TGR: But the share price is slumping some now.

JM: We view it as a buying opportunity. In fact, we have bought stock around these prices.

TGR: Another company you follow is Paramount Gold and Silver Corp. (NYSE.A:PZG; TSX:PZG), which is also in Mexico. It has the San Miguel Gold Silver Project there and just did a deal with X-Cal Resources Ltd. (TSX:XCL), which owns the past-producing Sleeper Gold Mine in Nevada. These are both exploration plays. The market has not been kind to those lately. What's your take on this deal?

DL: I haven't seen Sleeper; I've been to San Miguel. We have great confidence in their ability to find good things. For them to be in the U.S., especially with all the money they have behind them now, they should be well ahead (after the takeover).

If you look at a map of Paramount's San Miguel Project, you discover that Coeur d'Alene Mines Corp. (NYSE:CDE; TSX:CDM) Palmarejo Project is at the other end of it. In fact, to get there, you have to drive on Paramount's roads. The mineralized system is sort of shaped like a big seven. There's all this silver in the seven. Then, in the armpit of the seven, are two gold domes. Paramount is bringing San Miguel along and drilling it out. Now they've gone off to get the Sleeper Project, which should turn out very well for them. I haven't seen it yet, but I know people who have and they liked it very much.

TGR: They are trying to establish themselves as a takeover target?

DL: Possibly; a lot of companies do that. A lot of the work companies do makes it look like they'll mine it, but they're really de-risking the project. Having studies already done makes a buyer feel better, because that's money they don't have to spend if they take over the company.

When the Spanish arrived in the 15th Century, with a cross in one hand and a pick in the other, they could mine only what they saw. They couldn't go below the water table, so there's all this stuff at San Miguel where this artisanal work was done. And now they're finding lots more. It's very exciting down there.

TGR: Do you think we're going to see more M&A in this sector as commodity prices rise?

JM: Definitely, because what's happened is that the usual sources of cash have pretty much dried up. It's very tough to get financing. There are lots of junior explorers with very exciting projects that don't have the money to take them to production or continue to develop them. Those will be takeover targets.

DL: This so-called de-risking costs a lot of money, in terms of the extra drilling and more studies, and a lot of companies can't afford it.

JM: I think it's more a question of ounces than money.

DL: Yes, there's a whole game of how many ounces do you have. And not all ounces are created equal. As an explorer gets closer and closer to being eaten by a producer company, the price goes from $30 or $60 per-ounce-in-the-ground to $100 or, in some cases, $200/oz. This depends on location, grade and ease of production, plus the amount of estimated capex required to get into production. These days it's a buyer's market. The producer sometimes can get the ounces for under $50–$60.. But, once the deal is done, the explorer ounces with a low value now get valued at the producer's higher value.

TGR: Do you see some specific takeover targets among the junior gold/silver explorers?

JM: Yes, we hope we own a lot of them.

DL: That's a tricky question. It's very hard to tell because the buyers aren't always who you think they will be. A couple of years ago, everyone thought various projects were going to be eaten by larger North American companies, for example. Then, out of nowhere, comes an unknown Chinese smelting company.

TGR: Indeed. Let's look at some other Latin American explorers. There's Extorre Gold Mines Ltd. (TSX:XG; Fkft:E1R; OTC:EXGMF), which has the Cerro Moro Project in Argentina. I believe Doug visited that project.

DL: Awhile back, Exeter Resource Corp. (NYSE.A:XRA; TSX:XRC; Fkft:EXB) basically divided its assets. Exeter took the Chilean properties; the Caspiche copper-gold porphyry is the big one. There's also a little one called Zodiac and you get to it in a Zodiac boat, which is why they call it that. All the Argentinean properties went into Extorre.

The guys who run Exeter are really smart, and they're really good at what they do. They went out and got all these projects that the big guys couldn't be bothered with, started exploring them and found wonderful things. There are about 30 projects, other than Cerro Moro, inside of Extorre that they can work on.

TGR: What are the production prospects for Cerro Moro?

DL: They intend to go into production at Cerro Moro within two years, but I'm not sure they will need to. That project could well be taken over before they get it into production. I can tell you this—four small children with some buckets and a spade could work Extorre. The stuff's sticking out of the ground. When I was there with some silver guys, they just went crazy; they grabbed their rock hammers and were whacking away at pieces of outcropping rock. The mineralization gets even higher grade deeper down.

TGR: Andean Resources Ltd. (TSX:AND, ASX:AND) is probably the most talked about gold play in Argentina right now. It certainly has a lot of institutional support. It's over $4. Extorre is around $3.50. Do you see Extorre, and to a lesser extent, Exeter being undervalued right now?

JM: We do.

DL: In theory, somebody is going to come along and eat Exeter. It could take a price in the mid-teens or higher to get that big porphyry. There are all sorts of companies that just want copper/gold porphyry deposits, including their next-door neighbors, Barrick Gold Corporation (NYSE:ABX; TSX:ABX) and Kinross Gold Corp. (TSX:K; NYSE:KGC). Their Cerro Casale property is very close to Exeter's Caspiche, if you look on the map.

TGR: Copper/gold porphyry deposits seem to be fetching a premium right now.

JM: Usually, the grades are lower in porphyries than they are in vein systems; so they have to be very big, and Caspiche is very big.

TGR: That's why copper/porphyry deposits are developed almost exclusively as open pits.

DL: Yes, Exeter's management jokes that when they get their pit built, you'll see it from space. The more important thing is that Barrick's getting ready to go to work next door at Cerro Casale. That will provide a lot of infrastructure in the area because both projects are in the mountains.

TGR: Are both projects part of the same mineralized system?

DL: They're not the same system, but they're right next to each other. Think of two footballs standing together on a shelf.

TGR: Just about every company that we talked about today has a Latin American connection. What do you like about South America and Latin America?

JM: It's not just South America and Latin America—it's the whole Americas' land mass. We believe there are serious metal deposits all the way up the Andes and the Rockies. That doesn't mean they are not anywhere else. We just feel very comfortable with that area. We own shares in a lot of companies operating in Canada; we have plenty in Mexico, South America and in the United States, as well. We look for jurisdictions that are friendly to mining and friendly to oil and gas. They also tend to be in that North-South axis.

DL: We're really not as interested in Indonesia, Kurdistan or places like that. There are one or two projects we like in Africa; but, other than that, we're not interested because there's too much other trouble in those jurisdictions—and we always try to minimize risk.

One point I would like to make is that we've talked about producers with First Majestic and Silvermex and explorers with Paramount and Exeter. What's nice is that the producers also continue to explore.

TGR: So there's a catalyst for growth.

JM: Absolutely.

TGR: Do you have some parting thoughts for us today?

JM: There's a whole world out there. The U.S. and Europe may or may not be going in the right direction. But there's a whole world out there that is growing very nicely. You've got huge demographic pressure on food and fertilizers, those kinds of things. Those demographic pressures are not going away. Even with the one-child rule in China, its population is growing. India's population is growing very fast. Brazil's population is growing. They need to gentrify those populations. It's imperative because the alternative in those lesser-developed countries is revolution. No government wants that.

DL: Let's say you just give everybody in India, who wants one, a refrigerator and the electricity to run it, then we don't have enough copper. And that doesn't count China's need for copper.

By arrangement with: www.theaureport.com

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