Emerging Juniors Continue to Show Good Progress: Dale Mah
Source: Zig Lambo of The Gold Report (12/19/11)
This year has been difficult and confusing for many investors in the resource sector. Despite that, many junior companies with credible projects have continued to show good progress toward future production. In this exclusive interview with The Gold Report, Dale Mah, equity research analyst with Mackie Research Capital, talks about the general market environment, discusses his selection criteria and shares some of his favorite picks for the coming year.
The Gold Report: This gold market has been relatively confused in the last few weeks. We've had some pretty big fluctuations and days where we had big drops in one day, with the markets going in the same direction as the metals, contrary to what people would expect. What's your take on what's going on now, where things are headed in the coming year, and what kind of catalysts we are looking at that are going to make these moves happen?
Dale Mah: Most analysts would probably agree that the big price surge in gold during that high-week period in August/September was too fast. Lately, when we see gold selling off, it's usually because of a switch into the U.S. dollar. Considering the price of gold started the year at $1,420/ounce (oz), that's still an 18% return compared to -3% for the Dow. Our long-term view is that we're still in a good upward trend in gold with recent volatility due to global economic uncertainty. If we can see some improvements in the European debt situation, I think it will bring some confidence back.
TGR: Looking at a lot of these junior stocks, it seems like they haven't gotten the message yet and are trading as if gold were still down in the $800-900/oz range versus twice that price. What do you think is the problem here?
DM: Many factors affect the price of junior exploration companies. Right now, risk is the key. In the current investment climate, those looking at rebalancing their portfolios or just wanting to generate some liquidity decide the highest-risk stocks are usually the first to go. Naturally, that drives the prices down.
TGR: How do you define risky ones at this point-from the standpoint of fundamentals or just the fact that people are not buying them and so you think they're just going to sit around and do nothing?
DM: Those would be the early-stage projects or perhaps advanced projects with an element of risk, usually financial risk. A company might have huge NI 43-101 resources, but can also be associated with equally high capital expenditures (capex); that's a huge risk factor. So those will sit on the shelf, because in times like these, when you have a company needing to invest several billion dollars into a project, that's where you'll see spending cuts.
TGR: We see really encouraging news releases coming out every day from all sorts of companies, and yet there doesn't seem to be much reaction. Even looking back at one of the companies you follow, Amarillo Gold Corp. (AGC:TSX.V). The company came out with a very positive news release back in the middle of September, but the stock dropped about 25% in the next few days. It came back up after that. What seems to be the problem with that? Don't people care?
DM: Specifically with Amarillo there are two things. When it released its resource, it was focused more on upgrading resources so there wasn't really much growth expected. But it did increase its Measured and Indicated resources by about 89% in preparation for a feasibility study. So now it stands at 1.33 million ounces (Moz) compared with 1.17 Moz, which is a modest 14% growth. Shortly after that, beginning Sept. 22, is when we saw gold drop by about $200/oz in about a week. That certainly didn't help gold stocks. Amarillo has recovered somewhat, but it does trade fairly thin so the price doesn't seem as volatile as other juniors.
TGR: There are a lot of smaller companies out there with properties that are pretty credible, and, in years past, people would have been jumping all over them. Now it seems like not much is going on. Do the majors have more on their plates than they can handle or are there just too many things to pick from out there?
DM: With gold prices this high, small deposits get new life so there are a lot of projects to evaluate. However, there aren't very many world-class deposits out there anymore. The 10-20 Moz deposits are the ones that usually get snatched up. There are a lot of small, lower-grade deposits out there that look great when you run an economic cash flow model at current prices, but does a big major really want to take the risk on something small? A higher-grade deposit will be able to absorb fluctuations in gold prices whereas a low-grade deposit may not be very robust. I think they're just sitting back and waiting, unsure if gold prices can hold these levels.
TGR: As far as valuations of deposits these days, what rule of thumb do you apply to gold in the ground in dollars per ounce?
DM: It varies with the stage of the project. We tend to use about $50-75/oz for some early-stage projects and anywhere from $150/oz and up, maybe even up to $300/oz for advanced and developing projects. If the project has a higher degree of risk, like a prohibitively large capex, then $25/oz wouldn't be out of the question.
TGR: A lot of companies seem to be pretty undervalued now. What are you using for criteria to decide who you want to cover and recommend?
DM: I have three main criteria. The main one is multimillion ounce potential. The second one is good infrastructure. The third one is a politically safe jurisdiction. That's my checklist.
TGR: The politically safe factor has certainly gotten into the news a lot more, recently. All these countries and jurisdictions are realizing that they want a bigger piece of the pie. It looks like that's something companies have to worry about a lot more. What are your thoughts on that?
DM: Every situation is unique. Recent developments in Peru have certainly added some degree of risk. Financially speaking, the biggest change was a switch from royalty payments on sales to a new system of royalties on operating profits. It makes sense and the amount collected by the government will now scale to metals prices. It benefits the country when commodity prices are high, but is not too onerous on the company if prices dip.
On the political side, however, it's getting a little bit more uncertain. Peru has received about $50 billion (B) in investments, and the country really is at risk of losing much of that because concerns have arisen from approvals that are already in place. Newmont Mining Corp. (NEM:NYSE) halted construction of the $4.8B Conga mine. The company pretty much has said it will go elsewhere if the situation isn't resolved. I agree that there needs to be a balance between economic development and social and environmental standards, but President Humala still needs to provide some stability for the country's biggest investors.
TGR: Do you think he'll get the message, or is he just on a mission and doesn't care what the results are?
DM: He set a precedent with what happened with Bear Creek Mining Corp.'s (BCM:TSX.V) project. Bear Creek was a project that had received all required approvals but the former President had cancelled them after locals protested. In my opinion the current government needs to take a stand and support the country's largest economy. Peru just can't afford to shut down the mining sector.
TGR: You follow a number of junior companies that have pretty promising projects. A number of these have come out with some updated reports in the last few weeks. Which ones would you like to talk about at this point that you consider your top picks?
DM: One of my top picks is Probe Mines Ltd. (PRB:TSX.V). It has everything I look for in a company-multimillion ounce potential (4.1 Moz and growing). It's located in northern Ontario, which is traditionally supportive of natural resource development and has excellent infrastructure. The town of Chapleau is just a short drive away and has power generation, paved highways, a rail service and an airport with a 5,000-foot runway.
Another one is Sunward Resources Ltd. (SWD:TSX.V) in Colombia. It traded fairly flat despite more than doubling its resource from 3.7 Moz to 8.3 Moz. It's sitting in a great porphyry district and has excellent expansion potential where I can see a resource exceeding 10 Moz.
TGR: Has the market reacted positively to that huge increase in resources?
DM: It has traded fairly flat and didn't really take any giant leaps nor drastic falls. It's hung on pretty solid around $2/share. I don't think the market has really recognized the scale of this project.
TGR: So what do you think is going to be the catalyst for that one to go somewhere?
DM: It's going to be all about drilling right now. It has several great targets yet to be tested. The bulk of the 8 Moz is within two of seven zones.
TGR: How about some of the other ones you like?
DM: Colombia Crest Gold Corp. (CLB:TSX.V; EAT:Fkft) is one I have been following for a few months, and I think it's a great buy at these prices. It's actually a neighbor to Sunward, and all the signs of another big porphyry system are there-geochemistry, geophysics, surface sampling and surface mapping. IAMGOLD Corp. (IMG:TSX; IAG:NYSE) bought about 20% of the company a few weeks back. This is all before Colombia Crest has even gotten to drill a single hole.
I've also recently returned from a visit to Freegold Ventures Ltd.'s (FVL:TSX) Golden Summit project in Alaska. Now this is not your typical remote Alaskan project. It's located a short drive from Fairbanks, which has a rich mining history. It's fewer than 8km from Kinross Gold Corp.'s (K:TSX; KGC:NYSE) Fort Knox project. The two projects are actually connected by a road. It has an NI 43-101 resource of about 700,000 ounces, but recent drill results show that this has potential to grow 50-100%. So again, referring to my checklist, it has multimillion ounce potential. It's not there yet, but I could definitely see it hitting that number in the next year. Infrastructure? It's a short drive from Fairbanks, which is accessed by commercial airlines. There's a highway with grid power that also connects to the Fort Knox project. This is a politically safe jurisdiction with a rich mining history going back many years.
TGR: How about some of these other companies that you've talked about in the past and you still like?
DM: Amarillo Gold. It just came out with the results of its prefeasibility study (PFS). It's fairly conservative and there is room for improvement: perhaps more pit shell refinement and a bit more drilling as well to upgrade Inferred resources. Currently, because it's a PFS, it can only count the Measured and Indicated resources and the Proven and Probable reserves. Even though there are Inferred resources that fall into the pit shell, they are actually counted as waste as far as the PFS is concerned. This will help decrease strip ratio and reduce operating cost. Also, the pit shell is based on $1,100/oz gold, so if you used less conservative values such as $1,300/oz or $1,400/oz gold, you would have more gold falling into the conceptual pit, more gold produced and better net present value. I think there is definite upside on Amarillo's very conservative PFS.
TGR: You talked about Kiska Metals Corp. (KSK:TSX.V) last time. Anything new on that one?
DM: Kiska just wrapped up its Island Mountain program with drill results that were recently released. Island Mountain is looking pretty intriguing and is a nice breccia target. I think it will have some continuity issues that it will have to work on next year but from what I see from the drill results, I think it could add, at a minimum, 0.5 Moz and could get up to 0.75Moz-1 Moz.
TGR: How about Geologix Explorations Inc. (GIX:TSX)-you talked about it last time. Anything going on there?
DM: It has drilled a lot of meters this year and is going to do another resource estimate to see how much bigger it was able to make its Tepal gold-copper porphyry project in Mexico. It increased the drill density, upgraded its resources and will move on to a PFS, probably next year. That will just constrain the engineering and costs to a much higher confidence level.
TGR: Then there is Magellan Minerals Ltd. (MNM:TSX.V). What's happening with that one?
DM: Magellan is being fairly aggressive, and I respect its management for the type of drill program it's putting together. All the holes that have been drilled this year are stepout and expansion, rather than infill holes. Many companies put out news releases with fantastic intercepts and sexy grades but when you look into them, they're infill holes, which do little to increase resources and ounce count. Magellan is drilling some risky exploration holes and I think what we've seen in the share price recently is a reflection of that. You get more value from your budget in an early-stage project when you drill and try to expand your resource than by drilling within it. Magellan has hit some new zones this year that provide more directions to grow. The question is how much.
TGR: It sounds like there is progress being made with all of these. I guess, now we just need the market to recognize this and take some of these things higher. We're into tax loss selling season. It looks like most of these companies are probably pretty good buys. Would you agree?
DM: Oh, absolutely. Again, it depends on your situation. There are certainly a lot of bargains out there, but in uncertain times like these, risk is not the flavor of the month. So there's a tendency more toward large cap producers that pay dividends and have a lot of cash in the bank. January has traditionally been the time to pick up a few juniors.
TGR: What parting thoughts do you have for our readers on how to gauge and play this market with all these confusing factors?
DM: For the average investor, try not to pick the bottom. Everyone has an opinion, including me, but make your own decisions based on the best information that is available. We are in a tough economic environment. Many stocks are at or near all-time lows, but if we just think long term, we should all be in pretty good shape.
TGR: We'll keep that in mind and see how things develop. We greatly appreciate your time today and look forward to talking with you again in the new year to see what has happened with these companies.
DM: My pleasure. Thanks.
Dale Mah is an equity research analyst based in Mackie Research Capital's Vancouver office. Mah joined Mackie Research Capital in June 2010 after working in mining and mineral exploration industries for over 14 years and has experience in base metals, diamonds and gold in all stages of mineral exploration and mining, including grassroots exploration, advanced projects, production geology, mineral processing and resource estimation. He focuses on junior and developing exploration companies in the mining sector operating worldwide. Mah graduated with a Bachelor of Science with a specialization in geology from the University of Alberta in 1996 and has worked with both junior exploration companies and major mining companies.
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1) Zig Lambo of The Gold Report conducted this interview. He personally and/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: Amarillo Gold Corp., Geologix Explorations Inc., Kiska Metals Corp. Streetwise Reports does not accept stock in exchange for services.
3) Dale Mah: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. Dale Mah was not paid by Streetwise for participating in this story.
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