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Gold Mining Challenges and the Outlook for Gold Prices

Gold "has great upside", but eventual price could be $1000 says mining analyst...

ÉRIC LEMIEUX, a mining analyst with Laurentian Bank Securities, has worked at the Montreal Exchange, and prior to that managed exploration projects for Cambior, Noranda and Soquem. He holds two master's degrees, in mineral economics and in metamorphic-structural geology.

In this interview with The Gold Report, Éric Lemieux shares his latest insights on the gold market and the Gold Mining sector...

The Gold Report: When you last spoke with The Gold Report in May of 2010, you gave price forecasts for gold that turned out to be pretty conservative pretty quickly. What are you predicting for Gold Prices now?

Éric Lemieux: I was quite conservative, and obviously, I underestimated gold's momentum. I think right now the price of $1,600/oz. is set to go even higher in light of the increasing global economic turmoil. 

The US debt ceiling and credit rating will fuel gold's price rise to even greater heights. Add in the European bankruptcy threats and you have the catalysts to justify gold's further appreciation. 

Demand is largely based upon the view that gold is effectively a monetary instrument and a "valeur refuge" (store of value). Together, I think they explain the Gold Price action in the last year, which has been quite remarkable, but based on good fundamentals. 

TGR: So, you must have higher target prices for gold now?

Éric Lemieux: Yes, those have been revised and our range is now between $1,650 and $1,750/oz. until 2015. I set a very long-term price of $1,000/oz., which I think is still conservative, but I think it's justifiable since this is probably the marginal cost for producers. 

Gold still has some great upside, but I may not be the one who says it's going to go up to $5,000/oz. I see price stability, less downside risk and I think the $1,500/oz. range is probably something that we can envision in the long term.

TGR: Is gold in a bubble?

Éric Lemieux: I think not at all. Right now, if you look at the fundamentals, there are reasons for the precious metals' strength. On the supply side, there are still some challenges. Mine production has pretty much stayed constant, and the best deposits have been mined. 

We're now going to lower grade deposits. There are more jurisdiction and social challenges to mine gold. So, from the supply side, these are elements that provide some support to the price of gold. 

TGR: Laurentian is based in Quebec and your focus is mainly on opportunities in Eastern Canada, from where most of the gold produced in Canada has come. As far as the recent changes in Quebec's tax regulations, what effect do you envision that might have on exploration and the mining industry in general, especially for the junior companies that rely on certain tax benefits? 

Éric Lemieux: Obviously, I think there has been an impact. The government has made some questionable changes to mine legislation in line with the "resource nationalism" going on in the world. Governments have been pressed to increase royalties and tariffs on mining operations. The legislation in Quebec has tried to address this and an increase is probably acceptable to a certain measure. 

However, one thing that is really frightening in Quebec now is that some municipalities can have a say on claims and project status. That explains in part why Quebec has gone down in the Fraser Institute ranking because of the uncertainty that has been created in some aspects of the mining legislation.

The fact that they're increasing the royalties is perhaps fair in light of the strong commodity prices. There's a bit of give and take and the industry eventually has to give a little. At the same time, I think the government has perhaps been very aggressive about raking in even more profits and caving into special interest groups. What is really dangerous right now in Quebec is this trend of wanting to control the claims and what can be done in terms of development and even exploration. 

TGR: Do you think there might be any re-thought or reversal here if they end up seeing opposition from the mining industry?

Éric Lemieux: I think so. The metaphor we use is "Balkanization" of the mining resources, which is very dangerous. Once people are aware of the adverse impact that is having on the economy, I think they will realize that perhaps the government has gone too far, resulting in a readjustment. The pendulum swings from one side to the other, and now that we're really going to one end, hopefully we'll be able to eventually find a balance.

TGR: Historically, most mining in Eastern Canada has been underground mining when Gold Prices were relatively low and you had to have fairly high grades to justify the costs of doing so. With $1,500/oz. gold, we seem to be seeing a lot more talk about companies doing open-pit mining in much lower grade areas with much larger tonnages. Is this something that is going to be happening more in the future?

Éric Lemieux: This is definitely the wave of the future. Improvements in mining methods and economies of scale allow for bigger open-pit operations. The other thing that I think we will probably see also is bigger underground bulk mining scenarios. So, I think that will be another wave of the future where you will have these bulk mining operations. In the Abitibi Greenstone Belt, open-pit operations are fully justifiable. 

We will see these done in a sustainable manner in the sense that they will have to get community and First Nations acceptance with minimal impact on the environment. When you say an open pit, people think of an eyesore, but once they see the benefits that can be reaped for the local population in general, I think people will be more open to this sort of operation. In the long term, these big open pits can actually be transformed into lakes and it's not necessarily a big eyesore after operations end.

The James Bay region is a hot area that is vast and underexplored. What I find interesting for the James Bay area and Northern Quebec is the fact that the Quebec Government has just announced the Quebec Plan-Nord that will provide even better road, power and communication infrastructure to the area. Although there is some amazing infrastructure right now in the James Bay area, potential expansion, on a sustainable development basis, should provide a competitive advantage.

The Cree Nation, Inuit and Innu people are participating more and more, which opens up to sustainable development in that area and bodes well for social acceptability.

TGR: Are there any other thoughts that you would like to leave us with at this point?

Éric Lemieux: The Quebec Plan-Nord should put a spotlight on northern Quebec. The Ungava Peninsula, even higher up than the James Bay area, is perhaps the next frontier for Quebec exploration. Toward the east, near Labrador, the iron ore is a hot spot. There is even talk about expanding the railways in that area.

Up in northern Quebec, a number of companies are working toward discovery and advancing some huge deposits in rare earth elements (REE), uranium, gold and copper. These are very early stage, but I think there are some good elements for long-term development. Global warming might even result in year-round shipping lanes. 

TGR: So we'll have to stay tuned. Thanks for taking the time to bringing us up to date on these opportunities. 

Éric Lemieux: Thank you.

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