-- Published: Tuesday, 20 January 2015 | Print | Disqus
Source: Kevin Michael Grace of The Mining Report
Metals are like horses in a merry-go-round, believes Joe Reagor of ROTH Capital—as some rise, others fall. In this interview with The Mining Report, Reagor explains how looming surpluses, shortages and reduced confidence in central banks will be negative for copper but positive for silver, gold, uranium and, especially, zinc.
The Mining Report: Gold rose 2.5% Jan. 15, and is up 8.4% for the year already. What do you make of that?
Joe Reagor: I think there's a lot of money flowing into the sector. It's been two rough years in a row for gold, but now there's a feeling that a solid floor has been established in the $1,175–1,200 per ounce ($1,175–1,200/oz) range.
TMR: Marc Faber says investor confidence in central banks is collapsing, and gold could rise 30% in 2015 as a result. What do you think?
JR: Investor confidence in the large banks and the world economy has been reduced. Gold should have a steady increase throughout the year, but just one or two examples of positive economic data could result in a loss of some of the upside we've seen so far this year. Our 2015 forecast for gold is an average of $1,263/oz.
TMR: The gold-silver price ratio has risen to 75. Does this surprise you?
JR: We've believed since 2012 that gold would outperform silver. Looking at the new projects being built around the world, we've seen silver projects at 80–100 grams per ton (80–100 g/t) and gold projects at 0.09–1.1 g/t. So after we applied our recovery rate, this suggested a higher gold-silver ratio on a rarity basis.
TMR: Will the gold-silver ratio decline in 2015?
JR: Silver should outperform gold this year because silver has industrial uses. So the ratio should approach 70, for a silver price of about $18/oz.
TMR: A number of experts interviewed recently by The Gold Report have said that at $16/oz the prospects for pure silver producers are poor. Do you agree?
JR: At that price, the pure silver producers would struggle. However, silver has risen to almost $18/oz, and if it continues to rebound, pure silver equities should perform better than those that derive silver credits from base metals operations.
TMR: What are your forecasts for 2015 base metal prices?
JR: We follow copper, lead and zinc. Our forecast for copper is an average price of $2.74 per pound (2.74/lb), with $2.70/lb in Q1/15 and $2.60/lb in Q2/15. We expect little movement in lead, with a flat $1/lb price for the year. And for zinc, we expect $1.10/lb for the year, with the price rising as high as $1.30/lb in Q4/15.
TMR: Given how important copper is to economic expansion, could its recent price decline be a leading indicator of a global slowdown?
JR: I think the biggest issue is a slowdown in China. That country had stockpiled large amounts of copper but now appears to be selling back into the market, which is what's driving the price down. We think that world economic growth has lagged a bit and may continue to do so. We further believe that the strength of the U.S. dollar is more a reflection of the weakness of other currencies than it is of the strength of the U.S. economy.
TMR: Assuming for the sake of argument modest global economic growth, does this favor the so-called currency metals, gold and silver, over the industrial metals?
JR: For the most part, yes. Zinc should be the best performer this year, but after that, it should be pretty close between gold, silver and maybe uranium.
TMR: Is the world running out of zinc?
JR: A more accurate evaluation is that the zinc price has been so low for so long that we are running out of current supply. In 2012, the world zinc market was significantly oversupplied. The price fell to the $0.80/lb range, so there was no incentive for reinvestment.
The London Metal Exchange's zinc inventory has fallen from 1.2 million tons in 2012 to below 700,000 tons (700 Kt), which means a roughly 250 Kt/year shortage right now, even before the Century shutdown. So world zinc inventories could drop to dangerously low levels by the end of 2015 or early 2016.
TMR: When will new zinc projects come on line to make up the deficit?
JR: If the price of zinc spikes, there could be a three to five year delay before the world can get zinc mines permitted and built. China has massive zinc reserves that aren't currently being produced, and a laxer regulatory regime than the rest of the world. But even if it brought some of its shuttered mines back on line and began construction of new ones, we'd still be looking at six months to get the former producing and a year or two for the latter.
TMR: What does the recent fall in the price of copper mean for investing?
JR: Generally speaking, a fall in copper prices today usually bodes well for three years from now.
TMR: Let's talk about uranium. To what extent is the fall in the spot price of U3O8 to $35/lb from $42/lb a short-term reaction to the oil price collapse?
JR: I don't think it had much to do with that. In November, Japan announced that the Sendai reactor would be restarted, and this spurred a uranium buying spree by world utilities. Back then, there wasn't much spot supply available, which caused a momentary price spike. Keep in mind that the spot price was under $28/lb last summer, and now it's over $35/lb.
TMR: You indicated earlier in the interview that you are bullish on uranium. Explain why.
JR: Our forecast is for a long-term shift from fossil fuels to uranium as an energy source. And besides one major mine in Saskatchewan, little uranium production has been added in the last few years. If more power plants come back on line in Japan, and China continues its nuclear power expansion, uranium demand will continue to increase. This could lead to the removal of the current surplus and the creation of a shortage.
We don't anticipate a major move in the price of uranium. Some industry experts expect a quick move to the $70/lb range, but we expect a staged recovery to the mid-to-high $40s by the end of 2015.
TMR: How do you rate ISR uranium mining versus traditional mining?
JR: ISR is the mining method that works when the industry is under fire because it requires lower upfront capital. The downside is that the permitting of additional wells and additional production areas can cause large fluctuations in production levels and impact overall profitability, whereas with conventional mining you're either producing or you're not. With conventional mining, once you're in production, you're done; you don't have to worry about repermitting as you go. Each approach has its advantages, but in today's market, ISR is clearly the leader. Should the price of uranium hit $70/lb, however, conventional mining would again be the preferred method.
TMR: What's your general counsel for investors in 2015?
JR: We favor the macro approach. Investors today aren't so much looking for analysts to pick specific stocks to buy and sell at specific prices as for general investing themes and some names that fit within them. So, for instance, we tell investors that with the U.S. dollar growing stronger, they should look for companies with all, or at least significant, production outside the U.S. Their costs are denominated in local currencies, so companies that mine metals whose prices are flat in U.S. dollars will benefit from the strong U.S. dollar.
We're negative on current copper producers because of our negative outlook on near-term copper prices. We like pure zinc producers or those with significant zinc contributions because of the zinc shortage. In precious metals, we're targeting silver companies over gold companies because we expect the gold-silver price ratio to fall from 75 to 70.
TMR: Given that mining equities have been bearish for almost four years, the good news of the past six weeks might lead investors to conclude that happy days are here again. Is this a reasonable conclusion?
JR: A cautious optimism is reasonable. Mining equities in general are going to benefit from the lower oil price, and gold and silver equities in particular will benefit from the higher prices of those metals.
I should again caution that better-than-expected economic data from Europe or China could easily reverse the recent trends in gold and silver. In addition, we note that the upward move in precious metals equities has outpaced the price increases in bullion. Therefore, we need further increases in gold and silver to support equity prices. Some gold stocks are up as much as 20–30% this year, so gold must continue to trend toward $1,300/oz to justify these gains. We expect moderate strength in the precious metals sector in 2015.
TMR: Joe, thank you for your time and your insights.
Joe Reagor is a research analyst with ROTH Capital Partners, providing equity research coverage of the natural resources sector. Prior to ROTH, he worked in equity research at Global Hunter Securities and at Very Independent Research, covering a wide array of resources companies including metals (steel and aluminum), mining (gold, silver and base metals) and forest products (containerboard, OCC, UFS and pulp). Reagor earned a Bachelor of Arts in economics and mathematics from Monmouth University.
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-- Published: Tuesday, 20 January 2015 | E-Mail | Print | Source: GoldSeek.com