Cosmos Chiu Finds Mining Opportunities Around the World

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Submitted by The Gold Report as part of our contributors program.

Source: Brian Sylvester of The Gold Report (11/2/12)

Cosmos Chiu, a director and research analyst with CIBC in Toronto, focuses on midtier gold producers, but his coverage gives him a leg up on truly understanding royalty companies’ assets. In this interview with The Gold Report Chiu talks about how much longer royalty companies could continue to outperform the rest of the market, while also discussing companies he follows in some of his favorite jurisdictions.

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The Gold Report: Gold spiked to about $1,800/ounce (oz) after the latest round of quantitative easing was announced. It was at about $1,700/oz recently. What’s responsible for gold’s recent price weakness?

Cosmos Chiu: If you look back, the month of October is usually the weakest month of the year. Because investors look at it as a seasonably weaker month, there’s less demand. That has held true this year as well.

TGR: Could gold finish the year higher than where it is now?

CC: Different factors that could drive bullion higher in November and December, including the restocking of jewelry for the winter holidays in the West and in India, the rethinking of the role for gold following traditionally weaker markets in October, and continued bailout concerns for Spain and Greece. It has also been a favorable monsoon season in India as well. That should also help increase demand coming from the Indian population.

TGR: Do you forecast strengthening investment demand, too?

CC: Investment demand was lower for the first half, but there’s been strong central bank buying, which certainly helps. Demand isn’t just composed of exchange-traded funds.

TGR: What’s your investment thesis for midtier producers predicated on higher gold prices?

CC: They’re in the industry of producing gold so higher gold prices don’t hurt. Even though they’re in production, they’re small enough to have meaningful growth ahead. It’s not that hard to grow a company by 20?30% during the next year if a company has a starting base of 200,000 oz (200 Koz). Some of the midtier companies benefit from dealing more with pure gold instead of base metal byproduct credits, base metal contracts and smelter contracts. There’s sometimes less complexity in running these companies as well.

I just got back from traveling to a road show in Europe?I go about twice a year. Investors are still very bullish on the gold and silver prices. One key question that’s been unanswered in North America and across the pond is why have equities underperformed the commodity and will that continue?

Costs, more or less, are not stable?they’re not going down, but they’re not increasing at the same rate they did before. Earlier, they were increasing at a faster rate than the increase in the gold price. There has been some margin deterioration. We don’t have any concrete evidence that this has reversed, but we certainly have seen some of the input costs moderate a little. That’s going to be a key driver for some share price catch-up to the underlying commodity.

Companies’ multiples will start to move more consistently as investor confidence continues to come back.

TGR: What about jurisdiction?

CC: People always like to bring up political risk. But what is political risk? Is it higher taxes? The risk of expropriation? The risk of war? To understand political risk, investors have to understand all these different types of risks. And don’t ever forget about permitting challenges and issues like that. Investors need to understand that there’s a wider scope to political issues than what’s highlighted in newspapers.

TGR: What’s the first thing you would tell an investor interested in African gold plays?

CC: Africa is one of the fastest growing areas in the world. While mining in South Africa is well developed, a lot of opportunities are still currently available to investors in other parts of the continent. I quite like Burkina Faso, Ghana, Sierra Leone. They provide good value for investors.

I’d also say it’s a mistake to lump together all countries in the entire region. There might be issues in Mali, for example, but that doesn’t mean all the other countries are impacted.

TGR: Which countries in West Africa are you most bullish on?

CC: I look for stability in the government and exploration upside. The three that I like the most are Burkina Faso, C