Spotting the Miners That Can Survive the Long Capital Drought: Eric Coffin
The Gold Report: In your January Hard Rock Analyst Journal, you remarked that 2012 "sucked" for precious metal investors. What happened?
Eric Coffin: Last year was a very difficult time for junior gold miners to raise funds and there has been no improvement in the financing environment yet in 2013. There were a few bright spots. SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT) moved into production profitably. Management did a great job getting the Santa Elena mine up to full production and the company uncovered a lot of new ounces at its La Joya property. Generating profits insulates SilverCrest from having to finance, although its share price will still track gold and silverfor good or for ill.
The companies that did well, and there weren't many of them, were new discovery stories. The epitome of the phenomenon on the HRA list was GoldQuest Mining Corp. (GQC:TSX.V), which shot from a share price of $0.07 up to $2 after its discovery in the Dominican Republic. It drifted down thanks to the weak market and some weaker holes but it now has a $15+ million ($15M) cash position to sustain it.
The basic problem is that with such a weak market backdrop, the financial sector is focused only on companies with strong management and proven projects. That's a very small subset of the explorers.
TGR: Are the small companies going to wither on the vine?
EC: Companies with large shareholders that can be tapped for cash to keep things going might eke through. Companies that did not have a lot of success in the last two years are going to have a real problemunless the fundraising situation improves soon.
TGR: Are the capital markets for gold miners likely to improve this year?
EC: I believe that the financial market will get better for the juniors, but selectively. Money will go to development stories with clear top-quartile economics and successful exploration stories. And the devil will take the hindmost. A few hundred companies could disappear over the next couple of years. That stinks, but on a rational, sector-wide level, it is better for everybody in the long run if there is more focus on a smaller number of companies that have multiple targets and the ability to deliver. That's where the real game is.
"Money will go to development stories with clear top-quartile economics and successful exploration stories."
The thousand other companies hoping to be able to option a property to a major are just not going to get any attention. It is easy to see the writing on the wall: Today's tiny financings are via insiders. Those are guys in the front office putting in $100,000 among them to keep the door open for another three months. You can only do that for so long. Without real funding to generate real news, companies are stuck.
TGR: Is there a feeling out there that the price of gold is too high, that it's going to collapse and not be able to sustain development and exploration?
EC: When gold was at $280/ounce (280/oz), mining companies were trading at 5060 times earnings. That's because investors were not trading on earnings; they were buying for leverage on gold reserves. But after the price of gold went up more than fivefold, the market shifted to trading on earnings. The firms that get higher multiples, as in any other sector, have convinced the market that they can grow earnings. That's fairly normal market behavior, but it is shocking to a lot of people in precious metals. Plus, there is just a lot of competition for capital, although a fair amount of it will eventually return to the gold sector.
TGR: Large corporations are sitting on trillions of dollars that have to find a home.
EC: There is definitely a lot of big money around, but it is very picky. In 2007, 2008 and 2010, there were a lot of large takeovers. Some of those deals came back to haunt the executives who did the takeovers, because many of them lost their jobs. And the executives who replaced them are very hands off, thinking, "I don't want to be the next person to do a $5 billion takeover that blows up in my face." But the pendulum will shift back, because executives who work 120 hours a week want to run big companies and to do takeovers. That's who they are!
TGR: Were expectations too high with the takeovers?
EC: In some cases, acquirers just paid too much. In other cases, there were difficulties with permitting or construction that slowed things. Take a deal that has, say, $1M net present value (NPV). Push the start of the cash flow of that project back a couple of years and you reduce the NPV by 1525% just based on the start of cash flows being pushed back. It may still be a good project, but in terms of what was paid for it, it suddenly does not look so cheap. There's not much you can do about that. A lot of big low-grade bulk tonnage projects in South America, for instance, have really big capital expenditures (capex) required to build them and their payback periods are just too long. Those types of firms are having trouble finding buyers. Massive increases in the cost of mine building is a problem across the sector.
TGR: On the other hand, gold stocks that were trading for dollars are now trading for pennies. So for the average investor, it could be a pretty good deal if they can wait for these companies to come back into the game.
EC: Long-term investors who have done well are game for that. They know that when stocks are cheap is when you make the big money. It's not for the faint of heart, though, as you usually only see bottoms in the rear-view mirror and companies need to survive until things improve.
TGR: Have you made any gold buys recently?
EC: I added a couple of companies to the list near the end of the year. They had lots of cash and are in no rush to find new financing. That removes the dilution risk, if not the market risk. For example, I bought Mundoro Capital Inc. (MUN:TSX.V). Back in the day, Mundoro had developed a large gold discovery in China. Unfortunately, the Chinese yanked it away, handing Mundoro a $20M door prize. The company still has $1516M in the bank. Its market cap is $10M. It has early-stage prospective properties in Serbia and Mexico. Mundoro hasn't drilled in Serbia yet, but it has picked up some good-looking geophysical anomalies adjacent to Reservoir Minerals Inc. (RMC:TSX.V).
"Mexico is simply a great exploration address."
Reservoir Minerals Inc. is a Serbian discovery story, also on the HRA list. Reservoir and Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE) made a very impressive blind copper-gold discovery on the Timok project; the discovery hole reported 160 meters (160m) of over 10% copper equivalent. Freeport is earning into the project and seems to be taking it very seriously, with five high-capacity drill rigs at work. Reservoir is being carried at Timok and working on earlier-stage projects elsewhere. It's also very well cashed up with about $20M on hand.
TGR: What's the infrastructure for drilling in Serbia?
EC: It's good. The foreign investment rules are quite good in Serbia and it is a mining region. There is a famous cooper mine there called Bor, a high-sulfidation epithermal deposit, similar to what Reservoir and Freeport are drilling just to the north of their project. Serbia has lots of good geologists. The permitting system is well understood. Because it's a mining area, people do not freak out when they see a piece of flagging taped to a tree. There are lots of miners living in the area.
TGR: Are there any other bargain price picks in the junior gold sector?
EC: My late brother, Dave, and I followed GoldQuest in the Dominican Republic for years. We liked it because the belt of rocks that its new discovery is in is very well endowed. GoldQuest and its former partner Gold Fields Ltd. (GFI:NYSE) really drew attention to the area several years ago. Unigold Inc. (UGD:TSX.V) has a discovery next door to GoldQuest. I don't follow Unigold but have been watching it closely. The company has reported a number of impressive drill results. It will certainly have a resource on its project and has several other targets it has barely started on. On the other side of the Haitian border, Eurasian Minerals Inc. (EMX:TSX.V) and Newmont Mining Corp. (NEM:NYSE) have a nice discovery. It's a great belt with lots more potential.
TGR: Have you been on the ground in the DR?
David was there several times over the years. When GoldQuest drilled its successful holes and became the flavor of the day, I went looking in the Dominican Republic. Now, I am a very large shareholder in Precipitate Gold Corp. (PRG:TSX.V), which has picked up two concessions bordering GoldQuest in the same rocks: the Tireo volcanic belt. I do not have a rating on Precipitate and won't, due to my large shareholding and closeness to the company, but I do update it periodically for readers.
"I view gold as a currency but it's also a commodity, one that gets harder to find and more expensive to mine every day."
Precipitate acquired its concession applications last fall. It takes time to get concessions approved and until they are approved, companies make sure they don't do any work that is "messy" like drilling or large-scale trenching, just sticking to sampling and mapping. Precipitate announced a few days ago that it has results just shy of 12 grams/ton (12 g/t) gold and 5060 g/t silver in one spot and over 100 g/t silver in another spot. The company is exploring altered Tireo volcanic rocks over a 1+ kilometer area on one of its concessions and has other targets it is working on as well. I was quite happy about this because Precipitate has not spent a lot of money on the operation yet. The company ran a few fast reconnaissance programs and found a couple of interesting areas. There is a crew back at work there. Precipitate also just announced an inexpensive option to earn 100% in a Mexican project that should be easy to work and has reported historic results up to 180m of 1.2 g/t gold in a drill hole.
It is worth noting that when GoldQuest ran up to $2/share, it was pulling insanely high-grade drill holes. They were so good that the many better-than-average results that came more recently paled by comparison. Its stock fell back to $0.50/share. But GoldQuest is doing a very large induced polarization (IP) geophysical survey. IP discovered the Romero zone on its Las Tres Palmas property and has been responsible for other finds in the trend like those of Unigold next door. It appears that GoldQuest's new geophysics system may discriminate the higher-grade areas better than before, presumably picking up the copper.
The only way to prove this out is to drill the new anomalies. Exploration is generating a whole set of new targets. If GoldQuest hits on one or two of those targets, it will be flavor of the day again. The Romero discovery is quite real and is probably already close to a couple million ounces. GoldQuest just announced a fully funded 30,000m drill program so the company will be generating a steady news flow.
HRA has recently put together a report on the Tireo Trend and the companies that we follow in the Dominican Republic. Gold Report readers can receive a free copy of it by clicking here.
TGR: What about North America and Canada?
EC: Mexico lost its flavor of the day status for a while, but it's starting to get traction again. Mexico is simply a great exploration address. It has excellent geology, lots of discoveries, mineral tenure and a smooth permitting system. You don't get a lot of permitting surprises in Mexico. A number of the new minesand SilverCrest is a good exampleare not gigantic, but they are low-capex, low-cash-cost-per-ounce mines that are proving to be quite profitable. I think that track record will lure people back.
TGR: Any more names in Mexico?
EC: I like International Northair Mines Ltd. (INM:TSX.V). It has been drilling a silver project called La Cigarra for a couple of years. Three separate zones in that property are part of the same trend. It has reported plenty of broad 5060m drill intercepts of 40, 50, 60 g/t silver and quite a number of much higher-grade ones in shoots within the broader zones. Northair is due to report its first resource estimate this month. I'd be surprised if it is less than 50 million ounces (50 Moz) silver, and it's probably more like 100 Moz. The original property was small; it didn't have much room to work with for drilling to depth or putting in a leach pad or mill. So International Northair just did a deal that vastly enlarged the property, which should give the company more targets to work on.
Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) recently put out a resource estimate for its Ixtaca project. It is over 3 Moz equivalent, roughly equal gold-silver. It wasn't high grade. The metallurgy seems to be pretty good, but it needs to either be a little bit larger, which it could well be because it's open in a couple of directions, or the company must hit on some of the other targets on this property. Almaden isn't joint venturing this project; it's drilling for itself. But it is participating in many joint ventures and has other companies spending a lot of money on its properties. Almaden has a very strong, well-known management group and is really good at finding targets. Its joint venture model skills are really the main asset. Not many companies are really good at executing the JV model but Almaden is one of them.
In Canada, I expect more activity in the Yukon, though it will be at levels far below the past couple of years. Last year didn't see much new discovery and that took the shine off the Yukon play. One company that did make a bona fide discovery there last year was Comstock Metals Ltd. (CSL:TSX.V), which reported very good drill results from its QV project located just northwest of the Golden Saddle discovery that kicked off the whole rush. Comstock Metals has been hammered like most gold explorers lately but it is fully funded for a 5,000m drill program this year. It's trading very cheaply so it could generate some positive traction with a few more good drill holes.
TGR: Anybody else come to mind?
EC: The Labrador Trough in Canada is an iron ore story. The first company we followed in the trough, Consolidated Thompson, was taken over by Cliffs Natural Resources (CLF:NYSE) at an impressive $17.50/share. Iron ore prices declined last year as traders fretted about China but have come roaring back to the $150/tonne level. There will be production coming onstream over the next couple of years that should moderate prices but $150/tonne is very high by historic standards. Most recent feasibility studies use longer-term pricing in the $100115/tonne range.
The big question mark for the Labrador Trough right now is transportation. The current rail line is near capacity. CN just announced it was suspending its study on a new rail line, which sent most of the Labrador iron stocks into a tailspin. It will take time to resolve this issue. The solution might be a second rail line to the current main port on the St. Lawrence Seaway at Sept Îles, it might be a line going north or a slurry pipeline that avoids rail altogether. I don't know, but I suspect it will be one of them. There is too much value in the region for it to stay landlocked, but the transport issue will determine the short-term direction.
There are two companies in the trough that we currently follow. Champion Iron Mines Ltd. (CHM:TSX) has several iron ore resources in the area. Fire Lake North is the lead project and a prefeasibility study was recently released. The numbers were pretty good, but it has to deal with the rail situation noted above. It is one of the most advanced developers in the region with large resources so it's worth watching.
Cap-Ex Ventures Ltd. (CEV:TSX.V), the other company in the area I follow, issued a very impressive initial resource estimate of 7.2 billion tons (Bt) iron ore in the Labrador Trough. The resource, located on Cap-Ex's Block 103 project, is quite thick, good grade, flat lying and at or near surface. A 7.2 Bt resource is very large and it still has room to grow. Cap-Ex has the same challenge of convincing traders that the transport issue can be handled, but it's also very inexpensive compared to the size and quality of resource it controls.
Farther afieldmuch fartherin Fiji, actually, is another company I follow called Lion One Metals Ltd. (LIO:TSX.V; LOMLF:OTCQX; LY1:FSE). The company has a gold project in Fiji called Tuvatu, which hosts a gold resource of about 650,000 ounces at about 6.5 g/t gold. Work by Lion One has shown the veins that host the resource are still open along strike and there are several other gold bearing structures that have not been brought into the resource. There are workings in place on much of the resource and a feasibility study from the 1990s that indicates the project should be quite profitable at current prices. The company is well funded with over $15M at Sept. 30. Lion One recently made a takeover offer for a small Australian explorer, Avocet Resources Ltd. (AYE:ASX). This deal would bring another $4M onto the balance sheet, several good-looking gold and iron ore projects in Australia and a strong technical team that could help accelerate work at Tuvatu. It looks like a smart deal.
TGR: Let's talk for a minute about how gold investors should view the macroeconomic situation. Is the debt ceiling back and forth a real crisis?
EC: The whole debt ceiling thing just makes me crazy. It's a farce. Since World War II, they've raised the debt ceiling 90 times. Politicians like to have it around because they can feel like stewards of the public interest when they raise it. I'd like to see it abolished.
TGR: What about the outlook for the world economy?
EC: The numbers are improving. We are emerging from a long balance sheet recession. It takes a long time for people to clean up their balance sheets, not just the government, but also companies and individuals that have a lot of debt on the books. I don't expect growth to go back to where it was six or seven years ago, and it shouldn't, because that was a bubble. But it will return to something more like normal. The rebound in housing and slow healing of the labor market continues in the United States. It should be a relative bright spot and I expect it to surprise to the upside with growth in the 23% range later in the year.
I think Japan is going to get a bumpwhich it desperately needs thanks to the new Prime Minister. Japan has been the poster boy for deflation for 20 years now. Shinzo Abe is starting to crank up the government's printing presses. I don't know if it's the best idea ever but I have to agree that the deflationary spiral has to be broken or Japan will never get anywhere.
With the installation of the new Politburo, China's numbers have gone positive in the last few months. It is working on rebalancing its economy and I think China can continue to grow at 78% for a while yet.
Europe is still a basket case, although the bond markets have calmed down. Europe has seen a lot of austerity and a lot of budget cutting. A lot of people in my line of work tend to think good fiscal policy is all about austerity and cutting budgets. But there is a limit to that when austerity chokes the growth rate. And at the end of the day, most governments will do what governments do: try to grow their way out of recession by increasing government spending. It is a short-term political solution but these are democracies and politicians want to get re-elected. The most painless way to reduce your debt load long term is to grow and/or inflate your way out of it. Governments have been doing this for centuries and I see no evidence the current crop of world leaders is planning anything different.
TGR: Maybe they should buy some gold stocks.
EC: Not a bad idea. All of these countries are trying to get a currency advantage. In Japan, there's no pretense. It is saying, "We are going to devalue the yen. We're just going to keep printing yen until the price goes down." We will see governments continue with this competitive devaluation, so gold is going to bounce around for a while. It's not an easy algorithm to track because gold is trading in a variety of currencieslike a currency itself.
Gold has gotten hammered because traders worry about the U.S. dollar staying "strong" because others devalue, and worrying about the U.S. Federal Reserve taking away the punch bowl. Both are possible but I think the Fed will keep monetary policy loose for a while yet and that things settle out once currencies find some new equilibrium. I view gold as a currency but it's also a commodity, one that gets harder to find and more expensive to mine every day. Medium term, I don't see huge downside in gold because the mining sector simply will not produce enough to meet demand at prices much below current levels. That's not politics, it's the realities of the mining business.
TGR: Thanks for your time, Eric.
EC: You are welcome, Peter.
Click here for more information on the Toronto Subscriber Investment Summit on March 2, co-sponsored by HRA Advisories.
Eric Coffin is the editor of the HRA (Hard Rock Analyst) family of publications. Responsible for the "financial analysis" side of HRA, Coffin has a degree in corporate and investment finance. He has extensive experience in merger and acquisitions and small-company financing and promotion. For many years, he tracked the financial performance and funding of all exchange-listed Canadian mining companies and has helped with the formation of several successful exploration ventures. Coffin was one of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997. He also predicted the start of the current secular bull market in commodities based on the movement of the U.S. dollar in 2001 and the acceleration of growth in Asia and India. Coffin can be reached at firstname.lastname@example.org or the website www.hraadvisory.com.
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1) Peter Byrne 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: SilverCrest Mines Inc., Unigold Inc., Precipitate Gold Corp. Almaden Minerals Ltd. and Lion One Metals Ltd. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Eric Coffin: I personally and/or my family own shares of the following companies mentioned in this interview: SilverCrest Mines Inc., GoldQuest Mining Corp., Precipitate Gold Corp., Cap-Ex Ventures Ltd., International Northair Mines Ltd. and Lion One Metals Ltd. I was not paid by Streetwise Reports for participating in this story.
( Companies Mentioned: AMM:TSX; AAU:NYSE, CHM:TSX, CSL:TSX.V, EMX:TSX.V, FCX:NYSE, GFI:NYSE, GQC:TSX.V, INM:TSX.V, LIO:TSX.V; LOMLF:OTCQX; LY1:FSE, MUN:TSX.V, NEM:NYSE, PRG:TSX.V, RMC:TSX.V, SVL:TSX.V; SVLC:NYSE.MKT, UGD:TSX.V, )
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