-- Posted Sunday, 7 June 2009 | | Source: GoldSeek.com
With generous enough cash flows to fund expansion and fuel organic growth without going to the market for capital expenditures, the companies that Mike Starogiannis follows should be in a position to drive stock valuations up. According to Mike, Wolverton Securities' Mining Research Analyst, as long as they enhance their production profiles, they are in good shape—unless the price of gold drops considerably. But in this exclusive interview with The Gold Report, he tells us that his sights are set on gold averaging in the neighborhood of $900 to $1,000 per ounce over the next year or two, and any spikes in either direction would be temporary phenomena.
The Gold Report: Gold is a big topic of conversation today and, of course, the big thing everyone is discussing is how high it will go. What is your perspective?
Mike Starogiannis: I think that gold is positioned to go higher from here strictly based on the current fiscal policy of the United States in terms of printing cash to fund a lot of new infrastructure projects and economic stimulus packages. Eventually, in the mid-term, that money will trickle through the economy and inflate the U.S. dollar. Because gold has always been a historical hedge against U.S. dollar inflation, just fundamentally based on that we could see upward movements.
TGR: If most developed countries are similarly expanding money supply, wouldn't you expect to see inflation around the world? What happens to gold if all the currencies are inflating?
MS: The U.S. economy out-leverages most other economies, and the economies that really count are probably China and the U.S. China is seeing its own economic slowdown right now and China holds U.S. dollars. Another impetus for gold to move upward is too many U.S. dollars coming through the economy.
TGR: Most of what we read suggests that China is getting rid of U.S. dollars by buying base metals from around the world. Will that help offset the inflation that the U.S. economy faces?
MS: I don't see that the Chinese buying base metals with U.S. bucks will impact significantly the U.S. dollar inflation, no.
TGR: So looking at the U.S. as core economy driving the price, how high will gold go?
MS: My crystal ball is no better than anybody else's. If you look at the trading pattern for gold historically through economically turbulent times, it can easily spike upwards by 50% of what it's currently trading at, but it'll spike right back down almost as fast. I believe fundamentally that any spike will be a temporary phenomenon. My target for gold pricing mid-term is right about where it is now.
TGR: What do you mean by 'mid-term'?
MS: We could see gold spike well through $1,000 on a 12- to 24-month horizon, but I think it'll be in the $900 to $1,000 band for that period on average.
TGR: If gold stays in the $900 to $1,000 band, what hope do you have that stock value of any junior or producing company that you follow will appreciate?
MS: Appreciation will not come if gold stays in this band, based on fundamental valuation and current production profiles. Where appreciation will come from is these companies' leveraging their fairly generous cash flows. These cash flows, basically, are accumulating in cash accounts until these companies come up with good generative projects to invest in—and there are projects out there. I believe the next leg up for some of these juniors will come with spending their cash wisely and investing in good new projects. In other words, it won't necessarily come from fundamental share appreciation based on current production. Many of them are fairly valued at this point.
At $500 gold, many companies would probably have trouble remaining going concerns. But that applies to just about everybody. Most senior companies are now boasting cash costs anywhere in the range from $400 to $500 per ounce.
TGR: Given U.S. fiscal policies, isn't seeing it down even to the $700s improbable for the next 5 to 10 years?
MS: Yes. There's always room for short-term stimuli to push commodity prices downward if someone were to flood the market with physical gold for whatever reason; if, for example, one of the central banks decided to sell gold, en-mass, into the market. But in the short term, for the next year or two, I believe that we're in a good solid trading band between $900 and $1,000 per ounce.
TGR: Is there a cost differential between mining vertically and horizontally?
MS: There may be differences in costs, but it's really hard to say until mining has begun. It's kind of a backward-looking exercise, so you probably would have to get a year of mining at commercial rates under your belt before you can really assess whether there are any dramatic differences. From a technical standpoint, mining in vertical structures is sometimes easier and therefore may be cheaper. You can use gravity to your advantage to load and move ore around versus mining in horizontal structures, where you generally have to scoop ore and truck it over to where you're hoisting or ramping it.
Another difference may be in how you support underground openings; in terms of requiring more support, such as rock bolts and screening, which can add to the operating cost per ounce when developing new ore. But it's pretty early days to assess whether mining horizontally vs. vertically in this particular case is going to be dramatically different.
Mike Starogiannis is Mining Research Analyst at Wolverton Securities, a privately owned family business that has participated in the Western Canadian investment community since 1910. The oldest member of the Toronto Stock Exchange Group, Wolverton is associated with every major stock exchange group in North America through either membership or trading agreements. The company's longevity and financial stability, combined with the quality and expertise of its employees, are key factors that further Wolverton's position as a valued resource and a recognized leader in Western Canada. Before joining Wolverton last year, Mike was Metals and Mining Analyst at Fraser Mackenzie.
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-- Posted Sunday, 7 June 2009 | Digg This Article
| Source: GoldSeek.com
