The Gold Report: Jocelyn, your expertise lies in crunching the numbers and quantifying the catalysts that affect equity values. Generally speaking, high commodity prices benefit the companies that mine them. Are commodity prices also important to the valuation of pure exploration companies?
Jocelyn August: The difficulty in valuing a pure exploration company is the lack of revenue from actual mining operations. You have to consider commodity prices in valuation because the higher the price a company will be able to get for its commodity, the better. However, if the company's projects are several years from production, the current and near-future commodity price is not that relevant.
For pure exploration companies, catalysts—or share-moving events—are likely to be events that demonstrate how well the company's projects are meeting important milestones. Being aware of these catalysts can make an investor a better judge of the amount of risk involved and of how much time remains before the company will be generating revenue from a project.
TGR: Is it fair to say the commodity price is useful for arriving at a net present value (NPV) to be used in a preliminary economic assessment (PEA), but that you need to be open to revision over time?
JA: Yes. Companies often do a lot of sensitivity analysis in calculating the NPV for their PEAs. Lately, gold companies have been using a $1,200–1,250/ounce (oz) gold price, even though it is now trading at $1,700/oz. Companies tend to be conservative because they realize that price may not hold until they take a project to production.
TGR: Which catalysts in the life cycle of a precious metals company do you track?
JA: There are catalysts, or predicted events, with a specific timeframe that we expect will affect the stock price of a company. At CatalystTracker, we researched which catalysts move stocks more than others do. For the most part, we found that the catalysts are generally the same across different types of companies, exploration and production versus pre-exploration, for example.
Most precious metals projects move from pre-exploration to exploration and then feasibility, followed by development or construction and finally into production.
The catalysts in pre-exploration typically involve testing the project area for the presence of minerals, usually without having to drill. Companies do a lot of airborne geophysics to determine good mineral targets. The catalysts here are successful results from the Z-Axis Tipper Electromagnetic (ZTEM) system or the Versatile Time Domain Electromagnetic (VTEM) system. Companies use them to identify where to begin exploratory drilling or to determine if the area has good prospects at all. Other catalysts at this stage include assaying or geochemical surveys to test for the presence of mineralization.
When these catalysts occur, we see varying effects on the stock price, depending on the characteristics of the company: size, market cap, exploration-and-production versus a pure exploration company, the number of other projects in its pipeline. For a small company, such as Liberty Star Uranium & Metals Corp. (LBSR:OTCBB), successful ZTEMs could be a very positive event for the stock price because they signify the value of further exploration and progress toward project milestones.
TGR: So the ZTEM and VTEM could affect share price?
JA: Definitely, in particular if they show noticeably positive or negative results. For smaller exploration companies just getting started, ZTEM and VTEMs could be very important.
TGR: Which catalysts come into play during exploration?
JA: The exploration phase involves evaluating the resources to quantify the grade and the tonnage of a mineral prospect. The ultimate aim is to generate enough drilling to satisfy the economic and statutory standards of an ore resource, in the form of an NI 43-101.
Typically, Indicated and Inferred resource carries the least geological confidence. Indicated resources are economic mineral occurrences that have been sampled to the point where an estimate can be made regarding the resource characteristics and the contained minerals. An Inferred resource is simply the amount of the mineral that can be estimated with a low level of confidence.
Generally, the Indicated and Inferred information comes out in the initial resource estimate. Our research shows that the initial resource estimate catalysts have a fairly large impact; moving the stock price up or down 7%, on average.
TGR: What is the effect of a company issuing a Measured resource?
JA: With a Measured resource, the company has done further testing in the ground and can say with much higher geological confidence that there is an ore resource. Compared to the Inferred and Indicated catalyst, the Measured resource announcement tends to move the stock only 6%.
You can see that an initial announcement would be more volatile for the stock versus a release that simply confirms continued exploration and progress.
We also see in the exploration phase a lot of different exploratory drilling being completed and results released. These announcements can move the stock price up or down 8% on average. We consider drilling results to be large-impact catalysts.
It makes intuitive sense that the smaller market-cap companies or the pure-play exploration companies would experience larger stock price movement upon the announcement of these drilling events compared to a larger company that already may have projects in production.
TGR: What are the catalysts in the feasibility phase?
JA: This is when the company defines its reserve, quantifies the grade continuity and the mass of the ore and determines the economic feasibility of actually extracting the mineral.
The elevation to reserve status is very important because it allows the deposit to be called bankable and to be an asset upon which loans and equity can be drawn.
In this phase, we see a lot of bulk sampling, metallurgical test work, and engineering studies and assessments. So here are announcements of the results of these tests and of feasibility study completion results. Feasibility studies tell investors whether it is economically feasible to produce the precious metal from this location.
We break feasibility catalysts into three different types: 1) initiation, 2) completion and 3) a go/no-go—or a final round—decision. We find that all three have above-average impact, with 6.4%, 7.2% and 9.2% movements, respectively. Because companies at the feasibility stage are determining how economically viable the prospect is and deciding whether to proceed with the construction and infrastructure, it makes sense that these types of announcements, positive or negative, would have a large effect on their share price.
There are often regulatory catalysts as well: environmental impact assessments, government approvals or permits, Environmental Protection Agency decisions and aquifer exemptions throughout the exploration, feasibility and development phases.
These regulatory events can vary depending on the location of the project and the amount of regulation, the degree of concern over environmental issues or the presence of an indigenous population. Although it can be difficult to follow all of these regulatory events, we follow them in CatalystTracker. We have determined that on average, government approval or permit decisions are catalysts with an up or down 7.26% move.
TGR: These environmental licensing events are included in feasibility studies, correct? I would assume environmental licensing would be an important event.
JA: It definitely is important. The economics of a project may work in getting the mineral from the ground, but permitting and governmental approvals may be too expensive.
When this catalyst happens depends on the project. Some companies may need permits to begin exploration or not until later on. They may be able to do the feasibility studies concurrently with environmental or approval permits.
TGR: And next comes construction.
JA: After feasibility and permitting, we move into the mine development, or construction, phase. Depending on the type of mine, open pit or underground, as well as existing infrastructure, the timeframe for construction can vary.
We have identified the completion of construction as a large-impact catalyst, with an up or down 8% move. Interestingly, construction moves stock prices more than the start of production, which moves the stock just over 5%.
TGR: Does that mean that when construction is done, the start of production is already baked into the price?
JA: At first, it seems a bit odd, but once construction is completed, the start of production soon follows, and, in effect, has already been priced into the share price.
TGR: Once construction is completed, what is the next catalyst?
JA: Once companies are generating revenue from production, they often look to expand. This could be in the form of adding mill capacity or a new deposit. In some cases, a company starts production with an open-pit mine and adds underground mining infrastructure later on. These types of expansion add to a company's revenue stream, but usually do not result in very large stock movements, about 5–5.8% on average.
TGR: Next, let's look at how the catalysts you just described might affect the valuations of some real companies. Where would you like to start?
JA: This will be a big quarter for Brigus Gold Corp. (BRD:NYSE.MKT; BRD:TSX). It will announce a PEA for an expansion of its Black Fox project, looking at the 147 and Contact zones there. We also expect a PEA for the Grey Fox complex, which is highlighted in our Q4 Outlook Report.That PEA will incorporate its Oct. 25 resource estimate announcing its Indicated and Inferred categories.
TGR: Those Indicated and Inferred numbers were dramatically higher than the December 2011 announcement. However, the stock is down 10% since then. How might an investor play an event like that?
JA: It is extremely important for investors to be aware of these potentially market-moving, binary events. It can be hard to discern what will be a positive and what will be a negative, but you can use it multiple ways with multiple trading strategies.
For example, you may want to capitalize on catalysts before they are fully baked into the share price. If you think it will be a gray area, going up or down, you may not worry about trading that stock at that point. You can also hedge your bets up or down using stock options.
At CatalystTracker we track these future events to identify potentially large-impact events that will affect the share prices of the companies involved. Many of our clients use the CatalystTracker to minimize their risk or to better understand which events to capitalize on and which events to avoid trading on.
TGR: Do you expect the PEA on Grey Fox will move the market for Brigus?
JA: That is hard to say without knowing more about Grey Fox. It could be a great addition for Brigus because it would use the Black Fox mill and infrastructure. That lowers the cost of Grey Fox. We need to find out how big Grey Fox actually is.
Brigus also has the Goldfields project, which it has kept on the back burner while getting Black Fox into production. If it does go ahead, Goldfields will at least double Brigus' production to an expected 100,000 oz (100 Koz)/year gold.
TGR: Brigus is a very small company, with a $215 million (M) market cap. These events could really make a difference in a company this small; for example, Goldfields would triple its production.
JA: What Brigus actually said was that it wanted to wait on a Goldfields decision until Black Fox was producing 25 Koz/quarter gold, which works out to 100 Koz/year. Once it got to that point, it would be doubling.
TGR: What other companies are expecting catalysts?
JA: We expect a PEA from MAG Silver Corp. (MAG:TSX; MVG:NYSE) for its Pozo Seco deposit at Cinco de Mayo very soon. MAG Silver previously announced an initial resource estimate, but we want more information regarding the project's NPV, as well as estimated costs. A positive PEA might encourage MAG Silver to commence the permitting process and do feasibility studies to provide more evidence for Pozo Seco.
TGR: Its stock is up 36% over the past 12 weeks, despite having delayed its PEA for the Pozo Seco portion. Delayed PEAs can be the kiss of death.
JA: The difference is that MAG is working on so many projects; it has not put all of its eggs in one basket. As a result, there is less risk in this one project, compared to Brigus, where the company only has a few projects.
Speaking of having more than one project, we are looking for permit approval of MAG Silver's Juanicipio project. If the company can get permit approval, which we have been waiting on for a couple of months and is now expected in Q4/12, it could start construction at the beginning of 2013. That could be a big event for it.
TGR: Is there another company you want to mention?
JA: We expect another environmental impact decision for Taseko Mines Ltd. (TKO:TSX; TGB:NYSE.MKT) on its New Prosperity mine, a gold and copper mine in Canada. Two catalysts for Taseko depend on approval of the environmental impact assessment—the construction start and production start catalysts.
The company submitted its environmental impact assessment on Sept. 20 and a decision should be made between now and mid-December. If the environmental impact statement is denied or delayed, it could be bad for Taseko.
TGR: Is that within the time range for a decision?
JA: I believe the Canadian Environmental Assessment Agency (CEAA) has 365 days to issue the final assessment decision from the initiation of the process. The process officially commenced in November 2011. In November 2010, Taseko was denied federal authorization, and the stock definitely reacted negatively to that.
TGR: You mentioned Liberty Star as an example of how a catalyst can affect a small company. Can you tell us more about its upcoming catalysts?
JA: We are looking at the ZTEM survey for Liberty Star's Tombstone project, which is a copper mining project in Arizona. It received permit approval for access roads to Tombstone in late September, but the permits require an archeological survey to ensure that the access roads or drill sites did not destroy any antiquities.
TGR: What does Liberty Star mine?
JA: Its North Pipes Super Project is uranium, but drilling exploration there is suspended. The company expects to restart drilling in 2013 if uranium prices stabilize.
Tombstone is copper. It looks like phase 1 drilling on the Hay Mountain area of Tombstone will start in the fall. Liberty Star seems to be doing a lot of exploration at this point.
TGR: Do you have one last name to share?
JA: Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ) expects to issue a bankable feasibility study on its Pitarrilla project, a silver mining prospect in Mexico, before year-end.
In late 2011, it filed a mineral resource that demonstrated Probable mineral reserves of 91.7 Moz, Measured, Indicated and Inferred. If the feasibility study is positive, the company could draw loans and equity against that asset. Right now, Silver Standard has just one producing mine, so the addition of another would improve its portfolio.
TGR: Jocelyn, thank you for your insights into catalysts and how they work.
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DISCLOSURE:
1) George S. Mack 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: Brigus Gold Corp. and MAG Silver Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Jocelyn August: 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.
