The Gold Report: You have doubled down on your declaration
that "Nov. 5 was the bottom for gold and gold equities." What makes
you so certain?
Gwen Preston: The primary reason is fundamental: supply and demand.
Demand for gold remains strong despite headlines about exchange-traded funds
liquidating their holdings. Physical buyers are buying a lot of gold. These
include the central banks of China and Russia, countries pushing for an
alternative to the U.S. dollar for international trade, and individual buyers
in India and China, people who have long believed in gold as a store of
value. The latter buy when it's cheap, which has resulted in $1,200 per ounce
($1,200/oz) becoming a real bottom for gold. Every time the price falls
toward $1,200/oz, the Shanghai premium—the extra amount that buyers in China
are willing to pay at that moment to get their hands on an ounce of
gold—spikes.
Meanwhile, gold supply is starting to shrink. Producers let costs climb
out of control during gold's bull market. When the bear market came, they
then had to cut costs. New mines and mine expansions were deferred or
canceled and output from higher-cost operations was cut back. We have reached
peak gold—we will never again produce as much gold as we're producing now.
TGR: What are the other reasons in support of your argument?
GP: The second reason is that, even after expenditures were reined
in, the all-in sustaining cost to produce an ounce of gold sits at a global
average of about $1,200/oz. So the market must be willing to pay at least
that much.
The third reason is gold's intangibles: currency concerns, global debt
worries and geopolitical risk. Gold is the only currency that exists outside
the world of government manipulation.
TGR: With regard to the increasing importance of gold bullion to
Asia, is it possible that the Chinese could tell the world that the gold
price will now be determined in Shanghai rather than in London?
GP: That shift is already underway. I don't believe China will come
out and say it because China is more calculating than that. For example,
China hasn't said it is promoting the renminbi as a real alternative to the
U.S. dollar, but it has inked 25 different currency-swap agreements with
countries all over the world, including some in the Middle East in the heart
of petrodollar land.
Having said that, there are rumors circulating about China establishing
its own gold fix. The London gold has been abandoned and there is active talk
of an alternate being set up in China.
TGR: Where do you see the price of gold going this year?
GP: I see a slow steady climb: $1,400–1,500/oz by the end of the
year. We won't have a proper bull market in 2015, but we are past the worst
of the bear market.
TGR: How will the mining juniors as a class do in 2015?
GP: It's difficult to talk about the mining juniors as a class
because in periods like this the market is going sideways, and a sideways
market is made up of companies going up and companies going down. Gold
companies are more likely going to be on the rising side. And within that
group there are certain companies with projects very appealing to the majors.
Those takeout candidates will be some of the best-performing stocks this year.
TGR: How close to production must projects be in order for their
owners to be likely takeout candidates?
GP: Projects across the entire spectrum have potential, but my
favorites for the best leverage are what I call the predevelopment projects
with good economic metrics. By this I mean proof that the metallurgy works,
the infrastructure is there, the engineering is straightforward and the
resource makes sense, whether for open-pit or underground mining. In other
words, all the boxes have been ticked and these projects demonstrate very
good potential to be high margin. Projects with high-margin opportunities
will be taken out first.
TGR: We heard last year that $200 million ($200M) to $300M was the
sweet spot for takeovers. In January, Goldcorp Inc.
(G:TSX; GG:NYSE) bought Probe Mines Limited (PRB:TSX.V) for $440M. Is that higher
figure a new baseline?
GP: The Probe takeout highlighted the importance of jurisdiction.
Goldcorp could have paid less per ounce for a project of perhaps similar size
and geologic potential in a less-favorable jurisdiction, but instead it was
willing to pay a bit more for a project in Ontario, an area where it already
had existing operations, an area with infrastructure left, right and center.
Probe's Borden gold project is an example of the predevelopment project I
noted above. Probe hadn't published an economic assessment of Borden, but
undoubtedly Goldcorp ran its own numbers and was persuaded that Borden has
the potential to become a very strong mine economically.
TGR: What's your opinion of the gold majors?
GP: I'm impressed by how cheap they are. They were even cheaper two
months ago, but they're still trading at historic lows. This has resulted in
incredible opportunities for investors willing to be patient while gold
rises. The question is, of course, which companies. You want a company with
an entry point that's still low relative to its one to three year chart. You
want a company with a good handle on costs. You want a company that has a
manageable balance of debt and cash—and certainly enough cash to be able to
act on acquisitions now while projects are cheap.
TGR: Which company in particular ticks those boxes?
GP: I recommended IAMGOLD Corp. (IMG:TSX; IAG:NYSE) in November. It has cut
its gold production cost notably over the last two years. It has sold high-cost
operations and reduced general and administrative costs. It has definitely
improved existing mines. It has a manageable debt, a healthy bank account,
and we know that it is actively seeking an acquisition. The market has
noticed this and rewarded IAMGOLD with a nice price rise.
TGR: How important is it for juniors to get significant support
from new investors?
GP: Very important, especially as generalist investors have largely
abandoned mining because the sector did not give their shareholders enough return
when gold prices went from $800/oz to $1,900/oz. So miners now fight for
support from a smaller group of investors. Within that smaller group, there
are some serious contrarian investors looking to get in now while stocks are
dirt cheap. Any companies that can attract interest from those people really
distinguish themselves from the pack.
One such contrarian is Ross Beaty, who made significant investments in Kaminak Gold
Corp. (KAM:TSX.V) in August and Dalradian
Resources Inc. (DNA:TSX) in January. His investments send a clear message
to the market that these projects have true potential, and have what it takes
to either go into production or be taken out.
Beaty is not infallible. He went into geothermal energy aggressively a few
years ago and those investments did not work out. In the mining sector,
however, he is called "the broken slot machine" because everything
he touches pays out.
After Beaty and another mining market guru, Lukas Lundin, put money into
Kaminak, its shares jumped. After Beaty invested in Dalradian, its shares
rose something on the order of 20% in two weeks.
TGR: Let's talk about Kaminak and its Coffee gold project in the
Yukon.
GP: I love Kaminak. I've visited Coffee several times. It has a lot
of gold—4.2 million ounces (4.2 Moz) Indicated and Inferred—and importantly
the majority of the gold is easy to recover. Coffee is in a part of the Yukon
that was not glaciated and as a result the oxidation horizon is very deep.
That means most of the resource is soft rocks with leachable gold—the ore can
simply be scooped up, crushed and put on a leach pad.
Coffee is also in a great location in the Yukon. It's on quite a gentle
hillside. It's easy to get around. The Yukon River is close, so the site can
be accessed by barge. That really keeps exploration costs down. For actual
development, a road must be built, but that won't be too difficult. Land
claims are largely settled in this part of the Yukon. Kaminak has put a lot
of effort into establishing good relations with the local First Nations, so
political risk is quite low.
TGR: Now let's talk about Dalradian and its Curraghinalt gold project.
Unlike Kaminak, it doesn't have a lot of gold, but what it has is exceedingly
high grade, correct?
GP: Exactly. And, like Coffee, it's in a great location. Mining in
Northern Ireland is established, accepted and desirable, actually. People
there want the jobs. Unlike Coffee, Curraghinalt would be underground. In the
last bull run, the market fell in love with large, open-pit projects, but
what's really important is economic ounces. Really high grades can make
underground ounces very economic and Curraghinalt's resource has an average
grade of 10.4 grams per ton (10.4 g/t) gold.
Because of the high grade and the fact that the mine already has a
partially driven adit from a previous operator, the initial capital
expenditure is only $249M. It will produce gold at $485/oz and offers a 36.2%
after-tax internal rate of return (IRR). These are strong economics.
TGR: Can we talk about some other gold juniors with strong
institutional support?
GP: This is important because, in tough markets, companies with widely
floated stock are hurt much more than those that are tightly held. And when
companies need to raise money in these tough times, those with tightly held
shares have an easier time because they know their investors. One good
example of such a company is Pilot Gold Inc. (PLG:TSX). It is exploring three large
projects: Kinsley Mountain in Nevada, which is gold, and Halilaga and TV
Tower in Turkey, which are copper-gold.
It takes a lot of money to advance three projects and Pilot, despite the
four-year bear market, has been able to keep its treasury pretty full. That's
largely because it's part of the Oxygen Capital group of companies, which
includes True
Gold Mining Inc. (TGM:TSX.V) and Pure Gold
Mining Inc. (PGM:TSX.V).
TGR: What do you like about Oxygen Capital?
GP: It's headed up by Mark O'Dea. He and his group used to run
Fronteer Gold, which was taken out for $2.6 billion ($2.6B) by Newmont Mining
Corp. (NMC:TSX; NEM:NYSE), so clearly a track record of success. They're a
technical, science-driven team, but because of their track record of success
and the way they have interacted with and treated shareholders in the market,
they have real access to capital. Pilot, True Gold and Pure Gold all have
been able to raise money and keep their projects moving forward through a
bear market. That shows the importance of strong support.
Another example of strong support is Rockhaven
Resources Ltd. (RK:TSX.V), an Archer Cathro company. Archer Cathro is a
very well established geologic consulting company in the Yukon. It is a
project incubator run by a group of really smart geologists who know the
Yukon well. It identifies projects with opportunities and these go into a
public company called Strategic Metals Ltd. (SMD:TSX.V), which has a large
portfolio of early-stage projects. When one of those projects is sufficiently
advanced, it is spun out. This is essentially the process that created
Rockhaven and ATAC
Resources Ltd. (ATC:TSX.V).
These companies own shares in each other and share costs. Archer Cathro's
principal is Doug Eaton; together, he and Strategic own almost half of
Rockhaven's float, which provides strong support for Rockhaven's share price.
We saw the value of this kind of support last summer when Eaton and Strategic
exercised Rockhaven warrants above market value to put a few million dollars
into Rockhaven's treasury. That enabled Rockhaven to add a few thousand meters
to its drill program, which in turn supplied important data to the Jan. 26
initial resource estimate of its Klaza project in the Yukon.
TGR: Were you impressed by this resource estimate?
GP: I was. It was precisely what I expected: just shy of 1 Moz gold
with an average grade of 4.2 g/t, plus almost 22 Moz silver at 92 g/t. The
market's expectations were lower than mine. Many analysts had expected
600,000 to 700,000 oz gold (600–700 Koz). Perhaps they hadn't been to the
project or spent enough time talking to CEO Matt Turner or Jared Tarswell,
the project geologist. Klaza is very exciting.
TGR: Were you also impressed by Pilot's Jan. 29 preliminary
economic assessment (PEA) of Halilaga?
GP: What I love about that PEA is that it is shows Pilot and its partner
at Halilaga, Teck Resources Ltd. (TCK:TSX; TCK:NYSE), responding to economic
reality. The previous PEA for Halilaga, done in 2012, had an initial capital
requirement of $1.2B. As the bear market set in, the partners realized this
no longer made sense. So they cut the mine in half: 25,000 tons per day (25
Ktpd) instead of 50 Ktpd. They added a carbon and leach circuit to boost gold
recoveries by 12%. They switched to contract mine operations from
operator-owned operations. All this reduced the initial capex by half, while
keeping the net present value exactly the same. And it boosted the after-tax
IRR from 20%, not sufficient to attract interest, to 43%, a fantastic number.
Halilaga is now exactly the type of project the majors want.
TGR: What's your opinion of the gold explorers?
GP: Explorers are a harder bet right now. They are always the last
to respond to a rising gold price and the last to respond to the turnaround
from a bear market. But there are definitely some really good ones out there.
TGR: Such as?
GP: I'll name two. The first is Guerrero
Ventures Inc. (GV:TSX.V). Its Biricu project is in the Guerrero Gold Belt
in Mexico, surrounded by multimillion-ounce gold deposits. This is elephant
country, and Biricu is on a land package that's never been drilled. But it
has the right kinds of alteration, the right kind of geophysical and
geochemical anomalies, the right topography.
And Guerrero has the right people. Its head geologist is Siegfried
Weidner, a Mexico-focused geologist with several discoveries to his credit.
David Jones, an adviser to the company, is the world's expert on the Guerrero
Gold Belt. I had a long conversation with him recently about the results from
Guerrero's first round of drilling. The market wasn't super excited, but
Jones was ecstatic. The company hit mineralization. It wasn't super long
width or super high grade, but it takes time to home in on these in the belt.
I think that Guerrero has a very good chance of discovering gold there.
TGR: And the second?
GP: Precipitate
Gold Corp. (PRG:TSX.V), which is exploring the Juan de Herrera project in
the Dominican Republic. Again, this is a story of location and people. The
location is highly prospective, with recent good gold discoveries. The
company has experienced geologists and a driven management team that has
managed to keep the project going during a very tough market.
Precipitate has put only four drill holes into its project, but one was a
true hit. The initial holes were targeted based on a geophysical anomaly. The
discovery hole was right on the edge of this anomaly and Precipitate has
since extended the anomaly substantially. It is getting bigger and stronger
and coming closer to surface. I'm really interested to see what the next
round of drilling will produce.
TGR: Are there any "boutique" or specialty gold juniors
you follow?
GP: Yes. Inca One Gold Corp. (IO:TSX.V). Peru is home to many
artisanal miners who tap into some high-grade gold deposits. That ore was
taken to toll mills but many were illegal, which meant that the Peruvian
government wasn't realizing any tax revenue from it. So the government passed
legislation that standardized the industry.
This created an opportunity for Inca One. Artisanal miners must now take
their ore to regulated mills, but because many mill owners could not improve
their operations enough to meet standards there are fewer mills in operation.
Of those operating, some are better and some are worse, in terms of how much
and how quickly they pay miners for their rocks.
Inca One is working to be one of the best. The company purchased a mill in
Peru and then raised debt to upgrade and expand it. It's now milling 100 tons
per day of ore that it buys from miners. This doesn't sound like a lot, but
the reason I like this company is that it offers similar advantages to a
royalty company. Royalty companies such as Silver Wheaton
Corp. (SLW:TSX; SLW:NYSE) and Franco-Nevada
Corp. (FNV:TSX; FNV:NYSE) excite investors because they provide exposure
to rising gold and silver prices without the risks inherent in exploration
and development. Inca One also sidesteps exploration and development.
Inca One's economics are pretty fantastic. Based on a conservative
estimate of incoming ore grades, the company produces almost $1M per month in
operating revenue. Its costs are one-quarter of that, so that's annual net
cash flow of about $8M, and the grades coming in the door are averaging well
above the conservative estimate. And the fact that Inca One relied on debt as
opposed to equity to expand the mill means its share structure has remained
very tight.
TGR: Final question. If there were a Junior Gold Investors
Happiness Index and at the end of 2014 it stood at 2 on a scale of 1 to 10,
where it will stand at the end of 2015?
GP: I would say something in the range of 3 or 3.5. Investors
starting in the market now will be quite happy because they are starting at a
bottom. However, those who have been invested in the market for many years
have a lot of lost ground to recover. It's going to take a while. It's going
to take a big rebound before that lost ground is recovered, and portfolios
are back in the black again. I think that the Happiness Index will start to
rise, but it will take a year or two or three before the big run up.
TGR: Gwen, thank you for your time and your insights.
