With a tumultuous 2011 coming to a close, Northern Miner staff writer Anthony Vaccaro assembled a panel of industry experts for their take on what 2012 will bring for the markets, commodities prices, and their favourite stocks. On our panel is: Brent Cook, editor of Exploration Insights, Brian Hicks, a portfolio manager at Frank Holmes' U.S. Global Investors, and the Mercenary Geologist Mickey Fulp.
State of the economy
While Brent Cook recognizes that sluggish economic growth in the U.S. and Europe, combined with the European debt crisis are a drag on the global economy, he thinks the real key is what happens in China and to a lesser degree India.
"What's happening in China is that home construction is off significantly. People aren't paying making mortgage payments and are going into default on debts and this will be a drag on the economy," he says.
"All of that points to a negative outlook on base metal prices and consumption. But opposing that, in general we've reached a period in man's evolution where even at current levels we are consuming more metal than we can put back into production. We can't build enough mines quick enough to replace resources that we're depleting.
"How this plays out in short term could be ugly, but in the long term I'm still very positive."
Brian Hicks is careful to point out that his forecasts on metal prices and stock picks were all contingent upon the global economy staying out of a recession and Europe holding itself together. Those are two conditions that no one is certain about, however.
"You've got to be careful in these markets," Hicks says. "You can't be too aggressive. The situation in Europe is not transparent with regards to what is taking place with powers that be."
At the same time, Hicks says that some progress is being made and that he's hopeful that the outcome will be material changes to a system that clearly hasn't worked.
"The key is to make sure you know what you own," he says. "When buying a stock you have to have the conviction it that it will be successful over the long term. These are the times you want to look to buy, it looks like some equities are stabilizing here and finding a bottom. We're not in an ongoing downfall."
It's often said that copper has a Ph.D in economics because of how well it tracks the health of the world economy, and Mickey Fulp would agree with that sentiment.
While he was calling for a correction of copper prices back in January when the metal hit US$4.50 a lb - and was proven right when copper fell to as low as US$3.08 in October - he now thinks the current US$3.35 range is too low.
"I don't think copper over US$4 per lb. is sustainable. I'm more comfortable in the US$3.50 to US$4.00 per lb. range," Fulp says.
"My gut feeling is that in the short term it will trade in a range of US$3.50 to US$4 per lb. The supply demand fundamentals are pretty much in balance and have been for four years now, because of that it can go into deficit and then into surplus quite often, but it has never gone far out of balance over the last four years."
On the demand side, Fulp believes increased demand from the U.S. and Russia will be tempered by declining demand from china. He says, however, that while the copper market in China is very opaque, it now appears that the country is starting to restock after being a seller in the fall.
Fulp likes Curis Resources (CUV-T), a Hunter Dickinson company that is developing the Florence copper project in central Arizona.
One of the distinguishing features of Florence that Fulp likes is that the company plans to extract copper using an in-situ copper recovery method that would reduce costs and increase margins.
"Florence is at the point where most of the technical risk is gone," he says. "The only risk left is permitting and financing risk and I believe those two are not of particular concern. As a Hunter Dickinson company it will get financed."
Of the base metals, Hicks is the most constructive on copper due to supply issues and constraints on new supply, including issues with labour, permitting, the ability to build infrastructure, and the time it takes to build a mine.
Such hurdles lead him to believe that a material increase in copper supply isn't on the horizon.
"The price has come down to US$3.40 a lb., think at some point in next twelve months it can get to the US$4 per lb. level again - given where inventories currently are and where demand is."
Hicks says copper is unique among the base metals.
"Other primary base metals don't seem to have tight supply and demand fundamentals," he explains. "You'll get a bounce here and there in aluminum or nickel but it quickly fades as supply reacts in a fairly prompt way to meet demand for shortfall in inventory."
Of the juniors, Hicks likes Augusta Resource (AZC-T, AZC-N) and its late development stage Rosemont copper deposit near Tucson, Ariz.
The stock has been beaten up over the last few months as it closed as high as $5.90 back in March but is currently trading in the $3.30 range.
"They have some permitting issues, but we believe they will sort themselves out and will unlock value for shareholders," he says.
Of the seniors, Hicks likes Freeport-McMoRan Copper & Gold (FCX-N) as it is the bellwether for copper. First Quantum Minerals (FM-T) also looks attractive at its current levels. The stock is trading in the $18.50 range down from a June high of $28.12.
Gold as a safe haven
Cook believes that given the likelihood of loose monetary policy carrying forward into the future, high gold prices will be maintained. He believes that next year the yellow metal will stay in its current lofty range of between US$1,600 and US$1,900 per oz.
"I have a hard time building a case for what's going to take gold down," he says. "What would take gold down is European and American politicians getting their act together and fixing their fiscal problems. But that would be very painful and the electorate in both countries won't vote for pain."
That leaves few politically palatable options.
"Therefore quantitative easing represents the easiest way out - it's not the best way because it's a slow death versus a fast death - but that's their only exit strategy."
Unlike Cook, Fulp does think gold is due for a bit of a correction - but not by much. He says he will renew his buying of the physical metal if the price falls another US$100 to around US$1,600. per oz.
"I'm bullish over the long term and I think that in one year it will be higher than where it is today, which has to do with devaluation of the U.S. dollar," he says. "You have to play the cards you are dealt and right now we're being dealt a hand that shows fiat currencies being printed willy-nilly. The way to protect yourself is to own significant amounts of precious metals."
What Hicks likes best about gold is that it is one of the only assets in the world today that is capable of performing well regardless of which way the global economy breaks.
"Gold looks good either way," he says. "If things improve gold will go up because there is a lot of money out there and that will start to pick up in velocity and reignite inflationary fears. And if things get worse gold will go up because of its safe haven status."
Cook likes Lydian International (LYD-T) for its Amulsar project in Armenia, which he says represents a high-margin, low-capex deposit that a mid-tier could buy.
"It will be a good deposit either way: if someone else buys it or if they build it," he says.
He also likes prospect generators: companies that generate targets then bring in others to spend money on them.
"It's a really good model especially given how uncertain the future is. Shareholders are not continually diluted at lower prices and this is important because we know that most projects will fail. These companies offset that risk to someone else."
The prospect generator he likes the best is Eurasian Minerals (EMX-V), for its solid management team, its portfolio of some 90 projects around the world, and the quality of the seniors it has teamed up with.
Fulp's gold pick is Brazil Resources (BRI-V), a newly formed junior run by the same management team that founded Uranium Energy (UEC-X).
Management's strong record combined with a portfolio of good projects in Brazil and a strong board of directors that is connected to the big money in Brazil make the company a good bet in Fulp's eyes.
"I think Brazil is underexplored," he says. "You can easily count all the junior companies operating in Brazil on your fingers and toes. Try to do that in Peru or Mexico."
Hicks favours the three big senior producers: Barrick Gold (ABX-T, ABX-N), Goldcorp (G-T, GG-N) and Newmont Mining (NMC-T, NEM-N).
"They all look attractive where they are currently trading with respect to the price of gold. Their cash flows to earning multiples are reasonable, they are all paying dividends, and overall they are looking extremely cheap."
On the junior circuit, his pick is Gran Colombia Gold (GCM-T).
"We like the fact that they are in gold rich area in Colombia and it looks like there is more discovery potential. We own it and we believe it looks cheap."
Silver: A 'beta play' on gold
Hicks advises that investors proceed with caution when dealing with silver. This is due to the fact that the much discussed correlation between gold and silver is actually quite erratic.
In periods where gold prices are strong, silver can overreact to the upside, but on the flip side, when gold pulls back, silver can over-correct to the downside. Such characteristics lead Hicks to call the metal a "beta play" on gold.
"If overall macro strength and inflation come into the picture we can see silver outperforming gold," he says. "But you have to take a balanced approach and trade around the volatility. Silver is a strong mean-reverting metal, and while gold also has that characteristic, because of the added volatility with silver we see it amplified."
Despite being labelled "poor man's gold," Cook likes silver for its monetary and industrial uses.
He cautions, however, that it is difficult to find good high-margin silver deposits, as evidenced by the fact that 70% of global supply is currently produced as byproduct.
Hicks has long favoured Silver Wheaton (SLW-T, SLW-N) as the go-to name in the sector. He points to the company's business model of lowering geological risk by making upfront payments to secure production from high-quality silver mines in politically stable jurisdictions.
He also likes Tahoe Resources (THO-T) for its strong management team and the solid growth profile coming out of its Escobal project in southeastern Guatemala.
At the top of Cook's list is Mirasol Resources (MRZ-V), which is still drilling out resources at the Joaquin silver project in Argentina.
The company has a 40% stake in the project with Coeur d'Alene Mines (CDE-N) holding the rest. A prefeasibility study is under way on Joaquin and Cook believes there is a good chance that Coeur will look to buy out Mirasol's stake in the project.
Uranium's solid fundamentals
Fulp has been beating the uranium drum for anyone willing listen for the past few years. His bullishness is based on straight-forward supply and demand fundamentals.
"We mine 70% of what we use every year with the deficit made up from government stockpiles, utility and speculation stockpiles," Fulp notes.
He also points out that the program to convert former nuclear bombs to reactor ready fuel will end in 2013, reducing supply in North America significantly.
Such factors lead Fulp to expect a spike in prices in medium term, despite the slightly negative impact on reactor development that the Fukushima disaster had on the industry.
While long term, Hicks views on uranium are in line with Fulp's, in the short term he is much less optimistic.
"Our view is that it's still early to move on uranium stocks," he says. "It's more of a 2013 story. I know it was hit extremely hard after the Fukushima power plant disaster, but there are still some concerns on a global basis that could slow development. In Asia they are still going hard but it looks like things may slow down in the west."
Strathmore Minerals (STM-T) is Fulp's number one uranium pick. The company has the Roca Honda project in New Mexico and the Gas Hills project in central Wyoming, which Fulp believes are two of the "best undeveloped uranium projects in the world."
A platinum opportunity
Of the three men, Fulp is the most bullish on platinum due largely to its relationship to the gold price.
"Platinum is a buy," he says. "The platinum-to-gold ratio is low, something on the order of 0.9 to 1 right now and it generally never goes below one. It has only happened three times in last fifteen years - in 1993, 1996 and 2008 - so it is quite unusual and it tells me it is a buying opportunity.
Fulp doesn't like the idea of investing in platinum through ETFs because you can't take delivery. He doesn't like platinum mining stocks in general either because wth the biggest operations being in South Africa, Zimbabwe and Russia, the companies are exposed to too much political risk. Fulp says the best way to play the platinum is to hold the physical metal, which at presstime, was trading at about US$1,567 per oz.
Antimony: a critical metal
It may be an obscure metal that most investors may never have heard of, but Cook says antimony is among the metals that could do well going forward. Antimony compounds are used in fire retardants and it is also used as an alloy with lead to increase hardness. As such it is found in both batteries and bullets.
Cook was drawn to the metal after seeing both the British and U.S. geological surveys point to it as critical metal - key point given that China currently dominates antimony production.
Global Minerals (CTG-V) is developing its wholly owned Strieborna silver, copper and antimony project in Slovakia.
Cook likes both the project and the political jurisdiction.
"Slovakia is desperate for investment and the area is a historical mining district," he says. "All the mines have shut down, however, so this should be an easy project to pe
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