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New deposits and
economic triggers will drive gold stocks, says Eric Coffin, the editor of HRA
Journal. In this exclusive interview with The Gold Report,
Coffin identifies the management characteristics of gold juniors that make
money for investors. A successful gold explorer in his own right, Coffin names
his picks from the Yukon to the Caribbean
The Gold Report: Eric, why is there a
bear market for metal mining companies in a season of bulls?
Eric Coffin: Post-recession, there
was a good bounce for commodity stocks. Two problems have slowed things down
during the last year. One was fear of the fiscal cliff as the politicians in
Washington argued about raising the debt ceiling. Banks were blowing up in
Europe. Most important, weakening numbers out of China scared off a lot of
investors, particularly from the base metals. There are simply a lot of
people concerned about the economy in general, and, specifically, the growth
economies where metals are keys to industrial development.
On the gold and silver
side, the real issue is that gold is over $1,700/ounce (oz)
and silver is now over $30/oz. It sounds as if I'm being ironic, but I'm not.
At the start of this major cycle, gold prices were $300/oz. It was not the
price-earnings (P/E) ratio that was determining the value of a lot of mining
companies, it was the P/E ratio plus a very large amount added for
in-the-ground resources. Goldbugs at the start of
this cycle expected gold and silver prices to go up 500%. They were as
interested, if not more interested, in the leverage, the "ounces in the
ground per share" that gold stocks represented.
I'm not going to assume
that gold is going to $10,000/oz. I'd be really happy if it does, but I'm not
expecting it. What we are seeing now is that the P/Es
for the gold firms are returning to the market average. In the past, gold
companies could trade at 80–90 P/E. The earnings part didn't matter
very much. It was all about the amount of gold resources on hand. Now
investors are taking a harder look at how much money these firms are actually
making. We can't just assume that gold is going up another 400–500%. So
the P/Es have normalized.
Another concern is
profit margins. Costs have gone up very rapidly in the mining business. For a
long time that was because there was a skills shortage. Part of the reason
why we expected this to be a long secular bull market was because we knew how
short the industry was on all kinds of skills, material and equipment. The
mining sector was not going to turn around and suddenly start producing twice
as much copper, zinc or whatever at the same cost. As the price of metals
rises, so does the price of a geologist, the price of an engineer, the price
of a ball mill.
The situation will
improve over time as more professionals are trained and the production
capacity of industry suppliers is increased, but this takes time. The final
piece of the cost equation for many metals is grade. As the "low hanging
fruit" is picked and the industry moves to tougher terrain with less
infrastructure and deposits with lower average grade, the cost of production
rises. While I'm not a big believer in things like "peak copper"
(at least not any time soon), supply is very much a function of price. If the
world wants ever increasing amounts of metals it will have to pay up and pay
the mining industry to supply them. The days of cheap metals, in most cases,
are over.
TGR: You observed recently
in HRA Journal that the currently depressed junior gold explorer
market is showing signs of life. Can you explain that?
EC: One reason is that the
market is running out of sellers. People who wanted out of gold equities are
largely gone; there is a huge amount of money on the sideline. That puts in a
bottom but doesn't cause a turnaround. I think the spark that gets the
juniors moving again, as it has in many past cycles, is new discoveries. We
haven't seen many discoveries that grabbed the market's attention in the last
couple of years.
Exciting discovery
stories are critical to the junior mining sector. People need to be reminded
of why they buy these high risk stocks. Investors do not buy a $0.10/share
junior as a widow or an orphan stock, they buy it
because they are swinging for the fences. It's hard for investors to talk
themselves into swinging for the fences unless they are seeing others hitting
one out of the park.
A couple of recent home
runs have generated a bit more liquidity in the market, but not as much as
I'd like to see. The summer is always slow. The real test is going to come in
the next month or two. However, we are starting to see financings close again.
And companies that have done well off of drill discoveries are getting big
increases in stocks prices and, critically, we are seeing more of these
companies maintaining higher prices; that generates money that gets
redeployed.
TGR: Let's talk about the
discoveries.
EC: GoldQuest Mining Corp. (GQC:TSX.V) is a big win for me.
David and I had specifically advised people to buy GoldQuest
for its drill program and then it made an amazing blind discovery in the
Dominican Republic. The best drill hole at this new zone, Romero, is on the
order of 235 meters (m) of almost 8 grams/ton (g/t) gold and 1.5% copper. It
has reported seven holes in a small area, but doesn't understand the geometry
yet. It started out with small stepouts in an area
measuring about 100x100m and is now starting larger stepouts.
Not only are the grades strong, but also the zone is thick. GoldQuest is looking at 200–250m+ intercepts, and
all of the holes have bottomed in the zone. The small area drilled should
contain over a million ounces and it’s still wide open. That is a
pretty impressive discovery, and GoldQuest stock
reacted accordingly. It was $0.07/share when it announced the first drill
hole. It's about $1.60/share now. It has raised $20 million in the last month
and a half, most of that at $1.25/share.
GoldQuest will drill the heck out
of this. It has two drill rigs going. There's a third one in customs, which
should be onsite in a week, and a fourth rig on the way. And, the success of
this target increases the value of its other targets. For instance, it has 40
kilometers (km) of contiguous holdings covering a rock formation called the Tireo Volcanics. With cash from
the new discovery in hand, GoldQuest can and will
up its exploration budget on that set of properties that have several other
early stage discoveries in addition to Romero.
TGR: Are you following any
particular gold miners in North America?
EC: In the Yukon, ATAC Resources Ltd. (ATC:TSX.V) is putting out really
good holes. Kaminak Gold Corp. (KAM:TSX.V) is also putting out
good holes, although it is not putting them out as often as I would like. It
has obviously gone to the whole batching idea.
I also really like the
look of Comstock
Metals Ltd. (CSL:TSX.V). It is operating on the
other side of the Yukon River from the Golden Saddle discovery. Golden Saddle
was discovered by Underworld Resources Inc. (UW:TSX)
four years ago, which kicked off the whole Yukon area play. It was
subsequently taken out by Kinross Gold Corp. (K:TSX; KGC:NYSE). Kinross hasn't published
a new formal gold resource number, but the jungle telegraph says it's between
2.25–2.5 Moz.
Comstock has the same
rocks and very similar mineralization on the other side of the Yukon River,
the north side. It is about 15 km away. It put out a very strong 75m trench
about a month and a half ago, averaging 3.75 g/t. Last week, Comstock put out
another set of trench results, extending the zone to almost 400m of strike
length on surface. The average thickness is probably 70–80m. It
compares quite favorably to Underworld's discovery. That was followed a few
days later by the announcement of a drill start. This is in the far North.
Just how much drilling gets completed this fall is weather dependent but
based on those trenches, it's a strong-looking
target.
TGR: Are there other
explorers in northern Canada that have your eye?
EC: On the opposite corner
of the Yukon, there are really high-grade numbers—up to hundreds of
grams per tonne gold—coming from Northern Tiger Resources Inc.'s
(NTR:TSX.V) 3Ace project this year.
The company drilled several short holes in this new one but hasn't released
results yet. The main question is how big is this thing? The deposit will
have to be thick to get the market excited, but the grades are high enough
that the tonnage could be small and yet still prove to be profitable.
TGR: What about in the U.S.?
Any names there?
EC: I have liked Premier Gold Mines Ltd. (PG:TSX) for several years. It
has developed nice land positions in Nevada and in Ontario. It's a good story
at many levels, and it has one of the best management groups in the junior
sector. Premier has several very good advanced projects in Ontario and Nevada
where it's growing resources with ongoing exploration. It's a very solid
stock with a wide following.
Evolving Gold Corp. (EVG:TSX; EVOGF:OTCQX; EV7:FSE) is drilling a project in
the same area of Nevada as Premier. It has put out some good holes and some
not-so-good holes. It needs to drill a range of deep holes to figure out the
geometry. But it definitely has a Carlin zone. And in the Carlin
mineralization, the gold tends to be very fine grained. It requires a lab
assay. But there's no real shortcut for getting the wedge holes done in order
to figure out which direction to chase the zone and determine if the one is
large enough to justify larger drill programs.
TGR: How does a smart
investor in gold juniors separate the wheat from the chaff?
EC: It's wise to focus on a
geographic area that's already generated a lot of good news. If a company is
looking for a bulk tonnage open-pit-type deposit, I look at the target size
to be sure there is enough scale potential. I don't have a problem with the
high-grade ore. Good high grade deposits can be very profitable even though
the market tends to focus on the big low grade systems. But to get the
market's attention for an underground operation, there needs to be a minimum
of 6–8 g/t and, ideally, more than 10 g/t in intercepts.
In many areas you can
make money on lower grades than that if there is good thickness but the
market tends to ignore grades below 10 grams unless they are at least several
meters thick. With bulk tonnage, you can get away with 1 g/t or 1.5 g/t, but
for drilling at those grades, you want to see 60, 80, 100m drill intercepts.
The property has to look strong from the outset, because the company has to
keep raising money. That being the case, one looks for a management group
with a strong brand and a track record of success—both in market terms
and in technical terms.
Things can get difficult
even when a discovery has been made if management isn't able to get the
market to take notice. Having access to capital is huge for a junior. It's
even more critical when the market is weak as it has been the past 18 months.
When the market's great, everybody's happy, people will say "yes"
to anything and it's much easier to raise money. But when the market is weak,
management must be able to convince people to write a check. Of the 1,500 or
so junior companies, there may be 100 that can do that in this type of market
on non-dilutive terms and no more.
TGR: How's it going with Precipitate
Gold Corp. (PRG:TSX.V), which is in both the
Dominican Republic and the Yukon?
EC: I'm pretty happy with
it. By way of disclosure, as you know, Precipitate was founded by my late
brother, David, and me and our friend Scott Gibson. We were very fortunate to
be joined from the start by such a strong board and management team. Adrian
Fleming is the chairman; he ran Underworld before it was taken out and has
huge business credibility. The board includes Quinton Hennigh,
a good friend and one of the smartest geologists I've ever met. Both Adrian
and Quinton know how to talk to the market. Our friend Gary Freeman is also
on the board. Gary is a great financier. David and I had been involved with
him in the early development of Pediment Gold Corp. (PEZ:TSX;
PEZGF:OTCBB;P5E:FSE), which was taken out by Argonaut
Gold Inc. (AR:TSX). Darryl Cardey, who was the chairman of Underworld, is also on
the Precipitate board of directors. Darcy Krohman,
another longtime friend who has the unusual combination of dual professional
standings both as a P. Geo geologist and a CA, is the president.
Due to its very credible
management team, Precipitate was able to do a $0.40/share initial public offering
on early-stage, Yukon properties in May with no warrants. Believe me, that
wasn't a piece of cake. People bought the stock as a bet on management.
Though we like the Yukon projects, it was no secret everyone involved with
the company was, and still is, on constant lookout for projects that would be
accretive and add value to the company.
As it happens, just
before Precipitate listed, GoldQuest made its
discovery in the Dominican Republic. I'm very good friends with Bill Fisher
and Julio Espaillat, who run it. I've always liked
that belt of rocks. And it is not an exaggeration to say that GoldQuest and Gold Fields Ltd. (GFI:NYSE)
invented the Tireo as an exploration destination.
They did the regional work that focused on those rocks and the belt has generated
several discoveries in its short 10 year exploration history. If Precipitate
had said six months ago, "Hey, we have a property next to GoldQuest," most people would have said, "Who
the hell is GoldQuest?" Now, it's a different
story.
As soon as its first
drill hole was announced, I was trying to find projects in the right rocks
for Precipitate. That is not easy to do because the belt was largely tied up
even before the Romero discovery, but we were lucky to get a large concession
that has the right geology along its eastern side bordering Goldquest. This is early stage exploration but it's a
great address and Romero is already looking as if it could be a world class
discovery after only seven drill holes.
TGR: Let's pull out and look
at the macroeconomic level for a minute. What kinds of economic triggers are
likely to affect gold equities positively or otherwise in the foreseeable
future?
EC: For the next three
months, it's central banks, central banks and central banks. Everybody is
expecting Federal Reserve Chairman Ben Bernanke to kick in Qualitative Easing
3 (QE3). I'm slightly less convinced, but I'm not going to complain if he
turns on the printing press. The latest monthly employment report in the U.S.
was quite weak so that may be the trigger for a QE announcement. What
Bernanke said at Jackson Hole brought the gold price back up through
$1,700/oz. We are seeing similar indications out of the European Central Bank
(ECB). Mario Draghi is telling the European
countries that are anti-stimulus, "I'm going to do it with you, or
without you!" And Germany's Chancellor Angela Merkel, who hasn't exactly
been a proponent of bond buying, is now saying they have to stimulate. It
looks like we could have stereo printing presses humming along on both sides
of the Atlantic before long.
Perversely, weak
employment numbers and weak purchasing manager index numbers help precious
metals. Weak economic indicators convince traders that Bernanke and the ECB
are going to have to pull the trigger. On the base metals side, the easing
could have the opposite impact, with one exception. If we continue to see
weak numbers out of Beijing, the traders will think that Beijing is going to
stimulate, too. But not with bond buying. The Chinese can simply loosen
reserve requirements for the banks. They hold trillions of dollars in foreign
reserves. Unlike Washington and most of the debtor countries in Europe, China
can simply start writing checks. It, too, has been putting out weaker numbers
and making more noise about stimulating. China does have slightly higher
inflation, which makes things trickier, but I expect it to step up stimulus
toward year-end as the next generation of Communist Party leadership is sworn
in.
TGR: What effect would QE3
have on mining interests, generally?
EC: It will help. QE3 will
weaken the U.S. dollar. It will cause traders to buy treasuries all the way
up and down the yield curve, thereby lowering the yields. In the last couple
of weeks, the U.S. dollar index has dropped a couple of points, which is a fairly
big move. As it moves lower, gold and silver prices in U.S. dollars will
strengthen. Then we will see better numbers in the U.S. as businesses gain
confidence and start hiring. Those hiring decisions are being held back right
now because managers aren't comfortable with the slow growth rate. Virtually
all traded commodities are priced in U.S. dollars, so it should help them
all, though precious metals will get the biggest, quickest boost.
TGR: How will monetary
easing affect mining in Mexico?
EC: In Mexico, the peso is
relatively weak by historic standards, which helps with mining costs. It has
good mining infrastructure and good mining legislation. It doesn't have any
real royalties to speak of. You don't get a lot of surprises there. However,
areas of the country are bloody dangerous; that's the one thing that has held
Mexico back recently. The drug cartels have scared people out of some areas.
Nobody really knows who is calling the shots. You certainly don't get the
impression that it is the Federales; the drug
cartels do whatever they want. But people more or less know where the growing
is and where the drug routes are, so they stay out of those areas. I'd like
to think that crime is not going to be a long-term problem. There are still
plenty of areas in Mexico that work out fine for miners.
You must have agreements
with the local ejitos, however. Although the ejitos don't own the mineral rights, they do have surface
rights and they have local political power. So you need to sit down, talk to
the locals and make sure that everybody is happy, because an angry ejito can really make your life miserable. There are some
ejitos who just don't want development. And when
the locals don't want you, there's just no point in bothering. All that said, it's a good country with lots of good geology and plenty
of recent discoveries. If the government can get the crime issue under
control, I don't doubt the high level of mining investment would continue and
probably grow again.
TGR: Are there any other
companies that you think are hot?
EC: I'd keep an eye on Reservoir Minerals Inc. (RMC:TSX.V). Its joint venture with
Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE)
is pulling some amazing drill holes in Serbia. It just put out the second one
today—the copper equivalent was almost 10% through 160m. That's a heck
of a drill intersection. Freeport is not fooling around. It is doing big stepouts. It wants to know right away if it's the real
thing and already has four drill rigs at work.
At a more advanced
level, I like EurOmax Resources Ltd. (EOX:TSX.V). It is in several
countries in Eastern Europe, including Serbia. It has a new management group
that came directly out of European Goldfields Ltd. (EGU:TSX;
EGU:AIM), which was taken out about a year ago for about $1.5 billion. These
guys have huge credibility, especially with European institutions. Euromax is drilling to expand Ilovitza,
a copper-gold porphyry in Macedonia. It has a couple
of nice projects that have gold resources on them, but there is room for some
more gain simply by the current management group going around and telling the
story. Management views the asset set as very comparable to that of European
Goldfields Ltd. (EGU:TSX; EGU:LSE) but with one
tenth the current market value.
Speaking of Mexico, if
you're interested in a production level story we like SilverCrest Mines Inc. (SVL:TSX.V;
SVLC:NYSE.MKT). We have followed the
company since inception. I have a very high regard for the management team,
which has been delivering on time and on budget for years. SilverCrest is generating nice profits from its Santa
Elena gold-silver mine in Sonora and plans are in the works to add a mill to
this heap-leach operation and start mining deeper parts of the system and
double the production rate by 2014. SilverCrest is
also drilling its La Joya bulk tonnage silver-base
metal project in Durango. There should be an updated resource estimate by the
end of the year and it looks like it's going to be big, probably close to 200
Moz silver equivalent. SilverCrest has gotten a lot of traction as gold and
silver prices jumped recently but if they keep going up, the company should
too.
Lastly, HRA is offering
a free report for your Gold Report readers. It's actually our latest HRA
Journal, which discusses in more detail some of the companies that we
have covered in this interview, such as Precipitate Gold, Comstock Metals and
GoldQuest. To access the report for FREE, all you
need to do is sign up through our page at HRAdvisory and you'll automatically
receive a copy of the Journal via email.
TGR: Thanks, Eric.
EC: You're welcome.
Eric Coffin is the editor of the HRA (Hard Rock Analyst)
family of publications. He has a degree in corporate and investment finance
and extensive experience in merger and acquisitions and small-company
financing and promotion. For many years, he tracked the financial performance
and funding of all exchange-listed Canadian mining companies and has helped
with the formation of several successful exploration ventures. Coffin was one
of the first analysts to point out the disastrous effects of gold hedging and
gold loan-capital financing in 1997. He also predicted the start of the
current secular bull market in commodities based on the movement of the U.S. dollar
in 2001 and the acceleration of growth in Asia and India. Coffin can be
reached at hra@publishers-mgmt.com or the website www.hraadvisory.com.
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DISCLOSURE:
1) Peter Byrne 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: Comstock Metals Ltd., Premier Gold Mines Ltd., Evolving Gold
Corp., Precipitate Gold Corp., Argonaut Gold Inc. and SilverCrest
Mines Inc.Streetwis Reports does
not accept stock in exchange for services. Interviews are edited for clarity.
3) Eric Coffin: I personally and/or my family own shares of the following
companies mentioned in this interview: Precipitate Gold Corp., Comstock
Metals Ltd., Kaminak Gold Corp., Goldquest Mining Corp., EurOmax
Resources Ltd., Reservoir Minerals Inc., SilverCrest
Mines Inc., Northern Tiger Resources Inc. and Argonaut Gold Inc. I personally
and/or my family are never paid by any of the companies followed by HRA. I
was not paid by Streetwise Reports for participating in this story.
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