Source: Brian Sylvester of The Gold Report (1/13/12)
Mining analysts at Ocean Equities spend more time at mining sites than at the natural resource brokerage's London headquarters. In fact, Christopher Welch, a mining analyst with Ocean, has been crisscrossing the Atlantic for most of the last year, he tells The Gold Report in this exclusive interview. Recent trips to Africa have bolstered his conviction that mining plays in Africa are being overlooked, but it's not too late for investors to get in on the ground floor.
The Gold Report: Most of your coverage universe at Ocean Equities consists of precious metals juniors with exploration- or development-stage projects. Why do you cover these types of companies?
Christopher Welch: It's the end of the market where our expertise has the biggest effect, particularly since my colleagues and I are either geologists or experienced industry professionals. We can look at ground where we know it's going to be prospective. We can look at the very early-stage exploration results and know if they are encouraging.
We still cover some big, producing companies. One of our biggest companies under coverage is Kirkland Lake Gold Inc. (KGI:TSX), which is a growing intermediate producer. But we've had such an effect on the junior exploration end because that's where our strengths lie.
TGR: Most of your companies have sub-$100 million (NYSE:M) market caps with gold and/or copper projects based in Africa, Canada or Nicaragua. What criteria do you use to choose these small-cap companies?
CW: We look at management, the ore body, exploration results, the geology of the region and country risk. We don't have a mandate to follow specific parts of the world, although we know where we feel comfortable operating. If it's a country where one of the research teams feels quite happy jumping on a plane, spending a few days in a tent on the ground and looking at the grassroots exploration data, that's a country we wouldn't mind doing business in.
TGR: You regularly go and visit these projects?
CW: Taking a job as a mining analyst is essentially getting a ticket on a plane somewhere. I've been crisscrossing the Atlantic for most of the last year. Our technical expertise and professional experience mean that when we get to the ground, we know what to look for. It's not a case of taking drilling results on trust. We look at the drill core and can see what's good. It's a lot of gut instinct and knowing what feels right. You can look at the lay of the land and say, "Yes, I can see the deposits here. I can see that this could be an open pit or the plant could go here, and there are no environmental or social issues." You have to get in and kick the tires to add value.
TGR: Do you believe that African mining stories are underrepresented in investors' portfolios?
CW: Yes. Over the last 10 years, contemporary exploration techniques have been applied to parts of Africa that were considered high risk, like Eritrea, Ethiopia and Liberia. However, there have been large-scale risk profile changes in these countries. Liberia is one of the best countries in Africa because of its transparency. There is now a combination of overlooked resources with safer governments, so it's just another scramble to get into these countries and establish companies that can turn natural resources into profits for both the company and the host country. If you're not exposed to the African mining story, you haven't missed the boat, but it's something you should look at quickly.
TGR: Are you concerned about another Charles Taylor, the former president of Liberia accused of war crimes, coming to power in these countries after you've invested heavily in them?
CW: Charles Taylor's regime was definitely a product of ignorance of the Western world to what was going on in that part of Africa. Now there is more free press in Africa and there are a lot of African businesspeople who are involved in making their countries better. I know that all the issues across Africa aren't solved, but we won't go to a country where we think there could be a risk. We have a very good understanding of what's going on across Africa. African risk can't be painted with a broad brush. Every region globally has its drawbacks. Some might say that laws in British Columbia are perhaps overly onerous on environmental licensing, for example.
TGR: An interesting company in Ocean's stable is Sunridge Gold Corp. (SGC:TSX.V). Tell us how you came across it and why you picked that one.
CW: It's definitely one of the more encouraging companies in that region because it's so undervalued. I constantly ask, "Where am I going to go next to find the overlooked or the best deposit?" That part of the Arabian-Nubian Shield really comes to the fore as the most overlooked part of the globe to find volcanic massive sulphide (VMS) deposits that have good grades. They don't always have the biggest scale, but the grade means that the mines that get developed can be quite profitable.
If you take just one of the components of Sunridge's project portfolio, its contained zinc for example, it has a greater gross in-situ metal value than the market cap of the company. So we think that Sunridge offers great potential.
TGR: What were your thoughts after visiting the Asmara gold project?
CW: My colleague was there recently as part of a larger trip around Eritrea and was very encouraged with what he saw. He said it looked very positive. Sunridge is in the prefeasibility stage on the Asmara project, which is part of a group of projects around the capital city.
TGR: Do you think that it will spin some of those assets out into a separate company?
CW: I think it will keep all of them under the same umbrella. It doesn't have a huge footprint in Eritrea. It's big, but manageable. Those projects will do very well when they combine and share infrastructure. Eritrea does need a fair amount of infrastructure to get up to the standards required for the mining. The company will likely build something centralized to take concentrate from different parts of its portfolio.
TGR: Is it a takeover target?
CW: It's definitely enticing. It has ground in a great country with great prospects. Any sort of mid-tier company that's looking to bolt on some high-grade VMS targets and near-term gold production capacity should be looking at it.
TGR: Are there plans to take Toro Gold Ltd., a private junior with a gold project in Senegal, public?
CW: It's something the company would like to do, but not at the expense of shareholders. It has quite a market-savvy management team. It has done exceedingly well to get its Mako project on its feet. Recent results for Mako show great grades: 3 grams of turnover into sections of up to 40 meters. It's one of the best grassroots discoveries in that part of Africa. There are definitely plans to take it to market, but it has to be done at the right time. I hope it will be within the next 12 months, but it's up to the company to say.
TGR: Initial tests have shown that Toro's deposits host free gold.
CW: The bottle roll test results are very encouraging, but the ultimate metallurgical process has yet to be determined. It looks like there is very little arsenic in the area, so it should be free gold. Toro has a large amount of ground, but it still has to do early-stage reconnaissance exploration, so there's a lot of growth there. It's in a part of Africa, which we call the Kenieba Window, which has been overlooked.
TGR: Many of our readers follow the junior mining sector quite closely, but few would have heard of Nyota Minerals Ltd. (NYO:AIM; NYO:ASX), which is conducting a definitive feasibility study on its Tulu Kapi deposit in Ethiopia. Nyota is about to announce a measured resource for the Tulu Kapi project in H112, as well as a maiden resource for other claim blocks in the area. Tell our readers about that story.
CW: It is in the same geological terrain as Sunridge, on the western half of the Arabian-Nubian Shield, which is very old rocks that have been somewhat agitated by the rift in the area. It's in a very geologically prospective part of the world, but it's been overlooked simply due to the historic Ethiopian-Eritrean conflict that's now resolved.
Nyota is progressing on its Tulu Kapi project. The new chief executive, Richard Chase, who took the reins in mid-2011, really has a good handle on what could be quite a robust open-pit project. It has a mineable grade after internal dilution of over 2 grams/tonne. Tulu Kapi is going to be quite a good story.
Nyota is also going to be the first public company to receive a mining license in Ethiopia. It put in its application in Q311. Ethiopia is very prospective, particularly parts of the western highlands. We've seen many major mining companies coming into the country to try and grab ground and capture the essence of the geology of Ethiopia. Nyota has this fantastic, early-mover advantage in that it has a large land package with known targets, but also it has the key to good exploration-high-level operating geologists with Ethiopian backgrounds who can go and do the grassroots exploration very well. Nyota has a great future ahead of it.
TGR: A lot of investors still perceive Ethiopia as a risk. Does it give you a measure of confidence given that a number of larger mining companies are coming into that country?
CW: Yes, it does. The Internal Finance Corp. (IFC) of the World Bank has been a shareholder in Nyota for a long time, and the IFC has perhaps one of the most rigorous sets of due-diligence tests for its investments. The area of Ethiopia that Nyota is operating is lush, green pasture. It poured with rain the entire time we were there. Ethiopia has a good future ahead of it. It acknowledges its natural resources could be a key for developing and expanding its growth prospects. Personally, I don't think the risk in Ethiopia is that high.
TGR: What are your preferred countries in Africa for mining development?
CW: Ethiopia, Eritrea and parts of Sudan are the most overlooked for ease of operation. Mali and Burkina Faso are developing into good countries to operate in, but my pick of the bunch is Liberia.
Just to give due respect to Ellen Johnson Sirleaf, the president of Liberia, she's done an awful lot to clean up the country. In particular, the Extractive Industries Transparency Initiative that she's taken on board in Liberia has really set the country up to benefit from iron-ore price growth. It has potential to be the largest iron-ore producer on the continent.
Liberia also has gold in the north with Aureus Mining Inc. (AUE:TSX; AUE:AIM), which is developing the New Liberty project.
TGR: That really is fascinating given that country's history.
CW: It just proves the point that the opportunities come up when you have on-the-ground, grassroots operating knowledge from people who go into the country and say, "Look, I know what you think about Liberia, but honestly, go, see, look. Go to the country, visit it and when you get there, you'll see that it's open for business."
TGR: Condor Resources Plc (CNR:LSE) has the promising La India gold project in Nicaragua. The one eyebrow-raising fact about Condor is that it's just a small junior with a relatively small market cap, but it has about 560M shares outstanding. Are you concerned by a management team that would allow that level of dilution?
CW: The large number of shares is just a legacy and something that the company can do something about quite easily. A chief executive has a lot of techniques in his arsenal to reduce that, and I dare say there will be some form of consolidation in the future. Condor is a company that's changed dramatically over the last two years. It's taken a small resource in Nicaragua and grown it to a substantial 1.6 million ounces. In 2009 Condor had a robust resource in Nicaragua but it suffered capital constraints due to the global financial crisis and then the El Salvadoran moratorium on mining. This was when it suffered the dilution. That is now water under the bridge and it is moving forward.
TGR: Perhaps the most promising part of that project is the central breccia zone. Tell us about what the company continues to find there.
CW: It's one of the largest scale mineralizations. Condor has plenty with a narrow vein, but high-grade, gold currencies cross its property. What is going to make a huge difference for the company is finding the bulk tonnage deposits where it can do either open-pit development or larger-scale underground development.
Condor found the central breccia toward the end of last year when it put in a trench to look at the bedrock. The initial grades of that sampling were very encouraging. Subsequently, it put in two drill holes and the results are likewise encouraging. It also extended the trench, and we're waiting for an update from the company on those results. All signs are that it found something significant with a larger scale to it.
It's a very good sign for Condor that it's found the central breccia, but there are other areas where bulk tonnage of mineralization exist, which it could exploit through larger-scale mining techniques.
TGR: There are also other mines nearby, which could lead to a takeover.
CW: Exactly. Obviously, I don't think it's something that Condor is going to aim for immediately. In our discussions with the company, it's all for just keeping its head down. It has an objective, it has a strategy to achieve that objective and it's going to take the La India project as far down the development track as it can.
But it's an interesting part of the world. Obviously, there is a lot of gold in Nicaragua, which in Central America is one of the more stable areas to operate in. There are larger-scale operations in the country. Whether one of the other Nicaraguan players would be the one to take Condor out or whether there might be a rollup by another company, I don't know. At the moment, Condor has a lot it can do to increase the value of its portfolio.
TGR: Rambler Metals & Mining Plc (RAB:TSX; RMM:AIM) just started producing gold from its Ming mine in Newfoundland and Labrador. It has already forward-sold some of its production to Sandstorm Resources Ltd. (SSL:TSX.V). It's one of those that quietly came into production. How did you find out about this story?
CW: It has the trifecta of things I look for in a mining project: management, geology and a stable location. Newfoundland and Rambler have it all in spades. It did come into production quietly, but that doesn't detract from the story. It's just been overlooked. It's in a part of the world that has the last of the low-hanging, high-grade fruit for the same reasons that we look at parts of the Arabian-Nubian Shield. That part of Newfoundland has the same VMS deposits with a strong grade. Rambler definitely has that in the Ming mine, which has very good grades of copper, gold and some associated silver as well.
Rambler took on a loan to keep the project moving forward at a time when gold prices were much lower than they are now, and it did seem like a very sound decision for the company to make at the time. Now that gold is at the price it is, you can look back and say, "Well, I don't think it was a good move," but you play the cards that you're dealt. I think George Ogilvie, the chief executive of the company, has done very well to get it up and running. It's in a gold production phase just because it can produce gold at the higher price. It's giving some of its revenue of gold away, but the payoff of the gold line is not having a dramatic negative effect on its cash flow. Later on this year, it's going to go into a copper production phase where it's going to increase its revenue.
TGR: How did you discover it?
CW: It came in through one of the mine organizers and management of a company that we've dealt with for a good time and trust.
TGR: You're going to keep that a secret.
CW: The mining industry is a relatively small game. There is no better commodity than knowledge and trust in certain mine managers.
TGR: Sprott Resource has put some money into that project as well. When you get players like Sandstorm and Sprott involved, obviously the numbers add up.
CW: I know Sprott did an awful lot of technical due diligence on the project, so it must be very comfortable. It's a very good deal for Sprott, as well as for Rambler.
TGR: Looking at the small-cap mining sector into 2012, do you expect a rebound or are we going to see more headwinds?
CW: We're going to get an overall flight to quality. There are a lot of projects out there that are going to stand out from the crowd. We'll see some re-ratings and some heads pop out from the parapet to show themselves to be above-average mining plays.
The pullback in mining shares and mine management becoming more cautious are going to pay dividends for the mining companies in the mid term. One thing we know is that resources are scarce. It's getting harder and harder to find the projects, particularly good gold and copper projects. We've lost another field season in 2011 and a lot of people brought their drill rigs home rather than overspend during a downturn, so it's going to be harder to find the projects in the development pipeline that can fill the metal supply gaps that develop.
When demand comes back to Asia or North America, there won't be a sufficient number of projects in the development pipeline to feed that demand.
TGR: Thanks for your insights.
Christopher Welch holds a master's in international business management and a Bachelor of Science (Honors) in geology from University College London and an Advanced Certificate in economics from Birkbeck University. Before joining Ocean Equities, Welch spent four years with Bloomsbury Minerals Economics as a copper analyst, prior to which he worked as a geologist in Lesotho.
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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: Condor Resource Plc, Sunridge Gold Corp. Streetwise Reports does not accept stock in exchange for services.
3) Christopher Welch: I personally and/or my family own shares of the following companies mentioned in this interview: Condor Resources Plc, Rambler Metals & Mining Plc and Nyota Minerals Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for participating in this story.
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