A plan to build roads into mining projects. Tax breaks for junior mining companies. Does the return to power of the Parti Québécois signal the end to the province's mining-friendly policies? Unlikely, according to Eric Lemieux, equity analyst with Laurentian Bank Securities. In this exclusive interview with The Gold Report, Lemieux says that even if the PQ tweaks current policy, it will take time, and he believes there are plenty of good stories to tell and invest in before that happens.
The Gold Report: Eric, you primarily cover mining companies in Québec, one of Canada's most mining-friendly provinces. However, last month the Parti Québécois [PQ] won a minority mandate. Are the glory days for Québec's mining sector over?
Eric Lemieux: Without saying the glory days are over, the election of the Parti Québécois will definitely put things on hold. The PQ has a very pro-environment and anti-mining perspective based on the personal convictions of certain ministers.
I think the PQ will change some of the priorities in Québec. I do not know if it will turn out to be effectively anti-mining. I think its people will just want to do things differently or give the perception that they are doing things differently. Recall the PQ held a very pro-ecological, anti-mining electoral stance that went in-line with the "printemps érable" [Maple Spring Arising] with the student protests.
At the end of the day, I am optimistic that Québec will continue as a favorable jurisdiction, just maybe not as favorable as it used to be.
TGR: Do you think Plan Nord-the initiative to build a road to several mining projects in the northern part of the province-will be canceled?
EL: I do not. The PQ has said it believes in some elements of Plan Nord.
Plan Nord has wealth-generating elements; it is indeed the plan of a generation, so a long-term view is essential. Some parts of the plan have started to move forward on the infrastructure side. It would be counter-productive to stop road construction after having cut down so many cubic meters of trees. The PQ will have to analyze situations like that and come up with a balanced approach, perhaps case by case.
In many ways, the PQ's stance does not hold up. It wants to fully develop Québec and it favors entrepreneurship. But it also wants to increase taxes and change the rules of the game. That damages a stable business environment. I believe certain proposed infrastructures of the Plan Nord should go ahead either for practical reasons [investments mobilized] or because they may fit with the PQ "Maître chez-soi" doctrine. I think there will be a fine-tuning of the Plan Nord.
TGR: Will the sovereign investment funds in Québec have a say in what happens with Plan Nord?
EL: I believe so and would expect that their expertise and experience would hold some sway. Eventually, the sovereign funds should have a word with the PQ and explain that if the PQ wants them to invest in Québec companies, the PQ must give companies the occasion and encouragement to move forward in a stable framework and conducive business environment.
TGR: Junior mining companies operating in Québec get roughly half of their exploration tax back through tax breaks. Will those disappear?
EL: Probably not, largely because of the potential backlash from the regions that really profit from those tax breaks. I am talking about regions such as the Abitibi, which, incidentally, voted for the PQ. I think companies there, such as service providers, would stand up and argue that rolling back tax breaks would be going too far toward killing the golden goose.
As much of an advantage as the tax break is for the companies, it also has a larger ripple economic effect-the employment created and sustained by exploration activities. For example, Val-d'Or has been very vibrant in the last two years because of just that second-stage effect. If the PQ starts to play around with that, the people in the regions will say, no, we need this help to sustain the activities. This is all the more reason that there is a certain cooling of activities in light of current economic uncertainty and cycles in commodities prices.
TGR: Can you give us some recent examples of exploration success in Québec due, at least in part, to those tax breaks?
EL: Well most junior discoveries in the past decade can be traced to exploration activities funded by flow-through financings.
On the Québec side, the Fenelon deposit was worked on in the 1990s. Fenelon was very rich, but very small. The sizeable overburden depth and limited access has precluded much advance exploration.
As to James Bay East, this is an underexplored area. Virginia Mines Inc. (OTC:VGMNF) is one of the only key players in that area.
Virginia Mines is my top pick right now. Virginia also has a strong pipeline of projects in northern Québec. This company knows how to explore and it is good at it.
One of Virginia's latest news was trenching results in early September 2012 on its Wabamisk project, which is about 60km southwest of Eleonore. This is an area Virginia worked in the past and it is now amassing a huge land position there. The company plans to drill intensively at Wabamisk this winter; there appears to be a big alteration system. This is an example of the wisdom of going back to an area, using new models and coming up with interesting stuff. I think Virginia's portfolio of royalties and projects justifies my $17/share target price.
Going back to Plan Nord, this is an area that should benefit from its road-building component. The Route 167 extension will go from Mistissini to Stornoway Diamond Corp.'s (OTC:SWYDD) Renard project. There is talk of continuing from Stornoway up north to the Trans-Taiga Road and the hydropower plants of Hydro-Quebec's La Grande complex. If that happens, the road will go through the eastern James Bay area, where Virginia is active. That would add value to those projects.
TGR: You seem to favor companies near existing mines or developing projects. What are other aspects of your investment thesis?
EL: One key element is the quality of the management. You need to know who management is, what their track records are, what the industry sentiment is about them.
I also appreciate focus-on specific projects and geological models-that will lead the pack that goes beyond looking right next door to another company's recent discovery.
That being said, I do favor companies near existing mines or developing projects. I think you can often seize occasions when you understand what is happening in a certain area. That is how I make the relationship between existing mines and developing projects. I also highlight that the partnership model has its merit; in tough times this is a great way to remain active and keep some measure of cash and survive for another day.
Finally, I appreciate the under-promising and over-delivering mantra.
TGR: You recently visited mineral exploration projects in the Yukon. That was a hot region a few years ago, and then it cooled off. What is happening there now?
EL: I was there in mid-September. There has been a slow down, which is somewhat typical. The first discovery happens, followed by excitement, which then quiets down; it is the natural process I believe.
But, putting it in context, the Yukon is remote. It is not that easy to work. The Yukon Territory would probably benefit from a pro-mining policy to build infrastructure similar to what Québec has done by building roads and hydroelectric plants. If the Yukon Territory could build a power plant in conjunction with mining projects, it would have end-users to buy the power. That makes practical, political and governmental sense.
TGR: But Hydro-Québec had a strong tax base to draw on and pay for its development in Northern Québec. The Yukon has one-twentieth of the population.
EL: True, but I am not talking about the same scale. For example, if you dam a river for a hydroelectric plant in the Yukon, mining companies would be your first customers, but the supplemental power generated could be fed to communities farther away. That would be a forward-thinking policy that is win-win for all parties.
But getting back to your initial question, I think things are re-brewing in the Yukon. Kaminak Gold Corp. (KMKGF.PK), who rode some of the initial play in the White Gold District, and ATAC Resources Ltd. (ATADF.PK) in eastern Yukon are now coming out with some interesting results again.
If people have confidence in what they are doing, it can be good to take a step back, slow down and sometimes revisit a project later on. A case in point is the exploration team of Virginia Mines. Virginia Mines' strength is that it does not work all the deposits in its portfolio at once. It is willing to put a project on hold, maybe for three or four years, then revisit it from a different angle.
TGR: Recent trenching on QV suggested values of up to 3.74 grams per ton gold over 75 meters [m] in a part of Canada that has not seen any glaciation. Is that important?
EL: It is quite interesting, because it is so far north one would think everything had once been covered with ice.
Having no glaciation means that the material underground has not been transported great distances by surface erosion and the movement of glaciers. So, when you dig a trench, the soil sample you take at a certain depth is likely to be representative of the rock below.
This really helps in the geological and geochemical evaluation, especially in some parts of the Yukon, where there are so few outcrops.
TGR: When you visited QV, could you see any visible gold in the core?
EL: Yes, I saw visible gold. I photographed it. But I do not necessarily equate visible gold to a significant gold interception. I prefer to see a system. I prefer to see alteration, something that suggests that fluids passed through. Also, experience says to await the assay results.
It was reassuring to talk with the knowledgeable people who are running the show there at the QV project. Some of them worked on the Underworld Resources Inc.'s [now part of Kinross Gold Corp. (KGC)] Saddle discovery in the White Gold District. They know what type of rock is interesting.
TGR: Are there any other stories you'd like to share with our readers?
EL: Eagle Hill Exploration Corp.'s (EHECF.PK) Windfall Lake project has been producing some interesting drill results. This project is 100km east of the Lebel-sur-Quevillon. Its second resource estimate is about now 1.3 million ounces. Geologically, this looks very interesting.
NioGold Mining Corp. (NOXGF.PK) is not rated, but it has good results and the company has published resource estimates. Also, Cartier Resources Inc. (ECRFF.PK) came out with some interesting results on its Pusticamica gold project.
TGR: Eric, thank you for your time.
Eric Lemieux is a mining analyst who joined Laurentian Bank Securities in 2008. He worked for nine years as a consultant responsible for applying Regulation NI 43-101. He has worked at the Montreal Exchange, and prior to that managed exploration projects for Cambior, Noranda and Soquem. He holds two master's degrees, in mineral economics from the Colorado School of Mines and in metamorphic-structural geology from Laval University.
1) Brian Sylvester 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: None. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Eric Lemieux: I personally and/or my family own shares of the following companies mentioned in this interview: Cartier Resources Inc., Eagle Hill Exploration Corp., Kaminak Gold Corp., Kinross Gold Corp., NioGold Mining Corp., Stornoway Diamond Corp. and Virginia Mines Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.