Eric Lemieux: What Does 2014 Hold For Metals?

Includes: DRGDF, GG
by: The Gold Report

Eric Lemieux, a mining analyst with Laurentian Bank Securities in Québec, is a realist, which makes his optimistic outlook for miners in 2014 that much more compelling. Lemieux believes that with the wheat separated from the chaff over the past tumultuous year, the truly strong companies have emerged. But you may be surprised by the jurisdictions he predicts will come to life in 2014. Lemieux makes some startling, but happy forecasts in this interview with The Gold Report.

The Mining Report: Eric, your top stock pick in 2013 outperformed the S&P/TSX SmallCap Index. What's your recipe for picking stocks in 2014?

Eric Lemieux: The secret to success in picking stocks in 2014 will be simple: management. The senior vice president of Laurentian Bank Securities, who recruited me, asked me a question during my interview way back in 2007: What was the most important element when I was looking at a company? I started to talk about some financial ratios, etc. He began to laugh. He said there are three things: management, management and management. I know that's easy to say, but it is true. It is the team that's behind the company. That's the most important secret for success.

TMR: One interesting royalty find is Goldcorp Inc.'s (NYSE:GG) Éléonore project in the James Bay region of Québec, which should go into production in 2014. What's interesting is that some exploration done by Goldcorp seems to have delineated an entirely new zone of mineralization. What do you know about that?

EL: Goldcorp disclosed a new zone called 494, which would be about 500 meters [500m] north of the Roberto zones. It appears as a new ore shoot. It still has to be fully defined, but the hypothesis is that its geometry looks to be another Roberto. It's most interesting because it's not too far from the mining infrastructure that's being built. It could effectively double the size of Éléonore; which is also wide open at depth. That deposit is set to grow.

The key catalysts for the Éléonore royalty in 2014 are 1) new reserve and resource numbers that most likely will be disclosed by Goldcorp in February and 2) the start of production by the end of the year. It is tremendous. I think it is going to be a world-class operation soon.

TMR: You're predicting an average gold price of $1,400/ounce [$1,400/oz] in 2014. That's down from the previous estimate of $1,750/oz. Nonetheless, most observers would call $1,400/oz optimistic given the current spot price. What gives you confidence that the gold price will rise in 2014?

EL: I'm fairly optimistic. The price of gold is gravitating around $1,200/oz, so there's a substantial difference. I'm looking at the global picture. Yes, the price of gold has gone down, but it's approaching a floor of production costs. By midyear the price of gold will be higher.

TMR: Many of the companies you cover operate in Québec, which just passed a new mining act. Is that good news for investors?

EL: By and large, all this is good news for companies operating in Québec. It's not perfect. There are a few irritants, but it is a middle ground-a relatively well-balanced law.

TMR: An application for a mining lease now requires a feasibility study. What do you make of that?

EL: Well, feasibility studies are necessary. A company needs to go through the steps of a feasibility study for the normal process of calling a mineral reserve and getting financing, etc. The industry has to realize certain levels of obtainment and it is a normal process to have feasibility studies to receive the proper permits to achieve the proper level. The new act [as amended] states that an application for a mining lease must be accompanied with a scoping study and market study; note that previous Bill 43 had proposed a feasibility study for securing second and third transformation. The new dispositions are fair and less burdensome.

TMR: Does Québec remain the best jurisdiction in Canada in which to operate a junior mining exploration company?

EL: I would simply say no, but I would point out the positive is that Québec has stopped dropping in the standings. We've gained clarity with the Québec mining law and royalty revisions. All in all, we're not the best jurisdiction anymore, but at least we're not falling down the slope. I would highlight, however, that Goldcorp's recent offer to acquire Osisko suggests that Québec has seen the worst, and perception is improving.

TMR: What would you say is the best jurisdiction?

EL: This is an ever-evolving element. What is considered the best jurisdiction today could not be so a year from now. Québec is a case-in-point. It was one of the best jurisdictions a few years ago and it slid down. At least with the passage of the royalty and mining law, the worst is over.

TMR: Despite your optimism for precious metals, you've rolled back almost all of the target prices on the companies you cover, some by as much as 35%. What prompted that action?

EL: General market sentiment has obliged me to remove or decrease substantially my exploration goodwill, which was a proxy of the quality of the teams, the quality of the projects and the general market sentiment. I had to bring that goodwill down, and for certain explorers I had to completely remove it. Having said that, companies that are well managed, have a good portfolio of projects and are able to sustain a minimum of activities will be poised to bounce back eventually. Although I brought down the target price, I kept my recommendations. That's a powerful statement. I just needed to effectively downsize some of the expectations.

TMR: Detour Gold Corp. (OTCPK:DRGDF) [DGC:TSX] has gone through some struggles.

EL: The Detour story has had a major impact. The whole area has lost its shine with the difficulties [for example a slower ramp-up] going on at the Detour Lake mining operations. Having said that, the target is of a higher grade on the Québec side. All in all, the Québec Detour Trend will be able to hold its own in 2014.

While the Detour Lake operations have had an impact, it's more of a step back to eventually take two steps forward.

TMR: Detour Gold recently closed its mill and scaled back its guidance again for 2013.

EL: Detour is going through hardships. Ramping up a mining operation takes time and there are always some surprises. I still believe that it has the capacity to make this a winning proposition. There'll be hiccups, but it should be able to press all the wrinkles and make this a viable operation.

TMR: What about outside of Québec?

EL: Every jurisdiction has its issues and Ontario is no exception, but overall it is one of the better places in the world to work. Goldcorp and other majors are there, but there is still mining to be done in Ontario.

TMR: What's going to keep you optimistic in 2014?

EL: I'm optimistic. It was a difficult year for the mining industry in 2013. The fundamentals are still strong and the long-term story is solid. I believe that this will be able to set in during 2014. Companies have been tightening their belts and streamlining operations. Juniors are going back to the basics. There's no more waste. There's been a reality check. The companies that have been able to survive and sustain a minimum of operations and activities are going to be set for 2014.

The mining industry is a necessity. There's always a reason to go out and search for metals and commodities because the population continues to grow and needs resources. It may be through electronic devices. It may be through food or infrastructure. The overall portrait is interesting and positive. I'm optimistic for 2014.

TMR: Thanks for chatting today. I've enjoyed it.

EL: You're certainly welcome and as we say in French-merci!

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

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 masters degrees, in mineral economics from the Colorado School of Mines and in metamorphic-structural geology from Laval University.

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) Eric Lemieux: I or my family own 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 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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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.