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Mexico's Silver Mines Shine

The Gold Report and 'Mexico Mike' Kachanovsky
Tuesday, March 13th

Precious metals analyst "Mexico Mike" Kachanovsky, who opines on junior mining and exploration stocks at smartinvestment.ca, is bearish on the world economy, but bullish on mining stocks. Although he has seen a recent rise in narco-violence, in this exclusive interview with The Gold Report, Kachanovsky urges sensible investors to continue to look at firms exploring Mexican metal deposits because the upside is enormous.


The Gold Report: Last September, you predicted gold would rise above $2,000/ounce (oz) by the end of the year. It didn't quite get there. What do you see as a price limit now?

Mike Kachanovsky: I also suggested that silver would hit $50/oz before the end of last year. I was dead wrong on that prediction as well. But my outlook hasn't changed. It's difficult to put a specific timeline on price trends. It's more important to have confidence that the factors that have contributed to the rise in both gold and silver prices for the last decade are still in effect. What we can accurately predict is how factors driving these prices will play out, while sometimes delays and countertrends and mini bear markets occur along the way.

We are currently trading at a sideways consolidation for gold in the $1,600–1,700/oz range and silver $30–35/oz. I am confident that we are going to see a lot higher than $2,000/oz gold and higher than $50/oz silver. Metal trading is volatile. But I feel very strongly that before the end of 2012, we'll see both of those levels surpassed.

TGR: You said in your September interview with The Gold Report that we're likely in a double-dip recession. Is the global economic situation improving now or worsening?

MK: The United States is still in a recession. A lot of people have tempered their bearish sentiment because the official data suggests that things are getting better. A case in point is the way unemployment is calculated. It appears that the unemployment rate is falling because of the way government agencies classify and organize the data. But there are more people looking for work now than there were at this time last year.

There is lasting recession in Europe. There's less spending. Gross domestic product is generally in decline. Worldwide, more people are unemployed and looking for work. That reality is not necessarily reflected in the data.

TGR: Are we headed into a triple-dip recession?

MK: No matter how you look at it, we are in a secular slump. It's a real challenge. Decades of malinvestment and debt buildup have to be resolved. It's going to take years before the economic foundation is reset for another period of growth.

TGR: Will another round of quantitative easing help?

MK: Quantitative easing has been in place all along, although it has not been officially acknowledged. But where's the money coming from? Interest rates are being held at artificially low levels. The Federal Reserve prints money by buying bonds to keep the interest rates low. That officials have not acknowledged this fact does not mean that it's not occurring.

TGR: How does quantitative easing affect mining stocks?

MK: In the wake of the first two rounds of quantitative easing, a lot of hot money started chasing natural resource stocks. Printing money contributes to inflation. One of the ways to protect against inflation is to be leveraged in commodities—real stuff, for lack of a better word. But the prices of oil and gas and gold and silver and metals and hard commodities rise in an inflationary environment. Speculators flock to resource stocks to protect against inflation and more inflation ensues.

TGR: What statistical indicators are key when looking at junior mining stocks?

MK: You can't talk about junior mining stocks as a group. There are three different subsectors. The first subsector is the early stage explorers who don't have any real assets. They control properties, and they're spending money on defining a deposit. The second subsector is the emerging producers. These companies have recently commenced mining, and they generate money from operations. The third subsector is the established producers who have been around for a few years. They are far less risky. They are earning lots of money in the current metals price environment. They have strong balance sheets. Investors need to be aware of those distinctions. The early stage companies are attractive only if you're going to be patient. It may take months or years before those stocks become market leaders.

TGR: Is it still possible to hit a homerun with an early stage company?

MK: Absolutely. History hasn't changed. But you must be very selective. Look for companies that have management teams in place that can survive difficult times. Look at the property base—is there a legitimate chance of finding a deposit that has the magnitude to allow for a rapid up cycle in value? Be careful, but leverage to that sector, because that's where the biggest money will come from eventually.

TGR: Your particular area of expertise is Mexico. How do you assess the physical and financial safety of mining ventures in Mexico, considering the drug wars?

MK: That's the big question about the Mexico stocks. There is a perception that things are spinning out of control there. I travel to Mexico regularly to visit mining projects. For sure, the violence has intensified. In the past, people's daily lives were not much affected by the gangs. Now rival gangs fight turf wars and the violence spills over into the daily lives of average people and businesses in Mexico. But, overall, it's still contained.

It is still safe to walk the streets at night. Well, you do need to have your head on your shoulders. If you're driving on a major highway at night, you are at risk of being carjacked. If you travel in certain parts of Mexico City, you're asking for trouble. The senior executives of mining companies could be targets for kidnapping. I'm not aware of that happening yet, but many executives travel with armed security guards. If you are cautious, you can go about your business safely.

TGR: Have the drug wars affected labor pools in the rural areas of Mexico?

MK: Often people who are working in the mines have close relatives who are working with the drug cartels in the hills, growing marijuana. It's unlikely that the drug gangs have a reason to target the local labor at the mine. People are very pragmatic. I've been in towns that are centers of the drug trade. In some ways, they are the safest places in all of Mexico, because the cartels won't allow anything to get out of line.

TGR: What do you like about the Mexican silver companies you follow?

MK: They have recurring production in place. They are profitable. They have fantastic leverage to the upside for future discovery. Their strong balance sheets enable them to look further afield, to make acquisitions of late-stage deposits that have been stalled and can't move forward without more money. They've just been huge winners.

TGR: Do you tend to hold junior mining stocks for a while?

MK: Most of these companies I've owned for five years or more. I also have an active trading portion of my portfolio. When the market corrects, I can buy low. And I sell holdings during speculative highs. That is the nature our market. It can be volatile. We do not have to like it, but we have to acknowledge it and accept it is what it is: three steps forward and two steps back.

TGR: Thanks for sharing your insights.

"Mexico Mike" Kachanovsky is a consultant providing analysis of junior mining and exploration stocks. His work is published on a freelance basis in a variety of publications, including the Mexico Mike column in Investor's Digest of Canada. He is a founder of www.smartinvestment.ca, which serves as an online community for the discussion of all topics relating to junior mining stocks.

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