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Silver "a Screaming Buy", Crude Oil "Going to $60"

The beautiful thing about pessimism towards junior precious metal miners...
 
KAL KOTECHA is editor and founder of the Junior Gold Report, a publication about small-cap mining stocks.
 
Kotecha has previously held leadership positions with many junior mining companies, and after completing a Master of Business Administration in finance in 2007, he is now working on his PhD in business marketing, and also teaches economics at the University of Waterloo.
 
Here Kal Kotecha tells The Gold Report's sister title, The Mining Report, that to obtain superior results, you cannot do what everyone else is doing. He maintains that much of the risk associated with junior resource equities has been beaten out by the herd mentality and that selectively buying what's left presents opportunity...
 
The Mining Report: You're the editor of Junior Gold Report, but you also follow similar-sized companies in the energy sector. Please give our readers an overview of the energy space.
 
Kal Kotecha: I've been involved in the space since 2002 and I've never witnessed anything like what is currently happening. In the energy sector, I see the price of uranium increasing, but to see price appreciation across energy stocks, the price of oil must remain near $100 per barrel. That benchmark could prove challenging, given the growing supply of shale oil in the US Texas produces as much oil as Iraq or about 3 million barrels of oil per day. Most of it comes from two sources: the Eagle Ford Shale in southwest Texas and the Permian Basin in west Texas. Chris Guith, senior vice-president of policy for the US Chamber of Commerce's Institute for 21st Century Energy, estimates that recoverable resources amount to 120 years of natural gas, 205 years of oil and 464 years of coal at current demand levels.
 
Fracking has lowered the price of natural gas by about 70% over the previous seven years or so. The price of oil, especially in the US, should decrease to $60-70 per barrel on average because of shale oil. US dependency on imported oil should lessen, too.
 
TMR: Is that a near- or medium-term forecast?
 
Kal Kotecha: That's a medium- to longer-term forecast. I don't believe in peak oil theory. The US' savior in the oil industry is going to be shale oil, and there is a lot of it. Ultimately, that's going enhance the US economy. Basically everything runs on oil. The US won't have to import as much oil from Saudi Arabia or even Canada.
 
TMR: What's your price forecast for natural gas?
 
Kal Kotecha: Natural should stay between $4-6 per thousand cubic feet (Mcf). It's more expensive in Europe, but in North America the floor should remain around $4/Mcf. I don't think it's going to go back up to $12 or down to $3.
 
TMR: You mentioned earlier that you expect uranium prices to rise.
 
Kal Kotecha: Uranium is an interesting space. As oil prices slowly decrease, the demand for uranium seems to increase. Geopolitical tensions, especially in Russia and Ukraine, could lead to much higher prices. Russia is a large uranium producer and Western nations might stop importing uranium from Russia if political fires burn much hotter.
 
As of last month, China had 21 nuclear power reactors operating on 8 sites and another 20 under construction. China's National Development and Reform Commission intends to raise the percentage of electricity produced by nuclear power to 6% by 2020 from the current 2% as part of an effort to reduce air pollution from coal-fired plants. Ultimately, uranium demand will triple inside six years.
 
In India, the government is expected to spend nearly $150 billion to develop nuclear power over the next 10-15 years. India now has nuclear energy agreements with about a dozen countries and imports primarily from France, Russia and Kazakhstan.
 
TMR: In a recent note on Junior Gold Report you wrote, "I smell smoke, but where's the fire?" in relation to the current sentiment in the junior precious metals market. What's your conclusion?
 
Kal Kotecha: The current pessimism surrounding the junior precious metal space has largely contributed to the fall in price of the commodities, but the beautiful thing about pessimism and hate towards a market sector is that there is plenty of room for error. Fantastic opportunities arise when great companies have been undervalued due to negative news that does not have a long-term impact on the company. So how do you determine which stocks, in a beaten up resource market, are great buys?
 
TMR: Do you have an answer?
 
Kal Kotecha: One must understand the essential principles of intrinsic value and the margin of safety. The principle of intrinsic value determines the worth of a stock through a combination of the price and the condition of the company. So no matter how great a company is, it may not always be a good investment. As Howard Marks wrote in The Most Important Thing: Uncommon Sense for the Thoughtful Investor, investment success doesn't come from buying good things, but rather from buying things well.
 
The principle of the margin of safety involves minimizing risk and then, therefore, minimizing the potential loss of one's money. Dealing with risk is a necessary part of investing, as stock price fluctuations occur and are often unpredictable. If the risk perceived by the herd – general investors who follow the majority – is less than the actual risk, then the returns will outweigh the risks. So when consensus thinks something is risky, the general unwillingness to buy it pushes the price down to where it is no longer risky at all, given it still has intrinsic value, because all optimism has been driven out of the price.
 
TMR: What are some metrics to help investors?
 
Kal Kotecha: A junior mining company's ability to produce resources at a cost below its market price is essential for its sustainability. Junior mining companies should be judged by their ownership of mines, the quality of these mines and how management has executed similar projects in the past. Determining whether this data has been incorporated into the stock price is essential when seeking undervalued companies. I think this is where a lot of resource investors get duped.
 
Do you smell the smoke? I suggest investigating the source. I'd say that the herd is done shouting fire, and smart investors are filling up their baskets with goodies. But don't forget to do your research, check the facts and invest in a contrarian fashion. To obtain superior results, you cannot do what everyone else is doing.
 
TMR: Many investors have heard the adage "buy when there's blood in the streets." When should investors reasonably expect to start making money again, given the current market conditions?
 
Kal Kotecha: That's a billion-Dollar question. A lot of colleagues have predicted prices that have not come true yet. The big upswing in gold in the late 1970s was followed by a collapse and we had to wait 20 years for another upswing. It's already been three years. I don't think we have to wait another 5 or 10 years, but there is going to be a time very soon where investors will be rewarded. I think when the upswing happens it's going to be very parabolic. I think it's going to take wings on its own. Patience will be rewarded.
 
TMR: What gold price are you using in your analysis?
 
Kal Kotecha: $1200 an ounce. Many factors go into determining the price of commodities, especially gold and silver. Some of these factors include price manipulation, which cannot be foreseen; geopolitical strife; and import quotas, which are happening in India. However, I remain very bullish on precious metals in the long-term.
 
The best buy right now is silver. Silver is a screaming steal at $18 per ounce. I first started buying silver at around $7 per ounce in 2003 and I sold quite a bit in the $48 range a few years ago. I'm starting to accumulate silver quite heavily again. The ratio of gold to silver prices is currently around 68:1. I see that going to 50:1. If there's another precious metals mania, perhaps 25:1. Silver demand is also very high. A record 6,000 tonnes silver was imported into India last year – roughly 20% of global production.
 
TMR: What's your advice for investors in the current junior resource market?
 
Kal Kotecha: I think a combination of five or six stocks in a portfolio with a mix of junior energy and mining equities is probably a good start. That's what I do. It's difficult for the average investor to follow more than five companies. 
 
TMR: Thank you for your insights, Kal.

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