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If
gold equities are on sale, the stocks Carlos Andres follows as publisher of
the Frontier Research Report are on clearance. Andres seeks out stocks
that have been unfairly pummeled, offering extra upside for investors. In
this exclusive interview with The Gold Report, Andres identifies some
top picks trading at insanely low prices that belie their quality management
and mining projects.
Companies
Mentioned: Crocodile Gold Corp. - Forbes &
Manhattan - Gold Fields Ltd. - Gran Colombia Gold Corp. - Pacific
Rubiales Energy Corp. - Rusoro Mining Ltd. - Sulliden Gold
Corp.
The
Gold Report: How did you launch the Frontier
Research Report?
Carlos Andres: I grew up in an entrepreneurial household that gave me
an early foundation in business and finance. My career developed on that
foundation. I've been a founding partner of a couple of boutique consulting
firms over the last 20 years that provided a variety of services that
included financial analysis, business valuation, forensic accounting, business
turnaround and M&A work across a wide range of industries. I also have an
educational background in international or macro-economics and geopolitics.
In the mid-1990s, I took notice of global supply/demand imbalances in the
natural resource space with the emergence of the Chinese, Indian and other
Asian economies and, as a result, became a committed natural resource
investor in the late 1990s.
Like many, I began to read a lot of newsletters and ultimately entrusted my
investments to selections made by newsletter writers that I had come to
respect. With some exceptions, I had a good deal of success this way. But it
always bothered me that I wasn't applying my own experience, expertise and
education to company due diligence and industry and market research with the
idea that I could remove some of the risk from my investing activities.
Eventually I took my own advice and began looking at companies very closely,
applying my expertise and developing ideas about targeting companies where
there is a significant gap between perceived risk and actual risk. The
newsletter was born out of a desire to share my journey with a wider
audience.
TGR: How did you end up in Uruguay?
CA: I have always had a desire to travel extensively and live abroad
since I spent a year in France in my college days. On another track, as I
followed the global natural resource story with great interest over the last
decade or more, I also developed a desire to place myself geographically in
the midst of this emerging trend. As a result, I began to look for places
that satisfied both desires. For me, Uruguay represents just such a place. It
is an excellent base from which to explore the resource rich countries of
South America.
TGR: What is your definition of an overlooked opportunity, and what
approach do you use to unearth these opportunities?
CA: An overlooked opportunity, from my perspective, is one that goes
unnoticed or is simply ignored by the investment herd and most analysts.
Natural resource investing, although growing in popularity, is still
virtually ignored by the mainstream investment community. There are several
reasons for this, but an important one is simply a lack of familiarity in
connection with ever-increasing global supply and demand imbalances and the
complex business of mineral exploration and production. Therefore, we
specifically target companies in the natural resource space because this is
where we tend to find bargain basement prices, meaning this is where we will
find prices that are substantially below the company's intrinsic value. In
this context, we ask the question: Which companies represent the highest risk
and thus present the highest potential reward? The answer is pretty
straightforward: Junior exploration companies easily represent the highest
risk in mining and junior explorers located in emerging and frontier markets
drive the risk factor right off the charts. The investment herd and most
analysts typically fear to tread in foreign markets that are shrouded in
uncertainty. In targeting this segment, we vigorously apply our long
experience and considerable expertise to separate the wheat from the chaff.
In short, we choose countries and companies where perceived risk is
substantially higher than actual risk, with the idea of profiting on the
difference. When we get it right, we will make many multiples of our original
investment.
To spice things up and increase the high-risk, high-reward factor even
further, we will also target distressed junior explorers in emerging and
frontier markets. We are sometimes able to identify companies that are on the
verge of emerging from distress. The shares of such companies can typically
be purchased at steep discounts. Perhaps our tag line should be
"unearthing overlooked and undervalued opportunities."
As an example, we identified Sulliden Gold Corp. (TSX:SUE; OTCQX:SDDDF) as just such a
distressed opportunity. Sulliden was a junior exploration company with its
flagship project located in Peru. The company was involved in a four-year
lawsuit that put its title into question. As a result, the market completely
discounted the company. When Sulliden settled the lawsuit and emerged with an
established gold deposit, a new management team and a revamped business plan,
few people took notice. We recommended the company to our subscribers just as
it was emerging from the lawsuit with impressive results.
TGR: What are the drivers that you are focusing on now with rising
prices, unsettled world economic conditions and the possibility of another
recession?
CA: In the developed world, say North America and Europe, we have this
notion that the global economy is driven by the Western world that consumes
things that are manufactured in Asia. In order to manufacture these things,
Asia imports natural resources from the rest of the world to use along with
its own domestic supply. From this perspective, it is typically argued that
if there is an economic slowdown in North America and/or Europe, then, by
extension, this will cause manufacturing in Asia to slow down, which will
cause demand for natural resources to slow and hence cause a worldwide
recession. Although elements of this storyline are certainly true, it
overshadows a more important driver—fundamental domestic demand changes
taking place in Asia with respect to the size of its population, rapid
urbanization, a growing middle class, rising incomes and a rising standard of
living.
In short, internal demand is rising rapidly in Asia, which is creating an
economic dynamic that is being ignored in the West due to inaccurate
assumptions about emerging trends and what drives the global demand and
supply of natural resources. Asia is an emerging story all on its own with
growing domestic demand for natural resources. Asia's internal demand and
internal economy represent a huge global driver and Western investors ignore
it at the peril of their portfolios.
TGR: The gold price has made some spectacular moves in the last couple
of weeks. This should lead to some greater interest in mining stocks, which
have been underperforming the physical metal.
CA: It has been perplexing to a lot of people as to why the producers
should be undervalued when the gold price is rising. The HUI/Gold ratio chart
is a good place to see this borne out graphically as it is falling to lows
not seen since the onset of the global financial crisis in 2008. As one might
expect, this trend is even more pronounced among the gold junior explorers.
But the fundamentals that are driving the gold price higher remain powerfully
intact. Therefore, we expect the producers and juniors to eventually play
catch-up. Until then, current valuations represent a buying opportunity and
we are buyers at these levels. The disparity between the rising price of the
metal and the shares of the companies that find and produce the metal will
not likely go unnoticed forever. Demand for gold, oil, uranium, potash and
other mineral resources is rising at a much faster rate than supply can or
will be able to match over the short to medium term, if ever. In addition,
production is depleting reserves much faster than new reserves are being
found. This situation argues that commodity prices will continue their upward
climb.
TGR: Is Sulliden Gold, which you mentioned earlier, still undervalued?
It has a 1 million ounce (Moz.) resource that it has developed in Peru, which
is surrounded by some of the largest gold producers in that country.
CA: Sulliden's Shahuindo gold project is located in what may be the
lowest production cost gold mining neighborhood on the planet. The region
includes Yanacocha, which is by far the biggest open-pit mine in South
America and is considered the second largest in the world. It is owned by
major gold miners Newmont and Peru's Buenaventura. Among the many other gold
mines in the area, Buenaventura has two new projects to the north that are
similar to Shahuindo. Barrick's massive Laguna Norte mine is just to the
south. Overall, Peru is the fourth or fifth largest gold producer on the
planet.
In this setting, Sulliden updated its resource estimate in June. It has been
doing a lot of exploration drilling over the past year or more, which has
resulted in a dramatically increased estimate from 1.4 Moz. to 3.4 Moz.
today. Hence, the dramatic rise in the company's stock price. Sulliden is a
great little company with a great story.
After the four-year lawsuit we mentioned earlier, it was taken over by a
group of experienced and serially successful gold miners, from a mining
investment house known as Forbes & Manhattan. F&M is run by Stan Bharti,
who is an exceptional mining personality. The firm put Peter Tagliamonte, who
is also a very accomplished gold mine developer, in charge of Sulliden and
together they placed Sulliden on an aggressive exploration and development
footing as it emerged from the shadow of litigation.
For investors who were able to purchase the stock earlier last year as it
emerged from the lawsuit, it has provided a return that is many multiples of
their initial investment. The company has delivered on its business plan and
has now progressed beyond being an early-stage explorer to being a company on
the path to developing and operating a mine. Nevertheless it still has extraordinary
exploration upside as well.
The intriguing thing about the deposit is that the company continues to
extend the strike length and lateral extensions of the deposit. In other
words, it continues to find gold further and further away from the main
deposit in all directions. In addition, a vast majority of its previous
drilling has only explored down to about 110 meters (m). The current resource
of 3.4 Moz. is found at very shallow depths. The company has punched a few
holes beneath this depth to about 400m and discovered that the deposit is
open to that depth as well. The bottom line is this planned open-pit gold
mine is going to get a lot bigger—in length, width and depth.
It also looks as though the grade is getting better as the company better understands
the geology and continues to drill. Sulliden is in the midst of preparing a
definitive feasibility study and the results are due to be released any time
now. This will be a significant milestone in the company's development that
will set the stage for a decision to start construction and to obtain mine
financing. We would also expect a positive study to provide the basis for a
revaluation of the share prices in the upward direction.
TGR: What do you think the chances are of it being taken over by one
of its larger neighbors?
CA: We think the chances are very high. I have no doubt that the
company is on the short list of several of the majors.
TGR: What other companies appear undervalued to you?
CA: As the market has sold-off, gold shares have not been spared. As
one might expect, the sell-off does not discriminate and takes both good and
bad companies with it. This creates a great opportunity to buy good companies
at a steep discount. The current environment is no exception.
In this context, one company in particular that is extremely undervalued, in
our view, and represents extraordinary value is Gran Colombia
Gold Corp. (TSX.V:GCM), with multiple projects in Colombia. This is a
story that has flown significantly under the radar.
It represents the recently completed merger of two companies, Medoro
Resources and Gran Colombia. Both are run by the legendary Serafino Iacono
and his longtime business partner, Miguel de la Campa. Together they are
responsible for the development of Bolivar Gold Corp., which identified the
mammoth Choco 10 deposit on the Venezuelan segment of the resource-rich
geological setting known as the Guiana Shield. They sold the company to major
Gold Fields
Ltd. (NYSE:GFI), making fortunes for the shareholders in the process,
before Hugo Chavez began nationalizing the gold industry. Gold Fields
eventually sold the mine to Rusoro Mining Ltd. (TSX.V:RML). Rusoro owns some of the
most prolific gold mines and deposits in the world but is currently receiving
the Hugo Chavez discount.
Serafino Iacono and Miguel de la Campa are also the personalities behind Pacific
Rubiales Energy Corp. (TSX:PRE; BVC:PREC). For those unfamiliar with the
story, Pacific Rubiales is a relatively new company that is also the result
of a merger that created the basis for what is now the second largest oil and
gas producer in Colombia. The company went from roughly CAD$1.50 a share to a
price of over CAD$30 in just two short years. The point here is that these
guys know what they are doing. They know the region and they only know one
speed: Go big or go home.
Gran Colombia has assembled a group of historic gold projects within
Colombia's prolific and historic gold producing districts. Few realize that
Colombia was once the largest gold producer in the world and its gold
deposits are what prompted the Spanish to make it the headquarters for
colonial expansion. As a result of strategically targeting the area, the
company already has the largest deposit in Colombia and is the largest gold
producer. Its Marmato project has close to 10 Moz. and an operating
underground gold mine. This is a world class deposit no matter how you slice
it. In addition, its Gran Colombia project is currently mining just 4 of 29
known high-grade gold veins. These are all historic gold mining areas that
have been in production for over 100 years, and in some cases much longer.
However, they have not been subject to modern exploration or bulk mining
techniques. The company has tremendous upside with a world-class existing
deposit, underdeveloped production at 100 thousand ounces (Koz.) per year,
underexplored properties, superior management and $80M in the bank. It also
owns a 60% interest in a gold refiner, which is a definite value-added
feature that you rarely see in any gold mining company. Surprisingly, the
company is currently being valued as if it were an early stage junior
explorer. We don't think this perception or its low value will last for long.
TGR: Are there any other discounted stocks you're watching?
CA: One of the cheapest companies in our portfolio at the moment is Crocodile Gold
Corp. (TSX:CRK; OTCQX:CROCF) in Australia, which has an extensive
inventory of gold and other mineral deposits. It is a producing gold miner
with over 5 Moz. of resources, but, like Gran Colombia, is being valued as
though it's an early-stage, high-risk junior explorer. It is unbelievable how
cheap it is. This is another Stan Bharti and Forbes & Manhattan project.
Peter Tagliamonte from Sulliden is also actively involved in exploration and
mine development at the board level.
The value of the company on an enterprise value per ounce basis as a
percentage of the actual gold price is somewhere in the neighborhood of 1.5%.
It is just incredibly cheap for a company that is producing gold and has 5
Moz. in the ground. In addition, it recently hired the former CEO of DeBeers
Canada to oversee the strategic development of what amounts to a gold district
around Darwin in northern Australia.
TGR: Usually they're worth at least 5%–10% in the ground.
CA: Exactly. Gran Colombia is currently 1.7% and Crocodile is 1.5%.
Ironically, these two companies actually represent the companies in our
portfolio that have the largest gold deposits, with Gran Colombia at 10 Moz.
and Crocodile at 5 Moz. Both have plans to increase production from 100 Koz.
to somewhere around 600–700 Koz. per year. Both are world-class
operations run by top management with plenty of cash. Their low valuations
are just an anomaly and in our estimation investors would be well advised to
take advantage.
TGR: Anything else you would like to mention?
CA: The entire gold mining industry from producers on up the risk
curve to explorers is undervalued. I think it is definitely shopping season
in the gold sector. Do your homework, pick your favorites, buy some now and
nibble all the way down on price weakness. Then just have a little patience.
TGR: Do you have any closing thoughts?
CA: Times are definitely tough. The world seems to be undergoing some
sort of convulsion where the underlying theme is change, whether it is
political, economic, social, peaceful or violent. How things will settle out
is anybody's guess. This is very unsettling for people in general, and this
includes investors. It is at times like these that it is important for people
to replace their anxiety with a quest for knowledge, insight and
understanding. I encourage investors to get involved and do their homework
rather than allowing themselves to become overwhelmed by confusion resulting
in deer-in-the-headlights–type inaction. Investigate the trends and
then put your investments in the way of these trends. It's the equivalent of
setting your sails to harmonize with the direction the wind is blowing. Get
out there ahead of it all and run before the wind. Seize historic change as
historic opportunity. The road to wealth lies through such times as these.
TGR: I greatly appreciate your input. I think our readers now realize
that there are opportunities everywhere and they aren't just in North America
or Africa.
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. Mr. Andres applies a
potent mix of world-class expertise and lengthy experience in identifying
countries and companies where "perceived" risk is much higher than
"actual" risk, providing opportunities to profit significantly on
the difference. Mr. Andres has been a natural resource analyst and investor
for over 15 years.
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