Written by Gold Report
The lure of platinum is driving Energy and Scarcity and Outstanding InvestmentsEditor Byron King's investment choices for precious metals. In this exclusive interview with The Gold Report, he explains the looming demand and global opportunities. "We could see platinum prices skyrocket," he says.
COMPANIES MENTIONED: AFRICAN RAINBOW MINERALS LTD. - ANGLOGOLD ASHANTI LTD. - FREEPORT-MCMORAN COPPER & GOLD INC. - GOLD FIELDS LTD. - IMPALA PLATINUM HOLDINGS LTD. - RESERVOIR CAPITAL CORP. - SCORPIO MINING CORP. - STILLWATER MINING COMPANY
The Gold Report: Let's start with politics. In your opinion, would a Republican president in 2012 be good for the gold price?
Byron King: Whether Obama remains in office or a Republican wins the election, it is going to be tough to deal with the inflation and the built-in spending that is driving gold prices up. Republican or Democrat, either way, if you want a stable gold price you are going to be disappointed. If you want to see higher gold prices, you are going to get your wish.
TGR: Do you think we could see dramatically higher inflation?
BK: I think that's already cooked into the pie, yes. For the last 18 months, much of U.S. federal debt has been purchased by the Federal Reserve. It's not people buying U.S. Savings Bonds who are funding the deficit spending by owning the national debt. The Federal Reserve is just issuing new money into the system. That money is floating around the world somewhere and it's coming back in terms of inflation. We see it in the rising prices for energy, especially oil, plus gold, silver and other commodities. We see it in inflation in other currencies and trading zones—the Chinese yuan in Asia, the euro in Europe and even in South America's otherwise strong currencies. These things all reflect the inflation that's coming out of Washington D.C. to fund U.S. deficit spending.
TGR: The CFTC (Commodities Futures Trading Commission) said at the end of June that money managers have slashed their net bullish positions in gold futures to the lowest point in more than four months and silver to the lowest point in more than a year. Do you think that will affect the price given that hedge funds seem to believe in the economic rebound and may be starting to get out of gold and silver?
BK: I think that people trade in and people trade out. What we're seeing is a thought process that says, "We've had a nice run and it's time to take some profits off the table and show some gains to the bottom-line." This is a blip in the long-term upward trend. I go back to the point that inflation is already baked into the pie.
TGR: Gold hit a six-week low to end the second quarter, but was up 5% and led all precious metals during the quarter. Meanwhile, silver was down 7.5% after nine straight quarterly increases. What performance do you expect from both metals in the third quarter?
BK: I think that both will trade in a range without any real breakouts. The world economy isn't panicked enough to drive prices through the roof. But, it also isn't healthy enough for people to decide that they would just as soon liquidate their gold and silver positions and invest that cash somewhere else. That's because the next question is: where is somewhere else? What are the latitude and longitude of "somewhere else" that you would invest if you liquidated?
TGR: You recently wrote in Agora Financial's Daily Resource Hunter that "Smart money is holding gold. Never sell the real metal. Hang tough with the mining company shares." But equities, by and large, have vastly underperformed gold in 2011. Why aren't you telling people to sell?
BK: I was writing that for a retail audience, not for professional traders. When I say, "don't sell the real metal," I mean if you own gold, keep it in your safe deposit box. Real metal is the absolute last thing you want to sell, because looking 2, 5 or 10 years out, you may never ever see it again at current prices, and in the worst case at any price. I think that the scarcity of the physical stuff is that profound, and it's going to be even more profound as the rest of the world begins to catch on.
As far as hanging tough with mining company shares, I mean that, too. Implied in that statement is the idea that you've got to grit your teeth and deal with the fact that mining company shares have lagged the performance of gold over the past couple of years. It's annoying from an investor's standpoint because the mining companies are mining gold, which is going up in price, but so are the companies' costs for energy, labor and other production factors.
I have selectively told people to sell a couple of mining shares in the last six months or so. I gotOutstanding Investment readers out of two of the large South African players, AngloGold Ashanti Ltd. (NYSE:AU; JSE:ANG; ASX:AGG; LSE:AGD) and Gold Fields Ltd. (NYSE:GFI). Still, overall, I'm not telling people to sell gold mining shares because, what do I tell them to do instead? Where do they go with the money? I'm nervous about walking away from the gold miners in this particular precious metal environment.
TGR: You recently spent time touring projects in southern Africa. Did you return from that trip with any new investment ideas that you could share with our readers?
BK: South Africa is investable if you understand the level of risk. The large, deep gold mines have profound problems because they're large and deep. There are limits to how deep you can put human beings underground and have them work. There are limits to what technology can do in those deep, very hot, very stressful environments. When you dig holes three and four km. deep, you get these things called rock bursts where the walls explode inwards because of the pressure of the weight of the rock above. It's very deep, very dangerous mining. I think that within a couple of years, we could see a dramatic falloff in overall gold production out of South Africa, which would affect the world gold price.
In terms of the good news, the best investable item I brought away from two recent trips to South Africa is platinum. South Africa is one of the world’s most significant platinum producers. There's a looming shortage of platinum, which is used in the chemicals industry, in the automotive and electronics industries and in jewelry. It's become an investable item as well, in terms of bullion.
There aren't enough large platinum projects to replace what is being mined out. We could see platinum prices skyrocket. In terms of larger companies that have an acceptable risk profile, I recommend Impala Platinum Holdings Ltd. (JSE:IMP). I think it's going to do well over the next two or three years.
TGR: Is it on the London stock exchange?
BK: Impala trades on Johannesburg, London and on the Pink Sheets in the U.S.
TGR: Do you have some smaller platinum names?
BK: Another one that an Agora colleague has recommended—he sort of beat me to it—is African Rainbow Minerals Ltd. (JSE:ARI). It's a mining conglomerate. They mine iron, titanium, coal and platinum. I don't want to say it’s small, because it's a fairly substantial company in South Africa. It is very well run, a solidly positioned company. Impala Platinum and African Rainbow are two nice ways to get exposure in the South African platinum space. You can look elsewhere in the world for platinum, but I think the South African plays are among the best.
TGR: As far as North American companies producing platinum, does it comes down to Stillwater Mining Co. (NYSE:SWC)?
BK: Yes, in North America there's the Stillwater play. It's a $2.4 billion company that's done well over the past couple of years.
Here's what I think about platinum overall. It gets back to the medium- and long-term future. If someone discovered a platinum deposit tomorrow morning in Montana, Canada or Alaska, how long would it take to get that mine up and running? How long would it take to get the processing system up and running? We're looking at 10 to 15 years.
As platinum goes into shortage in the next few years and prices skyrocket, you want to be positioned in the companies that have the best chance to move quickly. You're looking for the best ideas in the here and now. Those two African plays are at the top of the heap. If you're too nervous about South Africa, then Stillwater will also do fine in a rising price environment.
TGR: In the April 6, 2011 edition of Energy and Scarcity you wrote about Scorpio Mining Corp. (TSX:SPM). Do you still recommend Scorpio? And, what's the next step for that junior?
BK: I like Scorpio and would still recommend it. Trailing price earnings have gone from 8 to about 12, which is still low. It is a smallish miner, but it's not one of those mining development plays you see all over the landscape. It has a true up-and-running, producing mine. When the company initially built the project, it installed capacity, poured the concrete, did all the design work for future expansion. And the future is now. It's expanding.
When silver and lead zinc prices were higher a couple months ago, Scorpio was up around US$1.60 a share. Now it's in the US$1.45 range. I think it still has an upside for the patient investor. If you're looking for something to hang on to for the next two or three years, I think you could do worse than Scorpio Mining. They mine; they produce a profit. Can you imagine that, a small mining company that produces a profit?
TGR: According to Google Finance, it has a P/E ratio of 5.5.
BK: Going forward, yes. Scorpio is profitable; the numbers appear to be improving and it'll stay profitable. It's going to be selling product into a strong market. As far as I know, the political and the crime issues in Mexico haven't affected Scorpio, but those factors are a caveat on investing in Mexico.
TGR: Are there other precious metals names you could share with our readers?
BK: I just spent a week in Serbia, looking at a company I've followed for a year and a half now calledReservoir Capital Corp. (TSX.V:REO). Reservoir is several different things wrapped up in one company. It’s an energy play in terms of hydropower development. But it also controls significant land position in the Balkans, next to what was once the largest copper mine in Europe. Reservoir is spinning off its mineral side into a group called Reservoir Minerals. Right now the way to play it is to buy Reservoir stock until they spin off Reservoir Minerals.
Reservoir has a 20-square-mile position over a known copper district adjacent to a place called Bor, an old mining town in Serbia. Nearby, it has a very strong land position in a historic gold mining district called Deli Jovan. This was the home of several historic gold mines from the early 1900s through the late 1930s. The old, Serbian gold mining company stopped gold mining not because it ran out of gold, but because it ran out of time when World War II came along. It sealed up the mines and the former Yugoslavian government never reopened them. It wasn't part of the five-year plan. Just last week I saw some of the operations. Reservoir and its subsidiary, Reservoir Minerals, have a strong copper and gold development future.
TGR: Are there any ownership security risk in Serbia?
BK: Serbia is a poorly understood place. But, it's working very hard to achieve EU membership and with that comes the legal obligations of having a property system and a title system that meets EU standards.
In terms of legal, claim and title security, the Reservoir people have a very strong relationship with the Serbian government. As an example, Reservoir arranged a meeting with the Serbian Prime Minister for me and a couple of other Reservoir investors. Management has a good relationship with the government.
TGR: Three visits in a year seems like a lot. What’s behind that?
BK: The first visit was to see things. The second time I was invited by Serbia's Minister of Energy to speak at an energy conference in Belgrade. While I was there I went out to see other things that I hadn't seen or hadn't seen enough of the first time around. The third time I led a group of Energy and Scarcity Investor readers to show them what is going on and let them make up their own minds.
TGR: Will the gold assets be rolled into Reservoir Minerals or will they be in another company?
BK: Currently, they are part of Reservoir Minerals. How things will play out is still a bit of an open book. The copper is being developed in cooperation with Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX). Freeport has a huge drilling program going on right now; in fact, the drilling rigs were on site last week during our visit. Reservoir has another joint venture on the gold mining side, with a London-listed company called Orogen Gold Ltd. (LSE:ORE). It's a bunch of Irish guys who understand gold mining in this kind of geology.
TGR: Is it part of a greenstone belt?
BK: It's right at the edge of a mineralized Paleozoic gabbro complex. Geologically it's good, solid hard-rock mining. It's right up the alley of these Orogen guys.
TGR: It would probably be very amenable to high gold recoveries.
BK: There's a lot of very good data, so far. You know the old expression, "The best place to build a mine is next to another mine." Well, this place has historical gold production from about 1904 until World War II. In its day, the Deli Jovan gold mines made Serbia one of the wealthiest countries in Europe. By the 1910s, the Kingdom of Serbia was so rich that it made the Austro-Hungarian and the Turkish Empires jealous, which had a lot to do with the origins of World War I. Historically it's a very rich place. Some of the assays from the old historical data on the Deli Jovan mine are up to 200 g/t.
TGR: In a couple of weeks you are scheduled to speak at an Agora Financial investment symposium in Vancouver called Fight or Flight: Your Capital at Risk. What do you plan to talk about there?
BK: My talk is titled "Re-Mining the Wealth of Nations Past; Discovering Assets Hidden by History." I'm going to give several examples of mining or resource plays that were simply lost to history over time, and that are now coming back into vogue. It's the idea of what's old is new again.
TGR: Do you have some parting thoughts on gold and silver and precious metals in general?
BK: Considering the uncertainly of government currencies such as the dollar, the euro, the yen and the yuan, and even commodity currencies like the Canadian dollar, the Russian ruble, the Brazilian real, you must understand the need to have solid exposure to precious metals in your own physical holdings of metal. Take delivery. Don't comingle it in somebody else's vault. That goes for gold, silver and platinum—and invest in mining shares.
I just don't trust the politicians to do the right thing. Nobody truly knows what the right thing is. I don't think the current group of political leaders will be able to steer the ship through the rocks without punching a few holes in the hull. And if you're an investor out there? Well, you may as well have a steerage ticket on the Titanic. There won't be any lifeboats for you. You'll have to come up with your own means of saving yourself.
Byron King is the editor of Outstanding Investments and Energy & Scarcity Investor. These publications reach over 60,000 paid subscribers. He is also a contributor to the Daily Resource Hunter. King is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, Marketwatch.com, Fox Business News, and PBS Newshour.