The Gold Report: What
are your forecasts for gold and silver prices in 2015?
Michael Fowler: I think gold could go
lower in U.S. dollars in the next three months. I stress U.S. dollars because
the price of gold is rising in many currencies, such as in Canadian and
Australian dollars. This will be a boon to producers in those countries, as
will the significant declines in energy costs.
The
average gold price should be slightly down: $1,150–1,200/oz. Negative factors
for gold are the strong U.S. dollar and lower inflation. These, however, will
be offset by strong physical demand from Asia, China in particular. Silver
follows gold, so I expect a 2015 average of $16/oz.
TGR: The gold-silver price ratio, which
for several years had been at a historic high of 65, has now reached 75. Will
that ratio be maintained?
MF: I think we will probably see a range
of 65–70. Historically, silver has outperformed gold on the way up and
underperformed gold on the way down.
TGR: Again, traditionally, geopolitical
turmoil has been good for gold. We had a great deal of such turmoil in 2014,
and it doesn't seem as if 2015 will be any calmer. For instance, January
brings the prospect of elections possibly leading to the exit of Greece from
the euro. Could 2015 be the year gold's value as a safe haven in a scary
world is reaffirmed?
MF: I think the world has always been a
scary place. Certainly, the Eurozone descending into crisis would be positive
for gold. That said, the gold market in the longer term reacts more strongly
to phenomena such as inflation, currency strength and monetary growth than to
various political skirmishes.
TGR: Keeping in mind what you noted about
the cost savings deriving from currency declines and lower energy costs, is
gold production sustainable at $1,200/oz? Can we expect a significant drop in
gold production?
MF: We should see a significant gold
production fall from 2016 onward.I think the industry got it completely
wrong. Producers should have been hoarding cash during the boom years so they
could deploy it now. Instead, most of the big gold producers took on huge
amounts of debt and are now selling off assets. Capital expenditures have
been curtailed, and that will lead to a lower reserve and resource basis and,
eventually, lower production.
TGR: Today, even projects with published
all-in costs well below $1,000/oz are having difficulty raising capital. What
does this tell us about the future health of the gold explorers?
MF: Essentially there's no money going
into the sector. At $1,200/oz, few junior deposits make sense.
TGR: The bear market in mining equities
began in April 2011. Assuming that sentiment in the gold sector becomes
positive again, how fast will financing come back? Are we talking months, or
more than a year?
MF: Should my gold price forecast be
wrong, and gold rises in price quickly, that would be a catalyst for many
investors to get back into the gold market. Another catalyst would be major
discovery, but that doesn't seem to be on the horizon. For the juniors,
there's always a lag effect. Even assuming a big increase in the gold price,
they would still be many months from a recovery.
MF: Three specific companies on my list
would be Pretium
Resources Inc. (PVG:TSX; PVG:NYSE), Torex Gold
Resources Inc. (TXG:TSX) and Guyana
Goldfields Inc. (GUY:TSX).
TGR: Despite rock-bottom asset prices,
2014 was not a brisk year for mergers and acquisitions (M&A) in the gold
sectors. Will M&As pick up in 2015?
MF: I don't expect much change. There are
many impediments to an increase in M&A. Two that are especially important
are soaring general and administrative expenses and golden parachutes for
management.
TGR: What can be done about the latter?
MF: Well, most companies with oversized
compensation contracts are probably not going to get taken over. They're
going to be put on the waste pile. Basically, shareholders should have a vote
on these parachute clauses at annual general meetings, but that isn't
happening at the moment. That's something regulators could focus on moving
forward.
TGR: Doesn't this suggest a significant
structural advantage for intermediate or junior producers?
MF: Yes, even though some juniors do have
outsized parachute clauses for management. So juniors with modest parachute
clauses make themselves much more interesting for M&As.
TGR: What type of company is most likely
to be taken out in 2015?
Takeover
targets must be able to demonstrate good actual or potential returns on
investment. The three companies I just named have that. Torex and Guyana
Goldfields are both financed to production. Pretium isn't but it has a very
high-grade deposit, which suggests the ability to be financed.
TGR: In the current depressed
environment, is mining jurisdiction more important than ever?
MF: I don't really think timing matters.
I've always preferred companies in countries with defined mining codes and
overall stability. Canada, the U.S. and Australia are at the top of that
list. Outside these areas, you're always dealing with the potential for
changes in tax regimes, royalty regimes or environmental regimes.
TGR: Let me ask you about Canada in this
regard. The federal government has passed a Yukon environmental bill, which
some observers believe to be calamitous. In British Columbia, the courts have
given undefined rights over all Crown Land to Indian bands. And Ontario's new
mining regulations are controversial. In the light of these changes, does
Canada remain one of the best jurisdictions?
MF: These changes cannot be considered in
isolation. Worse changes have been made elsewhere. For example, Zambia just
increased royalties up to about 20%, and Mexico has greatly increased
royalties as well.
Canada
should be considered on a province-by-province basis. What's going on in
British Columbia is quite difficult, but the First Nations situation is much
more settled in Ontario, Québec and points east.
TGR: Which junior producers do you follow
in Québec and Ontario?
MF: St Andrew
Goldfields Ltd. (SAS:TSX) and Wesdome Gold
Mines Ltd. (WDO:TSX). Wesdome has a property in Québec but also has major
properties in Ontario. St Andrew Goldfields has properties right up to the
Québec border on the Destor-Porcupine Fault line. These are two companies I
really like. Wesdome is doing very well right now. It's a small producer, but
it has been finding parallel zones to its deposit in Wawa, Ontario, and the
grade of the deposit is very high: 10 grams per ton (10 g/t). Wesdome has
turned around its operation and is making good money.
TGR: Wesdome has effectively doubled its
share price since October. How much of this is due to the recent rise in the
price of gold, and how much is the market's validation of what the company is
doing?
MF: I don't think that the upside is
finished on Wesdome, to answer that question. Part of the reason for the
share rise is the fall of the Canadian dollar, but more important than that
is the company's discovery of very high grade parallel zones to the Eagle
River production facility.
TGR: Wesdome has had good assays results
from Dubuisson North in Quebec, including 45 g/t over 5 meters (5m) and 3.4
g/t over 25m. Could this be a high-grade gold discovery?
MF: Dubuisson is really an exploration
target at the moment. It could be a factor in two or three years. The real
exciting thing for Wesdome is what's going on in Ontario in Wawa, where it is
producing about 45,000–50,000 ounces (45–50 Koz) gold per year. Wesdome found
a parallel zone that can be accessed from the production shaft there. The
company could actually increase its production at that mine at a lower cost.
TGR: St Andrew announced on Jan. 9 annual
production of almost 91 Koz gold. Its stock rose $0.01 in response. Does that
indicate a production figure pretty much in line with what was predicted?
MF: Yes, St Andrew revised its guidance
upward about six months ago. What's exciting about St Andrew is its Taylor
deposit, the company's next development play. That is a high-grade system as
well. St Andrew is processing a bulk sample from the Taylor deposit as we
speak. Bottom line on St Andrew is that it could increase its production, not
this year, but in 2016. Its balance sheet is pretty good as well.
TGR: What do you think about St Andrew's
all-in sustaining costs?
MF: Well, they're high, at $1,060/oz, but
they're coming down. St Andrew is doing a good job of efficiently mining what
it has. St Andrew has a royalty issue with Franco-Nevada
Corp. (FNV:TSX; FNV:NYSE), which is not going to go away any time soon,
but Taylor will lessen the royalty load after it goes into production.
TGR: Earlier you mentioned Torex Gold.
What specifically do you like about the company?
MF: Torex has a very high-grade mine, El
Limon-Guajes, in Mexico, which is fully financed. Torex has good management
that has built mines before. And it has another good Mexico discovery. Torex
has some good backing and good shareholders.
TGR: How prospective is the Guerrero Gold
Belt?
MF: It's a good belt and very
prospective. There are little companies around Torex, and Newstrike
Capital Inc. (NES:TSX.V), which looks very interesting as well. There are
some difficulties in Mexico, as I have mentioned. There's the royalty
increase and the increase in drug cartel-related violence.
TGR: Going back to Pretium, when do you expect
Brucejack to go into production?
MF: Something like 2018, if the company
hasn't been taken out by then.
TGR: Pretium's share price has been
rocketing, up 5.2% on Jan. 9 and 4.6% on Jan. 12 on no material news. Does
this suggest rumors of an imminent takeout?
MF: There are always takeover rumors
around companies like Pretium. And there's the New Year bounce in share
prices. Torex was up 5% Jan. 9, and so was Guyana Goldfields. The majors need
to do something to increase production. Goldcorp Inc.
(G:TSX; GG:NYSE) is a potential suitor for Pretium, and some of the
midtiers could potentially get involved as well. The midtier producers now
have significantly better balance sheets than the bigger producers, which is
really strange.
TGR: Does Pretium intend to begin
operations modestly at Brucejack?
MF: Pretium calls it modest, but my
personal opinion is that it wants to mine this deposit at about 2,000 tons a
day (2,000 tpd). If Pretium is taken out, the new owner will do its own
feasibility, and will size its own mill, and so forth. It may be totally
different from what Pretium is talking about right now.
Brucejack
is exceptionally high grade. Who knows exactly how high? It's difficult to
determine reserves or resources from a deposit as nuggety as this.
TGR: How close is Guyana Goldfields'
Aurora gold project to production?
MF: A progressive start-up should begin
in the middle of 2015. Guyana will initially mine the high-grade open-pit
material. I was down in Guyana not long ago, and everything seems to be on
time and on budget.
TGR: Have all of the details been worked
out regarding Aurora's financing?
MF: Yes, unless there's a huge overrun in
capital expenditure. I mean we're talking about financing for the first two
or three years. According to the feasibility plan, Aurora will be open-pit
initially, and it will then go underground. I don't know whether it will go
underground, to be honest. My feeling is that Guyana Goldfields will keep Aurora
as an open-pit deposit.
TGR: If Aurora is a success, will we see
a gold rush in the country of Guyana?
MF: It's part of the Guyana Shield. Many
years ago, South America and Africa were joined at the hip. The shield area
goes through Suriname, French Guiana, Brazil and into Africa and is very
prospective for gold. Guyana does have a history of gold mining. The biggest
issue for Guyana is infrastructure, which is not really that good. If the
country had infrastructure similar to what we have in Canada, we'd have a lot
of gold mines there already. But Guyana has worked out its mining code, and
although the royalty rate is quite high, the country has a reasonably stable
mining regime.
TGR: Which other gold companies would you
like to mention?
MF: I like the midtier gold producers,
three in particular: Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE), SEMAFO Inc.
(SMF:TSX; SMF:OMX) and Centamin Plc (CEE:TSX; CNT:ASX, CEY:LSE). I don't like
the majors. They took on too much debt, have been selling off assets and, as
a result, have little growth potential. The midtiers tend to have good
balance sheets and good growth. They've got their costs under control and are
cash flowing.
TGR: Randgold has been mentioned as a
company that might be aggressive in M&A. Do you agree?
MF: I don't think it's going to be
aggressive at all. Randgold is more interested in its organic growth profile.
This is a company that is aggressive once every, say, five years or so.
TGR: SEMAFO suffered some very bad press
a few years ago. Has it turned it around in Africa?
MF: Five years ago, SEMAFO didn't have a
very good mine. The company survived and found the Mana deposit in Burkina
Faso. Then around that deposit SEMAFO found the Siou deposit, which is the
big catalyst and source of increased production. Its production costs are
fairly low. It's efficient mining. Management has matured. I think it's a
pretty good situation still.
TGR: Centamin took a huge hit last week
after it released its Q4/14 production and 2015 guidance. Was that an
overreaction?
MF: Yes, I don't
know what some analysts were thinking. The company gave guidance, and with
Q4/14 production of 128 Koz, Centamin basically came in with the guidance.
Centamin is outperforming in the longer term. This year, with 420 Koz, it
will show more production growth. The problem with the land title should go
away. The regime in charge in Egypt is likely positive to Centamin.
TGR: After almost
four years of dashed hopes for gold investors, why should they be optimistic
in 2015?
MF: They should
be optimistic because everybody is pessimistic. Already, Canadian
dollar gold prices are actually in a bull market, and so are Australian
dollar gold prices. Input costs are going down significantly. Despite my
opinion that gold prices are going sideways to slightly down in 2015, the
gold equity market will do reasonably well this year.
TGR: Michael, thank you for your time and
your insights.
