The resource markets have weathered some death defying ups and downs lately. But Michael Ballanger, senior investment advisor with Toronto-based Union Securities, is looking for a renewed period of growth in the TSX Venture Composite Index. Is it too soon to see such a heady rebound? In this exclusive interview with The Gold Report,Ballanger makes his case for history repeating itself.
The Gold Report: The TSX Venture Composite Index reached a bottom of around 1,300 in October after it more than tripled from 2009 to early 2011. You believe the index is poised for another two-year gain. It's an interesting theory. Why should we believe that history will more or less repeat itself so quickly?
Michael Ballanger: It's all about mathematics. However, underneath that forecast lurks a much deeper premise. I'm a member of a very small minority that believes we're now in the continuation of a massive bull market in resources. The TSX Venture Exchange has had one sharp correction since 2008. It's now resuming its uptrend.
I'm also looking for a resurgence of the "manic phase" of markets. During the last manic phase in 1978–1981, the Vancouver Stock Exchange quadrupled in an 18-month period as gold went into its final ascendancy.
TGR: What were some characteristics of the market in the '70s that are comparable to what's happening now?
MB: Psychologically there are a lot of similarities to 1978 because investors have been behaving like scared rabbits. Fund managers were throwing things under the bus in October that I couldn't believe. It was mass liquidation for no reason. It was a generational buying opportunity.
TGR: There seems to be a lot more global instability now. Are you expecting "black swan" events in the next few years that could create further instability?
MB: I'm not looking for Armageddon at all. I think we are going to have a really good two-year run. There will be bumps along the way as the world financial system irons out its issues. Nothing cures debt levels better than inflation and growth, however.
TGR: This does seem to be a very friendly environment for commodity prices and resource companies. But aren't we just one negative macroeconomic data point away from being right back where we were?
MB: The problem with the media is that it continues to use European and North American data as its guidepost. Developing nations are creating demand for resources like I've never seen before. The population is growing and resources are being used at an increasing rate despite Europe, Japan and the U.S. struggling.
A lot of these populations approach gold and silver differently than the West does. They're not looking to trade it. It is part of their legacy that they pass down to generations. That's where the demand for the precious metals will come from. It's a shift in demand.
TGR: Most of the junior mining companies listed on the TSX Venture Exchange are gold companies. If you believe the TSX Venture Index is going up, you have to believe the gold price will head higher, too. What's your trading range for gold in 2012?
MB: Industrial metals, like zinc, copper and nickel, are going to outperform the precious metals in 2012. Just as the base metals got hammered violently in '08, the same occurred in the latter half of '11. The resultant rebound should show a greater percentage move based on the global recovery.
Silver could outperform gold in 2012 due largely to the supply-and-demand situation. However, gold and silver could both take out their 2011 highs this year. Gold at $1,525/ounce (oz) and silver at $25/oz will be seen as the correction lows in this multi-decade bull market. Those are two levels I wouldn't want to see violated.
TGR: What's the upside for gold and silver prices?
MB: Gold and silver could both take out their 2011 highs, but I don't like picking numbers. It just gets meaningless. It is an absolute breeding ground for gold and silver bugs. Not that I'm one of them, but it is a very favorable environment for the metals. If you're on the right side of the trend, you make money in the junior mining stocks.
TGR: You created a 2012 list of your top value plays. Could you tell our readers about some of those names?
MB: We emphasized Yukon stocks last spring and our two picks, Kaminak Gold Corp. (KAM:TSX.V) andATAC Resources Ltd. (ATC:TSX.V), hit record highs in July. The bright spot for this summer was the relatively superb performance of Tinka Resources Ltd. (TK:TSX.V; TLD:FSE; TKRFF:OTCPK), which closed 2011 above the July 2011 financing crisis of $0.35.
Another favorite that we've been involved with for four years and participated in multiple financings for is Explor Resources Inc. (EXS:TSX.V). It reported an NI 43-101-compliant 800,000 oz resource recently. It has been one of our top five companies since 2007.
Kaminak is still our darling of the Yukon. There's a lot of wannabes running around, but Kaminak is superbly run by Rob Carpenter.
Our junior penny stock in the Yukon is Stakeholder Gold Corp. (SRC:TSX.V). It is sandwiched between Kaminak and Kinross Gold Corp. (K:TSX.V; KGC:NYSE) in the Ballarat Creek area, which is located on Thistle Mountain.
TGR: Tinka's Colquipucro silver-lead-zinc project in Peru looks promising. What do you know about what's happening there?
MB: I must confess, Tinka has been a nice surprise. It was orphaned after the 2008 meltdown despite having drilled off an NI 43-101-compliant silver resource of 20.3 million ounces (Moz). It has two drills working about 1 kilometer apart at its deposit and at a new discovery, Ayawilca.
It's all open-pittable. Just move the top of the rock off, throw it on a crusher and you're away to the races. It's an engineer's dream. The first game plan is to get that resource up to north of 30 Moz. Now the blue sky becomes what is happening at depth underneath this oxide cap.
Just to the south is Cerro de Pasco, which is owned by Peruvian mining company Volcan Compania Minera SAA. It's the fourth biggest mine in Peru, one of the largest in South America and it is a massive epithermal. What's interesting about Cerro de Pasco is that the mineral rhodochrosite is prevalent there. Rhodochrosite isn't prevalent except in an epithermal. Tinka recently indicated that it has rhodochrosite at Ayawilca. There isn't enough drilling into it yet to confirm it's an epithermal, but Ayawilca's blue sky just lights up like a Christmas tree when you look at it.
TGR: How does its valuation compare with other companies at similar stages?
MB: It's too early to value Ayawilca, but you can value Tinka's silver. Tinka's got 20.3 Moz Inferred, but I have confidence it's going to move to 30 Moz.
With a rising silver price and the investment public warming to juniors again, it could reach a market cap of around $60–75 million (M) up from $38M today. That's based on the known. The unknown is where you accelerate your return. Ayawilca is the blue sky. If Mother Nature and Lady Luck bless us then we're going to be looking at the Ayawilca zone adding a lot more upside in the future.
TGR: Kaminak just recently optioned some potash properties in Michigan. Do you have any idea why?
MB: Shareholder value. Rob Carpenter knows that the ultimate rate of return for Kaminak is going to be the Coffee gold project in the Yukon. Kaminak has other assets that aren't being paid much attention. The best way to get shareholder value out of those is to let somebody else go to work on them while maintaining focus on a flagship property like Coffee. Let other people bear the risk and costs of exploring those properties.
TGR: Kaminak and ATAC shares have started to climb higher this year. ATAC reported a nice intersection in early December of 44 meters at about 4.5 grams/ton gold at its Osiris zone. Is ATAC going to return to its 2011 high?
MB: When a stock like ATAC, which moved to $10/share in July, is thrown irreverently under a bus, I have to ask why. I still can't figure that out. It wasn't the retail public. It had to be quasi-professional investors. ATAC has an excellent chance to get back to the midrange between where it bottomed around $2/share and its high of $10/share last year.
I think Kaminak is a takeover waiting to happen. The way that the Coffee property is being developed, there could be 6–8 Moz there. It has only drilled off 15% of the land package.
TGR: Stakeholder Gold is a micro-cap company with a market cap of just a few million dollars. Are they going to be drilling anything soon?
MB: Stakeholder had originally planned to drill the Ballarat property in July, but through some unfortunate developments it wasn't able to. I've looked at all the soil and trenching analysis. Various creeks flow down the sides of the mountain into the Yukon River. Where theses creeks flow is where the Klondike Gold Rush was. The source of that mineralization was in the upper elevation where Stakeholder's Ballarat property is. Stakeholder has excellent soils. It has good trenching results. It has two anomalies there. That property's got to get drilled. It's got every bit as much of what I call "geochem evidence" as Kaminak did before it drilled the Coffee property.
Yes, Stakeholder is a micro cap. But some Yukon juniors had $35M market caps when they didn't have any discoveries two years ago. I view Stakeholder as a bottom-feeding expedition now that it has dropped down to $5M. Stakeholder has got an excellent land package. It's compelling. That's why we like it.
TGR: Some market pundits feel that the junior exploration and mining sector has been hurt over the past decade as it moves from being a retail investor sector to an institutional investor sector.
A share price would jump on news and the retail investor would cash out and watch the stock come back down and buy back in. The retail investor would make money two or three times while supporting the stock price. Now the institutional investors get in, make their money and get out and stay out. What are your thoughts on that?
MB: If a management group executes its plan, the company gets rewarded whether it has an institutional, retail or a combination shareholder base. Take Kaminak as an example. Despite the recent correction, Kaminak has been a very successful company.
People have asked me, "Why aren't the juniors attracting the same kind of dominance they had in the '90s and the late '70s?" There are other reasons than the institutional involvement, such as the advent of exchange traded funds (ETFs). I'm going to get into hot water, but I absolutely detest ETFs. They're a financial product developed by and for the express benefit of the financial industry as opposed to the investor. I don't believe in them, I don't agree with them and I don't use them.
The problem with ETFs is they create this risk on/risk off attitude that the junior mining sector is a basket and it doesn't matter what Tinka's got or Explor's got or Kaminak's got. That's what happened in the latter part of 2011. Investors said, "Oh, we better get out! We'll sell everything." They didn't care that Kaminak's last three drill holes were spectacular. It didn't matter. They sell their ETF associated with junior mining companies and all the companies that are covered by that ETF get blown off.
TGR: Do you have any parting thoughts for us on this sector?
MB: In 2009, I predicted higher gold and silver prices and a booming mania-driven junior mining sector. We got the move in the precious metals. We have yet to experience anything close to the mania that we saw in 1978–1980. The TSX Venture Exchange traded to a new low on Oct. 4 relative to the gold price. It was absurd by any measure. Companies are taking the risks to find new deposits. That's precisely where the big upside is moving forward into 2012.
TGR: Thanks, Michael.
Michael Ballanger currently serves as an investment advisor at Union Securities, Ltd. He joined the investment industry in 1977 with McLeod Young Weir Ltd. His substantial background in financing junior resource companies is further informed by his 30 years of experience as a junior mining and exploration specialist. Ballanger earned a Bachelor of Science in finance and a Bachelor of Arts in marketing from Saint Louis University.
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