Written by Brian Sylvester
Emotions, especially irrational ones, can drive markets. Investors who are spooked by risks like nationalization and political upheaval are pulling dollars out of promising mining projects in some African and South American jurisdictions. But many of these companies are only guilty by association, Alka Singh, founder of Mine2Capital in Toronto, tells The Gold Report. It's time for investors to look beyond the headlines and the fear to find bargains that aren't as risky as they seem at first glance.
The Gold Report: Alka, gold is off to a weak start in 2013 and has dipped below $1,600/ounce ($1,600/oz). Should investors lower their expectations for the gold price this year?
Alka Singh: Just because gold has a weak start doesn't mean that it's going to have a weak finish. I'm bullish on precious metals—period. I believe that gold will close higher by the end of this year. There is short-term technical weakness in the gold market and some headline risk as some funds have been reportedly reducing their gold exposure. The U.S. also announced that the future of the quantitative easing is unclear.
Gold should have a strong performance this year. However, some gold equities will continue to underperform because of inflation and out-of-control spending by some gold companies. Companies have overspent. They purchased other companies. Mergers and acquisitions (M&A) over the past few years have been expensive. We'll continue to see that impact on equities.
TGR: Are gold companies to blame for their own demise?
AS: I definitely believe so. A year or two ago, all gold companies cared about was growth. It was what the investors wanted because they thought the gold prices would quickly go to $2,500/oz or higher. The more production, the better it would be for gold stocks, they thought. What they failed to realize was that the costs don't make sense if the new mines were coming on-line with gold prices hovering around $1,600/oz. Now investor sentiment is shifting from growth to cash flow and dividends. Investors want companies to have management that is more disciplined about expenses.
Gold companies have been chasing growth at the expense of the margins. They have also failed to keep cash costs under control. Companies have spent excessively on capital expenditures (capex) and the executives have paid themselves handsomely. The gold companies have no one else to blame but themselves.
TGR: Do you see any one part of the space being sweeter than others, or more likely to see some upside?
AS: Definitely, Brian. In the conditions that we have right now, with exchange-traded funds (ETFs) having outperformed the gold equity sector, investors are more likely to go for the ETFs or for the equities that are more liquid and already in production, like Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Goldcorp Inc. (G:TSX; GG:NYSE). The midtiers have made acquisitions that have proven to be costly, including Kinross Gold Corp. (K:TSX; KGC:NYSE) and IAMGOLD Corp. (IMG:TSX; IAG:NYSE), and have not been able to keep track of their costs. The juniors are still struggling; investors know that they will need money to bring production on-line. The safest—the sweet spot—are the Barricks and the Goldcorps of the world today.
TGR: Goldcorp said on Feb. 14 that its net earnings in the fourth quarter were $0.57/share, which was ahead of The Street's estimates. Is Goldcorp a growth story or a value story?
AS: Goldcorp is one of the few gold companies that has a disciplined approach to both growth and value. It has been pretty disciplined in its M&A strategies. I haven't seen a lot of deposits that are being shelved by Goldcorp, compared to Barrick, Gold Fields Ltd. (GFI:NYSE), Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE) and other larger gold producers. Goldcorp has been an exceptional company because of the liquidity, growth, management and steady cash costs.
IAMGOLD recently released its results and is now expecting cash costs in the $850–925/oz range, which was a big surprise and resulted in a big sell off in the stock. Goldcorp has not negatively surprised the market. Investors like that in this kind of a market.
TGR: Should investors buy Goldcorp because it's currently undervalued or because of the growth that's going to happen over the next few years or for both reasons?
AS: Investors should buy Goldcorp for both. Goldcorp is uniquely placed in the sector. Goldcorp has one of the lowest cash costs in the industry and also has some great projects in the pipeline.
TGR: You cover a number of companies operating in places that make some investors a bit nervous. Is the perceived risk in jurisdictions like Bolivia, Peru or Mali greater than the actual risk?
AS: Definitely. Every time that something bad happens in a country, investors become afraid and the perceived risk becomes greater than the actual risk.
Mali is still dealing with a coup, so West African countries have been ignored by investors. They're thinking that those countries are more risky or that non-cash flow companies in these areas might have an explosion in capex. Mostly, investors are just afraid. People are just more risk averse now.
TGR: Do you think there's a strong likelihood that the violence in Mali could spread to places like Burkina Faso or Ghana?
AS: That's not a very easy question to answer. We can never know for certain. Ghana and Burkina Faso have been stable countries. I don't think that these issues are contagious and will spread.
Mali is in a very bad situation right now. Companies that are operating there, including IAMGOLD, Randgold, Gold Fields and others, have cut down exploration budgets because investors are not ready to give them a premium if they still are spending a lot of money there. Companies are driven by what investors demand. Yet in our view, the perceived risk is greater than the actual risk in these countries.
TGR: What are some examples of some companies that have been oversold based on risk perception?
AS: Volta Resources Inc. (VTR:TSX) has been oversold mostly because it's in Burkina Faso. It's been bashed by the market.
Atacama Pacific Gold Corp. (ATM:TSX.V) has been oversold because it's a junior name with no cash flow and probably will not be in production until late 2016 or early 2017.
Volta was a $2/share stock not that long ago and it's trading at about $0.31/share. The company has over 5 million ounces (5 Moz) of gold at Kiaka, according to a prefeasibility study. It's oversold because of the risk perception versus the reality.
TGR: Where is Volta in financing Kiaka?
AS: Volta just completed a prefeasibility study on Kiaka. The company initially planned to have a bigger plant and more production and then the market bashed it. In our view the project can be scaled back and can start as a smaller project and then scaled up. The capex would be in the $400 million ($400M) range for a smaller project in our view. Investors don't want to own a junior with a capex of $700M in this market. Volta will be looking at all options to finance the project and move it ahead. Currently the project is in the feasibility stage.
TGR: If the market were better for resource companies, would Volta have gotten a takeover offer already?
AS: Definitely. How many mines have more than 5 Moz? I don't know of very many.
TGR: Atacama is developing the Cerro Maricunga project in Chile. The first five years are going to average close to 300,000 ounces (300 Koz) gold and have relatively low cash costs. However, one of the problems with developing a mine in Chile lately has been getting enough water to reach that volume. Does Atacama have similar issues?
AS: Atacama came out with its preliminary economic assessment, which had good numbers. However, the market ignored it because water is a big issue in the region where Cerro Maricunga is located. Unless Atacama is able to demonstrate that it does have the water for the production, investors don't care how impressive the prefeasibility story is.
TGR: The company is trading around $2.60/share, but you have a target price of $5.75/share. How does Atacama get from A to B?
AS: Atacama has hit water in a few wells, but I suspect that it is in talks with other companies as well to acquire water rights. Albrecht Schneider, Atacama's chairman who owns almost 40% of the company (directly or indirectly), has been in Chile for 30 years. I have no doubt that he'll be able to either buy the water rights or be able to find water in the area. The Cerro Maricunga mine has oxide hosted gold and will be a heap-leach project, which typically uses much less water than other types. However, getting the water is the next big step for Atacama. That is the biggest catalyst for the stock. Our target price on Atacama is CA$5.75/share.
TGR: Investors are also skittish about nationalization and permitting risk in South America. South American Silver Corp.'s (SAC:TSX; SOHAF:OTCBB) Bolivian assets were nationalized by the Bolivian government. There have been some permitting issues with some junior mining companies in Peru. Would you talk about the jurisdiction risk in those areas?
AS: The jurisdiction risk varies among the provinces within the same country, not just the countries themselves.
I don't think Bolivia wants to nationalize small projects like Apogee Silver Ltd. (APE:TSX.V). I think if the project is large and the company that has the project doesn't have good relationship with the local communities and the government, the chances of nationalization are higher. Apogee has good community relations and the project is not a very large project. The chances of that happening to Apogee are very small.
In Peru, there are some areas where there is permitting risk, but Sulliden Gold Corp. (SUE:TSX; SDDDF:OTCQX; SUE:BVL) is fine. It has a lot of community and political support. We have a buy rating and CA$1.85/share target price on Sulliden.
Some provinces in Argentina have a ban on cyanide and open-pit mining, but other areas are fine.
TGR: Sulliden's stock price has slowly trended down over the last couple of years. The company recently brought on Justin Reid as president to replace Peter Tagliamonte, who will continue as chief executive officer. What's your reaction to that news?
AS: Justin Reid has a lot of experience in the capital markets, which is why I believe he was hired. He has been head of mining sales for National Bank Financial and a mining analyst with Cormark Securities.
I also have a lot of respect for Peter Tagliamonte. He's got experience that will be helpful in bringing Sulliden into production. The two are a good combination.
TGR: Sulliden has the money to build its Shahuindo mine in Peru. When is that going to get the market's attention?
AS: Sulliden has more than 90% of the capex that is required to build the mine through a debt financing. Sulliden's stock was hammered pretty badly when the company announced an incentive bonus plan, which created a lot of uproar from investors. It has great takeover potential and companies should be looking at Sulliden if they want to expand their footprint in Peru. I'm still very positive on Sulliden.
TGR: How would you rate Brazil as a jurisdiction among the Latin American countries?
Some areas in Brazil are getting very nationalistic, but I like Brazil right now. I really like Brazil Resources Inc. (BRI:TSX.V; BRIZF:OTCQX), especially its transaction with Luna Gold Corp. (LGC:TSX.V) to acquire the Cachoeira project. Drilling has just started there. Hopefully, it has some good results soon and the resource expands from 650 Koz to about 1 Moz. I like what Brazil Resources has done. The market is right for a ripe story. Brazil Resources might just fit into that category, but it's too early to say. I have a buy rating and a target price of $1.45/share on Brazil Resources.
TGR: Belo Sun Mining Corp. (BSX:TSX.V) has run into some environmental opposition in Brazil. Does Brazil Resources face similar issues?
AS: No, it doesn't. One reason might be that its flagship project has a lot of public support. But it's still early. These sort of issues start emerging at the permitting stage and Brazil Resources is in the exploration stage. However, I'm not anticipating it will have any issues. The company has an experienced management team and is supported by Brasilinvest, a leading merchant bank with more than 80 associates in 16 countries.
TGR: Brazil Resources' Chairman Amir Adnani is seen in some circles as an up-and-coming young mind in this space. What do you know about him?
AS: Amir Adnani is also the chief executive officer of Uranium Energy Corp. (UEC:NYSE.MKT). I've known him for about five years. He does what he promises and he does deliver. Everyone said that Uranium Energy's Goliad project would never get permitted, yet Amir was always confident that it would. Just a few months ago, Goliad did get all its permits for production. Amir is very capable and hardworking. He's a good promoter and tells the story well.
TGR: Are there any names in the jurisdictions that are perceived to be safer that stand out?
AS: Premier Gold Mines Ltd. (PG:TSX) and Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT) continue to be undervalued. However, even in North America, investors have to look at companies that will be cash-flow positive, not just those that have a good growth profile.
TGR: Premier is an interesting name. It used to be about its play in the Red Lake camp. Then it had a project in Nevada. More recently, it's become about the Trans-Canada project near Geraldton. Is that just the company spinning the story or is this really the asset that people should be focusing on with Premier?
AS: Trans-Canada is a great asset and the company is trying to spin the story that way, but it's not just a marketing gimmick. I think it does have something real there. The company's stock is relatively cheaper than some comparables. With Prodigy Gold Inc. being taken over, Premier is a pretty good name in the junior space that investors might want to get in, especially as Premier has much better grades than Prodigy.
TGR: Timmins seems to have worked out its problems with its San Francisco property. Do you see smooth sailing ahead?
AS: It's ramping up pretty well and will continue to ramp up. Timmins Gold and Argonaut Gold Inc. (AR:TSX) have almost the same production profile, but Argonaut has double the market cap of Timmins. I would actually choose a company that is trading at a lower multiple right now than a company that is trading at a higher multiple when they have similar production levels and are in the same geographical area.
TGR: In a report on Argonaut, you said it has always delivered. It has "outperformed the gold equities market." Yet you have a sell rating on Argonaut based largely on its acquisition of Prodigy Gold and the Magino gold project in Ontario. If you had faith in management, as you suggest from that quote, you'd think you'd have faith in the company now that Magino really is in their best interest.
AS: That's a good point, Brian. Argonaut's management team is one of the best in the gold sector because they have delivered. They are also frugal and don't overspend. They have always delivered and that has to do with under-promising and over-delivering consistently. I don't have a sell because I don't like the management or I don't like the assets. It's because of the valuation. There are other things that investors can get into cheaper at the same risk/reward level.
The Magino acquisition is also out of management's comfort zone. It is very good at getting smaller heap-leach deposits in Mexico with low cash costs and scaling them up. Magino is in northern Canada. It has never been in an environment like this before. There is a capex explosion going on in northern Canadian deposits. It might have some hiccups on the way.
TGR: But it's also a 5 Moz+ deposit in a very safe jurisdiction near established infrastructure.
AS: Yes, but I am of the opinion that the capex would be much higher than what is in the public domain right now.
Let me give you an example: Osisko Mining Corp.'s (OSK:TSX) capex was 50% higher when it was built compared to the feasibility study. By the time Magino gets built, there could be a capex explosion of as much as 50–60%.
TGR: Why should investors stay positive about the mining sector?
AS: These are the kind of valuations you pray for before you get into a stock because the mining sector has been decimated. This is the time for investors to take a really pragmatic look: Look for good stories, good management teams, good jurisdictions and get in.
In 2011 and 2012, we were all very positive, life was great for the miners and money was flowing in. Now that the money has started flowing out of the sector, a lot of the resource-specific funds have closed or have underperformed. This is the time to take a hard look at the sector and get ready for the next cycle. If we are not at the bottom, we are very close.
TGR: Thanks for your time, Alka.
Alka Singh started her career as a mining research associate with Wellington West Capital Markets in Toronto. Since then she has worked for Orion Securities and Merrill Lynch in Canada. She then moved to New York City to build the mining franchise for Rodman and Renshaw, where she covered 24 precious metals, base metals and uranium names. Singh has since started her own independent research firm, Mine2Capital, to provide unbiased research for clients. She holds a Bachelor of Science degree in geology and a Master in Business Administration in finance and is a CFA charterholder.
Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an employee or as an independent contractor. He 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: Volta Resources Inc., Goldcorp Inc., Apogee Silver Ltd., Sulliden Gold Corp., Brazil Resources Inc., Premier Gold Mines Ltd., Timmins Gold Corp. and Argonaut Gold Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Alka Singh: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise - The Gold Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.