Select frontier markets,
once eyed skeptically as fraught with danger, are now some of the most robust
economies in the world. But the shares of companies exploring and producing
in these markets often continue to lag based on long-held fears that are no longer
valid. How does an investor decipher that fine line between real and
perceived? Carlos Andres, the chief analyst and managing editor of the Frontier
Research Report and the Global Resource Investor, makes his living
informing retail investors about risks in the junior resource space. In this
exclusive interview with The Gold Report, Andres discusses how to
capitalize on the narrowing gap between real and perceived risks in South
America and beyond.
The Gold Report: Carlos, you note in the
January edition of Frontier Research Report, entitled "2011 In
Review: A World in Turmoil," that only three
countries with major stock exchanges finished 2011 in the black: Indonesia,
the Philippines and Malaysia. Is the face of global risk changing?
Carlos Andres: In a word? Yes. Some
emerging and frontier markets with significant natural resource endowments
continue to emerge as robust places to invest and weather economic storms for
savvy investors. Paradoxically, the world's developed economies have become
the more risky markets.
TGR: What factors are contributing
CA: On the one hand, robust
natural resource demand has asserted itself over the last decade, led by Asia
in general and China in particular. Latin America deserves favorable mention
as well. This is reflected in the rise in global commodity prices over the
same period. It's being fueled by factors such as population growth,
industrialization, urbanization and infrastructure development driving income
growth and middle-class expansion. As a result, when you are operating in
these markets, there is a strong sense of economic activity, optimism and
wealth creation. It's tangible. You can see it and feel it.
On the other hand, as
has been covered ad nauseam by media of all kinds, developed world markets
are mired in myriad types of interlinking crises: financial, political,
budgetary, debt, employment, military, etc. This fuels a high degree of
uncertainty for investors in these markets. To a certain extent this is
masking the economic growth on other markets.
TGR: Can you rank what you
consider the top risks in the junior resource space?
CA: There are a lot of risks
competing to be on that list! Consulting firm Ernst & Young recently
released its annual metals and mining Top 10 report. At the top of the list,
and I don't disagree, is resource nationalism. There's a resurgence of
resource nationalism and it does seem to be taking on a rather virulent strain
as of late.
"Some emerging and
frontier markets with significant natural resource endowments continue to
emerge as robust places to invest and weather economic storms for savvy
Second on the list is a
significant shortage of skilled geoscientists. An all-time record of $18
billion was spent on non-ferrous metals exploration in 2011. As mining
activities have picked up, so has the demand for skilled and experienced
workers. There are not enough of them to go around.
Another rising risk
factor, stemming from the success of the sector, is cost inflation. There is
competition for the factors of production, including capital equipment. This
is a significant factor underpinning the viability of mining projects.
Ernst & Young also
lists capital project execution, or the ability to raise enough capital to
execute projects successfully. That's obviously a problem given current
weakness in capital markets. Despite record production levels and
profitability, investors have fled the sector. There's a large disconnect
that should spell opportunity for discerning investors
TGR: Does that particular
risk speak to a lack of skilled management, too?
CA: Yes. Management has to
shepherd capital very carefully and conservatively when cash is tight. It
does come down to experienced management teams who are shrewd and very nimble
on their feet. They must be creative about where and how to obtain financing
as well as how they allocate it. Also, their accomplishments and reputations
often have a lot to do with being able to bid away financing from management
teams who are weak in this area.
Ernst & Young also
talks about maintaining a social license to operate, which is a sophisticated
way of saying it's a good idea to get along with the locals near the mine. As
we are learning, management teams ignore this issue at their peril.
TGR: The industry has done a
poor job of that, by and large.
CA: It has. It's becoming
an increasing area of concern and focus for management teams as problems have
flared in various locales. The shrewd companies are beefing up in that area
to respond to social needs and concerns. It requires an added dimension of
expertise. These issues have added to the costs for many companies. It has
become a problem for both mines that have been operating for a very long time
as well as new projects.
TGR: Investing in small-cap
resource plays can be a high-risk game. What are some things that investors
routinely do that expose them to more risk than is necessary?
CA: It's obviously important
for investors to pick the right management with the right projects in the
right jurisdictions with financial firepower. The average retail investor
often falls down on the job in this area despite the fact that there are lots
of good news and research resources out there to help separate the wheat from
resource demand has asserted itself over the last decade, led by Asia in
general and China in particular."
There are maybe 3,000
publicly traded junior resource stocks and a lot of them are not worth their
listing. The first step is to eliminate the worthless, which means the list
of 3,000 quickly becomes 300 or less that are worth considering.
However, many investors
who are committed to this sector tend to engage in very poor trading
strategies. This is not covered nearly as much as it should be. I'll try to
reduce it to some simple ideas: When trading, investors often feel as if they
have to get in on this before it's too late and, therefore,
they will chase price as it moves up. Although it is certainly possible to
make money this way in some cases, it is a bad habit that will work against
you in the long run.
Investors also tend to
allocate far too much capital to individual companies while at the same time
not maintaining sufficient cash reserves. When price moves against them,
their investment capital is fully deployed. Given the inherent volatility in
junior resource stocks in particular, the prices of shares can move
dramatically against them. These folks end up selling with large losses. They
become demoralized and never return to these markets. Whereas if they had
pursued a different trading strategy, they might find themselves not only
being able to endure the storm, but able to generate wealth and become
successful long-term investors in the sector.
TGR: What would you suggest?
CA: Something along these
lines: Investors first find a company they like. It's at a certain price.
It's a good price, but good strategy says you shouldn't allocate all your
money at once. Given that many investors will allocate far too much of their
capital to one stock, once decided on an amount, an investor should probably
reduce it. It's a good risk-management practice in volatile markets.
If you decide to
allocate $10,000 (K), maybe you just spend $1K at the current price and wait
and watch. If the price falls significantly, say 20%, and you still think
it's a great company in a great jurisdiction, you spend another $2.5K. You
are buying on the way down because you believe in the fundamentals, rather
than chasing the price up because you are relying on the herd as proof for
the value of the stock. You want to be selling to the herd and not buying
from them. The only way to do this consistently over the long-term is to make
a habit of buying value at distressed prices, like now.
Therefore, the lower the
price goes, in 20% increments, for example, you would spend larger and larger
chunks of your allocation of $10K. Thus you are lowering your basis as you
go. When the price finally does turn around, you will have made a significant
purchase right near the bottom. It allows investors to manage emotions and
risk while accumulating value. If the company's stock takes off just after
the initial investment of $1K, you may have missed out on putting $9K in, but
you still get to participate in the upside and you will sleep well at night.
There are, of course,
more nuances to this type of approach to trading. These are the basics just
to give some idea of how investors should be thinking.
TGR: Resource nationalization
is a big part of jurisdiction risk. My sense is that there's greater
jurisdiction risk now than there was even five years ago. What's your view?
CA: It was always there,
but more countries are jumping on the bandwagon and asking for a bigger slice
of the pie by raising taxes, royalties and the ownership interest a country
takes in a mine. In some cases, such as in Africa, there is free-carried
interest where the state is entitled to 10–20% of the mine without
having to bear any of the development costs. It is creating uncertainty so
the analyst has to wade through this.
"With any good
fortune, the buying season for gold, and potentially for mining stocks as
well, is ahead of us in the fall of this year."
Some countries, like
Indonesia, are adding a new twist. In order to capture a bigger piece of the
pie, the government wants to require companies that extract natural resources
to build refineries and smelters to refine products in-country before they
are exported. Going from ridiculous to sublime, Indonesia is also requiring
that after 10 years of owning a mine, a company must divest itself of 50% by
selling to Indonesian concerns.
Where it starts to get
really intense is outright nationalization. We've seen some of that in
Argentina and Bolivia lately. There were rumors in mining-powerhouse South
Africa as well, but cooler heads appear to have prevailed for now.
TGR: When companies are
investing the kind of capital it takes to develop a large mine, they don't
want to lose half of it after just 10 years. That's quite extreme.
Frontier Research Report has success identifying
countries where there is more "perceived risk" than there is actual
risk. What are some of those jurisdictions?
CA: We like to profit on the
difference between perceived risk and actual risk because we're able to buy
things really cheap if perceived risk is higher than the reality. A company's
true value is revealed when it meets significant milestones and investors
take notice. However, there are times, like the present, when the margins
between perceived and actual risk narrows a bit.
TGR: Or a lot.
CA: Indeed. Now is one of
those times where perceived risk is moving close to actual risk. It's
narrowed, even in some of my favorite jurisdictions, like Peru, which is a
mining powerhouse and is No. 2 in the world in copper, No. 2 in silver and
No. 6 in gold. Nevertheless, it's experiencing some problems with local unrest
to the point where it's receiving international attention. It's brought a
cloud over Newmont Mining Corp.'s (NEM:NYSE) Minas Conga project, which has
the green light from government but is moving very slowly in the face of
TGR: It's forced Peruvian
President Ollanta Humala
to change around his cabinet somewhat in order to try to appease both sides.
CA: That's right.
TGR: Humala is a former soldier.
He's perceived as a leftist, but is he anti-mining?
CA: No, I don't believe he
is. Prior to the election, we argued to our subscribers that if he won the
presidency, given the nature of politics in Peru and the importance of mining
to the economy, he would find it very difficult to enforce his platform
overnight and would have to moderate it. In the lead up to the election we
started to see him do exactly that.
After he was elected, he
proceeded to raise royalties and taxes. The mining companies went along with
that. He said he would distribute funds and enact social programs in the
rural regions of Peru. It seemed to work out fairly well at first. The local
unrest that developed almost immediately after he was elected took many,
including me, by surprise. There has always been local unrest but it flared
TGR: These communities feel
that they've been left out of the boom that the country has participated in
over the last 10 to 15 years.
CA: I think they felt that
if they acted out their social displeasure, maybe they would have the backing
of their leftist president, but he perhaps caught them by surprise as he
proved unable or unwilling to offer that support.
TGR: Ultimately, is Peru is a
good place to be investing?
CA: Will mining companies be able to execute projects in Peru and successfully move
them from start to finish? Can that still happen logistically, politically,
from a regulatory standpoint in Peru? Absolutely. Will investors get
comfortable funding projects in a country where there is local unrest? That's
the rub. Can companies raise financing in the capital markets in order to
push projects through? That's the question mark.
In environments like
Peru, where mining will continue robustly even under a cloud, it will be more
and more important that investors be able to differentiate well-managed,
well-capitalized companies, with sound projects.
TGR: Your model portfolio
took somewhat of a beating in 2011, along with most portfolios with a focus
on this particular sector. Your gold holdings included Lion One
Metals Ltd. (LIO:TSX.V; LOMLF:OTCQX; LY1:FSE), Gran Colombia Gold Corp.
Resources Ltd. (MRY:TSX; MARL:LSE), Minera IRL Ltd. (IRL:TSX; MIRL:LSE;
MIRL:BVL), Rio Novo
Gold Inc. (RN:TSX), Sulliden
Gold Corp. (SUE:TSX; SDDDF:OTCQX; SUE:BVL) and Azumah Resources Ltd. (AZM:ASX). Auryx Gold was in there too, but it was taken over by B2Gold Corp. (BTO:TSX; BGLPF:OTCQX).
CA: All of these companies
except one are still in the portfolio.
TGR: A couple of those
companies in there have projects in Peru, including Sulliden,
which is suffering from the cloud hanging over Peru after Bear Creek Mining
Corp.'s (BCM:TSX.V) license to mine the Santa Ana silver deposit was pulled.
Does Sulliden simply wait it out or can it lift its
share price by continuing to derisk its Shahuindo project?
CA: Sulliden has experienced
management with a strong track record, is well capitalized with $44 million
(M) in the bank and is far enough along to shepherd the project through to
completion. The question is will the Peru cloud eventually lift and will
markets begin to improve so that Sulliden can
achieve its true value for shareholders? I believe so. As Shahuindo
moves toward development over the next 18 months, its share price is likely
to improve substantially. The company will release a definitive feasibility
study in August, which will likely add ounces to what is already an
impressive 3.4 million ounce (Moz) deposit. Sulliden is also ramping up for mine development. This
company has done well for our subscribers and will likely, in our view, add
more value in the near future.
TGR: What are you expecting
from the feasibility study due later in August?
CA: I'm relatively certain
the results will be positive. It will contain a resource estimate update to
the existing 3.4 Moz deposit, which includes 66 Moz silver. The deposit remains open in all directions,
including at depth, so there is excellent exploration upside. The update will
likely add ounces and upgrade existing ounces that are currently in the
Indicated and Inferred category. The initial production profile of the
open-pit mine will be scaled down from 150,000 ounces/year (150 Koz/year)to 100 Koz/year. That will reduce the initially planned
development cost of $200M by half.
With a definitive
feasibility study and a smaller, simpler mine plan, the approval process will
be easier to navigate as well. The definitive feasibility study will feed the
all-important environmental impact assessment, which will be submitted in the
fall. It should take 9–12 months to obtain approvals and Sulliden has recently hired a seasoned specialist to
manage the process for them.
story has all the hallmarks of a management team that is thinking soberly and
strategically with the wherewithal to get across the finish line.
TGR: Minera IRL also has
significant assets in Peru. It has a mine in production, Corihuarmi,
with about another three years of production left. Minera
is counting on future production from its Ollachea
project. Can Minera IRL bring it into production
within that timeframe?
CA: Chances are very good. Corihuarmi, which may be exhausted by mid-2015, is
currently producing 30+ Koz/year. When Ollachea comes on-line, it will have production of 117 Koz. It will be an underground mine and the access tunnel
is currently under construction and progressing on schedule.
The deposit itself
currently contains 2.6 Moz Indicated and Inferred
with solid grades between 2.8 and 4 grams per tonne
(g/t) with a higher-grade core within the resource envelope of 5.3 g/t. Ollachea also remains open in all directions.
Minera is currently in the
middle of preparing a definitive feasibility study that is due by the end of
the year and the company is already working on mine financing options.
Permitting and financing are scheduled for 2013 with mine development in 2014
and production scheduled for 2015. So, yes, I think the schedule is
In addition, Minera IRL is a very well-managed company with the
venerable Courtney Chamberlain at the helm and roughly $25M in the bank.
Finally, exercising tremendous foresight, the company has an excellent
relationship with the local community through numerous programs, including an
agreement that provides for a 5% ownership interest, and a recently signed
30-year surface rights agreement, which enjoyed wide
spread local support.
The company should be
able to weather the storm and continue advancing its projects in Peru, as
well as its Don Nicolas project in Argentina.
TGR: Some of Argentina's oil
and gas resources have been nationalized in recent months. Is Don Nicolas at
CA: The country does not
have a history of nationalization in the hard-rock mining industry, although
it does in the oil and gas industry. The nationalization of the oil company,
YPF SA (YPF:NYSE), has a lot to do with the fact
that Argentina has gone from energy exporter to net energy importer in a
massive way over the last few years. It used to provide all its own energy,
but now it's suddenly importing large quantities of natural gas to keep the
lights on and it's been draining the country's foreign exchange. As a result,
the government has been reacting rather radically. However Argentina didn't
try to nationalize the mining industry in the 2001 crisis and so far mining
companies are soldiering on.
TGR: What about the move by
President Cristina Fernández de Kirchner to
restrict access to imported mining equipment?
CA: The government of
Argentina is not necessarily targeting mining specifically. It is making
policy decisions related to keeping foreign exchange in the country. It is
impacting mining companies, but it hasn't shut things down for them. Is there
added risk? Yes, especially with imposing capital controls and rules on the
way dividends are repatriated and capital equipment purchases are made. It is
having an impact on mines. But it hasn't shut down operations or exploration.
TGR: What are some other
junior explorers that you believe have been unfairly punished by events
beyond their control, or that are unusually undervalued due to perceived
CA: Gran Colombia stands out
in this regard. It sits in the junior ranks in the sense that it is
continuing exploration on two very promising mining areas in Colombia. In
reality, it has several legacy operating gold mines with large underlying
deposits that are currently under development and hence is masquerading as a
junior. The company's Marmato deposit has over 12 Moz gold and 75 Moz silver and
yet it's valuation on an enterprise value per ounce level is around US$20 or
1.3% of the gold price. That's unbelievably low.
Marmato is in the heart of a
historic mining district in the center of Colombia dating back to the
centuries when the Spanish controlled it. The company is developing an
open-pit mine, scheduled to begin production in 2015.
In the meantime, Gran
Colombia is deriving cash flow from the existing underground mine, which
produces about 30 Koz/year. The company has another
well-known historic holding formerly known as the Frontino
gold mine but recently renamed Segovia. Three or four underground mines are
currently producing over 100 Koz/year. Segovia has
1.4 Moz so far, but it's going to get a lot bigger.
So the company has cash flow from legacy operations, a world-class deposit at
Marmato, lots of silver, a solid deposit at
Segovia, with tremendous exploration upside.
TGR: The deposits tend to be
high-grade underground vein deposits in Colombia, but they're difficult to
exploit en masse. There are these smaller high-grade operations, but nothing
at scale. That's what Gran Colombia is trying to do with the pit at Marmato. Do you think that it will prove successful?
CA: I do. Gran Colombia has
a very experienced management team that has developed large gold deposits
before. Although Marmato is operating a legacy
underground mine, the massive deposit is being developed with a large
open-pit bulk-mining design in mind. The drill results look good and I expect
the company to be able to rationalize the pit dynamics and the grade.
TGR: These older operations
that Gran Colombia is running have been grandfathered into the new mining act
there. However, there have been very promising, much larger deposits that
have not been green-lighted. What makes you think that this one will be?
CA: Because the management
team has already accomplished what no other mining company would even
attempt. Both Frontino (now Segovia) and Marmato had some significant legacy issues that had
previously caused miners to shun them like the plague. Frontino
had a $200M legacy pension problem from a bankruptcy in the '70s. Marmato was previously fragmented into dozens of
different ownership interests. In addition, the historic town of Marmato, which sat right in the middle of the deposit,
had been partially destroyed by a landslide, creating a humanitarian dilemma.
All of these issues have
been completely resolved by Gran Colombia management. The company was able to
raise the $200M in capital markets to resolve the pension issue in exchange
for a 100% unfettered interest in Frontino. It
consolidated all of the individual land holdings at Marmato
so that it now has 100% ownership of the entire site. Gran Colombia has also
aided the government in rebuilding the city of Marmato
further down the hillside, which has been completed. All of this was
management team hails from the region and is well connected. Executive
Co-Chairmen Serafino Iacono
and Miguel de la Campa are from Venezuela and were
responsible for finding and defining one of the larger deposits in South
America. Their success with Bolivar Gold and later Pacific Rubiales established a tremendous reputation for them
both and so they are able to open doors that few others can. In addition, the
President and Chief Executive Maria Consuela Araujo
is the former Minister of Foreign Relations and
former Minister of Culture in Colombia. That gives you some idea of the
pedigree of management.
TGR: Lion One appears to be
sitting on the tip of an iceberg with its high-grade low-tonnage Tuvatu gold project in Fiji. How is their story coming
CA: Lion One is making good
progress. It has become evident that the company is sitting at the periphery
of a large volcanic system at one edge of a large caldera. In geologic and
physical terms, it is very similar to the nearby historic and still-operating
Vatukoula mine, which also sits in a caldera. For
reference, Vatukoula has historic production and
remaining resources totaling 11 Moz. In this context, Tuvatu
has an initial existing deposit of roughly 650 Koz
established in the early 2000s.
Over the last eight
months, Lion One has established that consistent mineralization is extensive
laterally and at depth from the existing deposit. In short, this deposit is
going to grow. Another is that the company has a deep pool of local geo and
mining talent to draw on from Vatukoula, who have
lengthy first-hand experience with the above- and below-ground geology.
Thus, on the exploration
front Lion One is working hard to nail down the geological system
underpinning the deposit. At the same time, it is pushing to establish a
commercially viable mine plan scenario that could support the long-term
exploration and development of what is shaping up to be an extensive gold
field. This is a project to keep an eye on. The company is well-managed by an
experienced team and it has about $15M in the bank
TGR: Do you have some tips on
how to hone our approach in order to take advantage of opportunities while
mitigating risks in the junior resource space?
CA: As we alluded to
earlier, on one side of the ledger, it's important to pick the right
management, projects and jurisdictions. On the other side of the ledger, it
is equally important to look at trading strategies and how much money to
allocate to a particular company. The tried-and-true approach is not to
invest more than you can afford to lose. I know everyone knows that, but I
suspect a lot of retail investors lack the discipline to stick to it. Wait
for the prices to come to you. Buy light in the beginning and buy in ever
increasing amounts as the price declines. The rule is accumulation rather
than chasing prices as they run away from you. The downside is far too high
to chase prices like that.
TGR: Did we see the bottom
for small-cap resource stocks in May?
CA: Indeed, they've come off
the bottom a little bit—especially some of the more well
known ones. I think they're still probably meandering along the bottom
as a whole, but some of the more prominent names will bounce off the bottom.
With any good fortune,
the buying season for gold, and potentially for mining stocks as well, is
ahead of us in the fall of this year.
TGR: Hopefully, Carlos.
Thanks for speaking with us.
Learn more about the
companies mentioned in a special report at www.globalresourceinvestor.com
Carlos Andres is the managing editor
and chief analyst of the Frontier Research Report, a natural
resource-oriented monthly investment newsletter focused on high-risk, high-reward junior exploration companies in emerging and
frontier markets. Andres identifies countries and companies where
"perceived" risk is much higher than "actual" risk,
providing opportunities to profit significantly. Andres has been a natural
resource analyst and investor for over 15 years.
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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: Lion One Metals Ltd., Sulliden
Gold Corp. Ltd., B2Gold Corp. and Minera IRL Ltd.
Streetwise Reports does not accept stock in exchange
for services. Interviews are edited for clarity.
3) Carlos Andres: I personally and/or my family own shares of the following
companies mentioned in this interview: Lion One Metals Ltd., Sulliden Gold Corp., Minera IRL
Ltd., Gran Colombia Gold Corp., Mariana Resources Ltd., Rio Novo Gold Inc.
and Azumah Resources Ltd. 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.