Even in a depressed gold market, knowing your catalysts in mining stocks is indispensable and is still the fundamental yardstick for buy-sell decisions. Senior Analyst Jocelyn August of San Diego-based Sagient Research understands the impact that events can have on your portfolio, and she has mastered the art and science of fortunetelling by keeping an eye on the calendar and those occurrences that will move shares. In this interview with The Gold Report, August discusses top ideas that should move investors out of winter and into stocks with a shiny golden future.
The Gold Report: Jocelyn, I'm looking at a portfolio of junior precious metals mining stocks, and all I can see is red ink. All in that group are underwater for the past 52 weeks. We are currently in a down-trending precious metals market, and I'm interested to know if catalysts matter anymore.
Jocelyn August: Catalysts absolutely do matter right now. We may see a catalyst occur in a company followed by a 2% uptick in its stock, on the same day the sector as a whole may be down 2-5%. We may see that even in this price environment. If you were aware of that catalyst and you bet on it, you would actually have fared better than the sector on that day. By comparison it actually did help the stock price.
Conversely, we also see a fair amount of catalysts that might have a negative consequence to the stock price, particularly when it comes to permit approval decisions that may go the wrong way for the company. You could get pretty badly burned. For example, back in early October 2012, Pacific Booker Minerals Inc. (PBM) announced that the environmental assessment permit for its Morrison project in central British Columbia was denied. The stock dropped 66% in one day and then dropped even further in the week. A month after that event, Pacific Booker was down 75% from the day before the announcement. So, catalysts do matter.
TGR: In this kind of depressed gold and silver market, it appears that the effect of negative news is magnified. Is that in fact the case?
JA: I'd definitely say so. If it's a negative event for the company and the overall sector is down, you're going to experience magnified effect there.
TGR: The old thinking was that the juniors could perform independently of markets on their own merits as exploration and production companies. Can they indeed perform independently?
JA: Juniors can perform well on their own merits. But obviously, the spot price does have an impact on the company itself. That's because a lot more companies can invest in higher-risk, higher-cost projects when the spot price of the metal is at a higher price. So if you're looking at a spot price of $1,750/ounce ($1,750/oz) for the price of gold, that's a lot different than a spot price a couple of years ago when it was in the $1,200s/oz.
TGR: In essence, all of these stocks, whether large or small, are being held hostage right now by the underlying metal price. Is that what you're saying?
JA: I would say so. Looking at the environment several months ago or in the last year compared to right now, we were seeing a lot more positive price action in these stocks than we are seeing now.
TGR: Jocelyn, on Friday, Feb. 15, we read that Soros Fund Management had cut its stake in two exchange-traded funds (ETFs) - SPDR Gold Shares ETF (GLD) and Market Vectors Gold Miners ETF (GDX). The Dow Jones Industrial Average is close to 14,000 and near an all-time high. The NASDAQ is at a 12-year high. With such strong industrial and technology performance, can investors be expected to return to gold shares with this kind of news permeating the markets?
JA: If you didn't expect gold to go down at some point compared to the overall market, then you probably weren't thinking too far into the future. Those Feb. 15 events as well as a potential for gold markets to continue their current trends mean simply that an investor can't just throw a dart at any gold stock and see success. In this type of market, investors need to do their homework to identify gold companies that look to have better prospects than some of the others. Particularly with gold prices dropping, it's important to examine the potential costs of the mining projects that the company is involved in. You can have success with gold in the long term.
TGR: People who invest in juniors don't invest for slow growth, and they tend to be impatient. But your long-term success scenario suggests that you believe patience is important, even with juniors. Is that right?
JA: You definitely need to have patience in order to have success in them.
TGR: Can good catalyst news at the company level propel gold and silver stocks up in this kind of environment? Are you seeing it happen?
JA: I definitely think that it is possible. I'll give you an example. Augusta Resource Corp. (AZC), which is developing the Rosemont project in Arizona, a gold-silver-copper-molybdenum project, finally received its air quality permit at the end of January. The stock was up almost 15% the day after this catalyst occurred and up a little bit more, 17%, the week after, despite this turmoil going on in the gold and silver market. This is an example of a situation in which you can have good news and it can make the company stock go up.
TGR: I'm looking at the Market Vectors Junior Gold Miners ETF (GDXJ) versus Augusta Resource over one year, six months, three months and one month. Augusta has been significantly stronger, in double-digits, during all periods over the past 52 weeks. It's even up 10% over the past four weeks, a period when both juniors and large caps are down double-digits. Why is it experiencing such high relative strength versus its peers?
JA: People probably have been waiting for these permits to come through for a while. I know the company is waiting for another permit, too. But Augusta is going to be able to get metal from this project regardless of what the gold or silver price is. It can still make money when this project actually comes to production, of course.
TGR: Do you believe that juniors can access capital to move their programs forward in this kind of market? Do they have to explore their lowest-risk plays in this environment?
JA: To some extent, they do need to focus on their lowest-risk plays in this environment. Even Barrick Gold Corp. (ABX), with its $31 billion market cap, announced in its earnings release that it was not going to be looking at any new exploration projects while it got its costs under control. With gold spot prices going up over the last couple of years, companies were looking to develop the higher-cost, higher-risk plays because the economics allowed them to, and they could afford it. But now these companies probably should be looking at lower-risk and lower-cost prospects, but that's not to say they can't get access to financing.
TGR: What are you looking for in junior precious metals miners? What factors give investors an edge right now in this kind of market?
JA: For catalysts, we look for projects that have positive resource estimates and positive updates as well as positive dealings with the appropriate regulatory authorities. Augusta Resource is a good example of a project that has been held up by permitting for quite some time. That kind of holdup can certainly add to the capital costs and prolong the start of production and delay the start of revenue. So we're looking for positive regulatory filings, deadlines being met and we're looking for those companies that consistently keep the market updated as to their progress. There are some junior miners that are really good about giving updates-even if they're not quite meeting the deadlines they've set. They are making sure that they are transparent in what they are divulging. But there are some that maybe aren't quite as transparent. I tend to believe no news isn't necessarily good news. We're looking for that kind of transparency in those miners.
TGR: Augusta Resource has a $373M market cap. Are you positive on this company?
JA: Getting the air permit is definitely a good sign for Augusta. We're just waiting for the final clean water permit as well as an environmental impact study record of decision, the final hurdles for it for starting construction. Once it clears those hurdles, I think I'd be positive on it.
TGR: Can I get you to tell me your best idea?
JA: One we talk about in our "Early 2013 CatalystTracker Natural Resources Outlook Report" is Alexco Resource Corp. (AXU). It is currently a producer of silver at the Bellekeno silver mine, but it is also working on two new projects, the Lucky Queen and Onek. Those are in Keno Hill District of the Yukon Territory in Canada, and they are in the same general area as the Bellekeno mine. Alexco is looking at the final hurdle to the start of production, regulatory authorization. The quartz mining license was approved on Jan. 25. Now we're looking for a decision on the Water Use License, which is needed to regulate the miner's use and discharge of water at the Lucky Queen and Onek mines. A Water Board hearing is scheduled for Feb. 26-28, so we expect to hear some news regarding the permit imminently. With that approval decision it will be able to start production at both of those mines. The company has not given any guidance for production of those mines.
TGR: That's an interesting idea. It looks like Alexco has actually has its head above water for the past 52 weeks. Do you have another one?
JA: We're also looking at Timberline Resources Corp. (TLR). The PEA is expected by April for Lookout Mountain, its flagship property in Nevada, and it's a gold project. The company is moving toward a formal production decision, but it needs an updated resource estimate as well as a PEA. So we're looking for that in early 2013. The other interesting thing about Timberline is that it also has the Butte Highlands project in Montana where it has a joint venture (JV) partnership. The JV partner is 50/50, but it's actually completely funding this project, which is expected to start production in mid-2013. We think that once Timberline draws revenue from Butte Highlands, it will be able to funnel a lot of that revenue toward the Lookout Mountain development.
TGR: Interesting that Butte Highlands is funded by the partner, but Timberline is a true penny stock with an $11M market cap, and it's down 70% over the past 52 weeks. Isn't this the kind of stock that investors typically flee from?
JA: Obviously, it's down quite a bit, but I think if you're looking to make meaningful, quick cash and if you know what catalysts are coming up and have an idea of how they're expected to go, you can make some money based on that catalyst. It does have the upcoming catalysts in the spring.
TGR: Got it. Go ahead with another idea, please.
JA: The final one that we had in our Outlook Report was for Luna Gold Corp. (OTC:LGCUF), and we're looking for an updated resource estimate at its Aurizona project in Q1/13. Previously, it had announced a resource estimate in December 2011, which showed an increase of almost 250% of Measured and Indicated resources. We would like to look at its revised economic open-pit estimate, and we're looking to see whether or not Aurizona will deliver within its production estimates. The company is expected to produce over 74,000 ounces (74 Koz) gold in 2012 and over 100 Koz in 2013. Its cash costs are really low due to its increased gold production levels, according to its Q3/12 results.
TGR: I've enjoyed speaking with you, as always. Thank you.
JA: I look forward to speaking with you again.
This interview was conducted by George S. Mack of The Gold Report. To read more about Jocelyn August's picks, click here.
Jocelyn August is currently the senior analyst and product manager for CatalystTracker, a proprietary research product focused on identifying and analyzing the future events that will materially impact publicly traded companies. In her five years at Sagient, she has developed expertise in the highly event-driven medical device and diagnostic sector. In addition, she spearheaded the development of a new Natural Resource Industry product within the CatalystTracker product line with the publication of the "Catalyst Impact Study: Natural Resources Sector." Outside of Sagient, August was named the director of communications for the San Diego Professional Chapter of MBA Women International. August received a Master of Business Administration from the Rady School of Management at University of California, San Diego and graduated cum laude from the University of California, San Diego, with a Bachelor of Arts degree in sociology.
1) George S. Mack 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.
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