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Eric Lemieux: No Gold Bubble
Source: Zig Lambo of The Gold Report (7/25/11)
Laurentian Securities Analyst Eric Lemieux was headed out into the field a few days after this interview to check out the latest progress on some of his favorite exploration plays in the James Bay area of eastern Canada. In this exclusive interview with The Gold Report, he shared his latest insights on the gold market, and his current thinking on some of his favorite plays in the vast untapped areas of Quebec and Ontario now being opened up to expanded exploration efforts by both juniors and majors.
Eric Lemieux: I was quite conservative, and obviously, I underestimated gold's momentum. I think right now the price of $1,600/oz. is set to go even higher in light of the increasing global economic turmoil. The U.S. debt ceiling and credit rating will fuel gold's price rise to even greater heights. Add in the European bankruptcy threats and you have the catalysts to justify gold's further appreciation. Demand is largely based upon the view that gold is effectively a monetary instrument and a "valeur refuge" (store of value). Together, I think they explain the gold price action in the last year, which has been quite remarkable, but based on good fundamentals.
TGR: So, you must have higher target prices for gold now?
EL: Yes, those have been revised and our range is now between $1,650 and $1,750/oz. until 2015. I set a very long-term price of $1,000/oz., which I think is still conservative, but I think it's justifiable since this is probably the marginal cost for producers. Gold still has some great upside, but I may not be the one who says it's going to go up to $5,000/oz. I see price stability, less downside risk and I think the $1,500/oz. range is probably something that we can envision in the long term.
TGR: Is gold in a bubble?
EL: I think not at all. Right now, if you look at the fundamentals, there are reasons for the precious metals' strength. On the supply side, there are still some challenges. Mine production has pretty much stayed constant, and the best deposits have been mined. We're now going to lower grade deposits. There are more jurisdiction and social challenges to mine gold. So, from the supply side, these are elements that provide some support to the price of gold.
TGR: Laurentian is based in Quebec and your focus is mainly on opportunities in Eastern Canada, from where most of the gold produced in Canada has come. As far as the recent changes in Quebec's tax regulations, what effect do you envision that might have on exploration and the mining industry in general, especially for the junior companies that rely on certain tax benefits?
EL: Obviously, I think there has been an impact. The government has made some questionable changes to mine legislation in line with the "resource nationalism" going on in the world. Governments have been pressed to increase royalties and tariffs on mining operations. The legislation in Quebec has tried to address this and an increase is probably acceptable to a certain measure.
However, one thing that is really frightening in Quebec now is that some municipalities can have a say on claims and project status. That explains in part why Quebec has gone down in the Fraser Institute ranking because of the uncertainty that has been created in some aspects of the mining legislation.
The fact that they're increasing the royalties is perhaps fair in light of the strong commodity prices. There's a bit of give and take and the industry eventually has to give a little. At the same time, I think the government has perhaps been very aggressive about raking in even more profits and caving into special interest groups. What is really dangerous right now in Quebec is this trend of wanting to control the claims and what can be done in terms of development and even exploration.
TGR: Do you think there might be any re-thought or reversal here if they end up seeing opposition from the mining industry?
EL: I think so. The metaphor we use is "Balkanization" of the mining resources, which is very dangerous. Once people are aware of the adverse impact that is having on the economy, I think they will realize that perhaps the government has gone too far, resulting in a readjustment. The pendulum swings from one side to the other, and now that we're really going to one end, hopefully we'll be able to eventually find a balance.
TGR: Historically, most mining in Eastern Canada has been underground mining when gold prices were relatively low and you had to have fairly high grades to justify the costs of doing so. With $1,500/oz. gold, we seem to be seeing a lot more talk about companies doing open-pit mining in much lower grade areas with much larger tonnages. Is this something that is going to be happening more in the future?
EL: This is definitely the wave of the future. Improvements in mining methods and economies of scale allow for bigger open-pit operations. The other thing that I think we will probably see also is bigger underground bulk mining scenarios such as Agnico-Eagle Mines Ltd. (TSX:AEM; NYSE:AEM) Goldex mine near Val d'Or. So, I think that will be another wave of the future where you will have these bulk mining operations. In the Abitibi Greenstone Belt, open-pit operations are fully justifiable. I think the fact that you saw Osisko Mining Corporation's (TSX:OSK) Canadian Malartic project go ahead and perhaps be a success story is a catalyst for more of these operations.
We will see these done in a sustainable manner in the sense that they will have to get community and First Nations acceptance with minimal impact on the environment. When you say an open pit, people think of an eyesore, but once they see the benefits that can be reaped for the local population in general, I think people will be more open to this sort of operation. In the long term, these big open pits can actually be transformed into lakes and it's not necessarily a big eyesore after operations end.
TGR: When you talked with us last year, you discussed a number of companies you liked, and Premier Gold Mines Ltd. (TSX:PG) was one of them. They just announced this deal to acquire Goldstone Resources Inc. Can you update us on what's going on with Premier?
EL: Premier has been very active on several fronts. The company has four key sector area plays located in safe jurisdictions and offering excellent infrastructures. In Nevada, the company acquired the Saddle gold project in 2010. In the Beardmore-Geraldton area, it owns the Hardrock project and has reported a new, growing 3.6 million ounce (Moz.) global gold resource. Premier also has two projects in the Red Lake District, and the PQ North project in the Musselwhite District of Ontario. Premier just acquired Goldstone Resources and expanded its land package considerably in the Beardmore-Geraldton area. It now controls a strike of about 50 km., consolidating a mining camp district—which could be interesting for any major that wants to position itself there. So Premier has set itself up for discovery and it is ready to do some very good project development.
TGR: Another one you talked about was PC Gold Inc. (TSX:PKL) and it is still quite active up there. What's going on with that situation?
EL: I have to say I don't follow PC Gold closely; it's not a company that I have actually covered, but I think the company just provided an update to its mineral resource, which now stands at 1.26 Moz. This, again, is a recipe of revisiting old mining camps with a new set of eyes and advanced geological concepts. It's one that is interesting because it has an open-pit scenario with an underground component that, with time, may allow the company to play with different mining methods.
TGR: The James Bay region has turned into a hotbed of exploration and a lot of companies are looking at things up there. One that you talked about in the past was Eastmain Resources Inc. (TSX:ER). What's going on with that situation?
EL: The James Bay region is a hot area that is vast and underexplored. It will become even hotter as Goldcorp Inc.'s (TSX:G; NYSE:GG) Eleonore Project gets its permits for full blast construction toward the end of this summer.
What I find interesting for the James Bay area and Northern Quebec is the fact that the Quebec Government has just announced the Quebec Plan-Nord that will provide even better road, power and communication infrastructure to the area. Although there is some amazing infrastructure right now in the James Bay area, potential expansion, on a sustainable development basis, should provide a competitive advantage.
The Cree Nation, Inuit and Innu people are participating more and more, which opens up to sustainable development in that area and bodes well for social acceptability.
Eastmain has three very good positions—the Eastmain Mine, Clearwater and Eleonore South projects. The last one is a joint venture with Azimut Exploration Inc. (TSX.V:AZM) and Goldcorp. Eastmain released a new global resource estimate of 1.6 Moz. in April on the Eau Claire deposit. There was a substantial increase in the measured component of the mineral resource estimate. The project includes both an open pit and an underground target. The open-pit component has about 4.1 million tons grading 4.7 grams/ton, which is at the higher end of grade for open-pit mined gold deposits. So that is a positive.
Eastmain is currently drilling toward the west of the 450 West Zone in a new zone called the 850 West Zone that wasn't part of the mineral resource estimate in April. There is a lot of upside to increase that mineral resource, both for the underground potential and the open pit scenarios. I expect that for the Eau Claire Project some news will emerge in the course of the year. I think some interesting things will come from the Eau Claire as the company has the advantage of good infrastructure and accessibility.
Eastmain also has the Eastmain Mine Project, which was quite remote. It's going toward Stornoway Diamond Corp.'s project where the Quebec government will soon extend Route 167, the Otish Mountain Route. Eventually, it will be accessible via a hard surface road rather than an old winter road. The Eastmain Mine Project has now started to drill and has about 15,000m planned. Again, this is a gold project with a known mineral resource that is open for expansion.
The Eleonore South Project is a joint venture with Goldcorp and Azimut Exploration located to the southeast of the Eleonore deposit. Goldcorp is working very aggressively on the Eleonore project, and building a world-class mine there, but I know it is also active on the exploration front in areas further from the mine site. I believe the Eleonore South project will eventually be re-worked by the partners and could become an interesting development project in the long term.
TGR: Another one up there is Virginia Mines Inc. (TSX:VGQ), which is also active. What's been going on with that company since the last time we talked about them?
EL: They're very active. Virginia will have about a $17M exploration budget for 2011, of which $9M will be partner funded. New, high-quality partnerships include IAMGold Corporation (TSX:IMG; NYSE:IAG), Quadra FNX Mining Ltd. (TSX:QUX) and Anglo-American PLC (LSE:AAL).
The key for Virginia is its strategic acreage in James Bay and northern Quebec, where the company has been able to develop expertise that continues to be recognized. Virginia has a lot of projects going on right now. It is very aggressive. It is manned by explorationists who are able to generate and advance projects. I think it is just a matter of time before the company makes more discoveries. With a $17M budget, we can expect a lot of important news from Virginia.
Remember that Virginia discovered and holds a 2.2-3.5% NSR royalty on the Eleonore deposit, now going into production for Goldcorp by 2015. As the Eleonore project continues to grow, the project is being de-risked with the on-going exploration shaft and ramp sinking.
TGR: That sounds pretty positive. How about Midland Exploration Inc. (TSX.V:MD)? You also talked about them last time and that company has some interesting things going on.
EL: Yes, I always like to say that Midland is like a smaller version of Virginia in that it has the same sort of quality management and the same sort of explorationist business model. Midland also eventually farms out projects to quality partners.
The company is active on several fronts. In the course of 2010-2011, it acquired new projects by staking. I always appreciate the fact that a company is able to acquire projects by itself through staking rather than acquiring a property with a partner or from someone for shares and money. I believe it is good when you can do a thorough geological assessment of an area, pinpoint areas that haven't been staked, then go and get them for cheap. Here in Quebec, it's not very expensive to acquire claims through map staking. I think it's very positive that Midland can generate and acquire projects relatively inexpensively.
Midland is active on several fronts—gold, base metals, rare earths. It is exploring for gold with Osisko Mining Corp. (TSX:OSK), Aurizon Mines Ltd. (TSX:ARZ; NYSE.A:AZK), North American Palladium Ltd. (TSX:PDL; NYSE:PAL) and Agnico-Eagle Mines Ltd. So, we can expect lots of news as projects are drilled. Midland just announced a gold and nickel discovery on the Laflamme property, which is a partnership with North American Palladium. Midland also has a project called Casault, which is east of Detour Lake on the Quebec side. It's an area that I think will become a hot spot because of the size of the Detour deposit and the focus on possible satellite deposits. The Quebec side it hasn't been explored much because it's very swampy land, but a few companies are very well positioned in that area, including Balmoral Resources Ltd. (TSX.V:BAR) and Adventure Gold Inc. (TXS.V:AGE). Certainly the Detour/Sunday Lake Deformation Zone will be the most interesting revived gold belt to watch evolve and is well worth continuing to explore. So Balmoral, Midland, and Adventure Gold are well-positioned. The key words for Midland are diversification, partnerships and exploration.
TGR: Another interesting one is Detour Gold Corp. (TSX:DGC), which is building the largest gold mine in Canada. You talked about this company last time. What is the update there?
EL: I would summarize by saying: On track, on schedule and room to grow. I think it's a 14.9 Moz. reserve with more room to grow and perform. The company is building a world-class mine with a strong operating team north of Cochrane in Northeast Ontario. The pieces are coming together and that's very positive. The project is being de-risked in a very good and sustainable gold price environment. I think this project should be on a lot of people's radar screens.
TGR: Are there any other thoughts that you would like to leave us with at this point?
EL: The Quebec Plan-Nord should put a spotlight on northern Quebec. The Ungava Peninsula, even higher up than the James Bay area, is perhaps the next frontier for Quebec exploration. Toward the east, near Labrador, the iron ore is a hot spot. There is even talk about expanding the railways in that area.
Up in northern Quebec, a number of companies are working toward discovery and advancing some huge deposits in rare earth elements (REE), uranium, gold and copper. These are very early stage, but I think there are some good elements for long-term development. Global warming might even result in year-round shipping lanes. Virginia is probably the beacon. I wouldn't be surprised if someday world-class deposits are developed up there.
TGR: So we'll have to stay tuned. Thanks for taking the time to bringing us up to date on these opportunities.
EL: Thank you.
Éric Lemieux is a mining analyst who joined Laurentian Bank Securities in 2008. He worked for nine years as a consultant responsible for applying Regulation NI 43-101. He has worked at the Montreal Exchange, and prior to that managed exploration projects for Cambior, Noranda and Soquem. He holds two master's degrees, in mineral economics (Colorado School of Mines) and in metamorphic-structural geology (Laval University).
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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: Premier Gold Mines, PC Gold, Midland Exploration., Aurizon Mines Ltd., Detour Gold Corp., Goldcorp Inc.
3) Éric Lemieux: I personally and/or my family own shares of the following companies mentioned in this interview: Agnico-Eagle Mines Ltd., PC Gold Inc., Eastmain Resources Inc., Azimut Exploration Inc., Virginia Mines Inc., IAMGold Corporation, Midland Exploration Inc., Aurizon Mines Ltd., Adventure Gold. I personally and/or my family am paid by the following companies mentioned in this interview: None.