Joe Mazumdar: Gold Mining Companies Too Good to Pass Up
Source: Brian Sylvester of The Gold Report (8/15/11)
Suffocated by staggering unemployment and economic woes, many mining jurisdictions around the world are finding the nearly $1,800/ounce gold too good to pass up. Joe Mazumdar, a senior mining analyst with Haywood Securities in Vancouver, tells The Gold Report in this exclusive interview which projects are primed to see the light of day in the face of rising gold prices and a dearth of other industry.
The Gold Report: What is your thesis for covering junior mining?
Joe Mazumdar: I break out the sector into different stages: exploration, development and production. In exploration, I look for a company with a good geological concept or model such as ATAC Resources Ltd. (TSX.V:ATC). When I looked at that company last year, it had a significant land package, which is another big component. The company was putting forward geological evidence backing up their concept of a Carlin-type deposit in the Yukon, which nobody had actually found before. The Yukon was getting a lot of activity, but the people who were behind that play had been in the Yukon since the mid-1960s which speaks to their on-the-ground experience. So in the exploration space, I look for a proven geological model on a significant land package attractive to a major/intermediate gold company with a management team that is more than capable of delivering on the catalysts.
For developers, I predominantly focus on companies that can come into production within a three-year timeframe. I consider geopolitical jurisdiction, but I compensate geopolitical risk with some advantages in grade, cost or other factors. I like plays in areas that are old mining districts that haven't been touched in a long time. The rising gold price has brought people back to these districts, which tend to be in less geopolitically risky areas, such as Spain and the U.S. (Idaho, Michigan and Nevada), among others.
Management is also very important because they have to bring this project to fruition. They have to manage it. They have to permit it. They have to develop a critical path. I want to know how long the permit is going to take. When will they get the long lead items? A good example would be Midway Gold Corp. (TSX.V:MDW; NYSE.A:MDW), which has a portfolio of advanced exploration to development projects in Nevada. Some (Pan, Goldrock, Midway) are of a size that would be management to the more-than-capable management team under Ken Brunk but it also holds an option on a potentially large gold-only deposit, Spring Valley, where Barrick is earning in.
Producers are not unlike the developers. I look for a growth profile from perhaps 50 thousand ounces (Koz.) to 150 or 200 Koz. within three years. A company that I'm looking at right now that fits the profile is Minera IRL Ltd. (TSX:IRL), which is looking to expand in Peru at the Ollachea Project and in the Santa Cruz Province of Patagonia. The management team at Minera IRL, I believe, is not only strong technically, they are very well levered with their capacity to negotiate successfully with local communities to permit development projects in Peru and the new political paradigm related to the election of Ollanta Humala as president.
TGR: There are literally hundreds of junior exploration companies. How do you break it down into 30 or so names that get on your list?
JM: Exploration companies are mostly run by geologists and most of those guys aren't really interested in bringing anything into production. They're interested in doing grassroots exploration, which is currently an area of less interest to larger companies. I'm looking for companies that are searching for assets with the right people on the ground, a history of exploring for these kinds of assets and a significant land package that would interest a major. I'm looking for them to drill it and come out with a resource to sink one's teeth into.
One example is Carpathian Gold Inc. (TSX:CPN), which has a large gold rich copper porphyry with about 7 million ounces (Moz.) in global resource within the Golden Quadrilateral of Romania. The area also hosts Gabriel Resources Ltd.'s (TSX:GBU) large Rosia Montana project (~16 Moz.) which, incidentally, has recently acquired a critical archeological permit, derisking somewhat the project's development timeline.
Revolution Resources Corp. (TSX:RV; OTCQX:RVRCF) is in an area of the Carolina Slate Belt looking for analogs of Romarco Minerals Inc.'s (TSX:R) Haile Deposit, which has more than 4 Moz. It's an example of a low geopolitical risk jurisdiction with high unemployment. Romarco's done a great job of proving up those ounces. It is proving to be even higher grade with underground potential. Revolution is looking in the same belt for a similar deposit style that would interest a major.
Astur Gold Corp. (TSX.V:AST) is another example of a company in a less risky jurisdiction. Astur is in the northwestern Spanish province of Asturias. The area has more than 20% unemployment, far higher than the average in the European Union. The area is an old coal mining district that has been subsidized by the E.U. As those subsidies go away, the unemployment rate will go up.
Astur Gold has taken advantage of that environment with its acquisition of the Salave gold project that was previously unable to be permitted. The company has proposed an underground development project initially at an area that was previously reneged on a permit for an open-pit by Rio Narcea Gold Mines-and the deposits are still there. It's been drilled out for the previous open pit design, but there's still some more drilling to do for an underground deposit. The company wants to put in a kilometer-long tunnel into the deposit under the trace of the old open-pit. It's a good example of a company taking advantage of the changing economic situation to bring a gold deposit into development that wasn't previously considered possible.
TGR: Are there some stories on this side of the ocean that fit your thesis?
JM: We have seen projects in Michigan and Idaho that people have told me would never get permitted and nothing would happen. But I've seen permitting in Michigan. The Kennecott Eagle project was permitted. Areas that were off limits are now being reviewed. We cover Orvana Minerals Corp. (TSX:ORV) that is looking to develop the Copperwood project, which currently sits on about 3 billion pounds of copper in global resource, in the upper peninsula of Michigan proximal to an old copper mine operation, White Pine. The Company has had very positive feedback regarding the project from the local community.
Politics, I believe, is local. In areas of high unemployment, whether it is Michigan, Idaho or the Carolinas (among others), it's enticing to show residents that a project could bring jobs. Some areas are also offering refunds on infrastructure capital investments that could reduce overall capital expenditures.
The U.S. is very good jurisdiction for reviewing and bringing up projects within old mining districts that were seen before as non-starters but lie in areas of high unemployment, where manufacturing has gone away.
TGR: What about Nevada? Unemployment rates in Nevada haven't been extraordinarily high, but it's certainly an old mining district in a very safe jurisdiction.
JM: Nevada housing prices were hit hard during the mortgage debacle. Elko, which is one of the bases of the gold mining industry in Nevada, is one of the places that have kept employment going. Housing prices there have remained stable because the city has some major and junior miners with a lot of exploration, development projects and operations.
AuEx Ventures (TSX:XAU, de-listed) had 50% of the Long Canyon deposit, located less than an hour outside of Elko, that was an excellent grade for an open-pit heap leach deposit. The nature of the deposit meant it would have low capital and operating costs. AuEx was taken over by Fronteer Gold and then Fronteer Gold, in turn, was taken over by Newmont Mining Corp. (NYSE:NEM). AuEx is a good story for Nevada coming back onstream as a low geopolitical risk jurisdiction that's got a lot of endowment.
Midway Gold, as we have discussed previously, has the bulk of its portfolio in Nevada. The Pan and Gold Rock projects are open-pit heap leach deposits, which are grading just above the average for similar deposits in Nevada. The company has drilled intersections that have graded up to a gram of heap leachable material that is 100% oxidized, getting recoveries of around 70%. It's very easy to mine with low capital requirements. The management team is perfectly capable of pulling it off. The financing risk is always high for these sorts of companies because they don't have any cash flow, but the capital amounts required are nothing that's insurmountable. It has a portfolio of projects as well, including the Midway project near Tonopah and the Spring Valley project in Pershing County.
TGR: In a recent news release, the company talked about re-assaying the core from Spring Valley, which earned a higher grade than the previous assays. The highlight was 218 meters of 2.7 grams gold. Why was the core re-assayed? That's an unusual practice.
JM: It's not unusual for this kind of deposit because it's very coarse, free gold. Doing a small fire assay doesn't always pick up the gold; metallic screen assays have been part of the assay protocol for a few years and have been adopted by Barrick, the JV earn-in partner on the Spring Valley project. I have a target of $2.60 for Midway Gold and it was recently trading at about $2.20.
TGR: You evaluate risk on five levels: forecast, financial, valuation, people and technology, and geopolitical or political risk. Can you explain how you evaluate those?
JM: Forecast risk is assessing the direction that the company says it's going and comparing it to my estimates. And sometimes there is no direction. You're on your own. For example, if I say the mining costs for an open-pit in this area are going to be x, then I'll use the comparables with a similar facility or development project in the area that has been costed to arrive at our estimate. If the company's statements are in the lower quartile of that cost comparables, I may estimate a larger cost for the company. I do the same thing for processing and capital costs.
Financing risk is much bigger for developing projects because they don't have any cash flow. They're going to have to go to the debt and equity markets as opposed to having organic cash flow to finance its development play. To quantify that in the model, I bring in the financing component and dilute the stock to compensate for future financing, if I believe it will develop the project themselves.
The technical and execution risk is a lot about the permitting, mining, and metallurgy of a project, among other factors. I was looking at one project that had a new type of floatation circuit that hadn't been used at the same scale this company was planning. There was a risk component because we couldn't be sure that the company could reproduce that scale. There is a risk around mining. Can the company get the aggregate to do a cement rock fill? What is the cost going to be like? Can the company actually get the permit in that timeframe? What does the critical path look like? I cannot mitigate risk, only attempt to quantify it. Risk mitigation is primarily the management's responsibility.
Political risk, such as mining in the Congo, for example, means an investor would really need to be compensated with a higher grade of metal. Chalice Gold Mines Ltd. (TSX:CXN; ASX:CHN) has a project with just over five grams of sheer zone-hosted gold in Eritrea, a geopolitical risky country near Ethiopia. The risk may be too much for some investors, but others who like that kind of deposit grade may think that it can work because the government there requires a lot of foreign exchange. Note the company recently completed a successful negotiation with the local mining authority. Nevsun Resources Ltd.'s (TSX:NSU; NYSE.A:NSU) Bisha Deposit is being developed there. The prospectivity of the belt , Arabian Nubian Shield, is excellent and of interest to majors.
TGR: How do you quantify the degree of geopolitical risk in a discounted rate?
JM: The volatility for gold is less than for other commodities such as oil, copper or silver, so the discount rate for gold tends to be lower. We usually use discount rates of about 5%, but for places like Bolivia or for some copper projects, we've used more than 10%. The geopolitical component is there, but the commodity plays a part in the discount rate.
TGR: If the rate of return is still fairly robust and you use a steeper discount rate, doesn't that make you sit up and take more notice of an asset?
JM: A project in a geopolitically uncertain area with a target about 100% over where it's trading can be something that investors are willing to take a risk on. If a company can only show a 15% or 20% return in a very geopolitically risky area, then an investor is probably not interested in that risk-return ratio. But that return might be acceptable for Nevada or British Columbia.
TGR: There can also be risks associated with a company's staff. Quite frequently I hear about mid-tier companies poaching people from juniors and a lot of staff shifting between companies because there really aren't enough people to go around.
JM: It's definitely an impact. Although junior explorers can operate with a smaller group and require less manpower, they range from a grassroots level up to drilling an advanced stage project. Once a company starts into development, it needs teams of miners, metallurgists, legal, compliance and so on. As a company moves downstream and begins development, fewer people have that kind of experience.
TGR: Is that boosting costs? Is a lot of financing going toward payroll?
JM: I have noticed that the G&A of companies have been trending higher especially for those who are closer to development and need to ramp up their staff. Some compensation is rolled up into stock as well. That's part of the impetus for somebody to leave a big company with a decent salary to go somewhere with a lower base pay, but the opportunity to make a significant windfall through stock compensation on a successful venture. Some people at larger companies who want to take that plunge are finding a lot of opportunities in the junior sector.
TGR: What are some companies with A+ management operating in low-risk jurisdictions?
JM: Midway has an excellent development and operations team led by Ken Brunk, its president, chief operating officer and director, who has built a lot of the asset base in Nevada for Newmont. He also has experience permitting and working with local governments and state regulators to get projects into production, as well as doing the technical work. His background is metallurgy, which is an important skill set as deposits become more difficult to extract.
TGR: If that's the case, it seems a lot of companies are going to face staffing problems because that kind of varied expertise is in short supply.
JM: Yes, I think it is. When you have people with less experience, there is the risk that it takes longer and it's not done as well or not at all.
TGR: Bear Creek Mining Corp. (TSX.V:BCM) had to shut down its operations in Peru after violent protests. Can you tell us about what is happening in Peru?
JM: Bear Creek has not actually been shut down in Peru. It is still looking at developing its Corani project, which represents the lion share of its value, according to Chris Thompson who covers the company on behalf of Haywood.
The former president of Peru, Alan Garcia, was very positive about resource development including mining, oil and gas. He took a stand in an area of southeastern Peru where he sought to allow development of some projects that the local indigenous people, the Aymara, were against. Garcia basically rescinded the original decree to mine that area prior to the new president, Ollanta Humala, taking office on July 28. Humala is planning a new tax and/or royalty on miners. Peru remains a very prospective country for gold, silver and copper, among other metals, and foreign direct investment has had an important role in reducing poverty over the past few years. So although I believe that mining investment will continue-Newmont and Buenaventura have recently approved the development of the multibillion dollar Conga copper-gold project in Peru-an investor should lever him or herself to companies that are comfortable permitting and developing projects in this environment. My pick would be Minera IRL; its senior management team predominantly resides in Peru and is levered to the new geopolitical paradigm in Peru.
TGR: Have you rerated Andean American Gold Corp. (TSX.V:AAG; OTCPK:ANMCF) or Minera IRL as a result of what happened to Bear Creek?
JM: No. The Aymara situation is unique. While there can be issues with the local communities in many mining jurisdictions, the Aymara are a little bit different as they are an indigenous population that have occupied that area around Lake Titicaca before the Incas. Peruvians who are descendents of the Incas (Quechua), on the other hand, have a long mining history.
Whether it's Compania de Minas Buenaventura (NYSE:BVN; BVL:BUE), Hochschild Mining (LSE:HOC), Bear Creek or Rio Tinto (NYSE:RIO; ASX:RIO), the Aymara would still consider them as foreign. It wouldn't matter. The Aymara situation was helped by the fact that President Humala came in and they are a big part of his support base. However, the influence of the Aymara beyond that area is very limited.
For example, in other areas of Puno that are dominated by the Quechua, Minera IRL spent 12-15 months negotiating with the local community. The company's president, Diego Benavides, spent that time working to nail down a deal to satisfy both factions of locals, those who supported mining (farmers) and those who didn't (artisanal miners). The company provided the local community with a 5% free carry, which is unheard of with mining companies in that area. That new and innovative solution in the end played a role in the acquisition of the surface land use rights critical for permitting. With Humala or without Humala, you just can't move forward on a development project if you have a problem with the local community.
We have made changes to our tax and royalty assumptions to align with Humala's rhetoric. We benchmarked the tax and royalty rates with other South American countries. We modified our 12-month target on Andean America to $1.10 based on increases in taxes and royalties. The issues they have with permitting are still very much a local issue and aren't necessarily impacted by Humala's election as president. The process is still the same. They still need the surface land use agreement with the locals.
TGR: Is the threat of a double-dip recession in the U.S. and debt worries in Europe causing you to reassess some of your targets and ratings?
JM: A lot of those issues are global macro-issues that may be a benefit for long-term gold prices going forward. We use those trends to revise our gold prices that in turn influence our targets and ratings. Another component of those trends is their impact on geopolitical jurisdictions suffering from high unemployment and economic woes, like in Spain, Idaho and Michigan, which may now be more amenable to permitting. Also, rising gold prices coincident with the need for tax revenue may increase the risk of higher tax and/or royalty rates in some jurisdictions on mining companies.
TGR: Do you have any parting thoughts for us?
JM: As we have discussed, risk and reward are two vital components of any investment thesis but the sources of risk and reward vary somewhat depending on the stage of development (exploration, development and production). However, a few common themes would be the quality of the underlying asset and the ability of the management team to mitigate risk and deliver on its plan.
TGR: Thanks, Joe.
Joe Mazumdar is a senior mining analyst with Haywood Securities in Vancouver. Previously he served as director of strategic planning at Newmont Mining where he also held the positions of director of corporate development and director of project and financial analysis. Mr. Mazumdar also was the senior market analyst (copper, molybdenum specifically) for Phelps Dodge from 2003 to 2005. He has held a variety of geologist positions with other mining companies, including IAMGOLD Corp., North Mining (purchased by Rio Tinto), Rio Tinto Plc, Mount Isa Mines (purchased by Xstrata Plc) and Noranda Inc., working in South America (Argentina, Chile, Peru and Ecuador for seven years), Australia (Queensland for three to four years) and Canada (Arctic, Yukon and S.E. BC for three field seasons), rounding out ~20 years of industry experience. Mr. Mazumdar holds a BSc in geology from the University of Alberta, Canada, an MSc in exploration and mining from James Cook University in Queensland, Australia, and an MSc in mineral economics from the Colorado School of Mines.
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1) Brian Sylvester 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: Orvana Minerals Corp., Revolution Resources Corp.
3) Joe Mazumdar: I personally and/or my family own shares of the following companies mentioned in this interview: Carpathian Gold Inc. (CPN-T), Midway Gold Corp. (MDW-V).
4) Haywood Securities, Inc. has reviewed lead projects of Minera IRL Ltd. (IRL-T), Astur Gold Corp. (AST-V), Nevsun Resources Ltd. (NSU-T), Bear Creek Mining Corp. (BCM-V), Orvana Minerals Corp. (ORV-T) and Andean American Gold Corp. (AAG-V) and a portion of the expenses for this travel have been reimbursed by the issuer.
5) Haywood Securities, Inc. or an Affiliate has received compensation for investment banking services from Astur Gold Corp. (AST-V), Midway Gold Corp. (MDW-V), Bear Creek Mining Corp. (BCM-V) and Andean American Gold Corp. (AAG-V) in the past 12 months.
6) As of the end of the month immediately preceding this publication either Haywood Securities, Inc., its officers or directors beneficially owned 1% or more of Astur Gold Corp. (AST-V), Midway Gold Corp. (MDW-V), Bear Creek Mining Corp. (BCM-V).
7) Haywood Securities Inc. or an Affiliate has managed or co-managed or participated as selling group in a public offering of securities for Midway Gold Corp. (MDW-V), Bear Creek Mining Corp. (BCM-V), Orvana Minerals Corp. (ORV-T) and Andean American Gold Corp. (AAG-V) in the past 12 months.
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