How tight is money in the mining industry? So much so, according to Chris Ecclestone, mining strategist with Hallgarten & Co., that juniors are punished for resource estimates because the market believes they can't afford to develop their properties further. In this interview with The Gold Report, Ecclestone explains that canny juniors are choosing past-producing properties, which boast dependable resources estimated by majors and already existing infrastructure. And he names two current gold producers he believes are woefully undervalued.
The Gold Report: Gold rose to $1,200 per ounce ($1,200/oz) Nov. 21 and has stayed close to that price since. Is this evidence of the end of the bear market?
Chris Ecclestone: It's evidence of a bump upward in gold. The rise has not been so robust that one would be persuaded the tide has turned.
TGR: What's your opinion of the hypothesis that there is an organized shorting campaign to bring gold down to $1,000/oz?
CE: I don't believe it. Gold is being pushed around on pretty low volumes by buyers and sellers. The Indian trade isn't what it was. Western buyers are just not there anymore, particularly large speculative buyers.
TGR: The Toronto Stock Exchange has had recent highs led by mining stocks. Are we seeing a recovery in precious metals equities?
CE: There's an outsized correlation between the gold price and gold equities. Gold will drop 5%, and then gold equities drop 20%, but it's not so sticky on the way back up. Investors have seen over and over again that being a first mover on gold equities is not worth the effort.
TGR: Why has the gold price fallen so precipitously?
CE: People are just not feeling inflationary at the moment. Quantitative easing (QE) is being tapered, and the money supply apocalypse has not occurred. Exhaustion eventually sets in when the same old argument keeps being trotted out and proved wrong.
TGR: What about the trillions of dollars in new money created since 2008?
CE: Much of it is being sterilized and recycled and has gone off to other places. The gold bulls talk about the printing presses being run endlessly, but what has happened since 2008 in the West is not comparable to what happened in Zimbabwe in 2008 or Germany in the 1920s. This isn't funny money. It's still owed to the government and will have to be repaid.
QE consisted of the U.S. government loaning money to banks. The banks loaned it to hedge funds that then put it into emerging markets. One of the reasons why markets like Brazil have been so floppy over the last year is the carry trade is over, and the money is coming back to the original borrowers. They, in turn, are flipping it back to the Federal Reserve or into the U.S. equity markets, which after a brief hiccup are again ebullient. At least it's not going into the U.S. property markets again, which is a good thing because that bubble is not with us anymore.
TGR: You stress the importance of mining jurisdictions. Which jurisdictions once thought mining friendly are no longer so?
CE: Chile was a great favorite for years, but it now has some black marks against it. Yamana Gold Inc. has been hit with a new levy described as a noncash tax charge. How can you have a tax charge that's noncash? It either is or isn't, particularly when levied retroactively.
Barrick Gold Corp.'s problems with Pascua-Lama are much more than a simple capital expenditure (capex) blowout. Capex exploded because the process took a lot longer than expected on the Chilean side, not the Argentinean side. Then there's the water problem. Many Chilean projects at whatever capex cannot get water because it is needed at lower altitudes to service the urban areas.
Mexico has been a happy hunting ground for Canadian miners over the last 10–15 years. When I was based in New York, investors would ask about the cartels. They were told not to worry because they weren't active in mining areas, only in Tijuana. That's now been dispelled as a myth.
TGR: How is the mining industry dealing with this threat?
CE: I went to a presentation recently where a company said it was employing people to maintain good relations with the cartels. This sounds like skating on the thin ice of the international anticorruption rules. The miners are not paying off the government but paying off some gangsters threatening to blow up their mines or roads unless they employ some of their factotums as a security force.
Then there's the issue of royalties. We heard for years that they would never rise in Mexico. Well, after 10–15 years of the country being open for mining, the government had not realized the increased revenues it expected, so it decided to squeeze more juice out of that lemon.