TGR: Are you describing a scenario in which China becomes the financial market for metals juniors?

LR: It's very important to differentiate between the government and the hundreds of publicly traded companies based in China. In some cases they're partly owned by the government, but in every way, they act as private enterprises. Those companies are definitely on the prowl. I see evidence of them in every part of the world—Africa, Canada, South America. They will become more and more active and a bigger factor in terms of junior takeovers.

TGR: So the strategy you're pursuing could be really wonderful if the metals markets continue up. These Chinese miners competing with other capital should make stocks respond more positively.

LR: Absolutely. And getting new supplies of metals is critical. Going back to gold as an example, the gold mining industry pulls 80 million ounces of gold out of the ground every year. If they don't replace it with 80 million ounces of reserves, the industry shrinks. In fact, over the last few years the rate of production has exceeded the rate of new reserves, so the gold mining industry overall has shrunk. Barrick Gold Corp. (NYSE:ABX) and Newmont Mining Corp. (NYSE:NEM) alone each need about 8 million ounces a year of new reserves just to stay level, and the same applies throughout the industry.

And to a somewhat lesser extent, it applies to base metals as well as precious metals. If the typical life of a mine is roughly 20 years, every decade 50% of all the metal mining capacity in the world has to be replaced just to stay level. Factoring in 2% to 3% average growth annually over the last few years, you can see an incredible need for new metals deposits to be discovered, developed and brought into production. That's where my focus has been.

TGR: And it's been quite successful. Do you have some examples of companies that you'll share with us that fit your focus—companies that advance early-stage deposits from exploration through development?

LR: Most of our companies are looking at deposits that are further along, but a good example of the process in action is Underworld Resources Ltd. (TSX.V:UW). A year ago was trading at about 50 cents a share. They made the discovery in the Yukon—they've only just announced their initial resource estimate—and are now up to $1.65 a share. So we've had a triple on that one.

Kaminak Gold Corporation (TSX.V:KAM) will be drilling this spring on a project that looks very much like Underworld's. So there's another discovery potential. If you pick a company that makes a discovery, you get enormous upside potential, but it's really challenging finding that one out of hundreds and hundreds that actually will make a discovery.

The much better model, in my opinion, is with development-stage companies, such as Sandspring Resources Ltd. (TSX.V:SSP), which only recently started trading. Sandspring has a deposit where a lot of historic work has been done, but the potential for the value added is tremendous. They're going to drill it over the course of a year and, hopefully, increase the confidence level in the deposit and increase the size of their deposit. That's one that I'm counting on for substantial returns as they advance that deposit through the development process.

TGR: Where is Sandspring's project located?

LR: It's in Guyana. Until Sandspring came along, the mining investment business paid very little attention to Guyana, but I think we're going to see a lot more companies with interesting projects there. A lot of work had been done in Guyana a couple of decades ago and then it sort of fell out of favor. Now we're going to start to see a lot of activity in Guyana, with Sandspring just being the first example of that.

LR: Silvermex Resources Ltd. (TSX.V:SMR) is using the same model, beginning work on a project that's had previous work done on it, looking at it from a new geological perspective and bringing new ideas. Silvermex actually took it one step further. In addition to a deposit that's interesting geologically, close by they bought a processing plant that another company had shut down. Silvermex put these two pieces together—a deposit that had some historic work and a nearby mill—which should give them a fast track to production.

There are a lot of situations around like that, where companies in years gone by did a lot of work and now a new generation of companies goes in to start from that basis, rather than just putting a drill hole where they hope a deposit might be.

TGR: What's making these historic properties attractive again? Is it better technology that enables miners to extract more volume, or lower operating costs, or higher metals prices?

LR: In many of these situations where deposits were looked at in the past, it was an era of lower metal prices. At that time—a lot of this was in the '60s, '70s and the early part of the '80s—picture a company that goes looking for a copper deposit, finds one and starts developing it. Meanwhile, the company's geologists are finding other copper deposits all over the place, and as soon as they find something better, they drop everything and put the focus on developing the better one they found later. Fast-forward 20 or 30 years, and those better deposits are all mined out.

The properties that were cast off in decades gone by are now the best available in the world. The low hanging fruit has been picked. The mining industry has spent 50 years now going over every square inch of the surface of the earth, and the big deposits that were sticking out of the ground have been found, developed and mined out. Now we're going back to what were effectively second-tier deposits in the first pass.

TGR: So instead of being cheaper thanks to technology or whatever, these deposits actually cost more to develop and more to mine than they did in the good old days.

LR: And that's why we'll never see metal prices back at the levels of previous decades.

TGR: Are there any other parts of the world making a name for themselves on the metals maps?

LR: Colombia has long been recognized as having a lot of geological potential. As the situation regarding personal safety—guerillas, kidnappings, etc—has improved, there's been a real rush into Colombia. The Philippines has also become attractive. A change in government policy that was fairly recently implemented has resulted in a real pick-up in activity in the last few months. I think that's going to really accelerate.

TGR: What kinds of deposits are you looking at in the Philippines?

LR: The most popular geological type is copper-gold porphyries, so huge deposits with a fairly low grade of copper and a low grade of gold, but together the grades are very attractive.

TGR: Do you have any companies there to tell us about?

LR: One striking example is Indophil Resources NL (ASE:IRN), which trades in Australia. I haven't followed it specifically, but Indophil has a 37% interest in a project that's just about to begin a feasibility study. A Chinese company has bid $500 million cash to take over Indophil to gain access to that 37% interest. Normally takeovers happen toward the end of the feasibility stage, so it's really unusual to see a deal like this on the table when the study isn't even under way. That gives an indication of the valuations that the mining industry will place on these types of deposits in an area like the Philippines.

TGR: Very interesting. And there's China again. You talked a bit about gold and its role as a hedge against dollar devaluation and inflation. How do you feel about silver as an investment metal?

LR: Silver is very different than gold. Most of the silver that's mined is used up in products of all kinds. There's only a very small investor component in the silver market and the silver market is very small. Because it's such a small market, as investors get excited about silver, the price can move up very sharply and very quickly, but it can fall just as fast.

I imagine silver will continue to spike up and down, but it won't go back to the levels it saw briefly in 1979-1980. Those were unique circumstances and unlikely to be repeated. That's not to say that I don't like silver. I do. And I invest in silver companies, but not because I expect a sudden, large gain in the metal price.

TGR: You offer such interesting information and good insights. Thank you, Lawrence.

By arrangement with: www.theaureport.com

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