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A plan to
build roads into mining projects. Tax breaks for junior mining companies.
Does the return to power of the Parti
Québécois signal the end to the province's mining-friendly
policies? Unlikely, according to Eric Lemieux, equity analyst with Laurentian
Bank Securities. In this exclusive interview with The Gold Report, Lemieux
says that even if the PQ tweaks current policy, it will take time, and he
believes there are plenty of good stories to tell and invest in before that
happens.
The Gold Report: Eric, you
primarily cover mining companies in Québec, one of Canada's most
mining-friendly provinces. However, last month the Parti
Québécois (PQ) won a minority mandate. Are the glory days for
Québec's mining sector over?
Eric Lemieux: Without saying the glory days are
over, the election of the Parti
Québécois will definitely put things on hold. The PQ has a very
pro-environment and anti-mining perspective based on the personal convictions
of certain ministers.
I think the PQ will change some of the priorities in Québec. I
do not know if it will turn out to be effectively anti-mining. I think its
people will just want to do things differently or give the perception that
they are doing things differently. Recall the PQ held a very pro-ecological,
anti-mining electoral stance that went in-line with the "printemps érable"
(Maple Spring Arising) with the student protests.
At the end of the day, I am optimistic that Québec will
continue as a favorable jurisdiction, just maybe not as favorable as it used
to be.
TGR: Do you think Plan Nord—the
initiative to build a road to several mining projects in the northern part of
the province—will be canceled?
EL: I do not. The PQ has said it believes
in some elements of Plan Nord.
Plan Nord has wealth-generating elements; it is indeed the plan of a
generation, so a long-term view is essential. Some parts of the plan have
started to move forward on the infrastructure side. It would be
counter-productive to stop road construction after having cut down so many
cubic meters of trees. The PQ will have to analyze situations like that and
come up with a balanced approach, perhaps case by case.
In many ways, the PQ's stance does not hold up. It wants to fully
develop Québec and it favors entrepreneurship. But it also wants to
increase taxes and change the rules of the game. That damages a stable
business environment. I believe certain proposed infrastructures of the Plan
Nord should go ahead either for practical reasons (investments mobilized) or
because they may fit with the PQ "Maître chez-soi"
doctrine. I think there will be a fine-tuning of the Plan Nord.
TGR: Will the sovereign investment funds in
Québec have a say in what happens with Plan Nord?
EL: I believe so and would expect that
their expertise and experience would hold some sway. Eventually, the
sovereign funds should have a word with the PQ and explain that if the PQ
wants them to invest in Québec companies, the PQ must give companies
the occasion and encouragement to move forward in a stable framework and conducive business environment.
TGR: Junior mining companies operating in
Québec get roughly half of their exploration tax back through tax
breaks. Will those disappear?
EL: Probably not, largely because of the
potential backlash from the regions that really profit from those tax breaks.
I am talking about regions such as the Abitibi, which, incidentally, voted
for the PQ. I think companies there, such as service providers, would stand
up and argue that rolling back tax breaks would be going too far toward
killing the golden goose.
As much of an advantage as the tax break is for the companies, it also
has a larger ripple economic effect—the employment created and
sustained by exploration activities. For example, Val-d'Or has been
very vibrant in the last two years because of just that second-stage effect.
If the PQ starts to play around with that, the people in the regions will
say, no, we need this help to sustain the activities. This is all the more
reason that there is a certain cooling of activities in light of current
economic uncertainty and cycles in commodities prices.
TGR: Can you give us some recent examples
of exploration success in Québec due, at least in part, to those tax
breaks?
EL: Well most junior discoveries in the
past decade can be traced to exploration activities funded by flow-through
financings. The Detour Gold Trend is presently on my radar screen. I cover
three companies in that area: Balmoral
Resources Ltd. (BAR:TSX.V; BAMLF:OTCQX) and its Martiniere play, Midland Exploration Inc.
(MD:TSX.V) and Adventure
Gold Inc. (AGE:TSX.V).
All three are within 20 kilometers (km) of Detour Gold Corp. (DGC:TSX). When Detour gets into
production in early 2013, it could well become Canada's biggest gold mine.
TGR: Detour Gold is on the other side of
the border in Ontario.
EL: Yes, but the geology does not
subscribe to political borders. The same geological trend extends into
Québec. The Detour Gold Trend is a structure that crosses into both
Québec and Ontario, similar to the famous Cadillac-Larder Lake Fault.
We know there is a World Class deposit being built on the Ontario side with
Detour. On the Québec side, the Fenelon deposit was worked on in the
1990s. Fenelon was very rich, but very small. The sizeable overburden depth
and limited access has precluded much advance exploration. However, works by Balmoral, Midland and Adventure may result in new
discoveries and advancements.
TGR: In August Balmoral
announced the discovery of three new mineralized zones outside of the known
extent of the Martiniere gold system. Its share
price went up on that news. What happens now?
EL: I cannot be very specific at this
moment, but the company believes it is justified in drilling more to determine
the size of this emerging gold system.
TGR: Somewhat unlike Balmoral,
Midland uses the prospect generator model, but it does not have a standout
project. Will Midland have a flagship project in the near future?
EL: Midland does not necessarily need a flagship
project to succeed at this stage. To the contrary, I think it is a bit like
playing the piano. You can play different notes, not just tap on the same
key.
The broad picture for Midland is the value of diversification in its
projects, commodities and partners. The stock has held up and it has several
potential flagship projects, any one of which could really light up or become
a takeout by one of its partners. An example is Osisko Mining Corp.'s (OSK:TSX) Casault
project on the Detour Trend. It is still very early stage but Midland
attracted the interest of a major gold company on an early play by selling
the story based on technical merits. That is a testament to the quality of
Midland's technical team. My target price on Midland is $2.75/share.
TGR: What about Midland's Eleonore and James Bay projects? They are near Goldcorp Inc.'s (G:TSX;
GG:NYSE) Eleonore deposit, now in development.
EL: Neither one has been drilled, but they
are very well located.
Midland has been working on its Eleonore
project, mostly prospecting work, for three summers. It is preparing to farm Eleonore out to a partner or to reach the point where
Midland will have sufficient data to do its own drilling campaign.
As to James Bay East, this is an underexplored area. Midland and Virginia Mines Inc. (VGQ:TSX) are the only key players in
that area.
Virginia Mines is my top pick right now. As Goldcorp derisks Eleonore the value of
Virginia's royalty there will be rerated. Virginia also has a strong pipeline
of projects in northern Québec. This company knows how to explore and
it is good at it.
One of Virginia's latest news was trenching results in early September
2012 on its Wabamisk project, which is about 60km
southwest of Eleonore. This is an area Virginia
worked in the past and it is now amassing a huge land position there. The
company plans to drill intensively at Wabamisk this
winter; there appears to be a big alteration system. This is an example of
the wisdom of going back to an area, using new models and coming up with
interesting stuff. I think Virginia's portfolio of royalties and projects
justifies my $17/share target price.
TGR: Might Midland team with Virginia?
EL: I would not expect that. But, if an
exchange of ideas will make it a bigger land package, more of an area play, that could attract a bigger company and then
there might be a merger of projects.
Going back to Plan Nord, this is an area that should benefit from its
road-building component. The Route 167 extension will go from Mistissini to Stornoway Diamond
Corp.'s (SWY:TSX) Renard
project. There is talk of continuing from Stornoway
up north to the Trans-Taiga Road and the hydropower plants of Hydro-Quebec's
La Grande complex. If that happens, the road will go through the eastern
James Bay area, where Midland and Virginia are active. That would add value
to those projects.
TGR: You put out a note on Adventure Gold
in mid-September. What did that have to say?
EL: Adventure Gold announced an increase
in the size of its Pascalis-Colombière
property, which is about 30km east of the town of Val-d'Or. It is in a sweet
spot, in that there is no residential area nearby, but it is close enough for
workers to live at home and drive to the mine site. There is a premium to
that, which we sometimes overlook.
Pascalis-Colombière is in a
mining and industrial area. Train tracks and the Beaufor
mine owned by Richmont Mines Inc. (RIC:TSX; RIC:NYSE.MKT) are just a couple of kilometers to the
south and northwest.
Adventure Gold continued drilling that project this summer using a
geological model that appears to confirm the presence of a gold system that
had been overlooked when Cambior Inc. [now part of IAMGOLD Corp. (IMG;TSX;
IAG:NYSE)] mined a small gold deposit there. The Pascalis-Colombière
project should have an initial resource estimate by the end of October. I
believe that this should set the stage for a rerating of the stock.
TGR: Are there any connections between
Adventure Gold's management team and Richmont's?
EL: Jules Riopel, Adventure Gold's vice
president of exploration, previously worked for Richmont.
I think they have a cordial business relationship, along the lines of being
neighbors and being curious about what the other is doing. I do not know if
there is an official exchange of information. Obviously it would be natural
for Richmont to look seriously at Pascalis-Colombière.
TGR: What is your target price on Adventure
Gold?
EL: I have a $1.20/share target price.
TGR: You seem to favor companies near
existing mines or developing projects. What are other aspects of your
investment thesis?
EL: One key element is the quality of the
management. You need to know who management is, what their track records are,
what the industry sentiment is about them.
I also appreciate focus—on specific projects and geological
models—that will lead the pack that goes beyond looking right next door
to another company's recent discovery.
That being said, I do favor companies near existing mines or
developing projects. I think you can often seize occasions when you
understand what is happening in a certain area. That is how I make the
relationship between existing mines and developing projects. I also highlight
that the partnership model has its merit; in tough times this is a great way
to remain active and keep some measure of cash and survive for another day.
Finally, I appreciate the under-promising and over-delivering mantra.
TGR: You recently visited mineral
exploration projects in the Yukon. That was a hot region a few years ago, and
then it cooled off. What is happening there now?
EL: I was there in mid-September, but had
the chance to visit only Comstock
Metals Ltd.'s (CSL:TSX.V) QV
project.
There has been a slow down, which is
somewhat typical. The first discovery happens, followed by excitement, which
then quiets down; it is the natural process I believe.
But, putting it in context, the Yukon is remote. It is not that easy
to work. The Yukon Territory would probably benefit from a pro-mining policy
to build infrastructure similar to what Québec has done by building
roads and hydroelectric plants. If the Yukon Territory could build a power
plant in conjunction with mining projects, it would have end-users to buy the
power. That makes practical, political and governmental sense.
TGR: But Hydro-Québec had a strong
tax base to draw on and pay for its development in Northern Québec.
The Yukon has one-twentieth of the population.
EL: True, but I am not talking about the
same scale. For example, if you dam a river for a hydroelectric plant in the
Yukon, mining companies would be your first customers, but the supplemental
power generated could be fed to communities farther away. That would be a
forward-thinking policy that is win-win for all parties.
But getting back to your initial question, I think things are
re-brewing in the Yukon. Kaminak Gold Corp. (KAM:TSX.V), who rode
some of the initial play in the White Gold District, and ATAC Resources Ltd. (ATC:TSX.V) in
eastern Yukon are now coming out with some interesting results again.
If people have confidence in what they are doing, it can be good to
take a step back, slow down and sometimes revisit a project later on. A case
in point is the exploration team of Virginia Mines. Virginia Mines' strength
is that it does not work all the deposits in its portfolio at once. It is
willing to put a project on hold, maybe for three or four years, then revisit it from a different angle.
TGR: Comstock has an option to earn 100%
ownership of the QV Project in the Yukon's White Gold District. What does
that option mean?
EL: Basically, an option is a way for a
company to acquire something for a certain amount of money. It is a way to
spread the risk between the optioneer and the optionee. Comstock optioned QV from Shawn Ryan and Cathy
Wood. Options are quite common in the mining industry.
An option is usually a win-win situation. The optionees,
in this case Shawn Ryan and Cathy Wood, receive monetary consideration
upfront and through staged payments. Optionees also
usually get a net smelter return (NSR) royalty.
TGR: And Comstock, if it spends a certain
amount of money on exploration over a given period of time period, will
receive its 100% interest.
EL: Exactly. My understanding is that
Comstock will gain 100% interest through staged payments, issuing shares and
completing the exploration work over a four-year period. The deal involves $230,000
in cash, 1.25 million (M) shares and $1.25M in exploration commitments.
Additionally, a 2% underlying NSR royalty (1% may be purchased for $2.5M) is
attached. This particular agreement follows the norm.
TGR: Recent trenching on QV suggested
values of up to 3.74 grams per ton gold over 75 meters (m) in a part of
Canada that has not seen any glaciation. Is that important?
EL: It is quite interesting, because it is
so far north one would think everything had once been covered with ice.
Having no glaciation means that the material underground has not been
transported great distances by surface erosion and the movement of glaciers.
So, when you dig a trench, the soil sample you take at a certain depth is
likely to be representative of the rock below.
This really helps in the geological and geochemical evaluation,
especially in some parts of the Yukon, where there are so few outcrops.
TGR: Comstock is drilling QV now. What will
it take to move the stock price?
EL: Simply put: assay results. Comstock
just finished its 2012 program: eight diamond holes drilling on almost
1,235m. This was a first phase following the summer trenching works. My
understanding is that the drilling is indicating the presence of a gold
system. It will be interesting to follow the assay results.
TGR: When you visited QV, could you see any
visible gold in the core?
EL: Yes, I saw visible gold. I
photographed it. But I do not necessarily equate visible gold to a
significant gold interception. I prefer to see a system. I prefer to see
alteration, something that suggests that fluids passed through. Also,
experience says to await the assay results.
It was reassuring to talk with the knowledgeable people who are
running the show there at the QV project. Some of them worked on the Underworld
Resources Inc.'s [now part of Kinross Gold Corp. (K:TSX;
KGC:NYSE)] Saddle discovery in the White Gold District. They know what
type of rock is interesting.
TGR: Are there any other stories you'd like
to share with our readers?
EL: Eagle Hill Exploration Corp.'s
(EAG:TSX.V) Windfall
Lake project has been producing some interesting drill results. This project
is 100km east of the Lebel-sur-Quevillon. Its
second resource estimate is about now 1.3 million ounces. Geologically, this
looks very interesting.
NioGold Mining Corp. (NOX:TSX.V; NOXGF:OTCPK) is not
rated but it is with Aurizon Mines Ltd. (ARZ:TSX;
AZK:NYSE.MKT). They have the Marban
project just northeast of Osisko's Canadian Malartic mine. It has good results and the companies have
published resource estimates. Also, Cartier Resources Inc. (ECR:TSX.V) came out
with some interesting results on its Pusticamica
gold project.
I have Premier Gold Mines Ltd. (PG:TSX) as a buy with a target price
of $7.50/share. It has a growing portfolio of properties in Ontario and
Nevada, both well-known, gold-endowed districts in stable jurisdictions.
TGR: Is Premier a takeover target?
EL: Premier owns 49% of its portfolio of
projects in the Red Lake District. Goldcorp is the operator. So, Goldcorp
would perhaps be a natural suitor.
All I know is that Premier has positioned itself as a great explorer
and now as developer. Ebe Scherkus,
the chairman, is bringing Premier to another level.
TGR: Eric, thank you for your time.
Eric Lemieux is a
mining analyst who joined Laurentian Bank Securities in 2008. He worked for
nine years as a consultant responsible for applying Regulation NI 43-101. He
has worked at the Montreal Exchange, and prior to
that managed exploration projects for Cambior, Noranda
and Soquem. He holds two master's degrees, in
mineral economics from the Colorado School of Mines and in metamorphic-structural
geology from Laval University.
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DISCLOSURE:
1) Brian Sylvester 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: Balmoral Resources Ltd., Midland
Exploration Inc., Adventure Gold Inc., Detour Gold Corp., Goldcorp Inc.,
Comstock Metals Ltd., Aurizon Mines Ltd. and
Premier Gold Mines Ltd. Streetwise Reports does not
accept stock in exchange for services. Interviews are edited for clarity.
3) Eric Lemieux: I personally and/or my family own shares of the following
companies mentioned in this interview: Adventure Gold Inc., Aurizon Mines Ltd., Comstock Metals Ltd., Cartier
Resources Inc., Eagle Hill Exploration Corp., Goldcorp Inc., Kaminak Gold Corp., Kinross Gold Corp., Midland
Exploration Inc., NioGold Mining Corp., Stornoway Diamond Corp. and Virginia Mines Inc. 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.
Companies Mentioned : Adventure Gold Inc. : ATAC Resources Ltd. : Aurizon Mines Ltd. : Balmoral Resources Ltd. : Cartier Resources Inc. : Comstock Metals Ltd. : Detour Gold Corp. : Eagle Hill Exploration Corp. : Goldcorp Inc. : Kaminak Gold Corp. : Midland Exploration Inc. : NioGold Mining Corp. : Osisko Mining Corp. : Premier Gold Mines Ltd. : Virginia Mines Inc.
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