Another company with a great portfolio and lots of properties is Allied Nevada Gold (ANV.TO). This is a relatively new company, more or less a spin-off from Vista Gold that was combined with a bunch of assets owned by a man named Carl Pescio, who is working with Allied now. Carl is an excellent prospector whom I have known for years. He’ll pull in more and more opportunities for them as they go forward. I know they’re working pretty aggressively on the Hycroft property right now, and are hoping to put that back into production. They’re a more advanced group than we are and hold a bigger land position. They are well financed too, and not a bad company to place a bet on.
TGR: Do they have low-grade gold? RP: The Hycroft property is quite low-grade, but it’s very shallow, so the stripping ratio is very low. The metallurgy for some of the ore is favorable to heap leaching. They have a lot of low-grade refractory material, and would benefit substantially from a new technology that could heap leach or treat refractory gold ores.
One of our partners, Fronteer Development Group (FRG)—Mark O’Dea's company — is now quite active in Nevada and is run by an excellent team of people here in Reno. I know them all very well. They’re doing very good work on our joint venture, and exploring in a number of other places as well. They have one property in a deal with Newmont. A lot of their share price is tied to a uranium district play in Labrador, through Aurora Energy Resources (TSX:AXU), in which Fronteer has a large stake (42%).
They have had some problems there recently and have been punished quite a bit in the marketplace — maybe to an extreme. For that reason, they may be undervalued. I know they do good work and have a good chance for success here in Nevada.
TGR: All of these explorers are Nevada-based. Are there companies outside of Nevada that you find are interesting? RP: I like Exeter Resource Corporation (AMEX: XRA,TSX.V: XRC, Frkt: EXB). I’m impressed with how they continue to come up with interesting projects. They had the Don Sixto property in Mendoza province in Argentina, and when things turned sour there, they pulled a rabbit out of the hat with the Cerro Moro Gold-Silver Project property in Santa Cruz province, also in Argentina. Now they’re drilling what sound like very good holes in Caspiche in Chile.
They seem to be quite well managed. They’re certainly producing some very good results, and their share price reflects that. They’re still doing quite well.
TGR: To what do you attribute the fact that they keep finding interesting things?
RP: They must have a group of highly experienced geologists who know property. Cerro Moro came to them, as I understand, through a deal they made with Anglo Ashanti ( AngloGold Ashanti Limited (NYSE: AU). When Exeter began to drill at Cerro Moro and were producing good results, they reached a point where Anglo had a back-in right. For whatever reason, Anglo chose not to exercise their right.
TGR: Do you have any predictions about where the price of gold is going? RP: I try not to focus on the ups and downs from day to day, week to week, or even month to month. Instead I watch the fundamentals of the U.S. dollar and paper currencies in general, and the demand for metals in the developing worlds — China, India, Indonesia.
When you look at all of that — assuming the U.S. trade deficit with China continues to grow along with ongoing demand for metals in that part of the world — it points toward long-term upward pressure on gold prices. Metal prices won't be high like this forever, but we are seeing a meaningful economic boom in that part of the world. It may well last for a long time.
TGR: Are you talking about the value of using gold as a hedge against inflation or about base metals for developing infrastructure? RP: China is now the largest consumer of every major metal — iron, aluminum, copper, lead, zinc, molybdenum, tungsten — many of which are used in construction. But the economic boom has raised the standard of living, making it possible for many to afford precious metals. If enough people in China, for instance, purchase just a little bit of gold or silver, that translates into a huge demand.
TGR: This might be a good point to discuss your company, AuEx Ventures. RP: As you go down the food chain from seniors, to mid-tiers, to small juniors, which describes AuEx Ventures at this stage, the risks for economic success go up dramatically. That's why we’ve chosen our particular business model.
We know that most of our projects won't be successful. To explore their projects, companies have to go the markets and raise money, and you can only do that for so long. We have chosen to minimize that by using joint ventures instead.
We acquire properties, develop them and then get companies like El Dorado Gold Corp. (ELD.TO, EGO-AMEX) to expend the higher risk dollars. Our partners pay to explore and we accept dilution in our equity ownership for the properties. Our shareholders don't have anywhere near the same degree of share dilution.
This approach has made it possible to keep our share structure tighter. In the long run, as we and our partners make discoveries and create real value, we will realize share price appreciation given our tight share structure. In our view it's working; our share price has held up well recently. We’re still above a couple of dollars, have $4 million in the bank, and we’re doing a lot of work this year. Our partners will spend well over $7 million on our projects. That’s what it takes to make discoveries.
TGR: Are the junior explorers really being hurt by the shortage of qualified geologists?
RP: That is clearly a problem. Things began to get difficult in 1997 when the price of gold started to decline. Companies were laying people off. There were a lot of acquisitions. Whenever the larger companies would buy a company, the exploration staff of the company they bought would be one of the first groups they let go. Many geologists left the business or retired.
Now that metal prices are up and the demand is up, we lack skilled personnel. The universities don’t have as many geologists in their programs; it’s improving because the jobs are there now, and the pay is very good. New masters graduates of the better schools start at $75,000 to $80,000 a year. More young people are entering the business again and we need them.
TGR: Is it common for CEOs to be geologists? RP: It’s more likely to happen among the juniors. If I were an investor, my first question would to ask which of the companies do geologists run? And how much experience do they have? I'm not saying lawyers, accountants and financial types couldn't manage a company but, I guess I have a bias; I would be looking for junior companies run by geologists with exploration experience. Alan Branham at Midway Gold Corp. (MDW) is a geologist. I like Alan, know him well; he’s a bright, capable guy.
TGR: We interviewed Rick Rule of Global Resource Investments this morning, and asked him when we would see some real price appreciation in the gold juniors. He said to focus on the companies themselves, not the sector. The sector will underperform because too many exploration companies took a bunch of money and aren’t discovering anything. He also said that a couple of large, exciting finds would re-engage investors. Do you agree?
RP: I do. Fruta del Norte is really the only big new discovery. Beyond that there hasn't been much. The only new greenfield discoveries that I am aware of that have been identified in Nevada are Long Canyon and maybe Midway's Spring Valley.
There hasn't been a really major new discovery in Nevada that would serve as the lightening rod to pull others in and get people excited. A discovery by one of my peers is good for all of us.
TGR: When do you think we will begin to see consolidation? RP: What typically happens is that people develop assets, then run out of steam in their ability to fund and finance them. Somebody a little bit bigger decides to acquire the asset, take the dilution and grow their company.
When I was with Santa Fe and Homestake, we were looking at merger partners all the time with advanced properties. You have to grow your company in any one of a number of different ways; you would prefer to do it organically through discovery with your exploration team because that's the way you can add ounces to your portfolio at the lowest cost per ounce. But when discoveries are not being made or aren’t enough, then you acquire. Some of that is happening now but it’s hard to say when the pace might accelerate.
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