The Gold Report: In early 2009, gold began its ascent that lasted for two and a half years until it began to correct at the beginning of September 2011. What were the issues that caused the rise, and what caused the correction?
Alka Singh: Gold prices have actually been on a rise since early 2002, but you are right that the last leg up started about two and a half years ago. The issues that led to the rise were that countries were printing money to finance themselves.
Gold is considered a safe haven, but the issue that gave rise to the correction is mainly the Eurozone concern—in Greece, Spain, Portugal, Italy and Ireland. Equity markets appear to be stabilizing as a consequence of quantitative easing in Europe, the U.S. and China and the apparent easing of concerns in Greece. This liquidity has forced interest rates down, pushing investors into riskier instruments, including equities, which in turn has lowered perceptions of default risk. The markets appear more confident, hence gold's attractiveness as insurance is fading.
Also, as the euro was depreciating, a lot of money moved from euros to U.S. dollars, and we did see improving economic numbers from the U.S., which strengthened the U.S. dollar. Because gold is priced in U.S. dollars, gold started declining as the dollar appreciated. There's another factor: India and Vietnam increased their excise and import taxes on gold, which also curbed demand for physical gold. India is one of the largest consumers of gold, so that had a big impact on the gold price as well.
TGR: Physical gold prices and gold mining equities appear to be disconnected. I'm looking at the Market Vectors Gold Miners ETF Trust (GDX:NYSEArca), which contains producers. It's down 23.5% over the last 12 months. I'm also looking at the Market Vectors Junior Gold Miners ETF (GDXJ:NYSEArca), which is down 46% over the past 12 months. But spot gold is up 6.7% during that same period. Why the disconnect?
AS: A lot of times there is a disconnect between commodities and equities. Even though gold is up 6.7% over the last 12 months, Junior Gold Miners ETF is down 46%. This disconnect is due to two factors: 1) gold equities are driven by the general market and 2) gold miners have not only commodity price risk but also operational risk and geopolitical risk depending on where their assets are located.
Why juniors underperform seniors when gold prices are going down has something to do with the nature of the junior miner sector itself. When gold prices are going down, the gold producers—the seniors—are already mining and selling the gold and making profits. So investors prefer to hold the gold producers rather than the junior explorers. Let me also say that when the prices of the commodity are going down, investors would rather have their money in more liquid names, which are generally the large caps.
TGR: Let's go to silver for a moment. Spot silver is down about 18% over the past 12 months while the Global X Silver Miners ETF (SIL:NYSEArca) is down 26% during the same period. The performance differential is not nearly as wide between silver equities and physical silver as it is between gold equities and physical gold. What does that tell you?
AS: Pure silver companies are scarcer than gold companies, which is why I think that the disconnect between silver and silver equities and gold and gold equities is different. You and I can name lots of gold companies. However, pure silver companies are much fewer in number.
I also think that silver has more upside potential than gold. If you look at the historical price ratio of silver to gold it's about 16:1, but that ratio is very, very wide right now, about 56:1. And, even at $1,575/ounce (oz) gold price, I think silver should be at $98/oz. So, I think that there is a disconnect between silver and gold prices as well, and I don't expect gold to come down to make that historical ratio closer to 16:1.
TGR: What is your current theme in regard to precious metals miners?
AS: Well, presently I think investors should definitely take a look at the more liquid large-cap gold and silver names but keep their eyes open. And, at any sign that the market for the juniors is turning up, they should have their top three or four junior gold and silver names that they would like to own. I think the situation is very similar to what happened in 2008 when the juniors were trading at cash value, if not below it. By the time Q1/09 came, the junior miners were up and in some cases over 60–70%. So, I think there will be a very fast turnaround as well for the junior space.
TGR: Alka, you said investors should first go with the more liquid names. Is that right?
AS: For right now, given the market volatility, I would go for more liquid, larger-cap names for the short term, yes.
TGR: What would those larger, more-liquid names be?
AS: Well, for the larger, more liquid gold names I would probably go and invest in Goldcorp Inc. (G:TSX; GG:NYSE), Barrick Gold Corp. (ABX:TSX; ABX:NYSE), Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) and Eldorado Gold Corp. (ELD:TSX; EGO:NYSE). Eldorado is one of my favorite names in the mid- to large-cap gold space. Those are the types of companies I would own right now before jumping into the junior space.
TGR: Now let's go ahead and talk about some of the juniors that you are recommending for investors.
AS: One of my gold names is Atacama Pacific Gold Corp. (ATM:TSX.V). I have liked the company for the last two years, in fact, since it came out with its IPO. Atacama's Cerro Maricunga has exposure to a large gold asset, which is rapidly increasing in size in the Maricunga Gold Belt in Chile. It is a single-asset vehicle with simple metallurgy, a near-term catalyst and a seasoned management team plus high leverage to gold price. The phase 3 drilling program is almost complete. There is also a new zone discovered to the east of the main trend. It's still early days there, but it looks like it has some potential. The company still has $30 million (M) in cash, and the Cerro Maricunga gold project currently has a resource estimate of 1.6 million ounces (Moz) gold in Indicated and an additional 2 Moz in the Inferred category. We expect this to go over 5 Moz. And, this is all oxide gold mineralization, which has lower capital expenditure (capex) requirements and lower operating costs and risk.
TGR: You mentioned catalysts.
AS: The near-term catalysts at Cerro Maricunga would be more drill and metallurgical test results; a preliminary economic assessment, which will be completed and released any time now; and an NI 43-101 compliant resource estimate that is expected in late-July/early-August.
TGR: Alka, I note from a company presentation that insiders own 42% of the company. How does that compare with other companies in the $175–200M market-cap range?
AS: That's a great question, and the reason I like this company so much is that the insiders have a lot of conviction in the deposit and in the company. Yes, they own over 40% of the shares. Gold Fields Ltd. (GFI:NYSE) and Kinross Gold Corp. (KGC:NYSE) together own about 16% of Atacama. So, there are not a lot of shares floating that can be traded. So, it's a thinly traded stock, but I like the fact that management has its own skin in the game. Not a lot of juniors in this market-cap range have 40% or even close to that much insider ownership. This is a plus for Atacama for sure.
TGR: Go ahead with another pick.
AS: Another junior gold company is Volta Resources Inc. (VTR:TSX), working in western Africa. Early in May the company released a prefeasibility study on its Kiaka gold project in Burkina Faso, and a feasibility study is due in Q2/13. The company has almost 4 Moz gold in reserves. Volta will be drilling 105 kilometers and continuing to grow Kiaka. It is also finding higher grades in the Kiaka South area, which should improve the economics of the project a lot. It also has other exploration projects in Titao and Nassara. The near-term catalysts for Volta would be when it comes out with more drill results from Kiaka South and also drill results for other exploration areas close to Kiaka. The company has a very good management team and a very good asset.
TGR: What about political risk in this region? Is this a safe jurisdiction?
AS: Burkina Faso is a safe jurisdiction. There were some issues regarding labor late last year and earlier this year, but it's a very safe, democratic country. The mining laws are similar to Ghana, which is one of the largest gold producers in Africa. And, Burkina Faso right now is about the fourth largest gold producer in Africa.
TGR: OK, what about another company?
AS: It's Timmins Gold Corp. (TMM:TSX.V; TGD:NYSE.A), which is already in production. The reason I like the company is because there are some short-term catalysts, which should drive the stock higher. It is planning an expansion of the mill from 14,000 tons per day (tpd) to 18,000 tpd this year, which would take gold production up to about 130,000 oz; by the end of 2012 Timmins will again expand the mill to 32,000 tpd, which will take the production to 150,000 oz per year. One of the main reasons I like Timmins is because it is cash-flow positive, and it has production growth. Another good thing is that operational improvements have increased recoveries up to expected levels. Timmins was getting low recoveries, and investors were afraid that they would not reach the feasibility level. But recoveries have gone up to the 58–68% level, which was the expected recovery rate.
TGR: Does the company have visibility on its exploration prospects?
AS: It does, and it has another project that is close to Goldcorp's Peñasquito project. Management has done some geological mapping and some grab samples. There is some good exploration upside there.
TGR: Alka, Timmins shares have had higher relative strength next to some of its peers, and I wonder if the valuation is as compelling as some of these others?
AS: The reason current valuation is better than most of the other juniors is because it's in production and has positive cash flow, and that's one of the reasons why investors like it. They can also see the ramp up to gold production growth over the next few years.
TGR: What about silver? We broached that earlier.
AS: Yes, and I would like to talk about Levon Resources Ltd. (LVN:TSX.V; L09:FSE; LVNVF:OTC) because we do have a silver theme as well. I just initiated on Levon, and I really like the company's Cordero asset, which is geologically similar to the Peñasquito mine that Goldcorp is putting into production in Mexico. It has over 500 Moz silver in resources, and we expect a new resource estimate any time now. I expect that to increase the resource estimate by at least 10–15%. I have modeled the company, and I think that right now it is trading at very low levels. It has over $56M in the bank. So, it's a junior name, but it has one of the best undeveloped silver deposits in the world. I believe the discount that the market is attributing to these shares right now is unreasonable; it is one of the better junior silver names out there.
TGR: The valuation does indeed sound unreasonable considering that the company has an $80M market cap with $56M in cash.
TGR: With that amount of cash, it should not have to dilute out investors.
AS: I don't think so. It has enough cash to last another four years, and CEO Ron Tremblay is very conscious about diluting shareholders as well. I don't expect to see much dilution.
TGR: Do you feel that the zinc and lead prospects can reduce silver cash costs significantly?
AS: Yes, Levon has a lot of zinc and lead production, which will lower cash costs significantly. I expect the cash costs would be around $3.75/oz silver. If not for the zinc and the lead, it would probably be over $7–8/oz.
TGR: Could you give me another name?
AS: I would like to talk about another junior name, Probe Mines Ltd. (PRB:TSX.V). The reason I like this company is because of its flagship Borden Lake project with a 3.4 Moz gold discovery in Ontario, Canada, a mining-friendly jurisdiction. At the end of April, IAMGOLD Corp. (IMG:TSX; IAG:NYSE) acquired Trelawney Mining and Exploration Inc. (TRR:TSX.V), which is also in Canada. I think that IAMGOLD was driven by the fact that Canada has much lower political risk than some other countries where it has mines. Probe has slightly lower grades but still a big resource number of about 3.4 Moz at 1.02 grams per ton. It also has some higher-grade zones, and it proved to have enough volume with the potential of lowering the capex, and that will make the project less sensitive to the gold price.
TGR: With a $73M market cap, Probe has the highest relative strength of all the juniors that I've looked at over the past month. It's up 11% over the past four weeks. All I see is red ink/negative returns everyplace else. What was the issue here?
AS: Basically, Probe is a story that everybody likes. It's in Ontario, and the recent acquisition of Trelawney has helped the stock as well. People do look at it, and they can see the upside potential. But again, I would say that people should be aware of the risks that juniors have sometimes.
TGR: Because silver and silver equities have more upside in your opinion, could you talk about one more silver name?
AS: Apogee Silver Ltd. (APE:TSX.V) is a silver name with a small market cap of $25M. But, that valuation doesn't speak about the good quality projects it has in Bolivia and Argentina. In this volatile environment, people are afraid, and they are in cash-preservation mode. Investors are just afraid of political risk with Bolivia, given that some countries have tried to nationalize assets. The market is very tough on juniors right now, but I think all this fear is a bit overdone. Apogee has a nice little silver deposit that could actually be built and even fast-tracked into a mine. This company is doing all the right things, but the market is not helping. I like both the assets the company has.
TGR: Back last September you told us that you had a $1.25 target price on Apogee. That would be something like a 1,300–1,400% return from current levels. Do you still feel as bullish about the company?
AS: Well, I still feel that the company has a lot of potential. Obviously things have changed. Silver prices have since then come off of where they were at $45–50/oz. There is a lot of value in the stock at $0.09. I would buy as much as I could and just sit on it until the market turned and easily make 200–300%.
TGR: You told us before that you expected Apogee's production to grow from 2.6 Moz in 2014 to over 4 Moz in 2017. Does that still sound right?
AS: That is still right. The only issue is I think companies are just afraid of spending all that money on capex; however, the capex for the Apogee project is not that high, and I'm still expecting the production to grow that way.
TGR: Alka, thank you. It's been a pleasure talking with you.
AS: Thank you, George. I have enjoyed it, too.
Alka Singh started her career as a mining research associate with Wellington West Capital Markets in Toronto. Since then she has worked for Orion Securities and Merrill Lynch in Canada. She then moved to New York City to build the mining franchise for Rodman and Renshaw, where she covered 24 precious metals, base metals and uranium names. Singh has since started her own independent research firm, Mine2Capital, to provide unbiased research for clients. She holds a Bachelor of Science in geology and a Master of Business Administration in finance and is a CFA charter holder.
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1) George S. Mack 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: Goldcorp Inc., Gold Fields Ltd., Timmins Gold Corp. and Apogee Silver Ltd. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Alka Singh: 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. I was not paid by Streetwise Reports for participating in this story.