The Gold Report: Congratulations on the new Exploration
Insights partnership, Brent and Joe. How is working on the newsletter
side different than the analyst side?
Joe Mazumdar: A lot of the work for a sell-side analyst involves
chasing news as it's released with little time for sober second thought. In
my opinion, writing for Exploration Insights is more amenable to
taking a longer look at the implications of events. The difference can be as
wide as between writing for a daily newspaper such as the New York Post
and for The Economist.
TGR: Do the two of you see the market similarly? In what ways do
you differ?
JM: Over the past decade or so, Brent has tended to focus on lower
market capitalization, low liquidity exploration companies that provide a
high potential reward but with a high risk. Brent's letter provides the
subscribers of Exploration Insights the benefit of his experience to
offer companies in this category that are filtered for red flags. I try to
provide the same filtering for the subscribers but for higher market
capitalization, more liquid developers and producers.
Brent Cook: I've been on a number of field trips with Joe around
the world, and he is a master at looking at the financial situation behind a
mine and company, plus the geology. In November, I got a lot more positive on
this sector and started buying. But I expected the initial bump would come in
the mid-tier companies. That's where Joe's expertise comes in. The first two
companies he brought to the table were Claude
Resources Inc. (CRJ:TSX) and Lake Shore Gold
Corp. (LSG:TSX). Claude is up over 60%, and Lake Shore has had a takeout
offer from Tahoe
Resources Inc. (TAHO:NYSE; THO:TSX) since his recommendation in early
December.
I'm not out of exploration at all. That's my passion. But Joe's
participation gives the newsletter more coverage of the solid assets that
could be the first to be rewarded.
As to what I am doing with my money, I'm probably half in small to
mid-tier producers and developers. I have another 25% in early-stage
exploration projects. I'm keeping aside about 25% for new discoveries that
are difficult to predict but will occur. I'm convinced we are going to find
some companies that are in the very early stages of making a discovery and I
want to be able to pounce on those before the rest of the market figures it
out. That's where we make our real ten-baggers.
TGR: Last summer when we talked, Brent, you compared the
mining market to a wasteland. As we approach the other side of the junior
mining equity valuation desert, how will we know if it is an oasis or a
mirage?
BC: I envision the past four years as a tribe of the unwanted
crawling across a foreboding abyss comparable to the Great Salt Lake desert
in the middle of summer. It's just been brutal. As we made our way across the
salt flats people just lost the will, went broke and in general fell to the
wayside one by one until there was only a small group of us left. But I think
we've finally stumbled onto a bit of water. It does not appear to be
alkaline. I think this is for real, but we have to remember that Donner Pass
lies up ahead. You know how that turned out for the unprepared.
JM: Over the last year and a half, one of the reasons that
companies like Claude, Richmont Mines Inc. (RIC:NYSE.MKT; RIC:TSX) and Lake
Shore have outperformed the market is because gold had been going up in
multiple currencies, just not the U.S. dollar. We've already seen 12+ months
of appreciation of the gold price in the local currencies of stable
jurisdictions like Australia and Canada. So some of these equities saw
significant price appreciation a while ago. Claude is up 220% from its
52-week low.
A true gold bull market requires gold rising in all the major currencies.
Just recently we have begun to see gold go up in the U.S. dollar as investors
became frustrated with the uncertainty in the U.S. economy and the potential
actions of the U.S. Federal Reserve. Will they raise rates or keep them the
same or even lower them? All that uncertainty adds to the allure of gold as a
safe-haven asset.
Now we're sitting at a decent gold price for a lot of the people who were
on the cusp at $1,000 per ounce ($1,000/oz) and $1,100/oz. Suddenly, a lot of
stocks with marginal assets are close to their 52-week highs. We've seen very
liquid, large market capitalization companies that are highly levered with a
lot of debt, like Barrick Gold Corp. (ABX:TSX; ABX:NYSE), up almost 80% year
to date. The mid-tier producers like Lake Shore Gold are up 60-65% year to
date.
We know that the last few years of protracted financing risk in a low gold
price environment has led to a paucity of development projects and downturn
in exploration expenditures. As the gold price environment turns, the ones
that should reap the benefits are the companies that are executing this
contrarian strategy.
TGR: Something that often happens when gold starts to go up again
is that we see quite a bit of mergers and acquisitions (M&A). You already
mentioned the Lake Shore-Tahoe deal, but some of the mining companies got in
trouble for doing bad deals last time around. Tell us what you think about
the Lake Shore-Tahoe deal. What makes for a good deal? Do the miners have the
discipline to know the difference this time around?
JM: Usually, when we see a rise in the gold price, we see investor
interest in the sector in the form of demand for equity. We've also seen
financings in the form of precious metal streams. Next comes interest from
the industry, which have been reflected as private placements in companies
and M&A.
Tahoe and Lake Shore are indicative of the way M&A has been for the
last few years. It's been selective and very suitor-specific. It's normally
in the form of friendly acquisitions as companies want to avoid bidding wars
and getting involved in overly dilutive transactions. The only multiple bid
we have seen over the past few years was the acquisition of Osisko Mining
Corp. (OSK:TSX) by Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) and Agnico
Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), when they successfully outbid Goldcorp
Inc. (G:TSX; GG:NYSE).
A variation of the theme is the recent investment by Goldcorp in Gold Standard
Ventures Corp. (GSV:TSX.V; GSV:NYSE), which has one of the largest land
packages in Nevada not owned by a major. Then OceanaGold Corp. (OGC:TSX;
OGC:ASX), which already owned a chunk of the company, raised its stake to
19.9%. It's unusual to see two companies vying for part of the same exploration
play. This renewed interest in exploration is good for the market as a whole.
TGR: Was it the location that made Gold Standard Ventures
attractive to both companies?
JM: Yes, absolutely. It's the jurisdiction (Nevada) and the size of
the land package. Other than Barrick and Newmont Mining Corp. (NEM:NYSE), no
company has that size of a land package in Nevada. Gold Standard Ventures is
considered to be a good vehicle for a major company to get leverage to a
Nevada footprint.
TGR: Is jurisdiction also the allure in the Lake Shore-Tahoe deal?
JM: Tahoe's biggest asset, Escobal, is in Guatemala, which is a
very high geopolitical risk jurisdiction but a very high-quality deposit-high
risk, high reward. Its first venture into diversification involved open-pit
heap-leach projects in Peru with Rio Alto Mining Ltd. (RIO:TSX.V; RIO:BVL).
Lake Shore's land package in the Timmins district of northern Canada puts
Tahoe in an even more stable jurisdiction. Lake Shore Gold's asset portfolio
is underground, similar to Tahoe's asset in Guatemala, so the company has
relevant experience. Tahoe also gets exposure to the local currency. What we
liked about Lake Shore was the ability of the company to grow its asset base
organically with a plant that is expandable. So if more resources are found,
they need not come at the end of the mine life.
TGR: Do you think the shareholders will approve that deal?
JM: We have seen some news lately about the significant change of
control fees for some senior executives from Lake Shore Gold that have some
investors concerned. But I believe that most will take advantage of the bid
and potentially hold the more liquid Tahoe to retain exposure to the silver
market. Or they will re-invest their gains in the sector.
Regardless, I believe it's a positive for the sector to see quality assets
in stable jurisdictions starting to be taken over. Both underground and
open-pit deposits in stable jurisdictions such as Canada have continued to
attract demand on the M&A front.
TGR: Do you see Claude and Richmont as takeover stories as well?
BC: I invested in Richmont almost a year ago and, yes, I do see
Richmont as a potential takeover further down the road. Claude has done an
excellent job of turning its mine around. I don't know that it's large enough
to interest anybody, though. What do you think, Joe?
JM: It could be, however, it is isolated in central Saskatchewan
with a big land package with a smaller production profile than Lake Shore
Gold. The nice thing about Lake Shore's plant is its capacity to expand with
ore that was proximal to it. With Claude, you get higher grade than Lake
Shore and a large land package, but I don't see much upside to expanding the
plant in the near to medium term.
I want to highlight that when we selected these companies, a potential
M&A bid did not underpin the investment thesis. We believed that the
management teams at Lake Shore, Claude and Richmont would be able to grow
their asset bases organically, as well as generate free cash flow. The key
was generating free cash flow while paying down their debt facilities, which
is something not very many companies were able to do in this cycle.
TGR: When we talked last time, Brent, you gave us nine names of
fully funded companies that you thought could make it to the other side of
the wasteland. Now that we're starting to see water, which ones did you
welcome to the promised land?
BC: With junior exploration companies, it's especially critical to
keep tabs on their progress. To constantly re-evaluate results against your
original investment theses: what the drilling is showing, the metallurgy and
what the local politics are. That's a long way of saying we have sold some of
that list since then. We are still holding Dalradian
Resources Inc. (DNA:TSX) and Guyana
Goldfields Inc. (GUY:TSX). As to Midas Gold
Corp. (MAX:TSX), it just completed a large financing with Paulson &
Co. Inc., which is very positive.
TGR: What does a company like Dalradian need to do now that we're
in a new stage in the market?
BC: Dalradian has a very consistent, high-grade, narrow-vein deposit
in Northern Ireland. It just released another 50 drill holes that continued
to confirm our investment thesis that this is a narrow, high-grade deposit
with a lot of upside potential, shows good continuity, and has a good chance
to be permitted by the local government. It's a simple deposit, and we expect
Dalradian to put out an updated resource later this year followed by a
feasibility study, which should look pretty darn positive. Of the ones we
discussed, I would put Dalradian at the top.
TGR: How does Midas plan to use the new financing to add value to
the company?
BC: This is really important. Although it's a dilutive financing,
it also means that it is now funded to bring the Golden Meadows deposit in
Idaho through the final feasibility and permitting process. That could take
three years. This financing guarantees the company can make it right to that
point and more. In the long run, I think it was a smart move because the
financing uncertainty just had to be taken care of. Once it gets its permitting,
this is a prime acquisition target for a major mining company.
TGR: You both put a lot of emphasis on the exploration side of Exploration
Insights. Joe, you just returned from Australia. What did you see there?
JM: The way this works is we take an interest in a company, we meet
the management team, we talk about the potential of what they're trying to
do, their strategy, then we decide whether this is a company we want to do
more work on, like a site visit prior to adding it to the Exploration
Insights portfolio. There is no guarantee that a site visit means we buy
the stock, in fact more often than not we pass on the opportunity. I recently
completed a site visit to Newmarket Gold Inc.'s (NMI:TSX; NMKTF:OTCQX) assets in
Australia. Newmarket is unusual because its asset portfolio is in Australia,
but it is a Toronto Stock Exchange-listed company. Its senior management team
is based out of Vancouver.
Recently, Newmarket put an ex-Newmont operations guy from Australia,
Darren Hall, on as the chief operating officer based out of Perth. I knew
Darren back when I worked for Newmont, and then I met him again when I
visited Newmarket's project in the Northern Territory, the Cosmo mine.
Newmarket also has the Stawell mine in Victoria but the "jewel in the
crown," in my opinion, is the Fosterville gold mine, which is also
in Victoria.
All the mines are now underground operations, which have been running for
an extended period of time with a long history. What piqued our interest is
the new type of gold mineralization, which is coarse grained and late,
recently encountered at the Fosterville mine. The discovery provides the
potential for supplying the plant with higher-grade ore that is easier to
recover using gravity than the current ore feed. The current ore feed
comprises refractory ore that is treated with a bio-oxidation system and
achieves recoveries in the low 90s.
The newly discovered, coarse-grained gold mineralization overprints the
earlier, finer-grained, disseminated mineralization, and uses the same
geologic structures. As both types of mineralization occur in the same
location, the operation is already mining prior to establishing a maiden
resource. The advantage of this new gold mineralization as it can be
processed via a gravity circuit, which could provide higher recoveries at a
lower cost.
So we are going to do some more work on Newmarket Gold to find out if the
upside potential at Fosterville plus the gold leverage provided by the more
marginal assets of Stawell and Cosmo justifies placing it in the portfolio.
Management is trying to build a mid-tier producer in a stable jurisdiction
that is free cash flow generating and exposed to a weak Australian dollar.
TGR: Brent, you went to Mexico and then Vancouver. What was the
atmosphere in both of those places?
BC: I was in Mexico late last year looking at an Australian-listed
company with assets in Mexico called Azure Minerals
Ltd. (AZS:ASX). It made a silver discovery just south of the Cananea
copper mine, which is probably the largest copper mine in Mexico right now.
So it's well located. It's a nice-looking discovery, and I think it grows. We
haven't bought it yet because there are nearly a billion shares out on this
company and Teck Resources Ltd. (TCK:TSX; TCK:NYSE) has a backing right that
needs to be sorted out.
TGR: What is your feeling about investing in Mexico from a safety perspective?
BC: It's really location specific. Azure is up in Northern
Chihuahua near the U.S. border-no problems really. There are areas in Mexico
where you don't go. That's always been the case. When I was exploring down
there in the 1990s, I'd go into a small village near a prospect that I wanted
to look at and the first thing I did was talk to the local mayor and have him
assign me a guide who was not really there to guide me to places but
to guide me away from where I didn't want to be. So you can still work
there.
Evrim
Resources Corp. (EVM:TSX.V) is a company we own. Its geologist, Alain
Charest, knows the country like the back of his hand, so he knows where to
go. He's exploring in the right areas and he knows how to get around. I think
Mexico is actually a pretty good place to be looking but admittedly nearly as
dangerous as Baltimore.
TGR: How was the atmosphere at the recent conferences in Vancouver?
Were there places it just wasn't safe to go?
BC: There are a few places on Hastings Street I tend to avoid but
otherwise no problems. Regarding the conferences, the geology and the
exploration side of business-they're always optimistic. I don't care how bad
it really is, they're always thinking there's a gold mine just around the
corner. So it was a good week of meetings. But what really struck me is that
a lot of the bad actors in this industry have moved on to other sectors.
You're down to a higher-quality group of people who are still running
businesses and doing exploration. I still think there are 600 too many junior
exploration companies listed up there out of about 1,100. I don't know how
you fix that problem because it's just such a tough business to make a
discovery in, and it's so technically complex that anyone with a good story
can often raise money when they don't deserve it. Nonetheless, there are some
good people up there doing good work. I was pretty pleased with all the
meetings we had. They were technically competent, solid people who, for the
most part, understood what an economic deposit looks like versus an
uneconomic one. You would be surprised how many people in this industry
actually don't get that rather important difference.
TGR: You're both going to be speaking at the PDAC Convention 2016,
correct?
BC: That's right. Joe is speaking Sunday, March 6, at 9:30 in the
newsletter session. I'm on at 2:30 at the newsletter session, then I'm also
on a session on Tuesday morning, March 8, where we're talking about what
companies can do to improve their visibility. The title of my talk is Why
Don't They Trust Us? It should be fun.
TGR: What do you hope that people will take away from your
newsletter talks?
BC: I want to get into why is it so hard to actually make an
economic discovery, what are the factors that make it so difficult and how,
as investors, can we identify the fatal flaws as quickly as possible and move
on. Then, if there are no fatal flaws, recognize that as well. I think that's
the key to investing in this junior sector, identifying the fatal flaws as
soon as possible and more importantly recognizing the legitimate discoveries.
JM: I'm going to be looking at project financing as we have seen a
pick-up after some difficult years. Financing, I believe, can serve as a
proxy for looking at asset quality, management or jurisdiction. If you see a
company that is able to raise equity with no warrant at a small discount to
where it's trading, that's a reflection of a decent asset in a stable
jurisdiction. If you see somebody raising equity at a discount with a full
warrant that's over a long period, you might want to be a little bit more
wary of the asset quality. You can draw similar conclusions based on hedges
and streaming. I will give attendees the warning signs so they can be their
own analysts.
TGR: So both of you are not just teaching investors to fish, but
also you're teaching them which fish to throw back. Thank you both for taking
the time to share your insights.
Brent Cook brings more than 30 years of experience to his
role as a geologist, consultant and investment adviser. His knowledge spans
all areas of the mining business, from the conceptual stage through detailed
technical and financial modeling related to mine development and production.
Cook's weekly Exploration Insights newsletter focuses on early
discovery, high-reward opportunities, primarily among junior mining and
exploration companies.
Joe Mazumdar is an economic geologist/analyst at Exploration
Insights. Prior to that he was a senior mining analyst at Canaccord
Genuity and Haywood Securities prior to that. His experience includes
director of strategic planning, corporate development at Newmont and senior
market analyst/trader at Phelps Dodge. Mazumdar also worked in technical
roles for IAMGOLD in Ecuador, North Minerals in Argentina/Chile and Peru, RTZ
Mining and Exploration in Argentina and MIM Exploration and Mining in Queensland,
Australia, among others. Mazumdar has a Bachelor of Science in geology from
the University of Alberta, a Master of Science in geology and mining from
James Cook University and a Master of Science in mineral economics from the
Colorado School of Mines.