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Carlos Andres: Discovering Bargain Basement Gold Stocks
Source: Zig Lambo of The Gold Report (8/24/11)
If gold equities are on sale, the stocks Carlos Andres follows as publisher of the Frontier Research Report are on clearance. Andres seeks out stocks that have been unfairly pummeled, offering extra upside for investors. In this exclusive interview with The Gold Report, Andres identifies some top picks trading at insanely low prices that belie their quality management and mining projects.
Carlos Andres: I grew up in an entrepreneurial household that gave me an early foundation in business and finance. My career developed on that foundation. I've been a founding partner of a couple of boutique consulting firms over the last 20 years that provided a variety of services that included financial analysis, business valuation, forensic accounting, business turnaround and M&A work across a wide range of industries. I also have an educational background in international or macro-economics and geopolitics. In the mid-1990s, I took notice of global supply/demand imbalances in the natural resource space with the emergence of the Chinese, Indian and other Asian economies and, as a result, became a committed natural resource investor in the late 1990s.
Like many, I began to read a lot of newsletters and ultimately entrusted my investments to selections made by newsletter writers that I had come to respect. With some exceptions, I had a good deal of success this way. But it always bothered me that I wasn't applying my own experience, expertise and education to company due diligence and industry and market research with the idea that I could remove some of the risk from my investing activities. Eventually I took my own advice and began looking at companies very closely, applying my expertise and developing ideas about targeting companies where there is a significant gap between perceived risk and actual risk. The newsletter was born out of a desire to share my journey with a wider audience.
TGR: How did you end up in Uruguay?
CA: I have always had a desire to travel extensively and live abroad since I spent a year in France in my college days. On another track, as I followed the global natural resource story with great interest over the last decade or more, I also developed a desire to place myself geographically in the midst of this emerging trend. As a result, I began to look for places that satisfied both desires. For me, Uruguay represents just such a place. It is an excellent base from which to explore the resource rich countries of South America.
TGR: What is your definition of an overlooked opportunity, and what approach do you use to unearth these opportunities?
CA: An overlooked opportunity, from my perspective, is one that goes unnoticed or is simply ignored by the investment herd and most analysts. Natural resource investing, although growing in popularity, is still virtually ignored by the mainstream investment community. There are several reasons for this, but an important one is simply a lack of familiarity in connection with ever-increasing global supply and demand imbalances and the complex business of mineral exploration and production. Therefore, we specifically target companies in the natural resource space because this is where we tend to find bargain basement prices, meaning this is where we will find prices that are substantially below the company's intrinsic value. In this context, we ask the question: Which companies represent the highest risk and thus present the highest potential reward? The answer is pretty straightforward: Junior exploration companies easily represent the highest risk in mining and junior explorers located in emerging and frontier markets drive the risk factor right off the charts. The investment herd and most analysts typically fear to tread in foreign markets that are shrouded in uncertainty. In targeting this segment, we vigorously apply our long experience and considerable expertise to separate the wheat from the chaff. In short, we choose countries and companies where perceived risk is substantially higher than actual risk, with the idea of profiting on the difference. When we get it right, we will make many multiples of our original investment.
To spice things up and increase the high-risk, high-reward factor even further, we will also target distressed junior explorers in emerging and frontier markets. We are sometimes able to identify companies that are on the verge of emerging from distress. The shares of such companies can typically be purchased at steep discounts. Perhaps our tag line should be "unearthing overlooked and undervalued opportunities."
As an example, we identified Sulliden Gold Corp. (TSX:SUE; OTCQX:SDDDF) as just such a distressed opportunity. Sulliden was a junior exploration company with its flagship project located in Peru. The company was involved in a four-year lawsuit that put its title into question. As a result, the market completely discounted the company. When Sulliden settled the lawsuit and emerged with an established gold deposit, a new management team and a revamped business plan, few people took notice. We recommended the company to our subscribers just as it was emerging from the lawsuit with impressive results.
TGR: What are the drivers that you are focusing on now with rising prices, unsettled world economic conditions and the possibility of another recession?
CA: In the developed world, say North America and Europe, we have this notion that the global economy is driven by the Western world that consumes things that are manufactured in Asia. In order to manufacture these things, Asia imports natural resources from the rest of the world to use along with its own domestic supply. From this perspective, it is typically argued that if there is an economic slowdown in North America and/or Europe, then, by extension, this will cause manufacturing in Asia to slow down, which will cause demand for natural resources to slow and hence cause a worldwide recession. Although elements of this storyline are certainly true, it overshadows a more important driver—fundamental domestic demand changes taking place in Asia with respect to the size of its population, rapid urbanization, a growing middle class, rising incomes and a rising standard of living.
In short, internal demand is rising rapidly in Asia, which is creating an economic dynamic that is being ignored in the West due to inaccurate assumptions about emerging trends and what drives the global demand and supply of natural resources. Asia is an emerging story all on its own with growing domestic demand for natural resources. Asia's internal demand and internal economy represent a huge global driver and Western investors ignore it at the peril of their portfolios.
TGR: The gold price has made some spectacular moves in the last couple of weeks. This should lead to some greater interest in mining stocks, which have been underperforming the physical metal.
CA: It has been perplexing to a lot of people as to why the producers should be undervalued when the gold price is rising. The HUI/Gold ratio chart is a good place to see this borne out graphically as it is falling to lows not seen since the onset of the global financial crisis in 2008. As one might expect, this trend is even more pronounced among the gold junior explorers. But the fundamentals that are driving the gold price higher remain powerfully intact. Therefore, we expect the producers and juniors to eventually play catch-up. Until then, current valuations represent a buying opportunity and we are buyers at these levels. The disparity between the rising price of the metal and the shares of the companies that find and produce the metal will not likely go unnoticed forever. Demand for gold, oil, uranium, potash and other mineral resources is rising at a much faster rate than supply can or will be able to match over the short to medium term, if ever. In addition, production is depleting reserves much faster than new reserves are being found. This situation argues that commodity prices will continue their upward climb.
TGR: Is Sulliden Gold, which you mentioned earlier, still undervalued? It has a 1 million ounce (Moz.) resource that it has developed in Peru, which is surrounded by some of the largest gold producers in that country.
CA: Sulliden's Shahuindo gold project is located in what may be the lowest production cost gold mining neighborhood on the planet. The region includes Yanacocha, which is by far the biggest open-pit mine in South America and is considered the second largest in the world. It is owned by major gold miners Newmont and Peru's Buenaventura. Among the many other gold mines in the area, Buenaventura has two new projects to the north that are similar to Shahuindo. Barrick's massive Laguna Norte mine is just to the south. Overall, Peru is the fourth or fifth largest gold producer on the planet.
In this setting, Sulliden updated its resource estimate in June. It has been doing a lot of exploration drilling over the past year or more, which has resulted in a dramatically increased estimate from 1.4 Moz. to 3.4 Moz. today. Hence, the dramatic rise in the company's stock price. Sulliden is a great little company with a great story.
After the four-year lawsuit we mentioned earlier, it was taken over by a group of experienced and serially successful gold miners, from a mining investment house known as Forbes & Manhattan. F&M is run by Stan Bharti, who is an exceptional mining personality. The firm put Peter Tagliamonte, who is also a very accomplished gold mine developer, in charge of Sulliden and together they placed Sulliden on an aggressive exploration and development footing as it emerged from the shadow of litigation.
For investors who were able to purchase the stock earlier last year as it emerged from the lawsuit, it has provided a return that is many multiples of their initial investment. The company has delivered on its business plan and has now progressed beyond being an early-stage explorer to being a company on the path to developing and operating a mine. Nevertheless it still has extraordinary exploration upside as well.
The intriguing thing about the deposit is that the company continues to extend the strike length and lateral extensions of the deposit. In other words, it continues to find gold further and further away from the main deposit in all directions. In addition, a vast majority of its previous drilling has only explored down to about 110 meters (m). The current resource of 3.4 Moz. is found at very shallow depths. The company has punched a few holes beneath this depth to about 400m and discovered that the deposit is open to that depth as well. The bottom line is this planned open-pit gold mine is going to get a lot bigger—in length, width and depth.
It also looks as though the grade is getting better as the company better understands the geology and continues to drill. Sulliden is in the midst of preparing a definitive feasibility study and the results are due to be released any time now. This will be a significant milestone in the company's development that will set the stage for a decision to start construction and to obtain mine financing. We would also expect a positive study to provide the basis for a revaluation of the share prices in the upward direction.
TGR: What do you think the chances are of it being taken over by one of its larger neighbors?
CA: We think the chances are very high. I have no doubt that the company is on the short list of several of the majors.
TGR: What other companies appear undervalued to you?
CA: As the market has sold-off, gold shares have not been spared. As one might expect, the sell-off does not discriminate and takes both good and bad companies with it. This creates a great opportunity to buy good companies at a steep discount. The current environment is no exception.
In this context, one company in particular that is extremely undervalued, in our view, and represents extraordinary value is Gran Colombia Gold Corp. (TSX.V:GCM), with multiple projects in Colombia. This is a story that has flown significantly under the radar.
It represents the recently completed merger of two companies, Medoro Resources and Gran Colombia. Both are run by the legendary Serafino Iacono and his longtime business partner, Miguel de la Campa. Together they are responsible for the development of Bolivar Gold Corp., which identified the mammoth Choco 10 deposit on the Venezuelan segment of the resource-rich geological setting known as the Guiana Shield. They sold the company to major Gold Fields Ltd. (NYSE:GFI), making fortunes for the shareholders in the process, before Hugo Chavez began nationalizing the gold industry. Gold Fields eventually sold the mine to Rusoro Mining Ltd. (TSX.V:RML). Rusoro owns some of the most prolific gold mines and deposits in the world but is currently receiving the Hugo Chavez discount.
Serafino Iacono and Miguel de la Campa are also the personalities behind Pacific Rubiales Energy Corp. (TSX:PRE; BVC:PREC). For those unfamiliar with the story, Pacific Rubiales is a relatively new company that is also the result of a merger that created the basis for what is now the second largest oil and gas producer in Colombia. The company went from roughly CAD$1.50 a share to a price of over CAD$30 in just two short years. The point here is that these guys know what they are doing. They know the region and they only know one speed: Go big or go home.
Gran Colombia has assembled a group of historic gold projects within Colombia's prolific and historic gold producing districts. Few realize that Colombia was once the largest gold producer in the world and its gold deposits are what prompted the Spanish to make it the headquarters for colonial expansion. As a result of strategically targeting the area, the company already has the largest deposit in Colombia and is the largest gold producer. Its Marmato project has close to 10 Moz. and an operating underground gold mine. This is a world class deposit no matter how you slice it. In addition, its Gran Colombia project is currently mining just 4 of 29 known high-grade gold veins. These are all historic gold mining areas that have been in production for over 100 years, and in some cases much longer. However, they have not been subject to modern exploration or bulk mining techniques. The company has tremendous upside with a world-class existing deposit, underdeveloped production at 100 thousand ounces (Koz.) per year, underexplored properties, superior management and $80M in the bank. It also owns a 60% interest in a gold refiner, which is a definite value-added feature that you rarely see in any gold mining company. Surprisingly, the company is currently being valued as if it were an early stage junior explorer. We don't think this perception or its low value will last for long.
TGR: Are there any other discounted stocks you're watching?
CA: One of the cheapest companies in our portfolio at the moment is Crocodile Gold Corp. (TSX:CRK; OTCQX:CROCF) in Australia, which has an extensive inventory of gold and other mineral deposits. It is a producing gold miner with over 5 Moz. of resources, but, like Gran Colombia, is being valued as though it's an early-stage, high-risk junior explorer. It is unbelievable how cheap it is. This is another Stan Bharti and Forbes & Manhattan project. Peter Tagliamonte from Sulliden is also actively involved in exploration and mine development at the board level.
The value of the company on an enterprise value per ounce basis as a percentage of the actual gold price is somewhere in the neighborhood of 1.5%. It is just incredibly cheap for a company that is producing gold and has 5 Moz. in the ground. In addition, it recently hired the former CEO of DeBeers Canada to oversee the strategic development of what amounts to a gold district around Darwin in northern Australia.
TGR: Usually they're worth at least 5%–10% in the ground.
CA: Exactly. Gran Colombia is currently 1.7% and Crocodile is 1.5%. Ironically, these two companies actually represent the companies in our portfolio that have the largest gold deposits, with Gran Colombia at 10 Moz. and Crocodile at 5 Moz. Both have plans to increase production from 100 Koz. to somewhere around 600–700 Koz. per year. Both are world-class operations run by top management with plenty of cash. Their low valuations are just an anomaly and in our estimation investors would be well advised to take advantage.
TGR: Anything else you would like to mention?
CA: The entire gold mining industry from producers on up the risk curve to explorers is undervalued. I think it is definitely shopping season in the gold sector. Do your homework, pick your favorites, buy some now and nibble all the way down on price weakness. Then just have a little patience.
TGR: Do you have any closing thoughts?
CA: Times are definitely tough. The world seems to be undergoing some sort of convulsion where the underlying theme is change, whether it is political, economic, social, peaceful or violent. How things will settle out is anybody's guess. This is very unsettling for people in general, and this includes investors. It is at times like these that it is important for people to replace their anxiety with a quest for knowledge, insight and understanding. I encourage investors to get involved and do their homework rather than allowing themselves to become overwhelmed by confusion resulting in deer-in-the-headlights–type inaction. Investigate the trends and then put your investments in the way of these trends. It's the equivalent of setting your sails to harmonize with the direction the wind is blowing. Get out there ahead of it all and run before the wind. Seize historic change as historic opportunity. The road to wealth lies through such times as these.
TGR: I greatly appreciate your input. I think our readers now realize that there are opportunities everywhere and they aren't just in North America or Africa.
Carlos Andres is the managing editor and chief analyst of the Frontier Research Report, a natural resource–oriented monthly investment newsletter focused on high-risk, high-reward junior exploration companies in emerging and frontier markets. Mr. Andres applies a potent mix of world-class expertise and lengthy experience in identifying countries and companies where "perceived" risk is much higher than "actual" risk, providing opportunities to profit significantly on the difference. Mr. Andres has been a natural resource analyst and investor for over 15 years.
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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: Crocodile Gold Corp., Forbes & Manhattan, Gold Fields Ltd., Sulliden Gold Corp.
3) Carlos Andres: I personally and/or my family own shares of the following companies mentioned in this interview: Sulliden Gold Corp., Gran Colombia Gold Corp., Crocodile Gold Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None.