Written by Brian Sylvester
Eric Winmill, mining equities research analyst with Casimir Capital, sees great potential for small-cap metals producers and developers in the Americas—home to good infrastructure, skilled workers and great geology. In this Gold Report interview, Winmill also explains how "all-in" cash costs are making it easier for companies and investors to understand—and predict—cash-flow generation and identifies companies that he expects to take off.
The Gold Report: Eric, most of the companies you cover are small-cap names operating one or two mines in the Americas. Is that where investors will make money in 2013?
Eric Winmill: We are seeing a lot of money flowing back into the Americas, along with a lot of merger and acquisition (M&A) activity in the gold space.
This is happening for all the reasons you might expect: access to skilled workers, a highly productive workforce, security of mineral rights, great infrastructure and, of course, great geology. These small- to mid-cap producers with one or two assets are typically ramping up. We focus on finding great teams and great assets as we believe these will deliver the best potential for returns this year and in subsequent years.
TGR: What valuation metric do you use or trust most?
EW: We tend to use price-to-net-asset-value (NAV) multiples. That captures most of the growth in the companies and the projects going forward and allows us to run sensitivities on gold prices and such. In some cases we incorporate price to cash flow, but rely primarily on price to NAV.
TGR: Can you give us a brief overview of Casimir Capital's gold trading range projections for 2013?
EW: Rather than forecasting a price range, we use a fixed value. For 2013 we are using a price of $1,800/ounce ($1,800/oz), a little bit above where the quote is now.
I agree with a Barron's quote from Darren C. Pollock at Cheviot Value Management LLC, who said, "We are in the middle of a monetary stimulus marathon, this is no sprint." Just about all of the major currencies are "reflating" at the moment. Against that backdrop, we are bullish on gold prices through 2013 and into 2014.
EW: Under our peak-pricing scenario, we forecast $1,900/oz in 2014. We move to a long-term price of $1,400/oz after 2016.
TGR: Since mid-July 2012 you have turned over or dropped 6 of 15 the companies you cover. Why such significant change?
EW: It really is not as significant or as unusual as it appears. One company, Prodigy Gold Inc., was taken out by Argonaut Gold Inc. (AR:TSX). That is the kind of scenario you want to see.
Three others were transferred to a colleague who joined us last summer. He had covered those firms at his prior shop and it made sense to hand them over to him.
The remaining two names were ones I covered with my previous company. When I joined Casimir, I inherited 10 names that demanded a lot of time although I would look to relaunch on those going forward.
TGR: Of the 10 companies, which is the most likely to receive a takeover offer?
EW: That is a good question, given that takeover "optionality" is a part of what we look for in the companies we cover. We see takeover potential underpinning or sweetening the valuation. However, looking solely for takeover targets as an investment strategy is not really our mandate.
Nonetheless, as companies surface value in their key assets, it is natural to suspect that they might be takeover targets. One example is Luna Gold Corp. (LGC:TSX.V), which is ramping production at its Aurizona mine in Brazil. Next year, production will reach 125,000 oz (125 Koz)/year. The company has a long-term plan that could take production up to 300 Koz/year or even 500 Koz/year. That kind of asset could be very attractive to midtier or even senior gold companies.
TGR: What are the longer-term expansion plans at Aurizona?
EW: Luna Gold has a very clear expansion strategy at Aurizona. The company is working through a phase 1 expansion right now. In the next few months we expect news on a phase 2 expansion that could add another 100 Koz/year or more.
Looking down the road, Luna Gold has a very promising property right next to the Aurizona property called Luna Greenfields. The company intends for that to be the source of its next gold mine. Including underground potential, it could drive production to 300–500 Koz/year.
TGR: Does Luna Gold plan to mine the high-grade portion of that first to generate early cash flow? If so, could we see a slight drop from production at Aurizona over the next couple of years?
EW: I would not call it "high-grading" per se. Right now, Luna is mining a lot of the near-surface saprolite-type ores. These are very easy and cheap to process. Down the road, the company plans to do some crusher improvements to facilitate processing of more of the deeper fresh rock ore.
TGR: How do Luna Gold's cash costs of roughly $705–715/oz compare with other companies of similar size?
EW: Luna Gold would probably be on the lower end of the junior to midtier gold producers.
In Luna Gold's latest guidance, it presented an "all-in sustaining cash cost" measure. This is a new trend in the industry to help investors understand better which companies are adding cash to the balance sheet. Luna Gold is suggesting a 2013 all-in cost just over $1,000/oz. I think that stacks up very well against the juniors and even the midtiers and some of the seniors.
Another interesting company is Eastmain Resources Inc. (ER:TSX), which is exploring its Eau Claire deposit in the James Bay region of Québec, Canada. Goldcorp Inc. (G:TSX; GG:NYSE) recently increased its stake in Eastmain to 9.9%. Eau Claire is right next door to Goldcorp's Éléonore project. It is fair to say that Goldcorp is watching very keenly what is happening there. Eau Claire has to be on the radar screen of a lot of potential acquirers.
TGR: Eastmain has a Measured and Indicated resource of 2.5 million ounces (2.5b Moz), and your valuation puts those ounces at roughly $100/oz in the ground. Is that a bit high given the devaluation of ounces-in-the-ground resources we have seen recently?
EW: We think $100/oz is a reasonable number in this instance. In the M&A landscape certain assets are commanding a real premium in the eyes of acquirers. Often those are very high-grade deposits with great infrastructure or great synergies with established companies. In those cases, it is not unreasonable to think that large premiums could be paid.
TGR: What advantages does Eastmain have over other similar-sized companies?
EW: One advantage is that Eastmain is operating in the Americas, and in Québec in particular. It is a great spot for exploration projects. Eastmain has good access to infrastructure, skilled talent and world-class geology: high-grade results near surface and at depth and a deposit that is wide open in many directions.
TGR: Doesn't an average of roughly 4 grams per ton (4 g/t) in an open-pit scenario seem quite positive?
EW: Yes, that is one of the reasons we like it. In 2013, we should see Eastmain do about 25,000 meters (2,500m) of drilling at its flagship Eau Claire project.
TGR: Of the companies you cover, some are up and some are down. Of those that are down, which is the most likely to rebound from a tough year in 2012?
EW: There is no doubt that the junior to mid-cap sector has been challenging for investors in the last 12 months. However, we are looking for catalysts in 2013 from a number of companies.
Luna Gold's expected news about its phase 2 expansion should be positive for that stock. Another is St Andrew Goldfields Ltd. (SAS:TSX), an underground producer in the Timmins Camp. The company is completing a bulk sample from its Taylor underground project in 2013. As St Andrew continues to demonstrate consistent results, its shares could move higher.
TGR: St Andrew met its production guidance for 2012. What is its forecast for 2013?
EW: In 2013, we have St Andrew producing just over 100 Koz. The company is scheduled to release financial results later this month, which should provide more clarity on the 2013 outlook.
TGR: What are its cash costs?
EW: We have cash costs at about $960/oz.
TGR: Production of 100 Koz in 2013 would be about 6 Koz over 2012. Where else does St Andrew's long-term growth lie?
EW: When the company brings the Taylor underground project on-line, it will have four mines in production. We could see production climbing to over 125 Koz/year by late 2013, early 2014.
TGR: Last month you launched coverage of Veris Gold Corp. (VG:TSX; YNGFF:OTCBB), previously called Yukon-Nevada Gold Corp. (YNG:TSX). Veris is slated to dramatically increase gold production in 2013. What should investors expect from Veris this year?
EW: We see 2013 as a very exciting year for Veris. The company owns and operates the Jerritt Canyon mine in Nevada. This is a storied asset that has produced nearly 8 Moz of gold since the early 1980s.
In 2012, the company produced 108 Koz gold. This year we could see production upward of 170 Koz from three underground mines.
One of the big catalysts we are looking for from Veris is its plan to do toll milling. The company's roaster in Nevada has spare capacity to treat refractory ore. We expect Veris to start toll-milling third-party ore. This could generate significant revenue and help drive its cash costs down.
The company also has a huge land package in Nevada: 120 square miles only 35 miles from the Carlin Trend. It contains some very interesting targets that Veris plans to drill off later this year.
TGR: Veris had some exploration success at Jerritt Canyon, too. One hole hit 49.7m of 8.3 g/t gold. What did you make of that?
EW: Those results were from the Smith underground mine and are indicative of the type of high-grade results we might see going forward. It is a prolific district with a long history of production and the right kind of geology for new discoveries as well.
TGR: You have a buy rating on Veris and target price of $3.80, correct?
TGR: Of your strong buy ratings, we have talked about two of them—Luna Gold and St Andrew. What are the other two?
Sandstorm is a gold royalty and streaming company. It has a portfolio of producing assets and is different from a traditional gold producer in that it provides early-stage financing in exchange for a portion of the gold sales. Nolan Watson and his team have done a terrific job of creating value. Investors get a lot of upside participation in gold prices without the traditional operating and capital expense risk.
TGR: It certainly seems to be an almost ideal way to play the space. Does Sandstorm have enough production coming onstream to get royalty streams at good prices?
EW: Absolutely. Sandstorm has a very full pipeline of deals. It just acquired a 60% interest in Premier Royalty Inc. (NSR:TSX), a new royalty company that just started trading in December 2012. The fact that Sandstorm has taken control is indicative of the kind of innovative, value-added transactions we think investors can look forward to.
TGR: And Brigus?
EW: Brigus has the Black Fox mine in Timmins. It is an open-pit and underground mine that Brigus has done a great job on, ramping up production. The company recently brought on Daniel Racine as chief operating officer, and he has just assumed the role of president. Racine has worked at Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) for many years. Brigus has put together a really strong team and the result can be seen in its latest production results. Cash costs are declining and production is increasing. Longer term, Brigus is drilling off its Grey Fox property, not far from Black Fox, and hopes to bring it into production in early 2015.
TGR: Other pundits in this space believe that a business combination of Brigus and St. Andrew makes sense. Do you agree?
EW: Certainly, when you look at the land map of the two companies' assets, there could be operational synergies. But I really could not speak to any of the particulars of that kind of a combination.
TGR: What are the biggest catalysts for Brigus in 2013?
EW: We should see the company's financial results for Q4/12 by the end of March.
We anticipate a feasibility study of Grey Fox in the latter half of 2013. The company is talking about 2013 production of 90–100 Koz, up from 77 Koz in 2012. It could be an exciting year for Brigus.
TGR: A couple of years ago Brigus was in turnaround. Is that process complete?
EW: The company has been growing production at Black Fox and the latest results suggest that the operation is hitting its stride.
TGR: Can you give our readers a reason or two to be hopeful in 2013, after a difficult 2012?
EW: I think the industry as a whole has gotten the message loud and clear that it is all about a renewed focus on smart projects and efficient capital allocation, not just growth for growth's sake. In addition, the industry trend toward reporting all-in sustaining cash costs should help investors make better decisions about which companies are really adding cash to the balance sheet.
TGR: Eric, thank you for your time and your insights.
Eric Winmill joined Casimir Capital in 2012 as a mining analyst in the Equity Research Department. Winmill has 14 years of capital markets' experience, primarily in the evaluation and analysis of precious and base metal projects around the globe. Most recently he worked in mining equity research at National Bank Financial and at Wellington West Capital Markets. Prior to that, Winmill was a vice president at Regent Mercantile Bancorp, a private resource-based merchant bank. Winmill holds a Bachelor of Commerce from McGill University and a Master in Finance from Rotman School of Management, and is a CFA Charterholder.
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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: Argonaut Gold Inc., Goldcorp Inc., St. Andrew Goldfields Ltd. and Brigus Gold Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Eric Winmill: 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.
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