Mix one part mining analysis with one part corporate finance, then add 25 years of investing experience to get executive chairman and founder of Augen Capital Corp., David Mason. In its first 10 years, Mason's merchant bank completed 250 investments and financings and emerged as an industry leader in tax-advantaged flow-through investments in Canada's resource sectors. In this exclusive interview with The Gold Report, Mason discusses market fears, a weakening U.S. dollar and "the most important factor" that will drive gold ahead of the commodities pack in 1Q09.

The Gold Report: Why don’t you give us some of the reasons that you’re bullish about '09?

David Mason: First of all, I ascribe to the idea that the world's still going to require basic materials. We still have a very strong economy in China from all accounts. I read that China is going into a “recession” and will only grow by 8% or 9% in '09. “We would be so lucky!” I think it's going to be true of a lot of the emerging economies.

The Chinese are extremely good commodity traders; I think iron ore is probably a very good example. They’ve basically walked away from the iron ore market, and I would expect they would be back in again this spring because it is certainly an essential for their economy.

I noticed the same thing with some of the base metals in January of '04. You recall we had a really strong run up from August of '03 through to about the end of January, and I saw the Chinese traders walking away from the market for about six months before coming back in again.

This is probably going to be the leading event that will happen in '09. The emergence of Asia as a prime buyer of basic commodities and, at the same time, people are absolutely worried about liquidity. One of our directors who has a home near Zurich was at the Munich Resource Show in November, and he came back with the idea that there was only one interest in the whole show—and that was gold and silver coins (i.e., very conservative).

So it shows that people’s only interest, at this point in time, is in what they can liquidate. And gold producing companies, I think, are going to be the winners in the first part of '09. But I think that the other commodities are going to take off after the first half of this year.

TGR: Do you mean the base metals or the juniors?

DM: No, I think base metals and steel additives. Coal, I don’t think so, but I think the base metals—being copper, lead, zinc and steel additives (primarily nickel and moly)—will have their day again later in '09.

TGR: Why later? Why not February?

DM: Because of the lag between the buying of materials and actual processing; it usually takes some time for it to feed through the system.

TGR: Now you mentioned you think the gold producers are going to enjoy the first quarter of '09?

DM: That's right.

TGR: Do you see that continuing? We talk to a lot of different people, and I’m hearing all sorts of comments regarding the first quarter of '09 being strong for gold and gold producers. Do you see it continuing, or do you see it pulling back with some down draft in the markets overall? Do you think we'll see that same need to liquidate that we saw in '08?

DM: I don't think so. One of the big drivers in the world economy, of course, is what's happening with the U.S. real estate market. I noticed the latest numbers indicate that the prices are down again in November. But, as someone pointed out, this is largely because the liquidation is still going on. People have thrown in the keys and have decided to just walk away and the mortgage holders are selling it for whatever they can get. That's bound to be a downer, but it doesn't mean that the overall real estate market's going to be anywhere near as severe. Is there any more than two or three months of that liquidation in real estate in the U.S.? I kind of doubt it, and that's been a primary cause for uncertainty in our whole economic environment. That's my view.

TGR: What do you think is going to be the driver for leading gold and gold producers higher in the first quarter of the next year?

DM: Well, there's still a huge amount of money sitting there ready for speculation. Everybody that I talk to, very astute investors, are sitting there just waiting for the next move. When it happens, I think you'll find a major turn in speculation again. We've never seen so much capital sitting on the sidelines as this time around.

TGR: That's true. What do you mean by a 'turn'? I look at a lot of the producers like Goldcorp (TSX:G) (NYSE:GG) or Hecla Mining Company (NYSE:HL) that have more than doubled off the bottom of October. That’s a pretty significant move. What do you think these people are looking for?

DM: The first to move is always the majors. Then you have your second-tier gold producers and then your explorers. We haven't seen the second-tier gold producers move yet, so I think that would be an obvious area to target. It's not the focus of what we do; we're involved at the exploration stage.

The exploration stage companies have been absolutely devastated, so a significant turn in speculation in the gold market—which has been strong right now—but a move to, let's say, $1,050 gold, will pump up the first-tier gold a little bit, the second-tier gold a lot, and the explorers will get back into orbit again. I'm sure, like me, you've looked at all the stats.

On the Toronto TSX Venture exchange, there are about 750 companies that are really active. There are a lot more than that, but as for the really active ones, most of them are down significantly; and the majority is down as much as 90% from their peak in '08. A lot of those companies—meaning at least 30% to 40%—are even trading below their working capital. So they're sitting there with working capital less than their market price, good enough cash to keep the company going for the next few years, and a great resource. So any kind of a turn in gold or silver, as a commodity, is going to have that ripple effect throughout our whole business.

TGR: What specifically are you looking for to drive gold to $1,050? What sort of events would drive this?

DM: I'm of the opinion that fear and the relationship with the U.S. dollar is, quite frankly, probably driving no more than 40% of the gold market. Fear will drive it, and a weakening in the U.S. dollar, which some people are betting will happen—those are only two components. Now the most important factor is just straight supply-demand imbalance.

The major companies are having one heck of a time finding enough reasonable targets. It used to be that the majors were looking for million-ounce deposits. Now that isn't enough. In order to get the growth they need and to support their infrastructure, they need three million-ounce deposits and those are extremely hard to come by.

I once did a calculation that if every wealthy individual on this planet (say 5% of the population) were to put 5% of his/her assets into gold, it would take something like 30 years of current production for demand to meet supply. So I think, because it is a store of value, it doesn’t necessarily have to be fear driven. During the 1930s, one of the greatest professions was being a geologist because gold (aside from the fact that it was fixed at $35 an ounce) was one of the few commodities that was stable; and I think we might see this even with freely traded gold markets.

TGR: What is the difference between your merchant banking portfolio and your consulting assets?

DM: You're familiar with the flow-through program in Canada?

TGR: Yes, I am.

DM: And what we did going back almost from inception — I've been involved in flow-through financing since the early '80s, actually — I started doing small limited partnerships and we grew it from, basically, our shareholder base buying the limited partnerships to a much bigger platform.

What it amounts to is if you have a limited partnership that buys a portfolio of flow-through shares, everybody gets the write-off — it's passed on to the individuals. So, even though all the companies that are being bought are small companies, it's become really big business in Canada. Above all else, our strength lies in organizing, financing and promoting junior resource companies. We do that better than any other country in the world. At this last peak, we were raising about $6 billion a year, which was, and remains, more than all other countries combined. So, considering that we're only a population base of 33 million, which is about one-twelfth of that of the U.S., it's quite a feat.

Funds like CMP and Front Street raise between $100 and $200 million annually in their flow-through funds. As a business model, it's a very good one for us to have. We've been able to grow it from almost a mom-and-pop business to one that's widely sold. We also took on a partner, BluMont Capital; and, through them, we got into four of the five major banks in Canada, which is quite a big move for us as a company. The banks in Canada control most of the businesses. It's very different than the U.S. and the banking system in the U.S.

In 2007, we raised about $30 million. In a good year with the syndicate that we’ve put together, I would expect that it could be much, much higher than that. There's no reason why we can't be really quite competitive with CMP and Front Street. So that's one significant part of our business. I look on it as being a good source of funds to keep Augen Capital (TSX.V:AUG), a public company, alive and healthy. It's very profitable and not only pays the bills, but we get a good rate-of-return on it. At the same time, when you have a public company, you have to be able to create some excitement and the real excitement is going into companies like Energy Fuels Inc. (TSX:EFR), which we created a few years ago. I don't know if you're familiar with the Energy Fuels story.

TGR: I am.

DM: How it started was in the late 1990s we bought a company; it didn't work out too well, so we took it over and reorganized it and went out to seek new opportunities. Energy Fuels came out of that looking for opportunity. So what was a 9-cent company in January of '06 became a quarter billion-dollar company within a year. And that kind of excitement is what really does attract people to Augen Capital.

The majority of investors don't have the opportunity to buy into things like that. If they see a company that's well managed and is going to be profitable (particularly through times like we're going into), and will capture upside in some of these merchant banking type investments we're making, it's pretty attractive. Quite frankly, I find more investors outside of Canada than inside. There are a lot of experts here; but, because people look on Canada as being a leader in the junior resource financing business, the thought of having one investment that does what they're looking for is quite attractive. Augen Capital has a large number of European shareholders. Our U.S. shareholder base is also growing.

What we look for, in a nutshell, in the resource LP type investment, are companies that are going to be very liquid so we can trade the shares or get cash out within a year to 18 months — that's the name of the game. Most investors are in the LP for the tax write-off and at least a modest rate-of-return. The companies we invest in appreciate that.

We work with the issuers to ensure there's an orderly transition out. Our rates-of-return in the LPs are consistently in the top three; the two we did in '08 are number one in Canada and we've held that position. Some have not done well, but that's the name of the game; we've very consistently been in the top three, which I feel good about because we're competing against — well, for instance, CMP has reams of people working for them, plus they have a sister company, Dundee, looking for resource opportunities, and portfolio managers and so on. For us to consistently be at least as good as them is quite a feat, even though they're raising many times more money than us. I feel good about that. With the merchant bank’s types of investments, what I'm really looking for is how to make an investment in a company that will become the next new mining district. In essence, Energy Fuels was that; the district, in that case, being through Western Colorado, Utah and down into Arizona.

TGR: Yes, the uranium belt.

DM: The uranium belt there. With Augen Gold Corp. (TSX.V:AUJ) (we started it as a private company and took it public via an IPO) we've got a 45-kilometre long belt of contiguous claims in some of the most prolific gold producing areas in Canada, and it lies along the western extension of the prolific Kirkland Lake—Larder Lake break, parallel to the Porcupine Destor fault. There's no reason there can't be some major discoveries along that belt. We've already have a historical (non-NI 43-101 compliant) resource we're working on at the old Jerome Mine, where we've done some drilling and increased the potential resource. So that's typical of our type of investment.

We've also created a company called Polar Bear Exploration, another private company, and it's in the Hudson Bay/James Bay area of northern Ontario, which contains a suite of magnetic anomalies in favorable rocks that lie within the same geological belt that contains the nickel mines at Thompson in northern Manitoba and Raglan in northern Quebec. We staked our claims in Polar Bear following interpretation of an airborne geophysical survey over an area some 140 by 50 km.

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