Gold Miners to Catch Up?

Seeing a cap on Gold Prices near-term, this geologist thinks mining stocks will catch up first...

The MERCENARY GEOLOGIST, a.k.a. Michael S. "Mickey" Fulp, is a Certified Professional Geologist with a bachelor's degree in Earth Sciences from the University of Tulsa and a master's degree in Geology from the University of New Mexico.

Fulp's near-30 years' experience as an exploration geologist has come from working with junior explorers, major mining companies, private firms and investors as a consulting economic geologist, specializing in geological mapping, property evaluation and business development. He launched MercenaryGeologist.com in late April 2008.

Here Fulp speaks to The Gold Report about the outlook for Gold as well as Gold Mining stocks, plus the crucial importance of doing your own due diligence in whatever investment you make...

The Gold Report: You've been traveling quite a bit this summer...

Mickey Fulp: Yes, I focused mainly on the northern tier of North America, which is what I generally do in the summertime. I looked at some gold companies, some uranium companies and some rare earth companies; those are the sectors I'm following. I was in the Yukon, Saskatchewan, Northwest Territories, Quebec, Wyoming, Idaho, Armenia, Haiti – to name a few places. All in all, it was quite a busy summer.

TGR: You've gone to some remote places, which can be fun but also arduous traveling. From a geologist's perspective, it's apparent why you, as the Mercenary Geologist, look at your sectors from the mining angle. Each is so different in terms of what drives value, though, how do you build expertise in these three different sectors?

Mickey Fulp: All are quite different in what drive their values. I study commodities and commodity trends as part of my basic research. As you may be aware from my recent Mercenary Musing called The Trouble with Geologists, I'm an economic geologist. I meld both economics and geology disciplines. I'm always looking at sectors that appear undervalued, trying to determine whether there are upcoming catalysts that will tend to make those sectors appreciate.

TGR: What are the key elements that help you decide whether a sector is undervalued? Are you looking at company financials? At the overall sector relative to other investment opportunities?

Mickey Fulp: That's a very good question. It's basic commodities study. For instance, Gold drives the Venture and the Toronto markets in the junior resource sector. When the price of gold is robust, those companies tend to do well. We've seen that happen this year with the increase in the price of gold.

TGR: Gold, of course, is the big topic in the news, closing over $1,000 for more than seven trading days in a row before dropping a bit. What's going on in gold?

Mickey Fulp: I think it's the weak US Dollar. I am generally bullish on Gold, but I am far from being a gold bug. I'll stick with the prediction I made in January when I said gold was going to be range-bound this year between $750 and $1,050. I believe I missed that on the low side, but I think gold will finish the year in the present range, perhaps it could make $1,050, but I don't expect it to go higher than that.

TGR: What's holding it back?

Mickey Fulp: The fundamentals of the gold market are still not good. Jewelry demand at these prices has dried up in India and the Middle East, which are the biggest consumers. We're seeing that offset somewhat as Chinese people are now able to own gold and the government is encouraging its citizens to buy it. I think that gold is a bit overbought right now. I know I'm in the minority on this position, but we shall see at year end if my predictions are right.

TGR: If Gold is a little overbought – assuming you're talking about the actual commodity – what does that mean for the juniors in the sector?

Mickey Fulp: We'd seen a disconnect between the price of gold and the juniors' values last year; the juniors lagged behind. But then in the early part of this year the strongest gold juniors began doing remarkably well. Certainly that correlates with the fact that gold has been trading at $900-plus for a number of months now.

If you look at valuations from the highs of the junior market in October to November of '07, gold juniors are still trading at deep discounts. So I think there's room for up-trends in this marketplace.

TGR: If they're still trading at a discount from where they were at the highs, who's to say that the highs were the correct market caps for values of these companies?

Mickey Fulp: What is the correct market cap? The market does what the market will do. There's no predicting what these valuations are. It's driven by market psychology. In November of '07, we were using $65-$70 valuations for ounces in the ground for a junior explorer. Now, those valuations are in the $40-$45 range. What's fair market value? It's what the market says it is at any particular time. So if you use the metric we were using a couple of years ago, the gold sector is still undervalued.

TGR: But if people who say gold may go to $1,500 before the end of the year trigger a market mania, won't that continue to lift up the whole gold sector and make the discount from the highs of 2007 go away?

Mickey Fulp: Sure, if gold goes to $1,500, we'll see tremendous increases in valuations of gold companies, particularly the producers, and that will filter down to the explorers, too. But I won't buy the idea of $1,500 gold in the foreseeable future.

The gold explorers are the ones that have really done well this year. Early on in the year, I said that cash flow was king and that you wanted to go in and find small gold producers. That really hasn't played out; what's been king – and that's been driven home this summer – is the explorers. Companies that issued a release of 100 meters of over a gram per ton of gold went flying. So the emphasis and the attention have focused on the gold explorers. For some of the companies I'm involved in, that's been quite good.

TGR: When we interviewed you in June, we talked a bit about Armenia...

Mickey Fulp: Yes. Armenia is certainly an emerging market environment. Miners there are encountering very encouraging results and have been very well-received by the marketplace.

TGR: Anything else you would like to tell our readers?

Mickey Fulp: I'd say, "Do your own due diligence, dude." I borrow that alliteration from my friend Otto Rock who writes the Inca Kola News blog. The successful investors in this business are the ones who research and study companies before investing in them. You don't want to be throwing darts at the board. It's a high-risk business; it's gambling. But you can skew the odds in your favor by doing careful research.

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