Lagging Metals Equities May Offer Extra Upside

PETALUMA, CA (The Gold Report) – 

The Gold Report: How did you launch the Frontier Research Report?

Carlos Andres: I grew up in an entrepreneurial household that gave me an early foundation in business and finance. My career developed on that foundation. I’ve been a founding partner of a couple of boutique consulting firms over the last 20 years that provided a variety of services that included financial analysis, business valuation, forensic accounting, business turnaround and M&A work across a wide range of industries. I also have an educational background in international or macro-economics and geopolitics. In the mid-1990s, I took notice of global supply/demand imbalances in the natural resource space with the emergence of the Chinese, Indian and other Asian economies and, as a result, became a committed natural resource investor in the late 1990s.

Like many, I began to read a lot of newsletters and ultimately entrusted my investments to selections made by newsletter writers that I had come to respect. With some exceptions, I had a good deal of success this way. But it always bothered me that I wasn’t applying my own experience, expertise and education to company due diligence and industry and market research with the idea that I could remove some of the risk from my investing activities. Eventually I took my own advice and began looking at companies very closely, applying my expertise and developing ideas about targeting companies where there is a significant gap between perceived risk and actual risk. The newsletter was born out of a desire to share my journey with a wider audience.

TGR: How did you end up in Uruguay?

CA: I have always had a desire to travel extensively and live abroad since I spent a year in France in my college days. On another track, as I followed the global natural resource story with great interest over the last decade or more, I also developed a desire to place myself geographically in the midst of this emerging trend. As a result, I began to look for places that satisfied both desires. For me, Uruguay represents just such a place. It is an excellent base from which to explore the resource rich countries of South America.

TGR: What is your definition of an overlooked opportunity, and what approach do you use to unearth these opportunities?

CA: An overlooked opportunity, from my perspective, is one that goes unnoticed or is simply ignored by the investment herd and most analysts. Natural resource investing, although growing in popularity, is still virtually ignored by the mainstream investment community. There are several reasons for this, but an important one is simply a lack of familiarity in connection with ever-increasing global supply and demand imbalances and the complex business of mineral exploration and production. Therefore, we specifically target companies in the natural resource space because this is where we tend to find bargain basement prices, meaning this is where we will find prices that are substantially below the company’s intrinsic value. In this context, we ask the question: Which companies represent the highest risk and thus present the highest potential reward? The answer is pretty straightforward: Junior exploration companies easily represent the highest risk in mining and junior explorers located in emerging and frontier markets drive the risk factor right off the charts. The investment herd and most analysts typically fear to tread in foreign markets that are shrouded in uncertainty. In targeting this segment, we vigorously apply our long experience and considerable expertise to separate the wheat from the chaff. In short, we choose countries and companies where perceived risk is substantially higher than actual risk, with the idea of profiting on the difference. When we get it right, we will make many multiples of our original investment.

To spice things up and increase the high-risk, high-reward factor even further, we will also target distressed junior explorers in emerging and frontier markets. We are sometimes able to identify companies that are on the verge of emerging from distress. The shares of such companies can typically be purchased at steep discounts. Perhaps our tag line should be “unearthing overlooked and undervalued opportunities.”

TGR: What are the drivers that you are focusing on now with rising prices, unsettled world economic conditions and the possibility of another recession?

CA: In the developed world, say North America and Europe, we have this notion that the global economy is driven by the Western world that consumes things that are manufactured in Asia. In order to manufacture these things, Asia imports natural resources from the rest of the world to use along with its own domestic supply. From this perspective, it is typically argued that if there is an economic slowdown in North America and/or Europe, then, by extension, this will cause manufacturing in Asia to slow down, which will cause demand for natural resources to slow and hence cause a worldwide recession. Although elements of this storyline are certainly true, it overshadows a more important driver-fundamental domestic demand changes taking place in Asia with respect to the size of its population, rapid urbanization, a growing middle class, rising incomes and a rising standard of living.

In short, internal demand is rising rapidly in Asia, which is creating an economic dynamic that is being ignored in the West due to inaccurate assumptions about emerging trends and what drives the global demand and supply of natural resources. Asia is an emerging story all on its own with growing domestic demand for natural resources. Asia’s internal demand and internal economy represent a huge global driver and Western investors ignore it at the peril of their portfolios.

TGR: The gold price has made some spectacular moves in the last couple of weeks. This should lead to some greater interest in mining stocks, which have been underperforming the physical metal.

CA: It has been perplexing to a lot of people as to why the producers should be undervalued when the gold price is rising. The HUI/Gold ratio chart is a good place to see this borne out graphically as it is falling to lows not seen since the onset of the global financial crisis in 2008. As one might expect, this trend is even more pronounced among the gold junior explorers. But the fundamentals that are driving the gold price higher remain powerfully intact. Therefore, we expect the producers and juniors to eventually play catch-up. Until then, current valuations represent a buying opportunity and we are buyers at these levels. The disparity between the rising price of the metal and the shares of the companies that find and produce the metal will not likely go unnoticed forever. Demand for gold, oil, uranium, potash and other mineral resources is rising at a much faster rate than supply can or will be able to match over the short to medium term, if ever. In addition, production is depleting reserves much faster than new reserves are being found. This situation argues that commodity prices will continue their upward climb.

TGR: Anything else you would like to mention?

CA: The entire gold mining industry from producers on up the risk curve to explorers is undervalued. I think it is definitely shopping season in the gold sector. Do your homework, pick your favorites, buy some now and nibble all the way down on price weakness. Then just have a little patience.

TGR: Do you have any closing thoughts?

CA: Times are definitely tough. The world seems to be undergoing some sort of convulsion where the underlying theme is change, whether it is political, economic, social, peaceful or violent. How things will settle out is anybody’s guess. This is very unsettling for people in general, and this includes investors. It is at times like these that it is important for people to replace their anxiety with a quest for knowledge, insight and understanding. I encourage investors to get involved and do their homework rather than allowing themselves to become overwhelmed by confusion resulting in deer-in-the-headlights-type inaction. Investigate the trends and then put your investments in the way of these trends. It’s the equivalent of setting your sails to harmonize with the direction the wind is blowing. Get out there ahead of it all and run before the wind. Seize historic change as historic opportunity. The road to wealth lies through such times as these.

TGR: I greatly appreciate your input. I think our readers now realize that there are opportunities everywhere and they aren’t just in North America or Africa.

Carlos Andres is the managing editor and chief analyst of the Frontier Research Report, a natural resource-oriented monthly investment newsletter focused on high-risk, high-reward junior exploration companies in emerging and frontier markets. Mr. Andres applies a potent mix of world-class expertise and lengthy experience in identifying countries and companies where “perceived” risk is much higher than “actual” risk, providing opportunities to profit significantly on the difference. Mr. Andres has been a natural resource analyst and investor for over 15 years.

Article published courtesy of The Gold Report – www.theaureport.com

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