"The case has never been better for having a position in precious metals as a store of value," says Mike Niehuser, founder of Beacon Rock Research, LLC, especially in light increasing amounts of government debt. In this exclusive interview with The Gold Report, Mike talks about his goal of finding mining stocks with good management and assets with defined pathways to value creation and two in particular that he's keeping an eye on that "have excellent exploration upside."

The Gold Report: Mike, has your outlook for precious metals changed given the recent strengthening of the U.S. dollar?

Mike Niehuser: From a U.S. perspective, we still see gold between $900 and $1,200 an ounce, and continue to believe that we could see gold at $1,500 by year end. Likewise for silver, $15 to $20 an ounce appears to be a reasonable trading range, and with Silver we would expect to have greater volatility. The case has never been better for having a position in precious metals as a store of value. With the bailout of Greece or Portugal, the euro may be in trouble, and yet the U.S. is also becoming an increasingly uncertain place to do business.

So long as the U.S. is perceived to be relatively more stable than most other parts of the world, and the federal government can manage its problems, the U.S. dollar will periodically strengthen and you may expect volatility with metal prices. The uncertainty being generated should have the offsetting effect of increasing the attraction for precious metals as a store of value, but over 2010 to the longer term, increasing amounts of government debt relative to a constant total supply of precious metals will allow metals to remain a store of value.

TGR: Is this a good time to invest in mining equities?

MN: We have a bias that over the long run, for mining stocks with good management and assets with defined pathways to value creation. So long as metal prices are above cost of production, we are in business, which seems to be the case today. Look at it this way, would you want to hold assets in the form of I.O.U.s from the government that has no will to stop the printing press, or would you rather have an interest in an outfit that actually produces hard currency?

The difficulties faced by mining companies to profitably produce gold and silver—read hard currency —is what makes them rare. In the current environment, holding shares of mining companies is an option to holding physical metals or in an ETF. The key to stock selection is locating companies that are either on a path or have achieved profitable production. Certainly, the deleveraging over the last couple of years has even taken down companies that have met investor expectations, and we may not be out of the woods yet. So yes, we don't see a bubble in precious metals or mining stocks, and so stock selection is still important.

TGR: What silver mining companies are you recommending to investors?

MN: There are two that come to mind. Minefinders Corporation (TSX:MFL;NYSE.A:MFN) has achieved their first profitable quarter mining gold and silver, or silver and gold, depending on metal prices from their open-pit Dolores mine near Chihuahua, Mexico. We also like Alexco Resource Corp. (TSX:AXR;NYSE.A:AXU), which has an early jump on constructing their modest but high-grade silver and base metal underground mine in the Yukon Territory. Both companies have excellent exploration upside with solid balance sheets, good management, and relatively fewer shares outstanding compared to other companies in their space. Interestingly, both companies are not trading far from where they were without significant improvements and at much lower metal prices.

TGR: Mexico has been getting a lot of bad press—do you have concerns?

MN: Look, sure, but I have concerns about the U.S. as well. We just got back from visiting Dolores and actually it seemed calmer than our last visit. Interestingly, it appeared that given room availability at the hotel and number of small airplanes in the hanger at the airport, they may be experiencing their own economic downturn. This may be both good and bad; we would expect that the government would appreciate a stable long-term operator like Minefinders. They have successfully relocated the village and the blockaders from years ago were nowhere in sight. You may attribute this to management working with the federal government and the locals.

TGR: So why would Minefinders, for example, be trading at lower than expected levels?

MN: Once again, Minefinders' stock is now trading at a price that is close to that when they had just finished the road to the project prior to construction. So that is a good question. They are now in production and it would appear to have worked out the bugs from startup and have recently completed their first earnings-positive quarter. This is a somewhat amazing statement to say that a mining company is now profitable.

TGR: If Minefinders keeps mining ore should the value drop from here?

MN: Only if there was no upside for exploration or increasing recoveries or if metal prices declined as they are unhedged. This should be a pretty good year from Minefinders for a number of reasons. Management reports that they have solved their screen issue of last year and that they should be processing at the 18,000 tons per day rate. In addition, having moved the village, they are now in position to pursue higher grades of both Gold and silver.

Silver grades should double through the end of the year and gold grades should step up in the second half as they move into higher grade areas of the pit. It will be important for investors to watch recoveries. Gold is fairly easy to recover in the leach process but Silver can take longer. On the whole, they have reported that leaching has met their expectations, but they learn as they go, and this is a good reason for their contemplating a mill to boost recoveries of higher-grade silver.

TGR: Could the cost of a mill be a concern to investors?

MN: It may be a concern for some. Minefinders is in the process of reviewing different scenarios of different types and sizes for a mill operation. They question is not an easy one as the terrain is a factor and power is always an issue. The nutshell for a mill is to boost recoveries of higher-grade silver that otherwise may be left on the leach pad. Even more important and not in the current resource model is the potential to process even higher grades from underground and outside the current resource model.

This expansion of the resource underground or expanding the pit to the south plus the potential for increasing recoveries does not appear to be in the stock price. The company is also profitable and has available credit and fewer shares outstanding, so they have options to make the best of the opportunity.

TGR: What is the life of the Dolores Mine?

MN: As contemplated in the Feasibility Study, the life of mine is 15 years. This will change with the mill; it could actually shorten by increasing processing or be extended with additional resources added to the project. Investors should also know that Minefinders should be making decisions on its La Bolsa heap leach project on the Arizona-Mexico border near Nogales. This was Minefinders' initial project that was put on the back burner after Dolores was discovered.

We have seen La Bolsa as well and it is a relatively simple project. La Bolsa could produce 40,000 to 50,000 ounces of gold over four to five years with relatively little cost. Potentially more important than La Bolsa, Minefinders reported on its new La Virginia target, which is a Dolores look-alike but with potentially higher grades of gold and silver. This should address some of your questions about Minefinders potential for value creation beyond the start up of Dolores.

TGR: Have you seen Alexco's project recently?

MN: We were up there last summer for the analyst tour of the Bellekeno underground work. It is still a little cold in the Yukon, but they are reported to be experiencing an unusually early spring. This should have allowed them to get a jump on construction having buttoned everything up for the winter and put them in good position to move into production in 2010. Unlike Dolores, Bellekeno is part of the Keno Hill Silver District, which has completed infrastructure from past production. In addition, Alexco is mining some of the highest grades of silver in the world, which allows them to build a relatively modest-size and low-cost processing operation.

TGR: So Minefinders and Alexco are apples and oranges?

MN: As far as being different types of silver projects and locales, you are correct. In addition to high grades of silver with base metals, the Yukon Territory is becoming more interesting to investors based on recent discoveries in the area plus the area's long mining history and friendly political jurisdiction. Alexco is also a bit different from a management perspective as Minefinders are exploration geologists while Alexco has the unique background as an environmental services firm, which is how it came into ownership of the Keno Hill Silver District.

TGR: Why was it important that Alexco had environmental expertise?

MN: Alexco acquired the Keno Hill Silver District from the government with the agreement to clean up environmental damage left over by previous operators. So Alexco will be paid by the government in the Yukon to clean up the district while having the opportunity to mine resources to current standards.

The Keno Hill Silver District has past production of over 200 million ounces of silver averaging about 40 ounces of silver per ton, yet the district has never been comprehensively explored with modern mining methods. We would expect that the market is only giving value for Bellekeno, while there is potentially much more beyond the initially identified resource for about a five-year mine life.

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