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Equities and Economics Report writer Victor
Gonçalves says he favors "no-brainer" companies, meaning
those you don't have to worry about. In this exclusive interview with The
Gold Report, Victor highlights several companies—some no-brainers,
some promising juniors—and offers his perspectives on long and
short-term investor commitment.
The Gold Report: Victor, one of the big headlines since we last spoke is
Europe's loan to Greece. Some are calling it an E.U. bailout. As an
economist, what's your perspective?
Victor Goncalves: I think it's a positive thing actually, given the
parameters. A lot of your Austrian guys would say this is the devil's work
and you should let markets run free. Given the economic policies of the
European Union, which is not a free market, that's probably one of the only
options it has.
TGR: What impact is this going to have on the markets?
VG: It'll have a positive impact because what it basically says is
we're not having a country go into default. That's the short-term impact. The
longer-term impact isn't just Greece, it´s the bigger picture in
relation to the EU. Will more countries come out of the closet with bad debt?
I don't know if that's the case, but I'm suspecting that might happen.
TGR: When we last spoke in January, you said that the economic
fundamentals weren't stellar and you were expecting a correction within the
markets. The TSX is still trading around 12,000, while the Dow remains around
11,000. Do you still see a correction coming and if so, when can we expect
it?
VG: We actually did get a correction, albeit a small one. We did have
about a 10%, 11% drop in the market. It wasn't as much as I would've liked to
have seen, but it still happened, nonetheless. The fundamentals of the market
really act in weird ways, so I'm not sure we're going to see the correction
we should see in the short term. Technically, we should be seeing one quite
soon. We should've seen one already.
If you look at the TSX Venture, which is a better barometer because it shows
a better picture of who is putting money in venture capital, it's moved up
parabolically recently. So that has to cool off a bit. Whether it will do it
now or in a couple of months, that's a lot harder to tell. It's a situation
where investors really need to watch the market a lot closer for the
volatility. Investors need to watch for the change in sentiment. It's a
little harder to figure out now, compared to what it was even a couple of
years ago when you could better predict when these things would happen.
TGR: We're currently in a decent earnings season. Historically, after
a good earnings season we've seen corrections. Some are saying that because
the mood is positive we won't see a selloff this time. What's your opinion?
VG: There's two ways to look at this. Earnings can look good, but what
kind of expectations are we giving ourselves? That's really what it comes
down to. If we reduce our expectations a lot and then all of a sudden we meet
those expectations, we end up fulfilling our own prophecy. So I think short
term, the market will probably do well if earnings levels are met, given the
current sentiment of the market. That's because we've lowered the bar. Longer
term is the issue. In the long term if nothing has changed, or if a little
has changed, the problems are still there.
Realistically we'll probably see a rally in the Dow. Even the TSX should
probably jump, but I don't think a ton. We are also coming into seasonal
weakness in the summer. Adding all those things up means that we're probably
going to see some strength near term going into the summer, and then a
selloff going into the summer.
TGR: If there's a summer selloff, how would you advise investors to
play that correction?
VG: There's multiple ways of doing it. The easiest way to do it is to
look back in history and see where the corrections have happened. Typically,
you're looking at the middle of May. Just sell the stocks that you've made
money on.
Now if they're really good stories, stories that you should be involved in
long term, then have a trading position and a core position. That core
position is something you want to build; it's one that you only want to sell
once you hit your target, which should be either full valuation of the
company or a level where you feel comfortable selling. The trading position
is something that you keep building and peeling away as the market dictates.
TGR: Do you have any companies in mind that you see presenting these
kinds of opportunities?
VG: Oh, absolutely. The first one is a no-brainer and I love
no-brainer stories. No-brainer stories are great because you don't have to
worry about them. Century Mining Corp. (TSX.V:CMM) is one of those no-brainer stories. Century Mining
got really beat up for quite a while. Then it turned around quite nicely for
multiple reasons. One reason is a Russian group bought 45% of the company to
get the company into production. They got the money they needed to put their
Lamaque Mine into production. It's not in production yet, but they're working
on that right now. What's interesting is the numbers. Between their Peruvian
operation and their Quebec operation, which is the Lamaque Mine, the company
should be producing between 140,000 and 150,000 ounces of gold a year. All-in
costs should be around $460 an ounce. So you're looking at a company that
could be making in the order of $70 million or $80 million a year before
taxes. You factor a 10 or 12 multiple into that, which is quite low, and you
could be looking at a stock price that is $2, $2.50 just for fair valuation.
The share price is currently at $.60. It's moved up a little bit in the past
couple of weeks-month, but it's still very cheap. That's a no-brainer.
TGR: Is Century Mining something you would hold on a long-term basis?
VG: I would and do have a core position on Century Mining. The company
has 6 million ounces of gold in all categories as it is now. To date it's
produced 9 million. I think the blue-sky potential is multiple millions more.
That's certainly a company that can expand production. It can potentially
even start consolidating the Val D'or area just by default of having a
stronger stock price and a lot of money in the bank. Whether it is Century or
some else like Agnico-Eagle Mines (TSX:AEM), I think that it is a likely scenario.
TGR: Any other no-brainers out there?
VG: There are companies that aren't necessarily absolute no-brainers
that are still significantly interesting. Kent Exploration Inc. (TSX.V:KEX;
PK SHEETS:KXPLF) is one that is
doing very good work and building shareholder value. They're trading around
the $.20 range. We've talked about them in the past. They're separating their
assets into two different companies to give Kent, and ultimately the new
company, Archean Star, shareholders more value.
A lot of times you'll see companies have 10 properties in their portfolio and
really one of them is getting value, maybe two. There are eight or nine
others in the portfolio, so the way to unlock that value is to put them in a
vehicle where they can get all the attention that's needed to build those new
projects. Graeme O'Neill, the president of the company, saw that. Very quickly
he decided that a spinning off of the Australian assets and the New Zealand
assets into a new company was the best way to unlock value for the
shareholders while maintaining the other properties in a vehicle that could
be worked on. So Kent right now is at $.20. What they're doing with their
spinoff is with every four shares you own of Kent you'll get one of Archean
Star. You'll be able to participate in both stories just by owning one.
TGR: Victor, share price is typically calculated by ounces in the
ground and progress toward production. Why does splitting it into two
companies provide more value to the shareholder?
VG: Let's say you have a company and it's got four projects. Say the
company has got 50 million shares that are trading at $.20. That gives you a
$10 million market cap. Now let's say one project has 600,000 ounces. That
project should be worth say, $8 or $9 million. Then you've got a bunch of
other projects that are effectively worth $1 million. The market tends to
value what you're working on now. The market doesn't look at the fact that
you've got three other projects. They're looking at what can become tangible
soon or reasonably soon. The only thing that's going to become tangible soon
is what you're working on now. So what ends up happening is the stuff that's
on the sidelines or in your portfolio ends up getting zero value. If you look
at 50 companies in that situation, you'll find that probably 50 of them have
the same problem.
The other reason is because, quite frankly, you're going to dilute your
company to raise the money you need to work on all the projects. For example,
to work on one project you need $3 million. If you want to work on say two
projects you need $8 million. You've got to raise a lot more money so your
share structure gets shot. The problem is all that work will not get
reflected in the stock price. So the best way to do it is to get a new
vehicle that can raise money for one particular project or a set of projects
that can be the focus.
So what happens is you get Project X with a valuation on it and then you've
got a small number shares with a higher nominal price. You can raise more
money with a higher stock price, consequently issuing less paper. How you
unlock shareholder value is the price of the shares has to be high to make it
worth anything. The market capitalization can move higher and higher and
higher, but if you're issuing shares at an even faster pace, dollars per
share, or cents per share will go down long term. Even though the company's
gotten more value, what you paid for your shares ends up going down. Spinning
off the asset makes a lot more sense.
TGR: In January, gold was still around $1,000. We've gone up to
$1,150. Where do you think gold is going as we head into the summer and
through the rest of 2010?
VG: You're going to see technical moves one way or the other. You may
see a drop to $1,000 and I wouldn't panic if that happens. You may see it run
to $1,250, $1,300. I certainly wouldn't get overly excited if that happens,
unless it holds there for a little while so it creates a new base. We're
probably not going to see a strong gold market in the summer. That doesn't
normally happen. So really we'll probably see more weakness going forward
than strength.
That being said, the price of gold-based equities still has to catch up to
$1,000 valuation of gold, let alone where we are now. So even if gold were to
come off a little bit during the summer, gold equities still have to catch up
to that valuation point before they can keep moving up. I think we're really
going to see a move in gold when we saw it last year, around September. We
might see a little strength here for the next month or so. We may hit $1,200.
We may test $1,240 but it should come off after that during the summer. For
really June, July and August it should see some weakness and that's normal.
So I wouldn't be concerned.
Long term, at the end of 2011, $1,500 I think is fair. Now if we see a huge
debacle in Europe, and let's say three or four countries start singing the
same tune as Greece, then I'm suspecting we'll see the $1,500 level come a
lot quicker.
TGR: What other junior mining companies do you see as a good value?
VG: Paramount Gold and Silver Corp.
(NYSE:PZG;TSX:PZG) looks
good. They're developing quite a strong asset, 2.6 million ounces of gold
equivalent. That being said, I think that company will take a little longer
to go anywhere. It's going to keep adding ounces. That's what that story is
about; it's just an adding-ounce story. It gives the company an intrinsic
value. As it develops more ounces, it will give the stock a higher and higher
price or a better value for it. So I think a company like this, at the current
level of $1.40, $1.50, should continue to do well. It's not going to start
screaming up in price, but it's going to have a steady increase going
forward. It's also going to get insulated against market activity a lot more
because it has that intrinsic value. You can say these shares should be worth
X because there's X amount of ounces of gold associated with it. So a company
like that is going to fair quite a bit better against a company that still
has to find their first or second ounce.
TGR: Anybody else in this category?
VG: Yes, we have Otis Gold Corp. (TSX:OOO) in that category as well. They've got ounces, and
they've already shown about 700,000. They also have exploration that they're
doing. So they have this intrinsic value from the current ounces they have.
Plus they have the upside potential that you get when you're trying to prove
up more ounces and that's what they're doing. Otis Gold, in the $.50 range,
is actually quite inexpensive given the number of ounces they have, plus
their exploration upside potential.
Let me talk about one more company in all of this. This one kind of goes
against everything I just finished saying. We're talking about all these
companies with ounces that are defined, companies that have an intrinsic
value. Richfield Ventures Corp.
(TSX.V:RVC) is entirely
different in that regard. They don't have a resource defined yet. This is a
discovery story. Richfield is in the process of finding and proving to us a
new gold camp in British Columbia. There could be a lot of activity with that
company this summer. They're going to be doing a 25,000-meter drill program
to define what some people are calling 4 to 7 million ounces of gold, which
is very significant. They're able to do this rather inexpensively, and they
also have a lot of money in the bank to do it with. They'll be sitting on
somewhere in the range of $15 to $16 million in cash right now if you
consider all the warrants that are well in the money. This is a very
interesting situation because they're in the process of proving now what I
think will be a new gold camp. They entered the last hole they drilled last
year that gave 1.25 g/t over 329 meters ending in 5 g/t over the last 9
meters. They recently announced that they have re-entered that hole and are
planning to take that hole to over 700 meters. In that announcement they said
that they were past the 500-meter mark and are still in the same rocks that
they got in the first 329 meters. This will be a very exciting story,
especially if they come up with the same spectacular results that they have
been getting so far.
TGR: Very interesting, Victor. Thanks for spending time with us today.
Victor Gonçalves developed a strong background in economics at the
University of Winnipeg, where he served as a Professor's Assistant as well as
earning his degree. His Equities and Economics Report has been accurately picking winners and calling
market direction. In 2007, for instance, he correctly predicted the Dow Jones
topping 14,000 points and pegged uranium reaching $136 per pound and many
more. In addition to EER, Victor also produces the Green Dollar Report as well as writes for a number of print and
electronic publications including CIM Magazine (Canadian Institute of
Mining), Western Standard, Barron's and Kitco. He also has been featured on
BNN, Mining Industry TV and at numerous industry events and conferences.
The
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