The Gold Report: In January, the exchange-traded fund SPDR Gold Trust (GLD:NYSE.Arca) outperformed its silver counterpart, the iShares Silver Trust (SLV:NYSE.Arca), by about 6%. Should investors expect gold to outperform silver for the entire year?
Michael Fowler: Gold and silver are going to perform in tandem this year. Gold is in a corrective phase at the moment. I expect it to average around $1,300/ounce ($1,300/oz) and silver to average about $21/oz. We expect gold and silver prices to increase into 2015.
TGR: We've seen a bevy of bought-deal financings to start the year. Some, like Luna Gold Corp. (LGC:TSX; LGC:BVL), are financing below current market prices. Could you provide us with some insight as to what's happening there?
MF: There are about 1,800 resource companies on the Toronto Stock Exchange and TSX Venture Exchange and a capital shortage. The demand for capital is huge, but the supply is low. Companies are taking advantage of the small bounce in the gold price last month. In terms of financings, a 10% to 15% discount over the share price is typical when you're trying to get a deal done in this kind of environment. Luna Gold has reasonable quality.
"The results from Clifton Star Resources Inc.'s Duparquet project are pretty encouraging."
TGR: Does that make you somewhat more optimistic?
MF: Yes, it is encouraging. However, it doesn't change my view that the industry is still in a mess. There continues to be a capital shortage. Companies spent money like drunken sailors in the past few years and the consequence is they have to cut costs significantly.
TGR: What types of projects are getting money?
MF: The better-quality companies are being financed. There is a capital shortage, but that doesn't mean there's no capital.
TGR: What makes a quality mining company in this market?
MF: Let's take Luna as an example. It has some production. The majority of these companies are still just exploring. Torex Gold Resources Inc. (TXG:TSX), which also came to the market, is a development play that is close to production. Investors want production, good assets and strong management.
TGR: Some recent reports suggest that there's as much as $10 billion in private equity looking to find its way into the undervalued junior mining sector. Is that changing how you evaluate companies in the junior gold and silver space?
MF: No, but if private equity finds the valuations of junior miners compelling, it means that these companies are extremely cheap. However, even private equity is having a hard time finding quality. There have been a few investments, but it's easy to get burned in this sector. Private equity firms are looking through the weeds and trying to find something of value.
TGR: Please outline the must-haves for companies you think are going to move in 2014.
MF: Jurisdiction-wise, North America is hot right now. So we would recommend assets in that jurisdiction. Companies have to have quality assets. The grade of the deposit is important. The cost structures are important. Valuation needs to be inexpensive, with potential for growing cash flows.
"Jurisdiction-wise, North America is hot right now."
A good example is Osisko Mining Corp. (OSK:TSX), which is the focus of Goldcorp Inc.'s (G:TSX; GG:NYSE) takeover bid. Osisko has a quality deposit in Québec. There is some growing cash flow coming out of that one.
TGR: Your coverage universe has changed dramatically compared to the previous year. What are some notable companies that you continue to cover?
MF: We cover four companies, which are all Speculative Buys: Fortune Minerals Ltd. (FT:TSX), Clifton Star Resources Inc. (CFO:TSX.V; C3T:FSE), St Andrew Goldfields Ltd. (SAS:TSX) and Wesdome Gold Mines Ltd. (WDO:TSX).
I'd encourage people to also invest in midtier gold companies, which would be my favorites. Our coverage only reflects our business, which is more speculative, but it's wise to be involved in midtier gold companies, too.
TGR: Fortune Minerals has the NICO polymetallic deposit in northern Canada. It has a positive feasibility study. Where is it at with its environmental assessment?
MF: NICO is far along on the permitting side in the Northwest Territories. It is still looking to get some permits in Saskatchewan, where it's going to build the processing plant. It's close to being totally permitted, but it's been a painful process—as permitting usually is.
The key for Fortune Minerals will be getting financing. That financing will probably come from an Asian source. I also suspect Fortune will come out with a revised feasibility study. It might be changing the mine plan slightly, but most of the changes will be how it's going to process the deposit through the Saskatchewan plant.
"Investors want production, good assets and strong management."
TGR: With so much focus on NICO, where does that leave its Arctos Anthracite metallurgical coal project in British Columbia?
MF: Arctos isn't as advanced as NICO. It is in the permitting phase, but there have been some issues with the First Nations that Fortune still needs to resolve. The government of British Columbia seems to be positive on the situation there. The metallurgical coal price is at a low at the moment. However, if NICO gets financed then it should provide a catalyst for the stock.
TGR: Clifton Star recently got some drill results back from its Duparquet project. What's that deposit shaping up to be?
MF: It's pretty encouraging. I estimate that it could have about 3 million ounces (3 Moz) gold in reserves and could produce 150,000 oz a year. It's not going to be like Osisko's deposit, which is about 10 Moz, but Duparquet will likely be a good, smaller mine. The stock could benefit from a joint venture or an acquisition of Clifton Star.
TGR: What's the market valuing those ounces at?
MF: It's under $10/oz.
TGR: That's just a staggering number.
MF: The reason for the low valuation is because of financing risk. The biggest risk here is how does this deposit, like Fortune's, get built? There's a lot of potential for a major to come in and joint venture or acquire the company.
"It's wise to be involved in midtier gold companies."
There's been a huge amount of drilling on this deposit. It's considerably derisked. Any issues will be on the mining, recovery and processing side. It's a pretty good deposit. I'm certain that Clifton Star will get some interest from majors on this one.
TGR: St Andrew Goldfields said in a recent presentation that its all-in sustaining costs for 2013 were $1,194/oz. The gold price is currently around $1,250/oz. [Editor's Note: Gold is currently around $1,325/oz.] It has some debt as well. Can St Andrew make money in the current gold price environment?
MF: In this environment, it's a little bit of a wash. Free cash flow will be zero, but it doesn't have a bad balance sheet. It has a very good team. It should be able to cut its all-in sustaining costs, particularly from the Holt mine. I'm optimistic that St Andrew can cut costs and also generate free cash flow. Maybe not by much, but its balance sheet is strong enough to sustain this present situation.
It also has a very good debt deal with Scotia Bank. Its interest rate is somewhere in the region of 4%. That gives you an indication of what the bank thinks of St Andrew. It doesn't think that this company is a particularly big risk. It should give equity investors some encouragement.
TGR: Where's the growth going to come from?
MF: St Andrew has a good development project called Taylor. It's very high grade. St Andrew has done some bulk samples from the deposit, got some good recoveries and got some cash out of it. It's going to be another incremental piece in its growth profile. It won't come this year. It will probably come in 2015. The company is going to have to keep an eye on its balance sheet and make sure that it doesn't overextend itself.
St Andrew is a prime acquisition target, too. Brigus Gold Corp. (BRD:NYSE.MKT; BRD:TSX) is next door. Brigus is being acquired by Primero Mining Corp. (PPP:NYSE; P:TSX). I wouldn't be surprised if Primero starts looking again after taking over Brigus.
TGR: And, finally, Wesdome Gold Mines. It had some issues in 2013. What's the recovery like?
MF: It did have issues, but they are being sorted out as we speak. Its Kiena mine was not making any money and was shut down. Its Eagle River mine is one of the highest-grade underground mines out there. The grade of the deposit is going to cut costs significantly. All-in sustaining costs are pretty similar to where the gold price is right now, but we are expecting a big fall in costs going forward due to the grade. The mill at Eagle River is also going to produce more throughput. It will have more tailings storage capacity, too.
We should see some earnings coming out of the company this year. The Canadian dollar is also helping it out and its balance sheet is reasonable.
Even Kiena still has great upside potential. It has high-grade areas that could make some money with the right gold price. It's possible that mine will reopen after 2016 or later.
This company has been orphaned. People are going to be surprised by it.
TGR: Although it's not your firm's target, you mentioned midtiers as being promising. What midtier companies have some fairly robust years ahead as we climb out of this trough?
MF: I like SEMAFO Inc. (SMF:TSX; SMF:OMX), Alamos Gold Inc. (AGI:TSX) and Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE). Those are good growth plays with reasonable balance sheets.
Then there are a couple of value plays that I like. Centamin Plc (CEE:TSX; CNT:ASX, CEY:LSE) has the risk of having its asset located in Egypt, but I think it's going to come through that OK. Alacer Gold Corp. (ASR:TSX: AQG:ASX) in Turkey is a good play as well.
TGR: Randgold said it would spend $60 million on exploration in 2014. It had a record year in 2013.
MF: Randgold is keeping its exploration budget up. That means longer-term growth. That is a big difference from some of the bigger names out there that are cutting exploration to the bone. Large-cap production will start falling in the long term. That's going to be a big negative for those guys going forward.
TGR: Did you want to talk briefly about those value plays?
MF: SEMAFO's flagship mine is Mana in Burkina Faso. It has a satellite deposit close to Mana that is very good grade. It's going to put that in production soon so we can expect some growth from that company.
Alamos' flagship mine is in Mexico, but its growth profile is going to come from Turkey. Its balance sheet is good.
Centamin is doing very well with its Egyptian property. It's producing more than expected.
Alacer is one of the lowest-cost mines in Turkey. It's developing a sulfide process for its deeper ore and that will provide some growth. Its balance sheet is excellent as well.
TGR: You are presenting an upcoming workshop at the annual PDAC conference in Toronto, March 1, titled, "Investment Fundamentals: Understanding Mineral Exploration and Resource Development and the Relationship to Company Stock Prices." What are three things you hope investors take away from that workshop?
MF: It's a great course that's been going for nine years. There's a lot of seasoned mining professionals, consultants, engineers, etc. We always get good reviews and we keep on getting invited back to the PDAC conference to do this.
It gives the attendees the basics of the business and the major risks in exploration and mining engineering. It goes through the mineral exploration cycle to development and production. It focuses on how consultants, analysts and engineers value mineral properties and companies and the techniques that they use. It tries to relate those valuation techniques to what is actually happening in the marketplace and the major drivers of company stock prices.
The audience is very interesting. It's a mix of CEOs, accountants, lawyers, geologists, engineers, students and people from all over the world.
TGR: Could you leave us with some thoughts on the cost cutting that's going on across the industry and how that's going to ultimately play out?
MF: This is a key issue. The cost cutting that's been going on is only a start. The industry wasn't doing so hot with gold at $1,250/oz. What if it goes to $1,150/oz? There will be some severe problems. The bottom line is that significant cost cutting is going to happen this year and there's going to be a lot of impairments as well. Reserves are going to be downgraded and write-offs are going to be in full swing in year-end results.
TGR:. Thanks, Michael.
MF: You're welcome, Brian.
Michael Fowler, senior mining analyst with Loewen, Ondaatje, McCutcheon Ltd., has worked in the investment industry since 1987 as a base and precious metals mining analyst for numerous high-profile firms. His coverage list included the major North American gold mining companies, but is now focused on small- to mid-sized companies. Previously, Fowler worked as a geophysicist involved in mineral exploration for 10 years. He was involved in the discovery of the high-grade Cigar Lake uranium mine in Northern Saskatchewan in the early 1980s. Fowler holds a Master of Business Administration from Cranfield University, UK; a Master of Science in mineral exploration from Leicester University, UK; and a Bachelor of Science in geology with geophysics from Liverpool University, UK. He is a member of the Institution of Materials in the UK and a member of the Canadian Institute of Mining and Metallurgy.
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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: Clifton Star Resources Inc., St Andrew Goldfields Ltd. and Primero Mining Corp. Goldcorp Inc. is not affiliated with The Gold Report. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Michael Fowler: I or my family own shares of the following companies mentioned in this interview: SEMAFO Inc., Alacer Gold Corp. and Randgold Resources Ltd. 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: None. 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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