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Gold has been produced in Africa for thousands of years in places like
Ghana and neighboring countries whose names have changed over the centuries.
One thing that has not changed is that there's still a huge amount of gold to
be found and mined in West Africa. That's what Mark Lackey likes about the
area and in this interview with The Gold
Report, he talks about companies that are or will be
producing significant amounts of the world's prized metal.
The Gold
Report: When you
last spoke with The
Gold Report this past March, gold had just dropped from its first peak of
the year, from $1,781/ounce (oz) at the end of
February to $1,660/oz in a matter of three weeks.
Now it's looking for support at $1,700/oz. The trading range you predicted
for 2012 looks good in retrospect. What are you projecting from here?
Mark
Lackey: I'm looking at a range from $1,680/oz to $1,850/oz, and moving up
over the year so that by December I am expecting to see the gold price at
$1,850/oz.
TGR: But you
don't see a big breakout past $2,000/oz that some
people are predicting?
ML: It's
possible, but for the gold price to go much higher than $1,850/oz there needs to be a good reason, such as a big decline
in the value of the U.S. dollar or major gold buying by central banks. While
I expect the dollar will weaken somewhat in 2013, I don't expect a huge
decline. Over the next few years we'll get above $2,000/oz,
but probably not in 2013.
TGR: What do
you see as the market drivers for gold at this time?
ML:
Significant trade and fiscal deficits remain in the United States and the
country is continuing to use quantitative easing, which tends to lower the
value of the U.S. dollar. Investors are going to look at the U.S. dollar and
the euro and decide that there are other financial options they would rather
own. Some investors will buy gold as an investment alternative to paper
currencies.
"I
believe that jewelry demand will continue to increase as a result of the
growing middle class in Indonesia, China and India."
In
addition, I believe that jewelry demand will continue to increase as a result
of the growing middle class in Indonesia, China and India. Those are the
demand factors that will move the price of gold higher in the short run. We
also anticipate that some of the gold projects that are expected to begin
production in 2013 will be delayed due to regulatory and permitting issues
and this will lower the supply of gold on the world market and therefore push
up the price of gold.
TGR: What's the
next concern that might become the focus for precious metals investors?
ML: I don't
think Europe's problems have gone away after allocating over $300 billion to
Greece. We cannot count on Europe to have the kind of economic growth it once
did, but as long as it doesn't crater dramatically, there's still going to be
demand for gold and other commodities. I'm looking at a modest recession in
Europe in 2013. I do think the Spanish banking system will be bailed out but
as long as Spain's sovereign debt doesn't have to be bailed out, Europe will
muddle through.
TGR: Despite
the relative strength of gold over the past year, the performance of gold
stocks has been pretty disappointing. When and how is the turnaround coming?
ML: If you
look at the performance of the gold markets, the one area where we've
actually made some good returns was in the mid-cap gold producers and
near-term producers that did rally with the price of gold. The problem for
many of the larger producers was that they didn't reach the production
numbers that they had forecast and their production costs were also above what
they had planned. Thus their earnings and cash flows were below expectations
and this resulted in share prices that did not follow the rising gold price.
"We
expect that with gold prices going higher in 2013, investors will be buying
the well-run junior companies."
There are
a number of smaller gold companies that do not have much cash left on the
balance sheet and found it difficult to raise money in this past year so this
prevents these companies from moving their projects forward. The Toronto
Venture market has declined from a level of 2,450 in April 2011 to 1,200 at
end of 2012, so it is not surprising that many junior mining companies have
had a difficult time trying to attract new financing. Many of those companies
saw significant declines in their share prices especially at the end of 2012
as they were hit by tax-loss selling.
We believe
that there will be share price appreciation in 2013 for those junior gold
companies that still have money (or can raise it) and have good projects. We
expect that with gold prices going higher in 2013, investors will be buying
the well-run junior companies, especially those that may have declined or
lagged behind in 2012 due to the overall market conditions.
TGR: Where do
you see the best opportunities for investors in gold stocks these days?
ML: We look at
three or four factors when we try to make a decision on a gold company. We
like to see an experienced management team with a project or projects in a
jurisdiction that does not have significant political risk. We also look for
companies that have a mining-friendly terrain and have access to
transportation, power and water. We prefer the companies to be producers or
near-term gold producers. We are concentrating, as we mentioned earlier, on
mid-cap and junior companies that have cash in the treasury and are also
looking for those companies that are potential takeover candidates. My
company, CHF Investor Relations, has several clients in gold.
TGR: Last time
you talked mainly about companies active in Africa. We know there is lots of
potential there, but it seems that there's also been some unrest lately that
might cause concerns for some investors. How does the current picture look to
you?
ML: The gold
opportunities tend to concentrate in West Africa, where three of the four
countries, Senegal, Ghana and Burkina Faso, are quite stable by anybody's
standards and have had no problems with political unrest or indigenization of
resources. In Mali, the problem is with the Tuareg
rebels and Islamists in northern Mali. The mining companies are in southern
Mali, hundreds of miles away.
"West
Africa has a lot of advantages compared to some of the more traditional
mining areas."
Last month
the UN Security Council voted to have 3,300 African troops sent to Mali to
remove the rebels from the northern part of the country. The mining employees
who we have talked to in Mali have told us that their mining operations have
not been impacted, either in production or exploration, by the problems in
the north. There have been problems in other parts of Africa, but we have
been watching West African projects closely. CHF has no clients in West
Africa, by the way.
TGR: So what
are some of the most interesting stories you're looking at now?
ML: One we
like is Teranga Gold Corp. (TGZ:TSX;
TGZ:ASX), which is in Senegal. Teranga says it will exit 2012 with production between
210,000 oz and 225,000 oz
for the year and in the third quarter cash costs were down to $594/oz. The
company has its own mill, which is the only one in Senegal, and Teranga also has the largest land position in the
country. It has a strong balance sheet having cash equivalents of $31.2
million (M) at Nov. 1, 2012, and reported a record high third quarter profit
of $21.3M. The company says it will eliminate its hedge book by August and
will have increasing gold production along with lowering costs of production.
Teranga will focus on producing the gold ounces
that will provide the best returns.
TGR: What else
do you like in West Africa?
ML: Another
one we've been looking at is Orezone Gold Corporation (ORE:TSX), which is developing the Bomboré project, the largest undeveloped gold mine
in Burkina Faso. It has a strong development team and large near-surface
tonnage, so it's going to be a relatively low-cost producer. It has 2 million
ounces (Moz) in oxide resources in the top 50
meters, and 80% of its resources are within the top 80 meters from surface.
The property is close to the national highway and has nearby water, power and
a large labor force, which should translate into reduced development and
operating costs.
TGR: Those are
some pretty world-class resources.
ML: Orezone's recent NI
43-101 released in October 2012 contained 4.1 Moz
of Indicated and 1 Moz of Inferred resources. This
will be a significant gold producer in the next few years.
TGR: Or
possibly get taken out.
ML: That's
certainly possible. Given the increasing drilling activity and the increase
in gold reserves in Burkina Faso, Senegal, Mali and Ghana, many major and
mid-size gold producers will be looking to acquire some of these companies. Orezone is one of the companies that could be taken over.
TGR: What's
been going on with some of the companies you talked about last March?
ML: Riverstone Resources Inc. (RVS:TSX.V) announced on Dec. 19
that it had completed its takeover of Blue Gold Mining. This will add some
very strong talent to an already very good management team working to advance
the Karma project, its flagship play in Burkina Faso. Riverstone
also has three additional properties. Recent drilling activity has been very
good. This is another miner that we think will have production in the next
few years.
TGR: Was this a
strategic merger?
ML: Yes. I
think the idea here was that if these two teams got together, they could make
a much stronger company. Combining the management teams and their financial
resources will, in our view, lower the execution risk of their projects and
significantly improve the company's ability to finance itself in the future.
TGR: What else
do you have here?
ML: We talked
about Channel Resources Ltd. (CHU:TSX.V), which
has the Tanlouka property in Burkina Faso. We like
Channel as it could become a mid-term producer of approximately 100,000 oz by 2018. The present Indicated and Inferred estimate
at Mankarga 5 is 1.2 Moz. Channel has some other
excellent exploration targets and we believe that the projects at Manesse and Tanwaka have the
potential to host gold deposits similar to Mankarga
5. The additional exploration could eventually define a resource above the 2 Moz level. This exploration team has done an excellent
job as it has been successful in defining a major gold resource. We like
these oxide deposits for their metallurgical properties, since it usually
means that the deposits can be mined at a low strip ratio.
TGR: What else
looks interesting?
ML: The next
one is African Gold Group Inc. (AGG:TSX.V); the
company is developing the Kobada property in
southwest Mali. We think African Gold can begin production in 2015, and by
2017 we are projecting annual production of 125,000 oz
of gold. One of the big advantages in this part of the world is the highly oxidized
rock, which is relatively cheap to mine and mill and also lies close to the
surface. It has other exploration opportunities with the large sulfide
resources below the oxide layers, which can significantly increase reserves.
In
addition to the Kobada property, the company has
other promising exploration targets at Gossokorodji,
Diaban and Foroko North.
African Gold has been in Mali for years and has personnel who have developed
other gold mines in Mali.
TGR: What's
next on your list?
ML: Volta Resources Inc. (VTR:TSX) is a company that has really
moved forward, having nine exploration projects. It is currently
transitioning itself from explorer to producer in Burkina Faso, at present to
converting its flagship asset, the Kiaka gold
project, into a producing gold mine. The present NI 43-101 contains 4.1 Moz in the Measured and Indicated categories, and 1 Moz in the Inferred category. Given the size of the
resource, I would think that, down the road, Volta could be a potential
takeover candidate. Given its excellent resources and $21M in cash and no
debt, Volta will have no concerns about having to raise money anytime soon.
That's a significant plus in this market.
TGR: What else
do you have?
ML: A lot of
people know Pelangio Exploration Inc. (PX:TSX.V) because,
going back in its history, it developed the Detour Lake Gold Mine in northern
Ontario and that ended up becoming a big winner for shareholders. It now has
two properties in Ghana where it has completed some drilling that has
recently started to show some interesting results. Its Manfo
property lies between the Ahafo mine, which is
operated by Newmont Mining Corporation (NEM:NYSE),
and Kinross Gold Corp.'s (K:TSX; KGC:NYSE) Chirano
mine. You would think Pelangio has a good chance of
being on strike with the producers on either side. If it can continue to do
more drilling and produce more similar results, we might see some pretty
interesting resource estimates come about for this project.
Pelangio also has
another very good property, the Obuasi property in
Ghana, located adjacent to AngloGold Ashanti Ltd.'s (AU:NYSE;
ANG:JSE; AGG:ASX) Obuasi mine, which has already
produced 30 Moz of gold. This is an interesting
play because of management's extremely successful track record and because it
has added a number of individuals to the management team who have significant
experience with mining operations in Ghana. We'll have to follow and see how
the drilling results go, but certainly it is a very interesting play with
major upside potential.
TGR: That's
another one to keep an eye on.
ML: The last
one I've got in Africa is Roxgold
Inc. (ROG:TSX.V), which
had a proxy battle last summer. Ultimately a deal was completed and I give
credit to Oliver Lennox-King and Rick Mazur. Mazur was the executive handling
the restructuring and then left when it was done. They put together a strong
board and a good management team. This is important because I've seen these
sorts of proxy battles in the past that ended up destroying some companies.
Roxgold is
presently developing three mining properties in Burkina Faso. The company is
advancing a high-grade gold discovery at its flagship property at Yaramoko. At the 55 Zone there is an initial resource
estimate of 354,000 oz of gold,
that graded 17.8 grams/ton (g/t) in the Indicated category and 306,000 oz of gold that graded 7.7 g/t in the Inferred
category. These grade are not typical in Burkina
Faso where most projects are big volume but low grade. The company has raised $65M to date, so it's well capitalized for its 2013
drilling program. If the company can continue to increase its high-grade
tonnage, it will certainly be a takeover candidate.
TGR: Do you
have any wildcard plays anywhere that people might be interested in, either
in precious metals or otherwise?
ML: We've been
looking at a number of zinc plays and probably our favorite right now is Chieftain Metals Inc. (CFB.TSX), which
has properties in northern British Columbia. We like this one because, first
of all, it has a very experienced management team, which is critical to
understanding the metallurgy and the mining in northwestern B.C. Second, with
all the zinc mines that are going to close in the next few years, taking
millions of pounds out of production, we believe there's going to be an
upward move in the price for zinc, certainly by 2014–2015. Chieftain
has recently completed a financing and it should be publishing its
feasibility study later this month.
Within a
couple of years we think that the zinc price will increase up to $1.40 a
pound. That makes a number of zinc plays attractive, especially Chieftain,
given its potential to become a zinc producer.
TGR: Where do
we go from here, and how should our readers be positioning themselves for
what lies ahead in 2013?
ML: As I
said, CHF has a number of clients in gold, some low-cost producers, too, but
generally speaking, in the gold sector, we would concentrate primarily on
jurisdictions we like. West Africa has a lot of advantages compared to some
of the more traditional mining areas. One factor is that it is easier to get
mining permits compared to some of the jurisdictions in North and South
America. West Africa is also flat and dry, has water, power, transportation
and a good labor force. In addition, we want experienced management teams
that have experience in the jurisdictions where they are exploring.
TGR: Thanks for
the ideas and updates, Mark, and we'll stay tuned and hope for the best in
2013.
ML: Thanks for
the opportunity.
Mark Lackey, executive vice president of CHF Investor Relations (Cavalcanti Hume Funfer Inc.),
has 30 years of experience in energy, mining, banking and investment research
sectors. At CHF, Lackey involves himself with business development, client
positioning, staff team coaching and education, market analysis and special
projects to benefit client companies. He has worked as chief investment
strategist at Pope & Company Ltd. and at the Bank of Canada, where he was
responsible for U.S. economic forecasting. He was a senior manager of
commodities at the Bank of Montreal. He also spent 10 years in the oil
industry with Gulf Canada, Chevron Canada and Petro Canada.
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DISCLOSURE:
1) Zig Lambo 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: Teranga Gold Corp., Orezone Gold Corporation and Chieftain Metals Inc.
Streetwise Reports does not accept stock in exchange
for services.
3) Mark Lackey: 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) CHF Investor Relations: None of the companies mentioned in this interview
are CHF's clients.
5) Interviews
are edited for clarity.
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