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Source: Brian Sylvester of The Gold Report (7/30/12)
Which junior miners are giving the Street something to talk about? Some shining examples of promising companies with good balance sheets do exist despite what seems like a market dominated by bad news. In this exclusive interview with The Gold Report, Philip Ker, an analyst with Vancouver-based Union Securities, shares the good news his latest site visits have revealed about projects in Nevada and Mexico.
The Gold Report: Kitco reports that gold-specific exchange-traded products (ETPs) attracted $570 million (M) in net new funds, and holdings of gold ETPs hit an all-time high of around 77 million ounces (Moz) during the second quarter. There were also inflows into silver ETPs of $269M. Will this impact mining equities?
Philip Ker: We're in a period of extremely tight liquidity within capital markets. Any capital that's not being deployed into equities and transformed into ETPs will definitely impact equity valuations going forward. Keep in mind that exchange-traded funds do offer variable perks, such as diversification and lower management fees versus other managed investment options, which is why a lot of investors are beginning to favor them.
TGR: On a macro level, the problems of the euro continue to plague the U.S. dollar-denominated gold price. The International Monetary Fund recently said that there was "a sizeable risk" of deflation in the Eurozone. What is Union Securities' view of what's happening in Europe and the possible effect on the gold price?
PK: We believe that this is just a temporary shift out of the Eurozone, which is ultimately strengthening the U.S. dollar while consequently weakening the gold price. In the longer term, we see the gold price going much, much higher. The substantial leverage created by the U.S.' escalating debt will cause investors to shift away from these temporary investment vehicles and back into the safety of gold.
TGR: When we talked to you in February you were predicting an average 2012 gold price of $1,725/ounce (oz) and $34.50/oz for silver. Have those numbers been revised since?
PK: We're maintaining those targets until some macroeconomic things evolve and answers begin to be known, particularly concerning the skepticism within the market about the Eurozone and U.S. debt issues. There are also several significant elections globally, including the U.S. presidential election in November.
TGR: You must think that gold's going to have a strong finish this year then?
PK: That's correct. We are pretty optimistic for a strong run later this year and view the current lull in precious metals and relative equities as only a temporary phase of market sentiment.
TGR: Small-cap resource equities are down an average of roughly 40% since September 2011. Why should investors continue to hold these companies?
PK: The overall perspective of the investment community is that we are in a fairly bearish cycle. Fortunately for investors, markets are never static and there's always an upside. I prefer the view to buy and accumulate when no one else believes there is money to be made. Buying at opportune times such as now positions one ahead of the herd and can churn much more profitable investments. If investors are well positioned and ready to take advantage of the market, they can be very prosperous in the long run.
TGR: You like sizeable and growing mining-friendly jurisdictions. What are some of the companies you're following that fit those terms?
PK: Geologix Explorations Inc. (GIX:TSX; GIXEF:OTCQX) has a great gold-copper resource base in Mexico. In addition to its huge 187 million ton resource containing 4.5 Moz of gold equivalent, the company recently identified additional targets about 1.5 kilometers north of its resource boundary. Several of these anomalies are looking quite interesting from their geophysical signatures and preliminary sample results. The exploration team is currently taking additional prospecting and chip samples on the targets and will continue sampling and delineating them through an upcoming 5,000-meter (m) program.
TGR: When should we know how much this new mineralized zone could add to its Tepal project's resource?
PK: The company is aiming to start its shallow drill hole program later in August. I expect to see assay results in late September or October and that will give us a good indication of grades and potential. A secondary program would follow up on successful results.
TGR: Geologix has a prefeasibility study due in the third quarter. What does that study need to show in order to move the needle at the company?
PK: The study should confirm that the economics of Tepal are robust. The project has a strong net present value, a long mine life and good production numbers at low operating costs. Unfortunately, Geologix has a lower market cap of about $30M at this time and capital expenditure (capex) requirements pushing $400M. It could be a severe challenge to get project financing. However, it should be able to use the prefeasibility study to its advantage in negotiating its financing options.