An Interview with Managing Editor & Chief Analyst Carlos Andres

Source: Brian Sylvester of The Gold Report (2/22/12)

Volatile markets. Natural disasters. Geopolitical turmoil. Last year was definitely one for the record books, according to Carlos Andres, managing editor and publisher of the Frontier Research Report. With the world in turmoil, is there any upside for mining investors? Andres believes there is for investors courageous enough to look past the perceived risk and snap up battered, but fundamentally sound, junior mining stocks. In this exclusive interview with The Gold Report, Andres talks about why historical data points to a breakout year for gold and perhaps gold shares.
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The Gold Report: In a recent edition of the Frontier Research Report, you wrote, “As perplexing and disconcerting as it may be, the performance of major global stock markets currently has a much stronger influence on share prices in the mining sector than the actual performance of the underlying commodity.” How is that different from previous cyclical dips in the resource commodity space?

Carlos Andres: It’s not different at all. The commodity space tends to be viewed with a bit of fear and skepticism by most retail investors and analysts generally. By extension, mining companies are viewed skeptically also, especially those in emerging and frontier markets. As a result, resource companies in emerging and frontier markets tend to be the last to receive investment capital during a bull market in stocks and the first that investors exit when markets get rattled.

TGR: Do you see a time in the near future when mining equities are influenced more directly by commodity prices instead of overall market conditions?

CA: It happens in the mature phase of a commodity bull, but the dynamic just described isn’t going to disappear. However, I wouldn’t be in this space if I didn’t expect there to be appreciation in the shares. Although rising commodity prices drive the process, investors and analysts cannot ignore rising profits at mining companies as commodity prices rise. Analysts begin to look foolish by ignoring sectors that are outperforming. Generally, these rising profits begin to attract the investment herd to the mining space. Some of this money will also find its way into the junior resource exploration companies we cover. Because this market is relatively small compared to the overall market, it doesn’t take much investment capital to drive share prices significantly higher, often many multiples higher than where the share prices bottomed.

TGR: In your latest edition of the Frontier Research Report you wrote, “Gold outperformed all major stock markets (in 2011) with a gain of +10%, confirming its role as the ultimate safe haven.” Yet many pundits believe gold plays second fiddle, if not third or fourth, to the U.S. dollar in terms of “safe haven” investments and that gold’s fall in the latter half of 2011 severely tarnished gold’s reputation as a safe haven. Whom should retail investors believe?

CA: Since January 2000, the dollar is down 22%. During that same period, gold is up 497%. During this same period we have had a tech bubble, 9-11, wars in Iraq and Afghanistan, a global financial crisis in 2008 and the global train wreck that characterized 2011. This is a hint at the answer to your question. In 2011, the dollar was flat, while gold was up 10%. You be the judge.

TGR: Last year marked the 11th straight year of gains for gold. It has only returned less than 10% in four different years: 2001, 2004, 2008 and 2011. That pattern suggests that gold slumps slightly every three years. It begs the question: What’s the pattern in the years immediately after a slump?

CA: Gold has performed very well after the years with single digit gains. For example, gold returned 1% in 2001, but then returned 26% in 2002 and 20% in 2003. In 2004, gold had a 5% gain, but in the following years it was 17%, 23% and 32%. In 2005, it returned 5% again. However, in 2009, it reached 25%, and in 2010, it hit 30%.

Based on historical returns, gold could perform quite well in 2012. It could also break the pattern and underperform, and that wouldn’t shock me or cause me to change my outlook on gold. If gold didn’t perform well in 2012, I would still keep my eye on the supply and demand fundamentals, which are as positive, if not more so, than they were at the beginning of the gold bull more than a decade ago.

TGR: The gold price is already off to a good start for the year.

CA: That’s right. It’s up 14%. As you say, we’re off to a good start.

TGR: What role could China play in gold’s performance this year?

CA: China’s role could be huge. China is the largest gold producer on the planet. It is also the second largest consumer behind India. However, China’s demand is rising at a torrid pace and thus will likely pass India in the near future. No other countries even come close to the level of demand from these two. The Chinese government has become extremely aggressive in building up the country’s gold reserves as well as promoting gold ownership for its citizens. It has adopted a long-term policy of accumulating gold reserves with a goal of catching the U.S. Believe it or not, China would ultimately like to see the yuan established firmly as a global reserve currency like the dollar. The government is also encouraging the public, which has a historic affinity for gold anyway, to accumulate a significant portion of its already large savings in gold. Therefore, China will continue to be a huge driver underpinning a rising gold price.

TGR: If there were transparency in China’s purchasing patterns, would we see a rise in the gold price?

CA: It’s widely believed that the Chinese are buying far more than it admits to. It’s only recently that China has admitted to having over 1,000 tonnes, which was a surprise because it was believed to be much smaller than that. This revelation provided strong support for the gold price. We know that over the short term, China wants to catch up with the reserves of Germany, France and Italy at around 3,500 tonnes and ultimately the U.S., which has around 8,000 tonnes. If China’s true activities were revealed, I suspect it would drive the gold price to much higher levels.

TGR: You haven’t ditched gold because of events in 2011. What opportunities are you looking at this year?

CA: No, I haven’t steered away from gold. The fundamentals look fine to me, so I’m happy to buy junior gold explorers in emerging and frontier markets at these distressed levels.

TGR: What does your research process involve when you’re investigating a mining company?

CA: I generally visit exploration projects, interview management and perform extensive due diligence on all public and private information I can get my hands on. I’m very interested in looking for opportunities in emerging and frontier markets because they tend to be shunned for their perceived risk as opposed to actual risk.

Our approach is to take a close look at these companies, their projects, the jurisdictions they operate in, their management teams, financing, and investor relations as factors to get a feel for their prospects, regardless of the fact that they may be in emerging and frontier markets where perceived risk is fairly high. We pick the best of the best. Honestly, the more risk associated with these companies, the more we like it. It means we’ll be able to buy the shares at depressed prices that don’t reflect their inherent value.

TGR: What are some of those names?

CA: Sulliden Gold Corp. (SUE:TSX; SDDDF:OTCQX; SUE:BVL) in Peru is a favorite. It has an excellent management team. Its Shahuindo gold project represents a large, low-grade, bulk-tonnage affair with a deposit that is literally open in all directions, including at depth. The company continues to find mineralization in all directions that’s consistent with what it has already found. It had 1 million ounces (Moz) defined when we first recommended the company in 2010. Since then the resource has grown to about 3.4 Moz and it likely has a long way to go before Sulliden finds its limits. We wouldn’t be surprised if it has 5 Moz by the end of the year, and in our opinion the sky’s the limit beyond that.

In terms of jurisdiction, Peru is one of the biggest gold producers on the planet with a mature mining industry; however, it has had a few hiccups on the local level lately. Some mining operations have experienced protests, sometimes violent, from the local communities, including Newmont Mining Corp.’s (NEM:NYSE) giant Conga project, which was under construction. There were serious local protests and, as a result, it shelved that project temporarily. The project appears to be back on track and Newmont expects to begin production from the new mine in 2015. Although we are watching all aspects of the situation in Peru closely, events have not been sufficient to cause us to turn negative on the country as a mining jurisdiction.

TGR: Sulliden recently purchased a 1.5% net smelter return royalty on Shahuindo for $11 million (M). Was that a good price, or did it create a lag on Sulliden’s stock?

CA: I don’t believe it caused a lag on the stock. Sulliden’s stock price has retreated in lock step with the overall markets in general and along with the gold mining sector in particular. The current mine plan calls for 105,000 oz of annual production with a 10-year mine life. We think the mine life will ultimately be much larger than that. However, using these figures and a $1,500/oz gold price, Sulliden paid $11M now to obtain $24M in revenue over the 10-year mine life. That’s not a bad deal and given that the deposit and the mine life are likely to grow, this is probably a shrewd move by management.

TGR: Sulliden recently had a drill intercept of about 54 meters (m) at 0.85 grams per ton (g/t) gold and 71.4 g/t silver in the central corridor of Shahuindo. What’s interesting about that is the high-grade silver aspect of that intercept. Do you believe that this is becoming more of a silver play than a gold play and may garner some interest from some of the big silver players?

CA: It certainly has the potential. At current market prices, the gold deposit is roughly 2.6 times bigger than the silver deposit. If Sulliden continues to encounter silver grades and intercepts like this going forward, it may indeed reduce that ratio further, making it more attractive to silver players over time.

TGR: What other companies interest you right now?

CA: Because we are talking about Peru, let’s talk about Minera IRL Ltd. (IRL:TSX). It has a strong management team led by Courtney Chamberlain, a man whose capabilities we highly respect. Although considered a junior explorer, the company has a producing gold mine, Corihuarmi, in Peru, which is helping to finance exploration at its flagship project named Ollachea, a much bigger project in Peru. Existing production is always nice as it diminishes the company’s need to raise capital and dilute shareholders.

Ollachea, so far, has 1.4 Moz of Indicated resources, of which 1.1 Moz are classified as “Probable,” and an additional 1.2 Moz of Inferred, with strong grades between 2.8 g/t and 4.0 g/t. That’s 3.6 Moz in all. To make things more exciting, the deposit consists of two separate zones and both are open in all directions. The company is on to something very large. This will be an underground affair, and as such, Minera is currently digging a lengthy tunnel into the mountain that will be both the basis for production as well as for further exploration deeper into the existing deposit. The project is advancing rapidly as Minera has already completed a prefeasibility study and the definitive study is expected by the 3rd quarter of this year. It currently expects to bring the deposit into production in 2014 at a rate of 117,000 oz (117 Koz) per year. To top it off, the company maintains outstanding relationships with the local community.

The company also hopes to rapidly advance production on its Don Nicolas project in southern Argentina. Don Nicolas is in a highly prospective gold district known as the Deseado Massif, where many of the majors are located. It’s turning into a gold-silver district of significant proportions. The project already has an established resource of over 500 Koz with respectable grades between 1.5 g/t and 2 g/t. Minera is planning to bring this deposit into production in 2013.

Don Nicholas is right next door to another promising company that we cover, Mariana Resources Ltd. (MRY:TSX; MARL:LSE). Minera and Mariana actually own separate halves of the same deposit. The property line between them bisects the deposit. As each company makes progress, it actually helps both to assess the geology.

TGR: Don Nicholas’s recent feasibility study indicates that at $1,250/oz gold, it would create an internal rate of return (IRR) of about 35%. If the price of gold increases by $300/oz, the IRR could top 50%. However, Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) has had some issues with permitting its Navidad project in Chubut province in Argentina. Is Minera likely to encounter problems, too?

CA: No, we don’t think so. Don Nicholas is in the Santa Cruz province, which is known to be extraordinarily mining-friendly. The agriculture and ranching economy of Santa Cruz was destroyed 20 years ago by a blanket of ash dropped by a volcano in Chile. The area has welcomed mining to restart a dead economy, but other provinces in Argentina have proven to be unfriendly to mining.

TGR: Are there any other unusual jurisdictions that you’re looking at?

CA: Lion One Metals Ltd. (LIO:TSX.V; LOMLF:OTCQX; LY1:FSE) is advancing the Tuvatu gold deposit in Fiji. A previous owner had defined an underground deposit and prepared a feasibility study. The project was shelved due to low gold prices in the late ’90s. This was all prior to the advent of NI 43-101 standards so Lion One has to carry out definition drilling again to define the deposit based on current standards. The bottom line is that we know there’s gold there; the question is how much. All indications are that there is a great deal. In addition, survey work and drill results have caused the company to reinterpret the geology of Tuvatu in a way that suggests the potential for a large open-pit bulk mining operation.

TGR: Lion One has split Tuvatu into a number of development areas. It would like to expand the high-grade underground epithermal system in addition to proving up the larger bulk tonnage target. Is this accurate in your view? And what do you think the upside potential is?

CA: We should know a lot more by the end of the year. There is an underground situation with an existing tunnel, so it doesn’t have to dig a new one. It allows the company access into the heart of the mineralization that’s already been discovered. Lion One can explore from there. But this tunnel is about 200m underground, and there is mineralization between the surface and the top of the tunnel. If the mineralization is sizeable enough, a bulk-tonnage low-cost open-pit mine may indeed be what makes sense there. That, combined with the fact that it’s identified a few other target zones close by that have consistent geology, means the size and scope of the deposit may be very large. Some important milestones are going to be reached in 2012. We should see a maiden resource estimate and some light should be shed on whether the mineralization conforms to an open-pit bulk-mining solution.

TGR: Fiji is a beautiful place. A large, open-pit gold mine doesn’t seem to fit with the country’s tourism-based economy.

CA: That’s a good point and worth talking about. We can’t guarantee that there won’t be issues, but the government of Fiji has historically been friendly to mining. The Vatukoula gold mine has operated for decades just 50 kilometers up the road. In addition, China recently opened a bauxite mine there. We are not overly concerned about it. But an open-pit mine in this particular area of Fiji is new territory, so there will be environmental issues that will have to be addressed successfully.

TGR: Do you have some parting thoughts on this space?

CA: The markets, natural disasters, financial crises, economic upheaval, geopolitical events like the Arab Spring—all of these things made 2011 one for the record books. It created a great deal of fear in the minds of investors, even though the junior gold mining sector had positive fundamentals. The markets were overwhelmed, even in the places where there was some light. Investors need to stay dialed into the fundamentals because, over the long term, fundamentals will assert themselves regardless of short-term shocks to the marketplace. I encourage investors to be bold enough to take advantage of price weakness when it comes. This is one way in which you mitigate risk in the sector. Buy strong companies where the underlying fundamentals are also extremely strong. Even when those companies get hammered during hard times, investors should use those as buying opportunities to add new companies to your portfolio or reduce the basis in your existing holdings.

TGR: Thank you for your time, Carlos.

CA: It was my pleasure, Brian.

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Carlos Andres is the managing editor and chief analyst of the Frontier Research Report, a natural resource-oriented monthly investment newsletter focused on high-risk, high-reward junior exploration companies in emerging and frontier markets. Andres applies a potent mix of world-class expertise and lengthy experience in identifying countries and companies where “perceived” risk is much higher than “actual” risk, providing opportunities to profit significantly on the difference. Andres has been a natural resource analyst and investor for over 15 years.

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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Sulliden Gold Corp., Lion One Metals Ltd. Streetwise does not accept stock in exchange for services.
3) Carlos Andres: I personally and/or my family own shares of the following companies mentioned in this interview: Sulliden Gold Corp., Lion One Metals Ltd. Minera IRL Ltd., Mariana Resources Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for participating in this story.

Source: Zig Lambo of The Energy Report  (8/25/11)

Operating out of Uruguay, Carlos Andres’ Frontier Research Report provides a vastly different perspective. In this exclusive interview with The Energy Report, he gives us some insights on global mineral exploration and production in areas that are more “out of the way” than what we usually consider. He tells us about two very exciting companies with huge investment potential in projects located in Namibia and Ethiopia.

The Energy Report: Carlos, as publisher of the Frontier Research Report based in Uruguay, you seek out attractive undervalued situations in the metals mining area and in energy and agricultural minerals. Can you explain your philosophy in making investment selections for the portfolio that you follow?

Carlos Andres: Sure. We’ve chosen the junior exploration space because we believe it gives investors the best bang for their buck. It’s high risk but it can also provide the highest imaginable returns. By investing in well-researched companies, with strong management and highly prospective projects, investors can make many multiples of their initial investments as companies successfully transition from explorer through development to producer.

However, we can dramatically reduce the risk involved without reducing the upside by doing our homework. We apply our well-honed expertise and lengthy experience to differentiate opportunities that may appear high risk on the surface but actually have critical value drivers in their favor. With this in mind, we target emerging and frontier markets because investors and analysts tend to lack knowledge of or experience with these countries, and therefore tend to associate fear and high risk with them. In contrast to this tendency, refined expertise and experience can be the biggest differentiators in clearing the fog of “perceived” risk in order to unearth overlooked opportunities in these less traveled and less understood markets.

Emerging and frontier markets provide opportunities to buy high-quality companies at a discount simply because of the “perceived” risk factor. So we look at places such as Mongolia, which is a resource-rich country that is just beginning to realize the benefits of 20 years of liberalizing its markets. As a result, foreign direct investment has been steadily increasing, the rich resource endowment is starting to be developed and the country is experiencing historic economic growth. From a broader perspective, there are emerging and frontier market economies in South America, Southeast Asia and Africa with similar stories, although they all have their own unique twists. Countries like Colombia, Peru, Chile, Brazil, Guyana, Argentina, Ghana, Namibia, Tanzania, Botswana, Ethiopia, Indonesia, Papua New Guinea and others all play an important role in meeting historic and rapidly increasing global demand for natural resources.

TER: You live in Uruguay, which is a place most people have maybe heard of but couldn’t find on a map to save their lives.

CA: That’s probably true. Many think it’s a landlocked dictatorship in South America. They have the South America part right. Still others boldly identify it as a country in Southeast Asia. Yes, it’s off the radar for most, but a lovely place nonetheless.

TER: You obviously have a different perspective on viewing resource companies and opportunities there versus somebody who does this from a nice office in a high-rise building somewhere in the U.S. or Canada. Can you give us a little perspective from your point of view and tell us what investors there think if they’re even involved in these kinds of investments?

CA: Sure. From a retail investor standpoint, I’m not sure how folks in South America invest their money. But I do know that in terms of wealth generation and economic growth, natural resources play a big role. How much of the capital investment comes from South America itself and how much of it comes from the major capital markets like Canada, London or Australia, I’m not sure. But South American retail investment is growing and therefore transaction and market cap levels in the local stock markets in places like Peru, Colombia and Chile are growing. As a result, there are mergers in the works between these exchanges to develop a world-class capital market in South America, if that’s any indicator. This is also prompting many Canadian-, Australian- and London-listed miners to adopt local listings in the South American countries in which they do business. This is a growing trend, and companies often proudly report the percentage of their share ownership that is local. Certainly the focus down here among the general population is natural resources. That is how most wealth is generated, whether it’s in agriculture, forestry, mining, or oil and gas. It is a significant factor here and there is an acceptance of it and orientation toward it.

TER: Rising prices and struggling economies are causing many countries to rethink their tax and mineral royalty laws to increase their percentage take of the commodities produced by private companies. How is this going to affect companies developing new mines and producing from existing ones?

CA: Governments in countries that are rich in natural resources with populations that may be relatively poor are going to look toward their natural resource endowments to provide economic relief to their populations. Natural resource extraction is often one of the bigger contributors to an emerging country’s economic growth. It’s quite natural for governments to look to it as a source of revenue and they are going to want a bigger piece of the pie. The question is how far is the government going to take it—either in the form of royalties against revenue or increasing income taxes against company profits. A government can also take an ownership interest in the company, which some do. Sometimes governments will pay for this interest, thereby becoming a JV partner or sometimes they do not. Depending on the details and the manner in which these reforms are introduced, companies and foreign investment capital often successfully endure the burden. However, in a worst case scenario, governments can also outright nationalize a company and take it over. We’ve seen this in Bolivia and Venezuela, for example, with another round of gold mining nationalization on the horizon apparently, and South Africa is threatening such legislation.

On the other hand, in Ghana, a very mining friendly country, it is required by law that when you get your mining permit, 10% of the company will go to the government for free. And it works very well because the government approached the issue in a mature and transparent way in consultation with the industry. Many of the gold majors profitably operate mines there and it is a premier exploration destination in Africa. Ghana is the second largest gold producer in Africa, behind South Africa. In addition, the government imposes royalties on revenue and income taxes on profits.

So if an explorer or a producing major is assessing various emerging or frontier markets, these are important considerations. Typically, a happy medium can be found between the industry and constructive governments seeking to increase the benefits to citizens from their natural resource endowments. However, companies have to remain ever vigilant in watching for changes in government attitudes. Reading the tea leaves is an important skill set for mining managers.

TER: So, a risk factor component is incorporated into the prices of many of these companies that have big operations in those areas. I guess that’s the price you have to pay if you want to play the game?

CA: That’s right. It’s part of the equation.

TER: There was quite a bit of controversy recently with the Australian government wanting to raise taxes on the mining industry there. Will that have an impact on future development?

CA: The Australian government at the time was led by Kevin Rudd, the former prime minister—and he is the former Prime Minister for a reason. He proposed a 40% super-profits tax on mining companies across the board. It was done by surprise without consulting the industry at all. The number appeared to be picked arbitrarily without taking into account the profitability of Australia’s mining sector or its ability to pay the tax. Obviously, miners have varying ranges of profitability so some might be able to pay it and some might not. The government just threw a big number out there. It was a big and unnecessary risk politically and Kevin Rudd lost.

Mining companies got up in arms and the public was sober and rational enough to recognize that the mining industry represents a significant part of the Australian economy and a lot of jobs. Ultimately, Kevin Rudd had to step down. The government has now gone into negotiations with the big mining companies, which have acknowledged that they are willing to pay some higher taxes, but it has to be done rationally and intelligently. What has happened is, instead of extending to all mining companies in all mineral sectors, now it seems to be focused on the bulk mining industries, like coal and iron ore, but it likely won’t affect gold or silver mining companies and a lot of the mineral miners outside of the bulk industrial commodity sphere. It also appears that the tax will be less than 40% when implemented but it is still in negotiation. In the meantime, mining and exploration in Australia continues.

TER: You follow at least a couple of companies in your portfolio in the energy and mineral fields. One Australian name is Bannerman Resources Ltd. (TSX:BAN; ASX:BMN), which is a uranium explorer and developer with a big project in Namibia. How will the recent Chinese takeover offer impact the company’s prospects?

CA: We like Bannerman a lot. China has 26 nuclear power plants currently under construction. Russia, South Korea and India have another 21 under construction between them. As a result, they are all shopping for a stable supply of uranium. Namibia is one of the more stable uranium rich countries in which to go shopping, to keep all these new reactors fed. Namibia is home to the largest uranium mine in the world, the Rossing mine, owned by Rio Tinto and is the fourth largest uranium producer. Currently, the country only has two advanced-stage deposits. One is owned by Bannerman and is known as the Etango project. The other is owned by Extract Resources Ltd. (TSX:EXT; ASX:EXT). Both represent world-class deposits in terms of size.

We like Namibia as a mining jurisdiction. It represents a somewhat mature and stable mining friendly jurisdiction, despite the fact that it had a recent hiccup where the minister of Mining and Energy proposed government ownership of the country’s mining licenses and the imposition of a super-profits tax. But the uproar has calmed down as discussions have taken place and the government has made it clear that it has no intention of killing the goose that lays the golden eggs. So Namibia represents a fairly stable mining jurisdiction. When the nuclear energy companies around the world go shopping for sources of uranium for their power plants, they obviously want a stable supply from jurisdictions that are outside geopolitical hotspots, which are prevalent in the Northern Hemisphere at the moment. Of course, this isn’t always possible. For example, Kazakhstan is the largest uranium producer in the world but hardly the most stable place to mine. It has evolved into that position over the last few years.

In contrast, Namibia has been a stable mining jurisdiction for a long time. So in this context, Bannerman has a very attractive established deposit where it has defined 213 million pounds (Mlb.) of uranium. That’s a lot of uranium and it is currently selling in the spot market for about $50/pound (lb.). This makes the resource worth $10 billion (B) while the company’s current market cap is $100 million (M) with about $20M in the bank. The mine may cost $700M to build and it may need to come back to capital markets sometime next year for more cash. However, Bannerman has a definitive feasibility study that is due to be completed by the first quarter of next year. A positive study will enhance shareholder value and set the stage for a mine development decision and bank financing.

In this sense, Bannerman is extraordinarily cheap at current prices on an enterprise value per pound basis and it will likely be taken over sooner or later by someone. The company is in discussions with Indian, South Korean and Russian groups in addition to the Chinese. The Chinese bid failed because Bannerman decided that China was trying to take advantage of a weak market to get an extremely valuable resource for almost nothing. Kudos to management for holding out. I hope it can continue to hold out for a better offer. The one Achilles’ heel is its low cash position. But we feel that it could probably come back to the market and get more cash if necessary given the high value that the project represents and its advanced nature. The company also needs a $70/lb. uranium price to unlock the true value of the project. Given the supply/demand picture shaping up in the uranium market over the medium to long term, we suspect it will get it. The price of uranium had just reached $70/lb. when Fukushima hit and that cut it down to the $50/lb. range.

TER: Most of us know that the Chinese are out there trying to tie up almost every available resource in the world that will supply them with raw materials. What impact do you think that is having on resource investments in general?

CA: That is a good question and it’s an important one to contemplate as an investor. Mining projects around the world are confronted by governments that want a bigger piece of the pie and at worst might want to nationalize their projects. In addition, big, state-owned enterprises coming from China, India and others are looking to buy publicly traded mining companies outright. Thus, capital coming from the main public natural resource markets like Canada, the UK and Australia, has to compete with these forces around the world.

It is impossible to say how this competition will play out in the end, but I don’t think state-owned enterprises and national governments can run Western capital off the playing field because the mature natural resource markets in the world are in the West. The expertise for finding these resource deposits and defining, developing and operating mines actually rests in the West as well. They need Western capital, expertise and technology to operate effectively. So a balance will have to be found between the giant state-owned enterprises from emerging countries like China and India, and Western capital, technology and management. How it plays out in the end is anybody’s guess. But eventually market and geopolitical action will define the balance. It’s probably safe to assume that in meeting their resource needs, behemoths like China and India will have to be content, at least to some extent, on being customers rather than owners.

TER: Another area that is generating quite a bit of excitement because of the growing need for food is the potash business, which produces fertilizer. Can you give us a little background on what’s going on there?

CA: Most people probably don’t realize that the fertilizer used to grow the food they eat does not come from animal manure; it is mined. There is a complex of three minerals—nitrogen, potassium (potash) and phosphorus—that makes up the bulk of fertilizers used around the world. Potash, in particular, is interesting from a supply/demand perspective because, in terms of production, it is the rarest of the three. It is also bulk mined and, thus, is mined and priced by the ton. The commercially viable and producing deposits are extremely deep—1,000 meters underground. So, consider that this bulk-mined commodity has to be brought up from the depths by the ton and shipped by the train carload. It is a very capital intensive mining development enterprise compared to developing your average gold mine. When you talk about developing a potash mine, we’re talking about $3B–$4B, whereas you can often develop an open-pit gold mine for roughly $100M–$200M.

What is even more intriguing is that the world’s potash supplies are highly concentrated. You only have commercially viable potash deposits in 12 countries being produced by 13 companies, resulting in 80% of this bulky product being exported for use in some 160 countries. So, you have very constrained supply amidst broad global demand.

On the demand side of the equation, China and India have huge populations, in case you didn’t know. This requires them to tax their arable land very heavily, hence creating a large and growing demand for potash. China is planting much of its arable land three times a year to meet rising food demand. That kind of activity strips the land bare of the nutrients it needs, requiring heavy use of fertilizers such as potash. This dynamic is playing out across Asia as its population increases, urbanization continues, the middle-class grows, and incomes rise. One last piece of that puzzle is the geography of potash supplies. Potash production is dominated by Saskatchewan Canada; Russia; and Belarus. Belarus is right next door to its dominant and overbearing neighbor, Russia. A vast majority of the world’s available potash comes from those sources alone. Think about the geopolitical consequences of Russia and Canada controlling this critical agricultural fertilizer. It makes for a very interesting story.

To make a long story longer, demand is rising dramatically, led by Asia, and potash is an irreplaceable fertilizer. There is no substitute. The majority of the world’s potash is controlled by two countries, and supplies, although voluminous underground, are costly to mine and distribute. As a result, demand is rapidly outstripping supply, leading to a dramatic rise in potash prices over the last few years. This creates an opportunity to explore for and develop supplies that are both geographically diversified and located at shallower depths, making them cheaper to mine.

TER: Well, if Canada ever goes Communist, we’re in trouble.

CA: That’s right. And, just to add a little to the drama, because Belarus is in very deep economic trouble at the moment, Russia has taken a huge interest in a state-owned potash company, Belaruskali. In order to secure financing, Belarus has had to put up that company as collateral. So, Russia now has its teeth in the Belarus supply as well. The price peaked in 2008 just before the global financial crisis at something like $1,000/ton, where over the recent decade it had been $50–$200/ton. It has fallen back down to $400–$500/ton. That price level now makes certain locations or mines possible that weren’t possible at lower prices. The higher prices are driving potash exploration.

TER: What do you like there as an attractive investment opportunity?

CA: At the moment, we’ve recommended Allana Potash (TSX.V:AAA; OTCQX:ALLRF). It represents a high-risk, yet potential high-reward situation that is located in Ethiopia. This frontier market is slowly opening its markets and stabilizing both economically and politically, featuring a democratic government. In the process the country has become mining-friendly and is experiencing historic economic growth. However, it is early in its development and, therefore, still carries substantial jurisdictional risk. What’s exciting about Allana’s Dallol deposit is that it is massive in size, high grade and sits at very shallow depths in comparison to the deposits in Saskatchewan or Russia. It is also attractive to China and India because it is located outside of the geopolitical influence of Canada and Russia. As a result of this and the fact that Ethiopia is rich in other important resources, both China and India are very active there. They are building out infrastructure to help stabilize the economy and promote its growth in order to extract those resources securely.

Another interesting fact is that Allana is a Forbes & Manhattan (F&M) deal. We didn’t know that when we first began looking at the company. F&M CEO Stan Bharti is a big driver behind the development of the Dallol potash project. These folks are proven mine developers. Allana has defined a huge resource that’s open in all directions. It’s a promising project and the company has roughly $60M in cash headed by a proven management team. There are two critical risks facing the project. One is the country risk we just spoke of and the other is the very hot and remote location of the deposit, where the lack of transportation infrastructure is an issue. Product has to be shipped roughly 600 miles from the desert valley-like location to get to the main port in Djibouti. Allana will transport the potash by truck initially. What will really unlock value here is the proposed railroad, which needs to find funding. The government of Ethiopia is mining friendly and supportive of this project and the Chinese and Indians have both pledged a great deal of money to develop railroad infrastructure. The big question is: When will this railroad development take place relative to Allana’s potash mine development? We are bullish on the company despite the risks mentioned. We believe the strategic importance and location of the project, along with the deep pockets and influence of the Chinese and the Indians, will go a long way to mitigate risks.

TER: That’s definitely one to keep our eyes on. The potential is certainly big, and it sounds like a matter of timing and financing now. Do you have any closing thoughts you’d like to leave with us?

CA: During a down market, we always encourage investors to remember that to profit in the high-risk, high-reward exploration space we have to buy low and sell high. Therefore, down markets are our best friends. It allows us to purchase well-researched high-quality companies at steeply discounted prices and this greatly reduces our risk. Further, we believe uranium and potash are critical natural resources where demand is rising faster than the ability of miners to supply it. Therefore, these are good sectors in which to deploy capital at current prices. Of course, this should be done with speculative capital only and no leverage so that you have the staying power to wait for the trend to catch up.

On the supply front, all mining is capital intensive. It takes a long time, in terms of years, and a lot of expertise in the face of extraordinary risk before a deposit can be found, defined, developed and brought into production. We believe that the demand part of this current equation is sustainable because of the structural demographic changes happening in Asia to drive prices higher.

Despite current market turmoil, the trends driving higher prices are here to stay, making this a lucrative space. We don’t want investors to lose sight of that when they are thinking about short-term market volatility. So, the trick is to not be afraid but to buy good quality companies when they’re cheap, like now. Then we hold on for the ride because eventually market turmoil gives way to underlying fundamental supply and demand dynamics.

TER: We greatly appreciate your insight.

CA: Thanks for having me.

Carlos Andres is the managing editor and chief analyst of the Frontier Research Report, a natural resource–oriented monthly investment newsletter focused on high-risk, high-reward junior exploration companies in emerging and frontier markets. Mr. Andres applies a potent mix of world-class expertise and lengthy experience in identifying countries and companies where “perceived” risk is much higher than “actual” risk, providing opportunities to profit significantly on the difference. Mr. Andres has been a natural resource analyst and investor for over 15 years.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:
1) Zig Lambo of The Energy Report conducted this interview. He personally and/or his family owns the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Allana Potash Corp, Bannerman Resources Ltd., Forbes & Manhattan
3) Carlos Andres: I personally and/or my family own shares of the following companies mentioned in this interview: Bannerman Resources and Allana Potash. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Source: Zig Lambo of The Gold Report  (8/24/11)

If gold equities are on sale, the stocks Carlos Andres follows as publisher of the Frontier Research Report are on clearance. Andres seeks out stocks that have been unfairly pummeled, offering extra upside for investors. In this exclusive interview with The Gold Report, Andres identifies some top picks trading at insanely low prices that belie their quality management and mining projects.

The Gold Report: How did you launch the Frontier Research Report?

Carlos Andres: I grew up in an entrepreneurial household that gave me an early foundation in business and finance. My career developed on that foundation. I’ve been a founding partner of a couple of boutique consulting firms over the last 20 years that provided a variety of services that included financial analysis, business valuation, forensic accounting, business turnaround and M&A work across a wide range of industries. I also have an educational background in international or macro-economics and geopolitics. In the mid-1990s, I took notice of global supply/demand imbalances in the natural resource space with the emergence of the Chinese, Indian and other Asian economies and, as a result, became a committed natural resource investor in the late 1990s.

Like many, I began to read a lot of newsletters and ultimately entrusted my investments to selections made by newsletter writers that I had come to respect. With some exceptions, I had a good deal of success this way. But it always bothered me that I wasn’t applying my own experience, expertise and education to company due diligence and industry and market research with the idea that I could remove some of the risk from my investing activities. Eventually I took my own advice and began looking at companies very closely, applying my expertise and developing ideas about targeting companies where there is a significant gap between perceived risk and actual risk. The newsletter was born out of a desire to share my journey with a wider audience.

TGR: How did you end up in Uruguay?

CA: I have always had a desire to travel extensively and live abroad since I spent a year in France in my college days. On another track, as I followed the global natural resource story with great interest over the last decade or more, I also developed a desire to place myself geographically in the midst of this emerging trend. As a result, I began to look for places that satisfied both desires. For me, Uruguay represents just such a place. It is an excellent base from which to explore the resource rich countries of South America.

TGR: What is your definition of an overlooked opportunity, and what approach do you use to unearth these opportunities?

CA: An overlooked opportunity, from my perspective, is one that goes unnoticed or is simply ignored by the investment herd and most analysts. Natural resource investing, although growing in popularity, is still virtually ignored by the mainstream investment community. There are several reasons for this, but an important one is simply a lack of familiarity in connection with ever-increasing global supply and demand imbalances and the complex business of mineral exploration and production. Therefore, we specifically target companies in the natural resource space because this is where we tend to find bargain basement prices, meaning this is where we will find prices that are substantially below the company’s intrinsic value. In this context, we ask the question: Which companies represent the highest risk and thus present the highest potential reward? The answer is pretty straightforward: Junior exploration companies easily represent the highest risk in mining and junior explorers located in emerging and frontier markets drive the risk factor right off the charts. The investment herd and most analysts typically fear to tread in foreign markets that are shrouded in uncertainty. In targeting this segment, we vigorously apply our long experience and considerable expertise to separate the wheat from the chaff. In short, we choose countries and companies where perceived risk is substantially higher than actual risk, with the idea of profiting on the difference. When we get it right, we will make many multiples of our original investment.

To spice things up and increase the high-risk, high-reward factor even further, we will also target distressed junior explorers in emerging and frontier markets. We are sometimes able to identify companies that are on the verge of emerging from distress. The shares of such companies can typically be purchased at steep discounts. Perhaps our tag line should be “unearthing overlooked and undervalued opportunities.”

As an example, we identified Sulliden Gold Corp. (TSX:SUE; OTCQX:SDDDF) as just such a distressed opportunity. Sulliden was a junior exploration company with its flagship project located in Peru. The company was involved in a four-year lawsuit that put its title into question. As a result, the market completely discounted the company. When Sulliden settled the lawsuit and emerged with an established gold deposit, a new management team and a revamped business plan, few people took notice. We recommended the company to our subscribers just as it was emerging from the lawsuit with impressive results.

TGR: What are the drivers that you are focusing on now with rising prices, unsettled world economic conditions and the possibility of another recession?

CA: In the developed world, say North America and Europe, we have this notion that the global economy is driven by the Western world that consumes things that are manufactured in Asia. In order to manufacture these things, Asia imports natural resources from the rest of the world to use along with its own domestic supply. From this perspective, it is typically argued that if there is an economic slowdown in North America and/or Europe, then, by extension, this will cause manufacturing in Asia to slow down, which will cause demand for natural resources to slow and hence cause a worldwide recession. Although elements of this storyline are certainly true, it overshadows a more important driver—fundamental domestic demand changes taking place in Asia with respect to the size of its population, rapid urbanization, a growing middle class, rising incomes and a rising standard of living.

In short, internal demand is rising rapidly in Asia, which is creating an economic dynamic that is being ignored in the West due to inaccurate assumptions about emerging trends and what drives the global demand and supply of natural resources. Asia is an emerging story all on its own with growing domestic demand for natural resources. Asia’s internal demand and internal economy represent a huge global driver and Western investors ignore it at the peril of their portfolios.

TGR: The gold price has made some spectacular moves in the last couple of weeks. This should lead to some greater interest in mining stocks, which have been underperforming the physical metal.

CA: It has been perplexing to a lot of people as to why the producers should be undervalued when the gold price is rising. The HUI/Gold ratio chart is a good place to see this borne out graphically as it is falling to lows not seen since the onset of the global financial crisis in 2008. As one might expect, this trend is even more pronounced among the gold junior explorers. But the fundamentals that are driving the gold price higher remain powerfully intact. Therefore, we expect the producers and juniors to eventually play catch-up. Until then, current valuations represent a buying opportunity and we are buyers at these levels. The disparity between the rising price of the metal and the shares of the companies that find and produce the metal will not likely go unnoticed forever. Demand for gold, oil, uranium, potash and other mineral resources is rising at a much faster rate than supply can or will be able to match over the short to medium term, if ever. In addition, production is depleting reserves much faster than new reserves are being found. This situation argues that commodity prices will continue their upward climb.

TGR: Is Sulliden Gold, which you mentioned earlier, still undervalued? It has a 1 million ounce (Moz.) resource that it has developed in Peru, which is surrounded by some of the largest gold producers in that country.

CA: Sulliden’s Shahuindo gold project is located in what may be the lowest production cost gold mining neighborhood on the planet. The region includes Yanacocha, which is by far the biggest open-pit mine in South America and is considered the second largest in the world. It is owned by major gold miners Newmont and Peru’s Buenaventura. Among the many other gold mines in the area, Buenaventura has two new projects to the north that are similar to Shahuindo. Barrick’s massive Laguna Norte mine is just to the south. Overall, Peru is the fourth or fifth largest gold producer on the planet.

In this setting, Sulliden updated its resource estimate in June. It has been doing a lot of exploration drilling over the past year or more, which has resulted in a dramatically increased estimate from 1.4 Moz. to 3.4 Moz. today. Hence, the dramatic rise in the company’s stock price. Sulliden is a great little company with a great story.

After the four-year lawsuit we mentioned earlier, it was taken over by a group of experienced and serially successful gold miners, from a mining investment house known as Forbes & Manhattan. F&M is run by Stan Bharti, who is an exceptional mining personality. The firm put Peter Tagliamonte, who is also a very accomplished gold mine developer, in charge of Sulliden and together they placed Sulliden on an aggressive exploration and development footing as it emerged from the shadow of litigation.

For investors who were able to purchase the stock earlier last year as it emerged from the lawsuit, it has provided a return that is many multiples of their initial investment. The company has delivered on its business plan and has now progressed beyond being an early-stage explorer to being a company on the path to developing and operating a mine. Nevertheless it still has extraordinary exploration upside as well.

The intriguing thing about the deposit is that the company continues to extend the strike length and lateral extensions of the deposit. In other words, it continues to find gold further and further away from the main deposit in all directions. In addition, a vast majority of its previous drilling has only explored down to about 110 meters (m). The current resource of 3.4 Moz. is found at very shallow depths. The company has punched a few holes beneath this depth to about 400m and discovered that the deposit is open to that depth as well. The bottom line is this planned open-pit gold mine is going to get a lot bigger—in length, width and depth.

It also looks as though the grade is getting better as the company better understands the geology and continues to drill. Sulliden is in the midst of preparing a definitive feasibility study and the results are due to be released any time now. This will be a significant milestone in the company’s development that will set the stage for a decision to start construction and to obtain mine financing. We would also expect a positive study to provide the basis for a revaluation of the share prices in the upward direction.

TGR: What do you think the chances are of it being taken over by one of its larger neighbors?

CA: We think the chances are very high. I have no doubt that the company is on the short list of several of the majors.

TGR: What other companies appear undervalued to you?

CA: As the market has sold-off, gold shares have not been spared. As one might expect, the sell-off does not discriminate and takes both good and bad companies with it. This creates a great opportunity to buy good companies at a steep discount. The current environment is no exception.

In this context, one company in particular that is extremely undervalued, in our view, and represents extraordinary value is Gran Colombia Gold Corp. (TSX.V:GCM), with multiple projects in Colombia. This is a story that has flown significantly under the radar.

It represents the recently completed merger of two companies, Medoro Resources and Gran Colombia. Both are run by the legendary Serafino Iacono and his longtime business partner, Miguel de la Campa. Together they are responsible for the development of Bolivar Gold Corp., which identified the mammoth Choco 10 deposit on the Venezuelan segment of the resource-rich geological setting known as the Guiana Shield. They sold the company to major Gold Fields Ltd. (NYSE:GFI), making fortunes for the shareholders in the process, before Hugo Chavez began nationalizing the gold industry. Gold Fields eventually sold the mine to Rusoro Mining Ltd. (TSX.V:RML). Rusoro owns some of the most prolific gold mines and deposits in the world but is currently receiving the Hugo Chavez discount.

Serafino Iacono and Miguel de la Campa are also the personalities behind Pacific Rubiales Energy Corp. (TSX:PRE; BVC:PREC). For those unfamiliar with the story, Pacific Rubiales is a relatively new company that is also the result of a merger that created the basis for what is now the second largest oil and gas producer in Colombia. The company went from roughly CAD$1.50 a share to a price of over CAD$30 in just two short years. The point here is that these guys know what they are doing. They know the region and they only know one speed: Go big or go home.

Gran Colombia has assembled a group of historic gold projects within Colombia’s prolific and historic gold producing districts. Few realize that Colombia was once the largest gold producer in the world and its gold deposits are what prompted the Spanish to make it the headquarters for colonial expansion. As a result of strategically targeting the area, the company already has the largest deposit in Colombia and is the largest gold producer. Its Marmato project has close to 10 Moz. and an operating underground gold mine. This is a world class deposit no matter how you slice it. In addition, its Gran Colombia project is currently mining just 4 of 29 known high-grade gold veins. These are all historic gold mining areas that have been in production for over 100 years, and in some cases much longer. However, they have not been subject to modern exploration or bulk mining techniques. The company has tremendous upside with a world-class existing deposit, underdeveloped production at 100 thousand ounces (Koz.) per year, underexplored properties, superior management and $80M in the bank. It also owns a 60% interest in a gold refiner, which is a definite value-added feature that you rarely see in any gold mining company. Surprisingly, the company is currently being valued as if it were an early stage junior explorer. We don’t think this perception or its low value will last for long.

TGR: Are there any other discounted stocks you’re watching?

CA: One of the cheapest companies in our portfolio at the moment is Crocodile Gold Corp. (TSX:CRK; OTCQX:CROCF) in Australia, which has an extensive inventory of gold and other mineral deposits. It is a producing gold miner with over 5 Moz. of resources, but, like Gran Colombia, is being valued as though it’s an early-stage, high-risk junior explorer. It is unbelievable how cheap it is. This is another Stan Bharti and Forbes & Manhattan project. Peter Tagliamonte from Sulliden is also actively involved in exploration and mine development at the board level.

The value of the company on an enterprise value per ounce basis as a percentage of the actual gold price is somewhere in the neighborhood of 1.5%. It is just incredibly cheap for a company that is producing gold and has 5 Moz. in the ground. In addition, it recently hired the former CEO of DeBeers Canada to oversee the strategic development of what amounts to a gold district around Darwin in northern Australia.

TGR: Usually they’re worth at least 5%–10% in the ground.

CA: Exactly. Gran Colombia is currently 1.7% and Crocodile is 1.5%. Ironically, these two companies actually represent the companies in our portfolio that have the largest gold deposits, with Gran Colombia at 10 Moz. and Crocodile at 5 Moz. Both have plans to increase production from 100 Koz. to somewhere around 600–700 Koz. per year. Both are world-class operations run by top management with plenty of cash. Their low valuations are just an anomaly and in our estimation investors would be well advised to take advantage.

TGR: Anything else you would like to mention?

CA: The entire gold mining industry from producers on up the risk curve to explorers is undervalued. I think it is definitely shopping season in the gold sector. Do your homework, pick your favorites, buy some now and nibble all the way down on price weakness. Then just have a little patience.

TGR: Do you have any closing thoughts?

CA: Times are definitely tough. The world seems to be undergoing some sort of convulsion where the underlying theme is change, whether it is political, economic, social, peaceful or violent. How things will settle out is anybody’s guess. This is very unsettling for people in general, and this includes investors. It is at times like these that it is important for people to replace their anxiety with a quest for knowledge, insight and understanding. I encourage investors to get involved and do their homework rather than allowing themselves to become overwhelmed by confusion resulting in deer-in-the-headlights–type inaction. Investigate the trends and then put your investments in the way of these trends. It’s the equivalent of setting your sails to harmonize with the direction the wind is blowing. Get out there ahead of it all and run before the wind. Seize historic change as historic opportunity. The road to wealth lies through such times as these.

TGR: I greatly appreciate your input. I think our readers now realize that there are opportunities everywhere and they aren’t just in North America or Africa.

Carlos Andres is the managing editor and chief analyst of the Frontier Research Report, a natural resource–oriented monthly investment newsletter focused on high-risk, high-reward junior exploration companies in emerging and frontier markets. Mr. Andres applies a potent mix of world-class expertise and lengthy experience in identifying countries and companies where “perceived” risk is much higher than “actual” risk, providing opportunities to profit significantly on the difference. Mr. Andres has been a natural resource analyst and investor for over 15 years.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:
1) Zig Lambo of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Crocodile Gold Corp., Forber & Manhattan, Gold Fields Ltd., Sulliden Gold Corp.
3) Carlos Andres: I personally and/or my family own shares of the following companies mentioned in this interview: Sulliden Gold Corp., Gran Colombia Gold Corp., Crocodile Gold Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None.

In keeping with our genuine desire to add value to our reader’s investment activities, it is our pleasure to share with you a recently completed and informative interview series entitled:

A Frontier Capitalist

The series consists of a relaxed 4 part interview with the engaging Carlos Andres, managing editor and chief analyst of the Frontier Research Report.  The interview covers his unique entrepreneurial background, developing natural resource opportunities in emerging and frontier markets, how demand from Asia is reshaping the global mining industry, and the election of leftist Ollanta Humala and its implications for mining  in Peru, among other emerging and frontier market related topics.

The interview was conducted by Mark Wallace, a co-managing editor of the popular blog Capitalist Exploits.

You can immediately access all 4 parts of the interview series by clicking here.  Or you can link to the individual parts of the interview series using the links below:

1. A Frontier Capitalist Part I – Entrepreneurial and International Background
2. A Frontier Capitalist Part II – How China’s Global Resource Demand is Changing the World
3. A Frontier Capitalist Part III – Geopolitics and the election of leftist Ollanta Humala in Peru
4. A Frontier Capitalist Part IV – Investment Opportunities in Emerging Markets and Frontier Markets

Enjoy!

An Interview with Carlos Andres
Managing Editor & Chief Analyst of FRR
Friday – February 25, 2011 – 5pm Pacific Time

Click the mp3 link on the left to hear a recent radio interview of Carlos Andres on the topic of Frontier Markets.  The interview was conducted by respected market commentator Moe Ansari who is the longtime radio host of Market Wrap, a nationally syndicated radio broadcast that has been on the air for 22 years.  Over these years, Moe has interviewed some of the most informed and authoritative figures in the fields of economics, finance, business, and public policy.  Some of the distinguished guests who have appeared on the show include:

• Mr. Frank Holmes—President and CEO of U.S. Global Investors
• Dr. Milton Friedman – World Renowned Economist
• Mr.Sam Stovall—Sr. Investment Strategist, Standard & Poors
• Mr. Chuck Jaffe—Personal Finance Columnist at MarketWatch.com
• Ms. Christine Benz—Mutual Fund Editor, Morningstar
• Mr. Walter Updegrave—Sr. Editor of Money Magazine and CNN/Money
• Dr. Jeffrey Frankel—Prof. Capital Formation at Harvard Business School
• Mr. John Brynjolfsson—Managing Director at PIMCO
• Mr. William Niskanen—Chairman of the Cato Institute
• Prof. Robert Reich – Economist & Former Secretary of Labor
• Mark Hulbert – Editor of the Hulbert Financial Digest
• Ms. Pamela and Ms. Mary Anne Aden—”The Aden Forecast”
• Dr. Robert Prechter—President, Elliott Wave International
• Mr. John Buckingham—Publisher of the “Prudent Speculator”

If there is ever a right time during the year to own gold and the shares of gold mining companies, which are highly leveraged to gold, now is it.  Over the course of the current bull market in gold, which began in 2000, the Sweat of the Sun has typically, although not always, rallied strongly between August and February, with one historic exception being the 2008 market meltdown where stock and commodity markets were universally crushed.

It is during this time frame that a vast majority of the profits have been made from the current bull market in gold and gold shares over the last 10 years, and for good reason.  The summer harvest, festival and holiday seasons occurring in rapid succession during the autumn and winter create an avalanche of gold demand that is almost impossible to counter except by the most extreme or rare market events (e.g. the 2008 meltdown).

I woke up this morning in a problem solving mood.  So on this cold blustery day, draped in my arctic sleeping bag with a cup of Sumatran coffee close at hand and laptop resting on my lap, I set out to resolve the thorny issue of Middle East peace.  After all, you are reading the words of a guy who solved a Rubik’s Cube without the use of a solution guide, or peeling off and reorganizing the colored stickers.  So how hard could it be?

Can you find Israel?

Let’s see now, who are the players in this sordid tale?  You have the Israeli’s, the Palestinians, and the wider Muslim world, not to mention countries external to the region, who shall go unnamed, with an interest in all that oil.  That is to say, with an interest in the well being of the Palestinian’s, and world peace starting with the Middle East.  Who you callin’ cynical?  Where was I?

The Israeli electorate reflects a wide spectrum of positions between the appeasement and ‘land for peace’ crowd on one side, and the hawkish “let ‘em eat cake” crowd on the other, with a range of positions in between.  If you are an Israeli, whatever your position, it is all formulated to answer one basic question… What’s the best way to insure long term survival in a sea of enemies?   This is a preoccupation that is not hard to understand, considering the military genesis of the modern state of Israel, and it’s geographically small size and small population in comparison to the much larger Muslim world surrounding it.  In this context, Israel represents little more than a small but well established beachhead in hostile territory.

See, this is easy.  Now for the slightly more complex Muslim side of the equation.

Extra!  Extra!  Read all about it…

“Treasury prices rallied Tuesday after the Federal Reserve delivered on more bond buying, announcing that it will buy more long-term Treasury securities to help keep the U.S. economic recovery on track and avoid deflation.”

Wall Street Journal – August 10, 2010, 4:52 P.M. ET

What recovery?  From our lofty perch at Global Speculations, where we continually sift through reams of economic and market data for discussion over our favorite cocktail, we don’t see one.  Judging by many of the news articles we’ve been reading neither does a growing segment of the mainstream media.  But that’s beside the point.

The great and powerful Oz, that is the Federal Reserve, in its inimitable wisdom, has decided to continue its strategy of trying to stimulate the economy by buying treasury debt and mortgage backed securities (you know…real estate debt).  The general logic behind the madness is twofold.  First, by buying U.S. treasuries and mortgage backed securities from the Treasury or financial institutions, it will load them up with cash which they are free to lend or invest into the market place.  Second, by buying U.S. treasuries and mortgage backed securities they will maintain or drive up the value of this debt while at the same time driving down interest rates.

In theory, this makes lots of liquidity and debt available at low interest rates which will stimulate business and consumption and thus by extension, the economy.  This in turn helps to maintain asset values (which serve as collateral for debt) and insure that the colossal mountain of debt hanging over the economy like Damocles’ sword will remain serviceable.  Or so the story goes.  There are a lot of question marks in our minds about how you posture an economy for long term growth by pyramiding one mountain of debt on another, but that’s not the moral of today’s commentary either.

To digress still further, we’re not even sure why deflation (a decrease in prices) is something to be feared.  Isn’t a stronger currency that makes stuff cheaper a good thing?  Unless of course you are a lender, which, not to put too fine a point on it, the Federal Reserve is.  They are in fact, the lender of last resort.  A strengthening currency and falling asset prices creates a set of mutually reinforcing risks to a lender´s loan portfolios.  It means falling asset prices, which of course are the collateral securing the loans. It means that borrowers will be paying their loans back over time with dollars that are increasingly worth more than the dollars they borrowed in the first place.  It doesn’t take long for borrowers to figure this out.  You can google articles on the growing trend of home owners and commercial real estate borrowers walking away from their mortgages. There is even a new trend on the rise.  Borrowers who still have good credit but own property that is underwater are now applying for loans for new smaller properties before they hand back the keys to the bank.  Make no mistake, the Fed doesn’t hate deflation because it’s bad for the economy, they live in mortal fear of it because it’s the angel of death to the lending community´s gargantuan loan portfolios.

So much for introductions.  Although all of this is interesting and important to understand, the reason the crew at Global Speculations tracks this issue with great interest is because of its likely impact on our investment portfolio.  We are monitoring the gradual convergence of three hulking global economic storms into what appears to us as a perfect storm bearing down on commodity prices.

Storm number one is the rapidly urbanizing and industrializing economies of Asia.  We don’t have to tell you that a lot of people live in this part of the world and they are on a mission to improve their standard of living.

The second storm is the challenge in natural resource industry to meet growing demand.  It takes a great deal of time, capital and credit for natural resource companies to develop the production capacity and infrastructure required to meet rapidly growing demand.  This reality puts long term upward price pressure on the entire spectrum of commodities.  This is the mega-trend of the 21st century we see unfolding, despite current economic weakness in the major developed economies of the west.  In fact there are indications that supply is actually falling across many commodities.  There are many reasons for this with the most prominent being the disappearance of cheap and easy to access commodities.  The low hanging fruit is dwindling.  Prices will have to rise much higher to justify the effort to supply more.

The third storm front, which will turbo-charge pressure under commodity prices, is the avalanche of money and debt being pumped into the economies of the developed western world to stave off economic Armageddon.  The bottom line is quite simple.  if the volume of money available to buy stuff is increasing exponentially along with the demand, while at the same time the actual production of stuff remains the same or declines, then explosive pressure builds under the price.  It’s simple.  The tricky part is figuring out how to profit from the converging storms.  The FED´s latest actions may prolong the inevitable for a while but balance sheet trickery will only make the eventual price spikes more dramatic and for many more painful.

This is why your editors at Global Speculations are positioning ourselves and our Premium Subscribers in investments that are sitting right in the pathway of the storm.

In early July, I completed a Special Report for our subscribers explaining the fundamentals of the Uranium market and the rapidly emerging imbalance between supply and demand.  We wanted to draw attention to the likelihood of significantly higher prices in the near future.  As if right on cue, the spot price of Uranium awoke from its year long slumber in July.   It has increased roughly 10% to US$45.25 in the last couple of weeks, the most since last October when it settled into a bottoming pattern around US$41.

This is a sharp increase, that gets even sharper when we look at the stock prices of major Uranium producers.  It is even more dramatic for promising junior uranium explorers.  As uranium investors are well aware, the shares are highly leveraged to the price of the underlying commodity.  Of course this is true with other commodities as well but it is particularly true of the relatively small Uranium market.

To underscore this point, not only has the Uranium spot price begun to move, the stock price of Cameco (the world’s largest Uranium producer) has risen from C$22 to C$26.45 since early July.  This is a one month increase of 20% for a major producer with a US$10B market cap.  That’s a head turning leverage of 2x to the underlying spot price in 30 days.  But it gets better.  A promising advanced stage junior explorer we recommended in our July issue of the Frontier Research Report is up 40% from our recommended buy price since that time.

In summary, the underlying commodity price has moved 10%, a major producer has moved 20% and an advanced stage junior explorer has moved 40%.  This is a beautiful picture of leverage in action.  Of course this works in reverse as well, but as indicated above, we believe the Uranium market is poised to make a dramatic move upward in the coming months.  There are several significant emerging factors to explain this and we cover them in detail in our report.  However, we’ll share one of these factors with you here.

Despite concerns over the safety of nuclear energy, the world is quickly coming to the realization that only nuclear power has the ability to meet rapidly growing demand coming primarily from Asia.  Asian economies are steadily urbanizing and industrializing, leading to relentless economic growth, infrastructure expansion, and rising standards of living.  This transformation is driving up demand for a multitude of natural resources including electricity.  The only clean and viable solution is the ability of nuclear power plants to provide electricity on a scale that can keep up with growing demand.  This in turn has prompted many countries to aggressively step up the development of nuclear power plants.

Nowhere is this more true than in China, where 24 plants are under construction, 33 are planned and another 120 are proposed.  India is also on an aggressive development path, with 4 under construction, 20 planned and an additional 40 are proposed.  All told, there are 63 reactors under construction, 169 in advanced planning, and 384 proposed in a world that has 439 reactors currently operating.  This is a gigantic surge in development and the Uranium will have to come from somewhere.  Uranium miners will have a hard time increasing production to meet this burgeoning demand.

For a much fuller analysis of the supply and demand imbalance unfolding in the Uranium markets, I would like to extend an invitation for you to read our recently published Uranium Special Report for free, with no obligation.

To obtain immediate access to the report, please click the following link.  Uranium Special Report This link will also give you access to additional special reports written by Global Speculations authors.  Feel free to download and read those at your leisure.

I think you will find the Uranium Special Report very informative and useful as an investment tool.

Highest regards,

Carlos Andres
Managing Editor
Frontier Research Report

INTRO LETTER

Welcome to our ever diligent and vigilant subscribers.  Over the past month we have seen the markets in general, and the share prices of our recommendations in particular get whipsawed a bit.  In an email exchange with a very astute subscriber in Germany, Albrecht, one of the many things we discussed was market volatility.  He raised the important point that is always worth emphasizing; shares in the micro cap space are often thinly traded and therefore can be very volatile over the short term.  As a result share prices can move dramatically in both directions.  Although we would love to take credit when the short term price movement is up, it often has little to do with the strength or weakness of our recommendation.  The strength of the companies we recommend becomes apparent over months and years, not days or weeks.   Market volatility is a clever speculators friend. We understand the companies we recommend, and when the market gives us a better price we take it. There is no need to worry about short term movements if the story behind the company has not changed.  Stay patient and over time the value of a company will be recognized either by the market or by another company in a takeover bid.  That is the name of the game and that is why the results can be so spectacular.

Our last three recommendations have been junior gold exploration plays.  Accordingly, we thought it important to remind you that the Frontier Research Report is an emerging and frontier market natural resource investment newsletter.  We are focused on precious and base metals, energy and agriculture and not just gold.  At the moment we just happen to think gold companies possess a lot of upside.  We are, however, looking hard at Oil &Gas, Uranium, and Agriculture as there are signs the small cap shares in these sectors may come to life in the near future.  This month we have a Uranium company we think is poised to benefit from rising uranium prices.

Remain vigilant, do your homework and do not let short term market gyrations scare you out of positions that have dramatic wealth building potential.

Highest regards,

Carlos Andres
Managing Editor

P.S. This post is just an excerpt from a full issue of the Frontier Resource Report. If you would like to read the full article and gain exclusive access to all of the actionable investment intelligence that our current subscribers are profiting from every month, then we invite you to try out or subscription, risk-free, for 30 days. So, try it out today and discover a new world of undervalued overlooked opportunities.

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