Investors do not need to travel the world to make money in gold mining
stocks. Nevada has world-class geology, infrastructure and a mine-friendly
legal system without the substantial risks of international resource
development. In this exclusive Gold Report interview, David Sidders,
founder of Xeitel Capital Management, discusses how
to keep investments simple by staying close to home.
The Gold Report: What is your overall
strategy for gold-related investments at this time?
David Sidders: As with any sector in the market right now,
everybody is a bit cautious. There's risk in everything and around every
corner. We have problems in Europe. We have problems in the U.S. Investors
are pulling in the reins, and money is tight. In this environment, I strongly
prefer domestic operations in well-known, proven, mining-friendly
jurisdictions. I don't need the additional political risk from overseas
investing. The strategy is simple—stick with domestics. If you want
something exotic, go order a Mai Tai at the bar. Investors aren't compensated
for the risks involved in exotic mining investments at this time. Investors
have been chasing rainbows in Africa and windmills in South America and lots
of other fantasies when they could be focusing on domestic projects that are
crushing rock, pouring dore and making profits in
TGR: Do you have a
preference between exploration/development and production?
DS: I like two scenarios
here. I like smaller companies that are defining an ore body and building
reserves. I also like producers that are increasing production and containing
costs. Clearly, the companies that are looking to build mines—they
already have this magnificent resource and now they need to come up with
financing—are finding that the input costs and the capital expeditures (capex) are
exploding. Even the majors are seeing cost pressure; some pretty big majors
have dropped out of large capex projects. When you
read Barrick Gold Corp.'s (ABX:TSX;
ABX:NYSE) financial statements, it is clear that costs are escalating. One
strategy to deal with cost escalation is for the major to re-examine existing
operations and see how it can run them better, perhaps on a smaller scale
while adding to reserves. Another strategy would be to buy new blue-sky
opportunities in proven jurisdictions. Not far off places like Ecuador or
Mauritania, but somewhere closer to home, somewhere the company may have
TGR: That brings us to
Nevada, which you like, but Nevada is already a huge gold producer. Most of
the majors are there and have been there for over 20 years, producing a lot
of gold. Has all the low-hanging fruit already been picked? Could there be
that much exploration upside?
DS: In Nevada, something like
24 metal mines and 24 industrial mines currently are in operation. So that's
four dozen mines, and all the majors are there—companies like Goldcorp Inc. (G:TSX;
GG:NYSE) and Barrick
Gold. There are more holes in Nevada than there are on a dartboard. That is
not bad—it indicates that the ground is good. Many of those holes were
drilled long ago; the technology has improved and gold prices are higher.
Today's industry is different from 15 years ago.
"I don't need the
additional political risk from overseas investing. The strategy is
simple—stick with domestics."
What is new in Nevada?
One example of an area that is getting a second look is the Bullfrog Mining
District, where Barrick produced 2–3 million
ounces (Moz) during the 1990s. We're seeing some
juniors working there now. One of the juniors, Corvus Gold Inc. (KOR:TSX), has a resource of
greater than 1 Moz Indicated and Inferred in the
Bullfrog Hills. It's about a half-dozen miles from the old Barrick open-pit mine. There is still exploration opportunity
because the technology and the economics have improved dramatically since Barrick first mined the area. The improvements are in
addition to the well-known advantages that Nevada already has—low cost
surface mining, ores that can be processed by chemical leaching and a
favorable legal and tax system. There is a reason that Nevada produces
80–85% of all the gold in the U.S.
TGR: The Nevada gold fields
are concentrated in several trends: Battle Mountain Trend, Getchell Trend,
Walker Trend and so on. The Bullfrog district is in the latter. Is it
possible that some of these trends are relatively underexplored?
"I like smaller
companies that are defining an ore body and building reserves."
DS: I think so. Barrick closed down its operation at Bullfrog in 1999. If
it would have stayed in production, it could have done a little more
exploration, but the gold price was much lower. The economics have completely
changed since then. The capex of new mines in this
area is low. For example, Corvus expects to spend
around $70 million in capex on its North Bullfrog
project. That is a bargain compared to other projects in far-flung
TGR: Nevada is a good
jurisdiction for your investment model. Are there any other companies that
you are watching?
DS: Another company that I
like is Bullfrog Gold Corp. (BFGC:OTCBB). The company has three
projects; its prime Nevada project is adjacent to Barrick's
former surface mines. Bullfrog's second project, Newsboy, is in Arizona. That
state is another jurisdiction that is extremely friendly for mining and has
excellent infrastructure. Bullfrog completed two drill programs at Newsboy
during the past eight months. The historical mineral resource was a few
hundred thousand ounces (Koz). Bullfrog has
confirmed much of the old drilling and intersected a higher-grade zone in the
basement rocks. The geologic potential appears to be approximately
800–900 Koz. Bullfrog also acquired a third
project in Nevada that has strong potential for silver with base metal
credits. Bullfrog's projects are located in areas that offer low political
risk, straightforward permitting, good metallurgy, with a good local workforce
that will get the job done. The management team is led by a mining engineer
and has built many mines. It will be interesting to watch for the drill
results from the second drill program recently completed at Newsboy as well
as a third program scheduled later this year.
Over the next months, Corvus and Bullfrog will be generating lots of excitement
in the Bullfrog Hills area. It could become an area play. Maybe we'll see a
staking rush. If so, that would be exciting.
TGR: What is your exit
strategy for these types of investments? Could it be M&A or mine
DS: Mine building can be
expensive, but it is one option. A faster, and probably better, exit strategy
is to sell to a major that is already operating in the area and needs to
replace reserves. The goal of the junior is to create value by proving up a
great ore body and selling it to a major at a revalued price.
TGR: Are there other
domestic or North American areas that you're interested in?
DS: I like Canada, and
specifically Timmins. Everybody likes Timmins. It's another jurisdiction with
a 100-year history. In Timmins, I like a company called Brigus Gold Corp. (BRD:TSX;
BRD:NYSE.A). All of the majors are up
in Timmins, Goldcorp, Rio Tinto (RIO:NYSE; RIO:ASX),
Xstrata Plc (XTA:LSE) and a whole string of
juniors. Brigus is producing; I think this year
it's on target to do 85 Koz and is projecting over
100 Koz next year. This is a situation where you
have a company that's already built the mine. Brigus
is working on cost containment and increasing production. There may be a role
for a major to play by coming in and taking production to the next level
using its expertise and economy of scale. And there's your exit strategy. To
summarize, I like the blue-sky opportunities where we're drilling to prove up
a resource for a smaller producer. At the same time, if the efficiency can be
improved, a major might become interested and ideally become a bidder.
TGR: Another district with a
long domestic history is the Carolina gold belt. The most advanced project
there is the Haile mine for Romarco Minerals Inc. (R:TSX). Is that one that you
follow as well?
well-known advantages—low cost surface mining, ores that can be
processed by chemical leaching and a favorable legal and tax system."
DS: The Haile mine was, I
believe, used to finance the Civil War. That's a project where the company
has gone into a historic district, used the data, drilled it out, twinned it
and now has expanded the resource base. We did well with Romarco
on the run-up as it proved the resource. Lately, it has unfortunately run
into some permitting problems because part of the proposed mine is on
wetlands. Romarco is dealing with the Army Corps of
Engineers to find a solution. Once those issues are resolved, Romarco has to raise the funds to build the mine. The Romarco story was terrific. It ran to $2/share, and then
it ran into these problems. All the majors, everybody, can be subjected to
the difficulties of trying to get a mine off the ground, to raise the money
and to get it going. That's when it's really difficult.
TGR: Is there money out
there to finance permitted mines with a defined resource?
DS: Sure there is. That
money will come from the majors who want it. Once reserves have been defined,
they have lots of cash. If the majors are passing on big projects, they still
need to replace their reserves. If a major passes on advancing a Donlin Creek-sized project, that's a lot of money that
can be reallocated to something that's already running or a resource that's a
little closer and a little simpler to bring to fruition.
TGR: Are there any other
specific regions, jurisdictions or companies you want to talk about?
DS: Those are my three
favorites right now. I love Corvus. I love Bullfrog
because of the two projects it has and the exploration upside near Barrick's former mines. And I love Brigus
because of its potential efficiency improvements, additional production and
because it is a takeover target. All three of those companies are operating
in these terrific mining-friendly jurisdictions where there's no political
risk—they're almost lay-ups.
TGR: Over the past couple of
years, there have been a lot of investors who thought they had lay-ups. But
the junior sector moved sideways or down. How do you deal with the investing
psychology in the junior sector when the stocks trend
sideways or down—for what seems like forever?
DS: You have to remember,
last year things got very low, and they bounced. The conditions are, again,
where we're getting oversold here. People are nervous and people are throwing
out value, and they're doing it almost irrationally and for comfort. But at
some point, we'll start to see a little M&A. We've already seen some
companies try to merge with one another to keep things going. We've seen some
acquisitions, and I think that will increase as we go into the fall. Once the
risk appetite returns, we're going to definitely see first these domestic
companies take off and then, later on, the companies operating in far-flung
jurisdictions should get a bid as well. Prices are getting so cheap; Hecla
Mining Co. (HL:NYSE) the other day made a bid for
U.S. Silver Corp. (USA:TSX.V; USSIF:OTCQX). It just said, hey, what the hell?
It's next door and cheap—here is the cash.
TGR: It feels as if we're in
a holding pattern macroeconomically as well as in
the sector. It could be the summer doldrums. Maybe things will get a little
bit more exciting in the fall.
DS: There's an election
coming up. There are problems with Europe. If there is a convincing victory
in the election in the U.S., money is going to come back into the market.
Equities are cheap, and these gold equities are cheap. They're trading for
$35–40/ounce in the ground. At some point, everything becomes so cheap
that they become acquisition targets.
TGR: Do you have any closing
DS: Keep it simple. Just
keep it simple for the next little while. Stay domestic. Avoid unnecessary
risk. You don't need Nigeria or New Guinea in your portfolio.
TGR: And if you still seek
more risk, there are plenty of casinos in Nevada as well.
David Sidders is a Canadian who has
been resident in Bermuda since 1995. His career in the investment industry
began 25 years ago in Toronto at First Marathon Securities and then at
Altamira Investment Management where he worked as an institutional equity
trader. In 1995, Sidders moved to Bermuda to run
the trading operations of the LOM Group and, in 2002, he became the senior
vice president of program trading at Bank of NY ConvergEx.
In 2008, Sidders and a partner founded Xeitel Capital Management, which helps fund startup
companies and offers investment recommendations to individuals.
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1) Alec Gimurtu of The Gold Report conducted
this interview. He personally and/or his family own shares of the following
companies mentioned in this interview: Goldcorp Inc., Romarco
Minerals Inc. and Hecla Mining Co.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Bullfrog Gold Corp. and Goldcorp Inc. Streetwise Reports
does not accept stock in exchange for services. Interviews are edited for
3) David Sidders: I personally and/or my family own
shares of the following companies mentioned in this interview: Bullfrog Gold
Corp. 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