The Gold Report: When you last spoke with The Gold Report this past March, gold had just dropped from its first peak of the year, from $1,781/ounce (oz) at the end of February to $1,660/oz in a matter of three weeks. Now it's looking for support at $1,700/oz. The trading range you predicted for 2012 looks good in retrospect. What are you projecting from here?
Mark Lackey: I'm looking at a range from $1,680/oz to $1,850/oz, and moving up over the year so that by December I am expecting to see the gold price at $1,850/oz.
TGR: But you don't see a big breakout past $2,000/oz that some people are predicting?
ML: It's possible, but for the gold price to go much higher than $1,850/oz there needs to be a good reason, such as a big decline in the value of the U.S. dollar or major gold buying by central banks. While I expect the dollar will weaken somewhat in 2013, I don't expect a huge decline. Over the next few years we'll get above $2,000/oz, but probably not in 2013.
TGR: What do you see as the market drivers for gold at this time?
ML: Significant trade and fiscal deficits remain in the United States and the country is continuing to use quantitative easing, which tends to lower the value of the U.S. dollar. Investors are going to look at the U.S. dollar and the euro and decide that there are other financial options they would rather own. Some investors will buy gold as an investment alternative to paper currencies.
"I believe that jewelry demand will continue to increase as a result of the growing middle class in Indonesia, China and India."
In addition, I believe that jewelry demand will continue to increase as a result of the growing middle class in Indonesia, China and India. Those are the demand factors that will move the price of gold higher in the short run. We also anticipate that some of the gold projects that are expected to begin production in 2013 will be delayed due to regulatory and permitting issues and this will lower the supply of gold on the world market and therefore push up the price of gold.
TGR: What's the next concern that might become the focus for precious metals investors?
ML: I don't think Europe's problems have gone away after allocating over $300 billion to Greece. We cannot count on Europe to have the kind of economic growth it once did, but as long as it doesn't crater dramatically, there's still going to be demand for gold and other commodities. I'm looking at a modest recession in Europe in 2013. I do think the Spanish banking system will be bailed out but as long as Spain's sovereign debt doesn't have to be bailed out, Europe will muddle through.
TGR: Despite the relative strength of gold over the past year, the performance of gold stocks has been pretty disappointing. When and how is the turnaround coming?
ML: If you look at the performance of the gold markets, the one area where we've actually made some good returns was in the mid-cap gold producers and near-term producers that did rally with the price of gold. The problem for many of the larger producers was that they didn't reach the production numbers that they had forecast and their production costs were also above what they had planned. Thus their earnings and cash flows were below expectations and this resulted in share prices that did not follow the rising gold price.
"We expect that with gold prices going higher in 2013, investors will be buying the well-run junior companies."
There are a number of smaller gold companies that do not have much cash left on the balance sheet and found it difficult to raise money in this past year so this prevents these companies from moving their projects forward. The Toronto Venture market has declined from a level of 2,450 in April 2011 to 1,200 at end of 2012, so it is not surprising that many junior mining companies have had a difficult time trying to attract new financing. Many of those companies saw significant declines in their share prices especially at the end of 2012 as they were hit by tax-loss selling.
We believe that there will be share price appreciation in 2013 for those junior gold companies that still have money (or can raise it) and have good projects. We expect that with gold prices going higher in 2013, investors will be buying the well-run junior companies, especially those that may have declined or lagged behind in 2012 due to the overall market conditions.
TGR: Where do you see the best opportunities for investors in gold stocks these days?
ML: We look at three or four factors when we try to make a decision on a gold company. We like to see an experienced management team with a project or projects in a jurisdiction that does not have significant political risk. We also look for companies that have a mining-friendly terrain and have access to transportation, power and water. We prefer the companies to be producers or near-term gold producers. We are concentrating, as we mentioned earlier, on mid-cap and junior companies that have cash in the treasury and are also looking for those companies that are potential takeover candidates. My company, CHF Investor Relations, has several clients in gold.
TGR: Last time you talked mainly about companies active in Africa. We know there is lots of potential there, but it seems that there's also been some unrest lately that might cause concerns for some investors. How does the current picture look to you?
ML: The gold opportunities tend to concentrate in West Africa, where three of the four countries, Senegal, Ghana and Burkina Faso, are quite stable by anybody's standards and have had no problems with political unrest or indigenization of resources. In Mali, the problem is with the Tuareg rebels and Islamists in northern Mali. The mining companies are in southern Mali, hundreds of miles away.
"West Africa has a lot of advantages compared to some of the more traditional mining areas."
Last month the UN Security Council voted to have 3,300 African troops sent to Mali to remove the rebels from the northern part of the country. The mining employees who we have talked to in Mali have told us that their mining operations have not been impacted, either in production or exploration, by the problems in the north. There have been problems in other parts of Africa, but we have been watching West African projects closely. CHF has no clients in West Africa, by the way.
TGR: So what are some of the most interesting stories you're looking at now?
ML: One we like is Teranga Gold Corp. (TGZ:TSX; TGZ:ASX), which is in Senegal. Teranga says it will exit 2012 with production between 210,000 oz and 225,000 oz for the year and in the third quarter cash costs were down to $594/oz. The company has its own mill, which is the only one in Senegal, and Teranga also has the largest land position in the country. It has a strong balance sheet having cash equivalents of $31.2 million (M) at Nov. 1, 2012, and reported a record high third quarter profit of $21.3M. The company says it will eliminate its hedge book by August and will have increasing gold production along with lowering costs of production. Teranga will focus on producing the gold ounces that will provide the best returns.
TGR: What else do you like in West Africa?
ML: Another one we've been looking at is Orezone Gold Corporation (ORE:TSX), which is developing the Bomboré project, the largest undeveloped gold mine in Burkina Faso. It has a strong development team and large near-surface tonnage, so it's going to be a relatively low-cost producer. It has 2 million ounces (Moz) in oxide resources in the top 50 meters, and 80% of its resources are within the top 80 meters from surface. The property is close to the national highway and has nearby water, power and a large labor force, which should translate into reduced development and operating costs.
TGR: Those are some pretty world-class resources.
ML: Orezone's recent NI 43-101 released in October 2012 contained 4.1 Moz of Indicated and 1 Moz of Inferred resources. This will be a significant gold producer in the next few years.
TGR: Or possibly get taken out.
ML: That's certainly possible. Given the increasing drilling activity and the increase in gold reserves in Burkina Faso, Senegal, Mali and Ghana, many major and mid-size gold producers will be looking to acquire some of these companies. Orezone is one of the companies that could be taken over.
TGR: What's been going on with some of the companies you talked about last March?
ML: Riverstone Resources Inc. (RVS:TSX.V) announced on Dec. 19 that it had completed its takeover of Blue Gold Mining. This will add some very strong talent to an already very good management team working to advance the Karma project, its flagship play in Burkina Faso. Riverstone also has three additional properties. Recent drilling activity has been very good. This is another miner that we think will have production in the next few years.
TGR: Was this a strategic merger?
ML: Yes. I think the idea here was that if these two teams got together, they could make a much stronger company. Combining the management teams and their financial resources will, in our view, lower the execution risk of their projects and significantly improve the company's ability to finance itself in the future.
TGR: What else do you have here?
ML: We talked about Channel Resources Ltd. (CHU:TSX.V), which has the Tanlouka property in Burkina Faso. We like Channel as it could become a mid-term producer of approximately 100,000 oz by 2018. The present Indicated and Inferred estimate at Mankarga 5 is 1.2 Moz. Channel has some other excellent exploration targets and we believe that the projects at Manesse and Tanwaka have the potential to host gold deposits similar to Mankarga 5. The additional exploration could eventually define a resource above the 2 Moz level. This exploration team has done an excellent job as it has been successful in defining a major gold resource. We like these oxide deposits for their metallurgical properties, since it usually means that the deposits can be mined at a low strip ratio.
TGR: What else looks interesting?
ML: The next one is African Gold Group Inc. (AGG:TSX.V); the company is developing the Kobada property in southwest Mali. We think African Gold can begin production in 2015, and by 2017 we are projecting annual production of 125,000 oz of gold. One of the big advantages in this part of the world is the highly oxidized rock, which is relatively cheap to mine and mill and also lies close to the surface. It has other exploration opportunities with the large sulfide resources below the oxide layers, which can significantly increase reserves.
In addition to the Kobada property, the company has other promising exploration targets at Gossokorodji, Diaban and Foroko North. African Gold has been in Mali for years and has personnel who have developed other gold mines in Mali.
TGR: What's next on your list?
ML: Volta Resources Inc. (VTR:TSX) is a company that has really moved forward, having nine exploration projects. It is currently transitioning itself from explorer to producer in Burkina Faso, at present to converting its flagship asset, the Kiaka gold project, into a producing gold mine. The present NI 43-101 contains 4.1 Moz in the Measured and Indicated categories, and 1 Moz in the Inferred category. Given the size of the resource, I would think that, down the road, Volta could be a potential takeover candidate. Given its excellent resources and $21M in cash and no debt, Volta will have no concerns about having to raise money anytime soon. That's a significant plus in this market.
TGR: What else do you have?
ML: A lot of people know Pelangio Exploration Inc. (PX:TSX.V) because, going back in its history, it developed the Detour Lake Gold Mine in northern Ontario and that ended up becoming a big winner for shareholders. It now has two properties in Ghana where it has completed some drilling that has recently started to show some interesting results. Its Manfo property lies between the Ahafo mine, which is operated by Newmont Mining Corporation (NEM:NYSE), and Kinross Gold Corp.'s (K:TSX; KGC:NYSE) Chirano mine. You would think Pelangio has a good chance of being on strike with the producers on either side. If it can continue to do more drilling and produce more similar results, we might see some pretty interesting resource estimates come about for this project.
Pelangio also has another very good property, the Obuasi property in Ghana, located adjacent to AngloGold Ashanti Ltd.'s (AU:NYSE; ANG:JSE; AGG:ASX) Obuasi mine, which has already produced 30 Moz of gold. This is an interesting play because of management's extremely successful track record and because it has added a number of individuals to the management team who have significant experience with mining operations in Ghana. We'll have to follow and see how the drilling results go, but certainly it is a very interesting play with major upside potential.
TGR: That's another one to keep an eye on.
ML: The last one I've got in Africa is Roxgold Inc. (ROG:TSX.V), which had a proxy battle last summer. Ultimately a deal was completed and I give credit to Oliver Lennox-King and Rick Mazur. Mazur was the executive handling the restructuring and then left when it was done. They put together a strong board and a good management team. This is important because I've seen these sorts of proxy battles in the past that ended up destroying some companies.
Roxgold is presently developing three mining properties in Burkina Faso. The company is advancing a high-grade gold discovery at its flagship property at Yaramoko. At the 55 Zone there is an initial resource estimate of 354,000 oz of gold, that graded 17.8 grams/ton (g/t) in the Indicated category and 306,000 oz of gold that graded 7.7 g/t in the Inferred category. These grade are not typical in Burkina Faso where most projects are big volume but low grade. The company has raised $65M to date, so it's well capitalized for its 2013 drilling program. If the company can continue to increase its high-grade tonnage, it will certainly be a takeover candidate.
TGR: Do you have any wildcard plays anywhere that people might be interested in, either in precious metals or otherwise?
ML: We've been looking at a number of zinc plays and probably our favorite right now is Chieftain Metals Inc. (CFB.TSX), which has properties in northern British Columbia. We like this one because, first of all, it has a very experienced management team, which is critical to understanding the metallurgy and the mining in northwestern B.C. Second, with all the zinc mines that are going to close in the next few years, taking millions of pounds out of production, we believe there's going to be an upward move in the price for zinc, certainly by 2014–2015. Chieftain has recently completed a financing and it should be publishing its feasibility study later this month.
Within a couple of years we think that the zinc price will increase up to $1.40 a pound. That makes a number of zinc plays attractive, especially Chieftain, given its potential to become a zinc producer.
TGR: Where do we go from here, and how should our readers be positioning themselves for what lies ahead in 2013?
ML: As I said, CHF has a number of clients in gold, some low-cost producers, too, but generally speaking, in the gold sector, we would concentrate primarily on jurisdictions we like. West Africa has a lot of advantages compared to some of the more traditional mining areas. One factor is that it is easier to get mining permits compared to some of the jurisdictions in North and South America. West Africa is also flat and dry, has water, power, transportation and a good labor force. In addition, we want experienced management teams that have experience in the jurisdictions where they are exploring.
TGR: Thanks for the ideas and updates, Mark, and we'll stay tuned and hope for the best in 2013.
ML: Thanks for the opportunity.
Mark Lackey, executive vice president of CHF Investor Relations (Cavalcanti Hume Funfer Inc.), has 30 years of experience in energy, mining, banking and investment research sectors. At CHF, Lackey involves himself with business development, client positioning, staff team coaching and education, market analysis and special projects to benefit client companies. He has worked as chief investment strategist at Pope & Company Ltd. and at the Bank of Canada, where he was responsible for U.S. economic forecasting. He was a senior manager of commodities at the Bank of Montreal. He also spent 10 years in the oil industry with Gulf Canada, Chevron Canada and Petro Canada.
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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: Teranga Gold Corp., Orezone Gold Corporation and Chieftain Metals Inc. Streetwise Reports does not accept stock in exchange for services.
3) Mark Lackey: 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 interview.
4) CHF Investor Relations: None of the companies mentioned in this interview are CHF's clients.
5) Interviews are edited for clarity.