A lot of Gold Mining exploration programs won't go ahead as planned...
EDITOR and publisher of the Hard Rock Analyst newsletter, Eric Coffin says he has never heard so much negativity from investors.
"Everybody thinks the world is coming to an end," he tells The Gold Report. As a contrarian, all the doom and gloom tells him the market is about to pull out of its tailspin.
The Gold Report: Eric, the gold bears recently outnumbered the gold bulls in Bloomberg's weekly Gold Bull/Gold Bear Sentiment Survey for the fourth time in a year. Are you a bull or a bear?
Eric Coffin: I think the Gold Price is going to end the year higher, so I guess that makes me bullish, but I think of myself as agnostic.
There needs to be a return of calm to Europe for the Gold Price to move much higher. The currency pair trade between the Euro and the Dollar is going to be a big determinant to the Gold Price. There's been more noise about the EU providing stimulus funds to offset all the government budget cuts in Europe. All of those countries have to deal with their debt loads. But it's not realistic to think that they can cut their deficit and 3% off their gross domestic product year after year and realistically get any net growth.
The other side of that equation is that the US has slowed down. That'll help the Gold Price because a lot of goldbugs are riding on there being another round of quantitative easing. I'm not sure it's going to happen. But as long as Federal Reserve Chairman Ben Bernanke keeps saying it might happen, that's good enough.
TGR: Stagnant Gold Prices are translating to equities. Canaccord reports that "sector weakness in the gold equities over the last six years has typically ended with 'V'-shaped corrections to the upside." Do you believe that's what will happen this time?
Eric Coffin: I sure hope so because I'm on the buy side, not the sell side. I'm going to feel pretty dumb if it doesn't happen. We're still in a bull market for gold. In a secular bull market, generally speaking, coming out of a dip tends to be an impressive move.
TGR: Many Yukon junior mining companies are starting their 2012 exploration programs after completing off-season financing on buyers' terms. What types of companies are getting financing?
Eric Coffin: The only financings I've seen in the past five months are either relatively new deals where investors have a lot of respect for management—which is a roundabout way of saying that investors figure management will figure out a way to make money regardless—or companies that have something pretty definitive with a bunch of drill holes. Companies that didn't take the opportunity to raise money last year are going to have to pull a rabbit out of their hat. The Yukon is an expensive place. There's no getting around it.
Outside of companies with discoveries, nobody's really done large financings and that's going to be tough. About 60% of the companies are going to have a hard time undertaking any significant programs this year. If the market gets better, which I think is going to happen, they still have a shot, but it's at buyers' terms.
I suspect a lot of companies are going to say, "Let's just wait and see if next year is better." You haven't seen many announcements. Quite a few of those companies that were talking last year about doing $4, $6, $8 million exploration programs—many of those programs aren't going to happen.
TGR: Desjardins Capital reports that 26 mergers and acquisitions worth a combined $30 billion (B) took place during 2010 and 2011. There are about 120 more companies operating in the Yukon. Are other junior explorers going to be forced to merge?
Eric Coffin: I think there will be merger activity at the junior level. There are a lot of companies with decent but not spectacular projects where they haven't done enough work and are not in a position to raise money. A merger is one way out for them.
TGR: Is it still fair to call the Yukon an area play when the shares of most of the juniors operating there have declined considerably, often by more than half? Even good results often don't tangibly move share prices.
Eric Coffin: It still is an area play. This is a fairly common path even for a successful area play. The easy money has been made or, as is the case here, the market's just lousy and there is a lot of consolidation. The Yukon is getting to that point. The few companies that have done well will have the ability to pick up a lot of projects. In any area play, anywhere from a third to a half of the companies involved are piggybacking on the play to help raise money. Those companies tend to disappear quickly if they don't find something large right away or if the financing environment gets difficult. The bad market has exacerbated things but a large number of drop outs from an area play at this stage is not an unexpected development.
TGR: What are your thoughts on what's happening in Peru?
Eric Coffin: The political landscape has shifted a lot in Peru. It's made it very difficult for anybody outside of Peru—and maybe even inside Peru—to get a handle on what's a good spot and what isn't. There are a lot of South American countries where mining companies just shouldn't go because they're bound to face a political or indigenous population problem and they won't get permitting. Now no one seems to know what the good areas and the bad areas are. That's going to make it tough for everybody in Peru until this stuff gets clarified.
TGR: Do you have some parting thoughts for us on the market and how it translates to the retail investor?
Eric Coffin: I'm fairly comfortable that the US is going to do OK over the next couple of years. It's going to have another political fight at the end of the year when tax cuts die. Europe has the capability to pull itself out of its problems. In a large measure, it's political decision-making. I certainly appreciate northern Europeans and Germans that don't really see why they should be footing the bill, but they can afford to foot the bill.
We're not particularly worried about China. It's trying to rebalance its economy. China's in a different boat from Europe or the US in that it's got $3 trillion in reserves and can open the taps anytime it wants. China will increase the growth rate when it feels it's the right time to do it.
The world economy will do OK as well. I know it feels like the end of the world for investors that own a lot of resource stocks as I do. The secular bull market hasn't ended. Ironically, all the political problems in different producing regions are going to extend that secular bull market in metals because it's that much harder to grow production to a point that knocks metal prices down.
I'll just leave you with a contrarian thought: Everybody's so negative right now because this is what bottoms look like. Everybody thinks the world is coming to an end. Everybody thinks it's the worst market they've ever been in. Everybody thinks nothing is ever going to go up. That's what a bottom looks like. It's not fun to go through. There's so much negativity everywhere that it's telling me as a contrarian that there's probably not a lot more pain to go through before things start getting better.
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