If this is a bottom, Dr. Michael Berry sees it as the ideal time to pick up bargains in the mining sector. In this interview with The Gold Report, the Federal Reserve Board expert gives his diagnosis for what ails the markets and names the companies from Alaska to Brazil that could survive the financial plague wiping out equities all over the world.
The Gold Report: 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: 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.
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?
MB: I have developed a 10-factor model for discovery 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. (AXR:TSX; AXU:NYSE.A). 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.
Alexco is an example of a company that will have $20–30 million (M) 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: Do you think Alexco might buy Monster Mining Corp. (MAN:TSX.V) since it owns the rest of Keno Hill?
CB: Alexco is in production and the management team is spending all its time right now trying to figure out how to expand the 8 million ounces (Moz)/year it is currently mining on its property. The company has about 22 targets that were old mines and adits. I would be surprised if it bought Monster. If it were to look for an acquisition, it would look for something a little bigger to move up into the next segment of silver producing companies.
And remember, Alexco is really two companies. It does environmental clean-ups and mining. It will likely split off the environmental side and either vend that out to shareholders or IPO it at some point.