The Gold Report:
What's your macro outlook for gold?
Joe Reagor: International
debt concerns are going to drive gold this year into next year, in our view.
A number of countries with mounting debt loads can't continue to pay the
interest portion of their debt, let alone ever pay it back. Total
world debt continues to increase year after year. If the solution is for
everybody to print the money that they need to pay everybody else back with,
that's going to be a massive inflationary event, which would bode well for
gold.
TGR: Silver has been up dramatically vis-à-vis gold. Do you expect
that trend to continue?
JR: When gold started to catch in the early part of this year,
silver didn't. Traditionally, it's been the reverse; when a recovery begins,
silver moves first because it's the tighter market and, therefore, easier to
be moved by the money coming into the sector. That said, we think the
silver-gold ratio could contract down to 65:1 as a baseline level, but I
don't expect it to return to 50:1, which we saw during the height of the gold
and silver rally.
The other side is not just the macroeconomics of the world, but also the
individual fundamentals of gold versus silver and their natural rarity.
Silver and gold's recoverable rarity in nature is somewhere in the
neighborhood of 70-75:1, so we can expect silver to trend around that level,
maybe at a slight premium because it has more industrial uses than gold.
TGR: In your coverage, you have focused on advanced projects either
in development or in production. Why is this?
JR: We have a strong focus on companies with advanced exploration and
those nearing or entering development. The one company we have that is a
producer is Coeur
Mining Inc. (CDE:NYSE). It's hard for the producing mining companies, especially
the larger they are, to move the needle for investors beyond simply being a
proxy for what gold and silver are going to do. We made an exception for
Coeur because we believe it was doing what it had to do to move the needle,
and we've seen that in its significant outperformance this year. The
companies that are in the exploration or development stages have the ability
to move up the value curve.
In the exploration basket, there are two significant events that generally
drive the most increase in valuation. The first is at discovery-initial drill
holes on a project, small-cap oriented, almost too small for the
institutional investor. At that point, most of the calls being made are by
analysts with geological backgrounds. For a non-geologist like me, it's
tougher to make a judgment call there.
Then there's a lull from the initial discovery up until a project starts
to approach the possibility of development or acquisition. During that time,
the catalysts are few and far between. We believe that you either want the
really early-stage companies or those that are nearing that event that's
going to trigger a valuation improvement. That's why we've focused on stocks
that are in near-term development, either currently in development or about
to be, as the majority of our coverage list.
TGR: Would you tell us about some of your best picks and why?
JR: Coeur is one of our top picks because it really has improved its
economics, cash flow generation and costs at a number of its mines while
setting itself up to de-lever in a rising gold and silver price environment.
It started to get some of that credit already from the market, but we believe
there's still some room to go there. It was our top mining idea coming into
the year.
We like Pretium
Resources Inc. (PVG:TSX; PVG:NYSE) and MAG Silver
Corp. (MAG:TSX; MVG:NYSE) because they're both very high-quality assets
with a large number of ounces, gold and silver respectively, high grade, in
good jurisdictions and have solid management teams with proven track records.
If a company has those things, then it's in a position to generate a
world-class producing asset. If it's not already interesting in production,
it will still be interesting as a potential acquisition target to the larger
players that have struggled to replace production and reserves over the last
few years.
On the smaller side, we like companies that are approaching that initial
construction/development decision, but we prefer them to have a lower capital
expenditure project if they're going to be developing it on their own and
they're not major potential takeout targets. Along those lines, we have under
coverage Pershing
Gold Corp. (PGLC:NASDAQ) and Integra Gold
Corp. (ICG:TSX.V; ICGQF:OTCQX). Pershing is looking at a $12 million
($12M) budget to put its asset into production. It is very reasonable for a
small-cap mining company to raise that amount of capital. Integra Gold is
looking at probably a $50-100M budget but at a very high rate of return,
north of 70%, because it already has a built mill site that just needed to be
refurbished. Bringing those capital numbers down to sub-$100M makes it a
potential future producer that won't need a large investment or acquisition.
TGR: Do you think MAG, being a silver company, will get an extra push
in light of silver's appreciation?
JR: I think it already has. The company did raise some money earlier
this year, and it came out of that very strong. The valuation has moved
significantly higher since before the raise was announced. I think that's a demonstration
of 1) the silver price outperformance of gold over the last month or two and
2) that the company is now in position to fund its share of its project, if
it isn't acquired before the development decision is announced. Its larger
partner, Fresnillo Plc (FRES:LSE), has the power to make that development
decision, which we expect sometime this year. But there is less risk for an
investor now, which was part of the reason for its outperformance in the last
few months.
TGR: Pretium recently put out a news release with more drilling
results. Anything new there?
JR: It's further confirmation of what everyone sees in that deposit.
It's essentially a low-grade halo around some record-high gold intercepts
over very short lengths, sub-5 meter (sub-5m) intercepts, sometimes sub-1m
intercepts of apparently significant high-grade gold. Having been underground
at that deposit, I saw spots in the wall where a drill hole missed by two or
three inches what would have been a significant high-grade intercept. Instead,
it shows up as just a low-grade intercept. So the point of Pretium's infill
drilling is to delineate as much as it can an estimate of what production
might look like, so that it can provide reasonable guidance to the market
once it's in production sometime next year. One of the concerns that a lot of
people still have is it will be very difficult to put a range on what
production will be, given the highly variable nature of the deposit. That's
why it's still doing additional drilling, even as it brings it into
development.
TGR: Integra got a lot of publicity with its $1 Million Gold Rush
Challenge. What was the net benefit to the company?
JR: If you look at what it costs to hire one geologist to do the work
to make the decisions of where to put your next couple million dollars' worth
of drilling, you're looking at a quarter of a million dollars for one
person's input. Instead, it got the input of well north of 50 people,
sometimes even groups of geologists, for $1M because it's been a down market,
and there are a lot of people who are underutilized. It was a creative way
for Integra to generate ideas for where to explore for the next 5 or 10
years, at the cost of essentially four geologists. It's a good return for the
investors. Plus a big portion of it was funded by sponsors, so it didn't even
have too much of an upfront cost on its own part.
TGR: Do you have any parting thoughts for our readers?
JR: People need to have cautious optimism in this market, that gold
and silver could go higher, but not base investments decisions on that. It's
most valuable to pick companies that are in the right position with the right
upcoming catalysts to drive the valuation higher, regardless of what gold and
silver prices do.
During previous up cycles, investors would buy practically anything and
the investment would do OK. That mentality resulted in more investors not
spending enough time learning the specifics of the companies to understand
which ones had that potential to outperform their peers. That's the approach that
we've taken. We've spent less time on macro-where are gold and silver
going-and more time on picking the right companies that are at the right
stage in their development.
TGR: Thanks for your insights, Joe.
Joe
Reagor is a research analyst with ROTH Capital Partners, providing
equity research coverage of the natural resources sector. Prior to ROTH, he
worked in equity research at Global Hunter Securities and at Very Independent
Research, covering a wide array of resources companies including metals
(steel and aluminum), mining (gold, silver and base metals) and forest
products (containerboard, OCC, UFS and pulp). Reagor earned a Bachelor of
Arts in economics and mathematics from Monmouth University.
