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  • Junior Producers Riding Exploration Success To Reratings: Raj Ray

    In this interview with The Gold Report we learn that it's not enough for junior gold producers to have strong management teams running thrifty, efficient operations. These companies must be able to extend their mine life, either through exploration or distressed M&A, to reach the coveted market rerating, says National Bank Financial Mining Analyst Raj Ray. He covers a growing list of companies that, with help from depreciating currencies, are up about 75% year-over-year and could see further gains with success via the drill bit. Ray shares those names and others with outsized leverage to a big move in the gold price.

    The Gold Report: Have you ever witnessed such a sustained period where the U.S. Federal Reserve and/or the European Central Bank have had so much sway over market direction? Is it sustainable?

    Raj Ray: What we are seeing right now is a throwback to the Fed's original goal of preservation of financial stability. Central bankers believe that maintaining financial stability is just as important as managing monetary policy. Only time will tell whether it's sustainable, but it's here to stay for the foreseeable future.

    TGR: Are central bank decisions changing how you do things?

    RR: As a mining analyst, the objective has always been to focus on companies with efficient operations, good management and capital discipline. In addition, I am looking for exposure to investments that to some extent can hedge the gold price risk as a direct result of central bank decision-making. A lot of miners' favorable currency exposure has buffered the impact of an otherwise muted gold price. It's not about changing what we do. It really is about sticking to the basics and being more diligent about what we do.

    TGR: What is your call on gold as the traditional summer doldrums approach?

    RR: I expect gold to oscillate around the $1,200/ounce [$1,200/oz] mark, but it will be economic-data dependent. The possibility of the Fed raising short-term rates has kept a lid on gold prices. The market seems to expect a June increase as unlikely. If the Fed decides to maintain rates, you might see a small uptick in the gold price to $1,250/oz.

    TGR: Do you, like most other mining analysts, believe that it will be 2016 before the mining sector turns the corner?

    RR: I believe it will be commodity-price driven more than anything else. Late last year, National Bank Financial [NBF] Senior Mining Analyst Steve Parsons published a report looking at the impact of project deferrals on production declines. NBF believes that these deferrals have charted a direct course for production declines, which we forecast will commence in 2016 but any resulting impact on the gold price is more likely to play out in 2017. That's because come 2016 the hangover from the Fed's policy decisions on interest rates could be playing out on the gold price and it will be late 2016 before we see gold production supply/demand issues.

    TGR: We've seen some recent strength in the gold price. What accounts for that?

    RR: It's the expectation that the short-term rise in interest rates might happen later than September. At the last Federal Open Market Committee meeting, the Fed policy removed all calendar-based references in its forward guidance and has taken a more data dependent approach. So a rate increase could happen once positive economic data start coming out, but that doesn't seem likely in the next three months.

    TGR: We have seen some recent mergers and acquisitions [M&A] activity, and two companies National Bank Financial follows were involved-AuRico Gold Inc. [AUQ:TSX; AUQ:NYSE] and Alamos Gold Inc. [AGI:TSX]. What should investors take away from that deal?

    RR: Both Alamos and AuRico are covered by our precious metals analyst, Adam Melnyk. It's a good example of a deal where both parties stand to benefit. For Alamos, it's exposure to AuRico's long-life Young-Davidson gold asset in Ontario, a mining-friendly jurisdiction. For AuRico, it's much needed access to liquidity. There is market appetite for further synergistic M&A, as well as distressed M&A. I wouldn't be surprised to see some consolidation in Canadian mining camps given the operational and corporate synergies that could be realized.

    TGR: Though the sector is down year-over-year [YOY], certain names have managed to perform and perform well, especially a handful of companies you cover. What do those juniors have in common?

    RR: The companies that have outperformed have strong management teams, efficient operations and a disciplined approach to capital spending, but favorable exposure to a depreciating currency has helped, too. If I build a portfolio of one stock from each of the Canadian junior underground miners, the average return over the last 12 months would have been close to 75% as opposed to -30% for the Market Vectors Junior Gold Miners ETF [GDXJ:NYSE.Arca]. These companies must keep doing what they're doing, and with help from a depreciating currency they are in a good position to not only build their balance sheets but also get going on exploration programs, an overall weak point in the last couple of years.

    TGR: What are some companies with favorable exposure to a depreciating currency?

    RR: OceanaGold Corp. (OTCPK:OCANF) [OGC:TSX; OGC:ASX] is in a strong position to benefit from the continuing weakness in the New Zealand dollar versus the U.S. dollar. OceanaGold has almost 65-70% of its production over the next two years coming out of New Zealand and the company should continue generating free cash flow in this environment.

    TGR: Many Bay Street analysts believe currency depreciation has already been factored into share prices. Is there upside left?

    RR: Yes, part of that has been factored into the stock price, but I believe there is further upside. Over the last 12-18 months, management of these companies has focused on making operations more efficient and cleaning up balance sheets-and many have been successful. While being on the right side of currency exposure has resulted in the run-up in the stock prices we have seen to date, I don't think those stock prices have factored in growth potential. The focus is now on exploration as select companies are in a better position to expand their exploration programs.

    At Kirkland Lake Gold Inc. (OTCPK:KGILF) [KGI:TSX], some of the companies that I cover, exploration programs are back with a bang. There are some significant catalysts over the next six to eight months that could change the whole outlook for these companies.

    TGR: Since becoming Kirkland Lake CEO, George Ogilvie has made a number of changes, not the least of which was firing about 150 people as part of a move toward a more automated mining system at the Macassa Complex. What are your thoughts on him and what he's done?

    RR: Ogilvie has been there just over 12 months and it's been a phenomenal year for Kirkland Lake. His vision of what this mine is capable of has been spot on. Grades have always trumped tonnage at the Macassa mine. There has been significant improvement in mine grades. That's the reason why the company has returned to profitability. The stock price reflects that confidence in Ogilvie and the current management team. The company has delivered on its objective over the last 12 months. Beyond this, the stock price has to move. It has to do more.

    TGR: Do you have a target on Kirkland?

    RR: I have a $6.50 target and an Outperform rating.

    TGR: A recent NBF research report noted that "company efforts to maintain strong balance sheets in a weak gold price environment have been prudent, but the unintended consequence, in many cases, has been an adverse effect on production sustainability." Does that mean that high grading has put companies at risk?

    RR: When we talk about the consequences, we are really referring to the cuts in exploration and funding for project development, which have resulted in a flat to slightly declining growth pipeline for a lot of these companies over the next three to five years. High grading can be an issue, but as long as a company is mining in such a way that it is not sterilizing the ore body, it can still leave some room to recover the low-grade resource in a higher commodity price environment.

    A lot of the Canadian underground miners that I cover are backfilling, which provides the option to recover some of the low-grade resources in a higher commodity price environment. So, yes, it's a mix of companies that have optimized their mine plans and others that have realized the importance of grade over tonnage. When commodity prices were strong, the goal was to have higher tonnage from mines that were not supposed to operate that way. As commodity prices fell, companies reduced tonnage and dilution, and that's meant an uptick in grade and profitability for a lot of the junior underground miners.

    TGR: How has NBF adjusted its investment thesis to place a greater emphasis on companies with "production sustainability?"

    RR: While we continue to focus on profitable companies with strong balance sheets and favorable dilution and cost exposure, production sustainability remains an important part of our investment thesis. We look for companies with potential to add to reserve and mine life close to current infrastructure but without spending large amounts of capital. SEMAFO Inc. (OTCPK:SEMFF) [SMF:TSX; SMF:OMX] is one example where management not only added reserves through the drill bit but also through its M&A strategy via the Orbis Gold Ltd. [OBS:ASX] acquisition. Smaller but value-accretive acquisitions are the way to go forward.

    TGR: A few of the companies you cover had 100% or more YOY increases in free cash flow. One was SEMAFO, another was OceanaGold. What are some common elements of those stories?

    RR: These companies have strong management, efficient operations and a disciplined approach to capital spending. In addition, both SEMAFO and OceanaGold have been able to replace reserves with value-accretive acquisitions. SEMAFO acquired the Orbis Gold Ltd. [OBS:ASX] mine and OceanaGold recently announced the acquisition of the Waihi deposit in New Zealand from Newmont Mining Corp. [NEM:NYSE]. These are smaller acquisitions, but what's important is the value that the companies derive from them.

    TGR: Do you think SEMAFO is done with M&A for now?

    RR: SEMAFO is likely done with M&A for now. It has some considerable exploration potential close to its current Mana mill. Over the next 12-18 months, the company will also focus on getting Natougou, the project it acquired from Orbis, up and running. What could be a bit of a hangover on the stock over the next six months is the Burkina Faso political situation. The country has returned to normal but there is an election later this year. We will be watching that closely.

    TGR: What is your target on SEMAFO?

    RR: I have an Outperform rating, $5 target on SEMAFO, and an Outperform rating on OceanaGold with a $3.65 target.

    TGR: If gold were to jump to $1,500/oz or perhaps even $2,000/oz, what are some companies under coverage with outsized leverage to the gold price?

    RR: Given the gold price environment and high development costs attached to new projects, we have witnessed a complete reluctance on the part of the market to pay for optionality. Although the timing is uncertain, we believe optionality will return. If we get a sustained period of strong commodity prices, exposure to companies like Seabridge Gold Inc. (NYSE:SA) and NOVAGOLD (NG) could provide leverage to the commodity price. Seabridge's KSM deposit is one of the few large-scale projects in a stable jurisdiction. It already has environmental approval, which makes it attractive to a large number of base metals and gold mining companies. NOVAGOLD has a relatively high-grade, large-scale deposit in Donlin Gold, but is not expected to receive environmental approval until late 2016. Until then, we might not see much movement in the stock unless and until there is a steady and upward movement in gold price.

    TGR: NOVAGOLD has significant cash in the bank. It's definitely not going anywhere in the short term.

    RR: Its cash is currently around $136 million. That provides NOVAGOLD with protection to that optionality. That's an important point because a lot of junior development companies have large projects but do not necessarily have the cash to continue to operate for two or three years. We don't know when the gold price is going to return, so what this cash does is give NOVAGOLD the flexibility to continue advancing its project over the next two to three years as it waits for the commodity price to go upward.

    TGR: Please give us one lead-pipe cinch call before we let you go.

    RR: When looking to invest in the mining sector, I think it's important to focus on companies that have the cost structure to maintain profitability and a strong balance sheet in the current muted gold price environment.

    TGR: Thank you for talking with us today, Raj.

    This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.

    Raj Ray is a metals and mining research associate analyst with National Bank Financial, covering junior mining companies. Prior to joining NBF, Ray worked as an equity research associate with GMP Securities covering diversified and fertilizer sectors. He has also worked in investment banking with Dundee Capital Markets on equity financings and M&A transactions for small- to mid-cap gold and base metal companies. Prior to this Ray was a process engineer at Vedanta Resources Plc for four years. Ray holds a Bachelor in Metallurgical Engineering from India and a Master of Business Administration in finance from the Schulich School of Business. He is also a CFA charterholder.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

    Bottom of Form

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Richmont Mines Inc. and NOVAGOLD. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Raj Ray: I own, or my family owns, shares of the following companies mentioned in this interview: None. 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: Kirkland Lake Gold Inc., and Seabridge Gold Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (NYSE:I) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
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    Tel.: (707) 981-8999
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    May 28 3:17 PM | Link | Comment!
  • Yukon Premier Darrell Pasloski: Our Goal Is To Be The Number One Mining Location

    The Fraser Institute's 2015 Annual Survey of Mining Companies ranks Yukon first in mineral potential and ninth overall in global mining jurisdictions, points not lost on Yukon Premier Darrell Pasloski. Pasloski believes Yukon can improve on its survey ranking and says his government is making every effort to attract mining investment. That includes continued support for the Yukon Mining Alliance, a joint effort between companies and government to co-promote one another. In this interview with The Gold Report, Pasloski talks about some companies advancing their projects in one of the world's top mining jurisdictions.

    The Gold Report: The Yukon is ranked first in mineral potential and ninth overall in the recent ranking of global mining jurisdictions in the Fraser Institute's 2015 Annual Survey of Mining Companies. Is that good enough? What are some of your mining-related goals for the Yukon?

    Darrell Pasloski: You can't get better than number one when it comes to mineral potential but the ninth overall ranking to me says that there's still some work to be done. Our mineral endowment certainly is world class and the opportunities as a world-class jurisdiction for mining exploration and development will make us a future leader in the mining sector. There are more than 2,700 existing mineral occurrences in Yukon but these cover only about 12% of the land, so that leaves vast potential for current and future explorers.

    The first goal would be more streamlined permitting. The federal government currently holds our environmental assessment legislation and is making amendments to the Yukon Environmental and Socio-economic Assessment Act. Those amendments will ensure that our assessment process is consistent with those in other jurisdictions, which should allow us to remain competitive. Here in Yukon, we're working on the Mine Licensing Improvement Initiative. Improvement to this process will foster a more predictable and efficient regulatory environment.

    The second goal would be improved infrastructure. There has been more than 100 years of mining in the territory and some good foundational infrastructure has supported the sector for decades. Yukon already has about 5,000 kilometers of government-maintained roads, an international airport, many community airports, and access to two ice-free deepwater ports that are probably a couple of days sailing closer to market than other ports along the northwest coast. Last year we made significant capital investments in highway, bridge and airport upgrades. This year our capital budget marked another record capital investment in infrastructure. And we have begun to plan for development of new hydroelectric infrastructure that will provide enough energy capacity to take us well into the future. In fact, almost all of the electricity for communities now is from renewable energy sources.

    TGR: Where does mining rank in terms of economic impact in Yukon?

    DP: Historically, mining has accounted for about 20% of Yukon's GDP. Mining is the cornerstone of the Yukon economy. Things are great when the resource industry is strong, but we also feel the effects when the industry goes through cyclical downturns.

    TGR: Much of the Yukon is occupied by First Nations. How is the Yukon government helping mining companies and First Nations build trust and relationships?

    DP: The mining industry is the largest employer of First Nations people in Yukon. We have 14 First Nations in Yukon and almost half of the modern day land claims in Canada are here. Eleven First Nations already have land-claim and self-government agreements. Each of the First Nations that has land claims also has an economic development corporation. There's a tangible business-ready approach to identifying opportunities.

    One of the realities, though, is that because we've been modern treaty trailblazers we are also among the first to encounter the challenges of such uncharted territory. Our relationship with First Nations people is strong, but it's not always easy. Meanwhile, mining companies operating here have been progressive in developing First Nations relationships on their exploration and development projects. Each company has some type of cooperation agreement in place with affected First Nations. First Nation communities and businesses both benefit from these agreements and the opportunities that come from them.

    We also work with the Yukon First Nation Chamber of Commerce and Yukon First Nation Development Corporations. For example, we signed an agreement not long ago with Kluane First Nation to collect some geophysical data via airborne survey on a portion of the Kluane Ranges, part of its traditional territory.

    TGR: Please give us three reasons why mining companies should spend their limited exploration budgets in your territory versus perhaps Alaska or British Columbia?

    DP: First, you mentioned earlier that the Fraser Institute identified Yukon as having the world's greatest geological potential. There is a remarkable endowment of significant gold, silver, lead, zinc, copper, nickel, iron, molybdenum, tungsten, and platinum group metals [PGMs] deposits. More than 2,700 mineral occurrences have been identified in roughly 12% of the landmass-Yukon is significantly underexplored. We have a long history of discoveries that continues to multiply with each exploration boom. As a result of the recent two-year exploration boom that started in 2010, more than 7.3 million ounces [7.3 Moz] gold in new discoveries were added to the previously existing deposits that totaled 23 Moz gold, 50 Moz silver and 10 Moz PGMs. That's significant.

    Second, Yukon has an experienced and supportive service-supply sector. The knowledge is here whether it's assay labs, airborne electromagnetic surveys, helicopters or drillers. The businesses that are required to support the mining industry are well established in Yukon and are here to make life easier for exploration companies.

    Third, this is a very mining friendly jurisdiction. Our government recognizes that the mining industry is a cornerstone of our economy. We realize that the benefits accrue directly to Yukoners and Yukon businesses, as well as to mining companies and their investors. Our government will continue to work on its mineral development strategy. Our goal is to rank first in all of the categories in the Fraser Institute survey.

    TGR: Some mining pundits believe that recent environmental legislation put in place by Canada's federal government makes it unusually difficult to permit a mine or develop new deposits on an already permitted property. What's your view?

    DP: More than a decade ago the federal government transferred management of the territory's land, water and resources to the territorial government. Along with that was the creation of the Yukon Environmental and Socio-economic Assessment Act here in the territory. We have our own made-in-Yukon approach to environmental assessments. Those assessments also have to factor in the social and economic benefits of each project. In the past eight years, seven mining permits have been issued within 18-30 months, which is either comparable or better than most First World jurisdictions. Investors also benefit from being in one of the most geopolitically safe mining jurisdictions in the world, with security of tenure that is second to none. Once a permit is granted, a company and its investors can move forward with little risk that the permit will be revoked. We in Yukon have grown our mineral sector over the past decade and we want to stay at the forefront of investment attraction.

    TGR: Tell us briefly about the Yukon Mining Alliance.

    DP: It's actually quite exciting. The Yukon Mining Alliance [YMA] is composed of Yukon's leading exploration and development companies, and those firms are focused on creating innovative capital attraction initiatives to promote Yukon as a top mineral investment jurisdiction, while at the same time promoting their companies and projects. The YMA initiatives include such things as going to international conferences and events with a mining investment focus. Senior Yukon government officials support these activities by going along and communicating to investors some of Yukon's key advantages. For instance, in September 2014 I went to the Denver Gold Forum with the Mining Alliance. A lot of companies are envious of the relationship that exists between the Yukon government and the mining industry here. It's a unique relationship. Not only are these company CEOs promoting their product, but essentially they're promoting Yukon as well.

    TGR: That's rare in Canada. What are some companies that are demonstrating success in the territory?

    DP: Capstone Mining Corp. (OTCPK:CSFFF) [CS:TSX] has existed for a number of years. The company is currently completing the work necessary to obtain its water license to begin stripping its newest open pit. Capstone is a real success story. One of the unique aspects of the Capstone project is that it's situated on land owned by the Selkirk First Nation. And because it's on First Nation land, 100% of the royalties accrue to the First Nation development corporation and the Selkirk First Nation citizens. That's a good example of how there can be a substantial direct benefit to First Nations as a result of the mining industry. Those are some companies that are quite exciting and that have projects that are moving along.

    TGR: What's one message that you want to get out to mining investors and the public about Yukon?

    DP: Most people recognize Yukon for the incredible beauty of its vast mountain ranges, Boreal forest, and spectacular lakes and rivers, but Yukon is equally beautiful below the ground. When it comes to mining, our potential is second to none. I'm excited about the opportunities out there for the mining industry. The growth and development of that industry will help bring prosperity to Yukon citizens and their communities, as well as to mining companies and their investors. By continuing to invest strategically in infrastructure and ensuring that our permitting and assessment processes are as efficient as possible, we will help position Yukon to be the best place in the world for mining.

    TGR: Thank you for taking some time to talk with The Gold Report. It is much appreciated.

    This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.

    First elected as leader of the Yukon party on May 28, 2011, Darrell Pasloski was sworn in as Premier on June 11, 2011. He was elected to the Yukon Legislative Assembly in October of 2011 in Whitehorse's electoral district of Mountainview. In addition to his duties as Premier, he also serves as Minister responsible for the Executive Council Office and as Minister of Finance. Prior to entering politics, Premier Pasloski worked as a pharmacist and business owner, was an active member of Yukon's business community and had a long record of volunteer service.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

    Bottom of Form

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Darrell Pasloski: I own, or my family owns, shares of the following companies mentioned in this interview: None. 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 determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (NYSE:I) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    May 26 3:12 PM | Link | Comment!
  • 'Lean And Mean' Is The Secret To Junior Mining Equity Success: Thibaut Lepouttre

    Thibaut Lepouttre, editor of Belgium-based Caesars Report, says the gold price is range bound and if you want to be in gold equities you have to find "lean and mean" precious metals producers that are generating cash flow or have a clear path to cash flow at $1,200 per ounce gold. Lepouttre tells investors to look for projects with economic studies demonstrating high internal rates of return, as those projects are more likely to attract financing and command a market premium. In this interview with The Gold Report, Lepouttre talks at length about some of his favorites inside and outside the gold space.

    The Gold Report: In January, you told The Gold Report that the price of gold is driven by market panic and inflation, neither of which looks imminent. If investors can't expect higher gold prices in the near term, why should they be in this space?

    Thibaut Lepouttre: I've never been a goldbug but I see gold as a form of asset diversification. There's nothing wrong with having some exposure to precious metals in a portfolio, both in the physical form and in the form of precious metals mining equities. Mining companies are much like any other company. You should find the ones that have free cash flow or have set their sights on positive cash flow, even when the gold price is range bound. It's up to investors to make sure that they know what they own and understand the financial situation of those companies.

    TGR: How are you playing this space?

    TL: I want reliable, low-cost precious metals producers and some companies with development-ready projects. I try to identify companies with projects that are viable at the current gold price and that should be able to get financing because their projects' internal rates of return [IRR] are still acceptable at $1,200/ounce [$1,200/oz] gold or lower. I avoid companies with projects with high capital costs because the markets want companies that are small, lean and mean. I'm not investing in companies that need gold at $1,500/oz or $2,000/oz to make a project work.

    TGR: You're based in Belgium. Greece recently made a $224 million [$224M] payment to the International Monetary Fund [IMF]. Essentially, that's an interest payment on its European "credit card," but the country is still negotiating with the IMF, the European Central Bank and the European Commission on its next bailout. How do you expect these negotiations to unfold?

    TL: It was really the European Union's [EU] credit card that was used to make the payment because Greece asked all its public services to wire cash to Athens as an emergency measure. The big question is where will Greece get the money for its next payment? The treasury in Athens is running on fumes. Greece has to repay about €6-7 billion [€6-7B] over the next two months. It's a tricky situation, but Greece is probably in the driver's seat because the EU clearly does not want Greece to leave the Eurozone [for now].

    But would Greece be willing to leave the euro and go back to the drachma? It would in a heartbeat. That would once again give Athens a sovereign currency. The drachma would be weak but that would boost exports and attract more tourists, especially from Russia. European leaders are trying to make it sound as if Greece has to stay, but Greece doesn't have to do anything. If Greece leaves the Eurozone, it would be an important catalyst for gold because that would increase uncertainty in the markets.

    TGR: Which countries in the Eurozone are closely watching these negotiations with Greece?

    TL: The southern countries are really following the negotiations closely because if Greece exits, there's no reason for these countries to stay in the Eurozone; it's much easier for them to go their own way. It's the idea of a unified European Union that is causing the governments in the western and northern countries in the Eurozone to make sure that a solution is found because they would lose face if the EU failed.

    TGR: There is a critical IMF meeting in about a month. Could that be pivotal for gold?

    TL: You're alluding to the IMF meeting that will decide the compilation of the Special Drawing Rights [SDR] basket. The Chinese have requested that its currency be included in the SDR basket, which currently consists of the Japanese yen, U.S. dollar, euro and British pound. Gold could also potentially be included in the basket but I don't think the yuan nor gold will be included, at least not yet. It will be interesting to hear the Chinese arguments. China has not updated its gold reserves in a long time. It wouldn't surprise me to see China update its official gold reserves just before that meeting. If China chooses to disclose its gold reserves, it will show that China is serious about getting the yuan included in the SDR basket. It might be the main factor that the IMF considers.

    TGR: What range do you expect gold to trade in through the end of this year?

    TL: It depends whether Greece collapses or not. We're still in the same range where we saw strong support at $1,175-1,180/oz, but we also saw strong resistance at $1,220-1,225/oz. The range is definitely narrowing. Once we break out of that range, either in a positive or negative way, we will see a big move in the gold price.

    TGR: Which elements of junior developers are you most focused on with gold around $1,200/oz and financing still at a premium?

    TL: Investors should try to focus on high-margin projects with low capital and operating costs because the financing environment remains difficult. Mining projects with high IRR numbers will attract the necessary financing to move ahead and will always command a premium over other assets. The second priority is low geopolitical risk. I'm avoiding high-risk countries like the Democratic Republic of the Congo and South Africa.

    TGR: Do the essentials change for the smaller companies like the explorers?

    TL: It's a good time to be an exploration company with cash because diamond-drilling costs are the cheapest they have been in almost a decade. The all-in cost for diamond drilling is less than $100/meter [$100/m] in North America. The cost was $250-270/m four years ago. On the negative side, the explorers operating in remote areas will have a tougher time because it will cost them three or four times as much to drill the same hole.

    TGR: What are some companies you're following in that space?

    TL: The first one is Dynacor Gold Mines Inc. (OTC:DNGDF) [DNG:TSX]. It operates a 250 ton per day [250 tpd] mill in Huanca, Peru. It recently announced that it has the permits to increase capacity to 300 tpd. It also received a permit to build a new plant in Chala, Peru. Dynacor also has an exploration project called Tumipampa. I hope that Dynacor monetizes that asset in the next 18-24 months because Dynacor should not develop Tumipampa alone.

    TGR: Finally, what are some junior mining stories that you're following outside of the precious metals space?

    TL: Let's start with copper. I recently visited Nevada Copper Corp.'s (OTC:NEVDF) [NCU:TSX] Pumpkin Hollow copper project in Nevada, where the company has completed its production shaft for the underground portion of the deposit. It is now working toward an integrated feasibility study, which would see the company combine its open-pit and underground mine plans into one big plan. The results should be published by the end of May. Pumpkin Hollow is one of the last huge copper resources in North America. It contains about 5 billion pounds [5 Blb] copper, and more copper is found every day. Nevada is mining friendly. The nearby Anaconda copper mine produced almost 2 Blb copper over 30 years beginning in 1952. Nevada Copper is going to attract some senior producers.

    TGR: Nevada Copper was courting suitors five years ago. What is the stumbling block?

    TL: It finished the initial feasibility study three years ago and decided to start construction on its own and keep the underground deposit for itself, while potentially seeking a partner to develop the open pit. The plan changed when some potential partners demanded an integrated feasibility study. We could see a completely new mine plan where both zones are mined simultaneously but it will cost more than $1B to get the open pit into production. These aren't decisions you make overnight.

    TGR: How do you maintain your optimism in this space?

    TL: You always need to make sure that you understand the markets. I strongly believe that should gold go back to $1,000/oz, it will not stay there. It is going to be one of those V-shaped corrections as we saw in 2007-2008, and then it will move back up again. China and Russia are still buying gold and they will buy even more if the gold price goes as low as $900/oz. But I wouldn't be unhappy if gold were to stay at near current prices.

    TGR: Thank you for your insights, Thibaut.

    This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.

    Thibaut Lepouttre is the editor of the Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals. Lepouttre has a Bachelor of Law degree and two economics masters degrees that have forged his analytical approach to the mining sector. Considered a number cruncher, Lepouttre focuses on the valuations of companies and is consistently on the lookout for the next undervalued mining company.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

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    DISCLOSURE:
    1] Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2] The following companies mentioned in the interview are sponsors of Streetwise Reports: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3] Thibaut Lepouttre: I own, or my family owns, shares of the following companies mentioned in this interview: Nevada Copper Corp. 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: Nevada Copper Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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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