The Gold Report (TGR): When you look at companies making a discovery, what price of gold do you use to see if it's going to be economically viable?
Eric Coffin (EC): We tend to be a bit conservative about it. We view a mining scenario as one where you've got to look out 10 or 15 years, and especially when you're looking at juniors. Let's face it, for most of these companies, the end game is—and should be—getting taken out by a major. Finding deposits is what the juniors are good at and the best exit is often selling the discovery for a good price then moving on to try and find the next one. When you're trying to wrap your head around the value for these companies, you've got to look at those companies' potential acquirers. What are they thinking and what are they using as a base price.
I think you're going to see M&A activity increasing because companies that have sat on the sidelines waiting for the perfect number before they bid on a company are finding out that they're just not going to get it, and the company they've got their sights on, somebody else gets there first. So, I think you're going to see improving takeover prices, and in some cases I think these majors are probably gritting their teeth and using a $900 or $950 long-term gold price to value things. A lot of them must be using that high a price at least to explain some of the recent bids.
TGR: Right. So, you're looking for juniors who have some type of scale potential with an end-game of selling to majors. Do you have some companies that you're following that you can share with us that fit those criteria?
EC: One company that we're quite high on, and have been for a while, is East Asia Minerals Corporation (EAIAF.PK). They have a series of projects in Indonesia. It's an interesting company; they started out looking for uranium in Mongolia—Mongolia has not been the friendliest place to be for companies. Interestingly, they're one of the few companies that really got out of Mongolia unscathed, to put it mildly. They actually sold a uranium project to AREVA (ARVCF.PK) for $83 million and divvied up the money to their shareholders, and then moved on to Indonesia.
The guys that run it are very experienced guys out of the majors; they went into Aceh Province, which your readers may recognize as one of the areas that was hardest hit by the tsunami, and it was an area that was a real political sore point. There had been a lot of local unrest; they don't like the guys in Jakarta very much. It seems like the tsunami just turned things around in the sense that everybody said, "You know what? We've got bigger things to worry about than political machinations." These guys went in there not too long after that in 2005, 2006, and staked a lot of stuff that had been left from previous exploration companies and picked up a really great set of projects.
The one that really caught our eye—and we wrote them up last March at about 43 cents—is called Miwah. Miwah is basically a ridge that contains a large, flat-lying zone of disseminated epithermal gold. We became really interested in it because East Asia had gone in and done several kilometers, literally, of cut channel samples where they go in with diamond saws and get nice composite, very comparable samples across this large area, and the average value was over a gram. There was an Australian company in there 20 years ago that drilled a few holes and got some decent numbers, good but not great. East Asia's theory was that there were vertical structures that carried up and were controlling a lot of the gold deposition. You would need to drill it in several directions, and it looked like the better grades would be near the top of the zone. I won't go into more detail on the geology, but it turns out they've been right so far.
EC: When we first looked at it, we got pretty excited about it, and were banging the table pretty hard with our readers on this one. A lot of them bought it, and they're happy about it. We were the only guys following it for six months, which again, is one of those "scratch your head" situations—we couldn't figure out why no one else seemed interested.
But East Asia has started to pick up more of an institutional following lately. They've added a second drill. A lot of people, including us, are going to keep prodding them to keep adding drills which I think they will do as they get more areas on the project drill ready. They expect to have enough drilling for an initial 43-101 calculation just on the ridge zone itself, probably by the middle of the year. Right now, they're valued to 3 to 4 million ounces, and we think there's a lot more than that; there are large prospective areas near the Miwah ridge that have not even been drilled yet.
Another one that I'll mention is Riverstone Resources Inc., which we have followed for a couple of years. It's gone through its trials and tribulations, but really got hot in the last month and a half. All their projects are in Burkina Faso, West Africa. It's part of the Ghanaian Shield that's always been a great gold region. Burkina Faso seemed to have the same potential as better known countries in the region like Ghana and Mali, but for whatever reason it just didn't seem to get any headlines.
Riverstone has been at work there for several years and has proven up a resource of about a million ounces in four separate zones on their main project, Karma. Last year, a local gold rush developed on the eastern portion of the Karma project, about four kilometers north of Riverstone's Rambo zone. This new area, which they are calling Nami, has had thousands of artisanal miners working it, digging hundred of shafts by hand and concentrating the gold in crude sluices. Riverstone went there in December and quickly sampled 30 different shafts and 20 waste piles. The average grade of those 50 samples is 10 grams, which is amazingly high in this kind of situation. The market got pretty excited when it heard about that; the stock went from 23 cents to around 80 cents before settling back in the 60 cent range last week, with a lot of volume. They have raised some more money and have had crews sampling 200 shafts and a couple of hundred waste piles from the hand dug workings. Results should be in and compiled during the next few weeks and RVS plans to follow up immediately with a 3,000 meter drill program.
While we do not expect the actual grade to average anything like ten grams, Nami has a large enough footprint to contain a lot of ounces. The combination of that sort of potential plus the fact there should be a good flow and results for several months makes Nami a target that can hold the market's attention. It's the one component they have always lacked; they have good management, good projects, but there was never anything with that sort of "ooomph" to get people excited, and this seems to be that key factor.
TGR: Are there some other companies that you're following?
EC: Mirasol Resources Ltd. (MRZLF.PK) is another company run by very strong professional exploration people in Argentina. We've always considered Argentina to be an area that is going to generate a lot of great deposits in the next 10 years. And much of Argentina is still pretty lightly explored.
Mirasol went down there several years ago and they picked up a very large land package and a very strong one. They are project developers; their forte is applying geological models to areas that have seen very little work. They really get going on large structures and geology. They focus on the very basic, early stage work to see if they can generate discoveries. And then, they winnow things down. They have 30 or 40 projects in early development at any given time. They have made several quite high-grade silver vein discoveries; one of those discoveries, the Joaquin Project, was optioned to Coeur d'Alene Mines Corporation (CDE).
Coeur d'Alene started drilling Joaquin in 2008. They did another program last year and got some quite strong results towards the end of it. We wrote them up in the early fall because of the combination of good early drill results at Joaquin that were about to be followed up on and a strong project pipeline, giving them real discovery potential. Coeur D'Alene started drilling again in October and released some pretty spectacular numbers in November. The first set of drill holes that Coeur put out—the best hole was a ridiculous number. It was around 25 meters with 1,100 grams.
So far, MRZ has stuck to their knitting, being a project developer and a project generator, and Dave and I tend to prefer guys who will swing for the fence for themselves rather than just option everything. One thing that was holding them back—and rightly so—was the market wasn't that great. They've made another high-grade discovery on a nearby property that looks like it's very similar to this and they, in fact, have several other properties that have strong potential. Again, this really got the market's attention; this stock was 50 cents when we wrote it up and it's trading now at about $2.70.
TGR: Any others?
EC: I'll update a couple of the other companies we talked about last time. Evolving Gold drilled a large number of good holes at its Rattlesnake Hills project in Wyoming. The company will report an initial gold resource this spring and will be back as soon as weather allows with a big follow-up drill program and all the zones remain open. EVG also just reported a high-grade discovery hole from its Carlin project in Nevada. Follow-up drilling is required but it looks like the company may have another important discovery on its hands.
Underworld Resources Ltd. (UNDWF.PK) also had a lot of drilling success at its White Gold project in the Yukon. They reported an initial resource estimate of 1.4 million ounces for White Gold, close to what we expected. They too will be busy again this year. Several of the zones remain open and there are some good targets on the main project and in the regional area still to be tested. We are following another company in the area as well and will be watching it closely.
Minefinders Corporation (MFN) continues to see improvement as it brings the Dolores project up to its full commercial production level. Cash costs have been dropping and the company is now stripping and starting to mine a higher-grade area of the deposit so the numbers should continue to improve. They will also be working on a preliminary economic study of adding a full mill to the project. We are very interested to see how that turns out since we have always liked the deeper high-grade zones at Dolores. Higher-grade zones are the main beneficiary when a sulphide milling system that has higher recoveries is added and the deeper zones at Dolores are still open to expansion. We've been watching to see how the recoveries come in on the heap leach operation and they do seem to be still improving.
One important aspect to heap leach operations that traders need to be aware of is that it takes two or three or even four quarters to get to steady state production levels and really see what the recoveries percentages are for gold and silver with this type of mining. MFL also has a couple of exploration projects they have been assembling for the past few years and once Dolores is generating the cash flows projected for it, we would not be surprised to see Minefinders on the hunt for acquisitions.
TGR: Eric, we appreciate your time.
Eric Coffin and his brother David are the co-editors of the HRA (Hard Rock Analyst) family of publications. David is the "rocks side" of HRA, and has been active in mining exploration for over 30 years in roles spanning prospecting through feasibility studies, and now markets commentary. Responsible for the "financial analysis" side of HRA, Eric 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.
Eric was one of the first analysts (along with David) to point out the disastrous effects of gold hedging and gold loan capital financing (1997) and to predict the start of the current secular bull market in commodities based on the movement of the U.S. dollar (2001) and the acceleration of growth in Asia and India.
1) Karen Roche of The Gold Report conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Evolving Gold, Minefinders.
3) Eric and David Coffin — One or both of us own shares in all of the companies mentioned in the interview.