3 Buried Treasures in Gold and Silver

06/14/2012 9:40 am EST

Focus: STOCKS

If a gold bottom is near, Dr. Michael Berry says it’s the ideal time to pick up bargains in the mining sector, and in this interview with The Gold Report, Berry names three lesser-known miners with big-time potential.

The Gold Report (TGR): The Gold/Philadelphia Gold and Silver Index ($XAU) ratio recently surpassed its high in 2008, slightly crossing 11, and peaked in the high 10s at the bottom in 2008. Do you think we have put in a bottom?

Michael Berry (MB): If I were 100% sure, I would be a very wealthy person. I think we’re close to a bottom here. Gold is too important. The long-term secular bull markets, such as we’ve seen in gold and silver and in fact in many of the metals, do not end this way.

They end with a parabolic move upward. That is why I don’t think this is the end of the gold bull market at all. I think it’s probably a welcome reprieve. But ultimately, if we are not at the bottom, we’re fairly close to it.

Here is a daily chart:

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Click to Enlarge

TGR: You testify to the Federal Reserve Board twice a year. In the last meeting, was there any indication of more easing on the way?

MB: There is every indication of more easing; there is every necessity of more easing. But the Fed is divided. Some of the Federal Reserve Bank presidents and governors believe we should tighten, while others have followed the Bernanke line, pushing easing. I cannot even imagine how we could raise rates in this market.

I’m not saying that we don’t have food price inflation, but the Fed really wants to inflate out of this problem. So I think we’ll have more easing. But for now, the Federal Open Market Committee is divided between hawks and doves in a way it has never been in the past. It is going to be very interesting to see what happens as we move forward.

TGR: Many of your preferred companies have significant byproducts, primarily copper. Is this because you think copper has a bright future or because having significant byproducts tends to lower cash costs for gold and silver miners?

MB: I think it’s the former. If we are going to go into an irrecoverable economic depression, then there’s no future for copper. But I’m an optimist, and even though these are very difficult days for global growth, I think companies that own copper deposits are going to be very valuable when we exit this down period.

Therefore, I like copper—not necessarily as a byproduct, but as a major primary product. And if you look around the world right now, many countries are nationalizing their copper deposits. Good copper deposits are hard to come by. Copper is clearly an indicator of global economic health, and we are going to continue to grow again. It’s just going to take some time, perhaps a long time.

TGR: When it comes to silver and gold companies, what do you look for in a possible investment?

Interview Continues on Page 2

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MB: I have developed a ten-factor model for discovering micro-cap and small-cap companies. First, in extractive resources, we look for world-class deposits or at least the potential for world-class deposits.

The second critical factor is management. There are a lot of good management teams right now. But it is a very difficult time. Many of these companies have been sold down. And some of them are not going to survive. It’s a pity, but that’s just the way it is.

A number of companies that I would have said were good if we were speaking a few months ago are less good today, because a lot of them cannot access capital markets to raise money. One of the characteristics of all junior miners is that they are constantly raising money because, by definition, they don’t have production and cash flows yet. There are some great bargains out there, but it is going to take a strong stomach to buy some of these companies.

One company that I think is really excellent is the silver company Alexco Resource Corp. (AXU). The company is in the Yukon cleaning up the old silver dumps from the past century. There are 35 old mines up there with extraordinarily high-grade silver, 40 ounce (oz) silver that it is now beginning to mine. Clynton Nauman is the CEO; I really respect him and I think he has assembled a good team.

Here is a daily chart:

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Alexco is an example of a company that will have $20–$30 million on the balance sheet in cash, so it is sustainable. It probably will make $30M this year and next year. That is the kind of company we like, those with sustainability, especially in this tough market environment.

TGR: Any other silver companies you like? Maybe in Mexico?

MB: Mexico is a country in a bit of turmoil right now. It is a little more difficult to work there. But Mexico and silver go hand in hand. The Faja de Plata, the plain of silver, is famous. The Peñasquito mine, which is now owned by Goldcorp Inc. (GG), is the largest silver mine by net asset value in the world and the second largest gold mine by net asset value.

Here is a daily chart:

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Click to Enlarge

TGR: Nevada seems to be a hot spot, both for silver and gold. Are there some plays that you like there?

MB: Nevada is a great place because it is a mining state. Utah, Nevada, and Arizona are great places to find things and get permission to mine them. Terraco Gold Corp. (Toronto: TEN) has the Moonlight deposit, which is in northern Nevada, not very far from Reno. It is in the same Black Ridge Fault zone with Pershing Gold Corp. (OTC: PGLC), a new company with a new management team led by Steve Alfers, formerly one of the key managers at Franco-Nevada Corp. (FNV).

The company is consolidating the bottom of that trend in a land position around the Relief Canyon mine. I really like that management team. I have been out to see the property and spend time with management. I think it has a lot of potential. More than 150,000 oz. of historical gold has been drilled out and I think both companies will find a lot more, plus there is a fully commissioned gold plant that is not in operation at the present time.

Yes, I am bullish on Nevada. I think there is a lot of opportunity in gold, silver, and copper there. Why go to Africa or China when you can go to a place like Nevada and make great discoveries and subsequently mine?

Interview by the Staff at The Gold Report

Dr. Michael Berry served as a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia from 1982–1990, during which time he published a book, Managing Investments: A Case Approach. He has managed small- and mid-cap value portfolios for Heartland Advisors and Kemper Scudder. His publication, Morning Notes, analyzes emerging geopolitical, technological, and economic trends. He travels the world with his son, Chris, looking for discovery opportunities for his readers. His new, free Discovery Investing Scoreboard software covers all companies on all exchanges using a ten-point grid.

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