The Gold Report: What has surprised you most in the gold market in 2014?
Michael Curran: We're a little surprised that the gold price hasn't had at least short-term runs to higher levels. We've had continuing global financial challenges and we've had growing political risk in places like Ukraine. Historically, those things have sent the gold price higher.
TGR: What's gold's role in an improving global economy?
MC: We definitely believe that gold is a play against improving global economics. If we see strong moves toward improving global economics, then we expect gold's role to be diminished. We still view gold as a store of value. When interest rates are low there is a case to own bullion and/or equities because they tend to be negatively correlated with strong economies.
TGR: From where will the bid emerge?
MC: Possibly aftershocks to the system that would suggest that the global economy is deteriorating. That's when we tend to see the best performance in gold and gold equities.
TGR: Traditionally summer is soft for the gold market. How do you see gold prices unfolding this summer season?
MC: We definitely believe in the "summer doldrums" for gold, when the metal tends to lose some physical demand support. Jewelry manufacturers don't need to buy physical gold until the latter part of the summer for all those events around the end of the year, like Indian wedding season, Christmas and Chinese New Year. Unless there is some other market catalyst, we tend to see gold pretty flat over the summer months.
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TGR: It's difficult for investors to watch their portfolios slide lower on seasonal weakness. How should they cope with market softness?
MC: Our general view is that gold equities should be traded. We've never really been proponents of long-term holds on gold stocks. Historically, equities haven't been great long-term holds because of the way gold vacillates between "in favor" and "out of favor." A lot of the larger producers have already given back 20–25% in the last couple of months so it hasn't been a case of "sell in May and go away"; it's been "sell in March and go away."
A lot of the producers are in the middle of their 52-week price ranges. I wouldn't sell those stocks now; you might as well hold them. Some of those stocks will be pretty attractive opportunities in the next couple of months if they give back another 10% or 15%.
TGR: Generally speaking, what is an ideal percentage of gold exposure in an investment portfolio?
MC: Most portfolios would benefit from some gold exposure, but we're not zealots insisting people need to have 50%, 75% or 100% of their portfolios in gold or gold equities. I think somewhere between 5% and 10% is a good place for most people. Investors at the upper end probably want a mix of equities and bullion. At the lower end investors can probably get by with just buying equities.
"Cayden Resources Inc.'s El Barqueño has the potential to be the next multimillion-ounce deposit in Mexico."
TGR: What is your current investment thesis for small-cap gold equities or are there multiple theses?
MC: We prefer the small caps to larger caps at this point and we are taking a three-pronged approach. Our primary focus is high-grade projects in low political-risk jurisdictions. On the low-grade side, we focus on potential heap-leach projects as those projects tend to have low capital expenses and low operating costs. And we still see some opportunities in the early-stage drill plays where there is a little more risk but probably good returns if these companies are successful in their drill programs. For the most part, we would focus on explorers seeking high-grade gold.
TGR: What's your top pick in the small-cap gold equity space?
MC: Our favorite is Premier Gold Mines Ltd. (PG:TSX). The company ticks all the boxes. It is in low political-risk jurisdictions—Ontario and Nevada. It has a very strong management team, people who are good at exploring and financing, and who have built and run mines. Perhaps more importantly, Premier has more than $50 million ($50M) in cash so there are no concerns about shareholder dilution or having to finance at low equity prices.
TGR: Assays from drill holes on the Helen Zone extension on Premier's Cove property in Nevada are in and the grade looks promising.
MC: Cove is interesting in that there are two, perhaps even three distinct types of mineralization. The current resource at the Helen Zone and some of the extensions below the previously mined Cove pit are all classic Carlin-style gold deposits with carbonate-hosted gold. It's soft and easy to mine.
What's more interesting is that below the open pit Premier found this new zone that has massive sulphide mineralization, with base metals in addition to gold. For underground mining, that's a much more competent rock to be mining, assuming Premier finds enough of it at decent grades.
TGR: Premier is advancing three different projects. Does that confuse investors?
MC: We've had similar feedback regarding the focus of the company. Five years ago, investors would pay $5 per share for Rahill-Bonanza, a high-grade discovery in the heart of the Red Lake mining district in northern Ontario that's a joint venture with Goldcorp Inc. (G:TSX; GG:NYSE). The company is now much closer to finding something at Red Lake, but in the meantime these other assets have been advanced, especially Hardrock in the Geraldton-Beardmore area of Ontario. That asset has Measured and Indicated gold resources of 3.24 million ounces (3.4 Moz) and 3.78 Moz Inferred.
Premier could have an interesting medium-sized open pit there. Then there's a relationship with Newmont Mining Corp. (NEM:NYSE) at Cove. An aspect of Premier we've always liked is its potential for either a takeover or an asset selloff. Premier is a very attractive investment at $2/share.
TGR: What are some other companies that fit your theses?
MC: On the high-grade side we like Dalradian Resources Inc. (DNA:TSX). It has the Curraghinalt gold project in Northern Ireland, which has 1 Moz Measured and Indicated and 2.5 Moz Inferred gold resources at about 10 grams per ton (10 g/t). I think it can become a medium-sized gold mine in the next few years.
TGR: Curraghinalt will undergo a feasibility study over the next 18 months, generally a weak period for a junior gold stock. Why should investors stick around?
MC: The real incentive to own the stock now is clearly the valuation. When we look at market capitalization per ounce of resource, the global average is about $24 per ounce ($24/oz). But in the subset of non-producing gold companies with high-grade deposits similar to Dalradian, the average is $115/oz. Dalradian is valued at $25/oz—it's the cheapest high-grade deposit we see out there.
Mergers and acquisitions activity in the last four years in the non-producer space has been midtier or large caps buying the high-grade deposits owned by juniors. I think Dalradian fits that bill. The valuation is so compelling that during a period of depressed news flow, it's something that you can buy and hold and the stock can move up as Dalradian progresses through the feasibility study.
TGR: And you would consider Northern Ireland a low-risk jurisdiction?
MC: Northern Ireland is part of the U.K. and recently it has certainly shown a willingness to advance projects. Last year Dalradian received environmental approval to drive underground development at Curraghinalt and proceed with some test mining. If the company could get permits for that kind of activity, it should be able to permit it for mining.
TGR: Are there any more that fit that bill?
MC: One that we don't cover but definitely follow is Integra Gold Corp. (ICG:TSX.V). The company owns the Lamaque South gold project in Quebec's Val-d'Or camp in northwestern Québec. It has high grade in the heart of mining country so it has great infrastructure. People may think it's the old Lamaque property, but this is actually south of the old Lamaque mine. I visited Lamaque South in the spring. It's as if Integra found the initial discovery at Lamaque, which was an underground mine. Integra has outlined a couple of mineralized zones and the resource is up to 800,000 ounces (800 Koz). The Lamaque mine produced 4.5 Moz gold before various companies tried to make it a big low-grade open pit.
A preliminary economic assessment on that initial resource said Integra could put a mine into production for $70M in a toll-milling scenario but there are actually bankrupt mills sitting idle in the area. I think the market is waiting to see how it proceeds. We talked about Dalradian being very cheap but Integra trades at $30/oz, whereas high-grade situations elsewhere trade in excess of $100/oz.
TGR: What about an exploration story?
MC: Our favorite exploration-stage company that's building resources is Cayden Resources Inc. (CYD:TSX.V; CDKNF:OTCQX). Initially our attention was drawn to its strategic land position in the middle of the Guerrero Gold Belt in Mexico where Torex Gold Resources Inc. (TXG:TSX), Newstrike Capital Inc. (NES:TSX.V) and Goldcorp's Los Filos gold mine are located. Over the last nine months or so the focus has moved from the Guerrero Gold Belt to Cayden's newer project, El Barqueño, on the west side of Jalisco state. About 250 Koz was mined there in heap-leach open pits over the last decade. We have seen some strong drill results and Cayden is building resources. El Barqueño has the potential to be the next multimillion-ounce deposit in Mexico. Cayden's shares have done well despite the general malaise in the gold space.
TGR: El Barqueño is the new focus but Cayden believes its Las Calles property sits above the mineralized extension of Goldcorp's Los Filos mine. Do you agree with that thesis?
MC: Cayden has two adjacent projects in the Guerrero Gold Belt: Morelos Sur and Las Calles. Morelos Sur is due west of Goldcorp's Los Filos. Cayden hasn't found anything there yet but Morelos Sur is probably the most prospective target in the Guerrero Gold Belt, which hosts five multimillion-ounce deposits. Goldcorp and Torex each have two, and Newstrike has the other.
Cayden also has a sliver of ground between the two open pits at Los Filos. About half a dozen holes drilled in Las Calles have encountered gold at similar grades to what's found north and south, so there's definitely gold ounces on Las Calles. I think there's strong potential for Goldcorp to acquire either just Las Calles or perhaps all of Cayden's ground in the Guerrero Gold Belt.
TGR: What are some companies that fit into that the low-grade, heap-leach thesis?
MC: Kaminak Gold Corp. (KAM:TSX.V). The company has the Coffee project in the Yukon, which has a resource of 719 Koz gold Indicated and 3.4 Moz Inferred. What is less known is that there's a fair bit of high-grade oxide mineralization at Kaminak that is potentially heap leachable. There's probably 1 Moz at 4 g/t gold so that could be economic as a smaller operation, while still mining 100–200 Koz per year. That's one we like.
Another one we like in the low-grade, heap-leach space is Goldrock Mines Corp. (GRM:TSX.V). The company has the low-grade Lindero gold property in Argentina. It's probably running 0.7–0.8 g/t, with 2.19 Moz Measured and Indicated gold and 710 Koz Inferred, including reserves of 1.5 Moz . Goldrock even has decent infrastructure for being in the Andes of Argentina.
TGR: Goldrock bills itself as a near-term 100 Koz gold producer. Why haven't more people heard of this story?
MC: There have been two issues with Goldrock. One is that it's in Argentina. Investors haven't been excited about Argentina for a couple of years. That attitude is changing. We've seen an influx of money from international oil and gas companies. We haven't seen that in the mining space yet, but I think that will follow. A change in government is expected later this year and the new regime should be more mining friendly.
The other issue is financing. Goldrock has its feasibility study completed and permits in hand, but it lacks the capital to start building a mine. When people see some of the financing, whether it's debt or equity, to move that project into construction, that will put the company back on a lot of people's radar screens.
TGR: Any others?
MC: Another one I'd like to mention would be one of our favorite very early-stage explorers. Arena Minerals Inc. (AN:TSX.V) is looking for both copper and gold in Chile. The management team is familiar with that area of the world and has secured a large land package in the heart of copper mining country. The property is near six large copper mines owned by some of the world's biggest copper miners. This is ground that has lain dormant for decades. Arena has a second property that's north of Yamana Gold Inc.'s (YRI:TSX; AUY:NYSE;YAU:LSE) El Peñón mine, a high-grade underground mine that produces gold and silver. Arena could have some extensions of the mineralized structure on its property.
TGR: Do you believe gold will finish 2014 above $1,400/oz?
MC: I think we can finish the year somewhere in the $1,400–1,500/oz range. We're seeing a flat summer and then there will be some catalysts later in the year to push gold higher. Our current target would be $1,400/oz plus.
TGR: What would those catalysts be?
MC: They are going to be things related to either political risk or that economies aren't improving as much as people believed, or if there's a hiccup with quantitative easing in the U.S.
TGR: Michael, thank you for your time.
Michael Curran is a managing director and mining analyst with Beacon Securities in Toronto. He was previously a director and a mining research analyst with RBC Capital Markets. Curran received the #1 Ranking for Mining & Metals research coverage by The Wall Street Journal (Annual Best on the Street Survey) in May 2013. He holds a Master of Science degree in mineral exploration and a Master of Business Administration, and is a CFA charterholder.
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1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Premier Gold Mines Ltd., Cayden Resources Inc., and Integra Gold Corp. Goldcorp Inc. is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Michael Curran: I own, or my family owns, shares of the following companies mentioned in this interview: None. 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: Dalradian Resources Inc., Kaminak Gold Corp. and Cayden Resources Inc. 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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