The Gold Report: In Q2/15, Oban Mining Corp. (OBM:TSX),
backed by Osisko Gold Royalties Ltd. (OR:TSX), consolidated a number of
micro-cap gold equities in Québec and Ontario while Crocodile Gold Corp.
(CRK:TSX; CROCF:OTCQX) merged with Newmarket Gold Inc. (NGN:TSX.V) in an
effort to become a consolidator in its own right. These are two consolidation
stories in the gold sector. Should investors expect more?
Mick Carew: As we approach what we hope is the bottom of the
commodity cycle, we view this as an opportune time for consolidation in the
mining space. We've seen a migration toward increased mergers and
acquisitions (M&A) activity over the last couple of years. This year in
particular has seen a number of high-profile mergers, including Alamos Gold
Inc.'s (AGI:TSX) acquisition of AuRico Gold Inc. and Tahoe Resources
Inc.'s (TAHO:NYSE; THO:TSX) acquisition of Rio Alto Mining Ltd. We've
also seen major gold miners, including Barrick Gold Corp. (ABX:TSX; ABX:NYSE)
and AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) sell non-core
assets to address debt concerns.
We believe M&A is likely to continue as exploration funding is cut
further and development pipelines are also affected. Furthermore, we think
that this activity will be more pronounced as miners continue to refine their
operating costs after the dramatic fall in commodity prices that started in
2011. M&A is commonly viewed as an indicator of a potential swing in
market sentiment as intermediates and majors continue to scour for
undervalued assets and potential targets. Therefore, any pick up in this type
of activity could be deemed a positive.
TGR: Do you expect M&A activity to increase throughout the
remainder of the year and perhaps even gain momentum next year?
MC: Yes, this activity and other novel funding approaches are an
expected artifact as exploration funding dries up and project development
prospects continue to shrink.
TGR: What are some companies or what types of companies in the gold
space stand to benefit most from further consolidation?
MC: Cashed up and cash flow producing companies have a clear
advantage over their cash-challenged counterparts (e.g., exploration
companies and unfunded development-stage companies). Exploration companies
will continue to struggle to raise capital given depressed equity prices
relating to low commodity prices. We believe companies with healthy balance
sheets and proven management that already hold high-quality assets will
continue to be more attractive investment opportunities. In turn, as I
addressed earlier, these companies will look to accumulate assets that are
considered relatively undervalued as their holding companies struggle to
raise capital.
TGR: How long do you expect the low gold price environment to
persist?
MC: Gold is obviously a hedge against macroeconomic concerns. The
lift in the gold price since early August has been substantial as it now
resides well over $1,100 per ounce ($1,100/oz). We will have to wait to see
whether this recent move in gold is a short-term climb or whether it is part
of a sustained movement to the upside.
TGR: What is Haywood's price deck for gold near, medium and long
term?
MC: We recently lowered our 2015 gold price forecast to $1,210/oz .
We have a flat price deck of $1,250/oz gold from 2016 onwards.
TGR: Please provide us with an outline of your investment thesis.
MC: With the recent upward swing in the price of gold, a basket of
gold mining equities is likely to respond in kind, providing an opportunity
for investors. However, we still believe the market is keeping an eye out for
new discoveries and companies that are well funded and run by proven
management that can advance projects efficiently. In the developer space, projects
that require relatively low up-front capital expenditure (capex) also hold an
advantage over their peers and are more likely to attract funding in the
current environment.
TGR: Tell us about some of the equities you follow for Haywood
Securities.
MC: My focus is largely concentrated on some of the junior
companies among the mining equities. It's been a difficult few months for the
junior mining space, with the TSX Venture dropping almost 30% since November
2014. It dropped almost 10% in July alone. Despite this backdrop, we continue
to feature a number of junior explorers in Haywood's quarterly "Junior
Exploration Reports." A couple of names in particular are Balmoral
Resources Ltd. (BAR:TSX; BAMLF:OTCQX) and TerraX Minerals
Inc. (TXR:TSX.V).
Balmoral is focusing on the Grasset nickel-copper-platinum group metals
(PGE) project in Québec. The project is situated along a southeast-northwest
trending coincident magnetic/electromagnetic anomaly, about 8 kilometers
(8km) east of Detour Gold Corp.'s (DGC:TSX) Detour Lake gold mine. The
nickel-copper-PGE mineralization at Grasset is similar to what we see at Vale
S.A.'s (VALE:NYSE) Voisey's Bay base metals mine in Labrador. Drilling along
the southeast extension of the Grasset anomaly has identified multiple
stacked sulphide horizons. One assay returned an intersection of 58 meters
(58m) of over 1.8% nickel and contained copper, platinum and palladium. In
addition to that, some reconnaissance drilling by Balmoral northwest of the
main Horizon 3 zone, 8km along strike, intersected nickel, copper and PGE
mineralization, including some gold-rich zones. These gold-rich zones suggest
there may be more than one mineralizing event. We view this as positive given
that the presence of multiple mineralizing events suggests the mineralized
system is dynamic and complex. This added level of complexity ultimately
enhances the potential for a significant discovery at Grasset.
TGR: Considering the amount of drilling that has been completed at
Grasset thus far, what sort of picture emerges?
MC: It's still too early to talk about specific numbers or size,
but when we look at the drill results on the southeast portion of that
anomaly, there appears to be continuity, particularly along the net-textured
sulphide zones. Of particular interest is the presence of massive sulphide
lenses. At this stage, Balmoral has only intersected narrow intervals of
massive sulphide, but these high-grade lenses could be a game changer for the
project—especially considering some of these massive sulphide lenses grade up
to 14% nickel. If the company can identify similar zones with greater width
and continuity elsewhere, we could be dealing with a significant system
reminiscent of other magmatic nickel sulphide systems worldwide.
TGR: How much cash does Balmoral have to continue its exploration
program?
MC: Definition drilling and metallurgical studies are underway and expected
to be completed in Q3 or early Q4/15, the costs of which were included in a
$3.8 million ($3.8M) summer/fall exploration budget. In addition to the
resource delineation work at Grasset, Balmoral continues to delineate and
expand the high-grade Martiniere gold system located 40km east of Grasset.
The company has indicated it aims to produce a maiden resource estimate for
Grasset in late 2015 and an initial, partial resource for the Martiniere
system in Q1/16. The company has results from about 40 drill holes pending
from both projects and currently has two drills on site.
TGR: What about TerraX?
MC: TerraX Minerals has the Yellowknife City gold project situated
immediately north of Yellowknife and hosts the past-producing Con and Giant
gold mines. Osisko Gold Royalties now owns about 17% of TerraX and has a 1%
net smelter royalty option. TerraX has set aside $2.2M in support of a 6,000m
drill program plus some field work, structural and mapping, in partnership
with Osisko. Drilling will focus on what the company terms the "Core
Gold Area," which includes the Barney Shear, which is interpreted as the
extension of the Con and Giant deposits, as well as the Crestaurum deposit,
which has similar high-priority targets. The company conducted 1km of channel
sampling along strike of the Barney zone, which returned 11m grading 7.55
grams/ton (7.55 g/t) gold. We view TerraX's exploration portfolio as one of
the more prospective in the Canadian junior gold mining space. This view is
further supported with Osisko coming in as a partner and providing technical
support to the exploration program.
TGR: Do you have more faith in TerraX and Balmoral given that key
members of the management team have had previous success?
MC: It certainly provides a degree of confidence if a company's
management has a successful track record. Exploration is a high-risk venture
in which most companies that raise capital fail to discover assets that
migrate into production. We like companies that have strong management teams
with histories of discovery success, capital to explore and portfolios of
prospective projects.
In this context, the management teams of both TerraX and Balmoral have
proven track records. Darren Wagner, CEO of Balmoral, is the former CEO of
West Timmins Mining that was acquired by Lake Shore Gold Corp. (LSG:TSX) for
$424M. TerraX CEO Joe Campbell was central to the discovery and delineation
of the Meliadine gold project in Nunavut, which was subsequently acquired by
Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) through its acquisition of
Comaplex.
TGR: Are there any other small-cap gold names that are worth
mentioning?
MC: At Haywood, we also follow Calibre Mining
Corp. (CXB:TSX.V) quite closely. The company has adopted the project
generator model, an increasingly popular way for explorers to gain access to
capital in exchange for a key stake in the project or company. Calibre has a
number of projects in Nicaragua including its Borosi project in joint venture
with B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX), where B2Gold holds a 51%
interest with the option to earn an additional 19% interest by spending $6M
over three years. In addition, the Calibre's Eastern Borosi project is under
an earn-in agreement with IAMGOLD Corp. (IMG:TSX; IAG:NYSE), which can earn
51% by spending $5M. Both agreements are such that exploration is completely
funded by B2Gold and IAMGOLD. Both projects are early stage but have already
returned several high-grade gold intercepts and we expect more over the
coming months.
TGR: What about Nicaragua as a mining jurisdiction?
MC: B2Gold is operating in the country with its El Limon and La
Libertad gold mines and obviously views Nicaragua as an investible
jurisdiction. Given its history, we believe that the country has shown its
potential to provide a reasonable environment for explorers to work.
TGR: Let's go through some recent news events among the companies
you follow.
MC: Atlantic
Gold Corp. (AGB:TSX.V) recently posted an updated resource estimate and
feasibility study for its Touquoy project in Nova Scotia. The feasibility
outlined robust economics with a net present value (NPV) of $168M, an
internal rate of return (IRR) of 30% and an assumed capex of $137M with a 9
year mine life. Those are good numbers underpinned by Proven and Probable
gold reserves of 216,000 ounces (216 Koz) grading 1.4 g/t gold.
The feasibility study outlined a comparatively simple operation featuring
a 2 million ton per annum carbon in leach (CIL) plant fed by ore material
exploited via small-scale open-pit mining methods. The study examines
material extracted from both Touquoy and Beaver Dam where material from
Beaver Dam will be crushed and then trucked to the facility at the Touquoy
processing facility. There is also operating expansion upside potential given
the proximity of the Cochrane Hill and Fifteen Mile Stream deposits that have
defined resources containing 550 Koz and 480 Koz gold, respectively. In light
of the economics of the study, underpinned by relatively low capex requirements,
we see Atlantic as being ideally positioned in the developer group and a
stock to keep an eye on. We note that Beaver Dam's environmental impact
assessment is due to formally commence later this year with an eye on
completion in early 2016, assuming provincial-level review only.
TGR: Another company that released news?
MC: Integra
Gold Corp. (ICG:TSX.V; ICGQF:OTCQX) recently announced additional
intervals from the Triangle zone on its 100%-owned Lamaque South gold project
in Val-d'Or, Québec. The latest results from Lamaque have provided Integra
with a better indication of the structural controls on gold mineralization,
which in turn has aided in producing a more representative geological model.
In particular, recent results have shown that major sub-vertical mineralized
structures at Triangle bear a close affinity to the C structures at the Main
Plug at the historic Lamaque mine, which was mined to a depth of 1,100m and
produced over 4.5 million ounces of gold. We expect an updated resource
estimate later this year, which will add to an already robust preliminary
economic assessment (PEA). The most recent PEA, which was based on the last
published resource estimate for Triangle, returned a pre-tax NPV of CA$184.3M
and 77% IRR. The PEA considers average annual production of ~110 Koz/year
over 4.5 years, with preproduction capex of CA$61.9M, noting that Integra
purchased the Lamaque mine mill last year. The new interpretation will no
doubt improve the current resource, which will ultimately result in improved
economics moving forward.
TGR: Thank you for your market insights today, Mick.
See Mick Carew's thoughts on investing in the energy sector in The Energy Report.
