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1ST HOUR: THE EXPERTS

James Turk, GoldMoney

JIM PUPLAVA:  Welcome everyone, I’m here at the San Francisco Gold Show, this is my third year of attendance. And let me tell you what’s coming up on the program. We’re going to hear from the experts first. In this first hour, we’re going to be talking to James Turk, James Dines, and John Doody of the Gold Stock Analyst. In the second and third hours we’re going to be hearing from the company experts. Our first guest will be Ian Telfer from Goldcorp and Silver Wheaton; we’ll be talking to Yamana Gold’s Peter Marrone. We’ll also talk to some of the Juniors, as well as a uranium company this year where we’ll be hearing from David Miller of Strathmore Minerals.

And later on, we’ll be hearing from Frank Barbera who is joining me at the gold show. We’ll wrap-up everything in what has been, well, a different kind of show. You never know what to expect when you arrive at these shows. I have to say I was totally surprised, not only by the attendance but also by what the experts were saying. Quite honestly, I was completely surprised so you’ll have to listen in to what is coming.

If you’re following the gold market this year you know that we’re hovering close to $500 and my next guest is a gentleman who’s pegged and forecasted $500 dollar gold. Joining me on the program is James Turk, founder of GoldMoney.

Jim, I was surprised when I came. I think of the first time I came here in 2003, you couldn’t walk down the aisles. It was just packed with the individual investor, it was bumper to bumper. Last year it was busy. I’m looking around the room right now, it’s 2:30pm in the afternoon and it’s mainly the gold guys – the people running the companies. And here we are: dollars away from $500 gold. Does that surprise you?

JAMES TURK: Yeah, it is a bit surprising but it’s really very, very bullish. It shows that people don’t believe. And major bull markets begin when people don’t believe. If people were here screaming from the chandeliers with enthusiasm I would be a little bit worried, because it would show a lot of exuberance, perhaps the market’s overbought. But what I’m seeing here today is that gold’s got a lot left to it, and once we get to $500 it’s not going to be the hurdle or the ceiling that a lot of people are thinking about. I think it’s just going to hurdle right through $500 and head on higher than that. [2:47]

JIM: Do you think one of the reasons is that you’ve got a lot of technicians that look at gold and say, “boy! $500 gold, that’s it. It hits $500 and the central bankers are going to come in and play their game, start dumping, the commercials are short right now, so if it hits $500 it won’t stay there.” Do you think there’s a lot of that right now?

JAMES TURK: Yes, there is. Just like there was a lot of that when gold was at $325, and was never going to go through $325. And it’s the same thing when gold was in the $430s, it was never going to go through $432. You know, these targets are there, they are reasonable targets, and you may see some selling, but the reality is there are some very compelling reasons to own gold, not only from a short term point of view but also from a long term point of view. And ultimately $500 is going to be broken before we go much, much higher.

JIM: If we compare this gold bull market to the 70s, in the 70s the dollar went off gold, gold went from $35 in that first leg up to $200, and people were looking at that and saying, “Wow! where did this come from.” And then it went from $200 back down to $100, and then from $100 all the way up to $400. If we take a look at where gold has gone –we started this move in 2000-2001 – we’ve only gone from 250 to 500. That’s nothing as far as gold bull markets go. [4:09]

JAMES TURK: Particularly when you compare what gold has done compared to the other commodities which have far [out]-performed gold in the recent months or recent years. And the other thing to keep in mind is, while you talk about those 1970s numbers, let’s inflation adjust those today. Talking today, $500 an ounce in inflation-adjusted terms is probably like $100 in 1970s terms, if not even lower. So, gold is very, very cheap. [4:33]

JIM: The other thing too, I was talking to one of my other guests, if South African production is going to be down this year which I think is significant. I mean you’re talking about one of the largest gold producing countries in the world. Australian production is going to be down. So, at a time when the demand for gold is going up every single year – and that’s what I really think a lot of investors don’t understand – [yet] we keep having these deficits.

So, you’ve got countries that aren’t producing as much, you’ve got major mining companies that aren’t producing as much, you’ve got demand increasing. And certainly if you look at the monetary factors, money supply growth is at 13% in Europe, the last 3 months M3 is up almost at 10% a year, and [the statistic] is going to disappear in March when Bernanke takes over. Fundamentally, and monetarily, this tells me that prices are heading much higher. [5:32]

JAMES TURK: Yes, I agree completely. You make an interesting point about gold being demand driven, because you have to remember that gold is produced for accumulation. All other commodities are produced for consumption. At the end of the day, because the above ground stock of gold is essentially all the gold that has ever been mined throughout history, is the demand for that gold growing or is the demand for that gold declining? And over the past few years gold prices have been going up because the demand for that above ground stock of gold has been getting greater and greater. And that trend is going to continue for the reason that you pointed out: there are problems with the dollar, there are problems with the euro, there are problems with all of the national currencies out there. And the important point that people should be looking at is that gold is not just rising against the dollar, it’s rising against all of the major currencies of the world and the last one fell in to place just recently. We took out $570 Canadian dollars per ounce which was a 17 year high. We’re now at new 17,18 year highs against the Canadian dollar at current prices. That had been the strongest currency, but now gold is even moving higher in Canadian dollar terms. So this is very, very bullish. [6:36]

JIM: That reminds me because last year when I was talking to the experts, one expert said, “Nah, this is just a US phenomenon, it’s not a global phenomenon until gold starts taking out new highs in other currencies.” But that is something we’ve seen this year. Another thing that we’ve seen this year too, is that gold was sort of looked at as the anti-dollar commodity. So this year we’ve seen the dollar up 14 to 15%, but throughout it all gold was rising along with it. [7:04]

JAMES TURK: Yes, absolutely, which has confounded a lot of the mainstream thinking because for a long period of time people were thinking gold was going up when the dollar was going down. But now that the dollar has bounced a bit and gold is still continuing to rise. And the underlying message that we should take away from that is people around the world see problems with their own national currency and they’re moving into gold as a way of protecting themselves, looking for the safety and security that gold offers. [7:29]

JIM: Has it surprised you and do you think it’s not only just disbelief that if you take a look at the stock market there’s been horrendous losses for investors in this new Century: the NASDAQ losing almost 75% of its value, the S&P over 40%. Alright, we get a rally beginning in 2003, very good year for the stock market, very good year for the gold market by the way at the same time. 2004 was a very tough year for the stock market, I mean if you look at the gains they came in the last 6 weeks of the year. Here we are in 2005, the market’s have spent most of their time in negative territory all year round, or at least up to this point. Maybe they might end like up 4% or 5%, like last year. Who knows what will happen?

And yet here’s this metal that’s gone from $420 at the beginning of this year, and we’re approaching $500 –an historic benchmark – and the enthusiasm, as I look around this floor, it’s not a ghost town but it’s mainly people in the industry here. Why isn’t there more interest? The individual investor he’s not here. [8:40]

JAMES TURK: You know I’ve been following the markets now for almost 40 years, and you see it time and again in different markets all bull markets begin with a lack of enthusiasm. That’s why I look around here and say, “Gosh, I should be thinking something well over $500 for the immediate future, and that $500 is not going to be a significant hurdle, because there is no enthusiasm.” Like I say, if people were jumping up and down with joy then this might be a top, but this is not a sign of a top by any means. So, I think we’ve got a lot left.

I haven’t done my price forecasts for next year, but in the last 3 years we averaged about 13%, and if we close this year at $500 it will be another 13 to 14% on the year. I think 20% next year that would be $600 gold, but I think it’s going to be higher than that, just given the monetary problems we’re facing today in the States, and also the monetary problems other countries are facing around the world.

One point too, about the stock market. Keep in mind one thing about the stock market. If you look at it in terms of gold, the stocks have done even worse than one would otherwise think by looking at the Dow Jones Industrials and the S&P in terms of dollars, because gold has done so well this year, and the stock market itself has done relatively nothing. Basically, a chart of the Dow in terms of gold doesn’t look good at all, which means bad for stocks and good for gold. So, my basic point of view is what people should be doing is generally sitting in cash but cash gold, not dollar gold, while they wait for the Dow Jones and S&P to come back down to more normal levels: lower prices in terms of gold. [10:09]

JIM: Let’s talk about the monetary phenomenon. If you take a look at M3 in the United States, it’s up almost 10% annualized in the last 3 months, so they’re stepping it up. If you look at the European money supply since the beginning of the year it’s up nearly 13%. If you look at the money supply in China it’s up in the double digits. So, globally, we’ve got money supply figures growing at high single digits, and in many cases in double digits. That has got to be a fertile ground for the gold market. [10:45]

JAMES TURK: Absolutely. So, it’s no surprise that the Federal Reserve has announced just recently that they’re no longer going to report M3, which is truly a fantastic announcement. Basically, they’re saying they’re not going to report on what they create. As you know the Fed is there to create dollars. It would be the equivalent of General Motors saying they’re not going say how many cars they’re going to produce every year. I think what the Fed is doing is giving us a message that they know what is coming. They know that the structural imbalances in the system today are basically incurable. They know that the trade deficits, the growing Federal budget deficits mean that they’re going to have to create tremendous amounts of new dollars in the years ahead. And what I’m looking for over the next several years is what I’m already calling the Bernanke inflation. I think he’s going to try reflating the system, and you’re ultimately going to see a massive depreciation in the dollar, because of huge creation in dollars, even though they no longer report how many are out there circulating as currency. [11:39]

JIM: I want to bring up the idea of inflation and deflation. You’ve got a lot of prominent people that are talking about deflation. I don’t know where they get that, because if you see that chart that was run in Barron’s of the purchasing value of the dollar over the last 100 years, and especially the last 50 years, I don’t how you can call that a deflation. [12:07]

JAMES TURK: I know that chart and there’s a very simple answer to the inflation/deflation question of what’s it going to be? It’s a question of first determining how you’re going to measure that deflation or inflation. What currency? When you look at  prices of goods and services in terms of dollars you’re going to have inflation. In other words the dollar is going to purchase less and less. But if you look at the price of goods and services in terms of ounces of gold, or grams of gold, you’re going to have deflation, which basically means the purchasing power of gold is going to rise. I think that is the answer. So, if you calculate prices in terms of gold you’re going to get deflation – the value of the money goes up – if you calculate prices in terms of dollars you’re going to get inflation – the value of the dollar goes down. [12:46]

JIM: The one thing I see today if you look at the US and you contrast that to the debt-bubble and equity-bubbles in the 20s, is that our currency was backed by gold. So, when the stock market crash came, and they tried all kinds of different mixes, there was gold backing the currency. Today, there is absolutely nothing backing the currency. There is no limitation as was placed on the Fed back in the early 30s, and we did get deflation because that is what happens when you’re on a gold standard. [13:24]

JAMES TURK: Exactly. They had to deflate because people wanted gold which meant they had to contract this massive credit expansion that occurred in the 1920s. Now, what happened when Volcker came into the Federal Reserve to basically solve the monetary problems at that time of the double digit inflation we were getting in the 70s. He raised interest rates, and kept raising them to entice people out of tangible assets back into financial assets back into the dollar. So we got a 21% prime rate.

Now, Greenspan cannot do that today, nor can Bernanke, because 25 years ago we were the largest creditor nation, now we’re the largest debtor. We didn’t have the debt mountain we have today back in the late 1970s. We have the derivatives problems today you didn’t have 25-30 years ago. So, Greenspan’s been talking about raising interest rates to save the dollar, but the bottom line is that we still have negative real interest rates in this country. If you look at the Fed Funds rate and subtract the CPI away from that, interest rates are still negative. So the dollar is being debased even though interest rates have been raised. So, it doesn’t look good for the dollar looking forward, it looks very good for gold. [14:31]

JIM: Another aspect too is that I think there’s a lot of confusion in terms of definitions of inflation. If I’m a manufacturer and we were making widgets, if I can increase my production of widgets –where I can amortize my fixed costs over a larger number of units – I’m going to bring down the cost of my widgets down so I can lower their prices. Let’s say I’m making a lot of money manufacturing these widgets that attracts other businesses to come in so they start manufacturing widgets, and the price of those widgets come down. That, I hear over and over, people refer to as deflation. To me that is productivity. That is what happens to any kind of manufacturing market, where as more producers come on line and the more you produce, prices go down.

And what I think – and this is just a theory of mine – in the 80s and 90s, we transferred inflation from monetizing debt over to the financial system. So, governments instead of monetizing went to the bond markets and used savings to finance it. At the same time, you had this tremendous increase in manufacturing globally, and as that happened it brought down the cost of TV sets and DVD  players. So people were saying, “look, look we’ve got deflation here.” In the meantime, a starter home in Southern California costs three quarters of a million dollars. You’ve got houses in the suburbs now going for ¾ to a 1 ½ million dollars. I go to the store now and my groceries cost me more, energy costs me more. Yeah, I can buy a DVD player cheaper this year than I did 3 or 4 years ago, but I’m not buying a DVD player every week or a new computer, but I do need food. [16:22]

JAMES TURK: No, you’re absolutely right. And there’s lots of other things that you left off like medical expenses, property taxes, homeowner’s insurance, all of these things we pay year in and year out. They’re all going up, and that’s why I like to look at inflation/deflation in terms of the currency to explain whether the currency is gaining purchasing power rather than looking at specific prices. Because when you look at the dollar you can get a distortion in terms of what is truly happening to the purchasing power of the currency. And that’s why you’ve got to look at, in my mind, the price of goods and services, and even financial assets, in terms of ounces of gold as well. [16:57]

JIM: Looking forward, it seems to me I don’t care if you’re looking at energy, or gold, or copper, or uranium, I don’t think it has really quite dawned on people – I mean if you look at a graph of the CRB Index it’s obvious – that commodities are rising globally. And unlike any other industry it’s not something that we can flip on the light switch tomorrow, and we’re going to have a gazillion ounces of gold, or billions and billions of barrels of oil, or we’re going to have all these new uranium deposits. All this stuff takes time, and at the same time the world is getting to be a bigger place. There’s more people on the planet, there are countries like India and China that are industrializing. This to me is a long term trend, and I don’t think that has caught on with the public yet. [17:46]

JAMES TURK: You know you’re absolutely right. These markets have cycles. For example, in the 50s and 60s that was a cycle in which financial assets were favored over tangibles, until the late 1960s when financials became so overvalued, and tangibles so undervalued, that you had a switch. And that continued through the 70s, problems with the dollar continued through to the early 1980s when you had very high tangible prices, and very low financial asset prices. That cycle shifted again until 2000 when you had financials way overvalued compared to tangibles, and now we’re cycling back the other way.

Just like the last one lasted from 1968-1982, when you had the big tangible bull market, you’re only 4 or 5 years into this current one, and we probably have another 8-10 years left, and who knows where the price of gold and the price of commodities and the price of everything else tangible is going to be. It’s probably going to be by a factor of several times higher than it is today just for the simple reason that there are so many problems with the dollar, and we are on a path that is unsustainable because of these structural imbalances in the system. And that ultimately is going to mean people are going to want to own things, instead of just financial assets, and promises. [18:54]

JIM: This reminds me, Jim, of when I transitioned out of corporate life into the investment field. I got in the business in 1979 having spent 3 or 4 years in the corporate world with a Big Six accounting firm. When I got in this business – I became a certified financial planner – you went to the International Association of Financial Planner conventions like this, you saw the gold companies, the diamond companies, the energy companies. And we had this guy Volcker who was running the Fed, interest rates were going to 21%, and I can remember the first year,  probably almost up to 85 or 86, stocks were going up but if you watched Wall Street Week they were telling you all the reasons why stocks couldn’t go up any more. You know, the Dow hit 1000, and then it was working its way to 2000, then they were telling you why it was going back to 1500. And nobody believed it, people were still looking at gold and energy. I can remember going to a conference and somebody said, “well, I know the price of oil is down to $20, but we’re going right back to $40 and $100 oil.” That didn’t happen. But that is what investors were following. They were following that trend, and I look at the stock market rally we had in 2003, even today they’re still talking about the stuff that went on in the 90s, and ignoring a new bull market that is developing right underneath their noses. [20:19]

JAMES TURK: The reason why gold can’t go over $500 is the same type of logic why the Dow couldn’t go over 2000. People have it all wrong. That’s why when you look around at things like sentiment and levels of enthusiasm it’s sort of important to get a sense of what the market is saying, what the market is doing, what the market is thinking. That’s why my present view is we’re going to take out $500 and probably not look back. It just seems to be shaping up that way. It’s a very, very bullish near term outlook. [20:48]

JIM: Well, I can tell you just judging by what I see – I think sentiment is a very important gauge along with the charts, as well as the fundamentals – and looking at the dearth of investors I could probably do somersaults or bowl down this aisle. They’re just not here.

JAMES TURK: They’re still chasing the Cisco’s, and the Dell’s, and everything else of this world thinking there’s going to be another big stock market boom. If there is a stock market boom it’s going to be because the dollar isn’t worth anything. In nominal terms, the stock market might rise, but in real terms it won’t do as well as you will do by holding gold. [21:24]

JIM: It almost reminds me of Germany when you had the major German indexes of the 20s going to levels nobody even thought of. They thought it was real wealth, but the purchasing power in gold was declining.

JAMES TURK: Exactly. I make the comparison to what happened in Argentina a few years ago and this was very good in terms of explaining the inflation/deflation issue. What happened during the peso crisis is the quantity of pesos in circulation collapsed by about 30% in a six month period of time. Now normally, that would be a massive deflation because of a dramatic decline in the quantity of money, the quantity of pesos. But over that six months the price of things in pesos rose by 50%. How can you have a massive inflation when you had a huge 30% drop in the quantities of pesos circulating as currency? And the answer is very simple: the demand for money declined even more rapidly than the supply of money. And that’s what you’re going to see with the dollar. You’re going to see a massive decline in the demand for the dollar, and an increase in demand for gold and other hard assets. And as a consequence the price of gold is going to rise dramatically in dollar terms in the years ahead. [22:29]

JIM: Jim, if you were talking to a group of investors and we’ll call them skeptics, they’re sitting in the room and everything they hear, it’s “well yeah gold can go to $500 but it won’t stay there and this isn’t really a gold bull market.” Or you’ve got people talking about deflation. What would your advice be to the investor, right now? [22:51]

JAMES TURK: What I would do is I would have a plan. And in that plan I would be accumulating gold. It doesn’t have to be a large amount of gold, something within your means. You want it large enough so you can feel that money going into gold every month –month in and month out – but you don’t want to overdo it either. So, just stick to that plan. Regardless of what the price of gold is on the day of the month that you choose to buy it, just buy it, put it away and forget about it. And continue to do that for the next 2 to 3 years, and watch what is going on around you as you continue to accumulate gold, and watch that gold price go up. And it’s probably safe to say in 2 to 3 years you’re going to have an entirely different view as to how wise that gold investment is today, versus what you thought maybe at the time you made that gold investment. But if you have a plan and stick to it I think that is probably the best way to proceed, if you are a skeptic.  [23:40]

JIM: The one thing that we do see in the gold market, and especially with gold equities, the rise can come very quickly, suddenly and be almost parabolic when it occurs, but likewise on the down side. And one of the things I liked about what you said, and this has been our advice to our listeners, is if you’re accumulating bullion –whether it’s gold, silver – maybe gold has had a big run up and silver hasn’t, maybe switch to silver, buy some silver. And the same with your shares. that every month you have a purchase program, and quite honestly I love the corrective phases in these markets because it gives me another chance to buy at a cheaper price. But I’m a bargain shopper, a value investor, and if [only] investors would see that. As we used to teach people in the 80s dollar cost average into your mutual funds. [It’s] standard investment advice, and I would say it applies equally as well to the bullion and gold equity market. [24:37]

JAMES TURK: I agree 100%. I think dollar cost averaging is a very powerful concept. It gives you the opportunity to create a plan and stick to it, and over a period of time in 2, 3 or 5 years you’re going to be happy that you’ve done so.

JIM: And more importantly it takes you out of the emotional aspect of “Oh my goodness it fell, gold’s down 10 bucks today, I’d better not buy.” And then all of a sudden you make decisions emotionally instead of making decisions on a fundamental basis: “No, it’s cheaper today I’m going to buy more ounces this month or I’m going to buy more shares this month.” [25:15]

JAMES TURK: Warren Buffet, in one of his annual reports a few years ago, had a very good way of explaining that. He said imagine if you only ate hamburgers your entire life would you be happy if the price of hamburgers went up or went down. And clearly you want the price of hamburgers to go down. So he said how can you be happy if the prices of stocks go up. You really want the prices of stocks to go down so you can accumulate more of them, and ultimately let that value be realized. It’s the same kind of concept. You buy it through thick and thin, and forget about the daily papers, forget about what one Fed governor said this day, or one Fed governor said the next day and just look at the long term view. And keep in mind those cycles that I was talking about earlier. They last 10, 14, 15 years. And we’re very early into the tangible asset cycle. [25:57]

JIM: And Jim, finally as we close, why don’t you tell our listeners about GoldMoney, what is it, what’s its purpose and how they can find out more or participate?

JAMES TURK: GoldMoney is two things. It’s an online store to buy and sell gold and soon silver. I’ll give you a little bit of advance notice on that.

JIM: Did you hear that silver investors. That’s silver.

JAMES TURK: Coming soon. But it’s also a way to use gold as a form of currency for making payments on the internet. So it’s sort of like online banking but instead of your account being denominated in dollars and cents it’s denominated in gold grams and mils. You have 24/7 access to your account online through the internet, and it’s a very economical and convenient way to buy and own and hold and sell gold today. It’s one of the most convenient ways to do that.

We’re now storing approximately $70 million dollars (US) for our customers in 102 different countries worldwide. And from the American perspective the important thing is that the gold is actually stored for you in London –insured by Lloyds of London – so you get the geographical diversification of being able to buy and hold gold outside of the United States. Just in case there is another US confiscation of gold. We would not be affected by that because we are not a US company. [27:12]

JIM: So you’re kind of doing what Warren Buffett does with silver.

JAMES TURK: Absolutely.

JIM: And if they wanted to find out about GoldMoney, why don’t you give out your website?

JAMES TURK: It’s goldmoney.com.

JIM: Goldmoney.com. Jim Turk, I want to thank you for joining us on the Financial Sense Newshour. All the best to you, Sir.

JAMES TURK: Thank you very much Jim, it’s always a pleasure to speak with you.

JIM: And hopefully the next time we talk we’ll be talking about $600 gold.

JAMES TURK: And maybe $12 silver. [27:35]

James Dines, Editor: Dines Letter

JIM: Our next guest in Mr. Dines, editor of the Dines Letter, one of the longstanding newsletters in the industry.

Mr. Dines, this is my third year coming to the gold show and the one thing that has struck me this time around, on the way up here I thought with gold approaching close to $500 we’d see investors hanging from the chandeliers. Where are they?

JAMES DINES: My third book, Mass Psychology, studied the action of crowds and one of the points in the book was the remarkable invisibility of new bull markets. If you remember I turned very bullish on the internet stocks in 95. Nobody knew what the internet was, it was ignored in 96 and 97, by 98 they were still going up and they said, “well, it’s overpriced.” In 99 they said, “whoa, it’s way overpriced, forget it.” And they came in 2000, and that was the top, and that’s a normal progression, and what’s happening now is gold has done the same thing. It’s gone from $250 approximately up to $500, and the fact that there are no crowds here based on my mass psychology book, means that we are still very early in the bull market. [28:50]

JIM: And that’s something I think we need to point out to our listeners. Gold has gone from $250 so it’s got a double. Now, you were very active in the gold bull market in the 70s where you saw gold go from $35 to $200. It pulled back to $100, went to $400, then of course up and away.

JAMES DINES: to $850.

JIM: Yeah, so here we are it’s only gone from $250 to $500. The money supply, M3, has increased by 3 ½ trillion, and just in the last 3 or 4 years you’ve got greater [gold] demand. I just read in the mining company that the supplies are going down, the producers like South Africa will produce less gold. I can’t remember a time that the fundamentals for gold have been any better, can you? [29:38]

JAMES DINES: No, and I think what’s happening now is a low key flight from paper money. If you look at the price of gold this is an interesting point. One of the 64 ‘Dinesisms’ is Dines’ rule of gold relativity which says that gold is the hitching post of the monetary universe. People tend to think of gold as having a price. It does not. Gold is money and it commands a different number of pieces of paper in every country depending on how fast they are being produced. Right now the only currencies going up are the US dollar and gold and silver, and that is what’s happening. All this money that’s flowing into the oil countries, for example Venezuela, countries that are concerned about having their assets seized are moving in to what they perceive as safety.

And furthermore there’s another one of the ‘Dinesisms’ the Dines wolf pack theory – the dwopack theory is the acronym – which says that stocks in the same group governed by the same economics will run together. It sounds obvious but it wasn’t when I first wrote about it 40 years ago. And what you’re seeing now is the fact that gold is bullish, you immediately turn for confirmation to the other elements with 8 electrons in the outer ring, and that’s silver, platinum, palladium – I don’t follow Rhodium, Osmium or Meridium but they are probably also bullish. But the whole precious metals complex is moving up. You’ve now got platinum, almost up to a thousand dollars an ounce. It’s been in an uptrend. The bottom was reached in 1984 or 85, so you’re twenty years into a bull market that’s still invisible. And that again goes back to my first thesis that new bull markets are absolutely invisible to the majority, believe it or not. That’s why the average guy does not buy at bottoms. [31:27]

JIM: And so instead of attending this gold conference he’s probably off to a real estate conference and learning how to buy real estate with no money down.

JAMES DINES: Exactly. And real estate is already crumbling at the edges, and that’s how the public likes to buy: when it’s obvious, and it’s usually obviously a top. [31:44]

JIM: You know another area that you’re very bullish on and I am is something that I think is very important for this country, and the rest of the world, is the area of energy. And you’re very big on uranium, and nuclear power and the impact that that’s going to have. We have to figure out something to replace fossil fuels as we hit peak oil. Why don’t you talk for a moment about uranium, because that’s invisible to a lot of people?

JAMES DINES: Sure. When I first turned bullish on the internet at rock bottom, I said that was the greatest investment opportunity I had ever seen in my entire career. And as you know fortunes were made in the subsequent 3 or 4 years. I now believe uranium is the biggest and I think it’s bigger than the internet was possibly by an order of magnitude. I’ve never in my investing life seen anything like what’s going to happen to uranium. When I first got into it it was selling at $7.10 a pound, and I turned bullish on it at $8.00 within one dollar of the rock bottom low, and it has quadrupled. It is now selling at $34.25. And the uranium mining stocks are in screaming up trends.

And what is happening is a growing and dawning recognition that we are now into a multicentury event, and that is a massive switch from oil to uranium. There was a limited pool of oil. There were just so many dinosaurs that got melted down. And with the entry of India and China dipping their straws into the oil pool, so to speak, I felt that the pool would diminish much more quickly than those who were extrapolating very simply what had been the usage in the past. But the age of Europe is over. This is now a world market for automobiles. Only one percent of the people in China have a car and they all want one. And as the impact of  this demand for oil begins to be felt, we are going to have a very hurried reduction in the amount of oil available. I know there are all kinds of opinions on it and what have you, but the way I feel about it, the fact that oil recently hit $70 is a message from the market saying we are getting very low in the tank.

Matt Simmons’ book, as you know, Twilight in the Desert said that the oil available to the Saudis has peaked, and once it peaks in a field it declines very quickly. Just 2 weeks ago, Kuwait announced that they had reached a peak in their biggest oil field and put it on the front page of the Dines letter when I first saw it, and I was struck that it was only reported in 2 news sources in the world, and that was Google and Bloomberg. And it blew my mind that here is the second largest oil producer warning you that their oil has peaked, and it didn’t merit a single headline anywhere in the world, which means that the bear market is still very, very early, which means we are going to have much higher oil prices. I don’t think in the short term, we’re going to have a short term drop. I think in the next few years you’re going to see sky high oil prices.

Now, that’s just in terms of supply. Let’s look at the demand. First of all, the environmentalists, of which I am one, when I first turned bullish on uranium in 2001, they insisted that uranium was the worst substance on earth. It is a terrible poison, no question about it. On the other hand if it’s the choice of that and shivering in the dark, people are going to have to make a very grown up choice about it. And I’ve noted that James Lovelock, one of the founding members of the environmentalist movement, has come out pro-uranium because there are no emissions. And we are in a very serious condition because if the glacier – what do you call it? – on the West coast of Antarctica continues to melt and falls into the sea scientists say it’s going to raise the ocean level by 20 meters. Now, that’s a lot of meters and I think we’ll all be going in to the scuba diving business at that point. So there’s a very serious environmentalist shift, and I’ve made the radical prediction that the environmentalists will not only agree with me on uranium, they will lead the charge converting the world to uranium. And the Kyoto Protocol is a complete failure: the two biggest polluters, China and the United States, are not signatories. So voluntary lowering of the use of oil won’t work.

Furthermore, aside from the environmental impact on usage, you have the fear of terrorism. If they crash a plane into one of the Saudi terminals it could probably block 40% of the world’s oil for as much as several months, and if that happens you’ll see oil over $100/ barrel without a doubt. You’ll be paying 10 bucks a gallon at the gas [pump]. [36:40]

JIM: If you can get it.

JAMES DINES: If you can get it. That is the sword of Damocles hanging over the market as to what could happen. Or Venezuela or Iran could just say screw you, we’re not going to give you any oil for a year how do you like that? What are you going to do about it? And what would we do about it? And they’re quite able to do it. They’re flush with cash, they don’t care. They could live in the 10^th Century and live that way, they don’t care.

So, you’ve got a lot of very dangerous geopolitical situations going on, and when I first began to look at this stuff and began to project forward as I do in the Dines Letter, I said to myself, you know, uranium miners have had a 20 year crash, basically. There are very few uranium miners around. The amount of research and development is practically nil, or has been practically nil. The impact of a sudden surge of demand for uranium on a barren industry so to speak – with basically one blue chip which is Cameco, then a bunch of companies just barely surviving – is going to be unbelievable. It’d be like trying to squeeze an elephant through a garden hose.

And another thing, look at these nuclear plants, China is finally waking up to this new phrase, ‘energy security’ which I predict you’ll be hearing all over the world. Every nation in the world is saying we could get cut off from oil and our economy would stop. So they’re all beginning to look at energy security. They’re all beginning to order nuclear reactors. Bulgaria ordered one. But China ordered twenty by 2020, and what people don’t realize is that right now China gets only 4% of its energy from nuclear energy, but when they build these 20 they will simply be replacing the ones that are aged and will be decommissioned in the next 15 years. The net result is that China will still be getting 4% of their energy from nuclear.

So, my prediction again is a radical one but it’s based on solid fact. I think my prediction is China will not build 20 and not build 200, I think they’re going to be building thousands of them. Every time you see an announcement that they’re going to build a new nuclear plant you notice that there’s not a word about where they’re going to get the uranium from. They all assume they can buy it off the market as with any commodity. There’s actually a tremendous shortage. And when I realized that there was this huge demand and a shift to nuclear and impacting on an industry that was just struggling to get out of a depression I said to myself this is the most incendiary, bullish fireworks I’ve ever seen. And since then one of the recommendations I’ve had is Laramide, which is up 70,400% in the last 4 years. Is that good? [39:32]

JIM: Yeah, I think a lot of people would be happy with those returns.

JAMES DINES: If you put $10,000 in there 4 years ago you’d now have $7 million.

JIM: Incredible.

JAMES DINES: And that’s uranium. Now, again, going back to the first thing I said. If you recall, I said that bull markets are invisible. I challenge you to show me any new source except for this one here with you –and you typically publish far forward stuff, actually – to show anybody that’s even covered the topic of uranium mining. Now, just last week I saw something on CNBC, there was a panel on uranium. Of course, I was very interested, because if the public is starting to notice it that means we’re not far from a top, so I tuned into it and the only the thing they could talk about is nuclear reactors and which energy company to buy, which electrical utility. They don’t see uranium. They do not see it. And in fact, one of the guests said something about uranium that we also like uranium mining stocks, but the questioner didn’t think of asking which ones. It’s amazing to me. [40:36]

JIM: You’re going to build all of these plants and what’s going to power them?

Now here’s the thing about uranium. If we’re going to bring all these plants on – whether it’s India or China or Europe, and hopefully the United States will go in that direction – you and I know today if we were to go out and  poke a hole in the ground and we’ve got this uranium discovery. From the time we poke the hole in the ground to the time we want to get the permits, drill out the property...

JAMES DINES: 5 to 10 years.

JIM: 5 to 10 years. In the meantime look at the number of new plants that are going to be coming on stream, plus the ones that are already in existence. It’s amazing this stuff does not get discovered. And quite honestly I was taken aback coming to this gold show today, because I literally, from the previous two years, this is only my third show, I can remember walking into this room in 2003 and you couldn’t walk down the aisles, they were packed. I could roll bowling balls down the aisles today. So, to me, that’s got to be very, very positive from a public sentiment point of view for investing.

JAMES DINES: Sure, that’s what’s happening. The uranium is having a huge impact and it’s invisible to the public and I’ve done everything I could in the Dines Letter to write about it, as you know, you read my letter. I’m publicizing it, I’m on the air, I’m trying to tell people and they won’t hear it and this is what my book mass psychology talks about. They will not look at a new bull market. That’s one of the features that shows you’re early into it. [42:13]

JIM: Well, all I can say is for investors that are getting in right now – and the other thing not only are we early in this market, but when these markets trend they’re long lasting markets. You’re not going to solve, and provide all the worlds uranium, and go from deficits to surpluses in the next 2 or 3 years.

JAMES DINES: Oh no, that can’t happen.

JIM: No, so this is stuff that takes a long period of time.  But I also think another prerequisite for becoming successful is not only to get in this market – buy into it – but also have the financial stamina to hold on, because we do get pullbacks.

JAMES DINES: Well, we haven’t had any pullbacks in the uranium stocks, and I’m not looking for any in the price of uranium. If you look at the chart of the price of uranium in every issue of my letter there’s not been a single pull back. It’s been straight up, month after month after month. All the way from $8/pound to $34/pound. Incredible! And I’ll tell you something, that shows to me that there are people out there probably at nuclear facilities who are saying we had better have this stuff or the lights go out, and we will pay any price, because these prices are very small in relation to the price of a nuclear facility. The fuel is really small. If you had to pay $10/gallon for your car you could pay it, it would hurt, but you could survive. But that’s what’s happening to these nuclear facilities, and they are in there buying it. And they are scared silly, because all the way up they’ve been thinking in terms of a simplistic return to the mean gestalt, whereas in fact what’s happening now is the beginning of a major, major multicentury shift into uranium. [43:56]

JIM: And you know that’s rather significant too, because if you look at the price of energy which went from $20/barrel to $70/barrel, a few airlines like Southwest Airlines had the foresight to go into the market and hedge and lock in prices. But if you’re an energy producer –you’ve got a plant down here at San Onefre – and you’ve got multiple billions of dollars of investment, if you don’t have uranium what do you do?

JAMES DINES: The lights go out. They will.

JIM: And I think that’s something we’re not quite prepared for here.

JAMES DINES: They’re not. And what do I do about it. All I can do is stand up here and tell the truth. I’m not afraid to. But I know this: my subscribers have brought these uranium stocks and have been coming over to my booth all day thanking me. Some of them say they’ve never made so much money before in the market. And these uranium stocks have just gone bananas, and I think it’s just the beginning. [44:51]

JIM: You know certainly this Summer, with Katrina and Rita we saw how vulnerable the United States is on energy. You had two hurricanes that basically decimated the oil and natural gas production in the Gulf of Mexico. As you and I are speaking today it still hasn’t fully recovered, and we’re heading into Winter now.

JAMES DINES: Not only is that true but it’s also true that this parade of killer hurricanes is in itself an indication or evidence of global warming, and the people who deny it mystify me. I mean, if you look at a chart of the temperature of the planet over a period of time you’ll see it’s in an uptrend. Just last week they said that the measurement of the amount of global warming gases in our environment is the highest it’s been in history. And they know that because they’ve drilled ice cores deep into the Antarctic ice, and they bring up the snow which has trapped bubbles in it. So they know what the percentage of the various gases are. And they have scientific evidence. Those hurricanes are absolutely a sign of what’s going to be coming. We’re being warned. [46:00]

JIM: Anything else that if you were speaking to a group of investors, if you were to give them any advice, what would that be?

JAMES DINES: Well, there are a number of things going on at the same time. We’ve got a currency crisis number one, so you need to have some gold. Of course, I’m the original gold bug so I think everyone should always keep some, and also silver, platinum, palladium stocks. Then secondly I would get into the uranium arena quickly before the rest of the world jumps in. The demand is going to be frightening when people wake up, when these big institutions look at their portfolio and they see they don’t have a single uranium stock in there. The whole industry is probably worth about $20 billion right now –outside of Cameco – I think we’re going to see a stampede that will absolutely be the biggest in history. [46:54]

JIM: Is there anything else that you like that looks promising to you? Any longer term trend?

JAMES DINES: One trend that is very important to me is health foods, and I’ve been talking about that for decades. The importance of health foods is to me paramount and we’ve covered that in almost every issue of the Dines letter. We have health features.

One of the things we talk about is organic food, the importance of words ending in –cides, which is Latin for ‘kill’. So you have pesticides, fungicides, herbicides, all this garbage being put on our food is excused by saying they’re very small quantities. What bothers me is that nobody has funded or even thought about seeing whether or not these poisons accumulate in our bodies. And I’m especially suspicious of the halogenated hydrocarbons. And by that I mean the halogens Chlorine, Bromine, Fluorine, and Iodine and combined with hydrogen and carbon you get some of the most deadly poisons on the planet. For example, dioxin which is an herbicide and the soldiers who sprayed it in Vietnam and have been  plagued with cancers and all kinds of stuff for years. And it’s sprayed on our citrus fruits. I wouldn’t touch citrus fruits without rubber gloves.

And so the movement towards organic to me is a very profound, major new thread and the stock of choice I have presented is Whole Foods. Whole Foods has gone from about $1 to about $130 which is the biggest move for a grocery stock –I very seldom have a grocery stock on my supervised list because they are very slow moving and I’m interested in having something grow before I’m planted – but Whole Foods is in a wild uptrend and acting beautifully. I like the ethical culture of the company. Other chains are beginning to wake up and try to offer some health foods but they don’t have the culture and the ethics of Whole Foods. So, that is a very important trend. So, I guess you have uranium, the precious metals, and health foods are really where I’ve led my subscribers and we are making killings in the market.

JIM: Alright. And Mr. Dines, if somebody wanted to find out about the Dines Letter, why don’t you give out your website or tell them how they could do so?

JAMES DINES: Alright. The website is dinesletter.com, and basically there’s all kinds of information there that will describe it.

JIM: I want to thank you for joining us at this year’s San Francisco Gold Show. I look forward to talking to you once again. All the best.

JAMES DINES: Thank you. [49:52]

John Doody, Editor: Gold Stock Analyst

JIM: My next guest joining me at this year's San Francisco Gold Show, no stranger to the Gold Show, is John Doody, he’s editor of the Gold Stock Analyst.

John, I want to talk about some of the fundamentals of the gold market. As you and I are talking, we’ve got gold marching close to $500/oz, we’ve seen the breakout in the XAU, we’ve seen the large cap gold stocks and the intermediates doing very well,. Let’s talk about the juniors, what’s happened with them?

JOHN DOODY: Well, I think there’s a lack of belief in this market among the people who buy juniors. The juniors are not bought by the big funds that tend to buy the larger cap gold stocks. The juniors are bought for the lottery ticket effect of a big ten-bagger, and the retail guys are really not into this market yet. They think that the market’s peaked, because when it got in the $400 range they think that it peaked. And they’re not paying attention and are not understanding that the fundamentals are going to keep running this market: the twin deficits and the amount of paper that’s being created around the world is basically going to trash all currencies to some extent. But until the retail guy gets involved, nobody goes very deep down the stock list, and that’s in my opinion why nothing is happening at that end of the spectrum.

JIM: You know what makes this gold bull market so much different from the 70s is that in the 70s it was growth, you had a lot of surplus, we didn’t have the gold deficits that we have today. We’re still running a gold deficit, we’re still running a silver deficit, and I just don’t see, at least from what I’ve followed where all the major discoveries are. We’ve had a lot of dollars go into exploration but where are the Prudhoe Bay’s or the North Sea’s so to speak in the gold business?

JOHN DOODY: Yeah, there’s really only been one big discovery in the last 3 or 4 years, and that’s Barrick’s Laguna Norte which was already by a major, so that’s a 5 million oz deposit. But I think it takes a while for the money to filter down to be put to work. Remember, through the turn of the millennium there was no money going into exploration. And while there’s money out there now a lot of it is going to rehashing stories we heard in the 90s again.

Companies are now doing feasibility studies on properties, and it may be a longer pipeline between discovery and finally getting it to a deposit size that somebody can measure. And there are so many more issues involved now. Now you’ve got to be aware of the social climate for mining, and maybe that closes off some countries. We’ve known for years about a 10 million oz deposit in Colombia that Greystar, I think, owns it, and nobody has really pursued it because there are Colombian rebels there. And so that’s something that has been around but it’s not really on anybody’s radar screen. But that’s certainly a deposit that any major would be really interested in if Colombia could get its act together and become a viable mining country. But nobody wants to defend the Alamo while you’re trying to mine it at the same time. [53:05]

JIM: That’s something that also makes this market different. In addition to the supply deficits that we’re running, there is the social environment and the geopolitical ramifications today. You just mentioned going into Colombia, and the instability there. Also, there’s the environmental movement. You can’t just go into a country and start poking holes in the ground and then go into production. Some of these projects, and especially in North America, you’ve got six or seven or ten year delays in trying to bring a project online. What factor does that bring into the equation?

JOHN DOODY: I think it limits the number of places where people want to do the exploration if nobody wants to explore and not be able to exploit, and everybody wishes they could have a decent property in Nevada where you can do exploration and exploit. I mean look at Crystallex a 20 million oz global resource, 13 million oz proven and probable reserve, lots of money spent over the years, they’re ready to build a mine, money raised, but they can’t get a final last permit out of the Venezuelan government, that was originally promised in May. And here we are six months later and they’re are still not in hand. With Chavez you don’t know what’s going to happen. And I was glad to see Bolivar, who was in Venezuela, get taken out by Gold Fields with cash for $330 million in this last month. And that at least validates that someone with some standing – Gold Fields is one of the top 5 miners in the world – thinks you can do business in Venezuela. Venezuela is probably underexplored because people have been reluctant to get involved there not knowing  what the sanctity of deposit ownership is ultimately going to be.

But I’ll tell you, I was just in a country that I think is very underrepresented by global mining interests, and that was Brazil. I was down there for 8 days in the middle of the month, 5 of them on a mine tour with Yamana, and this is a country that’s geared for mining. It’s a mining culture. The guy who drove me in from the airport driving the taxi was a third-year mining student. The economics of mining are very unique in Brazil because the power is cheap, most of the electricity comes from hydroelectric; diesel is cheap, it’s subsidized by raising the price of gasoline, and they use the money to lower the price of fuel. It’s got a good work ethic, it’s not a mañana mentality, you don’t see guys sitting around and drinking beer on street corners, even though unemployment is over 10%. I guess that’s true everywhere in Europe too. It’s a culture that’s geared to mining, to exploiting the resources, but in a responsible way. At every mine of Yamana’s that we visited the management commented that there was very close supervision from the environmental people. There was supervision in a responsible way, they made sure that the company was doing everything right – of course, the company is – but they were just checking up, and it was easy to get permits as long as you did things right. They wanted mines built, and they wanted the jobs that came with it, and that’s a country that really doesn’t have a lot of mining in it. It has some base metal mining, CBRD is a big base metal miner. Kinross owns a big mine there, and Anglo owns a mine there but if you’re looking for a mining play in Brazil that’s Yamana. [56:30]

JIM: You bring up an  interesting thought about the gold industry. You said in Brazil they’ve got the energy infrastructure, it’s very mining friendly. Let’s talk about how the mining industry has changed in the last couple of years with energy. Mining is a very energy intensive business, so that’s changing some of the economics. We’ve got higher gold prices but the cost of steel is up, the cost of labor is up, the cost of medical care and insurance is up, the cost of energy [is up]. How is this changing what goes on in the business? 

JOHN DOODY: It makes everything more expensive to do business and it shrinks the margin. The rule of thumb is a dollar and a barrel of oil. A dollar change in the barrel of oil price is equivalent to a dollar change in the cash cost per oz. So, in some mines that is even more intensive. But there’s no question [about it]. I think Newmont is saying energy costs in total are 25% of their operating costs, and oil itself is 20% of their operating costs. So, it has a big role to play, and we’ve seen a margin shrinkage at least at the beginning of the year. That’s changed around a little bit as you saw, Jim, in the latest issue, where margins have slowly started to improve again in the gold business. But a lot of the big funds that are interested in owning perhaps a gold company or two, aren’t interested in buying into an industry that has shrinking margins. That’s a typical death knell for every other industry they’re involved in, and the funds aren’t necessarily believers in the sense that you and I might be. The funds are more interested in expanding profit margins.

I think with maybe the 3Q data that has come out in the last month where we saw margins expand again maybe that’ll be optimistic, and a couple of companies have had a big reduction in cash cost per oz: Barrick being one of them, but partly due to a new mine coming online. And maybe if Barrick is successful getting Placer, they can lower Placer’s cash cost per oz because Placer has been the least able to lower its own cash costs per oz over the last year. [58:37]

JIM: One thing that we’ve seen and we’ve talked about this at the beginning of the interview, you’ve got gold marching on $500 and it’s almost like that’s a magical number –these even numbers in the markets as you know technically – and there’s almost disbelief by everybody. I was watching CNBC the other day, you had the oil stocks going up, you had the metals stocks going up, and one of the commentators said, “well, you know, the market’s up but it’s the kind of leadership you don’t want to see.” It was the energy stocks and the gold stocks. So, once again there is this kind of throwback to the 90s – “well, you know, Google wasn’t up today so I guess this wasn’t a good market” – but the market’s changing.

JOHN DOODY: CNBC has a definite bias towards technology. Maybe it’s the nature of the guys who do the reporting. They’re younger and they grew up in a technology era whereas the metals stocks and commodity stocks have been around for a long time and they’re not so go-go. And so they have a sort of reluctance to report favorably on the metals stocks. And I think this $500 barrier is a real barrier. [For] people who advocate gold in one sense gold is the anti-dollar, so in one sense it’s an anti-US kind of vote. If you think gold is going up part of it is because you think the dollar is going down, and that’s almost a little unpatriotic. None of us are unpatriotic, we all think the country could be better if it was run on a sounder money policy. The stock market and the guys who work for CNBC all have big mortgages, they want to see a little inflation out there because that’ll help lower the burden of the mortgage payments they’ve got to pay on their McMansions they bought in New Jersey, and whatever. But it doesn’t really make any difference what they say, as long as we get our amount of sunlight. And we’re certainly getting a lot more sun on CNBC than we got a year ago. Frank Holmes of US Global, he’s on every week now and that kind of stuff is good for gold. [1:00:43]

JIM: Let’s go back to this $500 level. It’s very important psychologically, but I think one thing we’ve seen with gold this year is it’s been a good year for the dollar –the dollar has gone up – but it’s also been a good year for the gold bullion. So, you’ve got the dollar rising along with gold prices. So that speaks volumes in my mind.

JOHN DOODY: It does. And gold being up in other currencies is very good for gold. I mean it’s really a bull market in the last six months in all currencies, and that’s kind of a trashing of paper money I think. As well we have to realize some people think that there are 4 currencies out there: the dollar, the euro, the yen and gold. We have to realize that the gold market is so trivial compared to the size of the foreign exchange markets that it doesn’t take a big river of money coming to gold to move it. It takes a few drops falling off the big FOREX markets coming into gold that really makes gold move. And in fact, if all the money that could potentially go into gold, went into gold, maybe that’s something we wouldn’t even want to see. I’m not sure I want to see $3000 an ounce gold, because that must mean there’s really severe problems elsewhere in the economy: maybe I’m not going to be happy living. [1:01:57]

JIM: That’s another item that comes to mind too. Because when gold goes north of $500 on the charts, there’s a great breakout above that level to much, much higher levels. And I can’t help but think, John, when the guy on the street wakes up one day and he sees gold prices at $650 or $700, that’s telling him there’s something out there that’s not working.

JOHN DOODY: Yeah, and we’re going to see it, too. We had Pierre Lassonde –he’s the head of Newmont – just this week in Australia predicting $1000/oz gold in the next 5 to 7 years. Pierre’s been on record as being $525 by early next year, and I guess we’re going to see that now aren’t we? [1:02:35]

JIM: Sure looks like it. We’re closing in on $500. I want to move back before we get into what I call some of the paper money aspects of the gold market, and I’m talking about the money supply growth that we’re seeing globally. Let’s talk about junior investing. I know if I want to get a gold exposure if I’m a fund manager, I’m pretty safe going in and buying a Newmont, or a Barrick, or a Placer or Goldcorp, a lot of liquidity in the stock. Let’s talk about the juniors because you follow quite a few in your newsletter. What makes them different, and how does an investor approach them versus going out and buying a Barrick, where I know if the gold market takes a dip, which it does every year, I can trade out of it and protect my capital? In juniors, that’s a little bit harder to do.

JOHN DOODY: Yeah, the juniors tend to be one deposit companies. And the only way you can play them is with a basket. You’ve got to have 4,5,6,8. We have a top 10 but they also include some large companies too. If you just buy one stock and put all your money on that the chances are very high for disappointment. You’ve got to average out with a number of stocks and figure some are going to do well and some are going to do poorly. And that’s the same way you’d invest in any industry, or any stock group. And I think taking a balanced approach towards them makes a lot of sense. Buy some majors, and buy some smaller companies that have good projects, and ultimately you’re looking for them to get bought out by a major. There aren’t very many juniors that bring a project into full production, and that’s because the majors beat them to it. The majors can raise money better when the big spending times come, they are better at that than the juniors. [1:04:19]

JIM: And when you’re accumulating juniors, what are the things you would look for? You mention a lot of these are single deposit companies, but one of the things that strikes me about the juniors is all of a sudden like Bolivar Gold, it’s just kind of waddling out there in the market and then you turn on the TV one day and it’s been bought out.

JOHN DOODY: Well, in hindsight it’s always easy to pick’em. Gold Fields was already an 11% owner, so you knew that they had a big interest in the deposit, and Bolivar was waiting for one more final permit. They had a temporary operating permit at their site, they were in production but on a temporary operating permit. And when that final operating permit came in October, voila, here we are in November and there’s a bid on the table. So, I think the majors are risk adverse. The last thing they want to do is stub there toe on something because it’s happened and it’s happened recently. You had Meridian stub its toe on Esquel, where they couldn’t get permitted. They spent $300 million to buy a project that couldn’t get permitted finally because they didn’t do the right social programs in the country, to convince the local area of Esquel, that this could be a good project for bringing jobs. And I think Meridian will ultimately get that permitted, but it will probably have to be an underground mine and they may only mine half as many ounces as they would have as an open pit mine. [1:05:39]

JIM: Speaking of acquisitions as it applies to juniors, whether it’s a major going after one, or an intermediate company. Do you think the scale is coming down? A couple of years ago they would have all loved to have found somebody with a 5 million oz deposit, [it’s] maybe a 3 million oz deposit now. It seems like that scale’s coming back down as these companies get more realistic. And looking out on the horizon there just aren’t a lot of 3 and 5 million oz quality deposits that can easily be mined.

JOHN DOODY: Yeah, the number I hear a lot is 2 and 2. Two million oz in reserve, 200,000 oz a year in production, is something that is still of interest to a major. 50,000 oz a year mine is just too small, and while you can gang together a bunch of 50,000 oz a year production mines, the management issues are just too large. 200,000 ounces is a number that can support an in country management team that knows what it’s doing and can do a good job, and I think that is still going to remain the minimum. Everybody would like bigger but that is going to be the minimum. [1:06:43]

JIM: So, 2 and 2.

As we look at the future, it seems one of the things that not only if you take a look at the supply and demand side of the equation we’re running deficits, they’re not finding a lot of large deposits as readily. You don’t pick up the papers and see they are finding the equivalent of these big projects.

Let’s talk about the monetary situation because European money supply is growing at 13%, since the beginning of the year. In the last 3 months, M3 is growing at almost a 10% rate – some of the individual components much faster – and voila next March, when Ben Bernanke takes over M3 disappears. So, let’s talk about that for a moment.

JOHN DOODY: It’s a shoot the messenger theory. If M3 is no longer reported we can’t see how fast the money supply is going to be growing. And it’s not that it’s not going to be calculated, they’re just not going to report it anymore. So, it’s going to be some more of this thermometer breaking that’s already being done on the Consumer Price Index. And this will be just breaking the other thermometer looking at the money supply to see what kind of pipeline inflation we have ahead. It’s like XXX movies I guess, you know, we’re not sophisticated enough to know this kind of stuff, and they’re still going to go on – XXX movies and M3 – but they’re going to spare us having to know about it.  [1:08:11]

JIM: And then of course we’ll also have the core rate which will always remain the same, that too.

JOHN DOODY: doesn’t matter.

JIM: Low inflation. John, if you were to describe 3 or 4 key points that are going to drive this gold market in its second and third phase, what would they be?

JOHN DOODY: From a macroeconomic standpoint, well, number one, something I’ve written about extensively this year which I think is still generally underappreciated, particularly by the Canadians, is the end of the Homeland Investment Act. This is where foreign subsidiaries in 2005 are allowed to bring back the overseas profits at a very advantageous tax rate, a little under 6%,. Normally, overseas profits, if you bring them back into the country you get taxed again at the normal corporate tax rate of 35%. For this one year you can bring them back at a special tax rate – a special exemption of 5.85% it works out to be – and the money’s coming back. The New York Times just this month has reported that $200 billion is coming back, and it may well be more. We won’t know until the end of the year because the tax rate expires at the end of the year. What this has done is it’s brought new buying to support the dollar. The dollar I think would have gone lower. It would have not gone up as much this year if there hadn’t been this money. Because this is like exogenous money. This is like money that came out of nowhere. It wasn’t part of the ebb and flow of the daily trade. This was money that was stockpiled over the decades overseas and now it’s coming back and the companies are supposed to be using it to [create] jobs, but of course money is fungible, and they are using it to do anything they want to pay dividends, to buy back stock, or whatever. But in any case, it disappears this year.

The second factor I see coming is the interest rate differential. This has been a great year for currency funds to play the dollar. They borrowed cheaply overseas particularly in the euro or the yen, sold those currencies, bought dollars, and then purchased US Treasury securities here. The dollar carry trade, where they were basically taking advantage of the interest rate differential of 3, 4 or 5% depending what Treasury they were buying, and then they leverage it by a factor of 10-1, 15-1, or 20-1. This put in amazing dollar purchases, pressure to buy dollars to send the dollar higher through this whole year. Now that’s ending. We can see that the interest rate raising is going to end soon in the Federal Reserve, maybe not in the next meeting but in the first half of next year certainly the Fed will have ended its interest rate increases. And we’re getting talk now in the euro countries talking about raising their rates – whether that makes sense or not we don’t know but they’re concerned about inflation. And the Japanese have already gotten off their zero interest rate. So the interest rate advantage is going to be shrinking, the differential between US rates, and foreign rates, and that’ll lessen the dollar carry trade and lessen the currency traders borrowing abroad, selling those currencies to buy dollars, and then using those dollars to buy Treasuries. That trade is going to be short.

So those are the two big macro factors I see that really have nothing to do with the inflation we’re talking about, just having to do with issues that are short term in nature, that are going to be relieved from the dollar strength next year. [1:11:44]

JIM: And then on the fundamental side when we take a look at the industry itself are there any drivers that you see?

JOHN DOODY: Well, they all need more ounces and they’re telling us right now that the easy way to find more ounces is to buy them. And so from an investment standpoint if you can find companies that aren’t performing well [where] better management can help –and certainly Placer is a good example of that – you’re going to get takeovers. Placer was being talked about the last couple of years as someone that needs to be taken over and rationalized, and fixed. And to the extent that other smaller companies have good looking deposits they’re going to get acquired. [1:12:22]

JIM: And finally, John, as we close, tell us about your newsletter. It’s in my opinion one of the finest. I’m a paid-up subscriber.

JOHN DOODY: Thank you.

JIM: And talk about it.

JOHN DOODY: As you know, Jim, I’m a former professor of economics, and I got into gold investing personally in the 80s, basically being a cynic on government. I think government always tries to get 9 slices out of an 8 slice pizza. You can’t do it, and the only way you go do it is by debasing the money supply. One way or another you have to make everything go around further than what it’s physically able to do. And so part of what I bring to the newsletter is always this big macro overview, and what’s the overall picture going to look like for gold, and then as you look at gold itself what is the industry like.

And one thing that has always amazed me about this industry is gold is a price-taking industry. Whatever the price is in the market that is what we take. And the companies spend no time trying to distinguish their gold from anybody else’s gold. It’s not like Coke and Pepsi where they really make the same thing – carbonated beverages – but they spend billions trying to tell us that Coke is better than Pepsi or vice versa. Here we don’t do that. So we have everybody producing exactly the same thing and the question is their stock prices are all over the place. And they all have different amounts of reserves and production and whatever, and I’ve tried to develop a commonality: a way to evaluate these companies one versus the other. That’s why I do this market cap per oz calculation, where you take the number of shares outstanding, and you multiply that by the price of the shares and that gives you a market capitalization for the stock, and you divide that by its number of ounces of production, or its number of ounces of reserves. And you come up with a number that might be $100 per oz of reserve for one company, whereas another company might sell for $150 per oz or $200 per oz of reserve. Why that difference? And a company’s production might sell at $500 per oz and another company’s might sell at $2500 per oz. Why that difference? You can take all the data and aggregate it to get an average for the industry, and compare where we are right now compared to where we’ve been in the past at different gold prices. You could try to figure whether stocks in general are overvalued or undervalued.

And then if you take a micro look at the companies themselves, and this is what I do in my company reports, try to figure out whether this company really deserves to sell at a premium to the average market cap per oz of reserves or of production. Or does it really deserve to sell at a discount to it. And sometimes the discounts are warranted, maybe the political situation where it produces, maybe it has high cash costs, so you don’t want to pay so much for its production as in other companies. Sometimes I think the high prices per oz are not warranted. A company maybe has low cash costs because it’s all by-products which are used to lower its cash costs so maybe you’re really paying a gold premium for lead byproducts. So, I try to be as objective as possible and I only look at companies that have data so I don’t follow the exploration stories as you know. There are other guys who do a good job there, and I’m not a geologist. But when you look at the data then you find the differences and then you try and figure out why. Is it reasonable or is it not reasonable? If you look for undervalued stocks in any market, at any gold price, there are always going to be some stocks that are undervalued and I try to find those stocks. [1:14:47]

JIM: Well, you do a great job of it. John, I want to thank you for joining us on the Financial Sense Newshour. If our listeners would like to find out about your newsletter why don’t you give out your website and tell them how they could do so.

JOHN DOODY: Well, it’s very easy. Just go online, the url is www.goldstockanalyst.com, all one word. [1:16:11]

JIM: Alright. You do a great job, great newsletter and I highly recommend it to our listeners. Thanks for joining us.

JOHN DOODY: Thanks very much, Jim, always glad to talk to you and preach to your listeners.

2ND HOUR: THE COMPANIES

Ian Telfer, GoldCorp and Silver Wheaton

JIM: On the morning that we’re talking today gold hit $499 in London, and I can’t think of a more appropriate guest to have on our show –one of the phenomenal growth stories in the industry – joining me is Ian Telfer, he’s Director and President of Goldcorp, and a Director of Silver Wheaton.

Ian, this is my third Gold Show, here at San Francisco, and the first Gold Show I attended was in 2003, and you were heading up Wheaton River, and you were making some acquisitions at that time. In fact, you were making a series of acquisitions, and I can remember the talk on the floor and it was like, “what is he doing,” because there was still some pessimism in the industry. What did you see in 2003 that you went on this acquisition where others weren’t seeing?

IAN TELFER: Probably the biggest difference between what we were looking at, and what the others were, is that we absolutely believed the price of gold was going to go higher. And typically gold assets get sold based on today’s spot price. And so when someone’s selling a property they’re using today’s spot price. If there’s an auction everyone else is using today’s spot price. So, if you absolutely believe gold is going higher then you’re going to make a higher bid, and you will always win the auction, and that is what had happened to us. [1:25]

JIM: Well, certainly Wheaton was a phenomenal growth story. Now, you’re heading up Goldcorp and that’s turning into being a phenomenal growth story. From your perspective, on the day you and I are talking gold hit $499, where do you see gold in the next couple of years if you were to take out your crystal ball?

IAN TELFER: I see gold going higher. As people have started to notice in the past, gold would tend to go up when the US dollar was weakening. Lately, gold is going up when the US dollar is strengthening, and so that means of course in other currencies it’s continuing to go higher. And I think as the uncertainty in the economies continue people will start to look again at gold as the world currency, and of course it’s the only one you can’t print, and as that realization hits, gold will tend to go higher. [2:18]

JIM: One of the things that we’ve seen in the last couple of years, we’ve seen the money supply growth in the US now it’s kicking in, we’re seeing it play out in the inflation rates. European money supply is up 13%, M3 up at an annualized rate of 10% in the last 3 months. And of course they won’t even be tracking it next March. If we take a look at this, and we take a look at gold there are a lot of investors out there saying $499 and they’re getting a little worried it’s too high. But if you look at it in perspective then $500 gold today is, with the amount of money circulating in the world, really a small figure.

IAN TELFER: That’s right. And when you look at the historical relationship between gold and oil etc., gold looks very, very cheap if you’re looking at $60 oil. And so I think you’re right. All of this currency that’s being printed around the world as all these [countries] try to almost debase their own currencies to keep it lower than the US dollar, so they can continue economic growth I think gold will be the big beneficiary of all this extra paper. [3:23]

JIM: And we are starting to see inflation spill over into what I call main street. You can’t go to a grocery store, or pull into a gas station today, or even look at housing prices globally, and it’s obvious that there’s inflation out there. Do you think the investor eventually wakes up to the fact that maybe this paper stuff he has isn’t going to be worth as much? You know, for me, I don’t how you would go into the bond market today with interest rates this low and inflation rates this high.

IAN TELFER: No, I think you’re right. I think people will start to look upon the paper currencies as something to get nervous about, and I think gold will be the big beneficiary. I think hard assets will do well. People talk about the housing bubble, it may level out for a while but I think hard assets are going to look like pretty good investments 5 years from now. [4:12]

JIM: Jim Rogers wrote a book called Hot Commodities, and in that he had a chart by an analyst from Legg Mason, Barry Bannister, and it showed this cycled that has played out for 150 to 180 years, where you’ve got 18 year up-cycles in stocks as we did from 1982-2000, now from 2004 we’ve seen gold go up, we’ve seen oil, natural gas, lumber, copper, lead, zinc, you name it, it’s going up. These cycles tend to last for this 18 year period of time. Isn’t this pretty much also a reflection of supply and demand in the industry because what were we doing in the 90s, were we finding a lot of oil, were we finding a lot of gold? Companies spending a lot of money to develop new mines, you didn’t see a lot of that.

IAN TELFER: No, that’s right. And of course, all these things are price related. And when the price of the commodity is not responding then people tend not to explore and not to develop. So you’re absolutely right we’ve had quite a long period of time with no real major gold discoveries, and so it will take a long time for this system to catch up if the gold price does start to go up. [5:21]

JIM: The one thing about this industry – if there’s been any criticism – is a lot of the mining companies have not done very well for shareholders. They haven’t made money, the return of investment has been poor. That’s been different with Wheaton River, it’s been different with Goldcorp. I’m just looking at some of your financials: $86 million in the 3^rd Quarter. What are you guys doing that’s different from your competitors?

IAN TELFER: Well, first we’ve been very fortunate, and what we have focused on are returns. We do pay a lot of attention to costs. Sometimes, there’s a tendency in the commodity industry in general for people to develop assets that will make money down to the very last dollar of the price, but not make very much money. But both in Goldcorp and Wheaton we were focused on trying to acquire assets where there were real returns, and real cash flow, and real earnings, and we were willing to pay up for good assets, and I think that is the difference between us and some of the others. [6:23]

JIM: And of course the higher returns the higher cash flow that also raises the opportunity for more growth down the road. I see from reading your financials that you’re talking about eventually getting to 2 million ounces of production which can be done through acquisitions. From your perspective, do you still see those kind of profitable acquisitions out there. Even though gold is at $500, do they still exist?

IAN TELFER: Certainly as the commodity price goes up the asking price for assets that are being sold by the seller also goes up. So there’s certainly no real cheap deals around, but as you get bigger the size of the things you can look at also grows, and it means there are less bidders, or there’s less alternate buyers. And so we still see things out there where we can create value, and so you’ll continue to see us grow. [7:15]

JIM: One thing when you were making your acquisitions it reminded me of Warren Buffet and Coca-Cola, and I remember when Warren bought Coca-Cola in the late 80s. People were saying, “he paid too much, what was he seeing,” but talk about a phenomenal growth story as Coca-Cola was going international. So, basically, what you’re saying is when you look at a project, and you look at the quality of the assets, you’re more interested in saying, “OK, what are we going to make today, but what are we going to make in 3 and 5 five years from now.” And if that pencils out, then you’re willing to pay out a few more dollars to get a quality asset.

IAN TELFER: That’s correct. The biggest mistake people make in our industry on the acquisition side is they try to get a deal on things. They’re tempted to buy things that are broken and assume they’re able to fix them, and the history of the industry is that the quality companies continue to do well, and the struggling companies continue to struggle. [8:12]

JIM: Let’s talk about Silver Wheaton, because I think it’s a rather unique company in itself. Most investors may not be aware but about 80% of the world’s silver comes as a byproduct of mining from copper to gold producers. You’re buying byproduct silver. Talk about Silver Wheaton because it’s rather unique.

IAN TELFER: It certainly is unique, and that’s correct, Silver Wheaton has been set up to buy byproduct silver from lead, zinc, copper and gold mines – whomever is producing it – and buy it at a fixed cost, so that everything is transparent and every thing is known to investors and then sell it at market. And currently we have two contracts. We’re acquiring silver for $3.90 and selling today at $8.30, so therein lies the margin. For the producer of the silver for whom it’s not a core product we pay them an upfront fee. In one case we paid $250 million upfront, another time we paid $75 million upfront, and we’re looking at similar type acquisitions going forward. We give them the cash up front and we take the market price risk of the silver going forward. We’re very bullish on the price of silver, and the other unique thing about it is there are very few investment vehicles for people interested in silver. There are 4 or 5 companies, the majority of them struggle to make money even at $7 or $8 silver, so Silver Wheaton has filled that niche and has grown dramatically share pricewise. It’s tripled in share price basically over the last 12 months. [9:47]

JIM: You know anybody that’s watched television is familiar with the program The Apprentice, “you’re fired!” Ian, you did something rather unique in the industry and you started a program but it was called, “you’re hired.” Tell us about it.

IAN TELFER: It probably resulted from watching Mr. Trump get all these highly motivated, excited, intelligent people trying to become his apprentice. And so I looked at that and thought that would be interesting, I’m sure there are people who would want to become an apprentice to a CEO of a significant sized company. So I went back to the University of Ottawa where I happened to get my MBA, spoke to them about it, and they thought it was a great idea, so they put the offer out to the graduating MBA class, and a number of them sent in applications. I went through those and then I went and interviewed them at the school, which was a very interesting, invigorating process to meet all these  young people, and see how keen they were, and then ultimately hired one who’s now the apprentice to the President at Goldcorp. [10:53]

JIM: It’s a woman I believe.

IAN TELFER: It’s a woman but you know it was obviously open to all comers.

JIM: OK. And what does she do. She follows you around. Is she part of the executive decision making, seeing what you do, how you look at companies, how a mining company is run?

IAN TELFER: Exactly right. She gets to go to board meetings. She gets to go to negotiating sessions. She gets to participate in conference calls. She gets to help prepare material for the Board of Directors for these different acquisitions that we look at. So she’s getting a sort of ring side seat at what a CEO really does on a day to day basis. [11:29]

JIM: This is absolutely amazing, because if we look at the industry that you’re in – the mining industry – for 20 years the mining industry, the petroleum industry was in a bear market so a lot of the people that came into the industry in the late 60s and 70s are now retiring. I hear stories that there are not enough geologists out there, and there are not enough mining executives. People are looking at retirement, so it seems like this is a great way to pass on skills by bringing in a whole new crop of young executives and people that are going to take this industry forward in the next 10 years.

IAN TELFER: You’re absolutely right. And the other part of it is because the commodity industries have not done well over the past 20 years, they haven’t attracted the top graduates from an MBA school. One of my comments is no Harvard MBA ever went into mining, they went into things where they paid better or were seen as being more exciting. By setting up this program, a whole graduating class of MBAs are looking at mining as an alternative career choice for them. And so the combination of attracting –I’m going to do this every year – so I’ll bring in one new person every year and they’ll maybe stay with us or move on or whatever, but they’ll get great exposure to the industry. So, every graduating class at least at one university will take a hard look at the mining industry as a place to make their careers. [12:54]

JIM: As you look at this industry going forward and compare this to the bull market in the 70s – you’ve got over 20 years in the industry – what would you say are some of the tougher obstacles that miners face today? Certainly if you take a look at the cost of energy it’s becoming an important consideration; you’ve got environmental restraints today that you didn’t have as much 20 or 30 years ago. You can’t just poke a hole in the ground and discover gold and silver and take it directly into production. What would you say are some of the obstacles, or some of the more difficult challenges going ahead?

IAN TELFER: Certainly many parts of the world could not be considered friendly to the resource business, and especially the mining business. It’s an industry that because it hasn’t been very profitable has struggled to repair the environment after it has finished mining, and so these legacy deposits or sites around the country don’t help the industry. So, I’d say the biggest challenge for the industry is trying to have your mind in an area where the neighborhood would want you. The second one would be on the cost side. And then third would be on the personnel side. You just haven’t had enough people going into geology and mining engineering etc. And so those three things are our biggest challenges going forward. [14:16]

JIM: As you look forward over the next 10 years, are you optimistic about the industry and where it’s going?

IAN TELFER: Absolutely. I believe in these large cycles – these 17 or 18 year cycles – and as I said to my wife the first 20 years I was in this industry were probably the wrong 20 years. I think the next 20 years are going to be fantastic for the gold industry and commodities in general. [14:37]

JIM: And finally if you were speaking to investors, if you were to give them any advice on this commodity cycle what would that be?

IAN TELFER: I would tell them to invest in quality companies, and to look at the medium to long term and don’t try to play the short little cycle that will happen over the next few years. Don’t think you’re going to be smarter than the market because I think especially on the gold and silver side, it’s going to take off in a hurry and those that hesitate will be lost. [15:10]

JIM: Alright. Well, Ian, I want to thank you for being very generous with your time and all the best to you, Sir, with your “you’re hired” program, it’s a great innovative concept. Thanks for joining us.

IAN TELFER: Thank you very much, my pleasure. [15:21]

Peter Marrone, Yamana

JIM: One of the countries we’ve been talking about here on the FSO Gold Show this weekend has been Brazil. We had talked to John Doody of Gold Stock Analyst. And joining me on the program is Peter Marrone, he’s President of Yamana, which has a considerable stake out in Brazil.

Peter, good to have you back on the program. Why don’t you give us an update and first of all let’s talk about Brazil itself, because a lot of investors are thinking of North America, Canada, Mexico, Africa. There are a lot of great things going down in South America, why don’t you fill us in?

PETER MARRONE: Let me begin by saying good to see you again Jim, and good to be back on your program.

Yup, Brazil’s a great country. It’s difficult for me to start any discussion about our operations without talking about Brazil. This is a country that is among the 10 largest economies of the world. It’s a country that is industrialized. It is a country that has exceptional infrastructure. With to boot, a country that is mining friendly. It has a mining culture. We don’t have to deal with expatriates coming into the country. This is a country that has been doing mining as long as Canada, and the United States, Australia, and other parts of the world. It’s a country that has well established mining laws, that deal with everything from the environment to mining plans. Finally, with 175 million people it’s a country that has – despite the infrastructure and industrialization – a cost basis that is the equivalent of developing nations. So, I’d summarize it by saying, all the benefits of a developed nation with many of the benefits of a developing nation. [16:50]

JIM: The other thing that Brazil has, Peter, which I think is going to be key even to anybody getting into the mining industry is energy. They’ve been farming sugar, they are using ethanol, and that’s got to be a key to any company getting into mining is energy as a cost factor.

PETER MARRONE: Again, another very fair observation. One of the unique things about Brazil is that this is a country that is self-sufficient in terms of its petroleum, and in terms of energy. It’s a country that subsidizes diesel. For a mining company that’s important. The country does not do that for the mining industry, [but] we benefit from it. Diesel is subsidized largely because of the trucking. The overland transport business which I would describe as subsistence, it’s not the way Europeans and North Americans understand it with large trucking companies, these are Mom and Pop type operations with one truck, two trucks, maybe five trucks. So, diesel is subsidized. We as a mining company get the benefit of the subsidized diesel cost which is roughly 2/3 to 70% of the world price. In addition to that, we also have power coming from hydroelectric sources. All of our projects connect to the national grid. 95% of power in Brazil is hydroelectric power. So it’s relatively inexpensive by comparison to many other parts of the world. [18:04]

JIM: You mention 2 things that are very key to mining companies. You’ve got to have the power, you have to have the transportation system, and you have to have the energy. Mining is a very energy intensive business, and we’ve all heard about companies that maybe have a great gold discovery but they don’t have the power or the infrastructure around the mine. And you can’t grow a mining project without all those things in place.

PETER MARRONE: The best example I can give is our São Francisco project which is our third mine which has just started production. We’ve just completed construction and started production as we’d undertaken to do by the end of this year. That project is just about in the center of South America on the Brazilian side of the Brazilian-Bolivian border. If you imagine a map of South America, it’s right at the center of South America. Remote, but even there there are paved road ways, and we connect to a national grid. There are several communities that are anywhere from 25,000 people to 75,000 people. Our Chapada copper gold project – our largest project – has exceptional infrastructure. It will be among the third or fourth largest mines in Brazil when it’s built, but this is a project that will cost us roughly $200 million. You could not build it in another part of the world without the industrialization that comes from Brazil, and without the fact that the infrastructure around this project is already built: towns that are within 50 km; that are 50,000 people to 500,000 people. 300km from the capital of the country, Brazilia, there are paved roadways that are two lane and four lane roadways on a national grid. So, experienced labor with infrastructure, that’s what’s unique about this country. [19:40]

JIM: I want to go back to this energy because a lot of the mining companies have seen their cost structures go up considerably – the cost of steel is going up, the cost of labor is going up – and you even have companies like Pierre Lassonde’s Newmont which is hedging by buying investments in the Canadian tar sands to hedge its energy costs. So, being in a country where you have access to energy as the cost of oil and natural gas goes up, and the fact that you have hydroelectric power, I couldn’t emphasize that [enough] to investors how key that’s going to be in terms of return on investment going into production.

PETER MARRONE: There’s no question that costs are going up everywhere, but again it’s a question of relative cost increases and how we compare to peers. And because diesel is subsidized and there’s an abundance of hydroelectric power – and by abundance [I mean] there is a significant inversion between supply and demand in Brazil on power – roughly 80,000 MW of capacity and 60,000MW of demand. So this is a country that went through an energy crisis about 7 years ago –six years ago – and has done a systemic change about how it approaches energy. Things that we in North America will likely have to do in due course. And so, here’s a situation where you’ve got an abundance of relatively inexpensive power, and that’s why this is a country that’s unique to be operating in.

In addition to that there are some of the other things you mentioned: labor. Laborers in Brazil that work in the mining industry and collateral industries are paid very, very well but by world standards it’s lower that one would pay if one paid an expatriate to work in the jurisdiction. That’s just ordinary course. And in addition to that it has an industry that is tailored to mining and so when we buy our equipment, when we buy our trucking fleet, when we buy our mills, we are buying locally manufactured Brazilian made product, which is world standard but at a fraction of the cost. Steel [is] another excellent example. While steel prices have gone up all over the world, Brazil has amongst the best iron ore in the world, very modern steel mills and, as you know Jim, the cost of steel is largely a function of what the distance is between the iron ore mines and the plants in transportation. So, this is a situation where the distance between the mills and the mines is relatively short, and so you have steel that is produced at a lower cost than it would be produced in other parts of the world. [21:58]

JIM: This is also amazing too because people traditionally think of mining as being a very polluting type of industry, but if you take a look at Brazil you’ve got environmental people that are working with the mining companies. They recognize the economic role that mining plays in any industrialized economy. Whether you’re trying to produce steel, they have CRBD down there which is one of the largest iron ore producers. The Chinese have a definite interest in doing business there. So, you’ve got all the cost structure and infrastructure that you need.

I want to move on, Peter, and talk about this gold bull market. One of the things that we’ve seen is a big movement in the majors, their prices have moved up. Your stock has been doing nicely lately, but this market in this bull phase – I think a lot of investors are looking at $500 gold and I’m just judging by looking at the conference here, it’s the same type of people – I’m not seeing a lot of new investors coming here, the guy that’s buying Google, I’m not seeing him at the show yet.  A passer-by was talking about he had mentioned to somebody that had lost money in the stock market and he said gold and he looked kind of starry-eyed. So this story of this gold bull market has not caught on with investors I don’t think.

PETER MARRONE: I would absolutely agree with that. I think like all bull markets the generalists will come in at some point in the market and then I think the overwhelming masses will come in at some point in the market as well. It’s very typical for other markets that we’ve seen and I think it’s going to be the case here. I believe that gold is sustainably above $500. In a radio interview last year – it may have been yours, Jim –  I think that in a weakened moment I don’t normally predict the commodity price but someone asked where did I think it would be by the end of the year and I thought probably better than $500. We are almost there. I believe it’s sustainably above $500 and I believe that next year we may see gold that is significantly below about $500 [sic]. I can’t predict where it would be, and if I could I’d probably be doing something else. But I’m comfortable saying it’s at least $500 and it will go to significantly higher than $500 within the next few years.

What’s different in this industry in my view to others is this is an industry that is relatively small in comparison to other industries. If you take the market capitalization of every mining company out there it is less than one of the average-sized telecom companies. So it’s a relatively small industry, and when it does catch on with the generalist funds and with the overall masses it becomes, as I describe it, the Niagara Falls –the volume of water of the Niagara Falls – through a garden hose. It becomes a situation where you’ve got this massive inflow of money and massive inflow of investment into a relatively small industry, and that’s going to be very, very good for stock prices and companies in the industry. [24:48]

JIM: Yeah, because one thing that we’ve seen in this market and certainly since the downturn that came about in the Spring of 2004, a lot of investors – and I’m talking about the fund managers, the big money – they’ve come back into the market. But they’re going into the Barricks, they’re going into the Newmont’s, because they know if there’s a correction or if there’s an exit they can get out.

It hasn’t spilled over for the rest of the industry. You still have a lot of juniors that aren’t selling at the premiums that the majors or the intermediates are. And the thing that attracts me to this industry right now there are a lot of good companies out there that investors are totally ignoring and if you look at if this market catches on as I believe it will – as the price of gold stays to $500 and moves to higher levels – there isn’t a lot of selection. Everybody is focusing on the big cap stocks and I think this market needs to broaden. There needs to be more participation, there needs to be higher stock prices because that is what attracts institutions and attracts investors. Do you see that happening next year?

PETER MARRONE: I do. And I couldn’t predict if it would be the next 3 months, but I certainly think within the next year, and I don’t think it will be longer than a year but I think we will start to see that more general flow of funds into this industry, and into the smaller cap companies. We’re somewhat unique as you know in that we have a growth profile that is by our estimation, and by the estimation of many, unparalleled. A growth profile that takes us to 260,000 ounces next year, more than 400,000 the year after, with a stated objective that we’re going to be at 750,000 oz before 2008, with a cost structure that will be below $200 per oz. So, from that perspective we are unique but there are lots of interesting stories in the marketplace –lots of interesting companies in the marketplace – that with a sustained gold price of more than $500 will do remarkably well from a cash flow point of view, from a growth point of view, and also from a profit point of view. And so I think once the focus starts to be paid, once there’s attention on those types of companies and what’s taking place I think that we’ll see the generalists, I think we’ll see the bigger population, coming into these investments. And I think it is a matter of time, but it’s not a long time, say within the next year in my view. [27:03]

JIM: You’ve brought up something that’s real important too. As the price of gold moves up one of the ways to capture that is of course by being a producer, and number two, if you’re also increasing production. Tell us a little bit about Yamana, where you’ve come from, where you are today, and where you see the future going?

PETER MARRONE: I’d be happy to do that. We put this company together – we took this company public by a classic reverse takeover. That was July of 2003. In July of 2003 we started with a market capitalization of roughly $90 million, where today at an enterprise value a market cap that exceeds a billion dollars. What we’ve done is take a company with one producing gold mine, our only underground mine, with roughly 90,000 oz of production per year, we took that to a second mine early this year but we declared commercial production early this Spring, and that production rate is now 125,000 oz.

Our third mine has just started operations, that’s our largest gold mine, São Francisco. And with São Francisco in a full year of production next year we will be at more than 260,000 oz of production.

And then Chapada, our copper-gold project will come into production in October of 2006, 5 months ahead of schedule. We announced that a couple of months ago, we are ahead of schedule. A mine that was supposed to be completed at the end of the first quarter 2007, we’re completing by October of 2006. With a full year of production in 07 we expect to be at a production rate of more than 400,000 oz of gold, and another 100 million pounds of copper. And that will then increase to 500,000 oz of gold in 08 and roughly 140 million pounds of copper.

So it’s a significant growth profile, and this is not a growth profile that takes us from zero to 400,000. It’s progressive, it’s about 50% per year over the course of a 3 year period, and what we announced about a month and a half ago was 3 new potential mines. We have an exploration program that is about $13 million per year, and that program is on roughly 700,000 ha. of mineral concessions, it’s within the 4 largest land positions in Brazil. We started spending it in January of this year, and by 10 months, and so about a month to two months ago, we came to the point where we had 3 projects that were at the advanced stage where we declared that we will be taking them to feasibility by the middle of next year. With those 3 projects  and our existing mines, we should be at a production level that is more than 600,000 oz per year, starting in 2007 and extending in 2008, and that will take us into 2015.  [29:36]

JIM: What do you see for the future profile of your company. You’re talking about production right now growing about 50% per year. You’ve got a lot of things in the pipeline at the development stage. Do you become a million ounce company?

PETER MARRONE: We put out – my memory is being tested in terms of the timing – in the last six weeks we put out what I describe as a strategic plan, or a strategic vision press release. In that press release we said this is where we are, this is where we expect to be. 2 ½ years ago we said this is what we would do, and by and large we’ve executed on that plan. Now what we are saying to our shareholders and others is what we intend to do in the next 2 to 3 years. And in that press release we publicly said we expected to be at 750,000 oz – sustainably 750,000 – from internal growth and from acquisitions. So clearly, ¾ of a million is a number that we think is achievable, and we think that we can probably can get better than ¾ million oz of gold by 2007, 2008. [30:33]

JIM: Youre growth in production is rather substantial. If you take a look at some of the intermediate companies, you look at Glamis now at 400,000, if you take a look at Agnico at close to 300,000, there’s a group of companies in that category. So by next year Yamana will be in that same category of what we call intermediate producers in moving forward just with existing projects.

PETER MARRONE: Very much. In 2006 – so we’re now at the tail end of 2005 – within the span of the next couple of months with 3 mines in full production we will be at 260,000 oz of gold, with a fourth mine that will start to produce in the last quarter of 2006. So, not even including the production that comes from that copper-gold project, we expect to be at 260,000 oz of gold  production. That’s squarely in the intermediate ranks.

And as you know, Jim, and your listeners probably know the seniors that you described earlier, the senior companies are normally attracting good multiples – very good multiples – that then migrates down to the intermediates, and then to the juniors.  And the juniors are usually trading at multiples that are lower than the intermediates, and lower than the seniors. As we’re migrating to an intermediate stage company which we expect to be within the next few months with 3 mines as I mentioned, I should expect, and we should all expect, that we will be getting the same type of multiple that a Glamis or an Agnico – and the companies that you mentioned – would get. But that means the stock price that is roughly trading at the $5.50 (Canadian) on the Toronto Stock Exchange should be seeing prices that are higher than that. [32.11]

JIM: You know, Peter, that’s one of the things that are kind of unique in this gold market. If you go back to the last one that occurred in the 70s, a million oz producer was rare. You had the South African companies but producing a million oz, or 5 million oz, just didn’t exist in that kind of market. And if we take a look at where the majors are today, I have a hard time – even with all of the money that has gone into exploration – we are not finding Cortez Hills every year, and so you kind of wonder where the majors are going to be going in terms of growth versus somebody, let’s say, the size of your company, a Meridian, or a Glamis that has a chance of becoming a million oz producer, or 750,000. I see you guys as the growth play in this kind of bull market, because you’re going to get good value with Newmont – you’re going to do well in a gold bull market – but you’re not going to be growing your ounces. And if you want to make a lot of money in my opinion [it takes a company with] a rising gold price and also rising production. You’re selling more product, it’s just like any other industry.

PETER MARRONE: I share that view. I believe we will be going through a consolidation phase in addition to all of that. You’re right a million oz producer is not as rare today as it was 20 years ago, or even as much as 10 years ago. But you cannot get the growth from a major that you would get from a junior mining company, and an intermediate mining company. But again, I think we’re at the early stages of this. On the exploration side, we’re only now starting to see the benefit of that money that has been spent in the ground for the last 3 years. What we all recognize is that it’s a cycle. It takes a period of time to put money in the ground for exploration and then take a drill point to where it’s actually at feasibility and then to construction. So, we’re going through that cycle the money that was raised 3 years ago is now starting to bear fruit today in terms of some of the exploration companies, and in terms of some of the junior companies migrating to intermediate companies, including ourselves.

Where I think we are uniquely positioned is that we not only have that growth profile that I described but we also have this incredible exploration package. So, if I were to say can you find a company or are there other companies where there is the growth profile I described to you, where we have exposure to gold and some exposure to another metal – copper – and where we have an exploration program that is the size of ours, it is very unusual. So, from that perspective we are unique, but on the other hand there are a lot of companies out there that are just at that point – that inflection point – where they are going start to produce uniquely, and start to grow their production. And those companies I think will do very, very well. And you mentioned some of them, and there are many others that are in that market place. But in addition to that I think we’re also going to see some consolidation in the industry. I’ve been saying it for a year, and I think we’re starting to see it now. The majors, to become larger, will have to buy other companies, but I think we are going to start to see some consolidation among the juniors and intermediates as well. And we are positioning ourselves to be buyers of some of these assets and some of these companies. [35:14]

JIM: That’s my next question. You have 3 mines in production...

PETER MARRONE: Yes

JIM: You have a big exploration program going on in Brazil. Do you see Yamana as a one country company? Are the resources so vast that there’s enough to keep you satisfied there for say the next decade, or do you see Yamana going beyond the Brazilian borders?

PETER MARRONE: We certainly could see ourselves satisfied for the next decade in Brazil, but as we look at it, and what people have seen in terms of our public disclosure, our focus is not Brazil, our focus is Latin America. Clearly, the initial platform is Brazil, but Latin America is our broader focus. That is what we understand. So we won’t only limit ourselves to Brazil but will limit ourselves to the Latin American area of the world. Now, Latin America is a broad area everything from Mexico down through Central America, and down to the tip of South America. It’s a broad area but we understand it, we understand the culture there, the terrain and the geology - the mining approaches to those parts of the world – so we’ll focus on those.

I think that as a company grows you have to outgrow a company specific platform. You have to go to a broader platform than that, and we will start to evaluate that over the course of the next year, perhaps sooner than that, to get to a point where we have Latin American operations not only Brazilian operations. [36:33]

JIM: Fantastic. Peter, if you were speaking to a group of investors, and you were to ask them to invest in your stock why don’t you give us 3 reasons to invest in Yamana?

PETER MARRONE: Clearly, growth. First and foremost is growth. We have a growth profile that is significant. Second is value, we’ve been at the stock price it is trading today – you mentioned some of these other companies – they’re still trading at a  price – if you compare it to net asset value, our cash flow, our profitability – that is higher than ours. So, even independently of growth based on where we are today based on our current platform of production to where these companies are, we are trading at a discount to these companies. And so there is an immediate benefit to investing in Yamana today. So, value. And the third is it’s a mix and a match of the country that we’re in, with the reasons I described before, and also the exploration potential that comes from what we have in the company presently. Growth, value and an exceptional infrastructure, an exceptional place to be doing business from a mining perspective, and from an exploration perspective. [37:39]

JIM: Alright. Well, Peter, thank you very much for joining us on the Financial Sense Newshour, all the best to you, Sir.

PETER MARRONE: Happy to be here.

Peter McGaw, Mag Silver

JIM: Well, everybody’s getting excited about gold as this weekend of the show we were just a few dollars short of hitting $500. We’re going to talk about another metal now. We’re going to talk about the silver market and to do that, joining me on the  program is Peter McGaw. He’s with Mag Silver.

Peter, silver prices at $8. Is that the point that it becomes economic to mine?

PETER MCGAW: Actually depending on the grade of your deposit you can mine at substantially lower prices than that. If you look at the Penoles company for example, even when silver was at $3.50 an ounce, they were making money off the Fresnillo mine, because of the 23 oz average grade. You can do very well with silver. When you consider that 80% of silver is byproduct, primary silver mines that can survive during relatively low price times do exceptionally well when the price moves up dramatically. [38:33]

JIM: We’re here at the San Francisco Gold Show. There’s almost 200 or more companies here that are exhibiting. You’ve got a lot of companies here but they’re gold companies. One thing about silver that makes it somewhat unique, most of the world’s silver is mined as a byproduct – about 80% comes from the BHP Billitons and other companies as a byproduct – does that make silver somewhat unique as a metal in the sense that it’s more of a byproduct than a specific product? You don’t have a lot of silver companies out there.

PETER MCGAW: That’s true. Because the market for silver is so inflexible because of that when a price spike occurs in silver, when silver move up as it has been doing for the last couple of years, you can’t double the production from a giant porphyry copper deposit to produce a few more million ounces a year of silver at an average grade of 2 or 3 grams. If you want to satisfy the market you need a primary silver producer which technically means high grade silver. So we’re talking – in an underground operation – 10 plus ounces of silver per ton. And that is the kind of thing Mag Silver is looking for: deposits that will make money at any silver price so that when the silver price is high their mines, or projects, do exceptionally well. [40:00]

JIM: But if you look at how silver is produced – I mentioned that 80% that comes as a byproduct – I could think I could probably take silver producers and count them on both of my hands. Do you see that changing as the price moves up? Now that we’re at $8 it looks like we are very comfortable at that level.

PETER MCGAW: Having been involved in silver for 27 years, it’s been very interesting to see over the last 3 years, as a number of companies have reformulated themselves as focused on silver, a number of silver mines have been put back into production. So, the number of small silver producers has been increasing quite substantially over the last few years. And clearly as the price continues to strengthen and solidify, I think we should expect to see a number of additional producers. The question will simply be how big they are. [40:50]

JIM: That’s the thing, if you take a look at the silver market as you just mentioned, let’s say demand is growing at 3 or 4% a year, or even more depending on what happens with the market. It’s not something that you can flip a switch and Phelps Dodge or BHP Billiton is now going to crank out double the rate of production. So, you’re really talking about the pure silver companies. I almost look at them as being what I call peak power producers. Where you’re going to get that extra oomph or that extra production is from these silver companies.

You’ve been working in Mexico for quite some time. Tell us about Mexico as a silver and gold deposit company. It seems to me it has some of the richest ore veins in the world.

PETER MCGAW: Well, Mexico is historically and currently the world’s biggest silver producer. Aggregate production is over 10 billion ounces of silver the last 500 years. It is currently producing a little over 100 million ounces a year, almost half of that comes from Penoles’ Fresnillo mine, which has been undergoing a series of expansions over the last 2 or 3 years.

Mexico is exceptionally well endowed with silver deposits, many of them high grade, many of them grossly underexplored in the sense that if you look historically at exploration in Mexico there really hasn’t been concerted exploration effort in Mexico since 1960, with the exception of the period from 1990-1997 when there was a huge flood of companies that went into Mexico. These companies started with outcrop exposures of one kind or another, and old mines, and about the time they started to look under the pediment – about 60% of the silver producing area of Mexico is covered by alluvium, about the time people tried to looking through to the buried deposits – the bottom fell out of the market.

So, there’s a lot of exploration techniques that have been developed in other parts of the world – Australia, Canada, the US – for looking through alluvial cover of one kind or another, and those are just beginning to be used in Mexico. And they’re finding gold deposits, they’re finding silver deposits. There is an untold gold story in Mexico: the Guerrero gold belt where they found 12 million ounces of gold in 4 deposits over the last 10 years, and almost nobody’s heard about it. People keep saying Mexico needs a big gold discovery, well, they’ve got one, but the word for whatever reason simply hasn’t gotten out on that. And, there’s a number of companies here, I would guess probably half the companies at this show who are focused on silver are in Mexico. [43:23]

JIM: You know that’s surprising because we were talking to Peter Marrone of Yamana and a lot of people [when they] think of mining they don’t think of Brazil. [But] they have a mining culture down there, they’ve got the infrastructure, and also I would say in Mexico. They’ve got hundreds of years of culture going on in mining down in Mexico, that people are just now starting to talk about. And also, you’re seeing more of the modern techniques of exploration and mining coming into play into Mexico.

PETER MCGAW: Yeah, Mexico has an extremely strong mining culture. It has a number of very strong, homegrown companies: Penoles is right up to date with modern exploration technology. They are at the forefront in Mexico, and of course they have had a good head start over the rest of us who are working down there. [There’s] a very favorable economic and political climate and the most stable company in Latin America politically speaking, taxation rates on a par with what you would expect in any country in the world, and just generally a very favorable attitude by all of the political entities towards mining. You hear a few horror stories, typically from places where people haven’t done things in accordance with the details of the Mexican laws, but if you do them in accordance with the Mexican laws it’s a very straightforward environment to work in, and very welcoming. I used to work in the United States, and you couldn’t get a politician to talk to you for 5 minutes. In Mexico, they come to you and ask, “what can we do to advance your project, we want the economic development that mining represents.” They’re very strongly in favor of it. [45:05]

JIM: That’s going to be I think extremely important going forward, because there are geopolitical risks around the globe. You may find a deposit but who knows if you’re going to be able to mine it, if the government is going to be favorable, are there going to be delays? Do you have good contract law and property rights which I think are very important? And that’s something that changed in Mexico in 1992.

PETER MCGAW: That’s correct. When they changed the mining law in 1992, they did it deliberately to increase the transparency of holding a mining property in Mexico, and give foreign companies more comfort that they were protected. And the result was exploration expenditures in Mexico went from $50 million a year, to $500 million a year in 3 years. So, they saw politically that they got very immediate and very strong results from that policy change, and the expenditures are at or above that $500 million a year level now. In addition to the fact the government is out of the exploration business, and they used to be a major competitor with the private sector. [46:15]

JIM: Let’s talk about silver as a metal. When people think of a monetary metal they think of gold. The dollar at one time was backed by gold, and a lot of the currencies of the world had a gold standard. But if you take a look at money, over 5000 years of history, silver has wider use as money throughout history going all the way back to the Bible, or if you read Sidney Homer’s History of Interest Rates in Babylonia, before money was developed they had 2 kinds of loan: you could get a wheat loan or a silver loan. So silver has been used as money for hundreds and hundreds of years. Do you feel like talking about silver as a monetary metal as well, because people are talking about gold today in that vein?

PETER MCGAW: A lot of people have sort of dissed silver calling it the poor man’s gold, but don’t tell that to somebody in India which is one of the most populous countries in the world where silver remains the fundamental unit of monetary value that the people collect and hang on to to store their personal wealth. If you look at what has happened to imports of silver into India over the last year they’re up dramatically over previous years. The Indian economy is doing very well and individuals in India are clearly responding by sinking a significant part of their paper wealth into silver which they feel confident in over the long term. I also look at the US, we went off the gold standard a long time before we dropped the silver standard, and now we’ve sold off all the silver that was in our resource. So if the US government decides for some reason they want to bring silver back to the monetary system here, they’re going to have to go into the market to buy it. [48:00]

JIM: What about the market itself for silver? We’ve talked about [the fact there are] very few companies. Talk about your company in particular. You’re down in Mexico. What is Mag Silver?

PETER MCGAW: Mag Silver is first and foremost an exploration group, dedicated to finding district scale high grade silver deposits. [48:19]

JIM: Let me stop you there –district scale – define that for our listeners.

PETER MCGAW: District is a concept that takes a little while to wrap your head around, but rather than looking for a mine or a deposit where you’re talking tens of millions of ounces of silver, we’re talking deposits where it would be hundreds of millions of ounces of silver within a relatively restricted geographic and geologic area. So, a very large mine, or a series of large mines in an individual geologic environment. Essentially, we are going after as much of whatever the deposit is nature put there as we can possibly get our hands on. [49:02]

JIM: A district play would be not just one mine that is located in an area but a whole geographic region, so there’s a good likelihood of finding silver in surrounding areas.

PETER MCGAW: From a geologic standpoint – to be technical about it – it is a hydrothermal vent which is a single ore center, maybe 15 or 20 km in diameter. So, we are looking for something on that kind of scale. Mexico has something called the Silver Belt, a group of deposits that defines a band that runs across Mexico from the US border clear down practically to Oaxaca. And within that band there are a series of very well developed structures, one of which you can see on satellite images that runs from the Guanajuato district to the Zacatecas district to the Fresnillo district, through the San Martin district. Those are 4 billion ounce silver deposits that all occur along a well defined regional structure. You could define that as an enormous silver district. We’ve identified areas of high potential based on alteration and degree of cover essentially between the pieces that have been found because they stuck out on the surface. So, we’ve gone after high potential areas where we can apply these techniques for looking through the cover, and look for what is potentially another multi-hundreds of billion ounce silver deposit. We are going for homeruns here. We’re not looking to add 10, or 15 or 20 million ounces of silver to the resource inventory of an old mine. We’re looking for something that would go on the map historically as one of Mexico’s major silver deposits. [50:50]

JIM: Let’s talk about one particular play that you have which is right next to the largest silver mine in the world within Penoles’ Fresnillo [mine]. Talk about what you’ve got going on there.

PETER MCGAW: Basically back in the last exploration cycle my Mexican group worked on this property for Sunshine Mining. We did the mapping, everything up to drill permitting, Sunshine Mining disappeared, it was one of the properties we brought into Mag. The property boundary is 5 km from the principal headframe of the Fresnillo mine, and our premise was the Fresnillo district was bigger than Penoles thought it was. And we hit Fresnillo grade silver mineralization in our very first hole. We got an extra surprise in that in addition to the 20 some odd ounces of silver we got almost a third of an ounce of gold mixed in with the silver, which is much higher than had been found in the district before. So, we began to think about maybe the district was even bigger than we thought it was, and so our exploration has gone beyond Fresnillo into the surrounding grounds.

Penoles thought enough of our results to come to us and form a joint venture and we are very pleased that this last year we celebrated a joint venture with Penoles where they put some money into Mag. They took some shares in the company, and they are putting the next $5 million into exploration on the property. We are in the early stages of an 8500 meter drill program, as they spend $5 million to earn 56% interest in the property. They’ve got 2 rigs turning on it right now. And our initial results from the first hole were announced just a few weeks ago, and the hole was drilled very deliberately at a shallow level on the structure to get a feel for the geometry of the structure, because these style of veins in Fresnillo pinch out 250m below the surface. And it looked like with that drill hole they nicked right into the top of the pinch out, and when you connect that with what we had in our hole previously, we are right where we want to be in terms of getting a feel for where this vein is, getting it nailed down, and then once we’ve got another hole or two into it, and we know what the geometry is then we can start going for some deeper drilling into the guts of the ore shoot. [53:13]

JIM: This is just one project you are working on where you are joint venturing with Penoles. You have other projects in other areas you are looking at?

PETER MCGAW: We have six other projects. One of those which are really two pieces of property on either side of Fresnillo, a total of 170,000 hectares, one of which we hope to be drilling in the early part of next year based on detailed mapping and geochemistry and geophysics. We have another piece which is between Fresnillo and the Zacatecas district, that one is moving forward a little more slowly but we are moving that one aggressively. We have the Batopilas district in Chihuahua which is one of the highest grade silver deposits that has ever been found in the world, production grades over 30 years, from 1880 to 1912 of better than 2% silver. The ore bodies are essentially big brillo pads of crystallized native silver, and we believe they should show up very well to modern geophysical techniques. We’ve done the structural analysis to figure out where the veins should be widest. We’ve done the geophysics, we’ve got the anomalies and as of 10 days ago we got a drill rig out there shooting for the first target on that program.

Then we have a series of 4 carbonate replacement systems which is sort of the other half of Mexico’s silver production – half of it comes from veins, the other half comes from carbonate replacements – it’s not a type of deposit that is necessarily well known in other parts of the world, but these are major deposits in Mexico. They can get up to 50 million tons of very high grade lead/zinc silver ores. Some of them have been in continuous production for 300 years. We’ve tied onto the Southern half of the biggest one ever found, where geologic studies suggest half of the typical zoning of one of these systems hasn’t been found, so we are looking for it there. And there’s a series of 3 other properties which are the result of a systematic regional exploration program that we ran for a major during the 90s. It probably represents $2½-3 million of exploration expenditure by that company to identify favorable districts, and we’re moving those forward with geophysics. The geophysical crew moves onto one of those properties on Monday. So, we’re moving those forward smartly as well. [55:24]

JIM: Where do you see Mag Silver going? You’re accumulating, you’re exploring, you’re identifying these territorial or regional plays, where do you see yourself as a company?

PETER MCGAW: Well, again, I think quite clearly we’re explorers and we believe what we’re good at is identifying opportunities, geologic models that make sense, if we can bring these forward, demonstrate that the geologic model holds water, and makes sense, then we would expect to continue joint venturing those projects with majors. We’re very happy with our relationship with Penoles, but there are other companies out there as well that we would be more than happy to talk to. If we find something that’s high enough grade that makes sense for Mag to consider going into production ourselves we might do that but again that would probably be Botapilas where the potential is for hundreds of ounce per ton kind of silver grades where a relatively small mine would be more or less bomb-proof as far as the downside is concerned on a small scale production, but with very high upside production potential. [56:53]

JIM: How would you contrast, let’s say your model with say a Silver Standard. Silver Standard has gone around the globe, they’ve identified projects, acquired existing silver reserves, and have sort of warehoused the silver reserves until they thought they would get to the point where silver became economic to mine. Do you see yourself as just a company that just identifies and finds these type of  potential reserve deposits and then goes into joint venturing with somebody like you’re doing right now with Penoles?

PETER MCGAW: Well, our goal would be to joint venture with producers, and the point being that silver is economic to mine now if you have high enough grade. And we’re very bullish on silver. We believe that the silver price will continue to increase. Some of the more dire predictions for what the silver price could do in terms of dramatic moves to the upside connected to various kinds of monetary collapse or crises of one kind or another, some of those scenarios make certain silver deposits economic under those conditions, but it requires the production costs not to go up with them. And we think that a serious economic crisis would probably cause production costs to go up too. Unless you can get the silver price to move up independently of production costs then you’re not going to get those kinds of benefits. So, we’re looking for things – as I’ve said before – that make sense now, that would make money right now. But we also believe when  the price of silver does a dramatic move the people who are in production or have pieces of properties that are in production, because they make sense at current economic conditions, will be the real beneficiaries of the increase in the price of silver, as opposed to people who say silver has now crossed our threshold we can start thinking about putting these things into production. It takes several years to build a mine, and I would rather be in production and be able to see the reward for that physical silver as the market moves, rather than having to wait a couple of years when the market may have gone down again. [58:40]

JIM: Peter, if you were sitting in the front of a group of investors and you wanted to give them 3 to 4 reasons why they should consider Mag Silver, what would they be?

PETER MCGAW: Well, first and foremost I would say it’s because of our property position. We have extremely well located properties in some of the biggest grade highest producing districts in Mexico, either on top of or next to us. So, you’ve got to have the property.

The next thing and this is true for any company, you’ve got to have the people. We’ve got Dan McInnis who’s come in as the President of Mag over the last year. Dan has a 30 year track record of running major exploration companies for major companies throughout the world, including Latin America. He’s got a good track record of discovery, he understands the reality of exploration, especially exploration for big deposits. These aren’t the kinds of things you can go into and hope you’re going to drill 2 or 3 holes and then be done and move on. We’ve brought on Gordon Neal who’s Vice President of Corporate Development. Gord’s got a very long track record of raising lots of money in the institutional markets so we’re getting a very strong holding of Mag within institutions.

So, you’ve got property, you’ve got people, we’ve got the financing to move forward, we’ve got the market savvy, and I think we understand Mexico. We have a connection in Mexico based on my associates working there for more than 25 years, that puts us in the best place in the world to be looking for silver. So, if you’ve got political stability, geologic potential, properties in the right places, and the right people to look for them, I think that’s an unbeatable combination. [1:00:22]

JIM: Alright. Well, Peter McGaw from Mag Silver I want to thank you for joining us here on the Financial Sense Newshour. All the best to you, Sir.

PETER MCGAW: Thank you very much Jim, it’s a pleasure as always.

JIM: Well, we heard from some of the bigger companies in the intermediate producers, now we’re going to talk to some of the junior  companies. They’ve been somewhat laggards lately. In fact many of these stocks are quite frankly being given away, but that’s the nature of the market. Sometimes, when stock markets take off it’s the big guys who advance first and then the little guys.

3RD HOUR: MORE COMPANIES

Keith Barron, Aurelian Resources

JIM: Well, we’re going to move down on the exploration side of the business, we’ve been talking to some producers and joining me is Keith Barron, he’s President of Aurelian Resources.

Keith, you and I were having dinner last night, and we were talking about the gold industry. And for our listeners, this is my third time to a Gold Show in San Francisco. One of the things that really struck me is I expected to walk down on the floor this morning when the gold show opened and see huge crowds because we’re not far from $500 gold. I’m looking around the room and it’s mainly mining companies. Where are the investors? And that to me as an investor, that’s a good sentiment for a contrarian indicator. Because, Keith, you can remember, last year you couldn’t even walk down the aisles they were lined up outside the entry way to the hall.

KEITH BARRON: That’s right, yeah. It’s kind of an interesting thing that we see in the gold exploration business. As you know it’s very cyclical. I think one of the people that I talked to this morning encapsulated it pretty well. If you look around the hall here, it is a little different from 2003 because about 1/3 of the companies here are flogging uranium plays, and they’re start-ups – exploration plays – in uranium. We haven’t seen that before. And this gentleman said to me this is sucking a bit of the interest away from the gold market, and really with gold getting close to $500 we ought to see a much more robust scene on the exploration front.

But I think another thing we’ve been in a bull market now – the gold story – since really about 2002. In my situation with Aurelian, we started up Aurelian in 2001 when gold was about (US)$260/oz, and here it is closing in on $500 and gold’s done very, very well. But you know, internationally we haven’t seen a situation where one of the juniors out of this room or anywhere has come up with a huge, huge discovery. And this has been very, very strange, and unusual. Usually when you see a resurgence in exploration activity worldwide, one of the juniors trips over something that is really, really big. And so they go from a fairly miniscule market cap to something pretty substantial almost overnight. And that attracts a lot of market interest. And we just simply haven’t seen that this time. I’m not quite sure what the reasons are. Maybe it’s just getting harder to find these things. [2:52]

JIM: That’s one of the things that strikes me, Keith. Are we getting to a situation of what we call peak gold. When was the last time the world saw a major oil discovery other than the North Sea or Prudhoe Bay, which was the latter part of the 60s. We know that there are fewer gold discoveries each year. We know that the industry is not replacing its reserves that they’re producing each year. And I would have to say that aren’t we getting to that same situation in the gold industry. Is Newmont replacing its 7 million oz of production? Is Barrick? Well, yeah, maybe if they buy Placer, OK, but they’re doing it through an acquisition. And if a Placer is producing 3 ½ million oz, and they add that to Barrick’s production they become the largest mining company. How are they going to replace 7 or 8 million oz of production each year? I just don’t see that.

KEITH BARRON: Yeah, that’s the situation we’re facing right now. In the mining business a mine is a wasting asset. From the day you start the shovels in the ground, it’s got a finite life. And at some point the gold’s just not going to be in the ground anymore, it’s going to be mined out. It’s going to be sitting in a bank in a vault somewhere. And so these companies, the majors, have to either get aggressive and go out and do their own exploration. You know we had this period here in North America and elsewhere where there was really no exploration activity by the majors for many, many years – 5, or 6 years – just nothing. And it’s coming back from that. And we’re starting to see resurgence in that.

But the gold situation is a funny one. There’s been a lot of articles just in this last week talking about the production situation in places like Australia, and South Africa, and both of these countries have got declining profiles in terms of production. So, looking forward next year or the year after that production in gold is going to fall, and that’s just the reality of the situation. They’re not finding the ounces to replace the deposits.

And there are other factors here at work too, and I’ve talked about this on my own web site. The gold business – if you’re mining gold in America, and you get paid in American dollars for your bricks of gold, you’re in a great situation because your costs are in American dollars. If you’re mining in some place like Australia, or Canada, or South Africa, and the US dollar against those local currencies is falling it can actually offset the positive trend of the gold price in US dollars. It can make it less competitive.

Now you’ve got to focus all of this in the context of higher fuel costs, higher costs of structural steel, for concrete, all of this stuff. In some of these mining operations, one of their huge costs are rubber tires, because rubber tires are made synthetically from oil products. And all of this stuff is climbing in cost. I think we’re going to see worldwide a situation where the gold is not coming onto the market, the gold not being produced by the mining companies. And the majors are going to have to start moving down the food chain, and rather than focus on 5 million oz thresholds, 3 million oz thresholds that the last 5 or 6 years they’ve been historically focused on, they’re going to start looking at 1 and 2 million oz deposits, and put them in production. We’re going to need a much higher gold price to get there but with these falling production profiles worldwide, and escalating demand from places like China and India, I think we’re going to get there. [6:55]

JIM: You bring up an interesting point, Keith, because the fact that gold production has gone down in Australia, and South Africa, which has traditionally been in the last 100 years the largest producer of goldoutside of, let’s say, North America and Russia. When you have your largest producer of gold, and you sent me an article a couple of weeks ago and either their production is going to be down 40 tons this year. That is significant. If I was to make a comparison that would be like saying OPEC production was down 5-10 billion barrels of oil. That becomes significant. And that’s why you and I were talking last night there may be gold, and we know there’s gold in Antarctica, we know there’s diamonds there, but what are the prospects you could get out. That’s been taken off limits, like offshore drilling in California. You just don’t do that.

KEITH BARRON: It ain’t going to happen.

JIM: In one sense, you’ve got the environmental movement which has moved in very strongly globally, and that’s not just in the United States or Canada. You run into it all over. It doesn’t matter if you’re in South America or South Africa, they’re around. And that is making it more difficult to put a mine in production. It’s [increasing] the timeframe for putting that mine into production. So as you see demand growing globally –and we know year after year the demand for gold is going up, the demand for silver is going up – now we’re looking at a production profile that is actually falling. It just tells me we’re at the crossroads here in terms of price for the metals, because why would you produce when your steel costs have gone up, your labor costs have gone up, and certainly your energy costs because it’s a very energy intensive industry right now.

KEITH BARRON: Absolutely. It takes longer and longer to get a mine permitted anywhere. Especially in north America. And that’s got to do with the environmental movement. Pretty much every mining operation attracts a lawsuit, and rightly so. There’s a lot more environmental awareness and people are much more in tune with the fact that you have to respect Mother Earth and do things properly. The sort of things people did back in the 20s and 30s are not going to happen again, thank God.

I think what we’re going to come up against is basically a crunch in gold supply. You’re not going to see the stuff coming out of the ground. The big fund managers look at the majors and they want to see a growth in the reserve profile, that’s the real thing that they focus on. And the only way these companies can go out and grow their reserves is to go and pick each other off. We’re seeing this kind of thing happening right now with Barrick and Placer. The jewel in the crown that Barrick wants to get a hold of is Cortez Hills, which is a fantastic deposit that Placer has in Nevada. If it had been found by a junior you would see a huge resurgence of a very robust junior market right now. It was found by a major company, and there have been just some spectacular drill results that came out of that. But that’s only one discovery in the last few years, and there haven’t been many discoveries of that caliber.

So, we’re in a situation now where I think there will be a crunch in supply, as there’s a crunch in supply of things like natural gas, uranium, oil, all these things are shaping up, even in other things like base metals. You’re seeing increased demand from countries that are industrializing like India and China, and that puts real pressure on the production profiles and that’s driving the price higher. So, I think how all this spins out is it spins out very positively for all of us. We’re going to see a higher price with gold, we’re going to see the major companies start to get with the program and start to focus on being more realistic and look for deposits that are 1 million, or 2 million ounces. When I started in this business about 25 years ago, I was working for Gold Fields and our mandate was to go out and find a million ounce deposit. Now, I believe Gold Fields wants to find a 5 million oz deposit, and doesn’t want to look at anything smaller. Maybe they’ll look at 3 million –I’m not sure what their policy is right now – but probably not less than 3, and these things are just simply not being found.  [11:45]

JIM: Was it the Frank Bollis [phonetic] article that took a look at all the gold deposits and the discoveries out there in feasibility or exploration stage. 5 million ounce deposits, you can almost count them on one hand. There just aren’t a lot of them, and yet at the same time we have these monster behemoths – the Barricks, the Gold Fields, the Newmonts – that are out there, and it reminds me of the Exxons and the Chevron-Texacos – they’re not replacing their reserves.

KEITH BARRON: That’s right. Historically, senior producers have lived by acquiring juniors. Juniors get successful in their exploration, and they find something that looks really, really good, and then they get taken out by a major. And that’s how the majors grow their resources. Or sometimes they’ll buy a deposit, or essentially it ends up the same sort of end scenario. In this case the juniors have not been producing the biggies for the market, and so the only opportunity the seniors have to grow their resources is to merge, or to take each other out, and that’s what we’re seeing right now. [13:05]

JIM: It surprises me that you haven’t seen somebody consolidating in the junior sector, not coming from a major, and not coming from an intermediate. Because if you look at the price of the gold shares right now, we’ve got gold bordering on $500, you’ve had the Barricks do well, the Newmonts have gone up, but you’ve got a lot of developmental juniors that have been adding reserves, adding resources – and I’m talking about companies with 1 million oz plus potential – they’re actually being trashed, or actually thrown away. So in contrast to the majors, which are selling at 35-40% premium to net asset value, you’ve got junior producers and junior development companies, that are literally selling at 20-30%, sometimes 40%, discounts to net asset value. It’s almost like they’re being given away.

KEITH BARRON: Yes, that’s a very good point. It’s a funny situation when this current round of resurgence in activity from the junior sector started 2001 and 2002. Really, most of the projects out there were the leavings of the large companies. A lot of them had problems, political problems, they were in places that you really didn’t want to invest your money, or they had environmental problems with the deposit or they were places with basically ground control problems, or anyway, problem areas with the deposits. Since then we’ve had 3,4 solid years of exploration, and a lot of companies have found new stuff, ½ million, 1 million, 1 ½ million, 2 million ounces, that in any other scenario, especially back in the 1980s, would be mines. They’re not mines right now because of the fuel costs, and putting the costs of the infrastructure in, and everything that we’ve been talking about here. But at a higher gold price they certainly will be. [15:06]

JIM: It’s amazing it’s like everybody is asleep right now. I go back to this comment over and over but it really struck me, and I think we see it being played out on this floor right now as I look in the aisle that we’re on, just about everybody I see is a mining company. There are very few investors. And there was a comment made on one of the popular financial cable shows where the Dow was moving up, and the commentator on the floor of the exchange said, “well, this isn’t the kind of market you like to see, stocks are up, but it’s mainly the gold companies, and the energy companies.” And I don’t think investors really see what’s on the horizon. You’ve got gold creeping up, and it’s been doing well all year long, even though the value of the dollar’s is goning up, so you can’t say gold is an anti-dollar play: it’s been going up along with the dollar all year long. The other thing that you’re seeing is demand is increasing; we’re still running silver deficits; we’re still running gold deficits, and we don’t even have enough copper, or any other kind of mineral; and I don’t see any other kind of thing on the horizon coming out of India and China that says demand is going to be curtailed.

KEITH BARRON: Absolutely not. In fact, there was an article on Bloomberg this morning on my laptop, and it was talking about somebody forecasting $1000 gold, in 2007, or something like that. Now, I think that’s certainly possible, but what they were focused on was the fact that the supply of gold, as we’ve talked about here, is decreasing. Now, one thing we haven’t brought into this discussion at all is what’s happening with the American economy, with the world-wide economies, with inflation pressures. And you know a lot of people have been talking about helicopter money from Mr. Bernanke when he comes into Alan Greenspan’s shoes next year. I think there’s a real feeling out there that we’ll see some tremendous inflation, shorter term, and both longer term. But when you have inflation pressures, and the price of gold starts to move, gold is a funny thing, you know, if the price of your SUV gets too high people aren’t going to buy it. If the price of a building gets too high people aren’t going to buy it. When the price of gold starts to zoom up people leap in, and that’s when you start to get a lot of market activity. It’s almost a counter cycle thing. When it starts to move up people don’t say, “hey! it’s too expensive right now, I’m not going to buy it,” they say, “wow! here we go, it’s going to take off like a rocket like it did in 79, and 80, and we’re headed for $800 gold,” and they all leap in. And we’ve seen it many, many times before.

You know when we had dinner last night my father was talking at the dinner about back in 1979 and 1980 in Toronto being in the Bank of Nova Scotia seeing people lined up out the door of the bank, and two times around the block, to buy gold. And the fact, there were people in that line who were doing deals in the line, before they got to the wicket. Incredible stuff. But I really think we’re going to see that kind of stuff again. [18:30]

JIM: I almost sense it because not only is there growing demand especially coming from the wealth of the world being created which is in Asia and India, but at the same time you’ve got supply declining, both at the country level and Australia, South Africa we’ve talked about, and at the producer level with the large major companies. So, you’ve got increasing demand, and you’ve got decreasing supply, and to me that is just an explosive mixture. At the same time, Peter Marrone at Yamana has a saying that it’s going to be like a waterfall trying to get through a hose, because, yeah, there’s Newmont, there’s Barrick, and those companies, but if you take our collective industry as a whole – you take the gold and silver industry – add it up and it doesn’t even come close to the market value of a Coca-Cola.

KEITH BARRON: Yup, it’s very small. Very small in terms of market capitalization, and I’ve heard that kind of simile put together before. I think if you tried to take even a fraction of the investment capital of the venture money that’s out there in America and put it in to the gold market in a dedicated way, you could see some real explosive activity. [19:51]

JIM: It’s amazing though, the one thing I think investors don’t realize is that when gold moves like it did in September, boom!, it happens. 2 or 3 days the bullion moves, stocks are up 20, 30, 40% and when it happens it’s explosive, and nowhere near what I think the potential could be, and as Bill Murphy from GATA likes to say, “if you’re not in it, you can’t win it.”

One thing that we were talking about last night is, if you take a look at Barrick’s move towards Placer to acquire Cortez Hills – a very big, large, profitable deposit that they definitely want to add in a politically stable area – they’re going to have to move down the food chain, is that in the 80s if you look at Newmont they were producing less than a million ounces. A million ounce producer was considered to be a major, and I think we’re going to have to go back to that reality, that you’re not going to be able to produce 8-10 million oz if you’re a Newmont or a Barrick. And at the same time, as we go back to that reality, we’re going to have to go to much, much higher prices, because of –as you say – the permitting processes, the consumption of energy, whether it’s tires or diesel fuel, labor costs, just the legal structure of permitting that goes in, and then also the environmental movement. Plain and simple, it just takes a lot of years to bring [up a mine] from discovery. What would you say on average today, let’s say you’re a mining company, and you go out stick a hole in the ground, you’ve discovered gold, from the time of discovery to the time of production, what timeframe are you talking about?

KEITH BARRON: I think the fastest that anybody has been able to fast track it in recent times is about 2 1/2, 3 years, and that’s really, really pulling all of the stops out. But it would typically be 6 to 8 years. I know some companies like Glamis with the Imperial project in California, they’re into the teens now. They’re trying to get things done, just in some places it takes a lot of time. Yes, you have to do your engineering studies, all kinds of environmental studies internally, you have to bring independent people in to confirm your results, and you have to get it to a situation where the bank is going to lend you the money. So, there’s pre-feasibility, then feasibility studies, then there’s actually building the mine site, and putting in all the infrastructure and all that, and that takes considerable time. So you might be looking at 5,6,7,8 years to be actually churning the ounces out. [22:51]

JIM: Let’s talk about the company you’re involved in which is Aurelian. Tell our listeners about the company, what it is that you’re doing, where you’re located, and plans for the future.

KEITH BARRON: Well, actually I want to make a bit of a correction, I’m not the President, I’m a Director, but I’m also one of the founders. Myself and Patrick Anderson, who is the President, have been working with Aurelian since we founded it in early 2001. We’ve been working in a dedicated fashion in...we really think we’ve got almost completely to ourselves a whole gold camp. It’s like an embarrassment of riches. We’ve just completed all of our regional samplings, 12,000 stream samples over a couple of years worth of work. We’ve done a lot of drilling, a lot of scout drilling, we’ve got so much stuff now coming out of our ears, and we’re starting to get approached by various companies to do joint ventures, and participate in various different ways.

We’ve got a copper company, a copper exploration company up on our Northern flank of our project, right hard up against us, that just announced last week reserves, they believe they’ve got production reserves for 38 years, for copper production. We’ve got 10 copper porphyry type targets on our property. It’s going to take a long for us as Aurelian to work through all of those targets and I think probably the best thing for us to do right now is to start sorting through these ones, and make some decisions on whether we’re going to joint venture some of them, or partnership in some way, and spend other people’s money. There’s just too much for just one company to take on. [24:38]

JIM: You’re in a very fortunate situation that you have very target-rich land holding. So you’ve got a lot of areas, so it almost seems like joint venturing because...how much land does Aurelian have staked to?

KEITH BARRON: We’ve got about 100,000 hectares. It’s right along the border with Peru. It’s in Ecuador, and it’s basically a whole mineral belt, so we have porphyry copper and gold all through it. There’s been a lot of historic production right back to the days of the Conquistadors in this area, that’s 400 years ago, and we’re really the very first company to get into the area and start assessing on a competent and technologically sound basis. And that’s why we’ve just finished this sampling program – 12,000 sediment stream samples. That’s a high density of sampling over the whole area, but it really does produce high dividends. This is what we do, we’re exploration people, we think we’re very good at it, and we go out and find mines. We’ve got a lot of stuff right now, a lot of smoke. We think we’ve got real critical mass to start moving these things ahead, and really in a dedicated fashion start moving these projects down the road to pre-feasibility and feasibility. [26:05]

JIM: Any resource estimates, where are you today on that?

KEITH BARRON: Well, we do have a gold resource, it’s an inferred resource of 517,000 oz. We’ve just got over 5 million oz of silver accompanying that, and that’s on one main trend where we’ve just in the last couple of months we’ve extended that trend out, it runs for over a kilometer down. In fact, it’s closer to 2, that we’ve identified gold. We’ve really just drilled a small fraction of it. It’s going to take more work but certainly we’re up to the task, and we’ve got real direction and focus now. [26:44]

JIM: In the future, where do you see Aurelian going, are you at the point now where you consider joint ventures with, let’s say, major companies or intermediate companies. What do you do next?

KEITH BARRON: Well, we do have some areas on the property where there is exceptionally high grade gold. It’s been identified and drilled by us, and sampled quite heavily. It’s the sort of targets that are very drill intensive, and you know there’s a saying in our business, “you drill for structure, you drive for grade.” And some of these things will probably have to take a tunnel going underground with the decline to really find out what you’ve got. We’re at the stage now where we’re starting to think along those lines, that we’d have to do that. We’ve been approached by numerous companies to take things maybe down that path.

We’ve got other projects though where our main resources right now are inferred resources. An area which we think would be amenable to an open pit. Just in the last couple of months, in fact just in the last round of drilling we finished in October, we discovered a porphyry copper on the Western flank of that. We already have a porphyry copper on the Eastern flank as well, both of these have low grades of gold accompanying the copper, and we think that in a mining scenario, if you were to mine that main structure for gold, you’d end up having to take out the copper on both walls of an open pit. So this is basically what’s called a ‘push back’ on an open pit. You have to take this stuff out anyway to get down to the gold. And in our case it wouldn’t be waste it would actually be things you could stockpile and then run through a plant at a later date. [28:33]

JIM: Keith, if you were sitting here and talking to a group of investors and you were to give them 3 or 4 reasons why they ought to look at Aurelian, what would they be?

KEITH BARRON: Well, I think the first thing is that we’ve got a very good, strong team. We’re really focused on geology. We’re not so much focused on slick promotion. You know sometimes we get faulted in the market place because they say we’re not promotional enough. We go out there to generate some real solid numbers from the ground, and people in the resource industry especially the seniors, and some of the senior analysts, really respect us for that. A lot of our investors are actually funds, and you know they send people out – respected analysts – to check on us and make sure we’re doing things properly. And we talk to all of these people on a regular basis. So that would be number one.

Number two, Ecuador is a country which we think is a very, very friendly mining environment. It has an American cash economy. They use the American dollar as currency. It’s almost unique in the world, there are not many countries that do that. What that means is that your cost for mining, production are going to be generated in American dollars. You’re going to get paid in American dollars for your gold. So you don’t have a currency risk here, fluctuations in local currency that we see countries like South Africa, Australia have been exposed to.

I guess thirdly, there’s a lot of oil production in Ecuador, from international companies, especially American companies. The Americans actually have a naval base on the coast in a town called Manta. The Americans are very much aware what Ecuador is doing, and they want to make sure the place stays stable because they do get a fair percentage of their oil from there. And I don’t think there’s a chance that we’re going to see people like a Chavez of Venezuela arising in places like Ecuador. It’s a very friendly regime to go and invest. The Chinese right now have been making tremendous investments in the resource sector in Ecuador. They’re buying up timber, they’re buying up quarry stone, they’re buying up oil, natural gas, all this stuff, and they’re doing it for a reason. And so I think when you put all of these things together, we’re developing.

And the fourth thing is that we are out there and we’re doing the work and we’re making a lot of discovery. And we are in a very, very prospective mineral belt. It’s very early days now, but it’s what we call elephant country, and for various political reasons, historical reasons going back 100 years or so, this is an area that didn’t really have a big kick of the can historically for exploration like Peru did. And we know that geology is no respecter of political borders, and we think the prospective geology, we know – because we’ve found the gold now, and the copper – it continues  right across the border from Northern Peru into Ecuador. There are a number of companies active in Ecuador right now, some of them – I won’t mention any names because they are our competitors – are finding some really robust resources right now. And we think Ecuador in the future is really going to be a first class mining address. [32:04]

JIM: Alright. Keith, it’s a pleasure to have you on the Financial Sense Newshour, all the best to you, Sir, and the best to Aurelian.

KEITH BARRON: Thank you very much. [32:13]

Robert Longe, Kimber Resources

JIM: I’m sitting here in the Kimber booth at this year’s Gold Show, and of course, you guys have been very generous in letting me run my show from your booth, Robert. Joining me on the program is Robert Longe, and just as a means of fair disclosure I need to point out I’m a Director of the company, and also a shareholder.

Robert, I want to talk about Kimber, and also the area that you’re in. When Kimber got its start, and you went public you had a deposit called the Monterde, and on that there was a deposit identified as the Carmen. There has been some drilling in that area from the previous cycle in the 40s when they were mining in that region. So, you knew that you had gold and silver there, and so the goal of Kimber at that point was to drill out the Carmen, and take it to feasibility, that is coming close to an end now. And let’s talk about that for a moment because a couple of things have changed. The project has gotten bigger than you thought. You had some outlying areas that the company was drilling, and that now looks like those outlying areas are all part of the same structure. So, the Carmen is bigger than what you thought and then I want to talk about the new discoveries so if you might just take it from there.

ROBERT LONGE: Yes, Jim, as you mentioned, when we started we had this old mine, this is when we were still a private company. We did our own calculations it looked like there should be something like a million ounces there. Obviously that was only what we called in the inferred status. So, the big discovery was it looked like it should be a mine. So, these are rare events in the exploration business, so we took it very seriously and put our own money into it, and eventually went public, with I think we had at that time we reported some 700,000 inferred ounces.

Our policy at that time was to focus on that old mine – underground, high grade, small tonnage – and make it into a modern open pit operation: big tonnage, lower grade, etc., etc. So, for the first 2 ½ years that’s exactly what we were doing, and all the while we were tempted to look around and see what was next door, but it seemed the right thing to do was to nail down the value we had, and if possible enhance it. So, beginning in 2005, by this time we’d been at it for 2 ½ years and had nearly 300 hundred holes into it, we realized this was indeed heading towards being a mine, this was getting close to a pre-feasibility study, and it was time to look around and see what else was there. So that was a board decision, let’s make exploration a priority.

Only 4 months after that, we identified the Carotare exploration target which is 2 km to the West of the Carmen, and it looked very much the same geologically – the same sort of grades, widths, gold/silver ratio – a few old pits, but no old production.

And then in June we found another target, we call the El Orito Norte, midway between the Carotare and the Carmen. Then we had 3 km of the most promising alteration of mineralization, the Carmen was moving bit by bit towards pre-feasibility, but the real upside is on what’s next door, because we can’t put limits on that yet. [35:52]

JIM: One of the things, Robert, that you did and one of the things I want to compliment you on is you put out a monthly newsletter to your shareholders and potential investors where you lay out the company plans, you identify the goals and objectives. In January you said we’re going to change course a little bit, we’re going to go after exploration. We’ve got the Carmen further along, we’ve got it to a point now where we like it, and we’re going to go out and test the waters so to speak to see what we have around us. But there’s something also that changed at the company, and that is if you look at where you were a couple of years ago and you had 5000 ha of land, now the land package around the Monterde has been enhanced, there are 28,000 ha of land which is rather substantial. What were you seeing, were you seeing things that looked promising or similar in nature that would attract you to an enhanced land package, because it’s rather significant at the present time?

ROBERT LONGE: Jim, the mineralization is generally controlled on a regional scale by structures going North-West to the Southeast and just about the same time we redirected the company towards adding resources that land package – or a land package – next to our ground came open and we’d been monitoring it for some time, and one of the ground rules of this business is to be opportunistic, so of course we grabbed it. And that’s the cheapest way to acquire ground. So now we’ve got 20 miles or 37 km along the trend, and we’ve only been just nibbling at the North end. So, there’s a lot of potential there. In fact, we’re not there yet but I like to think that there’s some chance of establishing a mineral district rather than just one mine there. [37:41]

JIM: So, this could be somewhat more of a territorial play rather than just a single mine operation, because of the substantial land package?

ROBERT LONGE: Absolutely. The possibility of having a cluster of mines is a dream at present, but it’s a very realistic dream because the way nature usually  places these deposits is in groups. [38:05]

JIM: Well, you started on the exploration change so there’s been a change in direction of the company. It’s sort of like, “let’s go out and see what we’ve got around this land package.” You’ve identified 2 new gold discoveries in April of this year, that’s not too bad for being 4 months out of the starting gates.

ROBERT LONGE: You’re absolutely right, when you start an exploration program you don’t always expect to get traction that soon. So we were gratified by that.

JIM: So, you’ve got 2 gold discoveries, you’ve been drilling one of them the Carotare, you’ve just come out with your first resource estimates 250,000 oz, you’ve added to the company balance sheet, you’ve added another 250,000 from the Carmen, as the Carmen gets bigger. And now the company is drilling – or you’ve started to drill on – a third structure which is the El Orito Norte. Now, on a map if somebody was to go to the company website, it looks like if you take the Carmen going from East to West, on the map, it looks like one contiguous geological structure there, rather than just separate entities.

ROBERT LONGE: One could debate that point. In some senses they are partially separate in that they each have their own set of structures, but also in one sense it is more or less continuous mineralization and alteration for about over 3 km. And we haven’t put limits on it yet, so it’s about the same in gross dimension as our neighbors to the North, Alamos and the other neighbor Dolores. Those are 3 km structures and we’ve got one of those. And we haven’t been there as long nor have we spent as much so I like to think that when we do spend more we’ll find more. [39:55]

JIM: This year is coming close to an end, you’ve got 2 resource estimates another one for the Carmen, your first on the Carotare, tell me about the upcoming year 2006. What will Kimber be doing in 2006? Will you be continuing the exploration play? You’ve got the El Orito which you’re poking holes in the ground, hopefully that will turn out to be something like the Carotare or the Carmen. What are the company plans?

ROBERT LONGE: The company plans are in order of priority to increase the number of resource ounces. There’s really no substitute for that in adding value. While we’re doing that, and while that consumes the greater part of the drill budget, the Carmen deposit will be going through pre-feasibility, and I hope that will be positive and I have reason to believe it will be, and at that point we will have a decision to make. We can either carry on and go from pre-feasibility to feasibility, or we could put the Carmen on hold for a year while we see what the El Orito Norte or the Carotare are going to produce. If, for instance, each of those can produce another million oz, then the final feasibility on the Carmen really should reflect that. So we wouldn’t want to jump into a final feasibility until we know what’s next door. [41:15]

JIM: Because that becomes critical because if it looks like the Carmen, the El Orito and the Carotare could be linked in one mining operation, then how you would define the open pit, where you would place the mill, these are key decisions that obviously would affect the outcome and the economics of the whole project.

ROBERT LONGE: Absolutely. It would reduce the capital costs per oz and all those essential. One other thing I should mention, call it the wild card, is that Mexico is really a land of opportunity now. It hasn’t had modern exploration in a general sense for anything like the same number of years as say Nevada. Of course, they had restrictive foreign ownership laws for quite a while. So, we become aware through our Mexican geologists and engineers of other properties which could be quite exciting. And lots of these were old mines where the old miners ignored the lower grades on either side of the high grade. So, if we can acquire these cheaply we would do just that, provided that we can see a good chance of at least a million ounces that way. [42:30]

JIM: So, if I was to summarize the goals and direction of where you are going, at the beginning of the year you said we’re changing direction, we’ve got the Carmen, we’re going after exploration, by April you had made 2 new gold discoveries, through the Summer you started drilling out the Carotare into the Fall. So now you’ve got your first resource estimate on the Carotare. You are now beginning drill operations on what could be a second gold discovery – the El Orito Norte – and so for the next year I assume you will be going forward, drilling these, adding ounces, and adding resources, and determining based on the outcome of what you find in both projects, whether you should continue drilling this out where this becomes one larger project, one larger resource project in mineability, as well as looking at acquiring other ounces?

ROBERT LONGE: That’s right. I think by the end of the year we’ll have a pretty good idea, we’ll maybe 100 holes into the Carotare and also maybe another 100 in the El Orito. So we’ll have a pretty good idea of what’s there. And maybe at this point I’ll just tell you about one statistic if you like. We were talking about the proportion of our drill holes – reverse circulation drill holes – that make an intersection of economic interest, and it’s over 96%. And this is because we are very cautious. When we step out, we step out 25 meters, we don’t step out very far. So long as we can keep anything like that sort of batting record we’ll be doing very well. [44:07]

JIM: Robert, if you were sitting in front of a group of investors today and you were to tell them, “I’d like you to buy our stock.” What would be 3 reasons you would tell an investor that you would consider Kimber?

ROBERT LONGE: That junior companies are valued in 2 ways. One is how many precious metal ounces they are reporting, and then the quality of those ounces. How far they are advanced. Now, at present we have resource ounces, and they are mostly measured and indicated. Those on the Carmen will be reviewed by the pre-feasibility study, and some of those I expect to get into reserves. So, we will be advancing the Carmen towards production all the while adding additional resource ounces. So, we’re adding value in 2 ways. [45:03]

JIM: So you’re upgrading the ounces. And let me just explain for our listeners, if you take ounces that you get from a drill program, inferred ounces are of lesser value because they are not as certain, you haven’t drilled that out and you’re making an inferred estimate of what you think you have in the ground. As you put in closer drills – more drills in the surrounding area – then you could start putting it in too the measured and indicated [category] because you poked a hole here, you go 25m out here, and you’re getting the same kind of depths and grades. It tells you you’re finding consistency of the ore in the ground. And then when you have all of this analyzed by an independent agency, they come in and take a look at your ore samples, and things like that, as you go through this building a block model in feasibility. Then they get added into reserves so they even become more certain.

ROBERT LONGE: That’s right. And typically the market recognizes resource ounces somewhere between $25 and $50, and reserve ounces, we’ve been assuming, for general calculations about 100. I was just listening to a talk a moment ago where it’s well over 100 for reserve ounces. So, we’ve been chalking up these ounces for under $10 an ounce, and that of course makes business sense. If we can find these ounces – in our case it’s been $7 – and get market recognition for 40 or 100 as the case may be, we’re doing good work. [46:33]

JIM: So, there are two ways you’re adding value. One is you’re increasing the number of ounces, so you’re building the bank account or the warehouse with reserves so to speak. And the second way is you advance the project. You take the ounces that you have and take them from an inferred status which has less certainty in terms of their quality into a measured and indicated sstatus, and then finally into reserve status, which gets a higher valuation.

ROBERT LONGE: That’s right. Not only does he get a higher valuation, but it’s the level at which you can go to the bank and say, “hey, I’ve got something,” and they can lend you money on that. [47:10]

JIM: Alright. Well, Robert, as always it’s a pleasure to have  you on the program, and thank you so much for joining us on the Financial Sense Newshour.

ROBERT LONGE: Thanks, Jim, for the opportunity. [47:17]

David Miller, Strathmore Minerals

JIM: We’ve been talking about alternative energies [when] we talked to James Dines. David Miller is a Chief Geologist and newly appointed President of Strathmore Minerals. He’s also a uranium industry veteran.

David, one of the things that excites me about the uranium market – anybody following it seeing uranium prices go from 10 to 30 plus – and as we take a look at the energy industry today we hear stories. I’m a big believer in peak oil. We’re not finding major oil discoveries. The world has got to do something for energy, and I wonder if you might tell us a little bit about uranium because you’re rather unique: you’re a uranium industry veteran. There’s not too many of you. And by the way, folks, he isn’t glowing.

DAVID MILLER: Well, Jim, thank you, it’s great to be on your show, by the way.

I started in uranium in 1976 as a 23 year old geologist. I started with a company called Pathfinder Mines Corporation. It was a newly formed subsidiary of General Electric. General Electric and Utah International merged in 1976, that was the largest corporate merger in history at the time. There was anti-trust stuff, they spun out another company called Pathfinder Mines Corporation, that’s when I entered the picture. And at the time of course, as a newly graduated geologist I didn’t know the experience of the veterans I was working with back in the late 1970s. These were the people who founded the uranium industry back in the 50s and 60s. But anyway that company is where I got my roots from people who did it, and invented the industry. In 1982 the French company Cogema came along and purchased that company. I worked for the French company Cogema for 20 years. Strathmore came around in 1997 and recruited me away to go to work for them.

That brings us up to the present time. I’ve been through the uranium cycle. I entered it in the last boom, and rode it through the trough. Thankfully, Cogema purchased the company I was working for, that’s why I was a survivor through the low years when we were overproducing. And it’s interesting to note that all the private sector companies back in the 1980s and early 1990s got out of the Uranium business. The survivors were the government companies: Cogema, which was the French government; Cameco which was spun out of the Colorado Nuclear Corporation and Saskatchewan Development Corporation, two crown corporations in Canada. All private sector companies got out. Kerr-McGee Nuclear was the number one company in the world in the private sector back in the 70s and 80s. We’ve actually ended up with some of their databases, and some of their very best properties 

As far as your question goes on uranium and energy. Duh! Here we go. You can go back to Eisenhower in the early 1950s talking about Atoms for Peace. He was exactly right, exactly right. He said we would have cheap and plentiful energy for the masses of the earth. Duh! we’re there. It’s the way to go: it’s clean, it’s efficient, and it’s essentially unlimited. What are we doing with the carbon based economies today? What are we doing as a society? I got back from China about 10 days ago, the Chinese get it. They have horrendous pollution in their cities, they mine about a million tons of coal a year, kill about 5,000 people in the coal mines alone. I bet they kill a million people a year with emphysema deaths from air pollution. They are going nuclear. Fast forward 50 years from now they’re going to have a thousand nuclear power plants spread around China. They’re going to have clean, and cheap energy for their manufacturing base, and for their homes. They get it, we need to get it in this country in North America. [51:00]

JIM: You bring up an interesting point because you have expanding economies in India and China, and they’re going nuclear. They see the potential, they see the cost, they see it as environmentally friendly, it’s clean, it doesn’t pollute the environment like carbon fuels. Why do you think we’ve been so reluctant – in fact I watched a documentary by Rory Kennedy – talking about closing down our nuclear power plants, and yet I believe one of the chief environmentalists out of London – I can’t think of the guy’s name – but he’s urging his fellow environmentalists to get on board because this is a very viable solution at a time when quite honestly we’re running out of oil.

DAVID MILLER: You know, nuclear power is the energy source of the future. The hydrogen economy will run from hydrogen generated from nuclear power, period. It’s not going to come from windpower, it’s not going to come from solar panels, frankly those are jokes. I’m from Wyoming, I have some land that’s 5 miles from the grid I’m going to build a cabin on, I’m going to put solar panels up their or a wind turbine, that’s where it makes sense. I’m not going to spend $50,000 to run a power line to my cabin out in the remote wilderness, but solar cells on top of the Moscone Center here in San Francisco is frankly insanity. The cost per kilowatt hour is insane, and only governments can afford to do that. [52:22]

JIM: Do you think the Three Mile Island accident we had in the 70s, and then we had Chernobyl, and then of course the movie The China Syndrome, some of these which really killed the industry, there is a movement afoot I can’t think if it’s Ohio trying to get a nuclear power plant and when the town people got together the environmentalists came out and tried to stop them. And the town people voted to go ahead. It’s going to be 650 permanent jobs, almost 2000 construction jobs, and more importantly a source of cheap energy for an area that needs it.

DAVID MILLER: Frankly, I’m going to be very blunt about what’s going on here. You look at the anti-nuclear movement, it got its strength in 1975, they celebrated Three Mile Island. Again, remind me how many people were killed at Three Mile Island? Zero! Zero! OK, let’s look at coal fired power plants in 1979. We burned about 500 million tons of coal in this country in 1979. Now we burn over a billion tons of coal, it’s a 100% increase in the amount of coal we burn in just the United States, that is because of the anti-nuclear movement. OK, we’re burning all that extra coal, we’re emitting all that extra pollution. How many of the 50,000 that die every year of emphysema are caused by those anti-nuclear people that shut down the nuclear power industry? They literally shut it down. And we’re losing 50,000 people a year due to increased air pollution, in some of our cities across the country. The majority is coming from coal based power plants emitting that stuff into the air.

Here’s a couple of interesting facts. Coal itself has uranium in it. The amount of uranium lost in the smoke stack gases in particles exceeds the amount of uranium we burn in power plants in the Untied States, we contain and manage and dispose of properly. The coal industry simply emits this into the atmosphere, so they are actually emitting far more radioactivity into the world, into the environment, into people’s lungs than the nuclear industry ever thought about. But again, this goes unreported, and again you can point to the anti-nuclear movement that’s caused the problems we’re in right now and the increased deaths. Frankly, Reagan came up with some great words, the evil empire, well, the evil lobby group, that’s the anti-nuclear group. [54:50]

JIM: You know what is even surprising too as we look at the US today. We have record trade deficits, we’re importing record amounts of oil and natural gas into this country, and we really need to be thinking about our power centers and ask how we are going to power these mega cities in 5 or 10 years. In terms of looking at uranium do you see this as a turning point now perhaps, that there are people coming into this industry – like that town in Ohio, I can’t think of the name of the town off hand -  where they’re starting to say, “hey, wait a minute, this is a viable alternative.” Certainly, France powers 75-80% of its electricity, they’ve never had a death, there’s never been any accident in the technology today that we have with the new nuclear power plants. We’ve certainly come a long way from where we were 30 years ago.

DAVID MILLER: I sense that we really are at a turning point here. And frankly, either we as a country are going to get it, or we’re not. If we get it we’ll remain a power for the next century or two, or more. We can keep going on forever. If we don’t get it we’re going to be a second rate nation in 50 years, because there are other countries out there that get it. You’ve got to have cheap energy. Energy, throughout society has always been getting cheaper, cheaper, cheaper per unit of energy output. That’s how we have such a huge standard of living here in North America. It’s because of the amount of energy we consume per capita in this country. The Chinese want to come up to that same level and they will. That’s why the demand for uranium is going through the roof, because we have 103 nuclear power plants in this country right now, China only has maybe half a dozen small ones. 50 years from now I bet they have many fold more than we do.

But you mentioned these towns in Ohio, in North Carolina, Duke energy, Entergy, Excelon, all these are talking about building new nuclear power plants at their existing sites where they already have nukes. And the local communities that already have these already accept nuclear power, they know how safe it is, they know the good quality jobs. The average worker in a nuclear power plant is far healthier than the average person in the United States, people don’t know that but that’s just a simple fact. They get it, they want it. Frankly, I’d love to build a bunch of nukes in Wyoming, but we don’t have the population base to consume all that extra power. We would have to export it to Colorado and California, which is fine too. [57:20]

JIM: Let’s talk about some of the economics of uranium for a while the governments stock piled it, we’ve been running supply deficits with uranium, and we’re making that up by the governments are drawing down their stockpiles supplying it to the market. What do we do in the future?

ROBERT LONGE: It’s not quite like that. The real problem goes back to the middle of the 1980s. It goes back to Eisenhower’s original vision of nuclear basically running the electrical world – the increasingly electrical world. So, in the 1970s there were 250 nuclear power plants ordered in the United States alone. Everyone of those nuclear power plants contracted for the delivery of yellowcake for the production of their uranium fuel pellets. Three Mile Island happened in 1979. 147 of those nuclear power plants, or thereabouts, were cancelled, so you had utilities – 147 nuclear power plants – that had ordered the delivery of uranium from all the uranium mining companies spread around the world, mostly in the US at that time, that cancelled their orders. So utilities took delivery of this uranium at the then price of $30, $40, and $50 per pound, but they had no nuclear power plant to burn it up in. So that is the uranium that dribbled onto the market in the 1980s and the 1990s, and drove the price down from its peak of $43 in 1979, to the low of $7 in 2002. It’s that extra production that we had – production actually peaked and consumption actually crossed in 1983 – so it has taken 22 years to burn off all that extra production. Now, we’re entering a normal market in uranium, where consumption right now –without building one more nuclear power plant in the world – has nearly doubled what production is. So where’s the price got to go. You don’t turn on nuclear power plants like a faucet. It’s going to take a lot of permitting to get these going again. [59:14]

JIM: What about Russia? I’ve heard a lot of the destocking of nuclear weapons was bringing some of this uranium on, any truth to that, is that a contributing factor or is it minor?

DAVID MILLER:  No, no, no, half the nuclear power plants in this country right now are run by former weapons pointed at the United States.

JIM: That’s amazing.

DAVID MILLER:  Let that sink in. What a wonderful program: that swords to ploughshares program, that’s where they took the Russian highly enriched uranium downgraded it to reactor grade and we sold it to basically US utilities. We have 103 operating nuclear power plants in the US, and I understand half of the power generated from those power plants now is coming from former Soviet weapons that were pointed at the US. It’s incredible, it’s a wonderful thing, that’s called ATU-1, I think, and the Russians and the US, the DOE, the American Government are talking about an  ATU-2. But about a year ago the Russians said, “wait a minute, it looks like we’re going to need all the uranium we have for our own nuclear power program, plus we want more than 7 bucks a pound for it  now.” So, I don’t think there’s going to be an ATU-2. That program is still going on as I speak right now but it’s decreasing in importance, but right now it’s a major component of our current electrical supply in the US. 20% of our electricity comes from nuclear power, half of that is coming from former nuclear missiles pointed at the US. What a phenomenal thing and what a wonderful thing, that’s the way society should function.

Frankly, my vision of the future is society will have plenty of cheap energy for all people of the world. We can do that with nuclear power, you can’t do that with oil, you mention Hubbert’s peak – I’m finishing a book right now from that guy who wrote the book on Hubbert’s peak that is the sequel to that... JIM: Kenneth Deffeyes...yes, exactly, looking into the future and what is going to replace this, and he’s talking about the oil shale, the tar sands, and natural gas, and methane hydrates, all this stuff and they’re all going to have their own Hubbert’s peak. And he talks about uranium a little bit, and I haven’t actually read that section yet so I haven’t critiqued that one yet. But we have fission nuclear power plants right now, they produce energy cheaper than any other form of energy on earth. Ultimately, we’re going to have fusion nuclear power, the power of the sun, which will basically be in perpetuity. What’s going to transition us to that point in time 100, 200, 500, or a thousand years from now before we have small nuclear fusion reactors to power the world? I don’t know when it’s going to happen but it won’t happen in our lifetimes, it probably won’t happen in our children’s, but in 2, or 3, or 10 generations out there we’re going to have fusion nuclear power producing all the power we need in the universe. That is what the power of the suns are: fusion and nuclear power. And we already harnessed it here on earth because that is what a hydrogen nuclear bomb is: it’s fusion power. We know how to do it on that scale we can’t do it on a small electrical generating scale right now, but several hundred years from now, I have absolutely no doubt that we’ll be able to do that. [1:02:25]

JIM: Let’s talk about the economics of the industry. You’ve got growing demand, especially coming from China and India, where they need vast amounts of power, and obviously they don’t want to go with coal or oil. There’s a limitation in terms of that so they’re going ahead full steam – I think China is going to build 30 nuclear power plants in the next 10, 15 years, and India is going to do the same – On the other hand, you had a downturn in the industry you talked about earlier, so there weren’t a lot of people going out and mining uranium because there wasn’t a demand for it. How do we get this imbalance changed, and then we’ll talk about your company, because you’re going to have start going out and mining this stuff, otherwise you’re not going to be able to run a nuclear power plant.

DAVID MILLER: I’m a believer in the marketplace. The price will go to where it has to go to encourage enough new production. Again, a very important point is we are consuming twice as much uranium right now as we’re producing without China or India building one more nuclear power plant. I was in China in 2003, I’ve been there 4 or 5 times since. In 2003 I was there for the IEEA to teach uranium geology and in-situ uranium leach mining to a couple of Chinese government institutions. At that time they were talking about building 2 nuclear power plants per year for the next 20 years. So that would be 40 new nuclear power plants. Since then I’ve read an article on China that said let a thousand reactors bloom. A thousand reactors is 3 times the number of reactors running on Earth right now. That’s the mentality China has for the next 50 years.

They’re probably doing some of the best research on the planet right now into new designs for power plants, especially smaller nuclear power plants that can run continuously. It’s almost like they make the uranium fuel pellets into these little ceramic balls, and they feed one in and they run through the reactor over a period of months, and they come out the other end depleted and you never have to stop the reactor for reloading. So they can run continuously. They’re designing those right now, they’re doing the research for that. We here in North America have gotten away from that, the Chinese get it, and they’re going to have a huge fleet of nuclear power plants 50 and 100 years from now. I hope we get it too. But the demand is there now, without building one more nuclear power plant, but it looks like the US utilities are on the verge of announcing new nuclear power plants. The Japanese, Koreans, India have all announced building new nuclear power plants in the recent past. [1:04:52]

JIM: Alright, let’s talk about the supply talk about the supply side and especially talk about Strathmore, and what you’re doing, because there are very few: there’s Cogema; Cameco. But it’s not like you’re looking at 20, 30, 40 oil companies that are all producing uranium. When it comes to uranium there are very few producers.

DAVID MILLER: And the two big boys – Cameco and Cogema – are essentially – Cogema is still the French government. Cameco was spun out of El Dorado Nuclear and Saskatchewan Development Corporation. They were a pseudo-government corporation, they’re private now and are easily the number one private sector uranium company in the world, and they’re the only blue chip [uranium] company out there. I see Strathmore as the next tier down. We got into the uranium business in 96 and 97. We survived through the low in 2003 before all these new wannabees got started up. We got in there and picked up a lot of great properties.

We had a two-pronged strategy. The first prong was to go out there and acquire the known uranium deposits found in the last uranium boom in the 1970s. So we went out there and cherry picked the very best ones and got them. Number two, we didn’t ignore the number one uranium district on earth which is the Athabasca Basin in Canada. We’re the number one land holder up there. We own over 3 million acres in Canada, the majority of that in the Athabasca Basin. So we had a two-pronged strategy. We’ve been extremely successful with both of them. 

We’re well financed, we’ve got 4 offices, 2 in Canada, 2 in the US. We opened a permitting and feasibility office in Santa Fe, New Mexico, to start the permitting process on our New Mexico deposit. We’re not doing exploration in New Mexico, we have drilled out deposits. This is where we differentiate ourselves from the other companies. We don’t have to go out and find a deposit. To find a uranium deposit any new company that just has an exploration property, they have to find a deposit first before they can go to the permitting stage. They’re 6 to 10 years away from finding a deposit, and that’s only if they’re successful in finding one. First they have to find one, and then they can start the permitting process. So their production is probably 15 or 20 years away. One part of our two-pronged approach is we acquired known deposits. So as the price goes up these projects become in the money. They’re economic right now at current prices of uranium and higher prices of uranium. We’ve started the permitting process on those. We don’t have the risk of exploration. So, we’re doing permitting on our known deposits, we’re doing exploration in Canada, and that’s for production 15 or 20 years from now on great deposits. Like Cigar Lake and MacArthur River, we’re looking for deposits like that in Canada. So, again we kind of cover the whole gamut, and our goal is to become a reliable supplier of yellowcake to the nuclear utilities around the world, that’s what our goal is. [1:07:43]

JIM: And talk about it in terms of production, when do you plan to go into production?

DAVID MILLER: We’re permitting right now as we speak. We opened an office in Santa Fe, New Mexico, staffed by our Vice President of governmental and environmental affairs, and our Vice President of technical services, that’s what they’re doing. We probably have 8 consulting groups working for us, getting all the ducks in a row for permitting of our Mexico projects right now. We’re going to shift to some of our Wyoming projects, we’re going to start that conveyor belt of projects coming forward.

We’ve got one announced right now we started permitting on, we’ll have another one in the near future, we’ve got a couple in Wyoming we want to start permitting on. So you start that conveyor belt. How fast will it be? It’s going to be at least 3 years and maybe as long as 6 years before we can get through the entire permitting process. Even before we submit our package to the Nuclear Regulatory Commission in the US, you have to have all kinds of corporate structure things put together first before you can do this. We’re doing that, you have to do that.

Anyone who’s operating out there in any industrialized society are going to have to go through the same things. We’re operating in States, Wyoming and New Mexico, and Provinces, Quebec and Saskatchewan that allow uranium mining. You need to look to make sure the deposits owned by companies are in political environments that allow uranium mining. There are some areas on Earth, Virginia is an example, that has banned uranium mining. There are some states in Australia that have banned uranium mining. Watch where the projects are. We’ve got political diversity in the ownership of our properties, if New Mexico gives us a little too much difficulty we can move to South Dakota where we have a project or Wyoming where we have a project ,or Quebec where we have a project. Again, if you’re not permitting right now, if you don’t have a discovery, you’re decades away from uranium production. Again, it’s not an easy process to permit a mine, we’ve started the process. [1:09:36]

JIM: Let’s talk about the political front. If oil starts to move to $70-$100 per barrel – we’ve seen some movement in Washington on energy bills although they’ve just vetoed a couple of them – perhaps in the next hurricane season, $80 to $100 oil might get some of those politicians motivated. Do you see anything loosening up on the political front to make it easier. You’re talking about 3 years worth of permitting processes and you know, if people start freezing and we’re dealing with $100 oil and higher natural gas prices it seems to me that would be a big motivator in Washington for them to do something.

DAVID MILLER: You know, 3 years actually for permitting to me would be a great timeframe. I’d be perfectly happy in getting one of our projects permitted in 3 years. It takes time. There’s no immediate quick solution to the energy shortage out there but the future is nuclear power, and it will be replacing the carbon based fuels that are depleting on Earth. [1:10:38]

JIM: Finally, if you were talking to a room of investors, give me 3 reasons why somebody would want to own your stock.

DAVID MILLER: Three reasons. Number one is management. Three of us on the management team,  a Director, myself, and our Vice President of technical services come from the old Utah International Group that merged with GE in the largest corporate merger in history. We’ve got the background in uranium. We know how it was done back in the heyday, we know how to do it now. Again, that was the largest corporate merger in history in 1976. That’s the roots of our management team at Strathmore.

Number two, would be our focus on advanced uranium projects, mostly in the United States. We ended up with the Kerr-McGee database. We also ended up with Kerr-McGee’s two best virgin properties in New Mexico. Kerr-McGee was the number one private sector uranium company in the world in the 1970s and 1980s, we’ve got their databases, because there’re thousand man-years of delogging information, that’s what we’re working from, we’ve got their two virgin properties in New Mexico. That’s our second reason.

Number 3 would be our land position in the Athabasca Basin in Canada. The largest uranium district on Earth for deposits, MacArthur River averages 20% uranium. These are phenomenal deposits but Cigar Lake was found 20 years ago, so the deposits we find in the Athabasca basin, we won’t be putting into production for 20 years, so in the meantime the advanced drilled out properties we have in Wyoming and New Mexico are what are going to be coming on line the soonest. The next 10 years of uranium production are not going to come from new discoveries. It’s going to come from discoveries made in the 1970s and the early 1980s. [1:12:14]

JIM: Well, David I want to thank you for joining us on the Financial Sense Newshour. All my best to your Sir and I would love to see those projects come online because I think we’re going to need them. Perhaps it’ll take higher prices but nonetheless.

4TH HOUR: JIM AND FRANK BARBERA SUMMING IT UP

JAMES PUPLAVA: Joining me here at the San Francisco Gold Show is fellow compatriot Frank Barbera.

Frank, I have to admit what I was expecting to see at this year’s Gold Show was almost totally the opposite of what I actually saw. I thought, you know, gold was marching its way to $500 – in fact on the day you and I are talking it got to $499 or $498 – and where are the investors?

FRANK BARBERA: Jim, it’s amazing. We had gold approaching $500 today. You would think this gold show would be jam packed and I’ve been shocked, taken back. I’ve been to several of these things through the years, and I don’t think I’ve ever really been to one that was this devoid of investor interest and enthusiasm. The take on sentiment from here is just very downbeat actually. [1:04]

JIM: Yes, very downbeat. In fact I remember last year, with the key note speakers, you had Pierre Lassonde of Newmont, you also had Marc Faber, there was standing room only in the back of the room. You and I just walked by the conference room where the speakers were, and you could have picked a seat, and anyway it looked like the movie theater attendance to Gigli or something.

FRANK: Indeed, it was pretty empty and on the one hand I’m actually enjoying it  because there’s a lot of big gold companies here, a lot of CEOs, and a lot of people from the industry. And at that level there’s a lot of access to people to find out about the companies, you can really walk right up without any crowds or anything and talk to people. But I heard a few of the major headline speakers for this conference this morning, people who have been speaking to these conferences for years, and they were speaking to very small crowds. One famous gold bull didn’t comment once in his entire talk on gold, the word gold never was mentioned. Instead, he was talking about a revival in the Japanese stock market, the Chinese economy and really with a very mild analytic overview. I mean it’s something I could have gotten out of the Wall Street Journal or the Investor’s Daily, I didn’t see a lot of penetrating analysis coming from the speakers at this conference. [2:31]

JIM: I’ve also been going up and down the aisles and talking to the mining companies and they’ve been somewhat shocked by the low investor turnout. And I kept thinking, is it different this year? No, it’s the same weekend after Thanksgiving that it’s been for the last 3 years. Were there any special football games, was there anything special going on? I’m trying to look for where they are?

FRANK: It’s really been quite quiet. That would be the only way to describe it. It’s exactly the opposite of what you’d expect with a red hot gold market. I find that very comforting actually, Jim, that this conference isn’t jam-packed. You would think a natural resource conference would be really busy, you don’t really see that at all right now. I talked to the CEO of Meridian Gold in the hallway and there wasn’t anybody around, he had all kinds of time to talk, I learned a lot about Meridian Gold, normally you can’t talk to people like that. [3:32]

JIM: I took a look a couple of years ago, there was no way you could have walked up to a booth and talked to the President of a company like that. You would’ve got some underling who would’ve handed you a brochure which said, “hey, great, buy our stock.” But not this year.

FRANK: Oh, no, it’s been pretty quiet. In fact another one of the big speakers at this gold conference – the headliner – who’s a regular at all the gold conferences had a small audience of about 20 people in front of his booth, and he was basically telling them how lousy the gold industry has been over the last few years, how the return on capital has been very poor. And you know, if you’re a gold investor, and you’re hearing about how poor the industry is, that’s going to send a lot of people running.

So I haven’t heard anything upbeat and positive about the prospects for the mining industry or the prospects for gold at all out of this conference. It has been almost if none of the quote ‘gold experts’ are willing to talk about gold in a positive way. And I find that actually shocking considering the fact that we are getting much closer to the point where the Federal Reserve maybe is changing policy, and that could be a big inflection point where the dollar could start down again. So, that has not been discussed at all. [4:51]

JIM: I’ve just got done interviewing Ian Telfer who is very optimistic and who said in the interview, “I got in this industry during 20 years of a bear market.” He said it wasn’t pleasant, but he’s looking for another 12 to 15 years of very strong upside, and it’s certainly reflected in his numbers. So, the the one consistent thing that strikes me from a sentiment point of view, if you talk to the CEO of the company they’ve never been more bullish, [but] talk to the newsletter writers, the speakers, and the investors they’re bearish. And it’s almost as if – if we could draw an analogy – like the commercials and the traders – the commercials in this case would be the CEOs of the mining companies, who are very optimistic on what they see out there. And then talk about the investors, there’s an absence of them, and then the newsletter writers, who’ve been bearish all year long. I can remember when you issued your piece –it was at the New York Gold Show – and I got a call from one CEO,  he was so depressed after hearing everybody say, “sell your gold stock, get rid of your gold.”

FRANK: That’s exactly the kind of feeling you’d get here as well. It’s been a pretty downbeat type of climate. I’ve been shocked because the speakers are not talking about gold and silver. They’re not talking about what appear to be major structural problems in the global economy. I mean, I thought I was going to see a lot of charts about trade gaps, global imbalances and the fact that we have competitive currency devaluations taking place around the world, and protectionist type issues with China. There are some really weighty issues that will definitely affect the value of gold over the next few years, and to a very large degree – may be I missed a few things, it’s possible -  from what I’ve heard I really haven’t heard much of that being discussed. [6:54]

JIM: I didn’t hear anything about global money supply. In fact one prominent speaker last year was saying gold was strictly a US phenomenon, and that it was not going to break out against other currencies it was just strictly contained to the US. What have we seen in the last 12 months: we’ve seen gold break out in almost every single currency. The number one impression I’m walking away from this gold show is the contrast between the companies – you take someone like Ian Telfer of Goldcorp, or Silver Wheaton and they’re printing money – and their attitude is in contrast to what I see here. And from a technician’s point of view, Frank, you follow charts, you look at fundamentals, but a very important part of your work, is sentiment. And I think if we were to have walked in here in 2003, 2004 the aisles would have been packed – you know, standing room only with the speakers, you couldn’t move – right now I’m still looking this is like yesterday. I could go bowling here.

FRANK: In the past you really had to fight your way in to some of these booths to talk to the companies. I’ve seen people standing in the main auditorium, standing not sitting. Right now, there’s  rows and rows of chairs. The sentiment here is definitely far from bullish, and I would say coming from some of the key speakers it is basically indicative of a wall of worry. I mean, you feel a wall of worry. [8:27]

JIM: Do you feel from a sentiment point of view, looking at a chart –you’re almost at $499 gold, $500 –  those round numbers technically are very important.

FRANK: They are. Gold has a habit of having pretty important resistance and support right around the round numbers. That’s always been the case. You have to take a good long look at the market. I tend to think though if you look at the gold market now, we’re in a pretty powerful move to the upside: the momentum indicators are all fairly strong; there are no bearish divergences; we’ve got a lot of confirmation.

I definitely think we could see a quick move to $515 to $520 in the next few weeks, maybe some consolidation at that level and then another push to $550. I’m in the bull camp where gold is concerned. In fact, I think there’s a pretty high probability that we could see some upside – some really dramatic upside – in the metal over the next few months, where gold could cross $600, $700 and maybe even $800 very quickly.

I think there’s potential in both the stock market – the US stock market – for a serious downside reversal, for a continuation of the decline of the bond market , and I think those factors could stoke the price of gold from where it is now into a major spike. So, I think the level of complacency that we’re seeing here, the lack of investor interest , the lack of bullish sentiment, and the commentary coming from the speakers of this conference that to me on a contrary basis is all very positive. And it reinforces my view to stick with the long side of the gold trade. [10:04]

JIM: I would say in summing this up that in terms of what my expectations were coming here were, I can remember yesterday and we were looking [around] and I go where are the investors? And everybody would say: “well, maybe they’re out doing honey dues. Monday, we’ll see the professionals in here, fund managers.” It’s not happening.

FRANK: No, it has been really devoid of them. There are certainly retail investors here, people interested in catching up on some of the stories but really a fairly low turnout by any standard. And what’s remarkable about that too, is that you have so many gold companies here in one place. There are certainly no shortage of interesting stories to look at from an investing point of view, it is pretty remarkable to see such little interest.

JIM: And you know, just talking to some of the CEOs, one CEO was really surprised as they came out with their first resource estimate, ½ million oz, and they’re just getting started, and when they released it they were thinking, “well this is really going to help our stock.” Not happening.

And Frank, one of the things I’m just sensing here is we’re climbing a wall of worry, we’ve got a lot of skepticism in the market, people are saying: “Oh no we’re heading to $500 in the market, that’s the top. I don’t want to get burned.” If there’s been any movement it’s mainly been in what I call the large cap stocks, the intermediate stocks, with people going in and buying in. Even though they’re overpaying for these stocks they’re thinking if I have an exit strategy I can get out. And a lot of these juniors, they’re literally being given away.

FRANK: You don’t see any movement really to speak of yet in the way of the junior–the tertiary – market for gold stocks. A lot of these stocks are not moving, even the good stories, or some of the better stories where they have high grades, substantial number of ounces. One company I’ve been following closely, a big 5-6 million oz deposit, in a good country with very low costs, a very positive backdrop, yet the stock hasn’t gone anywhere. So, I see a lot of these stocks just basically dying on the vine, and running down cash positions in some cases. I think right now there are some bargains available in the junior market, I think you have to do a lot of homework to find them, but they’re there. [12:36]

JIM: You’ve been following the gold market for several decades now. Is this unusual in your sense where you’ll have a movement in gold this year, but taking a look at the newsletter writers they’ve been skeptical all year, the investors have been skeptical all year? The idea was the dollar’s been going up so gold can’t follow. Well, guess what? Gold did follow, it’s been following the dollar all the way up. We’ve gone from $420 at the beginning of the year we’re close to $500 now, yet we’ve seen this lagging in the market. Have you seen this in previous cycles. Does it happen this way or is this playing out differently?

FRANK: To me, in my view, this is very different. You probably have to go back to the 70s to see something like this: a year where gold was really emerging as a high strength relative currency on the global stage. I mean you’ve actually seen gold breaking out against the Australian to multi decade highs, against almost every currency, even outpacing the Canadian dollar, but I guess the British pound, the Swiss franc, the Japanese yen, let alone the euro. It’s had a fantastic year gaining in the face of a strong dollar environment, basically deriving most of its strength from the interest rate hikes. I don’t think I’ve ever seen this before. To me it’s a very bullish sign. If there was a point in time when gold should have been in a bear trend, you would think that it would have been this year with the Federal Reserve hiking interest rates, and the dollar rallying against most of the currencies. Jim, the euro’s down, what, about 20% this year, that’s huge, and gold is up against the dollar, it’s up 8 or 9% against the dollar. It’s having a big year, so I don’t think I’ve ever seen anything like that.

And the fact is it seems very likely that early next year the policy will start to change, I will say around March. I think the Fed is going to have a hard time backing away from its anti-inflationary stated policy of fighting inflation until the Winter is passed, until we see energy prices really coming down. I think there’s still a fairly substantial risk that in the next two to three months we’ll see a big spike in heating oil and natural gas over the course of the Winter if we have cold weather. And that may very well preclude the Federal Reserve from cutting interest rates or moving to a different stance on policy.

But I think eventually that change in policy will come but if it does I think the dollar will be the first thing to feel it, and I think we’re beginning to make a top in the dollar index. So over the last few days we’ve seen some pretty good evidence that it’s beginning to top out, that momentum levels are beginning to roll over, and I think in a few weeks from now we’ll see the dollar start down in anticipation of that change in Fed policy maybe next March. And I would really not be surprised to see the dollar actually accelerate on from March of the next year on, maybe back down across the range toward new lows. I think gold will really gain some strength from here. I would say what you’re seeing here is a sign of strength – relative strength on gold – and it’s a sign to stick with the market. [15:58]

JIM: You know another aspect that I think about, you’re saying this has been an unusual cycle where you’ve had the dollar go up and gold go up along with it, we’ve got it going up against other currencies. But the other thing too that strikes me is if you take a look at the fundamental side, South African production is going to be down, and Australian production is going to be down. What was the largest gold producer in the country, their production is going to be down to their lowest levels they’ve been in thirty years. So, you’ve got a period of increasing demand, especially strong Asian demand, strong OPEC demand for gold, there’s even some institutional interest in gold now, and at the same time, you’ve got supply decreasing, whether it’s countries or major gold producers. Then if you look at the monetary backdrop, you’ve got increasing money supply in Europe, you’ve got it increasing in the US, you’ve got rising trade gaps, you’ve got rising budget deficits.

FRANK: Negative real rates across the entire spectrum of the US Treasury curve, again, that’s very inflationary. We’re not running positive real interest rates in the United States, and that’s even using the inflation indices taking them at face value which we all know is fairly bogus. On a technical basis too I think it’s also worth pointing out that if you look at the metals complex, usually if you’ve got gold moving, and let’s say silver, platinum, and palladium not confirming, that might be a sign you’re near a top. Right now the price of palladium, the price of platinum, the price of silver, are all moving in tandem. So  you’ve got a lot of confirmation of a bull trend in the entire precious metals complex, and I would derive a lot of comfort from that. [17:48]

JIM: So you’ve got all the metals breaking out, you’ve got the commodities breaking out to new highs, you’ve got gold breaking out against all currencies to new highs, and even against the US dollar it’s breaking out to new highs. You’ve got a shortage of supply, declining production, increasing demand, a monetary backdrop, Frank...

FRANK: And nobody’s showing up at the gold show!

JIM: Yeah, and because nothing’s ever perfect you’re going to have some negatives. OK. And if you had a checklist: increasing fundamentals, checkmark, increasing demand, check;  supply declining, check; going up against major currencies, checkmark; other metals following suit, checkmark;

FRANK: strong technicals checkmark; changing monetary policy from tightening to easing, check mark. No, the list is quite extensive. And also the big one: brewing financial crisis, check. We have exploding derivatives, we have unprecedented leverage in the credit markets, we’re really sitting on the greatest credit boom of all time, and signs that that’s beginning to slow down, with the housing market and other signs. That to me is a major warning sign. [18:58]

JIM: I think if they wanted to bring the investors out they needed a booth for Google.

FRANK: Indeed, and the place would have been packed.

JIM: But it’s just absolutely amazing. Well, Frank, as you look forward at the end of the year to next year, I think both you and I expect higher gold prices, higher silver prices. But more importantly there’s the very, very strong potential of something I wrote about in the Day After Tomorrow where you could have a very explosive quick, down-market in the stock market. Some kind of precipitating [trigger] where it’s very short but very quick, very violent in nature when it occurs, and under those circumstances you could see in the gold markets a very violent upsurge.

FRANK: Jim, I agree with that possibility. I think the groundwork has already been laid for that in the current time period. I’ve noticed in the last few months, the last few weeks in particular with the US stock market, that we’ve seen a big rotation by institutions and hedge funds into financial stocks. That tells me that there is a lot of speculation taking place on the idea that the Fed is maybe done raising interest rates. It seems like if you look at the Fed Funds Futures models just a few short weeks ago they were pricing in 5% Fed Funds by March of next year. Those expectations for a 50 basis point in Fed increases, they’ve been factored out, and now you go out to March of next year and they’re looking for about a 4 ½ % Fed Funds rate. As a sentiment indicator that tells me money has been laying down bets on the idea that we had this energy spike – we had the hurricanes, energy prices rose – inflation picked up a bit, and right now what fund managers are doing is they’re laying down big bets on the idea that the inflation spike is behind us. And I think that could be the real Achilles’ heel that begins to trigger something early next year.

You and I have discussed in the past, and I know you have pointed out in copious detail that these high hurricane seasons tend to create cold Winters. I think the natural gas and oil markets are going to be very important to follow over the next few weeks because they seem well set up fundamentally and technically for a big rise. If we do indeed get a secondary spike in energy that will tend to reinforce the inflation that’s already in the pipeline. We’re seeing companies raising prices on products: Kraft just raised the price of Oreo cookies, they’ve just raised the prices on all of their foods. We’ve seen Colgate, other companies, Kimberley-Clark announce price hikes. I think the Fed will have to stay on the inflation fight a lot longer than Wall Street is hoping for. The consensus is really hoping for a change in the language at the December meeting, and I think if  they don’t get that a lot of the trades put on in this time period and the bets in the financial sector are going to have to be unwound. And I think that deleveraging could start to trigger some real problems. [22:09]

JIM: I couldn’t agree with you more, because not only have we seen the financial stocks do very well, the brokerages, the banks – a big run up – we’ve seen the retailers do very well. But the thing that struck me when I was writing the last segment of the Day After Tomorrow, I was looking at the 8-K statements of some of these financial companies and it doesn’t look like much, but this one particular company that I used to represent Citywide, their loan losses on non-performing loans went from 1/10 % to 2/10 % and 3/10 %. Now, you don’t think of that as much, but if you take 3/10 of 1 % of their total assets and then compare that to their equity it was disturbing.

FRANK: It was becoming significant as a percentage.

JIM: Yes, and that was increasing almost month by month, and it was a reflection I think of the fact they do a lot of variable rate financing. They do a lot of interest only financing. A good portion, 25% of their income was accrued interest from negative amortization loans. So, they’re booking it as profit even though they’re not receiving it, they’re just adding it as debt balances on to their customers.

FRANK: That was the big line item to watch though back in the early 1990s, as the S&L crisis began to unfold, was that non-performing loans were getting bigger month after month.

JIM: Yeah, and it was very consistent, it was almost every month, and we know for example, when the housing market really took off in 2003 when you had adjustable rate mortgages where you could get 2 ½ % to 3 % loans, and a lot of those were locked in for 3 years. Now they’re starting to roll over and they’re ready for reset, and as they reset what do you do with someone leveraged to the hilt like some of the characters in my story, like the Bensons or even the Wheeelers. Hey, the house was affordable at 3%, it’s not going to be affordable at 5 ½ % or 6%.

And what was very disturbing was a speech given by the Comptroller of the Currency to his bank examiners, and he said we’ve got a problem out there and your job is to start looking for these things. Start looking for if the institution is making piggy-back loans. And he gave an example where I thought maybe he read the Day After Tomorrow, because it was almost the Wheeler loan on their condo, and he talked about somebody who got a $354 – or $364,000 conforming loan, this was negative amortization, so the first year their payment was 1600, and then he said by the end of the fifth year this was almost close to $2500, almost the example in the story that I had. He said at the end of 5 years then it resets, and it goes up to close to $2500. And that’s assuming no interest rates are changed, because if interest rates were to go up, the next couple of years by 1 to 2%, he said you could have a $3,000 mortgage payment for somebody who maybe started out making an $1100-$1200 payment. And he said there’s some real danger out here that people aren’t aware of. So this is the Comptroller of the Currency talking to his bank examiners that are going out to do bank examinations. And he was concerned.

FRANK: Jim, I know first hand from friends of mine in the banking industry that they have been approached and told that they would be audited by the OCC, and so a lot of portfolio managers at banks have gone back and really gone through that. At the beginning of next year the OCC is set to pass some new legislation – changes which could really effectively shut down some of this loose credit. And if you go back through any of the history books...

JIM: A guy just came by and gave this to me: “300 FICA score, in bankruptcy OK, in foreclosure OK, stated income good enough with us, unlimited cash out no problem.”

FRANK: No problem, wow! Charles Kindleberger wrote a famous book called Panics and Crashes in which he talked about credit contractions. And in his book he made the point when you’re in a credit expansion with housing moving  higher, the stock market moving higher, one of the things you have to watch out for is that contraction in credit. And I think that is what we are seeing, you can certainly see it in Los Angeles. I drive around my neighborhood regularly, and where there were very few houses for sale a few months ago, right now you’re seeing a lot of properties coming onto the market and nothing is selling. A few houses are sitting there six or seven months, and I hear the wait time to sell a house is close to a year in Los Angeles. That’s a huge difference from what we saw 18 months ago when people were doing deals on the hoods of cars out on the street, writing up offers. [27:12]

JIM: When I took you through Big Sky Ranch, as we were looking at it, I was saying I’ve never seen anything like this, but then you were commenting that in your neck of the woods there are homes 50 years old, 2100-2200 sq ft that are going for what? 1 ½ million?

FRANK: 1 ½ million, $1.6 $1.7 million the house I live in is easily 50 to 55 years old. It’s a nice little house but it’s small, 2000 sq ft, it has 3 bedrooms and the market value on that house is $1.5 million. And I mean it’s a postage sized lot, every house on my block is over $1.2 million to $1.5 million and the higher end is maybe $1.8 million. And Jim, these are not mansions, they’re very small houses, they’re very old houses, some of them have Formica counter tops from the 1950s still in them. Some of them have bathrooms that have not  been redone in 30-40 years, I mean they’re very old and in many cases very dated but it’s just the value of the land that has shot up.

And as a portfolio manager and a newsletter writer living in Los Angeles I make a pretty good salary, I think I do pretty well, but looking at the price of these houses and what a mortgage would be if you were taking out the traditional 20% down payment, it would be $5000 to 6000 a month, and that’s an incredible amount of money. To be able to pay that much money out in rent every month out of an income you need to be making several hundred thousand dollars a year. And I wonder just how many people can possibly be making that much money in a city the size of Los Angeles where there are so many properties valued at over 1 ½ million dollars. [29:04]

JIM: You know I think what you’re seeing – and this always happens with inflation where you see wealth disparities – is those who have the means to invest and who can capture the value of inflation through investments, whether it’s the energy markets or the gold markets, they can profit from that. If you take somebody that’s just a wage earner trying to support a family and you take a look at what their costs are – their grocery bills, their medical bills, their medical premiums, their utilities – they are all going up. I can’t think of anything that they’re not seeing that isn’t going up. And you just wonder when  you look at Big Sky Ranch, and now this new development I call Hacienda Del Sol, which is going to be even more exclusive. But by comparison, you can get a starter home in Hacienda Del Sol $720,000. In your neighborhood an equivalent square footage  is $1 ½ million.

FRANK: Insane. And again, I can understand a certain number of these homes you would have an audience for them in the sense that some people maybe bought homes that were smaller or less expensive and now they’re trading up. But the kind of house that I see in Los Angeles, that’s going for $1 ½ million right now, in some cases $1.8 million, it’s not a house you would be trading up into. This is what used to be your basic starter home, and at that, maybe a starter home that needs a lot of work. So, basically your very average fixer upper is in a very high level and out of reach, and that’s what scares me.

Jim, just as a brief aside I rent my house right now because I’m expecting house prices to come down in the next recession. But my landlord, who’s made a lot of money in real estate, has been in the business 30 years. He actually fixes up homes and bills them out. I asked him one day just for kicks – we get along very well, sometimes we have barbecues together, and he lives right next door to me – “if I wanted to, just hypothetically, would you sell me this house.” And he said: “Frank, I like you a lot. Of course I’d sell you the house. However, I’d have to tell you in all the time I’ve been doing this, I’ve never seen prices like this, I think if you buy this house right here you are buying the exact top.” He said, “in my view it could lose 30 to 40% of its value in 3 or 4 months when it finally breaks, it’s not worth $1.4 million.” He paid under $300,000 for the house 8 years ago, now it’s almost $1.5 million. [31:37]

JIM: This is something most people don’t realize which is the various ways inflation gets manifested in the economy, in asset bubbles in the 80s and 90s, and stocks and now real estate. In fact we had real estate asset bubbles in the late 80s, before the 91 recession, and he bought this house 8 years ago for $300,000, and now it’s $1.5 million. 8 years ago $1.5 million would have bought you a 6000 sq.ft. custom built home on ¾ of an acre, not a starter home like you’re talking about.

FRANK: Exactly, I have a front yard that’s maybe 15ft by 20ft, and a backyard that’s about the same size. It’s a small house, a cute house, but it certainly strikes me as wildly over priced. In fact, I’ve even noticed in Los Angeles there was something of a phenomenon over the commute times and this house is very central. It’s close to everything near downtown LA, it’s in the mid-Wilshire area. And my parents own a home in Palos Verdes that they bought many, many years ago. It has almost an acre of land and it’s got an ocean view it overlooks Catalina Island, you can see the sunset over the pacific everyday, but it’s an hour and fifteen minutes drive time away from downtown LA because of the traffic. So the whole Palos Verdes peninsula has not really kept up. People trying to cut out commutes have wildly bid up prices of homes in the surrounding downtown area for Los Angeles because they don’t want to drive the freeways.[33:20]

JIM: Can you blame them?

FRANK: No, you can’t blame them but they’ve just driven houses up to the point where I just look at it – my parent’s house is 4,000 sq ft with a gorgeous view looking at the ocean, and I see what I’m living in and they’re priced exactly the same – and I think there’s no way in creation they are of the same value.

JIM: It’s amazing because one of the comments that was made from one of the gold companies and we were commenting on the investors and he said maybe they’re attending real estate conferences. Because you know you try to tell people this, Frank – and I remember when I wrote The Perfect Storm in 2000, when we first published that in the Summer, in fact I was interviewed on the radio and people were just hostile – and it’s like, “where are you coming from, where do you get these ideas, this is a new economy look at the technology, we’ve got the internet and look at how fast computers.” And people didn’t see it.

FRANK: Moore’s law.

JIM: Yeah, Moore’s law. And if you talk to people who sell real estate – when my son was looking at buying a property and I think you and I put the heavy “don’t do that” on him. Wait just a little bit – the standard response of the realtor is: “Well, look at all the people moving into California. We’ve got 12% of the country’s population, maybe we’ll have 15%.” But are all these people moving in going to be millionaires, are there going to be people making $200,000 coming into this State, with a couple hundred grand equity to plop down on properties. I don’t see that.

FRANK: It seems like it’s going to be a very hard thing to sustain. The prices are just way ahead of incomes, and in the end that can’t be a whole new era, and I think that’s what we’re being told. In that sense the real estate market today has the same feel as the tech stocks, basically you’ve got new era financing, you’ve got all the fundamentals that have changed within housing: by and large people are not putting down the same kinds of down payments they have in the past; the loan structures are not the same type of loan structures. And we’ve got this situation which is extremely precarious in the sense that what’s been holding down US interest rates over the last 2 years has really been the recycle trade from Asia. If you look at the trade gap we’ve been essentially buying Asian imports, and sending them US dollars, and they’ve been taking that money and essentially recycling it back. That is what has held interest rates down as energy prices in terms of crude oil have moved from $20 to $70. If you go back to the 70s and plot the price of crude oil  and you plot the direction of PPI and the direction of interest rates it was uniform trend: straight up. And the big disconnect in this cycle has come from the fact that Asian capital has been recycling money in and holding down US interest rates. [36:21]

JIM: Yeah, I don’t think most people realize that probably one out of four mortgages is owned by a foreign investor, and it’s been that money that’s come in in the last 3 or 4 years. And one of the reasons we’re trying to bring up this caution, is I wrote a piece in January of 2000 called Planes, Trains, and Dotcoms talking about if this thing is going to bust, and you were doing financial TV and you did a series a week long on the NASDAQ about how this thing was getting ready to collapse, and I think you got more negative viewer commentary than anything you ever did. You were telling me last night at dinner that you had a friend a noted technician who didn’t want to talk to you.

FRANK: No, for a while. I got a lot of feedback on that. A good friend of mine at the television station I worked with – a co-anchor – actually had done a separate segment where he regularly interviewed these technology companies, they would come in, explain what they were doing. These growth stories sounded so good, they kept saying the technology is doubling every 18 months because of Moore’s law. And of course with the internet stocks running wild – names like Inktomi, and Broadvision, and CMGI, Vertical Net – these companies that nobody had ever heard of just exploding with no earnings and no solid fundamentals, basically people could not believe that something like a Cisco, or a Sun Microsystems, or Vitesse Semiconductors – one of the glamour stocks I remember from that era, the stock had gone up a 1000 fold and then it crashed –  [could roll over]. As these things began to roll over a lot of the hard core technical people couldn’t believe it.

I remember one day during that week which actually pushed me, I saw a double top on the NASDAQ, the RSI had made a big bearish divergence, but that same weekend that I was looking at the market I had gone to a conference, and it was a tech conference, and this money manager showed basically tech fund after tech fund, and every one of these charts looked like a completely vertical parabola, and he was telling people it was just getting started, that this was the great boom ahead. And I walked out of that conference just shaking my head, and I thought either I should be getting out of this business, and I don’t know anything, and this guy is completely right, or this is going to be a real disaster. And it really shook me because his conviction was so high that this was just getting started, and he was allocating more and more money into technology. And I thought doesn’t he see how much these things have gone up over the last few months and where they’re selling. Cisco was at what? 90 times earnings. The PEG ratios were at 3,4,5,6 commonly. [39:14]

JIM: PEG ratios for our listeners is: PE times the growth rate. And you had PEG ratios that were looking like PE ratios.

FRANK: Indeed, and you had these incredible PEG ratios and I kept thinking to myself there’s something seriously wrong here. And one of the things that turned me very bearish is that I had looked at the NASDAQ back through history, and sometimes on occasion I do what’s known as time span. And on the NASDAQ if you had gone back to the very beginning in the 60s, to 2000, you would have found that it had gone maybe only 2 or 3 times in its entire history. It had gone maybe 250 or 300 days without hitting its lower band. And as we were going into that top from 1999 to 2000 it had gone something like 379 days without hitting its 200 day lower band. And I saw this double top form, the RSI was very bearish, what I call a 5 point top, and I knew it was due to hit the lower band and the lower band was 2000 points below where the NASDAQ was. And when markets are that extended both time-wise and price-wise you tend to get very fast moves, and so I put that in print: the lower band’s at 3,050; we need to get there in the next few weeks, and the odds are very high you’re going to have a crash. And in fact we hit it right by mid-April 2000. That was the beginning of the big break. [40:42]

JIM: As we look at this market now, and we look at the stock market, and there’s a very good strong possibility – as I think you alluded to earlier – there are big bets being made right now in the financial stocks, the bond market, that the Fed’s going to have to go to easing because the economy will start to slow down.  I read publications all the time of opposing viewpoints from my own, and it’s all saying the inflation cycle has peaked, people are saying energy prices have peaked. I think of something Ian Telfer said in the interview, the reason it was so a propos is I remember walking into this room 3 years ago and Ian at that time was running Wheaton River and he was making acquisitions in terms of paying for properties and some of the  chatter in the room was, “I can’t believe this guy is buying these properties at this price, we could have got that 2 years ago for ‘x’ amount of dollars.”

FRANK: Sure, got a lot of that stuff for pennies back in 2000, 2001.

JIM: Sure, but you know what, it was a changing market and what he saw was the market was changing We were moving into a bull cycle. So, he was looking at it and I bought this up in the interview and I said: “you know what you were doing back then is almost like what Warren Buffet did when he bought Coca-Cola, like 87-88. People said, ‘Oh my goodness he bought Coca-Cola at 20 times earnings.’ But he was looking at Coca-Cola going international – their cash flow statements.”

And that’s what I see in a lot of these mining industries today and this is something I would throw out to investors who’ve got a company. If you were adding resources each year, and your resources per share are increasing as a result – because we know juniors dilute themselves – you are adding value. And that’s no different from a company that increases its earnings and now that earnings is in the bank. So, if you’re involved in juniors, and they’re increasing their ounces, those ounces are growing, eventually the market comes back to the fundamentals and it recognizes what it is that you have. That’s something I would give as an encouragement because you and I have gone up and down the aisles and seen some companies and there are some very phenomenal stories.

FRANK: Indeed, and one other element that I think is taken for granted quite a bit is the idea – which people are not aware of in some case as much as they need to be – of the vast technological improvement that has taken place over the last two decades. I can remember when I first started at FNN in 1984, my boss at the time, John Bollinger had a big iron computer, the thing weighed like 50 lbs, and had a light bulb on it and switches, and it was a little bit dated even for that time. But in high school I can remember a computer with buttons that you would push.

The technology has come so far in the last 2 decades, that’s all basically post 1980. Now in terms of the mining industry you have aero-magnetic fly-overs, you have all kinds of different techniques that allow geologists to use computers, and 3-D imaging to find metal where in the past it was a much more grueling task. There’s still field work that has to be done but right now the mining industry has spread out over the last two decades around the entire world. You’ve got countries like Ecuador for example, Peru, Chile, and Mexico, a lot of these countries have never really been tested with this kind of new technology. So in a very real sense we are at the beginning of an exploration boom that’s being aided by modern technology. For a lot of countries that’s just never happened before. [44:44]

JIM: Yeah, it’s one of the exciting things when you look at Mexico or Ecuador, places where they’ve been mining gold or silver for 400 or 500 years – or going back to the time of the Incas and the Aztecs – that whole mining industry was shut down during the revolution, and it’s just opened up since the 90s. Now you’ve got companies coming in with this technology and also not just the technology in discovery but also in the processing and production capabilities.

FRANK: I was just talking to Farallon over the last 2 days they have an operation down in Mexico and in order to process their ore at their particular project they actually went out and reinvented a metallurgy process which they ended patenting,  because they found they could get 80% recoveries on their ore. So you see this technology and some of the companies being very, very innovative and bringing a lot of technology to bear on finding deposits. And that’s something which is a one shot deal. They’re getting into these countries that have not been under explored in modern times, and they’re finding a lot of resources, and we’re at a unique point in history in that sense. [46:05]

JIM: If anybody’s read Jim Rogers’ book Hot Commodities he’s got a chart in there from Barry Bannister that shows for the last 150-180 years these long 18 year cycles it’s remarkable, 1982-2000 financial stocks - since that period of time it’s definitely been hard assets.

You know I’d like to end with this bit of optimism and hope. And that is that when you’re in a bull market, something Ian Telfer said when I interviewed him was: don’t try to outsmart the market. If this is a long term trending market stay in that market, hold your positions, hold what you’re comfortable in buying. And look if you’re not smart enough to time the market and you want to put $10,000 or 10% of your portfolio whatever it is you’re comfortable with, then go in and do it on a monthly basis, buy a little gold, maybe you buy shares in a company, if it’s down the following month keep that consistent and take the emotions out of it.

FRANK: that’s exactly right and there’s nothing wrong with that strategy, that’s a perfectly good approach to making money in these markets. And understand what you’re buying, understand each business. Try to buy quality, try to buy good management, and then add to it over time.

JIM: Well, Frank this has been a real adventure, like I say, it was not what I expected, and it’s been kind of fun talking to you because you’ve been to a lot more of these than I have. And I could tell your sentiment antennas were going up and saying I’m not liking this.

FRANK: From a fairly modest crowd to begin with it’s thinning out even from there. I think you’re right a lot of the would be investors they are at the real estate conferences, and Jim that’s telling you something. That’s telling me gold’s going a lot higher. I bet a few years from now they’ll be back at the gold conferences, and that’ll be the time to sell.

JIM: Alright, and thanks so much, Frank.

FRANK: My pleasure Jim.

JIM: I want to thank you Frank for joining me on the show, John Loeffler took the week off but next week we’ll return to our regular format, our regular guests from Tim Wood to Paul Nolte to Dave Morgan to Joe Duarte will be back, and also we’re going to finish out the year with a very important debate: Are gloom times ahead of us or are we entering a brave new world. My guest next week will be Louis-Vincent Gave, he’s written a book called A Brave New World and according to him this time it’s different. Following next weeks guest, Addison Wiggins will be joining us, finishing out the debate their new book, Empire of Debt. According to them ‘doom, gloom’ is just ahead of us. Well you’re going to get a chance to hear both sides of that debate in our last remaining shows of 2005.

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