James Passin, Firebird Management, on Gold, Uranium, and What’s Going on
in Armenia…
Kitco (Bullion Dealers) Exclusive Commentaries
The Gold Report
July 18, 2005
The Gold Report sat down recently with James Passin of Firebird
Management LLC. Firebird manages over $1.2 billion in seven funds
dedicated to equity investment in emerging markets, with an emphasis on
the former Soviet Union and emerging Eastern Europe, and exotic sectors
worldwide. James joined Firebird in 1999 and launched Firebird Global
Fund in April of 2000, which he lead manages. He is the former director
of research at the investment newsletter Taipan and is an associate of
the Market Technicians Association.
TGR: It seems you have turned positive on gold, whereas you hadn’t been
before. What’s going on there?
JAMES: I like what is happening in terms of the de-coupling of gold
price and the dollar. I like the fact that there were several days when
the dollar was going up, and gold was going up significantly at the same
time. From my perspective, this is a sign of the next process, the next
leg, of the remonetarization of gold. I like gold, and I like gold
stocks as well, because the gold stocks have been, in my mind, lagging
behind the gold price. And, while gold companies still issue a lot of
gold paper, it’s below the rate that it was in the frenzy a year and a
half ago, which is about the time I was exiting many of my gold positions.
TGR: Could you give us some gold stocks that you like?
JAMES: From 2001 to 2003, I avoided playing the South African gold
mining companies, because I was very bullish on the Rand, and therefore
bearish on South African gold producers. During the last three months, I
began to accumulate South African gold producers because what we’re
seeing, for the first time, at least in this gold cycle, is the
sustained increase of gold in Rand terms. And I believe the Rand has
peaked. One of the companies I like is Gold Fields (JSE/NYSE-GFI)-I like
its strategic relationship with Norilsk Nickel in Russia. As far as the
more speculative, junior plays on gold, I will just mention a few. One
is Banro Corporation (BAA.v), which trades both on the Canadian Venture
Exchange and also on the American Stock Exchange. What’s exciting about
it is its large gold belt. According to an independent study by SRK,
their proved resources are above 10 million ounces, so it’s a very
important property. And I think the valuation is discounted because the
country is situated in the Democratic Republic of Congo. I have taken
two trips to the country over the last several years, and after paying
close attention to the political situation, I think the risk discount is
excessive, and the political trends of the country are very positive.
The likelihood that a major will want to either farm into part of the
property or acquire the company is very high. And it has excellent
management.
TGR: What’s brought the stock down since May?
JAMES: Well, equity markets have been weak, but Simon Village, formerly
a Managing Director of the World Gold Council, left the Council, and is
now the chairman of Banro. With his contacts, he could become chairman
of any gold junior that he wanted to, but he chose Banro. I think that
reflects the significant undervaluation of Banro’s assets, and the fact
that it’s sitting on a world-class gold asset.
So, going down the food chain even further, a very speculative gold
junior that I like is a company called Global Gold Corporation
(GBGD:OTCBB). The stock is about 75 cents, and there are about 13
million shares outstanding. I should mention that my colleague sits on
the board of Global Gold, and that Firebird owns, on a fully diluted
basis, more than 40% of the company. But Global Gold is very
interesting. I think that the valuation of the company is ridiculous.
Global Gold owns a 100% of a mine in Armenia, called Hankavan, which
according to the Soviet study looks to be a world-class mine. And I was
actually on the property in Armenia about six weeks ago. There’s a lot
of potential to consolidate properties in Armenia.
I am very excited about the prospects for Armenia. There’s been
gold-mining in Armenia for thousands of years; in fact, there are
Roman-era gold mining sites through all of Armenia. Geologists in the
region are very excited about Armenia’s mineral prospects. And the
fellow running Global Gold is the head of the American-Armenian Lobby
Organization, so he’s very connected to the Armenian government. Armenia
is important because it’s sitting in the middle of the Caucasian region,
right underneath the Republic of Georgia. And the republic of Georgia is
the host portion of this important new oil pipeline, called the
Baku-Ceyhan Oil Pipeline, which is the first oil pipeline to take oil
directly from the Caspian Sea and deliver it to the Mediterranean. And
it’s a strategically important pipeline, because it bypasses the Turkish
straits, which have been an environmental bottleneck because it takes a
long time for tankers to get through the strait. And it also bypasses
Russian territory, so it shifts the balance of power in terms of the
transportation of oil from the Caspian Sea. And that pipeline just
filled with oil very recently. And so the stability of Armenia, which is
surrounded by historic enemies-on one side, Azerbaijan, and then on the
other side, Turkey-is strategically important to European and to the
United States governments. I am expecting increased financial support
for Armenian projects, including mining projects.
TGR: Can we talk a bit about uranium?
JAMES: Absolutely. Uranium is something that I have been following very
closely since 2001 when I first started taking positions in uranium
companies. In 2001 I became a uranium bug; I looked at the fundamentals,
the supply and demand balance, the fact at that time that the 25-year
bear market had destroyed the uranium mining industry, while inventories
held by utilities were approaching record low levels. At the same time,
there was a physical shortage, Russia was becoming financially and
politically reinvigorated by rising oil production, the oil price was
rising, and President Putin wanted to insure Russia’s political and
historical role in the world.
I came to the conclusion that the United States, or at least the
utilities in the U.S., were becoming dangerously reliant on uranium
equivalent extracted from dismantled strategic warheads. I don’t believe
that this agreement, which comes to an end in 2012, will be renewed,
which means that there is a looming massive supply problem for the
nuclear utilities.
TGR: A further supply problem-don’t we have one already?
JAMES: We have one already; it’s just adding fuel to the fire.
Furthermore, there seems to be new political support for nuclear power.
There’s a bill in front of Congress that will result in significant tax
credits for the construction of new nuclear power plants. Moreover,
there’s pressure on the United States to ratify the Kyoto protocol,
which-were the United States to sign it-would mandate the reduction of
greenhouse gas emissions, which would mean that there’s going to be
pressure to increase nuclear power generation’s share of total
electricity generation in the U.S. And I think that’s a trend that we’re
going to see globally. So, I’m very bullish on nuclear power.
More nuclear power plants may be several decades away, but eventually
there will need to be enough uranium to meet the demands of the new
customers who will be in the market. And there will need to be a
stockpiling in anticipation of this demand, so I only see ann increasing
need for more uranium.
Now, this is the insight I had in 2001, and I was fortunate enough to
get into uranium stocks at very low prices. In the first quarter of this
year, the uranium stocks peaked when a “uranium frenzy” or a “uranium
bubble” developed, and prices became too high. I was lucky enough to
unload some of my uranium positions earlier this year. But now I am
starting to buy them back. And a lot of the small uranium stocks are
down as much as 30 to 50 percent from where they were during the
February bubble peak. I think this represents real value, because the
uranium price is materially higher than it was at that time. And there’s
just more and more political momentum for nuclear power.
TGR: So, the play here is in the uranium producers, explorers. . .?
JAMES: The play is in uranium producers and the uranium explorers. . .
TGR: I assume you’re geographically diverse in terms of your holdings?
JAMES: One of the most exciting ways to play uranium is Australian.
Australia’s uranium deposits are not as high grade as some of the
uranium deposits in Canada, but they are substantial. And the uranium
mining industry in Australia has been hurt by the policy of some of the
state governments, as well as the federal government. Now the federal
government has shifted around its policy, but Australians are very
environmentally conscious in general, so the opinions of the leaders in
the environmental movement are very influential. And for a long time,
the environmental movement was completely opposed to uranium mining.
Recently there has a wing of the environmental movement that’s become
pro-nuclear and embraces it as the only realistic means of addressing
warming. So, the opinion of the environmentalists is beginning to
splinter, which has created an opening for a change of mood in Australia.
The State of Queensland has had a ban on uranium mining for some time,
and that was a big problem for Summit Resources (SMM: ASX, NZSE). Summit
Resources owns a 50% interest in the Valhalla Mine in Queensland, which
is a world-class uranium mine with resources of about 70 million pounds.
I think that can be upgraded through a very low risk exploration
program. They stopped exploring after the Queensland government made it
clear that it wasn’t going to issue the uranium mining permits.
There is pressure on Queensland, which is one of the last states of
Australia to still have an outright ban on uranium mining, to lift the
ban. What’s very ironic is that Queensland is a big coal producer-I find
it mind-boggling that it’s fine to mine coal, but uranium mining is not
going to be allowed. It’s inevitable that the state of Queensland is
going to drop its ban on uranium mining. And the minute that that
happens, Summit Resources is going to increase in value significantly.
TGR: What do you ultimately is going to convince the Queensland
government to change their policy? Price?
JAMES: I am not an expert on Australian politics. I have the simple view
with respect to Summit that if uranium pricing gets high enough, and I
think uranium pricing is going to go a lot higher, then the economic
consequence of not permitting the mine that will be too much to bear.
There will be too much pressure on Queensland to back down. There are
articles every day now in major Australian newspapers urging Queensland
to abandon its ban on uranium mining. I think it’s destiny. And right
now there’s some optimism in the market that the permit will be granted,
but there is not conviction in the market that this will happen. I think
there is significant upside in a stock.
And what’s very exciting is Summit has some legacy exploration property
near the Valhalla Mine that it never bothered to do any work on. But as
soon as the ban is terminated, Summit can do a lot of low-risk
exploration that will significantly increase the value of its property.
I like Summit a lot more than a lot of other uranium juniors because it
has a real tangible asset that’s just waiting for the government to
change its ridiculous policy, as opposed to being a pure exploration story.
In Canada one stock that I like a lot is an exploration play-but it does
have some real assets as well-is UEX Corporation (UEX.TO). I think it’s
very exciting; they have a lot of properties that look very, very
promising in the Athabasca Basin, which is an area in Canada that has
the really high grade uranium mines like McArthur River, with some of
the most valuable uranium deposits in the world.
One of the numerous things I like about UEX is the fact that it’s backed
up by Cameco Corporation, the largest uranium miner in the world, and a
strategic shareholder of UEX Corp. I also like the fact that UEX is very
close to COGEMA, which is a subsidiary of Areva Group, the French
nuclear power giant. I am also a shareholder of Areva, so I pay close
attention to what is going on with Areva and COGEMA. I like the
relationships that UEX has with the uranium giants. The company has been
able to raise sufficient financing to try to create value on its various
exploration projects.
It’s a different type of play than Summit, but I still think it’s very
interesting, and the stock has proven to be, ultimately over the course
of time, a leveraged way to bet on a rising uranium price.
TGR: Have you any other names?
JAMES: Aflease Gold and Uranium Resources Limited in South Africa (AFL),
which trades on the Johannesburg Stock Exchange. It also has an ADR
(AFLUY.bk ), which trades in the United States, but there’s not much
liquidity in the ADR. It’s got a large uranium resource in South Africa.
It’s low grade, but it’s large. Gold is a by-product. It also has some
small gold properties. It’s basically a broken gold stock that revived
itself based on its large uranium properties. But I think it’s a real
value because of the size of its uranium properties.
TGR: If the Rand has peaked, that’s got to be good for uranium producers
as well as gold producers.
JAMES: Absolutely. I think that Aflease is a great way to bet on the Rand.
TGR: Back to Canada, what about Hornby Bay?
JAMES: I like Hornby Bay (HBE – TSXV). I am a significant shareholder of
Hornby Bay. I would have to say that this is down the food chain to the
extent that it is a pure exploration company. But its claims are very
strategically located in the Hornby Bay Basin, which is similar to the
Athabasca Basin. The Hornby Bay Basin is very close to Eldorado, which
was the oldest uranium mine in Canada. The uranium extracted from the
Eldorado mine went into the Manhattan Project, back during the
construction of the first atomic weapons.
So, there’s a lot of history of uranium mining in the area. And I think
that there’s a lot of very promising targets in their specific claims.
Although this is very risky, there is also tremendous upside, because if
I am right on the price of uranium and Hornby Bay succeeds in finding
where the source of various anomalies are and targets in on an economic
uranium deposit, then the stock is going to increase significantly.
TGR: Where do you think uranium is going? To me, this last move, when
both the spot and the contract price rose up to $29 to $30, was
partially created by this Uranium Participation Corp. that Sprott put
together with Dennison. Where do you see it going – what’s going to take
it higher?
JAMES: I think that the equilibrium price for uranium is somewhere in
the $40 to $50 range; I think that if uranium sustained itself within
the $40 to $50 range, it would be in a price threshold that would enable
the financing of low-grade projects in the Western United States, in
Australia, Kazakhstan, and Mongolia. The $40 to $50 price would help
alleviate the supply demand balance-not immediately, but over a 10- to
20-year period. I think that the $40 to $50 price threshold for uranium
is the magic number that will enable the production from low grade
deposits to increase. Uranium Participation Corp. was responsible, in
part, for the recent increase in the spot uranium. But the fact that the
uranium prices have sustained this level is a sign that the price is not
high enough. Nothing has changed in terms of the supply and demand
balance. The only thing that has changed is that this vehicle created by
Sprott and Dennison has proven that it’s possible for speculators to
enter the market and horde physical uranium, and this has changed the
nature of uranium trading because it’s never happened before in the
entire history of uranium trading.
Uranium trading is backwards. I guess you would call it pre-18th century
Amsterdam or whenever they started trading coffee futures and various
commodity futures. There are contracts between industry participants,
but there’s very little speculative participation. The pioneers, not
only Sprott and Dennison, but also Adit Capital, a hedge fund, have
purchased physical uranium, permanently changing the structure of the
uranium market. And I believe that the utilities have to be worried-not
about the recent speculative buying of Uranium Participation Corp., but
the speculative buying that might be done by other parties that could
potentially come to the market in the future; parties with deeper
pockets that are more aggressive, could cause a real corner in the
uranium price.
And then the $40 to $50 threshold that I am talking about will prove to
be conservative because there could be a great squeeze, especially if it
becomes clear that Russia is going to cut off the tap. I think there are
a number of circumstances under which the uranium price could far exceed
the price of the $40 to $50 range, at least on a short-term basis.
TGR: Do you see a specific event that will get it from $0 to $40 to $50?
JAMES: I think it will trend higher over time. Whatever particular
catalyst causes short-term movements I am really not concerned about.
The whole uranium supply chain is very tight. There is a lot that could
go wrong in terms of the delivery of supply.
JAMES: The price of physical uranium is such a minute component of the
overall operating cost of generating nuclear power that it’s really
irrelevant. The utilities will allow a higher price because there they
know there has to be a reasonable price for profitable uranium mining
and exploration.
TGR: Do you see uranium stocks trading like gold stocks or like energy
stocks?
JAMES: That’s a great question. I think that they should trade like
energy stocks.
TGR: I agree.
JAMES: But I think, at least our Canadian brethren see them trading and
think of them as mining stocks.
TGR: You mentioned gold decoupling from the dollar. Do you see at a
certain point, with oil prices rising, that it bodes well for uranium as
well?
JAMES: Absolutely. Strategically, with oil reaching new highs, and
geopolitically with the Gulf and Iraq-the will to support nuclear power
is only going to grow. Uranium, as an important alternate energy story
with powerful political momentum, has the possibility of becoming a
must-own component of a portfolio. I absolutely think that the uranium
stocks will begin to trade more like energy stocks than like mining
stocks, although, of course, both oil and mining stocks tend to be
somewhat correlated. But that’s another question.
*****
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