Has the Gold Bull Market Hit a Snag?

The Gold Report: What do you think will happen to interest rates and how will that affect gold?

Tobias Tretter: I don't see interest rates increasing at all right now. The Federal Reserve is giving banks money for 0.25%. The European Central Bank (ECB) has interest rates at 0.75%. That isn't an environment with increasing interest rates. The 10-year U.S. Treasuries are at 1.85%, which is up from 1.4%, but even in 2011 we were above 3%. We are still at the lowest possible levels and I can't imagine how countries, even relatively strong ones like Germany or the United States, will thrive in an environment with increasing interest rates. It would prove too challenging and cause too much pain; therefore, interest rates will be low for a long time.

I do not believe that the end of the gold bull market is here. I agree with former Fed Chairman Alan Greenspan that deficit spending is a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious progress, he said. It stands as a protector of property rights. As long as the Fed and the ECB are printing money and as long as things like the recent Cyprus bailout continue to happen, there's absolutely no way for gold to go down for very long.

TGR: You're responsible for making investment decisions for the Commodity Capital Global Mining Fund. What sort of year did that fund have in 2012?

TT: This past year was tough for every fund that focused mainly or exclusively on mining deals because the fundamentals of companies didn't matter at all. A company's performance depended on what type of investors it had and whether the investors had to sell. Performance also depended on whether a company's shares were included in one of the exchange traded funds. Nobody cared about the fundamentals of the companies at all.

TGR: What is your thesis when you're looking at taking a position in a company at this time?

TT: I'm a big believer in the juniors. The major companies are every day producing their resources and reserves and they have to buy the juniors to get their reserves and resources up again. The time is over for really huge projects, such as in Chile, where projects need $4, $5, $6, $7 billion in capital expenditures (capex). The next few years will be way better for junior projects with high margins, high grades and safe jurisdictions. That's exactly what we are buying right now and where we are positioning ourselves. Sure, the valuations right now are really bad, so sometimes you're getting companies with price-earnings ratios of 3, 4 and 5. But it won't be this way forever. The valuations for those companies will improve again and you have to be positioned in the right way.

TGR: What are some companies in the fund that performed well in a difficult 2012?

TT: One company that did perform very well until the recent selloff in gold and silver was Santacruz Silver Mining Ltd. (SCZ:TSX.V; 1SZ:FSE). The company is a new silver producer out of Mexico. We are quite happy with the share performance so far. We took part in the initial public offering (IPO) at $0.90/share, the shares traded up to a high of $2.50 and now the share price is at about $1.25. Santacruz recently did another $40 million ($40M) financing at $1.85/share, so the company is very well financed and it is a strong signal that the company was able do the financing without a warrant and the financing was oversubscribed immediately. It's just the beginning; there's still a lot of potential.

TGR: Santacruz has a number of projects including San Felipe, Gavilanes and Rosario. Where's most of that growth going to come from?

TT: From all of them. Santacruz is a unique company. It has been well funded from the beginning. The company also has no warrants outstanding so there is no big overhang. It is starting production at Rosario and declared commercial production one month ago. For just $10M capex Santacruz will produce 2 million ounces (2 Moz) silver annually. That's a very good start for the company. There's still some exploration upside there. Santacruz will start with 500 tons per day (500 tpd), should be able to raise that to 700 tpd and may increase it again. Once Rosario is up and running, the company will focus more on San Felipe. The company has scheduled production at San Felipe for the first quarter of 2015. After that, the biggest upside will be Gavilanes, which should go into production in the first quarter in 2016. Santacruz has a very good production pipeline. It will go up to 56 Moz of production in the next couple of years.

TGR: Tell us about some companies in the fund that had a rough year, but that could be poised to rebound.

"If things like the Cyprus bailout continue to happen, there's no way for gold to go down for very long."

TT: Newstrike Capital Inc. (NES:TSX.V) had a rough year in 2012 and in 2013 so far. The company recently put out its first resource announcement. It has about 43 million tons at 1.63 grams per ton (1.63 g/t) gold equivalent, so that's a very good start. Newstrike is exploring in the Guerrero region of Mexico, a very famous and very prospective gold belt. We will hear about a lot of new companies in the future from this belt. Goldcorp Inc. (G:TSX; GG:NYSE) is already producing from the Los Filos mine in the Guerrero Gold Belt. Goldcorp has about 13 Moz gold there and is producing 330,000 ounces (330,000 oz) a year right now. Torex Gold Resources Inc. (TXG:TSX) is also there with the Morelos project. It should be the next Guerrero Gold Belt company to go into production. Torex also is likely a takeover target. And recently Osisko Mining Corp. (OSK:TSX) staked a lot of exploration ground in this area so there is a lot to come.

Newstrike has one of the best and most highly prospective areas in the Guerrero Gold Belt. The company is well financed with $30M cash. The correction in its stock was way, way overdone.

TGR: Newstrike acquired the Ana Paula project from Goldcorp in 2010. The NI 43-101 resource for Ana Paula came in at about 2.26 Moz gold equivalent (Au eq), but the market was expecting something closer to 2.5 Moz. What were your thoughts on that estimate?

TT: It was still a very good estimate. The recovery, especially for silver, was a little bit low. But Newstrike has 1.63 g/t Au eq. Goldcorp is producing at 0.78 g/t in the same area. The cash costs per ounce of gold recovered are $646/oz. It's highly prospective and again it was the first resource estimate. Sometimes the market is expecting way too much from the first resource estimate. The land package is so huge that it's likely that Newstrike has explored just a tiny part. There is a lot of upside for the resource and the company will increase the resource. At the end of the day the company should be able to get up to the 35 Moz range.

TGR: You help manage the Midas Letter Opportunity Fund. Did that fund have a difficult 2012 as well?

TT: Yes and no. Yes, it was difficult, but the performance was quite good relative to its peers. We finished the year unchanged, which is quite good in a market where all the exploration and junior companies lost 6070%. Nevertheless, it was and still is a tough market because this is a fund for pre-IPOs, IPOs and early-stage investments, following good management teams with an excellent track record. Last year and this year we haven't seen as many opportunities for investment compared to previous years. Exploration companies are having a hard time getting financed these days.

Nevertheless, times will change. I still believe in the model that majors have to buy the good junior and exploration companies and if you follow the right management teams, then you can make a lot of money. I think 95% of the money in the mining industry is being made by only 5% of the management teams.

TGR: What are some companies in the fund that you think the retail investor should know about?

"If you follow the right management teams, you can make a lot of money."

TT: Atico Mining Corp. (ATY:TSX.; ATCMF:OTCBB) is a company that nobody has heard much about and it's one of the bigger positions in our fund. Atico was founded by Fernando and Jorge Ganoza, who are quite famous in the mining industry. They were also instrumental in building up Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE), a silver producer out of Mexico. The Ganozas are applying the same business model they used on Fortuna Silver on Atico but not in Mexico. Atico has an underground copper project underway in Colombia. It was previously run by a family there and Atico is using modern techniques to operate the mine in a better way and to find the right new ore sources to expand the mine.

Atico has drilled a couple of really good holes. One of the latest was 120 meters (120m) of 6.8% copper and 6.2 g/t gold. That's a phenomenal drill hole. I haven't seen that many good drill holes in the last couple of years. Even so, the market barely responded and I was a little surprised that you still can buy the company for its $35M market cap. It also has $10M cash. Everything is in place. The company has good infrastructure. The mill is already there. It will have to be refurbished before commercial production can start. Atico doesn't put out any official numbers, but if you do your own math, I think Atico will make at least $20M cash flow per year for a company with a market cap of $50M.

TGR: You said early-stage drilling success has barely moved the share price. Will future drill results be able to move the share price?

TT: Yes. I think we will see a lot of additional good drill holes at the El Roble mine. Until now, Atico has been focused on the existing ore body, but there are a lot of additional targets. Once the company hits new ore bodies I think some speculation, some blue sky, will open up and the share price can go up quite heavily in a short time.

TGR: What's the best way to invest in Atico?

TT: I would say invest half of the amount now and the other half a little bit later. The drill results will not be the big thing for the share price in the next little while. Everybody's waiting for Atico to go back to the market to finance the project to refurbish the mill. I think the company will need about $15M. I expect the company to do most of it through debt. That's a little bit of an overhang right now. Other than that it's more a production story than a pure exploration story. Just production potential alone justifies a share price that is way higher than the share price is now. The blue sky is an addition to it.

TGR: How important is share ownership structure?

TT: What I've learned over the last 12 months is that share ownership structure is way more important these days than in the past. A lot of junior mining companies are seeing their shares hurt because one large investor is selling. The investor is getting redemptions and then just selling its shares within a few days or weeks. It doesn't pay any attention to what the share price is doing. Huldra Silver Inc. (HAD:TSX.V) is a very good example of this. One of its major shareholders sold its whole stake in four weeks and it caused the share price to plummet 5060%.

TGR: What are some other companies that investors should know about?

TT: Another very good company is Brazil Resources Inc. (BRI:TSX.V; BRIZF:OTCQX). It was founded by Amir Adnani, the CEO of Uranium Energy Corp. (UEC:NYSE.MKT) and some very good shareholders are involved in this company, like Brasilinvest, which is the largest private merchant bank in Brazil. Brazil Resources has very prospective projects in the Gurupi Gold Belt, which is a very good place to be right now. The company is still actively looking for new acquisitions. Because of the shareholder structure, Brazil Resources has found it quite easy to raise money at a very good share price level.

The company went public in an IPO about a year and a half ago at $0.90/share and the share price is around $0.93 now. Even though the market is really horrible for most juniors, Brazil Resources is positioned to do well because it has cash and is still getting money because of its supportive shareholders. This is a situation that appears maybe once in a lifetime where you can buy nice resources, 25 Moz, for more or less nothing. Companies like Brazil Resources that have the cash to buy assets at today's prices will be the first to go up when the market finally realizes what it has accomplished.

TGR: Management of Brazil Resources owns roughly 30% of the company. Do you see that as a positive?

TT: Yes, absolutely. That's another important change in the last two or three years. Too many companies used to get financed and then their CEOs were flying around in first class and getting big salaries, but they didn't have big share positions in their own companies. As a result, the incentives for those kinds of CEOs was a little different from what it should be. Optimally, the management teams of junior mining companies shouldn't be getting huge salaries. Instead, they should have big equity stakes in the companies to align their interests with other shareholders. In this case, I know Amir and the other executives believe in the company. They believe in the story and that's exactly what attracts other investors.

TGR: Tell us about Brazil Resource's assets.

TT: Artulandia, which nobody is talking about, is a 100,000-hectare project in the state of Goias in the middle of Brazil. It's highly prospective and looks a little bit like Yamana Gold Inc.'s (YRI:TSX; AUY:NYSE; YAU:LSE) Chapada project. It's only 100 kilometers (100km) away from Chapada. It's also close to Amarillo Gold Corp.'s (AGC:TSX.V) Mara Rosa project. To my geologist, Artulandia looks really prospective and I'm excited for the first drill holes that we will see from this project.

TGR: Do you have another name you would like to discuss?

TT: I've been following Confederation Minerals Ltd. (CFM:TSX.V) for a couple of years. It owns 70% of the Newman Todd project in the Red Lake Camp area of Ontario. Redstar Gold Corp. (RGC:SX.V) is its partner. Confederation has to issue another 400,000 shares and pay Redstar another $250,000 and then it will be up to 50% on the earn-in. After a preliminary economic analysis, the earn-in will increase to 70%. So far, the company has put in 129 holes to 46,000m in total. What is unique is that every hole so far hit mineralization. That's not normal. The company discovered a strike length of 1.8km. It is hitting the typical Red Lake mineralization with a very high grade. About 40% of the drilling results to date have been above 20 g/t and about 90% of them have been above 5 g/t.

The really interesting thing is, although Confederation has mainly concentrated its drilling to a depth of 400m, it now has drilled a hole to a depth of between 787m and 932m. At the lower depth, the company hit about 8 g/t over 2m and three other 1m intersections. That means that this ore body, which has a strike length of 1.8km and looked as if it was going from 200400m, now has been extended to 800900m. It was a very significant hole, which showed the potential for this project. After the company released this news nothing happened to the share price, so that just tells me nobody is reading news releases anymore.

TGR: How does Newman Todd compare to other gold deposits in the Red Lake Camp, such as Premier Gold Mines Ltd.'s (PG:TSX) Rahill-Bonanza project for example?

TT: It's the same kind of structures, the same kind of grades. It looks pretty similar. It also looks similar to the Goldcorp project up there. Confederation's problem is that it doesn't own 100% of the Newman Todd project. If you don't own 100% of a project, not that many investors will be interested. We may have to see a consolidation before people recognize the potential there. For sure it is an exploration project and will take some time to get to a resource. Production will not start immediately, but it is one of the most prospective exploration projects up there.

TGR: Thanks for your insights.

Tobias Tretter is a managing director and chief investment officer for Zurich-based Commodity Capital AG, founded in 2009. He is responsible for making investment decisions of the Commodity Capital Global Mining Fund and for selecting the indexes. Tretter is a graduate of Bayreuth University in Germany, where he earned a business administration degree with a focus on finance and banking management. He began his career at Credit Suisse Asset Management and also worked at Fujitsu Siemens and Dr. Jens Ehrhardt Kapital AG.

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DISCLOSURE:

1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Gold Report: Santacruz Silver Mining Ltd., Newstrike Capital Inc., Goldcorp Inc., Atico Mining Corp., Fortuna Silver Mines Inc., Brazil Resources Inc. and Premier Gold Mines Ltd. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Tobias Tretter: I or my family own shares of the following companies mentioned in this interview: Newstrike Capital Inc., Atico Mining Crop., Brazil Resources Inc., Santacruz Silver Mining Ltd., Torex Gold Resources Inc., Confederation Minerals Ltd. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

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