The Gospel of Gold According to Peter: Peter Grandich

The Gold Report: Going back to your time as a fund manager in the '80s on Wall Street, how does what was happening then compare with what is happening now?

Peter Grandich: It's dramatically different. The biggest change is that the game is stacked against the average investor more so than at any other time. For example, the mortgage debacle a few years ago was equivalent to all the big car companies manufacturing cars that they knew were going to crash and buying life insurance on the people that they sold the cars to knowing that they would die so they could collect on both ends. That's what the financial institutions did. Those people are still in charge of the game. I take exception when I hear people talking as if the game is fair and the average person has a reasonable chance.

TGR: One revelation in your book is that your struggles led you to a belief in Christianity. Does your spiritual life influence your investment decisions?

PG: Yes. There's far less chance of me pushing the envelope and touching the gray area—or even going into the red area.

TGR: Another theme in the book is about being wrong and accepting that as an investor. Could you talk about the psychological pitfalls of investing?

PG: I could write a book about losing. The ultimate crime of investing is not being wrong. The crime is staying wrong and that happens to a lot of investors. They institute the worst investment strategy and simply hope things will change. Hope is a wonderful spiritual strategy but a very bad investment strategy.

The majority of investors usually can withstand the financial risk that they're taking, but greatly underestimate the mental anguish that can come from the downside of what their investments or speculations/gambling will bring. Wall Street created the word "speculating" so that it doesn't have to use the word "gambling," but it's gambling. You have to be prepared to lose part or all your money when you gamble and I don't think most investors are. They think of the best possible scenario and never think of the worst.

Most investors don't operate with a real plan either. That's why they lose over time because they don't have a written strategy and instead choose emotions and day-to-day, seat-of-their-pants thinking.

TGR: At the Cambridge House investment conference in Vancouver, you said that you don't look fondly upon the economic outlook for the U.S., but you remain bullish on some foreign markets, especially China. China's markets lack transparency and even some Chinese companies listed on North American markets have proven to be less than trustworthy, such as Chinese timber producer Sino-Forest Corp. Are you sending investors into the lion's den?

PG: It's foolhardy to think that the U.S. is the safest place and China's the worst place to invest in equities. There's no question that China's going through some growing pains. But there are also shady things that go on here in the U.S. that don't get reported or are twisted.

It's no longer a question of if China will become the world's largest economic power, but when. To not have exposure to Chinese equities over the next several years would be like not getting exposure to U.S. equities during our greatest growth in markets from the '50s–'90s. And right behind China will follow India. If we don't have exposure to China and India and the companies that do business there over the long term, we're shortchanging ourselves.

TGR: How should investors get exposure to China without getting exposed?

PG: The simplest, safest way is through exchange-traded funds or mutual funds that specialize in a group of stocks to avoid getting caught in one particular stock or style of business.

TGR: What are some Chinese investment themes that perhaps investors can piggyback on?

PG: China has a tremendous need for resources. That appetite is not going to disappear anytime soon. It's underpinning the commodities bull market, in particular steel and iron ore.

TGR: I read a report recently that said China was seeking alternative sources of iron ore for its smelters as part of an effort to limit its reliance on iron ore from Australia and Brazil. China's looking to northeastern Canada in the Labrador Trough. Do you know anything about that?

PG: A couple of my clients are there and some of my largest personal holdings are there. The Labrador Trough is probably the most interesting play in the world right now. A Chinese company recently did a big deal with Adriana Resources Inc. TSX up there.

I'm very bullish on Alderon Iron Ore Corp. TSX. I call it the son of Consolidated Thompson because it has many of the people who were successful at Consolidated Thompson and is following Consolidated's path, but in a more expedited way. I believe it's going to go the same way and be taken over within 12 months.

TGR: Alderon has the Kami iron ore project near to Consolidated Thompson's Bloom Lake deposit in the Labrador Trough. A recent preliminary economic assessment (PEA) on the project reported a pre-tax net present value (NPV) of just above $3 billion (B). How does the Kami deposit compare with its peers?

PG: Alderon should be able to develop Kami at a lower cost, which is key in that area. There's no question that there's a lot of iron ore up there, but success is a question of cost, efficiency and effectiveness. The expectation is that it will get port access in a relatively short period. The last missing ingredient will be an offtake agreement with a Chinese company, and the company seems to be suggesting that it's in advanced talks. All in all, the next big deal in that area appears to be Alderon.

A year from now, Alderon could be worth $10–12/share based on what Consolidated Thompson was worth. It's a legitimate target to have in the back of our minds.

TGR: Are there any other iron juniors that you're following?

PG: A big story on the exploration front is going to be Cap-Ex Ventures Ltd. TSX. I was able to see Cap-Ex's plans for its drill program in 2012 and it's just unbelievable. This deposit already looks like it's much bigger than anything else there. The company has four to six drills going. It's an interesting story. There is also Zone Resources Inc. TSX, a little company that is very low priced, very early stage and high risk. Its recent results from its 2011 program indicate that it could be into something significant. There is some serious talk that Quebec's government and the Chinese may expand infrastructure in the far north, where there presently isn't much now.

TGR: You expect the U.S. dollar to weaken once attention shifts away from the troubled euro. At that point, do you expect gold to have a sizeable run?

PG: I have called this the mother of all gold bull markets. I don't think we'll see a bull market like this again in our lifetime. However, it's also been the most stealth bull market. North Americans, and particularly Americans, have shown little or no participation, yet the price has increased five to six fold. All the fundamentals remain in place: central banks have gone from big sellers to net buyers and major producers don't forward sell much anymore.

The news that the Fed plans to continue flooding the system with cheap paper is just another example of why gold's path of least resistance is to the upside. I believe an all-time high, not just a nominal high, but adjusted for inflation, could reach $2,350–2,500/ounce (oz).

TGR: Which of your junior gold equities that you follow have recent news that could act as catalysts?

PG: Of all the companies that I am involved with, just about every one is an undervalued junior because they have multiple, advanced-stage exploration projects in either prefeasibility or feasibility studies. Their values are far more than their market caps. For instance, if Sunridge Gold Corp.'s TSX project wasn't in Eritrea, this stock would already be many times its current price.

TGR: Wouldn't it then be taken out?

PG: Yes. The market is discounting this project somewhere between 80% and 99% because it's in Eritrea. However, the country risk is even less than what it was. The U.N. sanctions against the country ended up getting watered down. The Chinese have announced a major investment in Eritrea and are talking about doing more.

It's extremely good for Sunridge and bullish for the bigger company in Eritrea at the moment, Nevsun Resources Ltd. TSX. I would not put it past Nevsun to acquire it, but I would think Nevsun would wait until Sunridge's projects are more advanced. Once Sunridge's studies are in, Nevsun, another company or Sunridge will develop it. It's close to getting updated resources on multiple projects, so it's just too compelling.

Even though they've moved up somewhat, Sunridge shares are still substantially lower than their 52-week high. This is a key year for Sunridge. It's gone through tough times. Its stock went down to pennies on the dollar. If it demonstrates what I think it's going to in these reports, no matter that it's in Eritrea, it should have a much higher valuation.

Some people that I've met who are familiar with Sunridge believe its Emba Derho zinc-gold-copper VMS deposit is bigger than Nevsun's Bisha project. That says a lot.

TGR: Could Nevsun be taken out by something like Rio Alto Mining Ltd. TSX, BHP Billiton Ltd. NYSE or a Chinese company?

PG: Both Nevsun and Sunridge could be gobbled up by a bigger company. But Nevsun could also be interested by something that's worth 5 to 10 times more than its current value with the advantage of being in its own backyard.

Also, Cliff Davis, the chief executive of Nevsun, and the principals of Sunridge go back a long time. They have cooperated on a lot of things. But no matter what happens, Sunridge's stock is extremely cheap.

TGR: Many retail investors hope that they will exit their junior resource equity positions via a takeover at a considerable premium. Shareholders of Minefinders Corp. TSX recently got their wish when Pan American Silver Corp. TSX made a $1.5B takeover bid in January. Did that news bolster your hopes of takeovers for other companies with properties in Mexico, like Timmins Gold Corp. TSX and Geologix Explorations Inc. TSX?

PG: I believe that they're both prime takeover candidates. The difference is that only Timmins could actually be an acquirer, as well as be acquired.

TGR: Pan American is putting a lot of stock in Mexico. Obviously, Minefinders has had some problems with its Dolores operation, but it's going to bring its expertise to bear on a promising deposit.

Timmins Gold had production of about 21,500 oz in Q411 from its San Francisco mine. But its recoveries were only 65%, up from about 50% in Q311. Do you have any reservations about Timmins because of its low recoveries?

PG: No. Timmins started from scratch and was producing within three years during the worst financial crisis in the modern era. CEO Bruce Bragagnolo should be congratulated. The company seems to be quite assured that it has the heap leaching all worked out. It is quite confident that it will reach 100,000 oz in 2012.

TGR: Geologix continues to drill the Tepal project in Mexico, which is really a copper play. Drilling has revealed that there's significant mineralization at depth. That could lead to an underground operation after the open pit is completed. What could that do to the share price?

PG: The share price is just too cheap. Regardless of that, the drilling news indicates that it could have something bigger. But by the time the reports start to come together in the spring, Geologix may not be around. It could become an acquisition target before it has a chance to be reasonably priced. That's not a problem for those of us who entered recently, but it may not get the full value that it wants.

So many good, advanced-stage exploration projects were beaten down in 2011—some to 80% below their 52-week highs. The Geologixs of the world are on the lists of the majors because the majors still struggle with replenishing resources. Mexico, despite its problems with crime, is still a very favorable mining district without many of the headaches some other areas of the world have.

TGR: Do you have any other stories you'd like to tell us about today?

PG: There is one company: Excelsior Mining Corp. TSX, a copper project in Arizona. It's my largest holding, so I'm speaking my book. It's incredibly cheap, but once management puts a couple of things in place, it's going to tell the story in a big way and I hope the stock will react. It's truly an unknown story right now. It could be worth a lot more than it currently is.

TGR: Its primary project is North Star, where it is doing in-situ recovery. What are your thoughts on that method of copper recovery?

PG: It's safe and environmentally friendly, but people don't understand it. Another company has run into some issues with part of its project being close to a town and there's been a push to not allow it to have permits. The good news for Excelsior is that it's truly out in God's country. There's no situation like that facing it.

TGR: The PEA stated an NPV of $480M with an internal rate of return of 34%. Would you like to see that a bit higher?

PG: Making money at about $0.60 copper costs is livable. There still needs to be a better understanding of the deposit, metallurgy and exploration potential, too. Because of the style of the management team, I anticipate that this won't end up being a one-project company.

TGR: Any parting thoughts for us today, Peter?

PG: The mother of all gold bull markets remains intact. The bears have once again been bloodied and they'll go into hiding until we go through $2,000/oz and then they'll come out again. Then the media will flock to them to tell us for the 19th time why gold has topped out.

TGR: Thanks for sharing your forecast.

Financial Adviser and Market Analyst Peter Grandich started publishing The Grandich Letter—now a blog—without a high school diploma or even a day of formal training. His ability to interpret and forecast financial happenings, which once earned him the moniker "Wall Street Whiz Kid," has led to hundreds of media interviews. He is regarded as one of the world's foremost market strategists. He's also published a new book called Confessions of a Wall Street Whiz Kid.

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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/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: Alderon Iron Ore Corp., Geologix Explorations Inc., Sunridge Gold Corp., Timmins Gold Corp. Streetwise Reports does not accept stock in exchange for services.
3) Peter Grandich: I personally and/or my family own shares of the following companies mentioned in this interview: Alderon Iron Ore Corp., Cap-Ex Ventures Ltd., Excelsior Mining Corp., Geologix Exploration Inc., Sunridge Gold Corp. and Zone Resources Inc. I personally and/or my family am paid by the following companies mentioned in this interview: Alderon Iron Ore Corp., Cap-Ex Ventures Ltd., Excelsior Mining Corp., Geologix Explorations Inc., Sunridge Gold Corp, Zone Resources Inc., Timmins Gold Corp. I was not paid by Streetwise for participating in this story.

(Companies Mentioned: ADI:TSX.V; ANARF:OTCBB; A7R:FSE, ADV:TSX; ALDFF:OTCQX, CEV:TSX.V, MIN:TSX.V, GIX:TSX, NSU:TSX; NSU:NYSE.A, SGC:TSX.V, TMM:TSX.V; TMM:NYSE.A, ZNR:TSX.V; 7ZR.F:FSE)