Look for Gold Juniors with Theme-Changing Catalysts: Annie Zhang

Annie Zhang: In 2011, gold was up by about 10%, while gold equities underperformed as investors became more risk averse. Junior exploration companies were beaten down pretty badly. We continue to hold a bullish view on gold, but we think 2012 is going to be a volatile year.

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Good stories with theme-changing catalysts will outperform in 2012, however. For example, Mega Precious Metals Inc. (MGP:TSX.V) is coming out with a resource update for the Monument Bay project in Manitoba. This resource update will outline for the first time the open-pit resource potential, which will significantly derisk the project and potentially improve the economics.

Premier Gold Mines Ltd. (PG:TSX) will come out with its preliminary economic assessment (PEA) on the Hardrock deposit, which is part of its Trans-Canada project in Northwestern Ontario. The PEA will provide more visibility for the project. Premier will also start exploration drilling sometime this year on the underground high-speed drift system passing through its joint-venture property with Goldcorp Inc. (G:TSX; GG:NYSE) in Red Lake.

TGR: You have a "speculative buy" on Mega Precious Metals and lowered your price target to $2.95 from $3.30. However, Mega has several promising projects, including Monument Bay and the North Madsen gold project in Northern Ontario's Red Lake camp.

AZ: We recently lowered the price to $2.95 due to the dilution. Juniors are facing financing risk under the current market conditions, especially companies with aggressive drill programs into 2012.

Mega has five projects in its portfolio. Three of them, including Monument Bay, North Madsen and Headway, are currently being actively drilled. The Satterly deposit, which is southwest of Gold Canyon Resources Inc.'s (GCU:TSX.V) Springpole deposit, was just optioned in May and Mega is currently doing the fieldwork there, preparing for preliminary drilling to test some early projects this year. It also has the Blue Caribou high-grade copper deposit in Nunavut, which has been on hold for a couple of years while Mega waits for infrastructure to be developed in the region.

Mega's management has been focused on Monument Bay and North Madsen, anticipating that they have the best potential to grow gold ounces. They have been delivering results. Through drilling conducted in 2011, North Madsen's gold resources in Measured, Indicated and Inferred categories increased to 1.3 million ounces (Moz) from fewer than 36,000 ounces (oz) in 2010. At Monument Bay, gold increased to 1.8 Moz, up from 1.2 Moz in 2009.

Going into 2012, Monument Bay and North Madsen will continue to be a focus. Drilling at North Madsen will be targeting growing ounces in order to prove the project will be economical as a standalone project. At Monument Bay, drilling will focus on growing ounces and derisking the project. Drilling at Satterly will depend on the funding availability. Whether drilling will continue at Headway will depend on the outcome of the current deep-hole drilling program.

TGR: You've assigned a $20 million (M) value to Headway, Blue Caribou and Satterly. It has done some drilling on those, but I thought that was a little high. Can you tell me why I'm wrong?

AZ: First of all, Mega's market cap, before it obtained 100% of Monument Bay through the $10M acquisition of Rolling Rock, was about $25M. Back then, it only had about 36 thousand ounces (Koz) in North Madsen, Blue Caribou was already on hold and it had 17% of Rolling Rock. That $25M market cap was mostly based on the Headway project because Headway was a very exciting project for Mega. It was located literally in the shadow of Goldcorp's headframe, about 600m southwest of Goldcorp's high-grade zone, 1 kilometer (km) south of the Campbell gold mine. If it hits something at Headway, the potential for stock price appreciation is huge.