Production is King in Gold Mining

A look at Gold Mining opportunities in Latin America...

MINING strategist with Hallgarten & Co. in London, Chris Ecclestone founded the Argentina-based equity research firm Buenos Aires Trust Company, which he ran for nearly 10 years. In this interview with The Gold Report, Ecclestone details the potential and pitfalls of different provinces for Gold Mining firms. 

The Gold Report: The Hallgarten website says, "Over the years, the team has successfully picked trends using our macroeconomic underpinnings to guide investors through the treacherous waters of the markets." Could you give us a couple of trends that retail investors could take advantage of?

Chris Ecclestone: The chief trend I see is a change in the nature of this gold market recovery. Production is going to be king. In 2009, cash was king after the economic crash. Now it's production. If a company doesn't have a preliminary economic assessment (PEA), it is going to wallow for a fair while. The main focus is going to be if these companies can become real miners or if they are just going to be forever out there with their project generator models. 

There are a lot more companies on the "For Sale" side then there are companies out there to buy them. A lot of them are going to be left standing alone at the wall. The only companies that are going to get the attention of majors are those that are along the continuum between PEA and production.

If they're not, who's really interested in exploration at the moment? There's no shortage of producers that have been pretty well proved up so that we don't need to have yet another 80,000 ounce (oz) resource in the mountains of Peru.

TGR: The price of gold got very close to $1,800/oz early in October, but has slipped to the low $1,700/oz range since then. Is the effect of quantitative easing (QE) wearing off?

Chris Ecclestone: QE didn't produce the inflation that it was supposed to. QE2 was nearly three years ago and there's only a little bit of inflation out there. I don't believe the official numbers, but it's certainly not the amount of inflation that the goldbugs would require to push the Gold Price to $3,000/oz. QE2 didn't do it, why should QE3 do it? 

TGR: Usually gold shows some strength in the fourth quarter regardless if there's QE or not. Why is it showing weakness in a traditionally strong quarter even with QE?

Chris Ecclestone: Part of the problem is that Europe has not blown up on schedule. A lot of goldbugs were looking for the perfect storm if QE3 happened at the same time that one or more European countries went over Niagara Falls, but it just hasn't happened. Even now, the Greek stock market is up 65% off its lows. Quite clearly people are more positive about what's likely to happen there. If it can pull through, then it looks less likely that we're going to be having the chaotic collapse that goldbugs have been looking for.

TGR: Your thesis sounds very intriguing: Since there are few majors and a lot of projects, only the prettiest girls are going to the dance, so to speak. With literally hundreds of projects between PEA and production, how do you narrow that field down?

Chris Ecclestone: That's up to the investor. They have to assess which areas they are most comfortable with. There was recently a coup in Mali. Peru's government is considering reforms after anti-mining protests. The Democratic Republic of Congo (DRC) increased taxes under its mining code. Yet, there are great companies and great new zones. 

It's up to investors to know what they personally feel most comfortable with. Some of these countries are in the dog house, but these things can happen anywhere and investors have to assess their own tolerance for complications. Any miner in Venezuela can unexpectedly be run out of the country. It can be a total bust. You never know.

TGR: For example, things can vary drastically depending on which province you're in inside Argentina.

Chris Ecclestone: Each province in Argentina has its own mining code. There's not a national mining policy. Yet, even provinces that seem to be anti-mining, like La Rioja, can end up on the other side being very pro-mining. The provinces in Argentina that have been consistently pro-mining for a few decades now are really the areas that investors are concentrating on. The biggest deals in Argentina largely have been done in the Santa Cruz province, which is pro-mining.

TGR: What are the provinces that investors should avoid? 

Chris Ecclestone: Mining has had problems in Mendoza province. There was a lot of protesting about what seemed like the environmental impact of mining, but in fact it was more about the Argentine wine trade not wanting competition for cheap labor. Mines were offering all-year employment to the type of people that the growers were only hiring on a seasonal basis to pick grapes. 

You have to look at the real reasons behind things happening in certain countries rather than the ostensible reason, which might be some sort of environmental complaint. If they came out and said, "Well, we don't want to have your mine because it's going to be paying better wages and paying more consistently," they wouldn't get much attraction. They've got to come out and make up some sort of plausible argument. One of the mines that was being proposed was miles away from anywhere so it wasn't likely to contaminate any water, but it was potentially going to draw away labor. 

TGR: Certain jurisdictions, like Latin America, can be drastically changed by different forms of resource nationalism. Do you start to develop other specialties or is your knowledge of Latin America still useful?

Chris Ecclestone: It's absolutely still useful because the more one wanders through these emerging markets, and frankly that's what they all are, the more one sees the same problems repeated. It is a challenge to cover emerging markets and then go look at a jurisdiction where everything is written in stone, like Canada or Australia, where there are fewer surprises. In jurisdictions like Canada, there's not as much latitude for willfulness on the part of politicians, approving one project and then denying another next door. That tends to not happen as much in the developed mining jurisdictions.

TGR: I think most investors are unfamiliar with Morocco as a mining jurisdiction. It would be completely off the radar for most investors, in fact. What sort of risk profile should an investor expect in Morocco?

Chris Ecclestone: Nobody's had a bad experience in Morocco that I've heard of, but there hasn't been enough time for any problems to develop yet. It's a little bit like Turkey was 15 years ago. For a long time there was a state-owned mining company that did everything and there were no private operators. Only recently have private operators been able to acquire assets from the state mining company through the privatization process.

TGR: Do you have any parting thoughts on this space and on precious metals in general?

Chris Ecclestone: There's a finite amount of money in the market and most of it is going to financings. The companies doing financings are getting all the money. The vast bulk of companies need to have someone buying their shares, but buying their shares outside of a financing. Instead all the insiders and the big players are getting into the next hot financing. Where is the new money there?

TGR: Thanks for your time.

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