Interview with Sergey Kurzin, CEO of Junior Gold Miner Orsu Metals

The following is an interview Jeff Clark, co-editor of Casey’s International Speculator, conducted with Dr. Sergey Kurzin, a Casey Explorers’ League honoree. The Explorers’ League regularly inducts serially successful mine finders with at least three economic discoveries under their belts – a true accomplishment considering that most explorers don’t even have one economic find throughout their careers.

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Kazakhstan: A Positive Climate for Gold

Jeff Clark, Casey’s International Speculator, interviews Dr. Sergey Kurzin

We haven't interviewed Dr. Sergey Kurzin since his induction into the Explorers' League in October 2008. As you'll read, he's had his head down in Kazakhstan but is now ready to speak publicly about his company, Orsu Metals (T.OSU), a gold-copper exploration and development company operating in Kazakhstan and Kyrgyzstan. Sergey is one of the most knowledgeable people we know about the politics in that region, including Russia. Here are his latest thoughts on his company and copper…

JEFF CLARK: It’s been two years since we talked, Sergey. Tell us what you've been doing.

DR. SERGEY KURZIN: I’ve been cleaning up the mess at our Varvarinskoye project, which we acquired from the merger with European Minerals. It was a very complicated arrangement with the banks, who could not agree with each other, and a very unforgiving, hostile, off-take agreement. On top of that, the output was hedged at $575 gold – can you imagine that at current prices? But the main problem was the deposit itself – the grades were 30% below what was stated in the reports. That’s why my head was down, to renovate this company. Now with this cleared up, we have put all our existing projects together and brought them to an advanced level.

Jeff: You’ve been operating in Kazakhstan and Kyrgyzstan for 20-plus years now. Tell us about the business climate there.

Sergey: Well, the business climate, like everything, has its ups and downs. But one can quite comfortably operate in Kazakhstan. If you have a contract with the government, meaning a license or title, and you comply with the requirements of the contract, you don’t have a problem. You just get on with your business. When metal prices moved higher and people were making big profits, they increased taxation in Kazakhstan, as a lot of other countries did, but the climate is still positive.

Jeff: Would you consider Kazakhstan a pro-mining jurisdiction?

Sergey: Yes. Kazakhstan is predominately a natural resource country. It is a giant country with a low population. It has oil in the west and north, and metals in the central region and onwards to the east. They have oil, gas, uranium, gold, copper, zinc, chrome – what did I miss? All the metals you basically want are in Kazakhstan.

Jeff: What about the politics in Kazakhstan?

Sergey: Politically, it is stable. Perhaps it is not an identical democracy to the United Kingdom or Canada, but it is still a democracy as they understand it, in terms of consistency of legislation. Meanwhile, Kyrgyzstan has just had elections, which went peacefully.  The new government is democratically elected and has the support of both the United States and Russia, so I think it is going to be okay.

Jeff: How have you been able to navigate the political waters better than most other companies operating in that region?

Sergey: Well, thank you, that is a compliment. The fact is we’ve done quite a few positive things in Kazakhstan with my previous company, Oriel Resources. We took the Voskhod deposit through all the usual stages of development, obtained all the essential approvals at the regional and district level, and created jobs. I have partners in Kazakhstan who I have been working with for eighteen years. They know what they are doing in this part of the world, so in conjunction with them, we are working quite well.

Jeff: So it's important to have strong local partners.

s, it is usually because they don’t have reliable, trustworthy, long-term relations with a local partner. If you are in Canada, you don’t need such a partner. But in Kazakhstan – which is part of the former Soviet Union – there is a certain way people look at things. They were never part of the British Commonwealth or anything like that, so they look at things differently. I am a Russian by birth and an ex-Russian citizen and lived there for 30 years. I have a lot of people with a Russian background working in the company that help navigate these waters.

Jeff: How did Orsu secure property rights in Kazakhstan?

Sergey: We have a contract with the government and work in accordance with the contract, complying with all the terms and conditions. As long as you do this, you are in good shape.

Jeff: Speaking of Russia, how would you assess mineral exploration in the Russian Federation?

Sergey: Well, that is a very interesting question. As you know, Orsu Metals is not in Russia at the moment. Why? Because there is a federal law that controls strategic assets and creates risk for explorers. But to be honest – in my personal opinion – it has nothing to do with strategic assets. It has everything to do with Russian companies trying to reduce competition.

Jeff: How are they doing that?

Sergey: By keeping them from developing big strategic assets. I believe the Russians already realize that this law is a mistake, because it puts off major Western companies to mining. I think they are currently reconsidering the situation.

Jeff: What do you base that judgment on?

Sergey: Putin and his speeches. But Russia is a large country and pretty slow historically. How fast they will react, I don’t know. But they’re talking about it. At the moment, I am not sure if it is worth establishing yourself in deep Siberia for a project of less than 50 tonnes of gold – just over 1.5 million ounces – which is on the border of what's considered a strategic asset. It would be too expensive and too difficult logistically.

The problem Russia faces with all its restricting legislation and bureaucracy is basically the absence of any new exploration in the whole country! They still exploit and use what they had twenty years ago before the Soviet Union collapsed. So everything that was worth developing is basically taken. There is a lack of new projects, the existing ones are too expensive, and those still undeveloped are usually not worth the effort.

Jeff: Your flagship project is Karchiga in Kazakhstan. I read that you recently increased your interest from 70% to 94.75%.

Sergey: Yes. Karchiga is a copper play. There is a little bit of gold, but we are not even considering it. And Karchiga is the most advanced Orsu project, but not necessarily the largest. It has a lot of advantages, like the location being forty kilometers from the Chinese border. It is a well-defined area and within an historic copper mining belt. 

It is not expensive to develop. We hope to use a lot of Chinese equipment, which will give us some interesting project finance opportunities with potential Chinese off-take agreements. And the infrastructure is good. There are hard paved roads on the Chinese side and a couple of smelters in the vicinity. Electricity is 10 kilometers away, water is plentiful, and the landscape is very gentle. Our contract with the Kazakh government is good until 2022.

As of Q1 2010, we have a 43-101-compliant indicated resource of nine million tonnes at 1.87% copper and an inferred resource of 1.83 million tonnes at 1.6% copper. That's about 400 million pounds of copper, over a billion dollars worth. We expect to complete our definitive feasibility study in September 2011. So this is a good project to turn a company into a producer. We’ve done projects more complicated than this in Kazakhstan, and it is our firm target to complete construction by Q1 2013.

Jeff: I saw that China is investing $13 billion in Kazakhstan. 

Sergey: Kazakhstan is full of natural resources, which China desperately needs for its development and growth. It's easier to bring it from Kazakhstan than import it from South America or Africa. Kazakhstan has a thousand-kilometer border with China. Our Karchiga project is only forty kilometers from the border, so it’s a given synergy. And copper in particular is one of the key metals for infrastructure.

Jeff: So why should I buy shares of Orsu now?

Sergey: Because we have a major resource. Six million ounces of gold equivalent. And our enterprise value is $30 million. What is that, $5 an ounce? It’s a pretty strong case, I think. The company will grow, too. We will acquire added projects and are progressing the existing ones. We are strongly undervalued. If you can discount all the risks, we should be trading at five or six times where we are now. The fact is, we have a track record and a very good technical team. I’ve been on the road and there was big interest in Toronto, New York, and London. We’ve been very well received. I think the stock will see some movement. Nothing happens instantly, as you well know, so give me some time.

Jeff: We will. To wrap it up, Sergey, what do you see going forward with copper and gold?

Sergey: I will answer simply. I think that gold, for the foreseeable future, is not going down because it is a barometer of people's fear. But I’m even more bullish on copper because it is essential. Gold is an artificial thing, a safe haven, and insurance against currency devaluation. But copper – especially in Kazakhstan where you are next door to China – has a strong future. And don’t forget, India is not far away. Of course there will be hiccups, but the overall trend in copper is definitely up, in my opinion.

Jeff: Thanks for your time, Sergey. We'll be watching as you develop Orsu. 

Sergey: Thanks a lot.

[Finding junior mining stocks to invest in is easy… and so is losing your shirt in the process. Finding winning stocks, on the other hand, requires asking the right questions. Learn all about “The 8 Ps of Resource Stock Evaluation,” Doug Casey’s secret of success, in our FREE special report. Click here to read it.]

What Will Happen to Gold When the Stock Market Crashes Again?

If you're like me, you're probably pretty damn nervous about the stock market right now - which looks like it's teetering on the precipice of disaster.  If you own gold, or gold stocks, what's going to happen to them when things melt down?  Louis James tackles that question in his guest piece here...

Gold Meltdown or Mania - Batten Down the Hatches

by Louis James, Senior Editor, Casey’s International Speculator

As Doug Casey said recently, we expect things to come unglued soon. With the ongoing madness in Europe, it seems to me that things are starting to look visibly less well glued already.

In contemplating the possibility of another stock market meltdown, it seems important to me that in spite of the exuberance with which investors rushed back into the market over the last year, the memory of 2008 remains vivid, tempering enthusiasm with caution. For example, the market still has relatively little appetite for early-stage, grassroots exploration projects; by our latest estimates, Mr. Market is willing to pay on the order of ten times more for Proven & Probable ounces in the ground than for less certain resource categories. With this evidence of caution in mind, and the great unwinding of the broader credit markets well underway, it seems likely that our sector is less leveraged than it was before the crash of 2008.

If a panic in the broader markets put liquidity-crunch-induced pressure on the gold price, the meltdown should be less severe than in 2008 and the eventual rebound could be dramatic, possibly triggering the mania we’ve been calling for. Remember: the market crash drove gold almost down to $700 in October ’08, but the same fear drove it almost back to $1,000 by February ’09. Silver topped that with a 60% rebound over the same period.

As the debt-glue holding everything together continues to lose its grip, the ride will only get rougher. As bad as 2008 was, if the Crisis Creature appears to be coming back when everyone on Main Street thought it was dead, the fear should be much worse – and that should drive gold way, way north. It’s possible the fear, coupled with the lack of any safer alternatives, could prevent gold from melting down at all, sending it instead straight through the roof into the clear blue Mania Phase sky.

With its industrial metal aspect, however, another big economic meltdown could hit silver harder than gold, and it might take longer to recover, especially if base metals don’t rebound the way they did in 2009. That said, silver has always tracked gold, so when gold heads for the moon, we expect silver will as well. It could reach even higher, if supply is cut by reduced base metal demand, as most silver production is as a by-product of base metal mines.

Either way, I don’t care if gold drops in the weeks and months ahead; the overall trend is for widespread economic fear and uncertainty to continue, holding gold prices up and eventually driving them higher. That makes the current retreat look like a great buying opportunity. In fact, putting my money where my mouth is, I picked up some more gold buffaloes just yesterday, when gold dropped to $1158. As I type, it has rebounded to $1181. I plan to buy more every time I see a sharp drop like this over the summer.

So, in addition to our multiple recent calls to take profits and go to cash, I want to reiterate that gold is cash. And it’s a whole lot more attractive than the dollar, the euro, or any paper money at present – not just as a speculation but for security as well.

What about the stocks?

Unfortunately, the stampede to safety that drives investors to gold is not likely to drive them immediately to junior exploration stocks. “The most volatile stocks on earth” is not what fearful people will be looking for – not until the panic sufficiently recedes and greed joins fear in equal measure in the marketplace…or in greater measure, come the Mania Phase.

If I’m right about fear being the driving force in the markets in 2010, whereas greed drove them in 2009, gold will have to deliver a serious wake-up call – perhaps holding over $1,500 – to really get the show on the road again for the gold stocks. If that happens while fear of a global economic slowdown continues to push oil prices lower, gold producers should be able to report extraordinary profit increases, even as other industries are tanking, and finally penetrate deeply into the awareness of broader pools of investors.

Cashed-up majors won’t have to wait for that to benefit; they may seize the opportunity created by market weakness to buy successful explorers, with significant discoveries in hand, while they are on sale. Well, some of the more nimble ones, like Kinross or Agnico-Eagle, might. The bigger companies, like Newmont and Barrick, didn’t lift a finger to pick up any bargains after the crash of 2008 and may be too cautious to act the next time around as well.

Be that as it may, acquisitions will increase the demand for quality exploration projects – the pipeline from exploration to development must be kept full – and good prospectors should at last get their day in the sun.

Punctuating this sequence will be the occasional big win on a new discovery. There haven’t been that many this cycle – not enough to replace all the gold the majors are depleting every year – but there have been some, and the market always loves a discovery.

After the first quarter of ‘09, greed outpaced fear and great development stories did phenomenally well; we saw better gains on large and growing gold stories than we did on the big producers. If fear retakes predominance in 2010, it’s profitable production that should do best, and I’d expect the biggest winners overall to be new, emerging, and highly profitable precious metals production stories. Spectacular discoveries should also do spectacularly well, but those are harder to predict. New and rapidly expanding production should be the sweet spots.

Generally, I think we’ll see our markets trading largely sideways over the next few months, with great volatility, until the debt-fueled “growth” in the global economy is exposed for the sugar high that it is. We’ve been forecasting that scenario for long enough here at Casey Research.

I expect this to play out by the end of this year, or 2011 at the latest, depending on how fast fear returns to the broader markets.

What to do

If I’m right about this, the strategy called for is a more cash-focused version of our “Buy only the Best of the Best” program. Buy nothing new unless you’re offered a great bargain in a solid company that can deliver significant new or expanding production. Nothing less than 50,000 ounces gold-equivalent per year in production will get much notice, and anything less than 100,000 ounces per year AuEq will have to struggle for respect. A solid company, of course, has great people, lots of cash, and the goods in hand.

If you want to speculate on a discovery, make sure you have very good reason to believe the project has much better than average odds of delivering a discovery – and it has to have world-class potential. That’s not hundreds of thousands of ounces but millions of ounces of gold, or equivalent.

If things do come truly unglued this year, we may well see 2008-style bargains on great companies with the staying power to recover and go on to new highs. Watch for it. Prepare for it.

Buy Low, Sell High – it’s a formula that requires patience but is the only way to go.

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Louis James has been guiding his subscribers through the ups and downs of the market with a steady hand. It’s no coincidence that every single one of his 2009 picks was a winner. Learn more about Louis’ hands-on approach and the profit opportunities Casey’s International Speculator offers – details here.

Ed. note: I am a Casey Research subscriber and affiliate.

Why the Gulf Disaster is Wildly Bullish for Canada's Oil Sands

Congrats to our friend and energy guru Marin Katusa on his excellent interview recently with John Mauldin!  I subscribe to Mauldin's premium service - thought the conversation was fantasic (which included resource expert Rick Rule as well).

Marin is always on the hunt for energy investments that also have economic advantages over competitors.  He wants stuff that's profitable at the lowest energy prices possible.  And while the Canadian oil sands don't immediately come to mind when you think of low cost oil, things start to click when you reason out which areas will benefit from the coming smackdown on offshore drilling...

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A Run for the Canadian Border

By Marin Katusa, Chief Energy Strategist, Casey Research

The Gulf of Mexico disaster has changed U.S. priorities, costs, and energy supply sources for years to come. But the fact that the U.S. needs energy isn’t changing anytime soon, and as mass sources of green energy are still a while away, the most likely alternative might be the most surprising one.

With US$15 billion invested annually in offshore drilling in the United States, the disaster in the Gulf of Mexico means that this money is getting ready to migrate elsewhere. And it is the Athabasca oil sands of Alberta, Canada, that are number one on the list.

Given the amount of bad press the oil sands get, this could come as a shocker. But technological advances and improvements in recovery methods, as well as reduction of water usage and greenhouse gas emissions, have made oil sands a viable and popular option for the future of U.S. energy.

The numbers, too, are looking in their favor. Out of the 1.34 trillion barrels that is the world’s total proved oil reserves (2009), only about 20% (270 billion barrels) of this number is actually available to free-flowing capital investment – the vast majority is in the tight grip of various national oil companies.

And a good chunk of these “free-market” barrels, about 178 billion, is sitting underneath the feet of Canadians, or as some call them, the Crazy Canucks. For a country that runs on oil, the United States couldn’t have been presented with a better lifesaver. Compared to alternatives such as Chavez’s Venezuela or the oil fields of the Middle East, reliable oil from politically stable and friendly Canada is by far the easier pill to swallow.

As it is, roughly one in every six barrels of oil consumed by a U.S. citizen today comes from the Canadian oil sands. The fact that infrastructure is already in place for oil sands development and oil already flows through pipelines between the two countries only sweetens the deal.

So, we wouldn’t be taking a huge step in assuming that any future capital spending that will be diverted away from the Gulf of Mexico will find it hard to bypass Canada. In addition, as global oil supply is affected by the drilling restrictions, in the long term we’ll be seeing higher oil prices. While this news might not make the drivers amongst us happy, it couldn’t get better for Alberta and the energy companies operating in the oil sands. With oil prices hovering over US$70 a barrel, the stream of investment dollars into the oil sands is guaranteed.

Obama’s first-ever Oval Office address has confirmed our expectations of no more growth in the American offshore drilling industry anytime soon. But the Gulf accounted for a large chunk of U.S. oil production (25-30%) and consumption (9% – the entire consumption of France), and that shortfall must be met.

While renewable energy is where the future of U.S. energy lies, according to Obama, it is still some time before green energy producers will be able to meet the full demands of the nation. In the meantime, authorities have also realized the importance of Canada for U.S. energy and are enticing companies with new pipelines. Plans on expanding the Keystone Pipeline, linking up Texas and Oklahoma to 500,000 Canadian barrels a day, have already been drawn up and put into motion.

The turmoil in the U.S. energy market has created a number of opportunities, both in the short and long term. For now, investment into the Canadian oil sands is about to increase dramatically, and things are moving rapidly. We’ve uncovered the lowest-cost producer with significant upside production, and they’re the one on the list as a takeout target by Big Oil.

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[Discover the oil sands company Marin thinks so highly of… and get ready to profit when shares shoot up. But oil sands are not the only energy investment to benefit from the Gulf Coast disaster – read more here or sign up right now for a $39/yr. subscription with 3-month money-back guarantee.]

Wheat Prices Rally Like Hell, But Fundamentals Lag - A Great Short Opp?

Today, wheat prices hit their highest levels in two years.  Russia announced a ban on exports, sending wheat "limit-up" on the day, as September futures closed at $7.83 a bushel.  It's been a wild ride for wheat this year:

Since the 4th of July, wheat has really taken off. (Source: Barchart.com)

Wheat headlining the Wall Street Journal caught me completely offguard.  Long time readers know we've been on the agricultural commodity beat since 2005, so it's tough to see wheat on the move without being aboard!  Alas, I have to admit I was too distracted by the looming presence of deflation to keep an eye on the grains.

There may be opportunity yet, though - and that may be in shorting corn and soybeans, which are also rallying on the bullish wheat news.  The WSJ writes:

The wheat supply concerns are spurring price increases for other grains too. September corn futures in Chicago hit a seven-month high in early trading, rising 6.2% to $4.25 a bushel. Corn and wheat are linked because both grains are used for animal feed. When wheat locks up at the exchange-imposed limit, traders who want to buy grain futures will likely look to CBOT corn and soybeans.

I saw the supply and carryover stock numbers on beans and corn recently, and there's plenty to go around.  Some services I subscribe to were already suggesting these two as potential shorts - I'd imagine this rally could make that trade even more attractive.

And while wheat is rolling, it remains to be seen how far the actual supply fundamentals will let this rally go:

However, the situation doesn't appear to be as dire at it was in 2008, when crops failed world-wide and wheat prices rose to more than $13 a bushel. According to the latest projection from the U.S. Department of Agriculture, there there will be almost 30 million tons of wheat in U.S. stockpiles at the end of next May, a 23-year high. U.S. inventories had dropped to an all-time low in 2007-08.

When trading the grains, you never want to go against the trend.  The current trend is UP, so that would be the correct short term play.  I, however, would be too skittish to pull the trigger on the long trade at this juncture, given the huge stockpiles still on hand.

Buy the breakouts, and sell the breakdowns, when it comes to the grains.  I'm afraid we missed the breakout, but there could be an inverse play when these skaters reverse course.

Why You Should Avoid MLP ETFs Until the "Froth" Subsides

Wall Street is going crazy for MLPs these days!  The safe, stable, dividend yield of a master limited partnership (MLP) is all the rage right now with investors.  Which is precisely the reason you might want to steer clear of this sector for a bit.

Tom Dyson elaborates in his Daily Wealth column:

Whenever you see Wall Street creating lots of new investment products to sell to the public – especially ETFs – you know investors must love the idea... and prices might be forming a bubble. You should be extremely wary of buying or holding stocks in these sectors. Chances are, they're about to enter a severe correction.

So what's the hottest new ETF sector right now? It's master limited partnerships...

A master limited partnership (MLP) is a special business structure available to a small number of firms trading on the stock market. Right now, there are 91 companies in the sector. MLPs treat their shareholders as partners in a business instead of owners of a corporation. This way, they avoid corporate tax. Many different businesses can qualify for MLP status... including real estate businesses, shipping lines, and money-management businesses. But the biggest companies in the MLP sector are all pipeline businesses.

You can read Tom's full piece here.

If the stock market tanks again - as we're anticipating here - then MLPs might be a great place to look for stable, 10%+ dividend yields.  But at just 6%, I agree with Tom that you're probably best served until some of the current froth is blown off.

More on ETF launches as contrarian indicators:

• Time to Short Brazil? New ETF Dedicated to Brazilian Midcaps
• COPX Launches - an ETF focused on copper miners

Ed. Note: This article was originally published in our sister publication, The Contrary Investing Report.