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Range-Bound Gold? Go 'Lean & Mean' in Junior Miners

Look for strong rates of return, low geopolitical risk, and new exploration...
THIBAUT Lepouttre is editor of the Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals.
Here he tells The Gold Report that, because the gold price is range bound, gold mining investors have to find "lean and mean" producers generating cash flow - or very nearly there – with a market price of $1200 per ounce...
The Gold Report: In January, you told The Gold Report that the price of gold is driven by market panic and inflation, neither of which looks imminent. If investors can't expect higher gold prices in the near term, why should they be in this space?
Thibaut Lepouttre: I've never been a goldbug but I see gold as a form of asset diversification. There's nothing wrong with having some exposure to precious metals in a portfolio, both in the physical form and in the form of precious metals mining equities. Mining companies are much like any other company. You should find the ones that have free cash flow or have set their sights on positive cash flow, even when the gold price is range bound. It's up to investors to make sure that they know what they own and understand the financial situation of those companies.
TGR: How are you playing this space?
Thibaut Lepouttre: I want reliable, low-cost precious metals producers and some companies with development-ready projects. I try to identify companies with projects that are viable at the current gold price and that should be able to get financing because their projects' internal rates of return (IRR) are still acceptable at $1200 per ounce gold or lower. I avoid companies with projects with high capital costs because the markets want companies that are small, lean and mean. I'm not investing in companies that need gold at $1500 or $2000 to make a project work.
TGR: Greece recently made a $224 million payment to the International Monetary Fund (IMF). Essentially, that's an interest payment on its European "credit card", but the country is still negotiating with the IMF, the European Central Bank and the European Commission on its next bailout. How do you expect these negotiations to unfold?
Thibaut Lepouttre: It was really the European Union's (EU) credit card that was used to make the payment because Greece asked all its public services to wire cash to Athens as an emergency measure. The big question is where will Greece get the money for its next payment? The treasury in Athens is running on fumes. Greece has to repay about €6-7 billion over the next two months. It's a tricky situation, but Greece is probably in the driver's seat because the EU clearly does not want Greece to leave the Eurozone (for now).
But would Greece be willing to leave the Euro and go back to the drachma? It would in a heartbeat. That would once again give Athens a sovereign currency. The drachma would be weak but that would boost exports and attract more tourists, especially from Russia. European leaders are trying to make it sound as if Greece has to stay, but Greece doesn't have to do anything. If Greece leaves the Eurozone, it would be an important catalyst for gold because that would increase uncertainty in the markets.
TGR: Which countries in the Eurozone are closely watching these negotiations with Greece?
Thibaut Lepouttre: The southern countries are really following the negotiations closely because if Greece exits, there's no reason for these countries to stay in the Eurozone; it's much easier for them to go their own way. It's the idea of a unified European Union that is causing the governments in the western and northern countries in the Eurozone to make sure that a solution is found because they would lose face if the EU failed.
TGR: There is a critical IMF meeting in about a month. Could that be pivotal for gold?
Thibaut Lepouttre: You're alluding to the IMF meeting that will decide the compilation of the Special Drawing Rights (SDR) basket. The Chinese have requested that its currency be included in the SDR basket, which currently consists of the Japanese yen, US Dollar, Euro and British pound. Gold could also potentially be included in the basket but I don't think the Yuan nor gold will be included, at least not yet. It will be interesting to hear the Chinese arguments. China has not updated its gold reserves in a long time. It wouldn't surprise me to see China update its official gold reserves just before that meeting. If China chooses to disclose its gold reserves, it will show that China is serious about getting the Yuan included in the SDR basket. It might be the main factor that the IMF considers.
TGR: What range do you expect gold to trade in through the end of this year?
Thibaut Lepouttre: It depends whether Greece collapses or not. We're still in the same range where we saw strong support at $1175-1180, but we also saw strong resistance at $1220-1225. The range is definitely narrowing. Once we break out of that range, either in a positive or negative way, we will see a big move in the gold price.
TGR: Which elements of junior developers are you most focused on with gold around $1200 and financing still at a premium?
Thibaut Lepouttre: Investors should try to focus on high-margin projects with low capital and operating costs because the financing environment remains difficult. Mining projects with high IRR numbers will attract the necessary financing to move ahead and will always command a premium over other assets. The second priority is low geopolitical risk. I'm avoiding high-risk countries like the Democratic Republic of the Congo and South Africa.
TGR: Do the essentials change for the smaller companies like the explorers?
Thibaut Lepouttre: It's a good time to be an exploration company with cash because diamond-drilling costs are the cheapest they have been in almost a decade. The all-in cost for diamond drilling is less than $100 per meter in North America. The cost was $250-270 per meter four years ago. On the negative side, the explorers operating in remote areas will have a tougher time because it will cost them three or four times as much to drill the same hole.
TGR: How do you maintain your optimism in this space?
Thibaut Lepouttre: You always need to make sure that you understand the markets. I strongly believe that should gold go back to $1000 per ounce, it will not stay there. It is going to be one of those V-shaped corrections as we saw in 2007-2008, and then it will move back up again. China and Russia are still buying gold and they will buy even more if the gold price goes as low as $900. But I wouldn't be unhappy if gold were to stay at near current prices.
TGR: Thank you for your insights, Thibaut.

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