Metals are like horses in a merry-go-round, believes Joe Reagor of ROTH Capital—as some rise, others fall. In this interview with The Mining Report, Reagor explains how looming surpluses, shortages and reduced confidence in central banks will be negative for copper but positive for silver, gold, uranium and, especially, zinc. And he suggests a handful of companies in these sectors that look to be best in show.

The Mining Report: Gold rose 2.5% Jan. 15, and is up 8.4% for the year already. What do you make of that?

Joe Reagor: I think there's a lot of money flowing into the sector. It's been two rough years in a row for gold, but now there's a feeling that a solid floor has been established in the $1,175–1,200 per ounce ($1,175–1,200/oz) range.

TMR: Marc Faber says investor confidence in central banks is collapsing, and gold could rise 30% in 2015 as a result. What do you think?

JR: Investor confidence in the large banks and the world economy has been reduced. Gold should have a steady increase throughout the year, but just one or two examples of positive economic data could result in a loss of some of the upside we've seen so far this year. Our 2015 forecast for gold is an average of $1,263/oz.

"PolyMet Mining Corp.'s NorthMet is my favorite polymetallic project."

TMR: The gold-silver price ratio has risen to 75. Does this surprise you?

JR: We've believed since 2012 that gold would outperform silver. Looking at the new projects being built around the world, we've seen silver projects at 80–100 grams per ton (80–100 g/t) and gold projects at 0.09–1.1 g/t. So after we applied our recovery rate, this suggested a higher gold-silver ratio on a rarity basis.

TMR: Will the gold-silver ratio decline in 2015?

JR: Silver should outperform gold this year because silver has industrial uses. So the ratio should approach 70, for a silver price of about $18/oz.

TMR: A number of experts interviewed recently by The Gold Report have said that at $16/oz the prospects for pure silver producers are poor. Do you agree?

JR: At that price, the pure silver producers would struggle. However, silver has risen to almost $18/oz, and if it continues to rebound, pure silver equities should perform better than those that derive silver credits from base metals operations.

TMR: What's your top silver pick?

JR: Hecla Mining Co. (HL:NYSE). It produces mostly silver but also some gold and zinc. We believe that in H2/15 the zinc price could make a really strong move. We recently downgraded Hecla from a Buy to a Neutral, but that was a timing issue based simply on its current valuation. We still believe it's in position to outperform some of its peers.

TMR: Hecla pays a dividend. 

JR: It's linked to the silver price, so it's quite small at today's prices. In the event of a significant spike in silver, however, this dividend would rise.

TMR: Which near-term gold projects do you like best and why?

JR: I'll name two. The first is Pretium Resources Inc. (PVG:TSX; PVG:NYSE) and its Brucejack project in British Columbia. We believe it should complete its financing, get its permits and break ground by the middle of 2015. Companies that go through that transition generally see a significant value-curve adjustment.

TMR: Pretium's shares have risen substantially in the last month, despite no material news. Is a takeover bid imminent?

"Pretium Resources Corp. should complete its financing, get its permits and break ground by the middle of 2015."

JR: A takeover bid is unlikely until the company has its permits in hand. Pretium has agreements with local First Nations, and new ownership could result in those groups asking for additional permitting requirements or additional review time. The company is certainly acting as though it will finance Brucejack and put it into production itself. Moving forward decisively is certainly the right decision for current shareholders, instead of just waiting for an offer.

TMR: What's your other favorite gold project?

JR: Solitario Exploration & Royalty Corp.'s (SLR:TSX) Mt. Hamilton project in Nevada. This is a much more modest project than Brucejack, with 600,000 Proven and Probable gold-equivalent ounces, compared to 6.9 million ounces (6.9 Moz) gold at Brucejack. Mt. Hamilton already has its environmental permitting, so it's further advanced than Pretium in that respect. The only permits it still needs are minor construction permits, which are generally a matter of following the letter of the law, and a water quality permit, which is pretty standard for Nevada. We expect Solitario will have those in the next couple of months and then be essentially shovel ready.

TMR: Befitting its more modest size, Mt. Hamilton's capital expenditure is only $91.7 million ($91.7M), as opposed to Brucejack's $746.9M. How does Solitario stand for financing?

JR: Solitario's market cap is only $42M, so a pure equity fundraising would be difficult. We expect the company will use a combination of debt and a gold-streaming agreement. Sandstorm Gold Ltd. (SSL:TSX.V; SAND:NYSE.MKT) currently holds a net smelter return on the project. There's also the possibility that Mt. Hamilton could be bought by a better-financed, larger gold company looking for a near-term, ready-to-go project with a reasonable rate of return at today's gold prices.

We believe that at the end of the day, Solitario is really a royalty company and will refocus on that.

TMR: Solitario also owns 30% of a major zinc project, Bongará, in Peru. How does that affect your valuation?

JR: We value Bongará at about half the company's total value. Investors don't value it highly because, although there is an initial resource and the zinc grade is very high, there is yet to be a publicly available financial study of any kind done on the project. We value Solitario based on the potential cash flows of Mt. Hamilton and the potential move in zinc later this year.

TMR: What are your forecasts for 2015 base metal prices?

JR: We follow copper, lead and zinc. Our forecast for copper is an average price of $2.74 per pound (2.74/lb), with $2.70/lb in Q1/15 and $2.60/lb in Q2/15. We expect little movement in lead, with a flat $1/lb price for the year. And for zinc, we expect $1.10/lb for the year, with the price rising as high as $1.30/lb in Q4/15.

TMR: Given how important copper is to economic expansion, could its recent price decline be a leading indicator of a global slowdown?

JR: I think the biggest issue is a slowdown in China. That country had stockpiled large amounts of copper but now appears to be selling back into the market, which is what's driving the price down. We think that world economic growth has lagged a bit and may continue to do so. We further believe that the strength of the U.S. dollar is more a reflection of the weakness of other currencies than it is of the strength of the U.S. economy.

TMR: Assuming for the sake of argument modest global economic growth, does this favor the so-called currency metals, gold and silver, over the industrial metals? 

JR: For the most part, yes. Zinc should be the best performer this year, but after that, it should be pretty close between gold, silver and maybe uranium.

TMR: Is the world running out of zinc?

JR: A more accurate evaluation is that the zinc price has been so low for so long that we are running out of current supply. In 2012, the world zinc market was significantly oversupplied. The price fell to the $0.80/lb range, so there was no incentive for reinvestment. Since then, Glencore International Plc's (GLEN:LSE) Brunswick and Perseverance mines in Canada have shut down. And MMG Ltd.'s (1208:HKSE) Century zinc mine in Australia, the largest in the world at 4% of zinc supply, will be depleted this year.

The London Metal Exchange's zinc inventory has fallen from 1.2 million tons in 2012 to below 700,000 tons (700 Kt), which means a roughly 250 Kt/year shortage right now, even before the Century shutdown. So world zinc inventories could drop to dangerously low levels by the end of 2015 or early 2016.

TMR: When will new zinc projects come on line to make up the deficit?

JR: If the price of zinc spikes, there could be a three to five year delay before the world can get zinc mines permitted and built. China has massive zinc reserves that aren't currently being produced, and a laxer regulatory regime than the rest of the world. But even if it brought some of its shuttered mines back on line and began construction of new ones, we'd still be looking at six months to get the former producing and a year or two for the latter.

TMR: Let's talk about polymetallic projects. Which is your favorite?

JR: PolyMet Mining Corp. (POM:TSX; PLM:NYSE.MKT) and its NorthMet project in Minnesota. This is essentially for similar reasons as to why Pretium is our top gold pick. This year, 2015, is the key year for NorthMet to be permitted, financed and begin construction. However, whereas Brucejack could be delayed three to five months and still break ground in 2015, NorthMet has only a one- or two-month window in late Q3/15 to early Q4/15 to begin construction because of its location. Delays beyond that would push NorthMet into 2016. That said, it seems to be on schedule, and we think it will make it to the finish line, winning the same value-curve adjustment we're predicting for Pretium.

TMR: Does PolyMet have a new permitting strategy?

JR: The current management, led by CEO Jon Cherry and CFO Douglas Newby, has learned from its mistakes and is now on the right course. PolyMet expects to issue its final environmental impact study in early spring. That will be, essentially, the end of the permitting process, and the company can then complete its financing.

TMR: NorthMet has 72 million pounds (72 Mlb) copper. How does the recent fall in the price of copper affect its profitability?

JR: If the copper price decline occurred when NorthMet was going into production, it would have been more of a concern. Generally speaking, a fall in copper prices today usually bodes well for three years from now. By the time NorthMet begins production, the price of copper will likely have rebounded significantly. Even at $2.50–2.60/lb, it would still be profitable. In addition, the company has offtake agreements with Glencore.

TMR: Let's talk about uranium. To what extent is the fall in the spot price of U3O8 to $35/lb from $42/lb a short-term reaction to the oil price collapse?

JR: I don't think it had much to do with that. In November, Japan announced that the Sendai reactor would be restarted, and this spurred a uranium buying spree by world utilities. Back then, there wasn't much spot supply available, which caused a momentary price spike. Keep in mind that the spot price was under $28/lb last summer, and now it's over $35/lb.

TMR: You indicated earlier in the interview that you are bullish on uranium. Explain why.

JR: Our forecast is for a long-term shift from fossil fuels to uranium as an energy source. And besides Cameco Corp.'s (CCO:TSX; CCJ:NYSE) Cigar Lake mine in Saskatchewan, little uranium production has been added in the last few years. If more power plants come back on line in Japan, and China continues its nuclear power expansion, uranium demand will continue to increase. This could lead to the removal of the current surplus and the creation of a shortage.

We don't anticipate a major move in the price of uranium. Some industry experts expect a quick move to the $70/lb range, but we expect a staged recovery to the mid-to-high $40s by the end of 2015.

TMR: Which specific uranium company can you discuss?

JR: We currently follow Energy Fuels Inc. (EFR:TSX; EFRFF:OTCQX; UUUU:NYSE.MKT), which recently announced its acquisition of Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT).

TMR: What do you make of this merger: ambitious, overambitious or just right?

JR: I think it's probably just the right move for the two companies. Uranerz had a long road to finally reach production, but sometimes you get a management group that's ultimate goal is to prove concept and then sell to a company that can move it forward. I think that's what has happened here. Dennis Higgs, the executive chairman of Uranerz, will be on the board of the new company. He brings a lot of capital markets experience to the company, but he will also be able to do other things as well. That's ideal for him.

From Energy Fuels' standpoint, it's a great acquisition. It provides the in-situ recovery (ISR), low-cost production option, while maintaining the conventional mining option. Should there be a significant uranium price spike, it would have the flexibility to restart large-scale mining, which gives it more of a production upside than, say, some of the ISR-only producers out there.

TMR: How do you rate ISR uranium mining versus traditional mining?

JR: ISR is the mining method that works when the industry is under fire because it requires lower upfront capital. The downside is that the permitting of additional wells and additional production areas can cause large fluctuations in production levels and impact overall profitability, whereas with conventional mining you're either producing or you're not. With conventional mining, once you're in production, you're done; you don't have to worry about repermitting as you go. Each approach has its advantages, but in today's market, ISR is clearly the leader. Should the price of uranium hit $70/lb, however, conventional mining would again be the preferred method.

TMR: What's your general counsel for investors in 2015?

JR: We favor the macro approach. Investors today aren't so much looking for analysts to pick specific stocks to buy and sell at specific prices as for general investing themes and some names that fit within them. So, for instance, we tell investors that with the U.S. dollar growing stronger, they should look for companies with all, or at least significant, production outside the U.S. Their costs are denominated in local currencies, so companies that mine metals whose prices are flat in U.S. dollars will benefit from the strong U.S. dollar.

We're negative on current copper producers because of our negative outlook on near-term copper prices. We like pure zinc producers or those with significant zinc contributions because of the zinc shortage. In precious metals, we're targeting silver companies over gold companies because we expect the gold-silver price ratio to fall from 75 to 70.

TMR: Given that mining equities have been bearish for almost four years, the good news of the past six weeks might lead investors to conclude that happy days are here again. Is this a reasonable conclusion?

JR: A cautious optimism is reasonable. Mining equities in general are going to benefit from the lower oil price, and gold and silver equities in particular will benefit from the higher prices of those metals.

I should again caution that better-than-expected economic data from Europe or China could easily reverse the recent trends in gold and silver. In addition, we note that the upward move in precious metals equities has outpaced the price increases in bullion. Therefore, we need further increases in gold and silver to support equity prices. Some gold stocks are up as much as 20–30% this year, so gold must continue to trend toward $1,300/oz to justify these gains. We expect moderate strength in the precious metals sector in 2015.

TMR: Joe, thank you for your time and your insights.

Joe Reagor is a research analyst with ROTH Capital Partners, providing equity research coverage of the natural resources sector. Prior to ROTH, he worked in equity research at Global Hunter Securities and at Very Independent Research, covering a wide array of resources companies including metals (steel and aluminum), mining (gold, silver and base metals) and forest products (containerboard, OCC, UFS and pulp). Reagor earned a Bachelor of Arts in economics and mathematics from Monmouth University.