The Gold Report: Some say the price of gold has for some
time been suppressed by fear of a Federal Reserve rate hike. What do you
think?
Rob Chang: Now that the Fed has finally raised the rate by a small
amount at its December meeting as we expected, we will see a continued
sideways trend for gold.
TGR: It has been suggested that the Fed has been exceedingly
reluctant to raise rates because of fears that would kill the economic
recovery and blow up the deficit.
RC: I agree absolutely. Raising rates is likely a bad idea,
especially raising them significantly. The key question is whether the Fed
will continue to raise rates, and if so, by how much. Higher rates cause
issues across the board, issues that frankly I don't believe the U.S. economy
can handle.
TGR: Given the lack of a robust economic recovery since 2008, and
the ever-increasing geopolitical instability throughout the world, the latest
being a possible war between Turkey and Russia, are you surprised that gold
has continued to fall rather than stabilize or rise?
RC: Yes. Given the geopolitical tensions you mentioned, one would
expect the gold price to go up. To be honest, I don't know why it hasn't. I
can only point to recent good U.S. economic news and the potential interest-rate
increases as the reasons.
TGR: Goldman Sachs predicted Nov. 19 that gold will fall to $1,000
per ounce ($1,000/oz) over the next 12 months. What are your predictions for
the prices of gold and silver?
RC: For gold: $1,173/oz for 2016, $1,185/oz for 2017, $1,200/oz for
2018 and $1,250/oz by 2020. For silver: $15.69/oz for 2016, $17/oz for 2017,
$18/oz for 2018 and then $19/oz long term.
TGR: We've seen that producers are already walking a tightrope. To
give a recent example, Rubicon Minerals Corp. (RBY:NYSE.MKT; RMX:TSX) ran
into geological problems at its Phoenix Lake project in Ontario, and suddenly
the future of the company was in doubt. At $1,050/oz gold, would you expect a
perhaps final wave of consolidations?
RC: I certainly think that we're due, and I'm a little surprised we
haven't seen more mergers and acquisitions already. Producers that do have
cash would be well served to cherry pick among the many companies trading at
extremely low valuations.
TGR: What are the attributes of the producers that will survive at
$1,050/oz gold?
RC: First, all-in sustaining costs (AISC) such that they can at
least tread water for the time being. Second, management teams that will
resist the temptation to buy cheap companies simply because they can. Third,
projects in safe jurisdictions. At Cantor, we look for companies in
world-class areas such as the Carlin and Battle Mountain trends or Red Lake:
places where you don't worry that you'll wake up one morning to find your
asset nationalized.
TGR: A bunch of juniors with late-stage development projects have
been treading water for years in the hope the gold price will rise. If it
doesn't, will these companies drown?
RC: Some will; others will be acquired by midtier producers. There
are some companies that have good access to capital and have been very
opportunistic in picking off companies or their assets at good prices.
TGR: Gold producers outside the United States, such as Canada,
Australia, Brazil, Russia, are currently enjoying a tremendous dollar
premium. How much of a leg up does this give them over U.S. gold producers?
RC: It's pretty significant, and the premium has increased by over
20% over the past year. With the direction the U.S. Fed is going, and the
associated strength in the U.S. dollar because of it, this premium has a good
chance of getting even better.
TGR: Will we see mining capital flow out of the U.S. and into those
four gold-producing countries?
RC: That would certainly make sense. All things being equal, of
course. But at the end of the day, a fantastic asset will always attract
investment dollars no matter the macro environment.
TGR: You make frequent visits to mining sites. What are the
qualities you look for on site?
RC: I try to see the things management is trying not to show: the
corners, the cracks, how the workers are interacting, the condition of the
machines, how clean certain areas should be relative to what they are. I try
to discover the actual conditions on site, and you can get that only from
good conversations with the employees.
I look also for good infrastructure and for a sense of how projects are
perceived by area residents. If community relations are poor, that could
really sidetrack a mine no matter how good the other metrics are.
TGR: What have you learned from your recent visits to Mexico?
RC: Every company operating there says that its locations are safe,
that the problems with the drug cartels are not there but in other locations
in other states. That can't always be true. That typical response has become
something of a challenge, and we are working out the best way of getting a
better handle on it.
TGR: What is it about Nevada you like so much?
RC: As they say, when you want to find a mine, the best place to
look is in the shadow of a head frame. Nevada is the home of many world-class
mines. It has the Carlin and Battle Mountain trends. It is easier to find
elephants there because Nevada is where the elephants roam.
TGR: Which Nevada gold companies are your particular favorites?
RC: Let's start with Pershing Gold
Corp. (PGLC:NASDAQ). It has the past-producing Relief Canyon mine, which
has 809,000 ounces (809 Koz) gold Measured, Indicated and Inferred. The
project has a short-term path to production: 6–12 months, once the decision
is made. It is fully permitted and will require capital expenditures of only
~$12 million ($12M).
In addition, the company has been finding some spectacular gold intercepts
just north of the mine, including 9 grams per ton over 14 meters (9 g/t over
14m) and 7.03 g/t over 16m. Pershing's management actually thinks that it
might be hitting a feeder system that could be a source for millions of
ounces of gold.
Finally, the company has a good management team. Steve Alfers, the CEO, is
the former head of U.S. operations for Franco-Nevada
Corp. (FNV:TSX; FNV:NYSE). He left Franco to join Pershing, which speaks
to how highly he values it. Alfers has experience in finding assets,
including Long Canyon, which was sold to Fronteer Gold. His permitting people
are quite strong. This is a solid company from top to bottom.
TGR: What's your opinion of the Relief Canyon internal cost
estimates published Nov. 19?
RC: What's significant is the AISC of less than $800/oz. If this
number holds, Relief Canyon will make money pretty easily, even at $1,050/oz
gold. We are currently more conservative and are forecasting AISC to average
$866/oz for Relief Canyon—more conservative, but still economic in the
current gold price environment.
TGR: This Nov. 19 estimate does not include the latest assay
results, correct?
RC: No, it does not. Given how good these results are and that the
company continues to drill, it could potentially add many more ounces and
improve the economics further still.
TGR: How does Pershing stand for cash?
RC: It's in a fairly good position with about $13M now. It will
likely need to raise a little more once the production decision is made.
TGR: Pershing's land package was augmented significantly in January
with the purchase of land from Newmont Mining Corp. (NEM:NYSE). Could Newmont
be a suitor for Relief Canyon?
RC: Potentially it could be. Newmont may be waiting to see how much
exploration upside there really is at Relief Canyon before it decides to pull
the trigger.
TGR: How do you rate Pershing?
RC: A Buy rating and a 12-month target price of $8.55.
TGR: What else do you like in Nevada?
RC: Premier
Gold Mines Ltd. (PG:TSX). This is one of those companies that has bought
good properties at good prices. Its 100%-owned McCoy-Cove project is looking
pretty solid, but more important is South Arturo, which we recently visited.
Premier owns 40% of this, and Barrick Gold Corp (ABX:TSX; ABX:NYSE) owns 60%
and is the operator. South Arturo should go into production in the middle of
2016, and will transition Premier Gold into a producer for the first time in
its history.
We're excited because Premier Gold will probably get a multiple expansion
as a result. The key thing to note about South Arturo is that there is likely
tremendous upside here as Barrick could be keeping its numbers on the project
in-house. As far as we know, this project has ~ 440 Koz gold, which speaks to
a two-year mine life. Of course, a company such as Barrick wouldn't spend all
this capital just for two years. So we expect a significant increase in
ounces underground. In the meantime, Premier should realize $50–60M in cash
flow over the first two years from South Arturo.
TGR: Besides the properties listed above, Premier has three others
in Ontario. Hasaga is 100%-owned, while Trans-Canada Geraldton is a 50/50%
joint venture (JV) with Centerra Gold Inc. (CG:TSX; CADGF:OTCPK) CADGF:OTCPK)
and Rahill-Bonanza at Red Lake is a 44/56% with Goldcorp Inc.
(G:TSX; GG:NYSE). Is this JV strategy a good one?
RC: It makes a lot of sense in the current environment. Premier has
several good assets, but it does not have a history of developing and
building mines. Its team is composed of a lot of former executives from
Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE). These people do have the
history, but it's a bonus that the company can get some of the best names in
the business, such as Barrick and Goldcorp, to help it out. Premier has its
fingers in many pies and has spread the risk to bigger and more experienced
companies so that it can devote more attention to its earlier-stage projects.
TGR: How do you rate Premier?
RC: A Buy rating with a 12-month target price of $4.25.
TGR: Which Canadian junior producer do you like?
RC: We like Primero Mining Corp. (P:TSX; PPP:NYSE), which produces in
Ontario and Mexico. Primero was once a market darling. It got a real kicking
for its acquisition of the Black Fox mine in Ontario through its purchase of
Brigus Gold. That mine has struggled for quite a bit but what we've seen over
the last couple of quarters is that it seems management may be turning Black
Fox around. It looks to be on the path to becoming an economic mine, as opposed
to being a fixer-upper.
TGR: What about Primero's Mexico mine?
RC: That would be San Dimas, a world-class mine located on the
border of Sinaloa and Durango states, a safe part of Mexico. It had a strong
Q3/15, reducing its gold-equivalent AISC there to $454/oz.
TGR: What is the company's overall gold-equivalent AISC?
RC: It's $775/oz for Q3/15. As Black Fox continues to progress, the
overall AISC should continue to come down. I really am a little surprised
just how fast Black Fox has come along.
TGR: How do you rate Primero?
RC: A Buy rating with a 12-month target price of $6.80. Right now,
it's trading at $3.19, so we see it doubling. There's good value there.
TGR: What other company do you like in Mexico?
RC: Avino
Silver & Gold Mines Ltd. (ASM:TSX.V; ASM:NYSE.MKT; GV6:FSE). This is
a silver company that has gold. It has two mines: San Gonzalo, which began
production in 2012, and the past-producing Avino mine, which began production
in January and is ramping up.
We expect the San Gonzalo mine to produce ~1.15 Moz silver equivalent
(~1.15 Moz Ag eq) annually for several years. We expect Avino to produce
1.5–1.7 Moz Ag eq annually going forward. This company has pretty decent cash
costs. We expect long-term AISC for the company to average around $13/oz Ag
eq.
TGR: How do you rate Avino?
RC: A Buy with a target price of $3.10. This is an extremely
underfollowed name, so it's usually a surprise when I mention it to people.
TGR: Baron Rothschild supposedly said, "Buy when there is
blood in the streets." Howe Street and Bay Street have seen blood in the
streets for years. Is now the time to invest in precious-metals companies?
RC: I do think so. Given how few gold miners can make money at
$1,050/oz, I struggle to see how gold prices can make a further significant
downward move. On the other hand, I see lots of potential for the gold price
to move a lot higher. Looking at the relative downside to upside, we can say
that gold could possibly move another $100/oz down, but on the upside, if
events move in the right way, gold could move up several hundred dollars.
TGR: Rob, thank you for your time and your insights.
nine years for the sellside and the buyside. Prior to Cantor, Chang
served on the equity research teams at Versant Partners, Octagon Capital and
BMO Capital Markets. His buyside experience includes managing $3 billion in
assets as a director of research/portfolio manager at Middlefield Capital, where
his primary resource portfolio outperformed its direct peer and benchmark by
over 28% and 18%, respectively. He was also on a five-person multistrategy
hedge fund team, where he specialized in equity and derivative investments.
He completed his master's degree in business administration at the University
of Toronto's Rotman School of Management.
