Purging the Gold Mining Sector

Companies that raised money in 2008 "are finally dying"...

THE WEAKEST Gold Mining firms have been hit since the capital faucet was turned off in 2008. What's left? Some exciting, early-stage companies with management teams industrious enough to make it through with promising projects on the horizon. In this interview with The Gold Report, Tom MacNeill, CEO of Saskatchewan-focused resource investment company  49 North Resources Inc., discusses the conditions that have primed the junior resource environment for growth.

The Gold Report: What sort of year are you expecting for gold?

Tom MacNeill: The recent pullback is perfectly healthy. The entire world is trying to competitively devalue currencies because it's the only way to get out from under the debt burden created by liquidity added to the capital markets over the last three years. 

We don't expect that the Gold Price is going to come down anytime soon. Either the international community has to keep adding liquidity, which is good for the price of gold, or it achieves economic development, which will create severe inflation, also good for the price of gold. 

The game isn't done yet. It will still take a few more years to see where macroeconomic policy takes us. I believe that we will have an upward-slanting chart through 2012 with some hiccups. When it gets ahead of itself, like all parabolic charts do every now and then, it will be painful for some in the short term. 

From a gold developer's perspective, what more could you ask for than $1,700/ounce (oz) gold and the ability to contain cash costs because there is economic pressure downward in the cycle? It's good news for gold developers.

TGR: So it's the best of both worlds?

Tom MacNeill: Yes, at least for the next couple of years until the world sorts itself out macroeconomically. There's going to be a point in the future to exit most gold positions, but not likely in the coming year.

TGR: What other metals do you believe are poised to perform in 2012?

Tom MacNeill: Historically, there have been times where gold leads the base metals. If consumption demand picks up, the price of gold will fall off. However, as an industrial metal, copper's price likely won't fall off because it will be in even higher demand. China already consumes half the world's copper. We are still in the early days of the copper cycle. 

When most investors were running away from base metals a couple of years ago is when we were getting our feet wet developing cheap projects. Our No. 1 and No. 3 projects right now are gold and copper projects. 

TGR: Have you noticed increasing competition for early-stage Dollars? 

Tom MacNeill: We're contrarians. We get involved in projects when commodity prices drop, investors are running away and companies can't raise capital. By the time most players want to throw capital at copper companies, we've likely already made our seed investments and are moving assets forward at that stage. We don't find competition because we run counter to the herd. There should be a lot of activity in early-stage copper exploration over the next 12 months, but we won't have much interest in competing for those investments because we are already developing assets that we acquired one to three years ago.

TGR: This space got off to a good start in 2011, but couldn't have finished much worse. What are your thoughts on the junior commodity sector going forward?

Tom MacNeill: There was a lot of money raised in 2008 for companies that shouldn't have gotten it in the first place. Those companies have been able to limp along and they're finally dying. After a resource down-cycle—and 2008 was such a violent one—a bunch of companies die. They're delisted. They go away and people forget about them. 

That didn't happen this go-around. There were hundreds of companies with enough in the till to pay the executives and limp along hoping for something good. That confused retail investors, who just saw a company with a couple million Dollars in the till and assumed it had some potential. However, most of them didn't. They got that money just because there was a lot of loose capital in 2008 that caused this cycle to drag on longer. 

It's normal for the industry to rationalize and for companies to dissolve. Investors need to look at who is left standing and realize it is always the good management groups. They're well capitalized. They've got good projects. There has been too much noise for the last couple of years that confused investors even further. 

Investors are more objective this year. They're a little bit smarter after losing money. There's an old adage on Wall Street that nobody ever went broke taking a profit. Investors are more tempted to take profits because they don't like the feeling of having a stock that they bought at $0.50/share go to $5/share then fall to $0.30/share. This new comfort with selling resource equities is a healthy thing because it gives investors capital to reinvest in new projects and smoothes the cycle by tempering speculation. 

That's exactly what we do. We are not afraid to liquidate positions so that we can move it back to the beginning of the food chain. That creates a healthy capital environment for junior resource explorers. We're moving into that phase now. 

Macroeconomically, things are not going to be hard for resource investors. To be sure, they will be volatile. But it will be very lucrative for patient investors who are objective.

TGR: Thanks for sharing your thoughts, Tom.

Buying Gold Bullion? See how BullionVault can dramatically cut your costs...