Michael Fowler Says Forget The Majors, Buy The Midtiers

According to Michael Fowler, senior mining analyst with Loewen, Ondaatje & McCutcheon, the major gold producers have gorged on debt and sold off their seed corn. In other words, they pursued exactly the wrong strategy in the past and are now paying the piper. The intermediates, on the other hand, have better balance sheets, positive cash flow and prospects for growth. In this interview with The Gold Report, Fowler highlights five producers prospering against the odds, and three companies with near-term projects likely to be taken out.

Gold ore

The Gold Report: What are your forecasts for gold and silver prices in 2015?

Michael Fowler: I think gold could go lower in U.S. dollars in the next three months. I stress U.S. dollars because the price of gold is rising in many currencies, such as in Canadian and Australian dollars. This will be a boon to producers in those countries, as will the significant declines in energy costs.

The average gold price should be slightly down: $1,150–1,200/oz. Negative factors for gold are the strong U.S. dollar and lower inflation. These, however, will be offset by strong physical demand from Asia, China in particular. Silver follows gold, so I expect a 2015 average of $16/oz.

TGR: The gold-silver price ratio, which for several years had been at a historic high of 65, has now reached 75. Will that ratio be maintained?

"Pretium Resources Inc. has a very high-grade deposit, which suggests the ability to be financed."

MF: I think we will probably see a range of 65–70. Historically, silver has outperformed gold on the way up and underperformed gold on the way down.

TGR: Again, traditionally, geopolitical turmoil has been good for gold. We had a great deal of such turmoil in 2014, and it doesn't seem as if 2015 will be any calmer. For instance, January brings the prospect of elections possibly leading to the exit of Greece from the euro. Could 2015 be the year gold's value as a safe haven in a scary world is reaffirmed?

MF: I think the world has always been a scary place. Certainly, the Eurozone descending into crisis would be positive for gold. That said, the gold market in the longer term reacts more strongly to phenomena such as inflation, currency strength and monetary growth than to various political skirmishes.

TGR: Keeping in mind what you noted about the cost savings deriving from currency declines and lower energy costs, is gold production sustainable at $1,200/oz? Can we expect a significant drop in gold production?

MF: We should see a significant gold production fall from 2016 onward.I think the industry got it completely wrong. Producers should have been hoarding cash during the boom years so they could deploy it now. Instead, most of the big gold producers took on huge amounts of debt and are now selling off assets. Capital expenditures have been curtailed, and that will lead to a lower reserve and resource basis and, eventually, lower production.

TGR: Today, even projects with published all-in costs well below $1,000/oz are having difficulty raising capital. What does this tell us about the future health of the gold explorers?

MF: Essentially there's no money going into the sector. At $1,200/oz, few junior deposits make sense.

TGR: The bear market in mining equities began in April 2011. Assuming that sentiment in the gold sector becomes positive again, how fast will financing come back? Are we talking months, or more than a year?

MF: Should my gold price forecast be wrong, and gold rises in price quickly, that would be a catalyst for many investors to get back into the gold market. Another catalyst would be major discovery, but that doesn't seem to be on the horizon. For the juniors, there's always a lag effect. Even assuming a big increase in the gold price, they would still be many months from a recovery.

MF: Three specific companies on my list would be Pretium Resources Inc. (PVG:TSX; PVG:NYSE), Torex Gold Resources Inc. (TXG:TSX) and Guyana Goldfields Inc. (GUY:TSX).

TGR: Despite rock-bottom asset prices, 2014 was not a brisk year for mergers and acquisitions (M&A) in the gold sectors. Will M&As pick up in 2015?

1 2 3 4
View single page >> |


1) Kevin Michael Grace conducted this interview for Streetwise Reports ...

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.