When Leily
Omoumi, a gold analyst with Scotiabank
in Toronto, turns her engineer's eye on a mining company, she can translate
insight into profits for investors. The Gold Report caught up with Omoumi
at the Denver Gold Forum for this exclusive interview, in which she discusses
misunderstandings about Eastern European and West African mining companies
and identifies opportunities in Canada and Armenia.
The Gold Report: Leily, you are with Scotiabank in Toronto, but you're not originally from
that area. Tell us about yourself.
Leily Omoumi:
I've
been living in Toronto for many years. I earned a degree in mechanical
engineering from the University of Toronto and worked as an engineer for
Hatch Ltd. for about four years. Following that, I earned a master's degree
in business administration at Rotman School of
Management. I started working at Scotia immediately after. I have been
covering gold stocks for a few years now.
I cover gold stocks and
one palladium name: North American Palladium Ltd. (PDL:TSX; PAL:NYSE).
TGR: There has been
resurgence in the price of gold, which is now at more than $1,700/ounce (oz). While the price of gold has held up during the past
several months, gold equities have languished through the summer. But equity
prices have been rebounding in the last several weeks. What are your thoughts
on that climb?
LO: You are quite right:
Even though the price of gold has held up, a lot of equities suffered earlier
in the year. Capital blowup, cost escalation and inflation have hit several
stocks. Many companies suffered as investors lost confidence in where costs
were trending and development projects progressing.
There has been a nice
push to the gold price in the past couple of weeks. Some of the losses have
been made up and the market is getting to levels similar to last year's,
before stocks really went down.
TGR: We are at the Denver
Gold Forum, a great venue for a gathering of institutions, analysts and
public companies. It feels like there is a little bit of optimism in the
crowd. What do you think?
LO: I agree. Investors have
been sitting on the sidelines for quite a while and they're starting to step
back in. In April, at the European Gold Forum in Zurich, the mood was very
different—more negative. People were watching from the sidelines and
waiting to make a move. Investors have more optimism now. They are ready to
step into names, primarily those that have free cash flow and are in
production or are close to production.
But many pre-producers
continue to be punished because of financing risk. Although the markets are
doing better, confidence is not fully back. Even companies that have released
decent feasibility or prefeasibility studies have not seen moves in their
stock prices because of the financing risk. Companies frequently have initial
capital requirements that are larger than the market cap of the company. It
can take a long time for a company to finance a project in a scenario like
that. Unfortunately in some cases, dilution becomes a significant factor.
Pre-producers have to
wait for the right opportunity to raise money. They must do it in tranches,
which can be a long process. They have a long road ahead.
TGR: Unfortunately, a lot of
those companies already have somewhat blown-out stock structures, which
further discourage them from doing equity financings because they don't want
to dilute shareholders any further. They have to look at royalties and large
debt financings. We are seeing a lot of creative financings, but we are also
seeing some preproduction and development stories that are spectacular values
for large caps. Do you agree?
LO: Yes. Large-cap companies
are moving ahead very cautiously, however. They are being scrutinized by
investors, too, so they are very careful about the investments they make. I
agree that there is great value. The market just needs confidence. A couple
of good merger-and-acquisition deals could potentially bring confidence back
and encourage others to step in. There are a lot of good names out there.
Two development stories
that I like are Lydian International Ltd. (LYD:TSX) and Rainy River Resources Ltd.
(RR:TSX.V). I like Lydian because of
the low initial capital intensity of its Amulsar
project. It's a simple heap-leach project with an initial capital cost of
below $300 million (M). Operating costs are below $500/oz. It's a project
that can be financed.
TGR: Lydian isn't on a lot of
people's radars because of its jurisdiction—Armenia. It certainly is
not Nevada or Ontario. Tell us about your comfort level with this company in
terms of its location.
LO: I have been to Armenia.
Armenia, as you said, is not Nevada. A lot of people are unfamiliar with it,
but it appears to be a pretty decent place for mining companies. For example, Dundee
Precious Metals Inc. (DPM:TSX) has an operating mine
there and other European and private mines operate there currently as well.
The country has a modern mining concession law and is open for business.
Lydian has not had too much difficulty advancing its permits; it's in the
advanced permitting stage now.
TGR: Lydian has drilled, and
has an NI-43-101-compliant resource. What are the next steps?
LO: Lydian released a full
feasibility study the first week of September. Some of the numbers I
mentioned are based on that prefeasibility study. The initial capital came in
at around $270M and life-of-mine cash costs are about $470/oz. The project is
expected to go into production in early to mid-2015.
Aside from final
permitting, the next big step for the Lydian team is financing. The company
has to start placing orders for long lead-time equipment early next year.
TGR: Tell us about Rainy
River in Ontario.
LO: Rainy River is in a
mining-friendly jurisdiction that is familiar to investors. What I like about
the Rainy River deposit is that it contains approximately 8 million ounces (Moz) of Measured, Indicated and Inferred resources. It
has a lot of optionality; the company proved that with its updated PEA, which
came out in late August. It initially expected to have a much larger
operation, with about 32,000 tons per day (Kt/day).
Rainy River has since reduced the scale of the operation because of capital
constraints. It is starting with a smaller operation, at 20 Kt/day.
The company has been
able to push a lot of the higher-grade ore ahead for the earlier years of
production. That helps with the internal rate of return on the project. It
now expects to process an average grade of 1.38 grams/ton (g/t) in the first
five years, compared to previous numbers of about 1 g/t. Over the first 10
years of operation grades are expected to average 1.45 g/t—this
includes underground.
TGR: Does Rainy River have a
lot of exploration potential? Is there still a lot of blue sky?
LO: Absolutely. It has
district potential and there are a lot of targets that the company is still
looking at. The underground potential is underexplored in my opinion, and the
company is still drilling. Although there is an underground portion in the
updated PEA, there is a lot more work to be done.
Aside from that, the
company is looking at regional targets. There is potential for other metals
as well. For example, it is looking at some nickel bearing targets to the
south of the current deposit. However, that's down the road and is not
something the company is counting on right now. But blue sky is certainly
there.
TGR: This seems like a
potential acquisition candidate based on its jurisdiction and improved grade.
LO: Given its jurisdiction,
the scale of the project, with life-of-mine production at more than 200 Koz, it could definitely move the needle for midsize to
larger companies. If a major were to look at Rainy River, it would probably
build the project differently. It might start with a larger scale right off
the bat and increase production levels. A midtier
company would potentially look at the project as outlined in the updated PEA,
which is a smaller scale.
Nonetheless, it's the
type of project that can move the needle. It is in Ontario. It's not expected
to have permitting issues. There is exploration potential. It's a good
project all around.
Additionally, I believe
Lydian, which we spoke about earlier, could be a potential takeover target. Amulsar is a simple and manageable project and could fit
nicely with midtier producers that have familiarity
with the region.
TGR: Let's move on to a
producer that may not be on the radar of some investors, Dundee Precious
Metals. Tell us about Dundee and why you like the story.
LO: I like Dundee Precious
Metals because it has production growth, it's a low-cost producer and it has
a pipeline of projects. Its largest operation is the Chelopech
underground mine in Bulgaria. The company is currently expanding underground
operations and we should see a step change in production next year. I expect
production—company-wide—to increase by about 20% in 2013 to over
170 Koz. I expect cash costs to be below $450/oz this year and next. What makes this story a little
different is that the company also owns a smelter in Namibia, where the
gold-copper concentrate from Chelopech is
processed.
TGR: How does Dundee get the
material from Bulgaria to Namibia?
LO: The concentrate is
transported to Bourgas, Bulgaria's largest port on
the Black Sea, for sea shipment to Namibia. It is then transported by rail to
the smelter from the Atlantic port of Walvis Bay. Tsumeb
is one of only a few smelters in the world capable of treating arsenic
bearing concentrates such as the one produced at Chelopech.
It is a long way to go but when it comes down to it, Dundee is a company that
is making money.
Its development project
in Bulgaria, Krumovgrad, is going through the
permitting stages right now. We expect that to be in production in 2016.
TGR: We have talked about the
cautious optimism among institutions that might jump into mining equities or
add them to their portfolios. Do you have any thoughts about what you see
happening as we go into the fourth quarter of 2012?
LO: I think optimism is
starting to come back, but it is going to take a while. Third-quarter (Q3/12)
financial results should be decent. However, I cover some West African names,
and Q3/12 could be relatively weak for some of those companies because of
heavy rains that the region has been experiencing.
Going forward, a lot of
the midtier and large-cap producers are expected to
have a good Q4/12. Many have had heavy backend-loaded years. The combination
of optimism in the market, the stronger gold price and better results toward
the end of the year is going to have an overall positive impact on the market
and the inflow of funds to the sector.
TGR: Some North American
investors don't understand the potential in West Africa. Do you feel like
West Africa—Côte d'Ivoire, Burkina Faso, Ghana—represents
an opportunity in terms of mineral wealth and share price appreciation for
juniors that are developing projects or producing there? Is it a
misunderstood jurisdiction?
LO: There is significant
mineral potential in that part of the world. However, in certain countries,
there are higher-than-average cash costs due to limitations with
infrastructure and power costs. Political risk in some regions is the other
issue to consider. There have been a number of blowups in West Africa
politically, including in Mali and Côte d'Ivoire. That has drained some
confidence and I don't see that changing quickly going forward. Companies
with a lower risk profile in North America and parts of South America, and
companies with access to good infrastructure and lower power costs, will
trade at a higher premium, in my opinion.
TGR: Are the political risks
in West Africa higher than the risks in, for instance, regions surrounding
Armenia or Bulgaria?
LO: It is hard to
generalize, because you have to look country by country. I think the
perceived risk in West Africa is a little overblown. Companies even in
Bulgaria have had permitting issues in the past. However, Bulgaria is pretty
stable politically and has excellent infrastructure. I wouldn't necessarily
compare Bulgaria to countries in West Africa. Ghana is an exception. It is a
very stable country with a very established mining industry.
TGR: Do you think West
African countries get too much of a discount sometimes?
LO: I don't necessarily
disagree with that statement. Some investors are not familiar with countries
in West Africa. They tend to put all of them in one basket. If something
happens in Mali, shares of a company with an asset in Burkina Faso also
fall—when there is really no relation or connection. In general,
European investors are probably a little bit more in tune with what is going
on in Africa.
TGR: Thank you, Leily.
LO: Thank you.
Leily Omoumi, a gold analyst with Scotiabank in Toronto, holds a degree in mechanical
engineering from University of Toronto and a Master of Business
Administration degree from the Rotman School of
Management.
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DISCLOSURE:
1) Sally Lowder of The Gold Report conducted
this interview. She personally and/or her 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: Lydian International Ltd. Streetwise Reports does not accept
stock in exchange for services. Interviews are edited for clarity.
3) Leily Omoumi: 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.
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