In the topsy-turvy gold equities market, it can be difficult to spot
junior mining firms capable of delivering substantial pay-offs. In this
exclusive interview with The Gold
Report, top market analyst and Resource Opportunities newsletter
editor Lawrence Roulston identifies undervalued
firms from Africa to British Columbia that have high-quality assets, access
to development cash, solid management teams and bright futures.
Report: You recently observed that there's $9
trillion of gold stashed away worldwide. Does this mean that short-term gold
traders are setting the market price for gold?
Lawrence Roulston: Most of the gold in the world
is held for the long term. Only a small portion of total gold holdings is
actively traded. Short-term price fluctuations are largely the result of
traders reacting to news. A long-term chart of the gold price tells the real
story. Gold is trending higher and there are short-term fluctuations, but the
long-term direction is obvious.
important message is that the long-term outlook for gold remains extremely
bullish. The gold producers have an ongoing need to replace reserves, and
they want to grow their businesses. That's the basis for viewing the exploration
and development companies. You're going to beat yourself up trying to figure
out what the next short-term move is going to be in the gold price, but if
you take this long-term uptrend seriously and look at the companies
developing deposits that are likely to be taken over by the larger companies,
that's a much better way to play the gold market.
February, you told The Gold
Report that for gold
shares, "the worst is over." Do you still feel that way? Are there
signs that a bottom for equities has been reached?
LR: That call
was premature. There was a brief rally. It turned around when the gold price
dropped. The U.S. dollar replaced gold as a safe haven as people fled from
the uncertainty in Europe. At that time, I differentiated between the
resource markets overall and the higher-quality junior companies. The message
still applies. Better-quality companies with good assets, cash on hand and
strong management are building strong bases in their share prices at this
time. Some of these companies have come down to the bottom and are trading at
cash value. There is not a lot of downside once they're trading at cash
We are in
the midst of the summer doldrums. People aren't really paying attention to
the junior markets. That's going to change in September when people come back
from holidays. Investors are going to recognize that companies with good
assets are trading for cash value or near that level, and that there is more
upside potential than there is downside risk.
long-term outlook for gold remains extremely bullish."
factor that is really going to drive the markets is takeovers. We're seeing
it now. For instance, Avion Gold Corp. (AVR:TSX; AVGCF:OTCQX) just received a takeover offer that was
a 70% premium to its 20-day trading price. There are going to be a lot more
offers like that, and that's going to make savvy investors pay attention.
TGR: In terms
of companies trading at or near their current cash value, are there any firms
that you think are a good deal for investors right now?
LR: Keegan Resources Inc. (KGN:TSX; KGN:NYSE.A) has $200
million (M) in the bank, and its market value is not a lot more than that. It
has a 5 million ounce (Moz) good quality gold
deposit in Ghana. That's an example of how irrational the valuations are in
this market now.
of rationality, what specific political and economic trends are affecting the
price of bullion and the price of gold equities?
Short-term prices are impacted by news headlines, but headlines are not all
that accurate. We hear constantly about the slowdown in China. In reality,
China is the largest consumer of metal and its economy is growing at better
than 7% a year. That's less than the 8–9% growth of recent periods, but
it's still a phenomenal pace of growth for the second largest economy in the
TGR: What about
the so-called euro dilemma?
situation in Europe is the most significant element impacting investor
sentiment. Markets have pretty much discounted a complete collapse of the
euro. Personally, I don't think we're going to see a complete collapse of the
euro. I think a more practical outlook is that the powers in Europe are
moving ever closer toward a wide-open monetary easing in the same way that
the Americans used monetary policy to overcome the 2008 global financial
crisis. And it worked very effectively in the U.S. The American economy is
not booming yet, but it has certainly rebounded from a recession to a period
of slow growth.
would be the effect of quantitative easing in Europe on gold investors?
time, it will be very positive for hard assets in general, and especially for
gold, but also positive for the whole range of commodities. Monetary easing
depresses the value of currencies. It's inflationary. Hard assets like gold
and other metals are going to effectively hold their value in real terms as
the value of currencies decline. In the long term, the easing could be very
bullish for commodities in general.
that now is a good time to bargain hunt for junior mining stocks, what
standards should investors use when evaluating whether a particular junior
has a solid chance at making it through the next year or so and emerging as a
biggest payoff for a junior exploration company comes with a new discovery.
We saw that recently with GoldQuest Mining Corp. (GQC:TSX.V). In a
period of three months, its stock price went from $0.05/share to $1.50/share.
But, unfortunately, discoveries like that are not very common. Investors must
balance risk and potential reward by buying companies that have a solid asset
combined with a realistic prospect of a takeover. The value of a quality
asset increases as the owner expands and upgrades the resource by conducting
engineering studies and moving toward production. Companies with solid mining
assets and good management teams that are advancing toward production provide
the best balance.
companies with good assets, with cash on hand and with strong management are
building strong bases in their share prices at this time."
for companies to raise money. Financings can be dilutive to the point where a
company may never recover. But enterprises with cash in hand are in strong
positions. And companies with good assets and strong management can still
raise money. Pretium Resources Inc. (PVG:TSX; PVG:NYSE), for
instance, is presently raising $18M in a flow-through financing that's priced
at a 25% premium to market. To be a winner, a project has to have size and it
has to have grade. It has to be well located with regard to infrastructure
and jurisdiction. Now, having said that, the number of good jurisdictions is
shrinking. The most recent downgrade came as Bolivia announced the takeover
of a project from South American Silver Corp. (SAC:TSX;
SOHAF:OTCBB). It's getting harder and harder to find good-quality assets in
TGR: Is that
good or bad for the junior investor?
term, it's good. The value of the good-quality assets will appreciate. In
decades gone by, there was a surplus of good-quality metal deposits available
for development. When metal prices rose, a lot of new deposits came onstream and knocked back
the metal prices. We saw that cycle repeated several times over the last few
decades. But the situation has dramatically changed; there is no longer a
surplus of good-quality assets. Finding large, high-grade deposits is getting
harder. That means that when a company makes a discovery, the discovery is
more likely to yield a high value for shareholders.
at the relative share prices of junior companies over a two-year window, we
see some that are still holding value, despite some downturn in share price.
For example, Newstrike Capital Inc. (NES:TSX.V) was
$0.40/share in August 2010 and now it's $1.80/share despite having risen as
high as $3.40/share in the interim. There are other firms with similar
stories. Do you consider this type of comparison to be an indicator of
company strength for the long term?
those price ranges are good indicators of value in this market. There are
several ways to explain undervaluation of high quality firms. Some individual
investors are terrified and are selling across the board; they want out of
all equities. Another huge component in the selling is investment funds,
hedge funds and other institutional-type investors who came into the resource
sector not really knowing what they were doing. Now they are looking to get
whatever they can get for their positions. Consequently, sophisticated
investors are picking up great bargains. That companies like Newstrike are still holding value indicates that they
have tangible assets and solid management.
TGR: Are there
other companies that you are looking at that are holding value comparable to Newstrike?
LR: GoldQuest is up from $0.05/share to $1.80/share in a
period of months after a discovery. Where it will go from here, who knows? It
will depend on the next drill results.
Pretium is up 2.5
times over the last couple of years.
Gold Mines Ltd. (XG:TSX; XG:NYSE.A; E1R:FSE) has
doubled from two years ago; Sandstorm
Gold Ltd. (SSL:TSX.V) has tripled.
all companies that have good management and solid assets, which are getting
recognition from, in the case of Extorre, another
mining company, and for the others, from investors who understand the sector.
TGR: Are some
of these juniors with relatively low stock prices benefiting from joint
ventures with seniors?
Absolutely. I've always been a fan of the joint venture approach to
exploration. It's a very high-risk business, and it's better to use other
people's money for the early-stage exploration. For example, Millrock Resources Inc. (MRO:TSX.V) has held
up better than some other companies because it benefits from senior companies
that are funding the work on its projects. Another example of that synergy is
Riverside Resources Inc. (RRI:TSX), which has held up well in a
really tough market.
TGR: Can you
be a little more specific about Riverside and what's going on there?
is a prospect generator-type company that has initiated many exploration
projects. A number of juniors and seniors are funding work on its projects.
It's focused on North America, so it's in good political jurisdictions. It
has two deals where it has entered into strategic alliances to conduct
regional exploration programs, one in Mexico and another in British Columbia.
That kind of business model is very effective, especially for a company like
Riverside that is able to attract the big companies that can afford
aggressive exploration programs.
mentioned Millrock. Can you tell us a little bit
about what's going on with that firm?
LR: Millrock has quite a number of exploration projects in
Alaska and also in Arizona. It has joint ventures with senior companies.
Quite a lot of work is going on at the moment. Any of those projects could
turn into a major discovery.
TGR: Tell us
more about Newstrike. What makes it attractive?
LR: Newstrike is working on a project in Mexico in a very
prolific gold belt. It has a big property position and has made a discovery.
It is systematically drilling off the discovery and has potential for
additional discoveries on its property.
TGR: I wonder
about Africa, which has a host of political and infrastructure obstacles. Are
there any undervalued juniors operating in eastern Africa that have drawn
LR: I like Sunridge Gold Corp. (SGC:TSX.V) a lot. It
has a very good project at the feasibility stage. It is gold and base metals.
In this kind of a market, investors don't want anything to do with a country
like Eritrea, but Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.A) has been very successful in that
country, has developed an operating mine and was able to raise debt financing
in the international markets. Sunridge is on the
same path to mine development. At its current share price, it's way
like to focus on firms that have a tangible asset in hand."
look at countries within Africa that have various levels of political risk,
it comes down to a tradeoff between risk and potential reward. There are some
places in Africa that I wouldn't touch under any circumstances, but there are
other places that are quite attractive in terms of their level of
geopolitical risk, are extremely prospective geologically and, therefore,
provide an excellent balance of risk and potential reward. Sunridge is one example.
other regions would fit those criteria?
Africa in general is very positive. Ghana is a good place to be. Ghana and
many other countries over the past couple of years have bumped up its rates
of taxation and royalties on the mining industry in response to high metal
prices. That's turned off a lot of investors, not so much about the level
that the royalties and taxes are at this time, but the political situation
creates uncertainty as to what it is going to do next. We saw the same thing
in Mongolia, which bumped up taxes, said it was satisfied with that, then
came back a year or two later and said, "no, we want more." That's
really the biggest problem right now, the uncertainty of what's coming next.
TGR: For the
retail investor, what are some of the major metrics that an investor could
look at to tell the difference between a good-quality company and one that's
maybe not so good in today's market?
LR: You have
to realize that most of the junior exploration companies have the best
intentions in the world of making a discovery next week or next month.
They're good geologists, they're well intentioned, but if they're not
successful at making a new discovery, they're not going to deliver a lot of
value to shareholders. Some of them will make discoveries, and they will
provide enormous payoffs for shareholders, as we saw recently in the case of GoldQuest. But, unless they make a discovery, there may
not be a lot of value in the vast majority of the companies in this sector.
I like to
focus on firms that have a tangible asset in hand. They have made a discovery
or they've reinvigorated a discovery that was made at some point in the past.
So they have something tangible, and they're adding value to it. It's
important to realize that the mining industry has changed dramatically over
the past couple of decades. There were discoveries made in the 1980s, 1990s
and even the early part of the 2000s that didn't make economic sense at that
time. The grade was too low or it was too remote. And of course the metal
prices at that time were very much lower than they are today. With higher
metal prices and with changing metrics in a number of areas, discoveries from
way back are now extremely valuable and, in fact, are some of the best
deposits available to the mining industry.
TGR: Before we
conclude, are there any juniors that you would like to recommend to our
that are working toward adding value on existing deposits include Kaminak Gold Corp. (KAM:TSX.V), which is
drilling a deposit in the Yukon. It will be putting together its first
resource estimate later this year. People are going to be very pleased when
they see the size of it.
Minerals Corp. (PGS:TSX.V) and its
joint partner are working on a very substantial situation in British
Columbia. It is a discovery from decades ago that was put aside. Paget
outlined 17 Moz high-grade gold ounces on its Brucejack property in British Columbia. The world had
seen Brucejack as being a large but low-grade
deposit, and the company was able to go in and identify a very substantial,
high-grade portion in that deposit.
New Gold Inc. (NGD:TSX; NGD:NYSE.A) is
conducting probably the biggest exploration program in the world at the
moment on its Blackwater project in British
Columbia. That opens up a whole region where there are a number of juniors
looking at other deposits or other prospects that might look like Blackwater.
Columbia is really coming back into the forefront. Not a lot of investors
have appreciated the significance of what's happening in British Columbia.
TGR: Well, it
has infrastructure. It is politically stable. There are a fair amount of new
discoveries going on.
LR: It's one
of the most highly prospective geologic areas. It has had a lot of work done
in the past, and there are many companies that are now building on that
historic work. In fact, I'm working now on a special issue of a newsletter
devoted to British Columbia.
TGR: In terms
of new extraction techniques?
LR: In terms
of companies that are building on work that was conducted in the province in
the past, such as Paget, which is drilling on a deposit that was discovered
initially in the 1960s. Until recently, it was perceived as having no value,
but this might end up being one of the most significant porphyry copper-gold
prospects anywhere. There are a lot of situations like this in British
Columbia. The province was explored pretty thoroughly in the 1970s and 1980s
but at that time, the grades that the enterprises were coming up with weren't
high enough to be economic in the context of metal prices. But now the gold
price in the last decade is six times higher and the copper price is six
times higher. Situations that had little value a decade ago are now highly
TGR: Do you
have any parting words?
LR: A lot of
people recognize the long-term fundamentals in gold and the mining industry
in general, but they are terrified about the situation in Europe and they're
standing back. They're waiting for a signal that the markets are at the
bottom. Nobody is going to ring a bell to announce that the market is at the
bottom. We saw in the early part of 2009 how quickly the markets could
rebound. Within a couple of weeks, the Toronto Stock Exchange Venture Index
was up 50% and went on to triple over the next two years.
TGR: We could
be in a similar situation.
LR: I believe
we are. The really important point is that the high-quality companies are
already seeing strong bases building in their share prices and many of them,
in fact, are beginning to trend upward. If people wait until there's a signal
that the markets are on the way up, it's going to be too late to get a
position in the good-quality companies.
TGR: Thank you
very much for your time. It's been a pleasure talking to you.
Lawrence Roulston, editor
of Resource Opportunities, is a
geologist with engineering and business training and more than 25 years of
hands-on experience in the resource industry. After completing his studies at
the University of British Columbia in 1975, Roulston
worked as an analyst for Cominco Ltd. and for a mid-size Calgary oil group
for several years. In 1984 he became the CFO for a group of mineral
exploration companies. He was also vice president in an investment management
firm focused on the resource industry. From 1994 to 1997, Roulston
was CEO and director of a mineral exploration company. Since then, he has
been a resource industry consultant and independent mining analyst. Roulston's years of hands-on experience and extensive
personal contacts in the industry provide unique insights that have generated
an impressive track record for Resource Opportunities.
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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: Pretium Resources Inc., Newstrike Capital Inc., Extorre
Gold Mines Ltd., Millrock Resources Inc., Sunridge Gold Corp. and Paget Mineral Corp. Streetwide Reports does not
accept stock in exchange for services. Interviews are edited for clarity.
3) Lawrence Roulston: I personally and/or my family
and/or Resource Opportunities may own shares of the following
companies mentioned in this interview: Keegan Resources Inc., Pretium Resources Inc., Newstrike
Capital Inc., Millrock Resources Inc., Riverside
Resources Inc., Sunridge Gold Corp., Kaminak Gold Corp. 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