Michael Fowler, senior mining analyst with Loewen Ondaatje McCutcheon Ltd. in Toronto, doesn't typically focus on midtier gold companies, but the opportunities are just too good to pass up. In this interview with The Gold Report, Fowler tells us that even private equity is getting into the game and discusses a handful of companies that are good growth plays.
The Gold Report: In January, the exchange-traded fund SPDR Gold Trust (NYSEARCA:GLD) outperformed its silver counterpart, the iShares Silver Trust (NYSEARCA:SLV), by about 6%. Should investors expect gold to outperform silver for the entire year?
Michael Fowler: Gold and silver are going to perform in tandem this year. Gold is in a corrective phase at the moment. I expect it to average around $1,300/ounce [$1,300/oz] and silver to average about $21/oz. We expect gold and silver prices to increase into 2015.
TGR: We've seen a bevy of bought-deal financings to start the year. Some, like Luna Gold Corp. (OTCPK:LGCUF), are financing below current market prices. Could you provide us with some insight as to what's happening there?
MF: There are about 1,800 resource companies on the Toronto Stock Exchange and TSX Venture Exchange and a capital shortage. The demand for capital is huge, but the supply is low. Companies are taking advantage of the small bounce in the gold price last month. In terms of financings, a 10% to 15% discount over the share price is typical when you're trying to get a deal done in this kind of environment. Luna Gold has reasonable quality.
TGR: Does that make you somewhat more optimistic?
MF: Yes, it is encouraging. However, it doesn't change my view that the industry is still in a mess. There continues to be a capital shortage. Companies spent money like drunken sailors in the past few years and the consequence is they have to cut costs significantly.
TGR: What types of projects are getting money?
MF: The better-quality companies are being financed. There is a capital shortage, but that doesn't mean there's no capital.
TGR: What makes a quality mining company in this market?
MF: Let's take Luna as an example. It has some production. The majority of these companies are still just exploring. Torex Gold Resources Inc. (OTCPK:TORXF), which also came to the market, is a development play that is close to production. Investors want production, good assets and strong management.
TGR: Some recent reports suggest that there's as much as $10 billion in private equity looking to find its way into the undervalued junior mining sector. Is that changing how you evaluate companies in the junior gold and silver space?
MF: No, but if private equity finds the valuations of junior miners compelling, it means that these companies are extremely cheap. However, even private equity is having a hard time finding quality. There have been a few investments, but it's easy to get burned in this sector. Private equity firms are looking through the weeds and trying to find something of value.
TGR: Please outline the must-haves for companies you think are going to move in 2014.
MF: Jurisdiction-wise, North America is hot right now. So we would recommend assets in that jurisdiction. Companies have to have quality assets. The grade of the deposit is important. The cost structures are important. Valuation needs to be inexpensive, with potential for growing cash flows.
A good example is Osisko Mining Corp. (OSKFF), which is the focus of Goldcorp Inc.'s (NYSE:GG) takeover bid. Osisko has a quality deposit in Québec. There is some growing cash flow coming out of that one.
TGR: Your coverage universe has changed dramatically compared to the previous year. What constitutes that you continue to cover?
MF: I'd encourage people to also invest in midtier gold companies, which would be my favorites. Our coverage only reflects our business, which is more speculative, but it's wise to be involved in midtier gold companies, too.
TGR: Although it's not your firm's target, you mentioned midtiers as being promising. What midtier companies have some fairly robust years ahead as we climb out of this trough?
Then there are a couple of value plays that I like. Alacer Gold Corp. (OTCPK:ALIAF) in Turkey is a good play.
TGR: Randgold said it would spend $60 million on exploration in 2014. It had a record year in 2013.
MF: Randgold is keeping its exploration budget up. That means longer-term growth. That is a big difference from some of the bigger names out there that are cutting exploration to the bone. Large-cap production will start falling in the long term. That's going to be a big negative for those guys going forward.
TGR: Did you want to talk briefly about those value plays?
MF: SEMAFO's flagship mine is Mana in Burkina Faso. It has a satellite deposit close to Mana that is very good grade. It's going to put that in production soon so we can expect some growth from that company.
Alamos' flagship mine is in Mexico, but its growth profile is going to come from Turkey. Its balance sheet is good.
Centamin is doing very well with its Egyptian property. It's producing more than expected.
Alacer is one of the lowest-cost mines in Turkey. It's developing a sulfide process for its deeper ore and that will provide some growth. Its balance sheet is excellent as well.
TGR: You are presenting an upcoming workshop at the annual PDAC conference in Toronto, March 1, titled, Investment Fundamentals: Understanding Mineral Exploration and Resource Development and the Relationship to Company Stock Prices. What are three things you hope investors take away from that workshop?
MF: It's a great course that's been going for nine years. There's a lot of seasoned mining professionals, consultants, engineers, etc. We always get good reviews and we keep on getting invited back to the PDAC conference to do this.
It gives the attendees the basics of the business and the major risks in exploration and mining engineering. It goes through the mineral exploration cycle to development and production. It focuses on how consultants, analysts and engineers value mineral properties and companies and the techniques that they use. It tries to relate those valuation techniques to what is actually happening in the marketplace and the major drivers of company stock prices.
The audience is very interesting. It's a mix of CEOs, accountants, lawyers, geologists, engineers, students and people from all over the world.
TGR: Could you leave us with some thoughts on the cost cutting that's going on across the industry and how that's going to ultimately play out?
MF: This is a key issue. The cost cutting that's been going on is only a start. The industry wasn't doing so hot with gold at $1,250/oz. What if it goes to $1,150/oz? There will be some severe problems. The bottom line is that significant cost cutting is going to happen this year and there's going to be a lot of impairments as well. Reserves are going to be downgraded and write-offs are going to be in full swing in year-end results.
TGR:. Thanks, Michael.
MF: You're welcome, Brian.
This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.
Michael Fowler, senior mining analyst with Loewen, Ondaatje, McCutcheon Ltd., has worked in the investment industry since 1987 as a base and precious metals mining analyst for numerous high-profile firms. His coverage list included the major North American gold mining companies, but is now focused on small- to mid-sized companies. Previously, Fowler worked as a geophysicist involved in mineral exploration for 10 years. He was involved in the discovery of the high-grade Cigar Lake uranium mine in Northern Saskatchewan in the early 1980s. Fowler holds a Master of Business Administration from Cranfield University, UK; a Master of Science in mineral exploration from Leicester University, UK; and a Bachelor of Science in geology with geophysics from Liverpool University, UK. He is a member of the Institution of Materials in the UK and a member of the Canadian Institute of Mining and Metallurgy.
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
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3) Michael Fowler: I or my family own shares of the following companies mentioned in this interview: SEMAFO Inc., Alacer Gold Corp. and Randgold Resources Ltd. I personally am or my family is 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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