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Vikas Ranjan: Junior Gold Equities to Watch
Source: Brian Sylvester of The Gold Report (11/4/11)
Junior gold explorers from British Columbia to Colombia are poised to pounce. And they are not your ordinary explorers. The Ubika Gold 50 Index has uncovered one explorer that also produces; another has a "fully earned option" with Goldcorp. In this exclusive interview with The Gold Report, Vikas Ranjan, managing director and principal, Ubika Research, reveals why these companies make a compelling case for success.
Vikas Ranjan: I think recent developments tell us that the risks are lower than a couple of weeks ago. The current economic problems, particularly in the Western countries, are more about policy than economics. The Greece debt bailout announcement could mitigate the potential of a hard run on other European countries, and it will have an impact on banks and the financial system in general.
TGR: Gold went up on the news. How do you explain that?
VR: That is a bit of a conundrum. Historically, gold goes up on uncertainty and other things go down. Over the last three to five months, we have seen more harmony; every asset class going up or going down together. The exception is U.S. Treasuries, which seems to be the only asset class people swarm to when things really are murky.
To some extent, gold has become a levered play. There are a lot of derivatives, a lot of exchange-traded fund-based trading in gold. Gold prices are decoupling from the fundamentals of demand and supply, purely from a physical gold perspective. That could explain, from a trading perspective, why things are looking good for asset classes in general; gold is simply one of those asset classes.
TGR: People seem to be exiting bonds for equities. Do you see that trend continuing?
VR: I would say so. There was a lot more pessimism than was warranted in the market in the summer and early fall. People had a panicky reaction. They flocked into U.S. Treasuries. We feel there will be a shift away from bonds and into equities and other riskier assets, such as copper bonds. That will be good for the global economy.
TGR: Will European banks have to liquidate some of their gold assets to cover write-downs on their Greek debt holdings?
VR: That is certainly a possibility. At the same time, gold as an asset class retains a lot of fundamental attraction. Any potential for liquidation by some European funds or banks will be counterbalanced by demand and buying from other sources.
Confidence in paper currency continues to erode, so gold is a store of value. We see gold remaining attractive as an asset class in the portfolios of major fund managers and institutions for at least the next couple of years. As an asset, gold is still less than 2% of the portfolio of all invested funds globally, I believe. Historic averages have been as high as 5% or more when some currencies were on the gold standard.
TGR: Can you be a bit more specific in terms of Ubika's gold forecast?
VR: We have probably seen the highs for this year. I wouldn't be surprised if it settles in the range of $1,600–1,700/ounce (oz). From there on, we see the next stop being $2,000+/oz levels, most likely in the first half of 2012.
TGR: You continue to call junior gold exploration companies the "most compelling case" for success. As of Dec. 31, 2010, the companies on the Ubika 50 Index were worth a combined $15.3 billion (B). By Oct. 14, 2011, their combined value was down to about $14.07B. Why do you still believe in these companies?
VR: The basic principles have not changed. In terms of risk and reward, the junior gold space presents the highest reward potential, along with high risk.
What has happened in the junior gold space is that investors' appetite for risk has gone down. The junior gold companies did very well after the 2008 meltdown; they had phenomenal returns in 2009 and part of 2010. In 2010, our index was up 99%.
This year, realization is setting in that the economy isn't going so well, which creates aversion to riskier assets. Junior companies and small-cap companies get hit first. Gold was singled out because fund managers who made money in junior gold companies and are losing money in other things liquidate junior gold stocks first where they may still have profits. It is ironic that most investors, including the so-called sophisticated ones, would not stick to their winners. Rather, they sell their winners and take out money wherever they can. That had an impact.
Longer term, if gold prices stay higher—I mean $1,200/oz or over for the foreseeable future—interest in companies with good assets and the potential to advance toward feasibility and production will come back.
TGR: What are some names on the Ubika 50 Index that are dirt cheap now, but could be poised for a significant rebound with better market conditions?
VR: Many are names we have discussed in the past. Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) would be one example and NWM Mining Corp. (NWM:TSX.V; NWMMF:NYSE) another. Lexam VG Gold Inc. (LEX:TSX; LEXVF:OTCQX; VN3A:Fkft), which has come down quite a bit in market cap, is an obvious example. Meadow Bay Gold Corp. (MAY:TSX.V; MAYGF:OTCQX) is a new addition. Paramount Gold and Silver Corp. (PZG:NYSE.A; PZG:TSX) is an established name. Others would include smaller names like Hy Lake Gold Inc. (HYL:CNSX; HYK:Fkft) and La Quinta Resources Inc. (LAQ:TSX.V).
TGR: What's going on with Rye Patch now?
VR: Rye Patch is an advanced exploration company. It found 4 million ounces (Moz) gold and gold equivalent in the NI 43-101 category on various projects in Nevada. In the last six months, it found the Garden Gate Pass project in the Cortez mine area where Barrick Gold Corp. (ABX:TSX; ABX:NYSE) found two sizable discoveries called Red Hill and Goldrush.
Rye Patch's project is adjacent. We believe it is highly likely the deposit extends to Rye Patch's property. Rye Patch just completed a six-hole drill program there, and we anticipate good results from that. We believe Rye Patch is highly undervalued. It has an excellent technical team and competent management. The company is very well funded to carry the required exploration plans, a big advantage during these tumultuous times. Our model share price is $1.52.
TGR: Tell us about NWM.
VR: NWM is a very rare junior company in that it has started producing. Its La Jojoba project is in northern Mexico, close to the Arizona border. We anticipate it will produce 9–10 thousand ounces (Koz) this year, and ramp up to 35 Koz next year. Our model share price is $0.49.
TGR: What will they do with the cash flow?
VR: It still has a lot of land to explore. Its current reserve is about 400 Koz. It can definitely find more ounces; 1 Moz would not be a stretch. And it can extend the mine life. As it does that, it could become a very attractive takeover target. There are various intermediate and large miners and exploration companies active in the area. The closest would be Timmins Gold Corp. (TMM:TSX.V). In the same neighborhood, Capital Gold Corp. (CGC:TSX; CGC:NYSE.A; CGU:Fkft) was in a bidding war and was taken out by AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE).
TGR: Lexam VG Gold's share price has come off quite a bit. Is that the result of being overpriced, or is something more fundamental going on?
VR: No, there's nothing fundamentally negative. We believe that by early 2012, it should be able to put out a resource update. It has done probably 40–50 thousand meters of drilling in the last 12–18 months. It wouldn't be surprising to see a full revision of the resource.
It is in a highly prolific district, close to past-producing mines. Rob McEwen, the former CEO and chairman of Goldcorp Inc. (G:TSX; GG:NYSE) and his group are the largest shareholders. Our Ubika model share price on Lexam VG Gold is $1.87, and the current share price is close to $0.40.
TGR: Let's go on to Meadow Bay Gold and its project in Nevada.
VR: Meadow Bay is a more recent addition to our coverage. We have a model share price of $3.62, and it is currently trading about $1.25. Meadow Bay is trying to revive an old project, the Atlanta gold mine, which has a resource estimate close to 0.5 Moz.
Meadow Bay is trying to drill around the pit area, make it NI 43-101 compliant and increase the resource to more than 1 Moz. Its exploration program has been pretty successful. It used a core-drilling program instead of the reverse circulation program used by Kinross Gold Corp. (K:TSX; KGC:NYSE) when it drilled previously. Using this process, Meadow Bay found evidence of a gold-copper porphyry system. As we know, porphyry systems could host large deposits and can be very valuable. There have been several high profile acquisitions in recent months involving porphyry deposits.
Obviously, it's early stage. We expect a resource estimate early in 2012. Meadow Bay plans to start small-scale production within two to three years, using the infrastructure from when gold was produced there in the late '70s to mid-'80s.
TGR: Tell us about Hy Lake Gold.
VR: Hy Lake is a smaller-size company in the Red Lake district. It has a market cap of about $7–8 million (M). Not many people know Hy Lake, which I hope will change in coming months.
Hy Lake's flagship project, called Rowan, is a joint venture with Goldcorp. Hy Lake is the operator and owns 60% of the project; Goldcorp is a 40% owner. We understand that Goldcorp is fully committed to participating in ongoing exploration there. For every dollar Hy Lake spends, Goldcorp will kick in $0.40. If I am correct, Hy Lake is the only junior company in that region with a fully earned option with Goldcorp.
Confederation Minerals Ltd. (CFM:TSX.V) is another junior in the area. One end of Hy Lake's Rowan project adjoins its property, in what is called the Rowan-NT zone. A research report on the company from the investment bank Fraser Mackenzie reported that the resource potential on the Confederation side of the Rowan-NT zone was about 1.7 Moz. Confederation only has 1.6 kilometers (km) strike length on that zone. Hy Lake has more than 2 km. On that zone alone, Hy Lake probably has the potential for more than 2 Moz gold resource. It also just discovered a new breccia corridor on the Rowan Property apart from the main zone.
Rowan alone could be a multimillion-ounce deposit. Hy Lake also has three other properties that it thinks are linked as a structure. Its drill results so far are very high grade. Based on the past exploration, we believe it could easily be sitting on 500–600 Koz resource right now, and the exploration potential is very strong.
TGR: Goldcorp's Red Lake mine goes down close to 7,000 meters (m), I believe.
VR: That's correct. Hy Lake has gone down only to 400m. In the last couple of years, Hy Lake spent time getting to know the structure, doing focused drilling. It understands where to go and what to drill. On Rowan, for example, the mineralization has an open-pit opportunity, with a 4–5 km strike length. That's a multimillion-ounce deposit potential.
Hy Lake continues to acquire strategic land positions in the area. Last year, it picked up a very strategic claim from Rubicon Minerals Corp. (RBY:NYSE.A; RMX:TSX). It is pushing ahead with the consolidation strategy and is looking for strategic opportunities to acquire land and expand its exploration potential.
TGR: Hy Lake trades on the Canadian National Stock Exchange (CSNX) and not the TSX Venture exchange. When will it graduate to the big board?
VR: Yes, it is listed on the CSNX, which is one of the reasons not too many people know about it. We have an $0.81 model share price on Hy Lake and it is trading around $0.20. Liquidity is one of the challenges of the CSNX. We believe that the company has plans to move to a bigger stock exchange and we wouldn't be surprised to see it listed on a bigger board soon.
TGR: Which juniors have enough money to continue development regardless of the economic climate?
VR: I can give you two quick examples. Lexam VG Gold is really well funded. I think it has more than $10M in the bank. It can continue what it has been doing for the next 12 months or so. Besides, it has very strong backers who can write a check if need be.
Another is Seafield Resources Ltd. (SFF:TSX.V), a Colombia gold play with a market cap of roughly $35M and close to $15M in the bank. It could drill for the next two years without a problem. Its new management team is very knowledgeable. They are Latin Americans and they understand the landscape. They have invested more than $3M of their own money at a premium to the stock price in the company.
TGR: What's your model share price on Seafield?
VR: It is $1.16. Initially, we had a $0.79 model share price, then good drill results more than doubled the resource, and we revised our model price upward. Its flagship project, called Miraflores, is moving toward feasibility. It has several other targets on its property in Colombia. It is a very good location. Infrastructure is good. It has a good management team and board now.
TGR: Ubika recently put out a press release on La Quinta's high-grade copper intersection on the Carruthers Pass project in British Columbia. Basically, one drill intersected about 14% copper near surface. That news has not done a lot for the share price. Why not?
VR: Let's talk about the news first. La Quinta acquired a prospective project in B.C. four or five months back. Carruthers Pass is a volcanogenic, massive sulphide deposit. This type of deposit can be very high grade and typically has multiple metals. La Quinta did the Induced Polarization survey and some initial drilling. That intersected close to 14% copper near surface. On a weighted average basis, the copper was closer to 6%. It also has good gold values and very high silver values.
We now know, very early in the project, that there is strong mineralization. La Quinta can use that information to prepare a three-dimensional model and find a baseline target to drill. The geologists are very excited at the potential for a very big deposit. This hasn't caught the attention of many people because it is still very early stage.
La Quinta's Easter gold project, in Nevada, is its most advanced project. It has an NI 43-101 resource. I think by spending an additional $500,000 on a drilling program, it could easily double or triple that resource.
Its third project is Black Jack, a silver project in Nevada, about 400–500 km from Easter. Right now, if it got the necessary permits and spent some money, Black Jack can have potential for a bulk-sampling scenario, where you grab bulk samples, ship the ore, process it and get some cash. With silver prices at $40/oz, it is a very lucrative thing to do. La Quinta could use that cash to explore the project. However, the real potential is related to the exploration. This appears to be a very good project to build high grade silver resource amenable to mining.
In terms of the risk/reward ratio, La Quinta presents a very good opportunity for sophisticated investors.
TGR: What is the model price on La Quinta?
VR: We have a model share price of $0.23 on La Quinta.
TGR: Any other small cap name with strong exploration potential?
VR: Yes. We recently added Victory Gold Mines Inc. (VGO:CNSX) to our coverage. The company is exploring in Timmins. It is exploring the former producing Gold Pike Mine property located in the East Timmins Gold Camp between the Black Fox mine operated by Brigus Gold Corp. (BRD:TSX; BRD:NYSE.A) and the Hislop mine operated by St. Andrews Goldfields Ltd. (SAS:TSX). Victory's plan is to confirm the mineralization at the current mine area and to confirm a sizable resource.
On Sept. 14, Victory Gold Mines announced the results of the first drill program with a huge drill intercept of 7.13 grams per ton gold over 65.4m at its Gold Pike Mine property in Timmins, Ontario, along with extensions to strike and depth. This really solidifies the exploration case. We believe that if Victory proves a decent size deposit in excess of 1 Moz gold, this company can be a very good takeover candidate for an intermediate miner in the area.
TGR: You also mentioned Paramount Gold and Silver. What is the latest on that?
VR: We have been consistently following Paramount. It has been a strong performer, despite the recent pull back and correction. It announced the results of a new NI-43-101-compliant resource estimate of over 3 Moz gold resource deposit on its 100%-owned past-producing Sleeper Gold project prepared by SRK Consulting, a well-recognized mining consulting firm. Paramount is working to aggressively develop the project with a preliminary economic assessment to be completed in early 2012. In April, Paramount announced new resource estimates for its San Miguel project in Mexico. The resource estimates represent a significant increase in both gold and silver resources for the project.
We believe that Paramount has a strong pipeline of upcoming news flow in coming months related to exploration and development activities on both these projects.
TGR: In closing, what advice would you offer investors in this low-priced equities environment?
VR: It is important to remember that economic growth is linked to demographics. If you look at global demographics, growth will come from emerging markets: 2.5 billion people live in India and China. They need things that we take for granted. The world economy, in general, is on a growth path and will be there for years to come.
There will be big falls and stumbles, but if I have to bet on the long term, I would bet on equities. Equities have provided the best returns over 100 years in real terms and will continue to do so in the foreseeable future. Don't get panicky or too skittish about not being in the market. Take your time, understand your companies, understand the risks, but invest wisely and maintain a good exposure to equities if you have the time horizon on your side.
TGR: That's good advice. Thank you, Vikas.
Vikas Ranjan is a management and investment professional with over 15 years experience in diverse areas of investment management, finance, customer analytics and investment research. Ranjan is a principal of Ubika Research, a specialized research and analytics company with a wide range of small-cap clients and operations in Toronto and Vancouver. Ranjan's previous experience includes various management positions in companies such as TAL Global Asset Management and Bank of Montréal. Ranjan has a strong knowledge of financial markets and has researched and analyzed companies in diverse industry sectors and markets. He holds a Bachelor of Arts in economics (Hons.), a Master in Management Studies from the University of Mumbai, India, and a Master of Business Administration in finance from McGill University. Prior to cofounding Ubika, Ranjan cofounded P2P Systems Inc., a company acquired by Toronto-based technology company Microforum In.
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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: Rye Patch Gold Corp., NWM Mining Corp., Lexam VG Gold Inc., Meadow Bay Gold Corp., Hy Lake Gold Inc., La Quinta Resources Inc., Timmins Gold Corp., Goldcorp Inc., Rubicon Minerals Corp. Paramount Gold and Silver Corp., Brigus Gold Corp.
3) Vikas Ranjan: I personally and/or my family own shares of the following companies mentioned in this interview: Lexam VG Gold Inc., Hy Lake Gold Inc., Victory Gold Mines Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None.
4) Ubika Research has received compensation from some companies mentioned in this interview for providing analyst research coverage.