The interview was conducted and published by The Gold Report.

It´s no surprise that Stephan Bogner, analyst with Rockstone Research Ltd. and CEO of Elementum International—a precious metals trading and storage firm—advises investors to hold physical metals outside the banking system, but he also advocates mining companies keeping gold on their balance sheets and forming a cartel. In this interview with The Gold Report, Bogner discusses which exploration and development companies will be ready to produce when metals prices rise and shares his interest in the diamond, potash and uranium space.

The Gold Report: Stephan, two years ago, Europe was awash in fears of debt defaults and countries exiting the Eurozone. On a scale of 1 to 10, where are we today on Europe´s "fear meter?"

Stephan Bogner: I think we are between 3 and 5. Inflation in the Eurozone fell to 0.7% in October, its lowest level since January 2010. Deflationary risks, a stronger euro and economic weakness have motivated the European Central Bank (ECB) to cut rates to a record low of 0.25%. However, these unprecedented low interest rates substantially devalue savings in the Eurozone and increase the danger of bubbles.

I believe the downward pressure will get worse and companies will suffer. Once the companies start demanding loans, the ECB will pump liquidity into the real economy, and inflation will pick up. The ECB seems to want inflation, but to justify that, it first must strangle the economy so people indirectly demand inflation. They then become the scapegoats during the upcoming inflationary times.

TGR: Are European investors embracing gold as a hedge against these weaknesses?

SB: Along with some central banks, only the smart money is moving into gold and silver at the moment. People should buy when prices are declining and low, but they are not. The masses buy when prices are rising and high.

I anticipate negative real interest rates ahead. Once that happens, people will take their money out of the banking system and look for safe vehicles like gold and silver. It only takes 5% or 10% of depositors withdrawing their deposits to push a bank into bankruptcy. Hence, I anticipate new laws to prohibit cash holdings and to prevent bank runs, especially if nominal interest rates go below zero.

People are increasingly looking for alternatives to banks. Independent vaults offer exactly that. Instead of holding your cash in a bank account, you can buy gold and silver and store it in an independent vault outside the banking system. My firm, Elementum International, stores precious metals in a high-security facility inside a mountain in central Switzerland. Our clients can sell the metals to us at any time if they need cash. That is banking backed by real values.

TGR: Should volatility of the gold price concern investors?

SB: Volatility is seen as something negative and the media is propagandizing that gold is not a safe investment anymore because it is so volatile. However, I somewhat like it being volatile because it shows that the market is alive and that the market forces are fighting a dead-serious war. I would be more concerned if the price moves sideways on low volumes. Volatility means action and investors want to be where the action is. People should not ask who is selling but who is buying.

TGR: How do you see paper versus physical gold?

SB: I see paper as an instrument to drive people out of holding bullion and to get their hands on that gold. Gold prices are beaten down to achieve one thing: redistribution of real values. If investors believe that inflation will come, they should want to hold gold and silver now. However, there are very few physical gold and silver sources from which to purchase substantial quantities, so investors must be smart on how to accumulate. They can accumulate most when buying into a declining price after it has been high.

A lot of speculative money has left the precious metals markets. Someone bought into all that. China is importing huge amounts of gold, and India now imports massive amounts of silver. I think China will back its currency with gold or somehow utilize gold as a monetary asset once gold prices have started to rise toward $2,000/ounce ($2,000/oz) and/or once there is nothing left to purchase from a dried-up physical market. Russia may very well do so, too. There is no other solution to the growing financial excesses but inflation, so investors have got to go for gold. Follow the smart/quiet money and not the dumb/noisy money.

TGR: Is China purposely trying to suppress the gold price, and, if so, how?

SB: Yes, I think it is. Why shouldn´t it do so? China is a large buyer in a small market, so it has to play smart to get its hands on physical bullion. It may do so with paper money and by playing the futures markets and putting pressure on the markets.

However, as soon as the price picks up again and the physical market has dried up, China will no longer manipulate the price to the downside but to the upside. China doesn´t mind price declines in the short term because it is buying for the long term and has an ever increasing interest to appreciate these assets relative to its dollar reserves.

TGR: You have advised gold and silver producers to hold onto their production in an effort to sell at higher prices. In a cash-hungry business like mining, is that feasible?

SB: It is sad that mines are coming into production or increasing output at these low prices.

Deposits should be exploited during high prices not low, when companies can only make losses or marginal profits. If I owned a gold mine, I would stop all operations and wait for better times. I know this is not easy or feasible, especially for public companies, but this is the time for innovation.

TGR: It´s one thing if you own the company, but a CEO needs to have the company perform to keep his job. How does management balance those two priorities?

SB: As soon as a company mines gold or silver, it sells it into the market and trades it for dollars. Instead, the company should use gold and silver as the functional currency for the industry. I´m certain that most companies would participate if such a system was in place. Companies should look for ways to bank their gold as cash assets or take out gold loans, not dollar loans. They should buy physical gold and silver and store it outside the banking system. When they require cash, they can sell part of their holdings.

Many exploration, development and producing companies have millions of dollars of cash in the bank. If they all bought bullion and stored it in an independent vault facility outside the banking system, that would put upward pressure on the price, which would benefit the companies.

Such a system is already in place and it is only a matter of time until mining companies will hold their cash in gold and silver. Shareholders will appreciate such prudent companies that know how to play a depressed market for the benefit of the shareholders. This also would bring a lot of credibility and investor confidence back into this dried-up market.

There are oil and potash cartels; the gold industry should come up with something similar.

TGR: Most cartels, like the Organization of the Petroleum Exporting Countries (OPEC) are privately held businesses. This makes it easier to get consensus. How would that work with publicly held companies?

SB: Public companies are part of the American and Russian potash cartels. A gold cartel would work like the potash market. Mining companies should collectively refrain from selling into the market at spot prices but should instead find buyers themselves, as there are definitely investors worldwide—especially from Asia, as well as the Middle and Far East—that would pay high premiums on the spot price to get their hands on physical bullion.

What is there left to lose for the deeply depressed mining industry but to take revolutionary steps and to fight back smartly? I hate to see the miners just waiting and hoping for better times, getting increasingly beaten up, defenseless. Now is the time to get their act together before the banks force them to hedge and sell forward their business for peanuts, rendering them incapable of benefiting from rising prices in the future.

TGR: Your research reports suggest that you favor small-cap precious metals companies over larger producers. Why are small caps worth the added risk?

SB: During down markets when metals prices are below production costs, producers struggle to stay alive. I only buy producers leveraged to a rising metal price, as they tend to rise stronger by a factor of three to five.

However, if you believe that the gold price will now recover quickly above $1,600/oz, I would recommend buying producers with the highest production costs. They´ve been beaten down the farthest, so they will benefit the most.

If you bet, as I do, that the gold price will go sideways or down for some time before rising, you should look for exploration and development companies active in bringing their deposits into production in the next few years when prices will be higher. When a junior discovers and develops a deposit, its share price will definitely rise because real value has been created. Right now, I see less risk with explorers and developers than with producers.

TGR: You recently went to various investment conferences in Europe and learned more about a number of companies. Please tell us about some of those names.

SB: Gold Standard Ventures Corp. (GSV:TSX.V; GSV:NYSE) is a young exploration company starting to make respectable gold discoveries in Nevada, potentially sitting on 20+ million ounces (20+ Moz) gold. If it can prove such a large gold resource, its stock will thrive even if gold continues to fall. This is the kind of exploration and development story I am focusing on right now during declining metal prices, as such stocks have the power to rise no matter what the gold price is doing.

I also like companies with a business model like Zimtu Capital Corp.´s (ZC:TSX.V). Creating, investing in and growing junior mining companies provide a great way for investors to participate in and profit from the public company-building process. Zimtu was behind Western Potash Corp. (WPX:TSX.V), which has a large mineable potash deposit in Canada. If Western Potash can find $700–900 million ($700–900M) from a strategic investor, it will develop that resource into a mine. It´s only a matter of time before this deposit is mined, and I´m very bullish for the mid- to long-term potash price.

I am certain that Brazil is becoming the largest agricultural farming and potash source of the world. For this reason I closely follow the current drill program of Pacific Potash Corp. (PP:TSZ.V) in the Amazonas Basin, a potash-rich basin that could change the fundamentals of the entire market.

TGR: Zimtu has a number of positions in graphite companies. Has it also taken positions in precious metals companies?

SB: Precious metals not so much, with the exception of Equitas Resources Corp. (EQT:TSX.V; T6U1:FSE), which will start drilling early next year on a remarkable copper-gold porphyry on Vancouver Island, and Pasinex Resources Ltd. (PSE:CNX), which is focused on base and precious metal exploration projects in Turkey. It has a promising joint venture with the Akmetal Group and started an exploration program a few weeks ago.

I like Zimtu because it is active on many fronts of the commodity markets and is thus somewhat independent from the precious metals prices. For example, Zimtu is involved with diamonds through Arctic Star Exploration Corp. (ADD:TSX.V). Buddy Doyle, who was instrumental in discovering the Diavik diamond mine in Canada as head of diamond exploration for Kennecott Canada [now part of Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK)], is behind Arctic Star. It looks as if he and his team are doing it again, discovering diamond deposits in Canada close to two other world-class diamond mines. I very much like the fundamentals of the diamond market and think prices will start rising substantially in 2014.

The fundamentals of the uranium market, where Zimtu is well positioned with Lakeland Resources Inc. (LK:TSX.V), also are attractive. Lakeland is active in the Athabasca Basin in Canada. The company is backed by Jody Dahrouge, who was instrumental in the J-Zone discovery in the eastern part of the basin and in the Patterson Lake deposits to the south. Other backers include John Gingerich, who worked in the northern part of the basin for Eldorado Nuclear, now Cameco Corp. (CCO:TSX; CCJ:NYSE), and Thomas Drolet, an experienced uranium industry expert.

Zimtu management is also behind Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX), a development company with two advanced-stage rare earth elements (REEs) deposits in Canada. I´m very bullish on REEs. Commerce has two projects, the Ashram REE project and the Blue River tantalum and niobium project. The Ashram REE project is remarkable because 1) it has a huge resource, 2) it has high grades, 3) it has a unique distribution with competitive grades of the most highly in-demand elements namely neodymium, europium, dysprosium, yttrium and terbium, and most important, 4) it is hosted by the three minerals that completely dominate current commercial production globally: bastnaesite, monazite and xenotyme. All of the first three (very positive) points are subservient to the fourth and most important point—that really only these three minerals are processed commercially.

The capital expenditure (capex) for Ashram is CA$763M, so it must find a strategic partner. This is only a matter of time because I believe the REE market will soon escalate. Commerce has a new set of drilling and metallurgical results that also will be released shortly, and I am positive that this will revive the stock and bring in a strategic partner, likely from Asia. The Blue River tantalum and niobium project is the world´s largest production scenario, cash positive, for tantalum. The Upper Fir capex is only CA$379M and in the last six months Commerce has increased the resource by over 30% and the recovery rate by 15% over the amounts used as the basis for the completed preliminary economic assessment.

Zimtu is also active in northern British Columbia via Prima Fluorspar Corp. (PF:TSX.V)and Big North Graphite Corp. (NRT:TSX.V), and is about to launch a new company involved with high-purity quartz used for silica. These are the kinds of industrial minerals I´m also bullish on.

Remarkably, Zimtu´s stock investments in all these companies have a book value 50% below the market value at the moment, so the company looks quite attractive, trading at a huge discount, and diversified with different kinds of projects.

TGR: Which small-cap precious metals companies are you following?

SB: I like stocks with prospective deposits that are heavily discounted and trading below or near cash levels. For example, Mundoro Capital Inc. (MUN:TSX.V) is trading almost 50% below cash value despite owning highly prospective deposits in Serbia and Bulgaria. More than 58 Moz gold has been discovered in the Tethyan porphyry copper-gold belt that runs through Serbia, Bulgaria and Turkey. This underexplored belt is similar to the well-explored porphyry Maricunga belt in Chile or the Greenstone belt in Ontario and Québec.

The corporate tax regimes of Serbia (15%) and Bulgaria (10%) are better than Ontario´s (30%). It´s no surprise that senior miners are active in this neglected part of this world, such as Rio Tinto and Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE).

Mundoro´s management is highly experienced and is prudently budgeting its large cash reserves for a project that shows remarkably high-gold grades. Mundoro is a bargain at current prices, and I´m certain this won´t last much longer, as I see a bottom at $0.18/share.

Among the few producers that I like, Klondex Mines Ltd.´s (KDX:TSX; KLNDF:OTCBB)stock has been rising since April. Paul Huet, its president and CEO, has high-grade mining experience, especially with narrow gold veins. Previously, he was with Premier Gold Mines Ltd. (PG:TSX) where he served as chief operating officer, was general manager at Great Basin Gold Ltd.´s (GBG:TSX, GBG:NYSE.MKT) Hollister mine and mine manager at Newmont Mining Corp.´s (NEM:NYSE) Midas mine.

Klondex´s flagship is the high-grade epithermal Fire Creek gold project in north-central Nevada, which is stunningly similar to the Midas and Hollister mines. In September, Klondex updated its NI 43-101 resource, applying a 7 grams/ton (7 g/t) gold cutoff, to host a Measured and Indicated resource totaling around 300,000 ounces (300 Koz) gold at 45 g/t and an Inferred resource of 421 Koz gold, averaging 90 g/t. That may not sound like a lot of gold, but Klondex has the skills to drill very effectively. Klondex has one of the best upside potentials in the entire market.

In regard to development companies bringing deposits into production within the next few years, I like Columbus Gold Corp. (CGT:TSX.V). It is developing a highly prospective gold deposit into a mine in French Guiana—a safe, but somewhat expensive jurisdiction. When Columbus acquired the property in 2011, it had a resource of 1.8 Moz gold. Columbus increased that to more than 5 Moz by drilling deeper than 135 meters and starting infill drilling. Further infill drilling will add another 2 Moz or so. The deposit is still wide open with excellent upside potential. I´m positive that more than 10 Moz gold can be proven during the next three years.

Columbus recently did a deal with Nord Gold N.V. (NORD:LSE). The Russia-backed company can earn 50.01% by spending $30M and completing a bankable feasibility study by October 2016. Nord Gold is a very aggressive resource company that had no assets in 2007. Since then, it has acquired eight companies and now has nine producing gold mines in four countries and $1 billion ($1B) in revenue. Nord Gold produces more than 800 Koz gold annually, which puts it among the top 20 gold producers worldwide. Columbus just started another aggressive, 28 kilometer drill program and Columbus will have a lot of news flow over the next two to three years. This development company´s stock price will thrive regardless of the gold price.

Sama Resources Inc. (SME:TSX.V) is another remarkable project that hasn´t received any attention from analysts and investors. It is poised to become a world-class nickel-copper-palladium producer in West Africa. The Minerals & Metal Group Ltd. (1208:Hong Kong) owns 18%, the IFC (World Bank group) 12% and African Lion owns 5%. Marc-Antoine Audet is the president and CEO. Benoit LaSalle, founder of SEMAFO Inc. (SMF:TSX; SMF:OMX), is the executive chairman.

Sama´s revised NI 43-101 Indicated resource includes 75 million pounds (75 Mlb) nickel and 61 Mlb copper, plus an Inferred resource of 134 Mlb nickel and 107 Mlb copper. The company is drilling in a newly discovered zone called Yepleu. Newly defined geophysical anomalies, along with nickel-copper sulphides at surface, indicate that Sama´s resource could grow exponentially. Yepleu could turn out to be a company maker shortly, and I believe the surrounding district will become a significant mining center for nickel.

TGR: You believe that silver could decouple from gold in the medium term. Can you explain why?

SB: Silver, unlike gold, is both a currency metal and an indispensable industrial metal. If the gold market is very small, the silver market is tiny. Central banks worldwide hold some 25,000 tons (25 Kt) gold, which has a market value of around $1 trillion. Central banks do not hold silver, but some 30 Kt are held as reserves for silver ETFs, stocks in warehouses from the London Bullion Market Association and COMEX or minted coins from the U.S. and Canada. Those 30 Kt of silver have a market value of only $20B.

If a drop in liquidity hits the silver market, the price will explode upward. Aboveground silver stocks are depleting quickly. A strongly rising or falling silver price does not affect demand or supply—both demand and supply are largely price inelastic, which is somewhat unique in the commodity sector and important to understand. If silver trades at $100 or more tomorrow, industry will not consume less because silver is mostly indispensable or nonsubstitutable. Typically, silver is a relatively small component of a product and thus, a fraction of its total cost. Price escalation is just a matter of time, in my opinion, especially when looking at the depleting warehouse stocks.

TGR: Which silver equities do you follow?

SB: Given that grade is king, one of my favorite stocks, especially during depressed metals markets, is MAG Silver Corp. (MAG:TSX; MVG:NYSE). I believe this company will become one of the largest silver miners in the world, maybe even the largest.

I also like companies that brought mines into production during this depressed market and are still profitable, such as IMPACT Silver Corp. (IPT:TSX.V). It owns four producing mines in Mexico, three of which are adjacent to each other. These three are mined underground from epithermal deposits feeding a 500 ton per day (500 tpd) mill. IMPACT´s fourth mine, Capire, started production as a volcanogenic massive sulfide open pit with a 200 tpd mill in March 2013. Then, the stock traded at $1/share. Its current price of around $0.46/share is quite attractive. I am confident IMPACT Silver can increase grade and output, and it has vast unrealized exploration potential.

I also like the prospects for Dolly Varden Silver Corp. (DV:TSX), an advanced-stage exploration company that owns 100% of a promising high-grade property in the Stewart Complex in British Columbia. Dolly Varden´s property has the potential for precious metal-rich Eskay Creek-type deposits. The company is expanding its historic resource with the goal of restocking production, and is exploring for untested Eskay Creek-type deposits. The property is near the ocean, making it easy to ship ore or concentrate. The company doesn´t yet have an NI-43-101-compliant resource, however its historic resource of 15 Moz silver will be changed into an official resource soon, with upgrade potential.

Another is Aurcana Corporation (AUN:TSX.V; AUNFF:OTCQX), which owns 100% of the low-capital cost and low-risk Shafter silver mine in southwest Texas. It has an NI 43-101 resource of 25 Moz silver in the Measured and Indicated category, with an average grade of 265 g/t silver and 23 Moz in the Inferred category averaging 327 g/t silver. Production started last year, but was suspended pending replacement of some parts. It should start up again in Q4/13.

Modifications to the plant will allow throughput of 1,500 tpd by mid-2014. This is an excellent entry point, as the stock was beaten down severely in October.

Aurcana´s second mine is La Negra, in Mexico. Starting in 1970, Industriales Peñoles S.A. de C.V., discovered, developed and operated the mine, until putting it on care and maintenance in 2000. Peñoles produced 36 Moz silver, 323 Mlb zinc, 70 Mlb copper and 161 Mlb lead. The 2000 NI 43-101 resource estimate shows 150 Moz silver, 270 Mlb copper, 540 Mlb lead and 1.4 billion pounds zinc, so there is more to be mined.

In 2012, Aurcana produced 2.5 Moz silver equivalent and in H1/13 produced 1.4 Moz silver equivalent. In Q2/13, total cash costs per silver ounce, net of byproducts, were $7.79. I like Aurcana´s substantial production upside potential. It´s a nice coincidence that the company didn´t produce at maximum while the silver price weakened.

TGR: Are there any other companies you´d like to tell us about?

SB: I like Sumatra Copper & Gold Plc (SUM:ASX), an emerging gold and silver producer on the Indonesian island of Sumatra. Its most advanced project is the 100%-owned Tembang, which is being fast-tracked into production in 2014. Sumatra´s other advanced project is Tandai, which is being developed under a joint venture with Newcrest Mining Ltd. (NCM:ASX).

Other gold stocks I follow closely include Golden Queen Mining Co. Ltd. (GQM:TSX), which is looking for a strategic investor for its gold project in California. San Gold Corp. (SGR:TSX.V) is a producer, looking to convert its debts. The Malaysian gold producer Monument Mining Ltd. (MMY:TSX.V) is restructuring, cleaning and preparing to double its resources and output. Pilot Gold Inc. (PLG:TSX), Mawson Resources Ltd. (MAW:TSX; MWSNF:OTCPK; MRY:FSE) and Midas Gold Corp. (MAX:TSX) also have compelling exploration and development projects.

TGR: How do you stay so positive in this bear market for precious metals?

SB: After the bear comes the bull; there is no other solution to the globalized financial excesses but gold and silver. Given global population growth, especially in emerging countries, coupled with the natural and inexorable human drive to improve one´s standard of living, when you look at the vanishing supplies of commodities, the question is not when the commodity bull market will end, but if it can end.

TGR: Stephan, thank you for your time and your insights.

Stephan Bogner is mining analyst at Rockstone Research, where he has independently analyzed capital markets and resource stocks for more than 11 years. He is also CEO at Elementum International AG of Switzerland. Bogner earned his degree in economics in 2004 at the International School of Management in Dortmund, Germany. He spent five years in Dubai brokering and reselling physical commodities and now resides in Zurich, Switzerland.

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