The Gold Report: As of Sept. 30, 2012, Toronto-based M Partners had Buy recommendations on 84% of the 58 companies it covered at that time. There are many brokerages with similar percentages. Have analysts lost some credibility in the mining space over the last few years when companies have vastly underperformed the broad market despite analysts' Buy ratings and high target prices?
Ingrid Rico: The simple way to answer that question is by explaining how we as analysts do our job. We try to do our best to demonstrate that a project makes economic sense. We look at the deposit and review mine plans. We try to get a handle on the operating challenges and the capital requirements for the project. Based on that, we build a model that needs some level of execution by the management in order to be achieved.
"The project financing window is fairly narrow right now."
Over the last few years, we have seen some hiccups in the execution and delivery in the space, which has made investors grow increasingly cautious on the sector. What we're seeing now is investors needing to get that confidence back. It's not to say that the companies are not a Buy and that the target is not valid because the projects make sense economically. We have also experienced a migration of funds away from the juniors and recent producers as investors looked to mitigate risk during a period of economic uncertainty. That funds flow as much as anything has hurt the share prices of companies in the sector.
TGR: Are you adjusting your models and lowering target prices to reclaim investor confidence?
IR: We continue to look at the inputs and make our assumptions fit the challenges. We're trying to get better at understanding the challenges—the operating challenges, the capital challenges—improving our models every time.
TGR: With ounces-in-the-ground valuations, have you had to reassess those, too, given how the market is valuing these junior mining companies?
IR: Yes, we have a couple of companies under coverage that are purely valued as ounces in the ground. Just a couple of years ago, our valuation metrics were essentially double what they are now.
TGR: What are the essentials of your investment thesis when it comes to junior mining companies?
IR: We look at the jurisdictions, the infrastructure and the prospective nature of the property. Also, grade is key to the project. Desirable high grades make a project withstand the market when it is as challenging as it has been lately. Let's not forget management either. We need to have a highly skilled and experienced group who understand the market and have proven that they can do the job.
TGR: How are you factoring financing risk into your models? What adjustments have you made there?
IR: It depends on the project. We see a number of projects that have economic merit, but the project financing window is fairly narrow right now. We look at the possible financing alternatives that the project has, whether that be a royalty streaming, an offtake or the conventional debt and equity ratio.
TGR: How would you describe the financing market right now for junior mining companies?
IR: It is quite difficult for some companies currently. It's part of the cycle. In the junior space, a lot of money came in at the high of the cycle. But some junior companies fell well short on delivering results. So now the market is saying that we need to see more consolidation.
Quite frankly, some of the juniors that didn't deliver are going to disappear. That is what the market is saying. Again, it's all part of the cycle.
TGR: How does that affect your job?
IR: It makes it interesting and makes me realize that there are projects out there that do stand out. There are many projects unfairly undervalued at this point because the entire sector is suffering from a cautious investor sentiment. It's interesting to get on those companies before people start jumping in, when sentiment begins to change.
TGR: What are some ways investors can determine whether or not a junior mining company is underfunded and possibly going to fold?
IR: For exploration companies, the key metric you can look at is burn rate. You need to have a sense of its exploration budgets, its current cash position and whether it will be able to fund the program for the year or not.
"For exploration companies, the key metric investors can look at is burn rate."
For developers, the technical report gives us guidance as to what a company needs for project funding. With the sector seeing quite a few cost overruns lately, we typically build in a contingency of 15–20%.
TGR: The old rule of thumb was that all good projects will get financed. Is that still the case?
IR: Yes. The good projects that stand out will get financed. It's a matter of timing, though.
TGR: How far into the future do you see a time when the markets are going to open up and start funding companies with fresh equity issues ŕ la 2010?
IR: It depends on the commodity. Supplies are pretty tight right now in the copper sector, and projects are going to have to get funded soon.
TGR: One of the companies you cover, Trevali Mining Corp. (TV:TSX; TREVF:OTCQX), recently entered into a bridge loan with Sprott. The loan is due Aug. 31, 2013, and will cost Trevali 11% interest/year plus almost 330,000 shares and a $100,000 handling fee. Do you prefer to see a junior mining company work out this type of financing or conduct a straight equity offer?
IR: Trevali has been an interesting story. It is building two mines, one in Peru and one in New Brunswick. It is at the stage where shareholders would rather see less of an equity dilution.
The company has been working on finalizing a senior debt facility so the bridge loan is, as the name suggests, just a bridge to get it to that senior financing and get things moving. We generally think that bridge financing, as opposed to equity, is an attractive option for a near-term/imminent producer, and this works well for Trevali at this time.
TGR: Trevali is working on bringing several past-producing, base metals mines in New Brunswick back into production. How soon could we start seeing cash flow?
IR: Its Santander project in Peru is the operation that should come into production in Q1/13. The mines in New Brunswick are targeted for H2/13, probably Q4/13. Trevali will see operating cash flow from Santander pretty early in the year.
TGR: Has Trevali issued production guidance for Santander for 2013?
IR: It hasn't put out numbers. It is still working as a development company, so it doesn't really give guidance on production.
TGR: You have a target price of $2.85 on Trevali. What is going to get it there?
IR: Trevali is a zinc play. We believe by 2015, it is going to have significant zinc production of over 250 million pounds (250 Mlb) zinc. The company is developing into a zinc play that majors are going to like. What is it going to take to get it to $2.85/share? It is going to be Trevali having Santander and the New Brunswick complex ramped up.
TGR: Are you saying that the ultimate goal of Trevali is to become another Breakwater Resources Ltd. and get taken out?
IR: That's a real possibility. Already Glencore International Plc (GLEN:LSE) holds a position in Trevali and other companies have also made mention of Trevali.
TGR: What are some other companies you have under coverage with lots of cash that continue to derisk their projects?
IR: Balmoral Resources Ltd. (BAR:TSX.V; BAMLF:OTCQX) is a good example. It has the cash to complete its 2013 work program and toward the end of the year deliver a resource estimate for its Martiniere project.
"The good projects that stand out will get financed."
Balmoral had an excellent exploration program in 2012. It delineated new targets and discovered three new zones. It has highlighted the prospective nature of the region and the Martiniere gold system. We believe that 2013 will be another interesting year for Balmoral. Its winter program is already underway. We expect to see results from new targets, resource definition and expansion drilling of the zones that were outlined last year.
TGR: One of the zones at Martiniere is the Bug Lake zone. To date it has delineated narrow, high-grade mineralization. It's been traced basically 375 meters (375m) at surface and goes as deep as 235m, and the mineralization remains open at depth. It's very early stage, but does that look like a starter pit to you?
IR: It's very early stage, but it is shaping up to where it could do a small pit, either at Bug Lake or at Martiniere West. It has been drilling fairly shallow holes, so all this high grade is actually close to surface.
TGR: What's your target price on Balmoral?
IR: It's $1.25.
TGR: Balmoral is expecting a maiden resource by the end of the year. I know you've already done the math and you're looking at what this could be. What are your early projections?
IR: Very conservatively, we're looking at 1 million ounces (1 Moz).
TGR: Do you think that's enough to move the needle?
IR: It should, but the key will be delivering results. This was a greenfield exploration program that developed into what it is now. It's now a matter of resource definition drilling and coming up with that initial resource.
The market sometimes takes the initial resource to be the total resource, but we know that Balmoral has way more to explore within Martiniere.
TGR: Tell us about some other names you're following.
IR: Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT) has been one of our best performing companies. The company had an excellent operational year in 2012. It is at the point where it has proven to the market that it can deliver operational performance. This year, Timmins is going to concentrate on drilling, getting that visibility of a bigger resource and further production expansion.
TGR: With its cash flow, is Timmins a hunter of other assets or is it being hunted?
IR: Because Timmins is generating cash, it does become pretty attractive. We have seen that before, such as when B2Gold Corp. (BTO:TSX; BGLPF:OTCQX) went after CGA Mining Ltd. (CGA:TSX; CGX:ASX).
But Timmins would like to keep growing on its own. I assume it is already actively looking at different properties and seeing what's out there so it can evolve into a more-than-one-asset operating mining company.
TGR: What is your target for Timmins?
IR: It's $4.10
TGR: Can you tell us about more of your favorite companies?
IR: Another company in our coverage with cash and completing its current work program is Panoro Minerals Ltd. (PML:TSX.V: PZN:FSE; PML:BVL). The company is completing a 30,000m drill project at its Cotabambas copper project in Peru.
Cotabambas is actually pretty interesting. It's located in the region where HudBay Minerals Inc. (HBM:TSX; HBM:NYSE) is developing its Constancia project and Xstrata Plc (XTA:LSE) has started building Las Bambas. Cotabambas has proven to have great exploration upside potential. Last year, its updated resource exceeded expectations by more than doubling the resource. This year, with a 30,000m drill program, we expect another very interesting resource.
TGR: What's your target on Panoro?
TGR: Panoro is a name that often flies under the radar. Not a lot of people are talking about it. Why do you think that is?
IR: A lot of people got really hyped up at the time when many of the copper mergers and acquisitions (M&A) were happening. But copper M&A was pretty quiet last year and that's why Panoro flew under the radar.
We do believe that once that next round of M&A starts happening, this would be one of those names that people should be looking at carefully, especially given its proximity to some other bigger players.
TGR: What is happening in Africa?
IR: I follow Volta Resources Inc. (VTR:TSX), which has the Kiaka deposit in Burkina Faso. The financing should be done in the upcoming months. The company has been derisking the project to a point that either it is going to mine it or someone else will. It's an attractive project. The deposit has proven to be pretty consistent. It has been able to optimize the deposit and taken other steps, making the project that much better.
TGR: Are you more concerned about smaller mining plays in Africa than you were a few months ago, given what's happening in Mali?
IR: It brings the valuations lower just having that socio-political risk there. But Burkina Faso has been one of the most stable jurisdictions in Africa, so I'm not overly worried about Volta.
TGR: There are some companies that you have on your Watch List. These are companies that are not under coverage, but you're following them and you're tracking their news releases. These are companies that might one day graduate to coverage. What are some companies that are piquing your curiosity there?
IR: Bellhaven Copper & Gold Inc. (BHV:TSX.V) in Colombia and Temex Resources Corp. (TME:TSX.V; TQ1:FSE) in Northern Ontario are two quite distinct companies with projects that offer the significant exploration upside that we look for.
Bellhaven recently announced its work program for the first six months of the year. The company will be drilling two new targets at its La Mina project, which may lead to some exciting news. One target is La Garrucha. It's has a magnetic anomaly that is roughly three times the size of La Cantera, which already holds 1.6 Moz gold equivalent.
Additionally, not many pay attention to Bellhaven's Panama asset. Bellhaven hasn't been doing work on it; it's waiting for some applications or concessions to be granted. Once it gets that green light, there should be some news coming from there.
TGR: How about Temex and its projects in Northern Ontario?
IR: Temex is advancing exploration at its two projects in Northern Ontario. The company has consistently delivered on its resource growth targets. This year, it is going for a global resource of nearly 5 Moz; right now, the company has on its books 2.5 Moz.
Temex is in the right location, with one of the projects in the Timmins Camp and the other one close to where the recent M&A happened with IAMGOLD Corp. (IMG:TSX; IAG:NYSE) and Trelawney Resources Inc. The management is sharp, with a good team of exploration geologists who have a handle on the properties.
TGR: Would you say the Timmins project is Temex's flagship project?
IR: You have to look at both projects because Temex is advancing them side by side. At Timmins you could see near-term production because there is so much infrastructure in place. The other project is more of an exploration play to grow the resource to a size large enough to grab the attention of companies in the area.
TGR: Temex has some significant neighbors in the area, not the least of which is Goldcorp Inc. (G:TSX; GG:NYSE). It also has Lake Shore Gold Corp. (LSG:TSX) as a neighbor. Would you say there's a greater likelihood of a takeover here than there is with similar plays of this size?
IR: Temex is in a great location with a few "hungry" mills in the area that would be quite interested in that property. The initial resource came out last year, and people are starting to get a handle on the property and what that resource implies, whether it is an open pit or a really high-grade underground mine.
TGR: What sort of year should mining investors expect?
IR: It seems to be shaping up as another challenging year ahead. We expect more consolidation as cash-constrained companies join well-funded partners either by choice or, in many cases, out of necessity.
Again, in the copper space, things are much tighter than people realize. First Quantum Minerals Ltd. (FM:TSX) is bidding for Inmet Mining Corp. (IMN:TSX); this could be the beginning of the next round of M&A in the copper space.
TGR: Is that an angle investors should be looking to play if they want to get into this space?
IR: Yes, we think so. In the junior space, it's looking at the ones that actually stand out, the ones with cash, that will be delivering, whether that be on exploration resources or on a new resource estimate. That's what mining investors should be looking at right now.
TGR: Thanks for your time, Ingrid.
Ingrid Rico is a mining analyst at Toronto-based investment bank M Partners, covering junior producers and exploration/development-stage companies. She is a graduate of the Lassonde Mineral Engineering program at the University of Toronto.
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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: Trevali Mining Corp., Balmoral Resources Ltd., Timmins Gold Corp., B2Gold Corp., Volta Resources Inc., Bellhaven Copper & Gold Inc. and Goldcorp Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Ingrid Rico: 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) Click here for M Partners' Disclosures.