Christos Doulis is a mining analyst with Stonecap Securities covering emerging precious metals producers with market capitalizations under $1 billion. He combines financial modeling of current and future cash flows with detailed first-hand analysis to find out what is really going on at smaller producers, some of which he believes will outperform the market. Could one or more of these companies become the next big mid-tier producer? The future darlings of Wall Street need to start somewhere. One starting point is cash flow and a good story. In this Gold Report interview, Doulis discusses several companies that have both.
The Gold Report: You have been involved in the mining space for some time, but not being a geologist or mining engineer, how do you approach the sector differently from other analysts?
Christos Doulis: I've been a banker and a research associate before becoming a mining analyst. I prefer to focus on producers, but I also cover advanced-stage developers. Generally, I look for production stories with market capitalizations of less than $1 billion [B]. I focus on gold and silver, but have a stronger representation of silver than most industry analysts.
TGR: Is silver more interesting to you than gold at the moment?
CD: I'm equally interested in both gold and silver. However, silver is a much smaller space compared to gold for most mining analysts. Most analysts' coverage universe is gold; mine is 50/50 gold and silver.
TGR: You have a lot of great research available on your website at Stonecap. I noticed one of your covered companies appears to be a copper developer. How do base metals fit into your analysis?
CD: I am looking for outstanding companies. I don't cover anything that doesn't have a precious metal component.
TGR: What is your base case price for silver?
CD: $34/oz across the board. Silver itself is volatile and not easy to forecast. The price of $34/oz is close to where it's been trading for a while. The market looks to the spot price of silver as a valuation metric.
TGR: What is the story with San Gold Corp. (OTCQX:SGRCF)?
CD: San Gold is a company that I was neutral on for some time and has recently gone positive. It's a situation where no more capital is needed to complete development. All required funding comes from internal cash flow and existing resources. San Gold had a real problem in the second quarter with its mill shut down for a month. That hit its Q2/12 numbers.
The new CEO, George Pirie, has started to turn San Gold around. Part of the current situation with the stock may be the result of the stock being oversold at the beginning, where the company was promoted as a 150 Koz high-grade producer. It's now a 100 Koz producer that is growing.
TGR: Those are underground high-cost mines from Canada. Another producer you cover is Rio Alto Mining Ltd. far south in Peru. The stock is performing extremely well. What is your outlook and is there still upside?
CD: I have been positive on Rio Alto in the past, but when it hit $4.50/share, I went to a Sector Perform. The stock continued to run to the $5.50/share range. In the past couple of weeks I have re-evaluated my position and went back to a Sector Outperform. I had been at a Sector Perform because I wanted to see an update on the oxides and/or an update on the sulfides. Rio Alto is mining the oxides now. I had some dialogue with management after the latest production numbers that led me to believe that I was underestimating the recoveries.
Furthermore, management convinced me that we would see some good news in either Q4/12 or the new year when the company tables a new mine plan for the oxide deposit. As long as there are no permitting issues, the mine should go to 36,000 tpd. That is 200 Koz/year for seven or more years from the La Arena project. That is at the top end of the previous range of 150-200 Koz, depending on the year and the mine sequencing. I expect the new plan to be no lower than 200 Koz/year.
I like Rio Alto's story because the company has executed well and a mine of that size is an obvious acquisition target for a major. Barrick Gold Corp.'s (ABX) Lagunas Norte mine is nearby, providing synergies with procurement and infrastructure.
Then there is the sulfide project. I'm not necessarily 100% convinced on the merits of the sulfide project because it's been a long time since we've seen any economic numbers wrapped around it. Plus, input costs have gone up and the sulfides are not high-grade. The sulfide deposit adds potential sizzle to the story that there is life here beyond the oxide mine. Because of all of this, I am back to an Outperform here. Based on my models, the upside is limited. My target is $6.60, which is a 20% upside.
TGR: Would you like to talk about other companies?
CD: A recent one that I've picked up is Alexco Resource Corp. (AXU), which is a silver producer in Canada's Yukon. I've come out with an Outperform rating and a $5.75 target. The stock is around $3.75/share today. This was an $8/share stock that got crushed down to $3.50/share. I'm a little opportunistic here, but these sub-$4/share prices hold a lot of upside potential.
Alexco has had a little trouble in the last year with feeding its mill. The mill is rated at 400 tpd, but it has never been able to get it more than 300 tpd. Part of the reason is that Alexco only has had one mine, Bellekeno, feeding the mill. It is bringing on two other regional mines, Onek and Lucky Queen, in Q1/13. That will allow it to start feeding the mill at its rated capacity of 400 tpd, which will change it from a 2 Moz producer into a 3+ Moz producer. Alexco is in a politically safe jurisdiction and has very high grades. It's a prolific past-producing camp with lots of potential to find new discoveries.
TGR: The Yukon is not an inexpensive place to do business. What do cash costs look like?
CD: High cash costs in 2012 were one of the reasons the stock has been punished this year. Costs were in the $13/oz range, while in 2011 they were below $10/oz. Alexco should be able to get back to that $10/oz range when the mill feed gets to 400 tpd.
TGR: Are there significant co-products in that deposit? The economics of lead and zinc in remote areas can be a challenge.
CD: This is super high-grade ore with 700-800 g/t silver with around 5% each lead and zinc. The $10/oz number is net of credits. It takes these robust lead and zinc credits for this project.
TGR: You have mentioned a lot of projects with strong economics at current prices. Does it concern you that there's a lot of silver coming on-line from many diverse sources that could put downward pressure on the silver price?
CD: It is something to consider, but I expect the monetary base to grow faster than miners can bring the silver to market. There will be a lot of volatility in the silver price and massive ups and downs. However, as long as the money supply grows faster than the precious metals supply, the price momentum for both gold and silver will continue to be positive.
TGR: Do you have other comments?
CD: My research is available for readers who would like to get a more in-depth view of the companies that I cover. There is no cost associated with my research. It's primarily for an institutional audience, but I'm always willing to send copies of my reports to the retail shareholder. My email is email@example.com.
TGR: Thanks for mentioning that. I was impressed with the depth and clarity of the reports. A lot of readers can benefit from that research. And thanks for your insights today.
Christos Doulis, before joining Stonecap Securities as a mining analyst in September 2010, spent 16 years in a wide variety of roles with a focus on the global mining sector. Most recently, Doulis was a partner at Gryphon Partners, a diversified global corporate advisory consultancy specializing in mining and resource company mandates. From 2006 to 2008, Doulis was a vice president in the Mining Investment Banking group at Blackmont Capital. Doulis began his professional career in 1994 with Scotia Capital as an equity research associate.
1) Alec Gimurtu 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) Christos Doulis: I personally and/or my family own shares of the following companies mentioned in this interview: None. 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.