The Gold Report: Many of the people we interview have a
theory about why gold is performing poorly this summer despite so much global
uncertainty, especially in China and Greece. What's your theory?
Joseph Fazzini: Gold typically plays numerous roles, including
being a hedge against inflation, devaluation and economic turmoil, but it's
still a commodity. Most commodities typically come under pressure in a
recessionary environment. Right now, the global economic landscape isn't all
that promising, inflation remains minimal and investors prefer other
safe-haven investments (i.e., U.S. dollar). As a result, we expect gold to
continue performing in-line with most other commodities and remain under
pressure.
TGR: How low can gold go?
JF: Recent events have shown that the price of gold can move
without rhyme or reason. While some have suggested that opportunistic
investors have conspired to drive down the price of gold, weakened investor
sentiment has also played an important role. Rather than try to hedge
inflation or economic uncertainty with gold, investors from around the world
have sought refuge in safety assets like the strengthening U.S. dollar, which
moves inversely with gold. With Chinese, European and North American equity
markets on precarious financial footing, gold remains out of favor and the
bottom is tough to call.
TGR: What about sub-$1000/ounce (sub-$1,000/oz) gold?
JF: With the price of gold recently declining to a five-year low of
US$1,088/oz, sub-$1,000 is certainly a near-term possibility. While we hope
for the best, we continue to advise caution.
TGR: Is it Dundee Capital Markets' view that gold could rebound in
2016 or possibly 2017?
JF: We have a constructive long-term view of gold, but in the near
term we still see a lot of risk. We're not ready to call a gold rebound. We
would need to see some serious developments in the global economy that would
support a rebound in gold.
TGR: What would some supportive measures be?
JF: Further quantitative easing would be probably the most
encouraging thing we could see for the gold price. As this scenario would
entail more money being pumped into the global economy, we expect this could
drive investors out of fiat currencies and into hard assets, including gold,
which can't be printed. With indications of U.S. interest rates rising in the
coming quarters, it's clear that the U.S. is unlikely to pursue that route,
but we could see it happen in Europe and China. In addition, a weakening of
the U.S. dollar would inherently be positive for gold as it would become more
affordable for foreign nations, most notably China and India, which have been
major buyers of bullion.
TGR: We have the situation in Europe with Greece and stock market
weakness in China. Which is more likely to affect the gold price?
JF: In our opinion we consider the recent events in China to be of
greater significance. Apart from China having one of the largest global
economies, the Chinese also represented roughly 25% of global gold demand in
Q1/15. If things were to materially worsen in China, we think that would have
a far more pronounced effect on the price of gold than anything happening
with Greece.
TGR: With such uncertainty surrounding the marketplace, what are
three things that become more important in gold equities, especially the
micro- and small-cap stocks?
JF: With continued volatility expected in the gold space, we
consider the three prerequisites for investment to be ownership of quality
low-cost assets, defensive balance sheets and responsible management teams.
You want to look for low-cost operations that continue to generate cash
despite gold price fluctuations. Next, you want companies with defensive
balance sheets. For the most part higher leverage will result in
significantly higher risk, and so you want companies with good cash balances
and limited debt. Those names are going to be better positioned to weather
prolonged market weakness. Lastly, having a responsible, experienced
management team is key. You really want to be in a position where the company
is being responsibly managed in tough market conditions. Whether that means
laying people off, shutting down an operation or selling the company you need
to have the people willing to make the best decisions for shareholders.
TGR: Would you tell us about consolidation in the industry?
JF: Dundee Corp. (DC.A:TSX) Chairman Ned Goodman is about to become
co-chairman of Oban Mining Corp (OBM:TSX), the banner under which
several small- and micro-cap gold names are being consolidated. The emergence
of Oban reflects a changing environment for the juniors. There was a time
when these companies could advance independently and get access to capital.
The reality today is that access to capital is limited to companies with cash
and credibility. In our view, the Oban strategy is the right approach as it
consolidates a couple of cash-rich micro-caps with attractive, yet
underfunded development projects. When you add in a reputable and experienced
management team and board of directors, we think that these assets are far
better positioned to advance within Oban than they would have been
independently. We think investors should want to see more deals like this.
TGR: Should investors expect mergers and acquisitions (M&A)
activity to gain momentum throughout the remainder of 2015 and into 2016?
JF: I think so. As I said, access to capital will remain limited.
The consolidation of juniors and mergers among larger players are, in our
opinion, essential to longer-term survival in this industry. When companies
join together, we see potential for significant synergies through economies
of scale and streamlined management structures. If we continue to see a
challenging metal price environment, M&A is inevitable. Companies will
have little choice but to get together or they simply won't survive.
TGR: Would you talk about some of the companies that you cover?
JF: Continental
Gold Inc. (CNL:TSX; CGOOF:OTCQX) is one that I cover. The company just
announced an updated mineral resource on its flagship Buriticá project; the
new resource provides a basis for the company's upcoming Feasibility study in
2016. With significant conversion of Inferred resources into Measured and
Indicated, the new resource also provides a greater degree of confidence in
the deposit.
The next catalyst is obviously the permit. A lot of people are waiting to
see Continental get its final operating permit. The permit would allow the
company to build-out and expand Buriticá from its current small-scale
production. Recognizing the importance of the permit from a derisking
perspective, our expectation is that Continental will receive the permit in
the coming months. The Feasibility study will also play a key role as it will
provide a better indication of potential project parameters and economics.
TGR: What does Buriticá look like to you at this stage?
JF: It's quite clear this is a high-grade underground mining
scenario. The question is how big will it be? And what will it cost to
develop Buriticá? The preliminary economic assessment (PEA) gives us a rough
sense of what that project will look like, but the differences between the
PEA and the Feasibility will be significant due to the additional amount of
drilling and technical studies that will be completed.
TGR: If Continental receives its final operating permit, do you see
it as a takeover target?
JF: Yes. Given the size of the deposit, the likelihood of an
extensive mine life and the potential for potent project economics, we think
Buriticá is a project that a lot of companies would be interested in.
TGR: What is your target on Continental?
JF: My target is $4.75, with a Buy, Speculative risk rating.
TGR: What are some companies you cover with low-cost assets, strong
balance and responsible management teams?
JF: Among the names that we like, B2Gold Corp.
(BTG:NYSE; BTO:TSX; B2G:NSX) remains a favorite. It offers the
combination of production growth, attractive cash costs, a defensive balance
sheet and a compelling valuation. The company recently commissioned the
Otjikoto gold mine in Namibia and it's performing well. The mine has further
improved B2Gold's cash cost profile, and it should help the company drive
consolidated production well in excess of 500,000 ounces (500 Koz) this year.
The company still has further growth ahead with the Fekola gold project in
Mali, which is expected to start production in 2018.
TGR: B2Gold is thumping its chest about Fekola. Should investors
buy the hype?
JF: We think so. We like the project. It offers both high grade in
an open pit and the potential for robust project economics once it is up and
running. Given the limited amount of exploration in the past, we see
potential for the deposit to get bigger through extension along strike and at
depth.
TGR: What's your target on B2Gold?
JF: $2.75 and a Buy rating.
TGR: What else does Dundee like?
JF: Detour
Gold Corp. (DGC:TSX) is another favorite. We consider the company's
Detour Lake mine to be a unique asset that supports a significant production
profile of over 500 Koz a year. As production continues to ramp up, we expect
to see further cost optimization, which will lead to meaningful cash flows
over the next 20+ years. Detour Lake is located in northern Ontario, a
jurisdiction with low geopolitical risk, which further enhances the company's
appeal. We think it's one of the best single-asset producers out there.
TGR: What does Detour have to do to get a rerating?
JF: Generate free cash. People look at Detour and they still see it
as a ramp-up story. It's still growing. The operations continue to show
improvement every quarter but people want to see the company become a
meaningful free cash flow generator.
TGR: The Street's consensus target on Detour is around $16. What's
yours?
JF: Our target is $17 with a Buy rating.
TGR: What are some other companies that you like?
JF: Kirkland
Lake Gold Inc. (KGI:TSX) is another one that we like. The company has
been a strong performer through the past 12 months on the back of an
operational turnaround at its Macassa mine in northern Ontario. It has a very
high-grade ore body with extensive mine life and a vastly improved balance
sheet. Given the operational results we've seen, Kirkland is well positioned
to continue generating robust cash flows through growing production over the
next few years.
TGR: Kirkland Lake reported earnings of $19.8 million ($19.8M) in
fiscal 2015 versus a loss of $11.08M in 2014. Was that in line with your
estimates?
JF: Indeed. Production was pre-released so there weren't really any
surprises. There has been such a big difference in that company over the past
12 months, predominantly due to management changes and a focus on mining
higher grades rather than moving marginal tonnes.
TGR: What's the next catalyst for Kirkland?
JF: The next quarter's results. The operational results are going
to be a key catalyst, along with ongoing exploration work.
TGR: What is your target there?
JF: $7.75 with a Buy rating.
TGR: What company did you recently initiate coverage on?
JF: SEMAFO
Inc. (SMF:TSX; SMF:OMX). The company is another name that we really like
for a variety of reasons, but predominantly because it has a track record of
under-promising and over-delivering. It has delivered on its guidance six out
of the past seven years, which is excellent. In addition, it has a meaningful
production profile, with almost 250 Koz a year coming from its Mana mine in
Burkina Faso. Mana is a low-cost mine with good grades and an extensive mine
life ahead of it. The other attraction is the Natougou project that SEMAFO is
advancing in Burkina Faso. A Feasibility study is expected in 2016 and
Natougou has all the indications of a world-class mine.
TGR: About 16 analysts cover SEMAFO. They seem mostly torn between
Buy and Hold. What's your view?
JF: I think the disparity between the different views is that some
people look at the valuation and think that SEMAFO is expensive. We believe
the company deserves a premium given the quality of its assets, the track
record of its management team and the growth profile that the company offers.
All those things together suggest that this is a company worth owning in a
portfolio.
TGR: What's your target on SEMAFO?
JF: $5 with a Buy rating.
TGR: Are there other names you would like to discuss?
JF: Claude
Resources Inc. (CRJ:TSX) has performed very well on the back of a
turnaround at its Seabee mine in Saskatchewan. The company began generating
meaningful cash flows after it changed its mining methods and focused on
higher-grade portions of the deposit. As a result, Claude has been able to
pay down debt while repeatedly beating its own production and cost guidance.
TGR: The company recently increased 2015 guidance to 68–72 Koz a
year, an increase of roughly 4 Koz. Is that meaningful?
JF: We consider the increase in guidance to be meaningful and
totally achievable.
TGR: Claude recently added 3,000 hectares to its land position in
Saskatchewan. What's the thinking behind that move?
JF: The ground around the Santoy mine complex is important for
Claude. Santoy has good grade and from an exploration perspective, it's quite
prospective ground. The company wanted to lock up those claims and given it
acquired the land for very little money, we think the move was prudent.
TGR: And your target on Claude?
JF: $1 with a Buy rating.
TGR: What's your advice to retail gold investors during this summer
of global economic discontent?
JF: Everything comes back to quality. Investors should focus on
quality. Don't buy the high-risk names in the hopes of outsized returns. Buy
companies with strong balance sheets, solid production assets and responsible
management teams.
TGR: Thank you for talking with us today, Joe.
