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). The midtiers have made acquisitions that have proven to be costly, including Kinross Gold Corp. (KGC) and IAMGOLD Corp. (IAG), 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.
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: Atacama Pacific Gold Corp. (ACPGF.PK) 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.
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 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. 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.
In Peru, there are some areas where there is permitting risk. Some provinces in Argentina have a ban on cyanide and open-pit mining, but other areas are fine.
TGR: How would you rate Brazil as a jurisdiction among the Latin American countries?
AS: Some areas in Brazil are getting very nationalistic, but I like Brazil right now.
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.
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.
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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.
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