Month: August 2013

Source: Zig Lambo of The Energy Report (8/1/13)

http://www.theenergyreport.com/pub/na/top-ten-stocks-for-a-uranium-price-rebound-david-talbot

When it comes to uranium market sentiment, “it’s all about Japan,” says David Talbot, senior mining analyst at Dundee Capital Markets. With restart applications trickling in and reactor construction underway throughout the world, a turnaround looks less like an “if” and more like a “when.” In the meantime, Talbot sees many investors sitting on the sidelines. In this interview with The Energy Report, Talbot discusses the catalysts that could trigger the next uranium boom and the companies that could make investors wish they had arrived at the party a little earlier.

The Energy Report: In your last interview with The Energy Report in December, you were expecting that 2013 would be the turnaround year for uranium. What’s your assessment of where things stand now?

David Talbot: Our long-term outlook remains essentially the same as last year. What we and most of the industry underestimated was the possible impact of cash-strapped sellers on the spot market. Despite recent spot market weakness, uranium producer equities have pushed ahead 10%, developers 12% and explorers 17%, on average. A uranium supply crisis is still brewing and the fundamentals do remain strong. Demand is stable and reasonably predictable. The weak spot price still threatens future mine supply with more closures, cancellations and deferrals of mining projects. The all-important catalyst at the end of this year is the end of the Russia-U.S. HEU “Megatons to Megawatts” program, which in our view will not be renewed. That means 24 million pounds (24 Mlb) of secondary supply comes offline with no replacement − equivalent to the entire production of Cameco Corp. (CCO:TSX; CCJ:NYSE). Uranium prices are too low to incentivize new builds right now. We think prices must rise, as will the equities. The Uranium One Inc. (UUU:TSX)takeout deal approved in March indicates Russia wanted to lock down a reliable uranium source. Guangdong’s (CGNPC) purchase of Extract Resources Ltd. is the preeminent takeover after Uranium One. As these utilities purchase these big projects it leaves less supply on the table for the rest of the utilities.

TER: The big price drop in early July sent uranium down to a seven-year low. What happened there? Was this the bottom or is there more to come?

DT: Uranium prices have dropped significantly in the past month or so. A few weeks ago, near-term requirements appeared low and the first applications for Japanese reactor restarts were not yet filed. Restrictions were also removed from the U.S. Department of Energy regarding how much uranium it’s allowed to sell in any given year. That added to the already negative sentiment.

The following week, a few suppliers failed to sell to a certain utility and were forced to place that material on the market relatively cheaply. That led to the spot price retreating even more. More positive news coming out of Japan on restarts should help the price edge back up. But during the summer lull, negative sentiment could still dominate, and prices could drop further.

TER: What catalysts might cause a significant uptrend in prices going to this predicted $70+ per pound ($70+/lb) level?

DT: It’s all about Japan. Japanese restarts should provide a psychological boost. Fukushima really ended the last uranium bull run and reactor restarts will likely get that going once again. Once Japan moves forward, the rest of the world will start to catch up on the uranium purchases they’ve been deferring.

Investors are likely to return at that point. Utilities will also have to return to term contracting as they do have significant unmet uranium requirements over the next four or five years. There are more reactors planned or proposed now than ever before, and we are seeing contract awards for construction of reactors, like in Turkey for example, and the UK reaffirmed its commitment to nuclear only a few months ago. We continue to forecast a supply/demand deficit by the end of 2014. By 2020, we expect about 240 Mlb of demand to be offset by only ~200 Mlb of total supply, including secondary supplies.

TER: The U.S. imports about 90% of its uranium, yet we still have significant recoverable deposits. What do things look like for domestic production?

DT: Things are moving forward on the permitting front in the U.S., which remains the largest uranium consumer in the world with the largest reactor fleet. It produced only about 4.1 Mlb last year, which was about a 4% increase from the prior year. We’d expect that number to increase to perhaps 4.5–5 Mlb this year. Cameco is by far the largest producer in the country and plans to increase production at both its Smith Ranch-Highland plant in Wyoming and its Crow Butte plant in Nebraska. We expect combined production to improve from 1.9 Mlb last year to about 2.6 Mlb this year. That should offset some production losses from, say, Uranium One, which decided not to develop any more well fields at its Willow Creek in-situ recovery (ISR) project in Wyoming.

We’re also expecting increased production from Uranium Energy Corp. (UEC:NYSE.MKT) from its Palangana operation in south Texas. We’re expecting initial production out of Ur-Energy Inc.’s (URE:TSX; URG:NYSE.MKT) Lost Creek mine in Wyoming. The U.S. still imports about 90% of its 55 Mlb per year consumption. Producers such as Ur-Energy and Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT) have had some preferential contracts in the past. For example, we believe that Ur-Energy’s contracts with utilities are in the $60/lb or greater range. That’s a pretty good premium to existing spot prices. Energy Fuels Inc. (EFR:TSX; EFRFF:OTCQX) sold its uranium last quarter for an average price of $56.23/lb when the average spot price for the period was in the low $40s.

TER: Energy Fuels is the largest U.S. conventional uranium producer, yet its market cap is only $130 million ($130M). What’s going on there?

DT: Energy Fuels has huge leverage to uranium prices and is one of our top picks in a rising uranium price environment. It has high price contracts, an effective and acquisitive management team and huge expansion potential. The company has really been focused on running only its lower-cost operations while delivering about 100% of its production into these higher-priced term contracts.

This stock is still relatively unknown, but these guys have the potential to go from around 1 Mlb this year to 3–5 Mlb going forward. It recently announced an acquisition of Strathmore Minerals Corp. (STM:TSX; STHJF:OTCQX) in an all-share deal worth about $30M. Shareholders could benefit with a stronger company, lower-cost project pipeline and relationships with a couple of Asian utilities with deep pockets, KEPCO and Sumitomo. Strathmore’s flagship Roca Honda project in New Mexico has some synergies that can really work with Energy Fuels. The acquisition eliminates Strathmore’s need to build a mill, potentially making the Roca Honda project much more economic. We definitely see Energy Fuels as an up-and-comer in a rising uranium price environment.

TER: So where is it trading now and what’s your target price?

DT: The stock right now is trading at $0.18 and our target price is a cool $0.75.

TER: You’ve been out on some site visits. Tell us a little about what you’ve seen.

DT: I enjoy site visits and have been to about 80 different uranium projects around the world. I went back to Wyoming in July and saw three ISR mines, Ur-Energy’s Lost Creek, Uranerz’s Nichols Ranch and Cameco’s Smith Highland Ranch operations. Ur-Energy is the best performer this year out of the developers. It’s up 70% over the past few months. We were very impressed with the innovative design of the Lost Creek plant and feel very comfortable with the expertise, depth and competence of the company’s team.

The Nuclear Regulatory Commission pre-operation inspections are underway at Lost Creek and we expect production by August with first deliveries in October. We’re looking for about 200,000 pounds (200 Klb) of production this year. Maybe 800–900 Klb next year with production costs under $25/lb. The Pathfinder acquisition brings two high-quality assets, primarily the Shirley Basin, which is the next project to be developed. There’s a little bit of financing risk remaining, but we expect that to be largely sorted out. We maintain our buy on Ur-Energy and target price of $2.30 per share from the current $1.29 level.

TER: How about Uranerz?

DT: Uranerz runs a bit different model, permitting smaller deposits and only constructing the frontend of the plant. It plans to toll process its resin at Cameco’s Smith Ranch facility where Cameco will take that loaded resin, precipitate the uranium, dry and package it. This arrangement benefits Uranerz by minimizing start up risks and saving capital through deferred completion of its own mill, and may even save on operating costs. Uranerz just started construction of two deep disposal wells at about $3M each; it will need these wells before production can start. We expect about 500 Klb of production next year with total cash costs of around $37/lb—somewhat higher than Ur-Energy’s costs due to higher taxes and royalties in Wyoming. Uranerz is now trading at $1.35 and we maintain a buy rating and a $2.65 target price.

We also visited Cameco’s Smith Highland Ranch ISR operation, which has been in production for over 16 years. Cameco’s U.S.-based operations have been core long life, low-cost projects for years. About 12% of Cameco’s production comes from the U.S., accounting for half of total U.S. production. About 18% of our NAV comes from its U.S. operations. We’re expecting increased production this year out of North Butte and see Cameco moving forward with the 15 Mlb Reynolds project, which is likely going to be permitted around yearend. We’ve got a buy on Cameco and target price of $25.20.

TER: Why did you only start covering Cameco now?

DT: With well over 20 analysts covering Cameco, I felt my value was better added covering earlier-stage development and exploration stories. I initiated coverage on Cameco in June as a clear defensive play in today’s uncertain uranium environment. It’s an industry leader with world-class assets. Cameco rarely misses its guidance and looks poised to continue the strong track record despite low uranium prices. The big catalyst this year is the commissioning of the Cigar Lake project, expected any day now. We’re forecasting 23.4 Mlb of production this year, 25.4 next year and just under 36 Mlb by 2018. Cameco is where the big money is going in the sector.

Despite our belief that producers are where investors should be going right now, we do want to highlight two exploration companies, Fission Uranium Corp. (FCU:TSX.V) and Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT). Both are exploring some exciting high-grade projects in the Athabasca Basin. Very few companies in the sector are receiving as much attention as these two names. We have Fission Uranium as a buy, speculative risk, no target. Fission owns 50% of the highly perspective and the much-talked-about PLS discovery in the Athabasca Basin. This has propelled the stock and also reignited interest in the whole sector. PLS is high grade, shallow, consistent and thick. The team’s already discovered three zones here, with indications that more discoveries are likely. There are already about 30 Mlb discovered in these three zones with 75 Mlb or more possible. Fission’s very first hole this summer intersected mineralization over 85 meters (85m). Perhaps the market has priced in the uranium that’s already been found, but we don’t think it accounts for the vast upside potential.

Fission has a very skilled technical team that already succeeded in discovering the J Zone and selling it to Denison. This team discovered the original Boulder Field on PLS with its patent pending airborne radiometric survey technology, and now it’s further expanding the PLS discovery. Fission’s entrepreneurial management team has significant ownership and is definitely aligned with shareholder interests. This is an exciting story that’s only going to improve with the 44-drillhole program currently underway.

Denison Mines is another investor favorite that trades very well. We rate Denison as a buy with a $2.00 target price. The company has majority ownership in the world’s third-highest-grade deposit, Phoenix, that already has 60 Mlb of uranium at 16.6% U308. We easily see 20–30 Mlb upside from here. The latest drill hole announced about two weeks back turned out to be the best hole ever on the property, 43% over 10m. A significant part of our NAV for Denison comes from a strategic value of its 22.5% ownership in the McClean Lake Mill. Its world-class mill is one of just three mills in the Athabasca Basin, and the only one capable of processing ultra high-grade ores. It represents near-term cash flow potential. Denison holds another large deposit called Midwest and a plethora of other exploration projects. This company is an attractive entry point for investors who want exposure to the basin. Between the takeover potential and the ultra high-grade Phoenix deposit, we clearly see investors supporting its premium valuation relative to its peers.

TER: Any others you’d like to mention?

DT: We like Paladin Energy Ltd. (PDN:TSX; PDN:ASX) and rate it as a buy with a $2.40 target price. Paladin has really delivered this year. Production and sales targets were met with realized prices 13% above spot. Cost-cutting targets at both operations exceeded expectations. Operations achieved capacity. Debt was trimmed. Production guidance was increased for next year and we believe a potential game-changing strategic initiative lies waiting in the wings. Paladin has huge leverage to rising uranium prices with costs that are coming down rapidly. We do expect a strategic partnership to be announced likely later this quarter. We believe that Paladin might be willing to sell about 20% of its Langer Heinrich mine in Namibia. Our NAV valuation suggests perhaps a $200–300M price tag for that. The company has a disciplined expansion approach here. We think right now is the time for investors to take advantage of the turnaround in Paladin. The stock still trades at a discount to its peers. With this strategic alliance, we do expect a rerating in the stock as debt levels fall further.

Finally, we like Uranium Participation Corp. (U:TSX) as a buy, high risk, with a $7.50 target price. Uranium Participation is essentially a uranium ETF holding 13.4 Mlb of physical uranium and therefore its easy to calculate an NAV for the stock. We estimate its NAV right now at $4.81 per share at $34.50/lb uranium. We view Uranium Participation as a proxy for sentiment from the sector and a low-risk investment vehicle for those who seek pure uranium price exposure with no operational permitting or geopolitical risk. We suggest getting in this name before uranium prices rally further.

TER: So what does the future look like for uranium and what should investors be doing to hopefully benefit and make some money here?

DT: Once we get through the summer doldrums and get some visibility on the Japanese nuclear power restarts, we expect uranium prices to firm and rise toward the end of this year and into next year. We are still calling for $65/lb uranium in the long term. To get to those levels, investors will need to see higher prices as incentives before any large uranium mines are built. Based on history, there’s a chance that once uranium prices do start to rebound, stock prices could jump quickly. It’s our expectation that many investors will sit on the sidelines, skip some of these early gains and likely come into the sector once it’s clear what direction it’s headed in. In the meantime, we suggest that investors look to the producers, especially those companies that are larger and more liquid. They should also look at select exploration companies, such as Fission Uranium or Denison Mines. All eyes are on those companies right now and their exploration programs are in full swing and expected to deliver significant news flow throughout the summer.

TER: Thanks for your thoughts today, David.

DT: Thank you for having me.

Dundee Capital Markets Senior Mining Analyst David Talbot worked for nine years as a geologist in the gold exploration industry in Northern Ontario. David joined Dundee’s research department in May 2003, and in the summer of 2007, he took over the role of analyzing the fast-growing uranium sector. David is a member of the PDAC, the Society of Economic Geologists and graduated with distinction from the University of Western Ontario, with an Honors Bachelor of Science degree in geology.

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DISCLOSURE:

1) Zig Lambo conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Energy Report: Fission Uranium Corp., Energy Fuels Inc., Strathmore Minerals Corp. and Uranerz Energy Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3)David Talbot: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

4) Dundee Capital Markets and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities mentioned in this interview: Energy Fuels Inc.

5) Dundee Capital Markets has provided investment banking services to companies mentioned in this interview in the past 12 months: Denison Mines Corp., Energy Fuels Inc., and Fission Uranium Corp.

6) All disclosures and disclaimers are available on the Internet at www.dundeecapitalmarkets.com. Please refer to formal published research reports for all disclosures and disclaimers pertaining to companies under coverage and Dundee Capital Markets. The policy of Dundee Capital Markets with respect to Research reports is available on the Internet at www.dundeecapitalmarkets.com.

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Source: George S. Mack of The Life Sciences Report (8/1/13)

http://www.thelifesciencesreport.com/pub/na/off-to-the-races-with-seven-extraordinary-biotech-and-medtech-companies-jason-napodano

Senior Biotechnology Analyst Jason Napodano of Zacks Investment Research specializes in uncovering small biotech and medtech companies with good prospects for successful drug development. He relishes proven management capable of creative financing to move private equity into the public markets, and he does not shy away from tiny companies outside the U.S. that have extraordinary technology. In this wide-ranging interview with The Life Sciences Report, Napodano presents the elegant growth stories of seven small companies that could return magnificent gains to investors.

The Life Sciences Report: Jason, you follow some companies that are not domiciled in the U.S. Are there special considerations or concerns that investors should be aware of before investing in stocks outside U.S. markets?

Jason Napodano: I cover a number of Canadian companies, one Switzerland-based company and one Israel-based company. Listing and liquidity are probably the two biggest hurdles that investors need to overcome with regard to companies outside the U.S.

The readers of Zacks Investment Research reports are primarily retail investors. The first hurdle for retail investors is finding a broker who allows them to buy a stock that is trading on the Toronto Stock Exchange (TSX) or the SIX Swiss Exchange.

Then there are tracking stocks. Some are company-sponsored, but others are Pink Sheet stocks not sponsored by the company. Retail investors have to be careful. You might want to buy a foreign-listed company that you can’t acquire on its primary exchange, but there may be a U.S. OTC-listed tracking stock available. You have to make sure that you’re buying company-sponsored stock—either the American depositary receipt or the tracking stock—and that you’re not buying a vehicle set up to follow the stock price that, in the end, may not follow the price at all.

The third issue is differences in accounting and reporting standards. The U.S. is one of the few countries using generally accepted accounting principles (GAAP). There are different standards in Canada and Europe. Some European companies only report twice a year, as opposed to the U.S., which reports quarterly results. Financial statements may look a little different than what you see in the U.S. Investors need to be aware of how and when companies report. Those are nuances investors need to be aware of when they are looking at foreign companies.

TLSR: Are there arbitrage opportunities available when trading international stocks, or is this beyond the scope of the average retail investor? Can hedge funds do it?

JN: Hedge funds probably could do it, because they can get in and out quickly and they have access to information that could allow them to play that arbitrage. However, I’m a pretty big believer in efficient markets. Individual investors may or may not be smart, but the market as a whole is pretty smart. If you have a stock listed on the TSX.V and the last trade there is $5.25, while the U.S. OTC stock is $5.15, you might be able to play some sort of arbitrage. What makes it difficult is the liquidity of the OTC. Can you short a stock on the TSX.V and long the same stock on the OTC? Does your broker allow you to do that? A lot of retail investors are not going to participate in this type of trading, but I wouldn’t doubt that there are hedge-fund guys out there who try to capture that arbitrage.

TLSR: Jason, what about a reverse merger? You’re familiar with this mechanism. Tell me what it is and why it is done.

JN: In a reverse merger, a private company acquires a public company. In most instances the public company has failed—either filed for bankruptcy or gone out of business—and its assets are substantially gone. But the public company provides the private company with a way to go public via the ticker symbol. When these private companies do become public, they typically change the ticker symbol because they may not have acquired a company in their industry. A reverse merger may involve a failed real estate investment trust (REIT), Internet venture, retailer or oil and gas explorer. The deal is done, and the new company is trading on the OTC.

TLSR: Does the Securities and Exchange Commission (SEC) require an S-1 in a situation like this, when a private company is obviously just acquiring the ticker symbol that it’s going to change?

JN: Yes, it does. There are some regulations, but fewer than in the typical initial public offering (IPO) process. You asked why a company would do this. It’s a heck of a lot faster and less expensive. If you’re a small, private biotech company and you don’t have the capital—or maybe the trial data or the awareness—to do a fully marketed IPO with a big-name investment bank, you can get a reverse merger done in three to four months at significantly lower cost. An IPO may take 6–9 months or longer, and costs more money.

When a company goes public via a reverse merger, management typically controls the process and doesn’t give up ownership to the public markets immediately. The reverse merger allows management to bring the company public and then decide the terms and timing of the S-1 filing and the initial financings, as opposed to coming public via an IPO, where ownership of the company is offered on day one. Many private companies go public via a reverse merger with the founders, management and bankers owning 90% of the shares; they only float whatever they need to acquire the company, which may be less than 10% of the shares. Typically what happens is the stock begins to trade, and then management files an S-1, registers the rest of the shares and raises capital.

TLSR: I surmise that these reverse merger deals are vehicles that private equity people use to create shareholder value more quickly in the public markets. Is that indeed the case?

JN: Absolutely. Sometimes reverse mergers get a bad rap because there is not a lot of information available to investors, and not a lot of liquidity. I sift through the murky water that surrounds reverse mergers and try to pick out the gems. Investors may have to look at 20 before they find one worth investing in, but if they can find one, they can get in early on what is potentially an enormous opportunity.

TLSR: Let’s go ahead and talk about some of your ideas. Go ahead.

JN: Since we’re talking about reverse mergers, I’ll talk about two that have been successful. I’ll start withInVivo Therapeutics Corp. (NVIV:OTCBB), which I started covering in Q3/11 at $0.64. It is now about $5.50/share. InVivo has a biodegradable scaffolding for patients who have experienced acute spinal cord injury. The company came public without a lot of fanfare. It had private equity backing, and it had a lead investor. I got involved with the story and loved it.

TLSR: The reverse merger, in this case, saved time and was capital-efficient. Is that part of the story here? What made InVivo a candidate for reverse merger?

JN: The reverse merger was a value creator here. InVivo was a good candidate for the technique because it had preclinical data but didn’t have a data package that would generate interest among big investment banks for an IPO. The company needed to come public to raise money more efficiently. After its initial financing, InVivo was able to generate additional data and control that process better. New data have come out since the merger, and that has sent the stock up six-fold. A lot of investors would shy away from a situation like InVivo’s, but there was incredible value and opportunity here, and it’s proved out a winner.

TLSR: InVivo Therapeutics’ technology platform is a biodegradable polymer scaffold that you can seed with human neural stem cells. You could also put medication, like a corticosteroid, into the scaffold. Where are we now in this project’s development, and what are the catalysts?

JN: The company just received U.S. Food and Drug Administration (FDA) approval to begin its first human clinical study with the device alone. It will not be seeding the scaffold with cells, and no drug is eluting off it.

This trial should start sometime in Q3/13. It will be a small pilot study—a humanitarian use device (HUD) study, which means that if the company can generate good safety and feasibility data, it could get its device on the market with just that study. Acute spinal cord injury patients are a small population, and nothing is available for them. If the study goes well, the company can file a humanitarian device exemption (HDE), which is essentially the medical device equivalent of an orphan drug designation.

For medical devices, you don’t do phase 1/2/3 studies, as you would in drug development. You do what’s known as an investigational device exemption (IDE) or a pilot study, which is the equivalent of a phase 1. Next is a premarket approval (PMA) study, which is essentially the equivalent of a phase 3 trial. InVivo is doing the equivalent of an IDE; it’s called an HDE because of the orphan indication. The company could get to market with the scaffold platform for the orphan indication if results are positive. To expand the label into much larger populations, InVivo would have to go back and do a PMA trial.

TLSR: With this HDE, there has to be some clinical benefit derived from the scaffold, even without seeded cells or a drug-eluting process. What possible efficacy could come out of just the scaffold alone?

JN: Under the HDE guidelines, you must demonstrate safety, no harm. There’s not a lot to demonstrate in terms of efficacy.

In terms of what the device can do by itself, the company talks about the body’s response to acute spinal cord injury, inflammation, which gives rise to scarring. This can push on the spine, causing long-term damage and paralysis. InVivo’s procedure involves stabilizing the spinal column with pedicle screws, and then the customized scaffold is cut and placed over the wound in the spinal cord. Cutting and placing the scaffold takes only a few minutes and is done by the spinal surgeon during the stabilization procedure. It’s very efficient, and so far looks to be very safe.

The device is designed to act as a shield and protect the spinal cord from the body’s own inflammatory process. As the body’s inflammatory response subsides, the scaffold degrades, and you don’t get that secondary scarring and injury that InVivo believes is the cause of the majority of the paralysis.

TLSR: Who will be the patients? What is their status coming into this study?

JN: Patients have what’s known as an AISA-A (American Spinal Injury Association classification) injury—complete paralysis with no motor or sensory function at or below the injury. Safety will be the primary endpoint, with ASIA impairment score data as secondary endpoints. If paralysis and loss of sensation are complete, any improvement should be attributable to the device, because typically these patients do not progress. If the company can say, “We protected that patient from further damage,” or is able to show touch sensation on pinprick testing, improved bladder function, or improved lung function, it will be attributable to the scaffold device. That will have to be confirmed in PMA pivotal trials, but the orphan indication allows the company to expand on that initial ASIA-A population by selling the product on the market. One final thing worth noting: The trial is with only five patients and open-label in design, so we should start to see data shortly after the trial starts.

TLSR: Jason, there was another reverse merger company that you wanted to talk about. What is it?

JN: It’s Organovo Holdings Inc. (ONVO:OTCPK). The reason I like to talk about InVivo and Organovo together is because the same private equity team, banking team and lead investor brought both companies public.

Organovo is developing a three-dimensional (3-D) bioprinter. It came public in early 2012, which is when I started coverage, and it was trading at $1.55/share. Today, it’s more than $6.30. The business development team has another home run, a fourfold win, with Organovo. On July 12 the company uplisted from the OTC to the NYSE.MKT. This listing on a major exchange allows for greater visibility and credibility with institutional investors. The stock nearly doubled on this news. This is the ultimate kind of success for a reverse merger.

TLSR: Anywhere you turn today, you hear about 3-D printing. What is Organovo doing with it?

JN: Organovo is developing a bioprinter to create 3-D biological structures for use as bioassays. Other companies are collaborating to see what can be accomplished with these 3-D bioassay structures.

TLSR: The company is developing a 3-D liver model as a hepatic toxicity screen, presumably for drug developers. Is that its lead development project? Is the idea that a 3-D liver structure will have more of a liver organ phenotype than hepatic cells floating in suspension or in a dish?

JN: Yes. When you plate what’s known as two-dimensional (2-D) liver cells in a dish, they begin to stop functioning as liver cells within 24 hours. You start with a dome-shaped cell in the dish, and within 24 hours it begins to flatten out and lose interaction. If you’re a large pharmaceutical company and want to test a drug for liver toxicity, you only have the ability to test on viable liver cells for those 24 hours. With Organovo’s 3-D liver cell assay, you can build structures that are 20–25 cells high. Because of this more phenotypic shape, the liver cells still behave like in vivo liver cells at five days. Because they are surrounded by each other, they build connective junctions and work in concert to produce enzymes and perform other normal functions of liver cells.

TLSR: This sounds like a premium-priced product line. What is the value proposition for the pharma customer?

JN: Organovo’s process is to create a simple assay kit built in tiny microwell plates, ranging from 24, 48 or 96 wells per kit. Each microwell will contain little 3-D livers, which it then sells to pharmaceutical companies. Drug developers can use Organovo’s product to get up to 144 hours of data, and not just the 24 hours that 2-D assays allow.

Using Organovo’s product, a pharma could protect itself from spending a lot of money to bring a drug to phase 3 only to have the drug fail because of liver toxicity—or worse, bring a drug to market and then have it pulled off the shelf because of toxicity. From a pharmaceutical company’s standpoint, it’s a risk-reward calculation. It may cost more to buy these assays from Organovo, but one phase 3 trial could cost $25–50 million ($50M). There is a real value proposition here, and I think Organovo can start generating revenues as soon as next year.

TLSR: What about using different cell types to build other organ models as toxicity screens?

JN: Liver toxicity is the No. 2 largest reason for drug failure. The No. 1 cause is cardiovascular toxicity. But this first development project at Organovo makes sense, because liver tissues can be grown, and liver is the only organ that can regenerate itself. Starting with liver, the company can map out the process and gain traction with its first product offering. Then it makes sense to create 3-D lung, kidney and cardiac assays.

In recent conversations, the company has talked about building oncology models as well. It has been expanding its research capabilities in this area, having signed collaborations with ZenBio Inc., the Knight Cancer Institute at Oregon Health and Science University, and even software maker Autodesk Inc. I can’t tell you what the next product will be, but I know Organovo wants to create a suite of biological toxicity and oncology assays that it can take to large pharma. It will definitely expand once it qualifies the process.

TLSR: Your next thought?

JN: I have mentioned the banking team, the private equity group and the investors who brought Organovo and InVivo public. What I didn’t mention is that this team brought another company public,Prolor Biotech Inc. (PBTH:NYSE), which I do not cover. Just to give you a sense, Prolor was less than $1/share in 2009, and it was recently acquired by OPKO Health Inc. (OPK:NYSE) for more than $6/share, more than $500M. These guys know what they’re doing. I’ve found a banking team and a private equity group that is three-for-three in grand slams. Now that team, headed up by Adam Stern at SternAegis Ventures, has brought a fourth company public, called LabStyle Innovations Corp. (DRIO:OTCBB), which I want to talk about.

TLSR: Clearly you love the pedigree. Tell me about the company.

JN: Diabetics must carry around a glucometer, a lancing mechanism, test strips and usually a needle and insulin. If you’re female, you might just throw it all in your bag. If you’re a guy, you might put it all in a little satchel. LabStyle has developed a product called Dario, which is the size of a stick of gum or a lighter and includes three mechanisms in one—the test strips, the glucometer and the lancing mechanism. The Dario ties into your smartphone. There are other products on the market that are similar, but they connect through the phone’s charging dock, and different smartphone brands have different charging docks. The Dario hooks in through the headphone jack, which is universal. It’s truly an elegant design, and LabStyle looks like another Prolor, InVivo and Organovo.

TLSR: Where is Dario in development? What is the regulatory pathway?

JN: LabStyle is an Israel-based company, so it started overseas. It filed for approval and is currently awaiting the CE mark, which is clearance for sale in the European Union. The company says it is on track for that approval in the next couple of months. Approval is about nine months or so behind that in the U.S., and I would expect the company’s 510(k) clearance for the U.S. market to come at some point next year. I encourage people to go to <href=”#product-spin” target=”_blank”>mydario.com and check out this device. The company just raised money, and is signing distribution partners. It is putting the pieces into place so that, as soon as it gets the CE mark, it is off to the races in Europe. With 510(k) approval next year, it’s off to the races here in the U.S. I think this Dario product is a winner. It’s a very clean story in a huge market.

TLSR: We talked about foreign investment earlier, and you seem very comfortable with it. I know you follow Canadian companies too. You’ve done quite well with one called Cipher Pharmaceuticals, Inc. (DND:TSX), haven’t you?

JN: Yes. Cipher is based in Mississauga, Ontario, and I initiated coverage on it at $0.96 two years ago. The stock is at around $6.60 today. I’m up almost 650% on this small Canadian pharmaceutical company. I’m the typical U.S. investor—skeptical of any company that is not in the U.S.—but I dug into this name and found it sitting on a potential gold mine.

Cipher has an improved formulation of isotretinoin, which is the most commonly used prescription acne medication. It licensed the drug to Ranbaxy Laboratories Ltd. (RBXLY:OTCMKTS), which markets the product as Absorica. Cipher markets the product as Epuris in Canada. The sales are unbelievable, and it has only been on the market for a couple of months. Every time I see the IMS Health numbers, they exceed my expectations. I just put out a note to Zacks investors and titled it, “Yes, I’m Raising my Estimates on Cipher Again.” It has been a wonderful growth story—a true diamond in the rough.

TLSR: Jason, you just recently initiated coverage on a couple of companies. Could you talk about them?

JN: One is an Australian biotech, a regenerative medicine company. The other is a small Canadian biotech. The first is Avita Medical Ltd. (AVH:ASX; AVMXY:OTCQX), listed in Australia and the United Kingdom. It has a regenerative medicine device product called ReCell Spray-On Skin (autologous cell suspension), a treatment for severe skin defects, burns, scalds, scars, vitiligo (discoloration of the skin when melanin is lost), acne scarring and what I call the holy grail of indications, chronic wounds. I like this product because it makes sense for burns and scalds, especially in children. It’s a difficult story to communicate—the pictures at the company’s website are worth a thousand words.

Avita’s ReCell product is fantastic because all that is needed to generate the suspension is skin from a donor site about the size of a postage stamp, instead of a huge harvest that creates another large wound, and two painful sites that need to heal. With ReCell, a skin biopsy is put in the ReCell kit, which separates and isolates the patient’s skin cells through an easy-to-follow, six-step process. The cells can then be sprayed onto the wound and a new layer of healthy skin grows.

TLSR: This product already has an approval, doesn’t it?

JN: It’s approved in Europe, but things in Europe are a little different with respect to marketing medical devices. Companies file for approval of a medical device without specific use claims. Once approved, the European Medicines Agency (EMA) asks for post-marketing studies to clarify specific uses of the approved device. These post-marketing studies then serve as the basis for gaining insurance reimbursement. In the U.S., ReCell is essentially in phase 3, and we’ll get data from that trial next year. Then Avita will file for approval, and ReCell should be on the U.S. market in 2015.

From a burns and scalds standpoint, ReCell is going to dominate the market. From an acne scarring or vitiligo standpoint, I think it can capture significant market share. For chronic wounds, venous stasis ulcers, diabetic foot ulcers and similar conditions, I need to see more data on how ReCell fares compared to the market-leading products, such as Dermagraft (human fibroblasts on a dissolvable mesh material; Shire Plc (SHPGY:NASDAQ; SHP:LSE), Apligraf (graft skin; Organogenesis Inc. [private]) or EpiFix (biologic human amniotic membrane; MiMedx Group, Inc. (MDXG:OTCBB)).

TLSR: You have to obtain cells from the biopsy, but you can’t macerate the tissue when you are processing it because you must have vital cells in suspension to spray onto the wound. How are the ReCell’s harvested cells processed?

JN: The cells must be aggregated to break them up, but you have to be gentle enough not to kill them. With ReCell, the process is done with a mini-medical device right on site, and takes about a half hour. The kit comes with all the necessary buffers and reagents. No harmful chemicals or growth hormones are added to the cell suspension. The suspension contains all of the skin cells necessary to promote healthy skin growth: skin stem cells, keratinocyte cells that form the basis of healthy skin, fibroblasts that produce collagen-providing texture and fullness, melanocytes that produce skin color (melanin).

The cells in the ReCell spray have shown viability in studies that compares to that of non-disrupted cells. The product has shown healing rates comparable to allogeneic (same species donor) products. I like ReCell because it’s autologous, meaning that it comes directly from the patient. If a patient has vitiligo, a clinician can obtain a biopsy from right below the vitiligo, process and spray. The same with a burn. And there are no supply issues.

TLSR: What is the business model? Is there a license fee paid to Avita for every use of the processing device?

JN: Almost all medical devices now follow the razor-razor blade model. You buy the device, a “lab-in-a-box” modular system, from Avita, and then you buy the single-use consumable sets. When you run out of spray bottles or kits, you go back to Avita and buy more consumables as needed.

TLSR: I’m noting this 106-patient burn trial (NCT01138917) says that pivotal data completion will be accomplished by mid-2014. When can we expect to see those data?

JN: I would say pretty close to that time. The trial was 85–90% enrolled in March 2013. My guess is that it’s fully enrolled by now, and that investigators are waiting on patients to heal and get the evaluations. As soon as that last patient hits the endpoint, the company should be able to package and present data pretty quickly. I expect data by the middle of 2014, and then an application, at least for burns and scalds, will go to the FDA shortly after.

Outside of burns and scalds, we recently got information from the company on the initiation of a 65-patient trial studying ReCell’s effectiveness in treating chronic venous leg ulcers. The trial, called RESTORE, will take place in Europe and should help expand use and reimbursement of the device. If you look at the company’s preliminary data on ReCell in venous leg ulcers and diabetic foot ulcers, it is very encouraging. Chronic wounds represent a very large market opportunity for Avita. I am pleased to see clinical activity moving forward with ReCell.

TLSR: What about that other company that you just recently initiated on?

JN: Cynapsus Therapeutics Inc. (CYNAF:OTCQX; CTH:TSX.V) is a small Canadian company developing a sublingual formulation of a drug called apomorphine, which is a rescue medication for Parkinson’s disease patients who experience something called “off time,” a rigid or frozen state that occurs when their levodopa + carbidopa medication has worn off. This typically happens in the morning, because the Parkinson’s patient takes his or her last dose of medication before bed, and it has worn off by the time they awaken.

Apomorphine is a rapid rescue medication for that “off time” state. An injectable formulation of this product, called Apokyn (U.S. WorldMeds [private]), is on the market. It is absolutely the right drug because it works. But Apokyn is completely wrong for a patient who has dyskinesia (uncontrollable movements), because the patient can’t administer his or her own drug subcutaneously with shaking hands. Neither is it feasible for patients in “off” episodes—who are frozen—to give themselves a shot. Oral tablet formulations of apomorphine have failed because they get deactivated by the liver on first-pass metabolism. Cynapsus’ sublingual film formulation of apomorphine is put under the tongue and dissolves in a very short period of time. Patients with dyskinesia can take it themselves. It just makes sense.

The regulatory route for this reformulated drug is through the FDA’s 505(b)2 pathway because the drug is already on the market, so Cynapsus doesn’t have to generate a lot of efficacy data. It has go to the FDA with similar blood plasma bioequivalence and biomarker data as for the injectable apomorphine, to show the new formulation gets the drug into the blood at the right concentration. The company also has to demonstrate long-term safety, but we see this as a relatively low hurdle given the history of Apokyn.

TLSR: If this sublingual formulation of apomorphine is effective as a rapid rescue, how much could it be worth?

JN: I think it could be a $500M or more opportunity. Parkinson’s is an enormous indication, and almost all Parkinson’s patients experience this on/off phenomenon. Apokyn was an orphan drug, protected for seven years, so no one has been able to develop an additional formulation. As soon as Apokyn came off orphan protection, Cynapsus got the patent for the sublingual formulation. This is a very clean, low-risk story, and I love the way Cynapsus has pulled this off, being the first to patent this delivery.

If this were a U.S. stock, it would be four or five times the price it is now, but because it’s in Canada, no one knows about it. Cynapsus reminds me a lot of Cipher when it was trading at $0.64 and no one was looking at it. All of a sudden, people started to take notice. That’s where Cynapsus is right now.

TLSR: When could Cynapsus’ product be on the market?

JN: It could be on the market as early as 2016.

TLSR: This is a $17M market cap company. That would scare most people away, but you’re clearly very passionate about it. Data are expected from a phase 1 trial in healthy human subjects in Q3/13. If data from the phase 1 study show the right levels of apomorphine in the serum, will that move these shares?

JN: I think so, yes. I don’t think Cynapsus has a drug problem. I think it just has an awareness problem. The company is financed.

TLSR: You have written some quite detailed work on Neuralstem Inc. (CUR:NYSE.MKT) recently. Everyone thinks of it as a stem cell company, but you are very excited about another side of its technology, aren’t you?

JN: Yes. Everybody knows Neuralstem as the company treating amyotrophic lateral sclerosis (ALS) patients with neural stem cells, directly injecting them into the spinal cord. It has just gotten an approval to use those same exact cells in a spinal cord injury trial. The lesser known part of the story is Neuralstem’s phase 1 small molecule program with NSI-189, which is addressing a completely new mechanism of action for depression and other neurological disorders.

What excites me is that new discoveries of mechanisms of action and new targets for central nervous system (CNS) disease don’t come around very often. Do I know that Neuralstem’s phase 1 trial is going to work? No. . .but the fact that the company is working on something new in CNS, and also has interesting animal data with preclinical proof of concept, leads me to believe that if Neuralstem can show that this molecule is safe and if there are some signs of efficacy, there is going to be a lot of interest from big pharma. I don’t want to oversell this, but if this NSI-189 molecule hits, it could be a tenbagger for the company.

TLSR: When are the phase 1 data expected?

JN: In Q3/13 or Q4/13. It’s tough to peg the exact time. We’re waiting for patients to enroll.

TLSR: I find it very interesting that Neuralstem’s phase 1 trial with NSI-189 is only a 24-patient study, yet it is double-blind. Also, the idea with this drug is to stimulate neo-neurogenesis in the hippocampus. This is a tall order, isn’t it?

JN: The belief is that hippocampal atrophy starts the major depressive disorder—or Alzheimer’s disease, schizophrenia, bipolar disorder, anxiety disorder. It’s the destruction of the hippocampus that leads to those indications.

For Alzheimer’s disease, a lot of researchers have spent a lot of time looking at beta amyloid and plaque formation. We are starting to get the sense, in some parts of the scientific community, that beta amyloid and plaque are a result of the disease, not a precursor to the disease. The precursor to the disease could be hippocampal atrophy. Neuralstem’s NSI-189 is designed to protect the hippocampus, stabilize it and even grow it, so that patients never get to the point where they have major depressive disorder, Alzheimer’s, anxiety or schizophrenia. Big pharma may come to Neuralstem and say, “Thanks for the phase 1 depression data, but we’re going to take the next steps into anxiety, Alzheimer’s or schizophrenia.”

With regard to the size and design of the phase 1 trial—24 patients and double-blind—Neuralstem specifically ran a larger-than-usual phase 1 program so that it could generate enough data to attract a big pharma partner. The goal was to show the mechanism works. Where the pharma companies take it remains to be seen.

TLSR: Jason, this has been terrific. Thank you.

JN: I appreciate that. Thanks a lot, George.

Jason Napodano is senior biotechnology analyst for Zacks Investment Research. In 2009, Napodano was promoted to managing director of research for Zacks’ Small-Cap Research division, which focuses on writing high-quality institutional research on underfollowed or undervalued small-cap stocks. Prior to his tenure at Zacks, Napodano spent three years on the buyside with Eastover Capital in Charlotte, N.C., where he focused on large-cap equities and specialized in healthcare, energy and technology. Prior to joining Eastover, Napodano worked as a research scientist for TechLab Inc., a biotechnology company focused on developing diagnostic kits and vaccines for infectious diseases. He also spent a year working in a lab at the Fralin Biotechnology Center, and a year working for a cancer researcher in Virginia. Napodano has a bachelor’s degree in biochemistry from Virginia Tech, with an additional bachelor’s degree in chemistry and a minor in math. He has a master’s degree in business administration and finance, with a concentration in securities analysis, from Wake Forest University. Napodano is also a Chartered Financial Analyst (CFA).

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DISCLOSURE:

1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Life Sciences Report:Neuralstem Inc., Cynapsus Therapeutics Inc., Avita Medical Ltd., OPKO Health Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Jason Napodano: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. Zacks has or seeks to have a financial relationship with the following companies mentioned in this interview: InVivo Therapeutics Holdings Corp., Organovo Holdings Inc., Prolor Biotech Inc., OPKO Health Inc., LabStyle Innovations Corp., Cipher Pharmaceuticals Inc., Avita Medical Ltd., Cynapsus Therapeutics Inc., Neuralstem Inc., Shire Plc, MiMedx Group Inc., Ranbaxy Laboratories Ltd. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

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By www.CentralBankNews.info     Egypt’s central bank cut its overnight deposit rate by 50 basis point to 9.25 percent, along with its other rates by the same amount, saying the downside risks to economic growth were outweighing the upside risks to inflation.
    The Central Bank of Egypt (CBE), which last raised rates in April to fend off inflationary pressures, added that it would closely monitor all economic developments and “will not hesitate to adjust the key CBE rates to ensure price stability over the medium-term.”
    Egypt’s headline inflation rate rose to an annual rate of 9.75 percent in June from 8.2 percent in May, mainly due to increases in food prices.
    But the bank said upside risks to inflation had moderated as the possibility of a rebound in international food prices was unlikely in light of recent global developments.
    Economic growth in Egypt has been hard hit by continued political unrest but Gross Domestic Product still expanded by an annual 2.2 percent in the first quarter, unchanged from the fourth.
    But the central bank said investment levels have remained low given the heightened uncertainty and “the current political transformation may continue to have ramifications on both consumption as well as investment decisions,” along with risk to the global recovery.
    “The pronounced downside risks to domestic GDP combined with the persistently negative output gap since 2011 will limit upside risks to the inflation outlook going forward,” the bank said.

    www.CentralBankNews.info  
   

By www.CentralBankNews.info     The Czech National Bank (CNB), which earlier today kept its policy rate steady at 0.05 percent, repeated that it would hold interest rates at the current level until “inflation pressures increase significantly” but added that it is now more likely to use intervention in foreign exchange markets to keep the koruna currency low.
    The Czech Republic’s central bank first raised the issue of using foreign exchange market intervention to lower the koruna currency last September and in May it said it was ready to use intervention if further policy easing becomes necessary.
    In its presentation to a press conference today, the bank sharpened its language, saying “the likelihood of launching foreign exchange interventions to ease monetary policy has increased further.”
    “Given the zero lower bound on monetary policy rates, this points to a need for easing monetary policy using other instruments,” it added.
    The CNB also revised its forecasts, projecting a contraction in the country’s 2013 Gross Domestic Product growth of 1.5 percent, up from its previous forecast of shrinkage of 0.5 percent, but then revised upwards its 2014 growth forecast to 2.1 percent from 1.8 percent and 3.3 percent growth in 2015.

      The CNB also revised downwards its inflation forecast, projecting consumer price growth of 1.7 percent in the third quarter of 2014, down from a previous 1.9 percent, and 1.8 percent in the fourth quarter of next year, down from 2.0 percent.
    “The new forecast does not predict an increase in inflation pressures and no tangible risks of such an increase in inflation pressures can be identified either,” the bank said, adding:
    “The risks to the new forecast are skewed towards a need for easier monetary conditions.”
    Headline inflation this year will be below the central bank’s 2.0 percent target while the monetary-policy relevant inflation will be below the bank’s lower tolerance boundary. The bank has a one percentage point tolerance band around its 2 percent target.
    Inflation in the Czech Republic rose to 1.6 percent in June from 1.3 percent in May while the country’s GDP contracted by 1.3 percent in the first quarter from the fourth, the seventh quarterly contraction in a row. On an annual basis, GDP shrank by 2.4 percent.
    The koruna has weakened against the euro ever since the central bank governor last September signaled that it may sell the currency in markets. This year the koruna is down 3.4 percent against the euro, quoted at around 26 to the euro today.
    In its latest forecast, the CNB projects and average koruna/euro rate of 25.7 this year, up from its earlier forecast of 25.6, then 25.6 in 2014, up from 25.3, and then 25.2 to the euro in 2015.

    www.CentralBankNews.info 
   
    

By www.CentralBankNews.info Here’s today’s Central Bank News’ link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don’t miss any important news.

Source: J. Alec Gimurtu of The Gold Report (7/31/13)

http://www.theaureport.com/pub/na/chris-berrys-strategies-for-profiting-from-a-distorted-reality-investing-after-qe

Quantitative easing has created new problems for commodity investors—the systemic distortion of the true supply-demand for commodities. What is a long-term investor to do? In this interview with The Gold Report, Chris Berry, founder of Mountain House Partners, explains what specific factors make a compelling junior miner in this market and lays out his strategy for profiting from a QE-distorted reality.

The Gold Report: After months of financial media coverage, investors are suffering from quantitative easing (QE) overload. At this point, what’s important for investors to know about QE?

Chris Berry: QE appears to be one of the last arrows in the quiver of central bankers in the U.S., the Eurozone and Japan to try and resuscitate the global economy. Successive rounds of QE have failed to ignite demand, which was the stated purpose. Currently, a great deal of economic data supports a deflationary rather than inflationary view.

The Federal Reserve would love to create inflation, as this is the intended effect of easy money from the QE programs. So far, however, the most prevalent inflation we have is asset price inflation rather than in wage growth. This is not what the Fed wants. We’re not seeing the “demand pull” inflation typically found when demand is outpacing supply. The two biggest overhangs in the U.S. economy right now are structurally high unemployment and a cratering velocity of money.

This has implications for productivity and demand worldwide. Personal balance sheet deleveraging must continue and will not happen overnight. Fed Chairman Ben Bernanke has clarified his intention to taper QE with the eventual goal of ending it outright. So it’s less a question of “if” QE will end, but “when.” The Fed wants the U.S. economy to stand on its own two feet and Bernanke’s public jawboning is, I think, testing the market’s readiness for the official end to monetary easing.

The spike in government bond yields and the increased volatility in the equity markets are signals that market participants are concerned about the end of QE. I still think the huge slack we see in the U.S. economy in aggregate demand has not diminished enough to end QE or similar programs like Operation Twist. Bernanke is walking a tightrope, as QE must end at some point but not too soon as to choke off a tenuous recovery in the U.S. economy.

TGR: Do you believe in “QE to infinity”? Or do you take him at his word that QE will be withdrawn at some point?

CB: QE will end in its current form because it has to. QE distorts the markets in many ways. One example is artificially low interest rates that give a false sense of security to market participants. The Fed’s stated target is unemployment below 6.5% or inflation above 2.5%. We’re not near either and Bernanke has acknowledged as much in recent statements to the U.S. Congress. Depending upon which Fed governor is speaking, there are different interpretations of where to go from here. This idea of a divided Fed vis-à-vis monetary policy is only adding to uncertainty in the markets.

TGR: What do you expect from the commodity markets as QE is removed?

CB: The only certainty is increased volatility until market participants can clarify the supply and demand dynamics in the absence of QE distortions. As an example, if aggregate demand remains subdued in the absence of QE, this will be negative for industrial metals like lithium, copper or graphite. Similarly, energy prices would also likely remain subdued. Conversely, if QE successfully increases demand and ignites inflation, we could see energy price spikes, which could hamper a global economic recovery.

I realize that I’m waffling a little bit here. Commodity pricing is dependent upon numerous factors, but the ultimate success or failure of QE is crucial to the health of the commodity markets, for sure.

TGR: QE has created several feedback loops that investors could react to in the short term, but that longer term investors might want to ignore. Is that why you’re writing about heading to the sidelines as a commodity investor for a few months?

CB: Yes. I recently wrote to subscribers that I was taking a pause in actively investing, and I’m going to re-evaluate this call in late Q3/13, so this is not an indefinite move. It’s also undeniable that there are some extraordinarily cheap companies in the junior mining space right now, but it doesn’t mean that they can’t get cheaper. Coupled with the fact that I view the global economy as essentially treading water right now, I’m just not compelled to aggressively buy shares in the market. Later this year, we’re going to know more from the Fed about its intentions on tapering QE and the trajectory of China’s slowdown in growth. These are two major catalysts in the marketplace.

Looking to year-end, investors should remember tax-loss selling may pressure the sector. Things may be cheap now, but they could get cheaper. If you’re a longer term investor, there is no harm in being on the sidelines. Rather than actively accumulating shares, my current focus is due diligence on a number of companies and metals. That includes reviewing economic data, technological advancements, and listening to clues from CEOs on earnings calls.

TGR: Besides low geopolitical risk, what does your ideal mining investment look like?

CB: Given the challenging environment for the junior mining industry today, it is critical that a company focus on its financial sustainability. A strong balance sheet and the ability to prudently manage cash in the face of declining or stagnant metals prices are absolutely crucial. Management must be able to execute its plans effectively and push forward with an effective exploration or development program—despite the current market sentiment. Management teams can’t control the price of gold or copper, for example, and therefore need to focus on cost control and finding opportunities in parts of the world with a record of being mining friendly. Nevada, which produces 80% of U.S. gold, is an excellent example.

TGR: What are the most important factors in selecting a junior mining investment?

CB: First and foremost is the management; its depth of experience is crucial. Second, as I mentioned, is the financial sustainability of the company. Third is the geopolitics. I like Nevada because of the well understood permitting process and respect for the rule of law. I have three favorites in Nevada that I like for different reasons—Terraco Gold Corp. (TEN:TSX.V), Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.MKT) and Pershing Gold Corp. (PGLC:OTCBB).

TGR: Let’s start with Terraco. What is the opportunity?

CB: Terraco has sound leadership in CEO Todd Hilditch, as well as very experienced geologic knowledge in Charlie Sulfrian and Dr. Ken Snyder. Terraco is focused on two projects, one in Nevada called Moonlight, which is 8 kilometers north of Coeur Mining Inc.’s (CDM:TSX; CDE:NYSE) Rochester mine, and one in Idaho called Almaden, which contains a Measured resource of 239,000 ounces (239 Koz) gold, an Indicated resource of 625 Koz gold and an Inferred resource of 84 Koz gold.

However, to me the most interesting asset is a royalty Terraco has. This is a net smelter return (NSR) royalty of which Terraco has an option on and owns a portion of up to 3% on the Spring Valley deposit, which Midway Gold and Barrick Gold Corp. (ABX:TSX; ABX:NYSE) are jointly developing. Valuing a royalty is a subjective exercise. My analysis indicates that the value of the Spring Valley royalty could be larger than Terraco’s current market cap. To be clear, this is based only on my own assumptions, but it’s one of the main reasons I think Terraco is undervalued. It is early days for the company, and I see a lot of unrealized value here.

TGR: Why is Pershing a favorite?

CB: Pershing is to the south of both Terraco and Midway on the Humboldt range. Pershing is substantially derisked relative to a number of other gold exploration and development plays. The company is consolidating a land package with a past-producing mine called Relief Canyon. It’s run by Steve Alfers, who has a background as chief of U.S. operations at Franco-Nevada Corp. (FNV:TSX; FNV:NYSE). He has a wealth of experience across the entire mining value chain. Relief Canyon was a past-producing, open-pit mine with low operating costs. The processing facilities at Relief Canyon are fully permitted and refurbished, which lowers the capital expenditures (capex) to get to production.

Relief Canyon has an NI 43-101 in-pit resource of approximately 463 Koz gold in the Measured and Indicated (M&I) categories and approximately 101 Koz in the Inferred category, with additional growth potential. For those investors who take solace in a “major” investing in a junior, one should not overlook the strategic partnership Pershing has initiated with Coeur Mining, which owns over 10 million (10M) shares in the company.

TGR: Do you have any concerns with Pershing’s limited cash position?

CB: That is obviously a real challenge for any junior. But given that we know a great deal about the economics of production, and the company has just started a new drill program to increase the size of its resource, this is currently not a concern.

TGR: The other one you mentioned is Midway. Speaking of cash, Midway did a financing at the end of last year and raised at least $70M, so doesn’t that put it in a strong position?

CB: Midway is a great story. This is a company with a pipeline of properties, most of which are in Nevada. It has a fantastic cash position and near-term production in the Pan deposit. Pan has a projected capex of about $99M. The deposit is at surface and suited to open-pit mining methods. The Proven and Probable reserves are approximately 864 Koz gold. It will be a low cost producer. Midway is targeting putting Pan into production in 2014. Additionally, Midway has a joint venture with Barrick at Spring Valley, which I alluded to when discussing Terraco.

Barrick has earned into a 60% interest in the joint venture and has stated that it will spend another $8M to earn up to 70%. The deposit has 2.2 Moz gold M&I and approximately 1.97 Moz gold Inferred. Recent additional drilling has potential to increase the size of this resource in the future. Midway has strong, experienced management in all aspects of mining from exploration through development into production. It also has strong institutional support, attractive project economics and the geopolitical stability of Nevada.

TGR: What is the exit strategy for the juniors that we just discussed? Do they require majors with lots of cash?

CB: The exit strategy hasn’t changed. The typical junior mining company will explore, make a discovery, develop it to a point and then typically try and position it to a major who is looking to add ounces or pounds to its own pipeline at an attractive, economic price point.

What has changed is how the juniors raise the adequate funds to execute this model. Raising small amounts (say $200,000 at a time) through the traditional equity channels is a recipe for failure and a sure way to slowly dilute shareholders into oblivion. Junior mining companies today must become much more creative in how they raise adequate capital. This may include funding from strategic investors such as life insurance companies looking to increase their overall rate of return or investing in royalties.

Failed mergers and acquisitions are a large part of the reason for many mining companies’ CEOs walking the plank recently. Capex on projects got out of hand, and the majors are writing off these projects. Going forward I expect the majors to continue retrenching and writing off assets. That does not bode well for the junior mining sector, but I do believe this is a short-term phenomenon. Ultimately, the major mining companies will need to replace mined ore. That’s why the junior mining sector is a critical part of the whole value chain.

TGR: Thanks for taking the time to talk with us. We look forward to checking in with you in the near future.

CB: It has been a pleasure.

Read Chris Berry’s ideas on investing in rare earth elements and graphite.

Chris Berry, with a lifelong interest in geopolitics and the financial issues that emerge from these relationships, founded House Mountain Partners in 2010. The firm focuses on the evolving geopolitical relationship between emerging and developed economies, the commodity space and junior mining and resource stocks positioned to benefit from this phenomenon. Berry holds a Master of Business Administration in finance with an international focus from Fordham University, and a Bachelor of Arts in international studies from the Virginia Military Institute.

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DISCLOSURE:

1) J. Alec Gimurtu conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Gold Report: Terraco Gold Corp., Pershing Gold Corp. and Franco-Nevada Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Chris Berry: I or my family own shares of the following companies mentioned in this interview: Terraco Gold Corp. I personally am or my family is paid by the following companies mentioned in this interview: Pershing Gold Corp. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

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