Long-Term Value in Junior Miners

08/17/2015 10:00 am EST

Focus: COMMODITIES

Brien Lundin

President, Jefferson Financial, Inc.

Brien Lundin, editor of Gold Newsletter, sees longer-term value developing in the gold market. Here, he discusses his outlook and highlights a trio of junior mining firms for speculative investors seeking exposure to gold.

Steven Halpern: Our guest today is gold sector expert, Brien Lundin, editor of Gold Newsletter. How are you doing today, Brien?

Brien Lundin: I’m doing great, Steven. Great to be with you.

Steven Halpern: It’s always fascinating to talk to you because you really look below the surface when you analyze the gold market. For example, you suggest that the price of gold now is being influenced by high-frequency traders. Could you explain this and touch on what the ramifications might be?

Brien Lundin: Yes, Steven. It’s more than being influenced, the price is actually set in the west by No. 1) the paper gold traders, the speculators operating on the futures exchanges, and in particular, at certain times, by these high-frequency traders who are finding the ability—or discovered the ability—to drive the market rapidly lower by flooding the market with sales in a very short amount of time, literally milliseconds, and then forcing sell stops along the way and profiting from shorting the market.

They’ve done this a few times over the past few years. The most notable one was in April of 2013, which really broke the back of the gold market.

Then, more recently, they did it on July 20, by starting to dump gold onto the COMEX just a few seconds—less than a minute—before the market opened in Shanghai.

Then following up in Shanghai with more sales to make it look like the Chinese had actually started to sell. That was the latest drop, the reason for the latest drop in gold, and we’re just starting to recover from that now.

Steven Halpern: Now, you also suggested a Fed rate hike and perhaps this is also tied in with the activity you’re seeing with these high-frequency traders, that there could be a sell on the news type event that forces these shorts to cover. Could you explain that in more detail?

Brien Lundin: Yes. The key thing that I’ve been telling my readers in Gold Newsletter is that, as a result of these short attacks on gold by the high-frequency traders, and because of the hedge funds and other speculators that are following the trend down, the managed money sector of the paper gold market is now net short for the first time ever.

Typically, the managed money sector is net long and it’s the commercials that are always net short because they have to hedge physical positions.

Now the speculators are net short and the commercials had their lowest short position ever. It’s really a historic turning point—a historic situation—and it’s perfectly set up for a massive short-covering rally that almost has to happen at some point in time.

I think, because the Fed rate hike has been holding—it’s been this issue overhanging the gold market for the past couple of years—that once that issue is resolved and we have the first rate hike, it could become a sell-the-news type of an event prompting the shorts to begin covering and literally running for the exits of this massive short trade.

Steven Halpern: Now, there’s some news that’s just developing. I was hoping you might comment on China’s currency devaluation and how that might impact the overall outlook for gold.

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Brien Lundin: Yes, you know, a number of people—well, most analysts—are looking at this as being negative for commodities because it raises the cost of commodities in China.

It came as a surprise that China would devalue the yuan overnight, but nothing else they were doing was working and I think it’s part of an overall plan to make the yuan more freely trading so that they can get IMF acceptance, etc., and make it a reserve currency.

What happens is that this initial devaluation was only a couple of %, which is huge in the currency world, but didn’t really raise the price of gold, in particular, that much for the Chinese consumer.

What it has been is a warning shot across the bow that further devaluations are not only possible, but likely in this new environment. Therefore, Chinese investors, and consumers, and savers need to buy gold more than ever. Gold is actually up on the day and I think this move is going to actually increase the Chinese demand for the yellow metal.

Steven Halpern: Let’s turn to some specific investment ideas in the gold market. One stock that you like is Almaden Minerals  (TSX: AMM). What’s the attraction here?

Brien Lundin: Well, in this environment where we have gold at a multi-year low, and with a rebound almost inevitable at some point, we’ve had a lot of mining stocks, from the seniors down to the juniors, down to the explorers, have been absolutely decimated.

What this has done has created a situation where you can buy junior explorer developers that have proven resources for a fraction—a small fraction—of what they were trading for just a few years ago.

You really have the potential of stocks that could multiple four or five times in value on a gold rebound and about the same level of responses you would expect from an exploration stock making a big discovery. You can buy these companies with proven resources right now and have that higher potential rebound—the higher potential profit—without taking on the risk of exploration.

Almaden Minerals is one of the companies that has about 4 million ounces of gold proven up in Mexico in a very large deposit; has a great management team, and I think is going to be one of the first companies to be taken out by the majors when we have a rebound in the metals.

Steven Halpern: Now, speaking of all management teams, which is an area that you really look at when you’re assessing these junior miners, you also like Auryn Resources (TSV: AUG) and for our listeners, that’s spelled Auryn. Could you tell our listeners a little about this situation?

Brien Lundin: Yes. I always recommend betting on management teams as absent anything else, of everything else being equal. This is really one of the best management teams running Auryn Resources in the entire junior sector.

They’ve had two big successes, Keegan Resources, which evolved into Asanko Gold, and Kayden Resources, both of which made a lot of money for Gold Newsletter readers over the past years.

Now this team’s latest effort is Auryn Resources and they’ve acquired 100% control of the Committee Bay Gold Project in Nunavut, Canada. It has over 1 million ounces of high-grade gold resource and they’ve just gotten onto the property after obtaining control from another junior explorer.

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They saw what the potential was and then quickly moved to take over the rest of the project by making an offer and taking control buying, essentially, the other junior explorer. The team is really in place now, has a project that they think will be a multi-million ounce high-grade gold project. At the current levels, I think it’s a great speculation for investors.

Steven Halpern: Now, we’ve been focusing on gold, but in the silver sector one high-grade producer that you like is Excellon Resources (TSX: EXN). Could you just share your thoughts on this company?

Brien Lundin: Yes. Excellon has been the highest grade silver producer in Mexico for over a decade. What they’ve done is they’ve—as they’ve expanded the mine lower and lower—they’ve gone further and further below the water table and now they’ve had some water infiltration issues that have affected the production rates and the cost.

What they’ve done is, they developed a way to alleviate this problem through some very innovative, yet proven, pumping techniques, but it’s going to take some capital expenditure.

To show the market what the impact of this was going to be, they actually did an economic study on it and showed just tremendous rates of return once they implement this new water management program.

They’re starting to do that now and this program would get their production cost well below $9 an ounce, so virtually any silver price scenario, this company is going to be making money and a lot of it.

You have the potential of growing resources, growing production rates, and you have a downside very well protected, so I think it’s an excellent all around silver plate for investors who want to have that added potential of a silver investment in their portfolio.

Steven Halpern: Now, we’re almost out of time, but I’d like to ask you briefly about Natcore Technology (TSV: NXT), noting to all listeners that you are a director of the company and the single largest investor in the firm. Could you tell us what’s got you interested and what the goals are with Natcore?

Brien Lundin: Absolutely. As you say, I am the chairman and a cofounder and largest investor in the company, so I really—I can’t recommend it in any of my publications because I’m such an insider—but I do enjoy the opportunity to tell people why I’ve put more money, time, and effort into this company than really anything else.

That’s because it has the potential to really revolutionize the solar industry through an exciting new technology.

Specifically, a way to process solar sales using lasers that will slash the cost of solar sales, but actually also allow for these very high efficiency structures in solar sales that have never been possible before.

One of the things—one of the off-shoots of this—is that we will or we will shortly be able to completely eliminate silver from solar sales and that alone is a quantum leap in slashing production costs for sales.

Steven Halpern: Again, our guest is Brien Lundin, editor of Gold Newsletter. I really appreciate your time, today. Thank you for joining us.

Brien Lundin: Great to be with you.

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