Which junior miners are
giving the Street something to talk about? Some shining examples of promising
companies with good balance sheets do exist despite
what seems like a market dominated by bad news. In this exclusive interview
with The Gold Report, Philip Ker, an analyst
with Vancouver-based Union Securities, shares the good news his latest site
visits have revealed about projects in Nevada and Mexico.
The Gold Report: Kitco reports that
gold-specific exchange-traded products (ETPs) attracted $570 million (M) in
net new funds, and holdings of gold ETPs hit an all-time high of around 77
million ounces (Moz) during the second quarter.
There were also inflows into silver ETPs of $269M. Will this impact mining
Philip Ker: We're in a period of
extremely tight liquidity within capital markets. Any capital that's not
being deployed into equities and transformed into ETPs will definitely impact
equity valuations going forward. Keep in mind that exchange-traded funds do
offer variable perks, such as diversification and lower management fees
versus other managed investment options, which is why a lot of investors are
beginning to favor them.
TGR: On a macro level, the
problems of the euro continue to plague the U.S. dollar-denominated gold
price. The International Monetary Fund recently said that there was "a
sizeable risk" of deflation in the Eurozone. What is Union Securities'
view of what's happening in Europe and the possible effect on the gold price?
PK: We believe that this is
just a temporary shift out of the Eurozone, which is ultimately strengthening
the U.S. dollar while consequently weakening the gold price. In the longer
term, we see the gold price going much, much higher. The substantial leverage
created by the U.S.' escalating debt will cause investors to shift away from
these temporary investment vehicles and back into the safety of gold.
TGR: When we talked to you in
February you were predicting an average 2012 gold price of $1,725/ounce (oz) and $34.50/oz for silver.
Have those numbers been revised since?
PK: We're maintaining those targets
until some macroeconomic things evolve and answers begin to be known,
particularly concerning the skepticism within the market about the Eurozone
and U.S. debt issues. There are also several significant elections globally,
including the U.S. presidential election in November.
TGR: You must think that
gold's going to have a strong finish this year then?
PK: That's correct. We are
pretty optimistic for a strong run later this year and view the current lull
in precious metals and relative equities as only a temporary phase of market
TGR: Small-cap resource
equities are down an average of roughly 40% since September 2011. Why should
investors continue to hold these companies?
PK: The overall perspective of
the investment community is that we are in a fairly bearish cycle.
Fortunately for investors, markets are never static and there's always an
upside. I prefer the view to buy and accumulate when no one else believes
there is money to be made. Buying at opportune times such as now positions
one ahead of the herd and can churn much more profitable investments. If
investors are well positioned and ready to take advantage of the market, they
can be very prosperous in the long run.
TGR: You like sizeable and growing
mining-friendly jurisdictions. What are some of the companies you're
following that fit those terms?
PK: Geologix Explorations Inc. (GIX:TSX; GIXEF:OTCQX) has a great gold-copper
resource base in Mexico. In addition to its huge 187 million ton resource
containing 4.5 Moz of gold equivalent, the company
recently identified additional targets about 1.5 kilometers north of its
resource boundary. Several of these anomalies are looking quite interesting
from their geophysical signatures and preliminary sample results. The
exploration team is currently taking additional prospecting and chip samples
on the targets and will continue sampling and delineating them through an
upcoming 5,000-meter (m) program.
opportune times such as now positions one ahead of the herd."
TGR: When should we know how
much this new mineralized zone could add to its Tepal
PK: The company is aiming to
start its shallow drill hole program later in
August. I expect to see assay results in late September or October and that
will give us a good indication of grades and potential. A secondary program
would follow up on successful results.
TGR: Geologix has a prefeasibility
study due in the third quarter. What does that study need to show in order to
move the needle at the company?
PK: The study should confirm
that the economics of Tepal are robust. The project
has a strong net present value, a long mine life and good production numbers
at low operating costs. Unfortunately, Geologix has
a lower market cap of about $30M at this time and capital expenditure (capex) requirements pushing $400M. It could be a severe
challenge to get project financing. However, it should be able to use the
prefeasibility study to its advantage in negotiating its financing options.
TGR: Do you believe that it
will have to fully delineate that new mineralized zone before this project
PK: I don't think so, but it
definitely adds upside. What's been indicated in the chip samples thus far is
that grades are 2–3 times higher than what is in the current resource.
It only gets better from here if there are additional grades and economic
tonnage to be added.
TGR: What are some other
companies you're following?
PK: Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) recently put out a
bankable feasibility study and the market had mixed reactions. This was due
to slightly higher than anticipated capex
requirements and any potential dilution that may come into play as it raises
capital to start the groundwork at Bissett Creek in
TGR: Northern Graphite is
looking at possibly selling battery-grade graphite at a substantial premium
to concentrate. The economics of that idea were not included in the recent
feasibility study. Have you developed any models on how that could change the
economics of Bissett Creek?
PK: My target actually
includes the production of battery-grade graphite. I changed my model and
increased my target substantially when Northern Graphite confirmed that
spherical high purity graphite could be made from its large flake deposit.
Currently, the company is investigating what parameters and infrastructure
would be needed for upgrading a recovered flake concentrate to high-purity
battery-grade material. Management is indicating that it would need
approximately $10M in addition to the current capex
requirements for the required processing facilities. An engineering study
into the upgrading scenario is under way and we can expect the results of
that later this year. Adding this circuit provides a substantial premium for
spherical graphite of approximately $5,000/ton.
TGR: Right now, the company
has about 60M shares outstanding. Considering those new capex
requirements, how high do you think that float could go?
PK: It all comes down to an offtake agreement. I know management is keen on having
some skin in the game from an offtake suitor. I
believe the company will be working diligently on this over the next few
months to solidify its financing options.
TGR: You regularly conduct
site visits. Tell us about some of your recent trips.
PK: A few months back I
toured Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) in Nevada. The company
is in an interesting scenario because of its current litigation with Coeur
d'Alene Mines Corp. (CDE:NYSE; CDM:TSX) over some
lapsed property claims that Rye Patch picked up. If Coeur d'Alene is
continuing to mine the Rochester pit and is damaging Rye Patch's claims,
under current mining laws in Nevada, damages done to another's claims
requires three times the gross metal value taken out of the ground to be paid
to the injured party. I believe Rye Patch is in a situation where it will
either be taken out or awarded a substantial settlement.
TGR: You think the companies
are likely to settle out of court for cash?
PK: To avoid the court
battle and have the litigation result in favor of Rye Patch, I believe it's
in Coeur d'Alene's best interest to settle out of court through a lump sum or
just purchase the company outright. If the latter occurs, Coeur would add
over 2.5 Moz gold and 32 Moz
silver to its asset base plus upside from its exploration prospects in the
TGR: Rye Patch has the Wilco deposit in Nevada that it's proving up. After
seeing some of the core first hand, what were your thoughts?
PK: The site visit was a
great learning tool to see the size potential of not only Wilco,
but the entire Oreana Trend. It's definitely in a
good jurisdiction to be in for developing gold and silver projects. Wilco is a small past-producing pit, but there still
remains a lot of upside and recent drilling targeted mineralized zones down
dip along structurally controlled contacts. The recently updated resource
proved the beauty of the beast and although low grade, an abundance of these
deposits in Nevada get mined because of the simple fundamentals,
infrastructure and quality personnel located in Nevada. I can see this is
going to a mine someday with continued work on the property.
TGR: You recently launched
coverage of Atna Resources Ltd. (ATN:TSX), which increased its gold
production by 30% in 2011 and almost doubled its total Measured and Indicated
gold resources, which are spread over several projects in the western U.S.
What catalysts lie ahead for Atna?
PK: This is a great story
and my current top pick. Last year, Atna picked up
100% ownership of the previously producing Pinson Mine just 30 miles north of
Winnemucca, Nevada. The company is currently working underground with plans
of commencing full production in Q4/12. Management plans on going from a
small miner's permit, which allows only 36,500 tons per year, to a full
production permit of 400,000 tons per year in 2013. It should more than
double its production in 2013 and beyond based on the addition of Pinson
" It's an ugly time in the
market but it's a great time to be a value shopper for cheap mining
The company is also
poised for internal growth by using internal cash flows from its Briggs and
Pinson mines to fund development at the Reward Mine. The Reward mine is also
in Nevada, has easy access to infrastructure and will provide low operating
costs under a heap-leach mining method. I believe Atna
will have this project pouring gold in 2014 and would be the third producing
mine under Atna's asset portfolio.
TGR: Atna is developing quite the following. Joe Mazumdar, an analyst at Haywood
Securities, follows the company, as does Rahul Paul at Canaccord.
Pinetree Capital CEO Sheldon Inwentash
and his holding company own almost 10% of Atna. Why
does this junior have such a strong institutional following?
PK: Atna has a great pipeline of projects and an
experienced management team to bring them into production. Acquiring the
Pinson Mine at such a near-term production phase definitely gives the Street
something to consider. The scale and ramp-up of its production from Briggs,
and with the addition of Pinson, and shortly thereafter Reward, Atna has created a substantial growth trajectory for the
company and for investors to look forward to.
TGR: Are there other
companies under coverage that you'd like to tell us about today?
PK: I toured Kootenay Silver Inc.'s (KTN:TSX.V) Promontorio deposit in Sonora, Mexico,
earlier this year. I came away quite impressed with the core and the layout
of the land there. Management is extremely knowledgeable in hydrothermal-type
deposits. I am currently anticipating a resource estimate to come out
sometime in August and am targeting approximately 100 Moz
silver equivalent, which is five times its
historical resource. Management now thinks a substantial gold credit may be
worked into the resource and would add additional value to the project
The stock has performed
quite well during this market turmoil. I believe a lot of investors are
keeping a close eye on it and it will be a good growth story moving forward.
TGR: You had a $2.50 target
price on Kootenay around Christmas 2011. What's your target now?
PK: It's $1.75. It was cut
based on lower comparable in-situ valuations for other silver explorers and
TGR: The Promontorio
deposit is quite promising and reasonably high grade. What about its mineability? Is the geological structure set in a way
that's going to make this easy to mine?
PK: The deposit is a
hydrothermal breccia and the structure could be easily mined with a
combination of open-pit and underground mining to target the various zonations and concentrations of higher-grade mineralization.
The deposit has only undergone one good round of drilling and management is
planning additional exploration within the center of the zone in order to
further prove continuity between the northeast and the southwest zones where
the historic pit is located.
leverage created by the U.S.' escalating debt will cause investors to shift
away from these temporary investment vehicles and back into the safety of
TGR: Then we don't really
know yet if there's no pit wall drilling. Can you tell us about some recent
results that keep you optimistic about Kootenay?
PK: It's definitely had some
bonanza-grade intercepts, especially up in the northeast zone. It's had
exceptional numbers of about 18m of 873 grams/ton (g/t) silver equivalent
within an intercept of 71m of 297 g/t silver equivalent. The strong metal
credits from lead and zinc (and now possibly gold) lead to a good indication
of metal credits should the project become a mine one day.
TGR: Of the companies you
cover, which one is best positioned for a takeover?
PK: I'd say Timmins Gold Corp. (TMM:TSX.V; TGD:NYSE.A) is positioning itself
nicely for M&A activity. Its San Francisco mine is located in a mining-friendly
jurisdiction of Sonora, Mexico, and it has the infrastructure in place with
considerable mine life remaining. Last year the company added over 1 Moz to the deposit through drilling and is currently
expanding its throughput at the mine in order to achieve 32,000 tonnes per day, which will help the company exceed
130,000 ounces of production annually. A complete takeover or a merger of
equals could be a likely outcome in the future.
TGR: When adding positions to
a portfolio would you suggest dollar-cost averaging or looking for value in
PK: At this time I would
first look at companies with strong balance sheets and growth profiles. You
know these companies won't have to go to the market and end up with any
equity dilution, especially at depressed prices. Then, if investors already
hold those equities, I'd definitely take a look at the dollar-cost average if
their portfolios are down. It could make the timing of the break-even point
come faster and they could dissolve the position and look at other investment
TGR: Could you please provide
our readers with a bit of a pep talk to raise their spirits before you go?
PK: It's an ugly time in
the market but it's a great time to be a value shopper for cheap mining
stocks. I suggest taking advantage of this market to perform due diligence in
order to pick the next winners, because there is always an upside to the
market and there will always be more profits to be made. We've seen several
good spikes out there, with parabolic-looking charts for some explorers, even
in these tough markets. Investors should prepare and not be last on the train
when the next upward ride in the market comes.
TGR: Thanks, Phil.
Philip Ker is a mining analyst for Union Securities
Ltd., a company formed in 1963 that is now one of the largest independent
brokerage firms in Canada. The company has offices all across Canada, as well
as one in London. He has field experience as an exploration geologist working
across Canada on gold, diamond and base metal projects. He joined Union
Securities in June 2011 after completing a Master of Business Administration
degree in finance at the University of Alberta. He holds a Bachelor of
Science degree in geology.
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1) Brian Sylvester 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: Geologix Explorations Inc.,
Northern Graphite Corp., Rye Patch Gold Corp. and Timmins Gold Corp.
Streetwise Reports does not accept stock in exchange
for services. Interviews are edited for clarity.
3) Philip Ker: 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