Angela Harmantas | SmallCapPower | December 21, 2015: "What's that old saying? I'm not a geologist, I just play one on TV," laughs Eric Coffin, co-founder and editor of commodities newsletter Hard Rock Advisories. Growing up in a mining town and running a consulting firm with his late brother David (who is HRA's co-founder), Coffin approaches his analyses with a slightly different viewpoint to other newsletters. A self-described sucker for discovery stories, his unique combination of practical and financial insights allowed him to foresee China's rise to prominence in the late 1990s and correctly predict a bull market in 2009. In an exclusive interview, Eric gives us a new perspective on US economic recovery, trends to watch in 2016 and a selection of companies with the potential to break out.
Can you give us a brief introduction to Hard Rock Advisories?
I'm looking for companies that have the potential to make 50-100%-plus gains over the next 12-24 months. I try to resist jumping on every trend that comes along and tend to be more cautious about sectors where I know you're ultimately dealing with a relatively small market, such as graphite and lithium. In markets like that you need to get product to market early because there is only room for a few winners. I like gold because discoveries tend to get a much better market reaction. HRA searches for these 3 types of companies through in-depth research, talking to management, combing news releases and then identifying these potential investment opportunities for its subscribers.
You've been a very successful investor with a strong track record, even calling bull markets when others were preparing for bearish times. What's been the secret to your success?
One thing that separated HRA over ten years ago was that we were early Sinophiles. I had family connections in China through my in laws and my brother and co-editor, David (Coffin), visited China in the late 1990s and witnessed firsthand the huge amount of infrastructure development taking place. We knew if development continued at that pace it would be difficult for the mining sector to keep up with Chinese demand.
Today, I always look for what I think are the best plays. My personal philosophy is to look at companies with resources or deposits that are viable at current prices, rather than having to count on commodity prices going up for the project to make sense. The project has to have a low cost base or high grade for me to be interested. I look for companies that could be a lowest cost-quartile producer.
How do you think China will impact commodity markets in 2016?
During the financial crisis in 2009 the drop was so quick and so ugly that everyone was convinced that it would be 5 years before the markets turned around; as it turned out, it was 5-6 months. Even though the US Fed gets most of the credit for turning things around in that time, we can really thank China's multi-trillion dollar infrastructure program.
Unfortunately I don't think we're in that situation this time, and I think the turnaround will take longer. China is announcing infrastructure programs and they haven't done much spending yet, so there is more demand to come, but unfortunately this is a situation where we're going to need to see supply response on the mining side which means we need to see mine closures to turn prices around.
A recent newsletter discussed what you saw as a "glimmer of hope" for base metals, which largely came at the expense of a weaker gold price. Can you elaborate on this?
If the economy is stronger then you'll see further increases in interest rates, which is automatically considered a negative for gold. That's an oversimplification - in fact, gold prices have risen quite nicely during periods of increasing interest rates. It comes down to what the "real" (adjusted for inflation) interest rates are. Negative real rates are good for commodities. If you accept the fact that the economy is going to do well globally and there will be a strong growth rate that will be a positive for base metals as they tend to be pro-cyclical. As far as the market is concerned, gold is anti-cyclical. I think we'll see a small uptick in inflation next year based on year- over-year comparables. I'm not sold on the idea that growth will strengthen next year yet however. We'll have to see how the market reacts to Fed moves.
Are you optimistic about base metal prices in 2016?
I don't think anything short of mine closures will satisfy bearish traders in the commodities space now. Once they see enough of that - we could see a 20-30% lift in prices in copper and zinc. It's not going to happen right away though as many miners are still in denial. If we get those production cuts I think we'll see a turn in zinc and copper prices quicker than most people expect. The 800-pound gorilla is still China. Nobody knows how much its economy is slowing. People are going to want to see some stability in China, because at the moment most people in the market don't have faith in Chinese government statistics. It will probably have to involve things like third party positive ratings on trade flows.
How do you think the gold price will perform over the next year or two?
We are extremely close to a bottom on the gold price, although I appear to be in the minority in this belief. I have seen many predictions that call for 120 on the US dollar index but I'm extremely skeptical that this is going to happen. If it does, it will vaporize the profits of three or four manufacturing sectors in the US and I don't see how markets in New York go up in that scenario. It is possible that we'll see a 15-20% move in the S&P next year, or a 15-20% move in the US currency, but we won't see both happening at the same time. I seem to be the only person who thinks that when the US Fed finally increases rates we'll see sell on news in the currency market but that's how traders trade. The Fed knows it's very late in the economic cycle to be starting rate increases. I think they should have pulled the trigger in early 2014. Janet Yellen has painted herself into a corner and seems committed to a 2015 rate increase. They'll likely stress after this meeting that they won't be increasing rates in every subsequent meetings, just to calm the market. If they succeed in calming fears, that should be a trigger to the large number of traders who are long on the dollar to take off some of those trades.
What trends are you looking at in 2016 and how might they impact the commodities market?
My concern is that the Fed waited too long to raise rates. I'm nervous that we'll see a top in the US market soon - we may have actually seen it already. We may see a major pullback in New York in early 2016, which vastly increases the odds of a US recession in the next 12-18 months. I don't think it's fair to lay every problem at the feet of the Feds but it was a mistake not to raise rates in early 2014. If traders continue to operate under the paradigm that the US is winning and everyone else is losing and run the S&P and US dollar up, it'll blow up in everyone's faces. I'm concerned that the market breadth is so narrow on the S&P - so much of the moves on the index are based on so few names right now. Debt traders are getting more bearish,widening the spread between equity and debt indices and that doesn't usually end well. Bond traders are good at detecting risks early. They are not always right but I've learned to pay attention to credit markets as imbalances often show there first. I'm watching the equity markets like a hawk because I think there's a high probability that we'll see a rollover. If that's the case, you'll want to be in gold because it will be an obvious beneficiary.
Are there any companies that you like at this time and why?
Goldquest is a "grade is king" story. I've followed them for a while and I really like the metrics on their Romero project in Dominican Republic. They have revised their earlier mine plan to come up with a lower-capital, higher-grade mining scenario. The management team used to run a company called Globestar, which discovered and put into production another gold-copper project in the DR, and are now doing the same at Romero. They know how to get a project across the finish line because they've done it successfully in the past. Goldquest also controls a large land position in the Tireo Belt. They are still exploring and I think there are more discoveries to be made.
Another company that I just started following is Energy Fuels. Despite being a uranium company, they have a lot of growth potential. They could easily increase production by 200-300%, but they're not planning to do that unless uranium prices improve so that they don't waste their resources just to break even. I think there will be a reasonably large move in the uranium price within a couple of years. Energy Fuels is one of the few uranium companies who are in a position to be able to take advantage of a price spike by locking in and delivering to longer term contracts by ramping up production fairly quickly when the time is right.
Kaminak Gold should deliver the feasibility study for its Coffee gold project in the Yukon in Q1 2016. Coffee is one of the highest grade undeveloped heap leachable gold resources in the world. It displays exceptional gold recoveries on run-of-mine ore. I'm expecting the study to verify Coffee as a high return moderate capex project that could attract either financing or a takeover offer. GoldQuest, Energy Fuels and Kaminak will be presenting at the Metals Investor Forum I'm hosting on January 23rd in Vancouver with Brent Cook and Gwen Preston.
Nevsun Resources operates arguably the best base metal mine in the world, in Eritrea. Bisha is an amazing deposit on many different levels. It's a copper producer and consequently is trading at 52-week lows. The market capitalization is around $700 million CAD but they have nearly $550 million in cash. They also have a new-ish discovery on the same project that they're currently drilling. The project is primarily a copper producer right now, but in the next year or two it will shift to being zinc-dominant. If Nevsun can keep adding cash to its working capital balance it will be a likely takeover candidate in the future even in a weak base metal environment.
Brave souls looking for a pure exploration play should consider SilverCrest Metals. It was spun out from SilverCrest Mines when that company merged with First Majestic, delivering a triple digit gain for HRA subscribers. SIL has very strong management, a tight share structure and is exploring in NW Mexico. Current cash on hand exceeds the company's market value and it will be drill testing two new projects in the next couple of months.
You are hosting the 2nd annual Metals Investor Forum in Vancouver in January. What makes this event different from the others and why should retail investors attend?
Yes, unlike most other resource investor conferences, the Metals Investor Forum brings you a curated list of companies (such as some of the companies I discussed above) followed by one or more of the newsletter editors that host it. It's invite-only for companies and the number of presenting companies is strictly limited. Just as importantly, it's invite only for attendees and we use a venue that limits the amount of total attendance. This is not about making a room look full. It's about getting the best list of presenting companies and an audience of subscribers that really want to hear their stories together. You can't just walk in. You need an invitation to register and attend.
After the success and positive feedback from our first event, we decided to add a winter event so that our attendees could benefit from our experts' advice during peak investment season. Serious investors have the rare opportunity to meet the companies' executives in person, ask the hard questions and really get to know the people managing your investment dollars firsthand.
Small Cap Power readers are invited to attend - click here now to register while seats are still available.