Should countries like Greece be more receptive to gold mining...?
THE RECENT fall in precious metals prices has investors on edge. Many precious metals equities were hurting even before the latest precious metals drop. In this interview with The Gold Report, Peter Rose, head of mining research with Fox-Davies Capital Ltd. in London, provides a European perspective on mining and advises looking at under-appreciated jurisdictions (think Europe) and neglected metals like tin, lead and zinc.
The Gold Report: Peter, can you give us your long-term view of the Eurozone as it lurches from bailout to bailout?
Peter Rose: Some major things have to happen in Europe and the sooner, the better. Unfortunately, I think it will get worse in the short term.
But from the mining industry perspective, these crises are bringing a lot of realism to certain governments. Greece has opposed mining, despite having quite good ore bodies, as do Portugal, Spain and Cyprus. Mining companies can generate real revenues, exports and jobs and contribute to the financial coffers.
In addition, the European Union has good rules of law. The tenures are pretty safe, there are pro-mining interests and there are deposits of strategic elements. If you compare the operating costs with Australia, the European infrastructure tends to be better; wage rates are significantly lower. It makes for a pretty compelling story.
TGR: You deal with many junior mining companies. In 2004, the junior mining companies listed on the TSX Venture Exchange (TSX.V) averaged 27 million (27M) shares outstanding. Today, the average is 73M shares. Why have share floats risen so dramatically?
Peter Rose: I put it down to the euphoria about rising metal prices. There was a long period when it was very easy to raise money due to rising metal prices. On the TSX.V there was always a bigger focus on exploration companies. I believe these to be the major reasons, although sentiment is very different today compared with even two years ago.
A lot of exploration companies had no hope of bringing a mine into production, but it was very easy to raise money in 2004, so they did. Today, the writing is on the wall for quite a few of them. It is exceptionally hard for an exploration company with no near-term development potential to raise money.
From what I understand of the Canadian market, it is easier to raise money for exploration than development. On this side of the Atlantic, it has been easier to raise money for development because you get something at the end, even if it may not be much.
TGR: Your firm, Fox-Davies, helps public companies raise money. Which mine commodities and which types of projects are consistently getting funded now?
Peter Rose: It is easier to raise money for oil and gas companies. People like gold and copper, and while the outlook for tin is as good as for any other metal, it is has some in-built resistance.
The funds do not like obscure commodities. As long as you stick to the main London Metal Exchange-traded metals—copper, lead, zinc, gold, silver, and less so, nickel—the funds tend to be content with that.
TGR: But gold and silver don't trade on the London Metal Exchange.
Peter Rose: No, but there is a good market for them, and they make the headlines quite often. Tin does not make headlines and nickel is in oversupply at the moment.
TGR: Have there been initial public offerings for tin juniors?
Peter Rose: A number of them are trying. We are looking at off-market financing for them. There are private tin companies out there.
TGR: What is your outlook for gold this year and beyond?
Peter Rose: I am not positive over the next three months. India has raised import duties to slow down the rate of imports and help with its balance-of-payments deficit. In addition, too many gold companies have chased production instead of profits, and people are a bit fed up, especially fund managers.
Longer term, I am not optimistic. When interest rates return to more normal levels, as they must do eventually, the gold price will come way down. Prices will overreact before stabilizing well off the bottom. However, I am surprised with the speed in which the market turned.
TGR: What is your timeframe for that?
Peter Rose: About five or six years.
TGR: What is your outlook for silver?
Peter Rose: In the short term, silver will track the gold price. However, given that silver is an industrial metal and that a lot of it is a byproduct of lead-zinc mining, I think there will be a disconnect between the gold and silver prices in 2014 and 2015. A number of lead-zinc mines will be nearing the end of their lives over the next couple of years. That will remove a lot of silver from the market, tightening up the supply side considerably.
TGR: Is silver's recent price weakness an early indicator of global economic weakness?
Peter Rose: No, it is more of a sympathy move with the gold market.
While global industrial production is not exactly brilliant at the moment, certain pockets are performing very well. The British automobile industry, for example, is performing as well as it has in the last 20 years. The aerospace industry is going really well, too. These are sectors that use quite a bit of silver, regardless of price.
TGR: Should precious metals investors buy select equities for growth, protection or both?
Peter Rose: I think it is probably better to buy equities than the metal, quite honestly. I think you get better leverage.
If you think that your currency is going to be devalued dramatically, you are better off buying gold or silver, depending on what you can afford. But generally, you have more liquidity and better leverage if you buy the correct stocks.
TGR: Should investors be more optimistic than they are right now?
Peter Rose: Yes. You can make a valid argument that precious metal mining companies are finally listening to the fund managers and starting to think of profit and returns rather than ounces of production. I think that is a positive development.
TGR: Do you have any words of wisdom for investors in this space?
Peter Rose: I would be optimistic about mining in Europe. If you are selective, there are quite good reasons to be upbeat.
TGR: Peter, thank you for your time and your insights.