The Gold Report: Thibaut, at your presentation at the Prospectors and Developers Association of Canada in March, you said that country risk was the second most important factor investors should look at when analyzing mining companies. Obviously, management is the most important factor, but how has country risk changed over the previous five years or so?
Thibaut Lepouttre: I think you will agree that there is a direct correlation between the rise in commodity prices and how greedy a country gets. Country risks have increased dramatically over the past five years with the global financial crisis as commodities are a way a government can make money. This trend will definitely continue.
TGR: Will resource nationalism be the single greatest threat to the mining industry over the next decade or so?
TL: Several countries actually have written into their laws language that gives them the authority to nationalize or partially nationalize mining projects. For example, Russia's mining code states it can nationalize every mine of strategic importance. However, it did not really define what strategic importance was.
TGR: What are some countries where investment risk is actually lower than it was and why?
TL: In Europe, I would say Serbia and Bulgaria. The war ended in Serbia about 15 years ago and since then the country has dramatically changed. It is completely open for foreign investment now, has a favorable tax rate and has great potential for new discoveries. As a country that is a candidate to join the European Union, the political risk has decreased tremendously. There have been several finds there recently such as Reservoir Minerals Inc. (RMC:TSX.V), which discovered an exciting drill hole. EurOmax Resources Ltd. (EOX:TSX.V) and Columbus Copper Corp. (CCU:TSX.V) also have properties that look promising. Reservoir and Columbus are in Serbia and EurOmax is in Serbia and Bulgaria, so maybe EurOmax is the better example for both countries.
TGR: Which one of those is furthest along the development chart?
TL: I would say EurOmax. Its main project is in Macedonia, but it has a gold project in Bulgaria with about 2 million ounces (2 Moz) gold. It will define an NI 43-101 resource this year on its Serbian copper-gold project.
TGR: What are some other European countries that are worthy of a look?
TL: The most surprising country is France. It has an overseas department, French Guiana, which borders Brazil and Suriname. Because it is part of France, the political risk is almost zero. A company there called Columbus Gold Corp. (CGT:TSX.V) recently outlined a resource estimate of 5.4 Moz gold. It is open pittable and the average grade is 1.4 grams/ton (1.4 g/t). The company plans to drill more holes this year. I am certain it will come up with a resource that contains in excess of 7 Moz.
TGR: Is Columbus Gold any relation to Columbus Copper Corp.?
TL: They are both part of the Columbus group. There are three Columbus companies: Columbus Gold that focuses on gold in Nevada and French Guiana. Columbus Copper focuses on copper mainly in Turkey where it has a joint venture with First Quantum Minerals Ltd. (FM:TSX). Then there is Columbus Exploration Corp. (CLX:TSX.V), whose properties are less exciting than the properties of the other two Columbus companies.
TGR: What are some examples of countries where the risk is perceived to be much higher than it actually is?
TL: Argentina because President Cristina Kirchner actually nationalized the company Yacimientos Petrolíferos Fiscales (YPF) from Repsol SA. A lot of people got scared and thought that the mining business might be next. That was 15 months ago and nothing has happened. The risk of nationalization or government involvement in mining projects is limited, especially because mining licenses are distributed by the state. The federal government is not making the decision on the mining project. As an example of a company there, Golden Arrow Resources Corp. (GRG:TSX.V; GAC:FSE; GARWF:OTCPK) has an exciting high-grade silver discovery in the Jujuy province in the northern part of Argentina next to Bolivia. The metallurgical tests were out recently and averaging in the 90s. The company has just released an NI-43-101-compliant resource estimate with 105 Moz silver equivalent, which is much better than what I was expecting.
TGR: Golden Arrow is also part of The Grosso Group, a group of mining companies based out of Vancouver. How important is that in a climate where financing is increasingly difficult?
TL: It is a good thing because it can share several resources, such as office and investor relations personnel. Being part of an umbrella group could actually reduce the overhead costs.
TGR: What are some other countries where risk is perceived to be higher than it is?
TL: Peru. After Ollanta Humala won the elections approximately two years ago, people were worried because he represents a left-wing party—and we all know how left-wing presidents treated the mining industry in Ecuador and Bolivia. But he has proven to be very moderate when it comes to his involvement in the mining sector.
TGR: What junior mining companies are you currently following in Peru?
"There is a direct correlation between the rise in commodity prices and how greedy a country gets."
TL: Inca One Resources Corp. (IO:TSX.V) has a few projects, one of which is actually a near-term production asset. The company is in the process of taking a 20 ton bulk sample out for processing at its Corizona project in Peru. This permitted project is allowed to extract up to 350 tons of ore out of the mine per day, which it will truck to a nearby mill to process and get the cash flow going. Production will be reached within six months. Corizona will be small, but it will provide the company with enough cash flow to continue development and exploration of its other projects. Besides Corizona, Inca One has in the north of Peru the Las Huaquillas asset, which has 440,000 ounces (440,000 oz) gold and an average grade in excess of 2 g/t.
TGR: Where is that project along the development path?
TL: Inca One submitted its application for the drill permits about three months ago, so I expect it will get the drill permits quite soon. It also submitted an environmental impact study to the government so we should see some news on Las Huaquillas within the next few months.
TGR: Obviously, Corizona is the near-term cash generator, but is Las Huaquillas the long-term company builder asset?
TL: Las Huaquillas has the potential to have at least 1 Moz gold in NI 43-101 resources. Corizona is an excellent asset because it will get cash flow going and allow the company to build up a treasury and start building up Las Huaquillas without actually diluting the current shareholders any further. It is actually a two-step process. The first is to get Corizona into production to get the cash flow, and the second step is to explore Las Huaquillas further.
TGR: Are there any other companies in Peru that you are following?
TL: Lupaka Gold Corp. (LPK:TSX) has two excellent targets and it merged with Andean American Gold Corp. last year. Lupaka has the Crucero project, which is at an elevation of approximately 4,400 meters (4,400m). And it has a resource estimate of 2.2 Moz gold with an average grade of 1 g/t. The company currently has $8 million ($8M) in cash and will actually continue to drill and expand the resource at Crucero.
TGR: Which of Lupaka's three assets in Peru—AntaKori, Invicta and Crucero—shows the most promise?
TL: I would say Crucero because it can easily increase the resource estimate over the current 2.2 Moz. The AntaKori asset, which is held by its 17% subsidiary, Southern Legacy Minerals Inc. (LCY:TSX.V), has a very strategic location in the middle of the belt of Peru. Southern Legacy Minerals is actually one of the takeout candidates for this year, which would obviously benefit Lupaka Gold as well.
TGR: Can a mining or exploration project with high grades and an experienced management team trump significant jurisdiction risk?
TL: Yes and no. There are countries where you can pull it off, and there are countries where you definitely cannot. An example of where you can is Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) in Eritrea. There the government gets a 10% statutory ownership in a mining project and can acquire 30% more based on the net present value (NPV). Compare that to Mongolia home to the Oyu Tolgoi deposit, one of the richest copper-gold deposits in the world. Turquoise Hill Resources Ltd. (TRQ:TSX; TRQ:NYSE) (formerly Ivanhoe Mines Ltd.) and Rio Tinto Plc (RIO:NYSE; RIO:ASX) are not freshmen in the business, but they still had severe difficulties with the Mongolian government.
TGR: Would you invest in Eritrea before Mongolia?
TL: I have been a shareholder of Nevsun for three years and have never encountered any problems. The government of Eritrea is holding up its part of the deal.
TGR: Do you attribute that almost entirely to the big stake that the government has in the Bisha project there?
TL: I would attribute it more to the intelligence of the government. In the Democratic Republic of the Congo, the government takes a 40% ownership, but it does not realize that if you nationalize part of it, you actually diminish and reduce your image in the world in the longer term. A lot of people have started to trust Eritrea because it thinks longer term.
TGR: What other countries would you add to the list where investment risk has dramatically increased since 2008?
TL: I would say South Africa. We have seen many strikes and wage hikes. On top of that, a regulation stipulates that 24% of every project should be given to the Black Economic Empowerment (BEE) movement. My main fear is that it is not just 24%, but that the percentage will actually increase over time and reach 49% or even 51%, just as in Zimbabwe.
TGR: But that black empowerment ownership structure started long before 2008.
TL: Yes, but it goes back to your first question that the higher the commodity prices, the greedier the government and these movements are. I think we will see some changes soon, whereby the BEE group will take a larger chunk of projects.
TGR: What other stories would you like to share?
"The financing capability of the management team is the most important thing to look at when a company is running low on cash."
TL: In North America, there are some interesting silver projects. I like Brixton Metals Corp. (BBB:TSX.V), which is in British Columbia and has extremely high-grade silver. Hecla Mining Co. (HL:NYSE) owns about 20% of the company.
Another silver name is Revett Minerals Inc. (RVM:TSX; RMV:NYSE.MKT), whose Troy mine is reopening later this year. The company should produce about 1 Moz silver at the cash cost of $11–12/oz at a full production rate.
TGR: Revett also has another asset in development after it won its court case. How soon could that be in production?
TL: We will not see production before 2020 or 2021 because Revett is taking a very cautious approach. It wants to ensure that everyone involved directly with the project is satisfied with the steps the company is making.
TGR: What are some other companies?
TL: Temex Resources Corp. (TME:TSX.V; TQ1:FSE) in Ontario. The company just released its resource update. It has 3.2 Moz gold at 1 g/t. It is open pittable and the project has the capability of reaching at least 5 Moz.
I also like High Desert Gold Corp. (HDG:TSX.V), which has a gold-silver oxide project on the border of Nevada and Utah. The company has drilled about 100 holes this year. We should see a 1 Moz gold equivalent resource estimate by the end of this year.
In South America there is Cliffmont Resources Ltd. (CMO:TSX.V). The company has the San Luis project in Colombia, and it is looking to reserve the high grades at the San Jorge underground mine. It has put in an application to erect a 100 ton per day mill.
TGR: You talked a little about Argentina and Peru. What is the risk profile of Colombia, especially after what happened with the Angostura project and Greystar Resources Ltd., which is now Eco Oro Minerals Corp. (EOM:TSX.V)?
TL: When we are talking about nature preservation and mining companies, Colombia is not alone. I do not think Peru or most other countries are different. Colombia's image has not worsened because Eco Oro is just one blip on the radar. Many other companies have projects that have run into the same problems elsewhere. Colombia is tremendously underexplored and if you look at the maps in the gold museum in Bogota, there is much more to be found there. Mining companies have to make sure they are in compliance with the environmental laws.
TGR: But in the case of Greystar, Colombia changed the law.
TL: It did change the law for the altitude. Quite a large part of the resources in the lease are accessible again right now. I think Colombia realizes it can't change the mining law too often or it will indeed scare companies away.
TGR: Do you wish to talk about any other companies?
TL: I would also like to give you some more names of companies operating in Europe and making my favorite list. One of them is Edgewater Exploration Ltd. (EDW:TSX.V), which has a project in the Galicia area of Spain with 1.4 Moz in a resource estimate. It is expecting an upgrade of that resource later this quarter followed by a feasibility study by the end of this year. Edgewater has all the necessary permits and the environmental assessment was approved in December. I think it will be in production within two years from now.
TGR: What is its cash position?
TL: Around $2M right now, so Edgewater will definitely need to go back to the market later this year to continue the feasibility study. The company sold a 1% net smelter royalty last year for $4M. It is a good sign that some royalty companies believe the project is worth at least $400M.
Another company is Dalradian Resources Inc. (DNA:TSX) in Northern Ireland. The company has a market cap of $60M right now with $20M in cash. It has 2.7 Moz high-grade gold and the 8% NPV based on a $1,160/oz gold price—a 25% cut from the recent average gold price—totaling $330M. Dalradian completed a preliminary economic assessment last summer, so I am expecting to see the feasibility study by the end of this year. It could be in production by 2017.
TGR: Any parting thoughts on commodity price risk or the market in general?
TL: I have always been quite conservative when I do my calculations, so I always use a lower gold price. I think from this year on, the financing capability of the management team is the most important thing to look at when a company is running low on cash.
TGR: How so?
TL: Some management teams can raise money easier than others. Look at EurOmax. Many on the board formerly served on the board of European Goldfields Ltd., which was sold to Eldorado Gold Corp. (ELD:TSX; EGO:NYSE) last year for $2.5 billion. The members of this board can raise $10M in seconds. They just call their old friends, old brokers, and get it together. A new company with an unproven management team will have a difficult time raising a quarter of a million dollars in this market.
TGR: On the gold price, do you see gold leveling off and remaining within $100 of its current range throughout the rest of the year?
TL: Gold will trade between $1,250/oz and $1,500/oz. The Cyprus-case has proven that even a big catalyst like confiscation of savings money did not help the gold price. The question in the market right now is whether confiscation and nationalization of savings accounts is a good thing for gold, and what will the catalyst be for gold to move up. I think gold will continue to move sideways.
TGR: Thank you for your insights.
Thibaut Lepouttre is the editor of the Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals. Lepouttre has a Bachelor of Law degree and two economics masters degrees that have forged his analytical approach to the mining sector. Considered a number cruncher, Lepouttre focuses on the valuations of companies and is consistently on the lookout for the next undervalued mining company.
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1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He 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: Golden Arrow Resources Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Thibaut Lepouttre: I or my family own directly or indirectly shares of the following companies mentioned in this interview: EurOmax Resources Ltd., Columbus Copper Corp., Columbus Gold Corp., Inca One Resources Corp., Golden Arrow Resources Corp., Revett Minerals Inc., Edgewater Exploration Ltd., Nevsun Resources Ltd., Brixton Metals Corp., Temex Resources Corp., High Desert Gold Corp., Cliffmont Resources Ltd. and Dalradian Resources Inc. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Cliffmont Resources Ltd., Golden Arrow Resources Corp., Revett Minerals Inc., Inca One Resources Corp., High Desert Gold Corp. and Lupaka Gold Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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