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Thibaut Lepouttre's Commodity Plays in a Sideways Market

 -- Published: Monday, 28 April 2014 | Print  | Disqus 

Source: Brian Sylvester of The Gold Report  


Metals prices have been trading sideways for some time. How can you make gains in your portfolio when commodity prices are in a stalemate? In this interview with The Gold Report, Thibaut Lepouttre, editor of Caesars Report, talks about ways to play metals from gold to copper and tungsten in a market with weak price movement, and scans the globe to find potential winners.


The Gold Report: The crisis in Ukraine may feel a little bit different in Brussels than in North America. From your point of view, does this look like a civil war? An invasion? Or is this just politics?


Thibaut Lepouttre: Russia took advantage of the political turmoil in Ukraine to occupy the pro-Russian Crimea region. Crimea has always been closer to Russia than it has been to Ukraine. You could say that Russia is reclaiming a piece of ground it had for more than 200 years that was only separated from it in the past 60 years. Russia wanted to safeguard its interests from the new pro-European Union government in Ukraine.


TGR: What role should Europe play in restabilizing the area? What about the role of the U.S.?


TL: I don't think Europe should do too much. This is a leftover problem from the dismantling of the Soviet Union—it should be dealt with internally between Ukraine and Russia. However, we should react if human rights are being infringed.


I think the role of the West will be quite limited to acting as some kind of intermediary between Ukraine and Russia. Political sanctions are perilous because Russia has real opportunities to retaliate. Look at the gas imports from the European Union: Germany imports 35% of domestic consumption from Russia, Hungary is about 45–50%, and the Czech Republic and Bulgaria are more than 70%. The moment the West and Europe try to impose some kind of economic sanctions on Russia, the Russians will retaliate.


TGR: What about actions such as what happened at the airport in mid-April—small, measured attempts to destabilize the Ukraine?


TL: Russia may attempt to destabilize the pro-EU government, but I do not think that the country will go into a full-on attack or invasion of Ukraine. There may be small infringements on Ukrainian sovereignty, but not full-out war.


TGR: The West seemed to dismiss Russia's actions in Crimea as "one and done." Was that the right approach?


TL: Yes. The Crimea region was historically Russian and more than 80% of the people speak Russian. Western countries realize that it might make more sense that Crimea be a part of Russia instead of an autonomous region of Ukraine, which could continue to cause political instability inside Ukraine.


TGR: Do you see this situation as having any further impact on commodities, such as gold, silver and perhaps even base metals?


TL: Full-on war in the Ukraine could be a real catalyst, but commodities will likely continue to trade sideways at least through the summer.


TGR: In October, you said you thought gold would continue to trade sideways between $1,200/ounce ($1,200/oz) to $1,410/oz. You've been pretty accurate with that prediction. Does a possible realignment in Eastern Europe impact your predictions?


TL: We saw a short spike in the gold price the moment that Russia flexed its muscles in the Crimea region, but I fail to see a decent catalyst that could catapult the gold price in one direction or the other.


TGR: Do you see silver tracking gold throughout 2014 or do you see a bit of a separation occurring?


TL: There will continue to be some kind of correlation between the gold and silver prices. Silver won't track gold one-on-one, but the difference in price variations and changes will not be that high.


TGR: Can silver be profitably mined at current prices?


TL: Yes, margins are much thinner than if silver were between $25–30/oz, but there are some companies that would be profitable at the current silver price. A PEA has shown an after-tax NPV of around $100M using a silver price of $22/oz. The operating expenditures outlined in the PEA were about $11/oz silver, but the NPV could be much higher if more resources can be added. After talking to the management team, I'm convinced there's potential for probably 200 Moz Ag eq. The mine life could be extended much longer. I think we'll see a lot more ounces in the ground after this year's drill program, which is expected to total about 25,000 meters. I'll be looking forward to seeing another resource update.


TGR: Let's talk about copper. The Chilean Copper Commission (Cochilco) revised its copper price forecast downward by about $0.10 to $3.05/pound ($3.05/lb) in 2014. What do you predict for copper prices for the remainder of the year?


TL: I've always been conservative about the copper price because I expect a lot more supply coming on the market than demand. I always use a long-term copper price of $2.75/lb.


TGR: Let's move to tungsten. What does the supply-demand picture look like?


TL: The supply-demand ratio in tungsten is very tight. Tungsten is dominated by a few countries, mainly China. That has led Western Europe and the U.S. to look at the security of their supply of strategic minerals like tungsten. Over the past few years, when the tungsten price started to move up again from $200/metric ton ($200/mt) to in excess of $400/mt, more and more companies have evaluated previously producing assets and tried to reopen them. Assets that were not profitable at $100/mt might be highly profitable at $360/mt.


TGR: Over in Peru, there are a couple of companies that are toll milling gold operations. Tell us about toll mining and the risks involved.


TL: Toll milling is a very interesting concept because companies that are engaged in toll milling aren't real miners. They provide service to artisanal miners that have no efficient way to treat their ore.


The toll milling company pays the miners based on the average gold grade of the expected recovery rate and factor in a little wiggle room in case the gold price changes. It's a win-win situation because the artisanal miners have a way to efficiently treat ore. If they did it themselves without the right permits, they would be breaking the law and could go to jail for a long time.


The average recovery will be much higher than what a private person could reach. Most artisanal miners reach a recovery of about 40–60%, while modern toll milling companies with modern equipment can reach recoveries of 90% and higher. It's a win-win situation. The toll milling company takes a cut of the value of the gold, the artisanal miner has a way to efficiently process ore and the Peruvian government gets more tax income because everything will be formalized.


The small-scale mining sector in Peru is officially estimated at about $2B/year. Unofficially, that number could be much higher, perhaps even $3–4B/year. As a country that has become serious about formalizing its mining sector, there are a lot of possibilities in Peru in toll milling.


TGR: Botswana is well known for its diamond mining. What do you know about its diamond assets?


TL: Diamond mines in Botswana will have to go underground during the next decade, increasing the cost and reducing the output. It's one of the main reasons why Botswana is supporting the development of other mineral and commodity projects. It's helping these companies out by trying to unlock the country—it's a land-locked country with no access to the sea. It signed an agreement with Namibia last month whereby Botswana and Namibia will construct a Trans-Kalahari Railway. That will be important for gold and iron projects because it will provide rail access to the Port of Walvis Bay in Namibia. Botswana understands the needs of the companies working in the country and is trying to accommodate them. It wants to continue to be one of the most important and safest mining destinations in Africa.


TGR: Do you have any other advice to investors that you'd want to leave us with?


TL: Do your homework. Understand every aspect of a company and its project. Never be afraid of getting in touch with the investor relations division of the company. Never be afraid to ask questions. You have to make sure you fully understand every aspect of the business before considering an investment.


TGR: Thank you for your insights.


Thibaut Lepouttre is the editor of the Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals. Lepouttre has a Bachelor of Law degree and two economics masters degrees that have forged his analytical approach to the mining sector. Considered a number cruncher, Lepouttre focuses on the valuations of companies and is consistently on the lookout for the next undervalued mining company.


1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report and and provides services to Streetwise Reports as an independent contractor.
2) Streetwise Reports does not accept stock in exchange for its services.
3) Thibaut Lepouttre: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.


Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.


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