Joe Mazumdar, senior mining analyst at Vancouver's Haywood
Securities, adheres to certain fundamental metrics when reviewing the
pedigree of a junior firm. In this exclusive interview with The Gold Report, Mazumdar explains why some juniors are positioned to do
better than some majors in the current geopolitical climate and he counsels
pragmatism: the key to unlocking golden opportunities is locating firms with
experienced management and adequate cash flow that can qualify for
mixed-source financing in the international context of uneven gold prices. He
shares a few picks in that space.
The Gold Report: Let's cut
to the chase, Joe. With the stock prices of gold mining companies in free
fall during the past year, why should gold investors stay the course?
Joe Mazumdar: One of
the underlying fundamentals driving the gold equity market is what investors
believe about the future supply and demand for gold. With respect to supply,
global gold production has grown at a compound annual growth rate (CAGR) of
3% over the past four years despite a 15 –17% CAGR increase in the gold
price over the same period. We note the risk of constraints on future
production, which include the paucity of large deposits for majors to replete
their reserve base, operating and capital cost escalation, skill set shortage
and increasing geopolitical risk, not to mention the current financing
We've seen the gold price in various currencies go up 5–18%
since 2011. In the Brazilian real and Indian rupee it's been up as high as
30%. Gold price appreciation has been problematic in countries such as India
that traditionally support gold via physical demand due to high local prices.
Consequently, a higher proportion of the physical gold demand has migrated to
China, where the gold price appreciation has been more modest due to the
strength of the currency. Overall, with gold fluctuating around US$1,550–1,600/ounce
(oz), we're seeing net speculative positions
reduced to the point that if we do have positive news on the gold front, such
as another round of quantitative easing, there is a lot of room for these
positions to rise and provide a significant lift to
the gold price.
Currently, long-term investment demand for gold is being supported by
exchange-traded funds. For diversification purposes, gold is being purchased
by central banks. In many emerging markets, the proportion allocated by
central banks to gold is rather low compared to the Western countries.
Therefore, the potential exists for sovereign nations to further diversify
their reserve base into gold. Volatilities are down off of the highs of Q3/11
and closer to long-term levels. Lower volatility would increase gold's appeal
as a safe-haven asset.
TGR: What strategy should gold investors
employ in an uncertain market?
JM: If you think gold prices will
continue to move sideways, you should lean toward dividend-paying gold
stocks, seniors to intermediate firms with low cash costs and a diversified
asset base, predominantly in a low geopolitical risk jurisdiction, that are
currently producing gold. If you think gold is headed up, then we advocate
for leveraged plays, which come with a higher risk profile and include gold
explorers, developers and junior producers. Notably, juniors are trading at
betas to the gold price of 1.5–1.7, on an annualized basis, over the
TGR: How do high interest rates affect the
price of gold as compared to currencies?
JM: Interest rates vary globally as the
global economy over the past few years has been running at two speeds.
Western countries, which are combating anemic growth, have experienced
protracted periods of low real interest rates; emerging markets are still
battling inflationary pressures that have led them to maintain higher
interest rates. Currently, risk averse investors
seeking shelter from the sovereign debt crisis in Europe have sought out U.S.
bonds, in particular, pushing yields down while driving the U.S. dollar
higher. The higher U.S. dollar has driven commodity prices lower in U.S.
dollar terms. Investor interest in low-yield, safe-haven assets lies in
protecting their investments rather than seeking higher yields in riskier
jurisdictions. Gold's ability to compete for a slice of the demand pie for
safe-haven assets will, I believe, be important over the near to medium term.
TGR: What are the key indicators of a gold
mining company in trouble—the signs of a management that may not be
able to weather the downturn in stock prices and restricted access to
JM: In a nutshell, developers and
explorers that are not producing cash flow are in danger. Important
indicators to look for include the company's current cash position, the
catalysts coming up and whether or not the firm has the cash to deliver the
catalysts. Then we ask: Will the catalysts impact the stock positively? Where
is the project located and what is the permitting
environment? Are there social-license-to-operate issues? Is there a
technically savvy management team? Can the team convince the debt market that
it can deliver on its execution plan?
Management is the key to success for developers in the junior market.
Possessing an in-situ resource alone in the current environment may not be
attractive unless there is a competent management team that has the capacity
to get the project permitted and is technically competent enough to execute
the development and production plan. These management teams can provide access
to alternative financing streams. If the skill set of the current management
team seeking to progress a development project lacks development and/or
operations experience, the stock is not going to go very far right now.
is the key to success for developers in the junior market."
Although we believe it's a buyer's market for development assets, we
are seeing more acquisitions of producing assets. Well-priced producing
assets present less risk of permitting or social-license-to-operate issues
and capital-cost escalation than a development project.
TGR: When is it generally prudent to sell
holdings in a troubled company?
JM: Many believe the market will turn, and we believe it will, but the
time frame is uncertain and in the long run we're all dead. Currently, we
have noted the longer-term investors are willing to increase positions in
equities within their current portfolio but less willing to take on new
names. Short-term investors continue to pursue opportunities to reduce their
position and sell into liquidity events such as a resource update or drill
TGR: How do you find companies to
JM: We lean toward companies with assets
primarily in low geopolitical risk jurisdictions with infrastructure.
Infrastructure is critical as it impacts capital (roads, power lines,
transportation, remote camp, for example) and
operating expenditures (diesel versus grid power, for example). The grade of
a deposit may look great, but if it doesn't have power from a reliable grid
and requires diesel, for example, it may only deliver weak margins and
require higher capital expenditures (capex).
Processing one gram of ore only works with inexpensive and reliable power
such as in areas of Ontario and Quebec. If, however, the company needs to
build a 100-kilometer power line, the capex quickly
becomes unreasonable and is at risk to escalation. Once we narrow the
jurisdiction, we seek the higher-grade deposits with a similar mining method
(open pit versus underground bulk versus underground selective) within the
area, which provides ample cushion for potential cost over-runs. A metallurgically simple ore body that can deliver
recoveries in the 90s is desirable. We either seek companies that can provide
assets that can generate a good margin with a manageable capital expenditure
requirement or one with an asset that would provide a merger and acquisition
(M&A) target for a major to intermediate producer seeking to replete its
TGR: Are there any junior companies that
you specifically favor at this time?
JM: As mentioned, currently we are
focused on the low geopolitical risk end of the spectrum. For the last two
years, we have liked Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.A). The
company has a joint venture option on a potential large open-pit heap-leach
deposit known as Spring Valley in Nevada with Barrick
Gold Corp. (ABX:TSX; ABX:NYSE). It provides the investor exposure to a series
of heap-leach projects in Nevada, which the management team is seeking to
develop. The capital expenditure is financeable and manageable. Midway's CEO
is an ex-Newmont Mining Corp. (NEM:NYSE) executive
who has permitted and built many projects in the mining-friendly jurisdiction
lean toward companies with assets primarily in low geopolitical risk
jurisdictions with infrastructure."
Midway's Nevada assets are low grade, open pit, heap leach with low capex requirements. Its Pan project, according to our
estimates, has the potential to generate 70,000 oz
per year (70 Koz) at cash costs of over $700/oz. In
the current gold price environment, the project can generate decent margins
with a quick return due to the low capex
requirements [US$110 million (M), Haywood estimate]. It recently completed a
financing, so its cash position [~US$16M] should enable it to deliver the
next round of catalysts. Once it gets its first mine into production, more
avenues for future financing are opened. The company has a few catalysts
coming up and will be announcing a resource update on its next open-pit
heap-leach project, Gold Rock, in Q3/12. Note the Spring Valley gold project
is currently being funded by its joint-venture partner, Barrick
Another company that fits our risk profile is Atna Resources Ltd. (ATN:TSX). The company operates a
steady-state ~40 Koz open pit, heap-leach project
in southern California at cash costs of US$930/oz. It is currently developing
a high grade (11.5 gram/ton gold, Haywood estimate) underground project known
as Pinson, a former open-pit, heap-leach operation, in the Getchell Trend of
Nevada. The company is only required to permit the underground mining
operation as it has negotiated deals with third parties to process its oxide
and sulphide ore. It's a leveraged play with high
cash costs (US$970/oz), low permitting risk and a
management team with abundant development and production experience.
Financing risk is low because Atna doesn't need a
lot of money to start the development at Pinson. We believe that the Pinson
project will be capable of delivering an annual production profile of 60 Koz over a 14-year mine life beginning in 2013.
Atna also has
a near-term open-pit heap-leach project, with the most significant permits in
hand, known as Reward in southwestern Nevada. We estimate that the project
can generate revenue from an annual production of about 30 Koz at cash costs of US$700–800/oz
in Nevada. In summary, the company has a multiple-asset portfolio, a good
management team, financeable projects, minimum permitting risk and lots of
infrastructure; that's what we want to find in a junior firm.
TGR: What about potentials for mergers and
acquisitions among the juniors?
JM: From an M&A perspective, we like Midas Gold Corp. (MAX:TSX) in Idaho. We believe that
majors should be seeking a critical mass, depending on existing
infrastructure and proximity to current operations, of over 5 million ounces
(Moz) in a low geopolitical risk jurisdiction,
depending, of course, on their current geopolitical risk profiles. Midas has
effectively consolidated the fractionated gold mining district of
Stibnite-Yellow Pine in central Idaho. The Stibnite-Yellow Pine area that
includes Midas' Golden Meadows project was mined back in the late 1800s/early
1900s and up to the mid-1980s/mid-1990s as heap-leach projects. It's not
pristine forest. Midas' Golden Meadows project is sitting on a global
resource of more than 7 Moz concentrated in three
deposits within a significant land package. There is, however, a protracted
permitting timeline; this asset may not enter production until
2019–2020. The management team is top notch and very capable of
executing the development plan. It has a significant treasury enabling it to
deliver its near- to medium-term catalysts including a scoping study by
TGR: Let's talk about geopolitical risk.
Is it increasing worldwide?
JM: I believe that major gold
corporations should be concerned, if they are not already, with their geopolitical
risk profiles with respect to current and future production. They need to
diversify—whether it's the South African companies that need more
assets outside of South Africa or other companies that have a bit too much of
their production profiles based in high geopolitical risk jurisdictions. With
all of the news about creeping nationalism, higher tax revenues, royalties,
ownership and overall increasing geopolitical risk, firms need to mitigate
the risk by investing more in increasing current production and reserves in
lower geopolitical risk environments. The amount of global gold production in
low geopolitical risk jurisdictions—such as the U.S., Canada,
Australia, Chile and some Scandinavian countries—is just below 30%.
TGR: Prodigy Gold
Inc. (PDG:TSX.V), a firm
that you have previously talked about to The Gold
Report, has enjoyed relative strength in its
stock price during the last two years. Why?
JM: Prodigy presents a low geopolitical
risk play in northern Ontario. The company's Magino
project is currently an open-pit, bulk-tonnage target where we are modeling a
mineable resource of 3.25 Moz. The project is located proximal to
infrastructure that was created to some extent by a currently depressed
logging industry that has left in its wake a lot of available labor.
TGR: Back to the majors: what
cost-benefits do senior companies generally use to assess the merit of repleting gold reserves?
JM: In the end the acquirer should be
convinced that the project is accretive on either a near-term cash flow
(CFPS) or longer-term net asset value (NAVPS) per share basis. The recent
trend in M&A has been for production over development projects as the latter
carries the risk of capital escalation, execution and permitting risk, among
others. Hence, what appears to be accretive on a NAVPS basis one day may not
be the next day.
Previously there was a lot of pressure from the investment community
to show growth. The problem is when you're producing at levels of 4–8 Moz,
it's difficult to show 3–5% annual growth rates. Currently, the
investing community has shifted its collective focus and reverted to
production at steady-state levels with dividends over concerns of escalating capex and delays with project development either
organically or via acquisitions. Nonetheless, for majors a lot of ounces must
be repleted on an annual basis just to maintain
production levels, let alone grow them. I don't believe that any company
wants to show a declining production profile to the market.
TGR: What is happening with Orvana Minerals Corp. (ORV:TSX)?
JM: Orvana Minerals is in production and
needs to get its operations to steady-state levels. The company needs a few
quarters to hit its targets and increase cash flow. It had technical issues
with the startup at both of its operations and was punished in a
downward-trending equity environment. Investors were concerned about its
working capital position as Don Mario, its Bolivian operation, failed to
generate meaningful positive cash flow due to a slow commissioning due to the
processing plant. The problem at the Don Mario operation has been an issue of
recovery rates from treating oxide and transitional ore with the leach
precipitation flotation (LPF) circuit. Orvana has
adjusted its process flowsheet to stabilize the
recovery rates, so that Don Mario does not drain its cash reserves.
Also, the company had grade issues at its flagship project in
northwestern Spain, El Valle-Boinás/Carlés (EVBC). Orvana
needs to get the EVBC head grade up. This is a function of getting more road
headers (mining instruments) into the high-grade zones. The throughput is
increasing as Orvana slowly gets its shaft into
place and de-bottlenecks the underground operation. Once the shaft is in
place, the throughput should improve markedly and provide steady-state head
grades. The plant has been running very well.
TGR: Do you have a target price for Orvana?
JM: Our target on Orvana
right now is $2/share, and it's trading just above $0.80/share.
TGR: Are there other firms that you are
JM: For Minera
IRL Ltd. (IRL:TSX; MIRL:LSE; MIRL:BVL), we're at
a $1.90/share target. Minera is a greatly
discounted company. It has a small, open-pit, heap-leach project in Peru
called Corihuarmi that is at well over 5,000
meters, an inhospitable environment with no pre-existing infrastructure. In
Peru, it's not easy to permit a heap-leach project proximal to standing water
but the management team has managed it. Since its commissioning, the Corihuarmi operation has exceeded expectations.
note the trend toward more debt financing and away from traditional equity
There are a lot of socio-political conflicts holding up mining
ventures in Peru, such as at Newmont's US$4.8 billion Minas Conga project, to
name one. Minera's management team is located in
Peru and its CEO has a long history with majors like Newmont and Newcrest
Mining Ltd. (NCM:ASX). The president of the company,
Diego Benavides, is a member of the Benavides family—a very
well-established local family with a rich mining history. At the Ollachea project, Minera spent
months negotiating with the local community and a group of miners with
divergent opinions on the project's development. Minera
negotiated a 5% free carry to the community, without the help of the
TGR: Given the geopolitical situation in
Latin America and Haywood's concentration on junior mining company
fundamentals, such as cash flow and existing production, how does a company
like Seafield Resources Ltd. (SFF:TSX.V) stack up
either on its own or as a potential takeover? Do you have a target price
JM: We monitor Seafield
Resources within our Exploration Quarterly with no formal coverage.
The company has a significant land package within a highly prospective region,
the Mid-Cauca Belt, for gold-rich copper porphyries in Colombia. Colombia is
a Latin American nation that has managed to avoid some of the negative
mining-related press emanating from others such as Bolivia, Venezuela,
Argentina and Peru.
We consider gold-rich copper porphyries to be a sought after deposit type by
majors due to the opportunity for scalable (+5 Moz)
gold deposits with significant co-product copper revenues. Due to their size,
these deposits would also require large capex
upfront that would limit the number of potential developers.
TGR: Any final thoughts on the market situation?
JM: In the near term, financing constraints will continue to be an
issue effectively restricting the volume of news flow from many junior mining
equity plays. We anticipate that many will reduce their burn rates and push
their catalysts back while re-benchmarking expectations.
But I still see opportunities for companies with well-managed assets
in low geopolitical risk jurisdictions that can produce near-term cash flow
to be financed. We note the trend toward more debt financing and away from
traditional equity financing. If the capex is
manageable, say, in the $100–200M range, other alternatives to finance
the project may be available such as vendor financings, selling of royalty,
streaming off byproducts, doing some debt and a smaller proportion of equity.
We acknowledge that a junior developer with a large capex
requirement (over $500M) may be difficult to finance in the current
TGR: Thank you for your time, Joe.
JM: You are welcome.
Joe Mazumdar is a senior
mining analyst with Haywood Securities in Vancouver. He served as director of
strategic planning at Newmont Mining and was the senior market analyst for
Phelps Dodge. He has held a variety of geologist positions with other mining
companies working in South America, Australia and Canada, rounding out ~20
years of industry experience. Mazumdar holds a
Bachelor of Science degree in geology from the University of Alberta, a
Master of Science in exploration and mining from James Cook University and a
Master of Science in mineral economics from the Colorado School of Mines.
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1) Peter Byrne of The Gold Report conducted this interview. He
personally and/or his family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Prodigy Gold Inc., Orvana Minerals
Corp., Minera IRL Ltd. and Seafield
Streetwise Reports does not accept stock in exchange
for services. Interviews are edited for clarity.
3) Joe Mazumdar: I personally and/or my family own
shares of the following companies mentioned in this interview: None. 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.
4) As of the end of the month immediately preceding this publication, Haywood
Securities Inc. or one of its subsidiaries, its officers or directors
beneficially owned 1% or more of the following companies: Midas Gold Corp.
(MAX:TSX) and Midway Gold Corp. (MDW:TSX.V). Haywood Securities Inc. or one
of its subsidiaries has managed or co-managed or participated as selling
group in a public offering of securities in the past 12 months and/or has
received compensation for investment banking services in the past 24 months
for the following companies: Midway Gold Corp. (MDW:TSX.V),
Midas Gold Corp. (MAX:TSX), Orvana Minerals Corp. (ORV:TSX), and Minera IRL Ltd.