The Metals Report: A lot of investors concentrate exclusively on precious metals. Why is diversification something they should consider?
Michael Curran: Because investments focused on exploration success should result in share price appreciation regardless of the commodity, especially when high-grade discoveries are made.
TMR: There are a great many low-price metal stocks today, but how do we find the real bargains?
MC: We concentrate on assets, location, management and balance sheets. We're looking for assets with potential for high-grade discovery. We're looking for low political risk in the location of these assets. We're looking for strong management with backgrounds in exploration and discovery or people who have demonstrated past involvement in success stories. And we're looking for companies that have enough cash to do exploration in the short term or a combination of assets and management expertise sufficient to raise money, which is not the easiest thing to do in this market.
TMR: What copper-gold speculative plays do you find most attractive?
MC: The first is Colorado Resources Ltd. (CXO:TSX.V). The company's North ROK project is in northwest British Columbia, near the Alaska Panhandle. It had one pretty impressive drill result back in the spring that took the stock from $0.30 to $1.50.
"We concentrate on assets, location, management and balance sheets."
More recent drilling has been less spectacular in terms of grade, and the stock has come back down. The excitement has waned a bit, but the property remains open, and there's still potential for future drill results to compare more favorably to the hole that got the stock moving last April.
TMR: North ROK is 15 kilometers from Imperial Metals Corp.'s (III:TSX) Red Chris copper-gold mine. How significant is this?
MC: Very significant. When a neighbor 15 kilometers away is spending $500 million ($500M) to build a very large open-pit mine, it does have implications for the size of deposit that Colorado would need to find.
If there were nothing going on around it, we suspect Colorado Resources would need to find a deposit of similar size to what Imperial has found. But with Red Chris so close, that lowers the threshold for economic discovery. If Colorado Resources finds something small but high grade, then certainly it's not hard to imagine that Imperial might be interested in something smaller that's truckable to its processing plant.
TMR: So Colorado is a possible takeover target?
MC: I think it's too early for that, but I'm sure Imperial is watching the drill results from North ROK. If Colorado gets more results like the first hole—0.63% copper and 0.85 grams per tonne gold (0.85 g/t) over 242 meters, which is about double Imperial's reserve grade—Imperial would be much more interested.
TMR: What is your second copper-gold play?
MC: Antofagasta Gold Inc. (AN:TSX.V), which is in Chile. We were first interested in the company for its gold play, which is very close to Yamana Gold Inc.'s (YRI:TSX; AUY:NYSE; YAU:LSE) El Peñón mine, a high-grade, narrow-vein gold-silver deposit that's been in operation since 2000.
" Investments focused on exploration success should result in share price appreciation regardless of the commodity, especially when high-grade discoveries are made."
More recently, Antofagasta has picked up a very large land package in the heart of Chile's copper country. This land hasn't really been explored for several decades and was held previously by a non-copper company. Antofagasta will start to explore it next year. This is an area where a half-dozen very large copper mines are being run by several of the biggest mining companies in the world.
TMR: How do you rate Chile on geopolitical stability and mining friendliness?
MC: Chile is one of our more favorable jurisdictions, especially in South America. It's been stable for decades. We have seen an increase in the royalty rate, which most people attribute to the devastating earthquakes a couple of years ago, which was required for Chile to rebuild its infrastructure.
TMR: Are Colorado Resources, Imperial Metals and Antofagasta well funded?
MC: Each has $4–10 million in cash. Our view is they have sufficient funds for their current programs and perhaps even through to the second half of 2014.
TMR: Moving on to base metals, what do you like?
MC: After copper, our favorite base metal is zinc. One of the prospective zinc explorers we like is Wolfden Resources Corp. (WLF.V, WLFFF:OTCPK). The company is in New Brunswick, not far from the old Brunswick #12 mine that shut down in May. Wolfden is a very early stage explorer, chasing high-grade boulders that are showing grades similar to what the Brunswick mine had.
TMR: The Brunswick mine hosted reserves greater than 100 million tonnes (Mmt) of 9% zinc, 3.65% lead and 100 g/t silver. How close to that would Wolfden need to find to be economic?
MC: The closer the better. To date, the boulders—loose rocks scattered along the surface—are showing as much as 20–30% combined lead-zinc, plus some copper and meaningful gold and silver. These grades actually exceed the reserve grade of the Brunswick mine. But, of course, Wolfden must find where the boulders came from. That's the short-term challenge, chasing the boulders to their bedrock source.
TMR: We've seen a fair amount of activity in New Brunswick of late.
MC: There's certainly more activity than we've seen for the last few years. There are a number of other juniors exploring for both gold and base metals in New Brunswick. Wolfden also has a gold deposit there.
TMR: It's quite a mining-friendly jurisdiction, is it not?
MC: That's our view, especially after the closure of Brunswick #12. New discoveries would mean that the miners that have had to move away could then return to New Brunswick.
TMR: No pun intended, but uranium has become a hot commodity again. There's an enormous amount of activity in Saskatchewan's Athabasca Basin, isn't there?
MC: It's long been the biggest producer of uranium in the world. The focus of attention now is the recent high-grade discovery by the 50-50 joint venture of Fission Uranium Corp. (FCU:TSX.V) and Alpha Minerals Inc. (AMW:TSX.V). Fission just recently announced a friendly merger with Alpha. If you take these companies together, the market's valuing their new discovery at around $360M.
The previous big discovery in the Athabasca Basin was Hathor Resources, which was bought out in 2012 by Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) for over $650M. High-grade uranium has certainly been highly rewarded by the market.
TMR: Is there a speculative play you like there?
MC: A newly listed company called NexGen Energy Ltd. (NXE:TSX.V). We really like its land position, immediately to the east of both Fission-Alpha's Patterson Lake South discovery and the Hathor discovery at Roughrider. So NexGen has got two kicks at the can there. In a single small-cap exploration company, that's as good as you can get.
TMR: Could you talk about the importance of the risk-reward profile in investing, particularly with juniors and micro-caps?
MC: All the companies we've talked about have early-stage projects. And it is here that we want to see strong risk-reward ratios. We're talking about upsides of 100%, 200%, 500%.
When Colorado published drill results that weren't viewed as being particularly positive, its stock fell close to 40% in a day. But Colorado still has lots of room at North ROK to replicate its early drilling success. That's why we're sticking with it.
TMR: Obviously, all projects are speculative until they go into production. But how far advanced must a project be before we stop calling it a speculative play?
MC: When projects get advanced enough so that we've got preliminary economic studies on them, and we can do discounted cash flow analysis of what a potential mine is going to look like, that's when we start thinking about removing the speculative qualifier. Colorado, Antofagasta, Wolfden and NexGen are early-stage explorers without proven discoveries, so they are clearly speculative.
TMR: Not that long ago, we heard a great deal about the "death" of the TSX Venture Exchange. Has the panic subsided, or can we expect a further cull of juniors?
MC: Well, unfortunately, we still see some pain to come. If we look back to 2010–2011, when gold made its run to $1,900/oz, the entry point for new companies was quite low. All a company needed was a property and a pitch, and it could go public, raise money and start exploring. And so we saw the listing of a lot of new junior explorers. Two years later, we can see a great many unsuccessful exploration efforts. The balance sheets of those juniors and micro-caps have been depleted, and they're finding it difficult to secure any additional financing. We expect a further cull of companies like this, and, in general, we view it as healthy for the overall market going forward.
TMR: Mike, thank you for your time and your insights.
Find out about speculative gold plays in Michael Curren's interview with The Gold Report, "Search for Speculative Juniors with the Potential to Soar."
Michael Curran, CFA, is a managing director and a mining research analyst with Beacon Securities Ltd. in Toronto. He was previously a managing director and a mining research analyst with RBC Capital Markets. Curran received the #1 Ranking for Mining and Metals research coverage in The Wall Street Journal's Annual Best on the Street Survey in May 2013. He holds a Master of Science degree in mineral exploration, a Master of Business Administration and is a CFA charterholder.
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1) Kevin Michael Grace conducted this interview for The Metals Report and provides services to The Metals 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 Metals Report: Colorado Resources Ltd. Fission Uranium Corp. is a sponsor of The Energy Report. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
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