognition Technology, “MRT.” The March 2nd news concluded that Ucore, “…successfully separated each of the rare earth elements (“REE’s”) at high purity.” How high? 7 of the 14 reported results came in at 99.9% with the single lowest at 99.0%.

Both Samarium and Gadolinium were separated in April at 99.2% purities. On March 3rd, Ucore reported that it entered into an agreement with IBC to obtain “exclusive rights to IBC’s SuperLig® MRT for rare earth separation, recycling and tailings processing applications.” This represents the culmination of decades of hard work, spearheaded by the Izatts and privately-held IBC Advanced Technologies, “IBC.” Old news, right? 170 days old? Yes and No. Since then, a number of skeptics have been silenced and, “believers” born. Mark MacDonald, VP Business development has this to say,

“The HREE market will require the development of new resources simply because of the restricted global supply of magnet input materials such as Dysprosium, Terbium and Neodymium. Demand for HREE is expected to have a 8%-11% compound annual growth rate (CAGR) until 2020. We expect that Ucore’s Bokan‐Dotson Zone resource could be the first producing HREE deposit in North America. With a 40% skew toward heavy rare earths, the Bokan‐Dotson Zone deposit has one of the most valuable ore baskets of any deposit in the world. However, Bokan’s development will only play a small role in satisfying the impending global supply shortage of HREE.”

Not all highly promising news is 170 days old! Please consider these condensed (by me) press releases:

August 17th. Ucore Rare Metals entered into an agreement with a high net worth U.S. investor through which the Investor will pay US$ 1.0 million (C$1.3 million) to Ucore for a Royalty on the sale of products and services related to the processing of REEs and other specialty metals and critical materials utilizing MRT. Note, this is the second such Royalty deal. The Royalty will be comprised of two components: (i) a Gross Royalty equal to 5% of gross sales from the Company’s first MRT installation(s), payable until the recapture of the initial Investment; and thereafter (ii) a Net Smelter Royalty (“NSR”) equal to 0.5% of the net sales from the Company’s first Tier I production client. A Tier I production client is considered to be one with an estimated gross revenue volume to Ucore exceeding C$ 50 million.

July 8th. Ucore Rare Metals commissioned the construction of a pilot plant for testing its MRT for the separation of REEs at bulk scale. Ucore contracted IBC for design & construction, targeting completion before year end. Ucore confirms agreements with REE feedstock providers to secure test material. The proposed pilot plant would be capable of accepting Pregnant Leach Solution, “PLS” and bulk concentrates from multiple prospective REE feedstock locations around the world. The plant would be customizable, for treating varying metals in different PLS feed solutions. The mid-term objective is to have the plant serve as a prototype for a full-sized separation plant to be located in North America. President and CEO Mr. Jim McKenzie noted,

“We expect to have a mini- plant commissioned to provide  pilot scale separation tests on the Bokan-Dotson Zone PLS  by the end of the calendar year. These tests  will inform our Bankable  Feasibility Study (BFS). The  mini-plant will be engineered for pilot scale testing on PLS or  mixed concentrate originating  from sources other than Bokan.  We are currently under contract to  test PLS from various sources  including ongoing process  flow, tailings as well as  other development stage  resources….There’s tremendous interest in our  pilot plant within the REE sector as well as from producers of iron, uranium  and phosphates. Given beleaguered commodity prices  since 2011, resource  companies are focused on  increasing their revenue.  Utilizing a proven economic  and environmentally sound technology to extract  elements previously  inaccessible is a sound  business practice for both Ucore and the interested parties.”

June 16Ucore announced the appointment of Dr. Reed and Mr. Steven Izatt to the Company’s Advisory Board. Dr. Reed Izatt is one of the founding principals of IBC, specializing in MRT. He’s author or co-author of over 550 publications, and has broad research experience in macrocyclic and separations chemistry, calorimetry, and thermodynamics of metal-ligand interactions. Dr. Izatt received a PhD degree in Chemistry with an Earth Sciences minor from Pennsylvania State University (1954). Steven Izatt is President and CEO of IBC, serves on the Board of the International Precious Metals Institute, “IPMI.” He received the IPMI Distinguished Achievement Award (2008) in recognition of his entrepreneurial contributions to the precious metals industry. Mr. Steven Izatt has authored or co-authored over 100 publications. He graduated in 1984 from the Massachusetts Institute of Technology (MIT) with an S.M. degree in Chemical Engineering.

President & CEO Jim McKenzie commented, “We’re extremely pleased to have attracted two such distinguished scientific minds to our advisory team… With Ucore’s expanding focus on metals separation technologies, the insights provided by Dr. Reed and Mr. Steven Izatt, combined with the benefit of IBC’s experience as the world leader in commercial scale MRT applications to the mining industry, will be invaluable…

June 12th. An agreement with a high net worth U.S.-based investor calls for payments totaling US$ 4.0 million (roughly C$ 4.9 million) to Ucore in consideration for a Royalty on the sale of products and services related to the processing of REE and other specialty metals and critical materials utilizing MRT. The first payment in the amount of US$ 1.0 million has been received. The Investor has the right to convert the total amount of the Investment (minus any Royalty amounts already then paid by Ucore) into common shares for three years after the date the full US$ $4.0 million is delivered to Ucore. If the Investor elects to convert, it can convert into shares at the greater of: (i) the 30 day volume weighted average share price, less a 20% discount; (ii) the price of shares on the day immediately prior to the conversion date, less a 20% discount; or (iii) C$ 0.25 per Common Share.

May 11th. Ucore Rare Metals Inc. (TSX-V:UCU) (OTCQX:UURAF) announced an upgraded and increased resource estimate for the Bokan Dotson-Ridge REE project in Southeast Alaska. An additional 1.043 million tonnes  Inferred mineralization has been added to the total Resource at Bokan, as a result of deeper exploratory drilling during the 2014 field season. More than 98% of the previously established Resource has now been upgraded to the fully Indicated category under NI 43-101 standards. The previously announced Resource, consisting of 2.936 million tonnes in the Indicated category and 1.995 million tonnes in the Inferred category under NI 43-101 standards. The Company reports that the anomalous skew towards the more valuable heavy rare earths (“HREO”) remains consistent across the entire deposit, at approximately 40% of total rare earths. The Resource remains open both at depth and along strike.

In the interest of keeping this article under 10,000 words, here are links to 3 additional press releases.

Why go to the trouble of summarizing press releases? I believe investors may not be reading and digesting them. Likely licking their wounds, to scared to look at their demolished portfolios. However, from among today’s “penny dreadfuls,” are the rising stars of tomorrow. Trading evidence in Ucore’s stock suggests that the above mentioned developments have pretty much been ignored. Even if one or two referenced news events are not as impactful as I presume, taken together with the March 2nd & March 3rd press releases, gives me increased confidence and excitement in Ucore. When a prospective investor in Ucore calls or emails me asking why invest now? I have several answers: near-term catalysts, recent successes, funded balance sheet, strong management team, potentially game-changing technology. There’s plenty to sink one’s teeth into. When the big-shot Portfolio Managers return from their summer vacations, Ucore Rare Metals will be spewing from a growing list of analysts lips.

Not only is the Company de-risking, but the investment opportunity at C$ 0.31 offers compelling risk / reward compared to 170 days ago. The chances of key project level investment(s) or earn-in(s) by global trading companies (and strategic investors) is increasing by the day. There have been no material setbacks for Ucore Rare Metals in quite some time. Equity dilution has been minimal. How many junior natural resource companies can make the same claim?

I highly suggest readers and investors carefully review Reed’s Izatt’s 550 publications. Links to the most important 250 are provided below. It took me a few months, the loss of sleep, appetite and hair, but it was well worth the effort. To reiterate what I said earlier, The Izatts, Board, Management and Stakeholders’ efforts is the culmination of decades of hard work. This is not a flash in the pan Company, jumping on the Rare Earth Elements bandwagon in 2011. Ucore has been at this for almost 8 years. One last quote of from a well done and informative research report from Gareth P Hatch, PhD, Founding Principal, Technology Metals Research, LLC, dated January, 2015.

Here’s a quote of the conventional wisdom before MRT was introduced to the world.

REEs are chemically very similar to each other – thus: They are always found together and have to be mined together. They are very difficult to separate from each other. They require complex processing routes. Facilities require significant capital & operational expenditures. Facilities have to be tuned to the mix of REEs present. The supply dynamics of the REEs are entwined with each other.” 

From the same report, “China officially admits major pollution issue, 20% of all arable land is polluted with heavy metals 60% of China’s water is moderately or seriously polluted. Chinese officials state that heavy REE resources in China will be exhausted in 10-20 years at current rates of exploitation.”

This is why MRT is potentially a game-changing technology for the separation of TREO. Experts agree that multiple solutions for TREO separation could be developed, I for one believe that since MRT is further along than peers, it will enable other inferior separation methods to be scrapped to save time, money and technology risk.

I regret that I am unable to address the Chinese wildcard impacting virtually all metals and minerals, as it’s beyond the scope of this article on Ucore. The two quotes above, taken together, suggest that demand for most HREEs and a select number of LREEs will be increasing difficult to meet, especially with respect to security of supply. The race is on to counter China’s needs, (and dominance). Only after China is satisfied and perhaps (Russia as well), will global supply of the most important REEs be readily available for ongoing technological breakthroughs. Alaska’s Ucore Rare Metals could help be the solution to North America’s problem. It’s said that the next global war will be fought over oil, some say over water. I believe it could be fought over a handful of the rarest of rare REEs.

Conclusion:

It’s always tempting, the potential of large or very large returns by playing the smaller market caps in REEs, uranium, gold, copper, potash, lithium, graphite etc. Large returns on one’s invested capital, in rare instances, make for a great story at the county club. Make no mistake, Ucore’s in the top quartile of market caps in the REE / HREE space. However, its risk / reward spectrum as measured only by market cap is misleading. Ucore Rare Metals, (OTCQX:UURAF) (TSXV:UCU) having access to MRT, one of the most promising TREO separation technologies in the world, revenues coming in this year and next offsetting SG&A, a high skew to HREEs, a potential low-cost AIDEA loan for US$ 145 million from the mining friendly State of Alaska, including a deep water sea port set it apart from smaller and larger market cap companies. Speaking to one risk, investors and readers alike risk missing out on the continued progress and positive announcements over the next 6-12 months. 

Please see management presentation.

Disclosures: Ucore Rare Metals ((OTCQX:UURAF) (TSXV:UCU) is a small cap stock that’s speculative, not suitable for all investors. I, Peter Epstein, own shares of UURAF. Mr. Epstein, CFA, MBA is not a licensed financial advisor. Readers should take that fact into consideration. Readers are encouraged to consult with their own investment advisors before buying or selling any stock, especially speculative ones like Ucore. I conduct a lot of written interviews that are popular among readers. At the time this article was posted, Ucore Rare Metals was a sponsor of http://EpsteinResearch.com. Please visit http:/EpsteinResearch.com for free updates on Ucore and other companies, many of which are not sponsors. Thank you for supporting my articles and visiting my website. 

Source: 170 Days Since Ucore Rare Metals’, Blockbuster News, Yet Stock Price Lower

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Gold News
Australian-listed Orinoco Gold (Ticker: ASX:OGR) (OGR:ASX) is endowed with expansive ​central Brazilian gold and silver assets​, most notably the Company’s 70% owned Cascavel Gold Project, within the Faina Greenstone Belt. Orinoco could have one of the cheapest risk-adjusted valuations of any gold company​ ​on the planet. ​Of course, many emerging gold producers presumably ​make stake to the same ​claim. What if I told you that Orinoco Gold has one of the strongest natural resource sector management teams and Board of any company with a market cap under US$ ​50 million (my opinion only, I’ve spoken with several of them). A Company that’s expected to be​ commence production ​in ​5 – ​6 months, a​ fully permitted &​ fully funded high-grade gold project​ with all-in sustainable costs estimated at roughly US$ 700/oz. CY 2016 gold production of ~​20,000 ounces, (~14,000 ounces net to Orinoco) and a major prospective silver deposit beneath the gold.

Orinoco is also making robust progress at its nearby 100% owned Sertão Gold Project. ​Orinoco intends to largely self-fund the Sertão Project and may never need to access the equity markets again, (my opinion only) except for capital for accretive, tuck-in acquisitions. Orinoco acquired t​he Sertão m​inning ​l​eases, including​ the past producing ​Sertão Gold ​Mine, from Troy Resources in February, 2014. The leases are located 28 km by road from Orinoco’s high-grade Cascavel Gold ​Project. The Sertão Gold prospect​ is located on an existing mining lease, and boasts historical production of 256,000 ounces of ​gold ​at a remarkable ​grade of 25g/t from a shallow open pit. Sertão offers meaningful potential for additional high-grade, coarse gold, discoveries.

​Longer-term there’s the Tinteiro prospect, a poly-metallic discovery located in the central portion of the Faina Greenstone Belt, just 4 km south-west of Cascavel. Sample silver assays at Tinterio include:

  • 17.5 m @ 1,263 g/t Ag
  • 25.0 m @ 39.2g/t Ag: including 3m @ 97.2g/t Ag from 114m 
  • 4.4 m @ 760.3g/t Ag: including  1.05m @ 2,510g/t Ag from 157m
  • 4.7m @ 58.6g/t Ag: including 0.85m @ 236g/t Ag from 162m

I​n October, ​2014, Orinoco materially increased the size of its​ Cascavel Project after securing a 70% interest in the Garimpo prospect​, a nearby tenement with known gold mineralization. The tenement is situated ​t​o the north of Cascavel and​ Tinteiro’s polymetallic prospects. Garimpo​ contains promising north-west extensions of both Cascavel &​ Tinteiro, extending the known Cascavel structure by 60% to approximately 4km of strike. ​I truly believe that Orinoco’s three highly promising deposits,Sertão, Tinteiro and Garimpo could be worth the Company’s current market cap o​f US$ 17 million. 

As impressive as what Orinoco DOES HAVE is what the Company does NOT HAVE. Dozens or hundreds of millions of remaining cap-ex, to reach cash flow positive operations, ​severe geopolitical risks in places like ​central Asia or​ western Africa, management members drawing high salaries and working in cushy offices in ​London & Vancouver, (rarely if ever visiting the ​so-called​ “project” site) and high op-ex of $1,000/oz + that might have played well in 201​1, but not so much today in high cost places like northern Canada and Australia. By comparison, consider a Management and Board, led by Orinoco’s 3 Co-Founders​. Importantly, 9 of the 12 listed personnel on Orinoco’s website have either direct exposure to Brazil or are long-time experts in mining​ or BOTH. [Please visit list of Management & Board members.]

Co-Founders are:​​

Managing Director, Mr PapendieckDiploma of Law from the NSW Legal Practitioners Admission Board (Dip. Law, NSW LPAB).

Chief Geologist, Dr. Marcelo ​De​-Carvalho, (Metalogeny), PhD (Metalogeny & Geochemistry), CREA​​.

P​resident Brazil Operations, Dr. Klaus Peterson,​ M.Sc (Mineralogy & Petrology), PhD (Mineralogy & Petrology), AusIMM, CREAM.Sc (Mineralogy & Petrology), PhD (Mineralogy & Petrology), AusIMM, CREA.

So much for my spellcheck!

Orinoco’s management and Board separate it from dozens of companies clamoring, hoping, desperate to get bought out before hitting the liquidity wall. Boots on the ground is one of the most important factors in getting a mine over the finish line. The Company contracted a local mining team with 20 years of experience, including geologists, mining engineers and metallurgists. There are consultants, senior Management and Board members willing and able to bring Cascavel into production within 5 – 6 months. There are a number of employees living in Brazil year-round. I took comfort and was greatly impressed by both how many employees are on the ground in central Brazil AND how much credit senior management attributed to them. They are not labors, but key stakeholders in Orinoco’s success.

A company that trades nearly 500,000 shares daily, Orinoco Gold is flying under the radar because stakeholders have been entirely focused on bringing Cascavel to life. But first, it’s my job to bring Cascavel to life for those readers looking for attractive risk/reward opportunities. The Cascavel Project hosts high-grade, structurally-controlled, coarse gold shoots, where underground sampling returned bonanza grades including 15 meters grading 88g/t. Bulk samples of (350 meters north) and (90 meters south), respectively with recorded grades of 27g/t gold (2.8 tonnes) and 39g/t gold (500kgs) respectively.

What might investors and prospective investors be missing? One thing that is that the Cascavel project contains a non JORC-compliant resource, but that’s not as uncommon as it seems. With coarse, high-grade vein systems, drilling A LOT of holes could still fail to give evaluators comfort enough to establish a JORC-compliant resource. Even bulk sampling is not necessarily accepted for a JORC-compliant resource. So the question for Orinoco was, should it try to become JORC-compliant company spending a lot more time and money? Or, should it focus capital on moving into small-scale production? In this case, an estimated 20,000 ounces of gold in 2016, (14,000 ounces net to Orinoco). The Company made the decision to go for it. No matter what I or anyone on the Board or Management team says, some will stay away from a non JORC compliant resource. This is a blessing and a curse. While fat cat hedge fund types might wait for clear signs of value, smaller investors can dive in and possibly make considerable profits before the, “smart” money piles in.

Most readers may not recognize that the bulk of Orinoco’s mine development expenses are in the Brazilian Reals, a currency that has cratered vs. the $US dollar. As a result, in Brazilian dollars, the gold price is near an all-time high. I know this might be difficult to understand at first blush, but I did the math. That’s why with 14,000 ounces of gold (net to Orinoco) next year, the Company could generate approximately US$ 5 million in cash flow (not revenue, not gross profit, true cash flow, before cap-ex). That’s impressive for a company with a US$ market cap of US$ 17 million. Note, this assumes a US$ price of gold of 1,100. Gold prices above US$ 1,100 could generate substantial leverage to the underlying price of gold. An increase in the US$ gold price from US$ 1,100 to US$ 1,200 would be a 9% gain for physical holders of gold, but a 33% gain for Orinoco investors.

But wait, there’s more. Orinoco plans to double production to 40,000 ounces of high-grade gold in 2017 (28,000 net to Orinoco) while the percentage of leverage, 9% vs. 33% would not change, cash flow before cap-ex could double to US$10 million on a US$ 17 million market cap. Remember, that’s on an uptick in gold price by $100/oz to US$ 1,200/oz. Each $100/oz gain generates $5 million of incremental cash flow for Orinoco, all else equal.

Disclosure:

Orinoco Gold (Ticker: ASX:OGR) (OGR:ASX)  is a speculative, small cap company, with limited trading volume. An investment in Orinoco Gold is not suitable for all investors. Readers and investors are encouraged to do their own due diligence before buying or selling stocks, especially small cap stocks. Due diligence should include consulting with one’s own investment advisor. The author, Peter Epstein,CFA, MBA owns shares of Orinoco Gold. Mr. Epstein is not a registered financial advisor. Readers should take this fact into careful consideration. 

Mr. Epstein wrote this article entirely on his own and it expresses only his opinions and conclusions, He cannot verify that the facts and opinions herein are accurate. However, Mr. Epstein believes the information contained in this article to be accurate. As of the date of this article, Orinoco Gold is a sponsor of EpsteinResearch For more information about EpsteinResearch please sign up for free articles and written interviews, buy providing an email on the home page.

Source: Orinoco Gold, Low-Cost, Fully-Funded, Production Within 6 Months, very CHEAP

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The Company – Input Capital Corp (TSX.V:INP)

Source: Input Capital Corp

History

Input Capital Corp’s beginnings go back to 2005 when Doug Emsley and Brad Farquhar started Canada’s first farmland fund, Assiniboia Farmland LP.  They raised $3 million to start buying farmland and continued to do so over the next decade. They sold the farmland fund to the Canada Pension Plan in 2014 for $128 million. The fund returned 19.8% on an annualized basis over 8 years, net of fees.

As time progressed, because of their close relationship with many farm tenants they were able to get a glimpse of the farming world, how farmers operated, how they made decisions and how they responded to various external forces.

In 2008 oil hit the peak of $148 a barrel and commodity prices spiked upwards. Wheat hit a record price and Canola, which many farmers grew, hit a record price as well. They thought the farmers would be excited, but this was not the case. The farmers were gloomy. They were gloomy because it wasn’t just the price of canola that was up, but also the price of fertilizer, fuel and many other inputs that were reaching record highs. So there hadn’t been a significant improvement in farming margins.

Many of the farmers were cutting back on fertilizer in order to control their costs. This attempt to reduce costs was coming at the expense of the yields of the crop. It got Brad and Doug wondering if there was a way that they, as guys who knew how to raise capital in the markets, could help fund the additional fertilizer requirements and receive a share of the improved yield in return. This was the initial spark of an idea that would grow into Input Capital Corp.

They had been to various agricultural conferences around the world and seen for themselves how companies were attempting to get involved in agriculture by buying up land, tractors, etc and farming, but they never liked the corporate farming model, so they took a smattering of ideas and put together a fund called Input Capital LP.

Farmland investors were approaching the fund looking to get more exposure to agriculture by stepping past the safe-haven of agricultural land, a little bit more risk for a little bit more reward. So, Input Capital went to the investors and pitched the opportunity to joint venture or find an arrangement that would work for farmers where Input Capital would fund the inputs like fertilizer and in return, they would get a portion of the crop which they can then sell.

Over a couple of years Input raised around $7 million to do pilot testing on their idea. The company liaised with farmers and asked for feedback so they could see what worked and what didn’t. They continued this pilot for 3 years, testing out different contracting methods and types of relationships with farmers and this provided Input’s management with the pro’s and con’s of their ideas.

So it’s now around 2012 and Brad had purchased shares in Silver Wheaton (SLW:NYSE) as he was a fan of precious metals and he liked their non operating business model. It occurred to him several months later that what they were trying to do at Input Capital was very similar to what they were doing at Silver Wheaton.

Silver Wheaton was funding producers who needed capital and in exchange, they were getting a portion of production that came out of the mine and making a smaller payment on delivery. Basically, buying the right to buy a deeply discounted commodity as it is produced off into the future. This was so close to what Input Capital LP was trying to do, Brad wondered if the model could be adapted for agriculture.

What he saw in the streaming companies were companies with no operating exposure and lots of commodity upside, high cash-flow margins and they traded at good multiples to their cash-flow in the public market. Brad talked with the other members of management and proposed the idea of becoming a streaming company. Turn what they are trying to do with farmers into a streaming contract. They spent a few months modelling it out and the more they thought it out, the more they thought it could work.

In the fall of 2012, they launched Input Capital Corp. They raised $25 million in a private placement, primarily from existing farmland investors. Their business plan was pretty simple.
They conveyed to investors that they had been pilot testing the various models for 3 years so they understood the agricultural issues and the streaming model had been proven to work for years in the mining sector. They were confident they could make it work within agriculture.
The plan was to deploy investor funds into deals with farmers over 12 to 18 months and then take the company public so they could raise more capital to keep growing the business and work toward attracting the market multiples available to streaming and royalty companies.
The deployment of capital was completed a lot sooner than expected and they had achieved their goal within 4 months instead of 18 months. Management then decided that it was the right time for them to get on a path to going public. Input Capital Corp went public 9 months after the first round of financing in July 2013.
The People
The single most important factor to consider before purchasing ownership in a company is the quality of the management that are running the show. As I detailed in the beginning of Input Capital’s history, Brad and Doug were the founders of Assiniboia Farmland, a Canadian farmland fund that was grown from $3 million and sold for $128 million giving investors an annualized return of nearly 20%. This is an amazing achievement in any sector, let alone agriculture.
I haven’t yet had the pleasure of speaking with Doug, but I know Brad is a fellow contrarian and entrepreneur. He’s the sort of person that I like to put my money behind.

Doug Emsley, Co Founder, Chairman, President and CEO

  • Co-Founder and President of Assiniboia Capital and Palliser Farmland Management Corp.
  • President of Emsley & Associates (2002) Inc., Chairman of Security Resource Group Inc. and Sabre West Oil & Gas Ltd.
  • Former Board Member – Bank of Canada, Royal Utilities Income Fund.

Brad Farquhar, Co Founder, Director, Executive VP and CFO

  • Co-Founder, Vice-President & CFO of Assiniboia Capital and Palliser Farmland Management and President of Nomad Capital Corp.
  • Advisory Board, AgFunder.com
  • Director of Mongolia Growth Group Ltd. (TSXV: YAK), Greenfield Carbon Offsetters Inc., and SIM Canada
  • Member of the Saskatchewan Chamber of Commerce Investment & Growth Committee.

Gord Nystuen, Co Founder, VP Market Development

  • Former Deputy Minister of Agriculture and Chairman of Saskatchewan Crop Insurance Corporation.
  • Former Chief of Staff to the Premier of Saskatchewan.
  • Previously served as VP of Corporate Affairs at SaskPower.
  • Partner, Golden Acres Seed Farm.

David H Laidley, FCPA, FCA, Independent Director

  • Counsel, Davies Ward Phillips & Vineberg LLP
  • Chairman Emeritus, Deloitte LLP (Canada).
  • Former Lead Director, Bank of Canada.
  • Chairman, CT REIT.
  • Director, Aimia Inc., EMCOR Group Inc., Aviva Canada Inc.

Dr Lorne Hepworth, Independent Director

  • Board of Advisors, Assiniboia Farmland Holdings LP.
  • Member, Canadian International Food Security Research Fund Scientific Advisory Committee.
  • Member of the Canadian Agriculture Hall of Fame.
  • Past President of CropLife Canada and Former Saskatchewan Minister of Agriculture, Finance, Education, and Energy & Mines.

David A Brown, QC, Independent Director

  • Former Chairman & CEO, Ontario Securities Commission (OSC).
  • Former Chair, Board of Directors, Canadian Employment Insurance Financing Board.
  • Director & Member, Funds Advisory Board, Invesco Trimark Group of mutual funds.
  • Director, Canada Health Infoway.

John Budreski, Special Advisor

  • CEO, Morien Resources.
  • Executive Chairman, EnWave Corp.
  • Director, Alaris Royalty Corp., Sandstorm Gold Ltd.
  • Former Vice-Chairman, Cormark Securities, President & CEO of Orion Securities Inc., and Head of Investment Banking, Scotia Capital Inc.

Agricultural Streaming

streaming

Source: Input Capital Corp

The ag-streaming graphic needs no explanation, it’s a very simple process. The farmers get the upfront cash that they need to purchase inputs like fertilizer in the off season when the biggest discounts are to be found (up to 40% off). Being able to purchase in cash means they also avoid the interest costs on any debt that would normally have been taken on for purchases. Under the terms of the streaming contract, they also pledge to hire an agronomist or agrologist to help them improve the efficiency of the farm, generating a higher yield.

Sometimes getting farmers to change their “tried and true” methods can be a challenge, particularly if it might cost more. Part of Input’s pitch is that Input’s money can fund the additional costs, and that if the plan is implemented properly, the farmers will get higher yields and make more money than if they hadn’t entered into the streaming contract with the company in the first place.

The Commodity – Canola

canola

Source: Input Capital Corp

Canadian Canola contributes $19.3 billion to the Canadian economy each year, including 250,000 jobs and $12.5 billion in salaries. It is Canada’s most valuable crop generating 1/4 of all farm cash receipts. More and more acreage is being devoted to Canola because of the profitability and resilience of the crop.

Canada is for Canola what Saudi Arabia is for oil. 70% of the global export supply comes from Canada. When the country has a bad crop, the Canola price goes up substantially and when there is a bumper crop, the price comes down. When the price does come down, Input is able to make up for the reduced price with increased volume.

Canola is mostly grown in the western provinces of Alberta, Saskatchewan and Manitoba. British Columbia, Ontario and Quebec also grow smaller amounts of the crop. New varieties of Canola are pushing the boundaries of where it can be grown.

Canada exports 90% of its canola as seed, oil or meal to 55 markets around the world. The biggest buyer of Canola oil and meal is the United States, accounting for about 65% of oil exports and 96% of meal exports in 2014. For raw seed, the most important destinations are China, Japan, Mexico and the United States.

Canola_Impact

Source: Canola Council of Canada

The growing middle class and improving diets in Asia are driving an increase in Canola consumption within the region. Within the USA there is also a trend of improving diets and recently the FDA has announced a ban on trans-fats. This means canola is well positioned to replace soybean oil, peanut oil and other oils that are used heavily in processed foods within the USA. Canola is not widely grown in the USA because the climate is not suited to it, giving Canadian growers an excellent advantage.
growth
Source: Input Capital Corp 
Agronomically, Canola is a 1 in 3 year rotation crop and Canada has reached the point where over 1/3rd of all the acres that could be seeded with Canola are seeded to Canola every year. So, there’s not much room to expand the area that is under cultivation. Increases in yield will need to be achieved through better, but more expensive, agronomic practices. This is where Input Capital makes its mark.

Benefits and uses of Canola

Global demand for Canola continues to increase at a steady rate as people discover the benefits and uses of Canola in its various forms. They include:

The health benefits of Canola

Canola is rich in two fatty acids that are essential to the diet because the body cannot synthesize them:

  • Alpha-linolenic Acid (ALA) Essential omega 3 fatty acid. Protects against heart attacks and strokes by lowering cholesterol.
  • Linoleic Acid (LE) Essential omega 6 fatty acid. Important for brain development and the growth of infants.

Compared to all other vegetable oils on the market, Canola oil has the lowest levels of fat that are bad for human health. Saturated fats raise the bad cholesterol (LDL) in your body and have been linked to coronary heart disease. Canola oil has the lowest saturated fat level of all vegetable oils.

A high protein source feedstock

Canola meal has a unique protein profile that helps cows produce more milk. In 24 research trials that included Canola meal in cow’s diets, milk production increased by a whopping 2.2 pounds per day. This is because Canola meal has more Rumen un-degradable protein (otherwise known as bypass protein). Bypass protein makes it through the Rumen so the cow is able to utilize it at the right time.

Whilst Canola meal might not always beat other crude protein sources for overall crude protein content, more of Canola meal’s protein gets turned into milk. When looked at from this perspective, Canola meal protein is used 16% more effectively than Soybean protein.

Using a more efficient feed-source helps dairy farmers produce more milk with less money.

Bio-Diesel

As of July 2012, all diesel fuel sold in Canada must contain 2% bio-diesel. Bio-diesel can be made from a variety of feed-stock, including vegetable oil, animal fats or recycled restaurant grease.

In Canada, it makes sense to make bio-diesel from canola because of the advantages the crop provides over other sources:

  • Proven technology and demand
  • High oil content
  • Superior flow in cold weather
  • Oxidative stability
  • Quality standards
  • Carbon sequestration

Canola bio-diesel is already widely used in Europe, which is expected to produce more than 7.3 billion liters of bio-diesel from vegetable oil in 2012. In the EU, rapeseed and canola are the foundation feed-stock for bio-diesel. Canola produces more oil per unit of seed than other oil-seeds. That means bio-diesel producers realize greater efficiencies from canola than seeds with lower oil contents, notably soybeans. Canola oil has the lowest level of saturated fat. That helps canola bio-diesel perform better in cold weather. Canola bio-diesel has a very low Cloud Point (the temperature at which small crystals form in the fuel).

2015 Crop

The planting season started out dry with an early spring. Some of the early seeded crop got frosted in May and had to be re-seeded. Some areas of Eastern Alberta and Western Saskatchewan had trouble with germination because it was so dry.
Input Capital doesn’t have many streams in those areas and so the company was not seriously affected by the dry spring. The forecasted decrease in yield from the affected regions has caused the Canola price to rise. Input will benefit from those higher prices.
The market seems to have been discounting the company because of an assumption of overall bad weather, but this has not been the case.
The company’s contracts are predominately weighted to Eastern Saskatchewan and Western Manitoba where conditions have been very good this year. Some farmers have described this year as the best crop they have had in recent times.
partners
Source: Input Capital Corp 
Inputs contracts are based on a fixed amount of tonnage so for the most part, they don’t participate in yield upside or yield downside. A typical canola yield would be 30-35 bushels an acre and the company likes to contract at approximately 10 bushels an acre, giving the company a large margin of safety. The reason for this is even a bad canola crop will produce 15-20 bushels an acre giving the company the assurance that there will be enough physical canola on each of the farms to satisfy the contract the farmer has signed with the company.
Management is pretty confident about the Canola volume. There is a higher price available and the company has been locking in some of that higher price within their contract for the fall Canola sales. That will translate in to some healthy revenue for the company this fall.
Sales Team
In the beginning, Gord Nystuen was the company’s face to the farmers. He sold all of the first 20 deals working his contacts and networks. Input now has a substantial sales force spread out regionally around Western Canada and these networks are now being leveraged.
Management also conducts local advertising that helps bring in leads to pass on to the sales team. The company is conducting heavy marketing at the farm trade show circuit. Most Canola farmers have now at least heard of Input Capital, even if they don’t understand what the company does or how a streaming contract would work for them.
This is a big change from a year ago and makes marketing a lot easier when there is a warmer relationship as opposed to a cold call with no familiarity of the company.
Management added 3 more sales people in June 2015, bringing the total to 8, and are in the process of interviewing a few more. They are working to establish a good footprint of sales people all across the Canola growing region. As these sales people begin to get traction, they will bring forward a lot of deals earlier than the company has previously experienced.
Strategy
Input Capital’s goal is to underwrite contracts in the high teens to 20% IRR range. If the price of canola goes up, they do even better than that. Input has 78 clients right now and there 50,000 canola farmers operating in western Canada alone. So there is a huge opportunity to grow over the next few years.
The company is looking for farmers who can make good use of Input’s capital. Roughly half of the farmers in the region would fit into the company’s addressable market. So that’s around 25,000 farmers who, if given the right pitch, could potentially sign up and make use of the capital available, adding value to their farm.
businessmodel
Source: Input Capital Corp 
Crop Diversification
Farmers in Manitoba have asked management to look at soybean streaming because they’re growing more Soybeans than Canola. As new varieties of the crop come out, they’re working their way north and west and up past the Mississippi valley into southern Manitoba and then gradually into Saskatchewan and Alberta. Based on that feedback, the company is examining the opportunity.
Were the company to expand into Soybeans, it would provide them with the advantage of crop diversification along with additional geographic diversification. On the other hand, it could be a distraction from the core commodity which the company knows best.
Part of what the company is pitching to farmers is that there is so much more yield in the canola crop that most farmers are not realizing because they are under-fertilizing and under-feeding their crops. Canola is amazingly responsive to incremental amounts of fertilizer.
If Input can help farmers optimize their working capital, thus optimizing their agronomics, the yield upside potential in Canola exceeds any other crop that is grown in western Canada. This is what gets farmers excited. Not only can they lower their costs for inputs, but they can increase their yield and win both ways. Canola has this feature that management just doesn’t see in other crops at this point.

Financing

 The first round of financing was at $1.00 per share. Input Capital went public at $1.60 and have since completed two financings at $1.60 and $2.30 per share. So in total, management has raised around $111 million. They’ve deployed around $90 million into streaming contracts (78 of them) and they’re all producing revenue in their very first year.

The company is in the explosive growth stage of the business and because of that, every year is a record year over the previous year, and this year is looking no different. Input has 75,000 tonnes of canola to be sold at an average of $500 a tonne, that’s $30-40 million in revenue coming their way in the next 6 months.

That capital will be turned around and deployed into new deals this winter by the sales force. This is where the compound growth effect takes off. Input can grow the business at 25% per year with internally generated cash-flow, without having to tap the market and issue any more shares.

This will be the first year where the company funds investment into new streams almost exclusively with internally generated cash flow. Input Capital is in a favorable position where the only thing that would cause them to return to the market would be greater demand for capital from farmers than the company can provide, a nice problem to have for any business.

The company has around $30 million in cash with another $30 million expected from the crop that is coming off soon, so there will be close to 60 million in deployable capital for this coming winter.

Low Hanging Fruit
Given the seasonality of agriculture and the company’s reporting cycle, Input is in a light news period until the first week of January when they will put out a quarterly update on activity in the quarter that runs from October 1st to the end of December.
Due to the early spring, the harvest may be a little early as well. This may enable the company to move more crop by the end of September and they may report that in early October. If there is a way for the company to get an earlier crop harvested and sold, that would generate earlier revenue than the market would expect giving investors a nice surprise.
Inside Ownership
Between management and directors, insiders own 20% fully diluted, 14% basic. A British insurance company, XL Catlin owns 17% of company. With both Insiders and XL Catlin owning nearly 40% of the company, management has a large vested interest in the performance of Input. The remainder of the shareholders are dominated by high net-worth retail investors who purchased many of their shares at $1.00 per share in 2012. As the company has grown, it is attracting significant institutional attention. Management believes institutional ownership to now be about 37%.
Share Structure
A nice, tight share structure. With the cash the company is generating, a dividend or repurchase plan could possibly be expected some time in the future. Obviously for the moment the company is focused on growth through the reinvestment of capital into additional streams.
sharestructure
Source: Input Capital Corp

Risk Mitigation

If there was an overall frost and it took the entire canola production down by a few million tonnes, that would result in a stronger Canola price, which the company would benefit from. So in many ways, a mediocre crop is the best outcome for Input because they get the volume and the better price.

The streams are with family operators. There is counter party risk in the sense that if something goes bad on the farm, how will the company get its Canola? Management mitigates a lot of these risks with registered mortgage security on farmland and the company doesn’t do streams with farmers who don’t have any equity in their land for the company to secure against.

Input has life insurance on many of the farmers. This ensures that if a farmer was to die, life insurance would pay out and the company would be able to end their streaming relationship with that family without having to foreclose on any of their land, so the family can continue their life and the company gets their capital so they can redeploy it elsewhere.

The company requires farmers to take out one of several kinds of crop insurance. The vast majority use Canadian government backed crop insurance, which guarantees 70% of the farmers’ historical total crop production. is significantly in excess of the tonnage that is owed to Input so the company’s revenues are effectively guaranteed by the government insurance.

  • Geographic diversification.
  • Streaming contracts call for fixed tonnage and are not yield dependent.
  • Crop insurance.
  • Life insurance on farmers.
  • Agronomist on all farms to improve yield.
  • Ability to accept other commodities of equal value in lieu of contract crop.
  • Contractual protection on the use of proceeds.
  • Strong security covenants embedded into every contract.

Margin of Safety

The company is down significantly from its 52 week high and provides investors with an attractive entry point. I’m buying at this level and will continue to average down if given the opportunity.

margin

Source: Google Finance

Summary
Input Capital Corp is blazing a trail as the first agricultural company to implement the profitable streaming business model. The company is led by people who have a track record of success within the agricultural sector and who have most importantly, made investors a lot of money.
This is the third year in a row that Input has expanded upon its capital deployment, from an average of $22M in each of its first two years to $47M in the third year. Despite the Canola price volatility, the company has managed to keep the IRR at its 20% goal.
Input Capital Corp is still in the explosive growth phase, continually adding additional streams and generating increasing revenue as each year goes by. The expansion of the sales force will see that the company is on the lips of every Canola farmer in the region, many of whom will recognize the benefit they will gain by partnering with Input through a streaming contract.
I asked Jason Stevens, Investment Executive with Sprott Global for his thoughts on Input Capital Corp:
“Input Capital demonstrates two of the most important qualities I look for in any investment;  (i) A history and pattern of disciplined deployment in high return investments and (ii) extensive opportunities to reinvest free cash flow.  In the last year, Input has increased their number of streaming contracts from 20 to 78 and more than doubled the volume of their expected canola deliveries for the coming year.  At the same time, they’ve been able to generate close to a 25% return on invested capital. In a market of 50,000 canola farmers, Input’s high-return growth is far from over.” – Jason Stevens
For investors who are looking to get exposure to the agricultural sector, Input Capital presents a low risk, cash flow generating, geographically stable investment. The current discounted stock price provides investors with an entry level that is far below the 52 week high, a significant margin of safety.
“Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.” – Warren Buffett 
I must give credit where credit is due so I would like to thank my good friend and fellow speculator, Adem Tumerkan from Diutinus LLC, for the piece he wrote on Input Capital just on a year ago (I highly recommend you read it). You can find Adem’s article here.
There is also a highly detailed piece on Valuewalk that was published not long after Input Capital went public (read this as well), you can find it here.

If you have been reading my commentaries for very long, you are already aware that I live in Houston, Texas which is the energy capital of the world. While the Houston economy has transformed since the “oil bust” in the 80’s, do not be misled about the importance of energy as a critical support of the Houston economy.

Beginning in late 2013, I begin discussing on my daily radio show that it was likely time to begin evaluating energy based holdings and reducing some of the related risks. The reasoning then was simple: everything cycles. Therefore, as the adage goes, it was important to “make hay while the sun shines.” 

As you can imagine, I was vilified for making such an outlandish commentary. I received literally hundreds of emails explaining the “new paradigm” in energy due to the “fracking revolution.”  That emerging markets, primarily China, would continue to drive the demand for oil/energy for decades to come. It was all the usual arguments for why “this time is different.”

Over the next couple of months, as I watched commercial/apartment/multi-use real estate explosed in Houston, I became even more committed to my call that “something wicked this way comes” for the oil patch. With fully 1/6th of all commercial properties in the United States being built in Houston, it was easy to see the excesses building in the system all driven by the energy boom.

office-construction

In the June 2014 weekly newsletter, I made my first written call with respect to energy-related holdings as follows:

“In early May I set a target for oil prices at $106. That target has now been reached. With oil prices extremely overbought, now is a good time to profits in energy-related stocks. This is particularly the case in operators and drillers that are directly impacted by changes in oil prices.”

However, the most important warning came in early August of 2014.

“While oil prices have surged this year on the back of geopolitical concerns, the performance of energy stocks has far outpaced the underlying commodity. The deviation between energy and the price of oil is at very dangerous levels. Valuations in this sector are also grossly extended from long-term norms.

If oil prices break below the consolidation channel OR a more severe correction in the markets occurs, the overweighting of energy in portfolios could lead to excessive capital destruction.”

Sector-Oil-Energy-080214

I have also suggested on multiple occasions, despite mainstream analysis that MLP’s were a “safe alternative” to investing in oil, such would not be the case when the correction in energy started. To wit (June 2014):

The same goes for ‘dividend’ plays such as close end funds, MLP’s and REIT’s which are all heavily leveraged. Despite your belief that you are buying these for the ‘income,’ these positions have the potential to drop 50% or more very rapidly which will lead you to panic sell to protect capital. Reduce weightings in portfolios to protect capital, you have had a great run – now it is time to wait for the next opportunity.”

(Josh Brown confirms my views in an excellent post on the “Myths Of MLP’s” today.)

Valuable Lessons Learned & Relearned

What this background teaches is, as always, “this time is not different.” Investors have once again been taught the folly of performance chasing and the belief that fundamentals will trump human psychology in the short-term.

There is currently a growing belief that oil has reached a bottom in the low 40’s. Of course, that was also the belief a couple of months ago with oil was in the low 50’s. These beliefs currently appear to be based more on “hope” rather than fundamental underpinnings.

There is a basic supply/demand imbalance currently operating within the oil complex. As shown in the chart below, despite the collapse in oil prices and rig counts, supply has steadily grown over the last several months.

Oil-Supply-Price-081715

As shown above, the last time that supply was this high, it was the peak of oil prices for almost 20-years as the imbalance in supply was resolved. The subsequent surge in oil prices, from extremely suppressed levels of production, supported the push into the “fracking” boom and a massive surge in supply without a subsequent increase in the demand to consume it.

Oil-Supply-Demand-081715

The ending was inevitable and just a function of timing. Importantly, the current surge in supply is once again exceeding a weakness in global demand. Given the current backdrop of the structural shift in employment dynamics and excessive indebtedness, it is unlikely that economic growth will accelerate to a point to markedly increase the demand side of the equation.

This suggests that oil prices may become mired within a lower trading range for many years to come as the reversion process clears the excess supply overhang.

However, from an investment standpoint, both in energy stocks and MLP’s, there is more to this story.

The supply/demand imbalance was resolved by the “fracking boom” as new technologies allowed for the extraction of “shale oil.” The rush for “black gold” enticed a large number of financial institutions to issue debt, with a large chunk of it classified as “high yield,” to industry players. Not surprisingly, many of these same financial institutions are having “night sweats” in the anticipation of defaults in 2016 as currently “hedged” oil prices become “unhedged” as the end of the year approaches.

The problem for marginal industry players is that access to cheap capital has now been cut off, and even larger producers are having a tougher time obtaining capital. If oil prices remain at substantially lower levels in the months ahead, as I currently suspect (not withstanding oversold bounces), there is likely going to be a good bit of turmoil in the energy space next year.

Oil-NetContracts-081715

I certainly understand the “temptation” to jump into the beaten down energy space currently, I would recommend only doing so in small amounts and with a very long time horizon measured in years rather than months.

The supply/demand dynamics currently suggest that oil prices and energy-related investments could find a long-term bottom in the months ahead. However, it does not mean those investments will repeat the run witnessed prior to 2008 or 2014. Such is the hope of many investors currently as their “recency bias” tends to overshadow the potential of the underlying fundamental dynamics.

I am suggesting that an argument can be made that oil prices could remain range-bound for an extremely long period of time as witnessed in the 80’s and 90’s. It is here that lessons learned in the past will once again be re-learned with respect to the dangers of commodities, fundamentals, leverage and greed.

For the Houston economy, there is likely more pain to go through before we reach the end of this current cycle. There are still far too many individuals chasing yields in MLP’s and speculating on bottoms in energy-related companies to suggest a true bottom has been reached.

While there will be some fabulous trading opportunities in the energy sector in the short-term, the real opportunity likely lays ahead in 2016, or beyond. Long-term investment opportunities generally align when the supply/demand imbalance is corrected, and a corresponding hatred for energy-related companies abounds.

Source: Oil Supply-Demand Suggests Pain Not Over Yet

Stock News Today
In a junior mining market that doesn’t value good news, M&A could be the golden ticket that pays investors a premium for their patience. In this interview with The Gold Report, AgaNola Asset Manager Florian Siegfried evaluates recent deals and points to the companies that could be the next takeovers. Plus, he makes a bold prediction for what the recent takeout activity and fallout from the Greek crisis could mean for the resource market as soon as October.

The Gold Report: When we talked in November, you warned that there would be downward pressure on gold this year. What are you anticipating for the balance of 2015 and into next year?

Florian Siegfried: We were being cautious in November when we published guidance that indicated gold could trade as low as $1,070 per ounce ($1,070/oz) as a support zone. And that is pretty close to where it is trading right now. But I think that we have to distinguish between the paper price of gold and the physical price, which trades at a premium. For example, the U.S. Mint currently sells gold at around $1,400/oz.

Pretium Resources Inc.’s Brucejack is one of those mines that brings a long mine life and high grade in a safe jurisdiction.

This suggests that there is some tendency toward increasing premiums in the market for physical metal. Where we go by the end of the year is a difficult question because it’s always hard to catch the bottom of the market. But a look at the last three or four years gives us some clues. Hedge funds were maximum net long in gold at the peak of 2011, and now they’re maximum net short, which could be a good contrarian indicator (see chart above).

It looks as if $1,080/oz could be the bottom. It’s not defined yet, but the sentiment is definitely at extremes.

The turn in gold will come from short covering, and the short covering will come when the bearishness really reaches a climax event. Probably we are there, but we will have to wait and see. It is difficult to make a call for year-end because there are so many factors influencing the gold price, and sentiment is extremely negative. The trigger for moving up could come from the bond market, which is in a difficult spot right now. Liquidity is down. Yields and credit spreads are rising. When something goes wrong there, where will the conservative money go to? I don’t think it is going to go back into government funds. As investors lose confidence, that could be the trigger for gold. We are probably going to see this in the fall, by September or October. I think the bond market is about to turn around.

TGR: What are some of the other triggers you’re watching? Are you monitoring the U.S. Federal Reserve and whether that rate hike happens in the fall?

FS: I think the Fed is testing the market because it knows we are in a massive bubble and is talking to see what happens. I have four simple reasons why I would not expect a rate hike in September:

1. The Fed sits on a US$4 trillion balance sheet. Raising rates would mean bonds go down in value, and this could wipe out the Fed’s capital. That’s the last thing it wants.

2. The impact to the carry trades, which the banks always need, would be drastic. The banks get free Fed money now that they can invest in treasuries and multiply it tenfold, making a profit basically at no risk. An increase in rates would put pressure on the banks, something the Fed doesn’t want either.

3. U.S. exports are already suffering with a strong dollar, and a rate hike would make the dollar even stronger.

4. This fragile economic situation is also something that the Fed doesn’t want. That is why quantitative easing is somewhat like the Hotel California. You can check out, but you can never leave.

I would expect more market dislocations because I think the Fed is between a rock and a hard place. Generally my advice is to play it safe and not to put all your capital at work at this time.

TGR: You’re in Switzerland. Are you more worried about what’s happening in Europe or what’s happening in the U.S.? Do you think the Greek crisis is now behind us and we’ve solved that problem or will that continue to haunt us the rest of the year?

FS: I would be more concerned about Europe right now because Greece is not fixed. It’s an exercise to save the banks because everybody knows that if Greece defaults, it will trigger a chain of events that becomes uncontrollable.

OceanaGold paid almost a 70% premium on Romarco Minerals Inc.’s shares.

The market seems to like the short-term fix and the U.S. dollar is benefitting. If you are looking to park your money, probably the U.S. is the only place you want to go. I don’t know how long it will last because the markets in the U.S. are shaky. I think we are lurking on a major top in the equity markets. But people still like the dollar, and it’s probably the best currency right now.

TGR: The last time we talked, you also anticipated that mergers and acquisitions (M&A) would be a major theme for this year, and that definitely seems to have played out. Let’s talk about some of the deals that have happened recently in the resource sector. What can investors learn from that?

FS: There were a few interesting acquisitions/mergers in the last month. The transaction between OceanaGold Corp. (OGC:TSX; OGC:ASX) and Romarco Minerals Inc. (R:TSX) is interesting because OceanaGold is an Australian gold producer with assets in the Philippines and New Zealand. The company is buying, for almost CA$900 million (CA$900M) in an all-equity transaction, Romarco, which has the 4 million ounce (4 Moz) high-grade Haile deposit in South Carolina. I think the transaction shows that good quality deposits are very rare. Otherwise, an Australian company wouldn’t enter new territory in the U.S. Also, I think this shows investors that good projects, despite dire market conditions, come at a premium. OceanaGold paid almost a 70% premium on the Romarco shares.

TGR: Are similar premiums being paid for rare high-quality silver projects?

FS: Yes. First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) recently bought SilverCrest Mines Inc. (SVL:TSX; SVLC:NYSE.MKT). Both are silver producers in Mexico. This was a friendly all-share deal for the Santa Elena high-grade mine. It is probably strategically important for a company like First Majestic to add to its footprint to realize the vision of becoming the leading silver producer in Mexico. The deal also adds net cash to its balance sheet on the order of CA$25M. That means the company is improving its balance sheet and it has another high-grade deposit to add to its portfolio.

In this market, there aren’t too many companies that can offer a $120M transaction, so it’s a buyer’s market. In a rising silver price environment investors will revalue the whole company and see the wisdom in the timing.

TGR: Will these deals set a precedent for pricing going forward?

FS: It really depends on quality.

Temex Resources Corp. (TME:TSX.V; TQ1:FSE) recently received a superior proposal from Lake Shore Gold Corp. (LSG:TSX) following the initial takeover bid from Oban Mining Corp. (OBM:TSX). Lake Shore is paying 50% more than Oban offered on the Temex share price and the weighted average price is roughly a 100% premium, but it’s a small transaction, $24M, compared to Lake Shore’s $500M market cap. That transaction makes sense strategically because the Whitney project is so close to Lake Shore’s Bell Creek mill in Ontario, Canada.

St Andrew Goldfields Ltd.’s Taylor mine could add another 20–30 Koz of high-grade and low-cost production to its portfolio.

I would be cautious when transactions don’t make sense operationally, for example, a company with a good asset base and poor balance sheet buying another company with a bad asset base but a good treasury. That might just be a transaction to fix the company financially without creating any long-term value or creating any benefit for the shareholders.

TGR: As you mentioned, a lot of these are paper deals. Do you think that’s going to be the standard?

FS: The companies buying now can dictate the terms. No one wants to pay a premium in cash because cash is rare, and companies need the cash for their mines, as we probably won’t come out of the downturn any time soon. So they use their share price as currencies, and that’s exactly the right thing to do. But it’s going to change when the market gets more buoyant, companies make cash and accumulate a treasury, and banks prove more willing to lend. It’s all cyclical.

TGR: Based on those deals, what are some companies that look attractive today, either as M&A targets or as projects that could be well positioned once the gold price does turn?

FS: The big mining companies, AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE), Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Newmont Mining Corp. (NEM:NYSE) are currently disposing of nonstrategic assets. They have to shrink their portfolios and fix their balance sheets. Sooner or later, these companies have to refill their production pipeline, and they will have to do this by acquiring.

When you are betting on M&A, one way is to evaluate smaller exploration companies that are in a good position financially because they’re backed by major shareholders who can fund their exploration programs through the downturn. Even better are companies with solid brownfield assets, which make it rather easy to prove up a substantial gold resource.

TerraX Minerals Inc. has a huge district in the Northwest Territories.

One of two companies I would suggest that are in this position would be Falco Resources Ltd. (FPC:TSX.V), which has a past-producing portfolio in Quebec called the Horne project. The strategy is pretty clear—drill this deposit out, prove up the preliminary economic assessment (PEA), prove up the metallurgy, move the project to bankable feasibility level and then sell it to a major. One way of getting exposure to M&A upside is through Falco Resources.

The other one in a similar position is TerraX Minerals Inc. (TXR:TSX.V), which has a huge district in the Northwest Territories, the Yellowknife City project, just north of the historic Con and Giant mines, which collectively produced about 10 Moz gold in the past. TerraX controls the whole district and is targeting a 5 Moz gold resource. Management knows what a high-grade deposit should look like to make it attractive as a takeover target. TerraX is never going to be a producer. I think it is heading for an exit strategy. Management holds 15% of the company. When the majors need to buy something, this project will be available with great recent work. But it needs time. This is not a stock you only need to hold for a couple months. You have to be patient. That requires a three- to five-year time horizon.

TGR: What are a couple of other companies that might be good acquisition targets?

FS: Torex Gold Resources Inc. (TXG:TSX) was an acquisition target over the last few years. With a market cap close to CA$1 billion and a new PEA for its second project called Media Luna in Mexico, which has an after tax net present value of almost US$500M, it might be too big when you consider that a potential buyer would have to pay a substantial premium. The company is building its first mine, El Limón, right now. It’s permitted and financed and adjacent to the Media Luna deposit. Both deposits are world class. Torex is poised to build the mine and go into production on its own.

Three names that still circle around as acquisition targets are Lake Shore Gold, Detour Gold Corp. (DGC:TSX) and Pretium Resources Inc. (PVG:TSX; PVG:NYSE).

TGR: What makes Lake Shore an interesting company as a takeover prospect?

FS: I think it is in the right jurisdiction. It is benefitting from the weak Canadian dollar and has a decent operation, plenty of in-the-ground potential and is fixing its balance sheet over time. Gold in Canadian dollars is almost $1,500/oz right now, so it is protected. It’s like a hedge.

TGR: What are the steps Lake Shore still needs to take to derisk it to the point that it would start turning heads?

FS: It was turned around two years ago. It has a relatively long mine life and generates cash flow. Although the valuation discount of the past has largely been removed over the last few quarters, I don’t think the market has really factored in an M&A premium. This could change once the company demonstrates its ability to repay its CA$103.5M convertible debenture by operating cash flow in the next two years in order to reduce the balance sheet risk.

TGR: Is Detour in the same position?

FS: In terms of mine life and annual gold production Detour is the only major Canadian deposit that is still in the hands of a single asset producer now that Osisko Mining Corp. is gone. Detour is highly leveraged to the gold price, but it has been volatile. Sometimes it makes money, sometimes it doesn’t, based on mining and milling rates. I think there is still some financing risk in a persisting low gold price environment as Detour currently has some CA$500M in outstanding convertible debt. What Detour really needs is an elevated, high gold price environment. Then it would make sense for an acquirer to buy. Right now, I don’t see that. It’s just a name circling around.

TGR: Pretium is busy moving the Brucejack deposit ahead in British Columbia. It recently announced new permitting and infill drilling in Valley of the Kings. Are there any key catalysts we should be looking for there?

FS: The great thing about Pretium is the sheer size of the deposit, as well as the grade. It’s one of those mines that brings a long mine life and high grade in a safe jurisdiction. Pretium is probably clicking the box there as well, but it’s also hard to say if an M&A premium is factored in. It recently received an Environmental Assessment Decision Statement from the Federal Minister of the Environment that also includes agreement with the Nisga’a Nation treaty. CA$80M in new Chinese money has been invested in the company. Pretium is a third name that I hear regularly in M&A discussions.

TGR: What about companies that might just be good investments right now?

FS: St Andrew Goldfields Ltd. (SAS:TSX) is attractive for me because it is priced right. The company has growth potential and no debt. It’s trading at around $0.28/share for a market cap of less than US$100M. The market has not taken note of St Andrew because of the tight shareholder structure. A single shareholder owns around 50% of the company so brokers have not really covered the stock, and it is not very liquid as a result. But when you look into the company a little bit deeper, it is currently producing around 100,000 ounces (100 Koz) of gold per year in the Timmins mining district on Ontario, Canada, but in Q4/15, it will bring the Taylor mine into production. That could add another 20–30 Koz of high-grade and low-cost production to its portfolio.

TGR: Do you think that is what investors are waiting for?

FS: In the last bulk sample, St Andrew put out a very good results from Taylor demonstrating the grades were 20% higher at almost 9 grams per ton (9 g/t) than its forecast. The stock price didn’t really react on the news, but I think that’s just a function of the market. There is no interest in the sector. This is an opportunity because if it can grow production by 25–30%, it doesn’t need to dilute shareholders, and it has another high-grade mine, which is open at depth, gives free cash flow and has no major royalty. That is something investors will really have to pay attention to. Taylor is going to change the whole production profile and financial situation of the company.

TGR: What is another company worth watching?

FS: When you look for value, where do you turn? Companies that suffered dramatically in the current downturn, but generate cash flow at current metal prices, have cash in the bank and no debt. I think one of them is Gold Resource Corp. (GORO:NYSE.MKT). It just put out Q2/15 financials. Despite an illegal mine protest and work stoppage in May, the company earned US$9.4M in operating cash flow and is paying around a 4% dividend yield, which should be sustainable given the strong balance sheet. It has cash in the bank. It’s debt free. It has a nice, high-grade silver-gold project in Mexico and plenty of exploration potential; nevertheless, the stock is down to US$2.50/share after the company announced a decrease in metal production for the second quarter. I think the selling is overdone. I remember in 2009 it moved from $1 or so to close to US$30/share in 2011 and it wasn’t even in commercial production. Now, Gold Resource is in production and the market cap is down to $120M, and it is still paying a dividend. The good news is it didn’t dilute all the way down. I think the sentiment there is very negative and consider the stock undervalued.

The same is true for Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT), which just made two acquisitions in Mexico over the last eight months. I think the market is overly concerned over whether the company has the capability to bring the two gold projects into production in the foreseeable future. But Timmins, with its existing San Francisco mine in Mexico, financed and put this mine into production in the last down cycle in 2008 and 2009, so management has proven it knows how to execute. The company has US$40M in net working capital and can sequence the development of the two new projects to manage the capital requirements. It is producing around 120 Koz annually. It reduced guidance a little bit, but the underlying asset portfolio has the potential to become a 300 Koz producer. The market cap in U.S. dollars is down to $100M, which I think is ridiculously cheap. Timmins looks very undervalued, in my opinion.

TGR: You also follow Australian companies. What will the precious metals mining landscape look like there once the dust settles on the OceanaGold deal?

FS: I think the Australian producers with West African operations get virtually no attention in this market regardless of the quality of the assets. The Australian dollar is so weak that gold there is at a two- to three-year high. That makes the local producers with mines in Australia look attractive.

One to watch is Perseus Mining Ltd. (PRU:TSX; PRU:ASX). The market cap is around AU$150M, and it has AU$127M in cash and bullion with no debt. This is an opportunity to buy a producer almost at cash value. Its Edikan gold mine in Ghana is targeting 200 Koz of annual production. It has a 5.4 Moz gold resource. The company added AU$40M cash and bullion in Q2/15. What is really attractive to me is that the resource base is so big. The mine life is eight years. Management has now proven that it has effectively brought costs under control. In the June quarter the company’s all-in site costs are below $700/ounce, so it has a good cash margin. It’s a low-grade deposit, 1.2 g/t according to the mine plan and, typically for such deposits, any reduction in mining costs can improve the operating cash flows significantly. At Edikan, there are seven pits to mine over the mine’s life, so it’s not so easy to work these deposits, but if you’re a value investor and you’re thinking gold is going to turn around one day, here is a company that trades almost at cash and you get the gold virtually for free.

TGR: Is there one last story that you want to mention?

FS: Probably the last one that also touches on this whole M&A story would be Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT). The stock has suffered lately after some exchange-traded funds sold their positions. But it made two acquisitions over the last few months that are interesting. It bought an option on the Coricancha polymetallic gold-silver-zinc deposit in Peru from Nyrstar (NYR:BSE). If it wants to execute its option to buy the whole project, including the infrastructure, mill, everything on site, the price would be around US$18M. It has a 124 Moz silver equivalent Inferred resource and 22 Moz silver equivalent Measured and Indicated resource. So it’s a big resource. Great Panther is reviewing the mine plan to see if it can find cost efficiencies. Then it will decide if it wants to execute on the option. I think that’s smart. Great Panther is a stock to watch.

TGR: Do you have any final words of wisdom for readers looking to survive 2015?

FS: Every bear market eventually turns into a bull market again. Things are cyclical. So don’t get depressed. You can never pick the bottom, but you can prepare for the next upturn. Be patient. Don’t get frustrated. The cycle will turn. I think it’s probably coming in late 2015 or early 2016. When we see the best teams in the mining industry buying assets, that gives you some confidence that the bottom can’t be far away.

TGR: Thank you for taking the time to talk with us, Florian.

Florian Siegfried is head of precious metals and mining investments at AgaNola Ltd., an asset management boutique based in Switzerland. Previously Siegfried was the CEO of Precious Capital AG, a Zürich-based fund specializing in global mining investments. Prior to this Siegfried was CEO of shaPE Capital, a SIX Swiss Exchange-listed private equity company that was founded by Bank Julius Baer & Co. Siegfried holds a masters degree in finance and economics from the University of Zürich.

DISCLOSURE:
1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Great Panther Silver Ltd., Timmins Gold Corp., St Andrew Goldfields Ltd., Pretium Resources Inc., Romarco Minerals Inc. and TerraX Minerals Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Florian Siegfried: I own, or my family owns, shares of the following companies mentioned in this interview: Timmins Gold Corp. 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 determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

Source: Swiss Asset Manager Florian Siegfried: Look for Value Opportunities and Put Your Capital to Work Selectively in this Market

Image Credit

Silver Coins

Lower precious metals prices on Wall Street aren’t necessarily bringing lower prices on Main Street.

The retail market for gold and silver coins, bars, and rounds has been swamped with high demand since mid June.  Both the U.S. Mint and the Royal Canadian Mint continue to run into serious issues keeping up with retail silver coin demand.

After selling out in early August, the U.S. Mint resumed deliveries of Silver American Eagles, but it has since been rationing them out.  And this week brings word of new silver supply-chain problems. Mint officials let it be known they are cutting further back on Silver Eagle shipments, reducing them as much as 20% below already insufficient levels.

Dealers already had some catching up to do, and similar news from the Royal Canadian Mint (RCM) late last week won’t help either.

RCM officials announced significant “problems” with sourcing silver blanks for production of the Silver Maple Leaf. At least one major wholesaler stopped accepting new orders for the popular coin all together.

The one-two punch of U.S. Mint and RCM rationing and production breakdowns promises to keep buy premiums elevated and cause shipping delays on most government-minted silver coins for the foreseeable future.

Are Delivery Delays and Higher Premiums Reasonable?

Bullion investors watched spot prices fall relentlessly during the month of July and a whole lot of them decided to go bargain hunting. Unfortunately, when they called their dealer to buy silver, they found significantly higher premiums and delivery delays on most items.

Seizing the opportunity to buy silver on the cheap when spot prices fell below $15 per ounce has proven harder than many expected.

Inventory constraints in the marketplace SO FAR are primarily a function of bottlenecks in manufacturing of certain products – not an outright shortage of raw silver grain or bars.

Reputable dealers like Money Metals Exchange will only accept orders for precious metals that it already owns and for products it knows it can fulfill. Responsible dealers make commitments to customers up front about when a customer should receive delivery, and then meet (or exceed) those commitments.  And, as frustrating as it might be to do so, prudent dealers will stop selling items that cannot be reliably sourced.

Unfortunately, some dealers operate differently – taking all the orders they can regardless and hoping and praying they can follow through as promised.  That’s risky for both the dealer and the customer.

If your dealer is consistently missing commitments on delivery, or quoting delays significantly longer than other dealers, you should be wondering if the company truly is “selling silver they don’t have.” Shipment in one to two weeks after payment clearing is reasonable given current bottleneck conditions. Anything approaching a multi-month delay at this point should be viewed as unacceptable.

Demand during Price Drops Tends to Force Premiums Up

The physical market for precious metals, unlike the paper futures markets for gold and silver, DOES respond to real-world supply and demand fundamentals. This market is also extraordinarily competitive. Premiums have to be set at fair levels or customers go elsewhere.

One misconception is that higher premiums go straight into the dealers’ pockets. In reality, the wholesale premiums and fabrication costs associated with securing inventory are also rising.

Dealers aggressively bid for scarce inventory and production capacity so their customers can access the supply they want.

In recent weeks, for example, Money Metals Exchange has actively encouraged customers to buy silver rounds, where premiums rose only modestly, and silver bars, where premiums increased only a few cents.

Bargain hunting for bullion investors is best done when the physical markets are quiet and premiums coming down.

Clint Siegner is a Director at Money Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.

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China Gold

China’s recent stock market gyrations have some analysts now calling China the biggest bubble in history. But those who write off China because of market volatility are missing a more important long-term trend of Chinese geopolitical and monetary ascendancy. That trend shows no signs of abating.

China’s leaders have a clever strategy, and Western financial powers may someday wake up in shock when they realize what has occurred.

It’s true that the Chinese government has helped fuel artificial demand for property and equities. China skeptics who argue that these artificially inflated markets will crash to much lower levels could well prove to be correct. Some China doubters also argue that a downturn in China’s economy will put downward pressure on commodity prices.

Commodities – from crude oil to copper to gold and silver – have already suffered a severe cyclical downturn. Commodity markets tend to be leading indicators, moving in advance of whatever economic story of the day the financial media are telling.

But single-day drawdowns of more than 8% in the Chinese stock market this summer certainly caused some forced liquidations of precious metals positions.

The very fact that booms and busts in China’s markets and economy can now exert heavy influence in globally traded markets such as commodities proves the point that China’s influence isn’t on the wane. Not by a long shot. Even if China’s double-digit rates of growth in the early 2000s prove fleeting and never return, China’s economy still remains on track to eclipse the U.S. economy in the years ahead as the world’s largest.

China, Russia Are Quietly Emerging as World’s Gold Buyers

Chinese officials aim to ultimately to challenge the America’s standing as the world’s superpower. That’s why they’re forming a strategic alliance with Russia, an adversary of the U.S. That’s why both the Russian and Chinese central banks have quietly emerged as the world’s largest gold buyers.

In July, the People’s Bank of China reported that it has added more than 600 tons of gold bullion to its stockpiles since 2009, taking the total to 1,658 tons. That represents a 60% jump in gold assets in just six years.

In fact, all of that new metal was added to central bank’s ledger in June 2015.

With gold prices down in June, there’s no way the actual buying had occurred then. It appears central bank officials simply moved that metal over from the books of China’s state-owned banks, which can hold metal secretly.

So that’s just what the Chinese are reporting officially.

Unofficially, according to MarketWatch columnist David Marsh, “China probably has a lot more gold than it admits.” That’s because the Chinese government regularly acquires gold directly from China’s mining industry.

The transactions are settled in yuan rather than dollars, so most or all of these “internal” gold purchases can avoid showing up as foreign reserve assets.

In examining gold flows into China as well as Chinese gold production, some experts believe that China actually holds more than 10,000 tons of gold, not the “paltry” 1,658 tons the People’s Bank of China is disclosing.

China Has an Incentive to Understate Its Gold Hoard

It makes logical sense that China would understate its gold aspirations. If you had the means to acquire hundreds, or even thousands, of tons of gold, you’d want to do so as stealthily as possible in order to avoid tipping off the market.

If your strategic objective was to dramatically boost gold reserves over a period of several years, you wouldn’t want to see the price rise – at least not while you’re still accumulating. And if you had no ethical qualms about interfering in the market, you’d want to rig prices lower so you could obtain more ounces.

Chinese officials are more than willing to manipulate markets, whether through subterfuge, deceit, or outright force. Recently, in an effort to prop up the stock market, they tried to forbid people from selling shares of stocks. How heavily involved China is in managing the gold market is impossible for an outsider to know.

But there is plenty of evidence to suggest that China is covertly buying gold while dumping U.S. Treasuries. JP Morgan analyst Nikolaos Panigirtzoglou calculated that China’s foreign exchange assets got depleted by $520 billion over the past five quarters. Most of that $520 billion in paper asset dumping comes, presumably, from China’s massive holdings of Treasury securities.

China Wants Admission to the Global SDR Club

If China continues to unload U.S. bonds at a feverish pace, the Federal Reserve might be forced to launch a new bond-buying campaign. That, in turn, would diminish the credibility of the U.S. dollar as China seeks inclusion of its yuan into the International Monetary Fund’s Special Drawing Rights (SDR) currency basket.

As Reuters reported, China “is pushing for the increased use of the yuan for trade and investment as part of a long-term strategic goal to reduce dependence on the dollar.” The yuan’s ascendancy to the status of a top-tier SDR currency would go a long way toward making the Chinese currency a serious global competitor to the U.S. dollar.

However, if it were known that China actually had 10,000+ tons of gold on hand, other countries would more likely balk at China’s pending petition to join the International Monetary Fund’s exclusive SDR club. (A decision is expected this fall.)

China’s gold-accumulation strategy will go a long way toward making China more independent of the dollar and other fiat currencies.

If you actually believe what the People’s Bank of China reports as its gold reserves, then it has a long way to go to catch up with other countries. While China’s official stash is the world’s sixth largest in absolute terms, it ranks much lower in relation to its economy and its total foreign reserves.

China’s admitted gold hoard represents just 1.6% of its foreign exchange holdings. By comparison, Russia’s gold bullion accounts for 13.4% of reserves.

Whether it owns 1,658 tons or upwards of 10,000 tons, China’s appetite for gold is far from being satisfied. The Chinese government will continue to buy, both officially and unofficially.

China may never establish a model sound money system; nor is that its goal. China simply appreciates the universality of gold. And, as the saying goes, “gold goes where it’s most appreciated.

Whether you’re a Communist or a capitalist, whether you speak Mandarin or English, gold remains the one permanent, immutable common denominator. Gold’s value has been recognized universally for hundreds of years and will continue to be recognized universally regardless of whatever market gyrations or economic or political strife the future may bring.

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Gold and Silver News

August 5, 2015 – Public demand for gold and silver coins, rounds, and bars suddenly skyrocketed since mid-June – particularly among first-time customers – to multiples of earlier demand levels, according to Money Metals Exchange, a national precious metals dealer in the U.S.

From June 16 to July 31, Money Metals Exchange experienced a 135% surge in gold and silver sales over the prior 45-day period (which was representative of the early months of 2015). Since June 16, the number of first-time customers rose even more dramatically, with 365% more new purchasers than the prior period.

“As the Greece default debacle unfolded in late June, something clicked in investors’ minds, and many have since bought whatever physical gold or silver they could get their hands on,” said Stefan Gleason, president of Money Metals Exchange. “In particular, we experienced a dramatic and unprecedented surge in first-time customers clamoring to obtain the financial insurance that gold and silver represent.”

“Paper” gold and silver prices set by the future markets have fallen since mid-June, and a bifurcation has emerged. The overwhelming demand for actual physical metal has led to significant strains on the supply chain, particularly in silver.

Many government and private mints, including the U.S. Mint and the Royal Canadian Mint, have been unable to keep up with demand and have either temporarily halted silver sales or rationed out their insufficient supply of silver coins.

Private mints have scrambled for raw silver to keep production running at full tilt. Major national depots, such as Los Angeles, have run dry while some users and investors sought physical delivery of silver (and gold) from Comex warehouses.

Premiums (i.e., amount paid above the metal’s melt value) have risen on all silver products except 100 and 1,000 ounce silver bars, and delivery delays have lengthened as suppliers and retailers scramble to fill orders.

“We’re seeing more buying interest than at any time since the 2008 financial crisis. If we see a further spike in demand, the whole supply chain could be cleaned out,” said Gleason. “In that event, customers will face long lead times and limited product choices. Gold supply is showing some signs of strain, but silver could become completely unavailable.”

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With over 50,000 customers and $120 million in annual sales, Money Metals Exchange was recently named precious metals “Dealer of the Year” by global ratings group Bullion.Directory. Money Metals emphasizes the importance of owning physical coins, bars, and rounds but avoiding all high-premium “rare” or “collectible coins.” In addition to helping investors buy and sell precious metals for their IRAs and personal accounts, Money Metals focuses on education through high-quality market commentary and analysis.

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