Despite Jay Taylor, editor of J Taylor’s Gold, Energy & Tech Stocks newsletter, telling us that he’s more or less given up on gold (see Part 1 of our interview here), he still sees select gold stocks that could thrive in this depressed environment. But what really worries him is the big economic picture that could make 2008 seem like child’s play.
Jay Taylor: Will gold ever come back? Well, yes, I guess if we survive as a human race. I think natural laws of economics will prevail, ultimately. We saw that from the fall of the Soviet Union, although we didn’t learn anything from it. I’m really just sort of giving up gold, for the time being, and looking to do other things. And so part of the strategy is to visit some interesting technologies in the energy sector. I’m also writing some covered calls on companies such as Newmont Mining (NYSE: NEM), or GAMCO is a fund that writes covered calls and pays out dividends of about 14% or so.
There are some companies here and there in the gold sector. One I just wrote about this past weekend is Dynacor Gold Mines Inc. (TSX: DNG). I really love that company. I’m sticking with it through thick and thin because it is earning money continuously. Dynacor is expanding and it will be opening its new Chala mill soon. The Company buys high-grade ore (about an ounce per ton) from the ‘Mom and Pop’ producers, it then processes this ore and builds in its margins. And it’s steady margins – if the price of gold goes down it affects Dynacor to a certain extent because the ‘Mom and Pops’ aren’t mining as aggressively, but it is still able to build in a nice margin through lower gold prices since those types of operations depend on cash flow from their mines. There are literally hundreds, if not several thousand, small miners in Peru. But, what’s really exciting about Dynacor is that it has its Tumipampa project, which it will come out with a NI-43-101. It has a historical resource of, I think, 600,000 or 700,000 ounces of high-grade gold (half an ounce per ton). Dynacor will be mining that themselves and processing it through the new Chala mill. And the Chala mill should substantially increase the Company’s profit margins for a host of reasons.
So Dynacor is really increasing its production, increasing its earnings in these bad markets and then the real upside, blue sky, part of this story has to do with discovery of a gold, copper-gold porphyry system that measures something like a kilometer and a half in length and three quarters of a kilometer in width is sort of the dimensions on surface. Some very high grades for copper and gold and perhaps some molybdenum as well. So if that extends to depth, that porphyry is in the middle of several other world class copper-gold porphyries, and it looks like they could be onto something very large there. So, Dynacor has cash flow, it has 37 million shares outstanding only, it doesn’t diluted, it just keeps earnings money. The majors have been very much interested in the guys around them there. Some of the biggest companies, HudBay Minerals is there as well as three or four household name majors that are mining copper and gold major projects right in that same area. That’s one I feel very confident about holding even in this horrible market.
SmallCapPower (SCP): In one of your past newsletters you wrote about a gold junior called Treasury Metals (TSX: TML)? Do you still like this Company?
Jay Taylor: Yes, I do. I think that’s a good example of the economics looking very strong there and the grades are quite high for an open pit deposit.
I think this U.S. equity market, though, is in big trouble. And when the general stock market starts to turn we may see some movement into gold and the gold stocks, possibly.
SCP: Many expect the Fed to raise interest rates at its December meeting? Do you think this will happen?
Jay Taylor: That’s a good question because I think they feel like they have to raise interest rates to keep some sort of credibility. I think that’s the only reason they’re doing it and I think that they’re fudging the numbers to a certain extent to make it look as though they’re justified in raising the numbers, raising interest rates. But when you are leveraged so much and you have so much of a cocaine habit or heroin habit, probably trying to go cold turkey is very difficult. If the stock market throws a ‘hissy fit’ or what I think is more telling might be in the low-grade debt markets where you’re seeing the triple-C rated interest rates climbing up to where they were in 2008 and 2009, it’s starting to tell you that the credit markets are very shaky I think right now. At some point in time if the credit markets start to go down and rates start to rise dramatically, I think that’s the canary in the coal mine, perhaps. It’s telling us that the global economy and the U.S. economy isn’t what it’s cracked up to be. I’m not sure we’ve seen the bottom in the oil prices yet. What people really don’t understand is that it’s not really ‘helicopter money’, not printed and tossed out of helicopters, it basically debt money. So, there’s debt behind every dollar – it’s a liability system. It’s not an asset system like gold and silver is, so the system retains its legitimacy only to the point where most people can repay their debts. Once they can’t, it can contract and go into the opposite direction very rapidly, and I think that what we are seeing is a global economy that’s on the verge of a collapse, an implosion if you will that could make the 2008, 2009 thing look like child’s play.
Disclosure: Treasury Metals (TSX: TML) is a client company of SmallCapPower/Ubika Research and has paid a fee for coverage.
