It's never too late to find a new way to evaluate mining companies and Jeff Desjardins, and James Fraser of Tickerscores.com have developed one based on over 20 different criteria. Add in some near-term catalysts and the wheat separates from the chaff. In this interview with The Mining Report Desjardins and Fraser share the names of companies with some of Tickerscores.com's highest junior mining scores.
The Mining Report: A recent article on Tickerscores.com, "The Great Divide: Inequality in Gold Juniors Means Opportunity," said: "It's clear we've reached a new level of separation between the wheat and the chaff." What does that mean for investors?
Jeff Desjardins: As the bear market has progressed, many companies have struggled to raise the necessary funds to advance their projects. Even for those that have been more fortunate, it has often come in the form of dilutive financings.
On the other hand, quality management teams have found ways to continue to move projects forward. We're starting to see a big separation in metrics such as cash, general and administrative expenses [G&A], news flow and, ultimately, the creation of shareholder value. For example, we cover 22 exploration companies working in Ontario and 82% of those had less than $400,000 in cash in Q1/14, up from 65% in Q3/13. Our top three exploration companies in Ontario hold an average cash position of $2.2 million [$2.2M] each. The other 19 average only a mere $150,000 per company. Furthermore, the G&A expense ratio for the bottom 19 companies is a hefty 76%, which means that $0.76 of every dollar is not going into the ground.
We are looking at a great divide between the rich and the poor. The funny thing is that even though the rich companies have great management teams and cash to continue to develop their projects-key things that you want in a junior name-they are still trading at great valuations.
TMR: In which mining subsector-producer, developer, explorer-is an investor likely to get the most bang for the buck?
JD: All those types of companies have their advantages. It depends on an investor's portfolio, strategy and risk tolerance. Right now, we're focusing on developers. We published a report in early September that lists some promising companies in this stage. We believe developers with high-quality assets will be subject to merger and acquisition [M&A] activity once they are sufficiently derisked because larger companies want to buy proven resources at rock-bottom prices.
Investors should look for developers with a resource of at least 3 million ounces [3 Moz] with high grade and in a safe jurisdiction. A takeover offer is rarely made before a company publishes a preliminary economic assessment [PEA] so investors should look for a PEA or feasibility study with a high net present value [NPV], low capital costs [sub-$700M] and a high internal rate of return [IRR].
TMR: What jurisdictions should investors be taking a closer look at right now?
James Fraser: Certainly anything in North America-Mexico, Nevada, British Columbia and Ontario.
TMR: Are companies in those jurisdictions trading at a premium to the companies that aren't?
JF: Yes. Assets in certain countries in Africa and other places like Russia trade at a significant discount to a similarly sized asset in a safe jurisdiction.
TMR: Tickerscores.com maintains a database of 450 companies that is constantly updated based on financials, management, stock performance and mining projects. What are the weightings for each of those elements and do those weightings change over time?
JD: They definitely change over time because the weightings are based on macro market conditions. In November 2013, the weightings of those factors were: financials, 54%; management, 20%; stock performance, 4%; and the project, 22%. Right now exploration companies are 43% for financials, 17% for management, 4% for stock performance and 36% for the project.
TMR: What accounts for the greater weighting in projects?
JD: The biggest reason for the jump in the project weighting is based on an improvement we have made over the last year, which is adding in a drill score economic analysis. We're looking at the economics of all drill holes for each exploration company, and comparing them against other companies in the same jurisdiction. We didn't do that before.
TMR: How do you go about analyzing drill results?
JF: In the drill hole analysis, we always compare companies in similar regions to each other. In British Columbia, for example, we would be comparing companies that are typically exploring for gold and copper together. We look at how many holes a company has drilled on the property and then take a company's best drill results to date and calculate a "gram meter" score. If an interval is 200 meters [200m] of 1 gram per ton [1 g/t], that's a score of 200. Or if it's 100 g/t over 2m, that's also 200. Once we have the results for a region, we will then rank them.
TMR: So as much as possible you are trying to compare apples to apples?
JD: By keeping as many variables as possible the same, it makes it easier to understand the key differences between two companies. We also provide "Power Rankings" to help investors sift through companies. If something jumps out to us, we make note of it there.
TMR: What are the top three or four catalysts that move the score for explorers, developers and producers?
JF: It's still a tough climate for exploration companies. The first thing we look at is cash position. A company needs money to do work. A significant financing or a well-funded joint venture partner would dramatically move a Tickerscore right now. As Jeff said, the higher quality names are outperforming while the majority of other companies are running very low on working capital. We don't expect the latter ones to survive the next 6 to 12 months. After cash, solid exploration drill results will certainly move a stock's Tickerscore.
We see the most change in developers as they advance to the next stage, such as moving from an NI 43-101 to a PEA, or when a resource gets significantly bigger. If a company receives an important environmental certificate or mining permit, that will really move a Tickerscore.
For producers it all comes down to making money. Were they profitable at the end of the quarter? Are their all-in cash costs increasing or decreasing? How do these metrics compare to previous quarters?
TMR: Traditional mining equity analysts use discounted cash flow [DCF] models or other proven metrics like NAV or enterprise value to determine how companies ought to be valued. How do you think your methodology stacks up?
JF: The higher-scoring companies in our database-the companies scoring over 60-are consistently outperforming the Toronto Stock Exchange and the Market Vectors Junior Gold Miners ETF (GDXJ).
It's also worth mentioning that in the Tickerscores Top 10 list we published in January, our top picks for the year are up 34% year-to-date.
Discounted cash flow models are generally used for producers and have limitations. The DCF model is static and does not account well for changing metal prices, increasing or declining production, or grade variability. We update our producers at least once each quarter based on their latest quarterly reports. We determine if the mine is high-grading [a process by which higher-grade ore is mined first]; we also look at all-in cash costs and other variables. We use 20 different metrics to determine a Tickerscore for each company.
TMR: Please tell us about some companies in the most recent report that was published at the beginning of September.
JD: In our Autumn 2014 report we have a mixture of exploration, development and producing companies. The companies that made this edition are some of the highest-scoring firms in our database. Each company has top-notch management, a solid balance sheet, and a promising project or mine. We also provide some near-term catalysts that investors need to watch closely.
Interestingly, the first company that we highlighted in our report was
Cayden Resources Inc. (CDKNF), which was just taken out by Agnico Eagle Mines Ltd. (AEM) for $205M at a premium of 42.5%.Our latest report went out a week before that happened, so any subscribers that were able to act quickly have already gotten a great return.
TMR: Cayden's key projects are also in Mexico. Tell us about that name.
JD: In our Tickerscores database, we independently cover 29 exploration companies that have their primary projects located in Mexico. In August, we had Cayden with the top score of 80 overall, which is actually the best exploration score in our entire database. Cayden has everything we look for in an exploration company.
For us, the key is its management team, which has a proven track record. President and CEO Ivan Bebek found a multimillion-ounce gold deposit in Ghana as a cofounder of Keegan Resources. With the agreement to sell the company to Agnico Eagle at a 42.5% premium, he has done it again for Cayden shareholders.
The company also has a solid balance sheet and exciting exploration results. Cayden's El Barqueño gold project in Mexico looks as if it has potential to be 3-5 Moz. Cayden is one of the best-performing stocks year-to-date on the TSX Venture Exchange and now with the recent deal, we believe shareholders will be very satisfied.
TMR: What are some other companies with exceptional Tickerscores?
JF: Some other names with high scores in our database include
Pretium Resources Inc. (PVG), Lake Shore Gold Corp. (LSG:TSX), Balmoral Resources Ltd. (BAMLF), Rio Alto Mining Ltd. (RIOM) [RIO:TSX.V] and Kirkland Lake Gold Inc. (KGILF) [KGI:TSX].TMR: Perhaps one more name to share with our readers before we let you go.
JF: One name that was featured in our April Top 10 report is an energy stock. We usually don't cover energy stocks but we believe
Mart Resources Inc. (MAUXF) [MMT:TSX.V] has too much potential to ignore. It's a small oil producer in Nigeria that pays a dividend and has several catalysts in the next six months. The big catalyst for Mart is the new Umugini pipeline. Mart could double its cash flow once the pipeline is complete.The CEO owns just over 8M shares and it is rumored that Mart could make an acquisition during the next couple of months. If Mart can deliver on its catalysts, we should see a significant re-rating of the stock price. The stock has gone from $0.10/share all the way up to $2. Now it's at $1.25/share as investors wait for that pipeline to come on-line. Investors should be cautious, though, because its main assets are in Nigeria.
TMR: What should mining investors expect in the final quarter of 2014?
JD: As we move into the fall, we expect to see more separation between the better companies and the weaker ones, or what we call "The Great Divide." It's all about the capacity to create shareholder value. The companies with no cash have severely limited capabilities to do this-and the quality names with world-class assets are going to be sought out by majors that need to replenish gold reserves.
TMR: Thank you for talking with us today, Jeff and James.
This interview was conducted Brian Sylvester of The Mining Report and can be read in its entirety here.
Jeff Desjardins founded Tickerscores.com, a universal, independent and comprehensive stock scoring system that gives investors access to investment research on mining stocks. Tickerscores has coverage of over 450 precious metals companies on the TSX and TSX.V and compares them head-to-head to make due diligence easier for investors. Each quarter, Tickerscores also puts out an in-depth Top 10 report of the highest scoring stocks in the system and other analyst picks.
James Fraser, mining analyst at Tickerscores.com, is passionate about the mining sector and mining stocks. His passion led to co-authoring the book "Mining Stocks Investor Guide: a guide to investing in mining companies." He has a finance background and has completed his Canadian Securities Course [CSC] and Conduct and Practices Handbook [CPH]. When Fraser is not "digging" up the latest mining stock, he can be found enjoying a wide variety of sports or travelling the world.
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1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining 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) Jeff Desjardins: 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 what 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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